UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended
or
For the transition period from ______to______
Commission
file number
(Exact name of registrant as specified in charter)
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
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.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | ☒ | |
| Non-accelerated filer | ☐ | Smaller reporting company | |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As
of August 5, 2020, the registrant had 56,521,702 shares of common stock issued and
TABLE OF CONTENTS
i
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
KANDI
TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| June 30,
2020 | December 31, 2019 | |||||||
| (UNAUDITED) | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable (net of allowance for doubtful accounts of $ | ||||||||
| Inventories | ||||||||
| Notes receivable | ||||||||
| Other receivables | ||||||||
| Prepayments and prepaid expense | ||||||||
| Amount due from the Affiliate Company, net | ||||||||
| Other current assets | ||||||||
| TOTAL CURRENT ASSETS | ||||||||
| LONG-TERM ASSETS | ||||||||
| Property, plant and equipment, net | ||||||||
| Intangible assets | ||||||||
| Land use rights, net | ||||||||
| Investment in the Affiliate Company | ||||||||
| Goodwill | ||||||||
| Other long term assets | ||||||||
| TOTAL Long-Term Assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | $ | ||||||
| Other payables and accrued expenses | ||||||||
| Short-term loans | - | |||||||
| Notes payable | ||||||||
| Income tax payable | ||||||||
| Advance receipts | - | |||||||
| Long term loans - current portion | ||||||||
| Other current liability | ||||||||
| Total Current Liabilities | ||||||||
| LONG-TERM LIABILITIES | ||||||||
| Long term loans | ||||||||
| Deferred taxes liability | ||||||||
| Contingent consideration liability | ||||||||
| Other long-term liability | ||||||||
| Total Long-Term Liabilities | ||||||||
| TOTAL LIABILITIES | ||||||||
| STOCKHOLDER’S EQUITY | ||||||||
| Common stock, $ | ||||||||
| Less: Treasury stock ( | ( | ) | ( | ) | ||||
| Additional paid-in capital | ||||||||
| Accumulated deficit (the restricted portion is $ | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| TOTAL STOCKHOLDERS’ EQUITY | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements
1
KANDI
TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, 2020 | June 30, 2019 | June 30, 2020 | June 30, 2019 | |||||||||||||
| REVENUES FROM UNRELATED PARTY, NET | $ | $ | $ | $ | ||||||||||||
| REVENUES FROM THE AFFILIATE COMPANY AND RELATED PARTY, NET | ||||||||||||||||
| REVENUES, NET | ||||||||||||||||
| COST OF GOODS SOLD | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| GROSS PROFIT | ||||||||||||||||
| OPERATING INCOME (EXPENSES): | ||||||||||||||||
| Research and development | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Selling and marketing | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| General and administrative | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gain on disposal of long-live asset | - | - | ||||||||||||||
| Total Operating Income (Expenses) | ( | ) | ( | ) | ||||||||||||
| INCOME (LOSS) FROM OPERATIONS | ( | ) | ( | ) | ||||||||||||
| OTHER INCOME (EXPENSES): | ||||||||||||||||
| Interest income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Change in fair value of contingent consideration | ( | ) | ||||||||||||||
| Government grants | ||||||||||||||||
| Gain from equity dilution in the Affiliate Company | ( | ) | - | |||||||||||||
| Share of loss after tax of the Affiliate Company | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expenses), net | ( | ) | ||||||||||||||
| Total other expenses, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| INCOME (LOSS) BEFORE INCOME TAXES | ( | ) | ( | ) | ||||||||||||
| INCOME TAX (EXPENSE) BENEFIT | ( | ) | ( | ) | ( | ) | ||||||||||
| NET INCOME (LOSS) | ( | ) | ( | ) | ||||||||||||
| OTHER COMPREHENSIVE INCOME (LOSS) | ||||||||||||||||
| Foreign currency translation | ( | ) | ( | ) | ||||||||||||
| COMPREHENSIVE INCOME (LOSS) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| WEIGHTED AVERAGE SHARES OUTSTANDING BASIC | ||||||||||||||||
| WEIGHTED AVERAGE SHARES OUTSTANDING DILUTED | ||||||||||||||||
| NET INCOME (LOSS) PER SHARE, BASIC | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| NET INCOME (LOSS) PER SHARE, DILUTED | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
See accompanying notes to condensed consolidated financial statements
2
KANDI TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
| Number of Outstanding Shares | Common Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Total | ||||||||||||||||||||||
| Balance, December 31, 2018 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Stock issuance and award | ||||||||||||||||||||||||||||
| Net income (loss) | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Foreign currency translation | - | |||||||||||||||||||||||||||
| Balance, March 31, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Stock issuance and award | ||||||||||||||||||||||||||||
| Net income (loss) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Foreign currency translation | ( | ) | ( | ) | ||||||||||||||||||||||||
| Balance, June 30, 2019 | ( | ) | ( | ) | ||||||||||||||||||||||||
| Number of Outstanding Shares | Common Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Total | ||||||||||||||||||||||
| Balance, December 31, 2019 | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
| Stock issuance and award | ||||||||||||||||||||||||||||
| Net income (loss) | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Foreign currency translation | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance, March 31, 2020 | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
| Stock issuance and award | ||||||||||||||||||||||||||||
| Net income (loss) | - | |||||||||||||||||||||||||||
| Foreign currency translation | - | |||||||||||||||||||||||||||
| Balance, June 30, 2020 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
3
KANDI
TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| June 30, 2020 | June 30, 2019 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income to net cash provided by operating activities | ||||||||
| Depreciation and amortization | ||||||||
| Impairments | ( | ) | ||||||
| Allowance for doubtful accounts | ||||||||
| Deferred taxes | ||||||||
| Share of loss after tax of the Affiliate Company | ||||||||
| Gain from equity dilution in the Affiliate Company | ( | ) | ||||||
| Gain on disposal of long-live asset | ( | ) | - | |||||
| Change in fair value of contingent consideration | ( | ) | ( | ) | ||||
| Stock compensation cost | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| (Increase) Decrease In: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Notes receivable | ||||||||
| Notes receivable from the Affiliate Company and related party | ||||||||
| Inventories | ( | ) | ( | ) | ||||
| Other receivables and other assets | ( | ) | ( | ) | ||||
| Advances to supplier and prepayments and prepaid expenses | ( | ) | ||||||
| Amount due from the Affiliate Company | ( | ) | ||||||
| Increase (Decrease) In: | ||||||||
| Accounts payable | ( | ) | ||||||
| Other payables and accrued liabilities | ||||||||
| Notes payable | ( | ) | ( | ) | ||||
| Income tax payable | ( | ) | ||||||
| Net cash used in by operating activities | $ | ( | ) | $ | ( | ) | ||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchases of property, plant and equipment, net | ( | ) | ( | ) | ||||
Proceeds from disposal of long-live asset | - | |||||||
| Cash received from equity sale in the Affiliate Company | ||||||||
| Advance receipts of equity transfer | - | |||||||
| Net cash provided by investing activities | $ | $ | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from short-term loans | ||||||||
| Repayments of short-term loans | ( | ) | ( | ) | ||||
| Proceeds from long-term loans | - | |||||||
| Repayments of long-term loans | ( | ) | ( | ) | ||||
| Net cash (used in) provided by financing activities | $ | ( | ) | $ | ||||
| NET DECREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH | ( | ) | ( | ) | ||||
| Effect of exchange rate changes on cash | ( | ) | ||||||
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF YEAR | ||||||||
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD | ||||||||
| -CASH AND CASH EQUIVALENTS AT END OF PERIOD | ||||||||
| -RESTRICTED CASH AT END OF PERIOD | ||||||||
| SUPPLEMENTARY CASH FLOW INFORMATION | ||||||||
| Income taxes paid | ||||||||
| Interest paid | ||||||||
See accompanying notes to condensed consolidated financial statements
4
NOTE 1 - ORGANIZATION AND PRINCIPAL ACTIVITIES
Kandi Technologies Group, Inc. (“Kandi Technologies”) was incorporated under the laws of the State of Delaware on March 31, 2004. As used herein, the terms “Company” or “Kandi” refer to Kandi Technologies and its operating subsidiaries, as described below.
Headquartered in Jinhua City, Zhejiang Province, People’s Republic of China (“China” or “PRC”), the Company is one of China’s leading producers and manufacturers of electric vehicle (“EV”) products (through the Affiliate Company, formerly defined as the JV Company), EV parts, and off-road vehicles for sale in the Chinese and the global markets. The Company conducts its primary business operations through its wholly-owned subsidiaries, Zhejiang Kandi Vehicles Co., Ltd. (“Kandi Vehicles”), Kandi Vehicles’ wholly and partially-owned subsidiaries, and SC Autosports LLC (“SC Autosports”, d/b/a Kandi America).
The Company’s organizational chart as of the date of this report is as follows:
5
In June 2020, Jinhua An Kao Power Technology Co., Ltd. changed its name to Zhejiang Kandi Smart Battery Swap Technology Co., Ltd (“Kandi Smart Battery Swap”).
The Company’s original primary business operations consist of designing, developing, manufacturing and commercializing EV products (through Kandi Electric Vehicles (Hainan) Co., Ltd. and the Affiliate Company), EV parts and off-road vehicles. The COVID-19 outbreak has seriously impacted the EV market in 2020. As a result, the Company plans to manufacture and sell a number of ancillary products aimed at the dynamic power train system of intelligent transportation. For example, the dynamic power train system of Electric Scooters and Electric Self-Balancing Vehicles. The Company is pursuing these opportunities by expanding production of intelligent transportation products that exploit its advantages in the Yongkang Scrou Electric Co, Ltd.’s power electric motor and Kandi Smart Battery Swap’s power battery pack. The products aimed at this market combine the Company’s motors and battery packs into a dynamic power train system. As part of its strategic objective of becoming a leading manufacturer of EV products (through the Affiliate Company) and related services, in the future, the Company will increase its focus on pure EV-related products and intelligent transportation dynamic power train system, and is actively pursuing expansion in the domestic and foreign markets.
NOTE 2 - LIQUIDITY
The
Company had working capital of $
6
The Company’s primary need for liquidity
stems from its need to fund working capital requirements of the Company’s businesses, its capital expenditures and its general
operations, including debt repayment. The Company has historically financed its operations through short-term commercial bank loans
from Chinese banks, as well as its ongoing operating activities by using funds from operations, external credit or financing arrangements.
Although the Company has paid off all the short-term bank loans as of June 30, 2020, it still retains the credit line, which can
be used at any time when the Company has special needs. In addition, the Company received the remaining RMB
NOTE 3 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim information, and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and notes required by U.S. GAAP for annual financial statements. In the management’s opinion, the interim financial statements reflect all normal adjustments that are necessary to provide a fair presentation of the financial results for the interim periods presented. Operating results for interim periods are not necessarily indicative of results that may be expected for an entire fiscal year. The condensed consolidated balance sheet as of December 31, 2019 has been derived from the audited consolidated financial statements as of such date. For a more complete understanding of the Company’s business, financial position, operating results, cash flows, risk factors and other matters, please refer to its Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (the “2019 Form 10-K”).
Beginning in 2020, a strain of new coronavirus (“COVID-19”) has spread globally and at this point, the extent to which the COVID-19 may impact operations of the Company is uncertain. The extent of the impact of the COVID-19 on the Company's business and operations will depend on several factors, such as the duration, severity, and geographic spread of the pandemic, development of the testing and treatment and stimulus measures of the government. The Company is monitoring and assessing the evolving situation closely and evaluating its potential exposure. The operating results for the six months ended June 30, 2020 may not be indicative of the future operating results for the fiscal year ending December 31, 2020 or other future periods, particularly in light of the uncertain impact COVID-19 could have on the Company's business.
NOTE 4 - PRINCIPLES OF CONSOLIDATION
The Company’s consolidated financial statements reflect the accounts of the Company and its ownership interests in the following subsidiaries:
| (1) | Continental Development Limited (“Continental”), a wholly-owned subsidiary of the Company, incorporated under the laws of Hong Kong; |
| (2) | Kandi Vehicles, a wholly-owned subsidiary of Continental, incorporated under the laws of the PRC; |
| (3) | Kandi New Energy Vehicle Co. Ltd. (“Kandi New Energy”), a |
7
| (4) | Yongkang Scrou Electric Co, Ltd. (“Yongkang Scrou”), a wholly-owned subsidiary of Kandi Vehicles, incorporated under the laws of the PRC; |
| (5) | Kandi Electric Vehicles (Hainan) Co., Ltd. (“Kandi Hainan”), a subsidiary, |
| (6) | Zhejiang Kandi Smart Battery Swap Technology Co., Ltd (“Kandi Smart Battery Swap”), a wholly-owned subsidiary of Kandi Vehicles, incorporated under the laws of the PRC. |
| (7) | SC Autosports, a wholly-owned subsidiary of the Company formed under the laws of the State of Texas. |
Equity Method Investees
The Company’s consolidated net income also includes the Company’s proportionate share of the net income or loss of its equity method investees as follows:
The
Affiliate Company, a
All intra-entity profits and losses with regard to the Company’s equity method investees have been eliminated.
NOTE 5 - USE OF ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Management makes these estimates using the best information available at the time the estimates are made; however actual results when ultimately realized could differ from those estimates.
NOTE 6 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Our significant accounting policies are detailed in “Note 6 - Summary of Significant Accounting Policies” of the Company 2019 Form 10-K, excepting the following.
(v) Reclassification
Certain reclassifications have been made to the condensed consolidated statements of cash flows for six months ended June 30, 2019 to conform to the presentation of consolidated financial statement for six months ended June 30, 2020. The Company reclassified the following 1) grouping due from employees into other receivables and other assets; 2) grouping customer deposits and deferred income into other payables and accrued liabilities.
8
NOTE 7 - NEW ACCOUNTING PRONOUNCEMENTS
In February 2018, the FASB released ASU 2018-2, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This standard update addresses a specific consequence of the Tax Cuts and Jobs Act (the “Tax Act”) and allows a reclassification from accumulated other comprehensive income to retained earnings for the stranded tax effects resulting from the Tax Act. Consequently, the update eliminates the stranded tax effects that were created as a result of the historical U.S. federal corporate income tax rate to the newly enacted U.S. federal corporate income tax rate. The Company is required to adopt this standard in the first quarter of fiscal year 2020, with early adoption permitted. The amendments in this update should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company adopted this ASU in the first quarter of 2020 and the new standard did not have a material impact on the consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13 Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds, and modifies certain disclosure requirements for fair value measurements under ASC 820. This ASU is to be applied on a prospective basis for certain modified or new disclosure requirements, and all other amendments in the standard are to be applied on a retrospective basis. The new standard is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. The Company adopted this ASU in the first quarter of 2020 and the new standard did not have a material impact on the consolidated financial statements.
In January 2020, the FASB issued ASU 2020-01, Investments—Equity Securities, Investments—Equity Method and Joint Ventures, and Derivatives and Hedging, which clarifies the interaction of the accounting for equity securities under Topic 321, the accounting for equity method investments in Topic 323, and the accounting for certain forward contracts and purchased options in Topic 815. This guidance will be effective in the first quarter of 2021 on a prospective basis, with early adoption permitted. The Company is currently evaluating the impact of the new guidance and do not expect the adoption of this guidance will have a material impact on the consolidated financial statements.
9
NOTE 8 - CONCENTRATIONS
(a) Customers
For
the three-month period ended June 30, 2020, the Company’s major customers, each of whom accounted for more than
| Sales | Trade Receivable | |||||||||||||||
| Major Customers |
|
Three Months Ended June 30, 2020 |
|
|
Three Months Ended June 30, 2019 |
|
|
June 30, 2020 |
|
|
December 31, 2019 |
|
||||
| Customer A | % | % | % | % | ||||||||||||
| Customer B | % | % | % | % | ||||||||||||
For
the six-month period ended June 30, 2020, the Company’s major customers, each of whom accounted for more than
| Sales | Trade Receivable | |||||||||||||||
| Major Customers | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | June 30, 2020 | December 31, 2019 | ||||||||||||
| Customer A | % | % | % | % | ||||||||||||
| Customer B | % | % | % | % | ||||||||||||
(b) Suppliers
For
the three-month period ended June 30, 2020, the Company’s material suppliers, each of whom accounted for more than
| Purchases | Accounts Payable | |||||||||||||||
| Major Suppliers | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | June 30, 2020 | December 31, 2019 | ||||||||||||
| Zhejiang Kandi Supply Chain Management Co., Ltd. | % | % | % | % | ||||||||||||
| Supplier C | % | % | ||||||||||||||
10
For
the six-month period ended June 30, 2020, the Company’s material suppliers, each of whom accounted for more than
| Purchases | Accounts Payable | |||||||||||||||
| Major Suppliers | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | June 30, 2020 | December 31, 2019 | ||||||||||||
| Zhejiang Kandi Supply Chain Management Co., Ltd. | % | % | % | % | ||||||||||||
| Supplier C | % | % | ||||||||||||||
NOTE 9 - EARNINGS (LOSS) PER SHARE
The
Company calculates earnings per share in accordance with ASC 260, Earnings Per Share, which requires a dual presentation of basic
and diluted earnings per share. Basic earnings per share are computed using the weighted average number of shares outstanding
during the reporting period. Diluted earnings per share represents basic earnings per share adjusted to include the potentially
dilutive effect of outstanding stock options and warrants (using treasury stock method). Due to the average market price of the
common stock during the period below the exercise price of the options and due to the loss from operations, approximately
The following is the calculation of earnings per share for the three-month and six-month periods ended June 30, 2020 and 2019:
| For three months ended | ||||||||
| June 30, | ||||||||
| 2020 | 2019 | |||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Weighted average shares used in basic computation | ||||||||
| Dilutive shares | - | - | ||||||
| Weighted average shares used in diluted computation | ||||||||
| Income (loss) per share: | ||||||||
| Basic | $ | $ | ( | ) | ||||
| Diluted | $ | $ | ( | ) | ||||
11
| For six months ended | ||||||||
| June 30, | ||||||||
| 2020 | 2019 | |||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Weighted average shares used in basic computation | ||||||||
| Dilutive shares | - | - | ||||||
| Weighted average shares used in diluted computation | ||||||||
| Income (loss) per share: | ||||||||
| Basic | $ | $ | ( | ) | ||||
| Diluted | $ | $ | ( | ) | ||||
NOTE 10 - ACCOUNTS RECEIVABLE
Accounts receivable are summarized as follows:
| June 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Accounts receivable | $ | $ | ||||||
| Less: allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Accounts receivable, net | $ | $ | ||||||
NOTE 11 - INVENTORIES
Inventories are summarized as follows:
| June 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Raw material | $ | $ | ||||||
| Work-in-progress | ||||||||
| Finished goods | ||||||||
| Inventories | $ | $ | ||||||
12
NOTE 12 - NOTES RECEIVABLE
As
of June 30, 2020, there was $0 notes receivable from unrelated parties. As of December 31, 2019, there was $
NOTE 13 - OTHER RECEIVABLES
Other receivables consist of the following:
| June 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Amount due from unrelated party for equity transfer of the Affiliate company | $ | $ | ||||||
| Loan to third party | ||||||||
| Others | ||||||||
| Total other receivables | $ | $ | ||||||
As
of June 30, 2020, the Company’s other receivable includes $
13
NOTE 14 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plants and equipment as of June 30, 2020 and December 31, 2019, consisted of the following:
| June 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| At cost: | ||||||||
| Buildings | $ | $ | ||||||
| Machinery and equipment | ||||||||
| Office equipment | ||||||||
| Motor vehicles and other transport equipment | ||||||||
| Molds and others | ||||||||
| Less : Accumulated depreciation | ||||||||
| Buildings | $ | ( | ) | $ | ( | ) | ||
| Machinery and equipment | ( | ) | ( | ) | ||||
| Office equipment | ( | ) | ( | ) | ||||
| Motor vehicles and other transport equipment | ( | ) | ( | ) | ||||
| Molds and others | ( | ) | ( | ) | ||||
| ( | ) | ( | ) | |||||
| Property, plant and equipment, net | $ | $ | ||||||
As
of June 30, 2020 and December 31, 2019, the net book value of property, plant and equipment pledged as collateral for the Company’s
bank loans totaled $
Depreciation
expenses for the three months ended June 30, 2020 and 2019 were $
NOTE 15 - INTANGIBLE ASSETS
Intangible assets include acquired other intangibles of trade name, customer relations and patent recorded at estimated fair values in accordance with purchase accounting guidelines for acquisitions.
14
The following table provides the gross carrying value and accumulated amortization for each major class of our intangible assets, other than goodwill:
| Remaining | June 30, | December 31, | ||||||||
| useful life | 2020 | 2019 | ||||||||
| Gross carrying amount: | ||||||||||
| Trade name | $ | $ | ||||||||
| Customer relations | ||||||||||
| Patent | ||||||||||
| Less : Accumulated amortization | ||||||||||
| Trade name | $ | ( | ) | $ | ( | ) | ||||
| Customer relations | ( | ) | ( | ) | ||||||
| Patent | ( | ) | ( | ) | ||||||
| ( | ) | ( | ) | |||||||
| Intangible assets, net | $ | $ | ||||||||
The
aggregate amortization expenses for those intangible assets were $
Amortization expenses for the next five years and thereafter are as follows:
| 2020 (Six months) | $ | |||
| 2021 | ||||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| Thereafter | ||||
| Total | $ |
NOTE 16 - LAND USE RIGHTS, NET
The Company’s land use rights consist of the following:
| June 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Cost of land use rights | $ | $ | ||||||
| Less: Accumulated amortization | ( | ) | ( | ) | ||||
| Land use rights, net | $ | $ | ||||||
During June 2020, $
15
As
of June 30, 2020 and December 31, 2019, the net book value of land use rights pledged as collateral for the Company’s bank
loans was $
The
amortization expenses for the three months ended June 30, 2020 and 2019, were $
| 2020 (Six months) | $ | |||
| 2021 | ||||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| Thereafter | ||||
| Total | $ |
NOTE 17 - SHORT-TERM AND LONG-TERM LOANS
Short-term loans are summarized as follows:
| June 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Bank A | ||||||||
| Interest rate | ||||||||
| Interest rate | ||||||||
| Bank B | ||||||||
| Interest rate | ||||||||
| Interest rate | ||||||||
| Interest rate | ||||||||
| $ | $ | |||||||
16
Long-term loans are summarized as follows:
| June 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Long term bank loans: | $ | |||||||
| Bank C | ||||||||
| Interest rate | ||||||||
| Other long term loans: | ||||||||
| Loan under Paycheck Protection Program① | ||||||||
| Economic Injury Disaster Loan ② | ||||||||
| Long term loans - current and noncurrent portion | $ | |||||||
| ① | The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, and provides over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (“PPP”). An eligible business can apply for a PPP loan up to the greater of: (1) 2.5 times its average monthly “payroll costs;” or (2) $10.0 million. PPP loans will have: (a) an interest rate of 1.0%, (b) a two-year loan term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and 75% of the loan proceeds are used for payroll expenses, with the remaining 25% of the loan proceeds used for other qualifying expenses. As of June 30, 2020, we had received $244,116 under the PPP. |
| ② | In addition, Economic Injury Disaster Loans (“EIDL”) through the SBA was also made available under the CARES Act passed by Congress in response to the COVID-19 pandemic. During June 2020, $150,000 of EIDL loan was approved with the term of a 3.75% rate over 30 years, and a 12-month deferment on the first repayment of principal with interest accrued during deferment. |
17
The
interest expenses of short-term and long-term loans for the three months ended June 30, 2020 and 2019 were $
As
of June 30, 2020, the aggregate amount of short-term and long-term loans guaranteed by various third parties was $
NOTE 18 - TAXES
(a) Corporation Income Tax
Pursuant
to the tax laws and regulations of the PRC, the Company’s applicable corporate income tax (“CIT”) rate is
The
Company’s tax provision or benefit from income taxes for interim periods is determined using an estimate of its annual effective
tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter the Company updates
its estimate of the annual effective tax rate, and if its estimated tax rate changes, the management makes a cumulative adjustment.
For 2019, the management estimates that its effective tax rate will be favorably affected by non-taxable income such as the share
of income of the Affiliate Company and the gain from the change of fair value of contingent liabilities and certain research and
development super-deduction and adversely affected by non-deductible expenses such as part of entertainment expenses. The Company
records valuation allowances against the deferred tax assets associated with losses for which it may not realize a related tax
benefit.
The
quarterly tax provision, and the quarterly estimate of the Company’s annual effective tax rate, is subject to significant
variation due to several factors, including variability in accurately predicting the Company’s pre-tax and taxable income
and loss, acquisitions (including integrations) and investments, changes in its stock price, changes in its deferred tax assets
and liabilities and their valuation, return to provision true-up, foreign currency gains (losses), changes in regulations and
interpretations related to tax, accounting, and other areas. Additionally, the Company’s effective tax rate can be more
or less volatile based on the amount of pre-tax income or loss. The income tax provision for the six months ended June 30, 2020
and 2019 was tax expense of $
18
Under ASC 740 guidance relating to uncertain tax positions, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of June 30, 2020, the Company did not have any liability for unrecognized tax benefits. The Company files income tax returns with the U.S. Internal Revenue Services (“IRS”) and those states where the Company has operations. The Company is subject to U.S. federal or state income tax examinations by the IRS and relevant state tax authorities for years after 2006. During the periods open to examination, the Company has net operating loss carry forwards (“NOLs”) for U.S. federal and state tax purposes that have attributes from closed periods. Since these NOLs may be utilized in future periods, they remain subject to examination. The Company also files certain tax returns in the PRC. As of June 30, 2020, the Company was not aware of any pending income tax examinations by U.S. or PRC tax authorities. The Company records interest and penalties on uncertain tax provisions as income tax expense. As of June 30, 2020, the Company has no accrued interest or penalties related to uncertain tax positions.
The
aggregate NOLs in 2019 was $
(b) Tax Holiday Effect
For
the six months ended June 30, 2020 and 2019, the PRC CIT rate was
The combined effects of income tax expense exemptions and reductions available to the Company for the six months ended June 30, 2020 and 2019 are as follows:
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2020 | 2019 | |||||||
| Tax benefit (holiday) credit | $ | $ | ||||||
| Basic net income per share effect | $ | $ | ||||||
(c) CARES Act
On March 27, 2020, the “Coronavirus Aid, Relief and Economic Security (CARES) Act” was signed into law. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The Company does not anticipate significant income tax impact on its financial and continue to examine the impacts this CARES Act may have on its business.
19
NOTE 19 - LEASES
The
Company has renewed its corporate office leases for SC Autosports, with a term of
As
of June 30, 2020, the Company’s right - of - use asset (grouped in other long term assets on the balance sheet) was $
Supplemental information related to operating leases was as follows:
| Six months ended June 30, 2020 | ||||
| Cash payments for operating leases | $ | |||
Maturities of lease liabilities as of June 30, 2020, were as follow:
| Maturity of Lease Liabilities: | Lease payable | |||
| 2020 | $ | |||
| 2021 | ||||
| Total | $ | |||
20
NOTE 20 - CONTINGENT CONSIDERATION LIABILITY
On
January 3, 2018,
As the outbreak of COVID-19 in 2020 affected Kandi Smart Battery Swap’s operation and business, on July 7, 2020, the Company and the KSBS Shareholders made following supplements to Condition III of the original Supplementary Agreement: The transferor has the right to receive a total of 20.83% of total equity consideration (i.e., 5,919,674 total shares), provided that Kandi Smart Battery Swap realizes a net profit of RMB50,000,000 or more for the period from January 1, 2020 to June 30, 2021 (as opposed to be the originally stated “December 31, 2020”), and such profit is audited or reviewed and Kandi Smart Battery Swap gets annual or quarterly financial report issued subject to US GAAP.
On
July 1, 2018,
21
The Company recorded contingent consideration liability of the estimated fair value of the contingent consideration the Company currently expects to pay to the KSBS Shareholders and SC Autosports’ former members upon the achievement of certain milestones. The fair value of the contingent consideration liability associated with remaining shares of restrictive common stock was estimated by using the Monte Carlo simulation method, which took into account all possible scenarios. This fair value measurement is classified as Level 3 within the fair value hierarchy prescribed by ASC Topic 820, Fair Value Measurement and Disclosures. In accordance with ASC Topic 805, Business Combinations, the Company will re-measure this liability each reporting period and record changes in the fair value through a separate line item within the Company’s consolidated statements of income.
As
of June 30, 2020 and December 31, 2019, the Company’s contingent consideration liability was $
NOTE 21 - STOCK AWARD
In
connection with the appointment of Mr. Henry Yu as a member of the Board of Directors (the “Board”), the Board authorized
the Company to compensate Mr. Henry Yu with
As
compensation for Mr. Jerry Lewin’s services as a member of the Board, the Board authorized the Company to compensate Mr.
Jerry Lewin with
As
compensation for Ms. Kewa Luo’s services as the Company’s investor relation officer, the Board authorized the Company
to compensate Ms. Kewa Luo with
In
November 2016, the Company entered into a three-year employment agreement with Mr. Mei Bing, to hire him as the Company’s
Chief Financial Officer. Under the agreement, Mr. Mei Bing was entitled to receive an aggregate
On January 29, 2019, the Board appointed Ms. Zhu Xiaoying as
interim Chief Financial Officer. Ms. Zhu was entitled to receive
On May 15, 2020, the Board appointed Mr.
Jehn Ming Lim as the Chief Financial Officer. Mr. Lim was entitled to receive
22
The fair value of stock awards based on service is determined based on the closing price of the common stock on the date the shares are approved by the Board for grant. The compensation costs for awards of common stock are recognized over the requisite service period of three or six months.
On
December 30, 2013, the Board approved a proposal (as submitted by the Compensation Committee) of an award (the “Board’s
Pre-Approved Award Grant Sub-Plan under the 2008 Plan”) for certain executives and other key employees. The fair value of
each award granted under the 2008 Plan is determined based on the closing price of the Company’s stock on the date of grant
of such award. On September 26, 2016, the Board approved to terminate the previous Board’s Pre-Approved Award Grant Sub-Plan
under the 2008 Plan and adopted a new plan to grant the total number of shares of common stock of the stock award for selected
executives and key employees
For
the three months ended June 30, 2020 and 2019, the Company recognized $
NOTE 22 - SUMMARIZED INFORMATION OF EQUITY METHOD INVESTMENT IN THE AFFILIATE COMPANY
The Company’s condensed consolidated net income (loss) includes the Company’s proportionate share of the net income or loss of the Company’s equity method investees. When the Company records its proportionate share of net income (loss) in such investees, it increases equity income (loss) – net in the Company’s consolidated statements of income and the Company’s carrying value in that investment. Conversely, when the Company records its proportionate share of a net loss in such investees, it decreases equity income (loss) – net in the Company’s consolidated statements of income (loss) and the Company’s carrying value in that investment. All intra-entity profits and losses with the Company’s equity method investees have been eliminated.
23
On
March 21, 2019,
The
Company accounted for its investments in the Affiliate Company under the equity method of accounting. The Company recorded
The consolidated results of operations and financial position of the Affiliate Company are summarized below:
| Three Months ended | ||||||||
| June 30, | ||||||||
| 2020 | 2019 | |||||||
| Condensed income statement information: | ||||||||
| Net sales | $ | $ | ||||||
| Gross loss | ( | ) | ( | ) | ||||
| Gross margin | - | % | - | % | ||||
| Net loss | ( | ) | ( | ) | ||||
| Six Months ended | ||||||||
| June 30, | ||||||||
| 2020 | 2019 | |||||||
| Condensed income statement information: | ||||||||
| Net sales | $ | $ | ||||||
| Gross loss | ( | ) | ( | ) | ||||
| Gross margin | - | % | - | % | ||||
| Net loss | ( | ) | ( | ) | ||||
| June 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Condensed balance sheet information: | ||||||||
| Current assets | $ | $ | ||||||
| Noncurrent assets | ||||||||
| Total assets | $ | $ | ||||||
| Current liabilities | ||||||||
| Equity | ||||||||
| Total liabilities and equity | $ | $ | ||||||
24
Note: The following table illustrates the captions used in the Company’s Income Statements for its equity based investment in the Affiliate Company.
The Company’s equity method investments in the Affiliate Company for the six months ended June 30, 2020 and 2019 are as follows:
| Six Months ended | ||||||||
| June 30, | ||||||||
| 2020 | 2019 | |||||||
| Investment in the Affiliate Company, beginning of the period, | $ | $ | ||||||
| Gain from equity dilution | ||||||||
| Company’s share in net (loss) income of Affiliate based on 22% ownership for six months ended June 30, 2020 and 50% ownership for three months ended March 31, 2019, 43.47% ownership for three months ended June 30, 2019 | ( | ) | ( | ) | ||||
| Intercompany transaction elimination | ( | ) | ||||||
| Prior year unrealized profit realized | ||||||||
| Subtotal | ( | ) | ( | ) | ||||
| Exchange difference | ( | ) | ||||||
| Investment in Affiliate Company, end of the period | $ | $ | ||||||
25
As
of June 30, 2020 and December 31, 2019, the net amount due from the Affiliate Company and its subsidiaries, was $
NOTE 23 - COMMITMENTS AND CONTINGENCIES
Guarantees and pledged collateral for bank loans to other parties
(1) Guarantees for bank loans
On
March 15, 2013, the Company entered into a guarantee contract to serve as the guarantor of Nanlong Group Co., Ltd.
On
September 29, 2015, the Company entered into a guarantee contract to serve as the guarantor of Zhejiang Shuguang Industrial Co.,
Ltd.
26
(2) Pledged collateral for bank loans for which the parties other than the Company are the borrowers.
As of June 30, 2020 and December 31, 2019, none of the Company’s land use rights or plants and equipment were pledged as collateral securing bank loans for which the parties other than the Company are the borrowers.
Litigation
Beginning in March 2017, putative shareholder class actions were filed against Kandi Technologies Group, Inc. (“Kandi”) and certain of its current and former directors and officers in the United States District Court for the Central District of California and the United States District Court for the Southern District of New York. The complaints generally alleged violations of the federal securities laws based Kandi’s disclosure in March 2017 that its financial statements for the years 2014, 2015 and the first three quarters of 2016 would need to be restated, and seek damages on behalf of putative classes of shareholders who purchased or acquired Kandi’s securities prior to March 13, 2017. Kandi moved to dismiss the remaining cases, all of which were pending in the New York federal court, and that motion was granted by an order entered on September 30, 2019, and the time to appeal has run. In June 2020, a similar but separate putative securities class action was filed against Kandi and certain of its current and former directors and officers in California federal court and remains pending.
Beginning in May 2017, purported shareholder derivative actions based on the same underlying events described above were filed against certain current and former directors of Kandi in the United States District Court for the Southern District of New York. The New York federal court confirmed the voluntary dismissal of these actions in April 2019.
In October 2017, a shareholder filed a books and records action against the Company in the Delaware Court of Chancery pursuant to 8 Del. C. Section 220 seeking the production of certain documents generally relating to the same underlying items described above as well as attorney’s fees (the “Section 220 Litigation”). On September 28, 2018, the parties, through their respective counsel, agreed to dismiss the Section 220 Litigation with prejudice and with each party bearing its own attorney’s fees, costs, and expenses, thereby concluding the action. In February 2019, this same shareholder commenced a derivative action against certain current and former directors of Kandi in the Delaware Court of Chancery. A motion to dismiss this derivative action was filed in May 2019 and that motion was denied on April 27, 2020.
Separately, in connection with allegations of misconduct identified in pre-suit demands made by putative shareholders of Kandi, Kandi formed a Special Litigation Committee (“SLC”) and retained a Delaware law firm as independent counsel to the SLC to aid in the SLC’s investigation of, and to ultimately report on, the allegations of misconduct set forth in the pre-suit demands. In June 2020, the SLC recommended that it be dissolved in light of the ongoing derivative action pending in the Delaware Court of Chancery as referenced in the immediate above paragraph.
27
While the Company believes that the claims in these litigations are without merit and will defend itself vigorously, the Company is unable to estimate the possible loss, if any, associated with these litigations. The ultimate outcome of any litigation is uncertain and the outcome of these matters, whether favorable or unfavorable, could have a negative impact on the Company’s financial condition or results of operations due to defense costs, diversion of management resources and other factors. Defending litigation can be costly, and adverse results in the litigations could result in substantial monetary judgments. No assurance can be made that litigation will not have a material adverse effect on the Company’s future financial position.
NOTE 24 - SEGMENT REPORTING
The
Company has
The following table sets forth disaggregation of revenue:
| Three Months Ended June 30, | ||||||||
| 2020 | 2019 | |||||||
| Sales Revenue | Sales Revenue | |||||||
| Primary geographical markets | ||||||||
| Overseas | $ | $ | ||||||
| China | ||||||||
| Total | $ | $ | ||||||
| Major products | ||||||||
| EV parts | $ | $ | ||||||
| EV products | ( | ) | ||||||
| Off-road vehicles | ||||||||
| Electric Scooters and Electric Self-Balancing Scooters | ||||||||
| Total | $ | $ | ||||||
| Timing of revenue recognition | ||||||||
| Products transferred at a point in time | $ | $ | ||||||
| Total | $ | $ | ||||||
28
The negative amount is due to exchange rate difference.
| Six Months Ended June 30, | ||||||||
| 2020 | 2019 | |||||||
| Sales Revenue | Sales Revenue | |||||||
| Primary geographical markets | ||||||||
| Overseas | $ | $ | ||||||
| China | ||||||||
| Total | $ | $ | ||||||
| Major products | ||||||||
| EV parts | $ | $ | ||||||
| EV products | ||||||||
| Off-road vehicles | ||||||||
| Electric Scooters and Electric Self-Balancing Scooters | ||||||||
| Total | $ | $ | ||||||
| Timing of revenue recognition | ||||||||
| Products transferred at a point in time | $ | $ | ||||||
| Total | $ | $ | ||||||
NOTE 25 - SUBSEQUENT EVENTS
On July 9, 2020, the Company received the second payment of RMB 119 million (approximately $17 million) under the Repurchase Agreement.
In order to construct a new facility in the Jinhua New Energy Automotive Zone, on July 7, 2020, Kandi Vehicles entered in to a construction contract. The total contract amount was RMB 138.2 million (approximately $19.6 million).
On July 27, 2020, the Company received the remaining RMB186 million (approximately $26.3 million) equity transfer payment from Geely.
29
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This report contains forward-looking statements within the meaning of the federal securities laws that relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminologies, such as “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “intend,” “potential” or “continue” or the negative of such terms or other comparable terminologies, although not all forward-looking statements contain such terms.
In addition, these forward-looking statements include, but are not limited to, statements regarding implementing our business strategy; development and marketing of our products; our estimates of future revenue and profitability; our expectations regarding future expenses, including research and development, sales and marketing, manufacturing and general and administrative expenses; difficulty or inability to raise additional financing, if needed, on terms acceptable to us; our estimates regarding our capital requirements and our needs for additional financing; attracting and retaining customers and employees; sources of revenue and anticipated revenue; and competition in our market.
Forward-looking statements are only predictions. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. All of our forward-looking information is subject to risks and uncertainties that could cause actual results to differ materially from the results expected. Although it is not possible to identify all factors, these risks and uncertainties include the risk factors and the timing of any of those risk factors described in the 2019 Form 10-K and those set forth from time to time in our other filings with the SEC. These documents are available on the SEC’s Electronic Data Gathering and Analysis Retrieval System at http://www.sec.gov.
Critical Accounting Policies and Estimates
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, as of the date of the financial statements, and the reported amounts of revenue and expenses during the reported period. If these estimates differ significantly from actual results, the impact to the condensed consolidated financial statements may be material. There have been no material changes in our critical accounting policies and estimates from those disclosed in on the 2019 Form 10-K. Please refer to Part II, Item 7 of such a report for a discussion of our critical accounting policies and estimates.
Overview
We are one of the leading manufacturers of EV products (through Kandi Hainan and the Affiliate Company), EV parts and off-road vehicles in China. For the six months ended June 30, 2020, we recognized total revenue of $25,809,500 as compared to $42,214,690 for the same period of 2019, a decrease of $16,405,190 or 38.9%. For the six months ended June 30, 2020, we recorded $4,704,037 of gross profit, a decrease of 35.9% from the same period of 2019. Gross margin for the six months ended June 30, 2020 was 18.2%, compared to 17.4% for the same period of 2019. We recorded a net income of $2,480,400 for the six months ended June 30, 2020, compared to a net loss of $11,727,630 in the same period of 2019, a positive change from net loss to net income by gaining $14,208,030 or 121.2%.
The spread of COVID-19 around China and other parts of the world has caused significant volatility in the markets of China, U.S., and the rest of the world. The pandemic has resulted in quarantines, travel restrictions, and the temporary closure of stores and facilities in China and elsewhere. Although the Company’s operations in China has fully resumed in early March 2020, the COVID-19 will affect the Company’s business performance in 2020. However, the extent to which the COVID-19 impacts our operations will depend on its future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or minimize its harm, among others.
30
The COVID outbreak has seriously impacted the EV market in 2020, leading us to explore how to augment our business. As we looked at other market opportunities that leverage our expertise, the management of the Company found potential in a number of ancillary products aimed at intelligent transportation. For example, Electric Scooters and Electric Self-Balancing Vehicles have distinct potential, with tens of millions of units sold each year around the world. The Company is pursuing these opportunities by expanding production of intelligent transportation products that exploit our advantages in the Yongkang Scrou’s power electric motor and Kandi Smart Battery Swap’s power battery pack. Our products aimed at this market combines our motors and battery packs into a dynamic power train system. Through extensive product trials, we are able to meet a leading standard in China, and thus went into production in the second quarter. As this business is developing quickly and progressing, the Company will consider to merge Yongkang Scrou and Kandi Smart Battery Swap into a single company that specialized in both smart battery swap system and powertrain technology.
The Company originally planned to export 2,000 to 5,000 units electric vehicles to the U.S. in 2020, but due to the COVID-19 pandemic in the first half of 2020, the plan are being adjusted according to the situation of COVID-19 control in the U.S, as well as the virtual pre-sales event on August 18.
During the second quarter of 2020, the Company’s revenue increased to $19.4 million from $6.4 million during the first quarter of 2020. However, COVID-19 may eventually affect the Company's 2020 overall business performance. The operating results for the three and six months ended June 30, 2020 may not be indicative of the future operating results for the fiscal year ending December 31, 2020 or other future periods, particularly in light of the uncertain impact COVID-19 could have on the Company's business.
Results of Operations
Comparison of the Three Months Ended June 30, 2020 and 2019
The following table sets forth the amounts and percentage to revenue of certain items in our condensed consolidated statements of operations and comprehensive income (loss) for the three months ended June 30, 2020 and 2019.
| Three Months Ended | ||||||||||||||||||||||||
| June
30, 2020 | % of Revenue | June
30, 2019 | % of Revenue | Change in Amount | Change in % | |||||||||||||||||||
| REVENUES FROM UNRELATED PARTY, NET | $ | 19,436,120 | 100.0 | % | $ | 20,056,696 | 83.1 | % | (620,576 | ) | (3.1 | %) | ||||||||||||
| REVENUES FROM THE AFFILIATE COMPANY AND RELATED PARTY, NET | 956 | 0.0 | % | 4,089,534 | 16.9 | % | (4,088,578 | ) | (100.0 | %) | ||||||||||||||
| REVENUES, NET | 19,437,076 | 24,146,230 | (4,709,154 | ) | (19.5 | %) | ||||||||||||||||||
| COST OF GOODS SOLD | (15,900,298 | ) | (81.8 | %) | (19,944,076 | ) | (82.6 | %) | 4,043,778 | (20.3 | %) | |||||||||||||
| GROSS PROFIT | 3,536,778 | 18.2 | % | 4,202,154 | 17.4 | % | (665,376 | ) | (15.8 | %) | ||||||||||||||
| OPERATING INCOME (EXPENSES): | ||||||||||||||||||||||||
| Research and development | (1,149,901 | ) | (5.9 | %) | (632,590 | ) | (2.6 | %) | (517,311 | ) | 81.8 | % | ||||||||||||
| Selling and marketing | (763,666 | ) | (3.9 | %) | (899,478 | ) | (3.7 | %) | 135,812 | (15.1 | %) | |||||||||||||
| General and administrative | (3,907,191 | ) | (20.1 | %) | (5,623,798 | ) | (23.3 | %) | 1,716,607 | (30.5 | %) | |||||||||||||
| Gain on disposal of long-live asset | 13,907,574 | 71.6 | % | - | 0.0 | % | 13,907,574 | - | ||||||||||||||||
| Total Operating Income (Expenses) | 8,086,816 | 41.6 | % | (7,155,866 | ) | (29.6 | %) | 15,242,682 | (213.0 | %) | ||||||||||||||
| INCOME (LOSS) FROM OPERATIONS | 11,623,594 | 59.8 | % | (2,953,712 | ) | (12.2 | %) | 14,577,306 | (493.5 | %) | ||||||||||||||
| OTHER INCOME (EXPENSE): | ||||||||||||||||||||||||
| Interest income | 221,792 | 1.1 | % | 97,814 | 0.4 | % | 123,978 | 126.7 | % | |||||||||||||||
| Interest expense | (1,123,056 | ) | (5.8 | %) | (429,355 | ) | (1.8 | %) | (693,701 | ) | 161.6 | % | ||||||||||||
| Change in fair value of contingent consideration | (929,000 | ) | (4.8 | %) | 548,000 | 2.3 | % | (1,477,000 | ) | (269.5 | %) | |||||||||||||
| Government grants | 86,799 | 0.4 | % | 175,319 | 0.7 | % | (88,520 | ) | (50.5 | %) | ||||||||||||||
| Gain from equity dilution in the Affiliate Company | - | 0.0 | % | (24,131 | ) | (0.1 | %) | 24,131 | (100.0 | %) | ||||||||||||||
| Share of loss after tax of the Affiliate Company | (2,978,529 | ) | (15.3 | %) | (4,500,201 | ) | (18.6 | %) | 1,521,672 | (33.8 | %) | |||||||||||||
| Other income (expenses), net | 1,043,335 | 5.4 | % | (174,597 | ) | (0.7 | %) | 1,217,932 | (697.6 | %) | ||||||||||||||
| Total other expenses, net | (3,678,659 | ) | (18.9 | %) | (4,307,151 | ) | (17.8 | %) | 628,492 | (14.6 | %) | |||||||||||||
| INCOME (LOSS) BEFORE INCOME TAXES | 7,944,935 | 40.9 | % | (7,260,863 | ) | (30.1 | %) | 15,205,798 | (209.4 | %) | ||||||||||||||
| INCOME TAX (EXPENSE) BENEFIT | (3,889,889 | ) | (20.0 | %) | (57,295 | ) | (0.2 | %) | (3,832,594 | ) | 6689.2 | % | ||||||||||||
| NET INCOME (LOSS) | 4,055,046 | 20.9 | % | (7,318,158 | ) | (30.3 | %) | 11,373,204 | (155.4 | %) | ||||||||||||||
31
(a) Revenue
For the three months ended June 30, 2020, our revenue was $19,437,076 compared to $24,146,230 for the same period of 2019, representing a decrease of $4,709,154 or 19.5%. The decrease in revenue was mainly due to the decrease in EV parts sales. Due to the outbreak of COVID-19 in China, the demand of EV parts from customers was significantly affected during the first half of 2020.
The following table summarizes our revenues by product types for the three months ended June 30, 2020 and 2019:
| Three Months Ended June 30, | ||||||||
| 2020 | 2019 | |||||||
| Sales | Sales | |||||||
| EV parts | $ | 12,514,548 | $ | 18,988,741 | ||||
| EV products | (1,913 | ) | - | |||||
| Off-road vehicles | 6,564,415 | 5,157,489 | ||||||
| Electric Scooters and Electric Self-Balancing Scooters | 360,026 | - | ||||||
| Total | $ | 19,437,076 | $ | 24,146,230 | ||||
The negative amount is due to exchange rate difference.
EV Parts
During the three months ended June 30, 2020, our revenues from the sales of EV parts were $12,514,548, representing a decrease of $6,474,193 or 34.1% from $18,988,741 for the same quarter of 2019.
Our revenue for the three months ended June 30, 2020 primarily consisted of revenue from the sales of battery packs, body parts, EV controllers, air conditioning units and other auto parts for use in the manufacturing of EV products. These sales accounted for 64.4% of total sales.
During the three months ended June 30, 2020 and 2019, our revenue from the sale of EV parts to the Affiliate Company and its subsidiaries accounted for approximately 0% and 17% of our total net revenue for the quarter, respectively.
EV Products
During the three months ended June 30, 2020, our revenue from the sale of EV Products was negative $1,913, which was due to exchange rate difference. There were no EV Products sales in the same period of 2020.
Off-Road Vehicles
During the three months ended June 30, 2020, our revenue from the sales of off-road vehicles, including go karts, all-terrain vehicles (“ATVs”) and others, were $6,564,415, representing an increase of $1,406,926 or 27.3% from $5,157,489, for the same quarter of 2019. The increase was mainly due to the increased sales from SC Autosports because of increased demand due to the power sports’ unique form of “socially distant” recreation.
Our off-road vehicles business line accounted for approximately 33.8% of our total net revenue for the three months ended June 30, 2020.
Electric Scooters and Electric Self-Balancing Scooters
During the three months ended June 30, 2020, our revenue from the sale of Electric Scooters and Electric Self-Balancing Scooters was $360,026. There were no Electric Scooters and Electric Self-Balancing Scooters sales in the same quarter of 2019.
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The following table shows the breakdown of our net revenues:
| Three Months Ended June 30, | ||||||||
| 2020 | 2019 | |||||||
| Sales Revenue | Sales Revenue | |||||||
| Primary geographical markets | ||||||||
| Overseas | $ | 8,571,281 | $ | 5,050,136 | ||||
| China | 10,865,795 | 19,096,094 | ||||||
| Total | $ | 19,437,076 | $ | 24,146,230 | ||||
| Major products | ||||||||
| EV parts | $ | 12,514,548 | $ | 18,988,741 | ||||
| EV products | (1,913 | ) | - | |||||
| Off-road vehicles | 6,564,415 | 5,157,489 | ||||||
| Electric Scooters and Electric Self-Balancing Scooters | 360,026 | - | ||||||
| Total | $ | 19,437,076 | $ | 24,146,230 | ||||
| Timing of revenue recognition | ||||||||
| Products transferred at a point in time | $ | 19,437,076 | $ | 24,146,230 | ||||
| Total | $ | 19,437,076 | $ | 24,146,230 | ||||
The negative amount is due to exchange rate difference.
(b) Cost of goods sold
Cost of goods sold was $15,900,298 during the three months ended June 30, 2020, representing a decrease of $4,043,778, or 20.3%, compared to $19,944,076 for the same period of 2019. The decrease was primarily due to the corresponding decrease in sales. Please refer to the Gross Profit section below for product margin analysis.
(c) Gross profit
Our margins by product for the three months ended June 30, 2020 and 2019 are as set forth below:
| Three Months Ended June 30, | ||||||||||||||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||||||||||||||
| Sales | Cost | Gross Profit | Margin % | Sales | Cost | Gross Profit | Margin % | |||||||||||||||||||||||||
| EV parts | $ | 12,514,548 | 10,745,020 | 1,769,528 | 14.1 | % | $ | 18,988,741 | 15,826,401 | 3,162,340 | 16.7 | % | ||||||||||||||||||||
| EV products | (1,913 | ) | (4,793 | ) | 2,880 | - | - | - | - | - | ||||||||||||||||||||||
| Off-road vehicles | 6,564,415 | 4,827,659 | 1,736,756 | 26.5 | % | 5,157,489 | 4,117,675 | 1,039,814 | 20.2 | % | ||||||||||||||||||||||
| Electric Scooters and Electric Self-Balancing Scooters | 360,026 | 332,412 | 27,614 | 7.7 | % | - | - | - | - | |||||||||||||||||||||||
| Total | $ | 19,437,076 | 15,900,298 | 3,536,778 | 18.2 | % | $ | 24,146,230 | 19,944,076 | 4,202,154 | 17.4 | % | ||||||||||||||||||||
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The negative amount is due to exchange rate difference.
Gross profit for the second quarter of 2020 decreased 15.8% to $3,536,778, compared to $4,202,154 for the same period last year. This was primarily attributable to the sales decrease of EV Parts, which was primarily due to the outbreak of COVID-19 in 2020. Our gross margin increased to 18.2% compared to 17.4% for the same period of 2019. The increase in our gross margin was mainly due to the sales under SC Autosports which has increased the unit price for the parts since the end of 2019 as well as introducing the sales of ATVs that brought higher margin than other off-road vehicles such as UTVs since May 2019.
(d) Research and development
Research and development expenses, including materials, labor, equipment depreciation, design, testing, inspection, and other related expenses, totaled $1,149,901 for the second quarter of 2020, an increase of $517,311 or 81.8% compared to $632,590 for the same period of last year. The increase was mainly due to the R&D expense related to the technology upgrading of the Company’s products.
(e) Sales and marketing
Selling and distribution expenses were $763,666 for the second quarter of 2020, compared to $899,478 for the same period last year, representing a decrease of $135,812 or 15.1%. The decrease was primarily attributable to the reclassification of sales related financial charges to interest expense since the end of 2019.
(f) General and administrative expenses
General and administrative expenses were $3,907,191 for the second quarter of 2020, compared to $5,623,798 for the same period last year, representing a decrease of $1,716,607 or 30.5%. For the three months ended June 30, 2020, general and administrative expenses included $824,621 as expenses for common stock awards and stock options to employees and Board members, compared to $1,282,733 of common stock awards and stock options expenses for the same period in 2019. Besides stock compensation expense, our net general and administrative expenses for the three months ended June 30, 2020 were $3,082,570, representing a decrease of $1,258,495, from $4,341,065 for the same period of 2019, which was largely due to the implementation of cost cutting strategy and tighter budget control by the management.
(g) Gain on disposal of long-live asset
Gain on disposal of long-live asset was $13,907,574 for the second quarter of 2020, which was related to the real estate repurchase agreement of our Jinhua Facility’s relocation. In June 2020, 73,333 square meters of land use right was transferred to the local government, and the related gain was recognized.
34
(h) Interest income
Interest income was $221,792 for the second quarter of 2020, representing an increase of $123,978 or 126.7% compared to $97,814 for the same period of last year. The increase was primarily attributable to increased interest earned on the loan to third party.
(i) Interest expenses
Interest expenses were $1,123,056 in the second quarter of 2020, representing an increase of $693,701 or 161.6% compared to $429,355 for the same period of last year. The increase was primarily due to the interest expense of Hainan factory’s long-term debt.
(j) Change in fair value of contingent consideration
For the second quarter of 2020, the loss related to changes in the fair value of contingent consideration was $929,000, a decrease of $1,477,000 or 269.5% compared to gain related to changes in the fair value of contingent consideration of $548,000 for the same period of last year, which was mainly due to the adjustment of the fair value of the contingent consideration liability associated with the remaining shares of restrictive common stock (Please refer to NOTE 20 – CONTINGENT CONSIDERATION LIABILITY). The fair value of the contingent consideration liability was estimated at each reporting date by using the Monte Carlo simulation method, which took into account all possible scenarios.
(k) Government grants
Government grants were $86,799 for the second quarter of 2020, compared to $175,319 for the same quarter last year, representing a decrease of $88,520, or 50.5%, which was largely attributable to the refund of 2018 social security and land use tax Kandi Vehicles received in the second quarter of 2019.
(l) Gain from equity dilution in the Affiliate Company
Gain from equity dilution was $0 for the second quarter of 2020, compared to negative $24,131 for the same quarter last year which was due to exchange rate difference.
(m) Share of loss after tax of the Affiliate Company
For the second quarter of 2020, our share of loss of the Affiliate Company was $2,978,529 as compared to share of loss of $4,500,201 for the same period of last year, representing a decrease of share of loss of $1,521,672, which was largely attributable to the fact that our equity interests of the Affiliate Company has been decreased to 22% from 43.47% after the equity dilution and equity transfer in 2019.
35
(n) Other income (expenses), net
Net other income was $1,043,335 for the second quarter of 2020, compared to net other expenses of $174,597 for the same period of last year, which was largely due to the discount of accounts payable after negotiation with supplier.
(o) Income Taxes
In accordance with the relevant Chinese tax laws and regulations, our applicable corporate income tax rate is 25%. However, Kandi Vehicle and Kandi Smart Battery Swap are qualified as high technology companies in China and are therefore entitled to a reduced corporate income tax rate of 15%.
Each of our wholly-owned subsidiaries, Kandi New Energy, Yongkang Scrou and Kandi Hainan, has an applicable corporate income tax rate of 25%.
We have a 22% ownership interest in the Affiliate Company, which has an applicable corporate income tax rate of 25%. Each of the Affiliate Company’s subsidiaries has an applicable corporate income tax rate of 25%.
Our actual effective income tax rate for the second quarter of 2020 was a tax expense of 48.96% on a reported income before taxes of approximately $7.9 million, compared to a tax expense of 0.79% on a reported loss before taxes of approximately $7.3 million for the same period of last year.
(p) Net income (loss)
Net income was $4,055,046 for the second quarter of 2020, representing a decrease in net loss by $11,373,204 compared to net loss $7,318,158 for the same period of last year. The decrease in loss was primarily attributable to gain on disposal of long-live asset which was related to the real estate repurchase agreement of our Jinhua Facility’s relocation.
36
Comparison of the Six Months Ended June 30, 2020 and 2019
The following table sets forth the amounts and percentage to revenue of certain items in our condensed consolidated statements of operations and comprehensive income (loss) for the six months ended June 30, 2020 and 2019.
| Six Months Ended | ||||||||||||||||||||||||
| June 30, 2020 | % of Revenue | June 30, 2019 | % of Revenue | Change in Amount | Change in % | |||||||||||||||||||
| REVENUES FROM UNRELATED PARTY, NET | $ | 25,808,544 | 100.0 | % | $ | 36,391,659 | 86.2 | % | (10,583,115 | ) | (29.1 | %) | ||||||||||||
| REVENUES FROM THE AFFILIATE COMPANY AND RELATED PARTY, NET | 956 | 0.0 | % | 5,823,031 | 13.8 | % | (5,822,075 | ) | (100.0 | %) | ||||||||||||||
| REVENUES, NET | 25,809,500 | 100.0 | % | 42,214,690 | 100.0 | % | (16,405,190 | ) | (38.9 | %) | ||||||||||||||
| COST OF GOODS SOLD | (21,105,463 | ) | (81.8 | %) | (34,876,099 | ) | (82.6 | %) | 13,770,636 | (39.5 | %) | |||||||||||||
| GROSS PROFIT | 4,704,037 | 18.2 | % | 7,338,591 | 17.4 | % | (2,634,554 | ) | (35.9 | %) | ||||||||||||||
| OPERATING INCOME (EXPENSES): | ||||||||||||||||||||||||
| Research and development | (1,790,141 | ) | (6.9 | %) | (1,170,023 | ) | (2.8 | %) | (620,118 | ) | 53.0 | % | ||||||||||||
| Selling and marketing | (1,641,972 | ) | (6.4 | %) | (1,517,481 | ) | (3.6 | %) | (124,491 | ) | 8.2 | % | ||||||||||||
| General and administrative | (6,973,926 | ) | (27.0 | %) | (7,663,326 | ) | (18.2 | %) | 689,400 | (9.0 | %) | |||||||||||||
| Gain on disposal of long-live asset | 13,907,574 | 53.9 | % | - | 0.0 | % | 13,907,574 | - | ||||||||||||||||
| Total Operating Income (Expenses) | 3,501,535 | 13.6 | % | (10,350,830 | ) | (24.5 | %) | 13,852,365 | (133.8 | %) | ||||||||||||||
| INCOME (LOSS) FROM OPERATIONS | 8,205,572 | 31.8 | % | (3,012,239 | ) | (7.1 | %) | 11,217,811 | (372.4 | %) | ||||||||||||||
| OTHER INCOME (EXPENSE): | ||||||||||||||||||||||||
| Interest income | 560,736 | 2.2 | % | 350,218 | 0.8 | % | 210,518 | 60.1 | % | |||||||||||||||
| Interest expense | (2,105,990 | ) | (8.2 | %) | (868,538 | ) | (2.1 | %) | (1,237,452 | ) | 142.5 | % | ||||||||||||
| Change in fair value of contingent consideration | 2,863,000 | 11.1 | % | 637,000 | 1.5 | % | 2,226,000 | 349.5 | % | |||||||||||||||
| Government grants | 97,898 | 0.4 | % | 223,043 | 0.5 | % | (125,145 | ) | (56.1 | %) | ||||||||||||||
| Gain from equity dilution in the Affiliate Company | - | 0.0 | % | 4,341,259 | 10.3 | % | (4,341,259 | ) | (100.0 | %) | ||||||||||||||
| Share of loss after tax of the Affiliate Company | (4,081,299 | ) | (15.8 | %) | (14,449,359 | ) | (34.2 | %) | 10,368,060 | (71.8 | %) | |||||||||||||
| Other income, net | 1,062,985 | 4.1 | % | 299,793 | 0.7 | % | 763,192 | 254.6 | % | |||||||||||||||
| Total other expenses, net | (1,602,670 | ) | (6.2 | %) | (9,466,584 | ) | (22.4 | %) | 7,863,914 | (83.1 | %) | |||||||||||||
| INCOME (LOSS) BEFORE INCOME TAXES | 6,602,902 | 25.6 | % | (12,478,823 | ) | (29.6 | %) | 19,081,725 | (152.9 | %) | ||||||||||||||
| INCOME TAX (EXPENSE) BENEFIT | (4,122,502 | ) | (16.0 | %) | 751,193 | 1.8 | % | (4,873,695 | ) | (648.8 | %) | |||||||||||||
| NET INCOME (LOSS) | 2,480,400 | 9.6 | % | (11,727,630 | ) | (27.8 | %) | 14,208,030 | (121.2 | %) | ||||||||||||||
37
(a) Revenue
For the six months ended June 30, 2020, our revenue was $25,809,500 compared to $42,214,690 for the same period of 2019, representing a decrease of $16,405,190 or 38.9%. The decrease in revenue was mainly due to the decrease in EV parts sales. Due to the outbreak of COVID-19 in China, the production of EV parts was interrupted during the first quarter of 2020, and the overall demand of EV parts from customers was significantly affected during the first half of 2020.
The following table summarizes our revenues by product types for the six months ended June 30, 2020 and 2019:
| Six Months Ended June 30 | ||||||||
| 2020 | 2019 | |||||||
| Sales | Sales | |||||||
| EV parts | $ | 14,595,883 | $ | 31,760,181 | ||||
| EV products | 253,906 | - | ||||||
| Off-road vehicles | 10,599,685 | 10,454,509 | ||||||
| Electric Scooters and Electric Self-Balancing Scooters | 360,026 | - | ||||||
| Total | $ | 25,809,500 | $ | 42,214,690 | ||||
EV Parts
During the six months ended June 30, 2020, our revenues from the sales of EV parts were $14,595,883, representing a decrease of $17,164,298 or 54.0% from $31,760,181 for the same period of 2019.
Our revenue for the six months ended June 30, 2020 primarily consisted of revenue from the sales of battery packs, body parts, EV controllers, air conditioning units and other auto parts for use in the manufacturing of EV products. These sales accounted for 56.6% of total sales.
During the six months ended June 30, 2020 and 2019, our revenue from the sale of EV parts to the Affiliate Company and its subsidiaries accounted for approximately 0% and 14% of our total net revenue for the quarter, respectively.
38
EV Products
During the six months ended June 30, 2020, our revenue from the sale of EV Products was $253,906, which was due to the export sales of Hainan factories’ products. There weren’t any EV products sales in the same period of 2019.
Off-Road Vehicles
During the six months ended June 30, 2020, our revenue from the sales of off-road vehicles, including go karts, all-terrain vehicles (“ATVs”) and others, were $10,599,685, representing an increase of $145,176 or 1.4% from $10,454,509, for the same period of 2019.
Our off-road vehicles business line accounted for approximately 41.1% of our total net revenue for the six months ended June 30, 2020.
Electric Scooters and Electric Self-Balancing Scooters
During the six months ended June 30, 2020, our revenue from the sale of Electric Scooters and Electric Self-Balancing Scooters was $360,026. There were no Electric Scooters and Electric Self-Balancing Scooters sales in the same period of 2019.
The following table shows the breakdown of our net revenues:
| Six Months Ended June 30, | ||||||||
| 2020 | 2019 | |||||||
| Sales Revenue | Sales Revenue | |||||||
| Primary geographical markets | ||||||||
| Overseas | $ | 10,702,105 | $ | 10,272,661 | ||||
| China | 15,107,395 | 31,942,029 | ||||||
| Total | $ | 25,809,500 | $ | 42,214,690 | ||||
| Major products | ||||||||
| EV parts | $ | 14,595,883 | $ | 31,760,181 | ||||
| EV products | 253,906 | - | ||||||
| Off-road vehicles | 10,599,685 | 10,454,509 | ||||||
| Electric Scooters and Electric Self-Balancing Scooters | 360,026 | - | ||||||
| Total | $ | 25,809,500 | $ | 42,214,690 | ||||
| Timing of revenue recognition | ||||||||
| Products transferred at a point in time | $ | 25,809,500 | $ | 42,214,690 | ||||
| Total | $ | 25,809,500 | $ | 42,214,690 | ||||
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(b) Cost of goods sold
Cost of goods sold was $21,105,463 during the six months ended June 30, 2020, representing a decrease of $13,770,636, or 39.5%, compared to $34,876,099 for the same period of 2019. The decrease was primarily due to the corresponding decrease in sales. Please refer to the Gross Profit section below for product margin analysis.
(c) Gross profit
Our margins by product for the six months ended June 30, 2020 and 2019 are as set forth below:
| Six Months Ended June 30, | ||||||||||||||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||||||||||||||
| Sales | Cost | Gross Profit | Margin % | Sales | Cost | Gross Profit | Margin % | |||||||||||||||||||||||||
| EV parts | $ | 14,595,883 | 12,603,150 | 1,992,733 | 13.7 | % | $ | 31,760,181 | 26,635,967 | 5,124,214 | 16.1 | % | ||||||||||||||||||||
| EV products | 253,906 | 236,594 | 17,312 | 6.8 | % | - | - | - | - | |||||||||||||||||||||||
| Off-road vehicles | 10,599,685 | 7,933,307 | 2,666,378 | 25.2 | % | 10,454,509 | 8,240,132 | 2,214,377 | 21.2 | % | ||||||||||||||||||||||
| Electric Scooters and Electric Self-Balancing Scooters | 360,026 | 332,412 | 27,614 | 7.7 | % | - | - | - | - | |||||||||||||||||||||||
| Total | $ | 25,809,500 | 21,105,463 | 4,704,037 | 18.2 | % | $ | 42,214,690 | 34,876,099 | 7,338,591 | 17.4 | % | ||||||||||||||||||||
40
Gross profit for the first half of 2020 decreased 35.9% to $ 4,704,037, compared to $7,338,591 for the same period last year. This was primarily attributable to the sales decrease, which was primarily due to the outbreak of COVID-19 in 2020. Our gross margin increased to 18.2% compared to 17.4% for the same period of 2019. The increase in our gross margin was mainly due to the sales under SC which has increased the unit price for the parts since end of 2019 as well as introducing the sales of ATVs that brought higher margin than other off-road vehicles such as UTVs since May 2019.
(d) Research and development
Research and development expenses, including materials, labor, equipment depreciation, design, testing, inspection, and other related expenses, totaled $1,790,141 for the first half of 2020, an increase of $620,118 or 53.0% compared to $1,170,023 for the same period of last year. The increase was mainly due to the R&D expense related to the technology upgrading of the Company’s products.
(e) Sales and marketing
Selling and distribution expenses were $1,641,972 for the first half of 2020, compared to $1,517,481 for the same period last year, representing an increase of $124,491 or 8.2%. The increase was primarily attributable to the increasing labor and advertising expenses in connection with the expansion the U.S. electric vehicle market.
(f) General and administrative expenses
General and administrative expenses were $6,973,926 for the first half of 2020, compared to $7,663,326 for the same period last year, representing a decrease of $689,400 or 9.0%. For the six months ended June 30, 2020, general and administrative expenses included $847,546 as expenses for common stock awards and stock options to employees and Board members, compared to $1,314,408 of common stock awards and stock options expenses for the same period in 2019. Besides stock compensation expense, our net general and administrative expenses for the six months ended June 30, 2020 were $6,126,380 which was comparable to $6,348,918 for the same period of 2019.
(g) Gain on disposal of long-live asset
Gain on disposal of long-live asset was $13,907,574 for the first half of 2020, which was related to the real estate repurchase agreement of our Jinhua Facility’s relocation. In June 2020, 73,333 square meters of land use right was transferred to the local government, and the related gain was recognized.
(h) Interest income
Interest income was $560,736 for the first half of 2020, representing an increase of $210,518 or 60.1% compared to $350,218 for the same period of last year. The increase was primarily attributable to interest earned on collateral for bank acceptance notes and increased interest earned on the loan to third party.
(i) Interest expenses
Interest expenses were $2,105,990 in the first half of 2020, representing an increase of $1,237,452 or 142.5% compared to $868,538 for the same period of last year. The increase was primarily due to the interest expense of Hainan factory’s long-term debt.
41
(j) Change in fair value of contingent consideration
For the first half of 2020, the gain related to changes in the fair value of contingent consideration was $2,863,000, an increase of $2,226,000 or 349.5% compared to gain related to changes in the fair value of contingent consideration of $637,000 for the same period of last year, which was mainly due to the adjustment of the fair value of the contingent consideration liability associated with the remaining shares of restrictive common stock (Please refer to NOTE 20 – CONTINGENT CONSIDERATION LIABILITY). The fair value of the contingent consideration liability was estimated at each reporting date by using the Monte Carlo simulation method, which took into account all possible scenarios.
(k) Government grants
Government grants were $97,898 for the first half of 2020, compared to $223,043 for the same quarter last year, representing a decrease of $125,145, or 56.1%, which was largely attributable to the refund of 2018 social security and land use tax Kandi Vehicles received in the second quarter of 2019.
(l) Gain from equity dilution in the Affiliate Company
Gain from equity dilution was $0 for the first half of 2020, compared to $4,341,259 for the same period of last year, which was primarily due to gain from the conversion of the loan into equity in the Affiliate Company in March 2019. Pursuant to the Equity Transfer Agreement, the Affiliate Company converted a loan of RMB 314 million (approximately $44.3 million) from Geely Group to equity in order to increase its cash flow (for details please refer to Note 22 - SUMMARIZED INFORMATION OF EQUITY METHOD INVESTMENT IN THE AFFILIATE COMPANY).
(m) Share of loss after tax of the Affiliate Company
For the first half of 2020, our share of loss of the Affiliate Company was $4,081,299 as compared to share of loss of $14,449,359 for the same period of last year, representing a decrease of share of loss of $10,368,060, which was largely attributable to the decreased operating expenses of the Affiliate Company, as well as the fact that our equity interests of the Affiliate Company has been decreased to 22% from 43.47% after the equity dilution and equity transfer in 2019.
(n) Other income, net
Net other income was $1,062,985 for the first half of 2020, representing an increase of $763,192 or 254.6% compared to net other income of $299,793 for the same period of last year, which was largely due to the discount of accounts payable after negotiation with supplier.
42
(o) Income Taxes
In accordance with the relevant Chinese tax laws and regulations, our applicable corporate income tax rate is 25%. However, Kandi Vehicle and Kandi Smart Battery Swap are qualified as high technology companies in China and are therefore entitled to a reduced corporate income tax rate of 15%.
Each of our wholly-owned subsidiaries, Kandi New Energy, Yongkang Scrou and Kandi Hainan, has an applicable corporate income tax rate of 25%.
We have a 22% ownership interest in the Affiliate Company, which has an applicable corporate income tax rate of 25%. Each of the Affiliate Company’s subsidiaries has an applicable corporate income tax rate of 25%.
Our actual effective income tax rate for the first half of 2020 was a tax expense of 62.43% on a reported income before taxes of approximately $6.6 million, compared to a tax benefit of 6.02% on a reported loss before taxes of approximately $12.5 million for the same period of last year.
(p) Net income (loss)
Net income was $2,480,400 for the first half of 2020, representing a decrease in net loss by $14,208,030 compared to net loss $11,727,630 for the same period of last year. The decrease in loss was primarily attributable to the Gain on disposal of long-live asset which was related to the real estate repurchase agreement of our Jinhua Facility’ relocation.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
| Six Months Ended | ||||||||
| June 30, 2020 | June 30, 2019 | |||||||
| Net cash used in by operating activities | $ | (34,327,490 | ) | $ | (33,118,904 | ) | ||
| Net cash provided by investing activities | 50,278,763 | 14,228,076 | ||||||
| Net cash (used in) provided by financing activities | (25,628,295 | ) | 1,474,078 | |||||
| NET DECREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH | (9,677,022 | ) | (17,416,750 | ) | ||||
| Effect of exchange rate changes on cash | (157,062 | ) | 246,604 | |||||
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF YEAR | 16,512,635 | 22,353,071 | ||||||
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD | 6,678,551 | 5,182,925 | ||||||
For the first half of 2020, cash used in operating activities was $34,327,490, as compared to cash used in operating activities of $33,118,904 for the same period last year. Our operating cash inflows include cash received primarily from sales of our EV parts and off-road vehicles. These cash inflows are offset largely by cash paid primarily to our suppliers for production materials and parts used in our manufacturing process, operation expenses, employee compensation, and interest expenses of our financings. The major operating activities that provided cash for the first half of 2020 were a decrease of amount due from the Affiliate Company of $4,129,516. The major operating activity that used cash for first half of 2020 was an increase of advances to supplier and prepayments and prepaid expenses of $12,586,777.
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For the first half of 2020, cash derived from investing activities was $50,278,763, as compared to cash derived from investing activities of $14,228,076 for the same period of last year. The major investing activities that provided cash for the first half of 2020 were an increase of proceeds from disposal of long-lived assets of $34,696,547. The major investing activities that used cash for first half of 2020 were $59,670 used for the purchases of property, plant and equipment.
For the first half of 2020, cash used in financing activities was $ 25,628,295, as compared to cash derived from financing activities of $1,474,078 for the same period of last year. The major financing activities that provided cash for the first half of 2020 were proceeds from short-term bank loans of $24,031,625. The major financing activities that used cash for the first half of 2020 were repayments of short-term bank loans of $49,769,638.
Working Capital
We had working capital of $75,587,762 at June 30, 2020, which reflects an increase of $11,889,065 from a working capital of $63,698,697 as of December 31, 2019.
After two years of negotiations, on March 10, 2020, a real estate repurchase agreement (the “Repurchase Agreement”) was entered into by and between Kandi Vehicles and Jinhua Economic and Technological Development Zone pursuant to which the local government shall purchase the land use right over the land of 66 acres (400 mu, 265,029 square meters) that is owned by Kandi Vehicles for RMB 525 million ($74 million). Payments to Kandi Vehicles shall be made in three installments as the Company disclosed in a Current Report on Form 8-K filed with the SEC on March 9, 2020. In addition, if Kandi Vehicles achieves certain milestones that contribute to local economic development, the Company will be eligible for tax rebates that could total up to RMB 500 million ($71 million) over the next eight years. On May 22, 2020, the Company received the first payment of RMB 244 million (approximately $35 million) under the Repurchase Agreement. On July 9, 2020, the Company received the second payment of RMB 119 million (approximately $17 million) under the Repurchase Agreement.
Contractual Obligations and Off-balance Sheet Arrangements
Short-term and long-term Loans:
For the discussion of short-term and long-term loans, please refer to Note 17 - Short-term and Long-term Loans under Notes to Condensed Consolidated Financial Statements.
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Guarantees and pledged collateral for third party bank loans
For the discussion of guarantees and pledged collateral for third party bank loans, please refer to Note 23 – Commitments and Contingencies under Notes to Condensed Consolidated Financial Statements.
Recent Development Activities
On July 13, 2020, we announced that the Affiliate Company launched sales of its first pure electric SUV, the Maple 30x. The Maple 30x comes in five styles and five different colors. In addition to the four styles offered in pre-sales earlier this year, the Affiliate Company also launched its “mobility version” customized for the urban mobility market.
On July 22, 2020, we announced that the Maple 60V all-electric MPV (Multi-purpose Vehicle) produced by the Affiliate Company was approved for purchase subsidies by China’s Ministry of Industry and Information Technology (“MIIT”). Subsidy approval is a key milestone as the Affiliate Company brings the 60V to market in the near future.
On July 30, 2020, we announced the formal launch of the most affordable pure electric automobiles in the U.S. market, the Kandi K27 and K23 models. The cars will be sold by Kandi America, the trade name of Kandi’s wholly owned subsidiary SC Autosports, LLC. Sales will initially focus on the Dallas-Fort Worth metroplex.
On August 3, 2020, we announced the achievement of a key milestone in our commercialization plan for our proprietary battery swap technology. On August 2, 2020, we delivered our fully automatic intelligent battery exchange system to the rideshare operator in Haikou City, Hainan Province. The system was developed and is produced by Kandi’s wholly-owned subsidiary, Kandi Smart Battery Swap. Installation is expected to be completed shortly, after which the rideshare operator will use the K23 model’s battery swap service for its online car-hailing business in Hainan.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
This item is not applicable to us.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We have evaluated, under the supervision of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), the effectiveness of disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) as of June 30, 2020. Based on this evaluation, our CEO and CFO concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective.
Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act (a) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) is accumulated and communicated to management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as described above.
Changes in Internal Control over Financial Reporting
There was no change to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, the Company is involved in legal matters arising in the ordinary course of business. Except as set forth in Note 23 - COMMITMENTS AND CONTINGENCIES under Notes to Condensed Consolidated Financial Statements, our management is currently not aware of any legal matters or pending litigation that would have a significant effect on the Company’s results of operation of financial statements, nor is the Company aware of any other legal matters in which any director, officer, or any owner of record or beneficial owner of more than five percent of any class of voting securities of the Company, or any affiliate of any such director, officer, affiliate of the Company, or security holder, is a party adverse to the Company or has a material adverse interest to the Company. For the detailed discussion of our legal proceedings, please refer to Note 23 - COMMITMENTS AND CONTINGENCIES under Notes to Condensed Consolidated Financial Statements, which is incorporated by reference herein.
Item 6. Exhibits
| Exhibit Number |
Description | |
| 10.1 | English Translation of the Supplementary Agreement II to the Share Transfer Agreement of Jinhua An Kao Power Technology Co., Ltd. dated July 7, 2020 | |
| 31.1 | Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 | |
| 31.2 | Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 | |
| 32.1 | Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS | XBRL Instance Document. | |
| 101.SCH | XBRL Taxonomy Extension Schema Document. | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | |
| 101.DEF | XBRL Taxonomy Definitions Linkbase Document. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Date: August 10, 2020 | By: | /s/ Hu Xiaoming |
| Hu Xiaoming | ||
| President and Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: August 10, 2020 | By: | /s/ Jehn Ming Lim |
| Jehn Ming Lim | ||
| Chief Financial Officer | ||
| (Principal Financial Officer and | ||
| Accounting Officer) |
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