Part III – Financial Condition
This is part three of a four-part series on Kandi Technologies (KNDI). Part I was an introduction, Part II took a look at Kandi’s Business, and Part IV will look at the company’s stock price, forecast and bottom line.
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 (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 global economic meltdown causing a dramatic drop in KNDI’s legacy export sales, increased fossil fuel costs and a worldwide recognition with China in the forefront that EV’s 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 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 the would be incomprehensible to any US manufacturing company. During this time, the Company developed, received approval and initiated sales of four different EV’s, 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, year over year in the recently reported second quarter, and initial consumer sales along with government and municipal sales of EV’s 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 their 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 prices 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 they completed the restructuring with little problem. A potentially fearful situation if this were a US based Company, but not necessarily so for a China company. Let me explain the difference.
Most don’t realize, but China Banks typically do not provide long term financing as explained in a footnote in the Company’s SEC filings. China 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.
Lets look 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 they still have some $7.5 million in available untapped Credit facility if needed. They also have 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 that vehicles for sale in China start showing up on their financials. As mentioned prior, in this second half, they have 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. So, for example, this is how they can build out this order with very little out of pocket cost. First they build 100 cars which might cost them $300k out of pocket, the then
deliver these 100 cars to the dealer and get paid maybe $200,000. They then bill the Government for an approximate $400 thousand for the subsidy and get paid the subsidy in about 10 days. They now have $600,000 to build 200 cars and do the same procedure all over again, then 400 cars and so on. So you can see, they are barely out-of-pocket any significant cash at any time and can make the whole 3000 car delivery in just a few months.
Continued in final Part IV which will look at the company’s stock price, forecast and bottom line.
DISCLOSURE: Long KNDI
Arthur Porcari is a retired former regional stock brokerage firm President with 37 years stock market experience. His finance background includes, three years a stockbroker, ten years a brokerage firm President, an OTC Market Maker, twenty three years an Investment Banker to include 14 years as Managing Consultant to Corporate Strategies, Inc. a firm specializing in advising young public companies and companies about to go public on the “Ways of Wall Street”. He currently blogs on Seeking Alpha under “Corstrat” and hn the past been an on-air guest as well has a guest host on Business Talk Radio Network His passion and particular expertise is for small cap emerging growth companies.
He currently is and has been a shareholder of Kandi Technologies since it was first listed for trading in the US.