| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE
6 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a)
Economic and Political Risks 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 $92,445 and $10,765,344 at December 31, 2020 and
December 31, 2019, respectively. Contingent
consideration related to the acquisitions of Kandi Smart Battery Swap and SC Autosports, 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
$3,703,000 and $5,197,000 at December 31, 2020 and December 31, 2019, respectively. Also see Note 21. (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, 2020 and December 31, 2019, the Company’s restricted cash was $ 442,445 and $11,022,078, respectively. (e)
Inventories 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. 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 and Due from the Affiliate Company and Related Parties Accounts
receivable are recognized and carried at net realizable value. An allowance for doubtful accounts is recorded for periods in which
the Company determines a loss is probable, based on its assessment of specific factors, such as troubled collections, historical
experience, accounts aging, ongoing business relations and other factors. 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. Net
amount due from the Affiliate Company represent net trade receivable from the Affiliate Company, loan lending to the Affiliate
Company as well as interest related to such loan. As of December 31, 2020 and 2019, the Company’s net amount due from the
Affiliate Company includes $19.8 million net trade receivable and $2.2 million loan interest, $29.3 million net trade receivable
and $2.1 million loan interest, respectively. As
of December 31, 2020 and December 31, 2019, amount due from related party was $886,989 and $0, respectively. As of December 31,
2020 and December 31, 2019, amount due to related party was $500,000 and $0, respectively. As
of December 31, 2020 and December 31, 2019, credit terms with the Company’s customers were typically 180 to 360 days after
delivery. As of December 31, 2020 and 2019, the Company had a $110,269 and $254,665 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. (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 if 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 3.50% to 4.50% annually. As of December 31, 2020 and 2019, the Company had notes receivable from
unrelated parties of $31,404,630 and $42,487,225, respectively, which notes receivable typically mature within six months. (h)
Property, Plants and Equipment, net Property,
Plants 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 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 Statement of Financial
Accounting Standards (“SFAS”) No. 144 (now known as “ASC 360”). 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 no impairment loss for years ended December 31, 2020 and 2019. (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 27 “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 $7,246,312
and $6,207,747 for the years ended December 31, 2020 and 2019, 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, 2020 and 2019, $1,130,262 and $792,628, 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,
2020 2019
Period end RMB : USD exchange rate 6.5277 6.9668
Average RMB : USD exchange rate 6.9001 6.9072 (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 Black-Scholes-Merton 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. ASC standards require forfeitures to be estimated at
the time of grant and revised in subsequent periods, if necessary, if actual forfeitures differ from those estimates. The
stock-based option expenses for the years ended December 31, 2020 and 2019 were $0 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. As
of December 31, 2020 and 2019, the Company performed goodwill impairment testing at the reporting unit level and determined that
no impairment was necessary. (t)
Intangible Assets Intangible
assets consist of patent, trade names and customer relations associated with the purchase price from the allocation of Yongkang
Scrou and Kandi Smart Battery Swap. Such assets are being amortized over their estimated useful lives. Intangible assets were
amortized as of December 31, 2020. The amortization expenses for intangible assets were $ 625,629 and $ 625,070 for the years
ended December 31, 2020 and 2019, 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 Kandi New Energy is a VIE and that the Company’s wholly-owned
subsidiary, Zhejiang Kandi Technologies, absorbs a majority of the risk of loss from the activities of this company, thereby enabling
the Company, through Zhejiang Kandi Technologies, to receive a majority of its expected residual returns. 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 own 100%
of Kandi New Energy, and have 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. (w)
Reclassification The Company has reclassified certain comparative
amounts in the consolidated balance sheets as of December 31, 2019 to conform to the current year’s presentation. The principal
reclassifications are related to the construction in progress and deferred taxes assets being reclassified from the other long term assets
which is categorized separately on the balance sheets. The reclassification did not have an impact on the reported total assets, liabilities,
stockholders’ equity and net income. Certain
reclassifications have been made to the consolidated statements of cash flows for year ended December 31, 2019 to conform to the
presentation of condensed consolidated financial statement for year ended December 31, 2020. The Company reclassified the following
1) grouping due from employees into other receivables and other assets; 2) grouping customer deposits and deferred income into
other payables and accrued liabilities. |
