Examining Kandi Technologies: A China-Based EV and Quick Change Battery Company (Part III)

| About: Kandi Technologies (KNDI)

Financial Condition

KNDI recently completed another excellent quarter with an 80% Year Over Year Increase in Revenues and 425% Gain in Net Income. For the six months, Revenues grew 91.5% to $18,166,224 and Net income advanced 383.5% from $(356,525) in the first half last year to $1,010,782. Full year 2009 results showed revenues of $33,827,762, net income of $999,801. Full year 2008 results showed revenues of $40,513,788, net income of $4,922,078.

I mentioned in Part II that Management took the Company through a major restructuring on two fronts in late 2008 and 2009. Prior to the restructuring KNDI was exclusively an exporter of gas and diesel powered off road recreational vehicles. As can be seen by recent record quarterly numbers by competitor Polaris Industries (NYSE:PII), this is still a very good and growing business and KNDI will remain a strong participant in this legacy sector.

However, a combination of the dramatic drop in KNDI's legacy export sales due to the economic meltdown, increased fossil fuel costs, and a worldwide recognition with China in the forefront that EVs were a wave for the future, created an opportunity for KNDI to reshape its destiny, and become a legitimate potential contender in a potential future Trillion dollar market. This type of major shift does not come without cost. As would be expected with any company making such a change, during this time R&D, re-tooling, and marketing costs ramped up considerably. Yet during this time, in spite of the non-recurring spikes in these costs and 50% or more drops in revenues, KNDI's low and extremely flexible labor costs managed to complete the transition suffering only one quarter of a cash loss of only a few hundred thousand dollars (A task that would be incomprehensible to any US manufacturing company). The Company developed, received approval and initiated sales of four different EVs, two for export and two in China. With the transition effectively completed as is evidenced by the 65% reduction in R&D and 55% decrease in Selling & Distribution expenses YOY in the recently reported second quarter, and initial consumer sales along with government and municipal sales of EVs in China beginning in this current third quarter, both revenues and net income should be expected to dramatically increase in the second half. More on this later.

But what about the Balance sheet?

At face, a quick review of KNDI’s balance sheet may make one think the Company might be low on cash to grow, particularly using US Company measures. However, a combination of a closer reading of the 10Q, along with an understanding of the way China banks handle their credit facilities and the way Government and Municipal subsidy payments work, presents a different story. Particularly when one sees how low the tangible assets are valued on the books.

Earlier this year the Company completed its first ever outside financing with a $10 million 6.25% convertible note offering convertible at $3.59 a share with two US Institutions which certainly has enhanced its balance sheet. With that offering completed, let me show why the Company is in excellent financial condition with no foreseeable need for additional equity capital, unless of course the stock price rises to a point that it would be imprudent not to add capital. With current assets of $49,115,201 and current liabilities of $48,433,030, its small positive working capital is as strong a financial position that the company has ever seen. A year ago, in the middle of its restructuring, current assets were $29,997,837 and current liabilities were $42,100,705, a negative $12 million, yet KNDI completed the restructuring with little problem. A potentially fearful situation if this were a US based Company, but not necessarily so for a Chinese company. Let me explain the difference.

Most don’t realize, but Chinese Banks typically do not provide long term financing as explained in a footnote in the Company's SEC filings. China's banks typically just provide credit facilities for one year with a mutual understanding that aside from adjusting for current rates, as long as the Company stays current, the facility will continue to roll over each year. This Company has been financed this way almost from inception. For this reason the Company has little Long Term Debt. While the balance sheet does show Long Term Liabilities of $5,969,452, $4,791,969 of this amount is a non-cash warrant liability, leaving only $1,177,483 in true long term debt.

Looking at the Assets

If this were a US Company, it would have a fantastic looking balance sheet. Why? A US company would most likely have a long term mortgage debt against its primary asset, its modern, ten-building, 2.7 million sq.ft. under roof, 400 acre campus. Due to statutory depreciation this asset is only carried on the books for approximately $11.5 million. This video clip which is a bit outdated and these photos will give an idea of their facilities and capacities. In today’s much increased China Real Estate market, it is unlikely the company could rebuild this facility for less than $80 million-- a value considerably more than the current stock market cap of $63 million. Further reading of the most recent 10Q, shows the company still has some $7.5 million in available untapped Credit facility if needed. It also has almost $10 million in inventory (an almost double from last year) already built out for the quarter ahead. Virtually all of this inventory and available credit facility is for the export side of the business. The China side of the business is being built almost exclusively through innovative use of the China subsidy programs.

Why the China side requires little capital outlay

As mentioned above, the current quarter is the quarter in which vehicles for sale in China start showing up on the KNDI's financials. As mentioned prior, in this second half, the company has government approval for subsidies for some 3000 cars to be sold in Jinhua City China alone. This should add some $18 million to the legacy business for the second half. Additionally, more direct Government and Municipal sales are anticipated in the second half. The good part about this business is that the subsidy alone covers more than the actual raw costs of building the cars, and they get paid this subsidy approximately ten days after they sell vehicles to the dealers.

For example, this is how KNDI can build out this order with very little out of pocket cost. First the company builds 100 cars which might cost them $300k out of pocket, then deliver these 100 cars to the dealer and get paid maybe $200,000. KNDI then bills the Government for an approximate $400 thousand for the subsidy and gets paid the subsidy in about 10 days. KNDI now has $600,000 to build 200 cars and do the same procedure all over again, then 400 cars and so on. So you can see, the company is barely out-of-pocket any significant cash at any time and can make the whole 3000 car delivery in just a few months.


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