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KNDI > SEC Filings for KNDI > Form 10-Q on 14-Nov-2013All Recent SEC Filings

Show all filings for KANDI TECHNOLOGIES GROUP, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for KANDI TECHNOLOGIES GROUP, INC.


14-Nov-2013

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, 2012 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.

Warrant costs are recorded in liabilities and equities, respectively, in accordance with ASC 480, ASC 505 and ASC 815.

The fair value of a warrant, which is classified as a liability, is estimated using the Black-Scholes-Merton model or the lattice 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, should be 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 is recorded in periods where we determine a loss is probable, based on our assessment of specific factors such as troubled collection, historical experience, accounts aging, ongoing business relation and other factors. Accounts are written off after an exhaustive collection effort. If accounts receivable are to be provided for, or written off, they are recognized in the consolidated statement of operations within operating expenses line item. As of September 30, 2013 and December 31, 2012, the Company recorded no allowance for doubtful accounts. This determination was made per our management's judgment, which was 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 sales 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 reporting period ended September 30, 2013.

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, 2013 and 2012

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
                     2013          Revenue          2012          Revenue       Amount            %

REVENUES, NET  $    43,975,463        100%    $    38,182,211      100.0%   $   5,793,252         15.2%
COST OF GOODS
SOLD               (33,673,048 )    (76.6% )      (29,829,097 )    (78.1% )    (3,843,951 )       12.9%
GROSS PROFIT        10,302,415       23.4%          8,353,114       21.9%       1,949,301         23.3%
Research and
development         (1,863,020 )     (4.2% )       (2,006,269 )     (5.3% )       143,249         (7.1% )
Selling and
distribution
expenses              (263,414 )     (0.6% )         (331,750 )     (0.9% )        68,336        (20.6% )
General and
administrative
expenses            (4,826,622 )    (11.0% )       (2,520,600 )     (6.6% )    (2,306,022 )       91.5%
INCOME FROM
OPERATIONS           3,349,359        7.6%          3,494,495        9.2%        (145,136 )       (4.2% )
Interest
income
(expense), net      (2,472,377 )     (5.6% )         (133,806 )     (0.4% )    (2,338,571 )    1,747.7%
Change in fair
value of
financial
instruments         (6,956,963 )    (15.8% )        1,078,795        2.8%      (8,035,758 )     (744.9% )
Government
grants                  60,884        0.1%             45,942        0.1%          14,942         32.5%
Investment
(loss) income         (165,344 )     (0.4% )          (45,670 )     (0.1% )      (119,674 )      262.0%
Other income,
net                    217,160        0.5%            285,805        0.7%         (68,645 )      (24.0% )
(LOSS) INCOME
FROM
CONTINUING
OPERATION
BEFORE INCOME
TAXES               (5,967,281 )     (13.6 )%       4,725,561       12.4%     (10,692,842 )     (226.3% )

INCOME TAX
(EXPENSE)             (502,123 )     (1.1% )         (842,863 )     (2.2% )       340,740        (40.4% )

NET (LOSS)
INCOME FROM
CONTINUING
OPERATION           (6,469,404 )     (14.7 )%       3,882,698       10.2%     (10,352,102 )     (266.6% )



(a) Revenue

For the nine months ended September 30, 2013, our revenue increased by 15.2% from $38,182,211 to $43,975,463 as compared to the nine months ended September 30, 2012.

The following table lists the number of vehicles sold, categorized by vehicle types, within the nine months ended September 30, 2013 and 2012:

                                                Nine Months Ended September 30
                                       2013                         2012
                                       Unit          Sales          Unit          Sales
ATV                                     14,304      7,772,598        10,657   $  4,696,067
EV                                       1,126      6,619,011         1,110      5,417,659
Go-Kart                                 28,707     25,538,290        24,354     22,237,265
Utility vehicles ("UTVs")                  440      1,150,885            36        134,740
Three wheeled motorcycle                   237        380,748           733        893,337
Refitted car                                39      1,054,124            86      2,362,096
Auto generator, auto equipment,         43,949      1,459,807        61,440      2,441,047
and electric motor
Total                                   88,802     43,975,463        98,416     38,182,211

Off-Road Vehicles

During the nine months ended September 30, 2013, revenues from our ATVs experienced a significant increase of $3,076,531, or 65.5% compared to the nine months ended September 30, 2012. This was attributable to 23.3% increase in the average unit price and an increase in overall unit sales of 34.2% . In the nine months ended September 30, 2013, our ATV Sales continued to increase; in comparison to nine months ended September 30, 2012, we sold more higher end and middle end ATVs during this reporting period.

During the nine months ended September 30, 2013, we experienced an increase in revenue realized from Go-Kart sales of $3,301,025 or 14.8% compared to the same period last year. This was mainly attributable to the fact that the Company sold more Go-Kart units in this nine months of 2013, especially during the second and third quarter of 2013, resulting in a 17.9% increase from 24,354 units in the nine months of 2012 to 28,707 units during the same period in 2013, although this increase in unit sales was somewhat offset by a 2.6% decrease in average unit price compared to the nine months ended September 30, 2012.

We experienced a significant decrease in revenue generated from sales of our three-wheeled motorcycle (TT). TT sales revenue decreased from $893,337 in the nine months ended September 30, 2012 to $380,748 during the nine months ended September 30, 2013. This 57.4% decrease in revenue was primarily attributable to a 67.7% decrease in unit sales. The decrease in unit sales was partially caused by the 31.8% increase in average unit price during this nine months ended September 30, 2013 compared to the same period of last year. During the three months ended March 31, 2013, the TTs we sold were mainly price-competitive gas-electric hybrid TTs in the Chinese markets; however, during the second quarter and third quarter of 2013, majority of the TTs sold were higher price models, resulting in a total overall unit price increase.

UTVs experienced a significant increase in revenues from $134,740 to $1,150,885. This 754.2% increase was mainly due to a 1,122.2% increase in unit sales, from 36 in the nine months ended September 30, 2012 to 440 units during the nine months ended September 30, 2013. This significant increase is primarily attributable to several large UTV orders received by the Company during the nine months ended September 30, 2013. However, the UTVs purchased in these orders were cheaper models in comparison to other UTV products offered by the Company.

EV

For the nine months ended September 30, 2013, revenues from EV sales increased by $1,201,352, or 22.2%, compared to the same period in 2012. This increase was primarily attributable to an increase in the average unit sales price of 20.4% over the comparable period of last year; in addition, we experienced a slight 1.4% increase in unit sales. This significant average unit price increase was primarily due to sales of a higher price model during the nine months ended September 30, 2013, compared to the same period of 2012. However, in comparison to the fourth quarter of fiscal year 2012, sales of EVs decreased in the first nine months of 2013. This decrease is likely attributable to the discontinuation of a government subsidy at the end of fiscal year ended 2012. However, the Company believes the EV sales will pick up in the fourth quarter of 2013, especially after the Chinese government introduced the new subsidy in September of 2013.


Refitted Cars

For the nine months ended September 30, 2013, revenues generated from sales of our refitted cars decreased by $1,307,972, or 55.4% compared to the same period of last year. This decrease in revenue was primarily attributable to a 54.7% decrease in unit sales, from 86 units during the nine months ended September 30, 2012 to 39 units during the nine months ended September 30, 2013. In addition to sales of our refitted cars, the Company generated revenue by refitting other companies' vehicles to meet special requirements for certain customers. Since this line of business has not been a strategic focus or resulted in a large-scale business, the Company decided to discontinue this business during the 3rd quarter of 2013 and focus its efforts on increasing its electric vehicles revenue in the Hangzhou market.

Auto Generators, Auto Equipment, and Electric Motors

On April 25, 2012, the Company acquired Yongkang Scrou, a manufacturer of various auto generators. For the nine months ended September 30, 2013, a total of 43,949 sets of auto generators were sold with sales totaling $1,459,807. Compared to the same period of last year, in the nine months ended September 30, 2013, the revenue created by our auto generator business decreased 40.2%, which was mainly attributable to a 28.5% decrease in unit sales, and a 16.4% decrease in average unit price. The significant decrease in unit price is because a portion of the auto generators sold during the nine months ended September 30, 2013 were simplified products specialized for a customer. The main reason for the decrease in unit sales is because Scrou adjusted its product structure and target customer base. Scrou's main products are now auto generators, auto equipment, and electric motors. Scrou provides these products to our vehicles; sales in connection with providing these products to our vehicles are categorized as inter-company transactions and have been eliminated in consolidation.

The following table shows the breakdown of our revenues from its customers by geographical markets based on the location of the customer during the nine months ended September 30, 2013 and 2012:

                                     Nine Months Ended September 30
                           2013                           2012
                           Sales        Percentage        Sales        Percentage
North America         $   4,388,519            10%   $   4,462,269            12%
China                    38,576,289            88%      32,868,171            86%
Europe & other region     1,010,655             2%         851,771             2%
Total                 $  43,975,463           100%   $  38,182,211           100%

For the nine months ended September 30, 2013, about 70% of 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, 2013 was $33,673,048, representing an increase of $3,843,951, or 12.9% compared to nine months ended September 30, 2012, which can be attributed to the significant increase in our revenue.

(c) Gross profit

Gross profit for the first nine months of 2013 increased $1,949,301, or 23.3% to $10,302,415, compared to $8,353,114 for the same period last year. This was mainly attributable to our increase in revenue. Simultaneously, our gross margin increased to 23.4% compared to 21.9% for the same period of 2012. This increase was primarily due to Yongkang Scrou's adjustment to its product structure and disposal of its old products in the second quarter of 2012, which caused our gross margin in the nine months of 2012 to be relatively lower.



(d) Selling and distribution expenses

Selling and distribution expenses were $263,414 for the nine months ended September 30, 2013, compared to $331,750 for the same period in 2012, representing a 20.6% decrease. This decrease is primarily attributable to the decrease in our advertising related fees and export related fees during this reporting period since the Company has become increasingly more focused on the Chinese market.

(e) General and administrative expenses

General and administrative expenses were $4,826,622 for the nine months ended September 30, 2013, compared to $2,520,600 for the same period in 2012, a 91.5% increase. For the nine months ended September 30, 2013, general and administrative expenses did not include any stock-based compensation costs for the options issued to the Company's executives and managerial level employees, which amounted to $19,053 for the same period in 2012. However, general and administrative expenses included $81,042 in expenses for common stock awards to directors, employees and consultants for financing and investor relations services, compared to $65,733 for the same period in 2012. Excluding stock based compensation costs and stock award costs, our net general and administrative expenses for the nine months ended September 30, 2013 were $4,745,580, an increase of 94.8% for the same period of 2012. This increase was primarily attributable to the cost related to the fund raising which happened in the third quarter of 2013, and to higher depreciation and amortization costs.

(f) Research and development

Research and development expenses were $1,863,020 for the nine months ended September 30, 2013, compared to $2,006,269 from the same period in 2012, a 7.1% decrease. This decrease was primarily because research and development for models was nearly finished in year 2012.

(g) Government grants

Government grants totaled $60,884 for the nine months ended September 30, 2013, an increase of 32.5% from $45,942 in the corresponding period in 2012. Among the $60,884 government grants, $563 was for technology innovation and patent application, $16,073 was for subsidies to supportcompanies that have competitive advantages, and $44,248 was related to export subsidies.

(h) Net interest (expense) income

Net interest expense was ($2,472,377) for the nine months ended September 30, 2013, compared to net interest expense of ($133,806) for the same period last year, representing a significant increase. For the nine months ended September 30, 2013, the interest expenses related to convertible notes was $0, and the interest incurred by debt discount amortization was $0, since all remaining convertible notes were converted during the first fiscal quarter of 2012. In comparison to the same period last year, our interest expense for convertible notes was $2, and the interest incurred by debt discount amortization was $43. Excluding the effects aforementioned, net interest expenses for this reporting period was ($2,472,377), a 1,748.4% increase compared to a net interest expense of ($133,761) for the same period in 2012. This increase was primarily attributable to: (i) a decrease in interest related income earned on notes receivable issued to third parties and (ii) bond interest expense incurred by the Company.

(i) Change in fair value of financial instruments

For the nine months ended September 30, 2013, interest expense, caused by changes in the fair value of warrants issued to investors and placement agents, was ($6,956,963), while, for the same period of last year, interest income was $1,078,795. The primary reason for this significant change was the issuance of investor and placement agent warrants pursuant to a registered direct offering that closed in the third quarter of 2013.

(j) Other Income, Net

Net other income was $217,160 for the nine months ended September 30, 2013, compared to $285,805 for the same period of last year, a decrease of $68,645 or 24.0% . This decrease is primarily because the Company sold more fittings of the EV cars during the reporting period of 2012.



(k) Investment (loss) income

Investment losses were ($165,344) for the first nine months ended September 30, 2013, compared to a loss of ($45,670) for the corresponding period in 2012. For the nine months ended September 30, 2013, investment losses of ($45,328) were attributable to our 30% equity interest investment in Jinhua Service, and investment losses of ($120,016) was attributable to our 50% ownership interest in the JV Company. While for the same period of 2012, investment losses were primarily attributable to our 30% equity interest investment in Jinhua Service. The JV Company recorded a high loss because the JV Company was still in the start-up phase.

(l) Net income from Continuing Operation

The operating performance of the Company's continuing business for the nine months ended September 30, 2013 reflected a net loss of ($6,469,404), a significant decrease of ($10,352,102) or 266.6% from a net income of $3,882,698 for the same period of last year. This decrease was primarily attributable to the effects resulting from a change in the fair value of warrants discussed in
(i) above.

Excluding the effects of option related expenses, which was $0 and $19,053 for the nine months ended September 30, 2013 and 2012, respectively; the stock award expense, which was $81,042 and $65,733 for the nine months ended September 30, 2013 and 2012, respectively; convertible note interest expenses, which were $0 and $2 for the nine months ended September 30, 2013 and 2012, respectively; the effect caused by amortization of discount on convertible notes, which was $0 and $43 for the nine months ended September 30, 2013 and 2012, respectively; and the change in the fair value of financial derivatives, which was ($6,956,963) and $1,078,795 for the nine months ended September 30, 2013 and 2012 respectively, for the nine months ended September 30, 2013, the Company's net income from continuing operations was $568,601, a decrease of 80.3%, compared to a net income of $2,888,734 for the same period of 2012, excluding the same effects. This decrease is primarily attributable to an increase in net interest expense and general and administrative expenses during this reporting period, even though our gross profits increased.


Comparison of Three Months Ended September 30, 2013 and 2012

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
                     2013          Revenue         2012          Revenue       Amount           %

REVENUES, NET  $    17,145,512        100%   $    12,765,694        100%   $  4,379,818         34.3%
COST OF GOODS
SOLD               (13,032,352 )    (76.0% )      (9,541,687 )    (74.7% )   (3,490,665 )       36.6%
GROSS PROFIT         4,113,160       24.0%         3,224,007       25.3%        889,153         27.6%

Research and
development           (500,864 )     (2.9% )        (630,083 )     (4.9% )      129,219        (20.5% )

Selling and
distribution
expenses              (102,380 )     (0.6% )        (158,714 )     (1.2% )       56,334        (35.5% )
General and
administrative
expenses            (2,893,935 )    (16.9% )        (940,930 )     (7.4% )   (1,953,005 )      207.6%
INCOME FROM
OPERATIONS             615,981        3.6%         1,494,280       11.7%       (878,299 )       (58.8 )%
Interest
income
(expense), net      (1,184,282 )     (6.9% )         (76,866 )     (0.6% )   (1,107,416 )    1,440.7%
Change in fair
value of
financial
instruments         (6,864,624 )    (40.0% )        (882,731 )     (6.9% )   (5,981,893 )     (677.7% )
Government
grants                  11,077        0.1%            20,634        0.2%         (9,557 )      (46.3% )
Investment
(loss) income         (125,428 )     (0.7% )         (18,259 )     (0.1% )     (107,169 )      586.9%
Other income,
net                     40,647        0.2%           239,203        1.9%       (198,556 )      (83.0% )
(LOSS) INCOME
FROM
CONTINUING
OPERATIONS
BEFORE INCOME
TAXES               (7,506,629 )    (43.8% )         776,261        6.1%     (8,282,890 )   (1,067.0% )

INCOME TAX
(EXPENSE)             (257,222 )     (1.5% )        (181,743 )     (1.4% )      (75,479 )       41.5%

NET (LOSS)
INCOME FROM
CONTINUING
OPERATION (7,763,851 ) (45.3% ) 594,518 4.7% (8,358,369 ) (1,405.9% )



(a) Revenue

For the three months ended September 30, 2013, our revenue increased by 34.3% from $12,765,694 to $17,145,512 as compared to the three months ended September 30, 2012, mainly because of increased sales of our ATV and Go-Kart vehicles compared to the same period of last year. For the three months ended September 30, 2013, our EV business only recorded a slight increase in unit sales and revenue compared to the same period of 2012. However, the Company believes that . . .

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