UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A10-K
(Amendment No. 1)Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year endedDecember 31, 20132014
or
[_]TRANSITION REPORT UNDER SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to ________________________
Commission file number: number001-33997
KANDI TECHNOLOGIES GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware | 90-0363723 |
(State or other jurisdiction of incorporation | (I.R.S. Employer Identification No.) |
or organization) |
Jinhua City Industrial Zone
Jinhua, Zhejiang Province
People's Republic of China
Post Code 321016
(Address of principal executive offices) (Zip Code)
(86-579) 82239856
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, Par Value $0.001 Per Share | NASDAQ Global Select Market |
(Title of each class) | (Name of exchange on which registered) |
Securities Registered Pursuant to Section 12(g) of the Act:None.
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [_] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes [_] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [_] | Accelerated filer [X] |
Non-accelerated filer [_] | Smaller reporting company [_] |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes [_] No [X]
The aggregate market value of voting common stock held by non-affiliates of the registrant as of June 28, 2013,30, 2014, the last business day of the registrant's second fiscal quarter, was approximately $108,038,543.$400,034,259.
The number of shares of common stock outstanding as of March 11, 20149, 2015 was 40,105,321.46,284,855.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
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TABLE OF CONTENTS
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Explanatory NoteSPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Kandi Technologies Group, Inc. (the “Company”, “we”, “us”, or “our” is filing this Amendment No. 1This Annual Report on Form 10-K/A10-K (this “Amendment”“Annual Report”) to amend and supplementcontains certain forward-looking statements within the following provisionsmeaning of Section 27A of the Form 10-KSecurities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These include statements about our expectations, beliefs, intentions or strategies for the year ended December 31, 2013, filed withfuture, which we indicate by words or phrases such as “anticipate,” “expect,” “intend,” “plan,” “will,” “we believe,” “our company believes,” “management believes” and similar language. These forward-looking statements are based on our current expectations and are subject to certain risks, uncertainties and assumptions, including those set forth in the U.S. Securitiesdiscussion under Item 1, “Business”, Item 1A, “Risk Factors” and Exchange Commission (the “Commission”) on March 17, 2014 (the “Form 10-K”), to agree with the Company’s responses to the SEC Staff’s comments dated April 25, 2014:
In this Amendment, we expanded the analysis under “Item 7. Management’s“Management's Discussion and Analysis of Financial Condition and Results of Operation” to: (i) include comparable GAAP measures where non-GAAP figures were presented regarding net incomeOperations.” Our actual results may differ materially from results anticipated in these forward-looking statements. We base our forward-looking statements on information currently available to us, and we assume no obligation to update them. In addition, our historical financial performance is not necessarily indicative of the results that may be expected in the “Overview” section; (ii) expandfuture and we believe such comparisons cannot be relied upon as indicators of future performance.
Although we believe that the disclosure under “EV Products”expectations reflected in the forward looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to provide greater detail regardingupdate any of the forward-looking statements to conform these statements to actual results.
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PART I
Except as otherwise indicated by the context, references in this Annual Report to “we,” “us,” “our,” “Kandi,” or the “Company” are to the combined businesses of Kandi Technologies Group, Inc. and its subsidiaries.
Item 1. Business Introduction
Our Core Business
Before the year 2013, the Company had been mainly engaged in the design, production and distribution of the off-road vehicle products. Due to various market factors and the environment with positive government supports, starting from the year 2013, the Company gradually shifted its main focus towards the development on pure electric vehicles (which we refer to as “EVs” in this report). For the year ended December 31, 2014, the majority of the Company’s revenue and profit were generated from EV parts and EV products.
The Market for Electric Vehicles
Business Environment and Policy
Research and development of major EV technology projects in China began in 2001. Driven by two central government five-year plans for scientific and technological research as well as by the Olympics, World Expo and the “1000 cars in 10 cities” demonstration platform, the Chinese electric automobile sector was officially born, which brings a positive basis for EV business.
With the growing consumer demand for motor vehicles in China many cities are experiencing severe problems from environmental pollution. At the same time, with the lack of the efficient traffic planning, major Chinese cities are crippled by traffic congestion. Thus, major cities, such as Beijing, Shanghai, Guangzhou, Hangzhou, have begun to implement various policies restricting the purchase and usage of traditional cars. We expect that more cities will have no choices but to adopt similar policies in the future.
To improve the environment of the urban areas, the China Central Government, along with many municipalities, has been introducing numerous supporting policies that encouraged the usage and adoption of EVs, including subsidies, tax exemptions, special treatment of tag and license. Among these policies, the most significant development involved the availability of subsidies from central and local government for the sale of EVs. The process of receiving government subsidies is as follows: manufacturers receive central government subsidies through application and sell the EVs to local dealers at a discounted price, reflecting the deduction of the central government subsidy from the normal sale price. Local dealers then establish their retail price based upon the prevailing purchase price from the manufacturers, then deduct the local government subsidy from the retail price before selling the EVs to consumers. Through these steps, consumers receive both subsidies from the central and local governments when they purchase EVs.
Because the central and local government subsidies are disclosed to the public and all the subsidies are reviewed and verified by the respective governments, consumers know what subsidies they will receive along with the price they expect to pay for EVs. Therefore, even though dealers can sell vehicles at prices established at their discretion, programs are designed to assure that consumers receive the entire benefit from both subsidies. This allows for full disclosure for consumers in the costs associated with purchasing EVs, along with the added benefits of the respective subsidies.
Issues confronting the market
Although the basis for the EV industry in China has already been established, the development of Chinese EV industry is still ongoing due to five major obstacles towards extensive commercialization of EVs and the full development of the EV market in China, These obstacles include the comparatively higher cost of EVs, compared with traditional automobiles, the shorter driving range between battery charges, long charging times for standard EV batteries, the limited infrastructure of EV charging facilities, and EV battery attenuation and maintenance.
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Our Solutions and Growth Strategy
To resolve these key market issues, given the economic and population growth in China, we believe there is an opportunity for a new business model. Kandi has been advocating, and through the Service Company, as defined below, implemented the “Micro Public Transportation” model, or MPT (the “EV-Share Program”), which provides a shared pure EV transportation platform that has not been previously afforded to urban residents. While it is less expensive than standard taxis. MPT is designed as a new business model for public transportation that maximizes the advantages of our existing EV products and technologies, and further stimulates the expansion of the EVs markets to urban communities. Since its inception, the “Micro Public Transportation” model has made impressive progress, and received great recognition and support from government officials, the end users, and our business partners throughout of China. In order to smoothly move the MPT concept forward, Kandi Electric Vehicles Group Co., Ltd., our 50/50 joint venture with Geely Automobile Holdings Ltd. ( the “JV Company”) participated in the establishing of Zhejiang ZuoZhongYou Electric Vehicle Service Co., Ltd. (the “Service Company”), of which the JV Company has a 19% of ownership interest. As of the end of 2014, the EV-Share Program had been launched, through the Service Company, in nine cities including Hangzhou, Shanghai, Chengdu, Nanjing, Guangzhou, Wuhan, Changsha, Changzhou and Rugao.
Today, cities in China face four critical challenges in the traffic environment, including pollution, traffic congestion, insufficient parking space and growing scarcity of energy supplies, which are mainly the result of ever growing volume of gas-powered automobiles. One solution to solve these problems is to create cleaner and more affordable public transportation to urban residents. Currently, subway and bus transport are the most abundant public transportation options available. In this regard, the Company advocates the EV-Share Program to reduce the total number of private cars in use, which will improve environmental conditions, ease traffic congestion, alleviate parking availability, and reduce the reliance and use of fossil fuels.
Besides the zero-emission benefit, the EV-Share Program combines the advantages of city taxis, resident vehicular transport, rental cars and traditional mass transportation, along with the benefits of the availability of the vertical automatic charging/parking garage and the street-level service stations. It is a seamless transportation tool in all dimensions for urban public transportation, designed to greatly improve the efficiency of urban EV usage, while easing traffic congestion, allowing for greater parking resources. Additionally, it will likely to promote the fast adoption of the pure EVs among Chinese consumers as MPT enables consumers to rent pure EVs on a short-term hourly base or lease them on the long-term base, without concerns on the costs and issues associated with owning and maintaining EVs individually.
The EV-Share Program is supported by a network of charging/parking stations, which provides charging, maintenance and battery recycling facilities. The stations locate at airports, train stations, hotels, business centers, selected residential areas and other strategic locations close to city public transportation network . A centralized tracking system allows the service provider of EV-Share Program to keep a close watch at the status and precise location of each vehicle. In addition to the short-term rental and long term leasing options to consumers described above, the Service Company also offers long-term leasing options to large enterprises, government entities and residential communities so they can use pure EVs for extended periods of time (the “Long-term Leasing Program”). In 2014, we have greatly benefited from the success of various MPT initiatives in China, especially the short-term hourly rental and the Long-term Leasing Program.
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Our Organizational Structure
The Company was incorporated under the laws of the State of Delaware on March 31, 2004. The Company changed its name from Stone Mountain Resources, Inc. to Kandi Technologies, Corp. on August 13, 2007. On December 21, 2012, the Company changed its name to Kandi Technologies Group, Inc.
Headquartered in the Jinhua city, Zhejiang Province, China, the Company’s primary business operations are the design, development, manufacturing and commercialization of electric vehicles, electric vehicle parts and off-road vehicles, which are distributed in China and global markets. The Company conducts its primary business operations through its wholly-owned subsidiary, Zhejiang Kandi Vehicles Co., Ltd. (“Kandi Vehicles”) and the partial and wholly-owned subsidiaries of Kandi Vehicles. As part of its strategic objective to become a leader in EV market in China, the Company focuses on fuel efficient, pure EV parts manufacturing with a particular emphasis on expanding its market share in China.
The Company's organizational chart is as follows:
* The box with dotted-line border represents the entity that has ceased operation and was dissolved in July 2014.
Operating Subsidiaries:
Pursuant to relevant agreements executed in January 2011, Kandi Vehicles is entitled to 100% of the economic benefits, voting rights and residual interests (100% profits and loss absorption rate) of Jinhua Kandi New Energy Vehicles Co., Ltd. (“Kandi New Energy”). Kandi New Energy currently holds vehicle production rights (license) on manufacturing Kandi brand electric utility vehicles (”Special-purpose Vehicles”) and the production rights (license) on manufacturing battery packs used in Kandi brand EVs.
Jinhua Three Parties New Energy Vehicles Service Co., Ltd. (“Jinhua Service”) was formed as a joint venture, by and among our wholly-owned subsidiary, Kandi Vehicles, the State Grid Power Corporation and Tianneng Power International. The Company, indirectly through Kandi Vehicles, had a 30% ownership interest in Jinhua Service. As of September 30, 2014, Jinhua Service ceased its operations and was dissolved.
In April 2012, pursuant to a share exchange agreement, the Company acquired 100% of Yongkang Scrou Electric Co, Ltd. (“Yongkang Scrou”), a manufacturer of parts for automobile and electric vehicle, including EV drive motors, EV controllers, air conditioners and other electrical products.
As a part of our EV business strategy, we believe we need more production resources to timely and efficiently satisfy the market demands. In March 2013, pursuant to a joint venture agreement (the “JV Agreement”) entered into between Kandi Vehicles and Shanghai Maple Guorun Automobile Co., Ltd. (“Shanghai Guorun”), a 99%-owned subsidiary of Geely Automobile Holdings Ltd. (“Geely”), the parties established Zhejiang Kandi Electric Vehicles Co., Ltd. (the “JV Company”) to develop, manufacture and sell EVs and related auto parts, and to invest in other companies with related or similar business. Each of Kandi Vehicles and Shanghai Guorun has a 50% ownership interest in the JV Company. In March 2014, the JV Company changed its name to Kandi Electric Vehicles Group Co., Ltd. At present, the JV Company is a holding company with products that are manufactured by its subsidiaries.
In March 2013, Kandi Vehicles formed Kandi Electric Vehicles (Changxing) Co., Ltd. (“Kandi Changxing”) in the Changxing (National) Economic and Technological Development Zone. Kandi Changxing is engaged in the production of EVs. In the fourth quarter of 2013, Kandi Vehicles entered into an ownership transfer agreement with JV Company pursuant to which Kandi Vehicles transferred 100% of its ownership in Kandi Changxing to the JV Company. The Company, indirectly through its 50% ownership interest in the JV Company, has a 50% economic interest in Kandi Changxing.
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In April 2013, Kandi Electric Vehicles (Wanning) Co., Ltd. (“Kandi Wanning”) was formed in Wanning City of Hainan Province by Kandi Vehicles and Kandi New Energy. Kandi Vehicles has a 90% ownership in Kandi Wanning, and Kandi New Energy has the remaining 10% interest. However, by contract, Kandi Vehicles is, effectively, entitled to 100% of the economic benefits, voting rights and residual interests (100% profits and losses) of Kandi Wanning. Hainan Province is planned as an international tourism island by the Chinese government and there is a high possibility that all non-EV vehicles will be banned from use within the province. Therefore, the Company believes EV business has a great potential growth rate in Hainan province. To capture this opportunity, the Company signed an agreement with Wanning city government and invested a total of RMB 1 billion to develop a factory in Wanning with an annual production of 100,000 EVs. Currently, this project is expected to launch its trial production by 2015.
In July 2013, Zhejiang ZuoZhongYou Electric Vehicle Service Co., Ltd. (the “Service Company”) was formed. The Service Company is engaged in various pure EV leasing businesses including the EV-Share Program. The JV Company has a 19% ownership interest in the Service Company. The Company, indirectly through its 50% ownership interest in the JV Company, has a 9.5% economic interest in the Service Company.
In November 2013, Zhejiang Kandi Electric Vehicles Jinhua Co., Ltd. (“Kandi Jinhua”) was formed by the JV Company. The JV Company has 100% ownership interest in Kandi Jinhua, and the Company, indirectly through its 50% ownership interest in the JV Company, has a 50% economic interest in Kandi Jinhua. According to the terms of the JV Agreement, except the JV Company and its subsidiaries, Kandi Vehicle and its subsidiaries are not allowed to manufacture pure EVs. However, Kandi New Energy holds the production rights (license) on manufacturing of Special-purpose Vehicles. Therefore, it is necessary to establish Kandi Jinhua, which is in charge of the Special-purpose Vehicle business and entitles to use Kandi New Energy’s Special-purpose Vehicle production rights (license).
In November 2013, Zhejiang JiHeKang Electric Vehicle Sales Co., Ltd. (“JiHeKang”) was formed by the JV Company and is engaged in car sales business. The JV Company has 100% ownership interest in JiHeKang, and the Company, indirectly through its 50% ownership interest in the JV Company, has a 50% economic interest in JiHeKang.
In December 2013, the JV Company entered into an ownership transfer agreement with Shanghai Guorun pursuant to which the JV Company acquired 100% ownership of Kandi Electric Vehicles (Shanghai) Co., Ltd. (“Kandi Shanghai”). As a result, Kandi Shanghai is a wholly-owned subsidiary of the JV Company, and the Company, indirectly through its 50% ownership interest in the JV Company, has a 50% economic interest in Kandi Shanghai.
In January 2014, Zhejiang Kandi Electric Vehicles Jiangsu Co., Ltd. (“Kandi Jiangsu”) was formed by the JV Company. The JV Company has 100% ownership interest in Kandi Jiangsu, and the Company, indirectly through its 50% ownership interest in the JV Company, has a 50% economic interest in Kandi Jiangsu.
Our Products
General
For the years ended December 31, 2014, 2013 and 2012, our products include EV parts, EV products, and off-road vehicles including ATVs, utility vehicles (“UTVs”), go-karts, and others. According to our market research on consumer demand trends, we have adjusted our production line strategically and continued to develop and manufacture new EV products in an effort to meet market demands and better serve our customers.
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Year Ended December 31, | ||||||||||||||||||
2014 | 2013 | 2012 | ||||||||||||||||
Unit | Sales | Unit | Sales | Unit | Sales | |||||||||||||
EV parts | 102,236 | $ | 116,431,310 | 51,588 | $ | 1,724,031 | 93,881 | $ | 3,517,237 | |||||||||
EV products | 3,758 | 33,978,619 | 4,694 | 46,619,203 | 3,915 | 19,034,936 | ||||||||||||
Off-Road Vehicles | 25,746 | 19,819,078 | 55,516 | 46,192,811 | 50,252 | 41,961,497 | ||||||||||||
Total | 131,740 | $ | 170,229,006 | 111,798 | $ | 94,536,045 | 148,048 | $ | 64,513,670 |
EV Parts
During the year ended December 31, 2014, our revenues from the sale of EV parts were $116,431,310. We sold our EV parts mostly to the JV Company for manufacturing of the EV products. We started the EV parts business to the JV Company in the first quarter of 2014 and achieved significant growth during the year. Among the total EV parts sales to the JV Company for the year ended December 31, 2014, approximately 83% or the majority of the sales were related to the sales of battery packs. Due to various Chinese auto industry regulations, we hold the necessary production license to manufacture battery packs to be exclusively used in the EVs manufactured by the JV Company under the Kandi brand. Approximately 6% of the sales were related to the sales of EV controllers. Approximately 5% of the sales were related to the sales of air conditioning units. Approximately 4% of the sales were related to the sales of EV drive motors, and the remaining 2% were related to the sales of body parts and other auto parts.
EV Products
We continued to sell EV products during the year of 2014. Our revenues from the sale of EV products for the fiscal year of 2014 were $33,978,619, a decrease of $12,640,584 or 27.1% from $46,619,203 for the year ended December 31, 2013, representing a 19.9% of reduction in unit sales. The decrease in the sales volume was due to a JV Agreement signed in 2013 which required us to gradually transfer our EVs production and distribution business to the JV Company.
Off-Road Vehicles
During the year ended December 31, 2014, our revenues from the sale of the off-road vehicles declined by $26,373,733, or 57.1%, to $19,819,078 from $46,192,811 for the year ended December 31, 2013, The decrease was primarily due to the rearrangement of our product portfolio for more efficient use of resources to capture more sales opportunities in the fast-growing EV market in China.
The following table shows the breakdown of Kandi's revenues from its customers by geographic markets:
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Year Ended December 31 | ||||||||||||||||||
2014 | 2013 | 2012 | ||||||||||||||||
Sales Revenue | Percentage | Sales Revenue | Percentage | Sales Revenue | Percentage | |||||||||||||
North America | $ | 2,900,789 | 2% | $ | 6,906,807 | 7% | $ | 7,243,257 | 11% | |||||||||
Europe and other regions | 5,729,035 | 3% | 2,394,948 | 3% | 1,639,990 | 3% | ||||||||||||
China | 161,599,182 | 95% | 85,234,290 | 90% | 55,630,423 | 86% | ||||||||||||
Total | 170,229,006 | 100% | 94,536,045 | 100% | 64,513,670 | 100% |
Recent Development Activities
In November 2014, SMA7002BEV05, the first Mid-tier Luxury Pure Electric Vehicle developed by JV Company was approved by the Ministry of Industry and Information Technology of the People's Republic of China ("MIIT") according to No. 69 public announcement of MIIT. The SMA7002BEV05 model is among the latest vehicles on the lists of the approved vehicle products (“MITT” No. 266) and the recommended models for energy saving & new energy vehicle demonstration and promotion in China (“MITT” No. 63). As a result, purchasers of such EV will now be the ultimate beneficiaries to receive all levels of national and local subsidies and incentives. The approval of SMA7002BEV05 is an indication of our beginning to enter the field of the middle and high level pure vehicle products. We believe that our diversified products will meet the market's growing demands and secure our leading position in manufacturing pure electric vehicle products in China.
In December 2014, Kandi Vehicles signed a purchase contract with Zhejiang Tianneng Energy Technology Co, Ltd ("Tianneng Energy Technology") for a one-year supply of TNL-ITR18650-2200P lithium batteries starting in January 2015. Kandi Vehicle's purchase amount is committed to be no less than RMB 260 million or approximately $42.6 million in 2015. Management believes Tianneng Energy Technology's lithium battery is a great addition and will help Kandi to achieve a better performance for EVs.
As of the end of 2014, our EV-Share Program has been expanded to 9 cities including Hangzhou, Shanghai, Chengdu, Nanjing, Guangzhou, Wuhan, Changsha, Changzhou, and Rugao. This program is an innovative business model aimed at promoting and popularizing the use of EVs in China. Since its inception, the program has generated significant public interest, and received key recognitions and endorsements from consumers as well as the government agencies. It also includes a variety of the Long-term Leasing Program, ideal for those companies, government entities and residential communities. As of the end of 2014, there had been a total of 14,398 Kandi EVs delivered to our customers. Leveraging the success of the EV-Share Program, Kandi has built a solid foundation to be recognized as the one of the leaders in the pure EV market in China.
On January 14, 2015, we announced that the first 60 Kandi Brand EVs were delivered to launch an innovative EV business model, which we called “Mini Police Car” Program. The EVs are the first time used by Hangzhou Uptown Public Security Bureau to facilitate performance of community safety patrols, population permit patrols, fire safety inspections, as well as other police duties. The Mini Police Car offers the advantage for police to quick access into these congested areas and small alleyways to carry out its duties. Kandi equips these EVs with the necessary police equipment, firefighting apparatuses, emergency kits, and other related equipment. In addition to our successful EV sharing program catering to average Chinese consumers, we hope to explore more EV growth opportunities in the area of fleet sales and leasing to large business and government entities in China in the future.
From January 23 to 25, 2015, the 2014 Global New Energy Auto Conference was held in Tianjin China. More than 700 people attended this conference, including government officers, scholars, auto industry experts, ecommerce companies, electric vehicles users, industry investors, technical development personnel, media and others. During the conference, Mr. Hu Xiaoming, our Chairman and CEO, was granted the sole award for “Innovator of Annual Green Auto ”.
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On January 31 2015, Mr. Hu Xiaoming, our Chairman and CEO, visited Shenzhen Chuangming Battery Technology Co., LTD. (“Chuangming”), which engages in research and development, production and distribution in the field of Lithium ion battery. Both parties had a friendly detailed discussion on how to apply the high performance battery No. 18650 from Chuangming on Kandi’s EVs and align with the intention of cooperation. The visit for Mr. Hu is to seek the partner for high performance battery for Kandi’s EV products, and secure the supply of EV’s battery for future mass EVs production.
On February 15, 2015, the management of the JV Company made a decision to add the direct-selling operation to its business for the sale of pure EVs, in addition to the current fleet sale model. The JV Company has made good progress in selling EV products to the Service Company, which operates various leasing options including short-term rental and the Long-term Leasing Program. We believe the EV-Share Program will continue to be the main business growth driver for the JV Company. Meanwhile, in line with the growing direct market demand from end users, the JV Company will begin to explore direct selling option. A new pure EV product, JL7001BEV03, or Cyclone, developed by the JV Company will be mainly directly sold to the end users. Up to date, Cyclone has passed the required technical inspection and tests from various regulated agencies in China, including National Passenger Car Quality Supervision and Inspection Centre. The Company also filed the final application of the product public announcement with China’s MIIT and expect the application to be approved within the next two months. “Cyclone” is a five-door, four-seat vehicle equipped with a newly developed triple element lithium ion battery, with a comfortable seating area and reliable safety conditions. Cyclone utilizes a central control system that features both touch screen and conventional buttons, and it has also achieved multiple domestic automobile leading standards. The participated launch of Cyclone will further strengthen the leading position of the JV Company in the new energy automobile industry. As the JV Company gears up to sell EVs direct to end users this year, we believe that the JV Company will have great advantages in both fleet sales and direct sales markets.
Sales and Distribution
The Company has three main products: electric vehicle products, electric vehicle parts and off-road vehicles in year 2014. According to the JV Agreement with Geely, we will be gradually transferring the production of the EV products to the JV Company, and continue to share the 50% economic benefits share from the JV Company. Besides EVs, Kandi focuses on the design, production and distribution of EVs parts, which has demonstrated significant growth in 2014. Additionally, Kandi still continued to produce and sell the off-road vehicles, which is our traditional products.
Customers
As of December 31, 2014, our major customers, in the aggregate, accounted for 71% of our sales. Currently, the Company is developing new business partners and clients for our products to reduce our dependence on existing customers and focusing the new business development efforts on our pure EV sharing project;business.
The Company's major customers, each of whom accounted for more than 10% of our consolidated revenue, were as follows:
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Sales | Accounts Receivable and Amount Duefrom JV Company, Net(1) | |||||||||||||||||
Year | Year | Year | ||||||||||||||||
Ended | Ended | Ended | ||||||||||||||||
December, | December, | December, | December | December | December | |||||||||||||
31, | 31, | 31, | 31, | 31, | 31, | |||||||||||||
Major Customers | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | ||||||||||||
Kandi Electric Vehicles (Changxing) Co., Ltd. | 38% | - | - | 17% | - | - | ||||||||||||
Kandi Electric Vehicles (Shanghai) Co., Ltd. | 23% | - | - | 16% | - | - | ||||||||||||
Shanghai Maple Auto Co., Ltd. | 10% | 23% | - | 3% | 47% | - |
(1) | The balance at December 31, 2014 didn’t include the one-year entrusted loan of $24,376,371 that Kandi Vehicle lent to the JV Company. |
Sources of Supply
All the raw materials are purchased from the suppliers. The major parts of our products are mainly manufactured by Kandi. Other components and (iii) quantify all factors contributingparts that are needed are purchased from third-party suppliers. Kandi does not have, and does not anticipate having, any difficulty in obtaining required materials from its suppliers. In reaching this determination, we considered our current contracts and our current business relationships with our suppliers.
The Company's material suppliers, each of whom accounted for more than 10% of our total purchases, were as follows:
Purchases | Accounts Payable | |||||||||||||||||
Year | Year | Year | ||||||||||||||||
Ended | Ended | Ended | ||||||||||||||||
December, 31, | December, 31, | December, 31, | December 31, | December 31, | December 31, | |||||||||||||
MajorSuppliers | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | ||||||||||||
Zhejiang New Energy Auto System Co., Ltd. | 31% | 33% | 26% | 12% | 12% | - | ||||||||||||
Shandong Henyuan New Energy Tech Co., Ltd. | 25% | - | - | 32% | - | - | ||||||||||||
Zhongju (Tianjin) New Energy Investment Co., Ltd. | 11% | - | - | 29% | - | - |
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Competitors
Our EV business faces the competition from two parts, one is the competition with traditional vehicles and the other is the competition from other EVs manufacturers.
In terms of the competition with the traditional vehicle manufacturers, many competitors are larger and have greater financial resources. But the traditional automobile companies face many urban traffic challenges, including urban pollution, traffic congestion, insufficient parking space and energy crisis., which gives us great opportunities for EVs’ development. The government grants great support and issues favorable policies to promote EVs development, which is a clear evidence for EVs growth. We believe electric vehicle industry in China has many years of great potential growth ahead.
Within electric vehicle market itself, the competitions are fierce as we have to compete with many domestic and global EV manufactures with greater brand recognition and financial resources. However, being one of the earliest companies to engage in the research, production and distribution of electric vehicles, we believe we have the advantage on the technology, innovation on the vehicle business operation and distribution channel. In particular, the innovative EV-Share Program, or MPT model we have been advocating, is different from our competitors’ offering, and has been well received by the government and the end users. This business model, along with our continuous efforts on research and development as well as strategic alliance, shall help us to build competitive advantages over other EV manufacturers.
Intellectual Property and Licenses
Our success depends, at least in part, on our ability to protect our core technology and intellectual property. We rely on a combination of patents, patent applications, trademarks, copyright and trade secret protection laws in China and other jurisdictions, as well as confidentiality procedures and contractual provisions to protect our intellectual property and our brand. As of December 31, 2014, we had 26 issued patents, 2 issued software copyrights and 6 pending patent applications with Chinese patent authority related to electrical vehicle products, electrical vehicle parts and off-road vehicle products. Under the PRC Patent Law, an invention patent is valid for a term of 20 years and a utility or design patent is valid for a term of 10 years. Our patents are valid for 10 years. In addition, we are authorized to use the trademark of “Kandi” and we are the owner of the trademark of “JASSCOL”. We intend to continue to file additional patent applications with respect to our technology.
Employees
As of December 31, 2014, excluding the contractors, Kandi had a total of 516 full-time employees as compared to 430 full-time employees on December 31, 2013, of which 328 employees are production personnel, 14 employees are sales personnel, 44 employees are research and development personnel, and 130 employees are administrative personnel. None of our employees are covered by collective bargaining agreements. We consider our relationships with our employees to be good. We also employ consultants on an as needed basis.
Pure Electric Vehicles Subsidies
Currently, there are two subsidies from central and local governments for the pure EVs in China – one from each of the central and local governments. The ultimate beneficiary for these subsidies is the consumer and the actual prices that consumers pay reflect the deduction of both subsidies.
a) The central government provides a subsidy to manufacturers paid in advance quarterly upon application and approval and settled annually. After selling product to dealers, manufacturers can submit subsidy payment applications with invoices and other supporting documents at the end of each quarter to the requisite central government agencies through their regional offices. After the review and approval by the agencies, the central government makes advance subsidy payments to the manufacturers. At the end of the year, the final subsidy amounts are verified, reconciled according to the number of vehicles actually sold to consumers and settled on an annual basis.
b) Pursuant to the requirement of the central government, the local governments provide a subsidy to consumers who purchase EVs by a price reduction from the dealer. After the consumer purchases an EV at a reduced selling price from the dealer, the dealer submits a subsidy application to the local government, including a consumer authorization letter for subsidy application, consumer personal I.D., EV Vehicle License, EV purchase invoice and other required documents and requests reimbursement (to the dealer) for the local government subsidy.
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Environmental and Safety Regulation
Emissions
Our products are all subject to international laws and emissions related regulations, including regulations and related standards established by China Environmental Protection Agency, the United States Environmental Protection Agency (“EPA”), the California Air Resources Board (“CARB”), Europe and Canada.
All Kandi's products comply with all applicable emissions standards and regulations in China Environmental Protection Agency, the United States and internationally, the California Air Resources Board (“CARB”), Europe and Canada. However, we are unable to predict the ultimate impact of standards and regulations adopted in the future or proposed regulations on Kandi and its business.
Use regulation
The sale and use of products must be subject to the "Traffic Law" and relevant laws & regulations in China. National, State, and federal laws and regulations have been promulgated, or are under consideration, that impact the use or manner of use of Kandi's products. Certain states and local authorities have adopted, or are considering the adoption of, legislation and local ordinances which restrict the use of ATVs and off-road vehicles to specified hours and locations. The federal government also has restricted the use of ATVs and off-road vehicles in some national parks and federal lands. In several instances, the restriction has been a complete ban on the recreational use of these vehicles. Kandi is unable to predict the outcome of such actions or the possible effect on its business. Kandi believes that its off-road vehicle business would be no more adversely affected than those of its competitors by the adoption of any such pending laws or regulations.
Product Safety and Regulation
Safety Regulation
The U.S. federal government and individual states have adopted, or are considering the adoption of, laws and regulations relating to the use and safety of Kandi's products. The federal government is the primary regulator of product safety. The Consumer Product Safety Commission (“CPSC”) has federal oversight over product safety issues related to ATVs and off-road vehicles. The National Highway Transportation Safety Administration (“NHTSA”) has federal oversight over product safety issues related to on-road motorcycles.
In August 2008, the Consumer Product Safety Improvement Act (the “Act”) was passed. The Act requires all manufacturers and distributors who import into or distribute ATVs within the United States to comply with the ANSI/SVIA safety standards, which were previously voluntary. The Act also requires the same manufacturers and distributors to have ATV action plans filed with the CPSC that are substantially similar to the voluntary action plans that were previously in effect. Kandi currently complies with the ANSI/SVIA standards.
Kandi's motorcycles are subject to federal vehicle safety standards administered by NHTSA. Kandi's motorcycles are also subject to various state vehicle safety standards. Kandi believes that its motorcycles comply with safety standards applicable to motorcycles.
Kandi's products are also subject to international safety standards in places where it sells its products outside the United States. Kandi believes that its motorcycles and EVs comply with applicable safety standards in the United States and internationally.
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Principal Executive Offices
Our principal executive office is located in the Jinhua City Industrial Zone in Jinhua, Zhejiang Province, PRC, 321016 and our telephone number is (86-579) 82239856.
Item 1A. Risk Factors.
You should carefully consider the risks described below together with all of the other information included in this report before making an investment decision with regard to our securities. The statements contained in or incorporated into this Annual Report that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. If any of the following risks actually occurs, our business, financial condition or results of operations could be harmed. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.
Risks Relating to Our Business
Our future growth is dependent upon consumers’ willingness to adopt EVs.
Our growth is highly dependent upon the adoption by consumers of, and we are subject to a risk of any reduced demand for, alternative fuel vehicles in general and EVs in particular. The market for alternative fuel vehicles (including EVs) is relatively new, rapidly evolving, characterized by rapidly changing technologies, price competition, additional competitors, evolving government regulation and industry standards, frequent new vehicle announcements and changing consumer demands and behaviors. If the market for EVs in China does not develop as we expect or develops more slowly than we expect, our business, prospects, financial condition and operating results will be harmed.
The unavailability, reduction or elimination of government and economic incentives could have a material adverse effect on our business, financial condition, operating results and prospects.
Chinese government has made significant efforts in actively advocating the development of new energy vehicles to reach production and sales targets of 0.5 million New Energy Vehicles (NEVs) by 2015 and 5 million NEVs by 2020. We received support from the local and central government of the PRC from time to time. Any reduction, elimination or discriminatory application of government subsidies and economic incentives because of policy changes, the reduced need for such subsidies and incentives due to the customer base of our EVs, fiscal tightening or other reasons may result in the diminished competitiveness of the alternative fuel vehicle industry generally or our EVs in particular. This could materially and adversely affect the growth of the alternative fuel automobile markets and our business, prospects, financial condition and operating results.
Our growth depends in part on the availability and amounts of government subsidies and economic incentives for alternative fuel vehicles generally and performance EVs specifically. For example, purchasers of three models of Kandi brand EVs are eligible to receive purchase tax exemption at the amount of 10% of the vehicle’s total purchase price during the three-year period from September 1, 2014. Purchasers of Kandi's SMA7000BEV and SMA7001BEV models are the ultimate beneficiaries, on a per car basis, the national government subsidy of RMB 47,500.00 (Approximately $7,738.00) and the local government subsidy of RMB 47,500.00 (Approximately $7,738.00) from provincial government and municipal government combined at both Chengdu (Sichuan province) and Nanjing (Jiangsu province). Additionally, these two vehicle models also qualify for free license plates in Shanghai. The license plates in Shanghai are auctioned to the public at an average price between RMB70,000.00 to RMB80,000.00 ($11,410.00 to $13,040.00) per license plate. While we believe the latest tax exemption, along with a series of government incentives and subsidies, may have a very positive impact on the sales of Kandi Brand EVs in China going forward, we cannot assure you it is always the case. In the event such favored policy and treatment discontinue, our business outlook and financial conditions could be negatively impacted.
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Developments in alternative technologies or improvements in the internal combustion engine may materially adversely affect the demand for our EVs.
Significant developments in alternative technologies, such as advanced diesel, ethanol, fuel cells or compressed natural gas, or improvements in the fuel economy of the internal combustion engine, may materially and adversely affect our business and prospects in ways we do not currently anticipate. Any failure by us to develop new or enhanced technologies or processes, or to react to changes in existing technologies, could materially delay our development and introduction of new and enhanced EVs, which could result in the loss of competitiveness of our vehicles, decreased revenue and a loss of market share to competitors.
If we are unable to keep up with advances in electric vehicle technology, we may suffer a decline in our competitive position.
We may be unable to keep up with changes in EV technology and, as a result, may suffer a decline in our competitive position. Any failure to keep up with advances in EV technology would result in a decline in our competitive position which would materially and adversely affect our business, prospects, operating results and financial condition. Our research and development efforts may not be sufficient to adapt to changes in EV technology. As technologies change, we plan to upgrade or adapt our vehicles and introduce new models in order to continue to provide vehicles with the latest technology, in particular battery cell technology. However, our vehicles may not compete effectively with alternative vehicles if we are not able to source and integrate the latest technology into our vehicles. For example, we do not manufacture battery cells, which makes us dependent upon other suppliers of battery cell technology for our battery packs.
Our business depends substantially on the continuing efforts of our executive officers, and our business may be severely disrupted if we lose their services.
Our future success depends substantially on the continued services of our executive officers, especially our CEO and Chairman of the Board of Directors, Mr. Hu Xiaoming. We do not maintain key man life insurance on any of our executive officers. If any of our executive officers are unable or unwilling to continue in their present positions, we may not be able to replace them readily, if at all. Therefore, our business may be severely disrupted, and we may incur additional expenses to recruit and retain new officers. In addition, if any of our executive officers joins a competitor or forms a competing company, we may lose some of our customers.
We may be subject to product liability claims, or recalls which could be expensive, damage our reputation and result in a diversion of management resources.
We may be subject to lawsuits resulting from injuries associated with the use of the vehicles that we sells or produces. We may incur losses relating to these claims or the defense of these claims. There is a risk that claims or liabilities will exceed our insurance coverage. In addition, we may be unable to retain adequate liability insurance in the future.
We may also be required to participate in recalls involving our vehicles, if any prove to be defective, or we may voluntarily initiate a recall or make payments related to such claims as a result of various industry or business practices or the need to maintain good customer relationships. Such a recall would result in a diversion of resources. While we do maintain product liability insurance, we cannot assure you that it will be sufficient to cover all product liability claims, that such claims will not exceed our insurance coverage limits or that such insurance will continue to be available on commercially reasonable terms, if at all. Any product liability claim brought against us could have a material adverse effect on our results of operations.
We retain certain personal information about our customers and may be subject to various privacy and consumer protection laws.
We and our operating companies use our vehicles’ electronic systems to log information about each vehicle’s condition, performance and use in order to aid us in providing customer service, including vehicle diagnostics, repair and maintenance, as well as to help us collect data regarding our customers’ charge time, battery usage, mileage and efficiency habits and to improve our vehicles. We also collect information about our customers through our website, at our stores and facilities, and via telephone.
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Our customers may object to the processing of this data, which may negatively impact our ability to provide effective customer service and develop new vehicles and products. Collection and use of our customers’ personal information in conducting our business may be subject to national and local laws and regulations in the PRC, and such laws and regulations may restrict our processing of such personal information and hinder our ability to attract new customers or market to existing customers. We may incur significant expenses to comply with privacy, consumer protection and security standards and protocols imposed by law, regulation, industry standards or contractual obligations. Although we take steps to protect the security of our customers’ personal information, we may be required to expend significant resources to comply with data breach requirements if third parties improperly obtain and use the personal information of our customers or we otherwise experience a data loss with respect to customers’ personal information. A major breach of our network security and systems could have serious negative consequences for our businesses and future prospects, including possible fines, penalties and damages, reduced customer demand for our vehicles, and harm to our reputation and brand.
Our business will be adversely affected if we are unable to protect our intellectual property rights from unauthorized use or infringement by third parties.
Any failure to adequately protect our proprietary rights could result in weakening or loss of such rights, which may allow our competitors to offer similar or identical products or use identical or confusingly similar branding, potentially resulting in the loss of some of our competitive advantage, a decrease in our revenue and an attribution of potentially lower quality products to us, which would adversely affect our business, prospects, financial condition and operating results. Our success depends, at least in part, on our ability to protect our core technology and intellectual property. To accomplish this, we rely on a combination of patents, patent applications, trade secrets, including know-how, employee and third party nondisclosure agreements, copyright protection, trademarks, intellectual property licenses and other contractual rights to establish and protect our proprietary rights in our technology. We have also received from third parties patent licenses related to manufacturing our vehicles.
The protection provided by the patent laws is and will be important to our future opportunities. However, such patents and agreements and various other measures we take to protect our intellectual property from use by others may not be effective for various reasons, including the following:
Existing trademark and trade secret laws and confidentiality agreements afford only limited protection. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States, and policing the unauthorized use of our intellectual property is difficult.
We may need to defend ourselves against patent or trademark infringement claims, which may be time-consuming and would cause us to incur substantial costs.
Companies, organizations or individuals, including our competitors, may hold or obtain patents, trademarks or other proprietary rights that would prevent, limit or interfere with our ability to make, use, develop, sell or market our vehicles or components, which could make it more difficult for us to operate our business. From time to time, we may receive inquiries from holders of patents or trademarks regarding their proprietary rights. Companies holding patents or other intellectual property rights may bring suits alleging infringement of such rights or otherwise assert their rights and seek licenses. In addition, if we are determined to have infringed upon a third party’s intellectual property rights, we may be required to do one or more of the following:
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In the event of a successful claim of infringement against us and our failure or inability to obtain a license to the infringed technology or other intellectual property right, our business, prospects, operating results and financial condition could be materially adversely affected. In addition, any litigation or claims, whether or not valid, could result in substantial costs and diversion of resources and management attention.
We may also face claims that our use of technology licensed or otherwise obtained from a third party infringes the rights of others. In such cases, we may seek indemnification from our licensors/suppliers under our contracts with them. However, indemnification may be unavailable or insufficient to cover our costs and losses, depending on our use of the technology, whether we choose to retain control over conduct of the litigation, and other factors.
Our vehicles make use of lithium-ion battery cells, which could catch fire or vent smoke and flame. This may lead to additional concerns, about the batteries used in automotive applications.
The battery pack in our EV products makes use of lithium-ion cells. We also currently intend to make use of lithium-ion cells in battery packs on any future vehicles we may produce. On rare occasions, lithium-ion cells can rapidly release the energy they contain by venting smoke and flames in a manner that can ignite nearby materials as well as other lithium-ion cells. Extremely rare incidents of laptop computers, cell phones and EV battery packs catching fire have focused consumer attention on the safety of these cells.
These events have raised concerns about the batteries used in automotive applications. To address these questions and concerns, a number of cell manufacturers are pursuing alternative lithium-ion battery cell chemistries to improve safety. We may have to recall our vehicles or participate in a recall of a vehicle that contains our battery packs, and redesign our battery packs, which would be time consuming and expensive. Also, negative public perceptions regarding the suitability of lithium-ion cells for automotive applications or any future incident involving lithium-ion cells such as a vehicle or other fire, even if such incident does not involve us, could seriously harm our business.
In addition, we store a significant number of lithium-ion cells at our manufacturing facility. Any mishandling of battery cells may cause disruption to the operation of our facilities. While we have implemented safety procedures related to the handling of the cells, there can be no assurance that a safety issue or fire related to the cells would not disrupt our operations. Such damage or injury would likely lead to adverse publicity and potentially a safety recall. Moreover, any failure of a competitor’s EV, may cause indirect adverse publicity for us and our EVs. Such adverse publicity would negatively affect our brand and harm our business, prospects, financial condition and operating results.
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Compliance with environmental regulations can be expensive, and noncompliance with these regulations may result in adverse publicity and potentially significant monetary damages and fines.
Our business operations generate noise, waste water, gaseous byproduct and other industrial waste. We are required to comply with all national and local regulations regarding protection of the environment. We are in compliance with current environmental protection requirements and have all necessary environmental permits to conduct our business. However, if more stringent regulations are adopted in the future, the costs of compliance with these new regulations could be substantial. Additionally, if we fail to comply with present or future environmental regulations, we may be required to pay substantial fines, suspend production or cease operations. Any failure by us to control the use of, or to adequately restrict the unauthorized discharge of, hazardous substances could subject us to potentially significant monetary damages and fines or suspensions to our business operations. Certain laws, ordinances and regulations could limit our ability to develop, use, or sell our products.
The electric vehicle industry is highly competitive, and we are subject to risks relating to competition that may adversely affect our performance.
The electric vehicle industry is highly competitive, and our continued success depends upon our ability to compete effectively in markets that contain many competitors, some of which have significantly greater financial, marketing and other resources than we have. Competition may affect our pricing structures, potentially causing us to lower our prices, which may adversely impact our profits. New or existing competition that uses a business model that is different from our business model may put pressure on us to change our model so that we can remain competitive.
Our high concentration of sales to relatively few customers may result in significant impact our liquidity, business, results of operations and financial condition.
As of December 31, 2014 and 2013, our top five customers, in the aggregate, accounted for 84% and 67%, respectively, of our sales and accounts receivable. Due to the concentration of sales to relatively few customers, loss of one or more of these customers will have relatively high impact on our operational results.
Our business is subject to the risk of supplier concentrations.
We depend on a limited number of suppliers for the sourcing of major components and parts and principal raw materials. For the years ended December 31, 2014 and 2013, the top two suppliers accounted for 57% and 65% of our purchases, respectively. As a result of this concentration in our supply chain, our business and operations would be negatively affected if any of our key suppliers were to experience significant disruption affecting the price, quality, availability or timely delivery of their products. The partial or complete loss of these suppliers, or a significant adverse change in interest income (expense)our relationship with any of these suppliers, could result in lost revenue, added costs and distribution delays that could harm our business and customer relationships. In addition, concentration in our supply chain can exacerbate our exposure to risks associated with the termination by key suppliers of our distribution agreements or any adverse change in the section entitled “Interest Income (Expense), Net.” The Company also amended Note 19terms of the “Notessuch agreements, which could have a negative impact on our revenues and profitability.
Our facilities or operations could be damaged or adversely affected as a result of disasters or unpredictable events.
Our headquarters and facilities are located in several cities in China such as Jinhua, Yongkang and Wanning. If major disasters such as earthquakes, fires, floods, hurricanes, wars, terrorist attacks, computer viruses, pandemics or other events occur, or our information system or communications network breaks down or operates improperly, our headquarters and production facilities may be seriously damaged, or we may have to Consolidated Financial Statements” under Item 8stop or delay production and shipment of Part IIour products. We may incur expenses relating to more clearly detail how the Company’ssuch damages, which could have a material adverse impact on our business, operating results and financial condition.
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If we fail to maintain an effective income tax rate was calculated. Finally,system of internal controls, we also amended the disclosure under “Item 13. Certain Relationshipsmay not be able to accurately report our financial results or prevent fraud. As a result, current and Related Transactions, and Director Independence” to be consistent with other disclosures made elsewhere in the Form 10-K. The supplementary disclosure does not affect any numberspotential shareholders could lose confidence in our financial reporting, which would harm our business and the trading price of our stock.
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. As directed by Section 404 of the Sarbanes-Oxley Act of 2002, or SOX 404, the SEC adopted rules requiring public companies to include a report of management on our internal controls over financial reporting in their annual reports.
Despite of our recent efforts in improving our internal control procedures and remediating the material weakness, we cannot provide assurance that we will not fail to achieve and maintain an effective internal control environment on an ongoing basis, which may cause investors to lose confidence in our reported financial information and have a material adverse effect on the price of our common stock.
The audit report included in this Annual Report was prepared by auditors who are not inspected by the Public Company Accounting Oversight Board and, as a result, you are deprived of the benefits of such inspection
The independent registered public accounting firm that issues the audit reports included in our annual reports filed with the SEC, as auditors of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), or the “PCAOB”, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards. Because our auditors are located in the PRC, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the PRC authorities, our auditors are not currently inspected by the PCAOB.
Inspections of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms' audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The inability of the PCAOB to conduct inspections in China prevents the PCAOB from regularly evaluating our auditor's statements, containedaudits and quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.
The inability of the PCAOB to conduct inspections of auditors in Form 10-K.China makes it more difficult to evaluate the effectiveness of our auditor's quality control and audit procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.
NoRisks Related to Doing Business in China
The economy of China had experienced unprecedented growth. This growth has slowed in the recent years, and if the growth of the economy continues to slow or if the economy contracts, our financial condition may be materially and adversely affected.
The rapid growth of the PRC economy had historically resulted in widespread growth opportunities in industries across China. This growth has slowed in the recent years. As a result of the global financial crisis and the inability of enterprises to gain comparable access to the same amounts of capital available in past years, there may be an adverse effect on the business climate and growth of private enterprise in the PRC. An economic slowdown could have an adverse effect on our sales and may increase our costs. Further, if economic growth continues to slow, and if, in conjunction, inflation is allowed to proceed unchecked, our costs would likely increase, and there can be no assurance that we would be able to increase our prices to an extent that would offset the increase in our expenses.
In addition, a tightening of the labor markets in our geographic region may result in fewer qualified applicants for job openings in our facilities. Further, higher wages, related labor costs and other increasing cost trends may negatively impact our results.
Changes in political and economic conditions may affect our business operations and profitability.
Since our business operations are primarily located in China, our business operations and financial position are subject, to a significant degree, to the economic, political and legal developments in China.
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While the Chinese government has not halted its economic reform policy since 1978, any significant adverse changes in the social, political and economic conditions of China may fundamentally impact China's economic reform policies, and thus the Company's operations and profits may be adversely affected.
Uncertainties with respect to the Chinese legal system could have a material adverse effect on us and may restrict the level of legal protections to foreign investors.
China's legal system is based on statutory law. Unlike the common law system, statutory law is based primarily on written statutes. Previous court decisions may be cited as persuasive authority but do not have a binding effect. Since 1979, the PRC government has been promulgating and amending the laws and regulations regarding economic matters, such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, since these laws and regulations are relatively new, and the PRC legal system continues to rapidly evolve, the interpretation of many laws, regulations and rules is not always uniform and enforcement of these laws, regulations and rules involves uncertainties, which may limit legal protections available to us.
In addition, any litigation in China may be protracted and may result in substantial costs and diversion of resources and management's attention. The legal system in China cannot provide investors with the same level of protection as in the U.S. The Company is governed by laws and regulations generally applicable to local enterprises in China. Many of these laws and regulations were recently introduced and remain experimental in nature and subject to changes and refinements. Interpretation, implementation and enforcement of the existing laws and regulations can be uncertain and unpredictable and therefore may restrict the legal protections available to foreign investors.
Changes in Currency Conversion Policies in China may have a material adverse effect on us.
Renminbi (“RMB”) is still not a freely exchangeable currency. Since 1998, the State Administration of Foreign Exchange of China has promulgated a series of circulars and rules in order to enhance verification of foreign exchange payments under a Chinese entity's current account items, and has imposed strict requirements on borrowing and repayments of foreign exchange debts from and to foreign creditors under the capital account items and on the creation of foreign security in favor of foreign creditors.
This may complicate foreign exchange payments to foreign creditors under the current account items and thus may affect the ability to borrow under international commercial loans, the creation of foreign security, and the borrowing of RMB under guarantees in foreign currencies. Moreover, the value of RMB may become subject to supply and demand, which could be largely impacted by international economic and political environments. Any fluctuations in the exchange rate of RMB could have an adverse effect on the operational and financial condition of the Company and its subsidiaries in China.
You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions based on United States or foreign laws against us, our management or the experts named in the prospectus.
We conduct substantially all of our operations in China and almost all of our assets are located in China. In addition, almost all of our senior executive officers reside in China. As a result, it may not be possible to effect service of process on our senior executive officers within the United States or elsewhere outside China, including with respect to matters arising under U.S. federal securities laws or applicable state securities laws. Moreover, our PRC counsel has advised us that the PRC does not have treaties with the United States or many other countries providing for the reciprocal recognition and enforcement of court orders and final judgments.
Risks Relating to Ownership of Our Securities
Our stock price may be volatile, which may result in losses to our shareholders.
The stock markets have experienced significant price and trading volume fluctuations, and the market prices and trading volumes of companies listed on the NASDAQ Global Market and the NASDAQ Global Select Market have been madevolatile. Although our stock was listed on the NASDAQ Global Market and upgraded to the Form 10-K.NASDAQ Global Select Market on January 2, 2014, the trading price of our common stock is likely to be volatile and could fluctuate significantly in response to many factors, including the following, some of which are beyond our control:
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variations in our operating results;
changes in expectations of our future financial performance, including financial estimates by securities analysts and investors;
changes in operating and stock price performance of other companies in our industry;
additions or departures of key personnel; and
future sales of our common stock.
Domestic and international stock markets often experience significant price and volume fluctuations. These fluctuations, as well as general economic and political conditions unrelated to our performance, may adversely affect the price of our common stock.
Mr. Hu, our CEO, President and Chairman of our Board of Directors is the beneficial owner of a substantial portion of our outstanding common stock, which may enable Mr. Hu to exert significant influence on corporate actions.
Excelvantage Group Limited controls approximately 25.9% of our outstanding shares of common stock as of March 9, 2015. Hu Xiaoming, the Company's Chief Executive Officer, President and Chairman of the Board of Directors, is the sole stockholder of Excelvantage Group Limited. Together with the shares held through Excelvantage Group Limited, Mr. Hu has 28.0% of our outstanding shares of common stock which could have a substantial impact on matters requiring the vote of our shareholders, including the election of our directors and most corporate actions. This Amendmentcontrol could delay, defer or prevent others from initiating a potential merger, takeover or other change in our control, even if these actions would benefit our other shareholders and the Company. This control could adversely affect the voting and other rights of our other shareholders and could depress the market price of our common stock.
We do not anticipate paying any cash dividends to our common shareholders.
We presently do not anticipate that we will pay dividends on any of our common stock in the foreseeable future. If payment of dividends does occur at some point in the future, it would be contingent upon our revenues and earnings, if any, capital requirements, and general financial condition. The payment of any common stock dividends will be within the discretion of our Board of Directors. We presently intend to retain all earnings to implement our business plan; accordingly, we do not reflect events occurring afteranticipate the declaration of any dividends for common stock in the foreseeable future.
Fluctuation in the value of the RMB may have a material adverse effect on your investment.
The change in value of the RMB against the U.S. dollar, the Euro and other currencies is affected by changes in China's political and economic conditions, among other things. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against certain foreign currencies. While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the RMB against the U.S. dollar. As a portion of our costs and expenses is denominated in RMB, the revaluation in July 2005 and potential future revaluation has and could further increase our costs. In addition, any significant revaluation of the RMB may have a material adverse effect on our financial condition. For example, to the extent that we need to convert U.S. dollars we receive from financings into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we receive from the conversion. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of making payments for business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us.
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The limitation of monetary liability against our directors, officers and employees under Delaware law and the existence of statutory indemnification rights of our directors, officers and employees may result in substantial expenditures by our Company and may discourage lawsuits against our directors, officers and employees.
Our articles of incorporation do not contain any specific provisions that limit the liability of our directors for monetary damages to our Company and shareholders; however, we are prepared to indemnify our directors and officers to the extent provided for by Delaware law. We may also have include contractual indemnification obligations in our employment agreements with our officers. The foregoing indemnification obligations could result in the Company incurring substantial expenditures to cover the cost of settlement or damage awards against its directors and officers, which we may be unable to recoup. These provisions and resultant costs may also discourage our Company from bringing a lawsuit against directors and officers for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our shareholders against our directors and officers even though such actions, if successful, might otherwise benefit our Company and shareholders.
We may need additional capital, and the Form 10-K,sale of additional shares or other equity securities could result in additional dilution to our shareholders.
In the future, we may require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities could result in dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. We cannot assure you that financing will be available, if at all, in amounts or on terms acceptable to us.
Our business is subject to changing regulations related to corporate governance and public disclosure that have increased both our costs and the risk of noncompliance.
Because our common stock is publicly traded, we are subject to certain rules and regulations of federal, state and financial market exchange entities charged with the protection of investors and the oversight of companies whose securities are publicly traded. These entities, including the Public Company Accounting Oversight Board, the SEC and NASDAQ, have issued requirements and regulations and continue to develop additional regulations and requirements in response to corporate scandals and laws enacted by Congress. Our efforts to comply with these regulations have resulted in, and are likely to continue resulting in, increased general and administrative expenses and diversion of management time and attention from revenue-generating activities to compliance activities. Because new and modified laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This evolution may result in continuing uncertainty regarding compliance matters and additional costs necessitated by ongoing revisions to our disclosure and governance practices.
Techniques employed by manipulative short sellers in Chinese small cap stocks may drive down the market price of our common stock.
Short selling is the practice of selling securities that the seller does not update disclosures containedown but rather has, supposedly, borrowed from a third party with the intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the Form 10-K,value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. As it is therefore in the short seller’s best interests for the price of the stock to decline, many short sellers (sometime known as “disclosed shorts”) publish, or arrange for the publication of, negative opinions or reports regarding the relevant issuer and its business prospects in order to create negative market momentum and generate profits for themselves after selling a stock short. These short attacks have, in the past, led to selling of shares in the market, on occasion in large scale and broad base.
23
These short seller publications are not regulated by any governmental, self-regulatory organization or other official authority in the U.S., are not subject to the certification requirements imposed by the Securities and Exchange Commission in Regulation AC (Regulation Analyst Certification) and, accordingly, the opinions they express may be based on distortions of actual facts or, in some cases, fabrications of facts. In light of the limited risks involved in publishing such information, and the enormous profit that can be made from running just one successful short attack, unless the short sellers become subject to significant penalties, it is more likely than not that disclosed short sellers will continue to issue such reports.
While we intend to strongly defend our public filings against any such short seller attack, often times we are constrained, either by principles of freedom of speech, applicable state law (often called “Anti-SLAPP statutes”), or issues of commercial confidentiality, in the manner in which we can proceed against the relevant short seller. You should be aware that in light of the relative freedom to operate that such persons enjoy – oftentimes blogging from outside the U.S. with little or no assets or identity requirements – should we be targeted for such an attack, our stock will likely suffer from a temporary, or possibly long term, decline in market price should the rumors created not be dismissed by market participants.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Kandi has the following granted land use rights:
Area | |||
Location | (square meters) | Term and Expiration | Certificate No. |
Zhejiang Jinhua Industrial Park | 72,901 | Nov 13, 2002 - Nov 13, 2052 | 10-15-0-203-1 |
Zhejiang Jinhua Industrial Park | 39,491 | Nov 13, 2002 - Nov 13, 2052 | 10-15-0-203-2 |
Zhejiang Jinhua Industrial Park | 46,651 | Dec 30, 2003 - Dec 30, 2053 | 10-15-0-16 |
Zhejiang Jinhua Industrial Park | 37,515 | Dec 30, 2003 - Dec 30, 2053 | 10-15-0-17 |
Zhejiang Jinhua Industrial Park | 49,162 | Dec 30, 2003 - Dec 30, 2053 | 10-15-0-18 |
Zhejiang Jinhua Industrial Park | 19,309 | Dec 07, 2009 - Dec 07, 2059 | 10-15-0-33 |
Zhejiang Qiaoxia Industrial Park | 9,405 | Apr 03, 2001 – Apr 03, 2051 | 574-26-36 |
All land in the PRC is owned by the government and cannot be sold or transferred by or to any individual or private entity. Instead, the government grants or allocates landholders a “land use right.” There are four methods to acquire land use rights:
In comparison with Western common law concepts, granted land use rights are similar to life estates and allocated land use rights are in some ways similar to leaseholds.
Granted land use rights are provided by the government in exchange for a grant fee and carry the rights to pledge, mortgage, lease, and transfer during the term of the grant. Land is granted for a fixed term, which is generally 70 years for residential use, 50 years for industrial use, and 40 years for commercial or other use. The term is renewable in theory. Granted land must be used for the specific purpose for which it was granted.
24
Allocated land use rights cannot be pledged, mortgaged, leased, or transferred. They are generally provided by the government for an indefinite period (usually to state-owned entities) and can be reclaimed by the government at any time. Allocated land use rights may be converted into granted land use rights upon the payment of a grant fee to the government.
Kandi has the following real estate properties:
Jinhua City, Zhejiang
The Company owns the following facilities located in Jinhua Industrial Park, Jinhua City, Zhejiang Province, China. The table below lists the primary facilities and the status of each facility:
Area | ||||
Description | (square meters) | Status | ||
Factories | 93,979 | Fully operational | ||
Sales Center | 3,130 | Fully operational | ||
Test Center | 2,220 | Fully operational | ||
Staff quarters | 8,090 | Fully operational | ||
Canteen | 2,602 | Fully operational |
Yongkang City, Zhejiang
The Company owns the following facilities located in Yongkang City, Zhejiang Province, China. The table below lists the primary facilities and the status of each facility:
Area | ||||
Description | (square meters) | Status | ||
Office | 1,301 | Fully operational | ||
Factories | 4,457 | Fully operational | ||
Warehouse | 341 | Fully operational | ||
Multi-purpose room | 480 | Fully operational |
Wanning City, Hainan
The Company acquired the land use rights and began the construction to build EV production factories in Wanning City, Hainan Province, China in 2014. As of the date of this report, the construction is still in progress; thus this facility is not operational at this point. We expect the construction will be completed and the trial production will be launched by the end of 2015.
Area | ||||
Description | (square meters) | Status | ||
Approximately | ||||
Factories | 60,000 | In progress |
Item 3. Legal Proceedings.
In July 2013, Judge Michael M. Pritchett of the Circuit Court of Ripley County of the State of Missouri (the “Circuit Court”) entered final orders and judgments in favor of the Company and Kandi Vehicles and against plaintiffs Griffin and Elder, respectively, pursuant to the jury verdicts rendered in the following two cases: Griffin v. SunL Group, et al., and Elder v. SunL Group, et al. On October 31, 2013, the plaintiffs appealed these decisions. On January 16, 2015, the Southern District of Missouri Court of Appeals affirmed the judgment from the Circuit Court and it is the final judgment.
25
The Company received a letter dated February 9, 2015 from the staff of the Enforcement Division (the “Division”) of the U. S. Securities and Exchange Commission (the "Commission") advising that the Division has concluded its investigation of the Company and, based on information received to date, does not modify or amendintend to recommend to the Form 10-K except as specifically describedCommission that any enforcement action be brought against the Company. This formally concludes the Commission’s investigation that commenced in this explanatory note. Accordingly, this Amendment should be read2013. As previously disclosed, The Company received notice of a formal investigation and a subpoena dated November 21, 2013 in conjunction with our Form 10-K and our other filings madeconnection with the Commission subsequentCommission's investigation.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
On January 2, 2014, our common stock began trading on the NASDAQ Global Select Market under the symbol “KNDI”. The following sets forth the high and low prices for our common stock for each quarter from January 1, 2013 to December 31, 2014 as reported by NASDAQ.
HIGH | LOW | |||||
FISCAL 2014 | ||||||
Fourth Quarter (through December 31, 2014) | $ | 18.17 | $ | 10.3 | ||
Third Quarter (through September 30, 2014) | $ | 22.49 | $ | 12.98 | ||
Second Quarter (through June 30, 2014) | $ | 17.69 | $ | 10.68 | ||
First Quarter (through March 31, 2014) | $ | 22.4 | $ | 10.9 | ||
FISCAL 2013 | ||||||
Fourth Quarter (through December 31, 2013) | $ | 12.79 | $ | 6.15 | ||
Third Quarter (through September 30, 2013) | $ | 9.20 | $ | 4.12 | ||
Second Quarter (through June 30, 2013) | $ | 8.50 | $ | 3.55 | ||
First Quarter (through March 31, 2013) | $ | 4.19 | $ | 3.37 |
Holders of Common Stock
As of March 9, 2015, there were 11 shareholders of record of our common stock. This does not include all the filingbeneficial holders who hold shares through their brokerage accounts.
Dividends
We have never paid cash dividends on our common stock. Our policy is to retain all earnings, if any, to provide funds for operation and expansion of our business. We do not anticipate paying cash dividends in the Form 10-K, including any amendmentsforeseeable future. Any future determination to those filings.declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors may deem relevant.
Pursuant to Rule 12b-15Sales of Unregistered Securities
None
26
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None
Securities Authorized for Issuance under Equity Compensation Plans
Please see the discussion in Item 12 titled “Equity Compensation Plan Information” below.
Stock Performance Graph
This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended this Amendment contains(the Exchange Act), or incorporated by reference into any filing of Kandi Technologies Group, Inc. under the complete textSecurities Act of Item 131933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
The following graph shows a comparison from December 31, 2009 through December 31, 2014, of the cumulative total return for our common stock, the NASDAQ Composite Index, and currently dated certificationsthe S&P Automobile Manufacturers Index. Such returns are based on historical results and are not intended to suggest future performance. Data for the NASDAQ Composite Index and the S&P Automobile Manufacturers Index assumes an investment of $100 on December 31, 2009 and reinvestment of dividends. We have never paid cash dividends on our Chief Executive Officer and Chief Financial Officer. Capitalized terms not otherwise defined have the meanings ascribed to themcapital stock nor do we anticipate paying any such cash dividends in the foreseeable future.
27
Item 6. Selected Financial Data.
The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K.
As of December 31, | |||||||||||||||
CONSOLIDATED BALANCE | |||||||||||||||
SHEETS DATA: | 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||
Cash and cash equivalents | $ | 26,379,460 | $ | 12,762,369 | $ | 12,135,096 | $ | 2,294,352 | $ | 7,754,166 | |||||
Restricted cash | 13,000,731 | 1,636 | 15,835,364 | 6,634,989 | 17,398,087 | ||||||||||
Working capital (deficit) | 39,202,684 | (6,631,680 | ) | 35,898,297 | 17,466,812 | 18,522,694 | |||||||||
Total assets | 323,073,352 | 204,306,730 | 160,284,990 | 112,273,750 | 109,614,715 | ||||||||||
Short-term bank loans | 35,589,502 | 34,020,281 | 32,615,063 | 36,372,492 | 28,434,012 | ||||||||||
Total liabilities | 111,488,513 | 115,780,611 | 85,762,922 | 56,424,875 | 65,140,577 | ||||||||||
Total shareholders' equity | 211,584,839 | 88,526,119 | 74,522,068 | 55,848,875 | 44,474,138 |
328
CONSOLIDATED STATEMENTSOF INCOME | Years Ended December 31, | ||||||||||||||
AND COMPREHENSIVE INCOMEDATA: | 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||
REVENUES, NET | $ | 170,229,006 | $ | 94,536,045 | $ | 64,513,670 | $ | 40,177,148 | $ | 42,880,300 | |||||
COST OF GOODS SOLD | (146,825,073 | ) | (72,793,517 | ) | (51,620,280 | ) | (30,964,173 | ) | (33,257,851 | ) | |||||
GROSS PROFIT | 23,403,933 | 21,742,528 | 12,893,390 | 9,212,975 | 9,622,449 | ||||||||||
Research and development | (2,755,637 | ) | (3,728,730 | ) | (2,877,283 | ) | (2,304,373 | ) | (1,908,134 | ) | |||||
Selling and marketing | (1,345,588 | ) | (399,504 | ) | (455,983 | ) | (414,255 | ) | (1,120,739 | ) | |||||
General and administrative | (14,058,548 | ) | (16,056,107 | ) | (4,250,832 | ) | (3,458,388 | ) | (3,371,829 | ) | |||||
INCOME FROM CONTINUINGOPERATIONS | 5,244,160 | 1,558,187 | 5,309,292 | 3,035,959 | 3,221,747 | ||||||||||
Interest income | 1,701,121 | 1,516,477 | 2,658,104 | 2,200,678 | 769,942 | ||||||||||
Interest (expense) | (3,480,646 | ) | (4,395,353 | ) | (2,775,891 | ) | (1,945,260 | ) | (2,922,960 | ) | |||||
Investment income (expense) in trading security | - | - | - | 9,653 | (1,771 | ) | |||||||||
Change in fair value of financial instruments | 6,531,308 | (16,647,283 | ) | 1,986,063 | 5,401,929 | (2,725,987 | ) | ||||||||
Government grants | 288,498 | 228,396 | 132,139 | 298,072 | 351,343 | ||||||||||
Share of (loss) in associated companies | (54,308 | ) | (69,056 | ) | (69,429 | ) | (52,696 | ) | - | ||||||
Share of profit after tax of JV | 4,490,266 | (2,414,354 | ) | - | - | - | |||||||||
Other income, net | (34,649 | ) | 676,257 | 332,936 | 717,495 | 761,960 | |||||||||
INCOME (LOSS) BEFORE | 14,685,750 | ||||||||||||||
INCOME TAXES | (19,546,729 | ) | 7,573,214 | 9,665,830 | (545,726 | ) | |||||||||
INCOME TAX EXPENSE | (2,414,412 | ) | (1,593,994 | ) | (1,523,735 | ) | (551,060 | ) | (405,713 | ) | |||||
NET (LOSS) INCOME | 12,271,338 | (21,140,723 | ) | 6,049,479 | 9,114,770 | (951,439 | ) | ||||||||
OTHER COMPREHENSIVEINCOME | |||||||||||||||
Foreign currency translation | (2,725,143 | ) | 2,112,902 | 424,623 | 1,816,639 | 1,323,814 | |||||||||
COMPREHENSIVE INCOME | $ | 9,546,195 | $ | (19,027,821 | ) | $ | 6,474,102 | $ | 10,931,409 | $ | 372,375 | ||||
WEIGHTED AVERAGE SHARESOUTSTANDING BASIC | 42,583,495 | 34,707,973 | 29,439,328 | 27,438,725 | 22,173,550 | ||||||||||
WEIGHTED AVERAGE SHARESOUTSTANDING DILUTED | 42,715,818 | 34,707,973 | 29,677,325 | 28,735,748 | 22,173,550 | ||||||||||
NET INCOME PER SHARE, BASIC | $ | 0.29 | $ | (0.61 | ) | $ | 0.21 | $ | 0.33 | $ | (0.04 | ) | |||
NET INCOME PER SHARE,DILUTED | $ | 0.29 | $ | (0.61 | ) | $ | 0.20 | $ | 0.32 | $ | (0.04 | ) |
Part II29
Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operation.
Overview
Our core business is designing, developing,Prior to 2013, we were primarily engaged in the design, manufacturing and commercializing puresales of traditional off-road vehicle products. Due to fast-growing market demand for electric vehicles (“EVs”), all-terrain vehicles (“ATVs”), go-karts, three-wheeled motorcycles and other specialized vehicles. We conduct our business primarily through our wholly-owned subsidiaries that operate in China and other global markets,Chinese government’s ambitious plan to lower pollution by adopting five million alternative-energy vehicles by 2020, we gradually and most typically, we sellsuccessfully transformed our non-EVcore business to the development of electric vehicle products to Chinese export agents who then resell our products in North America, Europe,(EV products) and other regions.
electric vehicle parts (EV parts). During the year ended December 31, 2013,2014, we recognizedhad total net revenues of $94,536,045,$170,229,006, an increase of $30,022,375,$75,692,961, or 46.5%80.1%, over totalour net revenues for the year ended December 31, 2012.2013. The majority of our revenues arewere generated by the sales of EV parts and EV products, which accountaccounted for 49%88.4% of theour total revenue in 2014.The significant revenue growth was mainly driven by the increased sales of EV parts during the year.
During the year 2014, we focused our efforts on the design, manufacturing and sales of EV parts and experienced significant sales growth from this business line. For the year ended December 31, 2014, we achieved net revenue of $116,431,310 from selling EV parts, mostly to our JV Company, an increase of $114,707,279, or 6653.4%, as compared to $1,724,031 for the year ended December 31, 2013. The main reasonWe were in the early stage of significantEV parts manufacturing in 2014, we haven’t reached a scale production and the unit prices of related parts were relatively high, which resulted in less profitable gross margin for our EV parts manufacturing. We believe, as our production volumes pick up and raw materials and unit prices of parts continue to fall, our EV parts unit production cost will gradually decrease and our gross margin will gradually improve.
Pursuant to our Joint Venture agreement, we gradually transferred our EV production to the JV Company in 2014, which caused our sales volume of EV products to decrease in the year compared with year 2013. However, as we have a 50% ownership interest in the JV Company and accounted for our investments in the JV Company under the equity method of accounting, we received 50% of the JV Company’s net profit for the year or $3,763,082 in the year ended December 31, 2014, compared to a loss of $1,510,378 in the year ended December 31, 2013. As the JV Company was established not too long ago and the business was still in the start-up phase, its earnings were not high but have great potential for growth. We believe our economic benefits from the JV Company will greatly increase in revenue generatedthe future as its business continues to steadily grow.
We continued to produce off-road vehicles in 2014 and our revenues from this business line decreased by $26,373,733 from year-ago period, or 57.1%, to $19,819,078 for the year ended December 31, 2014. This decrease was mainly because we shifted our business strategy to put more resources and efforts on Chinese EV industry to meet the increasing market demand for alternative energy vehicles. We believe this realignment of business focus is becausethe newly added EV models –Kandi Brand SMA7000BEV, a five-door & five-seat vehicle and SMA7001BEV, an improved modelin the best interest of electric vehicle, were both sold at a higher price. the Company’s long-term strategy for business growth.
In 2013, the Company2014, we recorded $21,742,528$23,403,933 of gross profit, increased 68.6%an increase of 7.6% from 2012,2013, primarily due to the increase of revenue. The CompanyWe recorded a net profit of $12,271,338 in 2014 compared to a net loss of ($21,140,723)$21,140,723 in 2013.Excluding the effects of stock award expenses, which were $8,455,422 and $9,658,320 for the years ended December 31, 2014 and 2013, compared to a net incomerespectively, and the change of $6,049,479 in 2012, primarily due to a special charge in the amount of ($16,647,283) in 2013, compared to a special income of $1,986,063 in 2012, resulting from a change in the fair value of financial instrumentsderivatives, which were a gain of $6,531,308 and stock awards. Excludinga loss of $16,647,283 for the affects of the change in the fair value of financial instruments and stock awards in both 2012years ended December 31, 2014 and 2013, the Company recordedrespectively, our net income (non-GAAP) of $5,164,880 in 2013was $14,195,452for the year ended December 31, 2014 as compared to net income (non-GAAP) of $4,168,072 in 2012, or$5,164,880 for the year ended December 31, 2013, an increase of 23.9% $9,030,572 or 174.8%. The increase in such net income was primarily attributable to the increase of revenue and gross profits during the year of 2014.
The vehicle manufacturing industry is highly competitive.competitive in China. Current and future factors impacting our industry include: (i) the exponential growth of electrical vehicle sales and dedicated platforms in the global market place, (ii) the consolidation of supply chains and costs of components, (iii) rapid technology developments (including 3D printing technology) and (iv) emerging strategic partnerships and joint ventures in the automotive industry generally.
30
Our business strategy includes our efforts to provide our customers with high-quality products, and to expand our footprint in new and existing markets. As part of these efforts, we have invested in a joint venture company called Zhejiang Kandi Electric Vehicles Co., Ltd. (the “JV Company”), which develops, manufacturesmarkets, and sells EVs and related products. In December 2013,to advance our EV business was recognized as producing the top two model types of EVs in China. These EV model types have an impressive driving range of 150 kilometers or more, which entitles them to a higher rebate or subsidy than older models under Chinese policy. We are also advancing the profile and demand for our EV products through the EV sharing project.Sharing Project. To further this initiative, we are working with our business partners to build a network of public EV sharing stations (for charging and parking) and partnering with high-end hotels in the Hangzhou area of China to provide energy-efficient, convenient travel options for local citizens and tourists. We anticipate that our pure EV business in China, through the operations of the JV Company and with the support of new Chinese subsidy policies, will continue to develop and thrivegrow in the future.
4
Results of Operations
Comparison of Years Ended December 31, 2014, 2013 and 2012
The following table sets forth the amounts and the percentage relationship to revenues of certain items in our consolidated statements of income for the years ended December 31, 2014, 2013 and 2012:
For The Years EndedDecember 31, 2013 and 2012
| 2013 | 2012 | Comparisons | Year | Year | Year | ||||||||||||||||||||||||||||||
| % of | % of | Change in | Change | Ended | Ended | Ended | |||||||||||||||||||||||||||||
| Amount | Revenue | Amount | Revenue | Amount | In % | December31, | % Of | December 31, | % Of | December 31, | % Of | ||||||||||||||||||||||||
REVENUES | $ | 94,536,045 | 100.0% | $ | 64,513,670 | 100.0% | $ | 30,022,375 | 46.5% | |||||||||||||||||||||||||||
2014 | Revenue | 2013 | Revenue | 2012 | Revenue | |||||||||||||||||||||||||||||||
REVENUES, NET | $ | 170,229,006 | 100.0% | $ | 94,536,045 | 100.0% | $ | 64,513,670 | 100.0% | |||||||||||||||||||||||||||
COST OF GOODS SOLD | (72,793,517 | ) | (77.0)% | (51,620,280 | ) | (80.0)% | (21,173,237 | ) | 41.0% | (146,825,073 | ) | -86.3% | (72,793,517 | ) | -77.0% | (51,620,280 | ) | -80.0% | ||||||||||||||||||
GROSS PROFIT | 21,742,528 | 23.0% | 12,893,390 | 20.0% | 8,849,138 | 68.6% | 23,403,933 | 13.7% | 21,742,528 | 23.0% | 12,893,390 | 20.0% | ||||||||||||||||||||||||
Research and Development | (3,728,730 | ) | (3.9)% | (2,877,283 | ) | (4.5)% | (851,447 | ) | 29.6% | (2,755,637 | ) | -1.6% | (3,728,730 | ) | -3.9% | (2,877,283 | ) | -4.5% | ||||||||||||||||||
Selling and Marketing | (399,504 | ) | (0.4)% | (455,983 | ) | (0.7)% | 56,479 | (12.4)% | (1,345,588 | ) | -0.8% | (399,504 | ) | -0.4% | (455,983 | ) | -0.7% | |||||||||||||||||||
General and Administration | (16,056,107 | ) | (17.0)% | (4,250,832 | ) | (6.6)% | (11,805,275 | ) | 277.7% | (14,058,548 | ) | -8.3% | (16,056,107 | ) | -17.0% | (4,250,832 | ) | -6.6% | ||||||||||||||||||
INCOME FROM OPERATIONS | 1,558,187 | 1.6% | 5,309,292 | 8.2% | (3,751,105 | ) | (70.7)% | 5,244,160 | 3.1% | 1,558,187 | 1.6% | 5,309,292 | 8.2% | |||||||||||||||||||||||
Interest income | 1,701,121 | 1.0% | 1,516,477 | 1.6% | 2,658,104 | 4.1% | ||||||||||||||||||||||||||||||
Interest (expense) | (3,480,646 | ) | -2.0% | (4,395,353 | ) | -4.6% | (2,775,891 | ) | -4.3% | |||||||||||||||||||||||||||
Change in Fair Value of Financial Instruments | 6,531,308 | 3.8% | (16,647,283 | ) | -17.6% | 1,986,063 | 3.1% | |||||||||||||||||||||||||||||
Government Grants | 228,396 | 0.2% | 132,139 | 0.2% | 96,257 | 72.8% | 288,498 | 0.2% | 228,396 | 0.2% | 132,139 | 0.2% | ||||||||||||||||||||||||
Share of (loss) of associated company | (69,056 | ) | (0.1)% | (69,429 | ) | (0.1)% | 373 | (0.5)% | (54,308 | ) | 0.0% | (69,056 | ) | -0.1% | (69,429 | ) | -0.1% | |||||||||||||||||||
Share of Loss after tax of JV | 4,490,266 | 2.6% | (2,414,354 | ) | -2.6% | - | - | |||||||||||||||||||||||||||||
Other Income, Net | 676,257 | 0.7% | 332,936 | 0.5% | 343,321 | 103.1% | (34,649 | ) | 0.0% | 676,257 | 0.7% | 332,936 | 0.5% | |||||||||||||||||||||||
Interest (Expense) Income, Net | (2,878,876 | ) | (3.0)% | (117,787 | ) | (0.2)% | (2,761,089 | ) | 2,344.1% | |||||||||||||||||||||||||||
Change in Fair Value of Financial | ||||||||||||||||||||||||||||||||||||
Instruments | (16,647,283 | ) | (17.6)% | 1,986,063 | 3.1 % | (18,633,346 | ) | (938.2)% | ||||||||||||||||||||||||||||
Share of Loss after tax of JV | (2,414,354 | ) | (2.6)% | - | - | (2,414,354 | ) | 100.0% | ||||||||||||||||||||||||||||
(LOSS) INCOME BEFOREINCOME TAX | (19,546,729 | ) | (20.7)% | 7,573,214 | 11.7% | (27,119,943 | ) | (358.1)% | ||||||||||||||||||||||||||||
INCOME TAX (EXPENSE)BENEFIT | (1,593,994 | ) | (1.7)% | (1,523,735 | ) | (2.4)% | (70,259 | ) | (4.6)% | |||||||||||||||||||||||||||
INCOME (LOSS)BEFORE INCOME TAX | 14,685,750 | 8.6% | (19,546,729 | ) | -20.7% | 7,573,214 | 11.7% | |||||||||||||||||||||||||||||
INCOME TAX(EXPENSE) | (2,414,412 | ) | -1.4% | (1,593,994 | ) | -1.7% | (1,523,735 | ) | -2.4% | |||||||||||||||||||||||||||
NET (LOSS) INCOME | $ | (21,140,723 | ) | (22.4)% | $ | 6,049,479 | 9.4% | $ | (27,190,202 | ) | (449.5)% | $ | 12,271,338 | 7.2% | $ | (21,140,723 | ) | -22.4% | $ | 6,049,479 | 9.4% |
5
Revenues
For the year ended December 31, 2014, we had net revenues of $170,229,006 compared to net revenues of $94,536,045 for the year ended December 31, 2013 and $64,513,670 for the year ended December 31, 2012, representing an increase of $75,692,961, or 80.1%, from 2013 and an increase of $105,715,336, or 163.9%, from 2012, respectively. Our products include EV parts, EV products, and off-road vehicles, including ATVs, utility vehicles (“UTVs”), go-karts, and others. For the year ended December 31, 2014, 2013 and 2012, 95%, 90% and 86%, respectively, of our revenues were derived from the sales of our products in the People’s Republic of China (the “PRC”).
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The following table summarizes our revenues as well as the number of units sold by product types for the years ended December 31, 2014, 2013 and 2012:
Year Ended December 31, | ||||||||||||||||||
2014 | 2013 | 2012 | ||||||||||||||||
Unit | Sales | Unit | Sales | Unit | Sales | |||||||||||||
EV parts | 102,236 | $ | 116,431,310 | 51,588 | $ | 1,724,031 | 93,881 | $ | 3,517,237 | |||||||||
EV products | 3,758 | 33,978,619 | 4,694 | 46,619,203 | 3,915 | 19,034,936 | ||||||||||||
Off-Road Vehicles | 25,746 | 19,819,078 | 55,516 | 46,192,811 | 50,252 | 41,961,497 | ||||||||||||
Total | 131,740 | $ | 170,229,006 | 111,798 | $ | 94,536,045 | 148,048 | $ | 64,513,670 |
EV Parts
During the year ended December 31, 2014, our revenues from the sale of EV parts were $116,431,310, representing an increase of $114,707,279 or 6,653.4% from $1,724,031 for the year ended December 31, 2013 and an increase of $112,914,073 or 3,210.3% from $3,517,237 for the year ended December 31, 2012, respectively
Our revenue for the year ended December 31, 2014 primarily consisted of the sales of battery packs, body parts, EV drive motors, EV controllers, air conditioning units and other auto parts to the JV Company for manufacturing of EV products. Of the total EV parts sold for the year ended December 31, 2014, approximately 83%, or the majority of the sales, were related to the sale of battery packs. Due to the Chinese auto industry regulation, we hold the necessary production license to manufacture the battery packs exclusively used in Kandi brand name’s EVs manufactured by the JV Company. Besides the sale of battery packs, approximately 6% of the sales were related to the sales of EV controllers, approximately 5% of the sales were related to the sales of air conditioning units, approximately 4% of the sales were related to the sales of EV drive motors and approximately 2% of the sales were related to the sales of body parts and other auto parts.
We started the EV parts business to the JV Company in the first quarter of 2014. During the year ended December 31, 2014, our revenues from the sale of EV parts to the JV Company accounted the majority or approximately 68% of our total net revenue for the year. For the year ended December 31, 2014, the majority of EV parts sold to the JV Companies, or approximately 56% of the sales were to Kandi Changxing, approximately 34% of the sales were to Kandi Shanghai, and approximately 10% of the sales were to Kandi Jinhua. Theses EV parts were used in manufacturing pure EV products by the JV Company’s subsidiaries, all of which were sold to Shanghai Maple Auto Co., Ltd.(“Shanghai Maple”). Shanghai Maple is an unaffiliated company that was granted by the Chinese government vehicle production rights for EV sedans, which is equivalent to a license that qualifies it to sell the EV products to the end customers. Our increased sales of EV parts during the year were largely driven by 46.5%the manufacturing of EV products by the JV Company to meet the EV demand of EV-Share Program. According to the JV Agreement, we are primarily responsible for supplying the JV Company with EV parts and the JV Company is primarily responsible for producing EV products and finished automobiles through sales channels to its end customers.
During the year ended December 31, 2014, of the total EV parts sales, our revenues from the sale of auto generators to other customers were $57,632, a decrease of $1,666,399, or 96.7% from $1,724,031 for the year ended December 31, 2013 and a decrease of $3,459,605 or 98.4% from $3,517,237 for the year ended December 31, 2012. This decrease in revenue was primarily due to the realignment of Yongkang Scrou’s product offering to shift focus to the manufacturing of automobile motors, air-conditioning systems, controllers, and accelerator pedals for EVs.
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EV Products
Our revenues from the sale of EV products for the fiscal year of 2014 were $33,978,619 including $33,421,638 from selling EV products and $556,981 from OEM-EV business line, representing a decrease of $12,640,584 or 27.1% from $46,619,203 for the year ended December 31, 2013 but an increase of $14,943,683 or 78.5% from $19,034,936 for the year ended December 31, 2012, respectively
We continued to sell certain EV products (completed automobiles) during the year of 2014. Our revenues from the sale of EV products for the year ended December 31, 2014 decreased by $13,197,565, or 28.3%, from $64,513,670 in 2012$46,619,203 for the year ended December 31, 2013 to $94,536,045 in 2013.
| Year ended December 31 | |||||||||||
| 2013 | 2012 | ||||||||||
| Units | Revenue | Units | Revenue | ||||||||
All-terrain Vehicles (ATVs) | 18,295 | $ | 10,407,858 | 14,467 | $ | 6,402,753 | ||||||
Electric Vehicles (EVs) | 4,694 | 46,619,203 | 3,915 | 19,034,936 | ||||||||
Go-Kart | 36,499 | 33,187,877 | 34,517 | 30,794,415 | ||||||||
Utility vehicles (UTVs) | 440 | 1,155,221 | 93 | 319,014 | ||||||||
Three-wheeled motorcycles (TT) | 243 | 383,760 | 1,060 | 1,272,898 | ||||||||
Refitted car | 39 | 1,058,095 | 115 | 3,172,417 | ||||||||
Auto generator | 51,588 | 1,724,031 | 93,881 | 3,517,237 | ||||||||
Total | 111,798 | $ | 94,536,045 | 148,048 | $ | 64,513,670 |
In 2013, our ATVs experienced an increase in revenue$33,421,638 for the year ended December 31, 2014, representing a 44.4% of $4,005,105 or 62.6%, a 26.5% increasereduction in unit sales andbut a 28.5%29.0% of increase in the average unit priceprice. As compared to fiscalour sale of EV products for the year 2012. The increaseended December 31, 2012, we increased our sales by $14,386,702, or 75.6%, representing a 33.4% of reduction in revenue was primarily attributable to the market condition for ATV products, which continued to recover and theunit sales but a 163.6% of increase in the average unit price is because a higher percentage of high-end and middle-end products were sold in 2013.
In 2013, our go-karts experienced an increase in revenue of $2,393,462, or 7.8%, a 5.7% increase in unit sales, and a 1.9% increase in the average unit price compared to fiscal year 2012.price. The increase in revenue was mainly attributable to the relative stable growth in go-karts sales. The Company manufactures both high-end, more expensive go-kart products and less expensive go-kart products to meet customers' various needs.
In 2013, our utility vehicles (“UTVs”) experienced an increase in revenue of $836,207 or 262.1%, a 373.1% increase in unit sales, and a 23.5% decrease in the average unit price compared to fiscal year 2012. The increase in revenue was mainly attributable to the increase of UTV orders. The decrease in the average unit price was largely due to the fact that cheaper model UTVs took a higher percentageinclusion of the cost for battery packs in the unit selling price in 2014. In addition, during the year ended December 31, 2014, our revenues from OEM business were $556,981 or 0.3% of total revenue. We started our OEM business in the second quarter of 2014, and our sales infor the year 2013
EV Products
In 2013, ourended December 31, 2014 were primarily derived from assembling EV products experienced an increase in revenue of $27,584,267 or 144.9%,for Kandi Jinhua, a 19.9% increase in unit sales, and a 104.3% increase in the average unit price compared to fiscal year 2012. In the fourth quarter, the EV revenues increased $26,382,915, or 193.7% compared to the same period of 2012. The unit sales grew by 27.2% and the average unit price increased by 130.9% . The significant increase was mainly attributable to the newly added EV model – Kandi Brand SMA7000BEV, a five-door & five-seat vehicle and SMA7001BEV, an improved model of electric vehicle, are both sold at a much higher price. The increasing sales were driven by the Hangzhou Public EV Sharing System (the “Carshare Project”).
The implementation of the Carshare Project, and other EV sharing networks, requires the development of public EV sharing stations. The Service Company is assisting the Company in the development of the public EV sharing stations. The Service Company is responsible for several aspects of the public EV sharing project, including: (i) launching the public EV sharing business; (ii) establishing a network of public EV sharing stations; (iii) investing in the construction of service facilities and parking facilities for the public EV sharing project; and (iv) providing services directly to customers who rent the EVs. The JV Company, a joint venture established by the Company and Geely (the “Joint Venture”), owns a 19% interest in the Service Company. The remaining 81% is owned by Jia Xing Jia Le Investment Partnership Enterprise, an entity which is unaffiliated with the Company.
The Company recognizes revenue from its EV sharing network when it sells the SKD set, a complete set of the main parts that can be assembled into whole vehicles, to Shanghai Maple. Shanghai Maple, a 99% ownedwholly-owned subsidiary of the Company’s business partner, Geely, then assembles the SKD into a complete vehicle and sells it to the ServiceJV Company. Revenue from the subsequent sale of the full vehicle to the Service Company by Shanghai Maple is not attributable to the Company. The Company indirectly owns a 9.5%Indirectly through our 50% ownership interest in the ServiceJV Company, through itswe have a 50% ownershipeconomic interest in Kandi Jinhua.
Our EV products business accounted approximately 20.0% of our total revenue for the year ended December 31, 2014, reduced from 49.3% and 29.5% in the Joint Venture.years ended December 31, 2013 and 2012, respectively. Of the total sales of EV products for the year ended December 31, 2014, approximately $25,593,023, or 75.3%, was sold to Shanghai Maple. The revenue from car rentals belongssales of EV products were mainly driven by the demand by EV-Share Program. In March 2013, Kandi Vehicles and Shanghai Maple Guorun Automobile Co., Ltd. (“Shanghai Guorun”), a 99%-owned subsidiary of Geely Automobile Holdings Ltd. (“Geely”) formed a joint venture (the “JV Company” ) to develop, manufacture and sell EVs and related auto parts. Under the JV Agreement, our EV product manufacturing business will be gradually transferred to the ServiceJV Company. The decreased sales of EV products in 2014 as compared to that in 2013 was a result of this JV Agreement. In the future, under the JV Agreement, we will be mainly responsible for supplying the JV Company notwith EV parts and the JV Company will be responsible for manufacturing EV products and selling finished goods through channel to its end customers.
Off-Road Vehicles
During the Company. Therefore, the sole source of revenue to the Company isyear ended December 31, 2014, our revenues from the sale to Shanghai Maple of off-road vehicles including selling go karts, all-terrain vehicles (“ATVs”), and others were $19,819,078, representing a decrease of $26,373,733 or 57.1% from $46,192,811 for the Company’s SKDyear ended December 31, 2013 and a decrease of an EV.$22,142,419 or 52.8% from $41,961,497 for the year ended December 31, 2012, respectively.
As a result of the renewal of national subsidy policy in September of 2013, mostOur off road vehicles business line accounted for approximately 11.6% of our SKDtotal net revenue for the fiscal year 2014, compared to 48.9% for the fiscal year 2013 and 65.0% for the fiscal year 2012, respectively. Of which go-kart business accounted for approximately 7.5% of an EVour total net revenue for the year ended December 31, 2014, reduced from 35.1% and 47.7% for the years ended December 31, 2013 and 2012, respectively, and ATV business accounted for approximately 4.2% of our total net revenue for the year ended December 31, 2014, reduced from 11.0% and 9.9% for the years ended December 31, 2013 and 2012, respectively. The sales occurredof three wheeled motorcycles, utility vehicles (“UTVs”) and refitted cars were insignificant in the fourth quarter. We believe thatfiscal year of 2014 as compared to the sales in the first three quarters were negatively affected by the delay of the subsidy policy.
6
Motorcycles
Infiscal years 2013 our TT experienced a decrease in revenue of $889,138 or 69.9%, a 77.1% decrease in unit sales, and a 31.5% increase in the average unit price compared to fiscal year 2012. The decrease wasdecreased sales of these products were primarily attributable to the change in the product structure. There were less TTs manufactured and we may decrease or stop manufacturing such products. The increase in the average unit price in 2013 was because higher percentage of TTs sold were more expensive models.
Refitted Car
In 2013, our refitted car experienced a decrease in revenue of $2,114,322, or 66.6%, a decrease of 66.1% in unit sales and a 1.7% decrease in the average unit price compared to fiscal year 2012. The decrease in revenue was mainly because that the Company decided to discontinue this business during the third quarter of 2013 and focus its efforts on increasing its electric vehicles revenue in China market. “Refitted Car” is a term used by the Company to describe a line of business, where the Company modifies (refits) vehicles manufactured by unrelated, other companies to meet the special requirements of our customers. For example, the Company may make exterior changes, refit AMWS, or install nonstandard features, including, but not limited to, a rearview camera, TPMS, drive recorder, anti-theft device, reversing radar and DVD player.
Auto generator
In 2013, our auto generator experienced a decrease in revenue of $1,793,206 or 51.0%, a 45.0% decrease in unit sales and a 10.8% decrease in the average unit price compared to fiscal year 2012. The decrease in revenue was due to the adjustmentrearrangement of our product portfolio for more efficient use of our resources to capture more sales opportunities in yongkang Scrou's product offering from a manufacturer of auto alternator to a wide range of main products, such as driving motor, air-conditioning system and controller for electric vehicles now. Yongkang Scrou provides these products for use with our vehicles; salesthe fast-growing EV market in connection with providing these products to our vehicles are categorized as inter-company transactions and have been eliminated in consolidation.China.
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Year Ended December 31 | ||||||||||||
2013 | 2012 | |||||||||||
Sales Revenue | Percentage | Sales Revenue | Percentage | |||||||||
North America | $ | 6,906,807 | 7% | $ | 7,243,257 | 11% | ||||||
Europe and other regions | 2,394,948 | 3% | 1,639,990 | 3% | ||||||||
China | 85,234,290 | 90% | 55,630,423 | 86% | ||||||||
Total | 94,536,045 | 100% | 64,513,670 | 100% |
7
Year Ended December 31 | |||||||||||||||
2014 | 2013 | 2012 | |||||||||||||
Sales Revenue | Percentage | Sales Revenue | Percentage | Sales Revenue | Percentage | ||||||||||
North America | $ | 2,900,789 | 2.0% | $ | 6,906,807 | 7.0% | $ | 7,243,257 | 11.0% | ||||||
Europe and other regions | 5,729,035 | 3.0% | 2,394,948 | 3.0% | 1,639,990 | 3.0% | |||||||||
China | 161,599,182 | 95.0% | 85,234,290 | 90.0% | 55,630,423 | 86.0% | |||||||||
Total | $ | 170,229,006 | 100.0% | $ | 94,536,045 | 100.0% | $ | 64,513,670 | 100.0% |
Cost of Goods Sold
Cost of goods sold duringfor the year ended December 31, 20132014 was $72,793,517,$146,825,073, representing a 41.0% increase from $51,620,280 in 2012. This was the result of an increase in our sales.
However, sales increased by a higher percentage than related costs. Our sales had a 46.5% increase in 2013 compared to 2012; whereas our cost of goods sold only increased by 41.0% in 2013 compared to 2012. The main reasons that our costs increased by only 41.0% in 2013 compared to 2012 are as follows:
In consideration of the cost increase resulting$74,031,556, or 101.7%, from the increase of sales volume, the actual cost increase in 2013 is 5.5% less when compared to the increase in sales. This was the result of the following three factors:
In 2013, the cost of raw materials had a relatively slower increase, which is 5.7% less than the percentage of our sales increase in the same period of time, mainly because (i) the new products, especially our EV products were sold at higher price compared to 2012, therefore those products raw material costs had a relative low increase percentage compared to their sale increase; and (ii) the Company strengthened its cost control, reduced the waste of raw materials in manufacturing process.
With the labor cost increase in China, due to short supply and higher standard wages, our labor costs also increased. Total wages and salaries had a relatively higher increase of 0.3% in 2013, compared to the sale increase in the same period of time.
Our other overhead costs in 2013 had a relatively slower increase of 0.1% in 2013 compared to the sales increase in the same period of time, because some low value consumption goods, such as tools, which were acquired in previous years were still being used in 2013. The wear and tear costs for tools in the workshops booked in accounting increased in a slower pace compared to the pace of increase of our sale.
Gross Profit
Gross profits increased by $8,849,138, or 68.6%, in 2013 as a result of increased net sales. During 2013, the gross margin increased from 20.0% in 2012 to 23.0% in 2013. This 3% increase in our gross margin resulted mainly because in 2013 we adjusted our product structure and more high price products, especially the EV products, are sold, while those high price products generally with higher gross margin.
Sales and Marketing
Sales and distribution expenses were $399,504 for fiscal year ended December 31, 2013, as compared to $455,983 from the same period in 2012, representing a 12.4% decrease. This decrease is primarily attributable to a decrease in our export and customs inspection fees during this reporting period.
General and Administrative
General and administrative expenses increased 277.7% during the fiscal year ended December 31, 2013, from $4,250,832 to $16,056,107. In addition to cash cost related to general and administrative expenses, in 2012, the general and administrative expenses included $85,558 stock awards related expense, whereas in 2013, the expense for common stock awards to directors and certain employees was $9,658,320. Additionally, in fiscal year 2012 the general and administrative expenses also included $19,053 in stock-based compensation costs for the options issued to the Company's executives and managerial level employees, while for the year 2013, this stock option based compensation cost was $0. Excluding the effect of stock award cost and option cost, the net general and administrative expenses$72,793,517 for the year ended December 31, 2013 was $6,397,787, increased 54.3%and an increase of $95,204,793, or 184.4%, from $4,146,221 for the same period in 2012. This increase was primarily attributable to costs related to the capital raise that occurred in the third quarter of 2013, and higher depreciation and amortization costs.
8
Research and Development
For the year ended December 31, 2013, research and development expenses increased $851,447, or 29.6%, to $3,728,730 from $2,877,283$51,620,280 for the year ended December 31, 2012. This increase was primarily due to additional researchthe corresponding increased sales for the year ended December 31, 2014. However, the increase in cost of goods sold outpaced the growth of our revenues, which was largely due to relatively less profitable raw material purchases in our newly-added EV parts product line, and development effortsthe sale of EV parts accounted for 68.4% of total revenue for the year ended December 31, 2014. As a result, cost of goods sold for our EV parts product line comprised the majority, or 72.5%, of the total cost of goods sold for the year ended December 31, 2014. The battery sales accounted for the majority of our EV parts sales and their corresponding cost of goods sold accounted for 61.6% of total cost of goods sold.
For the year ended December 31, 2014, excluding the battery business mentioned above, our cost of raw materials declined by 2.2% compared to the sales increase in the fourth quartersame period of time year over year.
Excluding the battery business mentioned above, total wages and salaries for the year ended December 31, 2014, increased by 1.8% compared to the sale increase in the same period of time year over year.
Excluding the battery business mentioned above, our other overhead costs for the year ended December 31, 2014 increased by 0.3% compared to the sales increase in the same period of time year over year.
For the year ended December 31, 2014, raw material costs comprised approximately 95.2% of total cost of goods sold, labor costs comprised approximately 1.5% of total cost of goods sold, and manufacturing overhead comprised approximately 3.3% of the total cost of goods sold. For the year ended December 31, 2013, for developing new EV products to meet market demands.raw material costs comprised approximately 90.1% of total cost of goods sold, labor costs comprised approximately 1.7% of total cost of goods sold, and manufacturing overhead comprised approximately 8.2% of the total cost of goods sold. For the year ended December 31, 2012, raw material costs comprised approximately 91.5% of total cost of goods sold, labor costs comprised approximately 2.5% of total cost of goods sold, and manufacturing overhead comprised approximately 6.0% of the total cost of goods sold.
Government GrantsGross Profit
Government grants totaled $228,396Gross profit for the year ended December 31, 2014 was $23,403,933 as compared to $21,742,528 for year ended December 31, 2013 and $12,893,390 for year ended December 31, 2012, representing an increase of $1,661,405 or 7.6% from 2013 and an increase of $10,510,543 or 81.5% from 2012, respectively. This increase was primarily attributable to the increase in our revenue driven by the sales of our newly-added business line of EV parts. However, our gross margin for the year ended December 31, 2014 decreased to 13.7% from 23.0% for the year ended December 31, 2013 and 20.0% for the year ended December 31, 2012. The decreased gross margin was mainly because the majority of our revenue growth during the year ended December 31, 2014 came from the relatively less profitable EV parts product lines, which accounted for 68.4% of total sales for the year and had a gross margin of 8.5% compared to the average gross margin of 13.7% for our company as a whole.
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Research and Development
Research and development expenses, including materials, labor, equipment depreciation, design, testing, inspection, and other related expense, totaled $2,755,637 for the year ended December 31, 2014, compared to $3,728,730 for the year ended December 31, 2013 and $2,877,283 for the year ended December 31, 2012, representing a 72.8% increase overdecrease of $973,093, or 26.1%, from 2013 and a decrease of $121,646, or 4.2%, from 2012, respectively. These decreases were primarily due to the same periodshift of our business strategy to focus more of our efforts on the China EV auto market and our primary responsibility under the JV agreement, which is to supply the JV Company with EV parts rather than EV products.
For the year ended December 31, 2014, approximately 40% of our research and development expenses was spent on the research and development of five new EV product models and the projects to develop new auto air conditioning system, vehicle control system and EV intelligent control platform (centralized control platform) used in 2012.our EV products, while the remaining or 60% of our research and development expenses was spent on the projects to develop EV related and off road vehicle products that we initiated in the previous year. For the year ended December 31, 2013, the government grants included $1,694majority of our research and development expense was spent to develop off road vehicle products. We initiated research and development efforts to develop new EV products to meet market demands in subsidies for technology innovation and patent applications, $182,287 subsidies for supporting companies that have competitive advantages and $44,415 export subsidies.the fourth quarter of 2013.
Share of (Loss) of Associated CompanySales and Marketing
Share of (loss) of associated company was ($69,056)Selling and distribution expenses were $1,345,588 for the year ended December 31, 2014, compared to $399,504 for the year ended December 31, 2013 compared to loss of ($69,429) for the corresponding period in 2012. For the years ended December 31, 2013 and 2012, these losses were attributable to our 30% equity interest investment in Jinhua Service.
Other Income (Expense), Net
Net other income was $676,257 for the year ended December 31, 2013, compared to $332,936$455,983 for the year ended December 31, 2012, representing an increase of $343,321$946,084, or 103.1% . This236.8%, from 2013 and an increase isof $889,605, or 195.1%, from 2012, respectively. These increases were primarily becauseattributable to the Company wrote off $841,251 payablewarranty expenses of $832,439 for repair and maintenance charged during the year of 2014. In 2014, we contracted a qualified third party to Ever Lotts Investment Limited, which had not been claimedprovide repair and maintenance services for more than three (3)the 1,620 Kandi 7001 series EV sedans we have sold. Excluding this charge, our selling and distribution expenses increased $113,645, or 28.4%, as compared to last year. The increase was largely due to the increased expenses in the shipping and handling costs and other sales and marketing related costs, while decreased product liability insurance partially offset this increase.
General and Administrative
General and administrative expenses were $14,058,548 for the year ended December 31, 2014, compared to $16,056,107 for the year ended December 31, 2013 and $4,250,832 for the year ended December 31, 2012, representing a decrease of $1,997,559,or 12.4%, from 2013 and an increase of $9,807,716, or 230.7%, from 2012, respectively. For the year ended December 31, 2014, general and administrative expenses included $8,455,422 in expenses for common stock awards to employees and consultants for their services, compared to $9,658,320 and $85,558 for the years asended December 31, 2013 and 2012, respectively. Excluding stock award costs, our net general and administrative expenses for the year ended December 31, 2014 were $5,603,126, a decrease of $794,661, or 12.4%, compared to $6,397,787 for the year ended December 31, 2013. Additional details regarding this write-off are set forthThis decrease was primarily attributable to more costs related to the capital raise were expensed in Note 142013 than 2014. The costs related to issuance of the derivative instruments in the capital raises during 2014, or $578,757, were expensed upon issuance in 2014. Additionally, the general and administrative expenses in 2012 also included $19,053 of stock-based compensation costs for the options issued to our financial statements.executives and managerial level employees, while for the years ended December 31, 2014 and 2013, we didn’t have such expenses.
Interest Income (Expense), Net
The Company’s totalNet interest expense was $1,779,525 for the year ended December 31, 2014, compared to $2,878,876 for the year ended December 31, 2013 was ($4,395,353), comprised of bank loan interest of ($2,302,389), bond interest of ($1,060,851), discount interest for bank notes of ($834,105) and borrowing interest paid to Kandi Group of ($198,008). For the year ended December 31, 2013, interest income received by the Company totaled $1,516,477, which included interest accrued from bank deposits of $324,319 and interest earned on note receivables of $1,192,158. In 2013, the interest expense for convertible notes was $0, and the interest incurred by the amortization of debt discount was $0, since the last $1,000 of convertible notes previously issued were converted in the first quarter of 2012. The interest for the convertible notes in 2012 was ($2), and the interest incurred by the amortization of debt discount was ($43). Thus, excluding the effects of interest expense related to convertible notes, net interest expense was ($2,878,876)$117,787 for the year ended December 31, 2012, representing a decrease of $1,099,351, or 38.2%, from 2013 a significant changebut an increase of $1,661,738, or 1,410.8%, from a2012. The decrease in net interest expense of ($117,787)compared to last year was primarily attributable to an increase in interest income earned on loans made to third parties for the year ended December 31, 2012. This increase was primarily attributable to: (i) a decrease in interest-related2014. We recorded interest income of $1,701,121 for the year ended December 31, 2014, which included$1,573,421 earned on note receivables issuedloans made to third parties, $39,849 earned on an entrusted loan lent to the JV Company through Bank of Communications Hangzhou Zhongan Branch as the agent bank, and (ii)$87,851 earned on bank deposits. We recorded interest expense of $3,480,646 for the year ended December 31, 2014, which included bank loan interest of $2,217,955 and bond interest expenses incurred by the Company.of $1,262,691.
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Change in Fair Value of Financial Instruments
For the year ended December 31, 2013,2014, the expense which was caused bygain related to changes in the increase of fair value of the derivative liability relating to the warrants issued to certain investors and placement agents was ($16,647,283), while$6,531,308, compared to a loss of $16,647,283 for the same period last year ended December 31, 2013 and a gain of $1,986,063 for the incomeyear ended December 31, 2012, an increase of $23,178,591from 2013 and an increase of $4,545,245 from 2012, respectively. The gain on the changes in the fair value of derivative liability was due to the decrease in the fair value price of the derivative which was primarily attributable to two factors. First, it was caused by fair value change of financial instruments was $1,986,063. This significant change was primarily due to a significant increasethe decrease in our stock price of the common stock underlying the warrants issued on September 4, 2014, which decreased from $17.13 on the issuance date to $14.01 on December 31, 2014. Secondly, it was due to the passage of remaining life of outstanding warrants (excluding the warrants issued in September 2014), a significant portion of which warrants expired in January 2015.
Government Grants
Government grants totaled $288,498 for the year ended December 31, 2014, representing an increase of $60,102, or 26.3%, from $228,396 in 2013 and an increase of $156,359, or 118.3%, from $132,139 in 2013. The increases were largely due to the fact that theresubsidies we received from the Chinese government for promoting local business and innovation.
Share of Profit (Loss) of Associated Company
Investment losses were more warrants outstanding as$54,308 for the year ended December 31, 2014, compared to a loss of $69,056 for the year ended December 31, 2013 compared toand a loss of $69,429 for the year ended December 31, 2012.2012, a decrease of $14,748, or 21.4%, from 2013 and a decrease of $15,121, or 21.8%, from 2012, respectively. For the years ended December 31, 2014 and 2013, these losses were attributable to our 30% equity ownership of Jinhua Service. In July 2014, Jinhua Service ceased its operations and was dissolved. As a result, we wrote off the remaining investment in this entity and associated liabilities due to this entity.
Share of Profit (Loss) after Tax of the JV Company
TheFor the year ended December 31, 2014, the JV Company’s net sales were $215,537,203, gross income was $41,889,144, and net income was $7,526,164. We accounted for our investments in the JV Company has absorbedunder the equity method of accounting as we have a profit (loss) in fiscal year 2013 due to its 50% ownership interest in the JV Company. The JV CompanyAs a result, we recorded a loss in 2013 because it is still in the start-up phase, though the Company believes it will generate profit in the near future, particularly as demand for our EV products continues to build in China. We believe this is reflected by the fact that if the subsidies receivable from the relevant government agencies for vehicles sold by the JV in 2013 had been paid in 2013, the JV would have experienced a profit instead of a loss; these subsidies are scheduled to be received by the JV in April, 2014. The financial results50% of the JV Company’s profit, or $3,763,082 for the year ended December 31, 2014. After eliminating intra-entity profits and their relationshiplosses, our share of the after tax profit of the JV Company was $4,490,266 for the year ended December 31, 2014, compared to a loss of $2,414,354 for the Company's investmentyear ended December 31, 2013, representing an increase in income of $6,904,620.
During the year of 2014, the JV Company’s revenues were primarily derived from the sales of EV products in the JV are more fully describedPRC with a total of 10,935 units sold during the year.
Other Income (Expense), Net
Net other expense was ($34,649) for the year ended December 31, 2014, compared to net other income of $676,257 for the year ended December 31, 2013 and net other income of $332,936 for the year ended December 31, 2012, a decrease in Note 23.net other income of $710,906, or 105.1%, from 2013 and a decrease in net other income of $367,585, or 110.4% from 2012, respectively. This difference was primarily attributable to a write-off of $841,251 payable to Ever Lotts Investment Limited incurred in 2013. In addition, we received less rental income received during the year of 2014.
36
Income Taxes
In accordance with the relevant tax laws and regulations of the PRC, our applicable corporate income tax rate is 25%. However, Kandi Vehicle is a qualified as a high technology company in China and is therefore entitled to pay a reduced income tax rate of 15%.
Each of our wholly-owned subsidiaries, Kandi New Energy, Yongkang Scrou and Kandi Wanning, is a wholly-owned subsidiary of the Company withhas an applicable corporate income tax rate of 25%.
The Company hasWe have a 50% ownership interest in the JV Company, and itswhich has an applicable corporate income tax isof 25%.
Zhejiang ZuoZhongYou Electric Vehicle Service Co., Ltd. is a 19% investment Each of the JV Company and its applicable corporate income tax rate is 25%.
Each of Kandi Electric Vehicles (Changxing) Co., Ltd., Zhejiang Kandi Electric Vehicles Jinhua Co., Ltd., Zhejiang JiHeKang Electric Vehicle Sales Co., Ltd. and Kandi Electric Vehicles (Shanghai) Co., Ltd. is a wholly-owned subsidiary of the JV Company withCompany’s subsidiaries has an applicable corporate income tax rate of 25%. as well.
The Company,We qualified as a high technology company in China, wasand were entitled to pay a reduced income tax rate of 15%. After combining with the research and development tax credit of 25% on certain qualified research and development expenses, the finalour effective reduced income tax rate was 18.40% as compared to 16.68%. in 2013. The combined tax benefits werebenefit was 60.38% as compared to 50.1%. in 2013. The actual effective income tax rate was reduced from 25% to 9.91% of the 2014 taxable corporate income as compared to 12.48% of the 2013 taxable corporate income.
10
Net Income (Loss)
ForWe recorded net income of $12,271,338 for the fiscalyear ended December 31, 2014, compared to net loss of ($21,140,723) for the year ended December 31, 2013 the Company generated a net loss of ($21,140,723), a significant change fromand a net income of $6,049,479 infor the year 2012.ended December 31, 2012, an increase of $33,412,061, or 158.0%, from the year ended December 31, 2013 and an increase of $6,221,859, or 102.8%, from the year ended December 31, 2012, respectively. The decreasenet income was caused by (i) changesprimarily attributable to increased revenue and gross profits, and the gain from the change in the fair value of financial derivatives, (ii) increases in general and administrative expenses, and (iii) interest expenses.warrant derivatives.
Excluding (i) the effects of (i) option-relatedstock award expenses, which were $0$8,455,422 and $19,053$9,658,320 for 2013the years ended December 31, 2014 and 2012, respectively, (ii) the stock award expense, which was $9,658,320 and $85,558 for 2013, and 2012, respectively, (iii) the Convertible Note's interest expense, which was $0 and $2 for 2013 and 2012, respectively, (iv) the effect caused by amortization of discount on Convertible Notes, which was $0 and $43 for 2013 and 2012, respectively, and (v)(ii) the change of the fair value of financial derivatives, which waswere a gain of $6,531,308 and a loss of ($16,647,283) expensefor the years ended December 31, 2014 and a $1,986,0632013, respectively, our net income for 2013 and 2012, respectively,(non-GAAP) was $14,195,452for the Company'syear ended December 31, 2014 as compared to net income (non-GAAP) of $5,164,880 for the year ended December 31, 2013, was $5,164,880. This net income figure represents an increase of 23.9% as compared with$9,030,572 or 174.8%. The increase in such net income was primarily attributable to the increase of $4,168,072 for the same period of 2012, excluding the same effects. This increase is primarily due to our increased salesrevenue and gross profit.profits during the year of 2014.
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SummaryWe make reference to certain non-GAAP financial measures, i.e., the adjusted net income. Management believes that such adjusted financial result is useful for investors in evaluating our operating performance because it presents a meaningful measure of Fourth Quarter Results
Comparisoncorporate performance. See the non-GAAP reconciliation table below. Any non-GAAP measures should not be considered as a substitute for, and should only be read in conjunction with, measures of Three Months Ended December 31, 2013 and 2012financial performance prepared in accordance with GAAP.
The following table sets forthsummarizes our non-GAAP net income from continuing operations for the amounts and percentage relationship to revenue of certain items in our condensed consolidated statements of income and comprehensive income
| For Three | For Three | ||||||||||||||||
| Months Ended | Months Ended | ||||||||||||||||
| December 31, | % Of | December 31, | % Of | Change In | Change | ||||||||||||
| 2013 | Revenue | 2012 | Revenue | Amount | In % | ||||||||||||
REVENUES, NET | $ | 50,560,582 | 100% | $ | 26,331,459 | 100% | $ | 24,229,123 | 92.0% | |||||||||
COST OF GOODS SOLD | (39,120,469 | ) | (77.4)% | (21,791,183 | ) | (82.8% | ) | (17,329,286 | ) | 79.5% | ||||||||
GROSS PROFIT | 11,440,113 | 22.6% | 4,540,276 | 17.2% | 6,899,837 | 152.0% | ||||||||||||
| ||||||||||||||||||
Research and development | (1,865,710 | ) | (3.7)% | (871,014 | ) | (3.3% | ) | (994,696 | ) | 114.2% | ||||||||
Selling and distribution expenses | (136,090 | ) | (0.3)% | (124,233 | ) | (0.5% | ) | (11,857 | ) | 9.5% | ||||||||
General and administrative expenses | (11,229,485 | ) | (22.2)% | (1,730,232 | ) | (6.6% | ) | (9,499,253 | ) | 549.0% | ||||||||
INCOMEFROMOPERATIONS | (1,791,172 | ) | (3.5)% | 1,814,797 | 6.9% | (3,605,969 | ) | (198.7)% | ||||||||||
Interest income (expense), net | (406,499 | ) | (0.8)% | 16,019 | 0.1% | (422,518 | ) | (2,637.6)% | ||||||||||
Change in fair value of financial instruments | (9,690,320 | ) | (19.2)% | 907,268 | 3.4% | (10,597,588 | ) | (1,168.1)% | ||||||||||
Government grants | 167,512 | 0.3% | 86,197 | 0.3% | 81,315 | 94.3% | ||||||||||||
Share of (loss) profit of associated company | (23,728 | ) | (0.1)% | (23,759 | ) | (0.1% | ) | 31 | (0.1)% | |||||||||
Other income, net | 459,097 | 0.9% | 47,131 | 0.2% | 411,966 | 874.1% | ||||||||||||
Share of (loss) after tax of JV | (2,294,338 | ) | (4.5)% | - | - | (2,294,338 | ) | 100.0% | ||||||||||
(LOSS)INCOMEBEFOREINCOMETAXES | (13,579,448 | ) | (26.9)% | 2,847,653 | 10.8% | (16,427,101 | ) | (576.9% | ) | |||||||||
| ||||||||||||||||||
INCOMETAX(EXPENSE) | (1,091,871 | ) | (2.2)% | (680,872 | ) | (2.6)% | (410,999 | ) | 60.4% | |||||||||
| ||||||||||||||||||
NET (LOSS) INCOME | (14,671,319 | ) | (29.0% | ) | 2,166,781 | 8.2% | (16,838,100 | ) | (777.1% | ) |
12
For the three monthsyears ended December 31, 2013, our revenue increased by 92.0% from $26,331,459 to $50,560,582 due to the fact the Company sold more higher-priced EV products in the fourth quarter of 2013. The cost of goods sold also increased 79.5% during the same period, while gross profit increased $6,899,837, or 152.0%, from $4,540,276 in the corresponding period last year to $11,440,113 in the fourth quarter of 2013.2014, 2013and 2012:
Year Ended December 31 | |||||||||
2014 | 2013 | 2012 | |||||||
GAAP net income (loss) | $ | 12,271,338 | $ | (21,140,723 | ) | $ | 6,049,479 | ||
Stock award expenses | 8,455,422 | 9,658,320 | 85,558 | ||||||
Options expenses | - | - | 19,053 | ||||||
Convertible note's interest expense | - | - | 2 | ||||||
Amortization of discount on convertible notes | - | - | 43 | ||||||
Change of the fair value of financial derivatives | (6,531,308 | ) | 16,647,283 | (1,986,063 | ) | ||||
Non-GAAP net income | $ | 14,195,452 | $ | 5,164,880 | $ | 4,168,072 |
For the three months ended December 31, 2013, the general and administrative expenses increased 549.0% to $11,229,485, mainly because of the expense related to stock awarded to directors and certain employees. Research and development expenses increased 114.2% as we engaged in additional research and development efforts for developing new EV products to meet market demands. For the three months ended December 31, 2013, we incurred a non-cash expense of ($9,690,320) relating to the change in fair value of financial instruments, which was a non-cash income of 907,268 for the same period in 2012.37
For the three months ended December 31, 2013, the company recorded a net loss of ($14,671,319), compared to a net income of $2,166,781 for the same period of last year. Excluding the effects of option-related expenses, stock award expenses, and the change in the fair value of financial derivative, for the three months ended December 31, 2013, the Company recorded a net income of $4,596,279, a significant increase from net income of $1,279,338 for the same period in 2012, excluding the same effects. This increase is primarily due to the increased revenue and gross profit.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
NetFor the year ended December 31, 2014, cash used in operating activities was $7,453,756, as compared to cash provided by operating activities wasof $14,687,446 for the year ended December 31, 2013 as compared to netand cash used in operating activities of ($10,721,895)$10,721,895 for the year ended December 31, 2012. The difference inmajor operating activities that provided cash flow was because in 2013, (i) the Company focused more on collecting accounts receivable, and the change in accounts receivable caused a net cash inflow of $3,251,168, compared to a net cash outflow of ($20,513,099) for the same reporting period in 2012, and (ii) the change in accounts payable caused a net cash inflow of $13,699,528, which was an increase from a net cash inflow of $3,566,354 in 2012.
Net cash used in investing activities was ($59,844,162) for the year ended December 31, 2013 as compared to2014 were net cash flowincome of $12,271,338, an increase in accounts payable of $23,095,825 and a decrease in accounts receivable of $15,445,962. The major operating activity that used in investing activities of ($4,751,858) for the same reporting period in 2012. This was primarily due to the ($80,668,972) cash outflow for the JV Company in 2013: The Company made a ($24,383,529) deposit to acquire certain assets in 2012, and spent an ($39,673,000) to acquire additional assets in 2013, all of which were transferred to Kandi Changxing; Kandi Changxing was then sold to the JV Company. In 2013, the Company recorded $64,535,177 cash inflow caused by the transfer of Kandi Changxing to the JV Company.
Net cash flow provided by financing activities was $46,317,978 for the year ended December 31, 2013,2014 was an increase in receivables from the JV Company of $48,593,522.
Cash used in investing activities for the year ended December 31, 2014 was $50,108,255, as compared to net cash flowused in investing activities of $59,844,162 and $4,751,858 for the years ended December 31, 2013 and 2012, respectively. Cash provided by investing activities for the year ended December 31, 2014 was primarily the result of the repayment of notes receivable of $29,354,592. Cash used in investing activities for the year ended December 31, 2014 was primarily the result of the purchases of construction in progress of $50,891,170 and the issuance of notes receivable of $24,705,489.
Cash provided by financing activities for the year ended December 31, 2014 was $72,775,040, as compared to cash provided by financing activities of $46,317,978 and $25,622,819 for the same periodyears ended December 31, 2013 and 2012, respectively. Cash provided by financing activities for the year ended December 31, 2014 was primarily the result of 2012. This change is primarily attributable to (i) a net cash inflowproceeds from short-term loans of $26,387,498 through issuing$48,306,743, proceeds from notes payable of $18,718,944, proceeds from common stock and warrants issued of $78,358,991, and (ii) a decreaseproceeds from warrant exercises of $21,101,039. Cash used in financing activities for the year ended December 31, 2014 was primarily the result of repayments of short-term loans of $46,517,604, repayments of notes payable of $29,602,112, repayment of bond payable of $13,011,917 and placement of restricted cash for 2013 compared to 2012,of $13,010,291.
As of December 31, 2014, we had unrestricted cash of $26,379,460. Our total current assets were $138,327,197, and our total current liabilities were $99,124,513, which caused a cash inflow of $16,135,044,resulted in contrast to 2012, when the Company recorded a net cash outflowworking capital of ($9,143,907) for restricted cash (though these effects are partially offset by the net cash outflow ($9,357,601) caused by notes payable in 2013, compared to the net cash inflow of $19,427,972 in 2012).$39,202,684.
13
Working Capital
The CompanyWe had a working capital surplus of $39,202,684 at December 31, 2014, which reflected an increase from a working capital deficit of ($6,631,680)as of December 31, 2013, a decrease from a working capital surplus of $35,898,297 as of December 31, 2012.2013.
As of December 31, 2013, the amount of advances to suppliers was $8,867,074, which included the advance of a RMB 47 million ($7,687,275) deposit by Kandi Electric Vehicles (Wanning) Co., Ltd (“Kandi Wanning”) to Nanjing Shangtong Auto Technologies Co., Ltd. (“Nanjing Shangton”) for an equipment purchase. Kandi Wanning and Nanjing Shangtong entered into a letter of intent contemplating the purchase of equipment up to RMB 180 million. The equipment will be purchased and delivered according to the construction schedule and development of Kandi Wanning. This advance will be used to offset the equipment purchase price upon delivery.
In fiscal year 2013, Kandi Changxing prepaid RMB 130 million to Zhejiang New Energy Auto System Co., Ltd. (“Zhejiang New Energy”) with the intent to acquire molds and equipment from Zhejiang New Energy, but the transaction did not close, and the advance was returned in full to Kandi Changxing.
As of December 31, 2013, the Company2014, we had credit lines from commercial banks in the total amount of $56,100,752,$42,739,904, of which $34,020,281 had been$35,589,502 was used as of December 31, 2013. The Company believes2014. We believe that itsour cash flows generated internally may not be sufficient to support the growth of futurein operations and to repay short-term bank loans for the next twelve (12) months, if needed.months. However, the Company believes itswe believe our access to existing financing sources, including the remaining net proceeds from our $71 million registered direct offering financing completed on September 4, 2014, and established relationships with PRC banks will enable itus to meet itsour obligations and fund its ongoing operations.
The Company hasWe have historically financed itselfour operations through short-term commercial bank loans from PRC banks. The term of these loans is typically for one year, and upon the payment of all outstanding principal and interest in a respectiveparticular loan, the banks have typically rolled over the loansloan for an additional one-year terms,term, with adjustments made to the interest rate to reflect prevailing market rates. The Company believesWe believe that this situation has not changed and is confident that the short-term bank loans will be available on marketnormal trade terms if needed.
On June 26, 2013,March 24, 2014, we raised approximately $11.05 million from the Company entered into a securities purchase agreement with certainsale to two institutional investors (the “Investors”) that closed on July 1, 2013, pursuant to which the Company sold to the Investors, in a registered direct offering,of an aggregate of 4,376,036606,000 shares of our common stock at a negotiated purchase price of $6.03$18.24 per share. As part of the transaction, we also issued to the investors warrants for the purchase of up to 90,900 shares of common stock at an exercise price of $22.80 per share, for aggregate gross proceeds ofwhich warrants expire in September 2015.
38
On September 4, 2014, we raised approximately $26,387,500,$71.00 million before deducting fees to the placement agent and other estimated offering expenses payable byincurred us from the Company.sale to six institutional investors of an aggregate of 4,127,908 shares of our common stock at a price of $17.20 per share. As part of the transaction terms, we also issued to the Investors also received (i) Series Ainvestors warrants for the purchase of up to 1,750,415743,024 shares of our common stock at an exercise price of $7.24$21.50 per share; (ii) Series Bshare, which warrants to purchase a maximum aggregate of 728,936 shares of our common stock at an exercise price of $7.24 per share;expire in February 2016.
Capital Requirements and (iii) Series C warrants to purchase a maximum aggregate of 291,574 shares of our common stock at an exercise price of $8.69.Capital Provided
14Capital requirements and capital provided for the year ended December 31, 2014 were as follows:
Year Ended | |||
12/31/2014 | |||
Capital requirements | (In thousands) | ||
Purchase of plant and equipment | $ | 2,101 | |
Purchases of land use rights | 1,669 | ||
Purchase of construction in progress | 50,891 | ||
Issuance of notes receivable | 24,706 | ||
Disposal of associated company | 96 | ||
Repayments of short-term bank loans | 46,518 | ||
Repayments of notes payable | 29,602 | ||
Repayments of bond | 13,012 | ||
Increase in restricted cash | 13,010 | ||
Internal cash used in operations | 7,454 | ||
Increase in cash | 13,617 | ||
Total capital requirements | $ | 202,676 | |
Capital provided | |||
Repayments of notes receivable | $ | 29,355 | |
Proceeds from short-term bank loan | 48,307 | ||
Proceeds from notes payable | 18,719 | ||
Common stock and warrants issued | 78,359 | ||
Warrant exercise | 21,101 | ||
Other financing activities | 8,431 | ||
Total capital provided | $ | 204,272 |
The difference between capital provided and capital required is caused by the exchange rate changes over the past twelve months.
Contractual Obligations and Off-balance Sheet Arrangements
Contractual Obligations
The following table summarizes our contractual obligations:
39
Payments Due by Period | ||||||||||||||||
Contractual Obligations | Total | Less than 1 year | 1 – 3 years | 3 – 5 years | More than 5 years | |||||||||||
Construction-in-progress | ||||||||||||||||
Obligations | $ | 103,999,090 | $ | 103,999,090 | $ | - | $ | - | $ | - | ||||||
Total | $ | 103,999,090 | $ | 103,999,090 | $ | - | $ | - | $ | - |
Short-term Loans:
Short-term loans are summarized as follows:
December 31, | December 31, | |||||
2014 | 2013 | |||||
Loans from Jinhua Bank | ||||||
Monthly interest only payments at 6.30% per annum, due October 10, 2014, guaranteed by Mr. Hu Xiaoming and Ms. Ling Yueping, and secured by the assets of the Company. The loan was fully repaid. Also see Note 13 and Note 14. | $ | - | $ | 1,635,590 | ||
Monthly interest only payments at 6.30% per annum, due December 2, 2014, guaranteed by Mr. Hu Xiaoming and Ms. Ling Yueping, and secured by the assets of the Company. The loan was fully repaid. Also see Note 13 and Note 14. | - | 817,795 | ||||
Monthly interest only payments at 6.30% per annum, due December 2, 2014, guaranteed by Zhejiang Kangli Metal Manufacturing Company, Mr. Hu Xiaoming, Ms. Ling Yueping, Mr. Lv Qingbo and Mr. Lv Qingjiang, and secured by the assets of the Company. The loan was fully repaid. Also see Note 13 and Note 14. | - | 3,271,181 | ||||
Loans from Yongkang Rural Cooperative Bank | ||||||
Monthly interest only payments at 1.026% per month, due March 31, 2014, guaranteed by Yongkang Sanli Metal Co., Ltd. The loan was fully repaid. | - | 817,795 | ||||
Loans from China Ever-bright Bank | ||||||
Monthly interest only payments at 6.94% per annum, due May 14, 2014, secured by the assets of the Company, guaranteed by Mr. Hu Xiaoming, Mr. Hu Wangyuan, Nanlong Group Co., Ltd. and Zhejiang Mengdeli Electric Co., Ltd. The loan was fully repaid. Also see Note 13 and Note 14. | - | 12,757,606 | ||||
Monthly interest only payments at 7.08% per annum, due May 11, 2015, secured by the assets of the Company, guaranteed by Mr. Hu Xiaoming, Mr. Hu Wangyuan, Nanlong Group Co., Ltd. and Zhejiang Mengdeli Electric Co., Ltd. Also see Note 13 and Note 14. | 12,675,713 | - | ||||
Loans from Shanghai Pudong Development Bank | ||||||
Monthly interest only payments at 6.60% per annum, due September 4, 2014, secured by the assets of the Company, guaranteed by Mr. HuXiaoming. The loan was fully repaid. Also see Note 13 and Note 14. | - | 6,542,362 | ||||
Loans from Bank of Shanghai | ||||||
Monthly interest only payments at 6.60% per annum, due December 27, 2014, guaranteed by Mr. Hu Xiaoming, Ms. Ling Yueping, Zhejiang Kangli Metal Manufacturing Company and Nanlong Group Co., Ltd. The loan was fully repaid. | - | 4,906,771 | ||||
Loans from China Ever-growing Bank | ||||||
Monthly interest only payments at 7.20% per annum, due April 22, 2014, guaranteed by Mr. Hu Xiaoming, Ms. Ling Yueping, Zhejiang Shuguang industrial Co., Ltd. and Zhejiang Mengdeli Electric Company. The loan was fully repaid. | - | 3,271,181 | ||||
Monthly interest only payments at 7.20% per annum, due April 22, 2015, guaranteed by Mr. Hu Xiaoming, Ms. Ling Yueping, and Zhejiang Shuguang industrial Co., Ltd. | 3,250,183 | - | ||||
Loans from Hangzhou Bank | ||||||
Monthly interest only payments at 6.00% per annum, due October 20, 2015, secured by the assets of the Company. Also see Note 13 and Note 14. | 7,930,446 | - | ||||
Monthly interest only payments at 6.00% per annum, due November 17, 2015, secured by the assets of the Company. Also see Note 13 and Note 14. | 11,733,160 | - | ||||
$ | 35,589,502 | $ | 34,020,281 |
40
As of December 31, 2014 and 2013, the Companywe provided guarantees for the following third parties:
(1) Guarantees for bank loans
| |||
| |||
| |||
| |||
| |||
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On December 27, 2013, the Company entered into a guarantee contract to serve as the guarantor for the bank loan borrowed from Shanghai Bank Hangzhou branch in the amount of $4,906,771 by Zhejiang Kangli Metal Manufacturing Company. (“ZKMMC”) for the period from December 27, 2013 to December 27, 2014. ZKMMC is not related to the Company. Under this guarantee contract, the Company agrees to perform all obligations of ZKMMC under the loan contract if ZKMMC fails to perform its obligations as set forth therein.
On February 26, 2013, the Company entered into a guarantee contract to serve as the guarantor for the bank loan borrowed from PingAn Bank in the amount of $4,906,771 by Zhejiang Shuguang industrial Co., Ltd. (“ZSICL”) for the period from February 26, 2013 to February 26, 2014. ZSICL is not related to the Company. Under this guarantee contract, the Company agrees to perform all obligations of ZSICL under the loan contracts if ZSICL fails to perform its obligations as set forth therein. This guarantee contract has been renewed for an additional one-year term.
Guarantee provided to: | December 31, 2014 | December 31, 2013 | ||||
Yongkang Angtai Trade Co., Ltd. | $ | - | $ | 817,795 | ||
Nanlong Group Co., Ltd. | 9,750,548 | 9,813,543 | ||||
Zhejiang Shuguang industrial Co., Ltd. | 4,875,274 | 4,906,771 | ||||
Zhejiang Kangli Metal Manufacturing Company. | 4,875,274 | 4,906,771 | ||||
Total | $ | 19,501,096 | $ | 20,444,880 |
On January 6, 2013, the Companywe entered into a guarantee contract to serve as the guarantor for the bank loans borrowed from China Communication Bank Jinhua Branch in the amount of $817,795 by Yongkang Angtai Trade Co., Ltd. (“YATCL”) for the period from January 6, 2013 to January 6, 2014. YATCL is not related to the Company.our company. Under this guarantee contract, the Company agreeswe agreed to perform all obligations of YATCL under the loan contracts if YATCL fails to perform its obligations as set forth therein. This
On February 26, 2013, we entered into a guarantee contract wasto serve as the guarantor for the bank loan borrowed from PingAn Bank in the amount of $4,906,771 by Zhejiang Shuguang Industrial Co., Ltd. (“ZSICL”) for the period from February 26, 2013 to February 26, 2014. On March 4, 2014, we entered into a guarantee contract to serve as the guarantor for the bank loan borrowed from PingAn Bank in the amount of $4,875,274 by Zhejiang Shuguang industrial Co., Ltd. (“ZSICL”) for the period from March 4, 2014 to March 4, 2015. ZSICL is not renewed.related to our company. Under these guarantee contracts, we agreed to perform all obligations of ZSICL under the loan contracts if ZSICL fails to perform its obligations as set forth therein.
41
On March 15, 2013 and December 27, 2013, the Companywe entered into two guarantee contracts to serve as the guarantor for the bank loans borrowed from Shanghai Pudong Development Bank Jinhua Branch and Shanghai Bank Hangzhou branch in the amountsamount of $3,271,181$3,250,183 and $6,542,362,$6,500,366, respectively, by Nanlong Group Co., Ltd. (“NGCL”) for the periodsperiod from March 15, 2013 to March 15, 2016, and December 27, 2013 to December 27, 2014, respectively. The guarantee contract to serve as the guarantor for the bank loan borrowed from Shanghai Bank Hangzhou branch was extended for four months to April 27, 2015 with the same terms after its original contract ended on December 27, 2014. NGCL is not related to the Company.our company. Under these guarantee contracts, the Company agreeswe agreed to perform all obligations of NGCL under the loan contractscontract if NGCL fails to perform its obligations as set forth therein.
On December 27, 2013, we entered into a guarantee contract to serve as the guarantor for the bank loan borrowed from Shanghai Bank Hangzhou branch in the amount of $ 4,875,274 by Zhejiang Kangli Metal Manufacturing Company (“ZKMMC”) for the period from December 27, 2013 to December 27, 2014. The guarantee contract was extended for six months to June 27, 2015 with the same terms after its original contract ended on December 27, 2014. ZKMMC is not related to our company. Under this guarantee contract, we agreed to perform all obligations of ZKMMC under the loan contract if ZKMMC fails to perform its obligations as set forth therein.
(2) Pledged collateral for a third party bank loans
As of December 31, 2014 and 2013, none of the Company'sour land use rights or plant and equipment were pledged as collateral securing bank loans to third parties.
15
Critical Accounting Policies and Related Estimates That Could Have a Material Effect on OurConsolidated Financial Statements
This section should be read together with the Summary of Significant Accounting Policies in the attached consolidated financial statements included in this Annual Report.
Estimates affecting accounts receivable and inventories
The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect our reporting of assets and liabilities (and contingent assets and liabilities). These estimates are particularly significant where they affect the reported net realizable value of the Company'sour accounts receivable and inventories.
Accounts receivable are recognized and carried at net realizable value. An allowance for doubtful accounts is recorded in the period when a loss is probable based on an assessment of specific factors, such as troubled collection, historical experience, accounts aging, ongoing business relations and other factors. Accounts are written off after exhaustive efforts at collection. If accounts receivable are to be provided for, or written off, they would be recognized in the consolidated statement of operations within operating expenses. The CompanyWe had an allowance for doubtful accounts of $0 for the years ended December 31, 20132014 and 2012,2013, in accordance with our management's judgment based on their best knowledge.
Inventory is stated at the lower of cost, determined on a weighted average basis, or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated costs necessary to make the sale. Adjustments to reduce the cost of inventory to its net realizable value are made, if required, for estimated excess, obsolescence, or impaired balances. When inventories are sold, their carrying amount is charged to expense in the year in which the revenue is recognized. Write-downs for declines in net realizable value or for losses of inventories are recognized as an expense in the year the impairment or loss occurs. There was a $315,584 and $352,734 of decline in net realizable value of inventory for the year ended of December 31, 2014 and 2013 due to our provision for slow moving inventory.
Although the Company believeswe believe that there is little likelihood that actual results will differ materially from current estimates, if customer demand for our products decreases significantly in the near future, or if the financial condition of our customers deteriorates in the near future, the Companywe could realize significant write downs for slow-moving inventories or uncollectible accounts receivable.
42
Policy affecting recognition of revenue
Our revenue recognition policy plays a key role in our consolidated financial statements. Revenues represent the invoiced value of goods sold, recognized upon the shipment of goods to customers, and revenues are recognized when all of the following criteria are met:
1. | Persuasive evidence of an arrangement exists; |
16
2. | Delivery has occurred or services have been rendered; |
3. | The seller's price to the buyer is fixed or determinable; and |
4. | Collectability is reasonably assured. |
The revenue recognition policies for our EV products and legacy products including ATVs, go-karts and EVs,other products are the same: When the products are delivered, the associated risk of loss is deemed transferred, and at that time the Company recognizeswe recognize revenue.
Policy affecting options, warrants and convertible notes
The Company'sOur stock option cost is recorded in accordance with ASC 718 and ASC 505. The fair value of stock options is estimated using the Black-Scholes-Merton model. The Company'sOur expected volatility assumption is based on the historical volatility of the Company'sour stock. The expected life assumption is primarily based on the expiration date of the option. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Stock option expense recognition is based on awards expected to vest. There were no estimated forfeitures. ASC standards require forfeitures to be estimated at the time of grant and revised in subsequent periods, if necessary, if actual forfeitures differ from those estimates.
The Company'sOur warrant costs are recorded in liabilities and equities, respectively, in accordance with ASC 480, ASC 505 and ASC 815. The fair value of a warrant, which is classified as a liability, is estimated using the Black-Scholes-Merton model and the lattice valuation model. The Company'sOur expected volatility assumption is based on the historical volatility of the Company'sour common stock. The expected life assumption is primarily based on the expiration date of the warrant. The risk-free interest rate for the expected term of the warrant is based on the U.S. Treasury yield curve in effect at the time of measurement. The warrants, which are freestanding derivatives classified as liabilities on the balance sheet, are measured at fair value on each reporting date, with decreases in fair value recognized in earnings and increases in fair values recognized in expenses.
The fair value of equity-based warrants, which are not considered derivatives under ASC 815, is estimated using the Black-Scholes-Merton model. The Company'sOur expected volatility assumption is based on the historical volatility of the Company'sour common stock. The expected life assumption is primarily based on the expiration date of the warrant. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
In accordance with ASC 815, the conversion feature of the convertible notes is separated from the debt instrument and accounted for separately as a derivative instrument. On the date the convertible notes are issued, the conversion feature is recorded as a liability at its fair value, and future decreases in fair value are recognized in earnings while increases in fair values are recognized in expenses. The CompanyWe used the Black-Scholes-Merton option-pricing model to obtain the fair value of the conversion feature. The Company'sWe expected volatility assumption is based on the historical volatility of the Company'sour common stock. The expected life assumption is primarily based on the expiration date of the conversion features. The risk-free interest rate for the expected term of the conversion features is based on the U.S. Treasury yield curve in effect at the time of measurement.
17
Warranty Liability
Most of our non-EV products (the “Legacy Products”) are exported out of China to foreign countries that have legal and regulatory requirements with which we are not familiar. Development of warranty policies for our Legacy Products in each of these countries would be virtually impossible and prohibitively expensive. Therefore, we provide price incentives and free parts to our customers and in exchange, our customers establish appropriate warranty policies and assume warranty responsibilities.
43
Consequently, warranty issues are taken into consideration during the price negotiation for our products. The free parts are delivered along with the products, and when products are sold, the related parts are recorded as cost of goods sold. Due to the reliable quality of our products, we have been able to maintain this warranty policy and we have not had any product liability attributed to the quality of our products.
For the EV products that we sell in China, there is a 3 year or 50,000 kilometer manufacturer warranty. This warranty affects the Company through our participation and investment in the JV Company, which manufactures the EVs.
Item 7A.Quantitative and Qualitative Disclosures About Market Risk.
Foreign Currency Exchange Rate Risk
While our reporting currency is the U.S. dollar, to date the majority of our revenues and costs are denominated in RMB and a significant portion of our assets and liabilities are denominated in RMB. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between the U.S. dollar and the RMB. If the RMB depreciates against the U.S. dollar, the value of our RMB revenues and assets as expressed in our U.S. dollar financial statements will decline. Since 2005, China reformed its exchange rate regime and the RMB is no longer pegged to the U.S. dollar. In 2010, the People’s Bank of China decided to move further to reform the RMB exchange rate regime to enhance the flexibility of the RMB exchange rate. At the end of 2014, the RMB has already appreciated more than 10% since 2010. In the long term, the RMB may appreciate or depreciate more significantly in value against the U.S. dollar or other foreign currencies, depending on the market supply and demand with reference to a basket of currencies. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the effectiveness of these hedges may be limited and we may not be able to successfully hedge our exposure. Accordingly, we may incur economic losses in the future due to foreign exchange rate fluctuations, which could have a negative impact on our financial condition and results of operations.
Interest Rate Risk
We had cash and cash equivalents and restricted cash totaling $39.4 million and notes receivable of $9.1 million as of December 31, 2014. Cash and cash equivalents are held for working capital purposes. We do not enter into investments for trading or speculative purposes. As of December 31, 2014, we had $35.6 million of short-term bank loans outstanding, which are fixed rate instruments. Our exposure to interest rate risk primarily relates to the interest income generated from cash held in bank deposits and notes receivable, and interest expense generated from short-term bank loans. We believe that we do not have any material exposure to changes in the fair value as a result of changes in interest rates due to the short term nature of our cash equivalents. We have not been exposed nor do we anticipate being exposed to material risks due to changes in interest rates.
Inflation Rate Risk
According to the National Bureau of Statistics of China, the change in the consumer price index in China was 2.0%, 2.6% and 2.6% in 2014, 2013, and 2012, respectively. China's inflation rate in 2014 was near a five-year low and was well below the government's target of 3.5%. China's National Statistics Bureau said the fall was largely due to falling oil prices. While this rate declined in 2014 compared to the past two years, there may be further increased inflation in the future, which could have an adverse effect on our business.
Item 8.Financial Statements and Supplementary Data.
1844
KANDI TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 20132014 AND 20122013
KANDI TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES
CONTENTS | |
PAGE F-2 | REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS |
PAGES F-3-4 | CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, |
PAGES F-5 | CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012 |
PAGE F-6 | CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012 |
PAGES | CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012 |
PAGES | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012 |
F-1
ALBERT WONG & CO.CERTIFIEDREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS7th Floor, Nan Dao Commercial Building359-361 Queen's Road CentralHong KongTel : +852 2851 7954Fax: +852 2545 4086
ALBERT WONGB.Soc., Sc., ACA., LL.B.,CPA(Practising)ACCOUNTING FIRM
To: The boardBoard of directorsDirectors and stockholdersStockholders of
Kandi Technologies Group, Inc. and Subsidiaries
Report of Independent Registered Public Accounting FirmInc
We have audited the accompanying consolidated balance sheet of Kandi Technologies Group, Inc. and subsidiaries ("the Company") as of December 31, 20132014 and 20122013 and the related consolidated statements of income and comprehensive income, stockholders' equity and cash flowflows for each of the three years then ended.in the period ended December 31, 2014. We have also audited the internal control over financial reporting of Kandi Technologies Group, Inc. and subsidiaries ("the Company")Company as of December 31, 2013,2014, based on criteria established in the 1992 Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)(2013 framework). The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company's internal control over financial reporting based on our audit. Our audit of, and opinion on, Kandi Technologies Group, Inc.'s internal control over financial reporting did not include internal control over financial reporting of Zhejiang Kandi Electric Vehicles Co. Ltd., a joint venture. As indicated in Management's Report, Zhejiang Kandi Electric Vehicles Co., Ltd. is a 50% owned joint venture of the Company established in March 2013 and is accounted as an equity method investment. The main operations of Zhejiang Kandi Electric Vehicles Co.,Ltd started on December 2013, and therefore, management's assertion of the effectiveness of Kandi Technologies Group, Inc.'s internal control over financial reporting excluded internal control over financial reporting of Zhejiang Kandi Electric Vehicles Co. Ltd.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness and significant deficiencies have been identified and included in management's assessment as of December 31, 2013:
Ineffective control environment — significant control deficiencies were identified in various components of internal control, which, in aggregate, lead us to conclude that a material weakness exist in the control environment. The significant deficiencies noted in the control environment are summarized as follows:
Lack of adequate policies and procedures in internal audit function, which may potentially result in: (1) lack of communication between internal audit department and the Audit Committee and the Board of Directors; (2) insufficient internal audit work to ensure that the Company's policies and procedures have been carried out as planned.
There was no self-assessment performed by the Audit Committee to assess the effectiveness of the Audit Committee in oversight of management.
The internal control audit department reported to the CEO instead of the Audit Committee. Such reporting structure impaired the independence and objectivity of the internal control audit department.
Inadequate design of internal controls over the approval procedures for related party transactions.
The material weakness or significant deficiencies were considered in determining the nature, timing and extent of audit tests applied in our audit of the Company's consolidated financial statements for the year ended December 31, 2013, and our opinion regarding the effectiveness of the Company's internal control over financial reporting does not affect our opinion on those consolidated financial statements.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Kandi Technologies Group, Inc. as of December 31, 20132014 and 20122013 and the consolidated results of its operations and its cash flowflows for each of the three years thenin the period ended December 31, 2014, in conformity with accounting principlesUS generally accepted in the United States of America.accounting principles.
InAlso, in our opinion, because of the effect of the material weakness describe above on the achievement of the objectives of the control criteria, the Company has not maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013,2014, based on criteria established in the 1992 Internal Control Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)(2013 framework).
Hong Kong, China | /s/ |
March | Certified Public Accountants |
F-2
KANDI TECHNOLOGIES GROUP, INC. AND SUBSIDIARIESKANDI TECHNOLOGIES GROUP, INC.AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
ASSETS
ASSETS | ||||||||||||
| December 31, | December 31, | December 31, | December 31, | ||||||||
| 2013 | 2012 | 2014 | 2013 | ||||||||
| ||||||||||||
CURRENT ASSETS | ||||||||||||
Cash and cash equivalents | $ | 12,762,369 | $ | 12,135,096 | $ | 26,379,460 | $ | 12,762,369 | ||||
Restricted cash | 1,636 | 15,835,364 | 13,000,731 | 1,636 | ||||||||
Accounts receivable | 31,370,862 | 33,557,534 | 15,736,805 | 31,370,862 | ||||||||
Inventories (net of provision for slow moving inventory of $352,734 and $56,248 as of December 31, 2013 and 2012 respectively | 9,187,714 | 7,630,715 | ||||||||||
Inventories (net of provision for slow moving inventory of $315,584 and $352,734 as of December 31, 2014 and 2013 respectively | 15,403,840 | 9,187,714 | ||||||||||
Notes receivable | 13,794,094 | 9,562,429 | 9,060,441 | 13,794,094 | ||||||||
Other receivables | 556,904 | 501,448 | 238,567 | 556,904 | ||||||||
Prepayments and prepaid expenses | 505,513 | 563,861 | 120,761 | 505,513 | ||||||||
Due from employees | 34,272 | 40,936 | 34,475 | 34,272 | ||||||||
Advances to suppliers | 8,867,074 | 4,769,825 | 6,901,505 | 8,867,074 | ||||||||
Amount due from JV Company, net | 2,917,592 | - | 51,450,612 | 2,917,592 | ||||||||
Deferred tax | 13,706 | - | - | 13,706 | ||||||||
Deposit for acquisition | - | 24,397,967 | ||||||||||
Total Current Assets | 80,011,736 | 108,995,175 | 138,327,197 | 80,011,736 | ||||||||
| ||||||||||||
LONG-TERM ASSETS | ||||||||||||
| ||||||||||||
Plant and equipment, net | 29,333,516 | 35,725,740 | 26,215,356 | 29,333,516 | ||||||||
Land use rights, net | 14,453,191 | 14,337,691 | 15,649,152 | 14,453,191 | ||||||||
Construction in progress | 16,356 | - | 58,510,051 | 16,356 | ||||||||
Deferred taxes | 81,076 | 695 | - | 81,076 | ||||||||
Investment in associated company | 96,838 | 161,507 | - | 96,838 | ||||||||
Investment in JV Company | 79,331,930 | - | 83,309,095 | 79,331,930 | ||||||||
Goodwill | 322,591 | 322,591 | 322,591 | 322,591 | ||||||||
Intangible assets | 659,496 | 741,591 | 577,401 | 659,496 | ||||||||
Other long-term assets | 162,509 | - | ||||||||||
Total Long-Term Assets | 124,294,994 | 51,289,815 | 184,746,155 | 124,294,994 | ||||||||
| ||||||||||||
TOTAL ASSETS | $ | 204,306,730 | $ | 160,284,990 | $ | 323,073,352 | $ | 204,306,730 |
See notes to consolidated financial statements
F-3
KANDI TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CURRENT LIABILITIES Accounts payable Other payables and accrued expenses Short-term bank loans Customer deposits Notes payable Income tax payable Due to employees Due to related party Deferred taxes Financial derivate - liability Total Current Liabilities LONG-TERM LIABILITIES Deferred tax Bond payable Financial derivatives - liability Total Long-Term Liabilities TOTAL LIABILITIES STOCKHOLDERS' EQUITY Common stock, $0.001 par value; 100,000,000 shares authorized; 37,012,904 and 31,696,794 shares issued and outstanding at December 31, 2013 and December 31, 2012, respectively Additional paid-in capital Retained earnings (the restricted portion is $3,807,551 and $2,831,005 at December 31, 2013 and December 31, 2012, respectively) Accumulated other comprehensive income TOTAL STOCKHOLDERS' EQUITY TOTAL LIABILITIES AND STOCKHOLDERS' EQUITYKANDI TECHNOLOGIES GROUP, INC.AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSLIABILITIES AND STOCKHOLDERS' EQUITYCONSOLIDATED BALANCE SHEETS December 31, December 31, 2013 2012 $ 22,843,143 $ 8,668,478 2,422,613 3,092,045 34,020,281 32,615,063 44,404 292,389 16,683,023 25,332,088 1,362,828 680,253 10,297 7,132 - 841,251 - 55,166 9,256,827 1,513,013 86,643,416 73,096,878 1,009,477 - 13,084,724 12,666,044 15,042,994 - 29,137,195 12,666,044 115,780,611 85,762,922 37,013 31,697 76,754,774 43,728,218 4,119,086 25,259,809 7,615,246 5,502,344 88,526,119 74,522,068 $ 204,306,730 $ 160,284,990
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||
| December 31, | December 31, | ||||
| 2014 | 2013 | ||||
CURRENT LIABILITIES | ||||||
Accounts payable | $ | 45,772,481 | $ | 22,843,143 | ||
Other payables and accrued expenses | 5,101,740 | 2,422,613 | ||||
Short-term bank loans | 35,589,502 | 34,020,281 | ||||
Customer deposits | 2,630,723 | 44,404 | ||||
Notes payable | 5,702,121 | 16,683,023 | ||||
Income tax payable | 1,835,685 | 1,362,828 | ||||
Due to employees | 15,787 | 10,297 | ||||
Deferred taxes | 230,864 | - | ||||
Financial derivate - liability | 2,245,610 | 9,256,827 | ||||
Total Current Liabilities | 99,124,513 | 86,643,416 | ||||
| ||||||
LONG-TERM LIABILITIES | ||||||
Deferred tax | 2,266,725 | 1,009,477 | ||||
Bond payable | - | 13,084,724 | ||||
Financial derivatives - liability | 10,097,275 | 15,042,994 | ||||
Total Long-Term Liabilities | 12,364,000 | 29,137,195 | ||||
TOTAL LIABILITIES | 111,488,513 | 115,780,611 | ||||
| ||||||
STOCKHOLDERS' EQUITY | ||||||
Common stock, $0.001 par value; 100,000,000 shares authorized; 46,274,855 and 37,012,904 shares issued and outstanding at December 31, 2014 and 2013, respectively | 46,275 | 37,013 | ||||
Additional paid-in capital | 190,258,037 | 76,754,774 | ||||
Retained earnings (the restricted portion is $4,172,324 and $3,807,551 at December 31, 2014 and 2013, respectively) | 16,390,424 | 4,119,086 | ||||
Accumulated other comprehensive income | 4,890,103 | 7,615,246 | ||||
TOTAL STOCKHOLDERS' EQUITY | 211,584,839 | 88,526,119 | ||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 323,073,352 | $ | 204,306,730 |
See notes to consolidated financial statements
F-4
KANDI TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES REVENUES, NET COST OF GOODS SOLD GROSS PROFIT Research and development Selling and marketing General and administrative INCOME FROM CONTINUING OPERATIONS Interest income Interest (expense) Government grants Other, net Change in fair value of financial instruments Share of (loss) in associated companies Share of profit after tax of JV INCOME (LOSS) BEFORE INCOME TAXES INCOME TAX EXPENSE NET (LOSS) INCOME OTHER COMPREHENSIVE INCOME Foreign currency translation COMPREHENSIVE INCOME WEIGHTED AVERAGE SHARES OUTSTANDING BASIC WEIGHTED AVERAGE SHARES OUTSTANDING DILUTED NET INCOME PER SHARE, BASIC NET INCOME PER SHARE, DILUTEDKANDI TECHNOLOGIES GROUP, INC.AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 2013 2012 $ 94,536,045 $ 64,513,670 (72,793,517 ) (51,620,280 ) 21,742,528 12,893,390 (3,728,730 ) (2,877,283 ) (399,504 ) (455,983 ) (16,056,107 ) (4,250,832 ) 1,558,187 5,309,292 1,516,477 2,658,104 (4,395,353 ) (2,775,891 ) 228,396 132,139 676,257 332,936 (16,647,283 ) 1,986,063 (69,056 ) (69,429 ) (2,414,354 ) - (19,546,729 ) 7,573,214 (1,593,994 ) (1,523,735 ) (21,140,723 ) 6,049,479 2,112,902 424,623 $ (19,027,821 ) $ 6,474,102 34,707,973 29,439,328 34,707,973 29,677,325 $ (0.61 ) $ 0.21 $ (0.61 ) $ 0.20
See notes to consolidated financial statementsFOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
| 2014 | 2013 | 2012 | ||||||
REVENUES, NET | $ | 170,229,006 | $ | 94,536,045 | $ | 64,513,670 | |||
| |||||||||
COST OF GOODS SOLD | (146,825,073 | ) | (72,793,517 | ) | (51,620,280 | ) | |||
| |||||||||
GROSS PROFIT | 23,403,933 | 21,742,528 | 12,893,390 | ||||||
| |||||||||
OPERATING EXPENSES: | |||||||||
Research and development | (2,755,637 | ) | (3,728,730 | (2,877,283 | ) | ||||
Selling and marketing | (1,345,588 | ) | (399,504 | ) | (455,983 | ) | |||
General and administrative | (14,058,548 | ) | (16,056,107 | ) | (4,250,832 | ) | |||
Total operating expenses | (18,159,773 | ) | (20,184,341 | ) | (7,584,098 | ) | |||
| |||||||||
INCOME FROM OPERATIONS | 5,244,160 | 1,558,187 | 5,309,292 | ||||||
| |||||||||
OTHER INCOME (EXPENSE): | |||||||||
Interest income | 1,701,121 | 1,516,477 | 2,658,104 | ||||||
Interest (expense) | (3,480,646 | ) | (4,395,353 | ) | (2,775,891 | ) | |||
Change in fair value of financial instruments | 6,531,308 | (16,647,283 | ) | 1,986,063 | |||||
Government grants | 288,498 | 228,396 | 132,139 | ||||||
Share of (loss) in associated companies | (54,308 | ) | (69,056 | ) | (69,429 | ) | |||
Share of profit (loss) after tax of JV | 4,490,266 | (2,414,354 | ) | - | |||||
Other income (expense), net | (34,649 | ) | 676,257 | 332,936 | |||||
Total other income (expense), net | 9,441,590 | (21,104,916 | ) | 2,263,922 | |||||
| |||||||||
INCOME (LOSS) BEFOREPROVISION FOR INCOME TAXES | 14,685,750 | (19,546,729 | ) | 7,573,214 | |||||
| |||||||||
PROVISION FOR INCOME TAXES | (2,414,412 | ) | (1,593,994 | ) | (1,523,735 | ) | |||
| |||||||||
NET INCOME (LOSS) | 12,271,338 | (21,140,723 | ) | 6,049,479 | |||||
| |||||||||
OTHER COMPREHENSIVEINCOME | |||||||||
| |||||||||
Foreign currency translation | (2,725,143 | ) | 2,112,902 | 424,623 | |||||
| |||||||||
COMPREHENSIVE INCOME (LOSS) | $ | 9,546,195 | $ | (19,027,821 | ) | $ | 6,474,102 | ||
WEIGHTED AVERAGE SHARES OUTSTANDING BASIC | 42,583,495 | 34,707,973 | 29,439,328 | ||||||
WEIGHTED AVERAGE SHARES OUTSTANDING DILUTED | 42,715,818 | 34,707,973 | 29,677,325 | ||||||
| |||||||||
NET INCOME (LOSS) PER SHARE, BASIC | $ | 0.29 | $ | (0.61 | ) | $ | 0.21 | ||
NET INCOME (LOSS) PER SHARE, DILUTED | $ | 0.29 | $ | (0.61 | ) | $ | 0.20 |
F-5
KANDI TECHNOLOGIES GROUP, INC. |
| Accumulated | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional | Other | |||||||||||||||||||||||||||||||||
| Accumulated | Par | Paid-in | Retained | Comprehensive | |||||||||||||||||||||||||||||||
| Additional | Other | Shares | Value | Capital | Earnings | Income | Total | ||||||||||||||||||||||||||||
| Common Stock | Paid-in | Retained | Comprehensive | ||||||||||||||||||||||||||||||||
| Shares | Par Value | Capital | Earnings | Income | Total | ||||||||||||||||||||||||||||||
BALANCE ATDECEMBER 31,2011 | 27,445,600 | $ | 27,446 | $ | 31,533,378 | $ | 19,210,330 | $ | 5,077,721 | $ | 55,848,875 | 27,445,600 | $ | 27,446 | $ | 31,533,378 | $ | 19,210,330 | $ | 5,077,721 | $ | 55,848,875 | ||||||||||||||
| ||||||||||||||||||||||||||||||||||||
Stock issuance, warrant and stock option exercise | 4,251,194 | 4,251 | 11,543,320 | - | - | 11,547,571 | 4,251,1 94 | 4,251 | 11,543,3 20 | - | - | 11,547,571 | ||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||
Deferred tax effect | - | - | (78,689 | ) | - | - | (78,689 | ) | - | - | (78,689 | ) | - | - | (78,689 | ) | ||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||
Stock option issued | - | - | 19,053 | - | - | 19,053 | - | - | 19,053 | - | - | 19,053 | ||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||
Acquisition of SCROU | - | - | 711,156 | - | - | 711,156 | - | - | 711,156 | - | - | 711,156 | ||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||
Foreign currency translation gain | - | - | - | - | 424,623 | 424,623 | - | - | - | - | 424,623 | 424,623 | ||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||
Net income | - | - | - | 6,049,479 | 6,049,479 | - | - | - | 6,049,47 9 | - | 6,049,479 | |||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||
BALANCE ATDECEMBER 31,2012 | 31,696,794 | $ | 31,697 | $ | 43,728,218 | $ | 25,259,809 | $ | 5,502,344 | $ | 74,522,068 | 31,696,794 | $ | 31,697 | $ | 43,728,218 | $ | 25,259,809 | $ | 5,502,344 | $ | 74,522,068 | ||||||||||||||
| ||||||||||||||||||||||||||||||||||||
Stock issuance and award | 4,396,036 | 4,396 | 28,983,299 | - | - | 28,987,695 | 4,396,036 | 4,396 | 28,983,299 | - | - | 28,987,695 | ||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||
Warrant exercise | 920,074 | 920 | 4,089,720 | - | - | 4,090,640 | 920,074 | 920 | 4,089,720 | - | - | 4,090,640 | ||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||
Deferred tax effect | - | - | (46,463 | ) | - | - | (46,463 | ) | - | - | (46,463 | ) | - | - | (46,463 | ) | ||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||
Foreign currency translation | - | - | - | 2,112,902 | 2,112,902 | - | - | - | 2,112,902 | 2,112,902 | ||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||
Net income | - | - | - | (21,140,723 | ) | - | (21,140,723 | ) | - | - | - | (21,140,723 | ) | - | (21,140,723 | ) | ||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||
BALANCE ATDECEMBER 31,2013 | 37,012,904 | 37,013 | 76,754,774 | 4,119,086 | 7,615,246 | 88,526,119 | 37,012, 904 | $ | 37,013 | $ | 76,754,774 | $ | 4,119,086 | $ | 7,615,246 | $ | 88,526,119 | |||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||
Stock issuance and award | 6,169,534 | 6,170 | 91,058,441 | - | - | 91,064,611 | ||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||
Warrant exercise | 3,092,417 | 3,092 | 22,444,822 | - | - | 22,447,914 | ||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||
Deferred tax effect | - | - | - | - | - | |||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||
Foreign currency translation | - | - | - | - | (2,725,143 | ) | (2,725,143 | ) | ||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||
Net income | - | - | - | 12,271,338 | - | 12,271,338 | ||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||
BALANCE AT DECEMBER 31, 2014 | 46,274,855 | $ | 46,275 | $ | 190,258,037 | $ | 16,390,424 | $ | 4,890,103 | $ | 211,584,839 |
See notes to consolidated financial statements
F-6
KANDI TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES |
| 2013 | 2012 | ||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||
Net (loss) income | $ | (21,140,723 | ) | $ | 6,049,479 | |
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||
Depreciation and amortization | 7,708,923 | 4,978,626 | ||||
Assets impairments | 355,876 | 465,199 | ||||
Deferred taxes | 876,255 | 92,521 | ||||
Change in value of financial instruments | 16,647,283 | (1,986,063 | ) | |||
Loss in investment in associated company | 69,056 | 69,429 | ||||
Share of profit after tax of JV | 2,414,354 | - | ||||
Option cost | - | 19,053 | ||||
| ||||||
Changes in operating assets and liabilities, net of effects of acquisition: | ||||||
(Increase) Decrease In: | ||||||
Accounts receivable | 3,251,168 | (20,513,099 | ) | |||
Inventories | (1,287,045 | ) | (904,355 | ) | ||
Other receivables | (38,491 | ) | 1,955,055 | |||
Due from employees | 10,797 | 37,117 | ||||
Prepayments and prepaid expenses | (3,810,447 | ) | (4,285,489 | ) | ||
Amount due from JV | (2,877,972 | ) | - | |||
| ||||||
Increase (Decrease) In: | ||||||
Accounts payable | 13,699,528 | 3,566,354 | ||||
Other payables and accrued liabilities | (746,838 | ) | (50,333 | ) | ||
Customer deposits | (254,151 | ) | (740,419 | ) | ||
Income tax payable | 651,124 | 525,030 | ||||
Due to related party | (841,251 | ) | - | |||
Net cash (used in) provided by operating activities | 14,687,446 | (10,721,895 | ) | |||
| ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||
(Purchases)/Disposal of plant and equipment, net | (158,830 | ) | (9,072,230 | ) | ||
Purchases of construction in progress | (16,134 | ) | - | |||
Deposit for acquisition | - | (24,383,529 | ) | |||
Asset acquisition, net of deposit | (39,673,000 | ) | - | |||
Disposal of subsidiary | 64,535,177 | - | ||||
Issuance of notes receivable | (4,174,247 | ) | (1,011,821 | ) | ||
Repayments of notes receivable | 311,844 | 29,603,171 | ||||
Investment in JV | (80,668,972 | ) | - | |||
Cash acquired in acquisition | - | 112,551 | ||||
Net cash provided by (used in) investing activities | (59,844,162 | ) | (4,751,858 | ) |
See notes to consolidated financial statementsCONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
| 2014 | 2013 | 2012 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||
Net income (loss) | $ | 12,271,338 | $ | (21,140,723 | ) | $ | 6,049,479 | ||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||
Depreciation and amortization | 5,571,465 | 7,708,923 | 4,978,626 | ||||||
Assets impairments | - | 355,876 | 465,199 | ||||||
Deferred taxes | 1,579,855 | 876,255 | 92,521 | ||||||
Change in value of financial instruments | (6,531,308 | ) | 16,647,283 | (1,986,063 | ) | ||||
Loss in investment in associated company | 54,308 | 69,056 | 69,429 | ||||||
Share of profit after tax of JV | (4,490,266 | ) | 2,414,354 | - | |||||
Decrease in reserve for fixed assets | (302,023 | ) | - | - | |||||
Option cost | - | - | 19,053 | ||||||
| |||||||||
Changes in operating assets and liabilities, netof effects of acquisition: | |||||||||
(Increase) Decrease In: | |||||||||
| 15,445,962 | (20,513,099 | ) | ||||||
Accounts receivable | 3,251,168 | ||||||||
Inventories | (6,280,502 | ) | (1,287,045 | ) | (904,355 | ) | |||
Other receivables | 315,071 | (38,491 | ) | 1,955,055 | |||||
Due from employees | 5,139 | 10,797 | 37,117 | ||||||
Prepayments and prepaid expenses | (5,360,637 | ) | (3,810,447 | ) | (4,285,489 | ) | |||
Amount due from JV | (48,593,522 | ) | (2,877,972 | ) | - | ||||
| |||||||||
Increase (Decrease) In: | |||||||||
Accounts payable | 23,095,825 | 13,699,528 | 3,566,354 | ||||||
Other payables and accrued liabilities | 2,694,689 | (746,838 | ) | (50,333 | ) | ||||
Customer deposits | 2,588,830 | (254,151 | ) | (740,419 | ) | ||||
Income tax payable | 482,020 | 651,124 | 525,030 | ||||||
Due to related party | - | (841,251 | ) | - | |||||
Net cash (used in) provided by operating activities | (7,453,756 | ) | 14,687,446 | (10,721,895 | ) | ||||
| |||||||||
CASH FLOWS FROM INVESTINGACTIVITIES: | |||||||||
(Purchases)/Disposal of plant and equipment, net | (2,101,355 | ) | (158,830 | ) | (9,072,230 | ) | |||
Purchases of land use rights | (1,668,534 | ) | - | - | |||||
Purchases of construction in progress | (50,891,170 | ) | (16,134 | ) | - | ||||
Deposit for acquisition | - | - | (24,383,529 | ) | |||||
Asset acquisition, net of deposit | - | (39,673,000 | ) | - | |||||
Disposal of subsidiary | (96,299 | ) | 64,535,177 | - | |||||
Issuance of notes receivable | (24,705,489 | ) | (4,174,247 | ) | (1,011,821 | ) | |||
Repayments of notes receivable | 29,354,592 | 311,844 | 29,603,171 | ||||||
Investment in JV | - | (80,668,972 | ) | - | |||||
Cash acquired in acquisition | - | - | 112,551 | ||||||
Net cash (used in) investing activities | (50,108,255 | ) | (59,844,162 | ) | (4,751,858 | ) | |||
CASH FLOWS FROM FINANCINGACTIVITIES: | |||||||||
Restricted cash | (13,010,291 | ) | 16,135,044 | (9,143,907 | ) | ||||
Proceeds from short-term bank loans | 48,306,743 | 52,918,845 | 41,504,215 | ||||||
Repayments of short-term bank loans | (46,517,604 | ) | (52,596,170 | ) | (45,539,128 | ) | |||
Proceeds from notes payable | 18,718,944 | 83,251,992 | 40,491,531 | ||||||
Repayments of notes payable | (29,602,112 | ) | (92,609,593 | ) | (21,063,559 | ) | |||
Proceeds from bond payable | - | 12,907,035 | 12,658,548 | ||||||
Repayments of bond payable | (13,011,917 | ) | (12,907,035 | ) | - | ||||
Fund raising through issuing common stock and warrants | 78,358,991 | 26,387,498 | - | ||||||
Option exercise, stock award & other financing | 8,431,247 | 9,659,103 | 1,258,231 | ||||||
Warrant exercise | 21,101,039 | 3,171,259 | 1,672,739 | ||||||
Common stock issued for acquisition, net of cost of capital | - | - | 3,784,149 | ||||||
Net cash provided by financing activities | 72,775,040 | 46,317,978 | 25,622,819 | ||||||
| |||||||||
NET INCREASE IN CASH AND CASHEQUIVALENTS | 15,213,029 | 1,161,262 | 10,149,066 | ||||||
Effect of exchange rate changes on cash | (1,595,938 | ) | (533,989 | ) | (308,322 | ) | |||
Cash and cash equivalents at beginning of year | 12,762,369 | 12,135,096 | 2,294,352 | ||||||
CASH AND CASH EQUIVALENTS AT ENDOF YEAR | $ | 26,379,460 | $ | 12,762,369 | $ | 12,135,096 | |||
| |||||||||
SUPPLEMENTARY CASH FLOWINFORMATION | |||||||||
Income taxes paid | $ | 1,932,392 | $ | 942,870 | $ | 998,706 | |||
Interest paid | $ | 3,475,893 | $ | 3,565,496 | $ | 2,570,691 | |||
Issuance of Common stock for acquisition | $ | - | $ | - | $ | 8,616,416 | |||
| |||||||||
SUPPLEMENTAL NON-CASHDISCLOSURES: | |||||||||
Prepayments transferred to construction in progress | $ | 7,652,959 | $ | - | $ | - | |||
Construction in progress transferred to plant and equipment | $ | - | $ | - | $ | 10,078,637 |
F-7
KANDI TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES |
| 2013 | 2012 | ||||
| ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||
Restricted cash | 16,135,044 | (9,143,907 | ) | |||
Proceeds from short-term bank loans | 52,918,845 | 41,504,215 | ||||
Repayments of short-term bank loans | (52,596,170 | ) | (45,539,128 | ) | ||
Proceeds from notes payable | 83,251,992 | 40,491,531 | ||||
Repayments of notes payable | (92,609,593 | ) | (21,063,559 | ) | ||
Proceeds from bond payable | 12,907,035 | 12,658,548 | ||||
Repayments of bond payable | (12,907,035 | ) | - | |||
Fund raising through issuing common stock and warrants | 26,387,498 | - | ||||
Option exercise, stock award & other financing | 9,659,103 | 1,258,231 | ||||
Warrant exercise | 3,171,259 | 1,672,739 | ||||
Common stock issued for acquisition, net of cost of capital | - | 3,784,149 | ||||
Net cash provided by financing activities | 46,317,978 | 25,622,819 | ||||
| ||||||
NET INCREASE IN CASH AND CASH EQUIVALENTS | 1,161,262 | 10,149,066 | ||||
Effect of exchange rate changes on cash | (533,989 | ) | (308,322 | ) | ||
Cash and cash equivalents at beginning of year | 12,135,096 | 2,294,352 | ||||
CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | 12,762,369 | $ | 12,135,096 | ||
| ||||||
SUPPLEMENTARY CASH FLOW INFORMATION | ||||||
Income taxes paid | $ | 942,870 | $ | 998,706 | ||
Interest paid | $ | 3,565,496 | $ | 2,570,691 | ||
Issuance of Common stock for acquisition | $ | - | 8,616,416 |
SUPPLEMENTAL NON-CASH DISCLOSURES:NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the years ended December 31, 2013 and 2012, $0 and $10,078,637 were transferred from construction in progress to plant and equipment, respectively.
See notes to consolidated financial statements
F-8
NOTE 1 - ORGANIZATION AND PRINCIPAL ACTIVITIES
The CompanyKandi Technologies Group, Inc. (“Kandi Technologies”) was incorporated under the laws of the State of Delaware on March 31, 2004. The CompanyKandi Technologies changed its name from Stone Mountain Resources, Inc. to Kandi Technologies, Corp. on August 13, 2007. On December 21, 2012, the CompanyKandi Technologies changed its name to Kandi Technologies Group, Inc. As used herein, the term the “Company” means Kandi Technologies and its operating subsidiaries, as described below.
Headquartered in the Jinhua city, Zhejiang Province, China, the Company is one of China'sChina’s leading producers and manufacturers of electrical vehicles, all-terrain vehicles, go-karts, specialized utility vehiclesvehicle products, electrical vehicle parts and a variety of other specialtyoff-road vehicles for sale in the PRCPeople’s Republic of China (the “PRC”) and global markets. The Company conducts its primary business operations through its wholly-owned subsidiary, Zhejiang Kandi Vehicles Co., Ltd. (“Kandi Vehicles”), and the partial and wholly-owned subsidiaries of Kandi Vehicles.
The Company'sCompany’s organizational chart is as follows:
* The box with dotted-line border represents the entity that has ceased operation and was dissolved in July 2014.
Operating SubsidiariesSubsidiaries:
In January 2011, pursuantPursuant to relevant agreements executed in January 2011, Kandi Vehicles is entitled to 100% of the economic benefits, voting rights and residual interests (100% profits and loss absorption rate) of Jinhua Kandi New Energy Vehicles Co., Ltd. (“Kandi New Energy”), a company in which Kandi Vehicles has a 50% interest. Mr. Hu Xiaoming owns the other 50% which he entrusted Kandi Vehicles to manage Kandi New Energy. Kandi New Energy was established in accordance with relevant Chinese government regulations on automobile manufacturing enterprises, which prohibit foreign ownership of greater than 50%. Kandi New Energy currently holds vehicle production rights (license) on manufacturing Kandi brand electric utility vehicles (”Special-purpose Vehicles”) and production rights (license) on manufacturing battery packs used in Kandi brand electric vehicles (“EVs”). Kandi New Energy supplies battery packs for Kandi brand EVs.
F-8
Jinhua Three Parties New Energy Vehicles Service Co., ltd.Ltd. (“Jinhua Service”) was formed as a joint venture, by and among our wholly-owned subsidiary, Kandi Vehicles, the State Grid Power Corporation and Tianneng Power International. The Company, indirectly through Kandi Vehicles, hashad a 30% ownership interest in Jinhua Service. Jinhua Service was established in order to provide public charging stations for lead-acid batteries for EVs in Jinhua city. Currently, most of EV customers in Jinhua have the ability to charge their EVs by themselves. Since self-charging is more cost-efficient and most of the customers have switched from public-charging to self-charging, Jinhua Service ceased its operations and was dissolved accordingly in July 2014.
In April 2012, pursuant to a share exchange agreement, the Company acquired 100% of Yongkang Scrou Electric Co.Co, Ltd. (“Yongkang Scrou”), a manufacturer of driving motor, air-conditioningautomobile and EV parts. Yongkang Scrou currently manufactures and sells EV drive motors, EV controllers, for electric vehiclesair conditioners and auto generators.other electrical products to the JV Company (defined below).
F-9
In March 2013, pursuant to a joint venture agreement (the “JV Agreement”) entered into betweenby Kandi Vehicles and Shanghai Maple Guorun Automobile Co., Ltd. (“Shanghai Maple”Guorun”), a 99% owned-owned subsidiary of Geely Automobile Holdings Ltd. (“Geely”), the parties established Zhejiang Kandi Electric Vehicles Co., Ltd. (the “JV Company”) in connection with developing, manufacturingto develop, manufacture and selling electrical vehicles (“EVs”)sell EVs and related auto parts. Each of Kandi Vehicles and Shanghai MapleGuorun has a 50% ownership interest in the JV Company. In March 2014, the JV Company changed its name to Kandi Electric Vehicles Group Co., Ltd. At present, the JV Company is a holding company with products that are manufactured by its subsidiaries.
In March 2013, Kandi Vehicles formed Kandi Electric Vehicles (Changxing) Co., Ltd. (“Kandi Changxing”) in the Changxing (National) Economic and Technological Development Zone. Kandi Changxing specializesis engaged in the production of EVs. In the fourth quarter of 2013, Kandi VehicleVehicles entered into an ownership transfer agreement with the JV Company pursuant to transferwhich Kandi Vehicles transferred 100% of its ownership toin Kandi Changxing to the JV Company. The Company, indirectly through its wholly-owned subsidiary, Kandi Vehicles,50% ownership interest in the JV Company, has a 50% ownershipeconomic interest in Kandi Changxing.
In April 2013, Kandi Electric Vehicles (Wanning) Co., Ltd. (“Kandi Wanning”) was formed by Kandi Vehicles and Jinhua Kandi New Energy Vehicles Co., Ltd. (“Kandi New Energy”) in Wanning City of Hainan Province.Province by Kandi Vehicles and Kandi New Energy. Kandi Vehicles has a 90% ownership in Kandi Wanning, and Kandi New Energy hasholds the remaining 10% interest. However, by contract, Kandi Vehicles is, effectively, entitled to 100% of the economic benefits, voting rights and residual interests (100% profits and loss absorption rate)losses) of Kandi Wanning. According to the JV Agreement, once Kandi Wanning since it is entitledbecomes fully operational, its entire equity interests will be transferred to 100% of the economic benefits, voting rights and residual interests (100% profits and loss absorption rate) of Kandi New Energy.JV Company.
In July 2013, Zhejiang ZuoZhongYou Electric Vehicle Service Co., Ltd. (the “Service Company”) was formed. The Service Company is engaged in various pure EV leasing businesses. The JV Company has a 19% ownership interest in the Service Company. The Company, indirectly through its wholly-owned subsidiary, Kandi Vehicles,50% ownership interest in the JV Company, has a 9.5% ownershipeconomic interest in the Service Company.
In November 2013, Zhejiang Kandi Electric Vehicles Jinhua Co., Ltd. (“Kandi Jinhua”) was formed by the JV Company. The JV Company has 100% ownership interest in Kandi Jinhua, and the Company, indirectly through its wholly-owned subsidiary, Kandi Vehicles, has a 50% ownership interest in the JV Company, has a 50% economic interest in Kandi Jinhua. Kandi Jinhua is engaged in EV manufacturing business.
In November 2013, Zhejiang JiHeKang Electric Vehicle Sales Co., Ltd. (“JiHeKang”) was formed by the JV Company.Company and is engaged in the car sales business. The JV Company has 100% ownership interest in JiHeKang, and the Company, indirectly through its wholly-owned subsidiary, Kandi Vehicles,50% ownership interest in the JV Company, has a 50% ownershipeconomic interest in JiHeKang.
In December 2013, the JV Company entered into an ownership transfer agreement with Shanghai Maple in connection with acquiringGuorun pursuant to which the JV Company acquired 100% ownership of Kandi Electric Vehicles (Shanghai) Co., Ltd. (“Kandi Shanghai”). As a result, Kandi Shanghai is a wholly-owned subsidiary of the JV Company, and the Company, indirectly through its 50% ownership interest in the JV Company, ownshas a 50% ofeconomic interest in Kandi Shanghai. The company is mainly engaged in EV research and development, manufacturing and sales.
F-9
In January 2014, Zhejiang Kandi Electric Vehicles Jiangsu Co., Ltd. (“Kandi Jiangsu”) was formed by the JV Company. The JV Company has 100% ownership interest in Kandi Jiangsu, and the Company, indirectly through its 50% ownership interest in the JV Company, has a 50% economic interest in Kandi Jiangsu. The company is mainly engaged in EV research and development, manufacturing and sales.
The Company'sCompany’s primary business operations are the design, development, manufacturing and commercialization of EVs, all-terrain vehicles (“ATVs”), go-karts,EV products, EV parts and other related specialized automobiles.off road vehicles. As part of ourits strategic objective to become a leader in electric vehicles manufacturingleading manufacturer of EV products and related services, we havethe Company has increased ourits focus on fuel efficient, pure electrical vehiclesEV products with a particular emphasis on expanding ourits market share in China.
F-10
NOTE 2 - LIQUIDITY
The Company had a working capital deficitsurplus of ($6,631,680)$39,202,684 as of December 31, 2013, decrease2014, an increase of $45,834,364 from a working capital surplusdeficit of $35,898,297($6,631,680) as of December 31, 2012.2013.
As of December 31, 2013, the amount of advances to suppliers was $8,867,074, which included the advance of a RMB 47 million ($7,687,275) deposit by Kandi Electric Vehicles (Wanning) Co., Ltd (“Kandi Wanning”) to Nanjing Shangtong Auto Technologies Co., Ltd. (“Nanjing Shangton”) for an equipment purchase. Kandi Wanning and Nanjing Shangtong entered into a letter of intent contemplating the purchase of equipment up to RMB 180 million. The equipment will be purchased and delivered according to the construction schedule and development of Kandi Wanning. This advance will be used to off-set the equipment purchase price upon delivery.
In fiscal year 2013, Kandi Changxing prepaid RMB 130 million to Zhejiang New Energy Auto System Co., Ltd. (“Zhejiang New Energy”) with the intent to acquire molds and equipment from Zhejiang New Energy, but the transaction did not close, and the advance was returned in full to Kandi Changxing.
As of December 31, 2013,2014, the Company had credit lines from commercial banks for $56,100,752,of $42,739,904, of which $34,020,281 had been$35,589,502 was used as of December 31, 2013.2014. The Company believes that its cash flows generated internally may not be sufficient to support the growth of future operations and to repay short-term bank loans for the next twelve (12) months, if needed.months. However, the Company believes its cash reserves, including the proceeds of its $71 million registered direct offering financing completed on September 4, 2014 and its access to existing financing sources, andincluding established relationships with PRC banks, will enable it to meet its obligations and fund its ongoing operations.
The Company has historically financed itselfits operations through short-term commercial bank loans from PRC banks. The term of these loans is typically for one year, and upon the payment of all outstanding principal and interest in a respectiveparticular loan, the banks have typically rolled over the loansloan for additional one-year terms, with adjustments made to the interest rate to reflect prevailing market rates. The Company believes this situation has not changed and thethat short-term bank loans will beremain available on normal trade terms if needed.
On June 26, 2013,March 24, 2014, the Company entered into a securities purchase agreement with certainraised approximately $11.05 million from the sale to two institutional investors (the “Investors”) that closed on July 1, 2013, pursuant to which the Company sold to the Investors, in a registered direct offering,of an aggregate of 4,376,036606,000 shares of ourits common stock at a negotiated purchase price of $6.03$18.24 per share. As part of the transaction, the Company also issued to the investors warrants for the purchase of up to 90,900 shares of common stock at an exercise price of $22.80 per share, for aggregate gross proceedswith a term of 18 months from the date of issuance.
On September 4, 2014, the Company raised approximately $26,387,500,$71.00 million before deducting fees to the placement agent and other estimated offering expenses payable byincurred from the Company.sale to six institutional investors of an aggregate of 4,127,908 shares of its common stock at a price of $17.20 per share. As part of the transaction terms, the InvestorsCompany also received Series Aissued to the investors warrants for the purchase of up to 1,750,415743,024 shares of our Common Stock at an exercise price of $7.24 per share and an option to make an additional investment in the form of Series B warrants and Series C warrants: Series B warrants to purchase a maximum aggregate of 728,936 shares of our common stock at an exercise price of $7.24$21.50 per share, andwith a term of 17 months from the Series C warrants to purchase a maximum aggregatedate of 291,574 shares of our common stock at an exercise price of $8.69.issuance.
F-11
NOTE 3 - BASIS OF PRESENTATION
The Company maintains its general ledger and journals with the accrual method accounting for financial reporting purposes. The financial statements and notes are representations of management. Accounting policies adopted by the Company conform to generally accepted accounting principles in the United States and have been consistently applied in the presentation of financial statements.
NOTE 4 – PRINCIPLES OF CONSOLIDATION
The consolidated financial statements reflect the accounts of the Company and its ownership interest in the following subsidiaries:
(i) | Continental, |
F-10
(ii) |
|
(iii) |
|
(iv) |
|
(v) |
|
| |
| |
| |
| |
Equity Method Investees | |
The consolidated net income also includes the Company’s proportionate share of the net income or loss of its equity method investees as following: | |
(vi) | The JV Company, a 50% owned subsidiary of Kandi Vehicles; |
(vii) | Kandi Changxing, a wholly-owned subsidiary of the JV |
(viii) | Kandi Jinhua, a wholly-owned subsidiary of the JV Company. The Company, indirectly through its 50% ownership interest in the JV Company, has a 50% economic interest; |
(ix) | JiHeKang, a wholly-owned subsidiary of the JV Company. The Company, indirectly through its 50% ownership interest in the JV Company, has a 50% economic interest; |
(x) |
|
(xi) |
|
(xii) |
|
(xiii) | Jinhua Service, a 30% owned subsidiary of Kandi Vehicles, which was dissolved in July 2014. |
All intra-entity profits and losses with the Company’s equity method investees have been eliminated. |
Inter-company accounts and transactions have been eliminated in consolidation.
NOTE 5 – USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Management makes these estimates using the best information available at the time the estimates are made; however actual results when ultimately realized could differ from those estimates.
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NOTE 6 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Economic and Political Risks
The Company'sCompany’s operations are conducted in the PRC. Accordingly,As a result, the Company'sCompany’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC economy.
The Company's operations are conducted mainly in In addition, the PRC. As such, itsCompany’s earnings are subject to movements in foreign currency exchange rates when transactions are denominated in Renminbi (“RMB”), which is the Company’s functional currency. Accordingly, the Company's operationCompany’s operating results are affected by changes in the exchange rate between the U.S. dollar and those currencies.the RMB.
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The Company'sCompany’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company'sCompany’s performance may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.
(b) Fair Value of Financial Instruments
ASC 820 “Fair Value Measurement and Disclosures” establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market.
These tiers include:
• | Level 1—defined as observable inputs such as quoted prices in active markets; | |
• | Level 2—defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and | |
• | Level 3—defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. |
TheAs of December 31, 2014, the Company’s assets, measured at fair value, on a recurring basis, subject to the disclosure requirements of ASC 820, as of December 31, 2013 arewere as follows:
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| Fair Value | |||||||||||||||||||||||
| Measurements | Active | Significant | |||||||||||||||||||||
| at Reporting | Markets | Other | Significant | ||||||||||||||||||||
Fair Value Measurements at Reporting Date Using Quoted Prices in | Date Using | for Identical | Observable | Unobservable | ||||||||||||||||||||
Active | Significant | Quoted Prices | Assets | Inputs | Inputs | |||||||||||||||||||
Markets for | Other | in Carrying | ||||||||||||||||||||||
Carrying value as | Identical | Observable | Significant | Value as of | ||||||||||||||||||||
of December 31, | Assets | Inputs | Unobservable Inputs | December 31, | ||||||||||||||||||||
2013 | (Level 1) | (Level 2) | (Level 3) | 2014 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||||||
Cash and cash equivalents | $ | 12,762,369 | $ | 12,762,369 | - | - | $ | 26,379,460 | $ | 26,379,460 | - | - | ||||||||||||
Restricted cash | $ | 1,636 | 1,636 | - | - | 13,000,731 | 13,000,731 | - | - | |||||||||||||||
Warrants (liability) | $ | 24,299,821 | - | - | $ | 24,299,821 | ||||||||||||||||||
Warrants | 12,342,885 | - | - | 12,342,885 |
Cash and cash equivalents consist primarily of high-ratedhighly-rated money market funds at a variety of well-known institutions with original maturities of three months or less. Restricted cash represents time deposits on account, some of which isare used to secure short-term bank loans and notes payable. The original cost of these assets approximates fair value due to their short-termshort term maturity.
Warrants, which are accounted as liabilities, are treated as derivative instruments which will beand are measured at each reporting date for their fair value using Level 3 inputs. Also see Note 6 section (t) and (u).
(c) Cash and Cash Equivalents
The Company considers highly liquidhighly-liquid investments purchased with original maturities of three months or less to be cash equivalents.
Restricted cash, onas of December 31, 2014 and 2013, and 2012 representrepresented time deposits on account some of which were used to secure short-term bank loans and notes payable.for earning interest income. As of December 31, 2014 and 2013, ourthe Company’s restricted cash was as set forth on the table below:were $13,000,731, which reflects a one-year Certificate of Time Deposit (CD) with Hangzhou Bank Jinhua Branch, and $1,636, respectively.
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(d) Inventories
Inventories are stated at the lower of cost or net realizable value (market value). The cost of raw materials is determined on the basis of weighted average. The cost of finished goods is determined on the weighted average basis and comprises direct materials, direct labor and an appropriate proportion of overhead.
Net realizable value is based on estimated selling prices less selling expenses and any further costs expected to be incurred for completion and selling expense.completion. Adjustments to reduce the cost of inventory to its net realizable value are made, if required, for estimated excess, obsolescence, or impaired balances.
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(e) Accounts Receivable
Accounts receivable are recognized and carried at net realizable value. An allowance for doubtful accounts will beis recorded in periods in which the period whenCompany determines a loss is probable, based on anits assessment of specific evidence indicatingfactors, such as troubled collection,collections, historical experience, accounts aging, ongoing business relationrelations and other factors. Accounts are written off after an exhaustive efforts at collection.collection effort. If accounts receivable are to be provided for, or written off, they would beare recognized in the consolidated statement of operations within the operating expenses. Atexpenses line item. As of December 31, 20132014 and 2012,2013, the Company hashad no allowance for doubtful accounts, as per the management'smanagement’s judgment based on their best knowledge.
In yearAs of December 31, 2014 and 2013, and 2012, the credit term usually wasterms with the Company’s customers were typically 90 to 120 days after delivery..delivery.
(f) Notes Receivablereceivable
Notes receivable represent short-term loans to third parties with the maximum term of one year. Interest income will be recognized according to each agreement between a borrower and the Company on an accrual basis. If notes receivable are paid back, or written off, that transaction will be recognized in the relevant year ifyear. If the loan default is probable, reasonably assured and the loss can be reasonably estimated. Theestimated, the Company will recognize income if the written-off loan is recovered at a future date. In case of any foreclosure proceedings or legal actions being taken, the Company will provideprovides an accrual for the related foreclosure expenses and related litigation expenses.
(g) Prepayments
Prepayments represent cash paid in advance to suppliers. As of December 31, 2013,2014, prepayments included cash paid advances to raw material suppliers, mold manufactures,manufacturers, and suppliers of equipment. The Company intends to purchase, as a prepaid expense, certain other expenses such as water and electricity fees.
As of December 31, 2013, the Company recorded a significant prepayment made by the Company was theto a supplier as an advance of a RMB 47 million ($7,687,275) depositand deposited by Kandi Wanning to Nanjing Shangtong. As of December 31, 2014, the advance to Nanjing Shangtong was transferred to “construction-in-progress” as described in Note 2.15.
Other advancesAdvances for raw materials purchases which usuallytypically are settled within two (2) months by receivingthe Company’s receipt of raw materials. Prepayment is offset against purchase amount after equipment or materials are delivered.
(h) Plant and Equipment
Plant and equipment are carried at cost less accumulated depreciation. Depreciation is provided over theirthe estimated useful lives of the assets, using the straight-line method. Leasehold improvements are amortized over the life of the asset or the term of the lease, whichever is shorter. Estimated useful lives are as follows:
Buildings | 30 years |
Machinery and equipment | 10 years |
5 years | |
5 years | |
Molds | 5 years |
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F-13
The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statement of income. The cost of maintenance and repairs is charged to expense as incurred, whereas significant renewals and betterments are capitalized.
(i) Construction in Progress
Construction in progress represents the direct costs of construction, or the acquisition cost of buildings or machinery and design fees. Capitalization of these costs ceases, and the construction in progress is transferred to plant and equipment, when substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is provided until the assets are completed and ready for their intended use.
(j) Land Use Rights
According to the Chinese laws, of China, land in the PRC is owned by the government and itland ownership rights cannot be sold to an individual or to a private company. However, the government grants the user a “land use right” to use the land. The land use rights granted to the Company are being amortized using the straight-line method over the lease term of fifty (50) years.
(k) Accounting for the Impairment of Long-Lived Assets
The Company periodically evaluates the carrying value of long-lived assets to be held and used, including intangible assets subject to amortization, when events and circumstances warrant such a review, pursuant to the guidelines established in Statement of Financial Accounting Standards (“SFAS”) No. 144 (now known as “ASC 360”). The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair market values are reduced for the cost to dispose.
During the reporting period, no impairment loss was recognized.
(l) Revenue Recognition
Revenues representRevenue represents the invoiced value of goods soldsold. Revenue is recognized uponwhen the shipment ofCompany ships the goods to customers. Revenues are recognized whenits customers and all of the following criteria are met:
• | Persuasive evidence of an arrangement exists;
(m) Research and Development Expenditures relating to the development of new products and processes, including significant F-14 (n) Government Grants and subsidies received from the PRC Government
(o) Income Taxes The Company accounts for income tax using an asset and liability approach, (p) Foreign Currency Translation The accompanying consolidated financial statements are presented in Assets and liabilities are translated at the exchange rates as of balance sheet date. Income and expenditures are translated at the average exchange rate of the
(q) Comprehensive Income Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive income are required to be reported in a financial statement that is presented with the same prominence as other financial statements. Comprehensive income includes net income and the foreign currency translation (r) Segments In accordance with ASC (s) Stock Option The The fair value of stock options is estimated using the Black-Scholes-Merton model. The
The recognition of the stock option The
(t) Warrant Cost The The fair value of a warrant, which is classified as a liability, is estimated using the Black-Scholes-Merton model and the lattice valuation model. The The fair value of equity-based warrants, which are not considered derivatives under ASC 815, is estimated using the Black-Scholes-Merton model. The (u)
The Company
Application of the goodwill impairment test requires
Intangible assets consist of (w) Accounting for Sale of Common Stock and Warrants Gross proceeds are firstly allocated according to the initial fair value of the freestanding derivative instruments (i.e. the warrants issued to the Company’s investors in its previous offerings, or the “Investor Warrants”). The remaining proceeds are allocated to common stock. The related issuance expenses, including the placement agent cash fees, legal fees, the initial fair value of the warrants issued to the placement agent, etc, were allocated between the common stock and the Investor Warrants based on how the proceeds allocated to these instruments. Expenses related to the issuance of common stock were charged to paid-in capital. F-16 Expenses related to issuance of the derivative instruments were expensed upon issuance. NOTE 7 – NEW ACCOUNTING PRONOUNCEMENTS
F-17 Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s consolidated financial statements upon adoption. NOTE 8 – CONCENTRATIONS (a) Customers The Company's major customers, each of whom accounted for more than 10% of
(b) Suppliers The Company's material suppliers, each of whom accounted for more than 10% of
F-18 NOTE 9 – INCOME 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 were 132,323, 0 and 237,997, respectively. The following table sets forth the computation of basic and diluted net income per common share:
Also see Note 19. NOTE 10
Accounts receivable are summarized as follows:
During the fiscal F-19 Mr. Hu Wangyuan was the sole shareholder and officer of Eliteway which served as a US importer of the Company's products. Mr. Hu Wangyuan is the adult son of the Company's chairman and Chief Executive Officer, Mr. Hu Xiaoming.
Inventories are summarized as follows:
NOTE 12 - NOTES RECEIVABLE Notes receivable are summarized as follows:
Notes receivable are unsecured. Details of Notes receivable from unrelated parties as of December 31,
Details of Notes receivable from unrelated parties as of December 31, 2013
F-20 NOTE 13 – PLANT AND EQUIPMENT Plant and equipment consisted of the following:
As of December 31, 2014 and 2013, the net book value of plant and equipment pledged as collateral for the Company's bank loans were $10,816,480 and $11,292,649, respectively. Depreciation expenses for the years ended December 31, 2014, 2013 and 2012 were $5,110,681, $7,273,260 and $4,577,092, respectively. NOTE 14 – LAND USE RIGHTS
As of December 31,
It is a common business practice among companies in the region of China where Kandi is located to exchange guarantees for bank debt with no consideration given. It is considered a “favor for favor” business practice and is commonly required by the lending banks as in these cases. The amortization expense for the years ended December 31, 2014, 2013 and 2012 F-21 Amortization expense for the next five years and thereafter is as follows:
NOTE
Kandi Wanning facility In April 2013, Kandi Electric Vehicles (Wanning) Co., Ltd. (“Kandi Wanning”) was formed in Wanning City of Hainan Province. The Company signed an agreement with Wanning city government and planned to invest a total of RMB 1 billion, or $162,509,141, to develop a factory in Wanning with an annual production of 100,000 EVs. In 2013, the Company contracted with an unrelated third party equipment supplier, Nanjing Shangtong Auto Technologies Co., Ltd. (“Nanjing Shangtong”), to purchase equipment. The equipment was purchased and delivered according to the construction schedule and development of Kandi Wanning. As of December 31, 2014, a total amount of advances to suppliers of RMB 360,041,600, or $58,510,051, made by Kandi Wanning to Nanjing Shangtong for equipment purchases was transferred to CIP. None of construction-in-progress was transferred to property, plant and equipment
The construction project the Company was in the progress of completing is as follow:
As of December 31, 2014 and 2013, the Company had construction in progress amounting to $58,510,051 and
NOTE 16 – SHORT-TERM BANK LOANS Short-term loans are summarized as follows:
F-23 As of December 31, 2014, the aggregate amount of short-term loans that was guaranteed by various third parties was $15,925,896 - $12,675,713 was guaranteed by Zhejiang Mengdeli Electric Co Ltd (“ZMEC”). - $3,250,183 was guaranteed by Zhejiang Shuguang industrial Co., Ltd., whose bank loan of $4,875,274 was guaranteed by the Company. Also see Note 24. - $12,675,713 was guaranteed by Nanlong Group Co., Ltd., whose bank loans of $9,750,548 was also guaranteed by the Company. Also see Note 24. As of December 31, 2013, the aggregate amount of short-term loans that were guaranteed or secured by various third parties was $27,477,919. The breakdown is as follows: - $16,028,786 - $8,177,952 - $3,271,181 - $17,664,376 - $817,795 It is a common business practice among companies in the region of the PRC in which the Company is located to exchange guarantees for bank debt with no additional consideration given. It is considered a “favor for favor” business practice and is commonly required by Chinese lending banks, as in these cases. NOTE 17 – NOTES PAYABLE By issuing bank Notes payable are summarized as follows:
F-24
After acceptance, the draft becomes an unconditional liability of the bank. But the holder of the draft can sell (exchange) it for cash at a discount to a buyer who is willing to wait until the maturity date for the funds in the deposit. All the bank acceptance notes do not bear interest, but are subject to No restricted cash is held as collateral for the notes payable at December 31, 2014 and 2013. NOTE 18 – BOND PAYABLE
On December 27, 2013, the Company issued the bond of RMB 80,000,000, The Company did not issue any bond during the year ended December 31, 2014. NOTE 19 – TAXES (a) Corporation Income Tax In accordance with the relevant tax laws and regulations of the PRC, applicable corporate income tax (“CIT”) rate is 25%. However, the Kandi Vehicle, qualified as a high technology company in China, was entitled to pay a reduced income tax rate of 15%.
of each of the Company’s three subsidiaries, Kandi New Energy, Yongkang Scrou Kandi
The Company, qualified as a high technology company in China, was entitled to pay
According to the PRC CIT reporting system, the CIT sales cut-off base is concurrent with the value-added tax (“VAT”), which Effective January 1, 2007, the Company adopted ASC 740, Income Taxes. The interpretation addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of December 31, F-25 Income tax
The Company's income tax expense differs from the “expected” tax expense for the years ended December 31, 2014, 2013 and 2012 (computed by applying the U.S. Federal Income Tax rate of 34% and PRC Corporation Income Tax rate of 25%, respectively to income before income taxes) as follows:
The tax effects of temporary differences that give rise to the Company's net deferred tax assets and liabilities as of December 31, 2014, 2013 and 2012 are summarized as follows:
(b) Tax Holiday Effect For the years ended December 31, 2014, 2013 and 2012, the PRC corporate income tax rate was 25%. Certain subsidiaries of the Company are entitled to tax exemptions (tax holidays) for the years ended December 31, 2014, 2013 and 2012. The combined effects of the income tax expense exemptions and reductions available to the Company for the years ended December 31, 2014, 2013 and 2012 are as follows:
NOTE 20 - STOCK OPTIONS (a) Stock Options On February 11, 2009, the Compensation Committee of the Board of Directors of the Company approved the grant of stock options On October 6, 2009, the Company executed an agreement with Wang Rui and Li Qiwen, third-party consultants, whereby Mr. Wang and Mr. Li F-27 The following is a summary of the stock option activities of the Company:
The fair value per share of the 2,600,000 options issued to the employees and directors in February 2009 is $0.7934 per share. (b) Warrants
On June 26, 2013, the Company entered into a On January 15, 2014, On March 19, 2014, the Company entered into a securities purchase agreement with certain purchasers (the “Fourth Round Investors”), pursuant to which the Company sold to the Fourth Round Investors, in a registered direct offering, an aggregate of 606,000 shares of common stock, at a negotiated purchase price of $18.24 per share, for aggregate gross proceeds to the Company of approximately $11,053,440, before deducting fees to the placement agent and other estimated offering expenses payable by the Company. As part of the transaction, the Fourth Round Investors also received warrants for the purchase of up to 90,900 shares of the Company’s common stock at an exercise price of $22.80 per share (the “Fifth Round Warrants”). In addition, the placement agent for this transaction also received warrants for the purchase of up to 36,360 shares of the Company’s common stock at an exercise price of $22.80 per share. The Fourth Round Warrants have a term of eighteen months and are exercisable by the holders at any time after the date of issuance. As of December 31, 2014, the fair value of the Fourth Round Warrants was $4.28 per share. On September 4, 2014, the Company entered in a securities purchase agreement with certain purchasers (the “Fifth Round Investors”), pursuant to which the Company sold to the Fifth Round Investors, in a registered direct offering, an aggregate of 4,127,908 shares of its common stock at a price of $17.20 per share, for aggregate gross proceeds to the Company of approximately $71 million (the “Fifth Round Offering”), before deducting fees to the placement agent and other estimated offering expenses payable by the Company. As part of the transaction, the Fifth Round Investors also received warrants for the purchase of up to 743,024 shares of the Company’s common stock at an exercise price of $21.50 per share (the “Fifth Round Warrants”). The Fifth Round Warrants have a term of seventeen months and are exercisable by the holders at any time after the date of issuance. In addition, the placement agent for this transaction also received warrants for the purchase of up to 206,395 shares of the Company’s common stock at an exercise price of $20.64 per share (the “Fifth Round Placement Agent Warrants”). The placement agent’s warrants are exercisable for a term of seventeen months after the six months from the issuance. As of December 31, 2014, the fair value of the Fifth Round Warrants was $7.37 per share and the Fifth Round Placement Agent Warrants had a fair value of $9.13 per share. F-28 In addition, any Fifth Round Investor that invests more than $30 million in the initial offering of shares and warrants in the Fifth Round Offering would have an option to purchase its pro rata share of up to a $30 million of shares, or 1,744,186 shares of common stock and its pro rata share of warrants to purchase an aggregate of up to 313,954 shares of our comment stock at $17.20 for a period commencing from September 4, 2014 and ending on November 17, 2014. None of the Fifth Round Investors that invests more than $30 million in the Fifth Round Offering exercised NOTE 21 – STOCK AWARD In connection with As compensation for
As compensation for As compensation for having Mr. Wei Chen to serve CFO assistant the Board authorized the issuance by the Company to Mr. Wei Chen of 10,000 shares of Company’s common stock every year beginning in January 2012 and 2,500 shares of Company’s common stock every three months, beginning in January 2014. As of June 1, 2014, Mr. Chen was no longer with the Company. The fair value of stock On December 30, 2013, the Board approved a proposal (as submitted by the Compensation Committee) of an award for selected executives and other key employees comprising a total of 335,000 shares of common stock for each fiscal year, beginning with the 2013 fiscal year, under the Company’s 2008 Omnibus Long-Term Incentive Plan (the “Plan”), if the Company’s determination that the Company’s “Non-GAAP Net Income” for the current fiscal year increased by 10% comparing to that of the prior year. The specific number of shares of common stock to be issued in respect of such award could proportionally increase or decrease if the actual Non-GAAP Net Income increase is more or less than 10%. “Non-GAAP Net Income” means the Company’s net income for a particular year calculated in accordance with GAAP, excluding option-related expenses, stock award expenses, and the effects caused by the change of fair value of financial derivatives. For example, if Non-GAAP Net Income for the 2014 fiscal year increases by 10% compared to the Non-GAAP Net Income for the 2013 fiscal year, the selected executives and other key employees each will be granted his or her target amount of common stock of the Company. If Non-GAAP Net Income in 2014 is less than Non-GAAP Net Income in 2013, then no common stock will be granted. If Non-GAAP Net Income in 2014 increases compared to Non-GAAP Net Income in 2013 but the increase is less than 10%, then the target amount of the common stock grant will be proportionately decreased. If Non-GAAP Net Income in 2014 increases compared to Non- GAAP Net Income in 2013 but the increase is more than 10%, then the target amount of the common stock grant will be proportionately increased up to 200% of the target amount. F-29 The fair value of each award granted under the Plan is determined based on the closing price of the Company’s stock on the date of grant of the award. To the extent that the performance goal does not meet and so no shares become due, no compensation cost is recognized and any recognized compensation cost during the applicable year is reversed. The number of shares of common stock granted under the Plan with respect to fiscal 2014 would be 670,000 shares based on the Non-GAAP Net Income of the year of 2014. The compensation expense is recognized in General and Administrative Expenses. NOTE 22 – INTANGIBLE ASSETS The following table provides the gross carrying value and accumulated amortization for each major class of intangible assets other than goodwill:
The aggregate amortization expenses for those intangible assets that continue to be amortized is reflected in amortization of intangible assets in the Consolidated Statements of Income and comprehensive Income and were $82,095, $82,095 and $54,730 for the years ended December 31, 2014, 2013 and 2012, respectively. Amortization expenses for the next five years and thereafter is as follows:
NOTE 23 – SUMMARIZED INFORMATION OF INVESTMENT IN THE JV COMPANY The Company’s consolidated net income includes the Company’s proportionate share of the net income or loss of the Company’s equity method investees. When the Company records its proportionate share of net income, 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, it decreases equity income (loss) – net in the Company’s consolidated statements of income and the Company’s carrying value in that investment. All intra-entity profits and losses with the Company’s equity method investees have been eliminated. Kandi Electric Vehicles Group Co., Ltd. (the “JV Company”) In March 2013, pursuant to a joint venture agreement (the “JV Agreement”) entered into between Kandi Vehicles and Shanghai Maple Guorun Automobile Co., Ltd. (“Shanghai Guorun”), a 99%-owned subsidiary of Geely Automobile Holdings Ltd. (“Geely”), the parties established Zhejiang Kandi Electric Vehicles Co., Ltd. (the “JV Company”) to develop, manufacture and sell electric vehicles (“EVs”) and related auto parts. Each of Kandi Vehicles and Shanghai Guorun has a 50% ownership interest in the JV Company. In the fourth quarter of 2013, Kandi Vehicles entered into an ownership transfer agreement with the JV Company pursuant to which Kandi Vehicles transferred 100% of its ownership in Kandi Changxing to the JV Company. As a result, the Company indirectly has a 50% economic interest in Kandi Changxing through its 50% ownership interest in the JV Company after this transfer. In November 2013, Zhejiang Kandi Electric Vehicles Jinhua Co., Ltd. (“Kandi Jinhua”) was formed by the JV Company. The JV Company has 100% ownership interest in Kandi Jinhua, and the Company, indirectly through its 50% ownership interest in the JV Company, has a 50% economic interest in Kandi Jinhua. In November 2013, Zhejiang JiHeKang Electric Vehicle Sales Co., Ltd. (“JiHeKang”) was formed by the JV Company. The JV Company has 100% ownership interest in JiHeKang, and the Company, indirectly through its 50% ownership interest in the JV Company, has a 50% economic interest in JiHeKang. In December 2013, the JV Company entered into an ownership transfer agreement with Shanghai Guorun pursuant to which the JV Company acquired 100% ownership of Kandi Electric Vehicles (Shanghai) Co., Ltd. (“Kandi Shanghai”). As a result, Kandi Shanghai is a wholly-owned subsidiary of the JV Company, and the Company, indirectly through its 50% ownership interest in the JV Company, has a 50% economic interest in Kandi Shanghai. In January 2014, Zhejiang Kandi Electric Vehicles Jiangsu Co., Ltd. (“Kandi Jiangsu”) was formed by the JV Company. The JV Company has 100% ownership interest in Kandi Jiangsu, and the Company, indirectly through its 50% ownership interest in the JV Company, has a 50% economic interest in Kandi Jiangsu. In addition, In July 2013, Zhejiang ZuoZhongYou Electric Vehicle Service Co., Ltd. (the “Service Company”) was formed. The JV Company has a 19% ownership interest in the Service Company. The Company, indirectly through its 50% ownership interest in the JV Company, has a 9.5% of economic interest in the Service Company. In March 2014, the JV Company changed its name to Kandi Electric Vehicles Group Co., Ltd. F-30 As of December 31, 2014, the JV Company consolidated the following entities on its financial statements: (1) 100% interest in Kandi Changxing; (2) 100% interest in Kandi Jinhua; (3) 100% interest in JiHeKang; (4) 100% interest in Kandi Shanghai; and (5) 100% interest in Kandi Jiangsu. The Company accounted for its investments in the JV Company under the equity method of accounting as the Company has a 50% ownership interest in the JV Company. Therefore, the Company’s consolidated net income for the year Ended December 31, 2014 and 2013 included equity income from the JV Company during such periods. The combined results of operations and financial position of the JV Company are summarized below:
F-31
For the year ended December 31, 2014, the JV Company’s revenues were $215,537,203, an increase of 1317% from $15,212,347 for the year ended December 31, 2013. For the three months ended December 31, 2014, the JV Company’s revenues were $88,773,410, an increase of 483% from $15,212,347 for the three months ended December 31, 2013. The revenue was primarily derived from the sales of EV products in the PRC with a total of 10,935 units sold during the year 2014, among which, a total of 3,656 units of EV products were sold during the three months ended December 31, 2014. The growth of sales of EV products was mainly driven by the demand by the EV-Share Program. For the year ended December 31, 2014, the JV Company recorded a net profit of $7,526,164 as compared to a net loss of $3,020,756 for the year ended December 31, 2013. For the three months ended December 31, 2014, the JV Company recorded a net profit of $743,892 as compared to a net loss of $2,780,723 for the three months ended December 31, 2013. As the Company only has a 50% ownership interest in the JV Company and accounted for its investments in the JV Company under the equity method of accounting, the Company didn’t consolidate the JV Company’s financial results but included equity income from the JV Company during such periods, which were a share of profit of $3,763,082 and a share of loss of $1,510,378 for the years ended December 31, 2014 and 2013, respectively. Note: The following table illustrates the captions used in the Company’s Income Statements for its equity basis investments in the JV Company. Changes in the Company’s equity method investment in JV Company for the year ended December 31, 2014 and 2013 are as follows:
Sales to the Company’s customers, the JV Company, for the year ended December 31, 2014 were $117,707,152 or 69% of the Company’s total revenue for the year, an increase of 948.7% of the sales to the JV Company from the previous year. Sales to the JV Company for the three months ended December 31, 2014 were $39,166,994 or 74% of total revenue for that three months period. The sales to the JV Company were primarily the sales of battery packs, body parts, EV drive motors, EV controllers, air conditioning units and other auto parts, of which the majority of the sales were to Kandi Changxing amounted to $14,071,221 and $65,342,342, respectively, for the three months and the year ended December 31, 2014, Kandi Shanghai amounted to $15,292,090 and $39,412,740, respectively, for the three months and the year ended December 31, 2014, and Kandi Jinhua amounted to $10,394,324 and $12,952,070, respectively, for the three months and the year ended December 31, 2014. These EV parts were used in manufacturing of pure EV products by the JV Company’s subsidiaries to sell entirely to the JV Company’s customer via Shanghai Maple Automobile Company, Limited (“Shanghai Maple”) and Zhejiang Geely Automobile Company Limited (“Zhejiang Geely”). Shanghai Maple and Zhejiang Geely hold the country’s vehicle production rights of sedan, equivalent to license, that qualifies it to sell the EV products to the end customers. Both Shanghai Maple and Zhejiang Geely are 90% owned by Zhejiang Geely Holding Group Company Limited and 10% owned by Zhejiang Maple Asset Management Co. Ltd. According to the JV agreement, before the JV Company receives vehicle production rights (license), the JV Company and its subsidiaries all may sell their products through the channel of Shanghai Maple’s vehicle production rights (license) to the end customers or the Service Company, which purchased and used the cars in EV-Share Program. Under the JV Agreement, the Company’s EV product manufacturing business will be gradually transferred to the JV Company. The Company will be mainly responsible for supplying the JV Company with EV parts in the future and the JV Company will be responsible to produce EV products and to sell finished goods through channel to its end customers. F-32 The following tables summarize the effects of transactions including sales and purchases with the JV Company:
As of December 31, 2014 and 2013, the amount due from the JV Company, net were $ 51,450,612 and $2,917,592, respectively, of which the majority were the balances with the JV Company and its subsidiaries Kandi Changxing, Kandi Jinhua and Kandi Shanghai. As of December 31, 2014 and 2013, the amount due from the JV Company, net were $24,376,371 and $4,121,688, respectively, the amount due from Kandi Changxing, net were $7,359,202 and $1,576,408, respectively, the amount due from (to) Kandi Jinhua, net were $12,736,420 and ($2,780,504), respectively, and the amount due from Kandi Shanghai, net were $6,978,618 and $0, respectively. The amount due from the JV Company of $24,376,371 is a one-year entrusted loan that Kandi Vehicle lent to the JV Company from December 16, 2014 to December 15, 2015 carrying an annual interest rate determined by using the People's Bank of China floating benchmark lending rate over the same period plus 5% of that rate, which was 5.88% on December 31, 2014. The loan was organized by Bank of Communications Hangzhou Zhongan Branch as the agent bank between Kandi Vehicle and the JV Company. Entrusted loans are commonly found in China, which restricts direct borrowing and lending between commercial enterprises. NOTE 24 - COMMITMENTS AND CONTINGENCIES Guarantees and pledged collateral for third party bank loans As of December 31, 2014 and 2013, the Company provided guarantees for the following third parties: (1) Guarantees for bank loans
On January 6, 2013, the Company entered into a guarantee contract to serve as the guarantor for the bank loans borrowed from China Communication Bank Jinhua Branch in the amount of $817,795 by Yongkang Angtai Trade Co., Ltd. (“YATCL”) for the period from January 6, 2013 to January 6, 2014. YATCL is not related to the Company. Under this guarantee contract, the Company agrees to perform all obligations of YATCL under the loan contracts if YATCL fails to perform its obligations as set forth therein. YATCL repaid the loan on the maturity date and the Company obligations under this guarantee contract extinguished thereafter. F-33 On February 26, 2013, the Company entered into a guarantee contract to serve as the guarantor for the bank loan borrowed from PingAn Bank in the amount of $4,906,771 by Zhejiang Shuguang industrial Co., Ltd. (“ZSICL”) for the period from February 26, 2013 to February 26, 2014. On March 4, 2014, the Company entered into a guarantee contract to serve as the guarantor for the bank loan borrowed from PingAn Bank in the amount of $4,875,274 by Zhejiang Shuguang industrial Co., Ltd. (“ZSICL”) for the period from March 4, 2014 to March 4, 2015. ZSICL is not related to the Company. Under these guarantee contracts, the Company agrees to perform all obligations of ZSICL under the loan contracts if ZSICL fails to perform its obligations as set forth therein. On March 15, 2013 and December 27, 2013, the Company entered into two guarantee contracts to serve as the guarantor for the bank loans borrowed from Shanghai Pudong Development Bank Jinhua Branch and Shanghai Bank Hangzhou branch in the amount of $ 3,250,183 and $ 6,500,366 respectively by Nanlong Group Co., Ltd. (“NGCL”) for the period from March 15, 2013 to March 15, 2016, and December 27, 2013 to December 27, 2014 respectively. The guarantee contract to serve as the guarantor for the bank loan borrowed from Shanghai Bank Hangzhou branch was extended for four months to April 27, 2015 with the same terms after its original contract ended on December 27, 2014. NGCL is not related to the Company. Under these guarantee contracts, the Company agrees to perform all obligations of NGCL under the loan contract if NGCL fails to perform its obligations as set forth therein. On December 27, 2013, the Company entered into a guarantee contract to serve as the guarantor for the bank loan borrowed from Shanghai Bank Hangzhou branch in the amount of $ 4,875,274 by Zhejiang Kangli Metal Manufacturing Company (“ZKMMC”) for the period from December 27, 2013 to December 27, 2014. The guarantee contract was extended for six months to June 27, 2015 with the same terms after its original contract ended on December 27, 2014. ZKMMC is not related to the Company. Under this guarantee contract, the Company agrees to perform all obligations of ZKMMC under the loan contract if ZKMMC fails to perform its obligations as set forth therein. (2) Pledged collateral for a third party's bank loans As of December 31, 2014 and 2013, none of the Company's land use rights or plant and equipment were pledged as collateral securing bank loans to third parties. NOTE 25 – SEGMENT REPORTING The Company has only one single operating segment. The Company's revenue and long-lived assets are primarily derived from and located in the PRC. The Company only operates in China. The following table sets forth revenues by geographic area:
F-34 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. Item 9A. Controls and Procedures. (a)Evaluation of Disclosure Controls and Procedures The Company has evaluated, under the supervision of the Company's Chief Executive Officer and the Chief Financial Officer, the effectiveness of disclosure controls and procedures as of December 31, 2014. This is done in order to ensure that information the Company is required to disclose in reports that are filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is: (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of December 31, 2014. (b)Management's Annual Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under Exchange Act. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. The Company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the consolidated financial statements. All internal control systems, no matter how well designed, have inherent limitations, so that no evaluation of controls can provide absolute assurance that all control issues are detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Therefore, any current evaluation of controls cannot and should not be projected to future periods. Management conducted an assessment of the effectiveness of our system of internal control over financial reporting as of December 31, 2014, the last day of our fiscal year. This assessment was based on criteria established in the framework Internal Control—Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and included an evaluation of elements such as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment. Based on management's evaluation under the 2013 COSO framework, management concluded that the Company's internal controls over financial reporting were effective as of December 31, 2014. 45 Remediation of Previously Reported Material Weakness As of December 31, 2014, the management evaluated the material weakness in our internal control that was disclosed in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2013 (the “2013 Form 10-K”) and related implementation of corrective measures in 2014. In May 2014, the Audit Committee reviewed and approved the Company's policies and procedures related to remediating inadequate internal control environment that was disclosed in Item 9A of the 2013 Form 10-K, of which Audit Committee Charter and Amended Business Ethics and Codes of Conduct have been posted on our website. The internal auditor reports directly to the Company's audit committee. The Chairman of the Audit Committee and management representatives met with the internal auditor and the independent auditor who conducts the audit of internal control over financial reporting. The Audit Committee also reviewed and approved the amended approval procedures and guidelines for related-party transactions (internal audit process). This new rule has been implemented by the management. In addition, the Audit Committee conducted a self-assessment to assess our effectiveness in oversight of management and updated the Audit Committee Charter. The management believes that the progresses made met the remediation requirements and were sufficient to remediate the material weakness in our internal control that was disclosed in Item 9A of our 2013 Form 10-K. We reviewed the results of management's assessment with the Audit Committee of our Board of Directors. Our independent registered public accounting firm, AWC (CPA) Limited, has audited the effectiveness of our internal control over financial reporting as of December 31, 2014 as stated in their report which is attached to the auditors’ report included under item 8 of this report. (c)Changes in Internal Control Over Financial Reporting Except for the changes noted above, there had been no other changes in the Company's internal control over financial reporting identified in connection with the above evaluation that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Item 9B. Other Information. On January 13, 2015, our independent public accounting firm, Albert Wong & Co. was succeeded by AWC (CPA) Limited, in the registration status in Public Company Accounting Oversight Board (“PCAOB”). AWC (CPA) Limited is not a separately registered entity with the PCAOB and therefore we are not required to file a current report on Form 8-K under item 4.01. PART III Item 10. Directors, Executive Officers and Corporate Governance The following table sets forth certain information regarding our executive officers and members of the Company's board of directors (the “Board of Directors”) as of December 31, 2014:
46 Business Experience of Directors and Executive Officers Biographical Information Hu Xiaomingwas appointed as our Chief Executive Officer, President and Chairman of the Board in June 2007. Prior to joining the Company, from October 2003 to April 2005, Mr. Hu served as the Project Manager (Chief Scientist) in the WX Pure Electric Vehicle Development Important Project of Electro-vehicle in the State 863 Plan. From October 1984 to March 2003, Mr. Hu served as: (i) Factory Director of the Yongkang Instrument Factory, (ii) Factory Director of the Yongkang Mini Car Factory, (iii) Chairman and General Manager of the Yongkang Vehicle Company, (iv) General Manager of the Wan Xiang Electric Vehicle Developing Center and (v) the General Manager of the Wan Xiang Battery Company. Mr. Hu personally owned 4 invention patents and 7 utility model patents, which he transferred to the Company in fiscal year 2012. Zhu Xiaoyingwas appointed as our Chief Financial Officer and a director of the Company in June 2007. In addition, since September 2003, Ms. Zhu has served as Chief Financial Officer of Zhejiang Kandi Vehicles Co., Ltd., our wholly-owned operating subsidiary. From January 2000 to September 2003, Ms. Zhu served as the Accounting Manager for Zhejiang Yonkang Automobile Manufacture Co. Ms. Zhu graduated from Hangzhou Electronic Engineering University. Ms. Zhu acquired CIA certificate in 2010 and EMBA certificate from Hong Kong Polytechnic University in 2011. Qian Jingsongwas appointed as a director of the Company on January 31, 2011. In addition, since October 2009, Mr. Qian has served as Deputy General Manager of Zhejiang Kandi Vehicles Co. Ltd., our wholly-owned operating subsidiary. Prior to joining the Company, from October 2006 to October 2009, Mr. Qian served in multiple capacities for Chery Karry Automobile, including Head of the Engineering Construction Group (2006-2007), Vice Manager of the Q21 Project (2007), Assistant General Manager of the Production Management and Integrated Management Departments (2007-2009). During his tenure at Chery Karry Automobile, Mr. Qian was in charge of quality assurance and participated in strategy, planning and product development work for Chery mini-cars. From August 1999 to September 2006, Mr. Qian served as Deputy General Manager and Executive General Manager of Anhui Huayang Auto Manufacturing Co., LTD, where he oversaw technical improvement, product development, administrative personnel, and external affairs. Mr. Qian received a degree in Professional Ordnance from the Aerospace Staff University in Nanjing, China in 1983. Ni Guangzhengwas appointed as a director of the Company in November 2010. Mr. Ni is a permanent member of the Chinese Society of Electrical Engineering, and, since 1998, has served as the Deputy Director of Technical Committee & Director of EV Research Institute of National ERC of Power Electronic Technology. Mr. Ni has extensive experience in the areas of electro-technical and electrical engineering. Mr. Ni has served as: Head of Department of Electrical Engineering at Zhejiang University (1994 to 1998), Deputy Director of Electro-technical Theory Committee of China Electro-Technical Society (1989 to 1993), Director of the National ERC of Power Electronic Technology (1996 to 1998) and Deputy Director of the Large Electrical Machine Committee of Chinese Society of Electrical Engineering (1997 to 1999). Mr. Ni received his bachelor degree in electrical machine and a master’s degree in Electro-technology theory from Xian Jiaotong University. Jerry Lewinwas appointed as a director of the Company in November 2010. Jerry Lewin currently serves as Senior Vice President of Field Operations for Hyatt Hotels Corporation and is responsible for managing 35 hotels throughout the North American continent. Mr. Lewin has been with Hyatt since 1987. In his capacity as Senior Vice President, Mr. Lewin supervises a number of areas, including finance, sales and marketing, public relations, customer service, engineering, and human resources. Mr. Lewin serves as a member of the Hyatt Hotels Corporation’s Managing Committee and sits on the board of directors of the New York City Hotel Association. Since July 2009, Mr. Lewin has served as a director of EFT Biotech Holdings, Inc. Mr. Lewin currently serves as the President of the New York Law Enforcement Foundation and as the President of the NY State Troopers PBA Signal 30 Fund. Mr. Lewin has served in various management capacities for several hotel companies in San Francisco, Oakland, Los Angeles, San Diego and Las Vegas. Mr. Lewin received his Bachelor of Science degree from Cornell University and completed the Executive Development Program at J.L. Kellogg Graduate School of Management at Northwestern University. 47 Henry Yuwas appointed as a director of the Company on July 1, 2011. Mr. Yu serves as a Managing Director & Regional Manager of Global Financial Institutions (Asia) of Fifth Third Bank. Prior to his current position, Mr. Yu served as Senior Vice President of the East West Bank from July 2011 to September 2012. Prior to that, Mr. Yu served as the President of Shanghai Bosun Capital Advisors in Shanghai, China from January to June 2011. From January 2008 to December 2010, Mr. Yu served as Head of Business Development at Standard Chartered Bank in China. From November 1999 to December 2007, Mr. Yu served as Managing Director of Global Trade Solutions of SunTrust Bank in Atlanta, Georgia. From January 1995 to November 1999, Mr. Yu served as Group Vice President of Comerica Bank in Chicago, Illinois. Mr. Yu started his banking career in 1981 with Bank of America in HK. Currently, Mr. Yu serves as Chair of the Advisory Board of the National Association of Chinese-Americans and serves as an Advisor to China’s Federation of Overseas Chinese. Mr. Yu is currently a member of the Foundation Board Trustees of Georgia Perimeter College, board member of Georgia State University’s China Task Force, and member of the Asian Studies Board of the Kennesaw State University. From 2003 to 2007, Mr. Yu held Series 7 and 62 Certifications from the Financial Industry Regulatory Authority. Mr. Yu received his Bachelor of Arts degree in Economics from the University of Michigan in 1978 and his MBA in Finance from the University of Detroit in 1980. Chen Limingwas appointed as a director of the Company on May 1, 2012. Mr. Chen serves as an advisor to AA Wind & Solar Energy Development Group, LLC. Prior to his current position, from February 2009 to October 2010, Mr. Chen participated in a joint venture with Mr. Qiu Youmin, the former designer of Geely Automobile Co., Ltd., and assisted in the development of super mini three seat pure electric vehicles. From June 2008 to July 2009, he participated in the development of Lithium Iron Phosphate Battery with Shanghai Yuankai Group. Mr. Chen served as a Professor of Electrical Engineering at Zhejiang University from 1983 to 1997. In addition, Mr. Chen served as a visiting scholar in the Electrical Engineering Department at Columbia University in New York City from 1981 to 1983 and as a professor in Electrical Engineering at Zhejiang University from 1960 to 1981. Mr. Chen received his bachelor degree from Southeast University in Jiangsu, China in 1960. Family Relationships No family relationships exist among any of our director nominees or executive officers. Audit Committee Financial Expert Our Audit Committee currently consists of Henry Yu (Chairman), Jerry Lewin and Chen Liming, each of whom is independent under NASDAQ listing standards. Our Board of Directors determined that each of Mr. Yu and Mr. Lewin qualifies as an “audit committee financial expert,” as defined by Item 407 of Regulation S-K and NASDAQ Rule 5605(a)(2). In reaching this determination, the Board of Directors made a qualitative assessment of Mr. Yu's and Mr. Lewin's level of knowledge and experience based on a number of factors, including formal education and business experience. Code of Ethics We have adopted a “code of ethics” as defined by regulations promulgated under the Securities Act of 1933, as amended, and the Exchange Act that applies to all of our directors and employees worldwide, including our principal executive officer, principal financial officer and principal accounting officer. A current copy of our Code of Ethics is included as an exhibit to our Form 8-K filed November 5, 2007. A copy of our Code of Ethics will be provided to you without charge upon written request to Hu Xiaoming, Chief Executive Officer, Kandi Technologies Group, Inc., Jinhua City Industrial Zone, Jinhua, Zhejiang Province, People's Republic of China, 321016. You may also access these filings at our web site under the investor relations link athttp://www.kandivehicle.com/default.aspx Section 16(A) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires that the Company's directors and executive officers and persons who beneficially own more than ten percent (10%) of a registered class of its equity securities, file with the SEC reports of ownership and changes in ownership of its common stock and other equity securities. Executive officers, directors, and greater than ten percent (10%) beneficial owners are required by SEC regulation to furnish the Company with copies of all Section 16(a) reports that they file. Based solely upon a review of the copies of such reports furnished to us or written representations that no other reports were required, the Company believes that, during fiscal year 2014, all filing requirements applicable to its executive officers, directors, and greater than ten percent (10%) beneficial owners were met, except for the following: (i) Mr. Hu Xiaoming and Ms. Zhu Xiaoying did not file on time the Form 4s after being issued 119,577 and 71,746 shares of common stock, respectively, under the Company’s 2008 Omnibus Long-Term Incentive Plan on May 22, 2014; (ii) Henry Yu did not file on time the Form 4s after being issued 5,000 shares on March 24, 2014 and September 8, 2014, respectively; and (iii) Jerry Lewin did not file on time the Form 4s after being issued 5,000 shares on March 24, 2014 and September 8, 2014, respectively. As of the date of this report, all of the filings mentioned above have been made. 48 Item 11. Executive Compensation Summary Compensation Table The following table summarizes the compensation earned during the years ended December 31, 2014, 2013 and 2012, by those individuals who served as our Chief Executive Officer or Chief Financial Officer during any part of fiscal year 2014 or any other executive officer with total compensation in excess of $100,000 during fiscal year 2014. The individuals listed in the table below are referred to as the “named executive officers.”
Salary and Incentive Compensation In fiscal 2014, the primary components of our executive compensation programs were base salary and equity compensation. 49 Salary We use base salary to fairly and competitively compensate our executives, including the named executive officers, for the jobs we ask them to perform. We view base salary as the most stable component of our executive compensation program, as this amount is not at risk. We believe that the base salaries of our executives should be targeted at or above the median of base salaries for executives in similar positions with similar responsibilities at comparable companies, consistent with our compensation philosophy. At the end of the year, each executive's performance is evaluated by our Compensation Committee, which takes into account the individual's performance, responsibilities of the position, adherence to our core values, experience, and external market conditions and practices. Incentive Compensation We believe it is a customary and competitive practice to include an equity-based element of compensation to the overall compensation package for our named executive officers. We believe that a significant portion of the compensation paid to our named executive officers should be performance-based and therefore at risk. Awards made are granted under the Kandi Technologies Group, Inc. Omnibus Long-Term Incentive Plan (the “Plan”). At our 2008 annual meeting of shareholders, our stockholders approved the adoption of the Plan. As of December 31, 2014, 2,600,000 options have been granted under the Plan to the Company's employees and directors, of which 2,593,332 have been exercised, and 6,668 have been forfeited. On December 30, 2013, the Board of Directors approved a proposal (as submitted by the Compensation Committee) of an award for selected executives and other key employees comprising a total of 335,000 for each fiscal year beginning with the 2013 fiscal year under the On July 25, 2014, the Board of Directors approved a proposal submitted by the Compensation Committee to modify the languages of stock awards in the Board Resolution of December 30, 2013. The
Outstanding Equity Awards at 2014 Fiscal Year-End The following table
We have employment agreements with our named executive officers. The agreements provide an annual salary for Mr. Hu and Ms. Zhu, with bonus to be decided at the discretion of our Board at the year-end. The employment agreements for Mr. Hu and Ms. Zhu each have a three (3) year term, ending on June 9, 2017. 51
Under Chinese law, we may only terminate employment agreements without cause and without penalty by providing notice of non-renewal one month prior to
The following table sets forth
52 The aggregate number of stock options and restricted outstanding, as of December 31, 2014, for each of the non-named executive officer directors were as follows:
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The following table sets forth information known to us, as of March 9, 2015, relating to the
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Item 13.Certain Relationships and Related Transactions, and Director Independence. Transactions with Related Persons The Board of Directors must approve all related party transactions. All material related party transactions will be made or entered into on terms that are no less favorable to us than can be obtained from unaffiliated third parties.
Other than as set forth below, for fiscal years ended December 31, 2014 and
The following table lists the amount due from related parties as of December 31,
During fiscal year ended December 31, 2014, 2013 and 2012, the Company sold products to Kandi USA Inc. carrying trade name of Eliteway Motorsports (“Eliteway”) amounting to $2,981,944, $6,906,807 Mr. Hu Wangyuan was the sole shareholder and officer of Eliteway which served as a US importer of the Company's products. Mr. Hu Wangyuan is the adult son of the Company's Procedures For Approval of Related Party Transactions In May 2014, we adopted a written Management Policy of Related-Party Transaction (the “Policy”). According to the Policy, a “Related Transaction” is “any transaction, includes, but not limited to, any financial transaction, arrangement, relationship (including any indebtedness or guarantee of indebtedness) or any series of similar transactions, arrangements or relationships, since the beginning of the Company’s last fiscal year, or any currently proposed transaction, and the amount involved exceeds $120,000, and in which any related party had or will have a direct or indirect material interest”. The Policy’s definition of a “Related Party” is in line with the definition set forth in the instructions to Item 404(a) of Regulation S-K promulgated by the SEC. Under the Policy, The Company’s proposed material related transaction with related person shall be submitted to the Board for consideration and discussion after independent director presents his/her approval opinion beforehand. The Audit Committee shall conduct audit on the related transaction and develop a written opinion, and can engage independent finance advisor to issue a report as a basis of its judgment, then submit it to the Board. The Policy states that the Board meeting can be held as long as non-affiliated directors over half of the Board attend, and any resolution made by the Board must be approved by over half of non-affiliated directors. Director Independence Mr. Henry Yu, Chen Liming, Ni Guangzheng and Jerry Lewin are all non-employee directors, all of whom our Board of Directors has determined are independent pursuant to NASDAQ rules. All of the members of our Audit Committee, Nominating/Corporate Governance Committee and Compensation Committee are independent pursuant to NASDAQ rules.
Fees for audit services include fees associated with the PART IV Item 15. Exhibits, Financial Statement Schedules.
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† Exhibits filed herewith.
SIGNATURES Pursuant to KANDI TECHNOLOGIES GROUP, INC.
Pursuant to the
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