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KNDI > SEC Filings for KNDI > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for KANDI TECHNOLOGIES CORP

Form 10-Q for KANDI TECHNOLOGIES CORP


14-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

This report contains forward-looking statements within the meaning of the federal securities laws that relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology, such as "may," "will," "should," "could," "expect," "plan," "anticipate," "believe," "estimate," "project," "predict," "intend," "potential" or "continue" or the negative of such terms or other comparable terminology, although not all forward-looking statements contain such terms.

In addition, these forward-looking statements include, but are not limited to, statements regarding implementing our business strategy; development and marketing of our products; our estimates of future revenue and profitability; our expectations regarding future expenses, including research and development, sales and marketing, manufacturing and general and administrative expenses; difficulty or inability to raise additional financing, if needed, on terms acceptable to us; our estimates regarding our capital requirements and our needs for additional financing; attracting and retaining customers and employees; sources of revenue and anticipated revenue; and competition in our market.

Forward-looking statements are only predictions. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. All of our forward-looking information is subject to risks and uncertainties that could cause actual results to differ materially from the results expected. Although it is not possible to identify all factors, these risks and uncertainties include the risk factors and the timing of any of those risk factors described in the Company's Form 10-K for the year ended December 31, 2011 and those set forth from time to time in our filings with the Securities and Exchange Commission ("SEC"). These documents are available on the SEC's Electronic Data Gathering and Analysis Retrieval System athttp://www.sec.gov.

Critical Accounting Policies and Estimates

Policy affecting options, and warrants

The Company's stock option cost is recorded in accordance with ASC 718 and ASC 505.

The fair value of stock options is estimated using the Black-Scholes-Merton model. The Company's expected volatility assumption is based on the historical volatility of the Company's stock. The expected life assumption is primarily based on the expiration date of the option. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Stock option expense recognized is based on awards expected to vest, and there were no estimated forfeitures. ASC standards requires forfeitures to be estimated at the time of grant and revised in subsequent periods, if necessary, if actual forfeitures differ from those estimates.

The Company's warrant costs are recorded in liabilities and equities, respectively, in accordance with ASC 480, ASC 505 and ASC 815.

The fair value of warrants, which is classified as a liability, is estimated using a Black-Scholes-Merton model. The Company's expected volatility assumption is based on the historical volatility of the Company's stock. The expected life assumption is primarily based on the expiration date of the warrant. The risk-free interest rate for the expected term of the warrant is based on the U.S. Treasury yield curve in effect at the time of measurement. The warrants, which are freestanding derivatives and are classified as liabilities on the balance sheet, will be measured at fair value on each reporting date, with decreases in fair value recognized in earnings and increases in fair values recognized in expenses.

The Company determined that the fair value of equity based warrants, which are not considered derivatives under ASC 815, is estimated using the Black-Scholes-Merton model. The Company's expected volatility assumption is based on the historical volatility of the Company's stock. The expected life assumption is primarily based on the expiration date of the warrant. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.


Estimates affecting accounts receivable and inventories

The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect our reporting of assets and liabilities (and contingent assets and liabilities). These estimates are particularly significant where they affect the reported net realizable value of the Company's accounts receivable and inventories.

Accounts receivable are recognized and carried at net realizable value. An allowance for doubtful accounts will be recorded in the period when a loss is probable based on an assessment of specific evidence indicating troubled collection, historical experience, accounts aging, ongoing business relation and other factors. Accounts are written off after exhaustive efforts at collection. If accounts receivable are to be provided for, or written off, they would be recognized in the consolidated statement of operations within operating expenses. At September 30, 2012 and December 31, 2011, the Company has an allowance for doubtful accounts of $0 and $0 respectively, as per the management's judgment based on their best knowledge.

Inventories are stated at the lower of cost, determined on a weighted average basis, or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated costs necessary to make the sale. When inventories are sold, their carrying amount is charged to expense in the year in which the revenue is recognized. Write-downs for declines in net realizable value or for losses of inventories are recognized as an expense in the year the impairment or loss occurs. There were no declines in net realizable value of inventory for the nine months ended September 30, 2012.

While the Company currently believes that there is little likelihood that actual results will differ materially from these current estimates, if customer demand for our products decreases significantly in the near future, or if the financial condition of our customers deteriorates in the near future, the Company could realize significant write downs for slow-moving inventories or uncollectible accounts receivable.

Revenue Recognition

Revenues represent the invoiced value of goods sold, recognized upon the shipment of goods to customers. Revenues are recognized when all of the following criteria are met:

Persuasive evidence of an arrangement exists;
Delivery has occurred or services have been rendered;
The seller's price to the buyer is fixed or determinable; and
Collectability is reasonably assured.


Results of Operations

Comparison of Nine Months Ended September 30, 2012 and 2011

The following table sets forth the amounts and percentage relationship to
revenue of certain items in our condensed consolidated statements of income and
comprehensive income

                   For Nine                      For Nine
                 Months Ended                  Months Ended
                 September 30,      % Of       September 30,      % Of       Change In      Change In
                     2012          Revenue         2011          Revenue       Amount           %

REVENUES, NET  $    38,182,211      100.0%   $    28,789,766      100.0%   $  9,392,445         32.6%
COST OF GOODS
SOLD               (29,829,097 )    (78.1% )     (22,060,888 )    (76.6% )   (7,768,209 )       35.2%
GROSS PROFIT         8,353,114       21.9%         6,728,878       23.4%      1,624,236         24.1%
Research and
development         (2,006,269 )     (5.3% )      (1,695,003 )     (5.9% )     (311,266 )       18.4%
Selling and
distribution
expenses              (331,750 )     (0.9% )        (234,854 )     (0.8% )      (96,896 )       41.3%
General and
administrative
expenses            (2,520,600 )     (6.6% )      (2,568,417 )     (8.9% )       47,817         (1.9% )
INCOME FROM
OPERATIONS           3,494,495        9.2%         2,230,604        7.7%      1,263,891         56.7%
Interest
income
(expense), net        (133,806 )     (0.4% )          95,549        0.3%       (229,355 )     (240.0% )
Change in fair
value of
financial
instruments          1,078,795        2.8%         7,480,992       26.0%     (6,402,197 )      (85.6% )
Government
grants                  45,942        0.1%           289,962        1.0%       (244,020 )      (84.2% )
Investment
(loss) income          (45,670 )     (0.1% )         (20,181 )     (0.1% )      (25,489 )      126.3%
Other income,
net                    285,805        0.2%           262,299        0.9%         23,506          9.0%
(LOSS) INCOME
FROM
OPERATIONS
BEFORE INCOME
TAXES                4,725,561       12.4%        10,339,225       35.9%     (5,613,664 )      (54.3% )

INCOME TAX
(EXPENSE)             (842,863 )     (2.2% )        (394,624 )     (1.4% )     (448,239 )      113.6%

NET (LOSS)
INCOME               3,882,698       10.2%         9,944,601       34.5%     (6,061,903 )      (61.0% )



(a) Revenue

For the Nine months ended September 30, 2012, our revenue increased by 32.6%, from $ 28,789,766 to $ 38,182,211 as compared to the nine months ended September 30, 2011.

The following table lists the number of vehicles sold, categorized by vehicle types, within the nine months ended September 30, 2012 and 2011:

                                    Nine Months Ended September 30
                                    2012                      2011
                             Unit        Sales         Unit        Sales
ATV                         10,657   $  4,696,067      4,695   $  2,770,356
Super-mini car 1             1,110      5,417,659        840      4,920,718
Go-Kart                     24,354     22,237,265     16,907     16,916,590
Utility vehicles ("UTVs")       36        134,740        853      1,854,771
Three wheeled motorcycle       733        893,337        678      1,433,049
Refitted car                    86      2,362,096         34        894,282

Auto generator              61,440      2,441,047          -              -
Total                       98,416     38,182,211     24,007     28,789,766

1) include the products called CoCo, EV in 2011's filing, and EV only in 2012.

Off-Road Vehicles

During the nine months ended September 30, 2012, the market condition for ATV products continued to recover. The Company developed some price competitive products to meet markets demands, which has caused good results and successfully increased the Company's sales. Revenues from our ATVs experienced a significant increase of $1,925,711, or 69.5% in the nine months ended September 30, 2012 over the comparable period, which was attributable to a 127.0% increase in units sold, from 4,695 units in the first nine months of 2011 to 10,657 units in 2012. This increase was partially caused by a 25.3% unit price reduction.

In the first nine months of 2012, our Go-Karts experienced a significant increase in revenue of $5,320,675 or 31.5% over the same period of last year, which was mainly attributable to a 44.0% increase in unit sales from 16,907 units in the nine months ended September 30, 2011 to 24,354 units in 2012. Just as with ATVs, the Company's successful development of meet-market-demands price competitive products has achieved good results.

The sales of three-wheeled motorcycle (TT) experienced a significant decrease in revenues from $1,433,049 to $893,337.In the first nine months ended September 30, 2012, the sales of TT decreased $539,712, or 37.7% from the same period of last year, despite the slight increase in unit sales from 678 units in the nine months ended September 30, 2011 to 733 units in 2012, with an average unit price decrease of 42.3% . The unit price decreased because the Company developed price-competitive gas-electric hybrid driven three wheeled motorcycles to meet the growing demand of such units in the Chinese urban and rural markets.

Utility vehicles (UTVs) experienced a significant decrease in revenues from $1,854,771 to $134,740. This 92.7% decrease is mainly due to the 95.8% drop in unit sales in the nine months ended September 30, 2012 compared to the same period of 2011. This significant drop is primarily because of the continuing high competition in this UTV market, while the UTV manufactured by the Company is relatively high end and more expensive, which caused the average unit price to increase significantly compared to the same period of last year.

Super-mini-Car Products

The EV products experienced a significant increase in revenues from $4,920,718 to $5,417,659. For the nine months ended September 30, 2012, revenues from our Super-mini car increased by $496,941, or 10.1% from the same period of 2011, which was attributable to an increase in unit sales of 32.1% from 840 units in the first nine months of 2011 to 1,110 units in 2012. This increase is primarily a result of the benefit from local government's policies which encourage the development of eco-car. For the nine months ended September 30, 2012, the average unit price of our super-mini-cars decreased 16.7%, because during most of the reporting period, the Company adopted the sales mode of charging or exchanging batteries to sell the super-mini-cars without batteries.


Refitted car

For the nine months ended September 30, 2012, revenues from our refitted car increased by $1,467,814, or 164.1% from the same period of 2011; that is because the Company started to refit other companies' vehicles to meet special requirements for certain customers since June 2011.

Auto generator

On April 25, 2012, the Company acquired Yongkang Scrou Electric Co. ("Yongkang Scrou"), whose main business is producing various auto generators. From April 25, 2012 to September 30, 2012, a total 61,440 sets of auto generators were sold with sales totaling $2,441,047.

The following table shows the breakdown of Kandi's revenues from its customers by geographical markets based on the location of the customer during the nine months ended September 30, 2012 and 2011:

                                     Nine Months Ended September 30
                                   2012                           2011
                           Sales        Percentage        Sales        Percentage
North America         $   4,462,269            12%   $   3,476,633            12%
China                    32,868,171            86%      24,531,801            85%
Europe & other region       851,771             2%         781,332             3%
Total                 $  38,182,211           100%   $  28,789,766           100%

For the nine months ended September 30, 2012, approximately 80% of our sales in China were to Chinese export agents, who resell the company's products to markets around the world.

(b) Cost of goods sold

Cost of goods sold during the nine months ended September 30, 2012 was $29,829,097, representing an increase of $7,768,209, or 35.2% from the nine months ended September 30, 2011. This increase can be attributed to the Company's significant increase of revenue.

(c) Gross profit

Gross profit for the first nine months of 2012 increased 24.1% to $8,353,114 compared to $6,728,878 at the same period of last year, as a result of increased revenue. However, gross margin decreased to 21.9% compared to 23.4% for the same period of 2011. This was primarily due to the fact that processing techniques for refitted cares are relatively simple; therefore, its gross margin is comparatively lower. In addition, Yongkang Scrou's adjustment to its product structure, its disposal of its old products, and sales of price-competitive products all contributed to a reduction in the Company's overall gross margin for this reporting period.

(d) Selling and distribution expenses

Selling and distribution expenses were $331,750 for the nine months ended September 30, 2012, as compared to $234,854 for the same period in 2011, representing a 41.3% increase. The significant increase is primarily because of the increase in fees related to customs inspection fees, higher transportation fees and advertising fees.

(e) General and administrative expenses

General and administrative expenses were $2,520,600 for the nine months ended September 30, 2012, as compared to $2,568,417 for the same period in 2011, representing a 1.9% decrease. For the nine months ended September 30, 2012, the general and administrative expenses included $19,053 in stock-based compensation cost for the options issued to the Company's executives and managerial level employees, while for the same period of last year, the stock based compensation cost was $195,474. In addition, general and administrative expenses also included $65,733 in expenses for common stock awards to employees and consultants for financing and investor relations services, while for the same period of last year, this cost was $30,530. Excluding the effect of stock based compensation cost and stock award cost, the net general and administrative expenses for the nine months ended September 30, 2012 was $2,435,814, an increase of 4.0% from $2,342,413 for the same period of 2011. This increase was primarily due to higher product insurance fees, travelling fees and expenses related to increases to our employee's general welfare.



(f) Research and development

Research and development expenses were $2,006,269 for the nine months ended September 30, 2012, as compared to $1,695,003 from the same period in 2011, representing an 18.4% increase. This increase was primarily due to additional research and development efforts on new products and on quality improvement on existing products. In the first nine months of 2012, the Company strengthened the research and development for electrical vehicles equipped with lithium battery in order to seek the leading position in EV market. In addition, on September 29,2012, the Company successfully signed a sales contract totaling amount RMB190 million with China Aviation Lithium Battery (Hangzhou) Co., Ltd.

(g) Government grants

Government grants totaled $45,942 for the nine months ended September 30, 2012, representing a 84.2% decrease over the same period in 2011.

(h) Net interest income (expense)

Net interest expense was $133,806 for the nine months ended September 30, 2012, as compared to $95,549 net interest income for the same period last year, representing a significant decrease. For the nine months ended September 30, 2012, the interest expense for convertible notes was $2, and the interest incurred by the amortization of debt discount was $43. While for the same period of last year, the interest expense for the convertible notes was $123, and the interest incurred by the amortization of debt discount was $406. Excluding the effects of interest expense related to convertible notes, the net interest expenses for this reporting period was $133,761, a change of $96,078 for the same period of 2011. This increase was primarily due to increases of interest expense caused by short-term bank loans.

(i) Change in fair value of financial instruments

For the nine months ended September 30, 2012, the interest income, which was caused by changes in the fair value of warrants issued to investors and placement agents was $1,078,795, while for the same period of last year, the interest income, which was caused by the changes of fair value of financial instruments, was $7,480,992. This significant decrease was primarily due to our stock price being more stable in the first nine months of 2012 compared to the same period of last year.

(j) Other Income, Net

Net other income was $285,805 for the nine months ended September 30, 2012, compared to $262,299 for the same period of 2011, an increase of $23,506 or 9.0%
. This increase was primarily due to the increase of selling the fittings of the EV-cars.

(k) Investment (loss) income

Investment loss was $45,670 for the first nine months ended September 30, 2012, compared to $20,181 for the corresponding period in 2011. For the nine months ended September 30, 2012, the investment loss was solely the result of our 30% equity interest investment in Jinhua Service, which was $29,786 for the same period of 2011. During the first nine months ended September 30, 2011, the $9,605 investment income was from trading securities.



(l) Net income

The operating performance of the Company for the nine months ended September 30, 2012 reflected a net income of $3,882,698, a decrease of $6,061,903 or 156.1% from a net income of $9,944,601 for the same period of last year, which was primarily due to changes in the fair value of certain warrants issued to investors and placement agents. Excluding the effects of option related expenses, which was $19,053 and $195,474 for the nine months ended September 30, 2012 and 2011, respectively; stock award expenses of $65,733 and $30,530 for the nine months ended September 30, 2012 and 2011, respectively; Convertible Note interest expenses of $2 and $123 for the nine months ended September 30, 2012 and 2011, respectively, which was caused by an amortization of discount on the Convertible Notes of $43 and $406 for the nine months ended September 30, 2012 and 2011, respectively; a change in the fair value of financial derivatives to $1,078,795 and $7,480,992 for the nine months ended September 30, 2012 and 2011, respectively; for the nine months ended September 30, 2012, the Company's net income was $2,888,734 , an increase of 7.4% compared to net income of $2,690,142 for the same period of 2011, excluding the same effects. This increase was primarily due to an increase in gross profit. As of September 30, 2012, all of the Convertible Notes have been converted.


Comparison of Three Months Ended September30, 2012 and 2011

The following table sets forth the amounts and percentage relationship to
revenue of certain items in our condensed consolidated statements of income and
comprehensive income

                   For Three                     For Three
                 Months Ended                  Months Ended
                 September 30,      % Of       September 30,      % Of       Change In      Change In
                     2012          Revenue         2011          Revenue       Amount           %

REVENUES, NET  $    12,765,694        100%   $    10,310,558        100%   $  2,455,136         23.8%
COST OF GOODS
SOLD                (9,541,687 )    (74.7% )      (7,984,828 )    (77.4% )   (1,556,859 )       19.5%
GROSS PROFIT         3,224,007       25.3%         2,325,730       22.6%        898,277         38.6%

Research and
development           (630,083 )     (4.9% )        (608,463 )     (5.9% )      (21,620 )        3.6%

Selling and
distribution
expenses              (158,714 )     (1.2% )         (85,239 )     (0.8% )      (73,475 )       86.2%
General and
administrative
expenses              (940,930 )     (7.4% )      (1,067,021 )    (10.3% )      126,091        (11.8% )
INCOME FROM
OPERATIONS           1,494,280       11.7%           565,007        5.5%        929,273        164.5%
Interest
income
(expense), net         (76,866 )     (0.6% )         117,353        1.1%       (194,219 )     (165.5% )
Change in fair
value of
financial
instruments           (882,731 )     (6.9% )        (271,780 )     (2.6% )     (610,951 )      224.8%
Government
grants                  20,634        0.2%             9,235        0.1%         11,399        123.4%
Investment
(loss) income          (18,259 )     (0.1% )         (12,905 )     (0.1% )       (5,354 )       41.5%
Other income,
net                    239,203        1.9%            95,067        0.9%        144,136        151.6%
(LOSS) INCOME
FROM
OPERATIONS
BEFORE INCOME
TAXES                  776,261        6.1%           501,977        4.9%        274,284         54.6%

INCOME TAX
(EXPENSE)             (181,743 )     (1.4% )        (117,119 )     (1.1% )      (64,624 )       55.2%

NET (LOSS)
INCOME                 594,518        4.7%           384,858        3.7%        209,660         54.5%



(a) Revenue

For the three months ended September 30, 2012, our revenues increased 23.8% from $10,310,558 to $12,765,694 as compared to the three months ended September 30, 2011.

The following table lists the number of vehicles sold, categorized by vehicle types, for the three months ended September 30, 2012 and 2011:

                                                         Three Months Ended September 30
                                                          2012                      2011
                                                   Unit        Sales        Unit        Sales
ATV                                                3,579   $  1,734,120     2,030   $  1,044,602
Super-mini car 1                                     471      2,780,807       298      1,512,861
Go-Kart                                            7,372      6,504,208     5,513      5,763,275
Utility vehicles ("UTVs")                              1          1,358       460        634,534
Three wheeled motorcycle ("TT")                      235        209,371       394        751,126
Refitted car                                          22        627,467        23        604,160
Auto generator                                    33,142        908,363         -              -
Total                                             44,822     12,765,694     8,718     10,310,558

1) include the products called CoCo, EV in 2011's filing, and EV only in 2012

Off-Road Vehicles

During the three months ended September 30, 2012, the market condition for our ATV products continued to recover. The Company developed some price competitive products to meet markets demands that caused good results and successfully increased the Company's sales. Revenues from our ATVs experienced a significant increase of $689,518, or 66.0% in the three months ended September 30, 2012, compared to the comparable period in 2011, which was attributable to a 76.3% increase from 2,030 units in the three months of 2011 to 3,579 units in 2012. This increase was partially caused by a 5.8% unit price decrease.

During the three months ended September 30, 2012, our Go-Karts experienced an increase in revenue of $740,933 or 12.9% compared to the same period in 2011, which was attributable to a 33.7% increase in unit sales from 5,513 units in the three months ended September 30, 2011 to 7,372 units in 2012. Just as with ATVs, the Company's successful development of price competitive products that meet market demands achieved good results.

In the three months ended September 30, 2012, sales of our TT decreased $541,755, or 72.1% compared to the same period of last year. This decrease primarily occurred because the market is highly competitive, and the decrease in . . .

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