Kandi Technologies Group, Inc. (“Kandi
Technologies”) was incorporated under the laws of the State of Delaware on March 31, 2004. Kandi Technologies changed its
name from Stone Mountain Resources, Inc. to Kandi Technologies, Corp. on August 13, 2007, and on December 21, 2012, Kandi Technologies
changed its name to Kandi Technologies Group, Inc. As used herein, the term the “Company” means Kandi Technologies
and its operating subsidiaries, as described below.
Headquartered in Jinhua City, Zhejiang
Province, People’s Republic of China, the Company is one of the People’s Republic of China’s (“China”)
leading producers and manufacturers of electric vehicle (“EV”) products, EV parts, and off-road vehicles for sale in
China and global markets. The Company conducts its primary business operations through its wholly-owned subsidiary, Zhejiang Kandi
Vehicles Co., Ltd. (“Kandi Vehicles”), and the partially and wholly-owned subsidiaries of Kandi Vehicles.
Pursuant to agreements executed in January
2011, Kandi Vehicles is entitled to 100% of the economic benefits, voting rights and residual interests (100% of profits and losses)
of Jinhua Kandi New Energy Vehicles Co., Ltd. (“Kandi New Energy”). Kandi New Energy currently holds battery pack
production licensing rights and supplies battery packs to the JV Company (as such term is defined below). In April 2012, pursuant
to a share exchange agreement, the Company acquired 100% of Yongkang Scrou Electric Co, Ltd. (“Yongkang Scrou”), a
manufacturer of automobile and EV parts. Yongkang Scrou currently manufactures and sells EV drive motors, EV controllers, air
conditioners and other electric products to the JV Company.
In March 2013, pursuant to a joint venture
agreement (the “JV Agreement”) entered into by Kandi Vehicles and Shanghai Maple Guorun Automobile Co., Ltd. (“Shanghai
Guorun”), a 99%-owned subsidiary of Geely Automobile Holdings Ltd. (“Geely”), the parties established Zhejiang
Kandi Electric Vehicles Co., Ltd. (the “JV Company”) to develop, manufacture and sell EV products and related auto
parts. Each of Kandi Vehicles and Shanghai Guorun has 50% ownership interest in the JV Company. In March 2014, the JV Company changed
its name to Kandi Electric Vehicles Group Co., Ltd. At present, the JV Company is a holding company and all products are manufactured
by its subsidiaries. In an effort to improve the JV Company’s development, Zhejiang Geely Holding Group, the parent company
of Geely, became the JV Company’s -shareholder on October 26, 2016, through its purchase of the 50% equity of the JV Company
held by Shanghai Guorun at a premium price (a price exceeding the cash amount of the aggregate of the original investment and the
shared profits over the years). On May 19, 2017, due to business development, Geely Holding entrusted Hu Xiaoming, Chairman of
the Board of the JV Company, to hold 19% equity of the JV Company from its 50% holding of the JV Company on behalf of Geely Holding
as a nominal holder. On the same day, Geely Holding transferred its remaining 31% equity in the JV Company to Geely Group (Ningbo)
Ltd., a company wholly owned by Li Shufu, Chairman of the Board of Geely Holding. On May 25, 2017, Mr. Hu pledged its 19% equity
in the JV Company held on behalf of Geely Holding to Geely Holding. On June 30, 2017, due to the JV Company’s operational
needs, Kandi Vehicle pledged its 50% equity in the JV Company to Geely Holding as counter-guarantee because Geely Holding provides
100% guarantee on the JV Company’s borrowings. Despite of the pledge, guarantee and counter-guarantee arrangements stated
above, there is no change in control with respect to the 50% ownership held by each shareholder of the JV Company.
In March 2013, Kandi Vehicles formed Kandi
Electric Vehicles (Changxing) Co., Ltd. (“Kandi Changxing”) in the Changxing (National) Economic and Technological
Development Zone. Kandi Changxing is engaged in the production of EV products. In the fourth quarter of 2013, Kandi Vehicles entered
into an ownership transfer agreement with the JV Company pursuant to which Kandi Vehicles transferred 100% of its ownership in
Kandi Changxing to the JV Company. The Company, indirectly through its 50% ownership interest in the JV Company, has a 50% economic
interest in Kandi Changxing.
In July 2013, Zhejiang ZuoZhongYou Electric
Vehicle Service Co., Ltd. (the “Service Company”) was formed. The Service Company is engaged in various pure EV leasing
businesses, generally referred to as the Micro Public Transportation (“MPT”) program. The Company, through Kandi Vehicles,
has 9.5% ownership interest in the Service Company.
In November 2013, Kandi Electric Vehicles
Jinhua Co., Ltd. (“Kandi Jinhua”) was formed by the JV Company. The JV Company has a 100% ownership interest in Kandi
Jinhua, and the Company, indirectly through its 50% ownership interest in the JV Company, has a 50% economic interest in Kandi
Jinhua.
In November 2013, Zhejiang JiHeKang Electric
Vehicle Sales Co., Ltd. (“JiHeKang”) was formed by the JV Company. JiHeKang is engaged in the car sales business. The
JV Company has a 100% ownership interest in JiHeKang, and the Company, indirectly through its 50% ownership interest in the JV
Company, has a 50% economic interest in JiHeKang.
In December 2013, the JV Company entered
into an ownership transfer agreement with Shanghai Guorun, pursuant to which the JV Company acquired a 100% ownership interest
in Kandi Electric Vehicles (Shanghai) Co., Ltd. (“Kandi Shanghai”). As a result, Kandi Shanghai is a wholly-owned subsidiary
of the JV Company, and the Company, indirectly through its 50% ownership interest in the JV Company, has a 50% economic interest
in Kandi Shanghai.
In January 2014, Kandi Electric Vehicles
Jiangsu Co., Ltd. (“Kandi Jiangsu”) was formed by the JV Company. The JV Company has a 100% ownership interest in Kandi
Jiangsu, and the Company, indirectly through its 50% ownership interest in the JV Company, has a 50% economic interest in Kandi
Jiangsu. Kandi Jiangsu is mainly engaged in EV research and development, manufacturing, and sales.
In November 2015, Hangzhou Puma Investment
Management Co., Ltd. (“Puma Investment”) was formed by the JV Company. Puma Investment provides investment and consulting
services. The JV Company has a 50% ownership interest in Puma Investment(the other 50% is owned by Zuozhongyou Electric Vehicles
Service (Hangzhou) Co.,Ltd., a subsidiary of the Service Company), and the Company, indirectly through the JV Company, has a 25%
economic interest in Puma Investment. The other 50% ownership interest is held by the Service Company.
In November 2015, Hangzhou JiHeKang Electric
Vehicle Service Co., Ltd. (the “JiHeKang Service Company”) was formed by the JV Company. The JiHeKang Service Company
focuses on after-market services for EV products. The JV Company has a 100% ownership interest in the JiHeKang Service Company,
and the Company, indirectly through the JV Company, has a 50% economic interest in the JiHeKang Service Company.
In January 2016, Kandi Electric Vehicles
(Wanning) Co., Ltd. (“Kandi Wanning”) was renamed Kandi Electric Vehicles (Hainan) Co., Ltd. (“Kandi Hainan”).
Kandi Hainan was originally formed in Wanning City in Hainan Province by Kandi Vehicles and Kandi New Energy in April 2013, and
was transferred to Haikou City in January 2016. Kandi Vehicles has a 90% ownership interest in Kandi Hainan, and Kandi New Energy
has the remaining 10% ownership interest. In fact, Kandi Vehicles is, effectively, entitled to 100% of the economic benefits, voting
rights and residual interests (100% of the profits and losses) of Kandi Hainan as Kandi Vehicles is entitled to 100% of the economic
benefits, voting rights and residual interests of Kandi New Energy.
In August 2016, Jiangsu JiDian Electric
Vehicle Sales Co., Ltd. (“Jiangsu JiDian”) was formed by JiHeKang. Jiangsu JiDian is engaged in the car sales business.
Since JiHeKang is 100% owned by the JV Company, the JV Company has a 100% ownership interest in Jiangsu JiDian, and the Company,
indirectly through its 50% ownership interest in the JV Company, has a 50% economic interest in Jiangsu JiDian.
In October 2016, JiHeKang acquired Tianjin
BoHaiWan Vehicle Sales Co., Ltd. (“Tianjin BoHaiWan”), which is engaged in the car sales business. Since JiHeKang is
100% owned by the JV Company, the JV Company has a 100% ownership interest in Tianjin BoHaiWan, and the Company, indirectly through
its 50% ownership interest in the JV Company, has a 50% economic interest in Tianjin BoHaiWan.
In November 2016, Changxing Kandi Vehicle
Maintenance Co., Ltd. (“Changxing Maintenance”) was formed by Kandi Changxing. Changxing Maintenance is engaged in
the car repair and maintenance business. Since Kandi Changxing is 100% owned by the JV Company, the JV Company has a 100% ownership
interest in Changxing Maintenance, and the Company, indirectly through its 50% ownership interest in the JV Company, has a 50%
economic interest in Changxing Maintenance.
In March 2017, Hangzhou Liuchuang Electric
Vehicle Technology Co., Ltd.(“Liuchuang”) was formed by Kandi Jiangsu. Since Kandi Jiangsu is 100% owned by the JV
Company, the JV Company has a 100% ownership interest in Liuchuang, and the Company, indirectly through its 50% ownership interest
in the JV Company, has a 50% economic interest in Liuchuang.
In April
2017, in order to promote business development, Kandi Jinhua, JiHeKang, and JiHeKang Service Company were reorganized to become
subsidiaries of Kandi Jiangsu. As the JV Company has a 100% ownership interest in Kandi Jiangsu, the JV Company has 100% ownership
interests in Kandi Jinhua, JiHeKang, and JiHeKang Service Company, and the Company, indirectly through its 50% ownership interest
in the JV Company, has a 50% economic interest in Kandi Jinhua, JiHeKang, and JiHeKang Service Company.
The Company’s primary business operations
are designing, developing, manufacturing and commercializing EV products, EV parts and off-road vehicles. As part of its strategic
objective of becoming a leading manufacturer of EV products (through the JV Company) and related services, the Company has increased
its focus on pure EV-related products, with a particular emphasis on expanding its market share in China.
The Company had a working capital surplus
of $56,822,668 as of June 30, 2017, a decrease of $29,525,357 from $86,348,025 as of December 31, 2016. As of June 30, 2017, the
Company had credit lines from commercial banks of $31,713,721. Although the Company expects the most of the Company’s outstanding
trade receivables from its customers will be collected in next twelve months, there are uncertainties about the timing in collecting
these receivables, especially the receivables due from the JV Company because the most of them are indirectly impacted by the timely
receiving of government subsidies. Since the amount due from the JV Company accounts for the majority of the Company’s outstanding
receivables and the Company can’t control the timing of the receiving of government subsidies, the Company believes that
its internally-generated cash flows may not be sufficient to support the growth of future operations and to repay short-term bank
loans for the next twelve months. However, the Company believes its access to existing financing sources and its good credit will
enable it to meet its obligations and fund its ongoing operations. As of the date of this report, the Company has refinanced more
than 75% of its current short-term loans with the banks and expects to maintain approximately current debt level for the next twelve
months given the Company’s current financial position and business development needs.
The Company has historically financed its
operations through short-term commercial bank loans from Chinese banks. The term of these loans is typically for one year, and
upon the payment of all outstanding principal and interest on a particular loan, the banks have typically rolled over the loan
for an additional one-year term, with adjustments made to the interest rate to reflect prevailing market rates. The Company believes
this practice has been ongoing year after year and that short-term bank loans remain available on normal trade terms if needed.
The Company maintains its general ledger
and journals using the accrual method of accounting for financial reporting purposes. The Company’s financial statements
and notes are the representations of the Company’s management. Accounting policies adopted by the Company conform to generally
accepted accounting principles in the United States and have been consistently applied in the Company’s presentation of its
financial statements.
The Company’s 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;
(3) Kandi New Energy, a 50%-owned subsidiary
of Kandi Vehicles (Mr. Hu Xiaoming owns the other 50%). Pursuant to agreements executed in January 2011, Mr. Hu Xiaoming contracted
with Kandi Vehicles for the operation and management of Kandi New Energy and put his shares of Kandi New Energy into escrow. As
a result, Kandi Vehicles is entitled to 100% of the economic benefits, voting rights and residual interests of Kandi New Energy;
(5) Kandi Hainan, a subsidiary 10% owned
by Kandi New Energy and 90% owned by Kandi Vehicles.
The Company’s consolidated net income
also includes the Company’s proportionate share of the net income or loss of its equity method investees as follows:
(2) Kandi Changxing, a wholly-owned subsidiary
of the JV Company. The Company, indirectly through its 50% ownership interest in the JV Company, has 50% economic interest in Kandi
Changxing;
(3) Kandi Jinhua, a wholly-owned subsidiary
of the JV Company. The Company, indirectly through its 50% ownership interest in the JV Company, has a 50% economic interest in
Kandi Jinhua;
(4) JiHeKang, a wholly-owned subsidiary
of the JV Company. The Company, indirectly through its 50% ownership interest in the JV Company, has a 50% economic interest in
JiHeKang;
(5) Kandi Shanghai, a wholly-owned subsidiary
of the JV Company. The Company, indirectly through its 50% ownership interest in the JV Company, has a 50% economic interest in
Kandi Shanghai;
(6) Kandi Jiangsu, a wholly-owned subsidiary
of the JV Company. The Company, indirectly through its 50% ownership interest in the JV Company, has a 50% economic interest in
Kandi Jiangsu;
(7) The JiHeKang Service Company, a wholly-owned
subsidiary of the JV Company. The Company, indirectly through its 50% ownership interest in the JV Company, has a 50% economic
interest in the JiHeKang Service Company.
(8) Tianjin BoHaiWan, a wholly-owned subsidiary
of the JV Company. The Company, indirectly through its 50% ownership interest in the JV Company, has a 50% economic interest in
Tianjin BoHaiWan;
(9) Changxing Maintenance, a wholly-owned
subsidiary of the JV Company. The Company, indirectly through its 50% ownership interest in the JV Company, has a 50% economic
interest in Changxing Maintenance;
(10) Liuchuang, a wholly-owned subsidiary
of the JV Company. The Company, indirectly through its 50% ownership interest in the JV Company, has a 50% economic interest in
Liuchuang.
All intra-entity profits and losses with
regards to the Company’s equity method investees have been eliminated.
The preparation of financial statements
in conformity with generally accepted accounting principles in the United States requires the Company’s management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting
period. Management makes these estimates using the best information available at the time the estimates are made; however actual
results when ultimately realized could differ from those estimates.
The Company’s operations are conducted
in China. As a result, the Company’s business, financial condition and results of operations may be influenced by the political,
economic and legal environments in China, and by the general state of the Chinese economy. In addition, the Company’s earnings
are subject to movements in foreign currency exchange rates when transactions are denominated in Renminbi (“RMB”),
which is the Company’s functional currency. Accordingly, the Company’s operating results are affected by changes in
the exchange rate between the U.S. dollar and the RMB.
The Company’s operations in China
are subject to special considerations and significant risks not typically associated with companies in North America and Western
Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange.
The Company’s performance may be adversely affected by changes in the political and social conditions in China, and by changes
in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad,
and rates and methods of taxation, among other things.
ASC 820 establishes a three-tier fair value
hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy prioritizes the inputs into three levels based
on the extent to which inputs used in measuring fair value are observable in the market.
Level 1—defined as observable inputs
such as quoted prices in active markets;
Level 2—defined as inputs other than
quoted prices in active markets that are either directly or indirectly observable; and
Level 3—defined as unobservable inputs
for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The Company’s financial instruments
primarily consist of cash and cash equivalents, restricted cash, accounts receivable, notes receivable, other receivables, accounts
payable, other payables and accrued liabilities, short-term bank loans, notes payable, and warrants.
The carrying value of cash and cash equivalents,
restricted cash, accounts receivable, notes receivable, other receivables, accounts payable, other payables and accrued liabilities,
and notes payable approximate fair value because of the short-term nature of these items. The estimated fair values of short-term
bank loans were not materially different from their carrying value as presented due to the brief maturities and because the interest
rates on these borrowings approximate those that would have been available for loans of similar remaining maturities and risk profiles.
As the carrying amounts are reasonable estimates of fair value, these financial instruments are classified within Level 1 of the
fair value hierarchy. The Company identified notes payable as Level 2 instruments due to the fact that the inputs to valuation
are primarily based upon readily observable pricing information. The balance of notes payable, which was measured and disclosed
at fair value, was $37,289,011 and $14,797,325 at June 30, 2017 and December 31, 2016, respectively.
Warrants, which are accounted for as liabilities,
are treated as derivative instruments, and are measured at each reporting date for their fair value using Level 3 inputs. The fair
value of warrants was $0 at June 30, 2017 and December 31, 2016, respectively. Also see Note 6(t).
The Company considers highly-liquid investments
purchased with original maturities of three months or less to be cash equivalents.
Restricted cash, as of June 30, 2017, and
December 31, 2016, includes time deposits on account for earning interest income. As of June 30, 2017, and December 31, 2016, the
Company’s restricted cash was $22,708,654 and $12,957,377, which includes a one-year Certificate of Time Deposit (CD) of
$11,800,454 with Hangzhou Bank Jinhua Branch, of which $5,900,227 will mature on September 29, 2017, and the remainder will mature
on October 29, 2017.
Inventories are stated at the lower of
cost or net realizable value (market value). The cost of raw materials is determined on the basis of weighted average. The cost
of finished goods is determined on the basis of weighted average and comprises direct materials, direct labor and an appropriate
proportion of overhead.
Net realizable value is based on estimated
selling prices less selling expenses and any further costs expected to be incurred for completion. Adjustments to reduce the cost
of inventory to net realizable value are made, if required, for estimated excess, obsolescence, or impaired balances.
Accounts receivable are recognized and
carried at net realizable value. An allowance for doubtful accounts is recorded for periods in which the Company determines a loss
is probable, based on its assessment of specific factors, such as troubled collections, historical experience, accounts aging,
ongoing business relations and other factors. Accounts are written off after exhaustive collection efforts. If accounts receivable
are to be provided for, or written off, they are recognized in the consolidated statement of operations within the operating expenses
line item.
As of June 30, 2017, and December 31, 2016,
credit terms with the Company’s customers were typically 210 to 720 days after delivery. The Company extended credit terms
with its certain customers, mainly the JV Company whose outstanding balance has already exceeded the originally granted credit
terms to a much longer period because of delayed subsidy payments for EVs sold by the JV Company from the Chinese government. Because
of the industry-wide subsidy review, the Chinese government temporarily delayed the issuing of the subsidy payments for the EVs
sold in 2015 and 2016, which negatively impacted the JV Company’s cash flow position and caused its delay in repaying the
Company. By extending the credit term to maximum 720 days, it will allow them to have sufficient time to repay the Company when
the government resumes the subsidy payments. According to the government’s subsidy policies, the EV sold in 2015 and 2016
by the JV Company are eligible for receiving the subsidies and Chinese government has a good record on paying subsidies. Therefore,
the Company believes the issues associated with the outstanding receivables due from the JV Company is timing rather than collectability.
Since the collectability is reasonably assured, as of June 30, 2017, and December 31, 2016, the Company had no allowance for doubtful
accounts, as per the Company management’s judgment based on their best knowledge. The Company conducts quarterly assessments
of the state of the Company’s outstanding receivables and reserve any allowance for doubtful accounts if it becomes necessary.
Notes receivable represent short-term loans
to third parties with maximum terms of six months. Interest income is recognized according to each agreement between a borrower
and the Company on an accrual basis. For notes receivable with banks, the interest rates are determined by banks. For notes receivable
with other parties, the interest rates are based on agreements between the parties. If notes receivable are paid back, that transaction
will be recognized in the relevant year. If notes receivable are not paid back, or are written off, that transaction will be recognized
in the relevant year if default is probable, reasonably assured, and the loss can be reasonably estimated. The Company will recognize
income if the written-off loan is recovered at a future date. In case of any foreclosure proceedings or legal actions, the Company
provides an accrual for the related foreclosure and litigation expenses. The Company also receives notes receivable from the JV
Company and other parties to settle accounts receivable. If the Company decides to discount notes receivable for the purpose of
receiving immediate cash, the current discount rate is approximately in the range of 4.80% to 5.00% annually. As of June 30, 2017
and December 31, 2016, the Company had notes receivable from JV Company and other related parties of $0 and $400,239, respectively,
which notes receivable typically mature within six months.
Advance to suppliers represent cash paid
in advance to suppliers, and include advances to raw material suppliers, mold manufacturers, and equipment suppliers.
As of June 30, 2017, the Company had made
a total advance payments of RMB744 million (approximately $110 million) to Nanjing Shangtong Auto Technologies Co., Ltd. (“Nanjing
Shangtong”) as an advance to purchase a production line and develop a new EV model for Kandi Hainan. Nanjing Shangtong is
a total solution contractor for Kandi Hainan and provides all the equipment and EV product design and research services used by
Kandi Hainan. After transferred to construction in progress and expensed for R&D purposes, the Company had $14,806,230 left
in Advance to Suppliers in current assets and $18,983,323 left in Advance to Suppliers in long-term assets as of June 30, 2017.
Advances for raw material purchases are
typically settled within two months of the Company’s receipt of the raw materials. Prepayment is offset against the purchase
price after the equipment or materials are delivered.
Property, plants and equipment are carried
at cost less accumulated depreciation. Depreciation is calculated over the asset’s estimated useful life using the straight-line
method. Leasehold improvements are amortized over the life of the asset or the term of the lease, whichever is shorter. Estimated
useful lives are as follows:
The costs and related accumulated depreciation
of assets sold or otherwise retired are eliminated from the Company’s accounts and any gain or loss is included in the statements
of income. The cost of maintenance and repairs is charged to expenses as incurred, whereas significant renewals and betterments
are capitalized.
Construction in progress (“CIP”)
represents the direct costs of construction and the acquisition costs of buildings or machinery. Capitalization of these costs
ceases, and construction in progress is transferred to plants and equipment, when substantially all the activities necessary to
prepare the assets for their intended use are completed. No depreciation is provided for until the assets are completed and ready
for their intended use. $1,044,012 of interest expenses have been capitalized for CIP as of June 30, 2017.
According to Chinese law, land in China
is owned by the government and land ownership rights cannot be sold to an individual or to a private company. However, the Chinese
government grants the user a “land use right” to use the land. The land use rights granted to the Company are amortized
using the straight-line method over a term of fifty years.
The Company periodically evaluates the
carrying value of long-lived assets to be held and used, including intangible assets subject to amortization, when events and circumstances
warrant such a review, pursuant to the guidelines established in Statement of Financial Accounting Standards (“SFAS”)
No. 144 (now known as “ASC 360”). The carrying value of a long-lived asset is considered impaired when the anticipated
undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is
recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value
is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived
assets to be disposed of are determined in a similar manner, except that fair market values are reduced for disposal costs.
Revenue represents the invoiced value of
goods sold. Revenue is recognized when the Company ships the goods to its customers and all of the following criteria are met:
The Company recognized revenue when the
products and the risks they carry are transferred to the other party.
Expenditures relating to the development
of new products and processes, including improvements to existing products, are expensed as incurred. Research and development
expenses were $5,142,041 and $494,193 for the three months ended June 30, 2017 and 2016, respectively. Research and development
expenses were $25,911,773 and $700,161 for the six months ended June 30, 2017 and 2016, respectively.
Grants and subsidies received from the
Chinese government are recognized when the proceeds are received or collectible and related milestones have been reached and all
contingencies have been resolved.
For the three months ended June 30, 2017
and 2016, respectively, the Company’s subsidiaries recognized $262,137 and $1,503,384 in grants from the Chinese government.
For the six months ended June 30, 2017 and 2016, respectively, the Company’s subsidiaries recognized $5,329,611 and $1,697,857
in grants from the Chinese government.
The Company accounts for income tax using
an asset and liability approach, which allows for the recognition of deferred tax benefits in future years. Under the asset and
liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The accounting for deferred
tax calculation represents the Company management’s best estimate of the most likely future tax consequences of events that
have been recognized in our financial statements or tax returns and related future anticipation. A valuation allowance is provided
for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their
benefits, or that future realization will be uncertain.
The accompanying consolidated financial
statements are presented in United States dollars. The functional currency of the Company is the Renminbi (RMB). Capital accounts
of the consolidated financial statements are translated into United States dollars from RMB at their historical exchange rates
when the capital transactions occurred.
Assets and liabilities are translated at
the exchange rates as of balance sheet date. Income and expenditures are translated at the average exchange rate of the reporting
period, which rates are obtained from the website:
http:// www.ofx.com
Comprehensive income is defined to include
all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, all
items that are required to be recognized under current accounting standards as components of comprehensive income are required
to be reported in a financial statement that is presented with the same prominence as other financial statements. Comprehensive
income includes net income and the foreign currency translation changes.
In accordance with ASC 280-10, Segment
Reporting, the Company’s chief operating decision makers rely upon the consolidated results of operations when making decisions
about allocating resources and assessing the performance of the Company. As a result of the assessment made by the Company’s
chief operating decision makers, the Company has only one operating segment. The Company does not distinguish between markets or
segments for the purpose of internal reporting.
The Company’s stock option expenses
are recorded in accordance with ASC 718 and ASC 505.
The fair value of stock options is estimated
using the Black-Scholes-Merton model. The Company’s expected volatility assumption is based on the historical volatility
of the Company’s common stock. The expected life assumption is primarily based on the expiration date of the option. The
risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of
grant.
The recognition of stock option expenses
is based on awards expected to vest. ASC standards require forfeitures to be estimated at the time of grant and revised in subsequent
periods, if necessary, if actual forfeitures differ from those estimates.
The stock-based option expenses for the
three months ended June 30, 2017 and June 30, 2016, were $1,994,993 and $4,998,817, respectively. The stock-based option expenses
for the six months ended June 30, 2017 and June 30, 2016, were $3,128,512 and $11,108,483, respectively. See Note 19. There were
no forfeitures estimated during the reporting period.
The Company allocates goodwill from business
combinations to reporting units based on the expectation that the reporting unit is to benefit from the business combination. The
Company evaluates its reporting units on an annual basis and, if necessary, reassigns goodwill using a relative fair value allocation
approach. Goodwill is tested for impairment at the reporting unit level on an annual basis and between annual tests if an event
occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.
These events or circumstances could include a significant change in the business climate, legal factors, operating performance
indicators, competition, or sale or disposition of a significant portion of a reporting unit.
Application of the goodwill impairment
test requires judgments, including the identification of reporting units, assignment of assets and liabilities to reporting units,
assignment of goodwill to reporting units, and the determination of the fair value of each reporting unit. The Company first assesses
qualitative factors to determine whether it is more likely than not that goodwill is impaired. If the more likely than not threshold
is met, the Company performs a quantitative impairment test.
As of June 30, 2017 and June 30, 2016,
the Company determined that its goodwill was not impaired.
Intangible assets consist of trade names
and customer relations associated with the purchase price from the allocation of Yongkang Scrou. Such assets are being amortized
over their estimated useful lives of 9.7 years. Intangible assets are amortized as of June 30, 2017. The amortization expenses
for intangible assets were $20,524 and $20,524 for the three months ended June 30, 2017 and June 30, 2016, respectively. The amortization
expenses for intangible assets were $41,048 and $41,048 for the six months ended June 30, 2017 and June 30, 2016, respectively.
Gross proceeds are first allocated according
to the initial fair value of the freestanding derivative instruments (i.e. the warrants issued to the Company’s investors
in its previous offerings, or the “Investor Warrants”). The remaining proceeds are allocated to common stock. The related
issuance expenses, including the placement agent cash fees, legal fees, the initial fair value of the warrants issued to the placement
agent and others were allocated between the common stock and the Investor Warrants based on how the proceeds are allocated to these
instruments. Expenses related to the issuance of common stock were charged to paid-in capital. Expenses related to the issuance
of derivative instruments were expensed upon issuance.
In accordance with accounting standards
regarding consolidation of variable interest entities, or VIEs, VIEs are generally entities that lack sufficient equity to finance
their activities without additional financial support from other parties or whose equity holders lack adequate decision making
ability. All VIEs with which the Company is involved must be evaluated to determine the primary beneficiary of the risks and rewards
of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.
The Company has concluded, based on the
contractual arrangements, that Kandi New Energy is a VIE and that the Company’s wholly-owned subsidiary, Kandi Vehicles,
absorbs a majority of the risk of loss from the activities of this company, thereby enabling the Company, through Kandi Vehicles,
to receive a majority of its respective expected residual returns.
Additionally, because Kandi New Energy
is under common control with other entities, the consolidated financial statements have been prepared as if the transactions had
occurred retroactively as to the beginning of the reporting period of these consolidated financial statements.
Control and common control are defined
under the accounting standards as “an individual, enterprise, or immediate family members who hold more than 50 percent of
the voting ownership interest of each entity.” Because the owners collectively own 100% of Kandi New Energy, and have agreed
to vote their interests in concert since the establishment of each of these three companies as memorialized the Voting Rights Proxy
Agreement, the Company believes that the owners collectively have control and common control of Kandi New Energy. Accordingly,
the Company believes that Kandi New Energy was constructively held under common control by Kandi Vehicles as of the time the contractual
agreements were entered into, establishing Kandi Vehicles as their primary beneficiary. Kandi Vehicles, in turn, is owned by Continental,
which is owned by the Company.
Recent accounting pronouncements that the
Company has adopted or may be required to adopt in the future are summarized below:
In January 2017, the FASB issued ASU No.
2017-1 “Topic 805, Business Combinations: Clarifying the Definition of a Business”. The amendments in this update provide
a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross
assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the
set is not a business. This screen reduces the number of transactions that need to be further evaluated. The amendments in this
update affect all reporting entities that must determine whether they have acquired or sold a business. Public business entities
should apply the amendments in this update to annual periods beginning after December 15, 2017, including interim periods within
those periods. All other entities should apply the amendments to annual periods beginning after December 15, 2018, and interim
periods within annual periods beginning after December 15, 2019. The Company does not expect the adoption of ASU 2017-1 to have
a material impact on its consolidated financial statements.
For the three-month periods ended June
30, 2017 and June 30, 2016, the Company’s major customer, who accounted for more than 10% of the Company’s consolidated
revenue, was as follows:
For the six-month periods ended June 30,
2017 and June 30, 2016, the Company’s major customer, who accounted for more than 10% of the Company’s consolidated
revenue, was as follows:
Trade receivable includes accounts receivable,
amount due from the JV Company net of loans to the JV Company, and amount due from other related parties.
For the three-month periods ended June
30, 2017 and June 30, 2016, the Company’s material suppliers, each of whom accounted for more than 10% of the Company’s
total purchases, were as follows:
For the six-month periods ended June 30,
2017 and June 30, 2016, the Company’s material suppliers, each of whom accounted for more than 10% of the Company’s
total purchases, were as follows:
The Company calculates earnings per share
in accordance with ASC 260, Earnings per Share, which requires a dual presentation of basic and diluted earnings per share. Basic
earnings per share are computed using the weighted average number of shares outstanding during the reporting period. Diluted earnings
per share represents basic earnings per share adjusted to include the potentially dilutive effect of outstanding stock options,
warrants and convertible notes (using the if-converted method). For the three months ended June 30, 2017 and June 30, 2016, the
average number of potentially dilutive common shares was 0 and 0, respectively. For the six months ended June 30, 2017 and June
30, 2016, the average number of potentially dilutive common shares was 0 and 6,024, respectively. The potential dilutive common
shares as at the six months ended June 30, 2017 and June 30, 2016, were 4,400,000 and 5,106,395 shares respectively.
The following is the calculation of
earnings per share for the three-month periods ended June 30, 2017 and 2016:
The following is the calculation of earnings
per share for the six-month periods ended June 30, 2017 and 2016:
NOTE 12 – NOTES RECEIVABLE
Notes receivable from the JV Company and
related parties as of June 30, 2017, and December 31, 2016, are summarized as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Bank acceptance notes
|
|
|
-
|
|
|
|
400,239
|
|
Total notes receivable
|
|
$
|
-
|
|
|
$
|
400,239
|
|
Details of notes receivable from the JV Company
and related parties as of December 31, 2016, are as set forth below:
Index
|
|
Amount ($)
|
|
Counter party
|
|
Relationship
|
|
Nature
|
|
Manner of settlement
|
1
|
|
|
400,239
|
|
Kandi Shanghai
|
|
Subsidiary of the JV Company
|
|
Payments for sales
|
|
Not due
|
NOTE 13 – PLANTS AND EQUIPMENT
Plants and equipment as of June 30, 2017
and December 31, 2016, consisted of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
At cost:
|
|
|
|
|
|
|
Buildings
|
|
$
|
13,296,092
|
|
|
$
|
12,977,465
|
|
Machinery and equipment
|
|
|
7,328,252
|
|
|
|
8,585,666
|
|
Office equipment
|
|
|
494,476
|
|
|
|
475,162
|
|
Motor vehicles
|
|
|
360,991
|
|
|
|
321,207
|
|
Molds
|
|
|
27,177,509
|
|
|
|
26,463,472
|
|
|
|
|
48,657,320
|
|
|
|
48,822,972
|
|
Less : Accumulated depreciation
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
(4,270,277
|
)
|
|
$
|
(3,948,909
|
)
|
Machinery and equipment
|
|
|
(6,865,730
|
)
|
|
|
(8,107,884
|
)
|
Office equipment
|
|
|
(256,922
|
)
|
|
|
(216,226
|
)
|
Motor vehicles
|
|
|
(283,853
|
)
|
|
|
(274,197
|
)
|
Molds
|
|
|
(23,395,655
|
)
|
|
|
(21,031,086
|
)
|
|
|
|
(35,072,437
|
)
|
|
|
(33,578,302
|
)
|
Less: provision for impairment for fixed assets
|
|
|
(51,462
|
)
|
|
|
(50,228
|
)
|
Plant and equipment, net
|
|
$
|
13,533,421
|
|
|
$
|
15,194,442
|
|
As of June 30, 2017 and December 31, 2016,
the net book value of plants and equipment pledged as collateral for bank loans was $8,875,078 and $8,875,111, respectively.
Depreciation expenses for the three months
ended June 30, 2017 and June 30, 2016 were $1,071,612 and $1,130,545, respectively. Depreciation expenses for the six months ended
June 30, 2017 and June 30, 2016 were $2,134,346 and $2,263,277, respectively.
NOTE 14 – LAND USE RIGHTS
The Company’s land use rights as
of June 30, 2017 and December 31, 2016, consisted of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cost of land use rights
|
|
$
|
14,630,896
|
|
|
$
|
14,280,282
|
|
Less: Accumulated amortization
|
|
|
(2,727,683
|
)
|
|
|
(2,504,562
|
)
|
Land use rights, net
|
|
$
|
11,903,213
|
|
|
$
|
11,775,720
|
|
As of June 30, 2017, and December 31, 2016,
the net book value of land use rights pledged as collateral for the Company’s bank loans was $8,752,429 and $8,660,097, respectively.
Also see Note 16.
The amortization expenses for the three
months ended June 30, 2017 and June 30, 2016, were $79,845 and $83,849, respectively. The amortization expenses for the six months
ended June 30, 2017 and June 30, 2016, were $159,383 and $153,836, respectively. Amortization expenses for the next five years
and thereafter is as follows:
2017(Six Months)
|
|
$
|
159,383
|
|
2018
|
|
|
318,766
|
|
2019
|
|
|
318,766
|
|
2020
|
|
|
318,766
|
|
2021
|
|
|
318,766
|
|
Thereafter
|
|
|
10,468,766
|
|
Total
|
|
$
|
11,903,213
|
|
NOTE 15 – CONSTRUCTION-IN-PROGRESS
Hainan Facility
In April 2013, the Company signed an agreement
with the Wanning city government in Hainan Province to invest a total of RMB 1 billion to establish a factory in Wanning to manufacture
100,000 EVs annually. Also in 2013, the Company contracted with an unrelated third party supplier, Nanjing Shangtong, to purchase
a production line in connection with the manufacturing facility and to help develop a new EV model. In January 2016, the Hainan
Province government implemented a development plan to centralize manufacturing in certain designated industry parks. As a result,
the Wanning facility was relocated from Wanning city to the Haikou city high-tech zone. Based on our agreement with the government,
all the expenses and lost assets resulting from the relocation were compensated for by the local government. As a result of the
relocation, the contracts to build the manufacturing facility had to be revised in terms of total contract amount, technical requirements,
completion milestones and others for the new construction site in Haikou. Because of this change, part of the construction-in-progress
previously recorded was transferred back to the advances to suppliers in accordance with the revised contract terms and technical
requirements. The Hainan facility construction improvement is currently underway. The Company started to assemble the prototype
model in the end of July and plans to send it to National Testing Center for inspection in the coming months. Once the prototype
passes the inspection, the Company will launch the trial production thereafter.
No depreciation is provided for CIP until
such time as the Hainan facility is completed and placed into operation.
The contractual obligations under CIP of
the Company as of June 30, 2017 are as follows:
|
|
Total in CIP as of
|
|
|
Estimate
|
|
|
Total
|
|
Project
|
|
June 30,
|
|
|
to
|
|
|
contract
|
|
|
|
2017
|
|
|
complete
|
|
|
amount
|
|
Kandi Hainan facility
|
|
$
|
43,655,614
|
|
|
$
|
38,671,989
|
|
|
$
|
82,327,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
43,655,614
|
|
|
$
|
38,671,989
|
|
|
$
|
82,327,603
|
|
As of June 30, 2017, and December 31, 2016,
the Company had CIP amounting to $43,655,614 and $27,054,181, respectively.
$
536,068
and $0 of interest expense has been capitalized for CIP for three months ended June 30, 2017 and 2016, respectively. $1,044,012
and $0 of interest expense has been capitalized for CIP for six months ended June 30, 2017 and 2016, respectively.
NOTE 16 – SHORT -TERM AND LONG-TERM
BANK LOANS
Short-term loans are summarized as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Loans from China Ever-bright Bank
|
|
|
|
|
|
|
Interest rate 5.22% per annum, due on April 25, 2018, , secured by the assets of Kandi Vehicle, guaranteed by Mr. Hu Xiaoming and his wife
,
and guaranteed by company's subsidiaries. Also see Note 13 and Note 14.
|
|
|
10,325,398
|
|
|
|
11,229,727
|
|
Loans from Hangzhou Bank
|
|
|
|
|
|
|
|
|
Interest rate 4.35% per annum, due on October 12, 2017, secured by the assets of Kandi Vehicle. Also see Note 13 and Note 14.
|
|
|
7,198,277
|
|
|
|
7,025,778
|
|
Interest rate 4.35% per annum, due July 3, 2017, paid off on July 3, 2017 and the new due date is July 4, 2018, secured by the assets of Kandi Vehicle. Also see Note 13 and Note 14.
|
|
|
10,649,910
|
|
|
|
10,394,696
|
|
Interest rate 4.35% per annum, paid off on March 23, 2017, secured by the assets of Kandi Vehicle. Also see Note 13 and Note 14.
|
|
|
-
|
|
|
|
5,614,864
|
|
Interest rate 4.35% per annum, due March 26, 2018, secured by the assets of Kandi Vehicle. Also see Note 13 and Note 14.
|
|
|
3,540,136
|
|
|
|
-
|
|
Loans from Individual Third Party
|
|
|
|
|
|
|
|
|
Interest rate 12% per annum
|
|
|
295,011
|
|
|
|
-
|
|
|
|
$
|
32,008,732
|
|
|
|
34,265,065
|
|
Long-term loans are summarized as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Loans from Haikou Rural Credit Cooperative
|
|
|
|
|
|
|
Interest rate 7% per annum, due on December 12, 2021, guaranteed by Kandi Vehicle and Kandi New Energy.
|
|
|
29,501,136
|
|
|
|
28,794,172
|
|
Total:
|
|
$
|
29,501,136
|
|
|
|
28,794,172
|
|
The interest expense of short-term and
long-term bank loans for the three months ended June 30, 2017, and 2016 was $548,810 and $432,318, respectively. The interest expense
of short-term and long-term bank loans for the six months ended June 30, 2017, and 2016 was $1,163,263 and $874,397, respectively.
As of June 30, 2017, the aggregate amount
of short-term and long-term loans guaranteed by various third parties was $0.
NOTE 17 – NOTES PAYABLE
By issuing bank notes payable rather than
paying cash to suppliers, the Company can defer payments until the bank notes payable are due. Depending on bank requirements,
the Company may need to deposit restricted cash in banks to back up the bank notes payable, while the restricted cash deposited
in the banks will generate interest income.
A bank acceptance note is a promised future
payment, or time draft, which is accepted and guaranteed by a bank and drawn on a deposit at the bank. The banker’s acceptance
specifies the amount of the funds, the date, and the person to which the payment is due.
After acceptance, the draft becomes an
unconditional liability of the bank, but the holder of the draft can sell (exchange) it for cash at a discount to a buyer who is
willing to wait until the maturity date for the funds in the deposit. $10,844,399 and $3,279,656 were held as collateral for the
notes payable as of June 30, 2017, and December 31, 2016, respectively.
As is common business practice in the PRC,
the Company issues notes payable to its suppliers as settlement for accounts payable.
The Company’s notes payable also
include the borrowing from the third party.
Notes payable for June 30, 2017 and December
31, 2016 were summarized as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Bank acceptance notes:
|
|
$
|
|
|
|
$
|
|
|
Due March 22, 2017
|
|
|
-
|
|
|
|
400,239
|
|
Due March 29, 2017
|
|
|
-
|
|
|
|
1,439,709
|
|
Due June 21, 2017
|
|
|
-
|
|
|
|
1,439,709
|
|
Due July 6, 2017
|
|
|
1,180,045
|
|
|
|
-
|
|
Due September 23, 2017
|
|
|
8,850,341
|
|
|
|
-
|
|
Due October 21, 2017
|
|
|
803,906
|
|
|
|
-
|
|
Due November 2, 2017
|
|
|
6,637,756
|
|
|
|
-
|
|
Due November 4, 2017
|
|
|
885,034
|
|
|
|
-
|
|
Due December 6, 2017
|
|
|
885,034
|
|
|
|
-
|
|
Due December 22, 2017
|
|
|
91,731
|
|
|
|
-
|
|
Due June 21, 2018
|
|
|
360,893
|
|
|
|
-
|
|
Other Notes Payable:
|
|
|
|
|
|
|
|
|
Due May 6, 2017
|
|
|
-
|
|
|
|
11,517,669
|
|
Due May 6, 2019
|
|
|
17,594,271
|
|
|
|
|
|
Total
|
|
$
|
37,289,011
|
|
|
$
|
14,797,325
|
|
NOTE 18 – TAXES
(a) Corporation Income Tax
Pursuant to the tax laws and regulations
of the PRC, the Company’s applicable corporate income tax (“CIT”) rate is 25%. However, Kandi Vehicles qualifies
as a High and New Technology Enterprise (“HNTE”) company in the PRC, and is entitled to pay a reduced income tax rate
of 15% for the years presented, which reduced rate will expire in 2017. An entity may re-apply for an HNTE certificate when the
prior certificate expires. Historically, Kandi Vehicles has successfully re-applied for such certificates when the its prior certificates
expired. The applicable CIT rate of each of the Company’s three other subsidiaries, Kandi New Energy, Yongkang Scrou and
Kandi Hainan, the JV Company and its subsidiaries, and the Service Company is 25%.
After combining research and development
tax credits of 25% on certain qualified research and development expenses, the Company’s final effective tax rate for June
30, 2017, and 2016 was 12.08% and -8.94%, respectively. The effective tax rates for each of the periods mentioned above are disclosed
in the summary table of income tax expenses for June 30, 2017 and 2016.
Effective January 1, 2007, the Company
adopted the guidance in ASC 740 related to uncertain tax positions. The guidance addresses the determination of whether tax benefits
claimed or expected to be claimed on a tax return should be recorded in the financial statements.
Under ASC 740, the Company may recognize
the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination
by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements
from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being
realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition, classification, interest and penalties on
income taxes, accounting in interim periods and requires increased disclosures. As of June 30, 2017, the Company did not have any
liability for unrecognized tax benefits. The Company files income tax returns with the U.S. Internal Revenue Services (“IRS”)
and those states where the Company has operations. The Company is subject to U.S. federal or state income tax examinations by the
IRS and relevant state tax authorities for years after 2006. During the periods open to examination, the Company has net operating
loss carry forwards (“NOLs”) for U.S. federal and state tax purposes that have attributes from closed periods. Since
these NOLs may be utilized in future periods, they remain subject to examination. The Company also files certain tax returns in
the PRC. As of June 30, 2017, the Company was not aware of any pending income tax examinations by U.S. or PRC tax authorities.
The Company records interest and penalties on uncertain tax provisions as income tax expense. As of June 30, 2017, the Company
has no accrued interest or penalties related to uncertain tax positions. The Company has not recorded a provision for U.S. federal
income tax for six months ended June 30, 2017, due to a net operating loss in 2016 and an accumulated net operating loss carry
forward from prior years in the United States.
Income tax expenses for the three months
and six months ended June 30, 2017 and 2016 are summarized as follows:
|
|
For Three Months Ended
|
|
|
|
June 30,
|
|
|
|
(Unaudited)
|
|
|
|
2017
|
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
Provision for CIT
|
|
$
|
508,023
|
|
|
$
|
2,647,813
|
|
Provision for Federal Income Tax
|
|
|
-
|
|
|
|
-
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Provision for CIT
|
|
|
(639,962
|
)
|
|
|
(247,587
|
)
|
Income tax expense (benefit)
|
|
$
|
(131,939
|
)
|
|
$
|
2,400,226
|
|
|
|
For Six Months Ended
|
|
|
|
June 30,
|
|
|
|
(Unaudited)
|
|
|
|
2017
|
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
Provision for CIT
|
|
$
|
508,023
|
|
|
$
|
4,408,966
|
|
Provision for Federal Income Tax
|
|
|
-
|
|
|
|
-
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Provision for CIT
|
|
|
(5,415,959
|
)
|
|
|
(4,645,415
|
)
|
Income tax expense (benefit)
|
|
$
|
(4,907,936
|
)
|
|
$
|
(236,449
|
)
|
The Company’s income tax expenses
differ from the “expected” tax expenses for six months ended June 30, 2017 and 2016 (computed by applying the U.S.
Federal Income Tax rate of 34% and the PRC CIT rate of 25%, respectively, to income before income taxes) as follows:
|
|
For Six Months Ended
|
|
|
|
June 30,
|
|
|
|
(Unaudited)
|
|
|
|
2017
|
|
|
2016
|
|
Expected taxation at PRC statutory tax rate
|
|
$
|
(10,154,847
|
)
|
|
$
|
661,288
|
|
Effect of differing tax rates in different jurisdictions
|
|
|
(446,896
|
)
|
|
|
(1,207,759
|
)
|
Non-taxable income
|
|
|
-
|
|
|
|
(24,041
|
)
|
Non-deductible expenses
①
|
|
|
2,086,777
|
|
|
|
2,068
|
|
Research and development super-deduction
|
|
|
(19,195
|
)
|
|
|
(74,248
|
)
|
Under-accrued EIT for previous years
|
|
|
267,574
|
|
|
|
(2,727,454
|
)
|
Effect of PRC preferential tax rates
|
|
|
1,717,207
|
|
|
|
(135,630
|
)
|
Addition to valuation allowance
|
|
|
1,688,376
|
|
|
|
3,269,327
|
|
Other
|
|
|
(46,932
|
)
|
|
|
-
|
|
Income tax expense (benefit)
|
|
$
|
(4,907,936
|
)
|
|
$
|
(236,449
|
)
|
|
①
|
It's mainly due to share of (loss) in JV Company and its subsidiaries.
|
The tax effects of temporary differences
that give rise to the Company’s net deferred tax assets and liabilities as of June 30, 2017 and December 31, 2016 are summarized
as follows:
|
|
June
30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Sales
cut-off difference derived from Value Added Tax reporting system to calculate PRC Corporation Income Tax in accordance with
the PRC State Administration of Taxation
|
|
$
|
-
|
|
|
$
|
-
|
|
Expense
k
|
|
|
522,909
|
|
|
|
72,742
|
|
Depreciation
|
|
|
205,704
|
|
|
|
230,156
|
|
Loss
carried forward
|
|
|
32,618,384
|
|
|
|
27,218,934
|
|
less:
valuation allowance
|
|
|
(27,337,091
|
)
|
|
|
(26,820,811
|
)
|
Total
deferred tax assets, net of valuation allowance
|
|
|
6,009,906
|
|
|
|
701,021
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Sales
cut-off difference derived from Value Added Tax reporting system to calculate PRC Corporation Income Tax in accordance with
the PRC State Administration of Taxation
|
|
|
-
|
|
|
|
-
|
|
Expense
l
|
|
|
1,615,714
|
|
|
|
1,698,303
|
|
Depreciation
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
Accumulated
other comprehensive gain
|
|
|
-
|
|
|
|
-
|
|
Total
deferred tax liability
|
|
|
1,615,714
|
|
|
|
1,698,303
|
|
Net
deferred tax assets (liabilities)
|
|
$
|
4,394,192
|
|
|
$
|
(997,282
|
)
|
k
|
It's provision for impairment inventory, fixed assets
and loss contingency-litigation.
|
l
|
It's due to the difference of tax basis and GAAP basis
of other long term assets.
|
As of June 30, 2017, the aggregate NOLs
incurred in 2013 through 2017 of $80.40 million deriving from entities in the U.S. will expire in varying amount between 2018 and
2022. The aggregate NOLs in 2016 through 2017 of $21.27 million deriving from entities in the PRC will expire in varying amount
between 2021 and 2022. As of December 31, 2016, the aggregate NOLs incurred in 2012 through 2016 of $78.88 million deriving from
entities in the U.S. will expire in varying amount between 2017 and 2021. The aggregate NOLs incurred in 2016 of $2.12 million
deriving from entities in the PRC will expire in 2021.The cumulative net loss in the PRC and U.S. can be carried forward for five
years, to offset future net profits for income tax purposes. The cumulative net loss in Hong Kong can be carried forward without
an expiration date.
Income (loss) before income taxes from
PRC and non-PRC sources for the six months ended June 30, 2017 and 2016 are summarized as follows:
|
|
For Six Months Ended
|
|
|
|
June 30,
|
|
|
|
(Unaudited)
|
|
|
|
2017
|
|
|
2016
|
|
Income(loss) before income taxes consists of:
|
|
|
|
|
|
|
PRC
|
|
$
|
(35,612,423
|
)
|
|
$
|
14,295,017
|
|
Non-PRC
|
|
|
(5,006,965
|
)
|
|
|
(11,649,866
|
)
|
Total
|
|
$
|
(40,619,388
|
)
|
|
$
|
2,645,151
|
|
Net change in the valuation allowance of
deferred tax assets are summarized as follows:
Net change of valuation allowance of Deferred tax assets
|
|
|
|
Balance at December 31,2016
|
|
$
|
26,820,811
|
|
Additions-change to tax expense
|
|
|
1,688,376
|
|
Deduction-expired of loss carried forward
④
|
|
|
(1,172,096
|
)
|
Balance at June 30,2017
|
|
$
|
27,337,091
|
|
④
It's due to the loss carried forward deduction-expired of Kandi Technologies of 2012.
(b) Tax Holiday Effect
For the six months ended June 30, 2017,
and 2016, the PRC CIT rate was 25%. Certain subsidiaries of the Company are entitled to tax exemptions (tax holidays) for the six
months ended June 30, 2017 and 2016.
The combined effects of income tax expense
exemptions and reductions available to the Company for the six months ended June 30, 2017 and 2016 are as follows:
|
|
For Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Tax benefit (holiday) credit
|
|
$
|
19,195
|
|
|
$
|
209,878
|
|
Basic net income per share effect
|
|
$
|
0.000
|
|
|
$
|
0.004
|
|
NOTE 19 – STOCK OPTIONS AND WARRANTS
(a) Stock Options
On
May 29, 2015, the Compensation Committee of the Board of Directors of the Company approved the grant of stock options to purchase
4,900,000 shares of the Company’s common stock, at an exercise price of $9.72 per share, to the Company’s directors,
officers and senior employees. The stock options will vest ratably over three years and expire on the tenth anniversary of the
grant date. The Company valued the stock options at $39,990,540 and will amortize the stock compensation expense using the straight-line
method over the service period from May 29, 2015, through May 29, 2018. The value of the stock options was estimated using the
Black Scholes Model with an expected volatility of 90%, an expected life of 10 years, a risk-free interest rate of 2.23% and an
expected dividend yield of 0.00%. There were $3,128,512 in stock compensation expenses associated with stock options booked for
the six months ended
June 30
, 2017.
The following is a summary of the stock
option activities of the Company:
Outstanding as of January 1, 2016
|
|
|
4,900,000
|
|
|
$
|
9.72
|
|
Granted
|
|
|
–
|
|
|
|
–
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Cancelled
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
|
(333,333
|
)
|
|
|
9.72
|
|
Outstanding as of January 1, 2017
|
|
|
4,566,667
|
|
|
|
9.72
|
|
Granted
|
|
|
–
|
|
|
|
–
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Cancelled
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
|
(166,667
|
)
|
|
|
9.72
|
|
Outstanding as of June 30, 2017
|
|
|
4,400,000
|
|
|
$
|
9.72
|
|
The fair value of each of the options to
purchase 4,900,000 shares of common stock issued to the employees and directors on May 29, 2015 is $8.1613 per share.
(b) Warrants
As of June 30, 2017 and December 31, 2016,
all the warrants had been exercised and the derivative liability relating to the warrants issued to the investors and a placement
agent was $0.
NOTE 20 – STOCK AWARD
In connection with the appointment of Mr.
Henry Yu as a member of the Board of Directors (the “Board”), and as compensation, the Board authorized the Company
to provide Mr. Henry Yu with 5,000 shares of Company’s restricted common stock every six months, beginning in July 2011.
As compensation for Mr. Jerry Lewin’s
service as a member of the Board, the Board authorized the Company to provide Mr. Jerry Lewin with 5,000 shares of Company’s
restricted common stock every six months, beginning in August 2011.
As compensation for Ms. Kewa Luo’s
service as the Company’s investor relation officer, the Board authorized the Company to provide Ms. Kewa Luo with 5,000 shares
of Company’s common stock every six months, beginning in September 2013.
In November 2016, the Company entered into
a three-year employment agreement with Mr. Mei Bing, who is now the Company’s Chief Financial Officer. Under the agreement,
Mr. Mei Bing is entitled to receive an aggregate of 10,000 shares of common stock each year, vested in four equal quarterly installments
of 2,500 shares.
The fair value of stock awards based on
service is determined based on the closing price of the common stock on the date the shares are approved by the Board for grant.
The compensation costs for awards of common stock are recognized over the requisite service period of three or six months.
On December 30, 2013, the Board approved
a proposal (as submitted by the Compensation Committee) of an award (the “Board’s Pre-Approved Award Grant Sub-Plan
under the 2008 Plan”) for certain executives and other key employees, comprising a total of 335,000 shares of common stock
for each fiscal year, beginning with the 2013 fiscal year, under the Company’s 2008 Omnibus Long-Term Incentive Plan (the
“2008 Plan”), if the Company’s “Non-GAAP Net Income” for the current fiscal year increased by 10%
comparing to that of the prior year. The specific number of shares of common stock to be issued in respect of such award could
proportionally increase or decrease if the actual Non-GAAP Net Income increase is more or less than 10%. “Non-GAAP Net Income”
means the Company’s net income for a particular year calculated in accordance with GAAP, excluding option-related expenses,
stock award expenses, and the effects caused by the change of fair value of financial derivatives. For example, if Non-GAAP Net
Income for the 2014 fiscal year increased by 10% compared to the Non-GAAP Net Income for the 2013 fiscal year, the selected executives
and other key employees each would be granted his or her target amount of common stock of the Company. If Non-GAAP Net Income in
2014 is less than Non-GAAP Net Income in 2013, then no common stock would be granted. If Non-GAAP Net Income in 2014 increased
compared to Non-GAAP Net Income in 2013 but the increase is less than 10%, then the target amount of the common stock grant would
be proportionately decreased. If Non-GAAP Net Income in 2014 increased compared to Non- GAAP Net Income in 2013 but the increase
is more than 10%, then the target amount of the common stock grant would be proportionately increased up to 200% of the target
amount based on the modification to 2013’s proposal in 2014. Any such increase in the grant would be subject to the total
number of shares available under the 2008 Plan, and the Company’s Board and shareholders will need to approve any increase
in the number of shares reserved under the 2008 Plan if all the shares originally reserved are granted. On May 20, 2015, the shareholders
of the Company approved an increase of 9,000,000 shares under the 2008 Plan at its annual meeting. On September 26, 2016, the Board
approved to terminate the previous Board’s Pre-Approved Award Grant Sub-Plan under the 2008 Plan and adopted a new plan to
reduce the total number of shares of common stock of the stock award for selected executives and key employees from 335,000 shares
of common stock to 250,000 shares of common stock for each fiscal year, with the other terms remaining the same. On February 13,
2017, the Board authorized the Company to grant 246,900 shares of common shares to certain management members as compensation for
their past services under the 2008 Plan.
The fair value of each award granted under
the 2008 Plan is determined based on the closing price of the Company’s stock on the date of grant of such award. Stock-based
compensation expenses are calculated based on grant date fair value and number of awards expected to be earned at the end of each
quarter and recognized in the quarter. In subsequent periods, stock-based compensation expenses are adjusted based on grant date
fair value and the change of number of awards expected to be earned. Final stock-based compensation expenses for the year are calculated
based on grant date fair value and number of awards earned for the year and recognized at the end of year.
For the three months ended June 30, 2017
and 2016, the Company recognized $2,016,043 and $8,269,691 of employee stock award expenses under General and Administrative Expenses,
respectively. For the six months ended June 30, 2017 and 2016, the Company recognized $4,493,187 and $15,157,583 of employee stock
award expenses under General and Administrative Expenses, respectively.
NOTE 21 – INTANGIBLE ASSETS
The following table provides the gross
carrying value and accumulated amortization for each major class of our intangible assets, other than goodwill:
|
|
Remaining
|
|
June 30,
|
|
|
December 31,
|
|
|
|
useful life
|
|
2017
|
|
|
2016
|
|
Gross carrying amount:
|
|
|
|
|
|
|
|
|
Trade name
|
|
4 years
|
|
$
|
492,235
|
|
|
$
|
492,235
|
|
Customer relations
|
|
4 years
|
|
|
304,086
|
|
|
|
304,086
|
|
|
|
|
|
|
796,321
|
|
|
|
796,321
|
|
Less : Accumulated amortization
|
|
|
|
|
|
|
|
|
|
|
Trade name
|
|
|
|
$
|
(262,188
|
)
|
|
$
|
(236,815
|
)
|
Customer relations
|
|
|
|
|
(161,970
|
)
|
|
|
(146,295
|
)
|
|
|
|
|
|
(424,158
|
)
|
|
|
(383,110
|
)
|
Intangible assets, net
|
|
|
|
$
|
372,163
|
|
|
$
|
413,211
|
|
The aggregate amortization expenses for
those intangible assets that continue to be amortized is reflected in amortization of intangible assets were $20,524 and $20,524
for the three months ended June 30, 2017 and 2016, $41,048 and $41,048 for the six months ended June 30, 2017 and 2016, respectively.
Amortization expenses for the next five
years and thereafter are as follows:
2017 (six months)
|
|
$
|
41,048
|
|
2018
|
|
|
82,095
|
|
2019
|
|
|
82,095
|
|
2020
|
|
|
82,095
|
|
2021
|
|
|
82,095
|
|
Thereafter
|
|
|
2,735
|
|
Total
|
|
$
|
372,163
|
|
NOTE 22 – SUMMARIZED INFORMATION
OF EQUITY METHOD INVESTMENT IN THE JV COMPANY
The Company’s consolidated net income
includes the Company’s proportionate share of the net income or loss of the Company’s equity method investees. When
the Company records its proportionate share of net income in such investees, it increases equity income (loss) – net in
the Company’s consolidated statements of income and the Company’s carrying value in that investment. Conversely, when
the Company records its proportionate share of a net loss in such investees, it decreases equity income (loss) – net in
the Company’s consolidated statements of income and the Company’s carrying value in that investment. All intra-entity
profits and losses with the Company’s equity method investees have been eliminated.
In March 2013, pursuant to a joint venture
agreement (the “JV Agreement”) entered into between Kandi Vehicles and Shanghai Maple Guorun Automobile Co., Ltd. (“Shanghai
Guorun”), a 99%-owned subsidiary of Geely Automobile Holdings Ltd. (“Geely”), the parties established Zhejiang
Kandi Electric Vehicles Co., Ltd. (the “JV Company”) to develop, manufacture and sell electric vehicles (“EVs”)
and related auto parts. Each of Kandi Vehicles and Shanghai Guorun has a 50% ownership interest in the JV Company. In order to
improve JV Company’s development, Zhejiang Geely Holding Group (“Geely Holding”), the parent company of Geely,
became the shareholder of the JV Company on October 26, 2016, by purchasing the 50% in the JV Company held by Shanghai Guorun at
a purchase price exceeding the cash amount of the aggregate of the original investment and past shared profits. In the fourth quarter
of 2013, Kandi Vehicles entered into an ownership transfer agreement with the JV Company pursuant to which Kandi Vehicles transferred
100% of its ownership in Kandi Changxing to the JV Company. As a result, the Company now has a 50% indirect economic interest in
Kandi Changxing through its 50% ownership interest in the JV Company. On May 19, 2017, due to business development, Geely Holding
entrusted Mr. Hu Xiaoming, Chairman of the Board of the JV Company, to hold 19% equity of the JV Company from its 50% holding of
the JV Company on behalf of Geely Holding as a nominal holder. On the same day, Geely Holding transferred its remaining 31% equity
in the JV Company to Geely Group (Ningbo) Ltd., a company wholly owned by Li Shufu, Chairman of the Board of Geely Holding. On
May 25, 2017, Mr. Hu pledged its 19% equity in the JV Company held on behalf of Geely Holding to Geely Holding. On June 30, 2017,
due to the JV Company’s operational needs, Kandi Vehicle pledged its 50% equity in the JV Company to Geely Holding as counter-guarantee
because Geely Holding provides 100% guarantee on the JV Company’s borrowings. Despite of the pledge, guarantee and counter-guarantee
arrangements stated above, there is no change in control with respect to the 50% ownership held by each shareholder of the JV Company.
In November 2013, Kandi Electric Vehicles
Jinhua Co., Ltd. (“Kandi Jinhua”) was formed by the JV Company. The JV Company has a 100% ownership interest in Kandi
Jinhua, and the Company, indirectly through its 50% ownership interest in the JV Company, has a 50% economic interest in Kandi
Jinhua.
In November 2013, Zhejiang JiHeKang Electric
Vehicle Sales Co., Ltd. (“JiHeKang”) was formed by the JV Company. The JV Company has a 100% ownership interest in
JiHeKang, and the Company, indirectly through its 50% ownership interest in the JV Company, has a 50% economic interest in JiHeKang.
In December 2013, the JV Company entered
into an ownership transfer agreement with Shanghai Guorun pursuant to which the JV Company acquired 100% of the ownership of Kandi
Electric Vehicles (Shanghai) Co., Ltd. (“Kandi Shanghai”). As a result, Kandi Shanghai is now a wholly-owned subsidiary
of the JV Company, and the Company, indirectly through its 50% ownership interest in the JV Company, has a 50% economic interest
in Kandi Shanghai.
In January 2014, Kandi Electric Vehicles
Jiangsu Co., Ltd. (“Kandi Jiangsu”) was formed by the JV Company. The JV Company has a 100% ownership interest in Kandi
Jiangsu, and the Company, indirectly through its 50% ownership interest in the JV Company, has a 50% economic interest in Kandi
Jiangsu.
In July 2013, Zhejiang ZuoZhongYou Electric
Vehicle Service Co., Ltd. (the “Service Company”) was formed. The JV Company had a 19% ownership interest in the Service
Company. In March 2014, the JV Company changed its name to Kandi Electric Vehicles Group Co., Ltd., and in August 2015, the JV
Company transferred its shares of the Service Company to Shanghai Guorun and Kandi Vehicles for 9.5% respectively. As the result,
the JV Company no longer has any ownership in the Service Company.
In November 2015, Hangzhou Puma Investment
Management Co., Ltd. (“Puma Investment”) was formed by the JV Company. The JV Company has a 50% ownership interest
in Puma Investment and the Company, indirectly through its 50% ownership interest in the JV Company, has a 25% economic interest
in Puma Investment.
In November 2015, Hangzhou JiHeKang Electric
Vehicle Service Co., Ltd. (“JiHeKang Service Company”) was formed by the JV Company. The JV Company has a 100% ownership
interest in JiHeKang Service Company and the Company, indirectly through its 50% ownership interest in the JV Company, has a 50%
economic interest in JiHeKang Service Company.
In August 2016, Jiangsu JiDian Electric
Vehicle Sales Co., Ltd. (“Jiangsu JiDian”) was formed by JiHeKang. Jiangsu JiDian is engaged in the car sales business.
Because JiHeKang is 100% owned by the JV Company, the JV Company has a 100% ownership interest in Jiangsu JiDian, and the Company,
indirectly through its 50% ownership interest in the JV Company, has a 50% economic interest in Jiangsu JiDian.
In October 2016, JiHeKang acquired Tianjin
BoHaiWan Vehicle Sales Co., Ltd. (“Tianjin BoHaiWan”). Tianjin BoHaiWan is engaged in the car sales business. Because
JiHeKang is 100% owned by the JV Company, the JV Company has a 100% ownership interest in Tianjin BoHaiWan, and the Company, indirectly
through its 50% ownership interest in the JV Company, has a 50% economic interest in Tianjin BoHaiWan.
In November 2016, Changxing Kandi Vehicle
Maintenance Co., Ltd. (“Changxing Maintenance”) was formed by Kandi Changxing. Changxing Maintenance is engaged in
the car repair and maintenance business. Because Kandi Changxing is 100% owned by the JV Company, the JV Company has a 100% ownership
interest in Changxing Maintenance, and the Company, indirectly through its 50% ownership interest in the JV Company, has a 50%
economic interest in Changxing Maintenance.
In March 2017, Hangzhou Liuchuang Electric
Vehicle Technology Co., Ltd. (“Liuchuang”) was formed by Kandi Jiangsu. Since Kandi Jiangsu is 100% owned by the JV
Company, the JV Company has a 100% ownership interest in Liuchuang, and the Company, indirectly through its 50% ownership interest
in the JV Company, has a 50% economic interest in Liuchuang.
In April
2017, in order to promote business development, Kandi Jinhua, JiHeKang, and JiHeKang Service Company were reorganized to become
subsidiaries of Kandi Jiangsu. As the JV Company has a 100% ownership interest in Kandi Jiangsu, the JV Company has 100% ownership
interests in Kandi Jinhua, JiHeKang, and JiHeKang Service Company, and the Company, indirectly through its 50% ownership interest
in the JV Company, has a 50% economic interest in Kandi Jinhua, JiHeKang, and JiHeKang Service Company.
As of June 30, 2017, the JV Company consolidated
its interests in the following entities on its financial statements: (1) its 100% interest in Kandi Changxing; (2) its 100% interest
in Kandi Jinhua; (3) its 100% interest in JiHeKang; (4) its 100% interest in Kandi Shanghai; (5) its 100% interest in Kandi Jiangsu;
(6) its 100% interest in JiHeKang Service Company; (7) its 100% interest in Jiangsu JiDian; (8) its 100% interest in Tianjin BoHaiWan;
(9) its 100% interest in Changxing Maintenance; and (10) its 100% interest in Liuchuang. The Company accounted for its investments
in the JV Company under the equity method of accounting because the Company has a 50% ownership interest in the JV Company. As
a result, the Company’s consolidated net income for the six months ended June 30, 2017, and 2016, included equity income
from the JV Company during such periods.
The combined results of operations and
financial position of the JV Company are summarized below:
|
|
Three months ended
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Condensed income statement information:
|
|
|
|
|
|
|
Net sales
|
|
$
|
18,650,533
|
|
|
$
|
111,767,049
|
|
Gross (loss)income
|
|
|
(1,487,979
|
)
|
|
|
14,663,818
|
|
Net (loss)income
|
|
|
(14,577,384
|
)
|
|
|
8,626,568
|
|
Company’s equity in net (loss) income of JV
|
|
$
|
(7,288,692
|
)
|
|
$
|
4,313,284
|
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Condensed income statement information:
|
|
|
|
|
|
|
Net sales
|
|
$
|
19,928,152
|
|
|
$
|
111,271,482
|
|
Gross (loss) profit
|
|
|
(1,824,736
|
)
|
|
|
13,601,171
|
|
Net (loss) income
|
|
|
(25,185,112
|
)
|
|
|
558,120
|
|
Company’s equity in net (loss) income of JV
|
|
$
|
(12,592,556
|
)
|
|
$
|
279,060
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Condensed balance sheet information:
|
|
|
|
|
|
|
Current assets
|
|
$
|
575,007,161
|
|
|
$
|
514,958,008
|
|
Noncurrent assets
|
|
|
176,042,414
|
|
|
|
177,563,800
|
|
Total assets
|
|
$
|
751,049,575
|
|
|
$
|
692,521,808
|
|
Current liabilities
|
|
|
576,715,978
|
|
|
|
505,356,626
|
|
Noncurrent liabilities
|
|
|
40,711,567
|
|
|
|
31,817,560
|
|
Equity
|
|
|
133,622,030
|
|
|
|
155,347,622
|
|
Total liabilities and equity
|
|
$
|
751,049,575
|
|
|
$
|
692,521,808
|
|
For the six months ended June 30, 2017,
and 2016, the JV Company’s revenues were derived primarily from the sales of EV products in China. Because the Company has
a 50% ownership interest in the JV Company and accounted for its investments in the JV Company under the equity method of accounting,
the Company did not consolidate the JV Company’s financial results, but rather included equity income from the JV Company
during such periods.
Note: The following table illustrates the
captions used in the Company’s Income Statements for its equity based investment in the JV Company.
The Company’s equity method investments
in the JV Company as of June 30, 2017 and December 31, 2016 are as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Investment in JV Company, beginning of the period,
|
|
$
|
77,453,014
|
|
|
$
|
90,337,899
|
|
Share of loss
|
|
|
(12,592,556
|
)
|
|
|
(7,077,789
|
)
|
Intercompany transaction elimination
|
|
|
(1,530,488
|
)
|
|
|
(230,787
|
)
|
Year 2016 unrealized profit realized
|
|
|
223,077
|
|
|
|
1,066
|
|
Exchange difference
|
|
|
1,705,929
|
|
|
|
(5,577,376
|
)
|
Investment in JV Company, end of the period
|
|
$
|
65,258,976
|
|
|
$
|
77,453,013
|
|
Sales to the Company’s customers, the
JV Company and its subsidiaries, for the three months ended June 30, 2017, were $26,171,724 or 96% of the Company’s total
revenue, a decrease of 44.9% from the same quarter last year. Sales to the Company’s customers, the JV Company and its subsidiaries,
for the six months ended June 30, 2017, were $27,483,366 or 87% of the Company’s total revenue, a decrease of 54.9% from
the same period last year. Sales to the JV Company and its subsidiaries were primarily battery packs, body parts, EV drive motors,
EV controllers, air conditioning units and other auto parts.
The breakdown of sales to the JV Company and
its subsidiaries is as follows:
|
|
Three Months ended
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
JV Company
|
|
$
|
25,715,753
|
|
|
$
|
41,919,634
|
|
Kandi Changxing
|
|
|
60,810
|
|
|
|
1,657,335
|
|
Kandi Shanghai
|
|
|
33,841
|
|
|
|
3,766,230
|
|
Kandi Jinhua
|
|
|
-
|
|
|
|
(5,197
|
)
|
Kandi Jiangsu
|
|
|
361,320
|
|
|
|
130,813
|
|
Total sales to JV
|
|
$
|
26,171,724
|
|
|
$
|
47,468,815
|
|
|
|
Six Months ended
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
JV Company
|
|
$
|
27,027,395
|
|
|
$
|
55,005,270
|
|
Kandi Changxing
|
|
|
60,810
|
|
|
|
1,817,932
|
|
Kandi Shanghai
|
|
|
33,841
|
|
|
|
3,924,432
|
|
Kandi Jinhua
|
|
|
-
|
|
|
|
47,067
|
|
Kandi Jiangsu
|
|
|
361,320
|
|
|
|
149,089
|
|
Total sales to JV
|
|
$
|
27,483,366
|
|
|
$
|
60,943,790
|
|
As of June 30, 2017 and December 31, 2016,
the amount due from the JV Company and its subsidiaries, was $139,801,316 and $136,536,725, respectively, of which the majority
were balances with the JV Company, Kandi Jinhua, Kandi Changxing, Kandi Jiangsu and Kandi Shanghai. The breakdown is as below:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Kandi Shanghai
|
|
$
|
821,277
|
|
|
$
|
281,657
|
|
Kandi Changxing
|
|
|
16,841,443
|
|
|
|
16,359,721
|
|
Kandi Jinhua
|
|
|
5,174,527
|
|
|
|
5,050,525
|
|
Kandi Jiangsu
|
|
|
767,495
|
|
|
|
352,587
|
|
JV Company
|
|
|
116,196,574
|
|
|
|
114,492,235
|
|
Consolidated JV
|
|
$
|
139,801,316
|
|
|
$
|
136,536,725
|
|
As of June 30, 2017 and December 31, 2016,
the amount due to the JV Company and its subsidiaries, was $892,759 and $566, respectively, of which the majority were balances
with Kandi Changxing and Kandi Shanghai. The breakdown is as below:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Kandi Shanghai
|
|
$
|
660,643
|
|
|
$
|
-
|
|
Kandi Changxing
|
|
|
232,116
|
|
|
|
566
|
|
Consolidated JV
|
|
$
|
892,759
|
|
|
$
|
566
|
|
The amounts due from the JV Company include
six short-term loans in the total amount of $43,514,175 that Kandi Vehicles lent to the JV Company. Each such loan carries an annual
interest rate of 4.35%.
NOTE 23 – COMMITMENTS AND CONTINGENCIES
Guarantees and pledged collateral for
bank loans to other parties
As of June 30, 2017, and December 31, 2016,
the Company provided guarantees for the following parties:
(1)
|
Guarantees for bank loans
|
|
|
June 30,
|
|
|
December 31,
|
|
Guarantee provided to
|
|
2017
|
|
|
2016
|
|
Zhejiang Shuguang industrial Co., Ltd.
|
|
|
4,277,665
|
|
|
|
4,175,155
|
|
Nanlong Group Co., Ltd.
|
|
|
-
|
|
|
|
2,879,417
|
|
Kandi Electric Vehicles Group Co., Ltd.
|
|
|
47,939,345
|
|
|
|
46,790,530
|
|
Total
|
|
$
|
52,217,010
|
|
|
$
|
53,845,102
|
|
On March 15, 2013, the Company entered
into a guarantee contract to serve as the guarantor of Nanlong Group Co., Ltd. (“NGCL”) for NGCL's loan in the amount
of $2,902,534 from Shanghai Pudong Development Bank Jinhua Branch, with a related loan period of March 15, 2013, to March 15, 2016.
NGCL is not related to the Company. Under this guarantee contract, the Company agreed to perform all the obligations of NGCL under
the loan contract if NGCL fails to perform its obligations as set forth therein. Because NGCL defaulted on the loan principal and
interest, Shanghai Pudong Development Bank brought a lawsuit to the People’s Court of Zhejiang Province in Yongkang City
against NGCL, the Company and ten other guarantors in April, 2017. A judicial mediation was taken place at court in Yongkang City
on May 27, 2017 and the plaintiff agreed NGCL to repay the loan principal and interest plus legal expenses in installments. As
of June 30, 2017, according to the enterprise credit report issued by the Credit Center of People’s Bank of China (PBOC)
or the central bank of the People’s Republic of China, the Company’s guarantee for NGCL’s loan has been removed.
The Company expects the likelihood of incurring losses in connection with this matter is remote.
On September 29, 2015, the Company entered
into a guarantee contract to serve as the guarantor of Zhejiang Shuguang Industrial Co., Ltd. (“ZSICL”) for a bank
loan in the amount of $4,277,665 from Ping An Bank, with a related loan period of September 29, 2015, to September 28, 2016. ZSICL
is not related to the Company. Under this guarantee contract, the Company agreed to perform all the obligations of ZSICL under
the loan contract if ZSICL fails to perform its obligations as set forth therein. Because ZSICL defaulted on the loan interest,
Ping An Bank brought a lawsuit against ZSICL, the Company and three other parties, and a court ruling was issued in December 2016
to order ZSICL to repay the principal and interest of the bank loan to Ping An Bank, with the Company and three other parties assuming
joint liability for the default. ZSICL and the Company appealed the ruling results on February 6, 2017, and the court rejected
the appeal on March 29, 2017. On July 31, 2017, the Company and Ping An Bank reached an agreement to settle this case. According
to the agreement, the Company will pay Ping An Bank RMB 20 million or approximately $2.9 million in four installments before October
31, 2017 to release the Company from the guarantor liability for this default. As of June 30, 2017, the Company has an accrued
liability of approximately $2.9 million for the estimated contingent loss in connection with this matter. According to the Company’s
agreement with ZSICL, ZSICL agreed to reimburse all the Company’s losses due to ZSICL’s default on the loan principal
and interests. On August 1, 2017, the first installment of RMB 5 million or approximately $0.73 million was paid to Ping An Bank
and ZSICL will reimburse the Company for the same amount according to the agreement. The Company expects the likelihood of incurring
losses in connection with this matter is low.
On December 14, 2015, the Company entered
into a guarantee contract to serve as the guarantor for the JV Company for bank loans in the aggregate amount of $36,876,420 from
China Import & Export Bank with a related loan period of December 14, 2015, to December 13, 2016, which was extended to September
14, 2017. Under this guarantee contract, the Company agreed to perform all the obligations of the JV Company under the loan contract
if the JV Company fails to perform its obligations as set forth therein.
On July 20, 2016, the Company entered into
a guarantee contract to serve as the guarantor for the JV Company for bank loans in the aggregate amount of $11,062,926 from Bank
of China, with a related loan period of July 20, 2016 to July 19, 2017. Under this guarantee contract, the Company agreed to perform
all the obligations of the JV Company under the loan contract if the JV Company fails to perform its obligations as set forth therein.
The loan was paid off on July 21, 2017.
All guarantee periods are two years from the
date of expiration of the debt performance under the principal loan contracts.
(2) Pledged collateral for bank loans to other
parties.
As of June 30, 2017 and December 31, 2016,
none of the Company’s land use rights or plants and equipment were pledged as collateral securing bank loans to other parties.
Contingencies
As of June 30, 2017 and December 31, 2016,
our loss contingencies are summarized as follow:
|
|
June 30,
|
|
|
December 31,
|
|
Loss contingencies – litigation
|
|
2017
|
|
|
2016
|
|
Zhejiang Shuguang Industrial Co., Ltd.
|
|
$
|
2,950,114
|
|
|
$
|
-
|
|
Total
|
|
$
|
2,950,114
|
|
|
$
|
-
|
|
Litigation
Beginning in March 2017, putative shareholder
class actions were filed against Kandi Technologies Group, Inc. and certain of its current and former directors and officers in
the United States District Court for the Central District of California and the United States District Court for the Southern District
of New York. The complaints generally allege violations of the federal securities laws based Kandi’s disclosure in March
2017 that its financial statements for the years 2014, 2015 and the first three quarters of 2016 will 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. We believe that the claims are without merit and intend to defend against these lawsuits vigorously. We are unable to estimate
the possible loss, if any, associated with these lawsuits.
Beginning in May 2017, a purported shareholder
derivative actions based on the same underlying events described above was were filed against certain current and former directors
of Kandi in the United States District Court for the Southern District of New York. We believe that the claims are without merit
and intend to defend against this lawsuit vigorously. We are unable to estimate the possible loss, if any, associated with this
these lawsuits.
NOTE 24 – SEGMENT REPORTING
The Company has one operating segment.
The Company’s revenue and long-lived assets are primarily derived from and located in China. The Company only has manufacturing
operations in China.
The following table sets forth revenues
by geographic area:
|
|
Three Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Sales Revenue
|
|
|
Percentage
|
|
|
Sales Revenue
|
|
|
Percentage
|
|
Overseas
|
|
|
886,374
|
|
|
|
3
|
%
|
|
|
992,662
|
|
|
|
2
|
%
|
China
|
|
|
26,438,905
|
|
|
|
97
|
%
|
|
|
54,224,706
|
|
|
|
98
|
%
|
Total
|
|
|
27,325,279
|
|
|
|
100
|
%
|
|
|
55,217,368
|
|
|
|
100
|
%
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Sales Revenue
|
|
|
Percentage
|
|
|
Sales Revenue
|
|
|
Percentage
|
|
Overseas
|
|
|
2,402,538
|
|
|
|
8
|
%
|
|
|
1,614,384
|
|
|
|
2
|
%
|
China
|
|
|
29,197,314
|
|
|
|
92
|
%
|
|
|
104,260,877
|
|
|
|
98
|
%
|
Total
|
|
|
31,599,852
|
|
|
|
100
|
%
|
|
|
105,875,261
|
|
|
|
100
|
%
|
NOTE 25 – Related Party Transactions
The Board must approve all related party
transactions. All material related party transactions will be made or entered into on terms that are no less favorable to the Company
than can be obtained from unaffiliated third parties.
The following table lists sales to related
parties (other than the JV Company and its subsidiaries) for the three months ended June 30, 2017 and 2016:
|
|
Three Months ended
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Service Company
|
|
|
-
|
|
|
|
769,065
|
|
Total
|
|
$
|
-
|
|
|
|
769,065
|
|
The following table lists sales to related
parties (other than the JV Company and its subsidiaries) for the six months ended June 30, 2017 and 2016:
|
|
Six Months ended
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Service Company
|
|
|
-
|
|
|
|
3,977,568
|
|
Total
|
|
$
|
-
|
|
|
|
3,977,568
|
|
The details for amounts due from related
parties (other than the JV Company and its subsidiaries) as of June 30, 2017 and December 31, 2016 were as below:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Service Company
|
|
|
10,742,243
|
|
|
|
10,484,816
|
|
Total due from related party (other than the JV Company and its subsidiaries)
|
|
$
|
10,742,243
|
|
|
|
10,484,816
|
|
The Company has a 9.5% ownership interest
in the Service Company and Mr.Hu, Chairman and CEO of the Company, has a 13% ownership interest in the Service Company. The main
transactions between the Company and the Service Company are purchases by the Service Company of batteries and EV parts.
For transactions with the JV Company, please
refer to Note 22.
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 terminology, such as “may,” “will,” “should,”
“could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,”
“project,” “predict,” “intend,” “potential” or “continue” or the negative
of such terms or other comparable terminology, although not all forward-looking statements contain such terms.
In addition, these forward-looking statements
include, but are not limited to, statements regarding implementing our business strategy; development and marketing of our products;
our estimates of future revenue and profitability; our expectations regarding future expenses, including research and development,
sales and marketing, manufacturing and general and administrative expenses; difficulty or inability to raise additional financing,
if needed, on terms acceptable to us; our estimates regarding our capital requirements and our needs for additional financing;
attracting and retaining customers and employees; sources of revenue and anticipated revenue; and competition in our market.
Forward-looking statements are only predictions.
Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements. All of our forward-looking information is subject to risks and uncertainties
that could cause actual results to differ materially from the results expected. Although it is not possible to identify all factors,
these risks and uncertainties include the risk factors and the timing of any of those risk factors described in our Annual Report
on Form 10-K for the year ended December 31, 2016 and those set forth from time to time in our other filings with the Securities
and Exchange Commission (“SEC”). These documents are available on the SEC’s Electronic Data Gathering and Analysis
Retrieval System at http://www.sec.gov.
Critical Accounting Policies and Estimates
This section should be read together with
the Summary of Significant Accounting Policies in the attached consolidated financial statements included in this report.
Estimates affecting accounts receivable and inventories
The preparation of our consolidated financial
statements requires management to make estimates and assumptions that affect our reporting of assets and liabilities (and contingent
assets and liabilities). These estimates are particularly significant where they affect the reported net realizable value of our
accounts receivable and inventories.
Accounts receivable are recognized and
carried at net realizable value. An allowance for doubtful accounts is recorded in the period when a loss is probable based on
an assessment of specific factors, such as troubled collection, historical experience, accounts aging, ongoing business relations
and other factors. Accounts are written off after exhaustive efforts at collection. If accounts receivable are to be provided for,
or written off, they would be recognized in the consolidated statement of operations within operating expenses. We had an allowance
for doubtful accounts of $0 as of June 30, 2017 and December 31, 2016, in accordance with our management's judgment based on their
best knowledge. The Company conducts quarterly assessments of the state of the Company’s outstanding receivables and reserve
any allowance for doubtful accounts if it becomes necessary.
Inventory is stated at the lower of cost,
determined on a weighted average basis, or net realizable value. Net realizable value is the estimated selling price in the ordinary
course of business less the estimated cost of completion and the estimated costs necessary to make the sale. Adjustments to reduce
the cost of inventory to its net realizable value are made, if required, for estimated excess, obsolescence, or impaired balances.
When inventories are sold, their carrying amount is charged to expense in the year in which the revenue is recognized. Write-downs
for declines in net realizable value or for losses of inventories are recognized as an expense in the year the impairment or loss
occurs. There was a $465,096 and $415,797 of decline in net realizable value of inventory as of June 30, 2017 and December 31,
2016, respectively, due to our provision for slow moving inventory.
Although we believe that there is little
likelihood that actual results will differ materially from our current estimates, if customer demand for our products decreases
significantly in the near future, or if the financial condition of our customers deteriorates in the near future, we could realize
significant write downs for slow-moving inventories or uncollectible accounts receivable.
Policy affecting recognition of revenue
Our revenue recognition policy plays a
key role in our consolidated financial statements. Revenues represent the invoiced value of goods sold, recognized upon the shipment
of goods to customers, and revenues are recognized when all of the following criteria are met:
1.
|
Persuasive evidence of an arrangement exists;
|
|
|
2.
|
Delivery has occurred or services have been rendered;
|
|
|
3.
|
The seller's price to the buyer is fixed or determinable; and
|
|
|
4.
|
Collectability is reasonably assured.
|
Our revenue recognition policies for our
EV products (through the JV Company), EV parts and legacy products, including ATVs, go-karts and other products are the same: When
the products are delivered, the associated risk of loss is deemed transferred, and we recognize revenue at that time.
Policy affecting options, warrants and convertible notes
Our stock option cost is recorded in accordance
with ASC 718 and ASC 505. The fair value of stock options is estimated using the Black-Scholes -Merton model. Our expected volatility
assumption is based on the historical volatility of our stock. The expected life assumption is primarily based on the expiration
date of the option. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in
effect at the time of grant. Stock option expense recognition is based on awards expected to vest. There were no estimated forfeitures.
ASC standards require forfeitures to be estimated at the time of grant and revised in subsequent periods, if necessary, if actual
forfeitures differ from those estimates.
Warranty Liability
Our products that are exported out of China
to foreign countries are subject to legal and regulatory requirements with which we are not familiar. The development of warranty
policies for the exported products in each of these countries would be virtually impossible and prohibitively expensive. Therefore,
we provide price incentives and free parts to our customers and in exchange, our customers establish appropriate warranty policies
and assume warranty responsibilities.
Consequently, warranty issues are taken
into consideration during price negotiations for our products. Free parts are delivered along with the products, and when products
are sold, the related parts are recorded as cost of goods sold. Due to the reliability of our products, we have been able to maintain
this warranty policy and we have not had any product liability attributed to our products.
For the EV products that we sell in China,
we provide a three year or 50,000 kilometer manufacturer warranty. This warranty affects the Company through our participation
and investment in the JV Company, which manufactures the EV products.
Results of Operations
Overview
We are one of the leading manufacturers
of EV products (through the JV Company), EV parts and off- road vehicles in China. For the six months ended June 30, 2017, we
recognized total revenue of $31,599,852 as compared to $105,875,261 for the six months ended June 30, 2016, a decrease of $74,275,409,
or 70.2%. Although we resumed normal production in May 2017, the significant decrease in revenue was primarily due to weak EV
parts demand for the most part of the first half year from the JV Company and its subsidiaries because of the overruling and re-announcement
of the MIIT’s (as such term is defined below) directory of recommended models of new energy vehicles as a result of the
PRC government’s new subsidy policies effective as of January 1, 2017, as well as the extended delays of subsidy payments
for EVs manufactured in previous years resulting from the Chinese government’s industry-wide subsidy review in 2016, which
resulted in temporary difficulties for the JV Company to increase production. Our primary source of revenue is from the sale of
our EV parts, which accounted for 91.4% of our total revenue in the six months ended June 30, 2017. For the six months ended June
30, our EV parts revenues were $28,867,714, a decrease of $71,136,764, or 71.1%, as compared to our EV parts revenues of $100,004,478
for the six months ended June 30, 2016. Our off-road vehicle revenue increased $640,971 from the year ago period, or 30.7%, to
$2,732,138 for the six months ended June 30, 2017 as compared to the same period a year ago, mainly as a result of organic growth.
For the six months ended June 30, 2017, we recorded $4,424,268 of gross profits, a decrease of 70.8% from the same period of 2016,
primarily due to the decrease of revenue from the sale of EV parts. Gross margin for the six months ended June 30, 2017, was 14.0%,
a slight decrease from 14.3% from the six months ended June 30, 2016. We recorded a net loss of $35,711,452 for the six months
ended June 30, 2017, compared to net income of $2,881,600 in the same period of 2016, largely due to net loss from the JV Company
of $13,899,967, significantly increased research and development (“R&D”) costs of $25,911,773 to develop a new
EV model to prepare the Company for business growth in the coming years, an accrued contingent loss of approximately $2.9 million
for a litigation case as well as decreased profits this period. Excluding the effects of stock award expenses, which were $4,493,187
and $15,157,583 for the six months ended June 30, 2017, and 2016, respectively, and the change of the fair value of financial
derivatives, which were $0 and a gain of $3,812,898 for the six months ended June 30, 2017, and 2016, respectively, our net loss
(non-GAAP) was $31,218,265 for the six months ended June 30, 2017, as compared to net income (non-GAAP) of $14,226,285 for the
six months ended June 30, 2016, a decrease of $45,444,550 or 319.4%.
The Hainan facility construction
improvement is currently underway. The Company started to assemble the prototype model in the end of July and plans to send
it to National Testing Center for inspection in the coming months. Once the prototype passes the inspection, the Company will
launch the trial production thereafter. This facility is expected to have an annual manufacturing capacity of 100,000 EV
products when fully operational. During the first half year of 2017, we increased our R&D efforts on the design and
development of the new EV model K23, which is a mid-tier pure electric vehicle designed to manufacture in Hainan facility
for our targeted market with innovative built in technology and state-of-the-art body and interior designs to meet the
preferences and demands of today’s educated customers. In November 2016, we filed an application of patent for exterior
design of EV model K23 with the Chinese government. On July 14, 2017, this patent application was approved by the State
Intellectual Property Office and the patent was granted to us. We expect this new model will be well received by the public
and will become a new revenue growth engine for our business going forward.
In July 2017, the Kandi model K17A was
included as a new recommended model vehicle in the Ministry of Industry and Information Technology of the People’s Republic
of China’s (the “MIIT”) Directory of Recommended Models for Energy Saving and New Energy Vehicle Demonstration
and Promotion (the “Sixth Annual Directory of New Energy Vehicles”) in the MIIT’s third public announcement of
2017. In addition, according to the Chinese government’s regulations of financial subsidy policy adjustment for recommended
models for energy saving and new energy vehicle demonstration and promotion, new energy passenger vehicles are required to incorporate
enhanced battery power systems with increased energy density quality of higher than 120 wh/kg in order to receive 110% of the central
government subsidy for such vehicles. Three of the JV Company’s EV models, K12, K10D, and K17A have successfully achieved
this standard after receiving technology upgrades. As a result, all three of these models are eligible to receive 110% subsidies
from the central government, which will contribute to the Company’s continued development in the second half of 2017.
Comparison of the Three Months Ended
June 30, 2017 and 2016
The following table sets forth the amounts
and percentage relationship to revenue of certain items in our condensed consolidated statements of income (loss) and comprehensive
income (loss) for the three months ended June 30, 2017 and 2016.
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
|
% of
Revenue
|
|
|
June 30,
2016
|
|
|
% of
Revenue
|
|
|
Change in Amount
|
|
|
Change
in %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES FROM UNRELATED PARTY, NET
|
|
|
1,153,555
|
|
|
|
4.2
|
%
|
|
|
6,979,488
|
|
|
|
12.6
|
%
|
|
|
(5,825,933
|
)
|
|
|
(83.5
|
%)
|
REVENUES FROM JV COMPANY AND RELATED PARTY, NET
|
|
|
26,171,724
|
|
|
|
95.8
|
%
|
|
|
48,237,880
|
|
|
|
87.4
|
%
|
|
|
(22,066,156
|
)
|
|
|
(45.7
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES, NET
|
|
|
27,325,279
|
|
|
|
|
|
|
|
55,217,368
|
|
|
|
|
|
|
|
(27,892,089
|
)
|
|
|
(50.5
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF GOODS SOLD
|
|
|
23,568,343
|
|
|
|
86.3
|
%
|
|
|
46,762,331
|
|
|
|
84.7
|
%
|
|
|
(23,193,988
|
)
|
|
|
(49.6
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
3,756,936
|
|
|
|
13.7
|
%
|
|
|
8,455,037
|
|
|
|
15.3
|
%
|
|
|
(4,698,101
|
)
|
|
|
(55.6
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
5,142,041
|
|
|
|
18.8
|
%
|
|
|
494,193
|
|
|
|
0.9
|
%
|
|
|
4,647,848
|
|
|
|
940.5
|
%
|
Selling and marketing
|
|
|
402,253
|
|
|
|
1.5
|
%
|
|
|
730,443
|
|
|
|
1.3
|
%
|
|
|
(328,190
|
)
|
|
|
(44.9
|
%)
|
General and administrative
|
|
|
1,558,652
|
|
|
|
5.7
|
%
|
|
|
9,625,194
|
|
|
|
17.4
|
%
|
|
|
(8,066,542
|
)
|
|
|
(83.8
|
%)
|
Total Operating Expenses
|
|
|
7,102,946
|
|
|
|
26.0
|
%
|
|
|
10,849,830
|
|
|
|
19.6
|
%
|
|
|
(3,746,884
|
)
|
|
|
(34.5
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(3,346,010
|
)
|
|
|
(12.2
|
%)
|
|
|
(2,394,793
|
)
|
|
|
(4.3
|
%)
|
|
|
(951,217
|
)
|
|
|
39.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
559,425
|
|
|
|
2.0
|
%
|
|
|
785,152
|
|
|
|
1.4
|
%
|
|
|
(225,727
|
)
|
|
|
(28.7
|
%)
|
Interest expense
|
|
|
(548,810
|
)
|
|
|
(2.0
|
%)
|
|
|
(432,318
|
)
|
|
|
(0.8
|
%)
|
|
|
(116,492
|
)
|
|
|
26.9
|
%
|
Change in fair value of financial instruments
|
|
|
0
|
|
|
|
0.0
|
%
|
|
|
526,558
|
|
|
|
1.0
|
%
|
|
|
(526,558
|
)
|
|
|
(100.0
|
%)
|
Government grants
|
|
|
262,137
|
|
|
|
1.0
|
%
|
|
|
1,503,384
|
|
|
|
2.7
|
%
|
|
|
(1,241,247
|
)
|
|
|
(82.6
|
%)
|
Share of loss after tax of JV
|
|
|
(8,738,254
|
)
|
|
|
(32.0
|
%)
|
|
|
4,918,633
|
|
|
|
8.9
|
%
|
|
|
(13,656,887
|
)
|
|
|
(277.7
|
%)
|
Other income (expense), net
|
|
|
121,556
|
|
|
|
0.4
|
%
|
|
|
286,790
|
|
|
|
0.5
|
%
|
|
|
(165,234
|
)
|
|
|
(57.6
|
%)
|
Total other expense, net
|
|
|
(8,343,946
|
)
|
|
|
(30.5
|
%)
|
|
|
7,588,199
|
|
|
|
13.7
|
%
|
|
|
(15,932,145
|
)
|
|
|
(210.0
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS) INCOME BEFORE INCOME TAXES
|
|
|
(11,689,956
|
)
|
|
|
(42.8
|
%)
|
|
|
5,193,406
|
|
|
|
9.4
|
%
|
|
|
(16,883,362
|
)
|
|
|
(325.1
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX BENEFIT
|
|
|
131,939
|
|
|
|
0.5
|
%
|
|
|
(2,400,226
|
)
|
|
|
(4.3
|
%)
|
|
|
2,532,165
|
|
|
|
(105.5
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (LOSS) INCOME
|
|
|
(11,558,017
|
)
|
|
|
(42.3
|
%)
|
|
|
2,793,180
|
|
|
|
5.1
|
%
|
|
|
(14,351,197
|
)
|
|
|
(513.8
|
%)
|
(a) Revenue
For the three months ended June 30, 2017,
our revenue was $27,325,279 compared to $55,217,368 for the same period of 2016, a decrease of $27,892,089 or 50.5%. Our products
include EV parts and off-road vehicles, including ATVs, utility vehicles, go-karts, and others. The decrease in revenue was mainly
due to the decrease in EV parts sales during this quarter. The selling prices of our products for the three months ended June 30,
2017 decreased on average from the same period last year. The decrease in revenues was primarily due to this decrease in sales
volume.
The following table summarizes our revenues
by product types for the three months ended June 30, 2017 and 2016:
|
|
Three Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Sales
|
|
|
Sales
|
|
EV parts
|
|
$
|
26,202,818
|
|
|
$
|
53,823,619
|
|
Off-road vehicles
|
|
|
1,122,461
|
|
|
|
1,393,749
|
|
Total
|
|
$
|
27,325,279
|
|
|
$
|
55,217,368
|
|
EV Parts
Among our total revenues during the three
months ended June 30, 2017, approximately $26,202,818, or 95.9%, resulted from the sale of EV parts. We started our EV parts business
in 2014, and revenue from EV parts in the second quarter of 2017 decreased $27,620,801 or 51.3% compared to the second quarter
of 2016. Our EV parts sales primarily consisted of the sales of battery packs, body parts, EV drive motors, EV controllers, air
conditioning units and other auto parts, which accounted for 95.9% of total sales. Among total sales for the three months ended
June 30, 2017, approximately 65.5% were related to the sale of battery packs. In compliance with the regulation of the Chinese
auto industry, we hold the necessary production licenses to manufacture the battery packs exclusively used in EV products manufactured
by the JV Company. Besides the sale of battery packs, approximately 11.2% of total sales were related to sales of EV controllers,
approximately 9.2% of the total sales were related to sales of air conditioning units, and approximately 7.8% of total sales were
related to sales of EV drive motors.
During the three months ended June 30,
2017 and 2016, our revenues from the sale of EV parts to the JV Company and its subsidiaries accounted for approximately 96% and
86% of our total net revenue for the quarter, respectively. The EV parts we sold were used in manufacturing pure EV products by
the JV Company’s subsidiaries.
During the three months ended June 30,
2017 and 2016, our revenue from the sale of EV parts to the Service Company was 0.0% and 1.4% of total sales, respectively. The
Service Company purchased the battery packs for speed upgrades and other EV parts for repair and maintenance.
Off-Road Vehicles
Among our total revenues during the three
months ended June 30, 2017, approximately $1,122,461, or 4.1%, resulted from the sale of off-road vehicles. The off-road vehicles
revenue decreased $271,289, or 19.5% compared to the same period of 2016.
(b) Cost of goods sold
Cost of goods sold was $23,568,343 during
the three months ended June 30, 2017, representing a decrease of $23,193,988, or 49.6%, compared to that of the same period of
2016. The decrease was primarily due to the corresponding decrease in sales resulting from weak demand for our EV parts by the
JV Company.
(c) Gross profit
The margins by products for the three months
ended June 30, 2017 and 2016 are as below:
|
|
Three Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Sales
|
|
|
Cost
|
|
|
Gross Profit
|
|
|
Margin %
|
|
|
Sales
|
|
|
Cost
|
|
|
Gross Profit
|
|
|
Margin %
|
|
EV parts
|
|
$
|
26,202,818
|
|
|
|
22,606,828
|
|
|
|
3,595,990
|
|
|
|
13.7
|
%
|
|
$
|
53,823,619
|
|
|
|
45,518,502
|
|
|
|
8,305,117
|
|
|
|
15.4
|
%
|
Off-road vehicles
|
|
|
1,122,461
|
|
|
|
961,515
|
|
|
|
160,946
|
|
|
|
14.3
|
%
|
|
|
1,393,749
|
|
|
|
1,243,829
|
|
|
|
149,920
|
|
|
|
10.8
|
%
|
Total
|
|
$
|
27,325,279
|
|
|
|
23,568,343
|
|
|
|
3,756,936
|
|
|
|
13.7
|
%
|
|
$
|
55,217,368
|
|
|
|
46,762,331
|
|
|
|
8,455,037
|
|
|
|
15.3
|
%
|
Gross profit for the second quarter of 2017
decreased 55.6% to $3,756,936, compared to $8,455,037 for the same period last year. This was primarily attributable to the sales
decrease. Our gross margin decreased to 13.7% compared to 15.3% for the same period of 2016. The decrease in our gross margin was
mainly due to the decreased selling prices of battery to the JV Company in the three months ended June 30, 2017 and increased manufacturing
overhead per unit because of decreased sales volume offset by decreased raw material purchase prices during the period and the
increased gross margin of off -road vehicles from export sales.
(d) Research and development
R&D expenses were $5,142,041 for the
second quarter of 2017, an increase of $4,647,848 or 940.5% compared to the same period of last year. This increase was primarily
due to significantly increased R&D expenses related to the development of a new EV model at Hainan facility for the three months
ended June 30, 2017. For the three months ended June 30, 2017 and 2016, approximately 94.1% and 0% of our R&D expenses were
spent on the research and development of a new EV product model at Hainan facility, respectively, and the rest was spent on other
various EV and off-road vehicles R&D projects.
(e) Sales and marketing expenses
Selling and marketing expenses were
$402,253 for the second quarter of 2017, compared to $730,443 for the same period last year, a decrease of $328,190 or 44.9%.
This decrease was primarily attributable to the decreased shipping costs due to decreased sales and decreased amortization of
product maintenance expenses for batteries during this period, which expenses will be amortized over the next eight
years.
(f) General and administrative expenses
General and administrative expenses were
$1,558,652 for the second quarter of 2017, compared to $9,625,194 for the same period of last year, a decrease of $8,066,542 or
83.8%. For the three months ended June 30, 2017, general and administrative expenses included $2,016,043 in expenses for common
stock awards to employees and consultants, compared to $8,269,691 for the same period in 2016. General and administrative expenses
for the three months ended June 30, 2017 also included an adjustment of approximately $1.7 million of expense reduction to a previously
accrued contingent loss in connection with a litigation (See note 23 for the reduced contingent loss related to the ZSICL bank
loan). Excluding stock compensation expense, our net general and administrative expenses for the three months ended June 30, 2017
were $-457,391, a decrease of $1,812,894, or 133.7%, from $1,355,503 for the same period of 2016.
(g) Government grants
Government grants were $262,137 for the
second quarter of 2017, compared to $1,503,384 for the same quarter last year, representing a decrease of $1,241,247, or 82.6%,
which was mainly due to the receipt of the government allowance for Kandi Hainan relocation of $1,421,976 last year.
(h) Interest income
Interest income was $559,425 for the second
quarter of 2017, a decrease of $225,727 or 28.7% compared to the same period of last year. This decrease was primarily attributable
to decreased interest rates on loans to the JV Company. The interest rate was reduced to 4.35% in 2017 from 8.7% in 2016 although
the loan amount increased from the same quarter last year. In addition, we had interest income from a loan to a third party in
the second quarter last year but we didn’t have such loan in the second quarter of 2017.
(i) Interest expenses
Interest expenses were $548,810 in the
second quarter of 2017, an increase of $116,492 or 26.9% compared to the same period of last year. This increase was primarily
due to the additional interest expenses associated with the note payable to a third party although the overall loan interest rates
decreased in general in the second quarter of 2017 as compared to that of the same period last year. Of the interest expenses,
$1,054, and $0 were discounts associated with the settlement of bank acceptance notes for the three months ended June 30, 2017
and 2016, respectively.
(j) Change in fair value of financial
instruments
For the second quarter of 2017, the gain
or loss related to changes in the fair value of derivative liability relating to the warrants issued to the investors and a placement
agent was $0, a decrease of $526,558 from the same period of last year, which was mainly the result of all remaining unexercised
warrants expired as of June 30, 2017.
(k) Share of loss after tax of the JV
Company
For the second quarter of 2017, the JV
Company’s net sales were $18,650,533, gross loss was $1,487,979, and net loss was $14,577,384. We accounted for our investments
in the JV Company under the equity method of accounting because we have a 50% ownership interest in the JV Company. As a result,
we recorded 50% of the JV Company’s loss for $7,288,692 for the second quarter of 2017. After eliminating intra-entity profits
and losses, our share of the after tax losses of the JV Company was $8,738,254 for the second quarter of 2017, an increase of loss
of $13,656,887 compared to the same period of last year. The increase of the JV Company’s losses was because significantly
decreased EV sales and profits during the second quarter of 2017 due to the re-announcement of the MIIT’s directory of recommended
models of new energy vehicles as a result of new government’s subsidy policies effective as of January 1, 2017 as well as
the extended delays of subsidy payments for EVs manufactured in previous years, which resulted in temporary difficulties for the
JV Company to increase production although the JV Company resumed normal production in May this year.
During the second quarter of 2017, the
JV Company sold 365 units of EV products as compared to 7,200 units of EV products sold in the same period of last year.
(l) Other income, net
Net other income was $121,556 for the second
quarter of 2017, a decrease of $165,234 or 57.6% compared to the same period of last year, which was largely due to increased rental
income last year.
(m) Net income (loss) from continuing
operation
Net loss was $11,558,017 for the second
quarter of 2017, a negative change of $14,351,197 compared to net income $2,793,180 for the same period of last year. The negative
change was primarily attributable to losses from the JV Company and significantly increased R&D expenses. Excluding the effects
of stock compensation expenses, which were $2,016,043 and $8,269,691 for the second quarter of 2017 and 2016, respectively, and
the change of the fair value of financial derivatives which was $0 and a loss of $526,558 for the three months ended June 30, 2017
and 2016, respectively, our non-GAAP net loss was $9,541,974 for the three months ended June 30, 2017 as compared to non-GAAP net
income $10,536,313 for the same period of 2016, a negative change of $20,078,287, or 190.6%. The decrease in net income (non-GAAP)
was primarily attributable to the JV Company’s net losses, and significantly increased R&D expenses made in an effort
to prepare the Company for future business growth.
We make reference to certain non-GAAP financial
measure, i.e., the adjusted net income. Management believes that such adjusted financial results are useful to investors in evaluating
our operating performance because they present meaningful measures of corporate performance. See the non-GAAP reconciliation table
below. Any non-GAAP measures should not be considered as a substitute for, and should only be read in conjunction with measures
of financial performance prepared in accordance with GAAP.
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
GAAP net (loss) income from continuing operations
|
|
$
|
(11,558,017
|
)
|
|
$
|
2,793,180
|
|
Stock award expenses
|
|
|
2,016,043
|
|
|
|
8,269,691
|
|
Change of the fair value of financial derivatives
|
|
|
-
|
|
|
|
(526,558
|
)
|
Non-GAAP net income from continuing operations
|
|
$
|
(9,541,974
|
)
|
|
$
|
10,536,313
|
|
Comparison of the Six Months Ended
June 30, 2017 and 2016
The following table sets forth the amounts
and percentage relationship to revenue of certain items in our condensed consolidated statements of income (loss) and comprehensive
income (loss) for the six months ended June 30, 2017 and 2016.
|
|
Six Months
Ended
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
% of Revenue
|
|
|
June 30, 2016
|
|
|
% of Revenue
|
|
|
Change in Amount
|
|
|
Change in %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES FROM UNRELATED PARTY, NET
|
|
$
|
4,116,486
|
|
|
|
13.0
|
%
|
|
$
|
40,953,904
|
|
|
|
38.7
|
%
|
|
|
(36,837,418
|
)
|
|
|
(89.9
|
%)
|
REVENUES FROM JV COMPANY AND RELATED PARTY, NET
|
|
|
27,483,366
|
|
|
|
87.0
|
%
|
|
|
64,921,357
|
|
|
|
61.3
|
%
|
|
|
(37,437,991
|
)
|
|
|
(57.7
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES, NET
|
|
|
31,599,852
|
|
|
|
100.0
|
%
|
|
|
105,875,261
|
|
|
|
100.0
|
%
|
|
|
(74,275,409
|
)
|
|
|
(70.2
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF GOODS SOLD
|
|
|
27,175,584
|
|
|
|
86.0
|
%
|
|
|
90,702,126
|
|
|
|
85.7
|
%
|
|
|
(63,526,542
|
)
|
|
|
(70.0
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
4,424,268
|
|
|
|
14.0
|
%
|
|
|
15,173,135
|
|
|
|
14.3
|
%
|
|
|
(10,748,867
|
)
|
|
|
(70.8
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
25,911,773
|
|
|
|
82.0
|
%
|
|
|
700,161
|
|
|
|
0.7
|
%
|
|
|
25,211,612
|
|
|
|
3600.8
|
%
|
Selling and marketing
|
|
|
760,562
|
|
|
|
2.4
|
%
|
|
|
776,778
|
|
|
|
0.7
|
%
|
|
|
(16,216
|
)
|
|
|
(2.1
|
%)
|
General and administrative
|
|
|
9,877,946
|
|
|
|
31.3
|
%
|
|
|
17,658,076
|
|
|
|
16.7
|
%
|
|
|
(7,780,130
|
)
|
|
|
(44.1
|
%)
|
Total Operating Expenses
|
|
|
36,550,281
|
|
|
|
115.7
|
%
|
|
|
19,135,015
|
|
|
|
18.1
|
%
|
|
|
17,415,266
|
|
|
|
91.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(32,126,013
|
)
|
|
|
(101.7
|
%)
|
|
|
(3,961,880
|
)
|
|
|
(3.7
|
%)
|
|
|
(28,164,133
|
)
|
|
|
710.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,090,067
|
|
|
|
3.4
|
%
|
|
|
1,565,333
|
|
|
|
1.5
|
%
|
|
|
(475,266
|
)
|
|
|
(30.4
|
%)
|
Interest expense
|
|
|
(1,163,263
|
)
|
|
|
(3.7
|
%)
|
|
|
(874,397
|
)
|
|
|
(0.8
|
%)
|
|
|
(288,866
|
)
|
|
|
33.0
|
%
|
Change in fair value of financial instruments
|
|
|
0
|
|
|
|
0.0
|
%
|
|
|
3,812,898
|
|
|
|
3.6
|
%
|
|
|
(3,812,898
|
)
|
|
|
(100.0
|
%)
|
Government grants
|
|
|
5,329,611
|
|
|
|
16.9
|
%
|
|
|
1,697,857
|
|
|
|
1.6
|
%
|
|
|
3,631,754
|
|
|
|
213.9
|
%
|
Share of loss after tax of JV
|
|
|
(13,899,967
|
)
|
|
|
(44.0
|
%)
|
|
|
96,163
|
|
|
|
0.1
|
%
|
|
|
(13,996,130
|
)
|
|
|
(14554.6
|
%)
|
Other income, net
|
|
|
150,177
|
|
|
|
0.5
|
%
|
|
|
309,177
|
|
|
|
0.3
|
%
|
|
|
(159,000
|
)
|
|
|
(51.4
|
%)
|
Total other expense, net
|
|
|
(8,493,375
|
)
|
|
|
(26.9
|
%)
|
|
|
6,607,031
|
|
|
|
6.2
|
%
|
|
|
(15,100,406
|
)
|
|
|
(228.6
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS) INCOME BEFORE INCOME TAXES
|
|
|
(40,619,388
|
)
|
|
|
(128.5
|
%)
|
|
|
2,645,151
|
|
|
|
2.5
|
%
|
|
|
(43,264,539
|
)
|
|
|
(1635.6
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX BENEFIT
|
|
|
4,907,936
|
|
|
|
15.5
|
%
|
|
|
236,449
|
|
|
|
0.2
|
%
|
|
|
4,671,487
|
|
|
|
1975.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (LOSS) INCOME
|
|
|
(35,711,452
|
)
|
|
|
(113.0
|
%)
|
|
|
2,881,600
|
|
|
|
2.7
|
%
|
|
|
(38,593,052
|
)
|
|
|
(1339.3
|
%)
|
(a) Revenue
For the six months ended June 30, 2017,
our revenue was $31,599,852 compared to $105,875,261 for the same period of 2016, a decrease of $74,275,409 or 70.2%. Our products
include EV parts and off-road vehicles, including ATVs, utility vehicles, go-karts, and others. The decrease in revenue was mainly
due to the significant decrease in EV parts sales during this period. The selling prices of our products for the six months ended
June 30, 2017 decreased on average from the same period last year. The decrease in revenue was primarily due to the decrease in
sales volume.
The following table summarizes our revenues
by product types for the six months ended June 30, 2017 and 2016:
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Sales
|
|
|
Sales
|
|
EV parts
|
|
$
|
28,867,714
|
|
|
$
|
100,004,478
|
|
EV products
|
|
|
|
|
|
|
3,779,616
|
|
Off-road vehicles
|
|
|
2,732,138
|
|
|
|
2,091,167
|
|
Total
|
|
$
|
31,599,852
|
|
|
$
|
105,875,261
|
|
EV Parts
Among our total revenues during the six
months ended June 30, 2017, approximately $28,867,714, or 91.4%, resulted from the sale of EV parts. We started our EV parts business
in 2014, and revenue from EV parts decreased $71,136,764 or 71.1% compared to the first half year of 2016. Our EV parts sales primarily
consisted of the sales of battery packs, body parts, EV drive motors, EV controllers, air conditioning units and other auto parts,
which accounted for 91.4% of total sales. Among total sales for the six months ended June 30, 2017, approximately 62.0% were related
to the sale of battery packs. In compliance with the regulation of the Chinese auto industry, we hold the necessary production
licenses to manufacture the battery packs exclusively used in EV products manufactured by the JV Company. Besides the sale of battery
packs, approximately 12.2% of total sales were related to sales of EV controllers, approximately 8.3% of the total sales were related
to sales of air conditioning units, and approximately 6.8% of total sales were related to sales of EV drive motors.
During the six months ended June 30, 2017
and 2016, our revenues from the sale of EV parts to the JV Company and its subsidiaries accounted for approximately 87% and 58%
of our total net revenue for the period, respectively. The EV parts we sold were used in manufacturing pure EV products by the
JV Company’s subsidiaries.
During the six months ended June 30, 2017
and 2016, our revenue from the sale of EV parts to the Service Company was 0.0% and 3.8% of total sales, respectively. The Service
Company purchased the battery packs for speed upgrades and other EV parts for repair and maintenance.
Off-Road Vehicles
Among our total revenues during the six
months ended June 30, 2017, approximately $2,732,138, or 8.6%, resulted from the sale of off-road vehicles. The off-road vehicles
revenue increased $640,971, or 30.7% compared to the same period of 2016, mainly due to its organic growth.
(b) Cost of goods sold
Cost of goods sold was $27,175,584 during
the six months ended June 30, 2017, representing a decrease of $63,526,542, or 70.0%, compared to that of the same period of 2016.
The decrease was primarily due to the corresponding decrease in sales resulting from weak demand for our EV parts by the JV Company.
(c) Gross profit
The margins by products for the six months
ended June 30, 2017 and 2016 are as below:
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Sales
|
|
|
Cost
|
|
|
Gross Profit
|
|
|
Margin %
|
|
|
Sales
|
|
|
Cost
|
|
|
Gross
Profit
|
|
|
Margin %
|
|
EV parts
|
|
$
|
28,867,714
|
|
|
|
24,797,448
|
|
|
|
4,070,266
|
|
|
|
14.1
|
%
|
|
$
|
100,004,478
|
|
|
|
85,140,184
|
|
|
|
14,864,294
|
|
|
|
14.9
|
%
|
EV products
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,779,616
|
|
|
|
3,690,797
|
|
|
|
88,819
|
|
|
|
2.3
|
%
|
Off-road vehicles
|
|
|
2,732,138
|
|
|
|
2,378,137
|
|
|
|
354,002
|
|
|
|
13.0
|
%
|
|
|
2,091,167
|
|
|
|
1,871,145
|
|
|
|
220,022
|
|
|
|
10.5
|
%
|
Total
|
|
$
|
31,599,852
|
|
|
|
27,175,584
|
|
|
|
4,424,268
|
|
|
|
14.0
|
%
|
|
$
|
105,875,261
|
|
|
|
90,702,126
|
|
|
|
15,173,135
|
|
|
|
14.3
|
%
|
Gross profit for the first half year of
2017 decreased 70.8% to $4,424,268, compared to $15,173,135 for the same period last year. This was primarily attributable to the
sales decrease. Our gross margin decreased to 14.0% compared to 14.3% for the same period of 2016. The decrease in our gross margin
was mainly due to the decreased selling prices of battery to the JV Company in the six months ended June 30, 2017 and increased
manufacturing overhead per unit because of decreased sales volume offset by decreased raw material purchase prices during the period
and the increased gross margin of off-road vehicles from export sales.
(d) Research and development
R&D expenses were $25,911,773 for the
first half year of 2017, an increase of $25,211,612 or 3600.8% compared to the same period of last year. This increase was primarily
due to significantly increased R&D expenses related to the development of a new EV model at Hainan facility for the six months
ended June 30, 2017. For the six months ended June 30, 2017 and 2016, approximately 98.0% and 0% of our research and development
expenses were spent on the R&D of a new EV product model at Hainan facility, respectively, and the rest was spent on other
various EV and off-road vehicles R&D projects.
(e) Sales and marketing expenses
Selling and marketing expenses were $760,562
for the first half year of 2017, compared to $776,778 for the same period last year, a decrease of $16,216 or 2.1%. This slight
decrease was primarily attributable to the decreased shipping costs due to the decreased sales this period offset by the increased
amortization of product maintenance expenses for batteries during this period.
(f) General and administrative expenses
General
and administrative expenses were $9,877,946 for the first half year of 2017, compared to $17,658,076 for the same period of last
year, a decrease of $7,780,130 or 44.1%. For the six months ended June 30, 2017, general and administrative expenses included $4,493,187
in expenses for common stock awards to employees and consultants, compared to $15,157,583 for the same period in 2016. Excluding
stock compensation expense, our net general and administrative expenses for the six months ended June 30, 2017 were $5,384,759,
an increase of $2,884,266, or 115.3%, from $2,500,493 for the same period of 2016. The increase was largely due to the contingent
loss of approximately $2.9 million accrued in connection with a litigation.
(g) Government grants
Government grants were $5,329,611 for the
first half year of 2017, compared to $1,697,857 for the same quarter last year, representing an increase of $3,631,754, or 213.9%,
which was primarily due to subsidies we received from the Hainan provincial government to assist our development of a new EV model.
(h) Interest income
Interest income was $1,090,067 for the
first half year of 2017, a decrease of $475,266 or 30.4% compared to the same period of last year. This decrease was primarily
attributable to decreased interest rates on loans to the JV Company. The interest rate was reduced to 4.35% in 2017 from 8.7% in
2016 although the loan amount increased from the same period last year. In addition, we had interest income from a loan to a third
party in the first half year of last year but we didn’t have such loan in the first half year of 2017.
(i) Interest expenses
Interest expenses were $1,163,263 in the
first half year of 2017, an increase of $288,866 or 33.0% compared to the same period of last year. This increase was primarily
due to the additional interest expenses associated with the note payable to a third party although the overall loan interest rates
decreased in general in the first half year of 2017 as compared to that of the same period last year. Of the interest expenses,
$61,583 and $0 were discounts associated with the settlement of bank acceptance notes for the six months ended June 30, 2017 and
2016, respectively.
(j) Change in fair value of financial
instruments
For the first half year of 2017, the gain
or loss related to changes in the fair value of derivative liability relating to the warrants issued to the investors and a placement
agent was $0, a decrease of $3,812,898 to the same period of last year, which was mainly the result of all remaining unexercised
warrants expiring as of June 30, 2017.
(k) Share of loss after tax of the JV
Company
For the first half year of 2017, the JV
Company’s net sales were $19,928,152, gross loss was $1,824,736, and net loss was $25,185,112. We accounted for our investments
in the JV Company under the equity method of accounting because we have a 50% ownership interest in the JV Company. As a result,
we recorded 50% of the JV Company’s loss for $12,592,556 for the first half year of 2017. After eliminating intra-entity
profits and losses, our share of the after tax losses of the JV Company was $13,899,967 for the first half year of 2017, an increase
of loss of $13,996,130 compared to the same period of last year. The increase of the JV Company’s loss was primarily due
to the decreased EV product sales in the first half year of 2017 because of the re-announcement of the MIIT’s directory of
recommended models of new energy vehicles as a result of new government’s subsidy policies effective as of January 1, 2017
as well as the extended delays of subsidy payments for EVs manufactured in previous years, which resulted in temporary difficulties
for the JV Company to increase or maintain production.
During the first half year of 2017, the
JV Company sold 365 units of EV products, including 50 units of K11 and 315 units of K17 as compared to a total of 7,200 units
of EV products sold by the JV Company in the same period of last year.
(l) Other income, net
Net other income was $150,177 for the first
half year of 2017, a decrease of $159,000 or 51.4% compared to the same period of last year.
(m) Net income (loss) from continuing
operation
Net loss was $35,711,452 for the first
half year of 2017, a negative change of $38,593,052 compared to net income $2,881,600 for the same period of last year. The negative
change was primarily attributable to significantly decreased sales and gross profits, losses from the JV Company and significantly
increased R&D expenses. Excluding the effects of stock compensation expenses, which were $4,493,187 and $15,157,583 for the
first half year of 2017 and 2016, respectively, and the change of the fair value of financial derivatives which was $0 and a loss
of $3,812,898 for the first half year of 2017 and 2016, respectively, our non-GAAP net loss was $31,218,265 for the six months
ended June 30, 2017 as compared to non-GAAP net income $14,226,285 for the same period of 2016, a negative change of $45,444,550,
or 319.4%. The decrease in net income (non-GAAP) was primarily attributable to the decrease in revenue and gross profits, the JV
Company’s net losses, and significantly increased R&D expenses made in an effort to prepare the Company for future business
growth.
We make reference to certain non-GAAP financial
measure, i.e., the adjusted net income. Management believes that such adjusted financial results are useful to investors in evaluating
our operating performance because they present meaningful measures of corporate performance. See the non-GAAP reconciliation table
below. Any non-GAAP measures should not be considered as a substitute for, and should only be read in conjunction with measures
of financial performance prepared in accordance with GAAP.
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
GAAP net (loss) income from continuing operations
|
|
$
|
(35,711,452
|
)
|
|
$
|
2,881,600
|
|
Stock award expenses
|
|
|
4,493,187
|
|
|
|
15,157,583
|
|
Change of the fair value of financial derivatives
|
|
|
-
|
|
|
|
(3,812,898
|
)
|
Non-GAAP net (loss) income from continuing operations
|
|
$
|
(31,218,265
|
)
|
|
$
|
14,226,285
|
|
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
For the first half year of 2017, cash used
in operating activities was $1,736,365 as compared to $3,732,158 for the same period of 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 to
our suppliers for production materials and parts used in our manufacturing process, operation expenses, employee compensation,
and interest expenses on our financings. The major operating activities that provided cash for the first half year of 2017 were
a decrease in advances to suppliers and prepayments and prepaid expenses of $23,946,781 and an increase in accounts payable of
$25,017,146 . The major operating activities that used cash for first half year of 2017 were net losses of $35,711,452 and an increase
in accounts due from the JV Company of $21,853,571.
For the first half year of 2017, cash provided
by investing activities was $3,351,158, as compared to $5,175,840 for the same period of last year. The major investing activity
that provided cash for the first half year of 2017 was the decrease in short term investments of $4,509,183. The major investing
activities that used cash for first half year of 2017 were $1,029,516 of purchases of construction in progress.
For the first half year of 2017, cash used
in financing activities was $6,643,401, as compared to cash provided by financing activities of $1,734,881 for the same period
of last year. The major financing activities that provided cash for the first half year of 2017 were proceeds from notes payable
of $5,713,368 and proceeds from short-term bank loans of $13,963,923. The major financing activities that used cash for first half
year of 2017 were $17,018,531 of repayments of short-term bank loans and $9,302,161 of increase in restricted cash for issuing
notes payables.
Working Capital
We had a working capital surplus of $56,822,668
at June 30, 2017, compared to $86,348,025 as of December 31, 2016.
We have historically financed our operations
through short-term commercial bank loans from Chinese banks. The term of these loans is typically for one year, and upon the payment
of all outstanding principal and interest in a particular loan, the banks have typically rolled over the loan for an additional
one-year term, with adjustments made to the interest rate to reflect prevailing market rates. We believe this practice has been
ongoing year after year and that short-term bank loans will be available with normal trade terms if needed.
Capital Requirements and Capital
Provided
Capital requirements and capital provided
for the six months ended June 30, 2017 were as follows:
|
|
Six Months Ended
|
|
|
|
June 30, 2017
|
|
|
|
(In Thousands)
|
|
Capital requirements
|
|
|
|
Purchase of plant and equipment
|
|
$
|
129
|
|
Purchase of construction in progress
|
|
|
1,030
|
|
Repayments of short-term bank loans
|
|
|
17,019
|
|
Increase in restricted cash
|
|
|
9,302
|
|
Internal cash used in operations
|
|
|
1,736
|
|
Total capital Requirements
|
|
$
|
29,216
|
|
|
|
|
|
|
Capital provided
|
|
|
|
|
Proceeds from short-term bank loan
|
|
|
13,964
|
|
Proceeds from notes payable
|
|
|
5,713
|
|
Repayments of short term investment
|
|
|
4,509
|
|
Decrease in cash
|
|
|
4,829
|
|
Total capital provided
|
|
$
|
29,015
|
|
The difference between capital provided
and capital required is caused by the effect of exchange rate changes over the past three months.
Contractual Obligations and Off-balance
Sheet Arrangements
Contractual Obligations
The following table summarizes our contractual
obligations:
Contractual obligations
|
|
Payments due by period
|
|
|
|
Total
|
|
|
Less than 1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than 5 years
|
|
R&D Obligations
|
|
$
|
8,850,341
|
|
|
|
-
|
|
|
|
8,850,341
|
|
|
|
-
|
|
|
|
-
|
|
Hainan Obligations
|
|
$
|
15,930,613
|
|
|
|
-
|
|
|
|
15,930,613
|
|
|
|
-
|
|
|
|
-
|
|
Loans from Haikou Rural Credit Cooperative
|
|
$
|
29,501,136
|
|
|
|
-
|
|
|
|
-
|
|
|
|
29,501,136
|
|
|
|
-
|
|
Total
|
|
$
|
54,282,090
|
|
|
|
-
|
|
|
|
24,780,954
|
|
|
|
29,501,136
|
|
|
|
-
|
|
To build the Hainan facility, the Company
signed contracts with Nanjing Shangtong Auto Technologies Co., Ltd. (“Nanjing Shangtong”) to purchase a production
line and develop a new EV model. As of June 30, 2017, the total revised contractual amount with Nanjing Shangtong was RMB 912,000,000
or approximately $135 million, of which RMB 744,000,000 or approximately $110 million has been paid and RMB168,000,000 or approximately
$25 million of remaining payments are outstanding as contractual obligations.
Short-term and long-term loans
:
Short-term loans are summarized as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Loans from China Ever-bright Bank
|
|
|
|
|
|
|
Interest rate 5.22% per annum, due on April 25, 2018, , secured by the assets of Kandi Vehicle, guaranteed by Mr. Hu Xiaoming and his wife
,
also guaranteed by the Company's subsidiaries. Also see Note 13 and Note 14.
|
|
|
10,325,398
|
|
|
|
11,229,727
|
|
Loans from Hangzhou Bank
|
|
|
|
|
|
|
|
|
Interest rate 4.35% per annum, due on October 12, 2017, secured by the assets of Kandi Vehicle. Also see Note 13 and Note 14.
|
|
|
7,198,277
|
|
|
|
7,025,778
|
|
Interest rate 4.35% per annum, due July 3, 2017, paid off on July 3, 2017 and the new due date is July 4, 2018, secured by the assets of Kandi Vehicle. Also see Note 13 and Note 14.
|
|
|
10,649,910
|
|
|
|
10,394,696
|
|
Interest rate 4.35% per annum, paid off on March 23, 2017, secured by the assets of Kandi Vehicle. Also see Note 13 and Note 14.
|
|
|
-
|
|
|
|
5,614,864
|
|
Interest rate 4.35% per annum, due March 26, 2018, secured by the assets of Kandi Vehicle. Also see Note 13 and Note 14.
|
|
|
3,540,136
|
|
|
|
-
|
|
Loans from Individual Third Party
|
|
|
|
|
|
|
|
|
Interest rate 12% per annum
|
|
|
295,011
|
|
|
|
-
|
|
|
|
$
|
32,008,732
|
|
|
|
34,265,065
|
|
Long-term loans are summarized as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Loans from Haikou Rural Credit Cooperative
|
|
|
|
|
|
|
Interest rate 7% per annum, due on December 12, 2021, guaranteed by Kandi Vehicle and Kandi New Energy.
|
|
|
29,501,136
|
|
|
|
28,794,172
|
|
|
|
$
|
29,501,136
|
|
|
|
28,794,172
|
|
Notes payable:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Bank acceptance notes:
|
|
$
|
|
|
|
$
|
|
|
Due March 22, 2017
|
|
|
-
|
|
|
|
400,239
|
|
Due March 29, 2017
|
|
|
-
|
|
|
|
1,439,709
|
|
Due June 21, 2017
|
|
|
-
|
|
|
|
1,439,709
|
|
Due July 6, 2017
|
|
|
1,180,045
|
|
|
|
-
|
|
Due September 23, 2017
|
|
|
8,850,341
|
|
|
|
-
|
|
Due October 21, 2017
|
|
|
803,906
|
|
|
|
-
|
|
Due November 2, 2017
|
|
|
6,637,756
|
|
|
|
-
|
|
Due November 4, 2017
|
|
|
885,034
|
|
|
|
-
|
|
Due December 6, 2017
|
|
|
885,034
|
|
|
|
-
|
|
Due December 22, 2017
|
|
|
91,731
|
|
|
|
-
|
|
Due June 21, 2018
|
|
|
360,893
|
|
|
|
-
|
|
Other Notes Payable:
|
|
|
|
|
|
|
|
|
Due May 6, 2017
|
|
|
-
|
|
|
|
11,517,668
|
|
Due May 6, 2019
|
|
|
17,594,271
|
|
|
|
-
|
|
Total
|
|
$
|
37,289,011
|
|
|
$
|
14,797,325
|
|
Guarantees and pledged collateral for
third party bank loans
As of June 30, 2017 and December 31, 2016,
we provided guarantees for the following third parties:
(1)
|
Guarantees for bank loans
|
|
|
June 30,
|
|
|
December 31,
|
|
Guarantee provided to
|
|
2017
|
|
|
2016
|
|
Zhejiang Shuguang Industrial Co., Ltd.
|
|
|
4,277,665
|
|
|
|
4,175,155
|
|
Nanlong Group Co., Ltd.
|
|
|
-
|
|
|
|
2,879,417
|
|
Kandi Electric Vehicles Group Co., Ltd.
|
|
|
47,939,345
|
|
|
|
46,790,530
|
|
Total
|
|
$
|
52,217,010
|
|
|
$
|
53,845,102
|
|
On March 15, 2013, the Company entered
into a guarantee contract to serve as the guarantor of Nanlong Group Co., Ltd. (“NGCL”) for NGCL's loan in the amount
of $2,902,534 from Shanghai Pudong Development Bank Jinhua Branch, with a related loan period of March 15, 2013, to March 15, 2016.
NGCL is not related to the Company. Under this guarantee contract, the Company agreed to perform all the obligations of NGCL under
the loan contract if NGCL fails to perform its obligations as set forth therein.. Because NGCL defaulted on the loan principal
and interest, Shanghai Pudong Development Bank brought a lawsuit to the People’s Court of Zhejiang Province in Yongkang city
against NGCL, the Company and ten other guarantors in April, 2017. A judicial mediation was taken place at court in Yongkang city
on May 27, 2017 and the plaintiff agreed NGCL to repay the loan principal and interest plus legal expenses in installments. As
of June 30, 2017, according to the enterprise credit report issued by the Credit Center of People’s Bank of China (PBOC)
or the central bank of the People’s Republic of China, the Company’s guarantee for NGCL’s loan has been removed.
The Company expects the likelihood of incurring losses in connection with this matter is remote.
On September 29, 2015, the Company entered
into a guarantee contract to serve as the guarantor of Zhejiang Shuguang Industrial Co., Ltd. (“ZSICL”) for a bank
loan in the amount of $4,277,665 from Ping An Bank, with a related loan period of September 29, 2015, to September 28, 2016. ZSICL
is not related to the Company. Under this guarantee contract, the Company agreed to perform all the obligations of ZSICL under
the loan contract if ZSICL fails to perform its obligations as set forth therein. Because ZSICL defaulted on the loan interest,
Ping An Bank brought a lawsuit against ZSICL, the Company and three other parties, and a court ruling was issued in December 2016
to order ZSICL to repay the principal and interest of the bank loan to Ping An Bank, with the Company and three other parties assuming
joint liability for the default. ZSICL and the Company appealed the ruling results on February 6, 2017, and the court rejected
the appeal on March 29, 2017. On July 31, 2017, the Company and Ping An Bank reached an agreement to settle this case. According
to the agreement, the Company shall pay Ping An Bank RMB 20 million or approximately $2.9 million in four installments before October
31, 2017 to release the Company from the guarantor liability for this default. As of June 30, 2017, the Company has an accrued
liability of approximately $2.9 million for the estimated contingent loss in connection with this matter. According to the Company’s
agreement with ZSICL, ZSICL agreed to reimburse all the Company’s losses due to ZSICL’s default on the loan principal
and interests. On August 1, 2017, the first installment of RMB 5 million or approximately $0.73 million was paid to Ping An Bank
and ZSICL will reimburse the Company for the same amount according to the agreement. The Company expects the likelihood of incurring
losses in connection with this matter is low.
On December 14, 2015, the Company entered
into a guarantee contract to serve as the guarantor for the JV Company for bank loans in the aggregate amount of $36,876,420 from
China Import & Export Bank with a related loan period of December 14, 2015, to December 13, 2016, which was extended to September
14, 2017. Under this guarantee contract, the Company agreed to perform all the obligations of the JV Company under the loan contract
if the JV Company fails to perform its obligations as set forth therein.
On July 20, 2016, the Company entered into
a guarantee contract to serve as the guarantor for the JV Company for bank loans in the aggregate amount of $11,062,926 from Bank
of China, with a related loan period of July 20, 2016 to July 19, 2017. Under this guarantee contract, the Company agreed to perform
all the obligations of the JV Company under the loan contract if the JV Company fails to perform its obligations as set forth therein.
The loans were paid off on July 21, 2017
All guarantee periods are two years from the
date of expiration of the debt performance under the principal loan contracts.
(2) Pledged collateral for bank loans to other
parties.
As of June 30, 2017 and December 31, 2016,
none of the Company’s land use rights or plants and equipment were pledged as collateral securing bank loans to other parties.
Contingencies
As of June 30, 2017 and December 31, 2016,
our loss contingencies are summarized as follow:
Loss contingencies – litigation
|
|
2017
|
|
|
2016
|
|
Zhejiang Shuguang Industrial Co., Ltd.
|
|
$
|
2,950,114
|
|
|
$
|
-
|
|
Total
|
|
$
|
2,950,114
|
|
|
$
|
-
|
|
Recent Development Activities:
On April 18, 2017, Mr. Yao Zhenhua, Chairman
of Shenzhen Baoneng Investment Group (“Baoneng”), came to Hangzhou to visit the JV Company with more than 10 people.
Mr. Li Shufu, Chairman of Geely, Mr. Yang Jian, Vice Chairman of Geely, and Mr. Hu Xiaoming, Chairman of the Company welcomed them.
Baoneng and the Company discussed on future cooperation. On April 27, 2017, Hu Xiaoming, and Mr. Yang Jian went to Shenzhen and
had a return visit to Baoneng.
On July 14, 2017, we announced that the
Geely Global Hawk electric vehicle (“EV”) model SMA7001BEV25 (the Kandi Model K17A), developed by the JV Company, has
been included as a new recommended model vehicle in the MIIT’s Sixth Annual Directory of New Energy Vehicles in the MIIT’s
third public announcement of 2017. According to the Ministry of Finance, the Ministry of Science and Technology, the MIIT, and
the National Development and Reform Commission’s (the "Four Ministries") Notice of Financial Subsidy Policy Adjustment
for Recommended Models for Energy Saving and New Energy Vehicle Demonstration and Promotion, new energy passenger vehicles are
required to incorporate enhanced battery power systems with increased energy density quality of higher than 120wh/kg in order to
receive 110% of the central government subsidy for such vehicles. Three of the JV Company’s EV models - SMA7000BEV05(K12),
SMA7000EV06(K10D), and SMA7001BEV25(K17A) - have successfully achieved this standard after receiving technology upgrades. As a
result, all three of these models are eligible to receive a 110% subsidy from the central government. We believe the approval of
these three models will contribute to the Company’s continued development in the second half of 2017.
On July 15, 2017, Mr. Hu Xiaoming, our
Chairman and his delegate group were invited to Suzhou, Jiangsu to visit Golden Concord Holdings Limited ("GCL"). Chairman
of board of GCL, Mr. Zhu Gongshan and other company executives welcomed Chairman Hu and the two sides conducted in-depth communication
on future cooperation. On July 27, 2017, Mr. Zhu Gongshan, went to Hangzhou and made a return visit to the JV Company with more
than 10 people. The two sides had further communication for future cooperation and reached many consensuses.
On July 26, 2017, Mr. Dai Qiwen, Vice President
of TUNGHSU Group came to Hangzhou to visit the JV Company and discussed potential cooperation with Mr. Hu Xiaoming, our Chairman.
On August 1, 2017, Chairman Hu and his group were invited to Beijing to made a return visit to TUNGHSU Group. Both sides were looking
forward to working closely together in the field of pure electric vehicles.
From August 3, 2017, through August 5,
2017, the JV Company unveiled its new model "Global Hawk K17AS" at the Global New Energy Vehicle Expo Conference - Future
Auto Show (the "GNEV EXPO"), held at the Shanghai New International Expo Centre. The theme of this year's exhibition,
"Redefine the Automobile, Redefine Going Places," is a call to action to transform electric vehicles by increasing electrification,
"smart" features, lightweight design, and car-sharing. The unveiling of the Global Hawk K17AS will underline the company’s
radical vision of engineering a connection to the future, and as a major exhibitor at the GNEV EXPO, the JV Company's advanced
products stand out among other presenters advocating the concept of Smart Life and Networked World.
Item 3. Quantitative and Qualitative
Disclosures About Market Risk
Exchange Rate Risk
While our reporting currency is the U.S.
dollar, to date the majority of our revenues and costs are denominated in RMB and a significant portion of our assets and liabilities
are denominated in RMB. As a result, we are exposed to foreign exchange risk because our revenues and results of operations may
be affected by fluctuations in the exchange rate between the U.S. dollar and the RMB. If the RMB depreciates against the U.S. dollar,
the value of our RMB revenues and assets as expressed in our U.S. dollar financial statements will decline. Since 2005, China reformed
its exchange rate regime and the RMB is no longer pegged to the U.S. dollar. In 2010, the People’s Bank of China decided
to move to further reform the RMB exchange rate regime to enhance the flexibility of the RMB exchange rate. Starting August 11,
2015, the RMB changed its trend of appreciation and began to depreciate as compared to the U.S. dollar. In the long term, the RMB
may appreciate or depreciate more significantly in value against the U.S. dollar or other foreign currencies, depending on the
market supply and demand with reference to a basket of currencies.
While the Chinese RMB is freely convertible
under the current account, it remains strictly regulated in the capital account. Chinese authorities have expressed their willingness
to allow the RMB to be fully convertible in the near future.
To date, we have not entered into any hedging
transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions
in the future, the effectiveness of these hedges may be limited and we may not be able to successfully hedge our exposure. Accordingly,
we may incur economic losses in the future due to foreign exchange rate fluctuations, which could have a negative impact on our
financial condition and results of operations.
Interest Rate Risk
We had cash, cash equivalents and restricted
cash totaling $30.1 million and notes receivable from JV Company and related parties of $0 million as of June 30, 2017. Cash and
cash equivalents are held for working capital purposes. We do not enter into investments for trading or speculative purposes. As
of June 30, 2017, we had $32.0 million of short-term bank loans and $29.5 million of long-term loans outstanding, which are fixed
rate instruments. Our exposure to interest rate risk primarily relates to the interest income generated from cash held in bank
deposits and notes receivable, and interest expenses generated from short-term bank loans. We believe that we do not have any material
exposure to changes in fair value as a result of changes in interest rates due to the short term nature of our cash equivalents.
We have not been exposed nor do we anticipate being exposed to material risks due to changes in interest rates.
Inflation Rate Risk
According to the National Bureau of Statistics
of China, the Consumer Price Index (CPI), a main gauge of inflation, rose 1.5 percent year on year in June 2017, the same as in
May and remaining below 2 percent for five consecutive months. China's producer price index (PPI), which measures costs for goods
at the factory gate, rose 5.5 percent year on year in June. Economists expect PPI will continue to moderate in the coming months
while core consumer inflation, or CPI excluding food and energy, will likely improve. China's monetary policy in 2017 is set to
be "prudent and neutral" to keep appropriate liquidity levels and avoid large injections. The steady price data reinforced
views about stabilization in the world's second-largest economy.
Economic and Political Risks
Our operations in China are subject to
special considerations and significant risks not typically associated with companies in North America and Western Europe. These
include risks associated with, among others, the political, economic and legal environment in China and foreign currency exchange.
Our performance may be adversely affected by changes in the political and social conditions in China, and by changes in governmental
policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and
methods of taxation, among other things.
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 June 30, 2017. 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 not effective.
Disclosure controls and procedures are
controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted
under the Exchange Act (a) is recorded, processed, summarized and reported within the time periods specified in the 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.
As previously disclosed in our Annual Report
on Form 10-K for the year ended December 31, 2016 which we filed with the SEC on March 16, 2017, our management concluded that,
as of December 31, 2016, material weaknesses existed in our internal control over financial reporting which affected the effectiveness
of our disclosure controls and procedures.
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.
During the second quarter of 2017, the
Company, under the supervision of the Board’s Audit Committee, continued to implement its remediation plans. The management
together with the Company’s internal control department completed a review of the Company’s internal control over financial
reporting.
|
i.
|
We completed a thorough review of the key personnel positions related to financial reporting to
ensure that the areas of responsibilities are properly matched to the staff competencies, there are sufficient competent resources
available to handle the works, and that the lines of communication and processes are as effective as possible;
|
|
ii.
|
We also completed a thorough review of the processes and procedures in the Company’s financial
reporting related to the areas where the material weaknesses existed to ensure the related controls in our current accounting practices
such as consolidation process, conversion and development of U.S. GAAP based financial statements process and internal review process
is sufficient and effective, related procedures in our accounting manual is updated and related documentation for internal control
over financial reporting is complete.
|
We are in the process of implementing and
intend to fully implement our remediation plans that were disclosed in our Annual Report on Form 10-K that was filed on March 16,
2017 to address the material weaknesses and will conduct quarterly assessments of the state of the Company’s financial reporting
measures and systems, as a whole.
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 below, 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 or financial
statements.
In August 2016, Ping An Bank Yiwu Branch
(“Ping An Bank”) filed a suit against Zhejiang Shuguang Industrial Co., Ltd. (“ZSICL”), the Company, and
three other parties in Zhejiang Province People’s Court in Yiwu City, alleging ZSICL defaulted on a bank loan borrowed from
Pin An Bank for a principal amount of RMB 29 million or approximately $4.2 million (the “Principal”), for which the
Company is a guarantor along with other three parties (please refer to Note 23 of the notes to our condensed consolidated financial
statements contained in this report). On December 25, 2016, the court ruled that ZSICL should repay Ping An Bank the Principal
and associated interest remaining on the bank loan within 10 days once the adjudication is effective; and the Company and other
three parties, acted as guarantors, have joint liability for this bank loan. ZSICL and the Company appealed the ruling results
on February 6, 2017 and the court rejected the appeal on March 29, 2017. On July 31, 2017, the Company and Ping An Bank reached
an agreement to settle this case. According to the agreement, the Company will pay Ping An Bank RMB 20 million or approximately
$2.9 million in four installments before October 31, 2017 to release the Company from the guarantor liability for this default.
As of June 30, 2017, the Company has an accrued liability of approximately $2.9 million for the estimated contingent loss in connection
with this matter. According to the Company’s agreement with ZSICL, ZSICL agreed to reimburse all the Company’s losses
due to ZSICL’s default on the loan principal and interests. On August 1, 2017, the first installment of RMB 5 million or
approximately $0.73 million was paid to Ping An Bank and ZSICL will reimburse the Company for the same amount according to the
agreement. The Company expects the likelihood of incurring losses in connection with this matter is low.
Beginning in March 2017, putative shareholder
class actions were filed against Kandi Technologies Group, Inc. and certain of its current and former directors and officers in
the United States District Court for the Central District of California and the United States District Court for the Southern District
of New York. The complaints generally allege violations of the federal securities laws based Kandi’s disclosure in March
2017 that its financial statements for the years 2014, 2015 and the first three quarters of 2016 will 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. We believe that the claims are without merit and intend to defend against these lawsuits vigorously. We are unable to estimate
the possible loss, if any, associated with these lawsuits.
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. We believe that the claims are without merit
and intend to defend against this lawsuit vigorously. We are unable to estimate the possible loss, if any, associated with these
lawsuits.
In April 2017, Shanghai Pudong Development
Bank filed a suit against Nanlong Group Co., Ltd. (“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, for which the Company is a guarantor along with
ten other guarantors (please refer to Note 23 of the notes to our condensed consolidated financial statements contained in this
report). On May 27, 2017, a judicial mediation took place in Yongkang City and a mediation settlement reached in court, which the
plaintiff agreed NGCL to repay the loan principal and interest plus legal expenses in installments. As of June 30, 2017, according
to the enterprise credit report issued by the Credit Center of People’s Bank of China (PBOC) or the central bank of the People’s
Republic of China, the Company’s guarantee for NGCL’s loan has been removed. The Company expects the likelihood of
incurring losses in connection with this matter is remote.
Other than the above described legal proceedings,
the Company is not 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. No provision
has been made in the consolidated financial statements for the above contingencies related to the shareholder class actions.
Item 1A. Risk Factors.
Given material weaknesses were found
in our internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current
and potential shareholders could lose confidence in our financial reporting, which would harm our business and the trading price
of our stock.
Effective internal controls are necessary
for us to provide reliable financial reports and effectively prevent fraud. As directed by Section 404 of the Sarbanes-Oxley Act
of 2002, or SOX 404, the SEC adopted rules requiring public companies to include a report of management on our internal controls
over financial reporting in their annual reports.
As disclosed in our Annual Report on Form
10-K filed with the SEC on March 16, 2017, management observed material weaknesses relating to our 2015 and 2014 financial statements
that resulted in the addition of separate audited financial statements of the JV Company, the correction in accounting for income
taxes and the reclassification of financial statement line items and related financial disclosures.
Although we have taken measures to remediate
the material weaknesses, we cannot provide assurance that we will not fail to achieve and maintain an effective internal control
environment on an ongoing basis, which may cause investors to lose confidence in our reported financial information and have a
material adverse effect on the price of our common stock.
Changes to the government’s subsidy
support policies and further delays in subsidy payments may have negative impacts on our operations.
The newly announced central government
subsidy support policies effective as of January 1, 2017, call for a 20% reduction in central government subsidies per car in 2017
from the 2016 level and total local government subsidy match to be not more than 50% of total central government subsidies per
car. The reduction of subsidies from both the central government and local governments will inevitably increase the costs to the
consumers to purchase our JV Company’s EVs if our JV Company cannot lower sale prices to compensate consumers for the subsidy
reductions, which may cause temporary pressure for the JV Company to expand its EV sales. The change in subsidy payment methods
in 2017 from paid in advance to paid post-sale and any further delay in releasing subsidy payments for the EVs manufactured and
sold in the prior years might also cause delays in collection of accounts receivable from our business partners, which will temporarily
increase the pressure on our working capital for continuing operations. The unavailability, reduction or elimination of government
and economic incentives could have a material adverse effect on our business, financial condition, operating results and prospects.
Item 6. Exhibits