Kandi(KNDI) - 2018 Q4 - Annual Report

PART I Business Kandi Technologies Group, Inc. develops and distributes EV parts, products, and off-road vehicles, focusing on its Geely JV and U.S. market entry - The Company's core business involves the development, production, and distribution of EV products, EV parts, and off-road vehicles[7] - A significant portion of the company's business is conducted through a 50/50 joint venture (the "JV Company") with a subsidiary of Geely, to which Kandi supplies EV parts[8][253] Net Revenue Breakdown by Product and Geography (2016-2018) | Category | 2018 ($) | 2017 ($) | 2016 ($) | | :--- | :--- | :--- | :--- | | By Geography | | | | | Overseas | $12,741,570 | $4,817,517 | $4,919,054 | | China | $99,697,258 | $97,988,104 | $124,572,959 | | Total | $112,438,828 | $102,805,621 | $129,492,013 | | By Product | | | | | EV parts | $99,099,312 | $97,355,828 | $120,079,312 | | Off-road vehicles | $13,339,516 | $5,449,793 | $5,694,410 | | EV products | - | - | $3,718,291 | - The company is pursuing U.S. market entry through its subsidiary SC Autosports, having received NHTSA approval for its EV Models EX3 and K22 in February 2019[19][46] - A key strategic initiative is the Online Ride Sharing Service ("ORSS") or "Car-Share Program," which includes a five-year alliance aiming to provide 300,000 government-accredited vehicles[13][17][43] Major Customer Concentration | Major Customer | % of Sales (2018) | % of Sales (2017) | % of Sales (2016) | | :--- | :--- | :--- | :--- | | Kandi Electric Vehicles Group Co., Ltd. (JV) | 43% | 90% | 60% | | Jinhua Chaoneng Automobile Sales Co. Ltd. | 33% | 4% | 30% | Risk Factors The company identifies numerous risks across its business operations, activities in China, and ownership of its securities Risks Relating to Our Business - Future growth is highly dependent on consumers' willingness to adopt EVs, as the market is new and rapidly evolving[50][51] - The company faces risks from product liability claims or recalls, which could be expensive and damage its reputation[58][59] - There is a high concentration of sales to a few customers, with major customers accounting for 76% of sales in 2018. The loss of any of these customers, particularly the JV Company, could significantly impact results[77][78] - The company depends on a limited number of suppliers, with the top two accounting for 42% of purchases in 2018, creating supply chain risk[79] - The company's auditors are located in China and are not inspected by the Public Company Accounting Oversight Board (PCAOB), which may deprive investors of the benefits of such inspections and reduce confidence in financial reporting[85][86][88] Risks Related to Doing Business in China - The business is subject to risks from China's slowing economic growth, which could adversely affect sales and increase costs[89][90] - Uncertainties within the Chinese legal system and changes in political and economic conditions could materially affect business operations and profitability[91][92] - Fluctuations in the RMB to U.S. dollar exchange rate could adversely affect financial results reported in U.S. dollars[98] - Changes to or elimination of government subsidies for new energy vehicles could have a material adverse effect on the business, financial condition, and operating results[101][102] Risks associated with the export of Kandi electric vehicles to the United States - The company faces risks of patent barriers and intellectual property litigation when entering the competitive international automobile market[104] - Strict environmental and product safety regulations in developed countries like the United States may require significant expenditures to ensure compliance[106][107] - Investment in expanding into the U.S. market may negatively impact short-term financial performance due to high initial costs and potentially slow sales growth[108] Risks Relating to Ownership of Our Securities - The company's CEO, President, and Chairman, Mr. Hu Xiaoming, beneficially owns 27.0% of the outstanding common stock, enabling him to exert significant influence on corporate actions[112][113] - The company does not anticipate paying cash dividends in the foreseeable future, intending to retain all earnings to fund business operations[114] Properties Kandi holds land use rights for industrial parks in China, operating manufacturing facilities, and has a new EV production facility in Haikou - The company owns and operates facilities in Jinhua Industrial Park and Yongkang City, Zhejiang Province, which are fully operational[132][133] - A new EV production facility in Haikou City, Hainan, with a planned annual capacity of 100,000 EV products, has been completed[134][135] - As of December 31, 2018, land use rights and property, plant, and equipment with net book values of $7.8 million and $8.1 million, respectively, were pledged as collateral for bank loans[128][132] Legal Proceedings The company is involved in legal matters arising in the ordinary course of business, detailed in Note 23 of the financial statements - For detailed discussion of legal proceedings, the report refers to Note 23 - COMMITMENTS AND CONTINGENCIES in Item 8[136] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ, and it does not anticipate paying cash dividends in the foreseeable future - The company's common stock trades on the NASDAQ Global Select Market under the symbol "KNDI"[140] - The company has never paid cash dividends and does not anticipate paying any in the foreseeable future, intending to retain all earnings for business operations[140] Selected Financial Data This section presents a five-year summary of key consolidated financial data, including 2018 net revenues of $112.4 million and a net loss of $5.7 million Selected Consolidated Financial Data (2014-2018, in thousands) | Metric | 2018 (in thousands) | 2017 (in thousands) | 2016 (in thousands) | 2015 (in thousands) | 2014 (in thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenues, Net | $112,439 | $102,806 | $129,492 | $201,069 | $170,229 | | Gross Profit | $20,247 | $14,344 | $17,722 | $28,419 | $23,404 | | (Loss) Income from Operations | $(1,638) | $(26,082) | $(31,016) | $(3,952) | $5,244 | | Net (Loss) Income | $(5,695) | $(28,347) | $(6,511) | $14,665 | $12,271 | | Net (Loss) Income Per Share, Diluted | $(0.11) | $(0.59) | $(0.14) | $0.31 | $0.29 | | Total Assets | $428,829 | $438,333 | $439,698 | $371,469 | $323,073 | | Total Liabilities | $203,206 | $215,343 | $207,351 | $132,543 | $111,489 | | Total Shareholders' Equity | $225,623 | $222,990 | $232,347 | $238,926 | $211,585 | Management's Discussion and Analysis of Financial Condition and Results of Operations Kandi's 2018 net revenues increased to $112.4 million, with improved gross margin and narrowed net loss, despite increased JV losses and decreased working capital Results of Operations Comparison of Key Financial Metrics (2017 vs. 2018) | Metric | 2018 ($) | 2017 ($) | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenues, Net | $112,438,828 | $102,805,621 | $9,633,207 | 9.4% | | Gross Profit | $20,247,445 | $14,344,189 | $5,903,256 | 41.2% | | Gross Margin | 18.0% | 14.0% | - | 4.0 p.p. | | Loss from Operations | $(1,638,348) | $(26,082,239) | $24,443,891 | (93.7%) | | Net Loss | $(5,694,699) | $(28,347,474) | $22,652,775 | (79.9%) | - The increase in 2018 revenue was primarily due to a 144.8% increase in sales of off-road vehicles, largely from the newly acquired subsidiary SC Autosports[158][165] - Research and development expenses decreased by 63.5% to $10.1 million in 2018, mainly due to the completion of R&D work for the EV Model K23 at the Hainan facility[172] - Government grants increased by 200.8% to $17.8 million in 2018, primarily from subsidies received from the Hainan provincial government to support the development of the K23 model[180] - The company's share of the after-tax loss from the JV Company increased by 54.8% to $17.9 million in 2018, up from a loss of $11.6 million in 2017[182] Liquidity and Capital Resources Cash Flow Summary (2016-2018) | Cash Flow Activity | 2018 ($) | 2017 ($) | 2016 ($) | | :--- | :--- | :--- | :--- | | Net cash from operating activities | $13,587,621 | $(3,214,471) | $(49,526,543) | | Net cash (used in)/from investing activities | $(947,441) | $2,708,638 | $966,627 | | Net cash (used in)/from financing activities | $(5,297,724) | $(9,814,541) | $42,570,343 | - Working capital decreased significantly from $53.7 million in 2017 to $2.5 million in 2018. This was primarily because Kandi converted RMB 545 million (approx. $79 million) of loans to the JV Company into an increased capital contribution[197] - The company has historically financed its operations through short-term commercial bank loans from Chinese banks, which are typically rolled over annually[198] Financial Statements and Supplementary Data This section presents audited consolidated financial statements for 2018 and 2017, including balance sheets, income statements, and detailed notes - The independent registered public accounting firm, BDO China Shu Lun Pan Certified Public Accountants LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[227][232] Consolidated Balance Sheet Highlights (as of Dec 31) | Account | 2018 ($) | 2017 ($) | | :--- | :--- | :--- | | Total Current Assets | $167,349,788 | $238,312,887 | | Total Assets | $428,829,264 | $438,332,844 | | Total Current Liabilities | $164,822,877 | $184,604,985 | | Total Liabilities | $203,206,390 | $215,342,532 | | Total Stockholders' Equity | $225,622,874 | $222,990,312 | - Note 22 provides summarized financial information for the equity method investment in the JV Company. For 2018, the JV Company had net sales of $122.5 million and a net loss of $36.3 million. Kandi's 50% share of this loss was $18.2 million before eliminations[426] - Note 23 discloses commitments and contingencies, including guarantees for bank loans provided to the JV Company and its subsidiary totaling $14.5 million as of Dec 31, 2018. It also details ongoing shareholder class action and derivative lawsuits[433][441][442] - Note 26 details the acquisitions of Jinhua An Kao and SC Autosports in 2018, including purchase price, contingent consideration, and goodwill recorded[452][463] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2018[476] - Based on the 2013 COSO framework, management concluded that the company's internal controls over financial reporting were effective as of December 31, 2018[481] - Control deficiencies noted in the 2017 10-K report, including lack of adequate knowledge of US GAAP and inaccurate accounting for income taxes, were corrected by December 31, 2018[481][483][484] PART III Directors, Executive Officers and Corporate Governance This section provides information on the company's board of directors and executive officers, including Audit Committee composition and Code of Ethics - Provides a list and biographical information for the company's executive officers and directors, including CEO Hu Xiaoming and Interim CFO Zhu Xiaoying[486][488][490] - The Audit Committee consists of three independent directors: Henry Yu (Chairman), Jerry Lewin, and Chen Liming. Both Mr. Yu and Mr. Lewin are qualified as "audit committee financial experts"[499] Executive Compensation Executive compensation primarily consists of base salary and equity awards, with CEO Hu Xiaoming's 2018 total compensation at $826,268 Summary Compensation Table (2018) | Name and Principal Position | Salary ($) | Stock Awards ($) | Option Awards ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | | Hu Xiaoming (CEO, President, Chairman) | 27,213 | 459,000 | 340,056 | 826,268 | | Mei Bing (Former CFO) | 180,000 | 35,000 | - | 215,000 | - As of December 31, 2018, CEO Hu Xiaoming held 900,000 unexercised stock options with an exercise price of $9.72, expiring on May 28, 2025[518] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details beneficial ownership of common stock, with CEO Hu Xiaoming as the largest beneficial owner controlling 27.01% of outstanding shares - As of March 8, 2019, CEO Hu Xiaoming beneficially owned 13,907,449 shares, representing 27.01% of the outstanding common stock[528] - All officers and directors as a group beneficially owned 14,734,277 shares, representing 28.61% of the outstanding common stock[528] Certain Relationships and Related Transactions, and Director Independence The company discloses related party transactions and confirms the independence of four non-employee directors under NASDAQ rules - The company has a formal policy for the review and approval of related-party transactions by the Board of Directors and Audit Committee[530][532] - Four directors (Henry Yu, Chen Liming, Lin Yi, and Jerry Lewin) have been determined to be independent by the Board pursuant to NASDAQ rules[533] Principal Accounting Fees and Services The company paid its principal accountant $470,000 in fees for fiscal year 2018, primarily for audit services Accountant Fees (2017-2018) | Fee Type | 2018 ($) | 2017 ($) | | :--- | :--- | :--- | | Audit Fees | $420,000 | $370,000 | | All Other Fees | $50,000 | $5,000 | | TOTAL FEES | $470,000 | $375,000 | PART IV Exhibits, Financial Statement Schedules This section lists all exhibits filed as part of the Annual Report on Form 10-K, including corporate documents and material contracts - A comprehensive list of exhibits filed with the report is provided, including corporate governance documents, material agreements, and required certifications[537][538]