10-K 1 f10k2018_kanditechnologies.htm ANNUAL REPORT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2018

 

or

 

☐ TRANSITION REPORT UNDER 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 its charter)

 

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

 

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

 

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

 

Securities Registered Pursuant to Section 12(b) of the Act:

 

Common Stock, Par Value $0.001 Per Share   NASDAQ Global Select Market
(Title of each class)   (Name of exchange on which registered)

 

Securities Registered Pursuant to Section 12(g) of the Act: None.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

 

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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “Emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐ Accelerated filer ☒
Non-accelerated filer ☐  Smaller reporting company ☒
  Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

The aggregate market value of voting common stock held by non-affiliates of the registrant as of June 30, 2018, the last business day of the registrant’s second fiscal quarter, was approximately $158,852,892.

 

The number of shares of common stock outstanding as of March 8, 2019 was 51,496,944.

 

DOCUMENTS INCORPORATED BY REFERENCE:

 

None.

 

 

 

 

 

TABLE OF CONTENTS

 

PART I  
     
Item 1. Business. 1
Item 1A. Risk Factors. 9
Item 1B. Unresolved Staff Comments. 21
Item 2. Properties. 21
Item 3. Legal Proceedings. 23
Item 4. Mine Safety Disclosures. 23
     
PART II    
     
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase Equity Securities. 24
Item 6. Selected Financial Data. 26
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 27
Item 7A. Quantitative and Qualitative Disclosures about Market Risk. 39
Item 8. Financial Statements and Supplementary Data. F-1
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure. 40
Item 9A. Controls and Procedures. 40
Item 9B. Other Information. 41
     
PART III    
     
Item 10. Directors, Executive Officers and Corporate Governance. 42
Item 11. Executive Compensation. 47
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 51
Item 13. Certain Relationships and Related Transactions and Director Independence. 52
Item 14. Principal Accounting Fees and Services. 53
     
PART IV    
     
Item 15. Exhibits, Financial Statement Schedules. 54
     
SIGNATURES 56

 

i

 

 

SPECIAL NOTE REGARDING FORWARD -LOOKING STATEMENTS

 

This Annual Report on Form 10-K (this “Annual Report”) contains certain forward -looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as “anticipate,” “expect,” intend,” “plan,” “will,” “we believe,” “our company believes,” management believes” and similar language. These forward-looking statements are based on our current expectations and are subject to certain risks, uncertainties and assumptions, including those set forth in the discussion under Item 1, “Business”, Item 1A, “Risk Factors” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our actual results may differ materially from results anticipated in these forward-looking statements. We base our forward -looking statements on information currently available to us, and we assume no obligation to update them. In addition, our historical financial performance is not necessarily indicative of the results that may be expected in the future and we believe such comparisons cannot be relied upon as indicators of future performance.

 

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

 

ii

 

 

PART I

 

Except as otherwise indicated by the context, references in this Annual Report to “we,” “us,” “our,” “Kandi,” or the “Company” are to the combined businesses of Kandi Technologies Group, Inc. and its subsidiaries.

 

Item 1. Business Introduction

 

Our Core Business

 

The Company was mainly engaged in the development, production and distribution of the electric vehicle (“EV”) products, EV parts and off-road vehicle products.

 

Our Organizational Structure

 

The Company’s organizational chart as of the date of this report is as follows:

 

 

 

Please refer to the discussion in NOTE 1 - ORGANIZATION AND PRINCIPAL ACTIVITIES under Item 8 Notes to Consolidated Financial Statements for a narrative of our organization structure and operating subsidiaries, including their dates of incorporation and history.

 

1

 

 

Industry Overview

 

Supported by the Chinese government’s endorsement and driven by its focus on petroleum resource independence, and environmental protection, the electric vehicle sector is the most promising segment in the Chinese auto industry. China has become the largest new energy vehicle market in the world. According to a government forecast, China’s new energy vehicle sales are projected to grow to 2.1 million units in 2020, and its penetration is expected to reach 7% by 2020.

 

The rapid growth of the electric vehicle sector in China is supported by the Chinese government’s policies. The Chinese government endorses the long-term development of new-energy vehicles. The electric vehicle boom was initiated by government efforts including tax deductions and subsidies. China is the largest producer of and market for new-energy vehicles. China is a global leader in the new-energy vehicle sector.

 

Competitive Landscape

 

In general, our EV business faces competition from two groups of competitors: traditional vehicle manufacturers and new market entrants.

 

In terms of competition with conventional fuel vehicle manufacturers, many of our conventional fuel vehicle competitors are much larger in terms of size, manufacturing capabilities, customer bases, financial, marketing and human resources than Kandi. However, the conventional fuel automobiles face many challenges, including but not limited to environmental pollution and energy scarcity, which provide great opportunities for the rapid development of the EV industry in China. With the government’s strong support and various policy incentives, the electric vehicle industry in China has the potential for significant growth in the future. We believe our exclusive focus on pure electric vehicles products and parts are the basis on which we can compete in the Chinese automotive market in spite of the challenges posed by our competition.

 

There are many companies in China that engage in the research, production and distribution of electric vehicles. Competition within the Chinese electric vehicle market is intense as we have to compete with many domestic and global, established and new EV manufacturers nationwide, some of whom have greater brand recognition and resources than we do. As one of the front runners in the Chinese electric vehicle industry, we believe our innovative business model, deep industry knowledge; technological innovation, competitive pricing, and service options allow us to develop the most suitable products and solutions for our targeted customers in our niche market. In particular, the Online Ride Sharing Service (“ORSS”) or the “Car-Share Program,” is an upgraded car share program of our Micro Public Transportation (the “MPT program”) that we advocated and tried for years, which had received praise by our customers and the Chinese government. We expect the ORSS program may help us gain additional market share and compete effectively against other EV manufacturers.

 

2

 

 

Our Opportunities and Growth Strategy

 

Local governments in China are pushing for new electric vehicle adoption with strong policy support, due to worsening air pollution and concerns about petroleum resource dependence. As one of the beneficiaries of the new energy vehicle industry take-off, Kandi has become one of the front runners in China’s electric vehicle industry, given its technology innovation with integrated solutions and operation experience.

 

Our business strategy includes efforts to provide customers with high-quality products, to expand our footprint in new and existing markets, and to advance our profile and the market demand through the further innovations in the Car- Share Program and the JV Company’s direct sales channel. We also provide EV products to end users through our distributors. We anticipate that our pure EV product business in China, through the operations of the JV Company and with the support of new Chinese policies (including the Double Credit System policy), will continue to develop and grow in the future.

 

Today, cities in China face four critical challenges in the traffic environment, including pollution, traffic congestion, insufficient parking availability, and growing scarcity of energy supplies, which are mainly the result of ever growing volume of gas-powered private cars. The best solution to solve these problems is to increase more affordable public transportation for urban residents. Subway and bus used to be the most popular public transportation options available. They form the main artery of urban public transportation but such system is lack of capillary. In this regard, we introduced the Car-Share Program by using pure electric vehicles. Urban public transportation system can be improved with the ORSS program.

  

In order to further improve the Car- Share Program, we united other operators in more than 10 cities to form of a five-year 300,000 units online ride-sharing service alliance at the beginning of 2019. As one of the most active practitioners of sharing economy model in China nowadays, this innovative business model provides a total solution to EV sharing. The character of this program is that all the cars casted to the online platform by the alliance use the changing-battery-model. The changing battery model solves the problems including high price of EVs, short recharging mileage, long recharging time, shortage of charging facilities, battery attenuation and potential pollution problem and so on. Furthermore this model allows the battery to be slowly recharged at a constant temperature, which prolongs the usage life of the battery and truly realize green energy efficiency. We have reason to believe that this upgrade to ORSS program from MPT advocated and practiced by Kandi will become the benchmark of urban car-share and play a significant role in the development of China’s urban travel ecosphere.

 

On July 1, 2018, we acquired 100% ownership of SC Autosports, LLC (“SC Autosports”). SC Autosports is a Dallas-based sales company primarily engaged in the wholesale of off-road vehicle products, with a small percentage of its business derived from off-road vehicle parts wholesale and retail. Currently, it has a seasoned management team and a distribution force averaging over ten years of sales experience. With nationwide sales channels in the U.S.

 

SC Autosports is going to commence the sales of the electric vehicles in 2019. On February 20, 2019, Kandi’s Model EX3 and Model K22, have received approval from the National Highway Traffic Safety Administration (“NHTSA”). The NHTSA approval is an assurance that Kandi’s two EV models conform to NHTSA standards and are registered in the U.S. Thus, SC Autosports is confident to launch these two models to American market.

 

3

 

 

Our Products

 

General

 

For the years ended December 31, 2018, 2017 and 2016, our products consist of EV parts, EV products, and off-road vehicles including ATVs, utility vehicles (“UTVs”), go-karts, and others vehicles. Based on our market research on consumer demand trends, we have adjusted our production line strategically and continue to develop and manufacture new products in an effort to meet market demand and better serve our customers.

 

The following table shows the breakdown of our net revenues:

 

   Year Ended December 31, 
   2018   2017   2016 
   Sales Revenue   Sales Revenue   Sales Revenue 
Primary geographical markets            
Overseas  $12,741,570   $4,817,517   $4,919,054 
China   99,697,258    97,988,104    124,572,959 
Total  $112,438,828   $102,805,621   $129,492,013 
                
Major products               
EV parts  $99,099,312   $97,355,828   $120,079,312 
EV products   -    -    3,718,291 
Off-road vehicles   13,339,516    5,449,793    5,694,410 
Total  $112,438,828   $102,805,621   $129,492,013 
                
Timing of revenue recognition               
Products transferred at a point in time  $112,438,828   $102,805,621   $129,492,013 
Total  $112,438,828   $102,805,621   $129,492,013 

 

Sales and Distribution

 

In 2018, the Company had two primary products: electric vehicle parts and off-road vehicles. Prior to 2014, the Company also featured EV products. As EV production was completely transferred to the JV Company at the end of 2014 pursuant to the JV Agreement, Kandi now focuses on EV parts production and supplies the JV Company with EV parts. In addition, Kandi continues to produce and sell off-road vehicles, which are our traditional products and are sold to domestic and international distributors or consumers.

 

4

 

 

Customers

 

As of December 31, 2018, our major customers, in the aggregate, accounted for 76% of our sales. We are working on developing new business partners and clients for our products to reduce our dependence on existing customers and is focusing our new business development efforts on our EV business.

 

The Company’s major customers, each of whom accounted for more than 10% of our consolidated revenue, were as follows:

 

   Sales   Trade Receivable 
Major Customers  Year
Ended
December 31,
2018
   Year
Ended
December 31,
2017
   Year
Ended
December 31,
2016
   December 31,
2018
   December 31,
2017
   December 31
2016
 
Kandi Electric Vehicles Group Co., Ltd. and its subsidiaries   43%   90%(1)   60%(2)   66%   74%(3)   70%(4)
Jinhua Chaoneng Automobile Sales Co. Ltd.   33%   4%   30%   22%   23%   19%

 

(1)Including 89% of Kandi Electric Vehicles Group Co., Ltd. as disclosed in 2017 10K Major Customer

 

(2)Including 59% of Kandi Electric Vehicles Group Co., Ltd. as disclosed in 2016 10K Major Customer

 

(3)Including 71% of Kandi Electric Vehicles Group Co., Ltd. as disclosed in 2017 10K Major Customer

 

(4)Including 53% of Kandi Electric Vehicles Group Co., Ltd. as disclosed in 2016 10K Major Customer

 

Sources of Supply

 

All raw materials are purchased from suppliers. We have developed close relationships with several key suppliers particularly in the procurement of certain key parts. While we obtain components from multiple third-party sources in some cases, we do not have, and do not anticipate having, any difficulty in obtaining required materials from our suppliers. We believe that we have adequate supplies or sources of availability of the raw materials necessary to meet our manufacturing and supply requirements.

 

The Company’s material suppliers, each of whom accounted for more than 10% of our total purchases, were as follows:

 

   Purchases   Accounts Payable 
   Year   Year   Year             
   Ended   Ended   Ended             
Major  December 31,   December 31,   December 31,   December 31,   December 31,   December 31, 
Suppliers  2018   2017   2016   2018   2017   2016 
Jiangsu Tian Peng Power Supply Co., Ltd.   23%   -    -    20%   -    - 
Shenzhen BiKe Power Battery Co., Ltd.   19%   -    -    14%   -    - 

 

5

 

 

Intellectual Property and Licenses

 

Our success depends, at least in part, on our ability to protect our core technology and intellectual property. We rely on a combination of patents, patent applications, trademarks, copyrights and trade secret protection laws in China and other jurisdictions, as well as confidentiality procedures and contractual provisions to protect our intellectual property and our brand. For 2018, Kandi Vehicles applied with the Chinese patent authority for total 23 patents, including 1 invention patent, 20 utility model patents and 2 appearance design patents. During 2018, Kandi Vehicles received total of 24 issued patents, including 1 invention patent, 14 utility model patents and 9 appearance design patents. As of December 31, 2018, Kandi Vehicles had total of 74 valid patents, including 1 invention patent, 41 utility model patents and 32 appearance design patents, as well as 2 software copyrights. For 2018, Jinhua Ankao applied with the Chinese patent authority for total of 24 patents, including 20 invention patents, 4 utility model patents. During 2018, Jinhua Ankao received total 8 issued patents, including 7 utility model patents and 1 appearance design patent. As of December 31, 2018, Jinhua Ankao had total of 24 valid patents, including 22 utility model patents and 2 appearance design patents. For 2018, Kandi New Energy applied total of 1 utility model patent. As of December 31, 2018, Kandi New Energy had total of 4 valid patents, all of which are appearance design patents. Under Chinese patent law, an invention patent is valid for a term of 20 years and a utility or design patent is valid for a term of 10 years. In addition, we are authorized to use the trademark “Kandi” and we are the owner of the trademark “JASSCOL”. The JV Company is authorized to use the trademark “Global Hawk”. We intend to continue to file additional patent applications with respect to our technology.

 

Kandi Vehicles was certified in intellectual property management systems in 2017 and is recognized as a national High and New Technology Enterprise by Zhejiang Provincial Science and Technology Bureau, Zhejiang Provincial Department of Finance, Zhejiang Provincial National Tax Bureau and Zhejiang Provincial Local Tax Bureau on November 13, 2017. The certification is valid for three years. The status of being a national High and New Technology Enterprise qualifies Kandi Vehicles for a preferred 15% income tax rate, as opposed to a standard corporate income tax rate at 25%.

 

In 2018, Kandi Vehicles was recognized as top 10 enterprises of Jinhua Economic Development Zone and Jinhua Ankao was identified as National High and New Technology Enterprise.

 

Employees

 

As of December 31, 2018, excluding the contractors and the employees with the JV Company, Kandi had a total of 705 full-time employees, as compared to 564 full-time employees on December 31, 2017, of which 423 employees are production personnel, 29 employees are sales personnel, 87 employees are research and development personnel, and 166 employees are administrative personnel. None of our employees are covered by collective bargaining agreements. We consider our relationships with our employees to be good. We also employ consultants on an as-needed basis.

 

6

 

 

Environmental and Safety Regulation

 

Emissions

 

Our products are all subject to international laws and emissions related standards and regulations, including regulations and related standards established by China Environmental Protection Agency, the United States Environmental Protection Agency, the California Air Resources Board, and European and Canadian legislative bodies. 

 

According to the management’s knowledge, the Company’s products have been designed and developed according to the environmental regulations of the target market since the research and development period, and have passed the corresponding tests before the products are put into production and sales, and obtained the compulsory product certification of the corresponding countries and regions.

 

If the standards and rules we execute are modified, or interpreted differently, or the product certification certificate expires, we will evaluate the product and restart the corresponding product design improvement and product testing/certification procedures to continuously ensure the target market environment regulatory compliance. The Company cannot estimate the extent to which these changes, if any, will affect our operating costs in the future.

 

As of December 31, 2018, the Company’s subordinates, Kandi Electric Vehicles and SC Autosports, conducted a policy investigation and conformity assessment on environmental regulations and standards for the Kandi electric vehicles EX3 and K22 sold to the US market. The Company’s subsidiaries will develop and implement corresponding action plans based on the assessment results. The resources required to implement such an action plan will be an important part of the foreseeable cost of sales that constitutes the export of Kandi EVs to the United States.

 

However, once the US changes in environmental protection policies and regulations for automotive products, or changes in import tariff policies, or changes in US automobile product consumption tax policies, or changes in US new energy vehicle product subsidy policies, the Company cannot estimate the impact of these changes on the EV sales in the United States.

 

Product Safety and Regulation

 

Safety Regulation

 

The U.S. federal government and individual states have adopted, or are considering the adoption of, laws and regulations relating to the use and safety of Kandi’s products. The federal government is the primary regulator of product safety. The Consumer Product Safety Commission (“CPSC”) has federal oversight over product safety issues related to ATVs and off-road vehicles. The National Highway Transportation Safety Administration (“NHTSA”) has federal oversight over product safety issues related to off-road vehicles and regulates the safety of electric vehicles for road vehicles.

 

In August 2008, the Consumer Product Safety Improvement Act (the “Product Safety Act”) was passed. The Product Safety Act requires all manufacturers and distributors who import into or distribute ATVs within the United States to comply with the American National Standards Institute/Specialty Vehicle Institute of America (“ANSI/SVIA”) safety standard, which previously had been voluntary. The Product Safety Act also requires the same manufacturers and distributors to have ATV action plans filed with the CPSC that are substantially similar to the voluntary action plans that were previously in effect. Both Kandi and SC Autosports currently comply with the ANSI/SVIA standard.

 

7

 

 

Kandi’s off-road vehicles are subject to federal vehicle safety standards administered by NHTSA. Kandi’s off-road vehicles are also subject to various state vehicle safety standards. Kandi believes that its off-road vehicles comply with safety standards applicable to off-road vehicles.

 

Kandi’s off-road vehicles are also subject to international safety standards in places where it sells its products outside the United States. Kandi believes that its off-road vehicle products comply with applicable safety standards in the United States and internationally.

 

For the future sales of Kandi EX3\K22 electric vehicle to the US market, the Company’s R&D department collected and checked the relevant provisions adopted by NHTSA by the end of 2018. Through the conformity assessment and design improvement of product safety standards, the Kandi EX3 and K22 electric vehicles were approved by NHTSA and obtained the qualification for the import and registration of electric vehicles in the United States. Therefore, Kandi believes that the EX3\K22 electric vehicle can meet the US product safety regulations and standards.

 

Principal Executive Offices

 

Our principal executive office is located in the Jinhua City Industrial Zone in Jinhua, Zhejiang Province, PRC, 321016, and our telephone number is (86-579) 82239856.

 

Recent Development Activities

 

On January 9, 2019, we announced that Kandi Jiangsu received an approval notice from Jiangsu Development and Reform Commission regarding Kandi Jiangsu’s annual capacity of 50,000 pure electric vehicles project (the “EV Project”) on January 8, 2019. The approval was granted pursuant to the provisions of Announcement No. 22 - the “Regulations on the Administration of Investment in the Automobile Industry” (the “Auto Regulations”) published on December 18, 2018 by the National Development and Reform Commission (the “NDRC”). Kandi Jiangsu’s EV Project application was assigned to the Jiangsu Provincial Development and Reform Commission for review and subsequent approval.

 

On January 22, 2019, we announced that the JV Company led the efforts in organizing a five-year online ride-sharing service alliance in Hangzhou on January 13, 2019 (the “Online Ride-sharing Service Alliance”). The Online Ride-sharing Alliance was initiated by Zhejiang Ruibo New Energy Vehicle Service Company Ltd. (“Zhejiang Ruibo”). Its goal is to provide 300,000 government-accredited vehicles within five years. Participating companies from more than ten cities including Beijing, Tianjin, Shenzhen, Chengdu, Suzhou, Guangzhou, and Xiamen jointly signed the alliance agreement. On January 18, 2019, the JV Company signed a Framework Agreement with Zhejiang Ruibo to serve as the primary vehicle supplier for the Online Ride-Sharing Service Alliance and provide 300,000 government-accredited vehicles for the ride-sharing service.

 

8

 

 

On January 29, 2019, we announced that the JV Company and Hangzhou Youxing Technology Co. Ltd. (“Youxing Technology”) have agreed to collaborate in exploring new and innovative models for an online ride-sharing business with their combined resources and market advantages. On January 28, 2019, representatives from each party, Mr. Zhu Feng, CEO of the JV Company and Mr. Dong Kainan, General Manager of Youxing Technology signed a Cooperation Agreement. Mr. Hu Xiaoming, Chairman of the JV Company and Mr. Liu Jinliang, Chairman of Youxing Technology also attended the signing ceremony. The two parties have agreed to utilize the “Cao Cao Zhuan Che” online ride-sharing platform to launch 20,000 Kandi brand pure electric vehicles for urban network ride-sharing services within three years.

 

On February 4, 2019, we announced that the JV Company received a RMB 1.6 billion (approximately US$237.2 million) supply chain finance (SCF) program, to be used as capital support for the JV Company, from the National Economic and Technological Development Zone of Rugao City. The total capital support amount of the SCF program has increased to RMB 1.6 billion (approximately US$237.2 million) based on the initial SCF program of RMB 730 million (approximately US$108 million) we received in May 2017. As of February 3, 2019, RMB 1.28 billion (approximately US$190.2 million) has already been received, and the remainder will be provided according to the JV Company’s capital requirements.

 

On February 20, 2019, we announced that Kandi brand electric vehicle (“EV”) Models EX3 and K22 have been approved for importation and registration in the USA by NHTSA. This is another significant milestone after qualifying for a $7,500 U.S. federal tax credit in October 2018. The NHTSA approval provides assurance that Kandi’s two EV models conform to NHTSA standards and are registered in the U.S. The JV Company will begin the process of launching the Model EX 3 and Model K22 for the American market.

 

On March 4, 2019, we announced that further steps the JV Company has taken in order to maintain favorable momentum generated by its recent establishment of the government-accredited Online Ride-sharing Service Alliance on January 13, 2019. The JV Company signed a strategic cooperative agreement for operating government-accredited vehicles with China Resources (Zhejiang) Vehicle and Ship Natural Gas Co., Ltd (“China Resources Zhejiang”) on March 2, 2019. The JV Company led the efforts in organizing the Online Ride-sharing Service Alliance, which includes over 10 vehicle service providers such as Zhejiang Ruibo and Hangzhou Ruixiang. The mission of the Online Ride-sharing Service Alliance is to provide 300,000 government-accredited vehicles for the ride-hailing service within five years. The JV Company will be the primary vehicle supplier in the Online Ride-sharing Service Alliance, responsible for delivering pure electric vehicles with quick battery exchange features. Going forward, China Resources Zhejiang will be in charge of investment and operations of Online Ride-sharing Service Alliance’s vehicle battery exchange business.

 

On March 11, 2019, we announced that Kandi Pure EV Models EX3 and K22 reached another significant milestone in the American market. After both models received approval of eligibility in October 2018 for up to a $7,500.00 New Qualified Plug-in Electric Drive Motor Vehicle Credit (the “Credit”) from the Internal Revenue Service (“IRS”) for U.S. customers who purchased models EX3 and K22 in 2019, new U.S. buyers who purchase models EX3 and K22 in 2020 also qualify for the Credit according to Internal Revenue Code Section 30D.

 

Item 1A. Risk Factors.

 

You should carefully consider the risks described below together with all of the other information included in this report before making an investment decision with regard to our securities. The statements contained in or incorporated into this Annual Report that are not historic facts are forward -looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. If any of the following risks actually occurs, our business, financial condition or results of operations could be harmed. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

 

9

 

 

Risks Relating to Our Business

 

Our future growth is dependent upon consumers’ willingness to adopt EVs.

 

Our growth is highly dependent upon the adoption by consumers of, and we are subject to a risk of any reduced demand for, alternative fuel vehicles in general and EVs in particular. The market for alternative fuel vehicles (including EVs) is relatively new and rapidly evolving, characterized by rapidly changing technologies, price competition, additional competitors, evolving government regulation and industry standards, frequent new vehicle announcements and changing consumer demands and behaviors. If the market for EVs in China does not develop as we expect or develops more slowly than we expect, our business, prospects, financial condition and operating results will be harmed.

 

Developments in alternative technologies or improvements in the internal combustion engine may materially adversely affect the demand for our EV Products.

 

Significant developments in alternative technologies, such as advanced diesel, ethanol, fuel cells or compressed natural gas, or improvements in the fuel economy of the internal combustion engine, may materially and adversely affect our business and prospects in ways we do not currently anticipate. Any failure by us to develop new or enhanced technologies or processes, or to react to changes in existing technologies, could materially delay our development and introduction of new and enhanced EV products, which could result in the loss of competitiveness of our vehicles, decreased revenue and a loss of market share to competitors.

 

If we are unable to keep up with advances in electric vehicle technology, we may suffer a decline in our competitive position.

 

We may be unable to keep up with changes in EV technology, and we may suffer a resulting decline in our competitive position. Any failure to keep up with advances in EV technology would result in a decline in our competitive position which would materially and adversely affect our business, prospects, operating results and financial condition. Our research and development efforts may not be sufficient to adapt to changes in EV technology. As technologies change, we plan to upgrade or adapt the vehicles and introduce new models in order to continue to provide vehicles with the latest technology, in particular battery cell technology. However, our vehicles may not compete effectively with alternative vehicles if we are not able to source and integrate the latest technology into our vehicles. For example, we do not manufacture battery cells, which makes us dependent upon other suppliers of battery cell technology for our battery packs.

 

Our business depends substantially on the continuing efforts of our executive officers, and our business may be severely disrupted if we lose their services.

 

Our future success depends substantially on the continued services of our executive officers, especially our CEO and Chairman of the Board, Mr. Hu Xiaoming. We do not maintain key man life insurance on any of our executive officers. If any of our executive officers are unable or unwilling to continue in their present positions, we may not be able to replace them readily, if at all. Therefore, our business may be severely disrupted, and we may incur additional expenses to recruit and retain new officers. In addition, if any of our executive officers joins a competitor or forms a competing company, we may lose some of our customers.

 

10

 

 

We may be subject to product liability claims or recalls which could be expensive, damage our reputation or result in a diversion of management resources.

 

We may be subject to lawsuits resulting from injuries associated with the use of the vehicles that we sell or produce. We may incur losses relating to these claims or the defense of these claims. There is a risk that claims or liabilities will exceed our insurance coverage. In addition, we may be unable to retain adequate liability insurance in the future.

 

We may also be required to participate in recalls involving our vehicles, if any (including the products SC Autosports sells in the U.S.) prove to be defective, or we may voluntarily initiate a recall or make payments related to such claims as a result of various industry or business practices or the need to maintain good customer relationships. Such a recall would result in a diversion of resources. While we do maintain product liability insurance, we cannot assure investors that it will be sufficient to cover all product liability claims, that such claims will not exceed our insurance coverage limits or that such insurance will continue to be available on commercially reasonable terms, if at all. Any product liability claim brought against us could have a material adverse effect on the results of our operations.

 

We retain certain personal information about our customers and may be subject to various privacy and consumer protection laws.

 

We and our operating companies use the electronic systems of our vehicles to log information about each vehicle’s condition, performance and use in order to aid us in providing customer service, including vehicle diagnostics, repair and maintenance, as well as to help us collect data regarding our customers’ charge time, battery usage, mileage and efficiency habits and to improve our vehicles. We also collect information about our customers through our website, at our stores and facilities, and via telephone.

 

Our customers may object to the processing of this data, which may negatively impact our ability to provide effective customer service and develop new vehicles and products. Collection and use of our customers’ personal information in conducting our business may be subject to national and local laws and regulations in China, and such laws and regulations may restrict our processing of such personal information and hinder our ability to attract new customers or market to existing customers. We may incur significant expenses to comply with privacy, consumer protection and security standards and protocols imposed by law, regulation, industry standards or contractual obligations. Although we take steps to protect the security of our customers’ personal information, we may be required to expend significant resources to comply with data breach requirements if third parties improperly obtain and use the personal information of our customers or we otherwise experience a data loss with respect to customers’ personal information. A major breach of our network security and systems could have serious negative consequences for our businesses and future prospects, including possible fines, penalties and damages, reduced customer demand for our vehicles, and harm to our reputation and brand.

 

11

 

 

Our business will be adversely affected if we are unable to protect our intellectual property rights from unauthorized use or infringement by third parties.

 

Any failure to adequately protect our proprietary rights could result in the weakening or loss of such rights, which may allow our competitors to offer similar or identical products or use identical or confusingly similar branding, potentially resulting in the loss of some of our competitive advantage, a decrease in our revenue or an attribution of potentially lower quality products to us, which would adversely affect our business, prospects, financial condition and operating results. Our success depends, at least in part, on our ability to protect our core technology and intellectual property. To accomplish this, we rely on a combination of patents, patent applications, trade secrets (including know-how), employee and third-party nondisclosure agreements, copyright protection, trademarks, intellectual property licenses and other contractual rights to establish and protect our proprietary rights in our technology. We have also received from third parties patent licenses related to manufacturing our vehicles.

 

The protection provided by the patent laws is and will be important to our future opportunities. However, such patents and agreements and various other measures we take to protect our intellectual property from use by others may not be effective for various reasons, including the following:

 

our pending patent applications may not result in the issuance of patents;

 

our patents, if issued, may not be broad enough to protect our commercial endeavors;

 

the patents we have been granted may be challenged, invalidated or circumvented because of the pre-existence of similar patented or unpatented technology or for other reasons;

 

the costs associated with obtaining and enforcing patents, confidentiality and invention agreements or other intellectual property rights may make aggressive enforcement impracticable; or

 

current and future competitors may independently develop similar technology, duplicate our vehicles or design new vehicles in a way that circumvents our intellectual property.

 

Existing trademark and trade secret laws and confidentiality agreements afford only limited protections. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States, and policing the unauthorized use of our intellectual property is difficult.

 

We may need to defend ourselves against patent or trademark infringement claims, which may be time-consuming and could cause us to incur substantial costs.

 

Companies, organizations or individuals, including our competitors, may hold or obtain patents, trademarks or other proprietary rights that would prevent, limit or interfere with our ability to make, use, develop, sell or market our vehicles or components, which could make it more difficult for us to operate our business. From time to time, we may receive inquiries from holders of patents or trademarks regarding their proprietary rights. Companies holding patents or other intellectual property rights may bring suits alleging infringement of such rights or otherwise assert their rights and seek licenses. In addition, if we are determined to have infringed upon a third party’s intellectual property rights, we may be required to do one or more of the following:

 

cease selling, incorporating or using vehicles or offering goods or services that incorporate or use the challenged intellectual property;

 

pay substantial damages;

 

obtain a license from the holder of the infringed intellectual property right, which license may not be available on reasonable terms or at all; or

 

redesign our vehicles or other goods or services.

 

12

 

 

In the event of a successful claim of infringement against us and our failure or inability to obtain a license to the infringed technology or other intellectual property right, our business, prospects, operating results and financial condition could be materially adversely affected. In addition, any litigation or claims, whether or not valid, could result in substantial costs and diversion of resources and management attention.

 

We may also face claims that our use of technology licensed or otherwise obtained from a third party infringes the rights of others. In such cases, we may seek indemnification from our licensors/suppliers under our contracts with them. However, indemnification may be unavailable or insufficient to cover our costs and losses, depending on our use of the technology, whether we choose to retain control over conduct of the litigation, and other factors.

 

Our vehicles make use of lithium-ion battery cells, which have the potential to catch fire or vent smoke and flame. This may lead to additional concerns about batteries used in automotive applications.

 

The battery packs in our EV products make use of lithium-ion cells. We also currently intend to make use of lithium-ion cells in battery packs on any future vehicles we may produce. On rare occasions, lithium-ion cells can rapidly release the energy they contain by venting smoke and flames in a manner that can ignite nearby materials as well as other lithium-ion cells. Extremely rare incidents of laptop computers, cell phones and EV battery packs catching fire have focused consumer attention on the safety of these cells.

 

These events have raised concerns about batteries used in automotive applications. To address these questions and concerns, a number of battery cell manufacturers are pursuing alternative lithium-ion battery cell chemistries to improve safety. We may have to recall our vehicles or participate in a recall of a vehicle that contains our battery packs, or redesign our battery packs, which would be time consuming and expensive. Also, negative public perceptions regarding the suitability of lithium-ion cells for automotive applications or any future incident involving lithium-ion cells such as a vehicle or other fire, even if such incident does not involve us, could seriously harm our business.

 

In addition, we store a significant number of lithium-ion cells at our manufacturing facility. Any mishandling of battery cells may cause disruption to the operation of our facilities. While we have implemented safety procedures related to the handling of the cells, there can be no assurance that a safety issue or fire related to the cells would not disrupt our operations. Such damage or injury would likely lead to adverse publicity and potentially a safety recall. Moreover, any failure of a competitor’s EV, may cause indirect adverse publicity for us and our EV products. Such adverse publicity would negatively affect our brand and harm our business, prospects, financial condition and operating results.

 

Compliance with environmental regulations can be expensive, and noncompliance with these regulations may result in adverse publicity and potentially significant monetary damages and fines.

 

Our business operations generate noise, waste water, gaseous byproduct and other industrial waste. We are required to comply with all national and local regulations regarding the protection of the environment. We are in compliance with current environmental protection requirements and have all necessary environmental permits to conduct our business. However, if more stringent regulations are adopted in the future, the costs of compliance with these new regulations could be substantial. Additionally, if we fail to comply with present or future environmental regulations, we may be required to pay substantial fines, suspend production or cease operations. Any failure by us to control the use of, or to adequately restrict the unauthorized discharge of, hazardous substances could subject us to potentially significant monetary damages and fines or suspensions to our business operations. Certain laws, ordinances and regulations could limit our ability to develop, use, or sell our products.

 

13

 

 

Our high concentration of sales to relatively few customers may result in significant impact on our liquidity, business, results of operations and financial condition.

 

As of December 31, 2018 and 2017 our major customers (above 10% of the total revenue), in the aggregate, accounted for 76% and 90%, respectively, of our sales. Due to the concentration of sales to relatively few customers including the JV Company, loss of one or more of these customers will have relatively high impact on our operational results. In the event that our relationship with the JV Company and/or our partner in the JV Company changes negatively, our operating results would be materially negatively affected.

 

Our business is subject to the risk of supplier concentrations.

 

We depend on a limited number of suppliers for the sourcing of major components and parts and principal raw materials. For the years ended December 31, 2018 and 2017 our top two suppliers accounted for 42% and 51% of our purchases, respectively. As a result of this concentration in our supply chain, our business and operations would be negatively affected if any of our key suppliers were to experience significant disruption affecting the price, quality, availability or timely delivery of their products. The partial or complete loss of these suppliers, or a significant adverse change in our relationship with any of these suppliers, could result in lost revenue, added costs and distribution delays that could harm our business and customer relationships. In addition, concentration in our supply chain can exacerbate our exposure to risks associated with the termination by key suppliers of our distribution agreements or any adverse change in the terms of such agreements, which could have a negative impact on our revenues and profitability.

 

Our facilities or operations could be damaged or adversely affected as a result of disasters or unpredictable events.

 

Our headquarters and facilities are located in several cities in China such as Jinhua, Yongkang and Haikou. If major disasters such as earthquakes, fires, floods, hurricanes, wars, terrorist attacks, computer viruses, pandemics or other events occur, or our information system or communications network breaks down or operates improperly, our headquarters and production facilities may be seriously damaged, or we may have to stop or delay production and shipment of our products. We may incur expenses relating to such damages, which could have a material adverse impact on our business, operating results and financial condition.

 

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential shareholders could lose confidence in our financial reporting, which would harm our business and the trading price of our stock.

 

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. As directed by Section 404 of the Sarbanes-Oxley Act of 2002, or SOX 404, the SEC adopted rules requiring public companies to include a report of management on our internal controls over financial reporting in their annual reports.

 

Although we continue to maintain and improve our internal control procedures, we cannot provide assurance that we will not fail to achieve and maintain an effective internal control environment on an ongoing basis, which may cause investors to lose confidence in our reported financial information and have a material adverse effect on the price of our common stock.

 

14

 

 

The audit report included in this Annual Report was prepared by auditors who are not inspected by the Public Company Accounting Oversight Board and, as a result, investors are deprived of the benefits of such inspection.

 

The independent registered public accounting firm that issues the audit reports included in our annual reports filed with the SEC, as auditors of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), or the “PCAOB”, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards. Because our auditors are located in China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of Chinese authorities, our auditors are not currently inspected by the PCAOB.

 

Inspections of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The inability of the PCAOB to conduct inspections in China prevents the PCAOB from regularly evaluating our auditor’s statements, audits and quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.

 

The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s quality control and audit procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.

 

Risks Related to Doing Business in China

 

The economy of China had experienced unprecedented growth. This growth has slowed in the recent years, and if the growth of the economy continues to slow or if the economy contracts, our financial condition may be materially and adversely affected.

 

The rapid growth of the Chinese economy had historically resulted in widespread growth opportunities for industries across China. This growth has slowed in the recent years. As a result of the global financial crisis and the inability of enterprises to gain comparable access to the same amounts of capital available in past years, there may be an adverse effect on the business climate and growth of private enterprise in China. An economic slowdown could have an adverse effect on our sales and may increase our costs. Further, if economic growth continues to slow, and if, in conjunction, inflation continues unchecked, our costs would be likely to increase, and there can be no assurance that we would be able to increase our prices to an extent that would offset the increase in our expenses.

 

In addition, a tightening of the labor markets in our geographic region may result in fewer qualified applicants for job openings in our facilities. Further, higher wages, related labor costs and other increasing cost trends may negatively impact our results.

 

15

 

 

Changes in political and economic conditions may affect our business operations and profitability.

 

Since our business operations are primarily located in China, our business operations and financial position are subject, to a significant degree, to the economic, political and legal developments in China.

 

While the Chinese government has not halted its economic reform policy since 1978, any significant adverse changes in the social, political and economic conditions of China may fundamentally impact China’s economic reform policies, and thus the Company’s operations and profits may be adversely affected.

 

Uncertainties with respect to the Chinese legal system could have a material adverse effect on us and may restrict the level of legal protections to foreign investors.

 

China’s legal system is based on statutory law. Unlike the common law system, statutory law is based primarily on written statutes. Previous court decisions may be cited as persuasive authority but do not have a binding effect. Since 1979, the Chinese government has been promulgating and amending laws and regulations regarding economic matters, such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, since these laws and regulations are relatively new, and the Chinese legal system continues to rapidly evolve, the interpretation of many laws, regulations and rules is not always uniform and enforcement of these laws, regulations and rules involves uncertainties, which may limit legal protections available to us.

 

In addition, any litigation in China may be protracted and may result in substantial costs and diversion of resources and management’s attention. The legal system in China cannot provide investors with the same level of protection as in the U.S. The Company is governed by laws and regulations generally applicable to local enterprises in China. Many of these laws and regulations were recently introduced and remain experimental in nature and subject to changes and refinements. Interpretation, implementation and enforcement of the existing laws and regulations can be uncertain and unpredictable and therefore may restrict the legal protections available to foreign investors.

 

Changes in currency conversion policies in China may have a material adverse effect on us.

 

Renminbi (“RMB”) is still not a freely exchangeable currency. Since 1998, the State Administration of Foreign Exchange of China has promulgated a series of circulars and rules in order to enhance verification of foreign exchange payments under a Chinese entity’s current account items, and has imposed strict requirements on borrowing and repayments of foreign exchange debts from and to foreign creditors under the capital account items and on the creation of foreign security in favor of foreign creditors.

 

This may complicate foreign exchange payments to foreign creditors under the current account items and thus may affect the ability to borrow under international commercial loans, the creation of foreign security, and the borrowing of RMB under guarantees in foreign currencies. Moreover, the value of RMB may become subject to supply and demand, which could be largely impacted by international economic and political environments. Any fluctuations in the exchange rate of RMB could have an adverse effect on the operational and financial condition of the Company and its subsidiaries in China.

 

16

 

 

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

 

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.

 

Investors may experience difficulties in effecting service of legal process, enforcing judgements or bringing original actions based on United States or foreign laws against us or our management.

 

We conduct substantially all of our operations in China and almost all of our assets are located in China. In addition, almost all of our senior executive officers reside in China. As a result, it may not be possible to effect service of process on our senior executive officers within the United States or elsewhere outside China, including with respect to matters arising under U.S. federal securities laws or applicable state securities laws. Moreover, our Chinese counsel has advised us that China does not have treaties with the United States or many other countries providing for the reciprocal recognition and enforcement of court orders and final judgments.

 

Changes to the government’s subsidy support policies and further delays in subsidy payments may have negative impacts on our operations.

 

Due to the changes of the policies, the unavailability, reduction or elimination of government and economic incentives could have a material adverse effect on our business, financial condition, operating results and prospects mainly in the following aspects.

 

2019 will be the implementation year for a decline in subsidies for new energy vehicles. The Chinese government’s subsidy for new energy vehicles has continued to decline compared to past years. However, as of the date of this report, the new government policy regarding state subsidies for new energy vehicles has not yet been released. The Chinese government has not made clear the extent to which new energy vehicle subsidies will decline. The Company cannot predict in the coming year whether the declining levels of national new energy vehicle subsidies will be made up by the scale effect of production, a reduction of the purchase price of key parts, or tightened control of manufacturing costs. This may also present greater challenges to the JV Company’s operations. Therefore, changes in government support policies may have a significant adverse impact on the Company’s business prospects, operating results, cash flow and profitability in the coming years.

 

17

 

 

Risks associated with the export of Kandi electric vehicles to the United States

 

Our intellectual property rights may be harmed by competitors preemptively filing legitimate and illegitimate patents, which could create significant barriers for our business by preventing us from adequately protecting our intellectual property.

 

Multinational automobile companies usually obtain patent portfolios consisting of basic patents and peripheral patents on improvements and related technologies, thereby creating patent barriers in the industry.  At the same time, certain multinational automobile companies also maliciously apply for patents, in order to obtain an unlawful competitive advantage or to directly receive invalid rights and use patents as weapons in litigation. New energy vehicles are emerging products in worldwide markets in recent years, while relevant and related patents in the industry are still in force.  Kandi Electric Vehicles may be seriously adversely affected by intellectual property rights barriers through participation in the competitive international automobile market. Therefore, Kandi Electric Vehicles faces risks of patent barriers and intellectual property litigation in the future.

 

Failures in our overseas business and export trade processes may present a risk of significant losses to our business.

 

Our automobile product export and overseas operations sections involve import and export currency exchange, insurance, ocean transportation, customs clearance and various other logistical procedures. A loss of trust in any part of the chain can lead to the failure of transactions, which in turn causes huge losses to our enterprise. In the future, the Company will expand its overseas market. An insufficient assessment of the capital strength and commercial credit of its partners, or any fraud in risk prevention and risk control systems may cause economic losses for the Company due to its business partners’ breach of contract or even fraud. In short, the export of Kandi electric vehicles to the United States may have risks in the overseas operation and export trade process.

 

The developed countries that import our products have strict environmental laws and regulations which may cause us to expend significant sums to comply with such laws and regulations.

 

The United States and other developed countries have strong awareness of environmental protection and product safety regulations. The penalties for violating environmental laws in such countries are extremely high. Developed countries have mature and highly saturated automobile markets. Costs associated with maintaining controls over atmospheric emissions, harmful toxic substances, and products safety are getting higher in an accelerated manner. The process for a company to obtain the applicable certifications is time-consuming, complicated and expensive. Kandi Electric Vehicles will also face the adverse impact of compliance with policy and regulatory standards in the United States. Thus, Kandi electric vehicles may face the risk of not being able to sustain its business in accordance with US and state environmental protection and product safety policies and regulations.

 

Our short-term financial performance may suffer due to our investment in expanding our presence and sales in the United States.

 

Chinese auto products have market competition disadvantages in terms of technology content, product structure, product quality and brand influence. It is difficult to reverse the sentiment of “low quality and low price” that have followed Chinese automobiles for a long time, resulting in weakened bargaining power for Chinese auto companies and generally low gross profit margins. In the future, Kandi will expand into the US market and rely on overseas distributors to establish a marketing network and after-sales service guarantee system. All actions require the Company to invest a certain amount of resources. Additionally electric vehicle sales may face a slow growth period. In a certain period of time, the growth of operating income lags behind the increase in sales inputs. At the same time, the company cannot predict the direct economic loss caused by an unsatisfactory market expansion caused by the adverse factors of market competition. Cash flows for Kandi Electric Vehicles and SC Autosports may be significantly adversely affected by large investments and small revenues in the short term. Therefore, in the future, there may be a risk that the short-term financial performance indicators will fall due to factors such as the expansion of resources in overseas markets.

 

18

 

 

Risks Relating to Ownership of Our Securities

 

Our stock price may be volatile, which may result in losses for our shareholders.

 

The stock markets have experienced significant price and trading volume fluctuations. Although our stock was listed on the NASDAQ Global Market and upgraded to the NASDAQ Global Select Market on January 2, 2014, the trading price of our common stock may be volatile and could fluctuate significantly in response to many factors, including the following, some of which are beyond our control:

 

variations in our operating results;

 

changes in expectations of our future financial performance, including financial estimates by securities analysts and investors;

 

changes in operating and stock price performance of other companies in our industry;

 

additions or departures of key personnel; or

 

future sales of our common stock.

 

Domestic and international stock markets often experience significant price and volume fluctuations. These fluctuations, as well as general economic and political conditions unrelated to our performance, may adversely affect the price of our common stock.

 

Mr. Hu, our CEO, President and Chairman of our Board, is the beneficial owner of a substantial portion of our outstanding common stock, which may enable Mr. Hu to exert significant influence on corporate actions.

 

Excelvantage Group Limited controls approximately 24.4% of our outstanding shares of common stock as of December 31, 2018. Hu Xiaoming, the Company’s Chief Executive Officer, President and Chairman of the Board of Directors, is the sole stockholder of Excelvantage Group Limited. Together with the shares held through Excelvantage Group Limited, Mr. Hu controls 27.0% of our outstanding shares of common stock, which could have a substantial impact on matters requiring the vote of our shareholders, including the election of our directors and other corporate actions. This control could delay, defer or prevent others from initiating a potential merger, takeover or other change in control, even if these actions would benefit our other shareholders and the Company. This control could adversely affect the voting and other rights of our other shareholders and could depress the market price of our common stock.

 

We do not anticipate paying cash dividends to our common shareholders.

 

We presently do not anticipate that we will pay dividends on any of our common stock in the foreseeable future. If payment of dividends does occur at some point in the future, it would be contingent upon our revenues and earnings, if any, capital requirements, and general financial condition. The payment of any common stock dividends will be within the discretion of our Board. We presently intend to retain all earnings in order to implement our business plan; accordingly, we do not anticipate the declaration of any dividends for common stock in the foreseeable future.

 

19

 

 

The limitation of monetary liability against our directors, officers and employees under Delaware Law and the existence of statutory indemnification rights of our directors, officers and employees may result in substantial expenditures by our company and may discourage lawsuits against our directors, officers and employees.

 

Our articles of incorporation do not contain any specific provisions that limit the liability of our directors for monetary damages to our Company or shareholders; however, we are prepared to indemnify our directors and officers to the extent provided for by Delaware law. We may also have included contractual indemnification obligations in our employment agreements with our officers. The foregoing indemnification obligations could result in the Company incurring substantial expenditures to cover the cost of settlement or damage awards against its directors and officers, which we may be unable to recoup. These provisions and resultant costs may also discourage our Company from bringing a lawsuit against directors and officers for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our shareholders against our directors and officers even though such actions, if successful, might otherwise benefit our Company and shareholders.

 

We may require additional capital, and the sale of additional shares or other equity securities could result in additional dilution to our shareholders.

 

In the future, we may require additional cash resources due to changed business conditions or other future developments, including investments or acquisitions that we may decide to pursue. If our resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities could result in dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. We cannot assure investors that financing will be available, if at all, in amounts or on terms acceptable to us.

 

Our business is subject to changing regulations related to corporate governance and public disclosure that may increase both our costs and the risk of noncompliance.

 

Because our common stock is publicly traded, we are subject to certain rules and regulations of federal, state and financial market exchange entities charged with the protection of investors and the oversight of companies whose securities are publicly traded. These entities, including the Public Company Accounting Oversight Board, the SEC and NASDAQ, have issued requirements and regulations and continue to develop additional regulations and requirements in response to corporate scandals and laws enacted by Congress. Our efforts to comply with these regulations have resulted in, and are likely to continue resulting in, increased general and administrative expenses and diversion of management time and attention from revenue -generating activities to compliance activities. Because new and modified laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This evolution may result in continuing uncertainty regarding compliance matters and additional costs necessitated by ongoing revisions to our disclosure and governance practices.

 

20

 

 

Techniques employed by manipulative short sellers in Chinese small cap stocks may drive down the market price of our common stock.

 

Short selling is the practice of selling securities that the seller does not own but rather has, supposedly, borrowed from a third party with the intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. As it is therefore in the short seller’s best interests for the price of the stock to decline, many short sellers (sometimes known as “disclosed shorts”) publish, or arrange for the publication of, negative opinions or reports regarding the relevant issuer and its business prospects in order to create negative market momentum and generate profits for themselves after selling a stock short. These short attacks have, in the past, led to selling of shares in the market, on occasion in large scale and broad base.

 

Short seller publications are not regulated by any governmental, self-regulatory organization or other official authority in the U.S. and are not subject to the certification requirements imposed by the Securities and Exchange Commission in Regulation AC (Regulation Analyst Certification) and, accordingly, the opinions they express may be based on distortions of actual facts or, in some cases, fabrications of facts. In light of the limited risks involved in publishing such information, and the enormous profit that can be made from running just one successful short attack, unless the short sellers become subject to significant penalties, it is more likely than not that disclosed short sellers will continue to issue such reports.

 

While we intend to strongly defend our public filings against any such short seller attack, often times we are constrained, either by principles of freedom of speech, applicable state law (often called “Anti-SLAPP statutes”), or issues of commercial confidentiality, in the manner in which we can proceed against the relevant short seller. You should be aware that in light of the relative freedom to operate that such persons enjoy – oftentimes blogging from outside the U.S. with little or no assets or identity requirements – should we be targeted for such an attack, our stock will likely suffer from a temporary, or possibly long term, decline in market price should the rumors created not be dismissed by market participants.

 

Item 1B. Unresolved Staff Comments.

 

None.

 

Item 2. Properties.

 

Kandi has the following granted land use rights:

 

   Area       
Location  (square meters)   Term and Expiration  Certificate No.
Zhejiang Jinhua Industrial Park   72,901   Nov 13, 2002 - Nov 13, 2052  10-75013
Zhejiang Jinhua Industrial Park   39,491   Nov 13, 2002 - Nov 13, 2052  10-75014
Zhejiang Jinhua Industrial Park   46,651   Dec 30, 2003 - Dec 30, 2053  110-12504
Zhejiang Jinhua Industrial Park   37,515   Dec 30, 2003 - Dec 30, 2053  110-12850
Zhejiang Jinhua Industrial Park   49,162   Dec 30, 2003 - Dec 30, 2053  110-11343
Zhejiang Jinhua Industrial Park   19,309   Dec 07, 2009 - Dec 07, 2059  110-05918
Zhejiang Qiaoxia Industrial Park   9,405   Apr 03, 2001 – Apr 03, 2051  574-26-36
Zhejiang Qiaoxia Industrial Park   3,851   Jan 21, 2018 – Jan 20, 2068  3310-1414461

 

21

 

 

As of December 31, 2018, the net book value of Zhejiang Jinhua Industrial Park’s land use rights pledged as collateral for the Company’s bank loans were $7,756,253.

 

All land in China is owned by the government and cannot be sold or transferred by or to any individual or private entity. Instead, the government grants or allocates landholders “land use rights.” There are four methods to acquire land use rights:

 

grant of the right to use land;

 

assignment of the right to use land;

 

lease of the right to use land; or

 

allocated land use rights.

 

In comparison with the western common law concepts, granted land use rights are similar to life estates and allocated land use rights are in some ways similar to leaseholds.

 

Granted land use rights are provided by the Chinese government in exchange for a grant fee and carry the rights to pledge, mortgage, lease, and transfer during the term of the grant. Land is granted for a fixed term, which is generally 70 years for residential use, 50 years for industrial use, and 40 years for commercial or other use. The term is renewable in theory. Granted land must be used for the specific purpose for which it was granted.

 

Allocated land use rights cannot be pledged, mortgaged, leased, or transferred. They are generally provided by the government for an indefinite period (usually to state-owned entities) and can be reclaimed by the government at any time. Allocated land use rights may be converted into granted land use rights upon the payment of a grant fee to the government.

 

Kandi has the following real estate properties:

 

Jinhua City, Zhejiang

 

The Company owns the following facilities located in Jinhua Industrial Park, Jinhua City, Zhejiang Province, China. The table below lists the primary facilities and the status of each facility:

 

   Area    
Description  (square meters)   Status
Factories   93,979   Fully operational
Sales Center   3,130   Fully operational
Test Center   2,220   Fully operational
Staff quarters   8,090   Fully operational
Canteen   2,602   Fully operational

 

As of December 31, 2018, the net book value of Zhejiang Jinhua Industrial Park’s property, plant and equipment pledged as collateral for the Company’s bank loans were $8,105,419.

 

22

 

 

Yongkang City, Zhejiang

 

The Company owns the following facilities located in Yongkang City, Zhejiang Province, China. The table below lists the primary facilities and the status of each facility:

 

    Area      
Description   (square meters)     Status
Office     1,301     Fully operational
Factories     4,457     Fully operational
Warehouse     341     Fully operational
Multi-purpose room     480     Fully operational

 

Haikou City, Hainan

 

In December 2015, the Company signed an investment contract with Haikou State High Technology Industry Development Zone to build up the EV production facility in Haikou City to an annual production of 100,000 EV products. Currently, the Hainan facility’s main project including manufacturing plant and office, main manufacturing equipment and facilities has been completed.

 

   Area    
Description  (square meters)   Status
Factories   196,000*  Completed

 

*Estimate number based on investment agreement signed with local government as the land certificate is in the process of application.

 

Item 3. Legal Proceedings.

 

From time to time, the Company is involved in legal matters arising in the ordinary course of business. Except as set forth in Note 23 - COMMITMENTS AND CONTINGENCIES under Item 8 Notes to Consolidated Financial Statements, our management is currently not aware of any legal matters or pending litigation that would have a significant effect on the Company’s results of operation of financial statements. For the detailed discussion of our legal proceedings, please refer to Note 23 - COMMITMENTS AND CONTINGENCIES under Item 8 Notes to Consolidated Financial Statements, which is incorporated by reference herein.

 

Other than the above described legal proceedings, the Company is not aware of any other legal matters in which any director, officer, or any owner of record or beneficial owner of more than five percent of any class of voting securities of the Company, or any affiliate of any such director, officer, affiliate of the Company, or security holder, is a party adverse to the Company or has a material adverse interest to the Company. No provision has been made in the consolidated financial statements for the above contingencies.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

23

 

 

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Market Information

 

On January 2, 2014, our common stock began trading on the NASDAQ Global Select Market under the symbol “KNDI”.

 

Holders of Common Stock

 

As of March 8, 2019, there were 33 shareholders of record of our common stock. This does not include all beneficial holders who hold shares through their brokerage accounts.

 

Dividends

 

We have never paid cash dividends on our common stock. Our policy is to retain all earnings, if any, to provide funds for the operation and expansion of our business. We do not anticipate paying cash dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our Board, subject to applicable laws, and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our Board may deem relevant.

 

Sales of Unregistered Securities

 

None.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

None.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

Please see the discussion in Item 12 titled “Equity Compensation Plan Information” below.

 

24

 

 

Stock Performance Graph

 

This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated by reference into any filing of Kandi Technologies Group, Inc. under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

 

The following graph shows a comparison from December 31, 2013, through December 31, 2018, of the cumulative total return for our common stock, the NASDAQ Composite Index, and the S&P Automobile Manufacturers Index. Such returns are based on historical results and are not intended to suggest future performance. Data for the NASDAQ Composite Index and the S&P Automobile Manufacturers Index assumes an investment of $100 on December 31, 2013, and reinvestment of dividends. We have never paid cash dividends on our capital stock nor do we anticipate paying any such cash dividends in the foreseeable future.

 

 

25

 

 

Item 6. Selected Financial Data.

 

The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K.

 

   As of December 31, 
CONSOLIDATED BALANCE SHEETS DATA:  2018   2017   2016   2015   2014 
Cash and cash equivalents  $15,662,201   $4,891,808   $12,235,921   $16,738,559   $26,379,460 
Restricted cash   6,690,870    11,218,688    12,957,377    16,172,009    13,000,731 
Working capital    2,526,911    53,707,902    86,348,025    67,464,090    39,202,684 
Total assets   428,829,264    438,332,844    439,698,185    371,469,024    323,073,352 
Short-term bank loans   30,539,236    33,042,864    34,265,065    36,656,553    35,589,502 
Total liabilities   203,206,390    215,342,532    207,350,718    132,543,456    111,488,513 
Total shareholders’ equity   225,622,874    222,990,312    232,347,467    238,925,568    211,584,839 

 

CONSOLIDATED STATEMENTS OF INCOME AND   Years Ended December 31,
COMPREHENSIVE INCOME DATA:  2018   2017   2016   2015   2014 
REVENUES, NET  $112,438,828   $102,805,621   $129,492,013   $201,069,173   $170,229,006 
COST OF GOODS SOLD   (92,191,383)   (88,461,432)   (111,770,197)   (172,649,955)   (146,825,073)
GROSS PROFIT   20,247,445    14,344,189    17,721,816    28,419,218    23,403,933 
Research and development   (10,084,378)   (27,628,085)   (26,504,650)   (3,482,511)   (2,755,637)
Selling and marketing   (3,189,022)   (1,465,007)   (1,567,707)   (633,863)   (1,345,588)
General and administrative   (8,612,393)   (11,333,336)   (20,665,709)   (28,255,267)   (14,058,548)
(LOSS) INCOME FROM OPERATIONS   (1,638,348)   (26,082,239)   (31,016,250)   (3,952,423)   5,244,160 
Interest income   1,324,812    2,269,844    2,961,153    3,138,717    1,701,121 
Interest (expense)   (1,871,851)   (2,280,286)   (1,831,667)   (2,214,635)   (3,480,646)
Change in fair value of financial instruments   -    -    3,823,590    8,519,295    6,531,308 
Change in fair value of contingent consideration   3,405,864    -    -    -    - 
Government grants   17,787,445    5,913,554    25,913,540    1,645,032    288,498 
Share of loss in associated companies   -    -    -    -    (54,308)
Share of (loss) profit after tax of JV   (17,888,706)   (11,555,302)   (7,307,510)   11,841,855    4,490,266 
Other income (loss), net   956,839    123,925    1,627,933    1,814,882    (34,649)
Total other income (loss), net   3,714,403    (5,528,265)   25,187,039    24,745,146    9,441,590 
INCOME (LOSS) BEFORE INCOME TAXES   2,076,055    (31,610,504)   (5,829,211)   20,792,723    14,685,750 
INCOME TAX (EXPENSE) BENEFIT   (7,770,754)   3,263,030    (681,546)   (6,127,228)   (2,414,412)
NET (LOSS) INCOME   (5,694,699)   (28,347,474)   (6,510,757)   14,665,495    12,271,338 
OTHER COMPREHENSIVE INCOME                         
Foreign currency translation   (13,610,495)   13,846,110    (15,415,223)   (9,631,753)   (2,725,143)
COMPREHENSIVE (LOSS) INCOME  $(19,305,194)  $(14,501,364)  $(21,925,980)  $5,033,742   $9,546,195 
                          
WEIGHTED AVERAGE SHARES OUTSTANDING BASIC   51,188,647    47,943,830    47,447,665    46,744,718    42,583,495 
WEIGHTED AVERAGE SHARES OUTSTANDING DILUTED   51,188,647    47,943,830    47,447,665    46,925,554    42,715,818 
                          
NET (LOSS) INCOME PER SHARE, BASIC  $(0.11)  $(0.59)  $(0.14)  $0.31   $0.29 
NET (LOSS) INCOME PER SHARE, DILUTED  $(0.11)  $(0.59)  $(0.14)  $0.31   $0.29 

 

26

 

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.

 

Overview

 

We are one of the leading manufacturers of EV products (through the JV Company), EV parts and off-road vehicles in China. For the year ended December 31, 2018, we recognized total revenue of $112,438,828 as compared to $102,805,621 for the year ended December 31, 2017, an increase of $9,633,207 or 9.4%. In 2018, we recorded $20,247,445 of gross profit, an increase of 41.2% from 2017, primarily due to the increase of revenue. Gross margin for the year ended December 31, 2018 was 18.0%, an increase from 14.0% for the year ended December 31, 2017. We recorded a net loss of $5,694,699 in 2018 compared to a net loss of $28,347,474 in 2017, a decrease of net loss of $22,652,775 or 79.9%, largely due to the increased gross profits, the decreased R&D expenses and the receipt of the remaining portion of subsidies this year from Hainan provincial government to assist our development of K23 model in 2017 and 2016.

 

Over the next 12 months, we plan to continue to market and sell our current products and to develop new products to meet market demand and penetrate domestic and international market. 2019 will be the implementation year for a decline in subsidies for new energy vehicles. The Chinese government’s subsidy for new energy vehicles has continued to decline compared to past years. However, as of the date of this report, the new government policy regarding state subsidies for new energy vehicles has not yet been released. The Chinese government has not made clear the extent to which new energy vehicle subsidies will decline. The Company cannot predict in the coming year whether the declining levels of national new energy vehicle subsidies will be made up by the scale effect of production, a reduction of the purchase price of key parts, or tightened control of manufacturing costs. This may also present greater challenges to the JV Company’s operations. Therefore, changes in government support policies may have a significant adverse impact on the Company’s business prospects, operating results, cash flow and profitability in the coming years. To weather the challenging market situation, we intend to continue to strengthen our technical abilities, improve our core competitiveness, and enhance our brand image to broaden our customer base and increase our market share.

 

Results of Operations

 

Comparison of Years Ended December 31, 2018, 2017 and 2016

 

The following table sets forth the amounts and the percentage relationship to revenues of certain items in our consolidated statements of operations for the years ended December 31, 2018, 2017 and 2016:

 

   Year Ended           Change in Amount       Change in Amount     
   December 31, 2018   % of Revenue   December 31, 2017   % of Revenue   December 31, 2016   % of Revenue   2018 VS 2017   Change in %   2018 VS 2016   Change in % 
                                         
REVENUES FROM UNRELATED PARTY, NET  $63,707,518    56.7%  $9,853,410    9.6%  $47,870,589    37.0%   53,854,108    546.6%   15,836,929    33.1%
REVENUES FROM JV COMPANY AND RELATED PARTY, NET   48,731,310    43.3%   92,952,211    90.4%   81,621,424    63.0%   (44,220,901)   (47.6%)   (32,890,114)   (40.3%)
                                                   
REVENUES, NET   112,438,828    100.0%   102,805,621    100.0%   129,492,013    100.0%   9,633,207    9.4%   (17,053,185)   (13.2%)
                                                   
COST OF GOODS SOLD   (92,191,383)   (82.0%)   (88,461,432)   (86.0%)   (111,770,197)   (86.3%)   (3,729,951)   4.2%   19,578,814    (17.5%)
                                                   
GROSS PROFIT   20,247,445    18.0%   14,344,189    14.0%   17,721,816    13.7%   5,903,256    41.2%   2,525,629    14.3%
                                                   
OPERATING EXPENSES:                                                  
Research and development   (10,084,378)   (9.0%)   (27,628,085)   (26.9%)   (26,504,650)   (20.5%)   17,543,707    (63.5%)   16,420,272    (62.0%)
Selling and marketing   (3,189,022)   (2.8%)   (1,465,007)   (1.4%)   (1,567,707)   (1.2%)   (1,724,015)   117.7%   (1,621,315)   103.4%
General and administrative   (8,612,393)   (7.7%)   (11,333,336)   (11.0%)   (20,665,709)   (16.0%)   2,720,943    (24.0%)   12,053,316    (58.3%)
Total Operating Expenses   (21,885,793)   (19.5%)   (40,426,428)   (39.3%)   (48,738,066)   (37.6%)   18,540,635    (45.9%)   26,852,273    (55.1%)
                                                   
LOSS FROM  OPERATIONS   (1,638,348)   (1.5%)   (26,082,239)   (25.4%)   (31,016,250)   (24.0%)   24,443,891    (93.7%)   29,377,902    (94.7%)
                                                   
OTHER INCOME (EXPENSE):                                                  
Interest income   1,324,812    1.2%   2,269,844    2.2%   2,961,153    2.3%   (945,032)   (41.6%)   (1,636,341)   (55.3%)
Interest expense   (1,871,851)   (1.7%)   (2,280,286)   (2.2%)   (1,831,667)   (1.4%)   408,435    (17.9%)   (40,184)   2.2%
Change in fair value of financial instruments   -    0.0%   -    0.0%   3,823,590    3.0%   -    -    (3,823,590)   (100.0%)
Change in fair value of contingent consideration   3,405,864    3.0%   -    0.0%   -    0.0%   3,405,864    -    3,405,864    - 
Government grants   17,787,445    15.8%   5,913,554    5.8%   25,913,540    20.0%   11,873,891    200.8%   -8,126,095    (31.4%)
Share of loss after tax of JV   (17,888,706)   (15.9%)   (11,555,302)   (11.2%)   (7,307,510)   (5.6%)   (6,333,404)   54.8%   (10,581,196)   144.8%
Other income, net   956,839    0.9%   123,925    0.1%   1,627,933    1.3%   832,914    672.1%   (671,094)   (41.2%)
Total other income (expense), net   3,714,403    3.3%   (5,528,265)   (5.4%)   25,187,039    19.5%   9,242,668    (167.2%)   (21,472,636)   (85.3%)
                                                   
INCOME (LOSS) BEFORE INCOME TAXES   2,076,055    1.8%   (31,610,504)   (30.7%)   (5,829,211)   (4.5%)   33,686,559    (106.6%)   7,905,266    (135.6%)
                                                   
INCOME TAX (EXPENSE) BENEFIT   (7,770,754)   (6.9%)   3,263,030    3.2%   (681,546)   (0.5%)   (11,033,784)   (338.1%)   (7,089,208)   1040.2%
                                                   
NET LOSS   (5,694,699)   (5.1%)   (28,347,474)   (27.6%)   (6,510,757)   (5.0%)   22,652,775    (79.9%)   816,058    (12.5%)

 

27

 

   

Revenues

 

For the year ended December 31, 2018, we had net revenues of $112,438,828 compared to net revenues of $102,805,621 for the year ended December 31, 2017 and $129,492,013 for the year ended December 31, 2016, representing an increase of $9,633,207, or 9.4%, from 2017 and a decrease of $17,053,185, or 13.2%, from 2016, respectively. Compared to 2017, the increase in revenue was primarily due to the increase in sales of off-road vehicles during 2018. Compared to 2016, the decrease in revenue for the year ended December 31, 2018, was primarily due to a decrease in EV parts sales, in both average selling price and sales volume.

 

The following table summarizes our revenues by product type for the years ended December 31, 2018, 2017 and 2016:

 

   Years Ended December 31, 
   2018   2017   2016 
   Sales   Sales   Sales 
EV parts  $99,099,312   $97,355,828   $120,079,312 
EV products   -    -    3,718,291 
Off-road vehicles   13,339,516    5,449,793    5,694,410 
Total  $112,438,828   $102,805,621   $129,492,013 

 

EV Parts

 

During the year ended December 31, 2018, our revenue from the sale of EV parts was $99,099,312, representing an increase of $1,743,484 or 1.8% from $97,355,828 for the year ended December 31, 2017 and a decrease of $20,980,000 or 17.5% from $120,079,312 for the year ended December 31, 2016, respectively.

 

Our revenue for the year ended December 31, 2018 primarily consisted of the sales of battery packs, body parts, EV drive motors, EV controllers, air conditioning units and other auto parts for use in the EV products manufactured by the JV Company, which accounted for 88.1% of total sales. Among total sales for the year ended December 31, 2018, approximately 75.6% were related to the sale of battery packs. In compliance with the regulations of the Chinese auto industry, we hold the necessary production licenses to manufacture the battery packs exclusively used in EV products manufactured by the JV Company. Besides the sale of battery packs, approximately 3.5% of total sales were related to sales of EV controllers, approximately 2.7% of the total sales were related to sales of air conditioning units, approximately 3.5% of total sales were related to sales of EV drive motors and approximately 2.8% of total sales were related to sales of body parts and other auto parts.

 

During the year ended December 31, 2018 and 2017, our revenues from the sale of EV parts to the JV Company accounted approximately 43.3% and 90.4% of our total net revenue for the year, respectively. The EV parts we sold to the JV Company were used in manufacturing pure EV products by the JV Company’s subsidiaries.

 

EV Products

 

Our revenue from the sale of EV products for the fiscal year 2018 and 2017 was $0, representing a decrease of $3,718,291 or 100% from $3,718,291 for the year ended December 31, 2016.

 

Pursuant to the JV Agreement, production of EV products was completely transferred to the JV Company at the end of 2014, but the Company retained the right to sell EV products that remained in stock. The Company completed sales of EV products in stock in 2016. The Company currently primarily focuses on manufacturing and supplying EV parts to the JV Company and third parties for the production of EVs.

 

Off-Road Vehicles

 

During the year ended December 31, 2018, our revenues from the sale of off-road vehicles including go-karts, all-terrain vehicles (“ATVs”), and others, were $13,339,516, representing an increase of $7,889,723 or 144.8% from $5,449,793 for the year ended December 31, 2017, and an increase of $7,645,106 or 134.3% from $5,694,410 for the year ended December 31, 2016. The increase in revenue of off-road vehicles was largely due to additional sales from SC Autosports, which became our wholly-owned subsidiary in the U.S. in July 2018.

 

Our off-road vehicles business line accounted for approximately 11.9% of our total net revenue for the year ended December 31, 2018. Of our off-road vehicle revenue, our ATV business accounted for approximately 8.5% of our total net revenue and our go-kart business accounted for approximately 3.3% of our total net revenue.

 

28

 

 

The following table shows the breakdown of our net revenues:

 

   Year Ended December 31, 
   2018   2017   2016 
   Sales Revenue   Sales Revenue   Sales Revenue 
Primary geographical markets            
Overseas  $12,741,570   $4,817,517   $4,919,054 
China   99,697,258    97,988,104    124,572,959 
Total  $112,438,828   $102,805,621   $129,492,013 
                
Major products               
EV parts  $99,099,312   $97,355,828   $120,079,312 
EV products   -    -    3,718,291 
Off-road vehicles   13,339,516    5,449,793    5,694,410 
Total  $112,438,828   $102,805,621   $129,492,013 
                
Timing of revenue recognition               
Products transferred at a point in time  $112,438,828   $102,805,621   $129,492,013 
Total  $112,438,828   $102,805,621   $129,492,013 

 

Cost of Goods Sold

 

Cost of goods sold for the year ended December 31, 2018 was $92,191,383, representing an increase of $3,729,951, or 4.2%, from $88,461,432 for the year ended December 31, 2017 and a decrease of $19,578,814, or 17.5%, from $111,770,197 for the year ended December 31, 2016. The change was primarily due to the corresponding increase in sales from 2017 and decrease in sales from 2016. Please refer to the Gross Profit section below for product margin analysis.

 

Gross Profit

 

Our margins by product for the past three years are as set forth below:

 

   Years ended December 31, 
   2018   2017   2016 
   Sales   Cost   Gross
Profit
   Margin
%
   Sales   Cost   Gross
Profit
   Margin
%
   Sales   Cost   Gross
Profit
   Margin
%
 
EV parts  $99,099,312    82,990,161    16,109,151    16.3%  $97,355,828    83,691,060    13,664,768    14.0%  $120,079,312    102,856,683    17,222,629    14.3%
EV products   -    -    -    -    -    -    -    -    3,718,291    3,632,762    85,529    2.3%
Off-road vehicles   13,339,516    9,201,222    4,138,294    31.0%   5,449,793    4,770,372    679,421    12.5%   5,694,410    5,280,753    413,657    7.3%
Total  $112,438,828    92,191,383    20,247,445    18.0%  $102,805,621    88,461,432    14,344,189    14.0%  $129,492,013    111,770,197    17,721,816    13.7%

 

29

 

 

Gross profit for the year ended December 31, 2018 was $20,247,445, as compared to $14,344,189 for the year ended December 31, 2017, and $17,721,816 for the year ended December 31, 2016, representing an increase of $5,903,256 or 41.2% from 2017 and an increase of $2,525,629 or 14.3% from 2016. The increases were primarily attributable to the increased margin in 2018 as compared to that in 2017 and 2016. Our gross margin for the year ended December 31, 2018, was 18.0%, compared to 14.0% for the year ended December 31, 2017, and 13.7% for the year ended December 31, 2016. The increase in our gross margin as compared to 2017 and 2016 was mainly due to the higher gross margin from off-road vehicle sales of SC Autosports, a result of its effective procurement of inventories at discounted prices, as well as increased gross margin from sales of battery packs.

 

Research and Development

 

Research and development expenses, including materials, labor, equipment depreciation, design, testing, inspection, and other related expenses totaled $10,084,378 for the year ended December 31, 2018, compared to $27,628,085 for the year ended December 31, 2017, and $26,504,650 for the year ended December 31, 2016, representing a decrease of $17,543,707, or 63.5%, from 2017 and a decrease of $16,420,272, or 62.0%, from 2016. This decrease was primarily due to the completion of R&D works related to the development of EV Model K23 at Hainan facility this year. For the year ended December 31, 2018, 2017 and 2016, approximately 66.2%, 94.2% and 94.0% of our research and development expenses were spent on the research and development of EV product model at Hainan facility, respectively, and the rest was spent on other various EV and off-road vehicles research and development projects.

 

Sales and Marketing

 

Selling and distribution expenses were $3,189,022 for the year ended December 31, 2018, compared to $1,465,007 for the year ended December 31, 2017, and $1,567,707 for the year ended December 31, 2016, representing an increase of $1,724,015, or 117.7%, from 2017 and an increase of $1,621,315, or 103.4%, from 2016. This increase was primarily attributable to the increase in product maintenance expenses for EV drive motors and EV controllers, and the increase in shipping costs and sales labor compared to 2017 and 2016. The additional sales and marketing expenses from newly acquired SC Autosports also contributed to this increase.

 

General and Administrative Expenses

 

General and administrative expenses were $8,612,393 for the year ended December 31, 2018, compared to $11,333,336 for the year ended December 31, 2017 and $20,665,709 for the year ended December 31, 2016, representing a decrease of $2,720,943 or 24.0%, from 2017 and a decrease of $12,053,316, or 58.3%, from 2016. For the year ended December 31, 2018, general and administrative expenses included $2,930,486 in expenses for common stock awards to employees and consultants for their services net of $2,644,877 of reversal of previously accrued stock option expenses for forfeited stock option, compared to $5,191,307 and $14,959,687 for the years ended December 31, 2017 and 2016, respectively. If excluding stock award costs, our net general and administrative expenses for the year ended December 31, 2018 were $8,326,784, an increase of $2,184,755, or 35.6%, compared to $6,142,029 for the year ended December 31, 2017, and an increase of $2,620,762, or 45.9%, compared to $5,706,022 for the year ended December 31, 2016. The increase was largely due to the increased labor costs and the increased amortization expenses for intangible assets of Jinhua Ankao. The additional general and administrative expenses from newly acquired Jinhua Ankao and SC Autosports also contributed to this increase.

 

30

 

 

Interest Income

 

Interest income was $1,324,812 for the year ended December 31, 2018, compared to $2,269,844 for the year ended December 31, 2017, and $2,961,153 for the year ended December 31, 2016, representing a decrease of $945,032, or 41.6%, from 2017, and a decrease of $1,636,341, or 55.3%, from 2016. The decrease as compared to 2017 and 2016 was primarily attributable to decreased interest earned on loans to the JV Company and bank deposits.

 

Interest Expense

 

Interest expense was $1,871,851 for the year ended December 31, 2018, compared to $2,280,286 for the year ended December 31, 2017, and $1,831,667 for the year ended December 31, 2016, representing a decrease of $408,435 from 2017 and an increase of $40,184 from 2016. The decrease compared to 2017 was primarily due to less interest expenses incurred associated with note payable and loan to third party. Of the interest expenses, $145,411, $135,766 and $18,694, respectively, were the discounts associated with the settlement of bank acceptance notes for the years ended December 31, 2018, 2017 and 2016.

 

Change in Fair Value of Financial Instruments

 

For the year ended December 31, 2018, gain related to changes in the fair value of derivative liability relating to warrants issued to investors and placement agents was $0, compared to $0 for the year ended December 31, 2017, and $3,823,590 for the year ended December 31, 2016, a decrease of $3,823,590 from 2016. The change in fair value of derivative liability is mainly the result of all remaining unexercised warrants expired as of December 31, 2017.

 

Change in fair value of contingent consideration

 

For the year ended December 31, 2018, the gain related to changes in the fair value of contingent consideration was $3,405,864, which was mainly the result of the decrease in fair value of contingent liability between the acquisition date and December 31, 2018 for the acquisition of Jinhua An Kao and SC Autosports.

 

Government Grants

 

Government grants totaled $17,787,445 for the year ended December 31, 2018, compared to $5,913,554 for the year ended December 31, 2017, and $25,913,540 for the year ended December 31, 2016, representing an increase of $11,873,891, or 200.8% from 2017 and a decrease of $8,126,095, or 31.4% from 2016. The increase from 2017 and decrease from 2016 were primarily the results from different amount of subsidies we received from the Hainan provincial government to assist our development of K23 model in 2018, 2017 and 2016. The total grant amount of subsidies we received from the Hainan provincial government is RMB300 million (approximately USD 44 million), of which $15,368,774, $5,316,964 and $24,844,149 was recognized as income in 2018, 2017 and 2016, respectively.

 

31

 

 

Share of Income (Loss) after Tax of the JV Company

 

For the year ended December 31, 2018, the JV Company’s net sales were $122,480,854, gross loss was $17,749,673, and net loss was $36,340,082. We accounted for our investments in the JV Company under the equity method of accounting because we have a 50% ownership interest in the JV Company. As a result, we recorded 50% of the JV Company’s loss, or $18,170,041 for the year ended December 31, 2018. After eliminating intra-entity profits and losses, our share of the after-tax loss of the JV Company was $17,888,706 for the year ended December 31, 2018, compared to loss of $11,555,302 for 2017 and loss of $7,307,510 for 2016, representing an increased loss of $6,333,404 from 2017 and an increased loss of $10,581,196 from 2016, which was largely due to the decreased average selling prices of EV sales, as well as the increased R&D expense for new EV products.

 

During 2018, the JV Company’s revenues were primarily derived from sales of EV products in China. The JV Company sold a total of 10,259 units of EV products in the PRC.

 

Other Income (Expense), Net

 

Net other income was $956,839 for the year ended December 31, 2018, compared to net other income of $123,925 for the year ended December 31, 2017, and net other income of $1,627,933 for the year ended December 31, 2016, an increase in net other income of $832,914 from 2017 and a decrease in net other income of $671,094 from 2016. The increase from 2017 was primarily due to the fees earned on technology development services in 2018. The decrease as compared to 2016 was largely due to fewer fees earned on technology development services, which was $0.7 million in 2018 as compared to $1.4 million in 2016.

 

Income Taxes

 

In accordance with the relevant Chinese tax laws and regulations, our applicable corporate income tax rate is 25%. However, Kandi Vehicle is qualified as a high technology company in China and is therefore entitled to use a reduced income tax rate of 15%.

 

Each of our wholly-owned subsidiaries, Kandi New Energy, YongkangScrou Kandi Hainan and Jinhua An Kao, has an applicable Chinese corporate income tax rate of 25%. SC Autosports is a Dallas Texas based company, which has an applicable U.S. corporate income tax rate of 21%.

 

Despite the fact that Jinhua Ankao was identified as Zhejiang National Hi-Tech Enterprise in November 30, 2018, with Certificate Number of CR201833000715, Jinhua Ankao was still subject to 25% of Chinese corporate income tax rate as the formal certificate is still pending. Once the formal certificate is received, the tax rate will be adjusted to 15% of corporate income tax rate for Jinhua An Kao.

 

32

 

 

We have a 50% ownership interest in the JV Company, which has an applicable Chinese corporate income tax rate of 25%. Each of the JV Company’s subsidiaries has an applicable corporate income tax rate of 25%.

 

Our actual effective income tax rate for 2018 was a tax expense of 374.30% on a reported income before taxes of $2.1 million, compared to an effective income tax rate with a tax benefit of 10.32% in 2017 on a reported loss before taxes of $31.6 million. The increased effective tax rate was due to valuation allowance of Hainan’s deferred tax assets because it had three-year accumulative loss in construction period.

 

Net Income (Loss)

 

We recorded net loss of $5,694,699 for the year ended December 31, 2018, compared to net loss of $28,347,474 for the year ended December 31, 2017, and net loss of $6,510,757 for the year ended December 31, 2016, a decrease of net loss of $22,652,775 from the year ended December 31, 2017 and a decrease of net loss of $816,058 from the year ended December 31, 2016. The decrease in net loss compare to 2017 was primarily attributable to the increased gross profits, the decreased R&D expenses and the increased government grant we received this year, offset by increased income tax expense. The decrease in net loss compare to 2016 was primarily attributable to the decreased R&D expenses and decreased stock compensation expense, offset by increased income tax expense.

 

If excluding (i) the effects of stock award expenses, which were $2,930,486 net of a reversal for forfeited stock options of $2,644,877, $5,191,307 and $14,959,687 for the years ended December 31, 2018, 2017 and 2016, respectively, and (ii) the change in the fair value of financial derivatives, which were gains of $0, $0 and $3,823,590 for the years ended December 31, 2018, 2017 and 2016, respectively, (iii) the change in the fair value of contingent consideration which was a gain of $3,405,864, $0 and $0 for the years ended December 31, 2018, 2017 and 2016, respectively, our net loss (non-GAAP) was $8,814,954 for the year ended December 31, 2018, as compared to net loss (non-GAAP) of $23,156,167 for the year ended December 31, 2017, a decrease loss of $14,341,213, and compared to net income (non-GAAP) of $4,625,340 for the year ended December 31,2016, a decrease income of $13,440,294. The decrease in net loss (non-GAAP) compare to 2017 was primarily attributable to the increased gross profits, the decreased R&D expenses and the increased government grant we received this year, offset by increased income tax expense. The decrease in net income (non-GAAP) compare to 2016 was primarily attributable to the increased share of loss after tax of the JV Company offset by decreased R&D expenses.

 

We make reference to certain non-GAAP financial measures, i.e., adjusted net income. Management believes that such adjusted financial results are useful for investors in evaluating our operating performance because they present 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.

 

33

 

 

The following table summarizes our non-GAAP net income for the years ended December 31, 2018, 2017 and 2016:

 

   Year Ended 
   December 31, 
   2018   2017   2016 
GAAP net loss  $(5,694,699)  $(28,347,474)  $(6,510,757)
Stock compensation expenses   285,609    5,191,307    14,959,687 
Change in fair value of contingent consideration   (3,405,864)   -    - 
Change of the fair value of financial derivatives   -    -    (3,823,590)
Non-GAAP net (loss)income  $(8,814,954)  $(23,156,167)  $4,625,340 

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash Flow

 

For the year ended December 31, 2018, cash provided in operating activities was $13,587,621, as compared to cash used in operating activities of $3,214,471 for the year ended December 31, 2017, and cash used in operating activities of $49,526,543 for the year ended December 31, 2016. Our operating cash inflows include cash received primarily from sales of our EV parts and off-road vehicles. These cash inflows are offset largely by cash paid primarily to our suppliers for production materials and parts used in our manufacturing process, operation expenses, employee compensation, and interest expenses on our financings. The major operating activities that provided cash for the year ended December 31, 2018 were an increase of accounts payable of $137,390,139, (net of assignment of notes receivable from unrelated parties to suppliers to settle accounts payable of $ 31,347,383, assignment of notes receivable from JV Company and related parties to suppliers to settle accounts payable of $77,107,835, settlement of accounts payable with notes payables of $31,039,932, reversal of construction in progress and accounts payable of $8,029,198, reclassification of overpaid accounts payable of $16,826 to advances to suppliers, and replacement of notes payables with accounts payable of $10,582,651), and an increase of other payables and accrued liabilities of $60,736,669 (net of assignment of notes receivable from unrelated parties to supplier to settle other payable of $28,636,652 and assignment of notes receivable from JV Company and related parties to supplier to settle other payable of $34,242,433). The major operating activity that used cash for the year ended December 31, 2018 was an increase in receivables from the JV Company of $95,442,739 (net of settlement of due from JV Company and related parties with notes receivable from related parties of $86,461,386 and due from JV Company converted to investment in JV Company of $82,393,493), and an increase of accounts receivable of $57,503,289 (net of settlement of accounts receivables with notes receivable from unrelated parties of $60,543,404).

 

Cash used in investing activities for the year ended December 31, 2018 was $947,441, as compared to cash derived from investing activities of $2,708,638 and cash derived from investing activities of $966,627 for the years ended December 31, 2017 and 2016, respectively. During the year ended December 31, 2018, the major investing activity that used cash was $3,555,766 for the acquisition of Jinhua An Kao net of cash received.

 

Cash used in financing activities for the year ended December 31, 2018 was $5,297,724, as compared to cash used in financing activities of $9,814,541 and cash derived from financing activities of $ 42,570,343 for the years ended December 31, 2017 and 2016, respectively. The major financing activities that provided cash for the year ended December 31, 2018 were proceeds from notes payable of $54,348,577 and proceeds from short-term bank loans of $ 32,503,855. The major financing activities that used cash for year ended December 31, 2018 were $58,588,036 of repayment of notes payable and $33,259,759 of repayments of short-term bank loans. 

 

Working Capital

 

We had a working capital of $2,526,911 at December 31, 2018, a decrease of $51,180,991 from a working capital surplus of $53,707,902 as of December 31, 2017as Kandi Vehicle increased its capital contribution to the JV Company by converting its RMB 545 million (approximately $79 million) of loans lent to the JV Company to the JV Company’s registered capital.

 

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

 

34

 

 

Capital Requirements and Capital Provided

 

Capital requirements and capital provided for the year ended December 31, 2018 were as follows:

 

   Year Ended 
   December 31, 2018 
   (In Thousands) 
Capital requirements    
Purchase of plant and equipment  $583 
Purchases of land use rights and other intangible assets   104 
Acquisition of Jinhua An Kao   3,556 
Purchase of construction in progress   419 
Repayments of short-term bank loans   33,260 
Repayments of long-term bank loans   302 
Repayments of notes payable   58,588 
Increase in cash   6,243 
Total capital Requirements  $103,055 
      
Capital provided     
Acquisition of SC Autosports   487 
Proceeds from short-term bank loan   32,504 
Proceeds from notes payable   54,349 
Internal cash provided in operations   13,588 
Long term investment   1,436 
Reimbursement of capitalize interests for construction in progress   1,791 
Total capital provided  $104,155 

 

The difference between capital provided and capital required was mainly the result of exchange rate changes over the past twelve months.

 

Contractual Obligations and Off-balance Sheet Arrangements

 

Contractual Obligations

 

The following table summarizes our contractual obligations:

 

Contractual obligations  Payments due by period 
   Total   Less than 1 year   1-3 years   3-5 years   More than 5 years 
Hainan Obligations   8,674,597    8,674,597    -    -    - 
Loans from Haikou Rural Credit Cooperative  $28,794,136    -    28,794,136         - 
Total  $37,468,733    8,674,597    28,794,136    -    - 

 

35

 

 

To build the Hainan facility, the Company signed contracts with Nanjing Shangtong Auto Technologies Co., Ltd. (“Nanjing Shangtong”) to purchase a production line and develop K 23 model. As of December 31, 2018, the total contractual amount with Nanjing Shangtong was RMB 912,000,000 or approximately $132 million, of which RMB 852,350,000 or approximately $123 million has been paid and RMB 59,650,000 or approximately $9 million of remaining payments are outstanding as contractual obligations.

 

Short-term and long-term Loans:

 

For the discussion of guarantees for bank loans, please refer to Note 16 - Short-term and long-term Loans under Item 8 Notes to Consolidated Financial Statements.

 

Notes payable:

 

For the discussion of guarantees for bank loans, please refer to Note 17 - Notes payable under Item 8 Notes to Consolidated Financial Statements.

 

Guarantees and pledged collateral for third party bank loans

 

For the discussion of guarantees for bank loans, please refer to Note 23 - COMMITMENTS AND CONTINGENCIES under Item 8 Notes to Consolidated Financial Statements.

 

Critical Accounting Policies and Related Estimates That Could Have a Material Effect on Our Consolidated Financial Statements

 

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

 

Estimates affecting accounts receivable and inventories

 

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

 

Accounts receivable are recognized and carried at net realizable value. An allowance for doubtful accounts is recorded in the period when a loss is probable based on an assessment of specific factors, such as troubled collection, historical experience, accounts aging, ongoing business relations and other factors. Accounts are written off after exhaustive efforts at collection. If accounts receivable are to be provided for, or written off, they will be recognized in the consolidated statement of operations within operating expenses. We had allowances for doubtful accounts of $120,010 and $133,930 for the years ended December 31, 2018 and 2017, in accordance with our management’s judgment based on their best knowledge.

 

36

 

 

Inventory is stated at the lower of cost, determined on a weighted average basis, or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated costs necessary to make the sale. Adjustments to reduce the cost of inventory to its net realizable value are made, if required, for estimated excess, obsolescence, or impaired balances. When inventories are sold, their carrying amount is charged to expense in the year in which the revenue is recognized. Write-downs for declines in net realizable value or for losses of inventories are recognized as an expense in the year the impairment or loss occurs. There were $840,701 and $620,919 of decline in net realizable value of inventory for the years ended of December 31, 2018 and 2017, respectively, due to our provision for slow moving inventory.

 

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

 

Policy affecting recognition of revenue

 

Our revenue recognition policy plays a key role in our consolidated financial statements.

 

We recognize revenue when goods or services are transferred to customers in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. In determining when and how revenue is recognized from contracts with customers, we perform the following five-step analysis: (i) identification of contract with customer; (ii) determination of performance obligations; (iii) measurement of the transaction price; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) we satisfy each performance obligation.

 

We generate revenue through the sale of EV products, EV parts and off-road vehicles and our revenue recognition policies for our EV products, EV parts and off-road vehicles are the same. The revenue is recognized at a point in time once we have determined that the customer has obtained control over the product. Control is typically deemed to have been transferred to the customer when the performance obligation is fulfilled, usually at the time of delivery, at the net sales price (transaction price). Estimates of variable consideration, such as volume discounts and rebates, are determined, reviewed and revised periodically by management. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. Shipping and handling costs for product shipments occur prior to the customer obtaining control of the goods are accounted for as fulfillment costs rather than separate performance obligations and recorded as sales and marketing expenses. 

 

Policy affecting options, warrants and convertible notes

 

Our stock option cost is recorded in accordance with ASC 718 and ASC 505. The fair value of stock options is estimated using the Black-Scholes-Merton model. Our expected volatility assumption is based on the historical volatility of our stock. The expected life assumption is primarily based on the expiration date of the option. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Stock option expense recognition is based on awards expected to vest. There were no estimated forfeitures. ASC standards require forfeitures to be estimated at the time of grant and revised in subsequent periods, if necessary, if actual forfeitures differ from those estimates.

 

37

 

 

Our warrant costs are recorded in liabilities and equities, respectively, in accordance with ASC 480, ASC 505 and ASC 815. The fair value of a warrant, which is classified as a liability, is estimated using the Binomial Tree model and the lattice valuation 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 warrant. The risk-free interest rate for the expected term of the warrant is based on the U.S. Treasury yield curve in effect at the time of measurement. Our warrants, which are freestanding derivatives classified as liabilities on the balance sheet, are measured at fair value on each reporting date, with decreases in fair value recognized in earnings and increases in fair values recognized in expenses.

 

The fair value of equity-based warrants, which are not considered derivatives under ASC 815, 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 warrant. 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.

 

In accordance with ASC 815, the conversion feature of the convertible notes is separated from the debt instrument and accounted for separately as a derivative instrument. On the date the convertible notes are issued, the conversion feature is recorded as a liability at its fair value, and future decreases in fair value are recognized in earnings while increases in fair values are recognized in expenses. We used the Black-Scholes -Merton option-pricing model to obtain the fair value of the conversion feature. The 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 conversion features. The risk-free interest rate for the expected term of the conversion features is based on the U.S. Treasury yield curve in effect at the time of measurement.

 

Warranty Liability

 

Most of our non-EV products (“Legacy Products”) are exported out of China to foreign countries that have legal and regulatory requirements with which we are not familiar. The 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 price negotiations for our products. Free parts are delivered along with the products, and when products are sold, the related parts are recorded as cost of goods sold. Due to the reliability of our products, we have been able to maintain this warranty policy and we have not had any product liability attributed to our products.

 

For the EV products that we sell in China, we provide a three year or 50,000 kilometer manufacturer warranty. This warranty affects the Company through our participation and investment in the JV Company, which manufactures the EV products.

 

38

 

 

U.S. Corporate Income Tax

 

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin (SAB) No. 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. If a company cannot determine a provisional estimate to be included in its financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

 

In connection with our initial analysis of the impact of the Tax Act, we recorded provisional estimates related to the remeasurement of deferred taxes and the Deemed Repatriation Transition Tax in our financial statements for our fiscal year ended December 31, 2017. The measurement period ended on December 22, 2018. As of December 22, 2018, we have completed the accounting for the impact of the Tax Act based on the guidance, interpretations, and data available. No adjustments to these provisional estimates have been recorded.

 

Under GILTI tax rules the Company must make an accounting policy election to either (1) recognize taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factor such amount into the Company’s measure of its deferred taxes (the “deferred method”). The Company elected to treat the guilty as a current-period expense when incurred.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

 

This item is not applicable to us.

 

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Item 8. Financial Statements and Supplementary Data.

 

KANDI TECHNOLOGIES GROUP, INC.

AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED

DECEMBER 31, 2018 AND 2017

KANDI TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

 

CONTENTS  
   
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-2
   
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2018 AND 2017 F-4
   
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016 F-5
   
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016 F-6
   
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016 F-7
   
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016 F-8

 

F-1

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and Shareholders of Kandi Technologies Group, Inc.

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of Kandi Technologies Group, Inc. and its subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2018, including the related notes (collectively referred to as the “consolidated financial statements”).

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 15, 2019 expressed an unqualified opinion thereon.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. 

 

 

/s/ BDO China Shu Lun Pan Certified Public Accountants LLP

BDO China Shu Lun Pan Certified Public Accountants LLP

 

Shanghai, The People’s Republic of China

 

March 15, 2019

 

We have served as the Company’s auditor since 2016.

 

 

F-2

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and Shareholders of Kandi Technologies Group, Inc.

 

Opinions on the Internal Control over Financial Reporting

 

We have audited the internal control over financial reporting of Kandi Technologies Group, Inc. and its subsidiaries (the “Company”)as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”).In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and our report dated March 15, 2019 expressed an unqualified opinion thereon.

 

Basis for Opinion

 

The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

 

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provide a reasonable basis for our opinion.

  

Definition and Limitations of Internal Control over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

 

/s/ BDO China Shu Lun Pan Certified Public Accountants LLP

BDO China Shu Lun Pan Certified Public Accountants LLP

 

Shanghai, The People’s Republic of China

 

March 15, 2019

 

 

F-3

 

 

KANDI TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

   December 31,
2018
   December 31,
2017
 
         
Current assets        
Cash and cash equivalents  $15,662,201   $4,891,808 
Restricted cash   6,690,870    11,218,688 
Accounts receivable (net of allowance for doubtful accounts of $120,010 and $133,930 as of December 31, 2018 and December 31, 2017, respectively)   34,274,728    34,397,858 
Inventories (net of provision for slow moving inventory of $840,701 and $620,919 as of  December 31, 2018 and December 31, 2017, respectively)   21,997,868    15,979,794 
Notes receivable   72,712    - 
Notes receivable from JV Company and related party   3,861,032    1,137,289 
Other receivables   1,264,323    2,650,668 
Prepayments and prepaid expense   11,136,408    6,536,839 
Due from employees   1,001    7,070 
Advances to suppliers   4,705,183    14,908,385 
Amount due from JV Company, net   67,683,462    146,422,440 
Amount due from related party   -    162,048 
TOTAL CURRENT ASSETS   167,349,788    238,312,887 
           
LONG-TERM ASSETS          
Property, plant and equipment, net   82,045,923    12,000,971 
Land use rights, net   11,749,728    12,666,047 
Construction in progress   -    53,083,925 
Deferred taxes assets   8,204    4,383,425 
Long term investment   -    1,460,034 
Investment in JV Company   128,929,893    70,681,013 
Goodwill   28,552,215    322,591 
Intangible assets   4,328,127    331,116 
Advances to suppliers   -    21,592,918 
Other long term assets   5,865,386    7,590,734 
Amount due from JV Company, net   -    15,907,183 
TOTAL Long-Term Assets   261,479,476    200,019,957 
           
TOTAL ASSETS  $428,829,264   $438,332,844 
           
CURRENT LIABILITIES          
Accounts payables  $112,309,683   $111,595,540 
Other payables and accrued expenses   4,251,487    6,556,209 
Short-term loans   30,539,236    33,042,864 
Customer deposits   94,408    205,544 
Notes payable   12,787,619    28,075,945 
Income tax payable   3,471,366    2,902,699 
Due to employees   28,473    35,041 
Deferred income   1,340,605    2,191,143 
Total Current Liabilities   164,822,877    184,604,985 
           
LONG-TERM LIABILITIES          
Long term bank loans   28,794,136    30,737,547 
Deferred taxes liabilities   1,711,343    - 
Contingent liability   7,256,000    - 
Other long-term liability   622,034    - 
Total Long-Term Liabilities   38,383,513    30,737,547 
           
TOTAL LIABILITIES   203,206,390    215,342,532 
           
STOCKHOLDER’S EQUITY          
Common stock, $0.001 par value; 100,000,000 shares authorized;  55,992,002 and 48,036,538 shares issued and 51,484,444 and 48,036,538 outstanding at December 31, 2018 and December 31,2017, respectively   51,484    48,037 
Additional paid-in capital   254,989,657    233,055,348 
Retained earnings (the restricted portion is $4,422,033 and $4,422,033 at December 31, 2018 and December 31, 2017, respectively)   (9,497,009)   (3,802,310)
Accumulated other comprehensive loss   (19,921,258)   (6,310,763)
TOTAL STOCKHOLDERS’ EQUITY   225,622,874    222,990,312 
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $428,829,264   $438,332,844 

 

See notes to consolidated financial statements.

F-4

 

 

KANDI TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)

FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

   Year Ended 
   December 31, 2018   December 31, 2017   December 31, 2016 
             
REVENUES FROM UNRELATED PARTY, NET  $63,707,518   $9,853,410   $47,870,589 
REVENUES FROM JV COMPANY AND RELATED PARTY, NET   48,731,310    92,952,211    81,621,424 
                
REVENUES, NET   112,438,828    102,805,621    129,492,013 
                
COST OF GOODS SOLD   (92,191,383)   (88,461,432)   (111,770,197)
                
GROSS PROFIT   20,247,445    14,344,189    17,721,816 
                
OPERATING EXPENSES:               
Research and development   (10,084,378)   (27,628,085)   (26,504,650)
Selling and marketing   (3,189,022)   (1,465,007)   (1,567,707)
General and administrative   (8,612,393)   (11,333,336)   (20,665,709)
Total Operating Expenses   (21,885,793)   (40,426,428)   (48,738,066)
                
LOSS FROM OPERATIONS   (1,638,348)   (26,082,239)   (31,016,250)
                
OTHER INCOME (EXPENSE):               
Interest income   1,324,812    2,269,844    2,961,153 
Interest expense   (1,871,851)   (2,280,286)   (1,831,667)
Change in fair value of financial instruments   -    -    3,823,590 
Change in fair value of contingent consideration   3,405,864    -    - 
Government grants   17,787,445    5,913,554    25,913,540 
Share of loss after tax of JV   (17,888,706)   (11,555,302)   (7,307,510)
Other income, net   956,839    123,925    1,627,933 
Total other income (expense), net   3,714,403    (5,528,265)   25,187,039 
                
INCOME (LOSS) BEFORE INCOME TAXES   2,076,055    (31,610,504)   (5,829,211)
                
INCOME TAX (EXPENSE) BENEFIT   (7,770,754)   3,263,030    (681,546)
                
NET LOSS   (5,694,699)   (28,347,474)   (6,510,757)
                
OTHER COMPREHENSIVE (LOSS) INCOME                
Foreign currency translation   (13,610,495)   13,846,110    (15,415,223)
                
COMPREHENSIVE LOSS  $(19,305,194)  $(14,501,364)  $(21,925,980)
                
WEIGHTED AVERAGE SHARES OUTSTANDING BASIC   51,188,647    47,943,830    47,447,665 
WEIGHTED AVERAGE SHARES OUTSTANDING DILUTED   51,188,647    47,943,830    47,447,665 
                
NET LOSS PER SHARE, BASIC  $(0.11)  $(0.59)  $(0.14)
NET LOSS PER SHARE, DILUTED  $(0.11)  $(0.59)  $(0.14)

 

See notes to consolidated financial statements.

 

F-5

 

 

KANDI TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

   Common Stock   Additional Paid-in   Retained   Accumulated Other Comprehensive     
   Shares   Par Value   Capital   Earnings   Income   Total 
BALANCE AT DECEMBER 31, 2015   46,964,855   $46,965   $212,564,334   $31,055,919   $(4,741,650)  $238,925,568 
Stock issuance and award   734,783    735    15,347,143              15,347,878 
Warrant exercise                            - 
Deferred tax effect                            - 
Foreign currency translation                       (15,415,223)   (15,415,223)
Net loss                  (6,510,756)        (6,510,756)
                               
BALANCE AT DECEMBER 31, 2016   47,699,638   $47,700   $227,911,477   $24,545,163   $(20,156,873)  $232,347,467 
Stock issuance and award   336,900    337    5,143,871              5,144,208 
Warrant exercise                            - 
Deferred tax effect                            - 
Foreign currency translation                       13,846,110    13,846,110 
Net loss                  (28,347,473)        (28,347,473)
                               
BALANCE AT DECEMBER 31, 2017   48,036,538   $48,037   $233,055,348   $(3,802,310)  $(6,310,763)  $222,990,312 
Stock issuance and award   3,447,906    3,447    21,934,309              21,937,756 
Warrant exercise                            - 
Deferred tax effect                            - 
Foreign currency translation                       (13,610,495)   (13,610,495)
Net loss                  (5,694,699)        (5,694,699)
                               
BALANCE AT DECEMBER 31, 2018   51,484,444   $51,484   $254,989,657   $(9,497,009)  $(19,921,258)  $225,622,874 

 

See notes to consolidated financial statements.

 

F-6

 

 

KANDI TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW

FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

   Year Ended 
   December 31,
2018
   December 31,
2017
   December 31,
2016
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:            
Net loss  $(5,694,699)  $(28,347,474)  $(6,510,757)
Adjustments to reconcile net income to net cash provided by operating activities               
Depreciation and amortization   4,326,296    4,777,992    4,863,277 
Assets impairments   263,185    170,506    (40,142)
Allowance for doubtful accounts   (213,809)   128,972    - 
Deferred taxes   4,815,774    (5,448,015)   3,651,362 
Change in fair value of financial instruments   -    -    (3,823,590)
Share of loss after tax of JV Company   17,888,706    11,555,302    7,307,510 
Reserve for fixed assets   (52,744)   451,503    - 
Change in fair value of contingent consideration   (3,405,864)   -    - 
Stock compensation cost   285,609    5,191,307    14,913,212 
                
Changes in operating assets and liabilities, net of effects of acquisition:               
(Increase) Decrease In:               
Accounts receivable   (57,503,289)   (5,821,522)   (40,962,889)
Deferred taxes assets   375    -    - 
Notes receivable   483,778    -    1,383,605.00 
Notes receivable from JV Company and related party   6,231,669    8,068,968    - 
Inventories   (5,243,388)   (3,311,357)   4,952,792 
Other receivables and other assets   (31,373,831)   (1,243,552)   (43,650,395)
Due from employee   1,045    10,127    41,529 
Advances to supplier and prepayments and prepaid expenses   (5,386,448)   23,107,334    (9,209,955)
Advances to suppliers-long term   -    (5,941,692)   - 
Amount due from JV Company   (95,442,739)   (53,622,842)   (111,996,250)
Amount due from JV Company-Longterm   15,907,183    (15,907,183)   - 
Due from related party   159,405    10,622,123    28,715,113 
                
Increase (Decrease) In:               
Accounts payable   137,390,139    66,784,385    112,150,789 
Other payables and accrued liabilities   60,736,669    1,914,293    (3,790,859)
Notes payable   (30,542,040)   (13,297,993)   (8,480,858)
Customer deposits   (104,047)   155,100    (48,312)
Income tax payable   822,422    1,221,012    1,008,274 
Deferred income   (761,736)   (4,431,765)   - 
Net cash provided by (used in) operating activities  $13,587,621   $(3,214,471)   (49,526,543)
                
CASH FLOWS FROM INVESTING ACTIVITIES:               
Purchases of property, plant and equipment, net   (582,872)   (760,253)   (275,801)
Purchases of land use rights and other intangible assets   (103,871)   (416,361)   (3,388)
Acquisition of Jinhua An Kao (net of cash received)   (3,555,766)   -    - 
Acquisition of SC Autosports   486,954    -    - 
Purchases of construction in progress   (418,755)   (702,719)   (6,001,664)
Reimbursement of capitalize interests for construction in progress   1,790,652    -    - 
Repayment of notes receivable   -    -    10,335,807 
Long Term Investment   1,436,217    -    - 
Short term investment   -    4,587,971    (3,088,327)
Net cash (used in) provided by investing activities  $(947,441)  $2,708,638    966,627 
                
CASH FLOWS FROM FINANCING ACTIVITIES:               
Proceeds from short-term bank loans   32,503,855    32,263,794    65,912,237 
Repayments of short-term bank loans   (33,259,759)   (35,667,772)   (35,815,325)
Repayments of long-term bank loans   (302,361)   -    - 
Proceeds from notes payable   54,348,577    22,270,028    12,038,765 
Repayment of notes payable   (58,588,036)   (28,680,591)   - 
Warrant exercise   -    -    434,666 
Net cash (used in) provided by financing activities  $(5,297,724)  $(9,814,541)   42,570,343 
                
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH   7,342,456    (10,320,374)   (5,989,573)
Effect of exchange rate changes on cash   (1,099,881)   1,237,572    (1,727,697)
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF YEAR   16,110,496    25,193,298    32,910,568 
                
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD   22,353,071    16,110,496    25,193,298 
                
SUPPLEMENTARY CASH FLOW INFORMATION               
Income taxes paid   2,056,670    1,448,523    2,598,846 
Interest paid   1,708,766    1,625,240    1,671,372 
                
SUPPLEMENTAL NON-CASH DISCLOSURES:               
Construction in progress transferred to Property, Plant and equipment   74,118,229    -    - 
Long term and short term Advances to suppliers transferred to Construction in progress   31,301,325    18,848,586    - 
Purchase of construction in progress by accounts payable   -    3,756,605    4,191,246 
Advances to suppliers-long term adjusted for other payable   -    1,065,100    - 
Settlement of due from JV Company and related parties with notes receivable from related parties   86,461,386    53,565,297    43,707,157 
Settlement of accounts receivables with notes receivable from unrelated parties   60,543,404    5,868,902    15,052,339 
Settlement of other receivables with notes receivable from related parties   34,015,662    -    - 
Assignment of notes receivable from unrelated parties to supplier to settle accounts payable   31,347,383    5,868,902    14,509,390 
Assignment of notes receivable from JV Company and related parties to supplier to settle accounts payable   77,107,835    44,812,574    44,846,561 
Assignment of notes receivable from unrelated parties to supplier to settle other payable   28,636,652    -    - 
Assignment of notes receivable from JV Company and related parties to supplier to settle other payable   34,242,433    -    - 
Settlement of accounts payable with notes payables   31,039,932    31,533,939    8,146,783 
Acquisition of Jinhua An Kao by stock   20,718,859    -    - 
Acquisition of SC Autosports by stock   756,664    -    - 
Replacement of notes payables with accounts payable   10,582,651    -    - 
Amount due from JV Company converted to investment in JV Company   82,393,493    -    - 
Reversal of construction in progress and accounts payable   8,029,198    -    - 
Construction in progress transferred back to prepayments   -    -    35,035,762 
Reclassification of overpaid accounts payable to advances to suppliers   16,826    -    - 
Deferred tax changed to other comprehensive income   -