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Kandi(KNDI) - 2019 Q2 - Quarterly Report
KandiKandi(US:KNDI)2019-08-09 11:39

PART I — FINANCIAL INFORMATION This section presents Kandi Technologies Group, Inc.'s unaudited condensed consolidated financial statements and management's discussion for the period ended June 30, 2019 Item 1. Financial Statements This section presents Kandi Technologies Group, Inc.'s unaudited condensed consolidated financial statements for the period ended June 30, 2019, including the balance sheets, statements of income (loss) and comprehensive income (loss), statements of changes in stockholders' equity, and statements of cash flows, along with detailed notes explaining the company's organization, accounting policies, and specific financial line items Condensed Consolidated Balance Sheets The company's total assets decreased by 4.59% from December 31, 2018, to June 30, 2019, primarily driven by a reduction in cash and cash equivalents and restricted cash, while accounts receivable and inventories saw increases; total liabilities also decreased by 6.44% over the same period Condensed Consolidated Balance Sheet Highlights | Metric | June 30, 2019 (Unaudited) | December 31, 2018 | | :---------------------- | :------------------------ | :---------------- | | Cash and cash equivalents | $3,608,933 | $15,662,201 | | Restricted cash | $1,573,992 | $6,690,870 | | Accounts receivable | $41,926,724 | $34,274,728 | | Inventories | $28,980,722 | $21,997,868 | | Total Current Assets | $161,673,143 | $167,349,788 | | Total Assets | $409,153,877 | $428,829,264 | | Total Current Liabilities | $152,032,806 | $164,822,877 | | Total Liabilities | $190,121,911 | $203,206,390 | | Total Stockholders' Equity | $219,031,966 | $225,622,874 | Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) For the three months ended June 30, 2019, the company reported a net loss of $7.32 million, a significant decline from a net income of $1.37 million in the prior year, primarily due to increased operating expenses and a substantial share of loss from the JV Company; revenues increased by 47.6% YoY, but gross profit growth was outpaced by operating expense increases Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) Highlights | Metric (Three Months Ended June 30) | 2019 (Unaudited) | 2018 (Unaudited) | Change ($) | Change (%) | | :---------------------------------- | :--------------- | :--------------- | :--------- | :--------- | | Revenues, Net | $24,146,230 | $16,359,606 | $7,786,624 | 47.6% | | Cost of Goods Sold | $(19,944,076) | $(14,301,594) | $(5,642,482) | 39.5% | | Gross Profit | $4,202,154 | $2,058,012 | $2,144,142 | 104.2% | | Total Operating Expenses | $(7,155,866) | $(4,732,325) | $(2,423,541) | 51.2% | | Loss From Operations | $(2,953,712) | $(2,674,313) | $(279,399) | 10.4% | | Share of (loss) income after tax of the JV Company | $(4,500,201) | $2,372,696 | $(6,872,897) | (289.7)% | | Net (Loss) Income | $(7,318,158) | $1,374,525 | $(8,692,683) | (632.4)% | | Net (Loss) Income Per Share, Basic | $(0.14) | $0.03 | | | - For the six months ended June 30, 2019, the company reported a net loss of $11.73 million, a significant decrease from a net income of $5.10 million in the prior year, primarily due to a substantial increase in the share of loss from the JV Company and higher operating costs7 Condensed Consolidated Statements of Changes in Stockholders' Equity Total stockholders' equity decreased from $225.62 million at December 31, 2018, to $219.03 million at June 30, 2019, primarily due to a net loss of $11.73 million for the six months ended June 30, 2019, partially offset by an increase in additional paid-in capital Condensed Consolidated Statements of Changes in Stockholders' Equity Highlights | Metric (Six Months Ended June 30) | 2019 (Unaudited) | 2018 (Unaudited) | | :-------------------------------- | :--------------- | :--------------- | | Total shareholder's equity, beginning balance | $225,622,874 | $244,111,743 | | Stock issuance and award | $1,335 | $3,261 | | Additional Paid-in Capital, Stock issuance and award | $4,646,948 | $21,138,032 | | Net (loss) income | $(11,727,630) | $5,102,520 | | Foreign currency translation | $488,439 | $(5,122,382) | | Total shareholder's equity, ending balance | $219,031,966 | $244,111,743 | Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2019, the company experienced a significant increase in cash used in operating activities to $33.12 million, compared to $0.17 million in the prior year; investing activities generated $14.23 million, primarily from advance receipts of equity transfer, a reversal from cash used in the prior year; financing activities provided $1.47 million, a positive shift from cash used in the prior year Condensed Consolidated Statements of Cash Flows Highlights | Metric (Six Months Ended June 30) | 2019 (Unaudited) | 2018 (Unaudited) | | :-------------------------------- | :--------------- | :--------------- | | Net cash used in operating activities | $(33,118,904) | $(165,499) | | Net cash used in investing activities | $14,228,076 | $(620,192) | | Net cash provided by (used in) financing activities | $1,474,078 | $(5,804,126) | | Net decrease in cash and cash equivalents and restricted cash | $(17,416,750) | $(6,589,817) | | Cash and cash equivalents and restricted cash at end of period | $5,182,925 | $9,490,659 | Notes to Condensed Consolidated Financial Statements These notes provide detailed explanations of the company's accounting policies, financial instrument valuations, and specific balance sheet and income statement items, covering organizational structure, liquidity, revenue recognition, and significant transactions like the JV Company equity transfer - The company's operations in China are subject to political, economic, and legal risks, as well as foreign currency exchange rate fluctuations (RMB to USD)528182 - Revenue is recognized at a point in time when the customer obtains control over the product, typically at delivery, at the net sales price; the company adopted ASC Topic 606 on January 1, 2018, with no material impact7274 - Goodwill and intangible assets are tested for impairment annually or when circumstances change; no impairment loss was recognized for goodwill as of June 30, 20198992 NOTE 1 - ORGANIZATION AND PRINCIPAL ACTIVITIES Kandi Technologies Group, Inc. is a Delaware-incorporated company headquartered in Jinhua City, China, primarily engaged in the design, development, manufacturing, and commercialization of electric vehicle (EV) products, EV parts, and off-road vehicles, with a significant investment in a Joint Venture (JV) Company, Zhejiang Kandi Electric Vehicles Co., Ltd., which recently underwent an equity transfer reducing Kandi's ownership to 43.47% - Kandi Technologies Group, Inc. is a leading producer and manufacturer of EV products (through the JV Company), EV parts, and off-road vehicles in China, with a strategic focus on pure EV-related products and expansion into Chinese and international markets, particularly the U.S1336 - Kandi Vehicles' ownership in the JV Company was reduced from 50% to 43.47% after the JV Company converted a RMB 314 million loan from Geely Group into equity; Kandi Vehicles further agreed to sell an additional 21.47% of its equity interests to Geely for RMB 516 million, which would reduce its ownership to 22% upon completion1741 - The company acquired 100% of SC Autosports LLC in July 2018, a Dallas-based sales company focused on wholesale of off-road vehicle products34 NOTE 2 - LIQUIDITY Kandi's working capital increased to $9.64 million as of June 30, 2019, up from $2.53 million at December 31, 2018; the company relies on short-term bank loans and expects to improve liquidity further upon receiving proceeds from the JV Company equity transfer and national subsidy payments Working Capital Trend | Date | Working Capital | | :--------------- | :-------------- | | June 30, 2019 | $9,640,337 | | December 31, 2018 | $2,526,911 | - The company expects to receive RMB 516 million (approximately $75.2 million) from the sale of 21.47% equity in the JV Company to Geely, with RMB 200 million already received by July 12, 2019, and the remainder expected by September 25, 201941 - The JV Company has received RMB 876 million (approximately $127.7 million) in national subsidy payments, which is expected to improve Kandi's cash flow once received from the JV Company42 NOTE 3 - BASIS OF PRESENTATION The financial statements are prepared using the accrual method of accounting in conformity with U.S. GAAP, consistently applied, and represent management's view of the company's financial position NOTE 4 - PRINCIPLES OF CONSOLIDATION The consolidated financial statements include Kandi Technologies and its wholly-owned subsidiaries, as well as Kandi New Energy, which is a Variable Interest Entity (VIE) consolidated due to Kandi Vehicles' entitlement to 100% of its economic benefits; investments in the JV Company and its subsidiaries, where Kandi holds a 43.47% economic interest, are accounted for using the equity method - Kandi consolidates its wholly-owned subsidiaries (Continental, Kandi Vehicles, YongkangScrou, Jinhua An Kao, SC Autosports) and Kandi New Energy (a VIE)45 - The company accounts for its 43.47% economic interest in the JV Company and its numerous subsidiaries (e.g., KandiChangxing, KandiJinhua, Kandi Shanghai, Kandi Jiangsu, Zhejiang Chang Dian) using the equity method46474849 NOTE 5 - USE OF ESTIMATES The preparation of financial statements requires management to make estimates and assumptions that impact reported asset and liability amounts, as well as revenue and expense recognition; actual results may differ from these estimates NOTE 6 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This section outlines Kandi's significant accounting policies, including those for economic and political risks in China, fair value measurements of financial instruments, inventory valuation, revenue recognition under ASC Topic 606, and accounting for goodwill and intangible assets, also detailing policies for government grants, income taxes, and foreign currency translation (a) Economic and Political Risks Kandi's operations are primarily in China, exposing it to political, economic, and legal risks, including foreign currency exchange rate fluctuations between RMB and USD, and potential changes in government policies - The company's business is influenced by China's political, economic, and legal environments, and by changes in the exchange rate between the U.S. dollar and the RMB52 (b) Fair Value of Financial Instruments Financial instruments like cash, receivables, and payables are carried at fair value due to their short-term nature (Level 1 or 2); contingent consideration related to acquisitions is measured at fair value using Level 3 inputs - The carrying value of most short-term financial instruments approximates fair value (Level 1 or 2)56 - Contingent consideration for acquisitions (Jinhua An Kao and SC Autosports) is measured at fair value using Level 3 inputs, totaling $6,619,000 as of June 30, 201957 (c) Cash and Cash Equivalents Cash equivalents include highly-liquid investments with original maturities of three months or less; restricted cash balances were $1,573,992 as of June 30, 2019, a decrease from $6,690,870 at December 31, 2018 Restricted Cash Balances | Date | Restricted Cash | | :--------------- | :-------------- | | June 30, 2019 | $1,573,992 | | December 31, 2018 | $6,690,870 | (d) Inventories Inventories are valued at the lower of cost (weighted average) or net realizable value, with provisions made for slow-moving or obsolete items - Inventories are stated at the lower of cost (weighted average) or net realizable value, with adjustments for estimated excess, obsolescence, or impaired balances5960 (e) Accounts Receivable Accounts receivable are recorded at net realizable value, with an allowance for doubtful accounts based on specific factors and historical experience; credit terms are typically 180 to 360 days Allowance for Doubtful Accounts | Date | Allowance for Doubtful Accounts | | :--------------- | :------------------------------ | | June 30, 2019 | $135,557 | | December 31, 2018 | $120,010 | (f) Amount due from the JV Company, net The net amount due from the JV Company includes trade receivables and loan interest, totaling $60 million as of June 30, 2019; collection timing is uncertain due to JV restructuring and government subsidy progress, but the company expects to receive the amount within one year - Net amount due from the JV Company includes $58 million net trade receivable and $2 million loan interest as of June 30, 201963 - Collection of receivables from the JV Company is indirectly impacted by government subsidies and the JV's management restructuring, but the company expects to receive the amount within one year63 (g) Other Receivable Other receivables include a $5.2 million short-term loan to an unrelated party at a 6% annual interest rate, aimed at maximizing idle cash utilization - Other receivables include a $5.2 million short-term loan to an unrelated party with a 6% annual interest rate64 (h) Notes receivable Notes receivable represent short-term loans to third parties and the JV Company, typically maturing within six months; as of June 30, 2019, notes receivable from unrelated parties were $0, while those from the JV Company and related parties were $1,456,537 Notes Receivable Balances | Category | June 30, 2019 | December 31, 2018 | | :------------------------------------- | :------------ | :---------------- | | Notes receivable from unrelated parties | $0 | $72,712 | | Notes receivable from JV Company and related parties | $1,456,537 | $3,861,032 | (i) Advances to Suppliers Advances to suppliers are cash payments made in advance for raw materials, molds, and equipment, typically settled within two months for raw materials (j) Property, Plants and Equipment Property, plant, and equipment are recorded at cost less accumulated depreciation, calculated using the straight-line method over estimated useful lives; net book value pledged as collateral for bank loans was $7,903,018 as of June 30, 2019 Property, Plant and Equipment, Net | Date | Net Book Value | | :--------------- | :------------- | | June 30, 2019 | $78,839,301 | | December 31, 2018 | $82,045,923 | - Depreciation expenses for the three months ended June 30, 2019, were $1,876,569, and for the six months, $3,892,028130 (k) Construction in Progress Construction in progress (CIP) includes direct construction and acquisition costs for buildings or machinery; costs are capitalized until assets are ready for intended use, at which point they are transferred to plants and equipment, and depreciation begins (l) Land Use Rights Land use rights in China are amortized using the straight-line method over a fifty-year term; the net book value pledged as collateral for bank loans was $7,656,229 as of June 30, 2019 Land Use Rights, Net | Date | Land Use Rights, Net | | :--------------- | :------------------- | | June 30, 2019 | $11,603,594 | | December 31, 2018 | $11,749,728 | - Amortization expenses for land use rights were $82,837 for the three months ended June 30, 2019, and $166,599 for the six months ended June 30, 2019132 (m) Accounting for the Impairment of Long-Lived Assets The company evaluates long-lived assets for impairment when events or circumstances indicate that their carrying value may not be recoverable; no impairment loss was recognized during the reporting period - No impairment loss was recognized during the reporting period for long-lived assets72 (n) Revenue Recognition Kandi adopted ASC Topic 606 on January 1, 2018, using the modified retrospective method, which did not materially impact its financial statements; revenue from EV parts and off-road vehicles is recognized when control is transferred to the customer, typically at delivery - The company adopted ASC Topic 606 Revenue from Contracts with Customers on January 1, 2018, with no material impact on its consolidated financial statements7299 - Revenue is recognized when the customer obtains control over the product, usually at the time of delivery, at the net sales price74 (o) Research and Development Research and development expenditures are expensed as incurred; R&D expenses decreased by 1.6% for the three months ended June 30, 2019, and by 16.4% for the six months ended June 30, 2019, compared to the prior year Research and Development Expenses | Period | 2019 ($) | 2018 ($) | Change ($) | Change (%) | | :-------------------------- | :---------- | :---------- | :--------- | :--------- | | Three months ended June 30 | $632,590 | $642,889 | $(10,299) | (1.6)% | | Six months ended June 30 | $1,170,023 | $1,400,187 | $(230,164) | (16.4)% | (p) Government Grants Government grants and subsidies are recognized when received or collectible, and related milestones are met; grants significantly increased for both the three and six months ended June 30, 2019, primarily due to a new policy supporting companies with stable employment Government Grants Received | Period | 2019 ($) | 2018 ($) | Change ($) | Change (%) | | :-------------------------- | :---------- | :---------- | :--------- | :--------- | | Three months ended June 30 | $175,319 | $15,558 | $159,761 | 1026.9% | | Six months ended June 30 | $223,043 | $110,813 | $112,230 | 101.3% | (q) Income Taxes Income taxes are accounted for using the asset and liability approach; Kandi Vehicles and Jinhua Ankao qualify for a reduced 15% corporate income tax rate as High and New Technology Enterprises, while other subsidiaries and the JV Company have a 25% rate; the effective tax rate for the six months ended June 30, 2019, was a 6.02% tax benefit on a loss before taxes - Kandi Vehicles and Jinhua Ankao benefit from a reduced 15% corporate income tax rate as HNTE companies140 Effective Income Tax Rate (Six Months Ended June 30) | Year | Reported Loss/Income Before Taxes | Effective Tax Rate | | :--- | :-------------------------------- | :----------------- | | 2019 | $(12.5) million loss | 6.02% tax benefit | | 2018 | $5.2 million income | 2.59% tax expense | (r) Foreign Currency Translation The company's functional currency is the Renminbi (RMB), with financial statements presented in U.S. dollars; assets and liabilities are translated at balance sheet date exchange rates, while income and expenditures use average rates RMB:USD Exchange Rates | Date | Period end RMB : USD exchange rate | Average RMB : USD exchange rate | | :--------------- | :--------------------------------- | :------------------------------ | | June 30, 2019 | 6.8656 | 6.7839 | | December 31, 2018 | 6.8764 | 6.6146 | | June 30, 2018 | 6.61905 | 6.3666 | (s) Comprehensive Income Comprehensive income includes all changes in equity except those from owner investments and distributions, encompassing net income and foreign currency translation adjustments (t) Segments The company operates as a single operating segment, with its chief operating decision makers relying on consolidated results for resource allocation and performance assessment (u) Stock Option Expenses Stock option expenses are recorded in accordance with ASC 718, with fair value estimated using the Black-Scholes-Merton model; no stock option expenses were booked for the three and six months ended June 30, 2019, as all expenses were amortized by May 29, 2018 Stock Option Expenses | Period | 2019 | 2018 ($) | | :-------------------------- | :--- | :---------- | | Three months ended June 30 | $0 | $589,430 | | Six months ended June 30 | $0 | $1,586,926 | (v) Goodwill Goodwill is allocated to reporting units and tested for impairment annually or when circumstances change; the company determined its goodwill was not impaired as of June 30, 2019 - Goodwill is tested for impairment annually, and no impairment was identified as of June 30, 201992 (w) Intangible assets Intangible assets, including patents, trade names, and customer relations, are amortized over their estimated useful lives; amortization expenses for the three and six months ended June 30, 2019, were $157,967 and $317,470, respectively Intangible Assets, Net | Date | Intangible Assets, Net | | :--------------- | :--------------------- | | June 30, 2019 | $4,020,363 | | December 31, 2018 | $4,328,127 | Intangible Asset Amortization Expenses | Period | 2019 ($) | 2018 ($) | | :-------------------------- | :---------- | :---------- | | Three months ended June 30 | $157,967 | $167,563 | | Six months ended June 30 | $317,470 | $335,588 | (x) Accounting for Sale of Common Stock and Warrants Proceeds from common stock and warrant sales are allocated based on fair value, with issuance expenses charged to paid-in capital for common stock and expensed for derivative instruments (y) Consolidation of Variable Interest Entities Kandi consolidates Kandi New Energy as a Variable Interest Entity (VIE) because Kandi Vehicles, its wholly-owned subsidiary, is entitled to 100% of its economic benefits, voting rights, and residual interests - Kandi New Energy is consolidated as a VIE because Kandi Vehicles absorbs a majority of its risks and rewards96 NOTE 7 - NEW ACCOUNTING PRONOUNCEMENTS This section details the adoption of new accounting standards, including ASC 606 (Revenue Recognition), ASU 2015-17 (Deferred Taxes), ASC 842 (Leases), ASU 2016-18 (Restricted Cash), and ASU 2017-04 (Goodwill Impairment); most adoptions had no material impact on the financial statements, with ASC 842 resulting in the recording of operating lease assets and liabilities - The company adopted ASC 606 (Revenue Recognition) and ASU 2015-17 (Deferred Taxes) in Q1 2018, with no material impact99100 - ASC 842 (Leases) was adopted on January 1, 2019, resulting in $140,000 in operating lease assets and liabilities, but no material impact on statements of operations or cash flows101102 - ASU 2016-18 (Restricted Cash) was adopted in Q1 2018, with no material impact105 - ASU 2017-04 (Goodwill Impairment) is effective after December 15, 2019, and is not expected to have a material impact107 NOTE 8 - CONCENTRATIONS Kandi has significant customer and supplier concentrations; for the three months ended June 30, 2019, Jinhua Chaoneng Automobile Sales Co. Ltd. and Zhejiang Kuke Sports Technology Co., Ltd. were major customers, while Kandi Electric Vehicles Group Co., Ltd. and its subsidiaries remained a significant customer despite a decrease in sales percentage; Zhejiang Kandi Supply Chain Management Co., Ltd. and Massimo Motor Sports, LLC were major suppliers Major Customers (Three Months Ended June 30, 2019) | Major Customers | Sales % (2019) | Sales % (2018) | Trade Receivable % (2019) | Trade Receivable % (2018) | | :--------------------------------------------- | :------------- | :------------- | :------------------------ | :------------------------ | | Jinhua Chaoneng Automobile Sales Co. Ltd. | 36% | 36% | 23% | 22% | | Zhejiang Kuke Sports Technology Co., Ltd. | 27% | 4% | 8% | 2% | | Kandi Electric Vehicles Group Co., Ltd. and its subsidiaries | 17% | 29% | 58% | 66% | Major Suppliers (Three Months Ended June 30, 2019) | Suppliers | Purchases % (2019) | Purchases % (2018) | Accounts Payable % (2019) | Accounts Payable % (2018) | | :------------------------------------------- | :----------------- | :----------------- | :------------------------ | :------------------------ | | Kandi Supply Chain Management Co., Ltd. | 69% | N/A | 3% | N/A | | Motor Sports, LLC | 13% | N/A | 1% | N/A | NOTE 9 - EARNINGS PER SHARE Basic and diluted earnings per share are calculated using the weighted average number of shares outstanding; for the three and six months ended June 30, 2019, the company reported a basic and diluted net loss per share of $(0.14) and $(0.22), respectively, compared to net income per share of $0.03 and $0.10 in the prior year Net (Loss) Income Per Share | Period | 2019 (Basic & Diluted) | 2018 (Basic & Diluted) | | :-------------------------- | :--------------------- | :--------------------- | | Three months ended June 30 | $(0.14) | $0.03 | | Six months ended June 30 | $(0.22) | $0.10 | - Potentially dilutive shares (3,900,000) were excluded from diluted EPS calculation for both periods as their effect would have been anti-dilutive116 NOTE 10 - ACCOUNTS RECEIVABLE Net accounts receivable increased to $41,926,724 as of June 30, 2019, from $34,274,728 at December 31, 2018; the allowance for doubtful accounts also saw a slight increase Accounts Receivable, Net | Date | Accounts Receivable | Less: Allowance for Doubtful Accounts | Accounts Receivable, Net | | :--------------- | :------------------ | :------------------------------------ | :----------------------- | | June 30, 2019 | $42,062,281 | $(135,557) | $41,926,724 | | December 31, 2018 | $34,394,738 | $(120,010) | $34,274,728 | NOTE 11 - INVENTORIES Net inventories increased to $28,980,722 as of June 30, 2019, from $21,997,868 at December 31, 2018, driven by increases across raw materials, work-in-progress, and finished goods Inventories, Net | Category | June 30, 2019 | December 31, 2018 | | :--------------- | :------------ | :---------------- | | Raw material | $8,781,174 | $7,741,264 | | Work-in-progress | $4,766,252 | $1,571,179 | | Finished goods | $16,334,406 | $13,526,126 | | Total inventories | $29,881,832 | $22,838,569 | | Less: provision for slowing moving inventories | $(901,110) | $(840,701) | | Inventories, net | $28,980,722 | $21,997,868 | NOTE 12 - NOTES RECEIVABLE Notes receivable from unrelated parties decreased to $0 as of June 30, 2019, from $72,712 at December 31, 2018; notes receivable from the JV Company and related parties also decreased to $1,456,537 from $3,861,032 over the same period Notes Receivable Summary | Category | June 30, 2019 | December 31, 2018 | | :------------------------------------- | :------------ | :---------------- | | Notes receivable from unrelated parties | $0 | $72,712 | | Notes receivable from JV Company and related parties | $1,456,537 | $3,861,032 | NOTE 13 - PROPERTY, PLANT AND EQUIPMENT Net property, plant, and equipment decreased to $78,839,301 as of June 30, 2019, from $82,045,923 at December 31, 2018; the net book value pledged as collateral for bank loans was $7,903,018 Property, Plant and Equipment, Net | Date | Property, Plant and Equipment, Net | | :--------------- | :--------------------------------- | | June 30, 2019 | $78,839,301 | | December 31, 2018 | $82,045,923 | - Depreciation expenses for the three months ended June 30, 2019, were $1,876,569, and for the six months, $3,892,028130 NOTE 14 - LAND USE RIGHTS Net land use rights decreased slightly to $11,603,594 as of June 30, 2019, from $11,749,728 at December 31, 2018; the net book value pledged as collateral for bank loans was $7,656,229 Land Use Rights, Net | Date | Land Use Rights, Net | | :--------------- | :------------------- | | June 30, 2019 | $11,603,594 | | December 31, 2018 | $11,749,728 | - Amortization expenses for land use rights were $82,837 for the three months ended June 30, 2019, and $166,599 for the six months ended June 30, 2019132 NOTE 15 - SHORT-TERM AND LONG-TERM BANK LOANS Short-term bank loans increased to $32,189,466 as of June 30, 2019, from $30,539,236 at December 31, 2018, with new loans from Agricultural Bank of China; long-term bank loans remained stable at $28,693,778; interest expenses for both short-term and long-term loans decreased for the three and six months ended June 30, 2019 Short-term and Long-term Bank Loans | Category | June 30, 2019 | December 31, 2018 | | :-------------- | :------------ | :---------------- | | Short-term loans | $32,189,466 | $30,539,236 | | Long-term loans | $28,693,778 | $28,794,136 | Interest Expenses on Bank Loans | Period | 2019 ($) | 2018 ($) | | :-------------------------- | :---------- | :---------- | | Three months ended June 30 | $429,355 | $433,914 | | Six months ended June 30 | $868,538 | $848,232 | NOTE 16 - NOTES PAYABLE Notes payable increased to $20,258,972 as of June 30, 2019, from $12,787,619 at December 31, 2018; these include bank acceptance notes and commercial acceptance notes, often backed by restricted cash deposits Notes Payable Summary | Category | June 30, 2019 | December 31, 2018 | | :--------------- | :------------ | :---------------- | | Bank acceptance notes | $18,792,013 | $7,060,846 | | Commercial acceptance notes | $1,456,537 | $2,763,074 | | Other Notes Payable | $0 | $1,256,875 | | Total | $20,258,972 | $12,787,619 | - Restricted cash of $1,323,992 and $6,440,870 was held as collateral for notes payable as of June 30, 2019, and December 31, 2018, respectively138 NOTE 17 - TAXES Kandi Vehicles and Jinhua Ankao benefit from a reduced 15% corporate income tax rate as High and New Technology Enterprises; the company's effective tax rate for the six months ended June 30, 2019, was a 6.02% tax benefit on a reported loss, compared to a 2.59% tax expense on income in the prior year; the Tax Cuts and Jobs Act (TCJA) accounting was completed by December 22, 2018, with no adjustments to provisional estimates - Kandi Vehicles and Jinhua Ankao qualify for a reduced 15% corporate income tax rate140 Effective Tax Rates (Six Months Ended June 30) | Year | Reported Loss/Income Before Taxes | Effective Tax Rate | | :--- | :-------------------------------- | :----------------- | | 2019 | $(12.5) million loss | 6.02% tax benefit | | 2018 | $5.2 million income | 2.59% tax expense | - The company completed accounting for the Tax Cuts and Jobs Act (TCJA) by December 22, 2018, with no adjustments to provisional estimates148 NOTE 18 - STOCK OPTIONS No stock option expenses were recognized for the three and six months ended June 30, 2019, as all expenses related to the 2015 grant of 4,900,000 options were fully amortized by May 29, 2018; as of June 30, 2019, 3,900,000 options remained outstanding at an exercise price of $9.72 Stock Option Expenses | Period | 2019 | 2018 ($) | | :-------------------------- | :--- | :---------- | | Three months ended June 30 | $0 | $589,430 | | Six months ended June 30 | $0 | $1,586,926 | - As of June 30, 2019, 3,900,000 stock options were outstanding with a weighted average exercise price of $9.72151 NOTE 19 - STOCK AWARD The company granted restricted common stock and annual equity bonuses to directors, officers, and key employees; stock award expenses for the three and six months ended June 30, 2019, were $1,282,733 and $1,314,408, respectively, recognized under General and Administrative Expenses Employee Stock Award Expenses | Period | 2019 ($) | 2018 ($) | | :-------------------------- | :---------- | :---------- | | Three months ended June 30 | $1,282,733 | $1,248,535 | | Six months ended June 30 | $1,314,408 | $1,280,210 | - On April 30, 2019, the Board authorized the grant of 238,600 shares of common stock to management and employees as compensation for past services157 NOTE 20 - INTANGIBLE ASSETS Intangible assets, net, decreased to $4,020,363 as of June 30, 2019, from $4,328,127 at December 31, 2018; these assets, including trade names, customer relations, and patents, are amortized over their estimated useful lives, with amortization expenses of $157,967 and $317,470 for the three and six months ended June 30, 2019, respectively Intangible Assets, Net | Date | Intangible Assets, Net | | :--------------- | :--------------------- | | June 30, 2019 | $4,020,363 | | December 31, 2018 | $4,328,127 | Intangible Asset Amortization Expenses | Period | 2019 ($) | 2018 ($) | | :-------------------------- | :---------- | :---------- | | Three months ended June 30 | $157,967 | $167,563 | | Six months ended June 30 | $317,470 | $335,588 | NOTE 21 - SUMMARIZED INFORMATION OF EQUITY METHOD INVESTMENT IN THE JV COMPANY Kandi's investment in the JV Company is accounted for using the equity method; the JV Company reported significant net losses for the three and six months ended June 30, 2019, primarily due to national subsidy policy adjustments and ongoing restructuring, leading to a substantial share of loss for Kandi; Kandi's ownership in the JV Company decreased to 43.47% after a loan conversion to equity by Geely - Kandi's ownership in the JV Company decreased to 43.47% after Geely converted a RMB 314 million loan into equity in March 2019, resulting in a gain from equity dilution of $4,341,259 for the six months ended June 30, 2019163164169261 JV Company Condensed Income Statement Information | Metric (Three Months Ended June 30) | 2019 (Unaudited) | 2018 (Unaudited) | | :---------------------------------- | :--------------- | :--------------- | | Net sales | $2,828,732 | $19,640,026 | | Net (loss) income | $(10,359,258) | $4,751,137 | | Kandi's share in net (loss) income | $(4,503,088) | $2,375,569 | JV Company Condensed Income Statement Information (Six Months Ended June 30) | Metric (Six Months Ended June 30) | 2019 (Unaudited) | 2018 (Unaudited) | | :-------------------------------- | :--------------- | :--------------- | | Net sales | $4,085,605 | $53,412,231 | | Net (loss) income | $(30,550,572) | $5,772,776 | | Kandi's share in net (loss) income | $(14,591,456) | $2,886,388 | - Sales to the JV Company and its subsidiaries decreased by 13.7% for the three months and 20.7% for the six months ended June 30, 2019, primarily due to the JV's restructuring and national subsidy policy adjustments170 NOTE 22 - COMMITMENTS AND CONTINGENCIES Kandi has various commitments and contingencies, including guarantees for bank loans to the JV Company and other parties, and ongoing litigations; the company expects the likelihood of losses from certain guarantees to be remote or low, but the ultimate outcome of litigations remains uncertain and could negatively impact financial results Guarantees Provided to Other Parties | Guarantee Provided to | June 30, 2019 | December 31, 2018 | | :-------------------------------------- | :------------ | :---------------- | | Kandi Electric Vehicles Group Co., Ltd. | $0 | $7,271,247 | | Kandi Electric Vehicles Jiangsu Co., Ltd. | $7,282,685 | $7,271,247 | | Total | $7,282,685 | $14,542,494 | - The company is involved in shareholder class actions and derivative actions related to past financial statement restatements181183185 - While the company believes claims are without merit, the ultimate outcome is uncertain and could have a negative financial impact due to defense costs and diversion of management resources185 NOTE 23 - SEGMENT REPORTING Kandi operates as a single segment, with its revenue and long-lived assets primarily derived from and located in China; the company disaggregates revenue by geographical markets (Overseas and China) and major product types (EV parts and Off-road vehicles) Revenue by Geographical Markets (Three Months Ended June 30) | Geographical Market | 2019 Sales Revenue | 2018 Sales Revenue | | :------------------ | :----------------- | :----------------- | | Overseas | $5,050,136 | $663,178 | | China | $19,096,094 | $15,696,428 | | Total | $24,146,230 | $16,359,606 | Revenue by Major Products (Three Months Ended June 30) | Major Products | 2019 Sales Revenue | 2018 Sales Revenue | | :------------------ | :----------------- | :----------------- | | EV parts | $18,988,741 | $15,509,780 | | Off-road vehicles | $5,157,489 | $849,826 | | Total | $24,146,230 | $16,359,606 | Note 24 - SUBSEQUENT EVENTS Subsequent events include the Board's approval of a $20 million stock repurchase program, the JV Company's receipt of $127.7 million in national EV subsidy payments, and Kandi Jiangsu's approval for dual production licenses for pure electric vehicles - The Board approved a stock repurchase program of up to $20 million, to be completed by the end of 2019281 - The JV Company received $127.7 million in national subsidy payments for EV sales from 2015-2017282 - Kandi Jiangsu, a JV subsidiary, received 'dual production licenses' from MIIT, qualifying it as a pure electric vehicle production manufacturer283 - The JV Company decided to transfer all equity interests of Kandi Shanghai to Zhejiang Yiting Holding Co., Ltd. for approximately $84 million in early July 2019189 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Kandi's financial performance and condition for the three and six months ended June 30, 2019, compared to the prior year, highlighting significant revenue growth driven by EV parts and off-road vehicles, but also detailing the substantial net loss primarily due to the JV Company's losses and increased operating costs, and covering critical accounting policies, liquidity, capital resources, and recent developments - Total revenue for the six months ended June 30, 2019, increased by 70.9% to $42.21 million, driven by increased EV parts and off-road vehicle sales212 - The company recorded a net loss of $11.73 million for the six months ended June 30, 2019, compared to a net income of $5.10 million in the prior year, largely due to the increased share of loss from the JV Company and higher operating costs212 - The new national subsidy standard for New Energy Vehicles, which reduces national subsidies and cancels local subsidies, presents both challenges and opportunities, prompting the JV Company to develop new models independent of government subsidies213 Critical Accounting Policies and Estimates This section outlines critical accounting policies and estimates, including those for accounts receivable, inventories, revenue recognition, stock options, warrants, convertible notes, and warranty liabilities; management emphasizes the significance of estimates in areas like net realizable value for receivables and inventories, and the five-step analysis for revenue recognition - Management's estimates for accounts receivable and inventories are critical, with allowances for doubtful accounts and provisions for slow-moving inventory impacting reported net realizable values195196197 - Revenue recognition follows a five-step analysis, with revenue from EV products, EV parts, and off-road vehicles recognized when customer control is transferred, typically at delivery201202 - Warranty policies for non-EV products involve price incentives and free parts, while EV products sold in China through the JV Company carry a three-year or 50,000-kilometer manufacturer warranty208209211 Results of Operations Kandi's results of operations for Q2 and H1 2019 show significant revenue growth, particularly in off-road vehicles due to the SC Autosports acquisition; however, net income declined sharply, primarily driven by substantial losses from the JV Company, which was impacted by national subsidy policy adjustments and restructuring; gross margins improved, but increased operating costs, especially general and administrative expenses, also contributed to the net loss - Total revenue for the three months ended June 30, 2019, increased by 47.6% to $24.15 million, and for the six months, by 70.9% to $42.21 million217246 - Net loss for the three months ended June 30, 2019, was $7.32 million (vs. $1.37 million net income in 2018), and for the six months, $11.73 million (vs. $5.10 million net income in 2018)239266 - The share of loss from the JV Company was a major factor, with a $(4.50) million loss for Q2 2019 (vs. $2.37 million income in 2018) and a $(14.45) million loss for H1 2019 (vs. $3.17 million income in 2018), attributed to national subsidy policy adjustments and JV restructuring235262 Overview Kandi experienced a 70.9% revenue increase for the six months ended June 30, 2019, driven by EV parts sales, but reported a net loss of $11.73 million, a reversal from prior year's net income; this loss was primarily due to increased share of loss from the JV Company, impacted by national subsidy policy adjustments and restructuring, and higher operating costs from the Hainan facility Six Months Ended June 30, 2019 vs 2018 Overview | Metric | 2019 ($) | 2018 ($) | Change ($) | Change (%) | | :------------- | :------------ | :------------ | :------------ | :--------- | | Total Revenue | $42,214,690 | $24,695,513 | $17,519,177 | 70.9% | | Gross Profits | $7,338,591 | $3,403,963 | $3,934,628 | 115.6% | | Gross Margin | 17.4% | 13.8% | 3.6% pts | | | Net (Loss) Income | $(11,727,630) | $5,102,520 | $(16,830,150) | (329.8)% | - The significant net loss is attributed to the increased share of loss from the JV Company, resulting from national subsidy policy adjustments and pending restructuring, as well as increased operating costs from the Hainan facility212 Comparison of the Three Months Ended June 30, 2019 and 2018 For the three months ended June 30, 2019, Kandi's revenue increased by 47.6% to $24.15 million, driven by strong growth in both EV parts and off-road vehicle sales; despite a 104.2% increase in gross profit and an improved gross margin of 17.4%, the company reported a net loss of $7.32 million, a significant decline from the prior year's net income, primarily due to a substantial increase in selling and marketing expenses, general and administrative expenses, and a large share of loss from the JV Company Key Financials (Three Months Ended June 30) | Metric | 2019 ($) | 2018 ($) | Change ($) | Change (%) | | :-------------------------- | :------------ | :------------ | :------------ | :--------- | | Revenues, Net | 24,146,230 | 16,359,606 | 7,786,624 | 47.6% | | Gross Profit | 4,202,154 | 2,058,012 | 2,144,142 | 104.2% | | Gross Margin | 17.4% | 12.6% | 4.8% pts | | | Selling and marketing | (899,478) | (228,173) | (671,305) | 294.2% | | General and administrative | (5,623,798) | (3,861,263) | (1,762,535) | 45.6% | | Share of (loss) income after tax of the JV Company | (4,500,201) | 2,372,696 | (6,872,897) | (289.7)% | | Net (Loss) Income | (7,318,158) | 1,374,525 | (8,692,683) | (632.4)% | - Off-road vehicle sales revenue increased by 506.9% to $5,157,489, largely due to additional sales from SC Autosports, acquired in July 2018221 - Government grants increased by 1026.9% to $175,319, primarily due to a new policy supporting companies with stable employment233 Comparison of the Six Months Ended June 30, 2019 and 2018 For the six months ended June 30, 2019, Kandi's revenue surged by 70.9% to $42.21 million, driven by a 45.1% increase in EV parts sales and a 271.6% increase in off-road vehicle sales, largely due to the SC Autosports acquisition; gross profit more than doubled, and gross margin improved to 17.4%; however, the company reported a net loss of $11.73 million, a significant reversal from the prior year's net income, primarily due to a substantial increase in the share of loss from the JV Company and higher general and administrative expenses Key Financials (Six Months Ended June 30) | Metric | 2019 ($) | 2018 ($) | Change ($) | Change (%) | | :-------------------------- | :------------ | :------------ | :------------ | :--------- | | Revenues, Net | 42,214,690 | 24,695,513 | 17,519,177 | 70.9% | | Gross Profit | 7,338,591 | 3,403,963 | 3,934,628 | 115.6% | | Gross Margin | 17.4% | 13.8% | 3.6% pts | | | Selling and marketing | (1,517,481) | (976,398) | (541,083) | 55.4% | | General and administrative | (7,663,326) | (3,463,092) | (4,200,234) | 121.3% | | Share of (loss) income after tax of the JV Company | (14,449,359) | 3,167,751 | (17,617,110) | (556.1)% | | Net (Loss) Income | (11,727,630) | 5,102,520 | (16,830,150) | (329.8)% | - EV parts sales increased by 45.1% to $31,760,181, and off-road vehicle sales increased by 271.6% to $10,454,509, largely due to SC Autosports248250 - Gain from equity dilution in JV was $4,341,259, primarily due to the March JV Loan to Equity Conversion, which reduced Kandi's equity interest to 43.47%261 LIQUIDITY AND CAPITAL RESOURCES Kandi's working capital significantly improved to $9.64 million as of June 30, 2019; cash used in operating activities increased substantially to $33.12 million, while investing activities generated $14.23 million, primarily from equity transfer advance receipts; financing activities provided $1.47 million; the company expects further liquidity improvement from the JV Company equity transfer proceeds and national subsidy payments Working Capital Trend | Date | Working Capital | | :--------------- | :-------------- | | June 30, 2019 | $9,640,337 | | December 31, 2018 | $2,526,911 | Cash Flow Summary (Six Months Ended June 30) | Cash Flow Activity | 2019 ($) | 2018 ($) | | :----------------- | :------------ | :------------ | | Operating | (33,118,904) | (165,499) | | Investing | 14,228,076 | (620,192) | | Financing | 1,474,078 | (5,804,126) | - The company expects to receive approximately $75.2 million from the sale of JV Company equity and approximately $127.7 million in national subsidy payments to the JV Company, which will significantly improve liquidity275276 Item 3. Quantitative and Qualitative Disclosures about Market Risk This section states that the item is not applicable to Kandi Technologies Group, Inc Item 4. Controls and Procedures As of June 30, 2019, Kandi's CEO and CFO concluded that the company's disclosure controls and procedures were effective; there were no material changes to internal control over financial reporting during the period - The CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2019285 - No material changes to internal control over financial reporting occurred during the period287 PART II – OTHER INFORMATION This section details Kandi's legal proceedings, risk factors, and other supplementary information Item 1. Legal proceedings Kandi is involved in various legal matters, including shareholder class actions and derivative actions related to past financial statement restatements; while the company believes these claims are without merit, the ultimate outcome is uncertain and could negatively impact its financial condition or results of operations - The company is facing putative shareholder class actions and derivative actions in federal and Delaware courts, alleging federal securities law violations related to past financial statement restatements181182183 - The company believes the claims are without merit but cannot estimate the possible loss, and litigation could have a material adverse effect due to defense costs and diversion of management resources185 Item 1A. Risk Factors Kandi's business growth is highly dependent on government subsidies and favorable policies for electric vehicles in China; changes in these policies, such as reduced national subsidies and canceled local subsidies, or increased competition from foreign EV manufacturers due to relaxed ownership limits, could materially and adversely affect the company's financial condition and operating results - The company's growth significantly depends on government subsidies and policies supporting new energy vehicles, which are subject to change and beyond its control290291293 - Changes in China's import tariffs and the lifting of foreign ownership limits for NEV manufacturers (e.g., Tesla building a wholly-owned factory) could increase competition and diminish Kandi's pricing advantage292 - The current subsidy standard reduces national subsidies and cancels local subsidies, significantly decreasing the total subsidy amount compared to 2018, which could adversely affect the company293 Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications from the Principal Executive Officer and Principal Financial Officer, and XBRL-related documents SIGNATURES The report is signed by Hu Xiaoming, President and Chief Executive Officer, and Zhu Xiaoying, Interim Chief Financial Officer, on August 9, 2019, certifying its submission pursuant to the Securities Exchange Act of 1934