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Kandi Technologies (KNDI) Financial Condition | Alternative Energy Stocks

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Kandi Technologies (KNDI) Financial Condition Part III - Financial Condition
Arthur Porcari.

This is part three of a four-partseries on Kandi Technologies (KNDI). PartIwasanintroduction, PartIItookalookat Kandi's Business, and PartIV will look at the company's stock price, forecast and bottomline.

KNDI recentlycompleted another excellent quarter with an 80% Year Over YearIncrease 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 year2009results showed revenues of $33,827,762, net income of $999,801. Full year2008 results showed revenues of $40,513,788, net income of $4,922,078.

I mentionedinPartII that Management took the Company through a majorrestructuring on two fronts in late 2008 and 2009. Prior to therestructuringKNDI was exclusively an exporter of gas and diesel powered off roadrecreationalvehicles. As can be seen by recent record quarterly numbers bycompetitor PolarisIndustries (PII),this is still a very good and growing business and KNDI willremain a strong participant in this legacy sector. However, acombination of theglobal economic meltdown causing a dramatic drop in KNDI's legacyexport sales,increased fossil fuel costs and a worldwide recognition with China intheforefront that EV's were a wave for the future, created an opportunityfor KNDIto reshape its destiny and become a legitimate potential contender in apotential future Trillion dollar market. This type of major shift doesnot comewithout cost. As would be expected with any company making such achange, duringthis time R&D, re-tooling, and marketing costs ramped upconsiderably. Yetduring 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 costsmanagedto complete the transition suffering only one quarter of a cash loss ofonly afew hundred thousand dollars. A task the would be incomprehensible toany USmanufacturing company. During this time, the Company developed,receivedapproval and initiated sales of four different EV's, two for export andtwo inChina. With the transition effectively completed as is evidenced by the65%reduction in R&D and 55% decrease in Selling & Distributionexpenses,year over year in the recently reported second quarter, and initialconsumersales along with government and municipal sales of EV's in Chinabeginning inthis current third quarter, both revenues and net income should beexpected todramatically increase in the second half. More on this later.

But what about the Balancesheet?

Atface, a quick review of KNDI’s balance sheet may make onethink the Company might be low on cash to grow, particularly usingUS Company measures. However, a combination of a closer reading ofthe 10Q, along with an understanding of the way China banks handletheir credit facilities and the way Government and Municipal subsidypaymentswork presents a different story. Particularly when one sees how low thetangibleassets are valued on the books.

Earlierthisyearthe Company completed its first ever outside financing with a$10 million 6.25% convertible noteoffering convertible at $3.59 a share with two US Institutions whichcertainlyhas enhanced their balance sheet. With that offering completed,let meshow why the Company is in excellent financial condition with noforeseeableneed for additional equity capital unless of course the stock pricesrises to apoint that it would be imprudent not to add capital. With currentassetsof $49,115,201 and current liabilities of $48,433,030, its smallpositive working capital is as strong afinancial position that the company has ever seen. A year ago, in themiddle ofits restructuring, current assets were $29,997,837 and currentliabilities were$42,100,705, a negative $12 million yet they completed therestructuring withlittle problem. A potentially fearful situation if this were a US basedCompany,but not necessarily so for a China company. Let me explain thedifference.

Mostdon’trealize, but China Banks typically do not provide long term financingasexplained in a footnote in the Company's SEC filings. China bankstypically just providecredit facilities for one year with a mutual understanding that asidefromadjusting for current rates, as long as the Company stays current, thefacilitywill continue to roll over each year. This Company has been financedthis wayalmost from inception. For thisreason the Company has little Long Term Debt. While the balance sheetdoes showLong 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.

Letslookatthe Assets

Ifthis werea US Company, it would have a fantastic looking balance sheet. Why? AUS companywould most likely have a long term mortgage debt against its primaryasset, its modern, ten-building, 2.7million sq.ft. underroof, 400 acre campus. Due to statutory depreciation this asset is onlycarriedon the books for approximately $11.5 million. This videoclipwhich is a bit outdated and these photoswill give an idea of their facilities and capacities. Intoday’s much increased China Real Estate market, it is unlikely thecompany could rebuild this facility for less than $80 million. Avalue considerably more than the current stock market cap of $63million.Further reading of the most recent 10q, shows they still have some$7.5 million in available untapped Credit facility if needed. Theyalso have almost $10 million in inventory (an almost double from lastyear) already built out for thequarter ahead. Virtuallyall of this inventory and available credit facility is for the exportside of the business. The China side of the business is being builtalmost exclusively through innovative use of the China subsidy programs.

WhytheChinaside requires little capital outlay

Asmentioned above, thecurrent quarter is the quarter that vehicles for sale in China startshowing up on their financials. As mentioned prior, in this secondhalf, they have government approval for subsidies for some 3000 cars tobe sold in Jinhua City China alone. Thisshould add some $18 million to thelegacy business for the second half. Additionally, more directGovernmentand Municipal sales are anticipated in the second half. The good partabout this business is that the subsidy alone covers more than theactual rawcosts of building the cars, and they get paid this subsidyapproximately ten daysafter they sell vehicles to the dealers. So, for example, this is howthey can build out this order with very little out of pocket cost.First they build 100 cars which mightcost them $300k out of pocket, the then deliver these 100 cars to thedealer andget paid maybe $200,000. They then bill the Government for anapproximate $400thousand for the subsidy and get paid the subsidy in about 10 days.They nowhave $600,000 to build 200 cars and do the same procedure allover again, then 400 cars and so on. So you can see, they are barelyout-of-pocket any significant cash at any time and can make the whole3000 car delivery in just a few months.

Continued in final PartIV which will look at the company's stock price, forecast andbottom line.

DISCLOSURE: Long KNDI
ArthurPorcariisaretiredformerregionalstockbrokerage firm President with 37years stock market experience. His finance background includes, threeyears a stockbroker, ten years a brokerage firm President, an OTCMarket Maker, twenty three years an Investment Banker to include 14years as Managing Consultant to Corporate Strategies, Inc. a firmspecializing in advising young public companies and companies aboutto go public on the “Ways of Wall Street”. He currently blogson Seeking Alpha under “Corstrat” and hn the past been anon-air guest as well has a guest host on Business Talk Radio NetworkHis passion and particular expertise is for small cap emerging growthcompanies.

Hecurrentlyisandhasbeenashareholderof Kandi Technologies since it was firstlisted for trading in the US.

Posted by Guest Contributor on September 17, 2010 07:25 PM | Kandi Technologies (KNDI) Financial Condition

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