KANDI TECHNOLOGIES GROUP, INC. This report contains forward-looking statements within the meaning of the federal securities laws that relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminologies, such as "may," "will," "should," "could," "expect," "plan," "anticipate," "believe," "estimate," "project," "predict," "intend," "potential" or "continue" or the negative of such terms or other comparable terminologies, although not all forward-looking statements contain such terms. In addition, these forward-looking statements include, but are not limited to, statements regarding implementing our business strategy; development and marketing of our products; our estimates of future revenue and profitability; our expectations regarding future expenses, including research and development, sales and marketing, manufacturing and general and administrative expenses; difficulty or inability to raise additional financing, if needed, on terms acceptable to us; our estimates regarding our capital requirements and our needs for additional financing; attracting and retaining customers and employees; sources of revenue and anticipated revenue; and competition in our market. Forward-looking statements are only predictions. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. All of our forward-looking information is subject to risks and uncertainties that could cause actual results to differ materially from the results expected. Although it is not possible to identify all factors, these risks and uncertainties include the risk factors and the timing of any of those risk factors described in the 2019 Form 10-K and those set forth from time to time in our other filings with theSEC . These documents are available on theSEC's Electronic Data Gathering and Analysis Retrieval System at http://www.sec.gov.
Critical Accounting Policies and Estimates
The preparation of the condensed consolidated financial statements in conformity withU.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, as of the date of the financial statements, and the reported amounts of revenue and expenses during the reported period. If these estimates differ significantly from actual results, the impact to the condensed consolidated financial statements may be material. There have been no material changes in our critical accounting policies and estimates from those disclosed in on the 2019 Form 10-K. Please refer to Part II, Item 7 of such a report for a discussion of our critical accounting policies and estimates. Overview We are one of the leading manufacturers of EV products (throughKandi Hainan and theAffiliate Company ), EV parts and off-road vehicles inChina . For the three months endedMarch 31, 2020 , we recognized total revenue of$6,372,424 as compared to$18,068,460 for the three months endedMarch 31, 2019 , a decrease of$11,696,036 or 64.7%. For the three months endedMarch 31, 2020 , we recorded$1,167,259 of gross profit, a decrease of 62.8% from the same quarter of 2019. Gross margin for the three months endedMarch 31, 2020 was 18.3%, compared to 17.4% for the same quarter of 2019. We recorded a net loss of$1,574,646 for the three months endedMarch 31, 2020 , compared to a net loss of$4,409,472 in the same quarter of 2019, a decrease in net loss of$2,834,826 or 64.3%. The spread of COVID-19 aroundChina and other parts of the world in the first quarter of 2020 has caused significant volatility in the markets ofChina ,U.S. , and the rest of the world. The pandemic has resulted in quarantines, travel restrictions, and the temporary closure of stores and facilities inChina and elsewhere. Although the Company's operations inChina has fully resumed in earlyMarch 2020 , the COVID-19 will affect the Company's business performance in 2020. However, the extent to which the COVID-19 impacts our operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or minimize its harm, among others. The COVID outbreak has seriously impacted the EV market in 2020, leading us to explore how to augment our business. As we looked at other market opportunities that leverage our expertise, the management of the Company found potential in a number of ancillary products aimed at intelligent transportation. For example, Electric Scooters and Electric Self-Balancing Vehicles have distinct potential, with tens of millions of units sold each year around the world. The Company is pursuing these opportunities by expanding production of intelligent transportation products that exploit our advantages in the Yongkang Scrou's power electric motor and Jinhua Ankao's power battery pack. Our products aimed at this market combines our motors and battery packs into a dynamic power train system. Through extensive product trials, we are able to meet a leading standard inChina , and thus will go into mass production this month. As this business is developing quickly and progressing, the Company will consider to merge Yongkang Scrou and Jinhua Ankao into a single specialized powertrain technology company. The Company originally planned to export 2,000 to 5,000 units electric vehicles to theU.S. in 2020, but due to the COVID-19 pandemic in the first half of 2020, the plan should be adjusted according to the situation of COVID-19 control
in theU.S. 25 Results of Operations
Comparison of the Three Months Ended
The following table sets forth the amounts and percentage to revenue of certain items in our condensed consolidated statements of operations and comprehensive income (loss) for the three months endedMarch 31, 2020 and 2019. Three Months Ended March 31, 2020 % of Revenue March 31, 2019 % of Revenue Change in Amount Change in % REVENUES FROM UNRELATED PARTY, NET$ 6,372,424 100.0 %$ 16,334,963 90.4 % (9,962,539 ) (61.0 )% REVENUES FROM THE AFFILIATE COMPANY AND RELATED PARTY, NET - 0.0 % 1,733,497 9.6 % (1,733,497 ) (100.0 )% REVENUES, NET 6,372,424 18,068,460 (11,696,036 ) (64.7 )% COST OF GOODS SOLD (5,205,165 ) (81.7 )% (14,932,023 ) (82.6 )% 9,726,858 (65.1 )% GROSS PROFIT 1,167,259 18.3 % 3,136,437 17.4 % (1,969,178 ) (62.8 )% OPERATING EXPENSES: Research and development (640,240 ) (10.0 )% (537,433 ) (3.0 )% (102,807 ) 19.1 % Selling and marketing (878,306 ) (13.8 )% (618,003 ) (3.4 )% (260,303 ) 42.1 % General and administrative (3,066,735 ) (48.1 )% (2,039,528 ) (11.3 )% (1,027,207 ) 50.4 % Total Operating Expenses (4,585,281 ) (72.0 )% (3,194,964 ) (17.7 )% (1,390,317 ) 43.5 %
LOSS FROM OPERATIONS (3,418,022 ) (53.6 %) (58,527 ) (0.3 )% (3,359,495 ) 5740.1 %
OTHER INCOME (EXPENSE):
Interest income 338,944 5.3 % 252,404 1.4 % 86,540 34.3 %
Interest expense (982,934 ) (15.4 )% (439,183 ) (2.4 )% (543,751 ) 123.8 %
Change in fair value of
contingent
consideration 3,792,000 59.5 % 89,000 0.5 % 3,703,000 4160.7 %
Government grants 11,099 0.2 % 47,724 0.3 % (36,625 ) (76.7 )%
Gain from equity
dilution in the
Affiliate Company - 0.0 % 4,365,390 24.2 % (4,365,390 ) (100.0 )%
Share of loss after tax
of the Affiliate
Company (1,102,770 ) (17.3 )% (9,949,158 ) (55.1 )% 8,846,388 (88.9 )%
Other income , net 19,650 0.3 % 474,390 2.6 % (454,740 ) (95.9 )%
Total other income
(expense), net 2,075,989 32.6 % (5,159,433 ) (28.6 )% 7,235,422 (140.2 )%
LOSS BEFORE INCOME
TAXES (1,342,033 ) (21.1 )% (5,217,960 ) (28.9 )% 3,875,927 (74.3 )%
INCOME TAX (EXPENSE)
BENEFIT (232,613 ) (3.7 )% 808,488 4.5 % (1,041,101 ) (128.8 )%
NET LOSS (1,574,646 ) (24.7 )% (4,409,472 ) (24.4 )% 2,834,826 (64.3 )%
26
(a) Revenue
For the three months ended March 31, 2020 , our revenue was $6,372,424 compared
to $18,068,460 for the same period of 2019, representing a decrease of
$11,696,036 or 64.7%. The decrease in revenue was mainly due to the decrease in
EV parts sales, which was primarily due to the outbreak of COVID-19 and the
lock-down policy in China in the first quarter of 2020 which significantly
affected our production and the demand from the customers.
The following table summarizes our revenues by product types for the three
months ended
Three Months Ended
March 31,
2020 2019
Sales Sales
EV parts $ 2,081,335 $ 12,771,440
EV products 255,819 -
Off-road vehicles 4,035,270 5,297,020
Total $ 6,372,424 $ 18,068,460
EV Parts
During the three months ended
Our revenue for the three months ended
During the three months ended
27
EV Products
During the three months endedMarch 31, 2020 , our revenue from the sale of EV Products was$255,819 , which was due to the export sales of Hainan factories' products. There weren't any EV products sales in the same quarter of 2019.
Off-Road Vehicles
During the three months endedMarch 31, 2020 , our revenue from the sales of off-road vehicles, including go karts, all-terrain vehicles ("ATVs") and others, were$4,035,270 , representing a decrease of$1,261,750 or 23.8% from$5,297,020 , for the same quarter of 2019. The decrease was mainly due to the sales decrease as a result of the outbreak of COVID-19 in the first quarter of 2020.
Our off-road vehicles business line accounted for approximately 63.3% of our
total net revenue for the three months ended
The following table shows the breakdown of our net revenues:
Three Months Ended
March 31
2020 2019
Sales Revenue Sales Revenue
Primary geographical markets
Overseas $ 2,130,824 $ 5,222,525
China 4,241,600 12,845,935
Total $ 6,372,424 $ 18,068,460
Major products
EV parts $ 2,081,335 $ 12,771,440
EV products 255,819 -
Off-road vehicles 4,035,270 5,297,020
Total $ 6,372,424 $ 18,068,460 Timing of revenue recognition
Products transferred at a point in time
28
(b) Cost of goods sold
Cost of goods sold was $5,205,165 during the three months ended March 31, 2020 ,
representing a decrease of $9,726,858 , or 65.1%, compared to $14,932,023 for the
same period of 2019. The decrease was primarily due to the corresponding
decrease in sales. Please refer to the Gross Profit section below for product
margin analysis.
(c) Gross profit
Our margins by product for the three months ended March 31, 2020 and 2019 are as
set forth below:
Three Months Ended March 31,
2020 2019
Sales Cost Gross Profit Margin % Sales Cost Gross Profit Margin %
EV parts $ 2,081,335 1,858,130 223,205 10.7 % $ 12,771,440 10,809,566 1,961,874 15.4 %
EV
products 255,819 241,387 14,432 5.6 % - - - -
Off-road
vehicles 4,035,270 3,105,648 929,622 23.0 % 5,297,020 4,122,457 1,174,563 22.2 %
Total $ 6,372,424 5,205,165 1,167,259 18.3 % $ 18,068,460 14,932,023 3,136,437 17.4 %
Gross profit for the first quarter of 2020 decreased 62.8% to $1,167,259 ,
compared to $3,136,437 for the same period last year. This was primarily
attributable to the sales decrease, which was primarily due to the outbreak of
COVID-19 and the lock-down policy in China in the first quarter of 2020. Our
gross margin increased to 18.3% compared to 17.4% for the same period of 2019.
The increase in our gross margin was mainly due to the sales under SC which has
increased the unit price for the parts since end of 2019 as well as introducing
the sales of ATVs that brought higher margin than other off-road vehicles such
as UTVs since May 2019 .
(d) Research and development
Research and development expenses, including materials, labor, equipment
depreciation, design, testing, inspection, and other related expenses, totaled
$640,240 for the first quarter of 2020, an increase of $102,807 or 19.1%
compared to $537,433 for the same period of last year. The increase was mainly
due to the R&D expense related to the technology upgrading of the Company'sproducts. (e) Sales and marketing Selling and distribution expenses were$878,306 for the first quarter of 2020, compared to$618,003 for the same period last year, representing an increase of$260,303 or 42.1%. The increase was primarily attributable to the increasing labor and advertising expenses in connection with the expansion theU.S. electric vehicle market. 29
(f) General and administrative expenses
General and administrative expenses were$3,066,735 for the first quarter of 2020, compared to$2,039,528 for the same period last year, representing an increase of$1,027,207 or 50.4%. For the three months endedMarch 31, 2020 , general and administrative expenses included$22,925 as expenses for common stock awards and stock options to employees and Board members, compared to$31,675 of common stock awards and stock options expenses for the same period in 2019. Besides stock compensation expense, our net general and administrative expenses for the three months endedMarch 31, 2020 were$3,043,810 , representing an increase of$1,035,957 , from$2,007,853 for the same period of 2019, which was largely due to a portion of depreciation of Hainan facilities related to abnormal amounts from idle capacity being charged to administrative expenses instead of cost of goods sold for the period incurred. (g) Interest income
Interest income was$338,944 for the first quarter of 2020, representing an increase of$86,540 or 34.3% compared to$252,404 for the same period of last year. The increase was primarily attributable to interest earned on collateral for bank acceptance notes. (h) Interest expenses
Interest expenses were$982,934 in the first quarter of 2020, representing an increase of$543,751 or 123.8% compared to$439,183 for the same period of last year. The increase was primarily due to the interest expense of Hainan factory's long-term debt.
(i) Change in fair value of contingent consideration
For the first quarter of 2020, the gain related to changes in the fair value of contingent consideration was$3,792,000 , an increase of$3,703,000 or 4160.7% compared to gain related to changes in the fair value of contingent consideration of$89,000 for the same period of last year, which was mainly due to the adjustment of the fair value of the contingent consideration liability associated with the remaining shares of restrictive common stock (Please refer to NOTE 20 - CONTINGENT CONSIDERATION LIABILITY). The fair value of the contingent consideration liability was estimated at each reporting date by using the Monte Carlo simulation method, which took into account all possible scenarios. (j) Government grants Government grants were$11,099 for the first quarter of 2020, compared to$47,724 for the same quarter last year, representing a decrease of$36,625 , or 76.7%, which was largely attributable to the one-time subsidies Jinhua An Kao received in the first quarter of 2019.
(k) Gain from equity dilution in the
Gain from equity dilution was$0 for the first quarter of 2020, compared to$4,365,390 for the same quarter last year, which was primarily due to gain from the conversion of the loan into equity in theAffiliate Company inMarch 2019 . Pursuant to the Equity Transfer Agreement, theAffiliate Company converted a loan ofRMB 314 million (approximately$44.3 million ) fromGeely Group to equity in order to increase its cash flow (for details please refer to Note 22 - SUMMARIZED INFORMATION OF EQUITY METHOD INVESTMENT IN THE AFFILIATE COMPANY). 30
(l) Share of loss after tax of the
For the first quarter of 2020, our share of loss of theAffiliate Company was$1,102,770 as compared to share of loss of$9,949,158 for the same period of last year, representing a decrease of share of loss of$8,846,388 , which was largely attributable to the decreased operating expenses of theAffiliate Company , as well as the fact that our equity interests of theAffiliate Company has been decreased to 22% from 43.47% after the equity dilution and equity
transfer in 2019. (m) Other income, net
Net other income was$19,650 for the first quarter of 2020, representing a decrease of$454,740 or 95.9% compared to net other income of$474,390 for the same period of last year, which was largely due to the reversal of accrued after-sale service fees of Jinhua An Kao, which has been evaluated by management in the first quarter of 2019, which subsequently concluded that this accrued liability will not be incurred. (n) Income Taxes In accordance with the relevant Chinese tax laws and regulations, our applicable corporate income tax rate is 25%. However, Kandi Vehicle and Jinhua An Kao are qualified as high technology companies inChina and are therefore entitled to a reduced corporate income tax rate of 15%.
Each of our wholly-owned subsidiaries, Kandi New Energy, Yongkang Scrou and
We have a 22% ownership interest in the
Our actual effective income tax rate for the first quarter of 2020 was a
tax expense of 17.33% on a reported loss before taxes of approximately
(o) Net loss Net loss was$1,574,646 for the first quarter of 2020, representing a decrease loss of$2,834,826 compared to net loss$4,409,472 for the same period of last year. The decrease in loss was primarily attributable to the decreased share of loss of theAffiliate Company and increased gain related to changes in the fair value of contingent consideration, offset by the decreased gain from equity dilution in theAffiliate Company and decreased gross profit. 31
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
Three Months Ended
March 31, March 31,
2020 2019
Net cash used in operating activities $ (26,526,069 ) $ (14,037,641 )
Net cash provided by (used in) investing activities 11,460,291 (300,704 )
Net cash provided by financing activities 8,452,964 -
Net decrease in cash and cash equivalents and restricted cash
(6,612,814 ) (14,338,345 )
Effect of exchange rate changes on cash (145,928 ) 446,948 Cash and cash equivalents and restricted cash at beginning of year
16,512,635 22,353,071
Cash and cash equivalents and restricted cash at end of
period 9,753,893 8,461,674
For the first quarter of 2020, cash used in operating activities was
$26,526,069 , as compared to cash used in operating activities of $14,037,641 for
the same period last year. Our operating cash inflows include cash received
primarily from sales of our EV parts and off-road vehicles. These cash inflows
are offset largely by cash paid primarily to our suppliers for production
materials and parts used in our manufacturing process, operation expenses,
employee compensation, and interest expenses of our financings. The major
operating activities that provided cash for the first quarter of 2020 were a
decrease of accounts receivable of $5,540,503 and a decrease of amount due from
the Affiliate Company of $4,187,038 . The major operating activity that used cash
for first quarter of 2020 was a decrease of notes payable of $10,745,294 .
For the first quarter of 2020, cash derived from investing activities was
$11,460,291 , as compared to cash used in investing activities of $300,704 for
the same period of last year. The major investing activities that provided cash
for the first quarter of 2020 were an increase of cash received from equity sale
in Affiliate Company of $11,461,646 . The major investing activities that used
cash for first quarter of 2020 were $1,355 used for the purchases of property,
plant and equipment.
For the first quarter of 2020, cash derived from financing activities was
$8,452,964 , as compared to cash used in financing activities of $0 for the same
period of last year. The major financing activities that provided cash for the
first quarter of 2020 were proceeds from short-term bank loans of $8,452,964 .
Working Capital
We had a working capital of
After two years of negotiations, onMarch 10, 2020 , a real estate repurchase agreement was entered into by and between Kandi Vehicles andJinhua Economic and Technological Development Zone pursuant to which the local government shall purchase the land use right over the land of 66 acres (400 mu, 265,029 square meters) that is owned by Kandi Vehicles forRMB 525 million ($75 million ). Payments to Kandi Vehicles shall be made in three installments as we disclosed in a Current Report on Form 8-K filed with theSEC onMarch 9, 2020 . The transaction includes additional financial incentives. If Kandi Vehicles achieves certain milestones that contribute to local economic development, the Company will be eligible for tax rebates that could total up toRMB 500 million ($71 million ) over the next eight years. Kandi Vehicles intends to use the proceeds from the land repurchase to fund the land use acquisition and factory construction in theNew Energy Automotive Zone , and to fund growth initiatives and general corporate purposes. OnMay 22, 2020 , the Company received the first payment ofRMB 244 million (USD34.4 million ) under the Repurchase Agreement. 32
Contractual Obligations and Off-balance Sheet Arrangements
Short-term and long-term Loans:
For the discussion of short-term and long-term loans, please refer to Note 17 - Short-term and Long-term Loans under Notes to Condensed Consolidated Financial Statements.
Guarantees and pledged collateral for third party bank loans
For the discussion of guarantees and pledged collateral for third party bank loans, please refer to Note 23 - Commitments and Contingencies under Notes to Condensed Consolidated Financial Statements.
Recent Development Activities:
The COVID outbreak has seriously impacted the EV market in 2020, leading us to explore how to augment our business. As we looked at other market opportunities that leverage our expertise, the management of the Company found potential in a number of ancillary products aimed at intelligent transportation. For example, Electric Scooters and Electric Self-Balancing Vehicles have distinct potential, with tens of millions of units sold each year around the world. The Company is pursuing these opportunities by expanding production of intelligent transportation products that exploit our advantages in the Yongkang Scrou's power electric motor and Jinhua Ankao's power battery pack. Our products aimed at this market combines our motors and battery packs into a dynamic power train system. Through extensive product trials, we are able to meet a leading standard inChina , and thus will go into mass production this month. As this business is developing quickly and progressing, the Company will consider to merge Yongkang Scrou and Jinhua Ankao into a single specialized powertrain technology company. Recently, Mr.Hu Xiaoming , CEO of the Company, has been in discussions with Mr.Ying Jiawei , CEO ofHangzhou Chic Intelligent Technology Co., Ltd. ("Hangzhou Chic"), a leading high tech company that is well-recognized as a major exporter in intelligent balance scooter sector. They have agreed to have Kandi to start using its power trains system to produce balance scooters for Hangzhou Chic. Hangzhou Chic has accumulated more than 500 technical patents in the balance scooter sector and is an original developer in the balance scooter products. Their leading and innovative technology has broadly penetrated this market. Each year, about ten million scooters using their patents are produced. We believe this can be a productive partnership, as we marry their technology expertise with our manufacturing prowess and technology advantages.
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