NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - ORGANIZATION AND PRINCIPAL ACTIVITIES
Kandi
Technologies Group, Inc. (“Kandi Technologies”) was incorporated under the laws of the State of Delaware on March
31, 2004 as Stone Mountain Resources, Inc. It changed its name to Kandi Technologies, Corp. on August 13, 2007, and on December
21, 2012, it further changed its name to its current name. 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 (“China”), the Company is one of China’s
leading producers and manufacturers of electric vehicle (“EV”) products (through the JV Company), EV parts, and off-road
vehicles for sale in China and global markets. The Company conducts its primary business operations through its wholly-owned subsidiaries,
Zhejiang Kandi Vehicles Co., Ltd. (“Kandi Vehicles”) and Sportsman Country, LLC (“Sportsman Country”)
which changed its name to SC Autosports LLC (“SC Autosports”) in August 2018, and the partially and wholly-owned subsidiaries
of Kandi Vehicles.
The
Company’s organizational chart as of the date of this report is as follows:
Operating
Subsidiaries:
Pursuant
to certain VIE (as defined below in this report) 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 an agreement with the shareholders of YongkangScrou Electric Co, Ltd. (“YongkangScrou”), the
Company acquired 100% of YongkangScrou, a manufacturer of automobile and EV parts. YongkangScrou currently manufactures and sells
EV drive motors, EV controllers, air conditioners and other electric products to the JV Company.
In
March 2013, pursuant to a joint venture agreement (the “JV Agreement”) entered into by Kandi Vehicles and Shanghai
Maple Guorun Automobile Co., Ltd. (“Shanghai Guorun”), a 99%-owned subsidiary of Geely Automobile Holdings Ltd. (“Geely”),
the parties established Zhejiang Kandi Electric Vehicles Co., Ltd. (the “JV Company”) to develop, manufacture and
sell EV products and related auto parts. Each of Kandi Vehicles and Shanghai Guorun has 50% ownership interest in the JV Company.
In March 2014, the JV Company changed its name to Kandi Electric Vehicles Group Co., Ltd. Currently, 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 a JV Company 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, Zhejiang Geely
Holding Group, Ltd. (Geely Holding) transferred its equity in the JV Company to Geely Group (Ningbo) Ltd., a company wholly owned
by Mr. Li Shufu, Chairman of the Board of Geely Holding. On May 23, 2018, in order to obtain its manufacturing license, and pursuant
to a recent notice (FGBCY[2018] No.547) from the National Development and Reform Commission in China, the JV Company increased
its registered capital by RMB 1.09 billion (approximately $165 million), of which Kandi Vehicle increased its capital contribution
to the JV Company by converting its loans to the JV Company, totaling RMB 545 million (approximately $79 million) to registered
capital in the JV Company. Geely Group, Ltd. (“Geely Group”) became a new shareholder of the JV Company by investing
RMB 545 million (approximately $79 million). After this restructure, Kandi Vehicles, Geely Group and Geely Group (Ningbo) Ltd.,
each own 50%, 26.08%, and 23.92% of the equity in the JV Company, respectively.
In
March 2013, Kandi Vehicles formed Kandi Electric Vehicles (Changxing) Co., Ltd. (“KandiChangxing”) in the Changxing
(National) Economic and Technological Development Zone. KandiChangxing 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 KandiChangxing to the JV Company. The Company, through its 50% ownership interest in the
JV Company, owns an indirect 50% economic interest in KandiChangxing.
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”)
and other EV share programs. Kandi Vehicle had a 9.5% ownership interest in the Service Company. After various tests and thorough
assessments in the last five years, the Company determined that a large sum of capital still needs to be invested in order to
increase the size of EV share programs. After considering Geely Group’s ability to grow the Service Company’s business
to be stronger and more expansive, and determining that the successful growth of the Service Company would have a positive impact
on the development of the JV Company’s business, Kandi Vehicle transferred its 9.5% ownership interest in the Service Company
to Geely Group in June 2018.
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, through its 50% ownership interest in the JV Company, indirectly
owns a 50% economic interest in Kandi Jinhua. In April 2017, Kandi Jinhua was reorganized to be owned directly by Kandi Jiangsu,
which is 100% directly owned by the JV Company.
In
November 2013, Zhejiang Ji He Kang Electric Vehicle Sales Co., Ltd. (“Ji He Kang”) 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, through its 50%
ownership interest in the JV Company, indirectly owns a 50% economic interest in JiHeKang. In April 2017, JiHeKang was reorganized
to be owned directly by Kandi Jiangsu, which is 100% directly owned by the JV Company.
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, through its 50% ownership interest in the JV Company,
indirectly owns a 50% economic interest in Kandi Shanghai.
In
January 2014, KandiElectric 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, through its 50% ownership interest in the JV Company, indirectly
owns a 50% economic interest in Kandi Jiangsu. Kandi Jiangsu is mainly engaged in EV research and development, manufacturing,
and sales. As of the date of this report, Kandi Jiangsu directly owns 100% of JiHeKang, JiHeKang Service Company, Liuchuang and
KandiJinhua.
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,
through its ownership of the JV Company, indirectly owns a 25% economic interest in Puma Investment.
In
November 2015, Hangzhou JiHeKang Electric Vehicle Service Co., Ltd. (the “JiHeKang Service Company”) was formed by
the JV Company. The JiHeKang Service Company focuses on after-market services for EV products. In April 2017, JiHeKang Service
Company was reorganized to be owned directly by Kandi Jiangsu, which is 100% directly owned by the JV Company. The JV Company
has a 100% ownership interest in the JiHeKang Service Company, and the Company, through the JV Company, indirectly owns a 50%
economic interest in the JiHeKang Service Company.
In
December 2015, Zhejiang JiHeKang Electric Vehicle Sales Co., Ltd. Tianjin Branch (“JiHeKang Tianjin”) was formed by
JiHeKang. JiHeKang Tianjin was engaged in the car sales business. JiHeKang Tianjin was dissolved in September 2018.
In
January 2016, Kandi Electric Vehicles (Wanning) Co., Ltd. was renamed Kandi Electric Vehicles (Hainan) Co., Ltd. (“Kandi
Hainan”). Kandi Hainan was originally formed in Wanning City in Hainan Province by Kandi Vehicles and Kandi New Energy in
April 2013, and was transferred to Haikou City in January 2016. Kandi Vehicles has a 90% ownership interest in Kandi Hainan, and
Kandi New Energy has the remaining 10% ownership interest. 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, through its 50% ownership interest in the JV Company, indirectly owns 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, through its 50% ownership interest in the JV Company, indirectly owns a 50% economic interest in Tianjin
BoHaiWan.
In
November 2016, Changxing Kandi Vehicle Maintenance Co., Ltd. (“Changxing Maintenance”) was formed by Kandi Changxing.
Changxing Maintenance is engaged in the car repair and maintenance business. In December 2017, the Service Company entered into
an agreement with the JV Company to acquire 100% of Changxing Maintenance for RMB 1,089,887 or approximately $167,501. The transaction
was completed in April 2018.
In
November 2016, Guangdong JiHeKang Electric Vehicle Sales Co., Ltd. (“Guangdong JiHeKang”) was formed by JiHeKang.
Guangdong JiHeKang is engaged in the car sales business. Since JiHeKang is 100% owned by the JV Company, the JV Company has a
100% ownership interest in Guangdong JiHeKang, and the Company, through its 50% ownership interest in the JV Company, indirectly
owns a 50% economic interest in Guangdong JiHeKang.
In
March 2017, Hangzhou Liuchuang Electric Vehicle Technology Co., Ltd. (“Liuchuang”) was formed by Kandi Jiangsu. Since
Kandi Jiangsu is 100% owned by the JV Company, the JV Company has a 100% ownership interest in Liuchuang, and the Company, through
its 50% ownership interest in the JV Company, indirectly owns a 50% economic interest in Liuchuang.
In
April 2017, in order to promote business development, Kandi Jinhua, JiHeKang, and the JiHeKang Service Company were reorganized
to become subsidiaries of Kandi Jiangsu. As the JV Company has a 100% ownership interest in Kandi Jiangsu, the JV Company has
owns 100% of KandiJinhua, JiHeKang, and the JiHeKang Service Company. The Company, through its 50% ownership interest in the JV
Company, indirectly owns a 50% economic interest in Kandi Jinhua, JiHeKang, and the JiHeKang Service Company.
In
December 2017, Zhejiang Chang Dian Technology Co., Ltd. (“Zhejiang Chang Dian”) was formed by the JV Company. Zhejiang
Chang Dian is primarily engaged in the battery replacement business. Zhejiang Chang Dian is 100% owned by the JV Company, and
the Company, through its 50% ownership interest in the JV Company, indirectly owns a 50% economic interest in Zhejiang Chang Dian.
In
December 2017, Kandi Vehicles and the sole shareholder of Jinhua An Kao Power Technology Co., Ltd. (“Jinhua An Kao”)
entered into a Share Transfer Agreement and a Supplementary Agreement, pursuant to which Kandi Vehicles acquired Jinhua An Kao.
The two agreements were signed on December 12, 2017 and the closing took place on January 3, 2018. Kandi Vehicles acquired 100%
of the equity interests of Jinhua An Kao for a purchase price of approximately RMB 25.93 million (approximately $4 million) in
cash. In addition, pursuant to the Supplementary Agreement, the Company issued a total of 2,959,837 shares of restrictive stock,
or 6.2% of the Company’s total outstanding shares of the common stock to the shareholder of Jinhua An Kao, and may be required
to pay future consideration up to an additional 2,959,837 shares of common stock, which are being held in escrow, to be released
contingent upon the achievement of certain net income-based milestones in the next three years. The Supplementary Agreement sets
forth the terms and conditions of the issuance of these shares, including a provision that gives the Company the voting rights
of the make good shares until conditions for vesting those shares are satisfied.
In
March 2018, Jiangsu Gu Xiang New Energy Technology Co., Ltd. (“Jiangsu Gu Xiang”) was formed by Zhejiang Chang Dian.
Jiangsu Gu Xiang is primarily engaged in technical research, development, services and consultation of new energy vehicles, battery
replacement and maintenance, and other business.
In
April 2018, Zhejiang Chang Dian Technology Co., Ltd. Hangzhou Tonglu Branch (“Chang Dian Tonglu”) was formed by Zhejiang
Chang Dian. Chang Dian Tonglu is primarily engaged in the battery replacement business.
In
April 2018, Zhejiang Chang Dian Technology Co., Ltd. Changxing Branch (“Chang Dian Changxing”) was formed by Zhejiang
Chang Dian. Chang Dian Changxing is primarily engaged in the battery replacement business.
On
May 31, 2018, the Company entered into a Membership Interests Transfer Agreement (the “Transfer Agreement”) with the
two members of Sportsman Country, LLC (“Sportsman Country”) under which the Company acquired 100% of the ownership
of Sportsman Country. Sportsman Country is a Dallas based sales company primarily engaged in the wholesale of off-road vehicle
products, with a small percentage of business in off-road vehicle parts wholesale and retail. According to the terms of the Transfer
Agreement, the Company transferred $10.0 million worth of restricted shares to acquire 100% of the membership interests of Sportsman
Country, of which the Company was required to issue $1.0 million worth of corresponding restricted shares within 30 days from
the signing date of the Transfer Agreement, and the remaining $9.0 million worth of corresponding restricted shares to be released
from escrow based on Sportsman Country’s pre-tax profit performance over the course of the following three years. The transaction
closed in July 2018. Sportsman Country subsequently changed its name to SC Autosports LLC (“SC Autosports”) in August
of 2018.
On
March 4, 2019, in order to build a logistics network composed of suppliers, manufacturers, warehouses, distribution centers and
channel providers, meeting the needs of production and operation, and optimizing the cost of supply chain system, Zhejiang Kandi
Supply Chain Management Co., Ltd. (“Kandi Supply Chain”) was formed. Kandi Vehicle has a10% ownership interest in
Kandi Supply Chain, the remaining 90% are owned by unrelated parties of Kandi Vehicle.
The
Company’s primary business operations are designing, developing, manufacturing and commercializing EV products (through
the JV Company), 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, and is actively
pursuing expansion in the Chinese and international markets, especially the U.S. market.
NOTE
2 - LIQUIDITY
The
Company had a working capital of $2,526,911 as of December 31, 2018, a decrease of $51,180,991 from a working capital surplus
of $53,707,902 as of December 31, 2017.
Although the Company expects that most
of its outstanding trade receivables from customers will be collected in the next twelve months, there are uncertainties about
the timing in collecting these receivables, especially the receivables due from the JV Company, because most of them are indirectly
impacted by the progress of the receipt of government subsidies. Since the amount due from the JV Company accounts for the majority
of the Company’s outstanding receivables, and since the Company cannot control the timing of the receipt of government subsidies,
the Company believes that its internally-generated cash flows may not be sufficient to support the growth of future operations
and to repay short-term bank loans for the next twelve months. However, the Company believes its access to existing financing
sources and its good credit will enable it to meet its obligations and fund its ongoing operations for the next twelve months.
The Company expects to approximately maintain the current debt level for the next twelve months given the Company’s current
financial position and business development needs.
The
Company’s primary need for liquidity stems from its need to fund working capital requirements of the Company’s businesses,
capital expenditures and general operational purposes, including debt repayment. The Company has incurred losses for the past
three years, and accordingly, the Company has taken a number of actions to continue to support its operations and meet its obligations.
The Company has historically financed its operations through short-term commercial bank loans from Chinese banks. The term of
these loans is typically for one year, and upon the payment of all outstanding principal and interest on a particular loan, the
banks have typically rolled over the loan for an additional one-year term, with adjustments made to the interest rate to reflect
prevailing market rates. This practice has been ongoing and the Company believes that short-term bank loans will remain available
on normal trade terms if needed. In 2019, management will take measures to grow the business and further improve the Company’s
liquidity. The Company acknowledges that it continues to face a challenging competitive environment and expects to take actions
that will enhance the Company’s liquidity and financial flexibility to support the Company’s operation needs.
We
finance our ongoing operating activities by using funds from our operations, external credit or financing arrangements. We routinely
monitor current and expected operational requirements and financial market conditions to evaluate the use of available financing
sources. Considering our existing working capital position and our ability to access debt funding sources, we believe that our
operations and borrowing resources are sufficient to provide for our current and foreseeable capital requirements to support our
ongoing operations for the next twelve months.
NOTE
3 - BASIS OF PRESENTATION
The
Company maintains its general ledger and journals using the accrual method of accounting for financial reporting purposes. The
Company’s financial statements and notes are the representations of the Company’s management. Accounting policies
adopted by the Company conform to generally accepted accounting principles in the United States and have been consistently applied
in the Company’s presentation of its financial statements.
NOTE
4 - PRINCIPLES OF CONSOLIDATION
The
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;
|
(2)
|
Kandi
Vehicles, a wholly-owned subsidiary of Continental;
|
(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;
|
(4)
|
YongkangScrou,
a wholly-owned subsidiary of Kandi Vehicles;
|
(5)
|
Kandi
Hainan, a subsidiary, 10% owned by Kandi New Energy and 90% owned by Kandi Vehicles; and
|
(6)
|
Jinhua
An Kao, a wholly-owned subsidiary of Kandi Vehicles.
|
(7)
|
SC
Autosports, a wholly-owned subsidiary of the Company.
|
Equity
Method Investees
The
Company’s consolidated net income also includes the Company’s proportionate share of the net income or loss of its
equity method investees as follows:
(1)
|
The
JV Company, a 50% owned subsidiary of Kandi Vehicles;
|
(2)
|
KandiChangxing,
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 KandiChangxing;
|
(3)
|
KandiJinhua,
a wholly-owned direct subsidiary of 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 KandiJinhua;
|
(4)
|
JiHeKang,
a wholly-owned direct subsidiary of 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 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 direct subsidiary of 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 the JiHeKang Service
Company.
|
(8)
|
Tianjin
BoHaiWan, a wholly-owned direct subsidiary of 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 Tianjin BoHaiWan;
|
(9)
|
Liuchuang,
a wholly-owned direct subsidiary of 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 Liuchuang;
|
(10)
|
Jiangsu
JiDian, a wholly-owned subsidiary of the JV Company. The Company, indirectly through its 50% ownership interest in the JV Company,
has a 50% economic interest in Jiangsu JiDian;
|
(11)
|
Guangdong
JiHeKang, a wholly-owned direct subsidiary of JiHeKang, a wholly-owned subsidiary of the JV Company. The Company, indirectly through
its 50% ownership interest in the JV Company, has a 50% economic interest in Guangdong JiHeKang; and
|
(12)
|
Zhejiang
Chang Dian, 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 Zhejiang Chang Dian.
|
(13)
|
Chang
Dian Tonglu, branch of Zhejiang Chang Dian, 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 Chang Dian Tonglu.
|
(14)
|
Chang
Dian Changxing, a branch of Zhejiang Chang Dian, 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 Chang Dian Changxing.
|
(15)
|
Jiangsu
Gu Xiang, a wholly-owned subsidiary of Zhejiang Chang Dian, a wholly-owned subsidiary of the JV Company.The Company, indirectly
through its 50% ownership interest in the JV Company, has a 50% economic interest in Jiangsu Gu Xiang.
|
All
intra-entity profits and losses with regard to the Company’s equity method investees have been eliminated.
NOTE
5 - USE OF ESTIMATES
The
preparation of financial statements in conformity with generally accepted accounting principles in the United States requires
the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts
of revenue and expenses during the reporting period. Management makes these estimates using the best information available at
the time the estimates are made; however actual results when ultimately realized could differ from those estimates.
NOTE
6 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Economic and Political Risks
The
Company’s operations are conducted in China. As a result, the Company’s business, financial condition and results
of operations may be influenced by the political, economic and legal environments in China, and by the general state of the Chinese
economy. In addition, the Company’s earnings are subject to movements in foreign currency exchange rates when transactions
are denominated in Renminbi (“RMB”), which is the Company’s functional currency. Accordingly, the Company’s
operating results are affected by changes in the exchange rate between the U.S. dollar and the RMB.
The
Company’s operations in China are subject to special considerations and significant risks not typically associated with
companies in North America and Western Europe. These include risks associated with, among others, the political, economic and
legal environment and foreign currency exchange restrictions. The Company’s performance may be adversely affected by changes
in the political and social conditions in China, and by changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.
(b)
Fair Value of Financial Instruments
ASC
820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy prioritizes
the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market.
These
tiers include:
Level
1—defined as observable inputs such as quoted prices in active markets;
Level
2—defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level
3—defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its
own assumptions.
The
Company’s financial instruments primarily consist of cash and cash equivalents, restricted cash, accounts receivable, notes
receivable, other receivables, accounts payable, other payables and accrued liabilities, short-term bank loans, notes payable,
and warrants.
The
carrying value of cash and cash equivalents, restricted cash, accounts receivable, notes receivable, other receivables, accounts
payable, other payables and accrued liabilities, and notes payable approximate fair value because of the short-term nature of
these items. The estimated fair values of short-term bank loans were not materially different from their carrying value as presented
due to the brief maturities and because the interest rates on these borrowings approximate those that would have been available
for loans of similar remaining maturities and risk profiles. As the carrying amounts are reasonable estimates of fair value, these
financial instruments are classified within Level 1 of the fair value hierarchy. The Company identified notes payable as Level
2 instruments due to the fact that the inputs to valuation are primarily based upon readily observable pricing information. The
balance of notes payable, which were measured and disclosed at fair value, was $12,787,619 and $28,075,945 at December 31, 2018
and December 31, 2017, respectively.
Contingent
consideration related to the acquisitions of Jinhua An Kao and SC Autosports, which is accounted for as liabilities, are measured
at each reporting date for their fair value using Level 3 inputs. The fair value of contingent consideration was $7,256,000 and
$0 at December 31, 2018 and December 31, 2017, respectively. Also see Note 26.
(c)
Cash and Cash Equivalents
The
Company considers highly-liquid investments purchased with original maturities of three months or less to be cash equivalents.
As
of December 31, 2018 and December 31, 2017, the Company’s restricted cash was $6,690,870 and $11,218,688, respectively.
(d)
Inventories
Inventories
are stated at the lower of cost or net realizable value (market value). The cost of raw materials is determined on the basis of
weighted average. The cost of finished goods is determined on the basis of weighted average and comprises direct materials, direct
labor and an appropriate proportion of overhead.
Net
realizable value is based on estimated selling prices less selling expenses and any further costs expected to be incurred for
completion. Adjustments to reduce the cost of inventory to net realizable value are made, if required, for estimated excess, obsolescence,
or impaired balances.
(e)
Accounts Receivable and Due from the JV Company and Related Parties
Accounts
receivable are recognized and carried at net realizable value. An allowance for doubtful accounts is recorded for periods in which
the Company determines a loss is probable, based on its assessment of specific factors, such as troubled collections, historical
experience, accounts aging, ongoing business relations and other factors. Accounts are written off after exhaustive collection
efforts. If accounts receivable are to be provided for, or written off, they are recognized in the consolidated statement of operations
within the operating expenses line item. If accounts receivable previously written off is recovered in a later period or when
facts subsequently become available to indicate that the amount provided as an allowance for doubtful accounts was incorrect,
an adjustment is made to restate allowance for doubtful accounts.
As
of December 31, 2018 and December 31, 2017, credit terms with the Company’s customers were typically 180 to 360 days after
delivery. As of December 31, 2018 and 2017, the Company had a $120,010 and $133,930 allowance for doubtful accounts, as per the
Company management’s judgment based on their best knowledge. The Company conducts quarterly assessments of the state of
the Company’s outstanding receivables and reserves any allowance for doubtful accounts if it becomes necessary.
(f)
Notes Receivable
Notes
receivable represent short-term loans to third parties with maximum terms of six months. Interest income is recognized according
to each agreement between a borrower and the Company on an accrual basis. For notes receivable with banks, the interest rates
are determined by banks. For notes receivable with other parties, the interest rates are based on agreements between the parties.
If notes receivable are paid back, that transaction will be recognized in the relevant year. If notes receivable are not paid
back, or are written off, that transaction will be recognized in the relevant year if default is probable, reasonably assured,
and the loss can be reasonably estimated. The Company will recognize income if the written-off loan is recovered at a future date.
In case of any foreclosure proceedings or legal actions, the Company provides an accrual for the related foreclosure and litigation
expenses. The Company also receives notes receivable from the JV Company and other parties to settle accounts receivable. If the
Company decides to discount notes receivable for the purpose of receiving immediate cash, the current discount rate is approximately
in the range of 3.50% to 4.50% annually. As of December 31, 2018 and December 31, 2017, the Company had notes receivable from
unrelated parties of $ 72,712 and $0, respectively, which notes receivable typically mature within six months. As of December
31, 2018 and December 31, 2017, the Company had notes receivable from JV Company and other related parties of $3,861,032 and $1,137,289,
respectively, which notes receivable typically mature within six months.
(g)
Advances to Suppliers
Advances
to suppliers represent cash paid in advance to suppliers, and include advances to raw material suppliers, mold manufacturers,
and equipment suppliers.
As
of December 31, 2018, the Company had made a total advance payments of RMB852 million (approximately $123 million) to Nanjing
Shangtong Auto Technologies Co., Ltd. (“Nanjing Shangtong”) as an advance to purchase a production line and develop
a new EV model for Kandi Hainan. Nanjing Shangtong is a total solutions contractor for Kandi Hainan and provides all the equipment
and EV product design and research services used by Kandi Hainan. After such advances were transferred to construction in progress
and expensed for R&D purposes, the Company had $0 left in Advance to Suppliers in current assets related to the purchases
from Nanjing Shangtong as of December 31, 2018.
Advances
for raw material purchases are typically settled within two months of the Company’s receipt of the raw materials. Prepayment
is offset against the purchase price after the equipment or materials are delivered.
(h)
Property, Plants and Equipment
Property,
Plants and equipment are carried at cost less accumulated depreciation. Depreciation is calculated over the asset’s estimated
useful life, using the straight-line method. Leasehold improvements are amortized over the life of the asset or the term of the
lease, whichever is shorter. Estimated useful lives are as follows:
Buildings
|
|
30
years
|
Machinery
and equipment
|
|
10
years
|
Office
equipment
|
|
5
years
|
Motor
vehicles
|
|
5
years
|
Molds
|
|
5
years
|
The
costs and related accumulated depreciation of assets sold or otherwise retired are eliminated from the Company’s accounts
and any gain or loss is included in the statements of income. The cost of maintenance and repairs is charged to expenses as incurred,
whereas significant renewals and betterments are capitalized.
(i)
Construction in Progress
Construction
in progress (“CIP”) represents the direct costs of construction, and the acquisition costs of buildings or machinery.
Capitalization of these costs ceases, and construction in progress is transferred to plants and equipment, when substantially
all the activities necessary to prepare the assets for their intended use are completed. No depreciation is provided for until
the assets are completed and ready for their intended use. As of December 31, 2018, $2,854,673 of interest expenses previously
capitalized for CIP have been reimbursed by the government.
(j)
Land Use Rights
Land
in China is owned by the government and land ownership rights cannot be sold to an individual or to a private company. However,
the Chinese government grants the user a “land use right” to use the land. The land use rights granted to the Company
are amortized using the straight-line method over a term of fifty years.
(k)
Accounting for the Impairment of Long-Lived Assets
The
Company periodically evaluates the carrying value of long-lived assets to be held and used, including intangible assets subject
to amortization, when events and circumstances warrant such a review, pursuant to the guidelines established in Statement of Financial
Accounting Standards (“SFAS”) No. 144 (now known as “ASC 360”). The carrying value of a long-lived asset
is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than
its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market
value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate
commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except
that fair market values are reduced for disposal costs.
The
Company recognized no impairment loss during the reporting period.
(l)
Revenue Recognition
The
Company adopted ASC Topic 606 Revenue from Contracts with Customers with a date of the initial application of January 1, 2018
using the modified retrospective method. As a result, the Company has changed its accounting policy for revenue recognition. The
impact of the adoption of ASC Topic 606 on the Company’s consolidated financial statements is not material.
The
Company recognizes revenue when goods or services are transferred to customers in an amount that reflects the consideration which
it expects to receive in exchange for those goods or services. In determining when and how revenue is recognized from contracts
with customers, the Company performs the following five-step analysis: (i) identification of contract with customer; (ii)
determination of performance obligations; (iii) measurement of the transaction price; (iv) allocation of the transaction
price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance
obligation.
The
Company generates revenue through EV parts and off-road vehicles. The revenue is recognized at a point in time once the Company
has determined that the customer has obtained control over the product. Control is typically deemed to have been transferred to
the customer when the performance obligation is fulfilled, usually at the time of delivery, at the net sales price (transaction
price). Estimates of variable consideration, such as volume discounts and rebates, are determined, reviewed and revised periodically
by management. The amount of variable consideration recognize is limited and is not likely to be reversed. Revenue is recognized
net of any taxes collected from customers, which are subsequently remitted to governmental authorities. Shipping and handling
costs for product shipments occur prior to the customer obtaining control of the goods are accounted for as fulfillment costs
rather than separate performance obligations and recorded as sales and marketing expenses.
The
Company’s contracts are predominantly short-term in nature with a contract term of one year or less. For those contracts,
the Company has utilized the practical expedient in ASC Topic 606 exempting the Company from disclosure of the transaction price
allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected
duration of one year or less.
Receivables
are recorded when the Company has an unconditional right to consideration.
See
Note 24 “Segment Reporting” for disaggregation of revenue by reporting segments. The Company believes this disaggregation
best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
(m)
Research and Development
Expenditures
relating to the development of new products and processes, including improvements to existing products, are expensed as incurred.
Research and development expenses were $10,084,378, $27,628,085 and $26,504,650 for the years ended December 31, 2018, 2017 and
2016, respectively.
(n)
Government Grants
Grants
and subsidies received from the Chinese government are recognized when the proceeds are received or collectible and related milestones
have been reached and all contingencies have been resolved.
For
the years ended December 31, 2018, 2017 and 2016, $17,787,445, $5,913,554 and $25,913,540, respectively, were received by the
Company’s subsidiaries from the Chinese government.
(o)
Income Taxes
The
Company accounts for income tax using an asset and liability approach, which allows for the recognition of deferred tax benefits
in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
The accounting for deferred tax calculation represents the Company management’s best estimate of the most likely future
tax consequences of events that have been recognized in our financial statements or tax returns and related future anticipation.
A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before
the Company is able to realize their benefits, or that future realization will be uncertain.
(p)
Foreign Currency Translation
The
accompanying consolidated financial statements are presented in United States dollars. The functional currency of the Company
is the Renminbi (RMB). Capital accounts of the consolidated financial statements are translated into United States dollars from
RMB at their historical exchange rates when the capital transactions occurred.
Assets
and liabilities are translated at the exchange rates as of balance sheet date. Income and expenditures are translated at the average
exchange rate of the reporting period, which rates are obtained from the website: http://www.oanda.com
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Period end RMB : USD exchange rate
|
|
|
6.8764
|
|
|
|
6.5067
|
|
|
|
6.94585
|
|
Average RMB : USD exchange rate
|
|
|
6.6146
|
|
|
|
6.7568
|
|
|
|
6.64520
|
|
(q)
Comprehensive Income
Comprehensive
income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners.
Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive
income are required to be reported in a financial statement that is presented with the same prominence as other financial statements.
Comprehensive income includes net income and the foreign currency translation changes.
(r)
Segments
In
accordance with ASC 280-10, Segment Reporting, the Company’s chief operating decision makers rely upon the consolidated
results of operations when making decisions about allocating resources and assessing the performance of the Company. As a result
of the assessment made by the Company’s chief operating decision makers, the Company has only one operating segment. The
Company does not distinguish between markets or segments for the purpose of internal reporting.
(s)
Stock Option Expenses
The
Company’s stock option expenses are recorded in accordance with ASC 718 and ASC 505.
The
fair value of stock options is estimated using the Black-Scholes-Merton model. The Company’s expected volatility assumption
is based on the historical volatility of the Company’s common stock. The expected life assumption is primarily based on
the expiration date of the option. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury
yield curve in effect at the time of grant.
The
recognition of stock option expenses is based on awards expected to vest. ASC standards require forfeitures to be estimated at
the time of grant and revised in subsequent periods, if necessary, if actual forfeitures differ from those estimates.
The
stock-based option expenses for the years ended December 31, 2018, 2017 and 2016 were $1,586,926 net of a reversal for forfeited
stock options of $2,644,877, $3,763,282 and $14,867,987, respectively. See Note 19. There were no forfeitures estimated during
the reporting period.
(t)
Goodwill
The
Company allocates goodwill from business combinations to reporting units based on the expectation that the reporting unit is to
benefit from the business combination. The Company evaluates its reporting units on an annual basis and, if necessary, reassigns
goodwill using a relative fair value allocation approach. Goodwill is tested for impairment at the reporting unit level on an
annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair
value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business
climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting
unit.
Application
of the goodwill impairment test requires judgments, including the identification of reporting units, assignment of assets and
liabilities to reporting units, assignment of goodwill to reporting units, and the determination of the fair value of each reporting
unit. The Company first assesses qualitative factors to determine whether it is more likely than not that goodwill is impaired.
If the more likely than not threshold is met, the Company performs a quantitative impairment test.
As
of December 31, 2018 and December 31, 2017, the Company determined that its goodwill was not impaired.
(u)
Intangible Assets
Intangible
assets consist of patent, trade names and customer relations associated with the purchase price from the allocation of
Yongkang Scrou and Jinhua An Kao. Such assets are being amortized over their estimated useful lives. Intangible assets were
amortized as of December 31, 2018. The amortization expenses for intangible assets were $649,089, $82,095 and $82,095 for the
years ended December 31, 2018, 2017 and 2016, respectively.
(v)
Accounting for Sale of Common Stock and Warrants
Gross
proceeds are first allocated according to the initial fair value of the freestanding derivative instruments (i.e. the warrants
issued to the Company’s investors in its previous offerings, or the “Investor Warrants”). The remaining proceeds
are allocated to common stock. The related issuance expenses, including the placement agent cash fees, legal fees, the initial
fair value of the warrants issued to the placement agent and others were allocated between the common stock and the Investor Warrants
based on how the proceeds are allocated to these instruments. Expenses related to the issuance of common stock were charged to
paid-in capital. Expenses related to the issuance of derivative instruments were expensed upon issuance.
(w)
Consolidation of variable interest entities
In
accordance with accounting standards regarding consolidation of variable interest entities, or VIEs, VIEs are generally entities
that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity
holders lack adequate decision making ability. All VIEs with which the Company is involved must be evaluated to determine the
primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial
reporting purposes.
The
Company has concluded, based on the contractual arrangements, that Kandi New Energy is a VIE and that the Company’s wholly-owned
subsidiary, Kandi Vehicles, absorbs a majority of the risk of loss from the activities of this company, thereby enabling the Company,
through Kandi Vehicles, to receive a majority of its 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 in 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.
(x)
Reclassification
The
Company adopted ASU 2016-18, “Statement of Cash Flows (Topic 230) - Restricted Cash” in the first quarter of 2018.
Certain amounts included in the 2017 and 2016 condensed consolidated statement of cash flows have been reclassified to conform
to the 2018 financial statement presentation as follows:
The
Company has included restricted cash of $12,957,377 and $11,218,688, respectively, with cash and cash equivalents when reconciling
the beginning-of-period and end-of-period total amounts shown on the statement of cash flows for the year ended December 31, 2017.
As a result, the total amount at the beginning of the period on the statement of cash flows for the year ended December 31, 2017
has changed from $12,235,921 to $25,193,298; the total amount at the end of the period on the statement of cash flows for the
year ended December 31, 2017 has changed from $4,891,808 to $ 16,110,496; and effect of exchange rate changes on the statement
of cash of cash flows for the year ended December 31, 2017 has changed from $459,780 to $1,237,572.
The
Company has included restricted cash of $16,172,009 and $12,957,377, respectively, with cash and cash equivalents when reconciling
the beginning-of-period and end-of-period total amounts shown on the statement of cash flows for the year ended December 31, 2016.
As a result, the total amount at the beginning of the period on the statement of cash flows for the year ended December 31, 2016
has changed from $16,738,559 to $ 32,910,568; the total amount at the end of the period on the statement of cash flows for the
year ended December 31, 2016 has changed from $12,235,921 to $25,193,298; and effect of exchange rate changes on the statement
of cash of cash flows for the year ended December 31, 2016 has changed from $(770,333) to $(1,727,697).
The
Company has eliminated the line item of restricted cash of $2,516,481 from the financing activities section on the statement of
cash flows for the year ended December 31, 2017. As a result, net cash used in financing activities of $7,298,060 on the statement
of cash flows for the year ended December 31, 2017 has changed to net cash used in financing activities of $9,814,541. Net decrease
in cash and cash equivalents and restricted cash of $7,803,893 on the statement of cash flows for the year ended December 31,
2017 has changed to net decrease in cash and cash equivalents and restricted cash of $10,320,374.
The Company has eliminated the line item
of restricted cash of $2,257,268 from the financing activities section on the statement of cash flows for the year ended December
31, 2016. As a result, net cash provided by financing activities of $44,827,611 on the statement of cash flows for the year ended
December 31, 2016 has changed to net cash provided by financing activities of $42,570,343. Net decrease in cash and cash equivalents
and restricted cash of $3,732,305 on the statement of cash flows for the year ended December 31, 2016 has changed to net decrease
in cash and cash equivalents and restricted cash of $5,989,573.
NOTE
7 - NEW ACCOUNTING PRONOUNCEMENTS
Recent
accounting pronouncements that the Company has adopted or may be required to adopt in the future are summarized below:
In
May 2014, the FASB issued a new standard on revenue recognition related to contracts with customers. This standard supersedes
nearly all existing revenue recognition guidance and involves a five-step principles-based approach to recognizing revenue. The
new model requires revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration a company expects to receive. The new standard also require additional qualitative and quantitative about the
nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments
made in applying the revenue guidance, and assets recognized from the costs to obtain or fulfill a contract. The Company adopted
this standard in the first quarter of 2018 using the modified retrospective approach. The impact of adoption on its Condensed
Consolidated Financial Statements for any period presented is not material.
In
November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes.” This ASU amends existing
guidance to require that deferred income tax assets and liabilities be classified as non-current in a classified balance sheet,
and eliminates the prior guidance which required an entity to separate deferred tax assets and liabilities into a current amount
and a non-current amount in a classified balance sheet. The Company adopted this standard prospectively in the first quarter of
2018. The impact of adoption on its Condensed Consolidated Financial Statements for any period presented is not material.
In
June 2016, the FASB issued ASU 2016-13,” Measurement of Credit Losses on Financial Instruments”, to require financial
assets carried at amortized cost to be presented at the net amount expected to be collected based on historical experience, current
conditions and forecasts. Subsequently, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, to clarify that
receivables arising from operating leases are within the scope of lease accounting standards. The ASUs are effective for interim
and annual periods beginning after December 15, 2019, with early adoption permitted. Adoption of the ASUs is modified retrospective.
We are currently obtaining an understanding of the ASUs and plan to adopt them on January 1, 2020.
In
October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers Other than Inventory, which requires
companies to recognize the income-tax consequences of an intra-entity transfer of an asset other than inventory when the transfer
occurs, rather than when the asset has been sold to an outside party. The Company adopted this standard prospectively in the first
quarter of 2018. The impact of adoption on its Condensed Consolidated Financial Statements for any period presented is not material.
In
November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230) - Restricted Cash,” (“ASU 2016-18”).
This ASU requires a statement of cash flows to explain the change during the period in the total of cash, cash equivalents, and
amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash
and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and
end-of-period total amounts shown on the statement of cash flows. The Company adopted this standard in the first quarter of 2018.
The impact of adoption on its Condensed Consolidated Financial Statements for any period presented is not material.
In
January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which revises
the definition of a business and provides new guidance in evaluating when a set of transferred assets and activities is a business.
The Company adopted this standard prospectively in the first quarter of 2018. The impact of adoption on its Condensed Consolidated
Financial Statements for any period presented is not material.
In
January 2017, the FASB issued ASU No. 2017-04 (Topic 350) Intangibles—Goodwill and Other: Simplifying the
Test for Goodwill Impairment, which removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price
allocation. Under the amended guidance, a goodwill impairment charge will now be recognized for the amount by which the carrying
value of a reporting unit exceeds its fair value, not to exceed the carrying amount of goodwill. This ASU will be applied on a
prospective basis and is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted
for any impairment tests performed after January 1, 2017. The Company does not expect the adoption to have a material impact on
the Consolidated Financial Statements.
In
February 2018, the FASB released ASU 2018-2, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive
Income.” This standard update addresses a specific consequence of the Tax Cuts and Jobs Act (“U.S. tax reform”)
and allows a reclassification from accumulated other comprehensive income to retained earnings for the stranded tax effects resulting
from U.S. tax reform. Consequently, the update eliminates the stranded tax effects that were created as a result of the historical
U.S. federal corporate income tax rate to the newly enacted U.S. federal corporate income tax rate. The Company is required to
adopt this standard in the first quarter of fiscal year 2020, with early adoption permitted. The amendments in this update should
be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal
corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company has finished the evaluation and determined there
is no impact of on its Condensed Consolidated Financial Statements.
In
August 2018, the FASB issued ASU 2018-13 Disclosure Framework — Changes to the Disclosure Requirements for Fair Value
Measurement, which eliminates, adds, and modifies certain disclosure requirements for fair value measurements under ASC 820.
This ASU is to be applied on a prospective basis for certain modified or new disclosure requirements, and all other amendments
in the standard are to be applied on a retrospective basis. The new standard is effective for interim and annual periods beginning
after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact of adoption on the Consolidated
Financial Statements.
NOTE
8 - CONCENTRATIONS
For
the years ended December 31, 2018, 2017 and 2016, the Company’s major customers, who accounted for more than 10% of the
Company’s consolidated revenue, were as follows:
|
|
Sales
|
|
|
Trade Receivable
|
|
|
|
Year
|
|
|
Year
|
|
|
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31
|
|
Major
Customers
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Kandi Electric Vehicles Group Co., Ltd. and its subsidiaries
|
|
|
43
|
%
|
|
|
90
|
%
(1)
|
|
|
60
|
%
(2)
|
|
|
66
|
%
|
|
|
74
|
%
(3)
|
|
|
70
|
%
(4)
|
Jinhua Chaoneng Automobile Sales Co. Ltd.
|
|
|
33
|
%
|
|
|
4
|
%
|
|
|
30
|
%
|
|
|
22
|
%
|
|
|
23
|
%
|
|
|
19
|
%
|
|
(1)
|
Including
89% of Kandi Electric Vehicles Group Co., Ltd. as disclosed in 2017 10K Major Customer
|
|
(2)
|
Including
59% of Kandi Electric Vehicles Group Co., Ltd. as disclosed in 2016 10K Major Customer
|
|
(3)
|
Including
71% of Kandi Electric Vehicles Group Co., Ltd. as disclosed in 2017 10K Major Customer
|
|
(4)
|
Including
53% of Kandi Electric Vehicles Group Co., Ltd. as disclosed in 2016 10K Major Customer
|
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 years ended December 31, 2018, 2017 and 2016, the Company’s material suppliers, each of whom accounted for more than
10% of the Company’s total purchases, were as follows:
|
|
Purchases
|
|
|
Accounts Payable
|
|
|
|
Year
|
|
|
Year
|
|
|
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
Major
|
|
December 31
|
|
|
December 31
|
|
|
December 31
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
Suppliers
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Jiangsu Tian Peng power supply Co., Ltd.
|
|
|
23
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
20
|
%
|
|
|
-
|
|
|
|
-
|
|
Shenzhen BiKe Power Battery Co., Ltd.
|
|
|
19
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
%
|
|
|
-
|
|
|
|
-
|
|
NOTE
9 - EARNINGS PER SHARE
The
Company calculates earnings per share in accordance with ASC 260, Earnings Per Share, which requires a dual presentation of basic
and diluted earnings per share. Basic earnings per share are computed using the weighted average number of shares outstanding
during the reporting period. Diluted earnings per share represents basic earnings per share adjusted to include the potentially
dilutive effect of outstanding stock options and warrants (using treasury stock method). For the years ended December 31, 2018,
2017 and 2016, 3,900,000, 4,233,334 and 4,566,667 potentially dilutive shares were excluded from the calculation of dilutive earnings
per share because their effect would have been anti-dilutive.
The
following is the calculation of earnings per share for the years ended December 31, 2018, 2017 and 2016:
|
|
Year Ended
|
|
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Net loss
|
|
$
|
(5,694,699
|
)
|
|
$
|
(28,347,474
|
)
|
|
$
|
(6,510,757
|
)
|
Weighted average shares used in basic computation
|
|
|
51,188,647
|
|
|
|
47,943,830
|
|
|
|
47,447,665
|
|
Dilutive shares
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Weighted average shares used in diluted computation
|
|
|
51,188,647
|
|
|
|
47,943,830
|
|
|
|
47,447,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.11
|
)
|
|
$
|
(0.59
|
)
|
|
$
|
(0.14
|
)
|
Diluted
|
|
$
|
(0.11
|
)
|
|
$
|
(0.59
|
)
|
|
$
|
(0.14
|
)
|
NOTE
10 - ACCOUNTS RECEIVABLE
Accounts
receivable are summarized as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Accounts receivable
|
|
$
|
34,394,738
|
|
|
$
|
34,531,788
|
|
Less: allowance for doubtful accounts
|
|
|
(120,010
|
)
|
|
|
(133,930
|
)
|
Accounts receivable, net
|
|
$
|
34,274,728
|
|
|
$
|
34,397,858
|
|
NOTE
11 - INVENTORIES
Inventories
are summarized as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Raw material
|
|
$
|
7,741,264
|
|
|
$
|
7,256,498
|
|
Work-in-progress
|
|
|
1,571,179
|
|
|
|
2,831,678
|
|
Finished goods
|
|
|
13,526,126
|
|
|
|
6,512,537
|
|
Total inventories
|
|
|
22,838,569
|
|
|
|
16,600,713
|
|
Less: provision for slowing moving inventories
|
|
|
(840,701
|
)
|
|
|
(620,919
|
)
|
Inventories, net
|
|
$
|
21,997,868
|
|
|
$
|
15,979,794
|
|
NOTE
12 - NOTES RECEIVABLE
Notes
receivable from unrelated parties as of December 31, 2018 and December 31, 2017, are summarized as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Notes receivable as below:
|
|
|
|
|
|
|
Bank acceptance notes
|
|
|
72,712
|
|
|
|
-
|
|
Notes receivable
|
|
$
|
72,712
|
|
|
$
|
-
|
|
Details
of notes receivable from unrelated parties as of December 31, 2018, are as set forth below:
Index
|
|
Amount ($)
|
|
|
Counter party
|
|
Relationship
|
|
Nature
|
|
Manner of settlement
|
1
|
|
|
72,712
|
|
|
Shaanxi Hua Dao Auto Sales Co., Ltd.
|
|
Third Party
|
|
Payments for sales
|
|
Not due
|
Notes
Receivable from JV Company and related party for the years ended December 31, 2018 and 2017 were summarized as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Notes receivable as below:
|
|
|
|
|
|
|
Bank acceptance notes
|
|
|
3,861,032
|
|
|
|
1,137,289
|
|
Notes receivable
|
|
$
|
3,861,032
|
|
|
$
|
1,137,289
|
|
Details
of Notes Receivable from JV Company and related party as of December 31, 2018 were as follows:
Index
|
|
Amount ($)
|
|
|
Counter party
|
|
Relationship
|
|
Nature
|
|
Manner of settlement
|
1
|
|
|
3,861,032
|
|
|
Kandi Electric Vehicles Group Co., Ltd.
|
|
Joint Venture of the Company
|
|
Payments for sales
|
|
Not due
|
Details
of Notes Receivable from JV Company and related party as of December 31, 2017 were as follows:
Index
|
|
Amount ($)
|
|
|
Counter party
|
|
Relationship
|
|
Nature
|
|
Manner of settlement
|
1
|
|
|
922,126
|
|
|
Kandi Electric Vehicles Group Co., Ltd.
|
|
Joint Venture of the Company
|
|
Payments for sales
|
|
Not due
|
2
|
|
|
153,688
|
|
|
Kandi Jiangsu
|
|
Subsidiary of the JV Company
|
|
Payments for sales
|
|
Not due
|
3
|
|
|
61,475
|
|
|
Kandi Changxing
|
|
Subsidiary of the JV Company
|
|
Payments for sales
|
|
Not due
|
NOTE
13 - PROPERTY, PLANT AND EQUIPMENT
Property,
plants and equipment as of December 31, 2018 and 2017 consisted of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
At cost:
|
|
|
|
|
|
|
Buildings
|
|
$
|
30,638,417
|
|
|
$
|
13,853,340
|
|
Machinery and equipment
|
|
|
63,398,627
|
|
|
|
7,916,562
|
|
Office equipment
|
|
|
852,172
|
|
|
|
532,774
|
|
Motor vehicles and other transport equipment
|
|
|
418,476
|
|
|
|
382,866
|
|
Molds and others
|
|
|
26,849,806
|
|
|
|
28,659,714
|
|
|
|
|
122,157,498
|
|
|
|
51,345,256
|
|
Less: Accumulated depreciation
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
(5,019,075
|
)
|
|
$
|
(4,683,040
|
)
|
Machinery and equipment
|
|
|
(8,442,940
|
)
|
|
|
(7,216,464
|
)
|
Office equipment
|
|
|
(393,893
|
)
|
|
|
(305,367
|
)
|
Motor vehicles and other transport equipment
|
|
|
(325,917
|
)
|
|
|
(310,631
|
)
|
Molds and others
|
|
|
(25,486,100
|
)
|
|
|
(26,306,306
|
)
|
|
|
|
(39,667,925
|
)
|
|
|
(38,821,808
|
)
|
Less: provision for impairment for fixed assets
|
|
|
(443,650
|
)
|
|
|
(522,477
|
)
|
Plant and equipment, net
|
|
$
|
82,045,923
|
|
|
$
|
12,000,971
|
|
As
of December 31, 2018 and 2017, the net book value of property, plant and equipment pledged as collateral for the Company’s
bank loans were $8,105,419 and $9,019,993, respectively.
Depreciation
expenses for the years ended December 31, 2018, 2017 and 2016 were $3,516,064, $4,371,561 and $4,448,010, respectively.
NOTE
14 - LAND USE RIGHTS
The
Company’s land use rights consist of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Cost of land use rights
|
|
$
|
14,925,518
|
|
|
$
|
15,676,450
|
|
Less: Accumulated amortization
|
|
|
(3,175,790
|
)
|
|
|
(3,010,403
|
)
|
Land use rights, net
|
|
$
|
11,749,728
|
|
|
$
|
12,666,047
|
|
As
of December 31, 2018 and 2017, the net book value of the land use rights pledged as collateral for the Company’s bank loans
were $7,756,253 and $8,993,913 respectively. Also see Note 16.
The
amortization expense for the years ended December 31, 2018, 2017 and 2016 were $ 348,533, $324,336 and $333,171, respectively.
Amortization
expense for the next five years and thereafter is as follows:
2019
|
|
$
|
348,533
|
|
2020
|
|
|
348,533
|
|
2021
|
|
|
348,533
|
|
2022
|
|
|
348,533
|
|
2023
|
|
|
348,533
|
|
Thereafter
|
|
|
10,007,063
|
|
Total
|
|
$
|
11,749,728
|
|
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 EV products annually. 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 the agreement with the government, all of the expenses
and lost assets resulting from the relocation were compensated for by the local government. As a result of the relocation, the
contracts to build the manufacturing facility had to be revised in terms of total contract amount, technical requirements, completion
milestones and others for the new construction site in Haikou. Currently, the Hainan facility’s main project including manufacturing
plant and office, main manufacturing equipment and facilities has been completed and the Company has transferred associated construction-in-progress
to fixed assets in 2018.
No
depreciation is provided for CIP until such time as the facility is completed and placed into operation.
As
of December 31, 2018 and December 31, 2017, the Company’s CIP were $0 and $53,083,925, respectively.
All
interest expenses previously capitalized for CIP were reimbursed by the government. There was no interest expense capitalized
for CIP for the year ended December 31, 2018.
NOTE
16 - SHORT -TERM AND LONG-TERM BANK LOANS
Short-term
loans are summarized as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Loans from China Ever-bright Bank
|
|
|
|
|
|
|
Interest rate 5.22% per annum, paid off 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. See also Note 13 and Note 14.
|
|
|
-
|
|
|
|
10,758,141
|
|
Interest
rate 5.655% per annum, due on April 25, 2019, secured by the assets of Kandi Vehicle, guaranteed by Mr. Hu Xiaoming and his
wife,also guaranteed by company’s subsidiaries. Also see Note 13 and Note 14.
|
|
|
10,179,745
|
|
|
|
|
|
Loans from Hangzhou Bank
|
|
|
|
|
|
|
|
|
Interest rate 4.79% per annum, paid off on October 15, 2018, secured by the assets of Kandi Vehicle. Also see Note 13 and Note 14.
|
|
|
-
|
|
|
|
7,499,962
|
|
Interest rate 5.66% per annum, due on October 14, 2019, secured by the assets of Kandi Vehicle. Also see Note 13 and Note 14.
|
|
|
7,096,737
|
|
|
|
|
|
Interest
rate 4.79% per annum, paid off on July 4, 2018, secured by the assets of Kandi Vehicle. Also see Note 13 and Note 14.
|
|
|
-
|
|
|
|
11,096,255
|
|
Interest
rate 5.66% per annum, due on July 1, 2019, secured by the assets of Kandi Vehicle. Also see Note 13 and Note 14.
|
|
|
5,816,997
|
|
|
|
-
|
|
Interest
rate 5.66% per annum, due on July 4, 2019, secured by the assets of Kandi Vehicle. Also see Note 13 and Note 14.
|
|
|
4,682,683
|
|
|
|
-
|
|
Interest rate 4.35% per annum, paid off on March 26, 2018, secured by the assets of Kandi Vehicle. Also see Note 13 and Note 14.
|
|
|
-
|
|
|
|
3,688,506
|
|
Interest rate 5.66% per annum, due March 25, 2019, secured by the assets of Kandi Vehicle. Also see Note 13 and Note 14.
|
|
|
2,763,074
|
|
|
|
-
|
|
|
|
$
|
30,539,236
|
|
|
$
|
33,042,864
|
|
Long-term
loan is summarized as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Loans from Haikou Rural Credit Cooperative
|
|
|
|
|
|
|
Interest rate 7% per annum, due on December 12, 2021, guaranteed by Kandi Vehicle and Kandi New Energy.
|
|
|
28,794,136
|
|
|
|
30,737,547
|
|
|
|
$
|
28,794,136
|
|
|
|
30,737,547
|
|
The
interest expense of the short-term and long-term bank loans for the years ended December 31, 2018, 2017 and 2016 were $ 1,708,766,
$1,525,585 and $1,831,667, respectively.
As
of December 31, 2018, the aggregate amount of short-term loans that was guaranteed by various third parties was $0.
NOTE
17 – NOTES PAYABLE
By
issuing bank notes payable rather than paying cash to suppliers, the Company can defer payments until the bank notes payable are
due. Depending on bank requirements, the Company may need to deposit restricted cash in banks to back up the bank notes payable,
while the restricted cash deposited in the banks will generate interest income.
A
bank acceptance note is a promised future payment, or time draft, which is accepted and guaranteed by a bank and drawn on a deposit
at the bank. The banker’s acceptance specifies the amount of the funds, the date, and the person to which the payment is
due.
After
acceptance, the draft becomes an unconditional liability of the bank, but the holder of the draft can sell (exchange) it for cash
at a discount to a buyer who is willing to wait until the maturity date for the funds in the deposit. $6,440,870 and $11,218,688
were held as collateral for the notes payable as of December 31, 2018, and December 31, 2017, 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 includes borrowing from third parties.
Notes
payable for December 31, 2018 and 2017 were summarized as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Bank acceptance notes
:
|
|
|
|
|
|
|
Due January 4, 2018
|
|
$
|
-
|
|
|
$
|
4,987,167
|
|
Due April 19, 2018
|
|
|
-
|
|
|
|
230,532
|
|
Due May 6, 2018
|
|
|
-
|
|
|
|
1,168,027
|
|
Due June 18, 2018
|
|
|
-
|
|
|
|
2,305,316
|
|
Due June 21, 2018
|
|
|
-
|
|
|
|
376,019
|
|
Due June 25, 2018
|
|
|
-
|
|
|
|
153,688
|
|
Due June 27, 2018
|
|
|
-
|
|
|
|
76,844
|
|
Due June 29, 2018
|
|
|
-
|
|
|
|
2,382,160
|
|
Due January 9, 2019
|
|
|
872,550
|
|
|
|
-
|
|
Due January 11, 2019
|
|
|
261,765
|
|
|
|
-
|
|
Due January 12, 2019
|
|
|
1,454,249
|
|
|
|
-
|
|
Due February 21, 2019
|
|
|
72,712
|
|
|
|
-
|
|
Due February 28, 2019
|
|
|
872,550
|
|
|
|
-
|
|
Due March 10, 2019
|
|
|
436,275
|
|
|
|
-
|
|
Due March 20, 2019
|
|
|
290,850
|
|
|
|
-
|
|
Due April 11, 2019
|
|
|
72,712
|
|
|
|
-
|
|
Due May 1, 2019
|
|
|
2,908,499
|
|
|
|
-
|
|
Due May 2, 2019
|
|
|
1,089,233
|
|
|
|
-
|
|
Due May 7, 2019
|
|
|
436,275
|
|
|
|
-
|
|
Commercial acceptance notes
:
|
|
|
|
|
|
|
|
|
Due March 29, 2019
|
|
|
2,763,074
|
|
|
|
10,758,140
|
|
Other Notes Payable
:
|
|
|
|
|
|
|
|
|
Due May 6, 2019
|
|
|
1,256,875
|
|
|
|
5,638,052
|
|
Total
|
|
$
|
12,787,619
|
|
|
$
|
28,075,945
|
|
NOTE
18 – TAXES
|
(a)
|
Corporation
Income Tax
|
Pursuant to the tax laws and regulations
of the PRC, the Company’s applicable corporate income tax (“CIT”) rate is 25%. However, Kandi Vehicles qualifies
as a High and New Technology Enterprise (“HNTE”) company in the PRC, and is entitled to pay a reduced income tax rate
of 15% for the years presented. An entity may re-apply for an HNTE certificate when the prior certificate expires. Historically,
Kandi Vehicles has successfully re-applied for such certificates when the its prior certificates expired. The applicable CIT rate
of each of the Company’s four other subsidiaries, Kandi New Energy, Yongkang Scrou, Jinhua An Kao and Kandi Hainan, the
JV Company and its subsidiaries, and the Service Company is 25%.
The
Company’s final effective tax rate for December 31, 2018, 2017 and 2016 was a tax expense of 374.30% on a reported income
before taxes of approximately $2.1 million, a tax benefit of 10.32% on a reported loss before taxes of approximately $31.6 million
and a tax expense of 11.69% on a reported loss before taxes of approximately $5.8 million, respectively. The effective tax rates
for each of the periods mentioned above are disclosed in the summary table of income tax expenses for December 31, 2018, 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
December 31, 2018, the Company did not have any liability for unrecognized tax benefits. The Company files income tax returns
with the U.S. Internal Revenue Services (“IRS”) and those states where the Company has operations. The Company is
subject to U.S. federal or state income tax examinations by the IRS and relevant state tax authorities for years after 2006. During
the periods open to examination, the Company has net operating loss carry forwards (“NOLs”) for U.S. federal and state
tax purposes that have attributes from closed periods. Since these NOLs may be utilized in future periods, they remain subject
to examination. The Company also files certain tax returns in the PRC. As of December 31, 2018, the Company was not aware of any
pending income tax examinations by U.S. or PRC tax authorities. The Company records interest and penalties on uncertain tax provisions
as income tax expense. As of December 31, 2018 the Company has no accrued interest or penalties related to uncertain tax positions.
The Company has not recorded a provision for U.S. federal income tax for year ended December 31, 2018 due to a net operating loss
for the U.S. companies as a whole in 2018 and an accumulated net operating loss carry forward from prior years in the United States.
As
of December 31, 2018 and December 31, 2017, we had unrecognized tax benefits of $0 million and $12.2, respectively, for various
federal, foreign, and state income tax matters. Unrecognized tax benefits decreased by $12.2 million. After considering valuation
allowance, none of the unrecognized tax benefits, if recognized, would affect our effective tax as of December 31, 2018 and December
31, 2017. These unrecognized tax benefits are presented on the accompanying consolidated balance sheets net of the tax effects
of net operating loss carry forwards, which are offset by valuation allowance.
Our
unrecognized tax benefit activity for fiscal 2018, 2017 and 2016 was as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Beginning balances
|
|
$
|
12,166,810
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Increases related to tax positions taken during a prior year
|
|
|
-
|
|
|
|
11,376,521
|
|
|
|
-
|
|
Decreases related to tax positions taken during a prior year
|
|
|
(12,166,810
|
)
|
|
|
-
|
|
|
|
-
|
|
Increases related to tax positions taken during the current year
|
|
|
-
|
|
|
|
790,289
|
|
|
|
-
|
|
Ending balances
|
|
$
|
-
|
|
|
$
|
12,166,810
|
|
|
$
|
-
|
|
Income
tax expenses for the year ended December 31, 2018, 2017 and 2016 are summarized as follows:
|
|
For Year Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Provision for CIT
|
|
$
|
2,954,980
|
|
|
$
|
2,184,985
|
|
|
$
|
601,212
|
|
Provision for Federal Income Tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for CIT
|
|
|
4,815,774
|
|
|
|
(5,448,015
|
)
|
|
|
80,334
|
|
Provision for Federal Income Tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Income tax expense (benefit)
|
|
$
|
7,770,754
|
|
|
$
|
(3,263,030
|
)
|
|
$
|
681,546
|
|
The
reconciliation of taxes at the PRC statutory rate (25% in 2018 and 2017) to our provision for income
taxes for the years ended December 31, 2018 and 2017 was as follows:
|
|
For Year Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Expected taxation at PRC statutory tax rate
|
|
$
|
519,014
|
|
|
$
|
(7,902,626
|
)
|
|
$
|
(1,457,303
|
)
|
Effect of differing tax rates in different jurisdictions
|
|
|
292
|
|
|
|
242,375
|
|
|
|
(1,403,077
|
)
|
Tax except income
|
|
|
(1,300,212
|
)
|
|
|
-
|
|
|
|
-
|
|
Non-deductible expenses
(1)
|
|
|
2,683,306
|
|
|
|
1,735,581
|
|
|
|
1,103,158
|
|
Research and development super-deduction
|
|
|
(487,725
|
)
|
|
|
(105,186
|
)
|
|
|
(43,826
|
)
|
Under-accrued EIT for previous years
|
|
|
171,623
|
|
|
|
267,574
|
|
|
|
(2,727,454
|
)
|
Effect of PRC preferential tax rates
|
|
|
607,069
|
|
|
|
1,277,678
|
|
|
|
-
|
|
Addition to valuation allowance
|
|
|
5,793,368
|
|
|
|
1,271,728
|
|
|
|
5,301,677
|
|
Other
|
|
|
(215,981
|
)
|
|
|
(50,154
|
)
|
|
|
(91,629
|
)
|
Income tax (benefit) expense
|
|
$
|
7,770,754
|
|
|
$
|
(3,263,030
|
)
|
|
$
|
681,546
|
|
|
(1)
|
It’s
mainly due to share of loss in JV Company and its subsidiaries.
|
The
tax effects of temporary differences that give rise to the Company’s net deferred tax assets and liabilities as of December
31, 2018 and December 31, 2017 are summarized as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Accruals and reserves
|
|
$
|
8,204
|
|
|
$
|
192,046
|
|
Tangible
|
|
|
113,767
|
|
|
|
182,961
|
|
Loss carried forward
|
|
|
7,029,548
|
|
|
|
6,581,726
|
|
Total deferred tax assets
|
|
|
7,151,519
|
|
|
|
6,956,733
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Expense
|
|
|
(1,022,141
|
)
|
|
|
(1,553,935
|
)
|
Intangible
|
|
|
(1,019,776
|
)
|
|
|
-
|
|
Total deferred tax liability
|
|
|
(2,041,917
|
)
|
|
|
(1,553,935
|
)
|
Net deferred tax assets (liabilities)
|
|
$
|
5,109,602
|
|
|
$
|
5,402,798
|
|
less: valuation allowance
|
|
|
(6,812,741
|
)
|
|
|
(1,019,373
|
)
|
Net deferred tax
assets(liabilities), net of valuation allowance
|
|
$
|
(1,703,139
|
)
|
|
$
|
4,383,425
|
|
T
he
aggregate NOLs in 2018 was $28.1 million and the aggregate NOLs in 2017 was $22.7 million deriving from entities in the PRC, Hong
Kong and US. The NOL will start to expire from 2021 if they are not used. The cumulative net operating loss in the PRC can be
carried forward for five years, to offset future net profits for income tax purposes. The cumulative net operating loss Pre-2018
in the U.S. can be carried forward for twenty years. The cumulative net operating loss in Hong Kong can be carried forward without
an expiration date.
Operating loss carry forward for tax purpose
resulted in a deferred tax asset of $7.03 million at December 31, 2018. Tax benefit of operating loss is evaluated on an ongoing
basis including a review of historical and projected future operating results, the eligible carry forward period, and available
tax planning strategies.
Income
(loss) before income taxes from PRC and non-PRC sources for the year ended December 31, 2018, 2017 and 2016 are summarized as
follows:
|
|
For Year Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Income(loss) before income taxes consists of:
|
|
|
|
|
|
|
|
|
|
PRC
|
|
$
|
(1,909,305
|
)
|
|
$
|
(25,471,997
|
)
|
|
$
|
6,023,694
|
|
Non-PRC
|
|
|
3,985,360
|
|
|
|
(6,138,507
|
)
|
|
|
(11,852,905
|
)
|
Total
|
|
$
|
2,076,055
|
|
|
$
|
(31,610,504
|
)
|
|
$
|
(5,829,211
|
)
|
Net
change in the valuation allowance of deferred tax assets are summarized as follows:
Net change of valuation allowance of Deferred tax assets
|
|
|
|
Balance at December 31, 2017
|
|
$
|
1,019,373
|
|
Additions-change to tax expense
|
|
|
5,793,368
|
|
Balance at December 31,
2018
|
|
$
|
6,812,741
|
|
For
the year ended December 31, 2018, 2017 and 2016, the PRC CIT rate was 25%. Certain subsidiaries of the Company are entitled to
tax exemptions (tax holidays) for the year ended December 31, 2018, 2017 and 2016.
The
combined effects of income tax expense exemptions and reductions available to the Company for the year ended December 31, 2018,
2017 and 2016 are as follows:
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Tax benefit (holiday) credit
|
|
$
|
1,090,348
|
|
|
$
|
105,186
|
|
|
$
|
36,522
|
|
Basic net income per share effect
|
|
$
|
0.000
|
|
|
$
|
0.000
|
|
|
$
|
0.020
|
|
|
(c)
|
The
Tax Cuts and Job Act
|
On
December 22, 2017, the SEC staff issued Staff Accounting Bulletin (SAB) No. 118, which provides guidance on accounting for the
tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment
date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax
effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s
accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must
record a provisional estimate in its financial statements. If a company cannot determine a provisional estimate to be included
in its financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect
immediately before the enactment of the Tax Act.
In
connection with our initial analysis of the impact of the Tax Act, we recorded provisional estimates related to the remeasurement
of deferred taxes and the Deemed Repatriation Transition Tax in our financial statements for our fiscal year ended December 31,
2017. The measurement period ended on December 22, 2018. As of December 22, 2018, we have completed the accounting for the impact
of the Tax Act based on the guidance, interpretations, and data available. No adjustments to these provisional estimates have
been recorded.
Under
GILTI tax rules the Company must make an accounting policy election to either (1) recognize taxes due on future U.S. inclusions
in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factor
such amount into the Company’s measure of its deferred taxes (the “deferred method”). The Company elected to
treat the guilty as a current-period expense when incurred.
NOTE
19 - STOCK OPTIONS AND WARRANTS
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 $1,586,926 in stock compensation expenses associated with stock options booked for
the year ended December 31, 2018. After netting of an expense reversal of $2,644,877 for forfeited stock options for the
year ended December 31, 2018, the net stock compensation expenses associated with stock options were negative $1,057,951
for the year ended December 31, 2018.
The
following is a summary of the stock option activities of the Company:
|
|
Number of Shares
|
|
|
Weighted Average Exercise
Price
|
|
Outstanding as of January 1, 2017
|
|
|
4,566,667
|
|
|
|
9.72
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(333,333
|
)
|
|
|
9.72
|
|
Outstanding as of December 31, 2017
|
|
|
4,233,334
|
|
|
$
|
9.72
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(333,334
|
)
|
|
|
9.72
|
|
Outstanding as of December 31, 2018
|
|
|
3,900,000
|
|
|
$
|
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 December 31, 2018 and December 31, 2017, all outstanding warrants had been exercised and 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 services as a member of the Board, the Board authorized the Company to provide Mr. Jerry
Lewin with 5,000 shares of Company’s restricted common stock every six months, beginning in August 2011.
As
compensation for Ms. Kewa Luo’s services as the Company’s investor relation officer, the Board authorized the Company
to provide Ms. Kewa Luo with 5,000 shares of the Company’s common stock every six months, beginning in September 2013.
In
November 2016, the Company entered into a three-year employment agreement with Mr. Mei Bing, to hire him as the Company’s
Chief Financial Officer. Under the agreement, Mr. Mei Bing was entitled to receive an aggregate 10,000 shares of common stock
each year, vested in four equal quarterly installments of 2,500 shares. On January 29, 2019, Mr. Mei resigned from his position
as the Company’s CFO.
On
January 29, 2019, the board appointed Ms. Zhu Xiaoying as interim Chief Financial Officer. As disclosed in Form 8K, Ms. Zhu was
entitled to receive 10,000 shares of the common stock under the Company’s 2008 Omnibus Long-Term Incentive Plan annually
as a year-end equity bonus.
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 2013. 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 was greater 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 was 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 was 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 was 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 would 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 and employees as compensation for their past services under the 2008 Plan. On April
18, 2018, the Board authorized the Company to grant 238,600 shares of common shares to certain management members and employees
as compensation for their past services under the 2008 Plan.
The
fair value of each award granted under the 2008 Plan is determined based on the closing price of the Company’s stock on
the date of grant of such award. Stock-based compensation expenses are calculated based on grant date fair value and number of
awards expected to be earned at the end of each quarter and recognized in the quarter. In subsequent periods, stock-based compensation
expenses are adjusted based on grant date fair value and the change of number of awards expected to be earned. Final stock-based
compensation expenses for the year are calculated based on grant date fair value and number of awards earned for the year and
recognized at the end of year.
For
the year ended December 31, 2018, 2017 and 2016, the Company recognized $1,343,560, $1,428,025 and $91,700 of employee stock award
expenses for stock compensation and annual incentive award under the 2008 Plan paid to Board members, management and consultants
under General and Administrative Expenses, respectively.
NOTE
21– INTANGIBLE ASSETS
Intangible
assets include acquired other intangibles of trade name, customer relations and patent recorded at estimated fair values in accordance
with purchase accounting guidelines for acquisitions. The Company acquired patents as a result of its acquisition of Jinhua An
Kao which were valued in conjunction with the Company’s purchase accounting at approximately $5 million (see Note 26). The
patents acquired have estimated economic useful lives of approximately 7.5 to 9.17 years.
The
following table provides the gross carrying value and accumulated amortization for each major class of our intangible assets,
other than goodwill:
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
Remaining useful life
|
|
2018
|
|
|
2017
|
|
Gross carrying amount:
|
|
|
|
|
|
|
|
|
Trade name
|
|
3 years
|
|
$
|
492,235
|
|
|
$
|
492,235
|
|
Customer relations
|
|
3 years
|
|
|
304,086
|
|
|
|
304,086
|
|
Patent
|
|
6.5-8.17 years
|
|
|
4,624,513
|
|
|
|
-
|
|
|
|
|
|
|
5,420,834
|
|
|
|
796,321
|
|
Less: Accumulated amortization
|
|
|
|
|
|
|
|
|
|
|
Trade name
|
|
|
|
$
|
(338,307
|
)
|
|
$
|
(287,561
|
)
|
Customer relations
|
|
|
|
|
(208,993
|
)
|
|
|
(177,644
|
)
|
Patent
|
|
|
|
|
(545,407
|
)
|
|
|
-
|
|
|
|
|
|
|
(1,092,707
|
)
|
|
|
(465,205
|
)
|
Intangible assets, net
|
|
|
|
$
|
4,328,127
|
|
|
$
|
331,116
|
|
The
aggregate amortization expenses for those intangible assets that continue to be amortized is reflected in amortization of intangible
assets in the Consolidated Statements of Income and Comprehensive Income and were $ 649,089, $82,095 and $82,095 for the year
ended December 31, 2018, 2017 and 2016, respectively.
Amortization
expenses for the next five years and thereafter are as follows:
2019
|
|
$
|
649,089
|
|
2020
|
|
|
649,089
|
|
2021
|
|
|
649,089
|
|
2022
|
|
|
569,730
|
|
2023
|
|
|
566,994
|
|
Thereafter
|
|
|
1,244,136
|
|
Total
|
|
$
|
4,328,127
|
|
NOTE
22 – SUMMARIZED INFORMATION OF EQUITY METHOD INVESTMENT IN THE JV COMPANY
The
Company’s consolidated net income includes the Company’s proportionate share of the net income or loss of the Company’s
equity method investees. When the Company records its proportionate share of net income in such investees, it increases equity
income (loss) – net in the Company’s consolidated statements of income and the Company’s carrying value in that
investment. Conversely, when the Company records its proportionate share of a net loss in such investees, it decreases equity
income (loss) – net in the Company’s consolidated statements of income and the Company’s carrying value in that
investment. All intra-entity profits and losses with the Company’s equity method investees have been eliminated.
As
of December 31, 2018, 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 Zhejiang Chang Dian and each of its three direct
wholly-owned subsidiaries, i.e., Chang Dian Tonglu, Chang Dian Changxing and Jiangsu Gu Xiang; (3) its 100% interest in Kandi
Shanghai; (4) its 100% interest in Kandi Jiangsu and each of its four direct wholly-owned subsidiaries, i.e., JiHeKang,
JiHeKang Service Company, Liuchuang and KandiJinhua; and (5) 100% interest in each of the directly wholly-owned subsidiaries
of JiHeKang, i.e., Tianjin BoHaiWan, Jiangsu JiDian, JiHeKang Tianjin and Guangdong JiHeKang. The Company accounted for its
investments in the JV Company under the equity method of accounting because the Company has a 50% ownership interest in the
JV Company. As a result, the Company’s consolidated net income for the year ended December 31, 2018, 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:
|
|
Year Ended
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Condensed income statement information:
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
122,480,854
|
|
|
$
|
192,748,328
|
|
|
$
|
179,328,669
|
|
Gross (loss) profits
|
|
|
(17,749,674
|
)
|
|
|
3,599,634
|
|
|
|
19,278,511
|
|
Gross margin
|
|
|
-14.5
|
%
|
|
|
1.9
|
%
|
|
|
10.8
|
%
|
Net loss
|
|
|
(36,340,082
|
)
|
|
|
(22,699,965
|
)
|
|
|
(14,155,578
|
)
|
% of net sales
|
|
|
-29.7
|
%
|
|
|
-11.8
|
%
|
|
|
-7.9
|
%
|
Company’s share in net loss of JV based on 50% ownership
|
|
$
|
(18,170,041
|
)
|
|
$
|
(11,349,983
|
)
|
|
$
|
(7,077,789
|
)
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Condensed balance sheet information:
|
|
|
|
|
|
|
Current assets
|
|
$
|
751,143,254
|
|
|
$
|
696,683,086
|
|
Noncurrent assets
|
|
|
140,736,300
|
|
|
|
179,943,752
|
|
Total assets
|
|
$
|
891,879,554
|
|
|
$
|
876,626,838
|
|
Current liabilities
|
|
|
633,711,465
|
|
|
|
703,629,444
|
|
Noncurrent liabilities
|
|
|
-
|
|
|
|
30,737,547
|
|
Equity
|
|
|
258,168,089
|
|
|
|
142,259,847
|
|
Total liabilities and equity
|
|
$
|
891,879,554
|
|
|
$
|
876,626,838
|
|
For
the years ended December 31,2018, 2017 and 2016, the JV Company’s revenues were derived primarily from the sales of EV
products and EV parts in China. During 2018, the JV Company sold a total of 10,259 units of EV products in the PRC. 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 instead 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 for years ended of December 31, 2018 and 2017 are as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Investment in JV Company, beginning of the period,
|
|
$
|
70,681,013
|
|
|
$
|
77,453,014
|
|
Investment in JV Company in 2018
|
|
|
79,256,588
|
|
|
|
-
|
|
Share of loss
|
|
|
|
|
|
|
|
|
Company’s share in net loss of JV based on 50% ownership
|
|
|
(18,170,041
|
)
|
|
|
(11,349,982
|
)
|
Intercompany transaction elimination
|
|
|
(160,254
|
)
|
|
|
(432,295
|
)
|
Year 2017 unrealized profit realized
|
|
|
441,589
|
|
|
|
226,975
|
|
Subtotal
|
|
|
(17,888,706
|
)
|
|
|
(11,555,302
|
)
|
Exchange difference
|
|
|
(3,119,002
|
)
|
|
|
4,783,301
|
|
Investment in JV Company, end of the period
|
|
$
|
128,929,893
|
|
|
$
|
70,681,013
|
|
Sales
to the Company’s customers, the JV Company and its subsidiaries, for the year ended December 31, 2018 were $48,731,310 or
43.3% of the Company’s total revenue for the year, a decrease of 47.6% of the sales to the JV Company from the previous
year. Sales to the JV Company and its subsidiaries were primarily battery packs, body parts, EV drive motors, EV controllers,
air conditioning units and other auto parts.
As
of December 31, 2018 and December 31, 2017, the current and noncurrent amount due from the JV Company and its subsidiaries, was
$67,801,735 and $162,329,623, respectively. The breakdown is as below:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Kandi Shanghai
|
|
$
|
29,106,464
|
|
|
$
|
2,354,195
|
|
Kandi Changxing
|
|
|
203,028
|
|
|
|
912,760
|
|
Kandi Jinhua
|
|
|
-
|
|
|
|
15,718
|
|
Kandi Jiangsu
|
|
|
614,537
|
|
|
|
1,506,199
|
|
Liuchuang
|
|
|
123,210
|
|
|
|
-
|
|
Zhejiang Chang Dian
|
|
|
273,927
|
|
|
|
-
|
|
JV Company
|
|
|
37,480,569
|
|
|
|
157,540,751
|
|
Consolidated JV
|
|
$
|
67,801,735
|
|
|
$
|
162,329,623
|
|
On
May 23, 2018, in order to obtain its manufacturing license, the JV Company increased its registered capital by RMB 1.09 billion
(approximately $159 million), of which Kandi Vehicle contributed its portion by converting loans to the JV company in the amount
of RMB 545 million (approximately $79 million) that were previously included in the current and noncurrent amount due from the
JV Company and its subsidiaries into the JV Company’s registered capital. Geely Group became a new shareholder of the JV
Company by investing RMB 545 million (approximately $79 million) in the JV Company.
As
of December 31, 2018 and December 31, 2017, the current and noncurrent amount due to the JV Company and its subsidiaries, was
$118,273 and $0, respectively. The breakdown is as below:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Kandi Jinhua
|
|
$
|
118,273
|
|
|
$
|
-
|
|
Consolidated JV
|
|
$
|
118,273
|
|
|
$
|
-
|
|
NOTE
23 - COMMITMENTS AND CONTINGENCIES
Guarantees
and pledged collateral for bank loans to other parties:
|
(1)
|
Guarantees
for bank loans
|
|
|
December 31,
|
|
|
December 31,
|
|
Guarantee provided to
|
|
2018
|
|
|
2017
|
|
Kandi Electric Vehicles Group Co., Ltd.
|
|
|
7,271,247
|
|
|
|
-
|
|
Kandi Electric Vehicles Jiangsu Co., Ltd.
|
|
|
7,271,247
|
|
|
|
-
|
|
Total
|
|
$
|
14,542,494
|
|
|
$
|
-
|
|
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 $2,908,499 from Shanghai Pudong Development Bank Jinhua Branch, with a related loan period
of March 15, 2013, to March 15, 2016. NGCL is not related to the Company. Under this guarantee contract, the Company agreed to
assume joint liability as the loan guarantor. In April 2017, Shanghai Pudong Development Bank filed a lawsuit against NGCL, the
Company and ten other parties in Zhejiang Province People’s Court in Yongkang City, alleging NGCL defaulted on a bank loan
borrowed from Shanghai Pudong Development Bank for a principal amount of approximately $2.9 million and demanded that the guarantor
bear the liability for compensation. On May 27, 2017, a judicial mediation took place in Yongkang City and parties reached a settlement
in mediation, in which the plaintiff agreed NGCL would repay the loan principal and interest in installments. As far as NGCL repays
the principal and interest according to the agreement, the plaintiff will not ask the Company for recovery. As of December 31,
2018, the Company expects the likelihood of incurring losses in connection with this matter to be remote.
On
September 29, 2015, the Company entered into a guarantee contract to serve as the guarantor of Zhejiang Shuguang Industrial
Co., Ltd. (“ZSICL”) for a bank loan in the amount of $4,217,323 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 failed to perform its obligations as set
forth therein. In August 2016, Ping An Bank Yiwu Branch (“Ping An Bank”) filed a lawsuit against ZSICL, the
Company, and three other parties in Zhejiang Province People’s Court in Yiwu City, alleging ZSICL defaulted on a bank
loan it had borrowed from Pin An Bank for a principal amount of RMB 29 million or approximately $4.2 million (the
“Principal”), for which the Company was a guarantor along with other three parties. On December 25, 2016, the
court ruled that ZSICL should repay Ping An Bank the principal and associated interest remaining on the bank loan within 10
days once the adjudication was effective. In addition, the court found that the Company and the three other parties, acted as
guarantors, have joint liability for this bank loan. On July 31, 2017, the Company and Ping An Bank reached an agreement to
settle. According to the agreement, the Company was to pay Ping An Bank RMB 20 million or approximately $3.0 million in four
installments before October 31, 2017 to release the Company from the guarantor liability for this default. As of October 31,
2017, the Company has made all four installments in the total of RMB 20 million or approximately $3.0 million to Ping An Bank
and thus the Company has been released from the guarantor liability for this default. According to the Company’s
agreement with ZSICL, ZSICL agreed to reimburse all the Company’s losses due to ZSICL’s default on the loan
principal and interests, of which RMB 11.9 million has been reimbursed to the Company as of the date of this report and the
remains is expected to be reimbursed in installments within next two years. The Company expects the likelihood of incurring
losses in connection with this matter to be low.
On
August 29, 2018, the Company entered into a guarantee contract to serve as the guarantor for the JV Company for bank acceptance
notes in the aggregate amount of $3,053,924 from Bank of China, with a related period of August 29, 2018 to February 29, 2019.
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
August 30, 2018, the Company entered into a guarantee contract to serve as the guarantor for Kandi Jiangsu for bank loans in the
aggregate amount of $7,271,247 from China Merchants Bank Nantong branch, with a related loan period of August 31, 2018 to February
28, 2019, and has been paid off on February 1, 2019. Under this guarantee contract, the Company agreed to perform all the obligations
of the JV Company under the contract if the Kandi Jiangsu fails to perform its obligations as set forth therein.
On
September 3, 2018, the Company entered into a guarantee contract to serve as the guarantor for the JV Company for bank acceptance
notes in the aggregate amount of $4,217,323 from Bank of China, with a related period of September 3, 2018 to March 3, 2019. Under
this guarantee contract, the Company agreed to perform all the obligations of the JV Company under the contract if the JV Company
fails to perform its obligations as set forth therein.
|
(2)
|
Pledged
collateral for bank loans to other parties.
|
As
of December 31, 2018 and December 31, 2017, none of the Company’s land use rights or plants and equipment were pledged as
collateral securing bank loans to other parties.
Litigation
Beginning
in March 2017, putative shareholder class actions were filed against Kandi Technologies Group, Inc. and certain of its
current and former directors and officers in the United States District Court for the Central District of California and the
United States District Court for the Southern District of New York. The complaints generally allege violations of the federal
securities laws based on Kandi’s disclosure in March 2017 that its financial statements for the years 2014, 2015 and
the first three quarters of 2016 would need to be restated, and seek damages on behalf of putative classes of shareholders
who purchased or acquired Kandi’s securities prior to March 13, 2017. All the remaining cases are in the New York
federal court, and lead plaintiff and lead counsel have been appointed. Kandi has moved to dismiss the remaining cases and
that motion remains pending.
Beginning
in May 2017, purported shareholder derivative actions based on the same underlying events described above were filed against certain
current and former directors of Kandi in the United States District Court for the Southern District of New York. Lead plaintiff
and lead counsel have been appointed. The directors have moved to dismiss the remaining case and that motion remains pending.
In October 2017, a shareholder filed a books
and records action against the Company in the Delaware Court of Chancery pursuant to 8 Del. C. Section 220 seeking the production
of certain documents generally relating to the same underlying items described above as well as attorney’s fees (the “Section
220 Litigation”). On September 28, 2018, the parties, through their respective counsel, agreed to dismiss the Section 220
Litigation with prejudice and with each party bearing its own attorney’s fees, costs, and expenses, thereby concluding the
action.
In February 2019, this same shareholder commenced
a derivative action against certain current and former directors of the Company in a pre-suit demands in the Delaware Court of
Chancery. The Board of Directors approved the formation of a Special Litigation Committee (“SLC”) and the retention
of a Delaware law firm as independent counsel to the SLC. The SLC and its independent counsel are in the process of conducting
an investigation of the allegations of misconduct set forth in the pre-suit demands.
The Company believes that although its financial
statements for the years 2014, 2015 and the first three quarters of 2016 were restated, the restatements had no effect on its
net income. While the Company further believes that the claims in the litigations are without merit and will defend itself vigorously,
Kandi is unable to estimate the possible loss, if any, associated with the litigations. The ultimate outcome of any litigation
is uncertain and the outcome of these matters, whether favorable or unfavorable, could have a negative impact on Kandi’s
financial condition or results of operations due to defense costs, diversion of management resources and other factors. Defending
litigation can be costly, and adverse results in the Litigations could result in substantial monetary judgments. No assurance
can be made that litigation will not have a material adverse effect on Kandi’s future financial position.
NOTE
24 – SEGMENT REPORTING
The
Company has one operating segment. The Company’s revenue and long-lived assets are primarily derived from and located in
China. The Company does not have manufacturing operations outside of China.
The
following table sets forth disaggregation of revenue:
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
Sales Revenue
|
|
|
Sales Revenue
|
|
|
Sales Revenue
|
|
Primary geographical markets
|
|
|
|
|
|
|
|
|
|
Overseas
|
|
$
|
12,741,570
|
|
|
$
|
4,817,517
|
|
|
$
|
4,919,054
|
|
China
|
|
|
99,697,258
|
|
|
|
97,988,104
|
|
|
|
124,572,959
|
|
Total
|
|
$
|
112,438,828
|
|
|
$
|
102,805,621
|
|
|
$
|
129,492,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Major products
|
|
|
|
|
|
|
|
|
|
|
|
|
EV parts
|
|
$
|
99,099,312
|
|
|
$
|
97,355,828
|
|
|
$
|
120,079,312
|
|
EV products
|
|
|
-
|
|
|
|
-
|
|
|
|
3,718,291
|
|
Off-road vehicles
|
|
|
13,339,516
|
|
|
|
5,449,793
|
|
|
|
5,694,410
|
|
Total
|
|
$
|
112,438,828
|
|
|
$
|
102,805,621
|
|
|
$
|
129,492,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of revenue recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
Products transferred at a point in time
|
|
$
|
112,438,828
|
|
|
$
|
102,805,621
|
|
|
$
|
129,492,013
|
|
Total
|
|
$
|
112,438,828
|
|
|
$
|
102,805,621
|
|
|
$
|
129,492,013
|
|
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 2018, 2017 and 2016:
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Service Company
|
|
|
-
|
|
|
|
-
|
|
|
|
3,913,031
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,913,031
|
|
The
details for amount due from related parties (other than the JV Company and its subsidiaries) as of the December 31, 2018 and 2017
were as below:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Service Company
|
|
|
-
|
|
|
|
162,048
|
|
Total due from related party
|
|
$
|
-
|
|
|
$
|
162,048
|
|
The
Company previously had 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. In June 2018, Kandi Vehicles transferred its 9.5% ownership interest in the Service
Company to Geely Group. As a result of this transaction, the amounts due from related parties in connection with the Service Company
were transferred to accounts receivable. The main transactions between the Company and the Service Company are purchases by the
Service Company of batteries and EV parts.
For
transactions with the JV Company and its subsidiaries, please refer to Note 22.
NOTE
26 - ACQUISITIONS
Jinhua
An Kao
On January 3, 2018, Kandi Vehicles completed
the acquisition of 100% of the equity of Jinhua An Kao Power Technology Co., Ltd., located in Jinhua City, Zhejiang Province,
China. Jinhua An Kao manufactures and markets a unique system of pure electric car battery replacement technologies including
an intelligent constant-temperature charging station, a 50-100 channel intelligent battery charging system, a car battery replacement
tool, and a car washing machine. Jinhua An Kao also owns plug-in and soft-connection PACK technology. The acquisition is intended
to strengthen Kandi’s EV battery exchange offerings in order to be the best available in the market. The Company paid approximately
RMB 25.93 million (approximately $4 million) at the closing of the transaction using cash on hand and issued a total of 2,959,837
shares of restrictive stock or 6.2% of the Company’s total outstanding shares of the common stock valued at approximately
$20.7 million to the former shareholder of Jinhua An Kao and his designees (the “An Kao Shareholders”), and may be
required to pay future consideration up to an additional 2,959,837 shares of common stock, which are being held in escrow, to
be released contingent upon the achievement of certain net income-based milestones in next three years. Any escrowed shares that
are not released from escrow to the An Kao Shareholders for failure to achieve the milestones will be forfeited and returned to
the Company for cancellation. While the escrowed shares are held in escrow, the Company will retain all voting rights with respect
to the shares. For the year ended December 31, 2018, Jinhua An Kao achieved its first year net profit target. According to
the agreement, the former shareholders of An Kao will receive 739,959 shares of Kandi’s restrictive common stock or 12.5%
of total Kandi stock in the purchase price.
As
of the acquisition date, the Company recorded a contingent liability of approximately $8.71 million, representing the estimated
fair value of the contingent consideration the Company currently expects to pay to the An Kao Shareholders upon the achievement
of certain net income-based milestones. The Supplementary Agreement sets forth the terms and conditions of the issuance of these
shares. The fair value of the contingent consideration liability associated with additional 2,959,837 shares of restrictive common
stock was estimated by using Monte Carlo simulation method, which took into account all possible scenarios. This fair value measurement
is classified as Level 3 within the fair value hierarchy prescribed by ASC Topic 820, Fair Value Measurement and Disclosures.
In accordance with ASC Topic 805, Business Combinations, the Company will re-measure this liability each reporting period and
record changes in the fair value through a separate line item within the Company’s consolidated statements of Income. During
the year of 2018, the Company recorded a gain of approximately $3.0 million in the accompanying statements of income representing
the decrease in fair value of this obligation between the acquisition date and December 31, 2018, which was largely due to the
decrease of the Company’s stock price during the period.
The
components of the preliminary purchase price as of the acquisition date for Jinhua An Kao are as follows:
Cash
|
|
$
|
3,988,765
|
|
Stock awards
|
|
|
20,718,859
|
|
Fair value of contingent consideration
|
|
|
8,712,996
|
|
Total
|
|
$
|
33,420,620
|
|
The
Company accounted for the acquisition as business combinations, in accordance with ASC Topic 805. The Company has recorded the
assets acquired and liabilities assumed at their respective fair values as of the acquisition date. The following summarizes the
preliminary purchase price allocations:
|
|
Jinhua An Kao
|
|
Goodwill
|
|
$
|
24,216,559
|
|
Amortizable intangible assets
|
|
|
4,892,165
|
|
Other net assets
|
|
|
5,552,986
|
|
Deferred income taxes
|
|
|
(1,241,090
|
)
|
Total
|
|
$
|
33,420,620
|
|
Transaction
costs of $33,295 associated with the acquisition were expensed as incurred through general and administrative expenses in the
statement of income in 2018.
The
Company allocated the preliminary purchase price to specific intangible asset categories as of the acquisition date for Jinhua
An Kao as follows:
|
|
Amount Assigned
|
|
|
Estimated
useful life
(in years)
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
Patents
|
|
$
|
4,892,165
|
|
|
|
7.5 – 9.17
|
|
The
Company allocated the preliminary purchase price to specific intangible assets for patents that the Company acquired. The Company
believes that the estimated intangible asset value so determined represent the fair value at the date of acquisition and do not
exceed the amount a third party would pay for the assets. The Company used the asset based approach to derive the fair value of
the amortizable intangible assets. These fair value measurements are based on significant unobservable inputs, including estimates
and assumptions and, accordingly, are classified as Level 3 within the fair value hierarchy prescribed by the ASC Topic 820.
The
Company recorded the excess of the purchase price over the estimated fair values of the identified assets as goodwill, which is
non-deductible for tax purposes. Goodwill was established due to primarily to revenue and earnings projections associated with
Jinhua An Kao’s future operations, as well as synergies expected to be gained from the integration of the business into
the Company’s existed operations.
The
Company’s condensed consolidated financial statements included approximately $10 million of revenue and approximately $1.3
million of operating income related to the operating results for Jinhua An Kao from its date of acquisition.
The
following unaudited pro forma financial information presents the combined results of operations of Kandi and the Acquired Business
as if the acquisition had occurred as of January 1, 2017. The pro forma information is not necessarily indicative of what the
financial position or results of operations actually would have been had the acquisition been completed as of January 1, 2017.
In addition, the unaudited pro forma financial information is not indicative of, nor does it purport to project, the future financial
position or operation results of Kandi. The unaudited pro forma financial information excludes acquisition and integration costs
and does not give effect to any estimated and potential cost savings or other operating efficiencies that could result from acquisition.
Unaudited
Pro Forma Combined Statements of Operations Information
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Revenue
|
|
$
|
112,438,828
|
|
|
$
|
114,550,699
|
|
LOSS FROM OPERATIONS
|
|
$
|
(1,638,348
|
)
|
|
$
|
(26,235,651
|
)
|
NET LOSS
|
|
$
|
(5,694,699
|
)
|
|
$
|
(28,414,886
|
)
|
SC
Autosports
On
July 1, 2018, Kandi Vehicles completed the acquisition of 100% of the equity of SC Autosports (formerly Sportsman Country). SC
Autosports is a Dallas TX based sales company primarily engaged in the wholesale of off-road vehicle products, with a small percentage
of business in off-road vehicle parts wholesale and retail. The acquisition is an entry point to gain a compelling opportunity
for business integration and market expansion in America which will provide Kandi a solid foundation for future strategic business
development. The Company issued a total of 171,969 shares of restrictive stock or approximately 0.3% of the Company’s total
outstanding shares of the common stock valued at approximately $0.8 million at the closing of transaction to the former members
of SC Autosports within 30 days from the signing date of the Transfer Agreement, and may be required to pay future consideration
up to an additional 1,547,721 shares of common stock, which are being held in escrow, to be released contingent upon the achievement
of certain pre-tax profit based milestones in the next three years. Any escrowed shares that are not released from escrow to the
SC Autosports former members for failure to achieve the milestones will be forfeited and returned to the Company for cancellation.
While the escrowed shares are held in escrow, the Company will retain all voting rights with respect to the shares. For the
year ended December 31, 2018, SC Autosports achieved its first year pre-tax profit target. According to the agreement, the former
members of SC Autosports will receive 343,938 shares of Kandi’s restrictive common stock or 20% of total Kandi stock in
the purchase price.
As
of the acquisition date, the Company recorded a contingent liability of approximately $5.3 million, representing the estimated
fair value of the contingent consideration the Company currently expects to pay to SC Autosports’ former members upon the
achievement of certain net income-based milestones. The Transfer Agreement sets forth the terms and conditions of the issuance
of these shares. The fair value of the contingent consideration liability associated with additional 1,547,721 shares of restrictive
common stock was estimated by using the Monte Carlo simulation method, which took into account all possible scenarios. This fair
value measurement is classified as Level 3 within the fair value hierarchy prescribed by ASC Topic 820, Fair Value Measurement
and Disclosures. In accordance with ASC Topic 805, Business Combinations, the Company will re-measure this liability each reporting
period and record changes in the fair value through a separate line item within the Company’s consolidated statements of
Income. During the year of 2018, the Company recorded a gain of approximately $0.4 million in the accompanying statements of income
representing the decrease in fair value of this obligation between the acquisition date and December 31, 2018, which was largely
due to the decrease of the Company’s stock price during the period.
The
components of the preliminary purchase price as of the acquisition date for SC Autosports are as follows:
|
|
SC Autosports
|
|
Stock awards
|
|
$
|
756,664
|
|
Fair value of contingent consideration
|
|
|
5,306,293
|
|
Total
|
|
$
|
6,062,957
|
|
The
Company accounted for the acquisition as business combinations and, in accordance with ASC Topic 805. The Company has recorded
the assets acquired and liabilities assumed at their respective fair values as of the acquisition date. The following summarizes
the preliminary purchase price allocations:
|
|
SC Autosports
|
|
Goodwill
|
|
$
|
5,240,359
|
|
Other net assets
|
|
|
822,598
|
|
Total
|
|
$
|
6,062,957
|
|
Transaction
costs of $8,256 associated with the acquisition were expensed as incurred through general and administrative expenses in the statement
of income in 2018.
The
Company recorded the excess of the purchase price over the estimated fair values of the identified assets as goodwill, which is
non-deductible for tax purposes. Goodwill was established primarily based on revenue and earnings projections associated with
SC Autosports’ future operations, as well as synergies expected to be gained from the integration of the business into the
Company’s existed operations.
The
Company’s condensed consolidated financial statements included approximately $7.9 million of revenue and approximately $1.6
million of operating income related to the operating results for SC Autosports from its date of acquisition.
The
following unaudited pro forma financial information presents the combined results of operations of Kandi and the Acquired Business
as if the acquisition had occurred as of January 1, 2017. The pro forma information is not necessarily indicative of what the
financial position or results of operations actually would have been had the acquisition been completed as of January 1, 2017.
In addition, the unaudited pro forma financial information is not indicative of, nor does it purport to project, the future financial
position or operation results of Kandi. The unaudited pro forma financial information excludes acquisition and integration costs
and does not give effect to any estimated and potential cost savings or other operating efficiencies that could result from acquisition.
Unaudited
Pro Forma Condensed Combined Statements of Operations Information
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Revenue
|
|
$
|
120,537,086
|
|
|
$
|
117,870,874
|
|
LOSS FROM OPERATIONS
|
|
$
|
(1,519,581
|
)
|
|
$
|
(25,063,646
|
)
|
NET LOSS
|
|
$
|
(5,575,932
|
)
|
|
$
|
(27,328,881
|
)
|