UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended
or
For the transition period from ______to______
Commission
file number
(Exact name of registrant as specified in charter)
| | ||
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) | |
Jinhua, Zhejiang Province | ||
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ | ||
| Non-accelerated filer | ☐ | Smaller reporting company | |
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐
As
of November 3, 2020, the registrant had 56,531,702 shares of common stock issued and
TABLE OF CONTENTS
i
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
KANDI
TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2020 | December 31, 2019 | |||||||
| (UNAUDITED) | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable (net of allowance for doubtful accounts of $ | ||||||||
| Inventories | ||||||||
| Notes receivable | ||||||||
| Other receivables | ||||||||
| Prepayments and prepaid expense | ||||||||
| Amount due from the Affiliate Company | ||||||||
| Other current assets | ||||||||
| TOTAL CURRENT ASSETS | ||||||||
| NON-CURRENT ASSETS | ||||||||
| Property, plant and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Land use rights, net | ||||||||
| Investment in the Affiliate Company | ||||||||
| Goodwill | ||||||||
| Other long term assets | ||||||||
| TOTAL NON-CURRENT ASSETS | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | $ | ||||||
| Other payables and accrued expenses | ||||||||
| Short-term loans | ||||||||
| Notes payable | ||||||||
| Income tax payable | ||||||||
| Advance receipts | ||||||||
| Long term loans - current portion | ||||||||
| Other current liabilities | ||||||||
| TOTAL CURRENT LIABILITIES | ||||||||
| NON-CURRENT LIABILITIES | ||||||||
| Long term loans | ||||||||
| Deferred taxes liability | ||||||||
| Contingent consideration liability | ||||||||
| Other long-term liabilities | ||||||||
| TOTAL NON-CURRENT LIABILITIES | ||||||||
| TOTAL LIABILITIES | ||||||||
| STOCKHOLDER'S EQUITY | ||||||||
| Common stock, $ | ||||||||
| Less: Treasury stock ( | ( | ) | ( | ) | ||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| TOTAL STOCKHOLDERS' EQUITY | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements
1
KANDI
TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2020 | September 30, 2019 | September 30, 2020 | September 30, 2019 | |||||||||||||
| REVENUES FROM UNRELATED PARTIES, NET | $ | $ | $ | $ | ||||||||||||
| REVENUES FROM THE AFFILIATE COMPANY AND RELATED PARTIES, NET | ||||||||||||||||
| REVENUES, NET | ||||||||||||||||
| COST OF GOODS SOLD | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| GROSS PROFIT | ||||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Research and development | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Selling and marketing | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| General and administrative | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gain on disposal of long-lived assets | ||||||||||||||||
| TOTAL OPERATING EXPENSES, NET | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| (LOSS) INCOME FROM OPERATIONS | ( | ) | ( | ) | ||||||||||||
| OTHER INCOME (EXPENSE): | ||||||||||||||||
| Interest income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Change in fair value of contingent consideration | ( | ) | ||||||||||||||
| Government grants | ||||||||||||||||
| Gain (loss) from equity dilution in the Affiliate Company | ( | ) | ||||||||||||||
| Gain from sale of equity in the Affiliate Company | ||||||||||||||||
| Share of loss after tax of the Affiliate Company | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income, net | ||||||||||||||||
| TOTAL OTHER (EXPENSE) INCOME, NET | ( | ) | ( | ) | ||||||||||||
| (LOSS) INCOME BEFORE INCOME TAXES | ( | ) | ||||||||||||||
| INCOME TAX BENEFIT (EXPENSE) | ( | ) | ( | ) | ||||||||||||
| NET (LOSS) INCOME | ( | ) | ||||||||||||||
| OTHER COMPREHENSIVE INCOME (LOSS) | ||||||||||||||||
| Foreign currency translation adjustment | ( | ) | ( | ) | ||||||||||||
| COMPREHENSIVE INCOME (LOSS) | $ | $ | $ | $ | ( | ) | ||||||||||
| WEIGHTED AVERAGE SHARES OUTSTANDING BASIC AND DILUTED | ||||||||||||||||
| NET (LOSS) INCOME PER SHARE, BASIC AND DILUTED | $ | ( | ) | $ | $ | $ | ||||||||||
See accompanying notes to condensed consolidated financial statements
2
KANDI TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
| Number of Outstanding Shares | Common Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total | ||||||||||||||||||||||
| Balance, December 31, 2018 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Stock issuance and awards | ||||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Foreign currency translation | - | |||||||||||||||||||||||||||
| Balance, March 31, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Stock issuance and awards | ||||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Foreign currency translation | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance, June 30, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Stock issuance and awards | ||||||||||||||||||||||||||||
| Stock buyback | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Commission in stock buyback | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| Foreign currency translation | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance, September 30, 2019 | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
| Number of Outstanding Shares | Common Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total | ||||||||||||||||||||||
| Balance, December 31, 2019 | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
| Stock issuance and awards | ||||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Foreign currency translation | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance, March 31, 2020 | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
| Stock issuance and awards | ||||||||||||||||||||||||||||
| Net income | - | |||||||||||||||||||||||||||
| Foreign currency translation | - | |||||||||||||||||||||||||||
| Balance, June 30, 2020 | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
| Stock issuance and awards | ||||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Foreign currency translation | - | |||||||||||||||||||||||||||
| Reduction in the Affiliate Company’s equity | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance, September 30, 2020 | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
3
KANDI
TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Nine Months Ended | ||||||||
| September 30, 2020 | September 30, 2019 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities | ||||||||
| Depreciation and amortization | ||||||||
| (Reversal) provision of allowance for doubtful accounts | ( | ) | ||||||
| Deferred taxes | ||||||||
| Share of loss after tax of the Affiliate Company | ||||||||
| Gain from equity dilution in the Affiliate Company | ( | ) | ||||||
| Gain from sale of equity in the Affiliate Company | ( | ) | ||||||
| Gain on disposal of long-lived assets | ( | ) | ||||||
| Change in fair value of contingent consideration | ( | ) | ( | ) | ||||
| Stock based compensation expense | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Notes receivable | ||||||||
| Notes receivable from the Affiliate Company and related party | ||||||||
| Inventories | ( | ) | ( | ) | ||||
| Other receivables and other assets | ( | ) | ( | ) | ||||
| Prepayments and prepaid expenses | ( | ) | ||||||
| Amount due from the Affiliate Company | ||||||||
| Increase (Decrease) In: | ||||||||
| Accounts payable | ( | ) | ||||||
| Other payables and accrued liabilities | ||||||||
| Notes payable | ( | ) | ( | ) | ||||
| Income tax payable | ( | ) | ( | ) | ||||
| Net cash used in operating activities | $ | ( | ) | $ | ( | ) | ||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchases of property, plant and equipment, net | ( | ) | ( | ) | ||||
| Payment for construction in progress | ( | ) | ( | ) | ||||
| Proceeds from disposal of long-lived assets | ||||||||
| Loan to third party | ( | ) | ( | ) | ||||
| Cash received from sales of equity in the Affiliate Company | ||||||||
| Net cash provided by investing activities | $ | $ | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from short-term loans | ||||||||
| Repayments of short-term loans | ( | ) | ( | ) | ||||
| Repayments of long-term loans | ( | ) | ( | ) | ||||
| Proceeds from long-term loans | ||||||||
| Repayments of loan from third party | ( | ) | ||||||
| Stock buyback with commission | ( | ) | ||||||
| Net cash used in financing activities | $ | ( | ) | $ | ( | ) | ||
| NET INCREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH | ||||||||
| Effect of exchange rate changes | ( | ) | ||||||
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF YEAR | ||||||||
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD | $ | $ | ||||||
| -CASH AND CASH EQUIVALENTS AT END OF PERIOD | ||||||||
| -RESTRICTED CASH AT END OF PERIOD | ||||||||
| SUPPLEMENTARY CASH FLOW INFORMATION | ||||||||
| Income taxes paid | $ | $ | ||||||
| Interest paid | $ | $ | ||||||
| SUPPLEMENTAL NON-CASH DISCLOSURES: | ||||||||
| Decrease in investment in the Affiliate Company due to change in its equity | $ | $ | ||||||
| Notes receivable from unrelated parties for equity transfer payment | $ | $ | ||||||
| Common stock issued for settlement of payables related to acquisitions (see Note 20) | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements
4
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 (through the Affiliate Company, formerly defined as the JV Company), 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).
The Company’s organizational chart as of the date of this report is as follows:
In June 2020, Jinhua An Kao Power Technology Co., Ltd. changed its name to Zhejiang Kandi Smart Battery Swap Technology Co., Ltd (“Kandi Smart Battery Swap”).
In September 2020, Kandi Vehicles transferred all of its equity interest in Yongkang Scrou Electric Co, Ltd. (“Yongkang Scrou”) to its wholly owned subsidiary, Kandi Smart Battery Swap.
In September 2020, to better monetize its
dozens of patents in the field of battery swap systems and attract strategic investors to participate across the whole sector value
chain, including battery swapping services and used battery recycling, the Company formed China Battery Exchange Technology Co.,
Ltd. (“China Battery Exchange”). Kandi Vehicles has
In September 2020, intending to operate
a ridesharing service across China, Zhejiang Ruiheng Technology Co., Ltd (“Ruiheng”) was established by Zhejiang Ruibo
New Energy Vehicle Service Company Ltd. (“Ruibo”), Jiangsu Jinpeng Group Ltd. (“Jinpeng”) and Kandi Vehicles.
Ruibo, Jinpeng and Kandi Vehicles each owns
The Company’s original primary business operations consist of designing, developing, manufacturing and commercializing EV products (through Kandi Electric Vehicles (Hainan) Co., Ltd. and the Affiliate Company), EV parts and off-road vehicles. The COVID-19 outbreak has seriously impacted the EV market in 2020. As a result, the Company plans to manufacture and sell a number of ancillary products aimed at the dynamic power train system of intelligent transportation. For example, the dynamic power train system of Electric Scooters and Electric Self-Balancing Vehicles. The Company is pursuing these opportunities by expanding production of intelligent transportation products that exploit its advantages in the Yongkang Scrou’s power electric motor and Kandi Smart Battery Swap’s power battery pack.
5
NOTE 2 - LIQUIDITY
The Company had working capital of $
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.
Although the Company has paid off all the short-term bank loans as of September 30, 2020, it still retains the credit line, which
can be used at any time when the Company has special needs. In addition, the Company received the remaining RMB
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 the 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, 2019 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, 2019 (the “2019 Form 10-K”).
Beginning in 2020, a strain of new coronavirus (“COVID-19”) has spread globally and at this point. Though it becomes more stable in China, there are new cases reported continuously at present. The extent to which the COVID-19 may impact operations of the Company, with majority of operations based in China, is alleviated though it remains uncertain due to the fact that the COVID-19 is not completely over. The extent of the impact of the COVID-19 on the Company’s business and operations will depend on several factors, such as the duration, severity, and geographic spread of the pandemic, development of the testing and treatment and stimulus measures of the government. The Company is monitoring and assessing the evolving situation closely and evaluating its potential exposure. The operating results for the nine months ended September 30, 2020 may not be indicative of the future operating results for the fiscal year ending December 31, 2020 or other future periods, particularly in light of the uncertain impact COVID-19 could have on the Company’s business.
6
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) | Kandi Vehicles, a wholly-owned subsidiary of Continental, incorporated under the laws of the PRC; |
| (3) | Kandi New Energy Vehicle Co. Ltd. (“Kandi New Energy”), a |
| (4) | Kandi Electric Vehicles (Hainan) Co., Ltd. (“Kandi Hainan”), a subsidiary, |
| (5) | Zhejiang Kandi Smart Battery Swap Technology Co., Ltd (“Kandi Smart Battery Swap”), a wholly-owned subsidiary of Kandi Vehicles, 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; and |
| (7) | SC Autosports (d/b/a Kandi America), a wholly-owned subsidiary of the Company formed under the laws of the State of Texas. |
Equity Method Investee
The Company’s consolidated net income
also includes the Company’s proportionate share of the net income or loss of its equity method investment in the Affiliate
Company, in which the Company owns
All intra-entity profits and losses with regard to the Company’s equity method investee have been eliminated.
NOTE 5 - USE OF ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP 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 condensed 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
Our significant accounting policies are detailed in “Note 6 - Summary of Significant Accounting Policies” of the Company’s 2019 Form 10-K, excepting the following.
(v) Reclassification
Certain reclassifications have been made to the condensed consolidated statements of cash flows for nine months ended September 30, 2019 to conform to the presentation of condensed consolidated financial statement for nine months ended September 30, 2020. The Company reclassified the following 1) grouping due from employees into other receivables and other assets; 2) grouping customer deposits and deferred income into other payables and accrued liabilities; 3) reclassifying a portion of other receivables and other assets under operating activities to loan to third party under investing activities; 4) reclassifying a portion of other payables and accrued liabilities under operating activities to repayments of loan from third party under financing activities.
7
NOTE 7 - NEW ACCOUNTING PRONOUNCEMENTS
In February 2018, the FASB released ASU 2018-2, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This standard update addresses a specific consequence of the Tax Cuts and Jobs Act (the “Tax Act”) and allows a reclassification from accumulated other comprehensive income to retained earnings for the stranded tax effects resulting from the Tax Act. Consequently, the update eliminates the stranded tax effects that were created as a result of the historical U.S. federal corporate income tax rate to the newly enacted U.S. federal corporate income tax rate. The Company is required to adopt this standard in the first quarter of fiscal year 2020, with early adoption permitted. The amendments in this update should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company adopted this ASU in the first quarter of 2020 and the new standard did not have a material impact on the consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13 Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds, and modifies certain disclosure requirements for fair value measurements under ASC 820. This ASU is to be applied on a prospective basis for certain modified or new disclosure requirements, and all other amendments in the standard are to be applied on a retrospective basis. The new standard is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. The Company adopted this ASU in the first quarter of 2020 and the new standard did not have a material impact on the consolidated financial statements.
In December 18, 2019, the FASB issued ASU 2019-12, income Taxes — Simplifying the Accounting for Income Taxes serves to simplify the accounting for income taxes by removing certain following Codification exceptions, including exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment. This guidance will be effective after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of the new guidance and do not expect the adoption of this guidance will have a material impact on the consolidated financial statements.
In January 2020, the FASB issued ASU 2020-01, Investments—Equity Securities, Investments—Equity Method and Joint Ventures, and Derivatives and Hedging, which clarifies the interaction of the accounting for equity securities under Topic 321, the accounting for equity method investments in Topic 323, and the accounting for certain forward contracts and purchased options in Topic 815. This guidance will be effective in the first quarter of 2021 on a prospective basis, with early adoption permitted. The Company is currently evaluating the impact of the new guidance and do not expect the adoption of this guidance will have a material impact on the consolidated financial statements.
NOTE 8 - CONCENTRATIONS
(a) Customers
For the three-month period ended September
30, 2020, the Company’s major customers, each of whom accounted for more than
| Sales | Trade Receivable | |||||||||||||||
| Three Months | Three Months | |||||||||||||||
| Ended | Ended | |||||||||||||||
| September 30, | September 30， | September 30, | December 31, | |||||||||||||
| Major Customers | 2020 | 2019 | 2020 | 2019 | ||||||||||||
| Customer A | % | % | % | % | ||||||||||||
| Customer B | % | % | % | % | ||||||||||||
| Customer C | % | - | % | - | ||||||||||||
For the nine-month period ended September
30, 2020, the Company’s major customers, each of whom accounted for more than
| Sales | Trade Receivable | |||||||||||||||
| Nine Months | Nine Months | |||||||||||||||
| Ended | Ended | |||||||||||||||
| September 30, | September 30, | September 30, | December 31, | |||||||||||||
| Major Customers | 2020 | 2019 | 2020 | 2019 | ||||||||||||
| Customer A | % | % | % | % | ||||||||||||
| Customer B | % | % | % | % | ||||||||||||
8
(b) Suppliers
For the three-month period ended September
30, 2020, the Company’s major suppliers, each of whom accounted for more than
| Purchases | Accounts Payable | |||||||||||||||
| Three Months | Three Months | |||||||||||||||
| Ended | Ended | |||||||||||||||
| September 30, | September 30, | September 30, | December 31, | |||||||||||||
| Major Suppliers | 2020 | 2019 | 2020 | 2019 | ||||||||||||
| Zhejiang Kandi Supply Chain Management Co., Ltd. | | % | | % | | % | | % | ||||||||
| Supplier D | % | - | % | - | ||||||||||||
For the nine -month period ended September
30, 2020, the Company’s major suppliers, each of whom accounted for more than
| Purchases | Accounts Payable | |||||||||||||||
| Nine Months | Nine Months | |||||||||||||||
| Ended | Ended | |||||||||||||||
| September 30, | September 30, | September 30, | December 31, | |||||||||||||
| Major Suppliers | 2020 | 2019 | 2020 | 2019 | ||||||||||||
| Zhejiang Kandi Supply Chain Management Co., Ltd. | % | % | | % | % | |||||||||||
| Supplier D | % | % | % | - | ||||||||||||
NOTE 9 - EARNINGS (LOSS) PER SHARE
The Company calculates earnings per share
in accordance with ASC 260, Earnings Per Share, which requires a dual presentation of basic and diluted earnings per share. Basic
earnings per share are computed using the weighted average number of shares outstanding during the reporting period. Diluted earnings
per share represents basic earnings per share adjusted to include the potentially dilutive effect of outstanding stock options
and warrants (using treasury stock method). Due to the average market price of the common stock during the period below the exercise
price of the options, approximately
NOTE 10 - ACCOUNTS RECEIVABLE
Accounts receivable are summarized as follows:
| September 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Accounts receivable | $ | $ | ||||||
| Less: allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Accounts receivable, net | $ | $ | ||||||
NOTE 11 - INVENTORIES
Inventories are summarized as follows:
| September 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Raw material | $ | $ | ||||||
| Work-in-progress | ||||||||
| Finished goods | ||||||||
| Inventories | $ | $ | ||||||
9
NOTE 12 - NOTES RECEIVABLE
As of September 30, 2020, there was $
NOTE 13 - OTHER RECEIVABLES
Other receivables consist of the following:
| September 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Loan to third party | $ | $ | ||||||
| Others | ||||||||
| Total other receivables | $ | $ | ||||||
As of September 30, 2020 and December 31,
2019, the Company’s other receivable includes $
NOTE 14 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plants and equipment as of September 30, 2020 and December 31, 2019, consisted of the following:
| September 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| At cost: | ||||||||
| Buildings | $ | $ | ||||||
| Machinery and equipment | ||||||||
| Office equipment | ||||||||
| Motor vehicles and other transport equipment | ||||||||
| Molds and others | ||||||||
| Less : Accumulated depreciation | $ | ( | ) | $ | ( | ) | ||
| Property, plant and equipment, net | $ | $ | ||||||
10
As of September 30, 2020 and December 31,
2019, the net book value of property, plant and equipment pledged as collateral for the Company’s bank loans totaled $
Depreciation expenses for the three months
ended September 30, 2020 and 2019 were $
NOTE 15 - INTANGIBLE ASSETS
Intangible assets include acquired intangibles of trade name, customer relations and patent.
The following table provides the gross carrying value and accumulated amortization for each major class of our intangible assets, other than goodwill:
| Remaining | September 30, | December 31, | ||||||||
| useful life | 2020 | 2019 | ||||||||
| Gross carrying amount: | ||||||||||
| Trade name | $ | $ | ||||||||
| Customer relations | ||||||||||
| Patent | ||||||||||
| Less : Accumulated amortization | ||||||||||
| Trade name | $ | ( | ) | $ | ( | ) | ||||
| Customer relations | ( | ) | ( | ) | ||||||
| Patent | ( | ) | ( | ) | ||||||
| ( | ) | ( | ) | |||||||
| Intangible assets, net | $ | $ | ||||||||
The aggregate amortization expenses for
those intangible assets were $
Amortization expenses for the next five years and thereafter are as follows:
| Three months ending December 31, 2020 | $ | |||
| Years ending December 31, | ||||
| 2021 | ||||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| Thereafter | ||||
| Total | $ |
11
NOTE 16 - LAND USE RIGHTS, NET
The Company’s land use rights consist of the following:
| September 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Cost of land use rights | $ | $ | ||||||
| Less: Accumulated amortization | ( | ) | ( | ) | ||||
| Land use rights, net | $ | $ | ||||||
During June 2020, land use right in the
net carrying value of $
As of September 30, 2020 and December 31,
2019, the net book value of land use rights pledged as collateral for the Company’s bank loans was $
The amortization expenses for the three
months ended September 30, 2020 and 2019, were $
| Three months ending December 31, 2020 | $ | |||
| Years ending December 31, | ||||
| 2021 | ||||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| Thereafter | ||||
| Total | $ |
NOTE 17 - SHORT-TERM AND LONG-TERM LOANS
Short-term loans are summarized as follows:
| September 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Bank A | ||||||||
| Interest rate | ||||||||
| Interest rate | ||||||||
| Bank B | ||||||||
| Interest rate | ||||||||
| Interest rate | ||||||||
| Interest rate | ||||||||
| $ | $ | |||||||
12
Long-term loans are summarized as follows:
| September 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Long term bank loans from bank C | ||||||||
| Interest rate 7% per annum, due on December 12, 2021, guaranteed by the Company’s subsidiaries. | $ | $ | ||||||
| Other long term loans: | ||||||||
| Loan under Paycheck Protection Program① | ||||||||
| Economic Injury Disaster Loan② | ||||||||
| Total long term loans | $ | $ | ||||||
| Long term loans - current portion | ||||||||
| Long term loans - noncurrent portion | ||||||||
| Total long term loans - current and noncurrent portion | $ | $ | ||||||
| ① | The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, and provides over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new 7 |
| ② | In addition, Economic Injury Disaster Loans (“EIDL”) through the SBA was also made available under the CARES Act passed by Congress in response to the COVID-19 pandemic. During June 2020, $ |
The interest expenses of short-term and
long-term loans for the three months ended September 30, 2020 and 2019 were $
As of September 30, 2020, the aggregate
amount of short-term and long-term loans guaranteed by various third parties was $
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
13
The Company’s tax provision or benefit
from income taxes for interim periods is determined using an estimate of its 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, the management makes a cumulative adjustment. For 2020, the management estimates
that its effective tax rate will be favorably affected by non-taxable income such as the share of income of the Affiliate Company
and the gain from the change of fair value of contingent liabilities and certain research and development super-deduction and adversely
affected by non-deductible expenses such as stock compensation inelegible for U.S. income tax deduction and part of entertainment
expenses. The Company records valuation allowances against the deferred tax assets associated with losses for which it may not
realize a related tax benefit.
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 more or less volatile based on the amount of pre-tax income
or loss. The income tax provision for the nine months ended September 30, 2020 and 2019 was tax expense of $
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 September 30, 2020, 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 September 30, 2020, 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 September 30, 2020, the Company has no accrued interest or penalties related to uncertain tax positions.
The aggregate NOLs in 2019 was $
(b) Tax Holiday Effect
For the nine months ended September 30,
2020 and 2019, the PRC CIT rate was
The combined effects of income tax expense exemptions and reductions available to the Company for the nine months ended September 30, 2020 and 2019 are as follows:
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2020 | 2019 | |||||||
| Tax benefit (holiday) credit | $ | $ | ||||||
| Basic net income per share effect | $ | $ | ||||||
14
(c) CARES Act
On March 27, 2020, the “Coronavirus Aid, Relief and Economic Security (CARES) Act” was signed into law. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The Company does not anticipate significant income tax impact on its financial and continue to examine the impacts this CARES Act may have on its business.
NOTE 19 - LEASES
The Company has renewed its corporate office
leases for SC Autosports, with a term of
As of September 30, 2020, the Company’s
right - of - use asset (grouped in other long term assets on the balance sheet) was $
Supplemental information related to operating leases was as follows:
| Nine months ended September 30, 2020 | ||||
| Cash payments for operating leases | $ | |||
Maturities of lease liabilities as of September 30, 2020, were as follow:
| Maturity of Lease Liabilities: | Lease payable | |||
| Three months ended December 31,2020 | $ | |||
| Year ended December 31, 2021 | ||||
| Total | $ | |||
NOTE 20 - CONTINGENT CONSIDERATION LIABILITY
On January 3, 2018,
15
As the outbreak of COVID-19 in 2020 affected
Kandi Smart Battery Swap’s operation and business, on July 7, 2020, the Company and the KSBS Shareholders made the following
supplements to Condition III of the original Supplementary Agreement: The KSBC Shareholders have the right to receive an aggregate
of
On July 1, 2018,
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 SC Autosports’ 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 September 30, 2020 and December 31,
2019, the Company’s contingent consideration liability was $
Details of the contingent consideration liability as of September 30, 2020 and December 31, 2019 were as follow:
| September 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Contingent consideration liability to KSBS Shareholders | $ | $ | ||||||
| Contingent consideration liability to former members of SC Autosports | ||||||||
| Total contingent consideration liability | $ | $ | ||||||
16
NOTE 21 - 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
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
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
In November 2016, the Company entered into
a three-year employment agreement with Mr. Mei Bing, to hire him as the Company’s Chief Financial Officer. Under the agreement,
Mr. Mei Bing was entitled to receive an aggregate
On January 29, 2019, the Board appointed
Ms. Zhu Xiaoying as interim Chief Financial Officer. Ms. Zhu was entitled to receive
On May 15, 2020, the Board appointed Mr.
Jehn Ming Lim as the Chief Financial Officer. Mr. Lim was entitled to receive
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
For the three months ended September 30,
2020 and 2019, the Company recognized $
17
NOTE 22 - EQUITY METHOD INVESTMENT IN THE AFFILIATE COMPANY
The Company’s condensed consolidated statement of operations includes the Company’s proportionate share of the net income or loss of the Company’s equity method investee. When the Company records its proportionate share of net income (loss) in such investee, it increases other income (expense) in the Company’s consolidated statements of operations and increase (decrease) the Company’s carrying value in that investment.
On March 21, 2019,
The Company accounted for its investments
in the Affiliate Company under the equity method of accounting. The Company recorded
The consolidated results of operations and financial position of the Affiliate Company are summarized below:
| Three Months ended | ||||||||
| September 30, | ||||||||
| 2020 | 2019 | |||||||
| Condensed income statement information: | ||||||||
| Net sales | $ | $ | ||||||
| Gross loss | ( | ) | ( | ) | ||||
| Gross margin | - | % | - | % | ||||
| Net loss | ( | ) | ( | ) | ||||
| Nine Months ended | ||||||||
| September 30, | ||||||||
| 2020 | 2019 | |||||||
| Condensed income statement information: | ||||||||
| Net sales | $ | $ | ||||||
| Gross loss | ( | ) | ( | ) | ||||
| Gross margin | - | % | - | % | ||||
| Net loss | ( | ) | ( | ) | ||||
| September 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Condensed balance sheet information: | ||||||||
| Current assets | $ | $ | ||||||
| Noncurrent assets | ||||||||
| Total assets | $ | $ | ||||||
| Current liabilities | ||||||||
| Noncurrent liabilities | ||||||||
| Shareholder’s equity | ||||||||
| Non-controlling interest | ||||||||
| Total liabilities and equity | $ | $ | ||||||
18
The change for the Company’s investments in the Affiliate Company for the nine months ended September 30, 2020 and 2019 are as follows:
| Nine Months ended | ||||||||
| September 30, | ||||||||
| 2020 | 2019 | |||||||
| Investment in the Affiliate Company, beginning of the period, | $ | $ | ||||||
| Investment decreased in 2019 | ( | ) | ||||||
| Gain from equity dilution | ||||||||
| Gain from sale of equity | ||||||||
| Reduction in the equity of the Affiliate Company* | ( | ) | ||||||
| Company’s share in net loss of Affiliate Company based on 22% ownership for nine months ended September 30, 2020 and 50% ownership for three months ended March 31, 2019, 43.47% ownership for six months ended September 30, 2019 | ( | ) | ( | ) | ||||
| Non-controlling interest | ( | ) | ||||||
| Intercompany transaction elimination | ( | ) | ||||||
| Prior year’s unrealized profit realized | ||||||||
| Subtotal | ( | ) | ( | ) | ||||
| Exchange difference | ( | ) | ||||||
| Investment in Affiliate Company, end of the period | $ | $ | ||||||
| * | The Affiliate Company converted RMB |
The gain from equity dilution for three months ended March 31, 2019 resulted from the Affiliate Company issuing shares to the major shareholder of the Affiliate Company, Greely, in exchange for extinguishment of a loan from Greely, resulting in dilution of equity ownership of the Company from 50% to 43.47%. This dilutive transaction was treated as if the Company sold a proportional share of its investment in the Affiliate Company.
Sales to the Company’s related parties, the Affiliate Company and its subsidiaries, for the three months ended September 30, 2020, were $6 (due to exchange rate difference) or 0% of the Company’s total revenue, a decrease of 100% from $4,720,159 of the same quarter last year. Sales to the Company’s related parties, the Affiliate Company and its subsidiaries, for the nine months ended September 30, 2020, were $ 962 or 0% of the Company’s total revenue, a decrease of 100% from $10,543,190 of the same period last year. Sales to the Affiliate Company and its subsidiaries were primarily of battery packs, body parts, EV drive motors, EV controllers, air conditioning units and other auto parts.
As of September 30, 2020 and December 31,
2019, the net amount due from the Affiliate Company and its subsidiaries, was $
19
NOTE 23 - 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.
(2) Pledged collateral for bank loans for which the parties other than the Company are the borrowers.
As of September 30, 2020 and December 31, 2019, none of the Company’s land use rights or plants and equipment were 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 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. Kandi moved to dismiss the remaining cases, all of which were pending in the New York federal court, and that motion was granted by an order entered on September 30, 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. In September 2020, this action was transferred to the New York federal court and remains 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. 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.
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.
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.
20
NOTE 24 - SEGMENT REPORTING
The Company has
The following table sets forth disaggregation of revenue:
| Three Months Ended September 30, | ||||||||
| 2020 | 2019 | |||||||
| Sales Revenue | Sales Revenue | |||||||
| Primary geographical markets | ||||||||
| Overseas | $ | $ | ||||||
| China | ||||||||
| Total | $ | $ | ||||||
| Major products | ||||||||
| EV parts | $ | $ | ||||||
| EV products | ||||||||
| Off-road vehicles | ||||||||
| Electric Scooters, Electric Self-Balancing Scooters and associated parts | ||||||||
| Total | $ | $ | ||||||
| Timing of revenue recognition | ||||||||
| Products transferred at a point in time | $ | $ | ||||||
| Total | $ | $ | ||||||
| Nine Months Ended September 30, | ||||||||
| 2020 | 2019 | |||||||
| Sales Revenue | Sales Revenue | |||||||
| Primary geographical markets | ||||||||
| Overseas | $ | $ | ||||||
| China | ||||||||
| Total | $ | $ | ||||||
| Major products | ||||||||
| EV parts | $ | $ | ||||||
| EV products | ||||||||
| Off-road vehicles | ||||||||
| Electric Scooters, Electric Self-Balancing Scooters and associated parts | ||||||||
| Total | $ | $ | ||||||
| Timing of revenue recognition | ||||||||
| Products transferred at a point in time | $ | $ | ||||||
| Total | $ | $ | ||||||
NOTE 25 - SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the date of issuance of the interim condensed consolidated financial statements, there were no other subsequent events occurred that would require recognition or disclosure in the interim condensed consolidated financial statements.
21
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This report contains forward-looking statements within the meaning of the federal securities laws that relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminologies, such as “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “intend,” “potential” or “continue” or the negative of such terms or other comparable terminologies, although not all forward-looking statements contain such terms.
In addition, these forward-looking statements include, but are not limited to, statements regarding implementing our business strategy; development and marketing of our products; our estimates of future revenue and profitability; our expectations regarding future expenses, including research and development, sales and marketing, manufacturing and general and administrative expenses; difficulty or inability to raise additional financing, if needed, on terms acceptable to us; our estimates regarding our capital requirements and our needs for additional financing; attracting and retaining customers and employees; sources of revenue and anticipated revenue; and competition in our market.
Forward-looking statements are only predictions. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. All of our forward-looking information is subject to risks and uncertainties that could cause actual results to differ materially from the results expected. Although it is not possible to identify all factors, these risks and uncertainties include the risk factors and the timing of any of those risk factors described in the 2019 Form 10-K and those set forth from time to time in our other filings with the SEC. These documents are available on the SEC’s Electronic Data Gathering and Analysis Retrieval System at http://www.sec.gov.
Critical Accounting Policies and Estimates
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, as of the date of the financial statements, and the reported amounts of revenue and expenses during the reported period. If these estimates differ significantly from actual results, the impact to the condensed consolidated financial statements may be material. There have been no material changes in our critical accounting policies and estimates from those disclosed in on the 2019 Form 10-K. Please refer to Part II, Item 7 of such a report for a discussion of our critical accounting policies and estimates.
Overview
We are one of the leading manufacturers of EV products (through Kandi Hainan and the Affiliate Company), EV parts and off-road vehicles in China. For the nine months ended September 30, 2020, we recognized total revenue of $44,526,718 as compared to $73,903,234 for the same period of 2019, a decrease of $29,376,516 or 39.7%. For the nine months ended September 30, 2020, we recorded $8,614,933 of gross profit, a decrease of 31.7% from the same period of 2019. Gross margin for the nine months ended September 30, 2020 was 19.3%, compared to 17.1% for the same period of 2019. We recorded a net income of $1,022,137 for the nine months ended September 30, 2020, compared to a net income of $361,811 in the same period of 2019, an increase of $660,326 or 182.5%.
The spread of COVID-19 around China and other parts of the world has caused significant volatility in the markets of China, U.S., and the rest of the world. The pandemic has resulted in quarantines, travel restrictions, and the temporary closure of stores and facilities in China and elsewhere. Although the Company’s operations in China has fully resumed in early March 2020, the COVID-19 has affected the Company’s business performance in 2020. Though it becomes more stable in China, there are new cases reported continuously at present. The extent to which the COVID-19 may impact operations of the Company, with majority of operations based in China, is alleviated though it remains uncertain due to the fact that the COVID-19 is not completely over. The extent to which the COVID-19 impacts our operations will depend on its future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or minimize its harm, among others.
As we approach year-end, despite the challenges posed by COVID-19 around the world, we were still productive in the third quarter. Most importantly, after a lengthy process of preparation, the ‘300,000 government-accredited pure EV within 5 years rideshare’ program—of which Kandi was a co-founder-- has begun its trial with the gradual delivery of 1,000 EVs to the city of Haikou in Hainan province and 2,500 EVs to the city of Shaoxing in Zhejiang province. All the EVs delivered for the program include our battery swap feature. We believe that this program can drive the production and sales of our EV parts and battery swap equipment, and we can thus restore growth in our pure EV business.
The COVID-19 outbreak has seriously impacted the EV market in 2020, leading us to explore how to augment our business. As we looked at other market opportunities that leverage our expertise, the management of the Company found potential in a number of ancillary products aimed at intelligent transportation. For example, Electric Scooters and Electric Self-Balancing Vehicles have distinct potential, with tens of millions of units sold each year around the world. The Company is pursuing these opportunities by expanding production of intelligent transportation products that exploit our advantages in the Yongkang Scrou’s power electric motor and Kandi Smart Battery Swap’s power battery pack. Our products aimed at this market combines our motors and battery packs into a dynamic power train system. Through extensive product trials, we are able to meet a leading standard in China, and thus went into production in the second quarter. As this business is developing quickly and progressing, the Company transferred all of its equity interest in Yongkang Scrou to Jinhua An Kao (changed name to Kandi Smart Battery Swap), and the work of listing Kandi Smart Battery Swap on Shanghai Stock Exchange’s STAR Board has been started.
The Company originally planned to export 2,000 to 5,000 units of electric vehicles to the U.S. in 2020, but due to the COVID-19 pandemic in the first half of 2020, the plan are being adjusted according to the situation of COVID-19 control in the U.S, as well as the progress of clearance from relevant government agencies such as United States Environmental Protection Agency. As of the date of this report, it has received the required clearance from the United States Environmental Protection Agency (EPA) for its two electric vehicle (EV) models, the K23 and K27 via Certificates of Conformity. We are performing self-inspection comparing to the safety standards published by the United States Department of Transportation. We are also in the process of modifying features, upgrading the software and technology for the EVs to cater for our potential U.S. constomers. Thus, no units of electric vehicles have been sold in the U.S.
22
Results of Operations
Comparison of the Three Months Ended September 30, 2020 and 2019
The following table sets forth the amounts and percentage to revenue of certain items in our condensed consolidated statements of operations and comprehensive income (loss) for the three months ended September 30, 2020 and 2019.
| Three Months Ended | ||||||||||||||||||||||||
| September 30, 2020 | % of Revenue | September 30, 2019 | % of Revenue | Change in Amount | Change in % | |||||||||||||||||||
| REVENUES FROM UNRELATED PARTIES, NET | $ | 18,717,212 | 100.0 | % | $ | 26,968,385 | 85.1 | % | (8,251,173 | ) | (30.6 | %) | ||||||||||||
| REVENUES FROM THE AFFILIATE COMPANY AND RELATED PARTIES, NET | 6 | 0.0 | % | 4,720,159 | 14.9 | % | (4,720,153 | ) | (100.0 | %) | ||||||||||||||
| REVENUES, NET | 18,717,218 | 31,688,544 | (12,971,326 | ) | (40.9 | %) | ||||||||||||||||||
| COST OF GOODS SOLD | (14,806,322 | ) | (79.1 | %) | (26,412,129 | ) | (83.3 | %) | 11,605,807 | (43.9 | %) | |||||||||||||
| GROSS PROFIT | 3,910,896 | 20.9 | % | 5,276,415 | 16.7 | % | (1,365,519 | ) | (25.9 | %) | ||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||||||||||
| Research and development | (987,285 | ) | (5.3 | %) | (596,187 | ) | (1.9 | %) | (391,098 | ) | 65.6 | % | ||||||||||||
| Selling and marketing | (2,165,383 | ) | (11.6 | %) | (930,810 | ) | (2.9 | %) | (1,234,573 | ) | 132.6 | % | ||||||||||||
| General and administrative | (3,212,209 | ) | (17.2 | %) | (3,432,920 | ) | (10.8 | %) | 220,711 | (6.4 | %) | |||||||||||||
| Gain on disposal of long-lived assets | 76,159 | 0.4 | % | - | 0.0 | % | 76,159 | - | ||||||||||||||||
| TOTAL OPERATING EXPENSES, NET | (6,288,718 | ) | (33.6 | %) | (4,959,917 | ) | (15.7 | %) | (1,328,801 | ) | 26.8 | % | ||||||||||||
| (LOSS) INCOME FROM OPERATIONS | (2,377,822 | ) | (12.7 | %) | 316,498 | 1.0 | % | (2,694,320 | ) | (851.3 | %) | |||||||||||||
| OTHER INCOME (EXPENSE): | ||||||||||||||||||||||||
| Interest income | 558,059 | 3.0 | % | 209,736 | 0.7 | % | 348,323 | 166.1 | % | |||||||||||||||
| Interest expense | (788,589 | ) | (4.2 | %) | (435,524 | ) | (1.4 | %) | (353,065 | ) | 81.1 | % | ||||||||||||
| Change in fair value of contingent consideration | (1,069,000 | ) | (5.7 | %) | 57,000 | 0.2 | % | (1,126,000 | ) | (1975.4 | %) | |||||||||||||
| Government grants | 13,431 | 0.1 | % | 502,146 | 1.6 | % | (488,715 | ) | (97.3 | %) | ||||||||||||||
| Gain (loss) from equity dilution in the Affiliate Company | - | 0.0 | % | (49,285 | ) | (0.2 | %) | 49,285 | (100.0 | %) | ||||||||||||||
| Gain from sale of equity in the Affiliate Company | - | 0.0 | % | 20,574,217 | 64.9 | % | (20,574,217 | ) | (100.0 | %) | ||||||||||||||
| Share of loss after tax of the Affiliate Company | (1,550,568 | ) | (8.3 | %) | (8,433,767 | ) | (26.6 | %) | 6,883,199 | (81.6 | %) | |||||||||||||
| Other income, net | 988,287 | 5.3 | % | 57,833 | 0.2 | % | 930,454 | 1608.9 | % | |||||||||||||||
| TOTAL OTHER (EXPENSE) INCOME, NET | (1,848,380 | ) | (9.9 | %) | 12,482,356 | 39.4 | % | (14,330,736 | ) | (114.8 | %) | |||||||||||||
| (LOSS) INCOME BEFORE INCOME TAXES | (4,226,202 | ) | (22.6 | %) | 12,798,854 | 40.4 | % | (17,025,056 | ) | (133.0 | %) | |||||||||||||
| INCOME TAX BENEFIT (EXPENSE) | 2,767,939 | 14.8 | % | (709,413 | ) | (2.2 | %) | 3,477,352 | (490.2 | %) | ||||||||||||||
| NET (LOSS) INCOME | (1,458,263 | ) | (7.8 | %) | 12,089,441 | 38.2 | % | (13,547,704 | ) | (112.1 | %) | |||||||||||||
23
(a) Revenue
For the three months ended September 30, 2020, our revenue was $18,717,218 compared to $31,688,544 for the same period of 2019, representing a decrease of $12,971,326 or 40.9%. The decrease in revenue was mainly due to the decrease in EV parts sales. Due to the outbreak of COVID-19 in China, the demand of EV parts from customers was significantly affected during the first three quarters of 2020.
The following table summarizes our revenues by product types for the three months ended September 30, 2020 and 2019:
| Three Months Ended September 30, | ||||||||
| 2020 | 2019 | |||||||
| Sales | Sales | |||||||
| EV parts | $ | 8,438,958 | $ | 25,847,506 | ||||
| EV products | 515,128 | - | ||||||
| Off-road vehicles | 8,852,475 | 5,841,038 | ||||||
| Electric Scooters, Electric Self-Balancing Scooters and associated parts | 910,657 | - | ||||||
| Total | $ | 18,717,218 | $ | 31,688,544 | ||||
EV Parts
During the three months ended September 30, 2020, our revenues from the sales of EV parts were $8,438,958, representing a decrease of $17,408,548 or 67.4% from $25,847,506 for the same quarter of 2019.
Our revenue for the three months ended September 30, 2020 primarily consisted of revenue from the sales of battery packs, body parts, EV controllers, air conditioning units and other auto parts for use in the manufacturing of EV products. These sales accounted for 45.1% of total sales.
During the three months ended September 30, 2020 and 2019, our revenue from the sale of EV parts to the Affiliate Company and its subsidiaries accounted for approximately 0% and 14.9% of our total net revenue for each quarter, respectively.
EV Products
During the three months ended September 30, 2020, our revenue from the sale of EV Products was $515,128, which was due to the export sales of Hainan factories’ products. There weren’t any EV products sales in the same period of 2019.
Off-Road Vehicles
During the three months ended September 30, 2020, our revenue from the sales of off-road vehicles, including go karts, all-terrain vehicles (“ATVs”) and others, were $8,852,475, representing an increase of $3,011,437 or 51.6% from $5,841,038, for the same quarter of 2019. The increase was mainly due to the increased sales from SC Autosports because of increased demand due to the power sports’ unique form of “socially distant” recreation.
Our off-road vehicles business line accounted for approximately 47.3% of our total net revenue for the three months ended September 30, 2020.
Electric Scooters, Electric Self-Balancing Scooters and associated parts
During the three months ended September 30, 2020, our revenue from the sale of Electric Scooters, Electric Self-Balancing Scooters and associated parts was $910,657. There were no Electric Scooters and Electric Self-Balancing Scooters and associated parts sales in the same quarter of 2019.
24
The following table shows the breakdown of our net revenues:
| Three Months Ended September 30, | ||||||||
| 2020 | 2019 | |||||||
| Sales Revenue | Sales Revenue | |||||||
| Primary geographical markets | ||||||||
| Overseas | $ | 9,253,750 | $ | 5,703,050 | ||||
| China | 9,463,468 | 25,985,494 | ||||||
| Total | $ | 18,717,218 | $ | 31,688,544 | ||||
| Major products | ||||||||
| EV parts | $ | 8,438,958 | $ | 25,847,506 | ||||
| EV products | 515,128 | - | ||||||
| Off-road vehicles | 8,852,475 | 5,841,038 | ||||||
| Electric Scooters, Electric Self-Balancing Scooters and associated parts | 910,657 | - | ||||||
| Total | $ | 18,717,218 | $ | 31,688,544 | ||||
| Timing of revenue recognition | ||||||||
| Products transferred at a point in time | $ | 18,717,218 | $ | 31,688,544 | ||||
| Total | $ | 18,717,218 | $ | 31,688,544 | ||||
(b) Cost of goods sold
Cost of goods sold was $14,806,322 during the three months ended September 30, 2020, representing a decrease of $11,605,807, or 43.9%, compared to $26,412,129 for the same period of 2019. The decrease was primarily due to the corresponding decrease in sales. Please refer to the Gross Profit section below for product margin analysis.
(c) Gross profit
Our margins by product for the three months ended September 30, 2020 and 2019 are as set forth below:
| Three Months Ended September 30, | ||||||||||||||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||||||||||||||
| Sales | Cost | Gross Profit | Margin % | Sales | Cost | Gross Profit | Margin % | |||||||||||||||||||||||||
| EV parts | $ | 8,438,958 | 7,200,214 | 1,238,744 | 14.7 | % | $ | 25,847,506 | 21,929,420 | 3,918,086 | 15.2 | % | ||||||||||||||||||||
| EV products | 515,128 | 248,945 | 266,183 | 51.7 | % | - | - | - | - | |||||||||||||||||||||||
| Off-road vehicles | 8,852,475 | 6,483,014 | 2,369,461 | 26.8 | % | 5,841,038 | 4,482,709 | 1,358,329 | 23.3 | % | ||||||||||||||||||||||
| Electric Scooters, Electric Self-Balancing Scooters and associated parts | 910,657 | 874,149 | 36,508 | 4.0 | % | - | - | - | - | |||||||||||||||||||||||
| Total | $ | 18,717,218 | 14,806,322 | 3,910,896 | 20.9 | % | $ | 31,688,544 | 26,412,129 | 5,276,415 | 16.7 | % | ||||||||||||||||||||
25
Gross profit for the third quarter of 2020 decreased 25.9% to $3,910,896, compared to $5,276,415 for the same period last year. This was primarily attributable to the sales decrease of EV Parts, which was primarily due to the outbreak of COVID-19 in 2020. Our gross margin increased to 20.9% compared to 16.7% for the same period of 2019. The increase in our gross margin was mainly due to the sales under SC Autosports which has increased the unit price for the parts since the end of 2019.
(d) Research and development
Research and development expenses, including materials, labor, equipment depreciation, design, testing, inspection, and other related expenses, totaled $987,285 for the third quarter of 2020, an increase of $391,098 or 65.6% compared to $596,187 for the same period of last year. The increase was mainly due to the R&D expense related to the technology upgrading of the Company’s products and new products development.
(e) Sales and marketing
Selling and distribution expenses were $2,165,383 for the third quarter of 2020, compared to $930,810 for the same period last year, representing an increase of $1,234,573 or 132.6%. The increase was primarily attributable to the increasing labor and advertising expenses in connection with the expansion the U.S. electric vehicle market.
(f) General and administrative expenses
General and administrative expenses were $3,212,209 for the third quarter of 2020, compared to $3,432,920 for the same period last year, representing a decrease of $220,711 or 6.4%. For the three months ended September 30, 2020, general and administrative expenses included $22,925 as expenses for common stock awards to employees and Board members, compared to $22,925 for the same period in 2019. Besides stock compensation expense, our net general and administrative expenses for the three months ended September 30, 2020 were $3,189,284, representing a decrease of $220,711, from $3,409,995 for the same period of 2019, which was largely due to the implementation of cost cutting strategy and tighter budget control by the management.
(g) Gain on disposal of long-lived assets
Gain on disposal of long-lived assets was $76,159 for the third quarter of 2020, which was due to exchange rate difference.
(h) Interest income
Interest income was $558,059 for the third quarter of 2020, representing an increase of $348,323 or 166.1% compared to $209,736 for the same period of last year. The increase was primarily attributable to increased interest earned on the loan to a third party.
(i) Interest expenses
Interest expenses were $788,589 in the third quarter of 2020, representing an increase of $353,065 or 81.1% compared to $435,524 for the same period of last year. The increase was primarily due to the interest expense of Hainan factory’s long-term debt.
(j) Change in fair value of contingent consideration
For the third quarter of 2020, the loss related to changes in the fair value of contingent consideration was $1,069,000, a decrease of $1,126,000 or 1975.4% compared to gain related to changes in the fair value of contingent consideration of $57,000 for the same period of last year, which was mainly due to the adjustment of the fair value of the contingent consideration liability associated with the remaining shares of restrictive common stock (Please refer to NOTE 20 – CONTINGENT CONSIDERATION LIABILITY). The fair value of the contingent consideration liability was estimated at each reporting date by using the Monte Carlo simulation method, which took into account all possible scenarios.
(k) Government grants
Government grants were $13,431 for the third quarter of 2020, compared to $502,146 for the same quarter last year, representing a decrease of $488,715, or 97.3%, which was largely attributable to the subsidies received by Hainan factory in the third quarter of 2019 for its science and technology projects. There were no similar subsidies received in the third quarter in 2020.
26
(l) Gain (loss) from equity dilution in the Affiliate Company
Gain from equity dilution was $0 for the third quarter of 2020, compared to loss of $49,285 for the same quarter last year which was due to exchange rate difference.
(m) Gain from sale of equity in the Affiliate Company
Gain from sale of equity was $0 for the third quarter of 2020, compared to $20,574,217 for the same quarter last year which was due to the Affiliate Equity Transfer. In March 2019, Kandi Vehicles agreed to sell 21.47% of its equity interests in the Affiliate Company to Geely for a total consideration of RMB 516 million (approximately $72.3 million). In the third quarter of 2019, the equity transfer was completed and the Company recognized the gain from equity sale.
(n) Share of loss after tax of the Affiliate Company
For the third quarter of 2020, our share of loss of the Affiliate Company was $1,550,568 as compared to $8,433,767 for the same period of last year, representing a decrease of share of loss of $6,883,199, which was largely attributable to the decreasing loss of the Affiliate Company and the fact that our equity interests of the Affiliate Company has been decreased after the equity dilution and equity transfer in 2019.
(o) Other income, net
Other income, net was $988,287 for the third quarter of 2020, compared to $57,833 for the same period of last year, representing an increase of $930,454, or 1608.9%, which was largely due to the discount and cancellation of accounts payable after negotiation with suppliers.
(p) Income Taxes
In accordance with the relevant Chinese tax laws and regulations, our applicable corporate income tax rate is 25%. However, Kandi Vehicle and Kandi Smart Battery Swap are qualified as high technology companies in China and are therefore entitled to a reduced corporate income tax rate of 15%.
Each of our wholly-owned subsidiaries, Kandi New Energy, Yongkang Scrou and Kandi Hainan, has an applicable corporate income tax rate of 25%.
We have a 22% ownership interest in the Affiliate Company, which has an applicable corporate income tax rate of 25%. Each of the Affiliate Company’s subsidiaries has an applicable corporate income tax rate of 25%.
Our actual effective income tax rate for the third quarter of 2020 was a tax benefit of 65.49% on a reported loss before taxes of approximately $4.2 million, compared to a tax expense of 5.54% on a reported income before taxes of approximately $12.8 million for the same period of last year.
(q) Net income (loss)
Net loss was $1,458,263 for the third quarter of 2020, representing a decrease by $13,547,704 compared to net income of $12,089,441 for the same period of last year. The decrease was primarily attributable to the gain from sale of equity in the Affiliate Company of approximately $20.6 million we recognized in the third quarter of 2019.
27
Comparison of the Nine Months Ended September 30, 2020 and 2019
The following table sets forth the amounts and percentage to revenue of certain items in our condensed consolidated statements of operations and comprehensive income (loss) for the nine months ended September 30, 2020 and 2019.
| Nine Months Ended | ||||||||||||||||||||||||
| September 30, 2020 | % of Revenue | September 30, 2019 | % of Revenue | Change in Amount | Change in % | |||||||||||||||||||
| REVENUES FROM UNRELATED PARTIES, NET | $ | 44,525,756 | 100.0 | % | $ | 63,360,044 | 85.7 | % | (18,834,288 | ) | (29.7 | %) | ||||||||||||
| REVENUES FROM THE AFFILIATE COMPANY AND RELATED PARTIES, NET | 962 | 0.0 | % | 10,543,190 | 14.3 | % | (10,542,228 | ) | (100.0 | %) | ||||||||||||||
| REVENUES, NET | 44,526,718 | 100.0 | % | 73,903,234 | 100.0 | % | (29,376,516 | ) | (39.7 | %) | ||||||||||||||
| COST OF GOODS SOLD | (35,911,785 | ) | (80.7 | %) | (61,288,228 | ) | (82.9 | %) | 25,376,443 | (41.4 | %) | |||||||||||||
| GROSS PROFIT | 8,614,933 | 19.3 | % | 12,615,006 | 17.1 | % | (4,000,073 | ) | (31.7 | %) | ||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||||||||||
| Research and development | (2,777,426 | ) | (6.2 | %) | (1,766,210 | ) | (2.4 | %) | (1,011,216 | ) | 57.3 | % | ||||||||||||
| Selling and marketing | (3,807,355 | ) | (8.6 | %) | (2,448,291 | ) | (3.3 | %) | (1,359,064 | ) | 55.5 | % | ||||||||||||
| General and administrative | (10,186,135 | ) | (22.9 | %) | (11,096,246 | ) | (15.0 | %) | 910,111 | (8.2 | %) | |||||||||||||
| Gain on disposal of long-lived assets | 13,983,733 | 31.4 | % | - | 0.0 | % | 13,983,733 | - | ||||||||||||||||
| TOTAL OPERATING EXPENSES, NET | (2,787,183 | ) | (6.3 | %) | (15,310,747 | ) | (20.7 | %) | 12,523,564 | (81.8 | %) | |||||||||||||
| INCOME (LOSS) FROM OPERATIONS | 5,827,750 | 13.1 | % | (2,695,741 | ) | (3.6 | %) | 8,523,491 | (316.2 | %) | ||||||||||||||
| OTHER INCOME (EXPENSE): | ||||||||||||||||||||||||
| Interest income | 1,118,795 | 2.5 | % | 559,954 | 0.8 | % | 558,841 | 99.8 | % | |||||||||||||||
| Interest expense | (2,894,579 | ) | (6.5 | %) | (1,304,062 | ) | (1.8 | %) | (1,590,517 | ) | 122.0 | % | ||||||||||||
| Change in fair value of contingent consideration | 1,794,000 | 4.0 | % | 694,000 | 0.9 | % | 1,100,000 | 158.5 | % | |||||||||||||||
| Government grants | 111,329 | 0.3 | % | 725,189 | 1.0 | % | (613,860 | ) | (84.6 | %) | ||||||||||||||
| Gain from equity dilution in the Affiliate Company | - | 0.0 | % | 4,291,974 | 5.8 | % | (4,291,974 | ) | (100.0 | %) | ||||||||||||||
| Gain from sale of equity in the Affiliate Company | - | 0.0 | % | 20,574,217 | 27.8 | % | (20,574,217 | ) | (100.0 | %) | ||||||||||||||
| Share of loss after tax of the Affiliate Company | (5,631,867 | ) | (12.6 | %) | (22,883,126 | ) | (31.0 | %) | 17,251,259 | (75.4 | %) | |||||||||||||
| Other income, net | 2,051,272 | 4.6 | % | 357,626 | 0.5 | % | 1,693,646 | 473.6 | % | |||||||||||||||
| TOTAL OTHER (EXPENSE) INCOME, NET | (3,451,050 | ) | (7.8 | %) | 3,015,772 | 4.1 | % | (6,466,822 | ) | (214.4 | %) | |||||||||||||
| INCOME BEFORE INCOME TAXES | 2,376,700 | 5.3 | % | 320,031 | 0.4 | % | 2,056,669 | 642.6 | % | |||||||||||||||
| INCOME TAX (EXPENSE) BENEFIT | (1,354,563 | ) | (3.0 | %) | 41,780 | 0.1 | % | (1,396,343 | ) | (3342.1 | %) | |||||||||||||
| NET INCOME | 1,022,137 | 2.3 | % | 361,811 | 0.5 | % | 660,326 | 182.5 | % | |||||||||||||||
28
(a) Revenue
For the nine months ended September 30, 2020, our revenue was $44,526,718 compared to $73,903,234 for the same period of 2019, representing a decrease of $29,376,516 or 39.7%. The decrease in revenue was mainly due to the decrease in EV parts sales. Due to the outbreak of COVID-19 in China, the production of EV parts was interrupted during the first quarter of 2020, and the overall demand of EV parts from customers was significantly affected during the first three quarters of 2020.
The following table summarizes our revenues by product types for the nine months ended September 30, 2020 and 2019:
| Nine Months Ended September 30, | ||||||||
| 2020 | 2019 | |||||||
| Sales | Sales | |||||||
| EV parts | $ | 23,034,841 | $ | 57,607,687 | ||||
| EV products | 769,034 | - | ||||||
| Off-road vehicles | 19,452,160 | 16,295,547 | ||||||
| Electric Scooters, Electric Self-Balancing Scooters and associated parts | 1,270,683 | - | ||||||
| Total | $ | 44,526,718 | $ | 73,903,234 | ||||
EV Parts
During the nine months ended September 30, 2020, our revenues from the sales of EV parts were $23,034,841, representing a decrease of $34,572,846 or 60.0% from $57,607,687 for the same period of 2019.
Our revenue for the nine months ended September 30, 2020 primarily consisted of revenue from the sales of battery packs, body parts, EV controllers, air conditioning units and other auto parts for use in the manufacturing of EV products. These sales accounted for 51.7% of total sales.
During the nine months ended September 30, 2020 and 2019, our revenue from the sale of EV parts to the Affiliate Company and its subsidiaries accounted for approximately 0% and 14.3% of our total net revenue for the quarter, respectively.
EV Products
During the nine months ended September 30, 2020, our revenue from the sale of EV Products was $769,034, which was due to the export sales of Hainan factories’ products. There weren’t any EV products sales in the same period of 2019.
Off-Road Vehicles
During the nine months ended September 30, 2020, our revenue from the sales of off-road vehicles, including go karts, all-terrain vehicles (“ATVs”) and others, were $19,452,160, representing an increase of $3,156,613 or 19.4% from $16,295,547, for the same period of 2019.
Our off-road vehicles business line accounted for approximately 43.7% of our total net revenue for the nine months ended September 30, 2020.
29
Electric Scooters, Electric Self-Balancing Scooters and associated parts
During the nine months ended September 30, 2020, our revenue from the sale of Electric Scooters, Electric Self-Balancing Scooters and associated parts was $1,270,683. There were no Electric Scooters and Electric Self-Balancing Scooters and associated parts sales in the same period of 2019.
The following table shows the breakdown of our net revenues:
| Nine Months Ended September 30, | ||||||||
| 2020 | 2019 | |||||||
| Sales Revenue | Sales Revenue | |||||||
| Primary geographical markets | ||||||||
| Overseas | $ | 19,955,855 | $ | 15,975,711 | ||||
| China | 24,570,863 | 57,927,523 | ||||||
| Total | $ | 44,526,718 | $ | 73,903,234 | ||||
| Major products | ||||||||
| EV parts | $ | 23,034,841 | $ | 57,607,687 | ||||
| EV products | 769,034 | - | ||||||
| Off-road vehicles | 19,452,160 | 16,295,547 | ||||||
| Electric Scooters, Electric Self-Balancing Scooters and associated parts | 1,270,683 | - | ||||||
| Total | $ | 44,526,718 | $ | 73,903,234 | ||||
| Timing of revenue recognition | ||||||||
| Products transferred at a point in time | $ | 44,526,718 | $ | 73,903,234 | ||||
| Total | $ | 44,526,718 | $ | 73,903,234 | ||||
(b) Cost of goods sold
Cost of goods sold was $35,911,785 during the nine months ended September 30, 2020, representing a decrease of $25,376,443, or 41.4%, compared to $61,288,228 for the same period of 2019. The decrease was primarily due to the corresponding decrease in sales. Please refer to the Gross Profit section below for product margin analysis.
30
(c) Gross profit
Our margins by product for the nine months ended September 30, 2020 and 2019 are as set forth below:
| Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||||||||||||||
| Sales | Cost | Gross Profit | Margin % | Sales | Cost | Gross Profit | Margin % | |||||||||||||||||||||||||
| EV parts | $ | 23,034,841 | 19,803,364 | 3,231,477 | 14.0 | % | $ | 57,607,687 | 48,565,387 | 9,042,300 | 15.7 | % | ||||||||||||||||||||
| EV products | 769,034 | 485,539 | 283,495 | 36.9 | % | - | - | - | - | |||||||||||||||||||||||
| Off-road vehicles | 19,452,160 | 14,416,321 | 5,035,839 | 25.9 | % | 16,295,547 | 12,722,841 | 3,572,706 | 21.9 | % | ||||||||||||||||||||||
| Electric Scooters, Electric Self-Balancing Scooters and associated parts | 1,270,683 | 1,206,561 | 64,122 | 5.0 | % | - | - | - | - | |||||||||||||||||||||||
| Total | $ | 44,526,718 | 35,911,785 | 8,614,933 | 19.3 | % | $ | 73,903,234 | 61,288,228 | 12,615,006 | 17.1 | % | ||||||||||||||||||||
Gross profit for the first three quarters of 2020 decreased 31.7% to $8,614,933, compared to $12,615,006 for the same period last year. This was primarily attributable to the sales decrease, which was primarily due to the outbreak of COVID-19 in 2020. Our gross margin increased to 19.3% compared to 17.1% for the same period of 2019. The increase in our gross margin was mainly due to the sales under SC which has increased the unit price for the parts since end of 2019.
(d) Research and development
Research and development expenses, including materials, labor, equipment depreciation, design, testing, inspection, and other related expenses, totaled $2,777,426 for the first three quarters of 2020, an increase of $1,011,216 or 57.3% compared to $1,766,210 for the same period of last year. The increase was mainly due to the R&D expense related to the technology upgrading of the Company’s products and new products development.
(e) Sales and marketing
Selling and distribution expenses were $3,807,355 for the first three quarters of 2020, compared to $2,448,291 for the same period last year, representing an increase of $1,359,064 or 55.5%. The increase was primarily attributable to the increasing labor and advertising expenses in connection with the expansion the U.S. electric vehicle market.
(f) General and administrative expenses
General and administrative expenses were $10,186,135 for the first three quarters of 2020, compared to $11,096,246 for the same period last year, representing a decrease of $910,111 or 8.2%. For the nine months ended September 30, 2020, general and administrative expenses included $870,471 as expenses for common stock awards to employees and Board members, compared to $1,337,333 for the same period in 2019. Besides stock compensation expense, our net general and administrative expenses for the nine months ended September 30, 2020 were $9,315,664, representing a decrease of $443,249, from $9,758,913 for the same period of 2019, which was largely due to the implementation of cost cutting strategy and tighter budget control by the management.
31
(g) Gain on disposal of long-lived assets
Gain on disposal of long-lived assets was $13,983,733 for the first three quarters of 2020, which was related to the real estate repurchase agreement of our Jinhua Facility’s relocation. In June 2020, 73,333 square meters of land use right was transferred to the local government, and the related gain was recognized.
(h) Interest income
Interest income was $1,118,795 for the first three quarters of 2020, representing an increase of $558,841 or 99.8% compared to $559,954 for the same period of last year. The increase was primarily attributable to increased interest earned on the loan to a third party.
(i) Interest expenses
Interest expenses were $2,894,579 in the first three quarters of 2020, representing an increase of $1,590,517 or 122.0% compared to $1,304,062 for the same period of last year. The increase was primarily due to the interest expense of Hainan factory’s long-term debt.
(j) Change in fair value of contingent consideration
For the first three quarters of 2020, the gain related to changes in the fair value of contingent consideration was $1,794,000, an increase of $1,100,000 or 158.5% compared to $694,000 for the same period of last year, which was mainly due to the adjustment of the fair value of the contingent consideration liability associated with the remaining shares of restrictive common stock (Please refer to NOTE 20 – CONTINGENT CONSIDERATION LIABILITY). The fair value of the contingent consideration liability was estimated at each reporting date by using the Monte Carlo simulation method, which took into account all possible scenarios.
(k) Government grants
Government grants were $111,329 for the first three quarters of 2020, compared to $725,189 for the same quarter last year, representing a decrease of $613,860, or 84.6%, which was largely attributable to the subsidies received by Hainan factory in the third quarter of 2019 for its science and technology projects. There were no similar subsidies received in the first three quarters of 2020.
(l) Gain from equity dilution in the Affiliate Company
Gain from equity dilution was $0 for the first three quarters of 2020, compared to $4,291,974 for the same period of last year, which was primarily due to gain from the conversion of the loan into equity in the Affiliate Company in March 2019. Pursuant to the Equity Transfer Agreement, the Affiliate Company converted a loan of RMB 314 million (approximately $44.3 million) from Geely Group to equity in order to increase its cash flow (for details please refer to Note 22 - EQUITY METHOD INVESTMENT IN THE AFFILIATE COMPANY).
(m) Gain from sale of equity in the Affiliate Company
Gain from sale of equity was $0 for the first three quarters of 2020, compared to $20,574,217 for the same period of last year which was due to the Affiliate Equity Transfer. In March 2019, Kandi Vehicles agreed to sell 21.47% of its equity interests in the Affiliate Company to Geely for a total consideration of RMB 516 million (approximately $72.3 million). Therefore, in the third quarter of 2019, the equity transfer was completed and the Company recognized the gain from equity sale.
(n) Share of loss after tax of the Affiliate Company
For the first three quarters of 2020, our share of loss of the Affiliate Company was $5,631,867 as compared to share of loss of $22,883,126 for the same period of last year, representing a decrease of share of loss of $17,251,259, which was largely attributable to the decreasing loss of the Affiliate Company and the fact that our equity interests of the Affiliate Company has been decreased after the equity dilution and equity transfer in 2019.
(o) Other income, net
Other income, net was $2,051,272 for the first three quarters of 2020, representing an increase of $1,693,646 or 473.6% compared to $357,626 for the same period of last year, which was largely due to the discount and cancellation of accounts payable after negotiation with supplier.
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(p) Income Taxes
In accordance with the relevant Chinese tax laws and regulations, our applicable corporate income tax rate is 25%. However, Kandi Vehicle and Kandi Smart Battery Swap are qualified as high technology companies in China and are therefore entitled to a reduced corporate income tax rate of 15%.
Each of our wholly-owned subsidiaries, Kandi New Energy, Yongkang Scrou and Kandi Hainan, has an applicable corporate income tax rate of 25%.
We have a 22% ownership interest in the Affiliate Company, which has an applicable corporate income tax rate of 25%. Each of the Affiliate Company’s subsidiaries has an applicable corporate income tax rate of 25%.
Our actual effective income tax rate for the first three quarters of 2020 was a tax expense of 56.99% on a reported income before taxes of approximately $2.4 million, compared to a tax benefit of 13.05% on a reported income before taxes of approximately $0.3 million for the same period of last year.
(q) Net income (loss)
Net income was $1,022,137 for the first three quarters of 2020, representing an increase of $660,326 compared to net income $361,811 for the same period of last year. The increase was primarily attributable to the gain on disposal of long-live asset which was related to the real estate repurchase agreement of our Jinhua Facility’ relocation and the decreased share of loss of the Affiliate Company .
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
| Nine Months Ended, | ||||||||
| September 30, 2020 | September 30, 2019 | |||||||
| Net cash used in operating activities | $ | (13,365,968 | ) | $ | (14,610,587 | ) | ||
| Net cash provided by investing activities | $ | 46,247,972 | $ | 21,532,383 | ||||
| Net cash used in financing activities | $ | (25,770,794 | ) | $ | (2,294,786 | ) | ||
| NET INCREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH | 7,111,210 | 4,627,010 | ||||||
| Effect of exchange rate | 535,314 | (928,440 | ) | |||||
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF YEAR | 16,512,635 | 22,353,071 | ||||||
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD | 24,159,159 | 26,051,641 | ||||||
For the first three quarters of 2020, cash used in operating activities was $13,365,968, as compared to $14,610,587 for the same period last year. Our operating cash inflows include cash received primarily from sales of our EV parts and off-road vehicles. These cash inflows are offset largely by cash paid primarily to our suppliers for production materials and parts used in our manufacturing process, operation expenses, employee compensation, and interest expenses of our financings. The major operating activities that provided cash for the first three quarters of 2020 were a decrease of accounts receivable of $18,165,084. The major operating activity that used cash for the first three quarters of 2020 was a decrease of accounts payable of $15,642,931.
For the first three quarters of 2020, cash derived from investing activities was $46,247,972, as compared to $21,532,383 for the same period of last year. The major investing activities that provided cash for the first three quarters of 2020 were an increase of cash received from equity sale in the Affiliate Company of $42,321,385 and an increase of proceeds from disposal of long-lived assets of $51,872,829. The major investing activities that used cash for the first three quarters of 2020 were $45,958,247 used for loan to third party.
For the first three quarters of 2020, cash used in financing activities was $25,770,794, as compared to $2,294,786 for the same period of last year. The major financing activities that provided cash for the first three quarters of 2020 were proceeds from short-term bank loans of $24,163,223. The major financing activities that used cash for the first three quarters of 2020 were repayments of short-term bank loans of $50,042,178.
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Working Capital
We had working capital of $ 79,767,999 at September 30, 2020, which reflects an increase of $16,069,302 from a working capital of $63,698,697 as of December 31, 2019.
After two years of negotiations, on March 10, 2020, a real estate repurchase agreement (the “Repurchase Agreement”) was entered into by and between Kandi Vehicles and Jinhua Economic and Technological Development Zone pursuant to which the local government shall purchase the land use right over the land of 66 acres (400 mu, 265,029 square meters) that is owned by Kandi Vehicles for RMB 525 million ($77 million). Payments to Kandi Vehicles shall be made in three installments as the Company disclosed in a Current Report on Form 8-K filed with the SEC on March 9, 2020. In addition, if Kandi Vehicles achieves certain milestones that contribute to local economic development, the Company will be eligible for tax rebates that could total up to RMB 500 million ($74 million) over the next eight years. On May 22, 2020, the Company received the first payment of RMB 244 million (approximately $36 million) under the Repurchase Agreement. On July 9, 2020, the Company received the second payment of RMB 119 million (approximately $17 million) under the Repurchase Agreement.
Contractual Obligations and Off-balance Sheet Arrangements
Short-term and long-term Loans:
For the discussion of short-term and long-term loans, please refer to Note 17 - Short-term and Long-term Loans under Notes to Condensed Consolidated Financial Statements.
Guarantees and pledged collateral for third party bank loans
For the discussion of guarantees and pledged collateral for third party bank loans, please refer to Note 23 – Commitments and Contingencies under Notes to Condensed Consolidated Financial Statements.
Recent Development Activities
On August 20, 2020, we announced that we are actively exploring the possibility of opening a manufacturing base in North America for its popular EV and off-road vehicles. We plan to more aggressively target the fast-growing North America market and ensure affordability by eliminating shipping costs and tariffs. The Company is in preliminary discussion with various potential partners, including local government agencies from the US-Mexico border, and has received positive feedback. The Company cautioned that the exploration process is in its early stage and any negotiations would not guarantee a North American plant will be built.
On September 14, 2020, we announced the establishment of a wholly-owned subsidiary for our battery swapping services: China Battery Exchange Technology Co., Ltd. By establishing the China Battery Exchange Technology Company, we can better monetize our dozens of patents in the field of battery swap systems. The new company can also attract strategic investors to participate across the whole sector value chain, including battery swapping services and used battery recycling.
On October 22, 2020, we announced that the Company entered into a strategic agreement with the Zhejiang State Grid Electric Vehicle Service Company to cooperate in the area of battery exchange for pure electric vehicles.
On October 26, 2020, we announced the establishment of an operating company that intends to operate a ridesharing service across China. The operating company will operate under the name Zhejiang Ruiheng Technology Company (“Ruiheng”). The company was established by Zhejiang Ruibo New Energy Vehicle Service Company Ltd. (“Ruibo”), Jiangsu Jinpeng Group Ltd. (“Jinpeng”) and Kandi Vehicles. Ruibo, Jinpeng and Kandi Vehicles each owns 80%, 10%, and 10% of Ruiheng, respectively. The establishment of the operating company was approved by the Hangzhou Xihu District Market Supervision Administration after an extensive application process.
On November 2, 2020, we announced that on October 30, 2020 we signed a cooperation agreement each with CITIC Securities, Grandall Law Firm (Hangzhou) and Pan-China Certified Public Accountants LLP to initiate the IPO process to list our wholly owned subsidiary, Zhejiang Kandi Smart Battery Swap Technology Co, Ltd on the Shanghai Stock Exchange’s Sci-Tech Innovation Board (“STAR”) market. CITIC Securities will act as the IPO sponsor and lead underwriter, Grandall Law Firm will act as the legal advisor, and Pan-China Certified Public Accountants LLP will act as the auditor for the IPO.
On November 4, 2020, we announced that Kandi America, the U.S. subsidiary of the Company, has received the required clearance from the United States Environmental Protection Agency (EPA) for its two electric vehicle (EV) models, the K23 and K27 via Certificates of Conformity.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
This item is not applicable to us.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We have evaluated, under the supervision of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), the effectiveness of disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) as of September 30, 2020. Based on this evaluation, our CEO and CFO concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective.
Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act (a) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) is accumulated and communicated to management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as described above.
Changes in Internal Control over Financial Reporting
There was no change to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, the Company is involved in legal matters arising in the ordinary course of business. Except as set forth in Note 23 - COMMITMENTS AND CONTINGENCIES under Notes to Condensed Consolidated Financial Statements, our management is currently not aware of any legal matters or pending litigation that would have a significant effect on the Company’s results of operation of financial statements, nor is the Company aware of any other legal matters in which any director, officer, or any owner of record or beneficial owner of more than five percent of any class of voting securities of the Company, or any affiliate of any such director, officer, affiliate of the Company, or security holder, is a party adverse to the Company or has a material adverse interest to the Company. For the detailed discussion of our legal proceedings, please refer to Note 23 - COMMITMENTS AND CONTINGENCIES under Notes to Condensed Consolidated Financial Statements, which is incorporated by reference herein.
Item 1A. Risk Factors.
The successful development of our U.S. EV markets depends on various factors.
On August 18, 2020, our subsidary in U.S., Kandi America held a virtual launch event to introduce the K23 and K27 EVs into the U.S. market. While it has received the required clearance from the United States Environmental Protection Agency (EPA) for its two electric vehicle (EV) models – the K23 and K27 – via Certificates of Conformity; the sale of such EVs into the U.S. market is conditioned upon the satisfaction of the safety standards set by the United States Department of Transportation and the completion of the feature modification, software and technology upgrades catering for our potentioal U.S. costomers. Thus, no units of electric vehicles have been sold in the U.S. There is no assurance all conditions for the sale of EVs in the U.S. could be satisifed as planned.
We have and may increasingly become a target for public scrutiny, including complaints to regulatory agencies, coverage, and malicious allegations, all of which could severely damage our reputation and materially and adversely affect our business, prospects and stock price.
We have been a target for public scrutiny, including complaints to regulatory agencies, coverage, and malicious allegations. For example, from 2013 to 2015, all the EVs we sold had the features of battery exchange, which exposed us to subsidies fraud investigation. Although we believe that these allegations are not true and the fact the Chinese government granted us subsidies after they completed investigation, negative publicity surrounding this incident had adversely affected our reputation.
In addition, we have adopted policies and procedures, specifically a Related Party Transactions Policy, to identify, review, consider and approve such conflicts of interest. In general, if an affiliate of a director, executive officer or significant stockholder, intends to engage in a transaction involving us, that director, executive officer or significant stockholder must report the transaction for consideration and approval by our audit committee and any such transactions have to be conducted at arms-length terms. We also follow the SEC regulations and the U.S. GAAP in reporting related party transactions. For example, under U.S. GAAP, it is permitted not to disclose a specific name of a major customer and/or supplier if they are not related parties to us. However, there are no assurances that negative media who may not have thorough understanding of the SEC disclosure rules and U.S. GAAP cast any incorrect critisizm on our disclosure.
From time to time, the allegations, regardless of their veracity, may result in consumer dissatisfaction, public protests or negative publicity, which could result in government inquiry or substantial harm to our brand, reputation, operations and stock price.
Moreover, as our business expands and grows, both organically and through acquisitions of and investments in other businesses, domestically and internationally, we may be exposed to heightened public scrutiny in jurisdictions where we already operate as well as in new jurisdictions where we may operate. There is no assurance that we would not become a target for regulatory or public scrutiny in the future or that scrutiny and public exposure would not severely damage our reputation as well as our business, prospects and stock price.
Item 6. Exhibits
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Date: November 9, 2020 | By: | /s/ Hu Xiaoming |
| Hu Xiaoming | ||
| President and Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: November 9, 2020 | By: | /s/ Jehn Ming Lim |
| Jehn Ming Lim | ||
| Chief Financial Officer | ||
| (Principal Financial Officer and Accounting Officer) |
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