Company Quick10K Filing
Kandi Technologies
Price5.04 EPS0
Shares53 P/E736
MCap266 P/FCF-10
Net Debt-26 EBIT3
TEV240 TEV/EBIT79
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-09-30 Filed 2020-11-09
10-Q 2020-06-30 Filed 2020-08-10
10-Q 2020-03-31 Filed 2020-06-05
10-K 2019-12-31 Filed 2020-04-28
10-Q 2019-09-30 Filed 2019-11-12
10-Q 2019-06-30 Filed 2019-08-09
10-Q 2019-03-31 Filed 2019-05-10
10-K 2018-12-31 Filed 2019-03-15
10-Q 2018-09-30 Filed 2018-11-09
10-Q 2018-06-30 Filed 2018-08-09
10-Q 2018-03-31 Filed 2018-05-10
10-K 2017-12-31 Filed 2018-03-16
10-Q 2017-09-30 Filed 2017-11-09
10-Q 2017-06-30 Filed 2017-08-09
10-Q 2017-03-31 Filed 2017-05-10
10-K 2016-12-31 Filed 2017-03-16
10-Q 2016-09-30 Filed 2016-11-09
10-Q 2016-06-30 Filed 2016-08-09
10-Q 2016-03-31 Filed 2016-05-10
10-K 2015-12-31 Filed 2016-03-14
10-Q 2015-09-30 Filed 2015-11-09
10-Q 2015-06-30 Filed 2015-08-10
10-Q 2015-03-31 Filed 2015-05-11
10-K 2014-12-31 Filed 2015-03-16
10-Q 2014-09-30 Filed 2014-11-10
10-Q 2014-06-30 Filed 2014-08-11
10-Q 2014-03-31 Filed 2014-05-12
10-K 2013-12-31 Filed 2014-03-17
10-Q 2013-09-30 Filed 2013-11-14
10-Q 2013-06-30 Filed 2013-08-14
10-Q 2013-03-31 Filed 2013-05-14
10-K 2013-03-25 Filed 2013-04-01
10-Q 2012-09-30 Filed 2012-11-14
10-Q 2012-06-30 Filed 2012-08-14
10-Q 2012-03-31 Filed 2012-05-15
10-K 2011-12-31 Filed 2012-03-30
10-Q 2011-09-30 Filed 2011-11-14
10-Q 2011-06-30 Filed 2011-08-15
10-Q 2011-03-31 Filed 2011-05-16
10-K 2010-12-31 Filed 2011-03-31
10-Q 2010-09-30 Filed 2010-11-15
10-Q 2010-06-30 Filed 2010-08-16
10-Q 2010-03-31 Filed 2010-05-17
10-K 2009-12-31 Filed 2010-03-31
8-K 2020-11-24
8-K 2020-11-20
8-K 2020-11-10
8-K 2020-11-10
8-K 2020-11-09
8-K 2020-09-03
8-K 2020-08-10
8-K 2020-08-10
8-K 2020-06-05
8-K 2020-06-05
8-K 2020-05-15
8-K 2020-05-11
8-K 2020-04-28
8-K 2020-04-28
8-K 2020-03-13
8-K 2020-03-06
8-K 2019-12-30
8-K 2019-11-12
8-K 2019-11-12
8-K 2019-10-07
8-K 2019-09-29
8-K 2019-08-09
8-K 2019-08-09
8-K 2019-05-14
8-K 2019-05-10
8-K 2019-05-10
8-K 2019-03-21
8-K 2019-03-15
8-K 2019-03-15
8-K 2019-01-29
8-K 2018-12-28
8-K 2018-11-09
8-K 2018-11-09
8-K 2018-08-09
8-K 2018-08-09
8-K 2018-05-31
8-K 2018-05-10
8-K 2018-05-10
8-K 2018-03-16
8-K 2018-03-16
8-K 2018-01-03
8-K 2017-12-28

KNDI 10Q Quarterly Report

Part I - Financial Information
Item 1. Financial Statements.
Note 1 - Organization and Principal Activities
Note 2 - Liquidity
Note 3 - Basis of Presentation
Note 4 - Principles of Consolidation
Note 5 - Use of Estimates
Note 6 - Summary of Significant Accounting Policies
Note 7 - New Accounting Pronouncements
Note 8 - Concentrations
Note 9 - Earnings (Loss) per Share
Note 10 - Accounts Receivable
Note 11 - Inventories
Note 12 - Notes Receivable
Note 13 - Other Receivables
Note 14 - Property, Plant and Equipment, Net
Note 15 - Intangible Assets
Note 16 - Land Use Rights, Net
Note 17 - Short - Term and Long - Term Loans
Note 18 - Taxes
Note 19 - Leases
Note 20 - Contingent Consideration Liability
Note 21 - Stock Award
Note 22 - Equity Method Investment in The Affiliate Company
Note 23 - Commitments and Contingencies
Note 24 - Segment Reporting
Note 25 - Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures.
Part II - Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 6. Exhibits
EX-31.1 f10q0920ex31-1_kanditech.htm
EX-31.2 f10q0920ex31-2_kanditech.htm
EX-32.1 f10q0920ex32-1_kanditech.htm

Kandi Technologies Earnings 2020-09-30

Balance SheetIncome StatementCash Flow
69555641727813902012201420172020
Assets, Equity
70513213-6-252012201420172020
Rev, G Profit, Net Income
80436-31-68-1052012201420172020
Ops, Inv, Fin

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-Q

 

 Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2020

 

or

 

 Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from ______to______

 

Commission file number 001-33997

 

KANDI TECHNOLOGIES GROUP, INC.
(Exact name of registrant as specified in charter)

 

Delaware

  90-0363723
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
Jinhua City Industrial Zone
Jinhua, Zhejiang Province
People’s Republic of China
  321016
(Address of principal executive offices)   (Zip Code)

 

(86 - 579) 82239856
(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
Common Stock   KNDI   NASDAQ Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

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)  Yes ☒ No ☐

 

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 

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 ☐ No

 

As of November 3, 2020, the registrant had 56,531,702 shares of common stock issued and 54,610,758 shares of common stock outstanding, par value $0.001 per share.  

 

 

 

 

 

  

TABLE OF CONTENTS

 

 

  Page
   
PART I — FINANCIAL INFORMATION  
   
Item 1. Financial Statements 1
     
  Condensed Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019 1
     
  Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (unaudited) – Three Months and Nine Months Ended September 30, 2020 and 2019 2
     
  Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited) – Three Months and Nine Months Ended September 30, 2020 and 2019 3
     
  Condensed Consolidated Statements of Cash Flows (unaudited) – Three Months and Nine Months Ended September 30, 2020 and 2019 4
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 22
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 35
     
Item 4. Controls and Procedures 35
     
PART II — OTHER INFORMATION  
     
Item 1. Legal Proceedings 36
     
Item 1A. Risk Factors 36
     
Item 6. Exhibits 36

 

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  $23,909,159   $5,490,557 
Restricted cash   250,000    11,022,078 
Accounts receivable (net of allowance for doubtful accounts of $105,833 and $254,665 as of September 30, 2020 and December 31, 2019, respectively)   38,370,898    61,181,849 
Inventories   30,244,514    27,736,566 
Notes receivable   235,249    42,487,225 
Other receivables   54,654,688    5,019,971 
Prepayments and prepaid expense   10,980,473    10,615,063 
Amount due from the Affiliate Company   20,869,315    31,330,763 
Other current assets   4,262,285    688,364 
TOTAL CURRENT ASSETS   183,776,581    195,572,436 
           
NON-CURRENT ASSETS          
Property, plant and equipment, net   71,132,470    74,407,858 
Intangible assets, net   3,264,500    3,654,772 
Land use rights, net   9,042,991    11,272,815 
Investment in the Affiliate Company   39,442,126    47,228,614 
Goodwill   28,792,031    28,270,400 
Other long term assets   13,132,240    10,811,501 
TOTAL NON-CURRENT ASSETS   164,806,358    175,645,960 
           
TOTAL ASSETS  $348,582,939   $371,218,396 
           
CURRENT LIABILITIES          
Accounts payable  $42,154,366   $72,093,940 
Other payables and accrued expenses   5,857,897    6,078,041 
Short-term loans   
-
    25,980,364 
Notes payable   
-
    10,765,344 
Income tax payable   1,087,338    1,796,601 
Advance receipts   36,691,372    
-
 
Long term loans - current portion   16,761,501    13,779,641 
Other current liabilities   1,456,108    1,379,808 
TOTAL CURRENT LIABILITIES   104,008,582    131,873,739 
           
NON-CURRENT LIABILITIES          
Long term loans   12,156,573    14,353,792 
Deferred taxes liability   3,460,346    1,362,786 
Contingent consideration liability   3,403,000    5,197,000 
Other long-term liabilities   588,123    574,152 
TOTAL NON-CURRENT LIABILITIES   19,608,042    21,487,730 
           
TOTAL LIABILITIES   123,616,624    153,361,469 
           
STOCKHOLDER'S EQUITY          
Common stock, $0.001 par value; 100,000,000 shares authorized; 56,531,702 and 56,263,102 shares issued and 54,610,758 and 52,839,441 outstanding at September 30,2020 and December 31,2019, respectively   54,611    52,839 
Less: Treasury stock (487,155 shares with average price of $5.09 at September 30,2020 and December 31,2019, respectively)   (2,477,965)   (2,477,965)
Additional paid-in capital   260,605,209    259,691,370 
Accumulated deficit   (15,663,602)   (16,685,736)
Accumulated other comprehensive loss   (17,551,938)   (22,723,581)
TOTAL STOCKHOLDERS' EQUITY   224,966,315    217,856,927 
           
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $348,582,939   $371,218,396 

 

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  $18,717,212   $26,968,385   $44,525,756   $63,360,044 
REVENUES FROM THE AFFILIATE COMPANY AND RELATED PARTIES, NET   6    4,720,159    962    10,543,190 
                     
REVENUES, NET   18,717,218    31,688,544    44,526,718    73,903,234 
                     
COST OF GOODS SOLD   (14,806,322)   (26,412,129)   (35,911,785)   (61,288,228)
                     
GROSS PROFIT   3,910,896    5,276,415    8,614,933    12,615,006 
                     
OPERATING EXPENSES:                    
Research and development   (987,285)   (596,187)   (2,777,426)   (1,766,210)
Selling and marketing   (2,165,383)   (930,810)   (3,807,355)   (2,448,291)
General and administrative   (3,212,209)   (3,432,920)   (10,186,135)   (11,096,246)
Gain on disposal of long-lived assets   76,159    
-
    13,983,733    
-
 
TOTAL OPERATING EXPENSES, NET   (6,288,718)   (4,959,917)   (2,787,183)   (15,310,747)
                     
(LOSS) INCOME FROM OPERATIONS   (2,377,822)   316,498    5,827,750    (2,695,741)
                     
OTHER INCOME (EXPENSE):                    
Interest income   558,059    209,736    1,118,795    559,954 
Interest expense   (788,589)   (435,524)   (2,894,579)   (1,304,062)
Change in fair value of contingent consideration   (1,069,000)   57,000    1,794,000    694,000 
Government grants   13,431    502,146    111,329    725,189 
Gain (loss) from equity dilution in the Affiliate Company   
-
    (49,285)   
-
    4,291,974 
Gain from sale of equity in the Affiliate Company   
-
    20,574,217    
-
    20,574,217 
Share of loss after tax of the Affiliate Company   (1,550,568)   (8,433,767)   (5,631,867)   (22,883,126)
Other income, net   988,287    57,833    2,051,272    357,626 
TOTAL OTHER (EXPENSE) INCOME, NET   (1,848,380)   12,482,356    (3,451,050)   3,015,772 
                     
(LOSS) INCOME BEFORE INCOME TAXES   (4,226,202)   12,798,854    2,376,700    320,031 
                     
INCOME TAX BENEFIT (EXPENSE)   2,767,939    (709,413)   (1,354,563)   41,780 
                     
NET (LOSS) INCOME   (1,458,263)   12,089,441    1,022,137    361,811 
                     
OTHER COMPREHENSIVE INCOME (LOSS)                    
Foreign currency translation adjustment   8,216,974    (8,531,043)   5,171,643    (8,042,604)
                     
COMPREHENSIVE INCOME (LOSS)  $6,758,711   $3,558,398   $6,193,780   $(7,680,793)
                     
WEIGHTED AVERAGE SHARES OUTSTANDING BASIC AND DILUTED   54,112,981    52,613,642    53,282,066    52,332,260 
                     
NET (LOSS) INCOME PER SHARE, BASIC AND DILUTED  $(0.03)  $0.23   $0.02   $0.01 

 

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   51,484,444   $51,484   $
-
   $254,989,657   $(9,497,009)  $(19,921,258)  $225,622,874 
Stock issuance and awards   1,096,397    1,097    
-
    3,387,379    
-
    
-
    3,388,476 
Net loss   -    
-
    
-
    
-
    (4,409,472)   
-
    (4,409,472)
Foreign currency translation  -    
-
    
-
    
-
    
-
    5,404,028    5,404,028 
Balance, March 31, 2019   52,580,841   $52,581   $
-
   $258,377,036   $(13,906,481)  $(14,517,230)  $230,005,906 
Stock issuance and awards   238,600    238    
-
    1,259,569    
-
    
-
    1,259,807 
Net loss   -    
-
    
-
    
-
    (7,318,158)   
-
    (7,318,158)
Foreign currency translation   -    
-
    
-
    
-
    
-
    (4,915,589)   (4,915,589)
Balance, June 30, 2019   52,819,441   $52,819   $
-
   $259,636,605   $(21,224,639)  $(19,432,819)  $219,031,966 
Stock issuance and awards   20,000    20    
-
    69,380    
-
    
-
    69,400 
Stock buyback   -    
-
    (2,477,965)   
-
    
-
    
-
    (2,477,965)
Commission in stock buyback   -    
-
    
-
    (14,615)   
-
    
-
    (14,615)
Net income        
 
    
-
    
-
    12,089,441    
-
    12,089,441 
Foreign currency translation   -    
-
    
-
    
-
    
-
    (8,531,043)   (8,531,043)
Balance, September 30, 2019  52,839,441   $52,839   $(2,477,965)  $259,691,370   $(9,135,198)  $(27,963,862)  $220,167,184 

 

   Number of
Outstanding
Shares
   Common
Stock
   Treasury
Stock
   Additional
Paid-in
Capital
   Accumulated
Deficit
   Accumulated
Other
Comprehensive
Loss
   Total 
Balance, December 31, 2019   52,839,441   $52,839   $(2,477,965)  $259,691,370   $(16,685,736)  $(22,723,581)  $217,856,927 
Stock issuance and awards   10,000    10    
-
    22,290    
-
    
-
    22,300 
Net loss   -    
-
    
-
    
-
    (1,574,646)   
-
    (1,574,646)
Foreign currency translation   -    
-
    
-
    
-
    
-
    (3,523,065)   (3,523,065)
Balance, March 31, 2020   52,849,441   $52,849   $(2,477,965)  $259,713,660   $(18,260,382)  $(26,246,646)  $212,781,516 
Stock issuance and awards   1,502,717    1,503    
-
    3,164,925    
-
    
-
    3,166,428 
Net income   -    
-
    
-
    
-
    4,055,043    
-
    4,055,043 
Foreign currency translation   -    
-
    
-
    
-
    
-
    477,734    477,734 
Balance, June 30, 2020   54,352,158   $54,352   $(2,477,965)  $262,878,585   $(14,205,339)  $(25,768,912)  $220,480,721 
Stock issuance and awards   258,600    259    
-
    870,837    
-
    
-
    871,096 
Net loss   -    
-
    
-
    
-
    (1,458,263)   
-
    (1,458,263)
Foreign currency translation   -    
-
    
-
    
-
    
-
    8,216,974    8,216,974 
Reduction in the Affiliate Company’s equity   -    
-
    
-
    (3,144,213)   
-
    
-
    (3,144,213)
Balance, September 30, 2020  54,610,758   $54,611   $(2,477,965)  $260,605,209   $(15,663,602)  $(17,551,938)  $224,966,315 

 

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  $1,022,137   $361,811 
Adjustments to reconcile net income to net cash provided by operating activities          
Depreciation and amortization   6,078,070    6,443,422 
(Reversal) provision of allowance for doubtful accounts   (150,756)   15,366 
Deferred taxes   1,256,167    50,693 
Share of loss after tax of the Affiliate Company   5,631,867    22,883,126 
Gain from equity dilution in the Affiliate Company   
-
    (4,291,974)
Gain from sale of equity in the Affiliate Company   
-
    (20,574,217)
Gain on disposal of long-lived assets   (13,983,733)   
-
 
Change in fair value of contingent consideration   (1,794,000)   (694,000)
Stock based compensation expense   870,471    1,337,333 
           
Changes in operating assets and liabilities:          
Accounts receivable   18,165,084    (36,822,184)
Notes receivable   
-
    174,881 
Notes receivable from the Affiliate Company and related party   
-
    437,203 
Inventories   (1,830,827)   (14,768,603)
Other receivables and other assets   (5,226,968)   (7,746,801)
Prepayments and prepaid expenses   (84,089)   1,357,001 
Amount due from the Affiliate Company   4,178,477    30,549,072 
           
Increase (Decrease) In:          
Accounts payable   (15,642,931)   11,383,411 
Other payables and accrued liabilities   2,675,156    8,934,397 
Notes payable   (13,725,855)   (11,836,950)
Income tax payable   (804,238)   (1,803,574)
Net cash used in operating activities  $(13,365,968)  $(14,610,587)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchases of property, plant and equipment, net   (383,568)   (955,670)
Payment for construction in progress   (1,604,427)   (18,491)
Proceeds from disposal of long-lived assets   51,872,829    
-
 
Loan to third party   (45,958,247)   (9,555,014)
Cash received from sales of equity in the Affiliate Company   42,321,385    32,061,558 
Net cash provided by investing activities  $46,247,972   $21,532,383 
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from short-term loans   24,163,223    27,864,409 
Repayments of short-term loans   (50,042,178)   (26,261,331)
Repayments of long-term loans   (285,955)   (145,734)
Proceeds from long-term loans   394,116    
-
 
Repayments of loan from third party   
-
    (1,259,551)
Stock buyback with commission   
-
    (2,492,579)
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 changes   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 
-CASH AND CASH EQUIVALENTS AT END OF PERIOD   23,909,159    14,338,637 
-RESTRICTED CASH AT END OF PERIOD   250,000    11,713,004 
           
SUPPLEMENTARY CASH FLOW INFORMATION          
Income taxes paid  $901,021   $1,711,101 
Interest paid  $644,724   $1,304,062 
           
SUPPLEMENTAL NON-CASH DISCLOSURES:          
Decrease in investment in the Affiliate Company due to change in its equity  $3,057,540   $
-
 
Notes receivable from unrelated parties for equity transfer payment  $
-
   $43,137,369 
Common stock issued for settlement of payables related to acquisitions (see Note 20)  $3,166,427   $3,357,425 

 

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 100% ownership interest in China Battery Exchange. As of September 30, 2020, China Battery Exchange has not commenced any business operations.

 

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 80%, 10%, and 10% of Ruiheng, respectively.

 

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 $ 79,767,999 as of September 30, 2020, an increase of $ 16,069,302 from the working capital of $63,698,697 as of December 31, 2019. As of September 30, 2020 and December 31, 2019, the Company’s cash and cash equivalents were $23,909,159 and $5,490,557, respectively. The Company’s restricted cash was $ 250,000 and $11,022,078, respectively.

 

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 pursuant to the Repurchase Agreement. In addition, if Kandi Vehicles achieves certain milestones that contribute to local economic development, the Company will be eligible for tax rebates totaling 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. The final payment of RMB 162 million ($23.8 million) will be received when the Company vacates the land, factory buildings, and other real estate and moves to the new facility. Kandi Vehicles intends to use a portion of the proceeds from the land repurchase (approximately RMB 130 million, or $19.1 million) to fund the land use acquisition and factory construction in the New Energy Automotive Zone, and use the rest portion to fund growth initiatives and for general corporate purposes. Although the Company expects that most of its outstanding trade receivables from customers will be collected in the next twelve months, there are uncertainties with respect to the timing in collecting these receivables, especially the receivables due from the Affiliate Company, because most of them are indirectly impacted by the progress of the receipt of government subsidies.

 

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 RMB186 million (approximately $27.3 million) equity transfer payment from Geely in July, 2020. The management believes that the Company currently has sufficient working capital to support its ongoing operations for the next twelve months. 

 

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 50%-owned subsidiary of Kandi Vehicles (Mr. Hu Xiaoming owns the other 50%), incorporated under the laws of the PRC. Pursuant to agreements executed in January 2011, Mr. Hu Xiaoming contracted with Kandi Vehicles for the operation and management of Kandi New Energy and put his shares of Kandi New Energy into escrow. As a result, Kandi Vehicles is entitled to 100% of the economic benefits, voting rights and residual interests of Kandi New Energy;

 

(4) Kandi Electric Vehicles (Hainan) Co., Ltd. (“Kandi Hainan”), a subsidiary, 10% owned by Kandi New Energy and 90% owned by Kandi Vehicles, incorporated under the laws of the PRC;

 

(5) Zhejiang Kandi Smart Battery Swap Technology Co., Ltd (“Kandi Smart Battery Swap”), a wholly-owned subsidiary of 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 22% equity interest.

 

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 10% of the Company’s consolidated revenue, were as follows:

  

    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    28%   30%    49%   55%
Customer B    11%   30%    9%   5%
Customer C    11%    -     4%   -  

 

For the nine-month period ended September 30, 2020, the Company’s major customers, each of whom accounted for more than 10% of the Company’s consolidated revenue, were as follows:

  

    Sales    Trade Receivable 
    Nine Months   Nine Months          
    Ended   Ended          
    September 30,   September 30,    September 30,   December 31, 
Major Customers   2020   2019    2020   2019 
Customer A    41%   39%    49%   55%
Customer B    13%   23%    9%   5%

 

8

 

 

(b) Suppliers

 

For the three-month period ended September 30, 2020, the Company’s major suppliers, each of whom accounted for more than 10% of the Company’s total purchases, were as follows:

 

   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.          32%         93%        9%         8%
Supplier D   28%    -    5%    - 

 

For the nine -month period ended September 30, 2020, the Company’s major suppliers, each of whom accounted for more than 10% of the Company’s total purchases, were as follows:

 

   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.   48%   67%             9%   8%
Supplier D   26%   13%   5%    - 

 

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 3,900,000 options were excluded from the calculation of diluted net loss per share, for the three-month and nine-month period ended September 30, 2020.

  

NOTE 10 - ACCOUNTS RECEIVABLE

 

Accounts receivable are summarized as follows:

 

   September 30,   December 31, 
   2020   2019 
Accounts receivable  $38,476,731   $61,436,514 
Less: allowance for doubtful accounts   (105,833)   (254,665)
Accounts receivable, net  $38,370,898   $61,181,849 

 

NOTE 11 - INVENTORIES

 

Inventories are summarized as follows:

 

   September 30,   December 31, 
   2020   2019 
Raw material  $10,551,048   $12,127,957 
Work-in-progress   13,643,534    4,545,736 
Finished goods   6,049,932    11,062,873 
Inventories  $30,244,514   $27,736,566 

 

9

 

 

NOTE 12 - NOTES RECEIVABLE

 

As of September 30, 2020, there was $235,249 notes receivable from unrelated parties. As of December 31, 2019, there was $42,487,225 notes receivable from unrelated parties, which was commercial acceptance notes from payments for equity transfer of the Affiliate Company, which had been collected during the nine-month ended September 30, 2020.

 

NOTE 13 - OTHER RECEIVABLES

 

Other receivables consist of the following:

 

   September 30,   December 31, 
   2020   2019 
Loan to third party  $50,925,239   $3,577,145 
Others   3,729,449    1,442,826 
Total other receivables  $54,654,688   $5,019,971 

 

As of September 30, 2020 and December 31, 2019, the Company’s other receivable includes $50,925,239 and $3,577,145 short-term loan lent to an unrelated party with a 6% annual interest rate to maximize the use of idled cash. This loan can be redeemed at any time.

  

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  $31,196,057   $30,447,480 
Machinery and equipment   64,833,897    62,973,794 
Office equipment   1,098,001    1,048,651 
Motor vehicles and other transport equipment   430,468    413,046 
Molds and others   26,466,491    25,836,241 
    124,024,914    120,719,212 
           
Less : Accumulated depreciation  $(52,892,444)  $(46,311,354)
Property, plant and equipment, net  $71,132,470   $74,407,858 

 

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 $0 and $6,484,497, respectively. Also see Note 17.

 

Depreciation expenses for the three months ended September 30, 2020 and 2019 were $1,795,124 and $1,832,835, respectively. Depreciation expenses for the nine months ended September 30, 2020 and 2019 were $5,325,289 and $5,724,864, respectively.

 

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  1.25 years  $492,235   $492,235 
Customer relations  1.25 years   304,086    304,086 
Patent  4.75-6.42 years   4,675,577    4,564,506 
       5,471,898    5,360,827 
Less : Accumulated amortization             
Trade name     $(427,113)  $(389,053)
Customer relations      (263,854)   (240,342)
Patent      (1,516,431)   (1,076,660)
       (2,207,398)   (1,706,055)
Intangible assets, net     $3,264,500   $3,654,772 

  

The aggregate amortization expenses for those intangible assets were $156,040 and $154,027 for the three months ended September 30, 2020 and 2019, respectively. The aggregate amortization expenses for those intangible assets were $463,743 and $471,497 for the nine months ended September 30, 2020 and 2019, respectively.

 

Amortization expenses for the next five years and thereafter are as follows:

 

Three months ending December 31, 2020  $156,041 
Years ending December 31,     
2021   624,165 
2022   544,805 
2023   542,070 
2024   542,070 
Thereafter   855,349 
Total  $3,264,500 

 

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  $11,983,731   $14,731,847 
Less: Accumulated amortization   (2,940,740)   (3,459,032)
Land use rights, net  $9,042,991   $11,272,815 

 

During June 2020, land use right in the net carrying value of $2.3 million was returned to the government as the Company began to perform its obligations under the Repurchase Agreement.

 

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 $0 and $4,937,138, respectively. Also see Note 17.

 

The amortization expenses for the three months ended September 30, 2020 and 2019, were $65,229 and $80,462, respectively. The amortization expenses for the nine months ended September 30, 2020 and 2019, were $225,941 and $247,061, respectively. Amortization expenses for the next five years and thereafter is as follows:

 

Three months ending December 31, 2020  $75,314 
Years ending December 31,     
2021   301,255 
2022   301,255 
2023   301,255 
2024   301,255 
Thereafter   7,762,657 
Total  $9,042,991 

 

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 5.66% per annum, paid off on May 22, 2020, secured by the assets of  Kandi Vehicle, also guaranteed by company’s subsidiaries. Also see Note 14 and Note 16.   
      -
    7,004,650 
           
Interest rate 5.66% per annum, paid off on May 22, 2020,secured by the assets of  Kandi Vehicle, also guaranteed by company’s subsidiaries. Also see Note 14 and Note 16.   
-
    4,621,921 
Bank B          
Interest rate 5.22% per annum, paid off on April 22, 2020, secured by the assets of  Kandi Vehicle. Also see Note 14 and Note 16.   
-
    5,741,517 
Interest rate 5.22% per annum, paid off on April 24, 2020, secured by the assets of  Kandi Vehicle. Also see Note 14 and Note 16.   
-
    4,306,138 
Interest rate 5.22% per annum, paid off on April 26, 2020, secured by the assets of  Kandi Vehicle. Also see Note 14 and Note 16.   
-
    4,306,138 
   $
-
   $25,980,364 

 

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.  $28,523,958   $28,133,433 
Other long term loans:          
Loan under Paycheck Protection Program①   244,116    
-
 
Economic Injury Disaster Loan②   150,000    
-
 
Total long term loans  $28,918,074   $28,133,433 
Long term loans - current portion   16,761,501    13,779,641 
Long term loans - noncurrent portion   12,156,573    14,353,792 
Total long term loans - current and noncurrent portion  $28,918,074   $28,133,433 

  

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(a) loan program called the Paycheck Protection Program (“PPP”). An eligible business can apply for a PPP loan up to the greater of: (1) 2.5 times its average monthly “payroll costs;” or (2) $10.0 million. PPP loans will have: (a) an interest rate of 1.0%, (b) a two-year loan term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and 75% of the loan proceeds are used for payroll expenses, with the remaining 25% of the loan proceeds used for other qualifying expenses. As of September 30, 2020, the Company had received $244,116 under the PPP.

 

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, $150,000 of EIDL loan was approved with the term of a 3.75% rate over 30 years, and a 12-month deferment on the first repayment of principal with interest accrued during deferment.

 

The interest expenses of short-term and long-term loans for the three months ended September 30, 2020 and 2019 were $504,905 and $435,524, respectively. The interest expenses of short-term and long-term loans for the nine months ended September 30, 2020 and 2019 were $2,095,222 and $1,304,062, respectively.

 

As of September 30, 2020, the aggregate amount of short-term and long-term loans guaranteed by various third parties was $0.

 

NOTE 18 - TAXES

 

(a) Corporation Income Tax

 

Pursuant to the tax laws and regulations of the PRC, the Company’s applicable corporate income tax (“CIT”) rate is 25%. However, Kandi Vehicles and Kandi Smart Battery Swap qualify as High and New Technology Enterprise (“HNTE”) companies in the PRC, and are entitled to pay a reduced income tax rate of 15% for the years presented. A HNTE Certificate is valid for three years. An entity may re-apply for an HNTE certificate when the prior certificate expires. Historically, Kandi Vehicles has successfully re-applied for such certificates when the its prior certificates expired. Kandi Smart Battery Swap has been qualified as HNTE since 2018. Therefore no records for renewal are available. The applicable CIT rate of each of the Company’s three other subsidiaries, Kandi New Energy, Yongkang Scrou and Kandi Hainan, the Affiliate Company and its subsidiaries is 25%.

 

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. After combining research and development tax credits of 25% on certain qualified research and development expenses, the Company’s effective tax rate for the nine months ended September 30, 2020 and 2019 were a tax expense of 56.99% on a reported income before taxes of approximately $2.4 million, a tax benefit of 13.05% on a reported income before taxes of approximately $0.3 million, respectively.

 

The quarterly tax provision, and the quarterly estimate of the Company’s annual effective tax rate, is subject to significant variation due to several factors, including variability in accurately predicting the Company’s pre-tax and taxable income and loss, acquisitions (including integrations) and investments, changes in its stock price, changes in its deferred tax assets and liabilities and their valuation, return to provision true-up, foreign currency gains (losses), changes in regulations and interpretations related to tax, accounting, and other areas. Additionally, the Company’s effective tax rate can be 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 $1,354,563 and tax benefit of $41,780, respectively.

 

Under ASC 740 guidance relating to uncertain tax positions, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of 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 $9.6 million deriving from entities in the PRC and Hong Kong. The aggregate NOLs in 2018 was $28.1 million deriving from entities in the PRC and Hong Kong. The NOLs will start to expire from 2021 if they are not used. The cumulative net operating loss in the PRC can be carried forward for five years, to offset future net profits for income tax purposes. The Company has $28,709 cumulative net operating loss in U.S. to carry forward as of September 30, 2020. The cumulative net operating loss in Hong Kong can be carried forward without an expiration date.

 

(b) Tax Holiday Effect

 

For the nine months ended September 30, 2020 and 2019, the PRC CIT rate was 25%. Certain subsidiaries of the Company are entitled to tax exemptions (tax holidays) for the nine months ended September 30, 2020 and 2019.

 

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  $1,669,668   $377,303 
Basic net income per share effect  $0.000   $0.000 

 

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 15 months from January 31, 2020 to April 30, 2021. The monthly lease payment is $11,000 from February 2020 to April 2020 and $12,000 from May 2020 to April 2021. The Company recorded operating lease assets and operating lease liabilities at January 31, 2020, with a remaining lease term of 15 months and discount rate of 4.25%.

 

As of September 30, 2020, the Company’s right - of - use asset (grouped in other long term assets on the balance sheet) was $80,561 and lease liability (grouped in other current liability on the balance sheet) was $82,823. For the three months ended September 30, 2020, the Company’s operating lease expense was $36,000. For the nine months ended September 30, 2020, the Company’s operating lease expense was $104,000.

 

Supplemental information related to operating leases was as follows:

 

   Nine months ended
September 30,
2020
 
Cash payments for operating leases  $104,000 

 

Maturities of lease liabilities as of September 30, 2020, were as follow:

 

Maturity of Lease Liabilities:  Lease payable 
Three months ended December 31,2020  $35,245 
Year ended December 31, 2021   47,578 
Total  $82,823 

 

NOTE 20 - CONTINGENT CONSIDERATION LIABILITY

 

On January 3, 2018, the Company completed the acquisition of 100% of the equity of Jinhua An Kao, currently known as Kandi Smart Battery Swap Co., Ltd. (“Kandi Smart Battery Swap”). The Company paid approximately RMB 25.93 million (approximately $4 million) at the closing of the transaction using cash on hand and issued a total of 2,959,837 shares of restrictive stock or 6.2% of the Company’s total outstanding shares of the common stock immediately prior to the closing of the acquisition valued at approximately $20.7 million to the former shareholders of Kandi Smart Battery Swap and his designees (the “KSBS Shareholders”), and may be required to pay future consideration of up to an additional 2,959,837 shares of common stock, which are being held in escrow and to be released contingent upon the achievement of certain net income-based milestones in the next three years. Any escrowed shares that are not released from escrow to the KSBS Shareholders as a result of the failure to achieve the milestones will be forfeited and returned to the Company for cancellation. While the escrowed shares are held in escrow, the Company will retain all voting rights with respect to such shares. For the year ended December 31, 2018, Kandi Smart Battery Swap achieved its first year net profit target. Accordingly, the KSBS Shareholders received 739,959 shares of Kandi’s restrictive common stock or 12.5% of the total equity consideration (i.e., 5,919,674 total shares) as part of the purchase price. For the year ended December 31, 2019, Kandi Smart Battery Swap achieved its second year net profit target. Accordingly, the KSBS Shareholders received 986,810 shares of Kandi’s restrictive common stock or 16.67% of the total equity consideration (i.e., 5,919,674 total shares) as part of the purchase price. All the escrowed shares have been included in the Company’s registration statement on Form S-3 declared effective by the SEC on April 5, 2019.

 

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 20.83% of the total equity consideration (i.e., 5,919,674 total shares), provided that Kandi Smart Battery Swap realizes a net profit of RMB50,000,000 or more for the period from January 1, 2020 to June 30, 2021 (as opposed to be the originally stated “December 31, 2020”), and such profit is audited or reviewed and Kandi Smart Battery Swap gets annual or quarterly financial report issued under US GAAP.

 

On July 1, 2018, the Company completed the acquisition of 100% of the equity of SC Autosports (d/b/a Kandi America). The Company issued a total of 171,969 shares of restrictive stock or approximately 0.3% of the Company’s total outstanding shares of the common stock immediately prior to the closing of the acquisition valued at approximately $0.8 million at the closing of transaction to the former members of SC Autosports within 30 days from the signing date of the Transfer Agreement, and may be required to pay future consideration of up to an additional 1,547,721 shares of common stock of the Company, which are being held in escrow and to be released contingent upon the achievement of certain pre-tax profit based milestones in the next three years. Any escrowed shares that are not released from escrow to the SC Autosports former members due to the failure to achieve the milestones will be forfeited and returned to the Company for cancellation. While the escrowed shares are held in escrow, the Company will retain all voting rights with respect to the shares. For the year ended December 31, 2018, SC Autosports achieved its first year pre-tax profit target. Accordingly, the former members of SC Autosports received 343,938 shares of Kandi’s restrictive common stock or 20% of the total equity consideration in the purchase price. For the year ended December 31, 2019, SC Autosports achieved its second year pre-tax profit target. Accordingly, the former members of SC Autosports received 515,907 shares of Kandi’s restrictive common stock or 30% of the total equity consideration in the purchase price. All the escrowed shares have been included in the Company’s registration statement on Form S-3 declared effective by the SEC on April 5, 2019.

 

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 $3,403,000 and $5,197,000, respectively.

 

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  $3,403,000   $2,505,000 
Contingent consideration liability to former members of SC Autosports   
-
    2,692,000 
Total  contingent consideration liability  $3,403,000   $5,197,000 

 

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 5,000 shares of Company’s restricted common stock every six months as compensation, beginning in July 2011.

 

As compensation for Mr. Jerry Lewin’s services as a member of the Board, the Board authorized the Company to compensate Mr. Jerry Lewin with 5,000 shares of Company’s restricted common stock every six months, beginning in August 2011.

 

As compensation for Ms. Kewa Luo’s services as the Company’s investor relation officer, the Board authorized the Company to compensate Ms. Kewa Luo with 5,000 shares of the Company’s common stock every six months, beginning in September 2013.

 

In November 2016, the Company entered into a three-year employment agreement with Mr. Mei Bing, to hire him as the Company’s Chief Financial Officer. Under the agreement, Mr. Mei Bing was entitled to receive an aggregate 10,000 shares of common stock each year, vested in four equal quarterly installments of 2,500 shares. On January 29, 2019, Mr. Mei resigned from his position as the Company’s CFO.

 

On January 29, 2019, the Board appointed Ms. Zhu Xiaoying as interim Chief Financial Officer. Ms. Zhu was entitled to receive 10,000 shares of the common stock annually under the Company’s 2008 Omnibus Long-Term Incentive Plan (the “2008 Plan”) as a year-end equity bonus. Effective May 15, 2020, Ms. Zhu resigned from her position as interim Chief Financial Officer of the Company.

 

On May 15, 2020, the Board appointed Mr. Jehn Ming Lim as the Chief Financial Officer. Mr. Lim was entitled to receive 6,000 shares of the common stock annually, which shall be issuable evenly on each six-month anniversary hereof.

 

The fair value of stock awards with service condition is determined based on the closing price of the common stock on the date the shares are granted. The compensation costs for awards of common stock are recognized over the requisite service period.

 

On December 30, 2013, the Board approved a proposal (as submitted by the Compensation Committee) of an award (the “Board’s Pre-Approved Award Grant Sub-Plan under the 2008 Plan”) for certain executives and other key employees. The fair value of each award granted under the 2008 Plan is determined based on the closing price of the Company’s stock on the date of grant of such award. On September 26, 2016, the Board approved to terminate the previous Board’s Pre-Approved Award Grant Sub-Plan under the 2008 Plan and adopted a new plan to grant the total number of shares of common stock of the stock award for selected executives and key employees 250,000 shares of common stock for each fiscal year. On April 18, 2018, the Company granted 238,600 shares of common stock to certain management members and employees as compensation for their past services under the 2008 Plan. On April 30, 2019, the Company granted 238,600 shares of common stock to certain management members and employees as compensation for their past services under the 2008 Plan. On May 9, 2020, the Company granted 238,600 shares of common stock to certain management members and employees as compensation for their past services under the 2008 Plan.

 

For the three months ended September 30, 2020 and 2019, the Company recognized $22,925 and $22,925 of employee stock award expenses for stock compensation and annual incentive award under the 2008 Plan paid to Board members, management and consultants under General and Administrative Expenses, respectively. For the nine months ended September 30, 2020 and 2019, the Company recognized $870,471 and $1,337,333 of employee stock award expenses for stock compensation and annual incentive award under the 2008 Plan paid to Board members, management and consultants under General and Administrative Expenses, respectively.

 

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, Kandi Vehicles signed an Equity Transfer Agreement with Geely Technologies Group Co., Ltd. (“Geely”) to transfer certain equity interests in the Affiliate Company to Geely. Pursuant to the Transfer Agreement, the Affiliate Company converted a loan of RMB 314 million (approximately $46.2 million) from Geely in the year of 2019 to equity in order to increase its cash flow. As a result, the registered capital of the Affiliate Company became RMB 2.40 billion (approximately $352.8 million), of which Kandi Vehicles owned 43.47% and Geely owned 56.53%, respectively, upon the conversion of the loan into equity in the Affiliate Company. Kandi Vehicles further sold 21.47% of its equity interests in the Affiliate Company to Geely for a total consideration of RMB 516 million (approximately $75.9 million). Kandi Vehicles owns 22% of the equity interests of the Affiliate Company as a result of the transfer. As of September 29, 2019, the Company had received payments in cash totaling RMB 220 million (approximately $32.3 million) and certain commercial acceptance notes of RMB 296 million (approximately $43.5 million) from Geely, of which RMB 140 million (approximately $20.6 million) matured on January 20, 2020 and the remaining RMB 156 million (approximately $22.9 million) matured on March 29, 2020. As of September 30, 2019, the equity transfer had been completed. Therefore, in the third quarter of 2019, the Company recognized the gain from equity sale of $20,574,217. As of September 30, 2020, all the equity transfer payment has been collected.

 

The Company accounted for its investments in the Affiliate Company under the equity method of accounting. The Company recorded 22% of the Affiliate Company’s loss for the nine months ended September 30, 2020.

 

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  $25,981,694   $520,275 
Gross loss   (3,590,584)   (377,700)
Gross margin   -13.8%   -72.6%
Net loss   (6,700,345)   (19,435,546)

  

   Nine Months ended 
   September 30, 
   2020   2019 
Condensed income statement information:          
Net sales  $49,065,507   $4,605,880 
Gross loss   (6,232,871)   (3,006,051)
Gross margin   -12.7%   -65.3%
Net loss   (25,272,713)   (49,986,119)

 

   September 30,   December 31, 
   2020   2019 
Condensed balance sheet information:          
Current assets  $612,861,812   $640,688,401 
Noncurrent assets   275,555,271    64,589,516 
Total assets  $888,417,083   $705,277,917 
Current liabilities   693,913,123    490,625,640 
Noncurrent liabilities   8,738,570    
-
 
Shareholder’s equity   179,241,720    214,652,277 
Non-controlling interest   6,523,670    
-
 
Total liabilities and equity  $888,417,083   $705,277,917 

 

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,  $47,228,614   $128,929,893 
Investment decreased in 2019        (72,309,417)
Gain from equity dilution   
-
    4,291,974 
Gain from sale of equity   
-
    20,574,217 
Reduction in the equity of the Affiliate Company*   (3,144,213)   
-
 
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   (5,561,258)   (23,025,049)
Non-controlling interest   (76,189)   
-
 
Intercompany transaction elimination   
-
    (12,557)
Prior year’s unrealized profit realized   5,580    154,480 
Subtotal   (5,631,867)   (22,883,126)
Exchange difference   989,592    (4,766,530)
Investment in Affiliate Company, end of the period  $39,442,126   $53,837,011 

 

*The Affiliate Company converted RMB 1.2 billion of the debt due from Zhejiang ZuoZhongYou Automobile Service Co., Ltd (“ZuoZhongYou”) into 85% of its equity interest. ZuoZhongYou is under common control with the Affiliate Company by Geely. On August 28, 2020. There was about RMB 97.2 million of difference between the carrying value of the debt of RMB 1.2 billion and the carrying value of ZuoZhongYou’s net asset at the transaction date. Hence, there is a decrease of RMB 21.4 million (approximately $3.1 million, which is 22% of the RMB 97.2 million) of “Investment in the Affiliate Company” on the Company’s book, with a corresponding decrease to the additional paid in capital.

 

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 $20,869,315 and $31,330,763, respectively. As of September 30, 2020 and December 31, 2019 the net amount due from the Affiliate Company and its subsidiaries included $2,106,607 and $2,056,564 interest receivable related to the loan lent to the Affiliate Company that was paid off.

 

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. (“NGCL”) for NGCL’s $2,940,614 (RMB 20 million) loan from Shanghai Pudong Development Bank Jinhua Branch, with a related loan period from March 15, 2013 to March 15, 2016. NGCL is not related to the Company. Under this guarantee contract, the Company agreed to assume joint liability as the loan guarantor. In April 2017, Shanghai Pudong Development Bank filed a lawsuit against NGCL, the Company and ten other parties in Zhejiang Province People’s Court in Yongkang City, alleging NGCL defaulted on a bank loan borrowed from Shanghai Pudong Development Bank for a principal amount of approximately $2.9 million and demanded that the guarantor bear the liability for compensation. On May 27, 2017, a judicial mediation took place in Yongkang City and parties reached a settlement in mediation, in which the plaintiff agreed NGCL would repay the loan principal and interest in installments. If there were an event of default that NGCL could not repay the loan, the Company may be obligated to bear the liability of defaulted amount. The Company expects the likelihood of incurring losses in connection with this matter to be remote.

 

(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 one operating segment. The Company’s revenue and long-lived assets are primarily derived from and located in China and US. The Company does not have manufacturing operations outside of China.

 

The following table sets forth disaggregation of revenue:

   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 

 

   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 

 

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.

 

32

 

 

(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.

 

33

 

 

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.

 

34

 

 

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.

 

35

 

 

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

 

Exhibit
Number
  Description
10.1   English Translation of the Supplementary Agreement II to the Share Transfer Agreement of Jinhua An Kao Power Technology Co., Ltd. dated July 7, 2020 (Incorporate by reference from Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 10, 2020)
31.1   Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934
31.2   Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934
32.1   Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of 2002
101.INS   XBRL Instance Document.
101.SCH   XBRL Taxonomy Extension Schema Document.
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB   XBRL Taxonomy Extension Label Linkbase Document.