10-Q 1 form10q.htm FORM 10-Q Kandi Technologies Group, Inc. - Form 10-Q - Filed by newsfilecorp.com

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

FORM 10-Q

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

For the quarterly period ended September 30, 2016

or

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

For the transition period from ______ to______

Commission file number 001-33997

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

Delaware 90-0363723
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)  

Jinhua City Industrial Zone
Jinhua, Zhejiang Province
People’s Republic of China
Post Code 321016
(Address of principal executive offices)

(86 - 579) 82239856
(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)
Yes [X]        No [   ]

1


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [   ] Accelerated filer                 [X]
   
Non-accelerated filer   [   ] Smaller reporting company [   ] 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [   ]        No [X]

As of November 3, 2016, the registrant had issued and outstanding 47,699,638 shares of common stock, par value $0.001 per share.

2


TABLE OF CONTENTS

  Page
     
PART I-- FINANCIAL INFORMATION   4
     
Item 1. Financial Statements 4
     
  Consolidated Balance Sheets as of September 30, 2016 (unaudited) and December 31, 2015 4
     
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) (unaudited) – Three Months and Nine Months Ended September 30, 2016 and 2015 5
     
  Consolidated Statements of Cash Flows (unaudited) –Nine Months Ended September 30, 2016 and 2015 6
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 46
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 62
     
Item 4. Controls and Procedures 62
     
PART II-- OTHER INFORMATION   63
     
Item 1A. Risk Factors 63
     
Item 6. Exhibits 64

3


PART I-- FINANCIAL INFORMATION

Item 1. Financial Statements. (Unaudited)

KANDI TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

    September 30, 2016     December 31, 2015  
             

Current assets

           

Cash and cash equivalents

$  3,689,850   $  16,738,559  

Restricted cash

  14,240,615     16,172,009  

Short term investment

  -     1,613,727  

Accounts receivable

  40,805,693     8,136,421  

Inventories (net of provision for slow moving inventory of $472,910 and $485,901 as of September 30, 2016 and December 31, 2015, respectively

  15,519,976     17,773,679  

Notes receivable

  1,969,252     13,033,315  

Other receivables

  3,243,391     332,922  

Prepayments and prepaid expense

  746,748     181,534  

Due from employees

  33,817     34,434  

Advances to suppliers

  30,759,354     71,794  

Amount due from JV Company, net

  114,763,704     76,172,471  

Amount due from related party

  10,916,700     40,606,162  

TOTAL CURRENT ASSETS

  236,689,100     190,867,027  

 

           

LONG-TERM ASSETS

           

Property, Plant and equipment, net

  16,690,437     20,525,126  

Land use rights, net

  12,342,904     12,935,121  

Construction in progress

  57,094,373     54,368,753  

Long Term Investment

  1,424,062     1,463,182  

Investment in JV Company

  87,721,955     90,337,899  

Goodwill

  322,591     322,591  

Intangible assets

  433,735     495,306  

Other long term assets

  8,914,927     154,019  

TOTAL Long-Term Assets

  184,944,984     180,601,997  

 

           

TOTAL ASSETS

$  421,634,084   $  371,469,024  

 

           

CURRENT LIABILITIES

           

Accounts payables

$  111,682,048   $  73,957,969  

Other payables and accrued expenses

  4,399,221     9,544,909  

Short-term loans

  35,676,489     36,656,553  

Customer deposits

  78,097     94,026  

Notes payable

  3,093,511     3,850,478  

Income tax payable

  1,142,678     624,276  

Due to employees

  26,954     9,423  

Deferred taxes liabilities

  87,387     2,374,924  

Financial derivate - liability

  -     3,823,590  

Deferred income

  14,990,122     13,726  

Total Current Liabilities

  171,176,507     130,949,874  

 

           

LONG-TERM LIABILITIES

           

Deferred taxes liabilities

  1,284,335     1,593,582  

Total Long-Term Liabilities

  1,284,335     1,593,582  

 

           

TOTAL LIABILITIES

  172,460,842     132,543,456  

 

           

STOCKHOLDER'S EQUITY

           

Common stock, $0.001 par value; 100,000,000 shares authorized; 47,699,638 and 46,964,855 shares issued and outstanding at September 30,2016 and December 31,2015, respectively

  47,030     46,965  

Additional paid-in capital

  226,929,764     212,564,334  

 

           

Retained earnings (the restricted portion is $4,172,324 and $4,172,324 at September 30,2016 and December 31,2015, respectively)

  33,371,578     31,055,919  

Accumulated other comprehensive income(loss)

  (11,175,130 )   (4,741,650 )

TOTAL STOCKHOLDERS' EQUITY

  249,173,242     238,925,568  

 

           

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$  421,634,084   $  371,469,024  

See accompanying notes to consolidated financial statements

4


KANDI TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND
COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)

    Three Months Ended     Nine Months Ended  
    September 30,     September 30,     September 30,     September 30,  
    2016      2015     2016     2015  
                         

REVENUES, NET

$  6,366,380   $ 50,528,545   $  112,241,641   $  142,273,091  

 

                       

COST OF GOODS SOLD

  5,715,211     43,411,839     96,417,337     122,294,189  

 

                       

GROSS PROFIT

  651,169     7,116,706     15,824,304     19,978,902  

 

                       

OPERATING EXPENSES:

                       

Research and development

  522,806     785,450     1,222,967     1,928,091  

Selling and marketing

  374,102     122,873     1,150,880     312,284  

General and administrative

  373,411     8,649,541     18,031,487     16,275,202  

Total Operating Expenses

  1,270,319     9,557,864     20,405,334     18,515,577  

 

                       

INCOME(LOSS) FROM

  (619,150 )   (2,441,158 )   (4,581,030 )   1,463,325  

OPERATIONS

                       

 

                       

OTHER INCOME(EXPENSE):

                       

Interest income

  832,031     1,140,756     2,397,364     2,454,079  

Interest expense

  (425,152 )   (534,987 )   (1,299,549 )   (1,730,898 )

Change in fair value of financial instruments

  10,692     3,049,242     3,823,590     11,802,586  

Government grants

  594,323     (724 )   2,292,180     92,139  

Share of profit (loss) after tax of JV

  (299,538 )   1,179,605     (203,375 )   1,900,128  

Other income (expense), net

  (106,299 )   988,224     202,878     1,094,278  

Total other income, net

  606,057     5,822,116     7,213,088     15,612,312  

 

                       

INCOME (LOSS) BEFORE

  (13,093 )   3,380,958     2,632,058     17,075,637  

INCOME TAXES

                       

 

                       

INCOME TAX (EXPENSE)

  (552,848 )   (1,037,763 )   (316,399 )   (3,175,287 )

 

                       

NET INCOME (LOSS)

  (565,941 )   2,343,195     2,315,659     13,900,350  

 

                       

OTHER COMPREHENSIVE

                       

INCOME(LOSS)

                       

Foreign currency translation

  (805,216 )   (7,098,249 )   (6,433,480 )   (6,157,006 )

 

                       

COMPREHENSIVE INCOME(LOSS)

$  (1,371,157 ) $ (4,755,054 ) $  (4,117,821 ) $  7,743,344  

 

                       

WEIGHTED AVERAGE SHARES OUTSTANDING BASIC

 

 47,695,290

   

46,959,638

   

47,436,418

   

46,670,533

 

WEIGHTED AVERAGE SHARES OUTSTANDING DILUTED

  47,695,290     46,959,638     47,436,418     46,945,277  

 

                       

NET INCOME (LOSS) PER SHARE, BASIC

$  (0.01 ) $  0.05   $  0.05   $  0.30  

NET INCOME (LOSS) PER SHARE, DILUTED

$  (0.01 ) $  0.05   $  0.05   $  0.30  

See accompanying notes to consolidated financial statements

5


KANDI TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

 

  Nine Months Ended  

 

  September 30, 2016     September 30, 2015  

 

           

CASH FLOWS FROM OPERATING ACTIVITIES:

           

 

           

Net income

$ 2,315,659   $ 13,900,350  

Adjustments to reconcile net income to net cash provided by operating activities

       

Depreciation and amortization

  3,681,345     4,388,902  

Deferred taxes

  (2,608,702 )   (1,854,863 )

Change in fair value of financial instruments

  (3,823,590 )   (11,802,586 )

Share of profit after tax of JV Company

  203,375     (1,900,128 )

Stock compensation cost

  13,930,829     12,486,881  

 

           

Changes in operating assets and liabilities, net of effects of acquisition:

       

(Increase) Decrease In:

           

Accounts receivable

  (33,335,798 )   (19,286,512 )

Inventories

  1,802,780     (17,289,849 )

Other receivables and other assets

  (11,868,318 )   (298,976 )

Due from employee

  17,718     (10,535 )

Prepayments and prepaid expenses

  (31,684,685 )   6,265,899  

Amount due from JV Company

  (41,182,480 )   (27,964,497 )

Due from related party

  28,994,314     -  

 

           

Increase (Decrease) In:

           

Accounts payable

  40,240,135     44,980,746  

Other payables and accrued liabilities

  10,415,706     (1,302,135 )

Customer deposits

  (13,598 )   (2,502,087 )

Income Tax payable

  607,422     1,062,643  

 

           

Net cash used in operating activities

$ (22,307,888 ) $ (1,126,747 )

 

           

CASH FLOWS FROM INVESTING ACTIVITIES:

           

Purchases of plant and equipment, net

  (39,250 )   (408,850 )

Purchases of construction in progress

  (4,236,301 )   (39,054 )

Issuance of notes receivable

  (51,553,604 )   (72,040,444 )

Repayment of notes receivable

  62,415,498     61,697,894  

Long Term Investment

  -     (1,535,651 )

Short Term Investment

  1,592,024     -  

 

           

Net cash provided by (used in) investing activities

$ 8,178,367   $ (12,326,105 )

 

           

CASH FLOWS FROM FINANCING ACTIVITIES:

           

 Restricted cash

  1,519,477     (3,232,950 )

 Proceeds from short-term bank loans

  -     30,583,709  

 Repayments of short-term bank loans

  -     (27,512,406 )

 Proceeds from notes payable

  5,187,040     9,860,498  

 Repayment of notes payable

  (5,849,988 )   (12,299,436 )

 Warrant exercise

  434,666     -  

 

           

Net cash provided by (used in) financing activities

$ 1,291,195   $ (2,600,585 )

 

           

NET INCREASE IN CASH AND CASH EQUIVALENTS

  (12,838,326 )   (16,053,437 )

Effect of exchange rate changes on cash

  (210,383 )   1,365,000  

Cash and cash equivalents at beginning of year

  16,738,559     26,379,460  

 

           

CASH AND CASH EQUIVALENTS AT END OF PERIOD

  3,689,850     11,691,023  

 

           

SUPPLEMENTARY CASH FLOW INFORMATION

           

Income taxes paid

  2,322,747     1,794,115  

Interest paid

  1,283,843     1,718,257  

See accompanying notes to consolidated financial statements

6


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. Kandi Technologies changed its name from Stone Mountain Resources, Inc. to Kandi Technologies, Corp. on August 13, 2007. On December 21, 2012, Kandi Technologies changed its name to Kandi Technologies Group, Inc. As used herein, the term the “Company” means Kandi Technologies and its operating subsidiaries, as described below.

Headquartered in the Jinhua city, Zhejiang Province, China, the Company is one of China’s leading producers and manufacturers of electrical vehicle products, electrical vehicle parts and off road vehicles for sale in the People’s Republic of China (the “PRC”) and global markets. The Company conducts its primary business operations through its wholly-owned subsidiary, Zhejiang Kandi Vehicles Co., Ltd. (“Kandi Vehicles”), and the partial and wholly-owned subsidiaries of Kandi Vehicles.

The Company’s organizational chart is as follows:

7


Operating Subsidiaries:

Pursuant to relevant agreements executed in January 2011, Kandi Vehicles is entitled to 100% of the economic benefits, voting rights and residual interests (100% profits and loss absorption rate) of Jinhua Kandi New Energy Vehicles Co., Ltd. (“Kandi New Energy”), a company in which Kandi Vehicles has 50% interest. Mr. Hu Xiaoming owns the other 50% which he entrusted Kandi Vehicles to manage Kandi New Energy. Kandi New Energy currently holds battery packing production rights (license), and supplies the battery pack to the JV Company (Defined below). It didn’t maintain the special-purpose vehicle production rights (license) on manufacturing Kandi brand electric utility vehicles. According to the JV Agreement (defined below),Kandi is not allowed to produce EVs. To avoid the maintenance fee on this license, the Company anticipates to close the sale of the special-purpose vehicle production rights (license) to a third party. The Ministry of Industrial and Information Technology of the People’s Republic of China has approved this transaction and the transfer is in process.

8


In April 2012, pursuant to a share exchange agreement, the Company acquired 100% of Yongkang Scrou Electric Co, Ltd. (“Yongkang Scrou”), a manufacturer of automobile and EV parts. Yongkang Scrou currently manufactures and sells EV drive motors, EV controllers, air conditioners and other electrical products to the JV Company (defined below).

In March 2013, pursuant to a joint venture agreement (the “JV Agreement”) entered into by Kandi Vehicles and Shanghai Maple Guorun Automobile Co., Ltd. (“Shanghai Guorun”), a 99%-owned subsidiary of Geely Automobile Holdings Ltd. (“Geely”), the parties established Zhejiang Kandi Electric Vehicles Co., Ltd. (the “JV Company”) to develop, manufacture and sell EV products and related auto parts. Each of Kandi Vehicles and Shanghai Guorun has 50% ownership interest in the JV Company. In March 2014, the JV Company changed its name to Kandi Electric Vehicles Group Co., Ltd. At present, the JV Company is a holding company with products that are manufactured by its subsidiaries. For JV Company’s better development, Zhejiang Geely Holding Group, the parent company of Geely, became the direct holding company of the JV Company on October 26, 2016 by completing the purchase of the 50% equity of the JV Company held by Shanghai Guorun with a premium price, or a purchase price exceeding the cash amount of the aggregate of the original investment and the shared profits over the years.

In March 2013, Kandi Vehicles formed Kandi Electric Vehicles (Changxing) Co., Ltd. (“Kandi Changxing”) in the Changxing (National) Economic and Technological Development Zone. Kandi Changxing is engaged in the production of EV products. In the fourth quarter of 2013, Kandi Vehicles entered into an ownership transfer agreement with the JV Company pursuant to which Kandi Vehicles transferred 100% of its ownership in Kandi Changxing to the JV Company. The Company, indirectly through its 50% ownership interest in the JV Company, has 50% economic interest in Kandi Changxing.

In July 2013, Zhejiang ZuoZhongYou Electric Vehicle Service Co., Ltd. (the “Service Company”) was formed. The Service Company is engaged in various pure EV leasing businesses, which is called “Micro Public Transportation (“MPT”) program. The Company has 9.5% ownership interest in the Service Company through Kandi Vehicles.

In November 2013, Zhejiang Kandi Electric Vehicles Jinhua Co., Ltd. (“Kandi Jinhua”) was formed by the JV Company. The JV Company has 100% ownership interest in Kandi Jinhua, and the Company, indirectly through its 50% ownership interest in the JV Company, has 50% economic interest in Kandi Jinhua.

In November 2013, Zhejiang JiHeKang Electric Vehicle Sales Co., Ltd. (“JiHeKang”) was formed by the JV Company and is engaged in car sales business. The JV Company has 100% ownership interest in JiHeKang, and the Company, indirectly through its 50% ownership interest in the JV Company, has 50% economic interest in JiHeKang.

In December 2013, the JV Company entered into an ownership transfer agreement with Shanghai Guorun pursuant to which the JV Company acquired 100% ownership of Kandi Electric Vehicles (Shanghai) Co., Ltd. (“Kandi Shanghai”). As a result, Kandi Shanghai is a wholly-owned subsidiary of the JV Company, and the Company, indirectly through its 50% ownership interest in the JV Company, has 50% economic interest in Kandi Shanghai.

9


In January 2014, Zhejiang Kandi Electric Vehicles Jiangsu Co., Ltd. (“Kandi Jiangsu”) was formed by the JV Company. The JV Company has 100% ownership interest in Kandi Jiangsu, and the Company, indirectly through its 50% ownership interest in the JV Company, has 50% economic interest in Kandi Jiangsu. The company is mainly engaged in EV research and development, manufacturing and sales.

In November 2015, Hangzhou Puma Investment Management Co., Ltd. (“Puma Investment”) was formed by the JV Company, which focuses on the investment and consulting service. The JV Company has 50% ownership interest in Puma Investment(the other 50% was owned by Zuozhongyou Electric Vehicles Service (Hangzhou) Co.,Ltd., a subsidiary of Service Company, and the Company, indirectly through its JV Company, has 25% economic interest in Puma Investment. The other 50% ownership is held by the Service Company.

In November 2015, Hangzhou JiHeKang Electric Vehicle Service Co., Ltd. (“JiHeKang Service Company”) was formed by the JV Company, which focuses on the after-market service for the EV products sold. The JV Company has 100% ownership interest in JiHeKang Service Company, and the Company, indirectly through its JV Company, has 50% economic interest in JiHeKang Service Company.

In January 2016, Kandi Electric Vehicles (Hainan) Co., Ltd. (“Kandi Hainan”) was renamed from Kandi Electric Vehicles (Wanning) Co., Ltd. (“Kandi Wanning”) which was originally formed in Wanning City of Hainan Province by Kandi Vehicles and Kandi New Energy in April 2013 and then was transferred to Haikou City in January 2016. Kandi Vehicles has 90% ownership in Kandi Hainan, and Kandi New Energy has the remaining 10% interest. However, Kandi Vehicles is, effectively, entitled to 100% of the economic benefits, voting rights and residual interests (100% profits and losses) of Kandi Hainan.

The Company’s primary business operations are designing, development, manufacturing and commercialization of EV products, EV parts and off-road vehicles. As part of its strategic objective to become a leading manufacturer of EV products (through the JV Company) and related services, the Company has increased its focus on pure EV related products with a particular emphasis on expanding its market shares in China.

NOTE 2 – LIQUIDITY

The Company had a working capital surplus of $65,512,593 as of September 30, 2016, an increase of $5,595,440 from $59,917,153 as of December 31, 2015.

As of September 30, 2016, the Company had credit lines from commercial banks of $35,676,489. The Company believes that its cash flows generated internally may not be sufficient to support the growth of future operations and to repay short-term bank loans for the next twelve (12) months. However, the Company believes its access to existing financing sources and established relationships with PRC banks will enable it to meet its obligations and fund its ongoing operations.

The Company has historically financed its operations through short-term commercial bank loans from PRC banks. The term of these loans is typically for one year, and upon the payment of all outstanding principal and interest in a particular loan, the banks have typically rolled over the loan for an additional one-year term, with adjustments made to the interest rate to reflect prevailing market rates. The Company believes this practice has been ongoing year after year and that short-term bank loans remain available on normal trade terms if needed.

10


NOTE 3 - BASIS OF PRESENTATION

The Company maintains its general ledger and journals with the accrual method accounting for financial reporting purposes. The financial statements and notes are representations of management. Accounting policies adopted by the Company conform to generally accepted accounting principles in the United States (“U.S. GAAP”) and have been consistently applied in the presentation of the Company’s financial statements.

The financial information included herein for the three-month and nine-month period ended September 30, 2016 and 2015 are unaudited; however, such information reflects all adjustments, consisting of normal recurring adjustments, that are, in the opinion of management, necessary for a fair presentation of the Company’s consolidated financial statements for these interim periods.

The results of operations for the three-month and nine-month periods ended September 30, 2016 are not necessarily indicative of the results expected for the entire fiscal year ending December 31, 2016.

NOTE 4 – PRINCIPLES OF CONSOLIDATION

The consolidated financial statements reflect the accounts of the Company and its ownership interest in the following subsidiaries:

(i)

Continental, a wholly-owned subsidiary of the Company;

   
(ii)

Kandi Vehicles, a wholly-owned subsidiary of Continental;

   
(iii)

Kandi New Energy, a 50% owned subsidiary of Kandi Vehicles, Mr Hu Xiaoming has owned the other 50% equity. Pursuant to relevant agreements executed in January 2011, Mr. Hu Xiaoming contracted Kandi Vehicles for the operation and management of Kandi New Energy and had his shares escrowed. As a result, Kandi Vehicles is entitled to 100% of the economic benefits, voting rights and residual interests of Kandi New Energy;

   
(iv)

Yongkang Scrou, a wholly-owned subsidiary of Kandi Vehicles; and

   
(v)

Kandi Hainan, a subsidiary, 10% owned by Kandi New Energy and 90% owned by Kandi Vehicles.

Equity Method Investees

The consolidated net income also includes the Company’s proportionate share of the net income or loss of its equity method investees as following:

(vi)

The JV Company, 50% owned subsidiary of Kandi Vehicles;

   
(vii)

Kandi Changxing, a wholly-owned subsidiary of the JV Company. The Company, indirectly through its 50% ownership interest in the JV Company, has 50% economic interest;

   
(viii)

Kandi Jinhua, a wholly-owned subsidiary of the JV Company. The Company, indirectly through its 50% ownership interest in the JV Company, has 50% economic interest;

11


(ix)

JiHeKang, a wholly-owned subsidiary of the JV Company. The Company, indirectly through its 50% ownership interest in the JV Company, has 50% economic interest;

   
(x)

Kandi Shanghai, a wholly-owned subsidiary of the JV Company. The Company, indirectly through its 50% ownership interest in the JV Company, has 50% economic interest;

   
(xi)

Kandi Jiangsu, a wholly-owned subsidiary of the JV Company. The Company, indirectly through its 50% ownership interest in the JV Company, has 50% economic interest;

   
(xii)

Puma Investment, a 50%-owned subsidiary of the JV Company. The Company, indirectly through its 50% ownership interest in the JV Company, has 25% economic interest; and

   
(xiii)

JiHeKang Service Company, a wholly-owned subsidiary of the JV Company. The Company, indirectly through its 50% ownership interest in the JV Company, has 50% economic interest.

All intra-entity profits and losses with the Company’s equity method investees have been eliminated.

NOTE 5 – USE OF ESTIMATES

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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 the PRC. As a result, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC 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 the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s performance may be adversely affected by changes in the political and social conditions in the PRC, 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.

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(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 in 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 receivable, 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 receivable, 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 short maturities and that the interest rates on the borrowing approximate those that would have been available for loans of similar remaining maturity and risk profile. As the carrying amounts are reasonable estimates of the fair value, these financial instruments are classified within Level 1 of the fair value hierarchy. The Company identified notes payable as a Level 2 instrument due to the fact that the inputs to the valuation are primarily based upon readily observable pricing information. The balance of notes payable, which was measured and disclosed at fair value, was $3,093,511 and $3,850,478 at September 30, 2016 and December 31, 2015, respectively.

Warrants, which are accounted as liabilities, are treated as derivative instruments, and are measured at each reporting date for their fair value using Level 3 inputs. The fair value of warrants was $0 and $3,823,590 at September 30, 2016 and December 31, 2015, respectively. Also see Note 6(t).

(c) Cash and Cash Equivalents

The Company considers highly-liquid investments purchased with original maturities of three months or less to be cash equivalents.

Restricted cash, as of September 30, 2016 and December 31, 2015, represented time deposits on account for earning interest income. As of September 30, 2016 and December 31, 2015, the Company’s restricted cash was $14,240,615 and $16,172,009, which includes a one-year Certificate of Time Deposit (CD) of $11,992,098 with Hangzhou Bank Jinhua Branch, among which $5,996,049 will mature on September 29, 2017 and the remaining $5,996,049 will mature on October 29, 2017.

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(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 weighted average basis 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 its net realizable value are made, if required, for estimated excess, obsolescence, or impaired balances.

(e) Accounts Receivable

Accounts receivable are recognized and carried at net realizable value. An allowance for doubtful accounts is recorded in 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 an exhaustive collection effort. If accounts receivable are to be provided for, or written off, they are recognized in the consolidated statement of operations within the operating expenses line item. As of September 30, 2016 and December 31, 2015, the Company had no allowance for doubtful accounts, as per the management’s judgment based on their best knowledge.

As of September 30, 2016 and December 31, 2015, the credit terms with the Company’s customers were typically 210 to 240 days and 150 to 180 days respectively after delivery. The Company extended the credit term with its customers this year to a longer period as referenced above due to the delayed subsidy payments from the government on EV sales.

(f) Notes receivable

Notes receivable represent short-term loans to third parties with the maximum term of one year. Interest income will be recognized according to each agreement between a borrower and the Company on an accrual basis. If notes receivable are paid back or written off, that transaction will be recognized in the relevant year. If the loan 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 being taken, the Company provides an accrual for the related foreclosure expenses and related litigation expenses. The Company also receives notes receivable from the JV Company to settle the accounts receivable. If the Company wants to discount the notes receivables for the purpose of receiving immediate cash, the current discount rate is 3.00% annually. As at the end of September 30, 2016, the Company had notes receivables of $1,969,252. Among which $428,268 will mature within 3 months and the remaining $1,540,984 will mature within 6 months.

(g) Prepayments

Prepayments represent cash paid in advance to suppliers, which also includes advances to raw material suppliers, mold manufacturers, and suppliers of equipment.

As of December 31, 2013, the Company recorded a significant prepayment made by the Company to a supplier Nanjing Shangtong Auto Technologies Co., Ltd. (“Nanjing Shangtong”) as an advance of RMB 353 million (approximately $52,915,129) and prepaid by Kandi Wanning (renamed to Kandi Hainan in January 2016). Nanjing Shangtong is a total solution contractor for Kandi Hainan project to provide all the equipment and EV product design and research services. As of September 30, 2016, the advance payment related to Kandi Hainan facility construction to Nanjing Shangtong was transferred to “construction-in-progress” as described in Note 15.

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In June 2016, Kandi Hainan made the second prepayment of RMB 70 million (approximately $10,493,085) to Nanjing Shangtong for the design and research of new EVs. In July 2016 and August 2016, another two prepayments of RMB 30 million (approximately $4,497,036) and RMB 90 million (approximately $13,491,109) respectively, were made to Nanjing Shangtong for the same purpose of the design and research for the new EV product. Also see Note 15.

Advances for raw materials purchases typically are settled within two months by the Company’s receipt of raw materials. Prepayment is offset against purchase amount after equipment or materials are delivered.

(h) Property, Plant and Equipment

Property, Plant and equipment are carried at cost less accumulated depreciation. Depreciation is provided over the assets estimated useful lives, 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 cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statements of income. The cost of maintenance and repairs is charged to expense as incurred, whereas significant renewals and betterments are capitalized.

(i) Construction in Progress

Construction in progress (“CIP”) represents the direct costs of construction, the acquisition cost of buildings or machinery and design fees. Capitalization of these costs ceases, and the construction in progress is transferred to plant and equipment, when substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is provided until the assets are completed and ready for their intended use. No interest expense has been capitalized for CIP as of September 30, 2016, as the Company did not get loans for CIP.

(j) Land Use Rights

According to Chinese laws, land in the PRC is owned by the government and land ownership rights cannot be sold to an individual or to a private company. However, the government grants the user a “land use right” to use the land. The land use rights granted to the Company are being amortized using the straight-line method over a term of fifty years.

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(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 the cost to dispose.

During the reporting period, no impairment loss was recognized.

(l) Revenue Recognition

Revenue represents the invoiced value of goods sold. Revenue is recognized when the Company ships the goods to its customers and all of the following criteria are met:

  • Persuasive evidence of an arrangement exists;
  • Delivery has occurred or services have been rendered;
  • The seller’s price to the buyer is fixed or determinable; and
  • Collectability is reasonably assured.

The Company recognized revenue when the products and the risk they carry are transferred to the other party.

(m) Research and Development

Expenditures relating to the development of new products and processes, including significant improvements to existing products, are expensed as incurred. Research and development expenses were $522,806 and $785,450 for the three months ended September 30, 2016 and 2015, respectively. Research and development expenses were $1,222,967 and $1,928,091 for the nine months ended September 30, 2016 and 2015, respectively.

(n) Government Grants

Grants and subsidies received from the PRC Government are recognized when the proceeds are received or collectible and the related milestones have been reached and all contingencies have been resolved.

For the three months ended September 30, 2016 and 2015, $ 594,323 and $-724 (due to the depreciation in RMB against U.S. dollars) of grants were received by the Company’s subsidiaries from the PRC government. For the nine months ended September 30, 2016 and 2015, $2,292,180 and $92,139 of grants were received by the Company’s subsidiaries from the PRC 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 management’s best estimate on 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 is uncertain.

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(p) Foreign Currency Translation

The accompanying consolidated financial statements are presented in United States dollars. The functional currency of the Company is 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

    September 30,       December 31,     September 30,  
    2016     2015     2015  
Period end RMB : USD exchange rate   6.67106     6.49270     6.37380  
Average RMB : USD exchange rate   6.58121     6.24010     6.18630  

(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 performance of the Company. As a result of the assessment made by the chief operating decision makers, the Company has only one single 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.

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The recognition of the stock option expenses is based on awards expected to vest, and there were no estimated forfeitures. ASC standards require forfeitures to be estimated at the time of grant and revised in subsequent periods, if necessary, if actual forfeitures differ from those estimates.

The stock-based option expenses for the three months ended September 30, 2016 and 2015 were $2,777,121 and $6,109,666, respectively. The stock-based option expenses for the nine months ended September 30, 2016 and 2015 were $13,885,604 and $8,146,221, respectively. See Note 19.

(t) Warrant Costs

The Company’s warrant costs are recorded in liabilities in accordance with ASC 480, ASC 505 and ASC 815.

We adopted the binomial tree valuation approach to estimate the fair value of the warrants. In binomial tree valuation approach, it is assumed that the life of the warrant (from Valuation Date to Expiration Date) is typically divided into many steps (or nodes). In each step there is a binomial stock price movement. With more steps, possible stock price paths are implicitly considered. Valuation of warrant is performed iteratively, starting at each of the final nodes (those that may be reached at the time of expiration), and then working backwards through the tree towards the first node (valuation date). The value computed at each stage is the value of the warrant at that point in time.

(u) 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 September 30, 2016, the Company determined that its goodwill was not impaired.

(v) Intangible assets

Intangible assets consist of trade names and customer relations associated with the purchase price from the allocation of Yongkang Scrou. Such assets are being amortized over their estimated useful lives of 9.7 years. Intangible assets were amortized as of September 30, 2016. The amortization expenses for intangible assets were $20,524 and $20,524 for the three months ended September 30, 2016 and 2015, respectively, and $61,571 and $61,571 for the nine months ended September 30, 2016 and 2015, respectively.

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(w) Accounting for Sale of Common Stock and Warrants

Gross proceeds are firstly 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.

(x) 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 these companies, thereby enabling the Company, through Kandi Vehicles, to receive a majority of their respective expected residual returns.

Additionally, as Kandi New Energy is under common control with other entities, the consolidated financial statements have been prepared as if the transactions had occurred retroactively as to the beginning of the reporting period of these consolidated financial statements.

Control and common control are defined under the accounting standards as “an individual, enterprise, or immediate family members who hold more than 50 percent of the voting ownership interest of each entity.” Because the owners collectively own 100% of Kandi New Energy, and have agreed to vote their interests in concert since the establishment of each of these three companies as memorialized the Voting Rights Proxy Agreement, the Company believes that the owners collectively have control and common control of the company. 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.

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 March 2016, the FASB has issued Accounting Standards Update (“ASU”)No. 2016-07 “Topic 323, Investments—Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting,” which aims to identify, evaluate, and improve areas of generally accepted accounting principles (GAAP) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The amendments in this Update affect all entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted. We are currently in the process of evaluating the impact of the adoption of ASU 2016-07 on our consolidated financial statements.

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In March 2016, the FASB has issued ASU No. 2016-08 “Topic 606, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” which requires the entity to determine whether the nature of its promise is to provide good or service to the customer (that is, the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party (that is, the entity is an agent). This determination is based upon whether the entity controls the good or the service before it is transferred to the customer. The amendments in this Update affect entities with transactions included within the scope of Topic 606. The core principle of the guidance in Topic 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in this Update affect the guidance in Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements of Update 2014-09. Accounting Standards Update No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. We are currently in the process of evaluating the impact of the adoption of ASU 2016-08 on our consolidated financial statements.

In April 2016, the FASB has issued ASU No. 2016-09 “Topic 718, Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting,” which aims to identify, evaluate, and improve areas of generally accepted accounting principles (GAAP) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The amendments in this Update affect all entities that issue share-based payment awards to their employees. The areas for simplification in this Update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments eliminate the guidance in Topic 718 that was indefinitely deferred shortly after the issuance of FASB Statement No. 123 (revised 2004), Share-Based Payment. For public business entities, the amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the amendments are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted for any entity in any interim or annual period. We are currently evaluating the impact of the adoption of ASU 2016-09 on our consolidated financial statements.

In April 2016, the FASB has issued ASU No. 2016-10 “Topic 606, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing.” The amendments in this Update do not change the core principle of the guidance in Topic 606. Rather, the amendments in this Update clarify the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. The amendments in this Update clarify that contractual provisions that, explicitly or implicitly, require an entity to transfer control of additional goods or services to a customer (for example, by requiring the entity to transfer control of additional rights to use or rights to access intellectual property that the customer does not already control) should be distinguished from contractual provisions that, explicitly or implicitly, define the attributes of a single promised license (for example, restrictions of time, geographical region, or use). The amendments in this Update affect the guidance in Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. We are currently in the process of evaluating the impact of the adoption of ASU 2016-10 on our consolidated financial statements.

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In May 2016, the FASB has issued ASU No. 2016-12 “Topic 606, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients”. The amendments in this Update add a project to its technical agenda to improve Topic 606, Revenue from Contracts with Customers, by reducing: 1. the potential for diversity in practice at initial application; 2. the cost and complexity of applying Topic 606 both at transition and on an ongoing basis. The amendments in this Update affect entities with transactions included within the scope of Topic 606. The amendments in this Update affect the guidance in Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09). We are currently in the process of evaluating the impact of the adoption of ASU 2016-12 on our consolidated financial statements.

In June 2016, the FASB has issued ASU No. 2016-13 “Topic 326, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments”. The amendments in this Update provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this Update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments affect entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments in this Update affect an entity to varying degrees depending on the credit quality of the assets held by the entity, their duration, and how the entity applies current GAAP. For public business entities that are U.S. Securities and Exchange Commission (SEC) filers, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For all other public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. For all other entities, including not-for-profit entities and employee benefit plans within the scope of Topics 960 through 965 on plan accounting, the amendments in this Update are effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. We do not expect the adoption of ASU 2016-13 to have a material impact on our consolidated financial statements.

In August 2016, the FASB has issued ASU No. 2016-15 “Topic 230, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments”. The amendments in this Update provide guidance on the following eight specific cash flow issues:(1) Debt Prepayment or Debt Extinguishment Costs;(2) Settlement of Zero-Coupon Debt Instruments or Other Debt Instruments with Coupon Interest Rates That Are Insignificant in Relation to the Effective Interest Rate of the Borrowing;(3) Contingent Consideration Payments Made after a Business Combination;(4) Proceeds from the Settlement of Insurance Claims;(5) Proceeds from the Settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned Life Insurance Policies;(6) Distributions Received from Equity Method Investees;(7) Beneficial Interests in Securitization Transactions;(8) Separately Identifiable Cash Flows and Application of the Predominance Principle. The amendments are an improvement to GAAP because they provide guidance for each of the eight issues, thereby reducing the current and potential future diversity in practice. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. We do not expect the adoption of ASU 2016-15 to have a material impact on our consolidated financial statements.

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NOTE 8 – CONCENTRATIONS

(a) Customers

For the three-month period ended September 30, 2016, the Company’s major customers, each of whom accounted for more than 10% of the Company’s consolidated revenue, were as follows:

    Sales     Accounts Receivable  
    Three Months     Three Months              
    Ended     Ended              
    September 30,     September 30,     September 30,     December 31,  
Major Customers   2016     2015     2016     2015  

Kandi Electric Vehicles Group Co., Ltd.and its subsidiaries

  19%     70%     64%     55%  

Jinhua Chaoneng Automobile Sales Co., Ltd.

  56%     -     25%     -  

Zhejiang Yongkang Dingji Imp.& Exp. CO.,LTD.

  24%     -     1%     -  

For the nine-month period ended September 30, 2016, the Company’s major customers, each of whom accounted for more than 10% of the Company’s consolidated revenue, were as follows:

    Sales     Accounts Receivable  
    Nine Months     Nine Months              
    Ended     Ended              
    September 30,     September 30,     September 30,     December 31,  
Major Customers   2016     2015     2016     2015  

Kandi Electric Vehicles Group Co., Ltd. and its subsidiaries

  55%     76%     64%     55%  

Jinhua Chaoneng Automobile Sales Co. Ltd.

  35%     -     25%     -  

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(b) Suppliers

For the three-month period ended September 30, 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  
    Three Months     Three Months              
    Ended     Ended     September 30,     December 31,  
    September 30,     September 30,              
Major Suppliers   2016     2015     2016     2015  

Dongguan Chuangming Battery Technology Co., Ltd.

  56%     26%     27%     15%  

Zhuhai Enpower Electrical Limited

  14%     -     6%     -  

For the nine-month period ended September 30, 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  
    Nine Months     Nine Months              
    Ended     Ended     September 30,     December 31,  
    September 30,     September 30,              
Major Suppliers   2016     2015     2016     2015  

Dongguan Chuangming Battery Technology Co., Ltd.

  48%     17%     27%     15%  

Zhejiang Tianneng Energy Technology Co., Ltd.

  19%     24%     21%     24%  

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, warrants and convertible notes (using the if-converted method). For the three months ended September 30, 2016 and 2015, the average number of dilutive common shares was 0 and 0, respectively. For the nine months ended September 30, 2016 and 2015, the average number of dilutive common shares was 0 and 274,744, respectively. The potential dilutive common shares as of September 30, 2016 and 2015 were 4,900,000 and 949,419 shares respectively.

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The following is the calculation of earnings per share for the three-month periods ended September 30, 2016 and 2015:

    For three months ended  
    September 30,  
    2016     2015  

Net income

$  (565,941 ) $  2,343,195  

Weighted average shares used in basic computation

  47,695,290     46,959,638  

Dilutive shares

  -     -  

Weighted average shares used in diluted computation

  47,695,290     46,959,638  

 

           

Earnings per share:

           

Basic

$  (0.01 ) $  0.05  

Diluted

$  (0.01 ) $  0.05  

The following is the calculation of earnings per share for the nine-month periods ended September 30, 2016 and 2015:

    For nine months ended  
    September 30,  
    2016     2015  

Net income

$  2,315,659   $  13,900,350  

Weighted average shares used in basic computation

  47,436,418     46,670,533  

Dilutive shares

  -     274,744  

Weighted average shares used in diluted computation

  47,436,418     46,945,277  

 

           

Earnings per share:

           

Basic

$  0.05   $  0.30  

Diluted

$  0.05   $  0.30  

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NOTE 10 - ACCOUNTS RECEIVABLE

Accounts receivable are summarized as follows:

    September 30,     December 31,  
    2016     2015  

Accounts receivable

$  40,805,693   $  8,136,421  

Less: Provision for doubtful debts

  -     -  

Accounts receivable, net

$  40,805,693   $  8,136,421  

NOTE 11 - INVENTORIES

Inventories are summarized as follows:

    September 30,     December 31,  
    2016     2015  

Raw material

$  7,825,367   $  8,509,421  

Work-in-progress

  2,384,830     1,648,498  

Finished goods

  5,782,689     8,101,661  

Total inventories

  15,992,886     18,259,580  

Less: provision for slowing moving inventories

  (472,910 )   (485,901 )

Inventories, net

$  15,519,976   $  17,773,679  

NOTE 12 - NOTES RECEIVABLE

Notes receivable are summarized as follows:

September 30, December 31,
    2016     2015  

Notes receivable as below:

           

Due September 30, 2016, interest at 7.2% per annum

$  0   $  10,578,574  

Bank acceptance notes

  1,969,252     2,454,741  

Notes receivable

$  1,969,252   $  13,033,315  

Details of Notes Receivable as of September 30, 2016 are as below:

25



Index Amount ($) Counter party Relationship Nature Manner of settlement
1 1,316,132 Kandi Shanghai Subsidiary of the JV Company Payments for sales Not due
2 428,268 Hohhot Xinhui Hengtong Automobile Trade Co. Ltd. No relationship beyond loan Payments for sales Not due
3 224,852 Kandi Electric Vehicles Group Co., Ltd. the JV Company Payments for sales Not due

Details of Notes Receivable as of December 31, 2015 are as below:

Index Amount ($) Counter party Relationship Nature Manner of settlement
           
1 10,578,574 Yongkang HuiFeng Guarantee Co., Ltd No relationship beyond loan Receive interest income Not due
2 1,871,332 Kandi Electric Vehicles Group Co., Ltd. the JV Company Payments for sales Not due
3 59,744 Kandi Shanghai Subsidiary of the JV Company Payments for sales Not due
4 523,665 Zhuhai Enpower electrical Limited No relationship beyond loan Payments for sales Not due

26


NOTE 13 – PROPERTY, PLANT AND EQUIPMENT

Plant and equipment consisted of the following:

  September 30,     December 31,  
    2016     2015  

At cost:

           

Buildings

$  13,512,024   $  13,883,211  

Machinery and equipment

  9,010,008     7,804,097  

Office equipment

  462,751     395,328  

Motor vehicles

  334,438     335,227  

Moulds

  27,394,924     32,931,740  

 

  50,714,145     55,349,603  

Less : Accumulated depreciation

       

Buildings

$  (3,997,470 ) $  (3,755,582 )

Machinery and equipment

  (8,492,712 )   (7,108,925 )

Office equipment

  (251,069 )   (249,378 )

Motor vehicles

  (280,502 )   (271,495 )

Moulds

  (20,949,656 )   (23,385,363 )

 

  (33,971,409 )   (34,770,743 )

Less: provision for impairment for fixed assets

  (52,299 )   (53,734 )

Plant and equipment, net

$  16,690,437   $  20,525,126  

As of September 30, 2016 and December 31, 2015, the net book value of plant and equipment pledged as collateral for bank loans was $9,351,427 and $9,949,661, respectively.

Depreciation expenses for the nine months ended September 30, 2016 and 2015, was $3,370,032 and $4,036,771, respectively. Depreciation expenses for the three months ended September 30, 2016 and 2015, was $1,106,755 and $1,317,383, respectively.

NOTE 14 – LAND USE RIGHTS

The Company’s land use rights consisted of the following:

    September 30,     December 31,  
    2016     2015  

Cost of land use rights

$  14,868,506   $  15,276,957  

Less: Accumulated amortization

  (2,525,602 )   (2,341,836 )

Land use rights, net

$  12,342,904   $  12,935,121  

27


As of September 30, 2016 and December 31, 2015, the net book value of land use rights pledged as collateral for the Company’s bank loans was $ 9,077,942 and $9,512,598, respectively. Also see Note 17.

The amortization expense for the nine months ended September 30, 2016 and 2015 was $249,742 and $290,559, respectively. The amortization expense for the three months ended September 30, 2016 and 2015 was $95,906 and $95,332, respectively. Amortization expense for the next five years and thereafter is as follows:

2016 (three months) $  83,247  
2017   332,989  
2018   332,989  
2019   332,989  
2020   332,989  
Thereafter   10,927,701  
Total $  12,342,904  

NOTE 15 - CONSTRUCTION-IN-PROGRESS

As of September 30, 2016, a total amount of advances to a supplier of RMB 353,000,000, or $52,915,129, made by Kandi Hainan to Nanjing Shangtong Nanjing Shangtong for equipment purchases was included in CIP. None of the CIP was transferred to property, plant and equipment as of September 30, 2016. See also Note 6(g).

The government of Hainan Province is enforcing a new plan to centralize the manufacturing in designated industry park, the Wanning facility has been relocated from Wanning City to Haikou City. In addition, all related expenses and assets disposal caused by the relocation were compensated by the local government. Currently Hainan facility is under construction. It is expected to be completed for production testing in the middle of 2017.

No depreciation is provided for CIP until such time as the facility is completed and placed into operation.

The contractual obligation under CIP of the Company as of September 30, 2016 is as follow:


Project
    Total in CIP as of
September 30,
2016
    Contracted but
not provided for
    Total contract
amount
 
                     
Kandi Hainan facility   $  57,094,373   $  16,189,331   $  73,283,704  
                     
Total   $  57,094,373   $  16,189,331   $  73,283,704  

As of September 30, 2016 and December 31, 2015, the Company had CIP amounting to $57,094,373 and $54,368,753, respectively.

28


No interest expense has been capitalized for CIP as of September 30, 2016 and 2015, respectively, as the Company did not get loans for CIP.

NOTE 16 – SHORT TERM BANK LOANS

Short-term loans are summarized as follows:

  September  30,       December 31,  
  2016       2015  

Loans from China Ever-bright Bank

           

Interest rate 4.698% per annum, renewed on October 21, 2016, secured by the assets of the Company, guaranteed by Mr. Hu Xiaoming and his wife, $6,295,851 due on April 21, 2017 and $5,396,444 due on April 20, 2017.

  11,692,295     12,013,492  

Loans from Hangzhou Bank

           

Interest rate 4.60% per annum, renewed on October 12, 2016, due on October 17, 2017, secured by the assets of the Company. Also see Note 14 and Note 15.

  7,315,179     7,516,134  

Interest rate 4.82% per annum, paid off on July 1, 2016, secured by the assets of the Company. Also see Note 14 and Note 15.

  -     7,700,956  

Interest rate 4.85% per annum, paid off on July 1, 2016, secured by the assets of the Company. Also see Note 14 and Note 15.

  -     3,419,225  

Interest rate 4.35% per annum, due on July 3, 2017, secured by the assets of the Company. Also see Note 14 and Note 15.

  10,822,868     -  

Interest rate 4.35% per annum, due on March 23, 2017, secured by the assets of the Company. Also see Note 14 and Note 15.

        5,846,147     -  

Interest rate 5.35% per annum, paid off on March 22, 2016, secured by the assets of the Company. Also see Note 14 and Note 15.

  -     6,006,746  
             
  $ 35,676,489       36,656,553  

29


The interest expenses for the nine months ended September 30, 2016 and 2015 were $1,299,549 and $1,730,898, respectively. The interest expenses for the three months ended September 30, 2016 and 2015 were $425,152 and $534,987, respectively.

As of September 30, 2016, the aggregate amount of short-term loans that was guaranteed by various third parties was $0.

NOTE 17 – NOTES PAYABLE

By issuing bank notes payables rather than paying cash to suppliers, the Company can defer the payments until the date the bank notes payable are due. Simultaneously, the Company may need to deposit restricted cash in banks to back up the bank notes payable. The restricted cash deposited in banks will generate interest income.

Notes payable as of September 30, 2016 and December 31, 2015 were summarized as follows:

    September 30,     December 31,  
    2016     2015  
Bank acceptance notes:            
Due May 12, 2016 $ -   $  2,310,287  
Due June 17, 2016   -     1,540,191  
Due November 16, 2016   2,248,518     -  
Due December 23, 2016   428,268     -  
Due March 22, 2017   416,725        
Total $  3,093,511   $  3,850,478  

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 money, 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. $3,093,511 and $3,850,478 were held as collateral for the notes payable as of September 30, 2016 and December 31, 2015, respectively.

NOTE 18 – TAXES

(a) Corporation Income Tax

In accordance with the relevant tax laws and regulations of the PRC, the applicable corporate income tax (“CIT”) rate for Kandi’s subsidiaries are as below:

30


Company Name Applicable Corporate Income Tax
Kandi Vehicles 15%
Kandi New Energy 25%
Yongkang Scrou 25%
Kandi Hainan 25%
JV Company 25%

The Company, qualified as a high technology company in China, was entitled to pay a reduced CIT rate of 15%. After combining with the research and development tax credit of 25% on certain qualified research and development expenses, the final effective reduced income tax rate was 16.60% . The combined tax benefits were 49.58% . The actual effective income tax rate was reduced from 25% to 12.60% in the third quarter of 2016.

According to the PRC CIT reporting system, the CIT sales cut-off base is concurrent with the value-added tax (“VAT”), which should reported to the State Administration of Taxation (“SAT”) on a quarterly basis. Since the VAT and CIT are accounted for on a VAT tax basis that recorded all sales on a “State provided official invoices” reporting system, the Company is reporting the CIT according to the SAT prescribed tax reporting rules. Under the VAT tax reporting system, sales cut-off is not done on an accrual basis but rather on a VAT taxable reporting basis. Therefore, when the Company adopted U.S. GAAP using an accrual basis, the sales cut-off CIT timing (due to the VAT reporting system) creates a temporary sales cut-off timing difference. This difference is reflected in the deferred tax assets or liabilities calculations on the income tax estimate reported elsewhere on the report.

Effective January 1, 2007, the Company adopted ASC 740, Income Taxes. The interpretation 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 September 30, 2016, the Company did not have a liability for unrecognized tax benefits. The Company files income tax returns to the U.S. Internal Revenue Services (“IRS”) and 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 China. As of September 30, 2016, the Company was not aware of any pending income tax examinations by U.S. and China tax authorities. The Company's policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of September 30, 2016, 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 as of September 30, 2016 due to the net operating loss in 2016 and an accumulated net operating loss carry forward from prior years in the United States.

31


Income tax expense (benefit) for the nine months ended September 30, 2016 and 2015 is summarized as follows:


    For Nine Months Ended  
    September 30,  
    (Unaudited)  
    2016     2015  
Current:            
Provision for CIT $  2,925,100   $  3,175,287  
Provision for Federal Income Tax   -     -  
Deferred:            
Provision for CIT   (2,608,702 )   -  
Income tax expense (benefit) $  316,399   $  3,175,287  

The Company’s income tax benefit (expense) differs from the “expected” tax expense for the nine months ended September 30, 2016 and 2015 (computed by applying the U.S. Federal Income Tax rate of 34% and PRC CIT rate of 25%, respectively, to income before income taxes) as follows:

    For Nine Months Ended  
    September 30,  
    (Unaudited)  
    2016     2015  
Computed “expected” expense $  3,638,048   $  (322,716 )
Favorable tax rate   (229,839 )   (880,016 )
Permanent differences   (69,203 )   280,798  
Valuation allowance   (3,022,607 )   4,097,221  
Income tax expense (benefit) $  316,399   $  3,175,287  

32


The tax effects of temporary differences that give rise to the Company’s net deferred tax assets and liabilities as of September 30, 2016 and December 31, 2015 are summarized as follows:

    September 30,     December 31,  
    2016     2015  
    (Unaudited)        
Current portion:            
Deferred tax assets (liabilities):            
           Expense $  165,221     (272,953 )
Subtotal   165,221     (272,953 )
             
Deferred tax assets (liabilities):            
Sales cut-off difference derived from Value Added Tax reporting system to calculate PRC Corporation Income Tax in accordance with the PRC State Administration of Taxation   -     290,850  
           Other   (252,608 )   (2,392,821 )
Subtotal   (252,608 )   (2,101,971 )
             
Total deferred tax assets (liabilities) – current portion   (87,387 )   (2,374,924 )
             
Non-current portion:            
Deferred tax assets (liabilities):            
                         Inventory falling price reserves   70,936     -  
                         Bad debt reserves   3,772     -  
           Depreciation   219,758     (353,115 )
           Loss carried forward   (3,022,607 )   7,645,386  
           Valuation allowance   3,022,607     (7,645,386 )
Subtotal   294,467     (353,115 )
             
Deferred tax liabilities:            
                          Long term deferred assets   (1,578,802 )   -  
           Accumulated other comprehensive gain   -     (1,240,467 )
Subtotal   (1,578,802 )   (1,240,467 )
             
Total deferred tax assets – non-current portion   (1,284,335 )   (1,593,582 )
             
Net deferred tax assets (liabilities) $  (1,371,722 )   (3,968,506 )

33


(b) Tax Benefit (Holiday) Effect

For the nine months ended September 30, 2016 and 2015, the PRC CIT rate was 25%. Certain subsidiaries of the Company were entitled to tax benefit (holidays) for the nine months ended September 30, 2016 and 2015.

The combined effects of the income tax expense exemptions and reductions available to the Company for the three and nine months ended September 30, 2016 and 2015 were as follows:

    For the Nine Months Ended  
    September 30,  
    (Unaudited)  
    2016     2015  
Tax benefit (holiday) credit $  229,839   $  880,016  
Basic net income per share effect $  0.005   $  0.019  

NOTE 19 - STOCK OPTIONS AND WARRANTS

(a) Stock Options

On May 29, 2015, the Compensation Committee of the Board of Directors of the Company approved the grant of stock options to purchase 4,900,000 shares of 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 options was estimated using the Black Scholes Model with an expected volatility of 90%, expected life of 10 years, risk-free interest rate of 2.23% and expected dividend yield of 0.00% .There was $13,885,604 stock compensation expense booked in the first three quarters of 2016.

The fair value of the 4,900,000 options issued to the employees and directors on May 29, 2015 is $8.1613 per share.

(b) Warrants

We adopted the binomial tree valuation approach to estimate the fair value of the warrant. In binomial tree valuation approach, it is assumed that the life of the warrant(from Valuation Date to Expiration Date) is typically divided into many steps(or nodes). In each step there is a binomial stock price movement. With more steps, possible stock price paths are implicitly considered. Valuation of warrant is performed iteratively, starting at each of the final nodes (those that may be reached at the time of expiration), and then working backwards through the tree towards the first node (valuation date). The value computed at each stage is the value of the warrant at that point in time.

On June 26, 2013, the Company entered into a securities purchase agreement (the “2013 Securities Purchase Agreement”) with certain institutional investors (the “Third Round Investors”) that closed on July 1, 2013, pursuant to which the Company sold to the Third Round Investors, in a registered direct offering, an aggregate of 4,376,036 shares of the Company’s common stock at a negotiated purchase price of $6.03 per share. Under the 2013 Securities Purchase Agreement, the Third Round Investors also received Series A warrants for the purchase of up to 1,750,415 shares of the Company’s common stock at an exercise price of $7.24 per share and an option to make an additional investment in the form of Series B warrants and Series C warrants, Series B warrants to purchase a maximum aggregate of 728,936 shares of the Company’s common stock at an exercise price of $7.24 per share and Series C warrants to purchase a maximum aggregate of 291,574 shares of the Company’s common stock at an exercise price of $8.69 (the “Third Round Warrants”). As of June 30, 2014, all the Third Round Warrants had been exercised on a cash basis. In addition, the placement agent for this transaction also received warrants for the purchase of up to 262,562 shares of the Company’s common stock with an exercise price of $7.24 per share (the “Third Round Placement Agent Warrants”). Based on the terms of the warrants, they contain the downward ratchet protection and anti-dilution terms, so the Company classified these warrants as liabilities on the balance sheet. On July 1, 2016, the Third Round Placement Agent Warrants expired without any exercise.

34


On January 15, 2014, the Company sold to certain institutional investors warrants to purchase an aggregate of 1,429,393 shares of the Company’s common stock at an exercise price of $15 per share (the “January 2014 Warrants”) for a total purchase price of approximately $14,294. According to the warrant subscription agreement by and among the Company and the holders, the exercise price was reduced by a credit of $0.01, which reflected the price per warrant share paid in connection with the issuance of the January 2014 Warrants. Consequently, the effective exercise price per warrant share is $14.99. Based on the terms of the warrants, they contain the downward ratchet protection and anti-dilution terms, so the Company classified these warrants as liabilities on the balance sheet. The January 2014 Warrants expired on January 30, 2015 and no investors exercised their warrants.

On March 19, 2014, the Company entered into a securities purchase agreement with certain purchasers (the “Fourth Round Investors”), pursuant to which the Company sold to the Fourth Round Investors, in a registered direct offering, an aggregate of 606,000 shares of common stock, at a negotiated purchase price of $18.24 per share, for aggregate gross proceeds to the Company of approximately $11,053,440, before deducting fees to the placement agent and other estimated offering expenses payable by the Company. As part of the transaction, the Fourth Round Investors also received warrants for the purchase of up to 90,900 shares of the Company’s common stock at an exercise price of $22.80 per share (the “Fourth Round Warrants”). In addition, the placement agent for this transaction also received warrants for the purchase of up to 36,360 shares of the Company’s common stock at an exercise price of $22.80 per share, which was adjusted to $9.72 on July 27, 2015. The Fourth Round Warrants have a term of eighteen months and are exercisable by the holders at any time after the date of issuance. On August 8, 2015, the Company extended the expiration date of these warrants from September 21, 2015 to January 20, 2016, among these warrants, 44,783 shares were exercised in January 2016 and the rest warrant shares were expired without exercise. Based on the terms of the warrants, they contain the downward ratchet protection and anti-dilution terms, so the Company classified these warrants as liabilities on the balance sheet.

On September 4, 2014, the Company entered in a securities purchase agreement with certain purchasers (the “Fifth Round Investors”), pursuant to which the Company sold to the Fifth Round Investors, in a registered direct offering, an aggregate of 4,127,908 shares of its common stock at a price of $17.20 per share, for aggregate gross proceeds to the Company of approximately $71 million, before deducting fees to the placement agent and other estimated offering expenses payable by the Company (the “Fifth Round Financing”). As part of the transaction, the Fifth Round Investors also received warrants for the purchase of up to 743,024 shares of the Company’s common stock at an exercise price of $21.50 per share (the “Fifth Round Warrants”), which was adjusted to $9.72 on July 27, 2015. The Fifth Round Warrants have a term of seventeen months and are exercisable by the holders at any time after the date of issuance. On August 8, 2015, the Company extended the expiration date of these warrants from February 4, 2016 to June 3, 2016, and as of now these warrants were expired without any exercise. In addition, the placement agent for this transaction also received warrants for the purchase of up to 206,395 shares of the Company’s common stock at an exercise price of $20.64 per share, which was adjusted to $9.72 per share as the exercise price in December 2015 due to its financial consulting service. The placement agent’s warrants are exercisable for a term of seventeen months after six months from the issuance. Based on the terms of the warrants, they contain the downward ratchet protection and anti-dilution terms, so the Company classified these warrants as liabilities on the balance sheet. On August 3, 2016, all the placement agent warrants were expired without any exercise.

35


As of September 30, 2016 and December 31, 2015, the derivative liability relating to the warrants issued to the investors and a placement agent was $0 and $3,823,590, respectively. For the three and nine months ended September 30, 2016, the gain related to changes in the fair value of derivative liability relating to the warrants issued to the investors and a placement agent was $10,692 and $3,823,590, respectively.

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 having Mr. Jerry Lewin to serve 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 having Ms. Kewa Luo to serve as the Company’s investor relation officer, the Board authorized the Company to provide Ms. Kewa Luo with 5,000 shares of Company's common stock every six months, beginning in September 2013.

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 six months.

On December 30, 2013, the Board approved a proposal (as submitted by the Compensation Committee) of an award (“Board’s Pre-Approved Award Grant Sub-Plan under the 2008 Plan”) for selected executives and other key employees comprising a total of 335,000 shares of common stock for each fiscal year, beginning with the 2013 fiscal year, under the Company’s 2008 Omnibus Long-Term Incentive Plan (the “2008 Plan”), if the Company’s “Non-GAAP Net Income” for the current fiscal year increased by 10% comparing to that of the prior year. The specific number of shares of common stock to be issued in respect of such award could proportionally increase or decrease if the actual Non-GAAP Net Income increase is more or less than 10%. “Non-GAAP Net Income” means the Company’s net income for a particular year calculated in accordance with GAAP, excluding option-related expenses, stock award expenses, and the effects caused by the change of fair value of financial derivatives. For example, if Non-GAAP Net Income for the 2014 fiscal year increased by 10% compared to the Non-GAAP Net Income for the 2013 fiscal year, the selected executives and other key employees each would be granted his or her target amount of common stock of the Company. If Non-GAAP Net Income in 2014 is less than Non-GAAP Net Income in 2013, then no common stock would be granted. If Non-GAAP Net Income in 2014 increased compared to Non-GAAP Net Income in 2013 but the increase is less than 10%, then the target amount of the common stock grant would be proportionately decreased. If Non-GAAP Net Income in 2014 increased compared to Non- GAAP Net Income in 2013 but the increase is more than 10%, then the target amount of the common stock grant would be proportionately increased up to 200% of the target amount. Any such increase in the grant would be subject to the total number of shares available under the 2008 Plan, and the Company’s Board and shareholders will need to approve an increase in the number of shares reserved under the 2008 Plan if the number of shares originally reserved is used up. 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. 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 the award. Stock-based compensation expense is 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 expense is adjusted based on grant date fair value and the change of number of awards expected to be earned. Final stock-based compensation expense for the year is calculated based on grant date fair value and number of awards earned for the year and recognized at the end of year. 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 and the other term was as same as before. For the three months ended September 30, 2016 and 2015, there were $4,003,250 of expense reversal and $872,107 of employee stock award expense recognized under General and Administrative Expenses, respectively. For the nine months ended September 30, 2016 and 2015, there were $0 and $4,296,060 of employee stock award expense recognized under General and Administrative Expenses, respectively.

36


The stock award was below starting from 2013 based on the award plan above:

Issue Date For Year Shares
May 22, 2014 2013 801,163
April 15, 2015 / June 12, 2015 2014 670,000
April 13, 2016 2015 670,000

37


NOTE 21 – INTANGIBLE ASSETS

The following table provides the gross carrying value and accumulated amortization for each major class of intangible assets other than goodwill:

          September 30,     December 31,  
      Remaining     2016     2015  
    useful life              
Gross carrying amount:                  
Trade name   5.25 years   $  492,235   $  492,235  
Customer relations   5.25 years     304,086     304,086  
          796,321     796,321  
                 
Less : Accumulated amortization                  
Trade name       $  (224,128 ) $  (186,069 )
Customer relations         (138,458 )   (114,946 )
          (362,586 )   (301,015 )
Intangible assets, net       $  433,735   $  495,306  

The aggregate amortization expense 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 were $20,524 and $20,524 for the three months ended September 30, 2016 and 2015, respectively, and $61,571 and $61,571 for the nine month period ended September 30, 2016 and 2015, respectively.

Amortization expense for the next five years and thereafter is as follows:

2016 (three months) $  20,524  
2017   82,095  
2018   82,095  
2019   82,095  
2020   82,095  
Thereafter   84,831  
Total $  433,735  

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.

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Kandi Electric Vehicles Group Co., Ltd. (the “JV Company”)

In March 2013, pursuant to a joint venture agreement (the “JV Agreement”) entered into between Kandi Vehicles and Shanghai Maple Guorun Automobile Co., Ltd. (“Shanghai Guorun”), a 99%-owned subsidiary of Geely Automobile Holdings Ltd. (“Geely”), the parties established Zhejiang Kandi Electric Vehicles Co., Ltd. (the “JV Company”) to develop, manufacture and sell electric vehicles (“EVs”) and related auto parts. Each of Kandi Vehicles and Shanghai Guorun has 50% ownership interest in the JV Company. For JV Company’s better development, Zhejiang Geely Holding Group, the parent company of Geely, became the direct holding company of the JV Company on October 26, 2016 by completing the purchase of the 50% equity of the JV Company held by Shanghai Guorun with a premium price, or a purchase price exceeding the cash amount of the aggregate of the original investment and the shared profits over the years. In the fourth quarter of 2013, Kandi Vehicles entered into an ownership transfer agreement with the JV Company pursuant to which Kandi Vehicles transferred 100% of its ownership in Kandi Changxing to the JV Company. As a result, the Company indirectly has 50% economic interest in Kandi Changxing through its 50% ownership interest in the JV Company after this transfer. In November 2013, Zhejiang Kandi Electric Vehicles Jinhua Co., Ltd. (“Kandi Jinhua”) was formed by the JV Company. The JV Company has 100% ownership interest in Kandi Jinhua, and the Company, indirectly through its 50% ownership interest in the JV Company, has 50% economic interest in Kandi Jinhua. In November 2013, Zhejiang JiHeKang Electric Vehicle Sales Co., Ltd. (“JiHeKang”) was formed by the JV Company. The JV Company has 100% ownership interest in JiHeKang, and the Company, indirectly through its 50% ownership interest in the JV Company, has 50% economic interest in JiHeKang. In December 2013, the JV Company entered into an ownership transfer agreement with Shanghai Guorun pursuant to which the JV Company acquired 100% ownership of Kandi Electric Vehicles (Shanghai) Co., Ltd. (“Kandi Shanghai”). As a result, Kandi Shanghai is a wholly-owned subsidiary of the JV Company, and the Company, indirectly through its 50% ownership interest in the JV Company, has 50% economic interest in Kandi Shanghai. In January 2014, Zhejiang Kandi Electric Vehicles Jiangsu Co., Ltd. (“Kandi Jiangsu”) was formed by the JV Company. The JV Company has 100% ownership interest in Kandi Jiangsu, and the Company, indirectly through its 50% ownership interest in the JV Company, has 50% economic interest in Kandi Jiangsu. In addition, In July 2013, Zhejiang ZuoZhongYou Electric Vehicle Service Co., Ltd. (the “Service Company”) was formed. The JV Company had a 19% ownership interest in the Service Company. In March 2014, the JV Company changed its name to Kandi Electric Vehicles Group Co., Ltd. In August 2015, the JV Company transferred its shares of the Service Company to Shanghai Guorun and Kandi Vehicles for 9.5% respectively. As the result, the JV Company no longer has any ownership of the Service Company since the transfer. In November 2015, Hangzhou Puma Investment Management Co., Ltd. (“Puma Investment”) was formed by the JV Company. The JV Company has 50% ownership interest in Puma Investment and the Company, indirectly through its 50% ownership interest in the JV Company, has 25% economic interest in Puma Investment. In November 2015,Hangzhou JiHeKang Electric Vehicle Service Co., Ltd. (“JiHeKang Service Company”) was formed by the JV Company. The JV Company has 100% ownership interest in JiHeKang Service Company and the Company, indirectly through its 50% ownership interest in the JV Company, has 50% economic interest in JiHeKang Service Company.

As of September 30, 2016, the JV Company consolidated the following entities on its financial statements: (1) 100% interest in Kandi Changxing; (2) 100% interest in Kandi Jinhua; (3) 100% interest in JiHeKang; (4) 100% interest in Kandi Shanghai; (5) 100% interest in Kandi Jiangsu; (6) 100% interest in JiHeKang Service; and (7) 50% interest in Puma Investment. The Company accounted for its investments in the JV Company under the equity method of accounting as the Company has 50% ownership interest in the JV Company. Therefore, the Company’s consolidated net income for the three months and nine months ended September 30, 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:

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    Three months ended  
    September 30,  
    2016     2015  
Condensed income statement information:            
Net sales $  11,688,178   $  98,447,939  
Gross income   5,937,134     13,325,271  
% of net sales   50.8%     13.5%  
Net income   (426,797 )   1,611,658  
% of net sales   -3.7%     1.6%  
Company’s equity in net income of JV $  (213,399 ) $  805,829  

    Nine months ended  
    September 30,  
    2016     2015  
Condensed income statement information:            
Net sales $  122,959,660   $  197,965,282  
Gross income   19,538,305     31,958,679  
% of net sales   15.9%     16.1%  
Net income   131,323     4,000,781  
% of net sales   0.1%     2.0%  
Company’s equity in net income of JV $  65,662   $  2,000,390  

    September 30,     December 31,  
    2016     2015  
Condensed balance sheet information:            
Current assets $  510,523,657   $  455,368,595  
Noncurrent assets   186,074,593     191,145,583  
Total assets $  696,598,250   $  646,514,178  
Current liabilities   475,158,369     429,487,683  
Noncurrent liabilities   45,463,021     36,348,514  
Equity   175,976,860     180,677,981  
Total liabilities and equity $  696,598,250   $  646,514,178  

During the first three quarters of 2016, 100% of the JV Company’s revenues were derived from the sales of EV products in the PRC with a total of 7,384 units sold, 2,153 units of which were direct sales through the distribution company, JiHeKang, and the rest were sold for the Micro Public Transportation Program (“MPT” or the “EV-Share” Program). As the Company only 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 didn’t consolidate the JV Company’s financial results but included the equity income from the JV Company during such periods.

40


Note: The following table illustrates the captions used in the Company’s Income Statements for its equity basis investments in the JV Company.

Changes in the Company’s equity method investment in the JV Company for the nine months ended September 30, 2016 and 2015 were as follows:

    Nine Months ended  
    September 30,  
    2016     2015  

Investment in JV Company, beginning of the period,

$  90,337,899   $  83,309,095  

Share of profit

  65,662     2,000,390  

Intercompany transaction elimination

  (270,113 )   (283,267 )

Year 2015 unrealized profit realized

  1,076     183,005  

Exchange difference

  (2,412,569 )   (2,935,339 )

Investment in JV Company, end of the period

$  87,721,955   $  82,273,884  

Sales to the Company’s customers, the JV Company and its subsidiaries, for the three months ended September 30, 2016 were $1,181,669 or 19% of the Company’s total revenue, a decrease of 96.3% of the sales to the JV Company from the same quarter last year. Sales to the Company’s customers, the JV Company and its subsidiaries, for the nine months ended September 30, 2016 were $62,125,458 or 55% of the Company’s total revenue, a decrease of 41.6% of the sales to the JV Company from the same period last year. The sales to the JV Company and its subsidiaries were primarily the sales of battery packs, body parts, EV drive motors, EV controllers, air conditioning units and other auto parts, the breakdown of the sales to the JV Company and its subsidiaries is as follows:

    Three Months ended  
    September 30,  
    2016     2015  
JV Company $  5,915,518   $  19,593,174  
Kandi Changxing   (1,570,084 )   7,245,341  
Kandi Shanghai   (3,300,932 )   5,061,218  
Kandi Jinhua   (313 )   (10,965 )
Kandi Jiangsu   137,480     -  
Total sales to JV $  1,181,669   $  31,888,768  

41



    Nine Months ended  
    September 30,  
    2016     2015  
JV Company $  60,920,788   $  19,593,174  
Kandi Changxing   247,848     42,484,537  
Kandi Shanghai   623,499     42,790,349  
Kandi Jinhua   46,753     1,591,067  
Kandi Jiangsu   286,570     -  
Total sales to JV $  62,125,458   $  106,459,127  

As of September 30, 2016 and December 31, 2015, the net amount due from the JV Company was $114,763,704 and $76,172,471, respectively, of which the majority was the balances with the JV Company, Kandi Jinhua, Kandi Changxing, Kandi Jiangsu and Kandi Shanghai. The breakdown is as below:

    September 30,     December 31,  
    2016     2015  
             
Kandi Shanghai $  255,533   $  (4,488,379 )
Kandi Changxing   16,921,022     3,249,445  
Kandi Jinhua   5,258,563     6,218,177  
Kandi Jiangsu   287,955     11,453  
JV Company   92,040,631     71,181,775  
Consolidated JV $  114,763,704   $  76,172,471  

The amount due from the JV Company included a one-year entrusted loan of $22,485,182 that Kandi Vehicle lent to the JV Company from December 16, 2015 to June 15, 2016 and then extended to December 16, 2016 carrying an annual interest rate 8.7%, which will not be adjusted after the withdrawal during the lending period. The loan was organized by Bank of Communications Hangzhou Zhongan Branch as the agent bank between Kandi Vehicle and the JV Company. Entrusted loans are commonly found in China, where direct borrowing and lending between commercial enterprises are restricted.

NOTE 23 – COMMITMENTS AND CONTINGENCIES

Guarantees and pledged collateral for third party bank loans

As of September 30, 2016 and December 31, 2015, the Company provided guarantees for the following third parties:

(1) Guarantees for bank loans

    September 30,     December 31,  
Guarantee provided to   2016     2015  
Zhejiang Shuguang industrial Co., Ltd.   4,347,135     4,466,555  
Nanlong Group Co., Ltd.   2,998,024     3,080,383  
Kandi Electric Vehicles Group Co., Ltd.   48,717,895     50,056,216  
Total $  56,063,054   $  57,603,154  

On March 15, 2013, the Company entered into a guarantee contract to serve as the guarantor of Nanlong Group Co., Ltd. (“NGCL”) from March 15, 2016 to March 15, 2018 for NGCL's loan amount of $2,998,024 from Shanghai Pudong Development Bank Jinhua Branch with related loan period from March 15, 2013 to March 15, 2016, which was extended to September 15, 2016. NGCL is not related to the Company but it has provided guarantees for the Company in the past due to industry customs. Under this guarantee contract, the Company agreed to perform all obligations of NGCL under the loan contract if NGCL fails to perform its obligations as set forth therein.

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On July 20, 2015, the Company entered into a guarantee contract to serve as the guarantor for the JV Company from July 20, 2016 to July 19, 2018 for the bank loans of $11,242,591 from Bank of China with related loan period from July 22, 2016 to July 21, 2017. Under this guarantee contract, the Company agreed to perform all obligations of the JV Company under the loan contract if the JV Company fails to perform its obligations as set forth therein.

On September 29, 2015, the Company entered into a guarantee contract to serve as the guarantor of Zhejiang Shuguang Industrial Co., Ltd. (“ZSICL”) from September 29, 2015 to September 28, 2018 for the bank loan amount of $4,347,135 from Ping An Bank with related loan period from September 29, 2015 to September 28, 2016. ZSICL is not related to the Company. Under this guarantee contract, the Company agreed to perform all obligations of ZSICL under the loan contract if ZSICL fails to perform its obligations as set forth therein.

On December 14, 2015, the Company entered into a guarantee contract to serve as the guarantor for the JV Company from December 14, 2016 to December 13, 2018 for the bank loans of $37,475,304 from China Import & Export Bank with related loan period from December 14, 2015 to December 13, 2016. Under this guarantee contract, the Company agreed to perform all obligations of the JV Company under the loan contract if the JV Company fails to perform its obligations as set forth therein.

For the Company guarantee for NGCL and ZSIC, it is a common practice that among companies in the region of the PRC in which the Company is located to exchange guarantees for bank debts with no additional consideration given. It is considered a “favor for favor” business practice and is commonly required by Chinese lending banks. Now with Kandi’s creditability improvement in the bank, the related banks have no requirement to ask the third party to provide the company guarantee for Kandi, and the Company decides not to provide new guarantee obligations to them accordingly in the proper time.

The Company was a party to enter into contracts to indemnify a third party for certain liabilities, and as of September 30, 2016 and December 31, 2015, the Company guaranteed the third party’s long-term loan from other companies amounting to $56,063,054 and $57,603,154 that matured at various times in 2018, as a guarantor. In most cases, the Company cannot estimate the potential amount of future payments under these indemnities until events arise that would result in a liability under the indemnities. The Company believes that the liabilities for potential future payments of these guarantees and indemnities are not probable.

(2) Pledged collateral for a third party’s bank loans

As of September 30, 2016 and December 31, 2015, none of the Company’s land use rights or plant and equipment were pledged as collateral securing bank loans to third parties.

NOTE 24 –SEGMENT REPORTING

The Company has only one single operating segment. The Company’s revenue and long-lived assets are primarily derived from and located in the PRC. The Company only has operations in the PRC.

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The following table sets forth revenues by geographic area for the nine months ended September 30, 2016 and 2015, respectively:

    Nine Months Ended September 30,  
    2016     2015  
    Sales Revenue     Percentage     Sales Revenue     Percentage  
Overseas $  3,134,750     3%   $  3,380,570     2%  
China   109,106,891     97%     138,892,521     98%  
Total $  112,241,641     100%   $  142,273,091     100%  

The following table sets forth revenues by geographic area for the three months ended September 30, 2016 and 2015, respectively:

    Three Months Ended September 30,  
    2016     2015  
  Sales
Revenue
    Percentage     Sales
Revenue
    Percentage  
Overseas $  1,520,367     24%   $  1,436,398     3%  
China   4,846,013     76%     49,092,147     97%  
Total $  6,366,380     100%   $  50,528,545     100%  

NOTE 25 – Related Party Transactions

The Board of Directors 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 the sales to related parties (other than the JV Company) for the three months ended September 30, 2016 and 2015:

  September 30,     September 30,  
    2016     2015  
Service Company   (26,490 )   -  
Total $  (26,490 )   -  

(The above negative amount was the exchange loss due to Chinese currency depreciation compared to US Dollar in the third quarter of 2016.)

The following table lists the sales to related parties (other than the JV Company) for the nine months ended September 30, 2016 and 2015:

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    September 30,     September 30,  
    2016     2015  
             
Service Company   3,951,078     -  
Total $  3,951,078     -  

The details for amount due from related parties (other than the JV Company) as of the September 30, 2016 and December 31, 2015 were as below:

  September 30,     December 31,  
    2016     2015  
             
Service Company   10,916,700     40,606,162  
             
Total due from related party $ 10,916,700     40,606,162  

The Company has 9.5% ownership of the Service Company and Mr.Hu, Chairman and CEO of the Company, has 13% ownership of the Service Company. The main transactions between the Company and the Service Company is that the Service Company needs to buy battery for the speed upgrade and also EV parts for the repairing and maintenance for its operating electric vehicles.

For any transactions with JV Company, please refer to Note 22 for the details.

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Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This report contains forward-looking statements within the meaning of the federal securities laws that relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology, such as “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “intend,” “potential” or “continue” or the negative of such terms or other comparable terminology, although not all forward-looking statements contain such terms.

In addition, these forward-looking statements include, but are not limited to, statements regarding implementing our business strategy; development and marketing of our products; our estimates of future revenue and profitability; our expectations regarding future expenses, including research and development, sales and marketing, manufacturing and general and administrative expenses; difficulty or inability to raise additional financing, if needed, on terms acceptable to us; our estimates regarding our capital requirements and our needs for additional financing; attracting and retaining customers and employees; sources of revenue and anticipated revenue; and competition in our market.

Forward-looking statements are only predictions. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. All of our forward-looking information is subject to risks and uncertainties that could cause actual results to differ materially from the results expected. Although it is not possible to identify all factors, these risks and uncertainties include the risk factors and the timing of any of those risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2015 and those set forth from time to time in our other filings with the Securities and Exchange Commission (“SEC”). These documents are available on the SEC’s Electronic Data Gathering and Analysis Retrieval System at http://www.sec.gov.

Critical Accounting Policies and Estimates

This section should be read together with the Summary of Significant Accounting Policies in the attached consolidated financial statements included in this report.

Policy affecting options, warrants and Stock award

Our stock option cost is recorded in accordance with ASC 718 and ASC 505. The fair value of stock options is estimated using the Black-Scholes-Merton model. Our expected volatility assumption is based on the historical volatility of our 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. Stock option expense recognition is based on awards expected to vest. There were no estimated forfeitures. ASC standards require forfeitures to be estimated at the time of grant and revised in subsequent periods, if necessary, if actual forfeitures differ from those estimates.

Our warrant costs are recorded in liabilities in accordance with ASC 480, ASC 505 and ASC 815. The fair value of a warrant is estimated using the binomial tree valuation approach. In binomial tree valuation approach, it is assumed that the life of the warrant(from Valuation Date to Expiration Date) is typically divided into many steps(or nodes). In each step there is a binomial stock price movement. With more steps, possible stock price paths are implicitly considered. Valuation of warrant is performed iteratively, starting at each of the final nodes (those that may be reached at the time of expiration), and then working backwards through the tree towards the first node (valuation date). The value computed at each stage is the value of the warrant at that point in time.

46


Our stock award for the employee is based on the Company annual performance achieved in the year. The Company annual performance will determine the pool of the stock award and the stock issued to an individual will be also linked with the individual’s performance. The performance-based stock award expense is recorded in accordance with ASC 718 and ASC 505. 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. We calculated the stock award expense by using the yearly accumulated basis compared to the same period last year and true-up the expense at the year end.

Estimates affecting accounts receivable and inventories

The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect our reporting of assets and liabilities (and contingent assets and liabilities). These estimates are particularly significant where they affect the reported net realizable value of our accounts receivable and inventories.

Accounts receivable are recognized and carried at net realizable value. An allowance for doubtful accounts is recorded in the period when a loss is probable based on an assessment of specific factors, such as troubled collection, historical experience, accounts aging, ongoing business relations and other factors. Accounts are written off after exhaustive efforts at collection. If accounts receivable are to be provided for, or written off, they would be recognized in the consolidated statement of operations within operating expenses. As of September 30, 2016 and December 31, 2015, we recorded no allowance for doubtful accounts. This determination was made per our management’s judgment, which was based on their best knowledge.

Inventory is stated at the lower of cost, determined on a weighted average basis, or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated costs necessary to make the sale. Adjustments to reduce the cost of inventory to its net realizable value are made, if required, for estimated excess, obsolescence, or impaired balances. When inventories are sold, their carrying amount is charged to expense in the year in which the revenue is recognized.

Write-downs for declines in net realizable value or for losses of inventories are recognized as an expense in the year the impairment or loss occurs.

Although we believe that there is little likelihood that actual results will differ materially from current estimates, if customer demand for our products decreases significantly in the near future, or if the financial condition of our customers deteriorates in the near future, we could realize significant write downs for slow-moving inventories or uncollectible accounts receivable.

Revenue Recognition

Our revenue recognition policy plays a key role in our consolidated financial statements. Revenues represent the invoiced value of goods sold, recognized upon the shipment of goods to customers, and revenues are recognized when all of the following criteria are met:

47


1.

Persuasive evidence of an arrangement exists;

   
2.

Delivery has occurred or services have been rendered;

   
3.

The seller's price to the buyer is fixed or determinable; and

   
4.

Collectability is reasonably assured.

The revenue recognition policies for our legacy products, including EV products, EV parts and Off-road vehicles, are the same: When the products are delivered, the associated risk of loss is deemed transferred, and at that time we recognize revenue.

Warranty Liability

Most of our non-EV products (the “Legacy Products”) are exported out of China to foreign countries that have legal and regulatory requirements with which we are not familiar with. Development of warranty policies for our Legacy Products in each of these countries would be virtually impossible and prohibitively expensive. Therefore, we provide price incentives and free parts to our customers and in exchange, our customers establish appropriate warranty policies and assume warranty responsibilities. Consequently, warranty issues are taken into consideration during the price negotiation for our products. The free parts are delivered along with the products, and when products are sold, the related parts are recorded as cost of goods sold. Due to the reliable quality of our products, we have been able to maintain this warranty policy and we have not had any product liabilities attributed to the quality of our products.

For the EV products that we sell (through the JV Company)in China, there is an eight-year or 120,000 kilometer manufacturer warranty implemented by the JV Company. This warranty affects us through our participation and investment in the JV Company, which manufactures the EV products.

Overview

We are one of the leading producers and manufacturers of electrical vehicle products (through the JV Company), electrical vehicle parts and off road vehicles in China. Our primary source of revenue is from the sale of our EV parts. During the quarter ended September 30, 2016, we recognized total revenue of $6,366,380 as compared to $50,528,545 for the quarter ended September 30, 2015, a decrease of $44,162,165 or 87.4%, primarily due to the weak EV parts demand from the JV Company and its subsidiaries. Gross margin for the quarter ended September 30, 2016 was 10.2%, a decrease from 14.1% for the quarter ended September 30, 2015. We continue to increase our sales of our legacy products and the off-road vehicles revenue increased $106,322 or 6.8% as compared to the same period a year ago, mainly from its organic growth.

The construction of our Hainan facility is on track and we expect it will be completed for production testing in the middle of 2017 as planned. The Hainan project has received great support from Hainan provincial government with a RMB 300 million (approximately USD 45 million) of government subsidy to assist its research and development on a new model of electric vehicle, of which the initial payment of RMB100 million (approximately USD15 million) has already been received.

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The JV Company continues to enhance its vehicle offering and debuted its new model of “Global Hawk K21” in August 2016, a newly developed mid-tier luxury pure electric vehicle, which has received significant interest from the public. Beginning early 2016, the government launched an industry-wide review of subsidies, which negatively impacted the JV Company’s operations and sales this year. Accordingly, our EV Parts sales to the JV Company and its subsidiaries have also been negatively impacted. Meanwhile, there have been certain misunderstandings from government regarding the EV battery exchange method, which was initiated by the JV Company for efficient battery utilization. The JV Company has been working diligently with the government and related authorities to clarify this issue. We believe there will be a positive outcome and the issue of subsidy delay will be resolved in the coming quarters, which will help us to regain the revenue growth momentum.

On April 29, 2015, the Central Government announced the subsidy policy for new energy vehicles from year 2016 to 2020, which indicates the subsidy of year 2017-2018 will be reduced by 20% based on the rate in year 2016, and the subsidy of year 2019-2020 will be reduced by 40% based on the rate in year 2016. Although we are confident the Government has firm commitment to support the growth of China’s EV industry and the subsidy program itself will continue through 2020, the JV Company and us are actively seeking new revenue growth avenue and optimizing our business model to cope with this industry-wide policy change. Our long-term goal is, through improving technical capabilities, optimizing cost structure and increasing operation efficiency, to develop high-performance yet price-competitive EVs for our end consumers to meet market demand and sustainably grow our business. The Company will continue to work closely with Geely, leverage its support, and seek additional strategic alliance or partnership to jointly develop the JV Company’s EV business and rapidly expand its business footprint in China.

Results of Operations

Comparison of Three Months Ended September 30, 2016 and September 30, 2015

The following table sets forth the amounts and percentage relationship to revenue of certain items in our Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the three months ended September 30, 2016 and September 30, 2015.

    Three Months Ended  
    September 30,     % of     September 30,      % of     Change in     Change  
     2016     Revenue     2015     Revenue     Amount     in %  
                                     
REVENUES, NET $  6,366,380     100.0%   $  50,528,545     100.0%     (44,162,165 )   (87.4% )
                                     
COST OF GOODS SOLD   5,715,211     89.8%     43,411,839     85.9%     (37,696,628 )   (86.8% )
                                     
GROSS PROFIT   651,169     10.2%     7,116,706     14.1%     (6,465,537 )   (90.9% )
                                     
OPERATING EXPENSES:                        
Research and development   522,806     8.2%     785,450     1.6%     (262,644 )   (33.4% )
Selling and marketing   374,102     5.9%     122,873     0.2%     251,229     204.5%  
General and administrative   373,411     5.9%     8,649,541     17.1%     (8,276,130 )   (95.7% )
Total Operating Expenses   1,270,319     20.0%     9,557,864     18.9%     (8,287,545 )   (86.7% )
                                     
INCOME (LOSS) FROM OPERATIONS   (619,150 )   (9.7% )   (2,441,158 )   (4.8% )   1,822,008     (74.6% )
                                     
OTHER INCOME(EXPENSE):                        
Interest income   832,031     13.1%     1,140,756     2.3%     (308,725 )   (27.1% )
Interest expense   (425,152 )   (6.7% )   (534,987 )   (1.1% )   109,835     (20.5% )
Change in fair value of financial instruments   10,692     0.2%     3,049,242     6.0%     (3,038,550 )   (99.6% )
Government grants   594,323     9.3%     (724 )   (0.0% )   595,047     -  
Share of profit (loss) after tax of JV   (299,538 )   (4.7% )   1,179,605     2.3%     (1,479,143 )   (125.4% )
                                     
Other income (expense), net   (106,299 )   (1.7% )   988,224     2.0%     (1,094,523 )   (110.8% )

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Total other income, net   606,057     9.5%     5,822,116     11.5%     (5,216,059 )   (89.6% )
                                     
INCOME (LOSS) BEFORE INCOME TAXES   (13,093 )   (0.2% )   3,380,958     6.7%     (3,394,051 )   (100.4% )
                                     
INCOME TAX BENEFIT (EXPENSE)   (552,848 )   (8.7% )   (1,037,763 )   (2.1% )   484,915     (46.7% )
                                     
NET INCOME (LOSS)   (565,941 )   (8.9% )   2,343,195     4.6%     (2,909,136 )   (124.2% )

(a) Revenue

For the three months ended September 30, 2016, our revenue was $6,366,380 compared to $50,528,545 for the same period of 2015, a decrease of $44,162,165 or 87.4% . The decrease in revenue during this period was largely due to the decrease in EV parts sales caused by the weak demand from the JV Company because of temporary suspension of the EV subsidies. The majority of the EV parts sales were battery sales.

The following table summarizes our revenues as well as the number of units sold by product types for the three months ended September 30, 2016 and 2015:

    Three Months Ended September 30,  
    2016     2015  
    Sales     Sales  
EV parts $  4,712,106   $  48,955,421  
EV products   (25,172 )   -  
Off-road vehicles   1,679,446     1,573,124  
Total $  6,366,380   $  50,528,545  

EV Parts

Among our total revenues during the three months ended September 30, 2016, approximately $4,712,106 resulted from the sale of EV parts, a decrease of $44,243,315 or 90.4% compared to $48,955,421 for the same period of 2015. The decrease was primarily due to the temporary suspension of the government subsidies to EVs as mentioned above which resulted in the decreased EV parts demand from the JV Company and its subsidiaries. Our EV parts sales primarily consisted of the sales of battery packs, body parts, EV drive motors, EV controllers, air conditioning units and other auto parts to the JV Company for manufacturing of EV products.

EV Products

Among our total revenues during the three months ended September 30, 2016, there was no EV products sales ($-25,172 was due to exchange rate change), because the manufacture of EV products was transferred to the JV Company based on the JV Agreement. Under the JV Agreement with our joint venture partner, since March 2013, our EV products manufacturing business has been gradually transferred to the JV Company, such transfer was completed at the end of 2014. We are now primarily responsible for supplying the JV Company with EV parts and the JV Company is primarily responsible for the production of EV products.

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Off-Road Vehicles

Among our total revenues during the three months ended September 30, 2016, approximately $1,679,446 or 26.4% resulted from the sale of off-road vehicles. The off-road vehicles revenue increased $106,322, or 6.8% compared to $1,573,124 for the same period of 2015, mainly from its organic growth.

(b) Cost of goods sold

Cost of goods sold was $5,715,211 during the three months ended September 30, 2016, representing a decrease of $37,696,628, or 86.8%, compared to $43,411,839 in the same period of 2015. This decrease was mainly due to the decrease in corresponding sales.

(c) Gross profit

Gross profit for the third quarter of 2016 decreased 90.9% to $651,169, compared to $7,116,706 for the same period last year. Margin by product is as below:

    Three Months Ended September 30,  
          2016                       2015              
  Sales     Cost     Gross
Profit
    Margin %     Sales     Cost     Gross
Profit
    Margin %  
EV parts $  4,712,106     4,123,261     588,845     12.5%   $  48,955,421     41,980,345     6,975,076     14.2%  
EV products   (25,172 )   (23,337 )   (1,835 )   7.3%     -     -     -     -  
Off-road vehicles   1,679,446     1,615,287     64,159     3.8%     1,573,124     1,431,494     141,630     9.0%  
Total $  6,366,380     5,715,211     651,169     10.2%   $  50,528,545     43,411,839     7,116,706     14.1%  

The overall margin decreased from 14.1% of the third quarter of 2015 to 10.2% of the same period of 2016. The decrease in gross margin was largely due to the significant decrease of production volume caused by the temporary suspension of EV subsidies payment from government.

(d) Selling and distribution expenses

Selling and distribution expenses were $374,102 for the third quarter of 2016, compared to $122,873 for the same period last year, an increase of $251,229 or 204.5%. This increase was primarily due to the amortization for the product maintenance expense in battery in this period, which will be amortized for the next eight years.

(e) General and administrative expenses

General and administrative expenses were $373,411 for the third quarter of 2016, compared to $8,649,541 for the same period of last year, a decrease of $8,276,130 or 95.7%. For the three months ended September 30, 2016, general and administrative expenses included a $1,203,204 of reduction adjustment for common stock awards and stock options to employees because of reduced profits this period, compared to $7,028,089 of expenses for common stock awards and stock options to employees for the same period in 2015. Excluding stock award and stock option costs, our net general and administrative expenses for the three months ended September 30, 2016 were $ 1,576,615, a decrease of $44,837, or 2.8%, from $1,621,452 for the same period of 2015.

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(f) Research and development

Research and development expenses were $522,806 for the third quarter of 2016, a decrease of $262,644 or 33.4% compared to $785,450 for the same period last year. This decrease was primarily due to the materials spending decrease for the research projects in the third quarter of 2016.

(g) Government grants

Government grants were $ 594,323 for the third quarter of 2016, an increase of $ 595,047 compared to $-724 (due to the change resulting from the RMB depreciation against the US dollars) for the same period of last year. The increase was mainly due to the receipts of various government awards and incentives during this quarter.

(h) Interest income

Interest income was $832,031 for the third quarter ended September 30, 2016, a decrease of $308,725 compared to $1,140,756 for the same period of last year. This decrease was primarily due to the reduced interest income earned on the loan to a third party and the cash in the bank.

(i) Interest expense

Interest expense was $425,152 for the third quarter of 2016, a decrease of $109,835 compared to $534,987 for the same period of last year. This change was primarily due to the renewed loans with a lower interest rate in year 2016. In 2015, China People’s Bank reduced the one-year loan interest rate for five times from 5.6% at the beginning of 2015 to 4.35% in October of 2015. Consequently, all the renewed loans in 2016 have a lower interest rate from the year beginning compared to the same period of 2015.

(j) Change in fair value of financial instruments

For the third quarter of 2016, the gain related to changes in the fair value of derivative liability relating to the warrants issued to the investors and a placement agent was $10,692, a decrease of $3,038,550 compared to $3,049,242 in the same period last year. The decrease was due to the expiration of all remaining unexercised warrants in the third quarter of 2016.

(k) Share of profit (loss) after tax of the JV Company

For the three months ended September 30, 2016, the JV Company’s net sales was $11,688,178, gross profit was $5,937,134, and net loss was $426,797. We accounted for our investments in the JV Company under the equity method of accounting as we have a 50% ownership interest in the JV Company. As a result, we recorded 50% of the JV Company’s loss of $213,399 for the third quarter of 2016. After eliminating intra-entity profits and losses, our share of the after tax loss of the JV Company was $299,538 for the third quarter of 2016, a change of $1,479,143 compared to $1,179,605 of gain for the same period last year. The decrease of the JV Company’s profits was primarily due to the decrease in sales in the third quarter of 2016.

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During the third quarter of 2016, a total of 184 units of EV products were sold by the JV Company, compared to 6,004 units sold in the same period of 2015.The decrease was due to the temporary suspension of EV subsidies payment from government.

(l) Other income (expense), net

Net other expense was $106,299 for the third quarter of 2016, a change of $ 1,094,523 compared to $988,224 of net other income for the same period of last year. The higher net other income in the third quarter of 2015 was primarily due to the fees received for providing technical services during the period of last year.

(m) Net income (loss) from continuing operation

Net loss was $565,941 for the third quarter of 2016, a change of $2,909,136 compared to $2,343,195 of net income for the same period of last year.

Excluding (i) the effects of employee stock compensation expenses, which were $ 1,203,204 of expense reversal and $7,028,089 of expense for the three months ended September 30, 2016 and 2015 respectively; and (ii) the change of the fair value of financial derivatives, which were $10,692 of gain and $3,049,242 of gain for the three months ended September 30, 2016 and 2015, respectively, our non-GAAP net loss was $1,779,837 for the third quarter of 2016 as compared to non-GAAP net income of $6,322,042 for the same period of 2015, a decrease of $8,101,879 of net income. This decrease in non-GAAP net income was primarily attributable to the decrease of revenue and gross profits as the result of weak performance of the JV Company during the third quarter of 2016 comparing to its corresponding quarter last year.

We make reference to certain non-GAAP financial measures, i.e., the adjusted net income. Management believes that such adjusted financial result is useful to investors in evaluating our operating performance because it presents a meaningful measure of corporate performance. See the non-GAAP reconciliation table below. Any non-GAAP measures should not be considered as a substitute for, and should only be read in conjunction with measures of financial performance prepared in accordance with GAAP.

    Three Months Ended  
    September 30,  
    2016     2015  
GAAP net income (loss) from continuing operations $ (565,941 ) $  2,343,195  
Stock award expenses   (1,203,204 )   7,028,089  
Change of the fair value of financial derivatives   (10,692 )   (3,049,242 )
Non-GAAP net income (loss) from continuing operations $ (1,779,837 ) $  6,322,042  

Comparison of Nine Months Ended September 30, 2016 and September 30, 2015

The following table sets forth the amounts and percentage relationship to revenue of certain items in our Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the nine months ended September 30, 2016 and September 30, 2015.

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     Nine Months Ended     
    September 30,     % of     September 30,     % of     Change in     Change  
     2016     Revenue      2015     Revenue     Amount     in %  
                                     
REVENUES, NET $  112,241,641     100.0%   $  142,273,091     100.0%     (30,031,450 )   (21.1% )
                                     
COST OF GOODS   96,417,337     85.9%     122,294,189     86.0%     (25,876,852 )   (21.2% )
SOLD                                    
                                     
GROSS PROFIT   15,824,304     14.1%     19,978,902     14.0%     (4,154,598 )   (20.8% )
                                     
OPERATING EXPENSES:                        
Research and development   1,222,967     1.1%     1,928,091     1.4%     (705,124 )   (36.6% )
Selling and marketing   1,150,880     1.0%     312,284     0.2%     838,596     268.5%  
General and administrative   18,031,487     16.1%     16,275,202     11.4%     1,756,285     10.8%  
Total Operating Expenses   20,405,334     18.2%     18,515,577     13.0%     1,889,757     10.2%  
                                     
INCOME(LOSS) FROM OPERATIONS   (4,581,030 )   (4.1% )   1,463,325     1.0%     (6,044,355 )   (413.1% )
                                     
OTHER INCOME (EXPENSE):                        
Interest income   2,397,364     2.1%     2,454,079     1.7%     (56,715 )   (2.3% )
Interest expense   (1,299,549 )   (1.2% )   (1,730,898 )   (1.2% )   431,349     (24.9% )
Change in fair value of financial instruments   3,823,590     3.4%     11,802,586     8.3%     (7,978,996 )   (67.6% )
Government grants   2,292,180     2.0%     92,139     0.1%     2,200,041     2387.7%  
Share of profit (loss) after tax of JV   (203,375 )   (0.2% )   1,900,128     1.3%     (2,103,503 )   (110.7% )
Other income (expense), net   202,878     0.2%     1,094,278     0.8%     (891,400 )   (81.5% )
                                     
Total other income, net   7,213,088     6.4%     15,612,312     11.0%     (8,399,224 )   (53.8% )
                                     
INCOME (LOSS) BEFORE INCOME TAXES   2,632,058     2.3%     17,075,637     12.0%     (14,443,579 )   (84.6% )
                                     
INCOME TAX BENEFIT (EXPENSE)   (316,399 )   (0.3% )   (3,175,287 )   (2.2% )   2,858,888     (90.0% )
                                     
NET INCOME (LOSS)   2,315,659     2.1%     13,900,350     9.8%     (11,584,691 )   (83.3% )

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(a) Revenue

For the nine months ended September 30, 2016, our revenue was $112,241,641 compared to $142,273,091 for the same period of 2015, a decrease of $30,031,450 or 21.1% . The decrease in revenue was mainly due to the decrease in EV parts sales during this period, which was largely caused by the decreased demand from the JV Company and its subsidiaries. The sales to the JV Company and subsidiaries were down 42% for the nine months ended September 30, 2016 as compared to the same period last year. Beginning early 2016, the Chinese government temporally suspended issuing EV subsidies to all EV manufacturers in China for an industry-wide review of subsidies, which negatively impacted the JV Company’s EV sales this year and our EV Parts sales to the JV Company. The majority of the EV parts sales were battery sales.

The following table summarizes our revenues by product types for the nine months ended September 30, 2016 and 2015:

    Nine Months Ended September 30,  
    2016     2015  
    Sales     Sales  
EV parts $  104,716,584   $  138,584,847  
EV products   3,754,444     -  
Off-road vehicles   3,770,613     3,688,244  
Total $  112,241,641   $  142,273,091  

EV Parts

Among our total revenues during the nine months ended September 30, 2016, approximately $ 104,716,584, or 93.3%, resulted from the sale of EV parts. Our revenue of EV parts decreased $33,868,263, or 24.4%, compared to the nine months ended September 30, 2015. The decrease was largely due to the decreased EV parts demand from the JV Company and its subsidiaries. Our EV parts sales primarily consisted of the sales of battery packs, body parts, EV drive motors, EV controllers, air conditioning units and other auto parts to the JV Company for manufacturing of EV products.

EV Products

Among our total revenues during the nine months ended September 30, 2016, approximately $3,754,444, or 3.3%, resulted from the sale of EV products. The EV products revenue increased $3,754,444, or 100% compared to the same period of 2015. Under the JV Agreement with our joint venture partner, starting from March 2013, our EV products manufacturing business has been gradually transferred to the JV Company, which was completed at the end of 2014, but the Company can continue to sell the EV products which were in the stock. We are now primarily responsible for supplying the JV Company with EV parts and the JV Company is primarily responsible for the production of EV products.

Off-Road Vehicles

Among our total revenues during the nine months ended September 30, 2016, approximately $ 3,770,613, or 3.4%, resulted from the sale of off-road vehicles. The off-road vehicles revenue increased $82,369, or 2.2%, compared to the same period of 2015, mainly from its organic growth.

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(b) Cost of goods sold

Cost of goods sold was $ 96,417,337 during the nine months ended September 30, 2016, representing a decrease of $ 25,876,852, or 21.2%, compared to $122,294,189 in the same period of 2015. This decrease was mainly due to the decrease in corresponding sales.

(c) Gross profit

Gross profit for the nine months ended September 30, 2016 decreased 20.8% to $ 15,824,304, compared to $19,978,902 for the same period last year. Margin by product was as below:

      Nine Months Ended September 30,     
    2016     2015  
    Sales     Cost     Gross Profit     Margin %     Sales     Cost     Gross Profit     Margin %  
EV parts $  104,716,584     89,263,446     15,453,138     14.8%   $  138,584,847     119,132,000     19,452,847     14.0%  
EV products   3,754,444     3,667,459     86,985     2.3%     -     -     -     -  
Off-road vehicles   3,770,613     3,486,432     284,181     7.5%     3,688,244     3,162,189     526,055     14.3%  
Total $  112,241,641     96,417,337     15,824,304     14.1%   $  142,273,091     122,294,189     19,978,902     14.0%  

The overall margin increased from 14.0% for the nine months ended September 30, 2015 to 14.1% for the same period of 2016. The increase was largely because the margin of battery packs has improved due to the cost savings.

(d) Research and development

Research and development expenses were $1,222,967 for the nine months ended September 30, 2016, a decrease of $705,124 or 36.6% compared to $1,928,091 for the same period of last year. This decrease was primarily due to the less materials spending for research projects in the first nine months of the year.

(e) Selling and distribution expenses

Selling and distribution expenses were $1,150,880 for the nine months ended September 30, 2016, compared to $312,284 for the same period last year, an increase of $ 838,596 or 268.5% . This increase was primarily due to the product maintenance expense on battery in this year, which will be amortized for the next eight years.

(f) General and administrative expenses

General and administrative expenses were $ 18,031,487 for the nine months ended September 30, 2016, compared to $16,275,202 for the same period of last year, an increase of $1,756,285 or 10.8%. For the nine months ended September 30, 2016, general and administrative expenses included $13,954,379 in expenses for common stock awards and stock options to employees and consultants, compared to $12,559,581 for the same period in 2015. Excluding stock award costs, our net general and administrative expenses for the nine months ended September 30, 2016 were $4,077,108, an increase of $361,487, or 9.7%, from $3,715,621 for the same period of 2015. The increase was primarily due to the increase in land use taxes for Hainan project.

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(g) Government grants

Government grants were $2,292,180 for the nine months ended September 30, 2016, an increase of $2,200,041 or 2,387.7% compared to $92,139 for the same period of last year. The increase was mainly due to the $1,421,976 relocation allowance received by Kandi Hainan and various government awards received during this year such as technologies innovation and financial rewards based on the taxes contribution.

(h) Interest income

Interest income was $2,397,364 for the nine months ended September 30, 2016, a decrease of $56,715 or 2.3% compared to $2,454,079 for the same period of last year. This decrease was primarily due to reduced interest income earned on the loan to a third party and the cash in the bank.

(i) Interest expense

Interest expense was $1,299,549 for the nine months ended September 30, 2016, a decrease of $431,349 or 24.9% compared to $1,730,898 for the same period of last year. This change was primarily due to the renewed loans with a lower interest rate in year 2016. In 2015, China People Bank reduced the one-year loan interest rate for five times from 5.6% at the beginning of 2015 to 4.35% in October 2015. Therefore all the renewed loans in 2016 have a lower interest rate compared to the same period in 2015.

(j) Change in fair value of financial instruments

For the nine months ended September 30, 2016, the gain related to changes in the fair value of derivative liability relating to the warrants issued to the investors and a placement agent was $3,823,590, a decrease of $7,978,996 compared to $11,802,586 of gain in the same period of last year. The change in the fair value of derivative liability is mainly because all remaining unexercised warrants expired during the year of 2016.

(k) Share of profit (loss) after tax of the JV Company

For the nine months ended September 30, 2016, the JV Company’s net sales were $122,959,660, gross profit was $19,538,305, and net profit was $131,323. We accounted for our investments in the JV Company under the equity method of accounting as we have a 50% ownership interest in the JV Company. As a result, we recorded 50% of the JV Company’s profit for $ 65,662 for the nine months ended September 30, 2016. After eliminating intra-entity profits and losses, our share of the after tax loss of the JV Company was $ 203,375 for the nine months ended September 30, 2016, a decrease of $2,103,503 compared to $1,900,128 of profits in the same period of last year, the main cause for the decrease of the JV Company’s profits is due to the decrease of sales and gross profits in the first nine months of 2016.

During the nine months ended September 30, 2016, a total of 7,384 units of EV products were sold by the JV Company, compared to 12,120 units sold in the same period of 2015.

(l) Other income, net

Net other income was $202,878 for the nine months ended September 30, 2016, a decrease of $891,400 or 81.5% compared to $1,094,278 in the same period of last year. The higher other income last year was primarily due to the receipts of fees for providing technical services for project K-17 technical development last year.

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(m) Net income from continuing operation

Net income was $2,315,659 for the nine months ended September 30, 2016, a decrease of $11,584,691 compared to the net income of $13,900,350 for the same period of last year. Excluding (i) the stock award and stock option expenses, which were $ 13,954,379 and $12,559,581 for the nine months ended September 30, 2016 and 2015, respectively, and (ii) the change of the fair value of financial derivatives, which was $3,823,590 of gain and $11,802,586 of gain for the nine months ended September 30, 2016 and 2015, respectively, our non-GAAP net income was $12,446,448 for the nine months ended September 30, 2016 as compared to $14,657,345 for the same period of 2015, a decrease of $2,210,897. This decrease in non-GAAP net income was primarily attributable to the decrease in revenue and gross profits as of the result of decreased EV parts demand from the JV Company and its subsidiaries.

We make reference to certain non-GAAP financial measures, i.e., the adjusted net income. Management believes that such adjusted financial result is useful to investors in evaluating our operating performance because it presents a meaningful measure of corporate performance. See the non-GAAP reconciliation table below. Any non-GAAP measures should not be considered as a substitute for, and should only be read in conjunction with measures of financial performance prepared in accordance with GAAP.

    Nine Months Ended  
    September 30,  
    2016     2015  
GAAP net income from continuing operations $ 2,315,659   $  13,900,350  
Stock award expenses   13,954,379     12,559,581  
Change of the fair value of financial derivatives   (3,823,590 )   (11,802,586 )
Non-GAAP net income from continuing operations $ 12,446,448   $  14,657,345  

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

For the nine months ended September 30, 2016, cash used in operating activities was $22,307,888, as compared to $1,126,747 used for the same period of last year.

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Below is the cash flows statement for the operating activities:

    Nine Months Ended  
    September 30, 2016     September 30, 2015  
             
CASH FLOWS FROM OPERATING ACTIVITIES:            
             
Net income $ 2,315,659   $ 13,900,350  
Adjustments to reconcile net income to net cash provided by operating activities        
Depreciation and amortization   3,681,345     4,388,902  
Deferred taxes   (2,608,702 )   (1,854,863 )
Change in fair value of financial instruments   (3,823,590 )   (11,802,586 )
Share of profit after tax of JV Company   203,375     (1,900,128 )
Stock Compensation cost   13,930,829     12,486,881  
             
Changes in operating assets and liabilities, net of effects of acquisition:        
(Increase) Decrease In:            
Accounts receivable   (33,335,798 )   (19,286,512 )
Inventories   1,802,780     (17,289,849 )
Other receivables and other assets   (11,868,318 )   (298,976 )
Due from employee   17,718     (10,535 )
Prepayments and prepaid expenses   (31,684,685 )   6,265,899  
Amount due from JV Company   (41,182,480 )   (27,964,497 )
Due from related party   28,994,314     -  
             
Increase (Decrease) In:            
Accounts payable   40,240,135     44,980,746  
Other payables and accrued liabilities   10,415,706     (1,302,135 )
Customer deposits   (13,598 )   (2,502,087 )
Income Tax payable   607,422     1,062,643  
             
Net cash used in operating activities $ (22,307,888 ) $ (1,126,747 )

The major operating activities that provided cash for the nine months ended September 30, 2016 were an increase in accounts payable of $ 40,240,135 and a decrease in due from related party (other than the JV Company) of $ 28,994,314, and an increase in other payables and accrued liabilities of $10,415,706, which was mainly from the receipt of government grants for Hainan new EV product design and development. The major operating activities that used cash for nine months ended September 30, 2016 were an increase in receivables from the JV Company of $41,182,480 and from other clients of $33,335,798, and an increase in prepayments and prepaid expenses of $31,684,685.

Below is the cash flows statement for the investing activities:

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    Nine Months Ended  
    September 30, 2016     September 30, 2015  
             
CASH FLOWS FROM INVESTING ACTIVITIES:            
Purchases of plant and equipment, net   (39,250 )   (408,850 )
Purchases of construction in progress   (4,236,301 )   (39,054 )
Issuance of notes receivable   (51,553,604 )   (72,040,444 )
Repayment of notes receivable   62,415,498     61,697,894  
Long Term Investment   -     (1,535,651 )
Short Term Investment   1,592,024     -  
             
Net cash provided by (used in) investing activities $ 8,178,367   $ (12,326,105 )

Cash provided by investing activities for the nine months ended September 30, 2016 was $8,178,367 compared to cash used in investing activities of $12,326,105 for the nine months ended September 30, 2015. The major investing activities that provided cash for the nine months ended September 30, 2016 was the repayment of notes receivable of $62,415,498. The major investing activities that used cash for nine months ended September 30, 2016 was the issuance of notes receivable of $51,553,604.

Below is the cash flow statement for the financing activities:

    Nine Months Ended  
    September 30, 2016     September 30, 2015  
CASH FLOWS FROM FINANCING ACTIVITIES:            
 Restricted cash   1,519,477     (3,232,950 )
 Proceeds from short-term bank loans   -     30,583,709  
 Repayments of short-term bank loans   -     (27,512,406 )
 Proceeds from notes payable   5,187,040     9,860,498  
 Repayment of notes payable   (5,849,988 )   (12,299,436 )
 Warrant exercise   434,666     -  
             
Net cash (used in) provided by financing activities $ 1,291,195   $ (2,600,585 )

Cash provided by financing activities for the nine months ended September 30, 2016 was $1,291,195 compared to cash used in financing activities of $2,600,585 for the nine months ended September 30, 2015. The major financing activities that provided cash for the nine months ended September 30, 2016 was the proceeds from notes payable of $5,187,040. The major financing activities that used cash for nine months ended September 30, 2016 was repayment of notes payable of $5,849,988.

Working Capital

We had a working capital surplus of $65,512,593 at September 30, 2016, compared to $59,917,153 as of December 31, 2015.

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We have historically financed our operations through short-term commercial bank loans from PRC banks. The term of these loans is typically for one year, and upon the payment of all outstanding principal and interest in a particular loan, the banks have typically rolled over the loan for an additional one-year term, with adjustments made to the interest rate to reflect prevailing market rates. We believe that this situation has not changed and that short-term bank loans will be available on normal trade terms if needed.

Capital Requirements and Capital Provided

Capital requirements and capital provided for the nine months ended September 30, 2016 were as follows:

    Nine Months Ended  
    September 30, 2016  
    (In Thousands)  
Capital requirements      
Purchase of plant and equipment $  39  
Purchase of construction in progress   4,236  
Issuance of notes receivable   51,554  
Repayments of notes payable   5,850  
Internal cash used in operations   22,308  
Total capital requirements $  83,987  
       
Capital provided      
Decrease in restricted cash   1,519  
Repayments of notes receivable   62,415  
Proceeds from notes payable   5,187  
Repayments of short term investment   1,592  
Warrant exercise   435  
Decrease in cash   13,049  
Total capital provided $  84,197  

The difference between capital provided and capital required was caused by the effect of exchange rate changes over the past nine months.

Recent Development Activities:

On August 8, 2016, we announced that Kandi Hainan had reached an agreement with the Hainan Provincial Government for Kandi Hainan to receive a RMB 300 million (approximately USD 45.1 million) subsidy to support its research and development expenditures on a new model of electric vehicle. The subsidy payment schedule is based on the progress of Kandi Hainan’s new model development and the initial payment of RMB100 million (approximately USD15 million) has already been received.

On August 31, 2016, we announced that the “Micro Public Transportation Program “or “MPT Program,” the program operated by Zhejiang ZuoZhongYou Electric Vehicle Service Co., Ltd, along with other programs and brand experiences such as the “Free West Lake Tour,”the “Beijing-Hangzhou Grand Canal,” the “Xixi National Wetland Park,”the “Right-of-Way in the Crosswalk,”and the “Hangzhou Resident Identification Card,” has been recognized as a “Hangzhou Top20 Best Brand Experiences” in the “G20 Top20.” Descriptions of the winners were included in the official brochure given as a city souvenir to all reporters and participants attending the upcoming G20 summit. The MPT Program was the only winner in the renewable energy vehicle sector for being selected into the official brochure.

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On September 6, 2016, we announced that the JV Company has signed a purchase and sale agreement with Qingdao TELD New Energy Co. Ltd. (“Qingdao TELD”) to sell its “Global Hawk” series all- EVs in Qingdao City, Shandong Province. The JV Company has received an initial payment of RMB56 million (approximately US$8.4 million) from Qingdao TELD.

On October 20, 2016, we announced that the JV Company had signed a strategic cooperation agreement with Shanxi Coal Asset Management Group (“Shanxi Coal”) to sell over 50,000 EVs during a five-year cooperation period. Shanxi abounds in mineral resources and has tremendous market potential, with a strong demand for zero emission all-electric vehicles. Our cooperation agreement with Shanxi Coal is a major milestone in our successful expansion throughout China. The initial payment of RMB 27,408,000 (or approximately USD $4 million) has already been received as of the date of this report.

Item 3.        Quantitative and Qualitative Disclosures about Market Risk

Exchange Rate Risk

Our operations are conducted mainly in the PRC. As such, our earnings are subject to movements in foreign currency exchange rates when transactions are denominated in Chinese Renminibi (“RMB”), which is our functional currency. Accordingly, our operating results are affected by changes in the exchange rate between the U.S. dollar and RMB currencies.

Economic and Political Risks

Our operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment in the PRC and foreign currency exchange. Our performance may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.

Item 4.        Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We have evaluated, under the supervision of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), the effectiveness of disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of September 30, 2016. Based on this evaluation, our CEO and CFO concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act (a) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) is accumulated and communicated to management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as described above.

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Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1A.      Risk Factors

The delay, reduction, unavailability, or elimination of government and economic incentives could have a material adverse effect on our business, financial condition, operating results and prospects.

Although the central government has clear policies encouraging qualified EVs, any delay, reduction, or elimination of government subsidies and economic incentives caused may result in the reduced or diminished competitiveness of the new energy vehicle industry generally or our EV products in particular. In the first nine months of 2016, our JV Company did not receive subsidies from central government on the EV products sold in year 2015. This period of subsidy suspension was a result of an industry-wide government investigation on EV manufacturers in China with regards to any potential violation of new energy vehicle subsidy policy, starting from the beginning of 2016. The subsidy suspension period impacted the JV Company’s financial conditions including the sales and cash flow. In the event that any favored policy and treatment delays or discontinues, our business outlook and financial conditions could be negatively impacted.

On April 29, 2015, the four government departments in the PRC, Ministry of Finance, Ministry of Science and Technology, Ministry of Industry and Information Technology and National Development and Reform Commission jointly announced the subsidy policy for new energy vehicles from year 2016 to 2020, which declares the subsidy of year 2017-2018 will be reduced by 20% based on the rate in year 2016, and the subsidy of year 2019-2020 will be reduced by 40% based on year 2016. Furthermore, the policy enhanced the threshold for receipt of the subsidy by increasing the driving range for eligible EVs from 80 kilometers to 100 kilometers. This policy may impact the Company’s future business and profitability growth.

Fluctuations in exchange rates could adversely affect our business and the value of our securities.

Starting from April 2015, Chinese currency turned into the depreciation trend which continued in year 2016. Compared with the lowest point from RMB versus USD in 2015, RMB has depreciated by 9.1% against USD as of September 30, 2016. Concerns remain that China’s slowing economy, and in particular its exports, will need a stimulus that can only come from further cuts in the exchange rate.

The value of our common stock will be indirectly affected by the foreign exchange rate between U.S. dollars and RMB and between those currencies and other currencies in which our sales may be denominated. Because substantially all of our earnings and cash assets are denominated in RMB, fluctuations in the exchange rate between the U.S. dollar and the RMB will affect our balance sheet and our earnings per share in U.S. dollars. In addition, appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations.

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Item 6.        Exhibits

Exhibit

Description

Number  
   
31.1

Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934

31.2

Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934

32.1

Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of 2002

101.INS

XBRL Instance Document.

101.SCH

XBRL Taxonomy Extension Schema Document.

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.

101.LAB

XBRL Taxonomy Extension Label Linkbase Document.

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.

101.DEF

XBRL Taxonomy Definitions Linkbase Document.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: November 9, 2016 By: /s/ Hu Xiaoming
    Hu Xiaoming
    President and Chief Executive Officer
    (Principal Executive Officer)
     
     
Date: November 9, 2016 By: /s/ Wang Cheng (Henry)
    Wang Cheng (Henry)
    Chief Financial Officer
    (Principal Financial Officer and Principal Accounting
    Officer)

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