See notes to consolidated financial statements.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND PRINCIPAL ACTIVITIES
Kandi Technologies Group, Inc. (“Kandi Technologies”)
was incorporated under the laws of the State of Delaware on March 31, 2004. As used herein, the terms “Company” or “Kandi”
refer to Kandi Technologies and its operating subsidiaries, as described below.
Headquartered in Jinhua City, Zhejiang Province,
People’s Republic of China (“China” or “PRC”), the Company is one of China’s leading producers and
manufacturers of electric vehicle (“EV”) products, EV parts, and off-road vehicles for sale in the Chinese and the global
markets. The Company conducts its primary business operations through its wholly-owned subsidiaries, Zhejiang Kandi Vehicles Co., Ltd.
(“Kandi Vehicles”), Kandi Vehicles’ wholly and partially-owned subsidiaries, and SC Autosports, LLC (“SC Autosports”,
d/b/a Kandi America) and its wholly-owned subsidiary, Kandi America Investment, LLC (“Kandi Investment”). In March 2021, Zhejiang
Kandi Vehicles Co., Ltd. changed its name to Zhejiang Kandi Technologies Group Co., Ltd. (“Zhejiang Kandi Technologies”).
The Company’s organizational chart as of
the date of this report is as follows:
Operating Subsidiaries
Pursuant to certain VIE agreements signed by Zhejiang
Kandi Technologies and Mr. Hu Xiaoming, from January 2011 to March 13, 2022, Zhejiang Kandi Technologies is entitled to 100% of the economic
benefits, voting rights and residual interests (100% of profits and losses) of Jinhua Kandi New Energy Vehicles Co., Ltd. (“Kandi
New Energy”). Specifically, on May 18, 2010, Zhejiang Kandi Technologies signed the Agreement of Establishment of Kandi New Energy
with Mr. Hu Xiaoming, pursuant to which both parties agreed to together contribute RMB 36 Million to establish Kandi New Energy, and each
party will contribute 50% of the total investment. Zhejiang Kandi Technologies will make its contribution in kind equivalent to its portion
and Mr. Hu will make his contribution in cash. On the same date, Zhejiang Kandi Technologies signed a Contractor’s Agreement
with Mr. Hu Xiaoming pursuant to which both parties agreed that during the existence of Kandi New Energy, it is contracted to Zhejiang
Kandi Technologies for operation and management and Mr. Hu Xiaoming will not participate in any management, dividend distribution or loss
of Kandi New Energy. On the same day, Zhejiang Kandi Technologies also signed a Share Escrow and Trust Agreement with Mr.
Hu Xiaoming, pursuant to which upon the existence of Kandi New Energy, Mr. Hu Xiaoming agreed to entrust his entire 50% equity
in the Kandi New Energy with Zhejiang Kandi Technologies, and Zhejiang Kandi Technologies agrees to accept such trust. All the above-mentioned
agreements shall only be effective within 30 days upon the Kandi New Energy receives government’s approval and reaches to the practical
operation stage. Therefore, all the three agreements became effective on January 2011. All these three agreements were previously attached
as Exhibit 10.13, Exhibit 10.14, and Exhibit 10.15 to the Company’s Annual Report on Form 10-K filed on March 31, 2011 and are incorporated
herein by reference. Effective March 14, 2022, Mr. Hu Xiaoming transferred his 50% equity interests of Kandi New Energy to Zhejiang
Kandi Technologies. As a result, Kandi New Energy has become a wholly-owned subsidiary of Zhejiang Kandi Technologies.
In April 2012, pursuant to an agreement with the
shareholders of YongkangScrou Electric Co, Ltd. (“Yongkang Scrou”), the Company acquired 100% of Yongkang Scrou, a manufacturer
of automobile and EV parts. In September 2020, Zhejiang Kandi Technologies transferred all of its equity interest in Yongkang Scrou to
its wholly owned subsidiary, Zhejiang Kandi Smart Battery Swap Technology Co., Ltd. (“Kandi Smart Battery Swap”).
On February 18, 2021, Zhejiang Kandi Technologies
signed an Equity Transfer Agreement with Geely to transfer the remaining 22% equity interests of the Fengsheng Automotive Technology Group
Co., Ltd. to Geely. As of September 10, 2021, the Company received all the equity transfer payment.
In April 2013, Zhejiang Kandi Technologies and
Kandi New Energy formed Kandi Electric Vehicles (Wanning) Co., Ltd., which was renamed Kandi Electric Vehicles (Hainan) Co., Ltd. (“Kandi
Hainan”), when it was relocated from Wanning City to Haikou City in January 2016. Zhejiang Kandi Technologies has 45% ownership
interest in Kandi Hainan, and Kandi New Energy has the remaining 55% ownership interest.
In December 2017, Zhejiang Kandi Technologies
and the sole shareholder of Jinhua An Kao Power Technology Co., Ltd. (“Jinhua An Kao”) entered into a Share Transfer Agreement
and a Supplementary Agreement, pursuant to which Zhejiang Kandi Technologies acquired 100% equity of Jinhua An Kao. In June 2020, Jinhua
An Kao changed its name to Kandi Smart Battery Swap.
On May 31, 2018, the Company entered into a Membership
Interests Transfer Agreement (the “Transfer Agreement”) with the two members of SC Autosports LLC (“SC Autosports”)
(formerly known as: Sportsman Country, LLC) pursuant to which the Company acquired 100% of the ownership of SC Autosports.
On March 4, 2019, in order to build a logistics
network composed of suppliers, manufacturers, warehouses, distribution centers and channel providers, meeting the needs of improving production
and operation efficiency, the Company participated in the formation of Zhejiang Kandi Supply Chain Management Co., Ltd. (“Supply
Chain Company”). Zhejiang Kandi Technologies has 10% ownership interest in Supply Chain Company, the remaining 90% is owned by unrelated
other parties. As of the date of this report, Zhejiang Kandi Technologies has not made any capital contribution to Supply Chain Company
since the contribution is not yet due as the relevant per PRC regulations, and is not involved in its operations. The Company deemed that
Supply Chain Company is not a related party with the analysis in accordance with ASC 850-10.
In September 2020, In order to make full use of
its dozens of patents in the field of battery swap systems and attract strategic investors to participate across the whole sector value
chain, including battery swapping services and used battery recycling, the Company formed China Battery Exchange (Zhejiang) Technology
Co., Ltd. (“China Battery Exchange”) and its subsidiaries. Zhejiang Kandi Technologies has 100% ownership interest in
China Battery Exchange and its subsidiaries.
In September 2020, intending to explore ridesharing
service business, the Company participated in the formation of Zhejiang Ruiheng Technology Co., Ltd (“Ruiheng”). Zhejiang
Kandi Technologies has 10% ownership interest in Ruiheng, the remaining 90% is owned by unrelated other parties. The Company deemed that
Ruiheng is not a related party with the analysis in accordance with ASC 850-10.
During January 2021, SC Autosports established
a wholly owned subsidiary, Kandi America Investment, LLC (“Kandi Investment”) in Dallas.
On July 13, 2021, Zhejiang Kandi Technologies
entered into a Share Transfer Agreement and Supplementary Agreement with three individual shareholders of Jiangxi Province Huiyi New Energy
Co., Ltd. (“Jiangxi Huiyi”) to acquire 100% equity of Jiangxi Huiyi. The acquisition was consummated at October 31, 2021.
On February 15, 2022, Kandi Hainan and Jiangsu
Xingchi Signed a joint venture agreement, the two parties jointly invested RMB 30,000,000 (approximately $4.6 million) in Haikou, Hainan
(of which Kandi Hainan owns 66.7% and Jiangsu Xingchi owns 33.3%) to establish Hainan Kandi Holding New Energy Technology Co., Ltd. (“Hainan
Kandi Holding”).
NOTE 2 - LIQUIDITY
The Company had working capital of $247,817,125 as
of December 31, 2022, a decrease of $30,628,321 from the working capital of $278,445,446 as of December 31, 2021. As of
December 31, 2022 and 2021, the Company’s cash and cash equivalents were $84,063,717 and $129,223,443, respectively. The Company’s
restricted cash was $66,976,554 and $39,452,564, respectively. As of December 31, 2022 and December 31, 2021, the Company had multiple
certificates of deposit with a total amount of $81,191,191 and $55,041,832, respectively. These certificates of deposit have an annual
interest rate from 3.25% to 3.99% which can be transferred when necessary without any penalty or any loss of interest and principal.
Although the Company expects that most of its
outstanding trade receivables from customers will be collected in the next twelve months, there are uncertainties with respect to the
timing in collecting these receivables.
The Company’s primary need for liquidity stems from its need
to fund working capital requirements of the Company’s businesses, its capital expenditures and its general operations, including
debt repayment. The Company has historically financed its operations through short-term commercial bank loans from Chinese banks, as well
as its ongoing operating activities by using funds from operations, external credit or financing arrangements. Currently the Company
has sufficient cash in hand to meet the existing operational needs, but the credit line is retained and can be utilized timely when
the Company has special capital needs. The PRC subsidiaries do not have any short-term bank loans and the US subsidiaries have $5.6 million short-term
bank loans outstanding as of December 31, 2022.
NOTE 3 - BASIS OF PRESENTATION
The Company’s financial statements and notes
are the representations of the Company’s management. Accounting policies adopted by the Company conform to generally accepted accounting
principles in the United States and have been consistently applied in the Company’s presentation of its financial statements.
NOTE 4 - PRINCIPLES OF CONSOLIDATION
The Company’s condensed consolidated
financial statements reflect the accounts of the Company and its ownership interests in the following subsidiaries:
| (1) | Continental
Development Limited (“Continental”), a wholly-owned subsidiary of the Company, incorporated under the laws of Hong Kong; |
| (2) | Zhejiang
Kandi Technologies, a wholly-owned subsidiary of Continental, incorporated under the laws of the PRC; |
| (3) | Kandi
New Energy Vehicle Co. Ltd. (“Kandi New Energy”), formerly, a 50%-owned subsidiary of Zhejiang Kandi Technologies (Mr.
Hu Xiaoming owned the other 50%), incorporated under the laws of the PRC. Pursuant to agreements executed in January 2011, Mr. Hu
Xiaoming contracted with Zhejiang Kandi Technologies for the operation and management of Kandi New Energy and put his shares of Kandi
New Energy into escrow. As a result, Zhejiang Kandi Technologies was entitled to 100% of the economic benefits, voting rights and
residual interests of Kandi New Energy. Effective March 14, 2022, Mr. Hu Xiaoming transferred his 50% equity interests of Kandi New Energy
to Zhejiang Kandi Technologies. As a result, Kandi New Energy has become a wholly-owned subsidiary of Zhejiang Kandi Technologies; |
| (4) | Kandi
Electric Vehicles (Hainan) Co., Ltd. (“Kandi Hainan”), a subsidiary 55% owned by Kandi New Energy and 45% owned
by Zhejiang Kandi Technologies, incorporated under the laws of the PRC; |
| (5) | Zhejiang
Kandi Smart Battery Swap Technology Co., Ltd (“Kandi Smart Battery Swap”), a wholly-owned subsidiary of Zhejiang Kandi Technologies,
incorporated under the laws of the PRC; |
|
(6) |
Yongkang Scrou Electric Co, Ltd. (“Yongkang Scrou”), a wholly-owned subsidiary of Kandi Smart Battery Swap, incorporated under the laws of the PRC; |
|
(7) |
SC Autosports (d/b/a Kandi America), a wholly-owned subsidiary of the Company formed under the laws of the State of Texas. |
|
(8) |
China Battery Exchange (Zhejiang) Technology Co., Ltd. (“China Battery Exchange”), a wholly-owned subsidiary of Zhejiang Kandi Technologies, and its subsidiaries, incorporated under the laws of the PRC; |
|
(9) |
Kandi America Investment, LLC (“Kandi Investment”), a wholly-owned subsidiary of SC Autosports formed under the laws of the State of Texas, USA; |
| (10) | Jiangxi Province Huiyi New Energy Co., Ltd. (“Jiangxi Huiyi”) and its subsidiaries, a wholly-owned subsidiary of Zhejiang Kandi Technologies, incorporated under the laws of the PRC; and |
| | |
| (11) | Hainan Kandi Holding New Energy Technology Co., Ltd. (“Hainan Kandi Holding”), a subsidiary of Kandi Hainan, incorporated under the laws of the PRC; Kandi Hainan owns 66.7% and a non-affiliate, Jiangsu Xingchi owns 33.3% of Hainan Kandi Holding. Consequently, effective February 15, 2022, non-controlling interests of an aggregate of 33.3% of the equity interests of Hainan Kandi Holding held by an entity are presented in the consolidated balance sheets, separately from equity attributable to the shareholders of the Company. Non-controlling interest in the results of the Company are presented on the consolidated statement of operations as an allocation of the total income or loss for the period between non-controlling interest holders and the shareholders of the Company. |
Equity Method Investees
The Company’s consolidated net income for
the year ended December 31, 2021 also includes the Company’s proportionate share of the net income or loss of its equity method
investment in Fengsheng Automotive Technology Group Co., Ltd. (“Former Affiliate Company”), in which the Company owned 22%
equity interest until March 9, 2021.
On February 18, 2021, Zhejiang Kandi Technologies
signed an Equity Transfer Agreement with Geely to transfer all of its remaining 22% equity interests in the Former Affiliate Company to
Geely.
All intra-entity profits and losses with regard
to the Company’s equity method investees have been eliminated.
NOTE 5 - USE OF ESTIMATES
The preparation of the consolidated financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities, and related disclosures of contingent assets and liabilities at the balance sheet date, and the reported revenues and
expenses during the reported period in the consolidated financial statements and accompanying notes. Significant accounting estimates
reflected in the Company’s consolidated financial statements primarily include, but are not limited to, allowances for doubtful
accounts, lower of cost and net realizable value of inventory, assessment for impairment of long-lived assets and intangible assets, valuation
of deferred tax assets, change in fair value of contingent consideration, determination of share-based compensation expenses as well as
fair value of stock warrants.
Management bases the estimates on historical experience
and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the
carrying values of assets and liabilities. Actual results could differ from these estimates.
NOTE 6 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Economic and Political Risks
Part of the Company’s operations are conducted
in China. As a result, the Company’s business, financial condition and results of operations may be influenced by the political,
economic and legal environments in China, and by the general state of the Chinese economy. In addition, the Company’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 operating results are affected by changes in the exchange rate between
the U.S. dollar and the RMB.
The Company’s operations in China 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 restrictions. The Company’s
performance may be adversely affected by changes in the political and social conditions in China, 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 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 for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The Company’s financial instruments primarily
consist of cash and cash equivalents, restricted cash, accounts receivable, notes receivable, other receivables, accounts payable, other
payables and accrued liabilities, short-term bank loans, notes payable, and warrants.
The carrying value of cash and cash equivalents,
restricted cash, accounts receivable, notes receivable, other receivables, accounts payable, other payables and accrued liabilities, and
notes payable approximate fair value because of the short-term nature of these items. The estimated fair values of short-term bank loans
were not materially different from their carrying value as presented due to the brief maturities and because the interest rates on these
borrowings approximate those that would have been available for loans of similar remaining maturities and risk profiles. As the carrying
amounts are reasonable estimates of fair value, these financial instruments are classified within Level 1 of the fair value hierarchy.
The Company identified notes payable as Level 2 instruments due to the fact that the inputs to valuation are primarily based upon readily
observable pricing information. The balance of notes payable, which were measured and disclosed at fair value, was $19,123,476 and $8,198,193
as of December 31, 2022 and December 31, 2021, respectively.
Contingent consideration related to the acquisitions
of Jiangxi Huiyi, which is accounted for as liabilities, are measured at each reporting date for their fair value using Level 3 inputs.
The fair value of contingent consideration was $1,803,000 and $7,812,000 as of December 31, 2022 and December 31, 2021, respectively.
Also see Note 18.
(c) Cash and Cash Equivalents
The Company considers highly-liquid investments
purchased with original maturities of three months or less to be cash equivalents.
(d) Restricted cash
Restricted cash primarily represents bank deposits
for letter of credit and bank acceptance bill.
As of December 31, 2022 and December 31, 2021,
the Company’s restricted cash was $66,976,554 and $39,452,564, respectively.
(e) Inventories
In the Company’s subsidiaries located in
China, 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 basis of weighted average and comprises direct materials,
direct labor and an appropriate proportion of overhead.
In the Company’s subsidiaries located in
the United States, the Company values its vehicle products at the lower of specific cost or net realizable value to reflect the nature
of the oversea trading operations. Specific cost consists of the amount paid to acquire the vehicle, plus the cost of transportation,
custom, and duty. The cost of remaining inventory items is determined on the basis of weighted average.
Net realizable value is based on estimated selling
prices less selling expenses and any further costs expected to be incurred for completion. Adjustments to reduce the cost of inventory
to net realizable value are made, if required, for estimated excess, obsolescence, or impaired balances.
(f) Accounts Receivable
Accounts receivable are recognized and carried
at net realizable value. The Company establishes provision for doubtful accounts when there is objective evidence that the Company may
not be able to collect amounts due. Management reviews the adequacy of the provision for doubtful accounts on an ongoing basis, using
historical collection trends and individual account analysis. The provision is based on management’s best estimates of specific
losses on individual customer exposures, as well as historical trends of collections. Account balances are charged off against the provision
after all means of collection have been exhausted and the likelihood of collection is not probable. An allowance for doubtful accounts
is recorded for periods in which the Company determines credit losses are probable. In order to measure expected credit losses of the
accounts receivable, the Company’s policy is to adopt aging method by reviewing and analyzing the aging of each customer, especially
those with aged balances without any movement, and then assessing their financial conditions and payment plans. On top of the aging analysis,
the Company also analyzed the nature and background of the customers, and analyzed the probability of recovery of the receivables. Accounts
are written off after exhaustive collection efforts. If accounts receivable are to be provided for, or written off, they are recognized
in the consolidated statement of operations within the operating expenses line item. If accounts receivable previously written off is
recovered in a later period or when facts subsequently become available to indicate that the amount provided as an allowance for doubtful
accounts was incorrect, an adjustment is made to restate allowance for doubtful accounts.
As of December 31, 2022 and December 31, 2021,
credit terms with the Company’s customers were typically 60 to 180 days after delivery. The Company has agreements or purchase orders
signed with the customers which state the payment term based on the scale of sales and background of the customers. The terms and agreements
signed are legally enforceable. As of December 31, 2022 and 2021, the Company had $2,285,386 and $3,053,277 allowance for doubtful accounts,
as per the Company management’s judgment based on their best knowledge. The Company conducts quarterly assessments of the state
of the Company’s outstanding receivables and reserves any allowance for doubtful accounts if it becomes necessary.
The table below summarized the aging of the
accounts receivable as of December 31, 2022 and 2021.
Aging of accounts receivable as of December 31, 2022 |
|
Outstanding balance |
|
|
Subsequent collection(1) |
|
1 to 90 days |
|
$ |
17,696,095 |
|
|
$ |
9,133,796 |
|
91 to 180 days |
|
|
1,863,518 |
|
|
|
1,666,790 |
|
Over 180 days |
|
|
634,596 |
|
|
|
14,165 |
|
Over one year |
|
|
1,104,456 |
|
|
|
111,514 |
|
Over two years |
|
|
19,137,597 |
|
|
|
20,973 |
|
Total |
|
$ |
40,436,262 |
|
|
$ |
10,947,237 |
|
Aging of accounts receivable as of December 31, 2021 | |
Outstanding balance | | |
Subsequent collection(1) | |
1 to 90 days | |
$ | 19,978,931 | | |
$ | 18,484,611 | |
91 to 180 days | |
| 8,317,622 | | |
| 5,927,822 | |
Over 180 days | |
| 1,815,817 | | |
| 1,364,236 | |
Over one year | |
| 13,960,230 | | |
| 4,085,036 | |
Over two years | |
| 11,876,982 | | |
| 7,854 | |
Total | |
$ | 55,949,582 | | |
$ | 29,869,559 | |
(1) | the Company reviewed the subsequent collection until March 10, 2023. |
(g) Notes Receivable
Notes receivable represent short-term loans to
third parties with maximum terms of six months. Interest income is recognized according to each agreement between a borrower and the
Company on an accrual basis. For notes receivable with banks, the interest rates are determined by banks. For notes receivable with other
parties, the interest rates are based on agreements between the parties. If notes receivable are paid back, that transaction will be
recognized in the relevant year. If notes receivable are not paid back, or are written off, that transaction will be recognized in the
relevant year once default is probable, reasonably assured, and the loss can be reasonably estimated. 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, the Company provides
an accrual for the related foreclosure and litigation expenses. The Company also receives notes receivable from the Affiliate Company
and other parties to settle accounts receivable. If the Company decides to discount notes receivable for the purpose of receiving immediate
cash, the current discount rate is approximately in the range of 1.5% to 2.1% annually depends on different banks. As of December 31,
2022 and 2021, the Company had notes receivable from unrelated parties of $434,461 and $323,128, respectively, which notes receivable
typically mature within six months.
(h)
Property, Plant and Equipment, net
Property,
Plant and equipment are carried at cost less accumulated depreciation. Depreciation is calculated over the asset’s estimated useful
life, 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 | |
| 20-30 years | |
Machinery and equipment | |
| 10 years | |
Office equipment | |
| 5 years | |
Motor vehicles | |
| 5 years | |
Molds | |
| 5 years | |
The
costs and related accumulated depreciation of assets sold or otherwise retired are eliminated from the Company’s accounts and any
gain or loss is included in the statements of income. The cost of maintenance and repairs is charged to expenses as incurred, whereas
significant renewals and betterments are capitalized.
(i)
Land Use Rights, net
Land
in China is owned by the government and land ownership rights cannot be sold to an individual or to a private company. However, the Chinese
government grants the user a “land use right” to use the land. The land use rights granted to the Company are amortized using
the straight-line method over a term of fifty years.
The
Company elected the practical expedient that permits the Company to carry forward the accounting treatment for land use rights in existing
agreements as of the effective date of ASC 842.
Upon
the adoption of ASC 842 on January 1, 2019, the new land use rights agreements signed beyond the effective date are identified as operating
lease right-of-use assets, whereas the existing agreements as of the effective date are separately disclosed as “Land use rights”
in the Company’s consolidated balance sheets.
(j)
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 ASC Topic 360 Impairment or Disposal of
Long-Lived Assets. 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 disposal costs.
The
Company recognized impairment loss of $2,697,521 and nil for finite-lived intangible assets as of December 31, 2022 and December 31,
2021, respectively.
(k)
Revenue Recognition
The
Company adopted ASC Topic 606 Revenue from Contracts with Customers with a date of the initial application of January 1, 2018 using the
modified retrospective method. As a result, the Company has changed its accounting policy for revenue recognition. The impact of the
adoption of ASC Topic 606 on the Company’s consolidated financial statements is not material.
The
Company recognizes revenue when goods or services are transferred to customers in an amount that reflects the consideration which it
expects to receive in exchange for those goods or services. In determining when and how revenue is recognized from contracts with customers,
the Company performs the following five-step analysis: (i) identification of contract with customer; (ii) determination of performance
obligations; (iii) measurement of the transaction price; (iv) allocation of the transaction price to the performance obligations;
and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.
The
Company generates revenue through EV parts and off-road vehicles. The revenue is recognized at a point in time once the Company has determined
that the customer has obtained control over the product. Control is typically deemed to have been transferred to the customer when the
performance obligation is fulfilled, usually at the time of delivery, at the net sales price (transaction price). Revenue is recognized
net of any taxes collected from customers, which are subsequently remitted to governmental authorities. Shipping and handling costs for
product shipments occur prior to the customer obtaining control of the goods are accounted for as fulfillment costs rather than separate
performance obligations and recorded as sales and marketing expenses.
See
Note 24 “Segment Reporting” for disaggregation of revenue by reporting segments. The Company believes this disaggregation
best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
(l)
Research and Development
Expenditures
relating to the development of new products and processes, including improvements to existing products as well as research and development
and consulting work performed by third parties, are expensed as incurred. Research and development expenses were $6,029,608 and $38,971,986
for the years ended December 31, 2022 and 2021, respectively.
(m)
Government Grants
Government
grants are recognized when there is reasonable assurance that: (1) the recipient will comply with the relevant conditions and (2) the
grant will be received. After initial recognition, government grants are recognized in profit or loss on a systematic basis that mirrors
the manner in which the Company recognizes the underlying costs for which the grant is intended to compensate. If some, or all, of a
government grant becomes repayable (e.g. due to non-fulfillment of the grant conditions), then the repayment is accounted for prospectively
as a change in accounting estimate. The effect of the change in estimate is recognized in the period in which management concludes that
it is no longer reasonably assured that all of the grant conditions will be met. A corresponding financial liability is recognized for
the amount of the repayment.
For
the years ended December 31, 2022 and 2021, $1,639,328 and $1,233,192, respectively, were received by the Company’s subsidiaries
from the Chinese government.
(n)
Income Taxes
The
Company accounts for income tax using an asset and liability approach, which allows for the recognition of deferred tax benefits in future
years. Under the asset and liability approach, deferred income taxes are recognized for differences between the financial reporting and
tax bases of assets and liabilities at enacted tax rates in effect for the years in which the differences are expected to reverse. The
accounting for deferred tax calculation represents the Company management’s best estimate of the most likely future tax consequences
of events that have been recognized in our financial statements or tax returns and related future anticipation. A valuation allowance
is recorded to reduce the deferred tax assets to an amount that is more likely than not to be realized after considering all available
evidence, both positive and negative.
(o)
Foreign Currency Translation
The
accompanying consolidated financial statements are presented in United States dollars. The functional currency of the Company is the
Renminbi (RMB). Capital accounts of the consolidated financial statements are translated into United States dollars from RMB at their
historical exchange rates when the capital transactions occurred.
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 reporting period, which rates are obtained from the website: http://www.oanda.com
| |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Period end RMB : USD exchange rate | |
| 6.8973 | | |
| 6.3588 | |
Average RMB : USD exchange rate | |
| 6.7284 | | |
| 6.4499 | |
(p)
Comprehensive Income (Loss)
Comprehensive
income (loss) 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 (loss) are required to be reported in a financial statement that is presented with the same prominence as other financial statements.
Comprehensive income (loss) includes net income (loss) and the foreign currency translation changes.
(q)
Segments
In
accordance with ASC 280-10, Segment Reporting, the Company’s chief operating decision maker (“CODM”), identified as
the Company’s Chief Executive Officer, relies upon the consolidated results of operations as a whole when making decisions about
allocating resources and assessing the performance of the Company. As a result of the assessment made by CODM, the Company has only one
reportable segment. The Company does not distinguish between markets or segments for the purpose of internal reporting. As the Company’s
long-lived assets are substantially located in the PRC, no geographical segments are presented.
(r)
Stock Option Expenses
The
Company’s stock option expenses are recorded in accordance with ASC 718 and ASC 505.
The
fair value of stock options is estimated using the Binomial Tree model. The Company’s expected volatility assumption is based on
the historical volatility of the Company’s common 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. The recognition of stock option expenses is based on awards expected to vest.
The
stock-based option expenses for the years ended December 31, 2022 and 2021 were $1,231,566 and $0, respectively. There were no forfeitures
estimated during the reporting period.
(s)
Goodwill
The
Company allocates goodwill from business combinations to reporting units based on the expectation that the reporting unit is to benefit
from the business combination. The Company evaluates its reporting units on an annual basis and, if necessary, reassigns goodwill using
a relative fair value allocation approach. Goodwill is tested for impairment at the reporting unit level on an annual basis and between
annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below
its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating
performance indicators, competition, or sale or disposition of a significant portion of a reporting unit.
Application
of the goodwill impairment test requires judgments, including the identification of reporting units, assignment of assets and liabilities
to reporting units, assignment of goodwill to reporting units, and the determination of the fair value of each reporting unit. The Company
first assesses qualitative factors to determine whether it is more likely than not that goodwill is impaired. If the more likely than
not threshold is met, the Company performs a quantitative impairment test.
The
Company applies the reporting unit criteria in ASC 350-20 to the components to determine if the reporting unit should be identified one
level below the operating segment. Each component will be evaluated to determine if: (a) it is a business (as defined in ASC 805), (b)
discrete financial information is available and (c) the operating results are regularly reviewed by the segment manager(s). If the components
of a specific operating segment meet these criteria, they might be deemed to be separate reporting units. However, if they have similar
economic characteristics (which is a matter of judgment based on individual facts and circumstances), these components must be aggregated
into one reporting unit. There are three reporting units under the goodwill impairment analysis, namely 1) SC Autosports, 2) Jinhua An
kao and Yongkang Scrou, and 3) Jiangxi Huiyi.
As
of December 31, 2022 and 2021, the Company performed goodwill impairment testing at the reporting unit level and recognized impairment
loss of $642,665 and nil, respectively.
(t)
Intangible Assets
Intangible
assets consist of patent, trade names, customer relations and technology associated with the purchase price from the allocation of Yongkang
Scrou, Kandi Smart Battery Swap and Jiangxi Huiyi. Such assets are being amortized over their estimated useful lives. Intangible assets
were amortized as of December 31, 2022. The amortization expenses for intangible assets were $1,965,490 and $906,618 for the years ended
December 31, 2022 and 2021, respectively.
The
Company recognized impairment loss of $2,697,521 and nil for finite-lived intangible assets as of December 31, 2022 and December 31,
2021, respectively.
(u)
Accounting for Sale of Common Stock and Warrants
In
connection of the issuance of common stocks, the Company may issue options or warrants to purchase common stock. Warrants classified
as equity are initially recorded at fair value and subsequent changes in fair value are not recognized as long as the warrants continue
to be classified as equity.
(v)
Consolidation of variable interest entities
In
accordance with accounting standards regarding consolidation of variable interest entities, or VIEs, VIEs are generally entities that
lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack
adequate decision making ability. All VIEs with which the Company is involved must be evaluated to determine the primary beneficiary
of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.
The
Company has concluded, based on the contractual arrangements, that as of December 31, 2021 and during the year ended December 31, 2021,
Kandi New Energy had been a VIE and that the Company’s wholly-owned subsidiary, Zhejiang Kandi Technologies, absorbs all risk of
loss from the activities of this VIE, thereby enabling the Company, through Zhejiang Kandi Technologies, to receive all of its expected
residual returns. Therefore, although Kandi Technologies only owns 50% equity in Kandi New Energy, for accounting purpose, Kandi Technologies
is the sole beneficiary and shall be wholly included in the consolidation.
Additionally,
because Kandi New Energy is under common control with other entities, the consolidated financial statements have been prepared as if
the transactions had occurred retroactively as to the beginning of the reporting period of these consolidated financial statements.
Control
and common control are defined under the accounting standards as “an individual, enterprise, or immediate family members who hold
more than 50 percent of the voting ownership interest of each entity.” Because the owners collectively owned 100% of Kandi New
Energy, and had agreed to vote their interests in concert since the establishment of each of these three companies as memorialized in
the Voting Rights Proxy Agreement, the Company believes that the owners collectively have control and common control of Kandi New Energy.
Accordingly, the Company believes that Kandi New Energy was constructively held under common control by Zhejiang Kandi Technologies as
of the time the contractual agreements were entered into, establishing Zhejiang Kandi Technologies as their primary beneficiary. Zhejiang
Kandi Technologies, in turn, is owned by Continental, which is owned by the Company.
The
Company has completed the conversion of Kandi New Energy to a wholly-owned subsidiary of Zhejiang Kandi Technologies, effective March
14, 2022. The Company no longer has any VIE subsequent to March 14, 2022.
For
accounting purpose, the tables below are condensed consolidating schedules summarizing separately the results of operations, financial
position and cash flows of the parent company including non-VIE subsidiaries and Kandi New Energy, which was deemed as an VIE since the
Company only owned 50% of the equity, and control Kandi New Energy through several contractual agreements prior to its conversion to
a wholly-owned subsidiary of Zhejiang Kandi Technologies effective March 14, 2022, together with eliminating adjustments:
Consolidated
Statements of Operations Information
| |
For the year ended December 31, 2022 | |
| |
Parent
including
non-VIE
subsidiaries | | |
VIE* | | |
Elimination | | |
Consolidated | |
Revenues | |
$ | 117,813,049 | | |
$ | - | | |
$ | - | | |
$ | 117,813,049 | |
Gross profit | |
$ | 19,517,726 | | |
$ | - | | |
$ | - | | |
$ | 19,517,726 | |
Loss from operations | |
$ | (27,679,432 | ) | |
$ | - | | |
$ | - | | |
$ | (27,679,432 | ) |
Loss before income taxes | |
$ | (13,338,534 | ) | |
$ | - | | |
$ | - | | |
$ | (13,338,534 | ) |
Net loss | |
$ | (12,851,024 | ) | |
$ | - | | |
$ | - | | |
$ | (12,851,024 | ) |
* | Effective
March 14, 2022, the Company has completed the conversion of Kandi New Energy to a wholly-owned subsidiary of Zhejiang Kandi Technologies
and the VIE agreements were terminated. The Company no longer has any VIE as of the date of this report. |
| |
For the year ended December 31, 2021 | |
| |
Parent
including
non-VIE
subsidiaries | | |
VIE | | |
Elimination | | |
Consolidated | |
Revenues | |
$ | 87,210,780 | | |
$ | 14,414,362 | | |
$ | (10,138,758 | ) | |
$ | 91,486,384 | |
Gross profit | |
$ | 15,892,507 | | |
$ | 355,355 | | |
$ | - | | |
$ | 16,247,862 | |
Income (loss) from operations | |
$ | 2,576,730 | | |
$ | (1,240,525 | ) | |
$ | - | | |
$ | 1,336,205 | |
Income (loss) before income taxes | |
$ | 46,250,219 | | |
$ | 3,115,420 | | |
$ | (20,155,351 | ) | |
$ | 29,210,288 | |
Net income | |
$ | 40,739,432 | | |
$ | 2,279,717 | | |
$ | (20,155,351 | ) | |
$ | 22,863,798 | |
Consolidated
Balance Sheets Information
| |
As of December 31, 2022 | |
| |
Parent
including
non-VIE
subsidiaries | | |
VIE* | | |
Elimination | | |
Consolidated | |
Cash and cash equivalents | |
$ | 84,063,717 | | |
$ | - | | |
$ | - | | |
$ | 84,063,717 | |
Total current assets | |
$ | 329,322,973 | | |
$ | - | | |
$ | - | | |
$ | 329,322,973 | |
Total non-current assets | |
$ | 153,659,303 | | |
$ | - | | |
$ | - | | |
$ | 153,659,303 | |
Total current liabilities | |
$ | 81,505,848 | | |
$ | - | | |
$ | - | | |
$ | 81,505,848 | |
Total non-current liabilities | |
$ | 3,783,457 | | |
$ | - | | |
$ | - | | |
$ | 3,783,457 | |
Total stockholders’ equity | |
$ | 397,692,971 | | |
$ | - | | |
$ | - | | |
$ | 397,692,971 | |
* | Effective
March 14, 2022, the Company has completed the conversion of Kandi New Energy to a wholly-owned subsidiary of Zhejiang Kandi Technologies
and the VIE agreements were terminated. The Company no longer has any VIE as of the date of this report. |
| |
As of December 31, 2021 | |
| |
Parent
including
non-VIE
subsidiaries | | |
VIE | | |
Elimination | | |
Consolidated | |
Cash and cash equivalents | |
$ | 128,862,704 | | |
$ | 360,739 | | |
$ | - | | |
$ | 129,223,443 | |
Total current assets | |
$ | 352,068,155 | | |
$ | 21,002,017 | | |
$ | (30,462,036 | ) | |
$ | 342,608,136 | |
Total non-current assets | |
$ | 181,562,128 | | |
$ | 32,700,203 | | |
$ | (36,710,195 | ) | |
$ | 177,552,136 | |
Total current liabilities | |
$ | 58,240,678 | | |
$ | 36,384,048 | | |
$ | (30,462,036 | ) | |
$ | 64,162,690 | |
Total non-current liabilities | |
$ | 11,971,688 | | |
$ | 825,567 | | |
$ | - | | |
$ | 12,797,255 | |
Total stockholders’ equity | |
$ | 463,417,917 | | |
$ | 16,492,605 | | |
$ | (36,710,195 | ) | |
$ | 443,200,327 | |
Percentage
of VIE’s assets and liabilities compared to consolidated assets and liabilities
| |
As of December 31, 2022 | |
| |
Parent
including
non-VIE
subsidiaries | | |
Consolidated | | |
% of VIE’s
assets and
liabilities in
consolidated
assets and
liabilities | |
Cash and cash equivalents | |
$ | 84,063,717 | | |
$ | 84,063,717 | | |
| - | |
Total current assets | |
$ | 329,322,973 | | |
$ | 329,322,973 | | |
| - | |
Total non-current assets | |
$ | 153,659,303 | | |
$ | 153,659,303 | | |
| - | |
Total current liabilities | |
$ | 81,505,848 | | |
$ | 81,505,848 | | |
| - | |
Total non-current liabilities | |
$ | 3,783,457 | | |
$ | 3,783,457 | | |
| - | |
Total stockholders’ equity | |
$ | 397,692,971 | | |
$ | 397,692,971 | | |
| - | |
* | Effective
March 14, 2022, the Company has completed the conversion of Kandi New Energy to a wholly-owned subsidiary of Zhejiang Kandi Technologies
and the VIE agreements were terminated. The Company no longer has any VIE as of the date of this report. |
| |
As of December 31, 2021 | |
| |
VIE | | |
Consolidated | | |
% of VIE’s assets and liabilities in consolidated assets and liabilities | |
Cash and cash equivalents | |
$ | 360,739 | | |
$ | 129,223,443 | | |
| 0.3 | % |
Total current assets | |
$ | 21,002,017 | | |
$ | 342,608,136 | | |
| 6.1 | % |
Total non-current assets | |
$ | 32,700,203 | | |
$ | 177,552,136 | | |
| 18.4 | % |
Total current liabilities | |
$ | 36,384,048 | | |
$ | 64,162,690 | | |
| 56.7 | % |
Total non-current liabilities | |
$ | 825,567 | | |
$ | 12,797,255 | | |
| 6.5 | % |
Consolidated
Cash Flows Information
| |
For the year ended December 31, 2022 | |
| |
Parent
including
non-VIE
subsidiaries | | |
VIE* | | |
Elimination | | |
Consolidated | |
Net cash provided by operating activities | |
$ | 31,478,911 | | |
$ | - | | |
$ | - | | |
$ | 31,478,911 | |
Net cash used in investing activities | |
$ | (35,031,115 | ) | |
$ | - | | |
$ | - | | |
$ | (35,031,115 | ) |
Net cash used in financing activities | |
$ | (4,333,088 | ) | |
$ | - | | |
$ | - | | |
$ | (4,333,088 | ) |
* | Effective
March 14, 2022, the Company has completed the conversion of Kandi New Energy to a wholly-owned subsidiary of Zhejiang Kandi Technologies
and the VIE agreements were terminated. The Company no longer has any VIE as of the date of this report. |
|
|
For
the year ended December 31, 2021 |
|
|
|
Parent
including non-VIE subsidiaries |
|
|
VIE |
|
|
Elimination |
|
|
Consolidated |
|
Net cash (used in) provided by operating
activities |
|
$ |
(9,412,900 |
) |
|
$ |
9,654,589 |
|
|
$ |
- |
|
|
$ |
241,689 |
|
Net cash provided by (used in) investing activities |
|
$ |
30,230,627 |
|
|
$ |
(22,811,949 |
) |
|
$ |
14,791,226 |
|
|
$ |
22,209,904 |
|
Net cash provided by (used in) financing activities |
|
$ |
2,042,523 |
|
|
$ |
13,496,632 |
|
|
$ |
(14,791,226 |
) |
|
$ |
747,929 |
|
NOTE
7 - NEW ACCOUNTING PRONOUNCEMENTS
Accounting
Pronouncements Adopted
In
October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805) – Accounting for Contract Assets and Contract
Liabilities from Contracts with Customers”, which requires that an acquirer recognize and measure contract assets and contract
liabilities acquired in a business combination in accordance with Topic 606, as if it had originated the contracts. Prior to this ASU,
an acquirer generally recognizes contract assets acquired and contract liabilities assumed that arose from contracts with customers at
fair value on the acquisition date. The ASU is effective for fiscal years beginning after December 15, 2022, with early adoption permitted.
The ASU is to be applied prospectively to business combinations occurring on or after the effective date of the amendment (or if adopted
early as of an interim period, as of the beginning of the fiscal year that includes the interim period of early application). The Company
has adopted this accounting pronouncement from January 1, 2023, and there was no material impact on its consolidated financial statements
from the adoption.
NOTE
8 - CONCENTRATIONS
(a)
Customers
For
the years ended December 31, 2022 and 2021, the Company’s major customers, who accounted for more than 10% of the Company’s
consolidated revenue, were as follows:
| |
Sales | | |
| |
| |
Year Ended | | |
Trade Receivable | |
| |
December 31, | | |
December 31, | | |
December 31, | |
Major Customers | |
2022 | | |
2022 | | |
2021 | |
Customer A | |
| 26 | % | |
| 1 | % | |
| - | |
| |
Sales | | |
| |
| |
Year Ended | | |
Trade Receivable | |
| |
December 31, | | |
December 31, | | |
December 31, | |
Major Customers | |
2021 | | |
2021 | | |
2020 | |
Customer B | |
| 15 | % | |
| 13 | % | |
| 13 | % |
Customer C | |
| 14 | % | |
| 2 | % | |
| 7 | % |
(b)
Suppliers
For
the years ended December 31, 2022 and 2021, the Company’s material suppliers, each of whom accounted for more than 10% of the Company’s
total purchases, were as follows:
| |
Purchases | | |
| |
| |
Year Ended | | |
Accounts Payable | |
| |
December 31, | | |
December 31, | | |
December 31, | |
Major Suppliers | |
2022 | | |
2022 | | |
2021 | |
Zhejiang Kandi Supply Chain Management Co., Ltd. | |
| 22 | % | |
| 32 | % | |
| 11 | % |
| |
Purchases | | |
| |
| |
Year Ended | | |
Accounts Payable | |
| |
December 31, | | |
December 31, | | |
December 31, | |
Major Suppliers | |
2021 | | |
2021 | | |
2020 | |
Zhejiang Kandi Supply Chain Management Co., Ltd. | |
| 50 | % | |
| 11 | % | |
| 9 | % |
NOTE
9 - EARNINGS (LOSS) PER SHARE
The
Company calculates earnings (loss) per share in accordance with ASC 260, Earnings Per Share, which requires a dual presentation of basic
and diluted earnings (loss) per share. Basic earnings (loss) per share are computed using the weighted average number of shares outstanding
during the reporting period. Diluted earnings (loss) per share represents basic earnings (loss) per share adjusted to include the potentially
dilutive effect of outstanding stock options and warrants (using treasury stock method).
Due
to the net loss for the year ended December 31, 2022, approximately 5,900,000 options and 8,131,332 warrants were excluded
from the calculation of diluted loss per share, for the year ended December 31, 2022. Due to the average market price of the common stock
during the period below the exercise price of the options, approximately 900,000 options and 8,131,332 warrants were excluded
from the calculation of diluted earnings per share, for the year ended December 31, 2021.
NOTE
10 - ACCOUNTS RECEIVABLE, NET
Accounts
receivable are summarized as follows:
| |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Accounts receivable | |
$ | 40,436,262 | | |
$ | 55,949,582 | |
Less: allowance for doubtful accounts | |
| (2,285,386 | ) | |
| (3,053,277 | ) |
Accounts receivable, net | |
$ | 38,150,876 | | |
$ | 52,896,305 | |
The
following table sets forth the movement of provision for doubtful accounts:
| |
Allowance for Doubtful Accounts | |
BALANCE AT DECEMBER 31, 2020 | |
$ | 110,269 | |
Provision | |
| 1,147,679 | |
Addition of allowance resulted from acquisition of Jiangxi Huiyi | |
| 1,763,231 | |
Exchange rate difference | |
| 32,098 | |
BALANCE AT DECEMBER 31, 2021 | |
$ | 3,053,277 | |
Provision | |
| 456,974 | |
Recovery | |
| (999,775 | ) |
Exchange rate difference | |
| (225,090 | ) |
BALANCE AT DECEMBER 31, 2022 | |
$ | 2,285,386 | |
NOTE
11 - INVENTORIES
Inventories
are summarized as follows:
| |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Raw material | |
$ | 6,551,450 | | |
$ | 9,291,441 | |
Work-in-progress | |
| 4,114,550 | | |
| 9,116,194 | |
Finished goods * | |
| 29,809,366 | | |
| 14,764,338 | |
Inventories | |
$ | 40,475,366 | | |
$ | 33,171,973 | |
* | As
of December 31, 2022, approximately $13.6 million of inventory of off-roads and EVs held by SC Autosports were pledged as collateral
for the $700,000 short-term loan. |
NOTE
12 - PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment as of December 31, 2022 and 2021 consisted of the following:
| |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
At cost: | |
| | |
| |
Buildings | |
$ | 49,239,626 | | |
$ | 52,481,460 | |
Machinery and equipment | |
| 77,845,979 | | |
| 81,994,596 | |
Office equipment | |
| 1,528,135 | | |
| 1,497,461 | |
Motor vehicles and other transport equipment | |
| 1,810,825 | | |
| 1,068,616 | |
Molds and others | |
| 10,983,573 | | |
| 11,852,568 | |
| |
| 141,408,138 | | |
| 148,894,701 | |
Less : Accumulated depreciation | |
| (44,239,385 | ) | |
| (37,317,290 | ) |
Property, plant and equipment, net | |
$ | 97,168,753 | | |
$ | 111,577,411 | |
The
Company’s Jinhua factory completed the relocation to a new industrial park in April 2021. The new location covers an area of more
than 57,000 square meters and a construction area of more than 98,000 square meters. The Company’s off-road vehicles, EV battery
packs, electric scooters battery packs, smart battery swap system and some EV parts are manufactured in the Jinhua factory. The Company’s
Jinhua factory owns the above production facilities. The Company’s EV products, EV parts and electrical off-road vehicles,
including Neighborhood EVs (“NEVs”), pure electric utility vehicles (“UTV”), pure electric golf cart and EV parts
are manufactured in the Hainan factory. The Company’s Hainan factory expects to have production capacity with an annual output
(three shifts) of 100,000 units of various models of EV products, EV parts and electrical off-road vehicles and owns the above facilities.
Currently, the project completion acceptance of Hainan factory is being processed. Before the completion acceptance is finished, the
Hainan factory is manufacturing the above products in the form of trial production.
Depreciation
expenses for the years ended December 31, 2022 and 2021 were $10,165,138 and $8,650,755, respectively.
NOTE
13 - INTANGIBLE ASSETS
Intangible
assets include acquired other intangibles of trade name, customer relations, patent and technology recorded at estimated fair values
in accordance with purchase accounting guidelines for acquisitions.
The
following table provides the gross carrying value and accumulated amortization for each major class of our intangible assets, other than
goodwill:
| |
Remaining | |
December 31, | | |
December 31, | |
| |
useful
life | |
2022 | | |
2021 | |
Gross
carrying amount: | |
| |
| | | |
| | |
Patent | |
2.5-4.17 years | |
$ | 4,938,765 | | |
| 5,000,944 | |
Technology | |
4-6 years | |
| 10,003,915 | | |
| 10,851,104 | |
| |
| |
| 14,942,680 | | |
| 15,852,048 | |
Less
: Accumulated amortization | |
| |
| | | |
| | |
Patent | |
| |
$ | (2,744,024 | ) | |
| (2,359,212 | ) |
Technology | |
| |
| (1,573,079 | ) | |
| (243,757 | ) |
| |
| |
| (4,317,103 | ) | |
| (2,602,969 | ) |
Less
: impairment for intangible assets | |
| |
| (2,631,465 | ) | |
| - | |
Intangible
assets, net | |
| |
$ | 7,994,112 | | |
$ | 13,249,079 | |
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 $1,965,490 and $906,618 for the year ended December
31, 2022 and 2021, respectively.
Amortization
expenses for the next five years and thereafter are as follows:
Years ended December 31, | |
| | |
2023 | |
$ | 1,625,884 | |
2024 | |
| 1,625,884 | |
2025 | |
| 1,562,016 | |
2026 | |
| 1,344,257 | |
2027 | |
| 990,825 | |
Thereafter | |
| 845,246 | |
Total | |
$ | 7,994,112 | |
NOTE
14 - LAND USE RIGHTS
The
Company’s land use rights consist of the following:
| |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Cost of land use rights | |
$ | 3,809,211 | | |
$ | 4,131,797 | |
Less: Accumulated amortization | |
| (899,261 | ) | |
| (881,461 | ) |
Land use rights, net | |
$ | 2,909,950 | | |
$ | 3,250,336 | |
The
amortization expense for the years ended December 31, 2022 and 2021 were $88,794 and $92,628, respectively.
Amortization
expense for the next five years and thereafter is as follows:
Years ended December 31, | |
| | |
2023 | |
$ | 88,794 | |
2024 | |
| 88,794 | |
2025 | |
| 88,794 | |
2026 | |
| 88,794 | |
2027 | |
| 88,794 | |
Thereafter | |
| 2,465,980 | |
Total | |
$ | 2,909,950 | |
NOTE
15 - OTHER LONG-TERM ASSETS
| |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Prepayments for land use right (i) | |
$ | 3,917,226 | | |
| 4,341,496 | |
Right - of - use asset (ii) | |
| 6,383,824 | | |
| 6,308,374 | |
Others | |
| 329,861 | | |
| 342,139 | |
Total other long-term asset | |
$ | 10,630,911 | | |
$ | 10,992,009 | |
(i) | As of December 31, 2022 and December 31, 2021, the Company’s other long term assets included net value of prepayments for land use right of Hainan facility of $3,917,226 and $4,341,496, respectively. As of December 31, 2022, the land use right of Hainan was not recognized since the land certificate is still in process. The amortization expense for the year ended December 31, 2022 and 2021 were $87,453 and $91,229, respectively. |
(ii) | As of December 31, 2022 and December 31, 2021, the Company’s operating lease right-of-use assets in other long term assets included net value of land use right of Jinhua facility acquired in October 2020 and Jiangxi facility acquired in October 2021 of $5,697,720 and $6,308,374, respectively, as well as the amount of $686,104 related to the lease of Hangzhou office starting January 1, 2022. The amortization expense of land use right of Jinhua facility and Jiangxi facility for the year ended December 31, 2022 and 2021 were $121,099 and $79,557, respectively. |
NOTE
16 - TAXES
|
(a) |
Corporation Income Tax |
Pursuant
to the tax laws and regulations of the PRC, the Company’s applicable corporate income tax (“CIT”) rate is 25%. However,
Zhejiang Kandi Technologies, Kandi Smart Battery Swap, Jiangxi Huiyi and Kandi Hainan qualify as High and New Technology Enterprise (“HNTE”)
companies in the PRC, and are entitled to a reduced income tax rate of 15% for the years presented. A HNTE Certificate is valid for three
years. An entity may re-apply for an HNTE certificate when the prior certificate expires. Historically, Zhejiang Kandi Technologies,
Kandi Smart Battery Swap, Jiangxi Huiyi have successfully re-applied for such certificates when their prior certificates expired. Kandi
Hainan has been qualified as a HNTE since 2020. Therefore, it will apply for its first renewal when eligible Additionally, Hainan Kandi
Holding also has an income tax rate of 15% due to its local preferred tax rate in Hainan Free Trade Port. The applicable CIT rate of
each of the Company’s other subsidiaries, Kandi New Energy, Yongkang Scrou, China Battery Exchange and its subsidiaries is 25%.
The Company’s provision or benefit from
income taxes for interim periods is determined using an estimate of the Company’s annual effective tax rate, adjusted for discrete
items, if any, that are taken into account in the relevant period. Each quarter the Company updates its estimate of the annual effective
tax rate, and if its estimated tax rate changes, management makes a cumulative adjustment. For 2022, the Company’s effective tax
rate is favorably affected by a super-deduction for qualified research and development costs and adversely affected by non-deductible
expenses such as stock rewards for non-US employees, and part of entertainment expenses. The Company records valuation allowances against
the deferred tax assets associated with losses and other timing differences for which we may not realize a related tax benefit. After
combining research and development tax credits of 25% on certain qualified research and development expenses, the Company’s effective
tax rate for December 31, 2022 and 2021 was a tax benefit of 3.65% on a reported loss before taxes of approximately $13.3 million and
a tax expense of 21.73% on a reported income before taxes of approximately $29.2 million, respectively. The effective tax rates for each
of the periods mentioned above are disclosed in the summary table of income tax expenses for December 31, 2022 and 2021.
Under
ASC 740 guidance relating to uncertain tax positions, which addresses the determination of whether tax benefits claimed or expected to
be claimed on a tax return should be recorded in the financial statements, the Company may recognize the tax benefit from an uncertain
tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based
on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured
based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740 also
provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires
increased disclosures. As of December 31, 2022, the Company did not have any liability for unrecognized tax benefits. The Company files
income tax returns with the U.S. Internal Revenue Services (“IRS”) and those states where the Company has operations. The
Company is subject to U.S. federal or state income tax examinations by the IRS and relevant state tax authorities. During the periods
open to examination, the Company has net operating loss carry forwards (“NOLs”) for U.S. federal and state tax purposes that
have attributes from closed periods. Since these NOLs may be utilized in future periods, they remain subject to examination. The Company
also files certain tax returns in the PRC. As of December 31, 2022, the Company was not aware of any pending income tax examinations
by U.S. or PRC tax authorities. The Company records interest and penalties on uncertain tax provisions as income tax expense. As of December
31, 2022, the Company has no accrued interest or penalties related to uncertain tax positions.
Income
tax expenses for the year ended December 31, 2022 and 2021 are summarized as follows:
| |
For Year Ended | |
| |
December 31, | |
| |
2022 | | |
2021 | |
Current: | |
| | |
| |
Provision for CIT | |
$ | (26,465 | ) | |
$ | 2,273,175 | |
Provision for Federal Income Tax | |
| | | |
| | |
Deferred: | |
| | | |
| | |
Provision for CIT | |
| (461,045 | ) | |
| 4,073,315 | |
| |
| | | |
| | |
Income tax (benefit) expense | |
$ | (487,510 | ) | |
$ | 6,346,490 | |
The
reconciliation of taxes at the PRC statutory rate (25% in 2022 and 2021) to our provision for income taxes for
the years ended December 31, 2022 and 2021 was as follows:
| |
For Year Ended | |
| |
December 31, | |
| |
2022 | | |
2021 | |
Expected taxation at PRC statutory tax rate | |
$ | (3,334,633 | ) | |
$ | 7,302,572 | |
Gain or loss difference due to outside basis in equity investments | |
| - | | |
| 106,289 | |
Effect of differing tax rates in different jurisdictions | |
| (81,257 | ) | |
| 66,108 | |
Effect of PRC preferential tax rates | |
| 790,053 | | |
| (704,361 | ) |
Non-taxable income | |
| (1,984,855 | ) | |
| (1,976,661 | ) |
Non-deductible expenses | |
| 2,315,146 | | |
| 1,352,085 | |
Research and development super-deduction | |
| (1,672,428 | ) | |
| (2,006,682 | ) |
(Over) Under-accrued EIT for previous years | |
| (538,545 | ) | |
| 323,427 | |
Addition to valuation allowance | |
| 2,800,862 | | |
| 8,499,993 | |
Divided received deduction | |
| - | | |
| (3,023,303 | ) |
Local tax adjustment | |
| - | | |
| 1,734,997 | |
Foreign tax credit | |
| (84,045 | ) | |
| - | |
Other (including intercompany transaction ) | |
| 1,302,192 | | |
| (5,327,974 | ) |
Income tax (benefit) expense | |
$ | (487,510 | ) | |
$ | 6,346,490 | |
The
tax effects of temporary differences that give rise to the Company’s net deferred tax assets and liabilities as of December 31,
2022 and December 31, 2021 are summarized as follows:
| |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Deferred tax assets: | |
| | | |
| | |
Accruals and reserves | |
$ | 6,759,952 | | |
$ | 7,471,881 | |
Loss carried forward | |
| 8,547,725 | | |
| 7,195,729 | |
Total deferred tax assets | |
| 15,307,677 | | |
| 14,667,610 | |
Deferred tax liabilities: | |
| | | |
| | |
Expense | |
| (212,143 | ) | |
| (411,195 | ) |
Tangible | |
| (207,905 | ) | |
| - | |
Intangible | |
| (1,146,339 | ) | |
| (1,981,862 | ) |
Revenue | |
| (426,504 | ) | |
| (462,623 | ) |
Total deferred tax liability | |
| (1,992,891 | ) | |
| (2,855,680 | ) |
Net deferred tax assets (liabilities) | |
$ | 13,314,786 | | |
$ | 11,811,930 | |
less:valuation allowance | |
| (13,260,631 | ) | |
| (12,052,774 | ) |
Net deferred tax assets (liabilities), net of valuation allowance | |
$ | 54,155 | | |
$ | (240,844 | ) |
The
tax effected aggregate Net Operating Loss (“NOL”) was $8.5 million and $6.2 million in tax year 2022 and 2021, which were
deriving from entities in the PRC, Hong Kong and U.S. Some of the NOLs will start to expire from 2026 if they are not used. The cumulative
NOL in the PRC can be carried forward for five years in general, and ten years for entities qualify High and New Technology Enterprise
(“HNTE”) treatment, which is $0.6 million and $7.9 million respectfully, to offset future net profits for income tax purposes.
The
Company recorded valuation allowances of $13.3 million as of December 31, 2022, against the deferred tax assets associated with losses
and other timing differences for which we may not realize a related tax benefit. Tax benefit of operating loss is evaluated on an ongoing
basis including a review of historical and projected future operating results, the eligible carry forward period, and available tax planning
strategies.
Income
(loss) before income taxes from PRC and non-PRC sources for the year ended December 31,2022 and 2021 are summarized as follows:
| |
For Year Ended | |
| |
December 31, | |
| |
2022 | | |
2021 | |
Income(loss) before income taxes consists of: | |
| | |
| |
PRC | |
$ | (10,448,802 | ) | |
$ | 30,719,006 | |
Non-PRC | |
| (2,889,732 | ) | |
| (1,508,718 | ) |
Total | |
$ | (13,338,534 | ) | |
$ | 29,210,288 | |
Net
change in the valuation allowance of deferred tax assets are summarized as follows:
Net change of valuation allowance of Deferred tax assets | |
| |
Balance at December 31,2021 | |
$ | 12,052,774 | |
Additions-change to tax expense | |
| 2,800,862 | |
Prior year true up | |
| (655,617 | ) |
Exchange rate difference | |
| (937,388 | ) |
Balance at December 31,2022 | |
$ | 13,260,631 | |
For
the year ended December 31, 2022 and 2021, the PRC CIT rate was 25%. Certain subsidiaries of the Company are entitled to tax exemptions
(tax holidays) for the year ended December 31, 2022 and 2021.
The
combined effects of income tax expense exemptions and reductions available to the Company for the year ended December 31, 2022 and 2021
are as follows:
| |
Year Ended | |
| |
December 31, | |
| |
2022 | | |
2021 | |
Tax benefit (holiday) credit | |
$ | 1,202,615 | | |
$ | 2,226,944 | |
Basic net income per share effect | |
$ | 0.02 | | |
$ | 0.03 | |
(c) | Inflation
Reduction Act |
On
August 16, 2022, the Inflation Reduction Act of 2022 (the “IR Act”) was signed into US federal law. The IR
Act provides for, among other things, a new U.S. federal 1% excise tax on certain repurchases (including redemptions) of stock or
shares by publicly traded domestic (i.e., U.S.) corporations and certain domestic subsidiaries of publicly traded foreign corporations.
The excise tax is imposed on the repurchasing corporation itself, not its shareholders from which shares are repurchased. The amount
of the excise tax is generally 1% of the fair market value of the shares repurchased at the time of the repurchase. However, for purposes
of calculating the excise tax, repurchasing corporations are permitted to net the fair market value of certain new stock or share issuances
against the fair market value of stock or share repurchases during the same taxable year. In addition, certain exceptions apply to the
excise tax. Treasury has been given authority to provide regulations and other guidance to carry out, and prevent the abuse or avoidance
of the excise tax. The IR Act applies only to repurchases that occur after December 31, 2022. We currently do not anticipate this
provision of the IR Act to have any material impact on our financial position, results of operations or cash flows. The real impact of
this provision will be dependent on the extent of share repurchases made in future periods.
NOTE
17 – LEASES AND RIGHT-OF-USE-ASSETS
The
Company previously renewed its corporate office leases for SC Autosports, with a term of 15 months from January 31, 2020 to April 30,
2021. The monthly lease payment is $11,000 from February 2020 to April 2020 and $12,000 from May 2020 to April 2021. The Company recorded
operating lease assets and operating lease liabilities on January 31, 2020, with a remaining lease term of 15 months and discount rate
of 4.25%. SC Autosports bought its own corporate office after this lease term expired in April 2021.
The
Company also elected to apply the short-term lease exception for lease arrangements with a lease term of 12 months or less at commencement.
Lease terms used to compute the present value of lease payments do not include any option to extend, renew or terminate the lease that
the Company is not able to reasonably certain to exercise upon the lease inception. Accordingly, operating lease right-of-use assets
and liabilities do not include leases with a lease term of 12 months or less.
During
October 2020, land use right of gross value of $3.5 million was acquired from the government as the new site of Jinhua Facility’s
relocation as per the Repurchase Agreement. On October 31, 2021, the Company acquired $2.8 million of land use rights through the acquisition
of Jiangxi Huiyi. This land use rights was wholly prepaid.
The
Company has entered into a lease for Hangzhou office, with a term of 48 months from January 1, 2022 to December 31, 2025. The Company
recorded operating lease assets and operating lease liabilities on January 1, 2022, with a remaining lease term of 48 months and discount
rate of 3.70%. The annual lease payment for 2022 was prepaid as of January 1, 2022. The Company has prepaid the first year of lease and
deposit amount of $253,337.
As
of December 31, 2022, the Company’s operating lease right-of-use assets (grouped in other long-term assets on the balance sheet)
was $6,383,824 and lease liability was $673,493 (grouped in other current liabilities and other long-term liabilities on the balance
sheet). For the years ended December 31, 2022 and 2021, the Company’s operating lease expense were $355,541 and $79,557, respectively.
Supplemental
information related to operating leases was as follows:
| |
Year Ended | |
| |
December 31, | |
| |
2022 | | |
2021 | |
Cash payments for operating leases | |
$ | 355,541 | | |
$ | 79,557 | |
Maturities
of lease liabilities as of December 31, 2022 were as follow:
Maturity of Lease Liabilities: | |
Lease payable | |
Years ended December 31, | |
| | |
2023 | |
$ | 216,392 | |
2024 | |
| 224,399 | |
2025 | |
| 232,702 | |
NOTE
18 - CONTINGENT CONSIDERATION LIABILITY
On
January 3, 2018, the Company completed the acquisition of 100% of the equity of Jinhua An Kao, currently known as Kandi Smart Battery
Swap Co., Ltd. (“Kandi Smart Battery Swap”). The Company paid approximately RMB 25.93 million (approximately $4 million)
at the closing of the transaction using cash on hand and issued a total of 2,959,837 shares of restrictive stock or 6.2% of the Company’s
total outstanding shares of the common stock immediately prior to the closing of the acquisition valued at approximately $20.7 million
to the former shareholders of Kandi Smart Battery Swap and his designees (the “KSBS Shareholders”), and may be required to
pay future consideration of up to an additional 2,959,837 shares of common stock, which are being held in escrow and to be released contingent
upon the achievement of certain net income-based milestones in the next three years. Any escrowed shares that are not released from escrow
to the KSBS Shareholders as a result of the failure to achieve the milestones will be forfeited and returned to the Company for cancellation.
While the escrowed shares are held in escrow, the Company will retain all voting rights with respect to such shares. For the year ended
December 31, 2018, Kandi Smart Battery Swap achieved its first year net profit target. Accordingly, the KSBS Shareholders received 739,959
shares of Kandi’s restrictive common stock or 12.5% of the total equity consideration (i.e., 5,919,674 total shares) as part of
the purchase price. For the year ended December 31, 2019, Kandi Smart Battery Swap achieved its second year net profit target. Accordingly,
the KSBS Shareholders received 986,810 shares of Kandi’s restrictive common stock or 16.67% of the total equity consideration (i.e.,
5,919,674 total shares) as part of the purchase price. All the escrowed shares have been registered in the Company’s registration
statement on Form S-3 declared effective by the SEC on April 5, 2019.
As
the outbreak of COVID-19 in 2020 affected Kandi Smart Battery Swap’s operation and business, on July 7, 2020, the Company and the
KSBS Shareholders made the following supplements to Condition III of the original Supplementary Agreement: The KSBS Shareholders have
the right to receive an aggregate of 20.83% of the total equity consideration (i.e., 5,919,674 total shares), provided that Kandi Smart
Battery Swap realizes a net profit of RMB50 million (approximately $8 million) or more for the period from January 1, 2020 to June 30,
2021 (as opposed to be the originally stated “December 31, 2020”), and such profit is audited or reviewed and Kandi Smart
Battery Swap gets annual or quarterly financial report issued under US GAAP. For the period from January 1, 2020 to June 30, 2021, Kandi
Smart Battery Swap achieved its net profit target. Accordingly, the KSBS Shareholders received 1,233,068 shares of Kandi’s restrictive
common stock or 20.83% of the total equity consideration (i.e., 5,919,674 total shares) as part of the purchase price. All the escrowed
shares have been included in the Company’s registration statement on Form S-3 declared effective by the SEC on April 5, 2019.
On
October 31, 2021, the Company completed the acquisition of 100% of the equity of Jiangxi Huiyi. The Company paid approximately RMB 50
million (approximately $7.9 million) at the closing of the transaction using cash on hand and may be required to pay future consideration
of up to an additional 2,576,310 shares of common stock, or the total make good shares, upon the achievement of certain net income-based
milestones in the next three years. Due to the latest COVID-19 outbreak and extended lockdown in some areas in China, in June 2022, the
Company agreed with the original shareholders of Jiangxi Huiyi (the “Transferors”) to revise the conditions of the annual
profit target and extension of evaluation period for the first year. Pursuant to the supplementary agreement, the Transferors have the
right to obtain 858,770 KNDI shares in each of the below-mentioned periods, provided that Jiangxi Huiyi achieves a net income of 1) RMB
8 million yuan or more during the period from July 1, 2021 to September 30, 2022 (“Period I”); 2) RMB 15 million yuan or
more during the period from October 1, 2022 to September 30, 2023 (“Period II”); 3) RMB 15 million yuan or more during the
period from October 1, 2023 to September 30, 2024 (“Period III”). If the net income of Jiangxi Huiyi fails to reach the respective
target number in any of the three periods, the shares that the Transferors are entitled to obtain in that period will be adjusted accordingly:
1) if the difference between the net income in each Period and its Target Number is less than or equivalent to 20% of its Target Number
(RMB 8 Million in Period I or RMB 15 Million in Period II or Period III), the transferee or KNDI has right to directly subtract 171,754
KNDI shares from the total make good shares, and the Transferor are entitled to obtain 687,016 KNDI shares; 2) if the difference between
the net income in each Period and its Target Number (RMB 8 Million in Period I or RMB 15 Million in Period II or Period III) is more
than 20% of its Target Number but less than 40% of its Target Number, the transferee or KNDI has the right to directly subtract 343,508
KNDI shares from the total make good shares, and the Transferors have the right to obtain 515,262 KNDI shares; 3) if the difference between
the net income in each Period and its Target Number (RMB 8 Million in Period I or RMB 15 Million in Period II or Period III) is greater
than or equal to 40% of its Target Number, the transferee of KNDI has the right to directly subtract 858,770 KNDI shares from the total
make good shares, and the Transferors will not have the right to obtain any shares in such year. For the period from July 1, 2021 to
September 30, 2022, Jiangxi Huiyi achieved its net profit target. Accordingly, the Transferors will receive 858,770 shares of Kandi’s
restrictive common stock as part of the purchase price.
The
Company recorded contingent consideration liability of the estimated fair value of the contingent consideration the Company currently
expects to pay to the KSBS Shareholders and Jiangxi Huiyi’s former members upon the achievement of certain milestones. The fair
value of the contingent consideration liability associated with remaining shares of restrictive common stock was estimated by using the
Monte Carlo simulation method, which took into account all possible scenarios. This fair value measurement is classified as Level 3 within
the fair value hierarchy prescribed by ASC Topic 820, Fair Value Measurement and Disclosures. In accordance with ASC Topic 805, Business
Combinations, the Company will re-measure this liability each reporting period and record changes in the fair value through a separate
line item within the Company’s consolidated statements of income.
As
of December 31, 2022 and December 31, 2021, the Company’s contingent consideration liability to former members of Jiangxi
Huiyi was $1,803,000 and $7,812,000, respectively.
NOTE
19 - COMMON SHARES
Purchases
of Equity Securities by the Issuer and Affiliated Purchasers
On
December 1, 2021, the board of directors had authorized the repurchase of up to $20 million worth of the Company’s common stock
in open market transactions or in privately negotiated transactions. As of December 31, 2022, the Company had repurchased a total of
3,488,559 common shares at an average stock price of $2.81 per share under the repurchase plan.
NOTE
20 - STOCK OPTIONS
On
September 7, 2022, the Compensation Committee of the Board of Directors of the Company approved the grant of stock options to purchase
5,000,000 shares of the Company’s common stock, at an exercise price of $2.07 per share, to the Company’s senior employees.
The stock options will vest ratably over three years on October 7, 2023, October 7, 2024 and October 7, 2025, respectively, and expire
on the tenth anniversary of the grant date. The Company valued the stock options at $6,704,829 and is amortizing the stock compensation
expense using the graded vesting method over the service period from September 7, 2022, through October 7, 2025. The value of the stock
options was estimated using the Binomial Tree Model with an expected volatility of 79.83%, an expected life of 10 years, a risk-free
interest rate of 3.27% and an expected dividend yield of 0.00%. There were $1,231,566 in stock compensation expenses associated with
stock options recorded for the year ended December 31, 2022.
The
following is a summary of the stock option activities of the Company:
| |
Number
of Shares | | |
Weighted
Average Exercise
Price | |
Outstanding as of December 31, 2020 | |
| 900,000 | | |
$ | 9.72 | |
Granted | |
| - | | |
| - | |
Exercised | |
| - | | |
| - | |
Cancelled | |
| - | | |
| - | |
Forfeited | |
| - | | |
| - | |
Outstanding as of December 31, 2021 | |
| 900,000 | | |
$ | 9.72 | |
Granted | |
| 5,000,000 | | |
| 2.07 | |
Exercised | |
| - | | |
| - | |
Cancelled | |
| - | | |
| - | |
Forfeited | |
| - | | |
| - | |
Outstanding as of December 31, 2022 | |
| 5,900,000 | | |
$ | 3.24 | |
The fair value of each of the 900,000 options issued to the employees
and directors on May 29, 2015 is $8.16 per share option. The fair value of each of the 5,000,000 options issued to the employees on September
7, 2022 is $1.34 per share.
NOTE
21 - STOCK AWARD
In
connection with the appointment of Mr. Henry Yu as a member of the Board of Directors (the “Board”), the Board authorized
the Company to compensate Mr. Henry Yu with 5,000 shares of Company’s restricted common stock every six months as compensation,
beginning in July 2011.
As
compensation for Mr. Jerry Lewin’s services as a member of the Board, the Board authorized the Company to compensate Mr. Jerry
Lewin with 5,000 shares of Company’s restricted common stock every six months, beginning in August 2011.
As
compensation for Ms. Kewa Luo’s services as the Company’s investor relation officer, the Board authorized the Company to
compensate Ms. Kewa Luo with 5,000 shares of the Company’s common stock every six months, beginning in September 2013.
On
May 15, 2020, the Board appointed Mr. Jehn Ming Lim as the Chief Financial Officer. Mr. Lim was entitled to receive 6,000 shares
of the common stock annually, which shall be issuable evenly on each six-month anniversary hereof.
The
fair value of stock awards with service condition is determined based on the closing price of the common stock on the date the shares
are granted. The compensation costs for awards of common stock are recognized over the requisite service period.
On
December 30, 2013, the Board approved a proposal (as submitted by the Compensation Committee) of an award (the “Board’s Pre-Approved
Award Grant Sub-Plan under the 2008 Plan”) for certain executives and other key employees. The fair value of each award granted
under the 2008 Plan is determined based on the closing price of the Company’s stock on the date of grant of such award. On September
26, 2016, the Board approved to terminate the previous Board’s Pre-Approved Award Grant Sub-Plan under the 2008 Plan and adopted
a new plan to grant the total number of shares of common stock of the stock award for selected executives and key employees 250,000 shares
of common stock for each fiscal year. On April 18, 2018, the Company granted 238,600 shares of common stock to certain management
members and employees as compensation for their past services under the 2008 Plan. On April 30, 2019, the Company granted 238,600 shares
of common stock to certain management members and employees as compensation for their past services under the 2008 Plan. On May 9, 2020,
the Company granted 238,600 shares of common stock to certain management members and employees as compensation for their past
services under the 2008 Plan. On April 30, 2021, the Company granted 238,600 shares of common stock to certain management members
and employees as compensation for their past services under the 2008 Plan. On May 10, 2022, the Company granted 238,600 shares
of common stock to certain management members and employees as compensation for their past services under the 2008 Plan.
For
the years ended December 31, 2022 and 2021, the Company recognized $694,810 and $1,484,576 of employee stock award expenses for stock
compensation and annual incentive award under the 2008 Plan paid to Board members, management and consultants under General and Administrative
Expenses, respectively.
NOTE
22 - EQUITY METHOD INVESTMENT IN THE AFFILIATE COMPANY
The
Company’s consolidated net income (loss) includes the Company’s proportionate share of the net income or loss of the Company’s
equity method investees. When the Company records its proportionate share of net income in such investees, it increases equity income
(loss) – net in the Company’s consolidated statements of income (loss) and the Company’s carrying value in that investment.
Conversely, when the Company records its proportionate share of net loss in such investees, it decreases equity income (loss) –
net in the Company’s consolidated statements of income (loss) and the Company’s carrying value in that investment. All intra-entity
profits and losses with the Company’s equity method investees have been eliminated.
On
February 18, 2021, Zhejiang Kandi Technologies signed an Equity Transfer Agreement with Geely to transfer all of its remaining 22%
equity interests in the Affiliate Company to Geely for a total consideration of RMB 308 million (approximately $48 million).
Zhejiang Provincial Administration for Market Regulation recorded the update of the ownership of Fengsheng on March 9, 2021. On March
16, 2021, the Company received the first half of the equity transfer payment of RMB 154,000,000 (approximately $24 million).
On September 10, 2021, the Company received the second half of the equity transfer payment of RMB 154,000,000 (approximately
$24 million).
The
Company accounted for its investments in the Affiliate Company under the equity method of accounting. As the equity transfer was completed
on March 9, 2021, the Company recorded 22% of the Affiliate Company’s loss for the period until completion of equity
transfer during the first quarter of 2021.
The
Company’s equity method investments in the Affiliate Company for the years ended December 31, 2022 and 2021 are as follows:
| |
Year Ended | |
| |
December 31, | |
| |
2022 | | |
2021 | |
Investment in the Former Affiliate Company, beginning of the period, | |
$ | - | | |
$ | 28,892,638 | |
Investment decreased in 2021 | |
| - | | |
| (48,436,812 | ) |
Gain from equity sale | |
| - | | |
| 17,788,351 | |
Reversal of prior year reduction in the equity of the Former Affiliate Company | |
| - | | |
| 3,363,015 | |
Company’s share in net (loss) income of Former Affiliate based on 22% ownership for period from January 1, 2021 to March 9, 2021 | |
| - | | |
| (2,692,225 | ) |
Non-controlling interest | |
| - | | |
| 99,891 | |
Prior year unrealized profit realized | |
| - | | |
| - | |
Subtotal | |
| - | | |
| (2,592,334 | ) |
Exchange difference | |
| - | | |
| 985,142 | |
Investment in Former Affiliate Company, end of the period | |
$ | - | | |
$ | - | |
NOTE
23 - COMMITMENTS AND CONTINGENCIES
Guarantees
and pledged collateral for bank loans to other parties:
(1)
Guarantees for bank loans
On
March 15, 2013, the Company entered into a guarantee contract to serve as the guarantor of Nanlong Group Co., Ltd.
(“NGCL”) for NGCL’s $2,899,685 (RMB 20 million) loan from Shanghai Pudong Development Bank Jinhua Branch, for a
term from March 15, 2013 to March 15, 2016. NGCL is not related to the Company. Under this guarantee contract, the Company agreed to
assume joint liability as the loan guarantor. In April 2017, Shanghai Pudong Development Bank filed a lawsuit against NGCL, the
Company and ten other parties in Zhejiang Province People’s Court in Yongkang City, alleging NGCL defaulted on a bank loan
borrowed from Shanghai Pudong Development Bank for a principal amount of approximately $2.9 million and demanded that the guarantor
bear the liability for compensation. On May 27, 2017, a judicial mediation took place in Yongkang City and parties reached a
settlement in mediation, in which the plaintiff agreed NGCL would repay the loan principal and interest in installments. The
settlement was executed starting from May 2019. If there were an event of default that NGCL could not repay the loan, the Company
may be obligated to bear the liability of defaulted amount. According to the current financial situation of NGCL, the Company does
not expect it will incur any losses in connection with this matter.
(2)
Pledged collateral for bank loans for which the parties other than the Company are the borrowers.
As
of December 31, 2022 and December 31, 2021, none of the Company’s land use rights or plants and equipment were pledged as collateral
securing bank loans for which the parties other than the Company are the borrowers.
Litigation
Beginning
in March 2017, putative shareholder class actions were filed against Kandi Technologies Group, Inc. (“Kandi”) and certain
of its current and former directors and officers in the United States District Court for the Central District of California and the United
States District Court for the Southern District of New York. The complaints generally alleged violations of the federal securities laws
based on Kandi’s disclosure in March 2017 that its financial statements for the years 2014, 2015 and the first three quarters of
2016 would need to be restated, and sought damages on behalf of putative classes of shareholders who purchased or acquired Kandi’s
securities prior to March 13, 2017. Kandi moved to dismiss the remaining cases, all of which were pending in the New York federal court,
that motion was granted in September 2019, and the time to appeal has run. In June 2020, a similar but separate putative securities class
action was filed against Kandi and certain of its current and former directors and officers in California federal court. This action
was transferred to the New York federal court in September 2020, Kandi moved to dismiss in March 2021, and that motion was granted in
October 2021. The plaintiff in this case subsequently filed an amended complaint, Kandi moved to dismiss that complaint in January 2022,
and the motion was granted in part and denied in part in September 2022. Discovery is ongoing as to the remaining claims and defendants.
Beginning
in May 2017, purported shareholder derivative actions based on the same underlying events described above were filed against certain
current and former directors of Kandi in the United States District Court for the Southern District of New York. The New York federal
court confirmed the voluntary dismissal of these actions in April 2019.
In
October 2017, a shareholder filed a books and records action against the Company in the Delaware Court of Chancery pursuant to 8 Del.
C. Section 220 seeking the production of certain documents generally relating to the same underlying items described above as well as
attorney’s fees (the “Section 220 Litigation”). On September 28, 2018, the parties, through their respective counsel,
agreed to dismiss the Section 220 Litigation with prejudice and with each party bearing its own attorney’s fees, costs, and expenses,
thereby concluding the action. In February 2019, this same shareholder commenced a derivative action against certain current and former
directors of Kandi in the Delaware Court of Chancery. A motion to dismiss this derivative action was filed in May 2019 and that motion
was denied on April 27, 2020. Discovery is ongoing.
Separately,
in connection with allegations of misconduct identified in pre-suit demands made by putative shareholders of Kandi, Kandi formed a Special
Litigation Committee (“SLC”) and retained a Delaware law firm as independent counsel to the SLC to aid in the SLC’s
investigation of, and to ultimately report on, the allegations of misconduct set forth in the pre-suit demands. The SLC recommended to
Kandi’s board of directors in June 2020 that the SLC be dissolved in light of the ongoing derivative action pending in the Delaware
Court of Chancery, and this recommendation was adopted by the board in August 2020.
In
December 2020, a putative securities class action was filed against Kandi and certain of its current officers in the United States District
Court for the Eastern District of New York. The complaint generally alleges violations of the federal securities laws based on claims
made in a report issued by Hindenburg Research in November 2020, and seeks damages on behalf of a putative class of shareholders who
purchased or acquired Kandi’s securities prior to March 15, 2019. This action remains pending.
While
the Company believes that the claims in these litigations are without merit and will defend itself vigorously, the Company is unable
to estimate the possible loss, if any, associated with these litigations. The ultimate outcome of any litigation is uncertain and the
outcome of these matters, whether favorable or unfavorable, could have a negative impact on the Company’s financial condition or
results of operations due to defense costs, diversion of management resources and other factors. Defending litigation can be costly,
and adverse results in the litigations could result in substantial monetary judgments. No assurance can be made that litigation will
not have a material adverse effect on the Company’s future financial position.
NOTE
24 - SEGMENT REPORTING
The
Company has one operating segment. The Company’s revenue and long-lived assets are primarily derived from and located
in China and U.S. The Company does not have manufacturing operations outside of China.
The
following table sets forth disaggregation of revenue:
| |
Year Ended
December 31, | |
| |
2022 | | |
2021 | |
| |
Sales Revenue | | |
Sales Revenue | |
Primary geographical markets | |
| | |
| |
U.S. and other countries/areas | |
$ | 65,871,112 | | |
$ | 32,669,996 | |
China | |
| 51,941,937 | | |
| 58,816,388 | |
Total | |
$ | 117,813,049 | | |
$ | 91,486,384 | |
| |
| | | |
| | |
Major products | |
| | | |
| | |
EV parts | |
$ | 8,964,094 | | |
$ | 25,348,003 | |
EV products | |
| 7,926,233 | | |
| 1,478,566 | |
Off-road vehicles and associated parts | |
| 70,622,278 | | |
| 29,336,693 | |
Electric Scooters, Electric Self-Balancing Scooters and associated parts | |
| 4,616,683 | | |
| 30,018,290 | |
Battery exchange equipment and Battery exchange service | |
| 1,691,486 | | |
| 785,183 | |
Lithium-ion cells | |
| 23,992,275 | | |
| 4,519,649 | |
Total | |
$ | 117,813,049 | | |
$ | 91,486,384 | |
| |
| | | |
| | |
Timing of revenue recognition | |
| | | |
| | |
Products transferred at a point in time | |
$ | 117,813,049 | | |
$ | 91,486,384 | |
Total | |
$ | 117,813,049 | | |
$ | 91,486,384 | |
NOTE
25 - PRE-EXISTED VIE
The
consolidated financial statements included in this Form 10-K reflect the results of operations, financial position and cash flows of
the registrant, Delaware incorporated parent company together with those of its subsidiaries, on a consolidated basis.
The
Company has completed the conversion of Kandi New Energy to a wholly-owned subsidiary of Zhejiang Kandi Technologies, effective March
14, 2022. The Company no longer has any VIE subsequent to March 14, 2022. Hence, there was no pre-existed VIE as of December 31, 2022.
The
tables below summarized the cash flows between the Company’s pre-existed VIE and other non-VIE entities for the year ended December
31, 2021:
For the year ended December 31, 2021 |
No. | |
Transfer from | |
Transfer to | |
Approximate value
($) | | |
Note |
1 | |
Other non-VIE subsidiaries in PRC* | |
VIE | |
| 750,787 | | |
Products purchased from VIE by the other non-VIE subsidiaries in PRC |
2 | |
Other non-VIE subsidiaries in PRC* | |
VIE | |
| 45,259,160 | | |
Cash (as working capital) borrowed by the VIE from other non-VIE subsidiaries in PRC |
3 | |
VIE | |
Other non-VIE subsidiaries in PRC* | |
| 11,051,936 | | |
Products purchased from the other non-VIE subsidiaries in PRC by the VIE |
4 | |
VIE | |
Other non-VIE subsidiaries in PRC* | |
| 34,465,328 | | |
Investment amount and working capital contribution, as well as repayment by the VIE to the other non-VIE subsidiaries in PRC |
5 | |
VIE | |
Zhejiang Kandi Technologies | |
| 20,155,351 | | |
Cash transferred as dividend from the VIE to its direct parent entity, Zhejiang Kandi Technologies. |
* | Other non-VIE subsidiaries in PRC include the entities such as Zhejiang Kandi Technologies, Kandi Smart Battery Swap, Kandi Hainan and Yongkang Scrou. |
Intercompany
activities between non-VIE subsidiaries and VIE
The
tables below present intercompany activities between non-VIE subsidiaries and VIE, balances for receivables and payables between non-VIE
subsidiaries and VIE for the year ended December 31, 2021.
1)
intercompany activities between non-VIE subsidiaries and VIE
For the year ended December 31, 2021 | |
# | |
Purchaser | |
Seller | |
Approximate value
($) | |
1 | |
VIE | |
Other non-VIE subsidiaries in PRC* | |
| 10,022,236 | |
2 | |
Other non-VIE subsidiaries in PRC* | |
VIE | |
| 116,522 | |
2)
Receivables and payables between non-VIE subsidiaries and VIE
As of December 31, 2021 | |
# | |
Description | |
Approximate value ($) | |
1 | |
Receivables of other non-VIE subsidiaries in PRC* due from VIE | |
| 28,582,029 | |
2 | |
Receivables of VIE due from other non-VIE subsidiaries in PRC* | |
| 1,880,007 | |
The
Company’s subsidiaries and its pre-existed PRC VIE are restricted in their ability to transfer a portion of their net assets to
the Company. The payment of dividends by entities organized in China is subject to limitations, procedures and formalities. Regulations
in the PRC currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards
and regulations in China. The Company’s subsidiaries and its pre-existed VIE are also required to set aside at least 10% of its
after-tax profit based on PRC accounting standards each year to its statutory reserves account until the accumulative amount of
such reserves reaches 50% of its respective registered capital. The aforementioned reserves can only be used for specific purposes and
are not distributable as cash dividends.
In
addition, the Company’s operations and revenues that are conducted and generated in China with currency received being denominated
in RMB. RMB is subject to the foreign exchange control regulation in China, and, as a result, the Company may be unable to distribute
any dividends outside of China due to PRC foreign exchange control regulations that restrict the Company’s ability to convert RMB
into U.S. dollars.
Otherwise,
there is no other impact from the Company’s involvement with the pre-exisited VIE that would affect the reporting entity’s
financial position, financial performance or cash flows.
NOTE
26 - SUBSEQUENT EVENT
On March 13, 2023 (the
“Signing Date”), Kandi Technologies Group, Inc., a Delaware corporation (the “Company”), entered into an Equity
Incentive Agreement (the “Equity Incentive Agreement”) with Pan Guoqing (the “Receiving Party”), who is the presentative
of the project management team of the project of crossover golf carts of Kandi Electric Vehicles (Hainan) Co., Ltd. (“Kandi EV Hainan”),
a wholly owned subsidiary of the Company organized under the laws of the People’s Republic of China. The Receiving Party was originally
the management team of golf crossover project of Hainan Kandi Holding New Energy Technology Co., Ltd. (“Hainan Kandi Holding”),
a company organized under the laws of the People’s Republic of China. The Receiving Party has agreed to be employed as management
team of Kandi EV Hainan, responsible for the operation of the golf crossover project of Kandi EV Hainan, and stop production and operation
of Hainan Kandi Holding’s business. An English translated copy of the Equity Incentive Agreement is filed as an exhibit and incorporated
by reference in its entirety to this report.
Pursuant to the Equity Incentive Agreement, for the next three calendar
years ending in December 31, 2025 (the “Incentive Period”), the Company will provide equity incentives to the Receiving Party,
subject to the Receiving Party meeting certain performance milestones in its role as the management team of the golf crossover project
(the “Crossover Project”) of Kandi EV Hainan. The performance milestones are measured in terms of the net profit of the Crossover
Project after deducting relevant operating costs and income taxes, excluding various incentives, allowances and rebates, among others,
and shall be audited and confirmed by the third party auditor designated by the granting party, or the Company. The net profit target
(the “Net Profit Target”) for the Incentive Period is RMB 150 million (approximately $21,719,613), with an annual net profit
target (the “Annual Net Profit Target”) of RMB 50 million (approximately $7,239,871). Should the Receiving Party meet or exceed
the Net Profit Target over the Incentive Period, the Company will issue to the Receiving Party as incentive compensation up to a maximum
of 5,957,811 shares (the “Maximum Incentive Shares”) of the Company’s common stock (the “Incentive Shares”).
The amount of Incentive Shares issued within each calendar year of the Incentive Period is adjusted based on the net profit of the Crossover
Project within that calendar year. If the net profit of every of the three calendar years is below 60% of the Annual Net Profit Target,
the Receiving Party will receive no Incentive Shares. If the net profit of every of the three calendar years is at or above the Annual
Net Profit Target, the Receiving Party will receive the Maximum Incentive Shares, with higher performance resulting in receiving the Incentive
Shares earlier. If the net profit of every of the three calendar years fall between 60% of the Annual Net Profit Target and the Annual
Net Profit Target, the Receiving Party will receive an amount of Incentive Shares below the Maximum Incentive Shares.
The Receiving Party has
no relationship to the Company other than as described above. The Equity Incentive Agreement is subject to shareholders approval.