See accompanying notes to condensed consolidated
financial statements.
KANDI TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| |
Three Months Ended | |
| |
March 31,
2023 | | |
March 31,
2022 | |
| |
| | |
| |
CASH FLOWS FROM OPERATING ACTIVITIES: | |
| | |
| |
Net income (loss) | |
$ | 595,457 | | |
$ | (1,619,013 | ) |
Adjustments to reconcile net (loss) income to net cash provided by operating activities | |
| | | |
| | |
Depreciation and amortization | |
| 3,051,089 | | |
| 3,294,499 | |
Provision (reversal) of allowance for doubtful accounts | |
| - | | |
| 4,389 | |
Change in fair value of contingent consideration | |
| 361,000 | | |
| (2,690,000 | ) |
Stock award and stock based compensation expense | |
| 1,003,818 | | |
| 22,925 | |
| |
| | | |
| | |
Changes in operating assets and liabilities: | |
| | | |
| | |
| |
| | | |
| | |
Accounts receivable | |
| 6,275,418 | | |
| 5,197,268 | |
Notes receivable | |
| 358,114 | | |
| 1,965,596 | |
Inventories | |
| (6,750,531 | ) | |
| 2,498,914 | |
Other receivables and other assets | |
| 3,108,680 | | |
| (790,486 | ) |
Advances to supplier and prepayments and prepaid expenses | |
| 1,865,040 | | |
| 1,425,684 | |
| |
| | | |
| | |
Increase (Decrease) In: | |
| | | |
| | |
Accounts payable | |
| 6,097,620 | | |
| 3,088,095 | |
Other payables and accrued liabilities | |
| (2,752,663 | ) | |
| (1,688,414 | ) |
Notes payable | |
| (5,413,459 | ) | |
| (4,401,457 | ) |
Income tax payable | |
| (437,385 | ) | |
| (119,559 | ) |
Net cash provided by operating activities | |
$ | 7,362,198 | | |
$ | 6,188,441 | |
| |
| | | |
| | |
CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | | |
| | |
Purchases of property, plant and equipment, net | |
| (562,717 | ) | |
| (709,881 | ) |
Payment for construction in progress | |
| (72,188 | ) | |
| (246,971 | ) |
Certificate of deposit | |
| (19,001,959 | ) | |
| (15,759,448 | ) |
Net cash used in investing activities | |
$ | (19,636,864 | ) | |
$ | (16,716,300 | ) |
| |
| | | |
| | |
CASH FLOWS FROM FINANCING ACTIVITIES: | |
| | | |
| | |
Proceeds from short-term loans | |
| 5,040,000 | | |
| 500,000 | |
Repayments of short-term loans | |
| (6,398,565 | ) | |
| - | |
Contribution from non-controlling shareholder | |
| - | | |
| 803,732 | |
Purchase of treasury stock | |
| - | | |
| (1,583,561 | ) |
Net cash used in by financing activities | |
$ | (1,358,565 | ) | |
$ | (279,829 | ) |
| |
| | | |
| | |
NET DECREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH | |
$ | (13,633,231 | ) | |
$ | (10,807,688 | ) |
Effect of exchange rate changes | |
$ | 676,206 | | |
$ | 352,415 | |
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF YEAR | |
$ | 151,040,271 | | |
$ | 168,676,007 | |
| |
| | | |
| | |
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD | |
$ | 138,083,246 | | |
$ | 158,220,734 | |
-CASH AND CASH EQUIVALENTS AT END OF PERIOD | |
| 75,133,544 | | |
| 99,997,938 | |
-RESTRICTED CASH AT END OF PERIOD | |
| 62,949,702 | | |
| 58,222,796 | |
| |
| | | |
| | |
SUPPLEMENTARY CASH FLOW INFORMATION | |
| | | |
| | |
Income taxes paid | |
$ | 17,433 | | |
$ | 5,496 | |
Interest paid | |
$ | 99,960 | | |
$ | 37,116 | |
| |
| | | |
| | |
| |
| | | |
| | |
| |
| | | |
| | |
SUPPLEMENTAL NON-CASH DISCLOSURES: | |
| | | |
| | |
Contribution from non-controlling shareholder by inventories, fixed assets and intangible assets | |
$ | - | | |
$ | 393,986 | |
See accompanying notes to condensed 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. As used herein, the terms “Company” or “Kandi”
refer to Kandi Technologies and its operating subsidiaries, as described below.
Headquartered in Jinhua City, Zhejiang Province,
People’s Republic of China (“China” or “PRC”), the Company is one of China’s leading producers and
manufacturers of electric vehicle (“EV”) products, EV parts, and off-road vehicles for sale in the Chinese and the global
markets. The Company conducts its primary business operations through its wholly-owned subsidiaries, Zhejiang Kandi Vehicles Co., Ltd.
(“Kandi Vehicles”), Kandi Vehicles’ wholly and partially-owned subsidiaries, and SC Autosports, LLC (“SC Autosports”,
d/b/a Kandi America) and its wholly-owned subsidiary, Kandi America Investment, LLC (“Kandi Investment”). In March 2021, Zhejiang
Kandi Vehicles Co., Ltd. changed its name to Zhejiang Kandi Technologies Group Co., Ltd. (“Zhejiang Kandi Technologies”).
The Company’s organizational chart as of
the date of this report is as follows:

NOTE 2 - LIQUIDITY
The Company had working capital of $253,144,741 as
of March 31, 2023, an increase of $5,327,616 from the working capital of $247,817,125 as of December 31, 2022. As of March
31, 2023 and December 31, 2022, the Company’s cash and cash equivalents were $75,133,544 and $84,063,717, respectively, and
the Company’s restricted cash was $62,949,702 and $66,976,554, respectively. As of March 31, 2023 and December 31, 2022, the Company
had multiple certificates of deposit with a total amount of $100,484,949 and $81,191,191, respectively. These certificates of deposit
have an annual interest rate from 3.10% to 3.99% which can be transferred when necessary without any penalty or any loss
of interest and principal.
Although the Company expects that most of its
outstanding trade receivables from customers will be collected in the next twelve months, there are uncertainties with respect to the
timing in collecting these receivables.
The Company’s primary need for liquidity
stems from its need to fund working capital requirements of the Company’s businesses, its capital expenditures and its general operations,
including debt repayment. The Company has historically financed its operations through short-term commercial bank loans from Chinese banks,
as well as its ongoing operating activities by using funds from operations, external credit or financing arrangements. Currently
the Company has sufficient cash in hand to meet the existing operational needs, but the credit line is retained and can be utilized
timely when the Company has special capital needs. The PRC subsidiaries do not have any short-term bank loans and the US subsidiaries
have $4.2 million short-term bank loans outstanding as of March 31, 2023.
NOTE 3 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP”) for interim information, and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X promulgated by the Securities
and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and notes required by U.S. GAAP for
annual financial statements. In management’s opinion, the interim financial statements reflect all normal adjustments that are necessary
to provide a fair presentation of the financial results for the interim periods presented. Operating results for interim periods are not
necessarily indicative of results that may be expected for an entire fiscal year. The condensed consolidated balance sheet as of December 31,
2022 has been derived from the audited consolidated financial statements as of such date. For a more complete understanding of the Company’s
business, financial position, operating results, cash flows, risk factors and other matters, please refer to its Annual Report on Form
10-K for the fiscal year ended December 31, 2022 (the “2022 Form 10-K”) filed with SEC on March 16, 2023.
NOTE 4 - PRINCIPLES OF CONSOLIDATION
The Company’s condensed consolidated financial
statements reflect the accounts of the Company and its ownership interests in the following subsidiaries:
|
(1) |
Continental Development Limited (“Continental”), a wholly-owned subsidiary of the Company, incorporated under the laws of Hong Kong; |
|
(2) |
Zhejiang Kandi Technologies, a wholly-owned subsidiary of Continental, incorporated under the laws of the PRC; |
| (3) | Kandi New Energy Vehicle Co. Ltd. (“Kandi New Energy”), formerly, a 50%-owned subsidiary of Zhejiang Kandi Technologies (Mr. Hu Xiaoming owned the other 50%), incorporated under the laws of the PRC. Pursuant to agreements executed in January 2011, Mr. Hu Xiaoming contracted with Zhejiang Kandi Technologies for the operation and management of Kandi New Energy and put his shares of Kandi New Energy into escrow. As a result, Zhejiang Kandi Technologies was entitled to 100% of the economic benefits, voting rights and residual interests of Kandi New Energy. Effective March 14, 2022, Mr. Hu Xiaoming transferred his 50% equity interests of Kandi New Energy to Zhejiang Kandi Technologies. As a result, Kandi New Energy has become a wholly-owned subsidiary of Zhejiang Kandi Technologies; |
| (4) | Kandi Electric Vehicles (Hainan) Co., Ltd. (“Kandi Hainan”), a subsidiary 55% owned by Kandi New Energy and 45% owned by Zhejiang Kandi Technologies, incorporated under the laws of the PRC; |
|
(5) |
Zhejiang Kandi Smart Battery Swap Technology Co., Ltd (“Kandi Smart Battery Swap”), a wholly-owned subsidiary of Zhejiang Kandi Technologies, incorporated under the laws of the PRC; |
|
(6) |
Yongkang Scrou Electric Co, Ltd. (“Yongkang Scrou”), a wholly-owned subsidiary of Kandi Smart Battery Swap, incorporated under the laws of the PRC; |
|
(7) |
SC Autosports (d/b/a Kandi America), a wholly-owned subsidiary of the Company formed under the laws of the State of Texas. |
|
(8) |
China Battery Exchange (Zhejiang) Technology Co., Ltd. (“China Battery Exchange”), a wholly-owned subsidiary of Zhejiang Kandi Technologies, and its subsidiaries, incorporated under the laws of the PRC; |
|
(9) |
Kandi America Investment, LLC (“Kandi Investment”), a wholly-owned subsidiary of SC Autosports formed under the laws of the State of Texas, USA; |
| (10) | Jiangxi Province Huiyi New Energy Co., Ltd. (“Jiangxi Huiyi”) and its subsidiaries, a wholly-owned subsidiary of Zhejiang Kandi Technologies, incorporated under the laws of the PRC; and |
| | |
| (11) | Hainan Kandi Holding New Energy Technology Co., Ltd. (“Hainan Kandi Holding”), a subsidiary of Kandi Hainan, incorporated under the laws of the PRC; Kandi Hainan owns 66.7% and a non-affiliate, Jiangsu Xingchi owns 33.3% of Hainan Kandi Holding. Consequently, effective February 15, 2022, non-controlling interests of an aggregate of 33.3% of the equity interests of Hainan Kandi Holding held by an entity are presented in the consolidated balance sheets, separately from equity attributable to the shareholders of the Company. Non-controlling interest in the results of the Company are presented on the consolidated statement of operations as an allocation of the total income or loss for the period between non-controlling interest holders and the shareholders of the Company. |
NOTE 5 - USE OF ESTIMATES
The preparation of the unaudited condensed consolidated
financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, and related disclosures of contingent assets and liabilities at the balance sheet date, and the reported revenues
and expenses during the reported period in the unaudited condensed consolidated financial statements and accompanying notes. Significant
accounting estimates reflected in the Company’s unaudited condensed consolidated financial statements primarily include, but are
not limited to, allowances for doubtful accounts, lower of cost and net realizable value of inventory, assessment for impairment of long-lived
assets and intangible assets, valuation of deferred tax assets, change in fair value of contingent consideration, determination of share-based
compensation expenses as well as fair value of stock warrants.
Management bases the estimates on historical experience
and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the
carrying values of assets and liabilities. Actual results could differ from these estimates.
NOTE 6 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Our significant accounting policies are detailed
in “Note 6 - Summary of Significant Accounting Policies” of the Company’s 2022 Form 10-K.
NOTE 7 - NEW ACCOUNTING PRONOUNCEMENTS
Accounting Pronouncements Adopted
In October 2021, the FASB issued ASU 2021-08,
“Business Combinations (Topic 805) – Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”,
which requires that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance
with Topic 606, as if it had originated the contracts. Prior to this ASU, an acquirer generally recognizes contract assets acquired and
contract liabilities assumed that arose from contracts with customers at fair value on the acquisition date. The ASU is effective for
fiscal years beginning after December 15, 2022, with early adoption permitted. The ASU is applied prospectively to business combinations
occurring on or after the effective date of the amendment (or if adopted early as of an interim period, as of the beginning of the fiscal
year that includes the interim period of early application). The Company has adopted this accounting pronouncement from January 1, 2023,
and there was no material impact on its consolidated financial statements from the adoption.
NOTE
8 - CONCENTRATIONS
(a) Customers
For the three-month period ended March 31, 2023
and 2022, the Company’s major customers, each of whom accounted for more than 10% of the Company’s consolidated revenue, were
as follows:
| |
Sales | | |
Trade Receivable | |
| |
Three Months | | |
| | |
| |
| |
Ended | | |
| | |
| |
| |
March 31, | | |
March 31, | | |
December 31, | |
Major Customers | |
2023 | | |
2023 | | |
2022 | |
Customer A | |
| 62 | % | |
| - | | |
| 1 | % |
| |
Sales | | |
Trade Receivable | |
| |
Three Months | | |
| | |
| |
| |
Ended | | |
| | |
| |
| |
March 31, | | |
March 31, | | |
December 31, | |
Major Customers | |
2022 | | |
2022 | | |
2021 | |
Customer B | |
| 13 | % | |
| 8 | % | |
| - | |
Customer C | |
| 10 | % | |
| 3 | % | |
| 2 | % |
Customer D | |
| 10 | % | |
| - | | |
| - | |
(b) Suppliers
For the three-month period ended March 31, 2023,
there were no suppliers that accounted for more than 10% of the Company’s total purchases. For the three-month period ended
March 31, 2022, 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 |
|
|
|
Three Months |
|
|
|
|
|
|
|
|
|
Ended |
|
|
|
|
|
|
|
|
|
March 31, |
|
|
March 31, |
|
|
December 31, |
|
Major Suppliers |
|
2022 |
|
|
2022 |
|
|
2021 |
|
ODES USA, Inc. |
|
|
26 |
% |
|
|
2 |
% |
|
|
1 |
|
Hunan Jinfuli New Energy Co., Ltd |
|
|
15 |
% |
|
|
9 |
% |
|
|
8 |
% |
Zhejiang Kandi Supply Chain Management Co., Ltd. |
|
|
11 |
% |
|
|
14 |
% |
|
|
11 |
% |
NOTE
9 - EARNINGS (LOSS) PER SHARE
The Company calculates earnings (loss) per share
in accordance with ASC 260, Earnings Per Share, which requires a dual presentation of basic and diluted earnings (loss) per share. Basic
earnings (loss) per share are computed using the weighted average number of shares outstanding during the reporting period. Diluted earnings
(loss) per share represents basic earnings (loss) per share adjusted to include the potentially dilutive effect of outstanding stock options
and warrants (using treasury stock method).
Due to the average market price of the common
stock during the period being below the exercise price of certain options and warrants, approximately 900,000 options and 8,131,332
warrants were excluded from the calculation of diluted earnings per share, for the three-month ended March 31, 2023. On September
7, 2022, the Compensation Committee of the Board of Directors of the Company approved the grant of 5,000,000 stock options, at an exercise
price of $2.07 per share. There were dilutive effects of 909,091 shares for the three-month period ended March 31, 2023.
Due to the average market price of the common
stock during the period below the exercise price of the options, approximately 900,000 options and 8,131,332 warrants were excluded
from the calculation of diluted earnings per share, for the three-month period ended March 31, 2022.
NOTE
10 - ACCOUNTS RECEIVABLE
Accounts receivable are summarized as follows:
| |
March 31, | | |
December 31, | |
| |
2023 | | |
2022 | |
Accounts receivable | |
$ | 30,571,343 | | |
$ | 40,436,262 | |
Less: allowance for doubtful accounts | |
| (2,295,570 | ) | |
| (2,285,386 | ) |
Accounts receivable, net | |
$ | 28,275,773 | | |
$ | 38,150,876 | |
The following table sets forth the movement of
provision for doubtful accounts:
| |
Allowance
for Doubtful
Accounts | |
BALANCE AT DECEMBER 31, 2021 | |
$ | 3,053,277 | |
Provision | |
| 456,974 | |
Recovery | |
| (999,775 | ) |
Exchange rate difference | |
| (225,090 | ) |
BALANCE AT DECEMBER 31, 2022 | |
$ | 2,285,386 | |
Exchange rate difference | |
| 10,184 | |
BALANCE AT MARCH 31, 2023 | |
$ | 2,295,570 | |
NOTE
11 - INVENTORIES
Inventories are summarized as follows:
| |
March 31, | | |
December 31, | |
| |
2023 | | |
2022 | |
Raw material | |
$ | 6,871,757 | | |
$ | 6,551,450 | |
Work-in-progress | |
| 7,662,294 | | |
| 4,114,550 | |
Finished goods * | |
| 32,769,032 | | |
| 29,809,366 | |
Inventories | |
$ | 47,303,083 | | |
$ | 40,475,366 | |
| * | As of March 31, 2023, approximately
$22.8 million of inventory of off-roads and EVs held by SC Autosports were pledged as collateral for the $2,000,000 short-term loan. |
NOTE 12 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plants and equipment as of March 31,
2023 and December 31, 2022, consisted of the following:
| |
March 31, | | |
December 31, | |
| |
2023 | | |
2022 | |
At cost: | |
| | |
| |
Buildings | |
$ | 49,916,484 | | |
$ | 49,239,626 | |
Machinery and equipment | |
| 76,311,324 | | |
| 77,845,979 | |
Office equipment | |
| 1,543,757 | | |
| 1,528,135 | |
Motor vehicles and other transport equipment | |
| 1,818,895 | | |
| 1,810,825 | |
Molds and others | |
| 12,972,967 | | |
| 10,983,573 | |
| |
| 142,563,427 | | |
| 141,408,138 | |
Less : Accumulated depreciation | |
| (46,956,565 | ) | |
| (44,239,385 | ) |
Property, plant and equipment, net | |
$ | 95,606,862 | | |
$ | 97,168,753 | |
The Company’s Jinhua factory completed the relocation to a new
industrial park in April 2021. The new location covers an area of more than 57,000 square meters and a construction area of more than
98,000 square meters. The Company’s off-road vehicles, EV battery packs, electric scooters battery packs, smart battery swap system
and some EV parts are manufactured in the Jinhua factory. The Company’s Jinhua factory owns the above production facilities. The
Company’s EV products, EV parts and electrical off-road vehicles, including Neighborhood EVs (“NEVs”), pure electric
utility vehicles (“UTV”), pure electric golf cart and EV parts are manufactured in the Hainan factory. The Company’s
Hainan factory expects to have production capacity with an annual output (three shifts) of 100,000 units of various models of EV products,
EV parts and electrical off-road vehicles and owns the above facilities. Currently, the environmental protection, planning, fire protection,
conservation of water and soil, and drainage of the Hainan factory have all passed the acceptance inspection, and are currently undergoing
the archive acceptance. The Hainan factory is ready for formal production.
Depreciation expenses for the three months ended
March 31, 2023 and 2022 were $2,578,224 and $2,701,507, respectively.
NOTE 13 - INTANGIBLE ASSETS
Intangible assets include acquired other intangibles
of trade name, customer relations, patent and technology recorded at estimated fair values in accordance with purchase accounting guidelines
for acquisitions.
The following table provides the gross carrying
value and accumulated amortization for each major class of our intangible assets, other than goodwill:
| |
Remaining | |
March 31, | | |
December 31, | |
| |
useful life | |
2023 | | |
2022 | |
Gross carrying amount: | |
| |
| | |
| |
Patent | |
2.25-3.92 years | |
$ | 4,960,775 | | |
| 4,938,765 | |
Technology | |
3.75-5.75 years | |
| 7,405,304 | | |
| 10,003,915 | |
| |
| |
| 12,366,079 | | |
| 14,942,680 | |
Less : Accumulated amortization | |
| |
| | | |
| | |
Patent | |
| |
$ | (2,911,819 | ) | |
| (2,744,024 | ) |
Technology | |
| |
| (1,822,808 | ) | |
| (1,573,079 | ) |
| |
| |
| (4,734,627 | ) | |
| (4,317,103 | ) |
Less : impairment for intangible assets | |
| |
| - | | |
| (2,631,465 | ) |
Intangible assets, net | |
| |
$ | 7,631,452 | | |
$ | 7,994,112 | |
The aggregate amortization expenses for those
intangible assets that continue to be amortized is reflected in amortization of intangible assets in the Unaudited Condensed Consolidated
Statements of Income and Comprehensive Income and were $399,757 and $514,169 for the three months ended March 31, 2023 and 2022, respectively.
Amortization expenses for the next five years
and thereafter are as follows:
Nine months ended December 31, 2023 | |
$ | 1,199,271 | |
Years ended December 31, | |
| | |
2024 | |
| 1,599,030 | |
2025 | |
| 1,536,217 | |
2026 | |
| 1,326,047 | |
2027 | |
| 1,017,076 | |
Thereafter | |
| 953,811 | |
Total | |
$ | 7,631,452 | |
NOTE 14 - LAND USE RIGHTS, NET
The Company’s land use rights consist of
the following:
| |
March 31, | | |
December 31, | |
| |
2023 | | |
2022 | |
Cost of land use rights | |
$ | 3,826,186 | | |
$ | 3,809,211 | |
Less: Accumulated amortization | |
| (925,020 | ) | |
| (899,261 | ) |
Land use rights, net | |
$ | 2,901,166 | | |
$ | 2,909,950 | |
The amortization expenses for the three months
ended March 31, 2023 and 2022, were $21,831 and $23,538, respectively.
Amortization expenses for the next five years
and thereafter are as follows:
Nine months ended December 31, 2023 | |
$ | 65,494 | |
Years ended December 31, | |
| | |
2024 | |
| 87,326 | |
2025 | |
| 87,326 | |
2026 | |
| 87,326 | |
2027 | |
| 87,326 | |
Thereafter | |
| 2,486,368 | |
Total | |
$ | 2,901,166 | |
NOTE 15 - OTHER LONG TERM ASSETS
Other long term assets as of March 31, 2023 and
December 31, 2022, consisted of the following:
| |
March 31, | | |
December 31, | |
| |
2023 | | |
2022 | |
Prepayments for land use right (i) | |
$ | 3,913,260 | | |
| 3,917,226 | |
Right - of - use asset (ii) | |
| 6,325,177 | | |
| 6,383,824 | |
Others | |
| 330,507 | | |
| 329,861 | |
Total other long-term asset | |
$ | 10,568,944 | | |
$ | 10,630,911 | |
(i) | As of March 31, 2023 and December 31, 2022, the Company’s other long term assets included net value of prepayments for land use right of Hainan facility of $3,913,260 and $3,917,226, respectively. As of March 31, 2023, the land use right of Hainan was not recognized since the land certificate is still in process. The amortization expense for the three months ended March 31, 2023 and 2022 were $21,502 and $23,183, respectively. |
(ii) | As of March 31, 2023 and December 31, 2022, the Company’s operating lease right-of-use assets in other long term assets included net value of land use right of Jinhua facility acquired in October 2020 and Jiangxi facility acquired in October 2021 of $5,693,446 and $5,697,720, respectively, as well as the amount of $631,731 and $686,104 related to the lease of Hangzhou office starting January 1, 2022, respectively. The amortization expense of land use right of Jinhua facility and Jiangxi facility for the three months ended March 31, 2023 and 2022 were $29,775 and $32,102, respectively. |
NOTE 16 - 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, Zhejiang Kandi Technologies, Kandi
Smart Battery Swap, Jiangxi Huiyi and Kandi Hainan qualify as High and New Technology Enterprise (“HNTE”) companies in the
PRC, and are entitled to a reduced income tax rate of 15% for the years presented. A HNTE Certificate is valid for three years. An entity
may re-apply for an HNTE certificate when the prior certificate expires. Historically, Zhejiang Kandi Technologies, Kandi Smart Battery
Swap, Jiangxi Huiyi have successfully re-applied for such certificates when their prior certificates expired. Kandi Hainan has been qualified
as a HNTE since 2020. Therefore, it will apply for its first renewal when eligible. Additionally, Hainan Kandi Holding also has an income
tax rate of 15% due to its local preferred tax rate in Hainan Free Trade Port. The applicable CIT rate of each of the Company’s
other subsidiaries, Kandi New Energy, Yongkang Scrou, China Battery Exchange and its subsidiaries is 25%.
The Company’s provision or benefit from
income taxes for interim periods is determined using an estimate of the Company’s annual effective tax rate, adjusted for discrete
items, if any, that are taken into account in the relevant period. Each quarter the Company updates its estimate of the annual effective
tax rate, and if its estimated tax rate changes, management makes a cumulative adjustment. For 2023, the Company’s effective tax
rate is favorably affected by a super-deduction for qualified research and development costs and adversely affected by non-deductible
expenses such as stock rewards for non-US employees, and part of entertainment expenses. The Company records valuation allowances against
the deferred tax assets associated with losses and other timing differences for which we may not realize a related tax benefit. After
combining research and development tax credits of 25% on certain qualified research and development expenses, the Company’s effective
tax rate for the three months ended March 31, 2023 and 2022 was a tax benefit of 175.79% on a reported income before taxes of approximately
$0.2 million, a tax benefit of 1.97% on a reported loss before taxes of approximately $1.7 million, respectively.
The quarterly tax provision, and the quarterly
estimate of the Company’s annual effective tax rate, is subject to significant variation due to several factors, including variability
in accurately predicting the Company’s pre-tax and taxable income and loss, acquisitions (including integrations) and investments,
changes in its stock price, changes in its deferred tax assets and liabilities and their valuation, return to provision true-up, foreign
currency gains (losses), changes in regulations and interpretations related to tax, accounting, and other areas. Additionally, the Company’s
effective tax rate can be volatile based on the amount of pre-tax income or loss. The income tax provision for the three months ended
March 31, 2023 and 2022 was tax benefit of $379,546 and tax benefit of $32,600, respectively.
Under ASC 740 guidance relating to uncertain tax
positions, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded
in the financial statements, 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 March 31, 2023, 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. 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 March 31, 2023, 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 March 31, 2023, the Company has no accrued interest or penalties related to uncertain
tax positions.
The tax effected aggregate Net Operating Loss
(“NOL”) was $8.5 million and $6.2 million in tax year 2022 and 2021, which were deriving from entities in the PRC, Hong Kong
and U.S. Some of the NOLs will start to expire from 2026 if they are not used. The cumulative NOL in the PRC can be carried forward for
five years in general, and ten years for entities qualify High and New Technology Enterprise (“HNTE”) treatment, which is
$0.6 million and $7.9 million respectfully, to offset future net profits for income tax purposes.
(b) Tax Holiday Effect
For the three months ended March 31, 2023 and
2022, the PRC CIT rate was 25%. Certain subsidiaries of the Company are entitled to tax exemptions (tax holidays) for the three months
ended March 31, 2023 and 2022.
The combined effects of income tax expense exemptions
and reductions available to the Company for the three months ended March 31, 2023 and 2022 are as follows:
| |
Three Months Ended | |
| |
March 31, | |
| |
2023 | | |
2022 | |
Tax benefit (holiday) credit | |
$ | 433,950 | | |
$ | 154,097 | |
Basic net income per share effect | |
$ | 0.01 | | |
$ | 0.00 | |
NOTE 17 - LEASES AND RIGHT-OF-USE-ASSETS
During October 2020, land use right of gross value
of $3.5 million was acquired from the government as the new site of Jinhua Facility’s relocation as per the Repurchase Agreement.
On October 31, 2021, the Company acquired $2.8 million of land use rights through the acquisition of Jiangxi Huiyi. This land use rights
was wholly prepaid.
The Company has entered into a lease for Hangzhou
office, with a term of 48 months from January 1, 2022 to December 31, 2025. The Company recorded operating lease assets and operating
lease liabilities on January 1, 2022, with a remaining lease term of 48 months and discount rate of 3.70%. The annual lease payment for
2022 was prepaid as of January 1, 2022. The Company has paid the first year of lease and deposit amount of $262,309.
The Company also elected to apply the short-term
lease exception for lease arrangements with a lease term of 12 months or less at commencement. Lease terms used to compute the present
value of lease payments do not include any option to extend, renew or terminate the lease that the Company is not able to reasonably certain
to exercise upon the lease inception. Accordingly, operating lease right-of-use assets and liabilities do not include leases with a lease
term of 12 months or less.
As of March 31, 2023, the Company’s operating
lease right-of-use assets (grouped in other long-term assets on the balance sheet) was $6,325,177 and lease liability was $622,156 (grouped
in other current liabilities and other long-term liabilities on the balance sheet). For the three months ended March 31, 2023 and 2022,
the Company’s operating lease expense were $87,417 and $94,250, respectively.
Supplemental information related to operating
leases was as follows:
| |
Three Months Ended | |
| |
March 31, | |
| |
2023 | | |
2022 | |
Cash payments for operating leases | |
$ | 29,775 | | |
$ | 94,250 | |
Maturities of lease liabilities as of March 31,
2023 were as follow:
Maturity of Lease Liabilities: | |
Lease payable | |
Years ended December 31, 2023 | |
$ | 163,018 | |
2024 | |
| 225,399 | |
2025 | |
| 233,739 | |
NOTE 18 - CONTINGENT CONSIDERATION LIABILITY
On October 31, 2021, the Company completed the
acquisition of 100% of the equity of Jiangxi Huiyi. The Company paid approximately RMB 50 million (approximately $7.9 million) at the
closing of the transaction using cash on hand and may be required to pay future consideration of up to an additional 2,576,310 shares
of common stock, or the total make good shares, upon the achievement of certain net income-based milestones in the next three years. Due
to the latest COVID-19 outbreak and extended lockdown in some areas in China, in June 2022, the Company agreed with the original shareholders
of Jiangxi Huiyi (the “Transferors”) to revise the conditions of the annual profit target and extension of evaluation period
for the first year. Pursuant to the supplementary agreement, the Transferors have the right to obtain 858,770 KNDI shares in each of the
below-mentioned periods, provided that Jiangxi Huiyi achieves a net income of 1) RMB 8 million yuan or more during the period from July
1, 2021 to September 30, 2022 (“Period I”); 2) RMB 15 million yuan or more during the period from October 1, 2022 to September
30, 2023 (“Period II”); 3) RMB 15 million yuan or more during the period from October 1, 2023 to September 30, 2024 (“Period
III”). If the net income of Jiangxi Huiyi fails to reach the respective target number in any of the three periods, the shares that
the Transferors are entitled to obtain in that period will be adjusted accordingly: 1) if the difference between the net income in each
Period and its Target Number is less than or equivalent to 20% of its Target Number (RMB 8 Million in Period I or RMB 15 Million in Period
II or Period III), the transferee or KNDI has right to directly subtract 171,754 KNDI shares from the total make good shares, and the
Transferor are entitled to obtain 687,016 KNDI shares; 2) if the difference between the net income in each Period and its Target Number
(RMB 8 Million in Period I or RMB 15 Million in Period II or Period III) is more than 20% of its Target Number but less than 40% of its
Target Number, the transferee or KNDI has the right to directly subtract 343,508 KNDI shares from the total make good shares, and the
Transferors have the right to obtain 515,262 KNDI shares; 3) if the difference between the net income in each Period and its Target Number
(RMB 8 Million in Period I or RMB 15 Million in Period II or Period III) is greater than or equal to 40% of its Target Number, the transferee
of KNDI has the right to directly subtract 858,770 KNDI shares from the total make good shares, and the Transferors will not have the
right to obtain any shares in such year. For the period from July 1, 2021 to September 30, 2022, Jiangxi Huiyi achieved its net profit
target. Accordingly, the Transferors will receive 858,770 shares of Kandi’s restrictive common stock as part of the purchase price.
The Company recorded contingent consideration
liability of the estimated fair value of the contingent consideration the Company currently expects to pay to the KSBS Shareholders and
Jiangxi Huiyi’s former members upon the achievement of certain milestones. The fair value of the contingent consideration liability
associated with remaining shares of restrictive common stock was estimated by using the Monte Carlo simulation method, which took into
account all possible scenarios. This fair value measurement is classified as Level 3 within the fair value hierarchy prescribed by ASC
Topic 820, Fair Value Measurement and Disclosures. In accordance with ASC Topic 805, Business Combinations, the Company will re-measure
this liability each reporting period and record changes in the fair value through a separate line item within the Company’s consolidated
statements of income.
As of March 31, 2023 and December 31, 2022,
the Company’s contingent consideration liability to former members of Jiangxi Huiyi was $2,164,000 and $1,803,000, respectively.
NOTE 19 - STOCK OPTIONS
On September 7, 2022, the Compensation Committee
of the Board of Directors of the Company approved the grant of stock options to purchase 5,000,000 shares of the Company’s common
stock, at an exercise price of $2.07 per share, to the Company’s senior employees. The stock options will vest ratably over three
years on October 7, 2023, October 7, 2024 and October 7, 2025, respectively, and expire on the tenth anniversary of the grant date. The
Company valued the stock options at $$6,704,829 and has amortized the stock compensation expense using the graded vesting method over
the service period from September 7, 2022, through October 7, 2025. The value of the stock options was estimated using the Binomial Tree
Model with an expected volatility of 79.83%, an expected life of 10 years, a risk-free interest rate of 3.27% and an expected dividend
yield of 0.00%. There were $980,893 and $0 in stock compensation expenses associated with stock options booked for the three months ended
March 31, 2023 and 2022, respectively.
NOTE 20 - STOCK AWARD
In connection with the appointment of Mr. Henry
Yu as a member of the Board of Directors (the “Board”), the Board authorized the Company to compensate Mr. Henry Yu with 5,000 shares
of Company’s restricted common stock every six months as compensation, beginning in July 2011.
As compensation for Mr. Jerry Lewin’s services
as a member of the Board, the Board authorized the Company to compensate Mr. Jerry Lewin with 5,000 shares of Company’s
restricted common stock every six months, beginning in August 2011.
As compensation for Ms. Kewa Luo’s services
as the Company’s investor relation officer, the Board authorized the Company to compensate Ms. Kewa Luo with 2,500 shares
of the Company’s common stock every three months, beginning in September 2013.
On May 15, 2020, the Board appointed Mr. Jehn
Ming Lim as the Chief Financial Officer. Mr. Lim was entitled to receive 6,000 shares of the common stock annually, which shall
be issuable evenly on each six-month anniversary hereof.
On January 10, 2023, the Board appointed Dr. Xueqin
Dong as the Chief Executive Officer, Dr. Dong was entitled to receive 20,000 shares of the common stock.
The fair value of stock awards with service condition
is determined based on the closing price of the common stock on the date the shares are granted. The compensation costs for awards of
common stock are recognized over the requisite service period.
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. 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. 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 grant the total number of shares of common
stock of the stock award for selected executives and key employees 250,000 shares of common stock for each fiscal year. On April
18, 2018, the Company granted 238,600 shares of common stock to certain management members and employees as compensation for
their past services under the 2008 Plan. On April 30, 2019, the Company granted 238,600 shares of common stock to certain management
members and employees as compensation for their past services under the 2008 Plan. On May 9, 2020, the Company granted 238,600 shares
of common stock to certain management members and employees as compensation for their past services under the 2008 Plan. On April 30,
2021, the Company granted 238,600 shares of common stock to certain management members and employees as compensation for their
past services under the 2008 Plan. On May 10, 2022, the Company granted 238,600 shares of common stock to certain management
members and employees as compensation for their past services under the 2008 Plan.
On March
13, 2023 (the “Signing Date”), Kandi Technologies Group, Inc., a Delaware corporation (the “Company”), entered
into an Equity Incentive Agreement (the “Equity Incentive Agreement”) with Pan Guoqing (the “Receiving Party”),
who is the presentative of the project management team of the project of crossover golf carts of Kandi Electric Vehicles (Hainan) Co.,
Ltd. (“Kandi EV Hainan”), a wholly owned subsidiary of the Company organized under the laws of the People’s Republic
of China. The Receiving Party was originally the management team of golf crossover project of Hainan Kandi Holding New Energy Technology
Co., Ltd. (“Hainan Kandi Holding”), a company organized under the laws of the People’s Republic of China. The Receiving
Party has agreed to be employed as management team of Kandi EV Hainan, responsible for the operation of the golf crossover project of
Kandi EV Hainan, and stop production and operation of Hainan Kandi Holding’s business. An English translated copy of the Equity
Incentive Agreement is filed as an exhibit and incorporated by reference in its entirety to this report.
Pursuant
to the Equity Incentive Agreement, for the next three calendar years ending in December 31, 2025 (the “Incentive Period”),
the Company will provide equity incentives to the Receiving Party, subject to the Receiving Party meeting certain performance milestones
in its role as the management team of the golf crossover project (the “Crossover Project”) of Kandi EV Hainan. The performance
milestones are measured in terms of the net profit of the Crossover Project after deducting relevant operating costs and income taxes,
excluding various incentives, allowances and rebates, among others, and shall be audited and confirmed by the third party auditor designated
by the granting party, or the Company. The net profit target (the “Net Profit Target”) for the Incentive Period is RMB
150 million (approximately $21,719,613), with an annual net profit target (the “Annual Net Profit Target”) of RMB 50 million
(approximately $7,239,871). Should the Receiving Party meet or exceed the Net Profit Target over the Incentive Period, the Company will
issue to the Receiving Party as incentive compensation up to a maximum of 5,957,811 shares (the “Maximum Incentive Shares”)
of the Company’s common stock (the “Incentive Shares”). The amount of Incentive Shares issued within each calendar year
of the Incentive Period is adjusted based on the net profit of the Crossover Project within that calendar year. If the net profit of every
of the three calendar years is below 60% of the Annual Net Profit Target, the Receiving Party will receive no Incentive Shares. If the
net profit of every of the three calendar years is at or above the Annual Net Profit Target, the Receiving Party will receive the Maximum
Incentive Shares, with higher performance resulting in receiving the Incentive Shares earlier. If the net profit of every of the three
calendar years fall between 60% of the Annual Net Profit Target and the Annual Net Profit Target, the Receiving Party will receive an
amount of Incentive Shares below the Maximum Incentive Shares.
The Receiving
Party has no relationship to the Company other than as described above. The Equity Incentive Agreement is subject to the Company’s
approval.
For the three months ended March 31, 2023 and
2022, the Company recognized $22,925 and $22,925 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 - COMMITMENTS AND CONTINGENCIES
Guarantees and pledged collateral for bank
loans to other parties
(1) |
Guarantees for bank loans |
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 $2,912,607 (RMB 20 million)
loan from Shanghai Pudong Development Bank Jinhua Branch, for a term from 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 lawsuit 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 demanded that the guarantor bear the liability for compensation. On May 27, 2017, a judicial mediation took place in Yongkang
City and parties reached a settlement in mediation, in which the plaintiff agreed NGCL would repay the loan principal and interest in
installments. The settlement was executed starting from May 2019. If there were an event of default that NGCL could not repay the loan,
the Company may be obligated to bear the liability of defaulted amount. According to the current financial situation of NGCL, the Company
does not expect it will incur any losses in connection with this matter.
(2) |
Pledged collateral for bank loans for which the parties other than the Company are the borrowers. |
As of March 31, 2023 and December 31, 2022, none
of the Company’s land use rights or plants and equipment was pledged as collateral securing bank loans for which the parties other
than the Company are the borrowers.
Litigation
Beginning in March 2017, putative shareholder
class actions were filed against Kandi Technologies Group, Inc. (“Kandi”) 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 alleged violations of the federal securities laws based on 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
sought damages on behalf of putative classes of shareholders who purchased or acquired Kandi’s securities prior to March 13, 2017.
Kandi moved to dismiss the remaining cases, all of which were pending in the New York federal court, that motion was granted in September
2019, and the time to appeal has run. In June 2020, a similar but separate putative securities class action was filed against Kandi and
certain of its current and former directors and officers in California federal court. This action was transferred to the New York federal
court in September 2020, Kandi moved to dismiss in March 2021, and that motion was granted in October 2021. The plaintiff in this case
subsequently filed an amended complaint, Kandi moved to dismiss that complaint in January 2022, and the motion was granted in part and
denied in part in September 2022. Discovery is ongoing as to the remaining claims and defendants.
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. The New York federal court confirmed the voluntary dismissal of these actions
in April 2019.
In October 2017, a shareholder filed a books and
records action against the Company in the Delaware Court of Chancery pursuant to 8 Del. C. Section 220 seeking the production of certain
documents generally relating to the same underlying items described above as well as attorney’s
fees (the “Section 220 Litigation”). On September 28, 2018, the parties, through their respective counsel, agreed to dismiss
the Section 220 Litigation with prejudice and with each party bearing its own attorney’s fees, costs, and expenses, thereby concluding
the action. In February 2019, this same shareholder commenced a derivative action against certain current and former directors of Kandi
in the Delaware Court of Chancery. A motion to dismiss this derivative action was filed in May 2019 and that motion was denied on April
27, 2020. Discovery is ongoing.
Separately, in connection with allegations of
misconduct identified in pre-suit demands made by putative shareholders of Kandi, Kandi formed a Special Litigation Committee (“SLC”)
and retained a Delaware law firm as independent counsel to the SLC to aid in the SLC’s investigation of, and to ultimately report
on, the allegations of misconduct set forth in the pre-suit demands. The SLC recommended to Kandi’s board of directors in June 2020
that the SLC be dissolved in light of the ongoing derivative action pending in the Delaware Court of Chancery, and this recommendation
was adopted by the board in August 2020.
In December 2020, a putative securities class
action was filed against Kandi and certain of its current officers in the United States District Court for the Eastern District of New
York. The complaint generally alleges violations of the federal securities laws based on claims made in a report issued by Hindenburg
Research in November 2020, and seeks damages on behalf of a putative class of shareholders who purchased or acquired Kandi’s securities
prior to March 15, 2019. Kandi moved to dismiss in February 2022, and that motion remains pending.
While the Company believes that the claims in
these litigations are without merit and will defend itself vigorously, the Company is unable to estimate the possible loss, if any, associated
with these litigations. The ultimate outcome of any litigation is uncertain and the outcome of these matters, whether favorable or unfavorable,
could have a negative impact on the Company’s financial condition or results of operations due to defense costs, diversion of management
resources and other factors. Defending litigation can be costly, and adverse results in the litigations could result in substantial monetary
judgments. No assurance can be made that litigation will not have a material adverse effect on the Company’s future financial position.
NOTE 22 - SEGMENT REPORTING
The Company has one operating segment.
The Company’s revenue and long-lived assets are primarily derived from and located in China and the US. The Company does not have
manufacturing operations outside of China.
The following table sets forth disaggregation
of revenue:
| |
Three Months Ended
March 31 | |
| |
2023 | | |
2022 | |
| |
Sales
Revenue | | |
Sales
Revenue | |
Primary geographical markets | |
| | |
| |
U.S. and other countries/areas | |
$ | 20,717,818 | | |
$ | 10,736,375 | |
China | |
| 2,144,290 | | |
| 14,155,029 | |
Total | |
$ | 22,862,108 | | |
$ | 24,891,404 | |
| |
| | | |
| | |
Major products | |
| | | |
| | |
EV parts | |
$ | 27,365 | | |
$ | 3,667,778 | |
EV products | |
| - | | |
| 339,955 | |
Off-road vehicles and associated parts | |
| 20,786,134 | | |
| 10,713,741 | |
Electric Scooters, Electric Self-Balancing Scooters and associated parts | |
| 145,991 | | |
| 2,127,365 | |
Battery exchange equipment and Battery exchange service | |
| 97,683 | | |
| 25,511 | |
Lithium-ion cells | |
| 1,804,935 | | |
| 8,017,054 | |
Total | |
$ | 22,862,108 | | |
$ | 24,891,404 | |
| |
| | | |
| | |
Timing of revenue recognition | |
| | | |
| | |
Products transferred at a point in time | |
$ | 22,862,108 | | |
$ | 24,891,404 | |
Total | |
$ | 22,862,108 | | |
$ | 24,891,404 | |