KANDI TECHNOLOGIES GROUP, INC. Overview
We are one of the leading manufacturers of EV products (throughKandi Hainan and theAffiliate Company ), EV parts and off-road vehicles inChina . For the year endedDecember 31, 2019 , we recognized total revenue of$ 135,741,336 as compared to$112,438,828 for the year endedDecember 31, 2018 , an increase of$ 23,302,508 or 20.7%. In 2019, we recorded$ 25,430,909 of gross profit, an increase of 25.6% from 2018. Gross margin for the year endedDecember 31, 2019 was 18.7%, compared to 18.0% for the year endedDecember 31, 2018 . We recorded a net loss of$7,188,727 in 2019 compared to a net loss of$5,694,699 in 2018, an increase of net loss of$1,494,028 or 26.2%. The current subsidy standard is provided for in the Circular on Further Improving the Subsidy Policies for the Promotion and Application of New Energy Vehicles, which was jointly promulgated by the Ministry of Finance, theMinistry of Science and Technology , theMinistry of Industry and Information Technology and theNational Development and Reform Commission in 2019. The current subsidy standard reduces the amount of national subsidies and cancels local subsidies, resulting in a significant reduction in the total subsidy amount as compared to 2018. We believe the new subsidy standard presents both challenges and opportunities to the Company. In the past few years, although the government had a strong support policy for new energy vehicles, the unstable subsidy policy and the unpredictable timing of receiving such subsidies have exerted tremendous pressure on the Company's cash flow. Currently, in order to adapt to the new subsidy standard, theAffiliate Company is making full use of Geely's resources and developing new models with goals to be independent of the government's subsidies and have strong competitiveness at the same time. OnJanuary 13, 2020 , theAffiliate Company hosted a launch ceremony to celebrate the release of its first production electric vehicle: the Maple Model 30X (or Maple 30X) at itsJiangsu subsidiary. OnApril 13, 2020 , the Maple 30x was revealed in an online brand launch ceremony and was available for immediate pre-order. Through the equity transfer of theAffiliate Company , although our share of theAffiliate Company decreased to 22%, we believe our 22% share of income from theAffiliate Company will exceed our 50% share of income before the equity transfer. We are working on developing new business partners and clients for our products to reduce our dependence on existing customers and is focusing our new business development efforts on EV parts and intelligent transportation products. OnMarch 4, 2019 , in order to build a logistics network composed of suppliers, manufacturers, warehouses, distribution centers and channel providers, meeting the needs of improving production and operation efficiency, the Company participated in the formation ofZhejiang Kandi Supply Chain Management Co., Ltd. ("Supply Chain Company "). Kandi Vehicles has a 10% ownership interest inSupply Chain Company , the remaining 90% is owned by unrelated other parties. Through centralized purchasing fromSupply Chain Company , the Company can reduce the purchasing cost by 3% to 5%. The COVID-19 will affect the company's business performance in 2020. However,, the extent to which the COVID-19 impacts our operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others. The Company originally planned to export 2,000 to 5,000 units electric vehicles to theU.S. in 2020, but due to the COVID-19 pandemic in the first half of 2020, the plan should be adjusted according to the situation of COVID-19 control
in theU.S. 20 Results of Operations
Comparison of Years Ended
The following table sets forth the amounts and the percentage relationship to revenues of certain items in our consolidated statements of operations for the years endedDecember 31, 2019 and 2018: Year Ended Change in December 31, % of December 31, % of Amount 2019 2019 Revenue 2018 Revenue VS 2018 Change in % REVENUES FROM UNRELATED PARTY, NET$ 119,879,895 88.3 %$ 63,707,518 56.7 % 56,172,377 88.2 % REVENUES FROM THE AFFILIATE COMPANY AND RELATED PARTY, NET 15,861,441 11.7 % 48,731,310 43.3 % (32,869,869 ) (67.5 %) REVENUES, NET 135,741,336 100.0 % 112,438,828 100.0 % 23,302,508 20.7 % COST OF GOODS SOLD (110,310,427 ) (81.3 %) (92,191,383 ) (82.0 %) (18,119,044 ) 19.7 % GROSS PROFIT 25,430,909 18.7 % 20,247,445 18.0 % 5,183,464 25.6 %
OPERATING EXPENSES: Research and development (6,207,747 ) (4.6 %) (10,084,378 ) (9.0 %) 3,876,631
(38.4 %)
Selling and marketing (4,070,001 ) (3.0 %) (3,189,022 ) (2.8 %) (880,979 ) 27.6 %
General and
administrative (14,243,625 ) (10.5 %) (8,612,393 ) (7.7 %) (5,631,232 ) 65.4 %
Total Operating Expenses (24,521,373 ) (18.1 %) (21,885,793 ) (19.5 %) (2,635,580 ) 12.0 %
INCOME (LOSS) FROM
OPERATIONS 909,536 0.7 % (1,638,348 ) (1.5 %) 2,547,884 (155.5 %)
OTHER INCOME (EXPENSE):
Interest income 791,888 0.6 % 1,324,812 1.2 % (532,924 ) (40.2 %)
Interest expense (4,822,734 ) (3.6 %) (1,871,851 ) (1.7 %) (2,950,883 ) 157.6 %
Change in fair value of contingent consideration (1,107,427 ) (0.8 %) 3,405,864
3.0 % (4,513,291 ) (132.5 %)
Government grants 792,628 0.6 % 17,787,445 15.8 % (16,994,817 ) (95.5 %)
Gain from equity dilution
in the Affiliate Company 4,263,764 3.1 % - 0.0 % 4,263,764 -
Gain from equity sale in
the Affiliate Company 20,438,986 15.1 % - 0.0 % 20,438,986 -
Share of loss after tax
of the
71.7 %
Other income, net 1,569,311 1.2 % 956,839 0.9 % 612,472 64.0 %
Total other (expense)
income, net (8,790,522 ) (6.5 %) 3,714,403 3.3 % (12,504,925 ) (336.7 %)
(LOSS) INCOME BEFORE
INCOME TAXES (7,880,986 ) (5.8 %) 2,076,055 1.8 % (9,957,041 ) (479.6 %)
INCOME TAX BENEFIT
(EXPENSE) 692,259 0.5 % (7,770,754 ) (6.9 %) 8,463,013 (108.9 %)
NET LOSS (7,188,727 ) (5.3 %) (5,694,699 ) (5.1 %) (1,494,028 ) 26.2 %
21
Revenues
For the year ended December 31, 2019, we had net revenues of$ 135,741,336 compared to net revenues of$112,438,828 for the year endedDecember 31, 2018 , representing an increase of$23,302,508 , or 20.7%, from 2018. Compared to 2018, the increase in revenue was primarily due to the increase in sales of EV parts and off-road vehicles. The following table summarizes our revenues by product type for the years endedDecember 31, 2019 and 2018: Years Ended December 31 2019 2018 Sales Sales EV parts$ 110,675,908 $ 99,099,312 EV products 108,640 - Off-road vehicles 22,743,142 13,339,516 Electric Scooters and Electric Self-Balancing Scooters 2,213,646 - Total$ 135,741,336 $ 112,438,828 EV Parts During the year endedDecember 31, 2019 , our revenue from the sale of EV parts was$110,675,908 , representing an increase of$11,576,596 or 11.7% from$99,099,312 for the year endedDecember 31, 2018 . The increase was mainly due to the sales from rental market battery maintenance and developing new clients
in 2019. Our revenue for the year endedDecember 31, 2019 primarily consisted of revenue from the sales of battery packs, body parts, EV controllers, air conditioning units and other auto parts for use in the manufacturing of EV products. These sales accounted for 81.5% of total sales. During the years endedDecember 31, 2019 and 2018, our revenues from the sale of EV parts to theAffiliate Company accounted approximately 11.7% and 43.3% of our total net revenue for the year, respectively. The decrease is mainly due to theAffiliate Company's temporary declining sales, which was caused by its product adjustments. During 2019, the EV parts we provided to theAffiliate Company were primarily used for battery upgrade and market maintenance for the EV products that were previously put into the leasing market. EV Products During the year endedDecember 31, 2019 , our revenue from the sale of EV Products was$108,640 , which was due to the export sales of Hainan factories' products including model K23 and K27 started in late 2019. There weren't any EV products sales in year 2018. Off-Road Vehicles During the year endedDecember 31, 2019 , our revenues from the sale of off-road vehicles including go-karts, all-terrain vehicles ("ATVs"), and others, were$ 22,743,142 , representing an increase of$ 9,403,626 or 70.5% from$13,339,516 for the year endedDecember 31, 2018 . The increase in revenue of off-road vehicles was largely due to the increase sales from SC Autosports. We consolidated SC Autosports's sales of off-road vehicles of$18,106,091 and$7,898,736 for the year endedDecember 31, 2019 and 2018. SC Autosports became our wholly-owned subsidiary in theU.S. inJuly 2018 .
Our off-road vehicles business line accounted for approximately 16.8% of our
total net revenue for the year ended
Electric Scooters and Electric Self-Balancing Scooters
During the year endedDecember 31, 2019 , our revenue from the sale of Electric Scooters and Electric Self-Balancing Scooters was$2,213,646 . These were new products launched by Kandi Vehicles in 2019. There weren't any Electric Scooters and Electric Self-Balancing Scooters sales in years 2018. 22
The following table shows the breakdown of our net revenues:
Year Ended December 31
2019 2018
Sales Sales
Revenue Revenue
Primary geographical markets
Overseas $ 24,623,424 $ 12,741,570
China 111,117,912 99,697,258
Total $ 135,741,336 $ 112,438,828
Major products
EV parts $ 110,675,908 $ 99,099,312
EV products 108,640 -
Off-road vehicles 22,743,142 13,339,516
Electric Scooters and Electric Self-Balancing Scooters 2,213,646 -
Total $
135,741,336
Timing of revenue recognition Products transferred at a point in time$ 135,741,336 $ 112,438,828 Cost of Goods Sold Cost of goods sold for the year endedDecember 31, 2019 was$110,310,427 , representing an increase of$18,119,044 , or 19.7%, from$92,191,383 for the year endedDecember 31, 2018 . The increase of cost of goods sold compare to 2018 was primarily due to the corresponding increase in sales. Please refer to the Gross Profit section below for product margin analysis. Gross Profit
Our margins by product for the past two years are as set forth below:
2019 2018
Sales Cost Gross Profit Margin % Sales Cost Gross Profit Margin %
EV parts $ 110,675,908 91,421,805 19,254,103 17.4 % $ 99,099,312 82,990,161 16,109,151 16.3 %
EV products 108,640 86,909 21,731 20.0 % - - - -
Off-road vehicles 22,743,142 16,979,661 5,763,481 25.3 % 13,339,516 9,201,222 4,138,294 31.0 %
Electric Scooters and
Electric
Self-Balancing
Scooters 2,213,646 1,822,052 391,594 17.7 % - - - -
Total $ 135,741,336 110,310,427 25,430,909
18.7 %
18.0 %
23
Gross profit for the year ended December 31, 2019 was $ 25,430,909 , as compared
to $20,247,445 for the year ended December 31, 2018 , representing an increase of
$ 5,183,464 or 25.6% from 2018. The increases were primarily attributable to the
increased sales in 2019 as compared to that in 2018. Our gross margin for the
year ended December 31, 2019 , was 18.7%, compared to 18.0% for the year ended
December 31, 2018 . The increase in our gross margin as compared to 2018 was
mainly due to due to the increased selling price of the charging and exchanging
equipment and the increased proportion of the high-margin battery processing
business in 2019.
Research and Development
Research and development expenses, including materials, labor, equipment
depreciation, design, testing, inspection, and other related expenses totaled
$6,207,747 for the year ended December 31, 2019 , compared to $10,084,378 for the
year ended December 31, 2018 , representing a decrease of $3,876,631 , or 38.4%,
from 2018. This decrease was primarily due to the completion of R&D works
related to the development of EV Model K23 at Hainan facility in the third
quarter of 2018. For the year ended December 31, 2019 and 2018, approximately 0%
and 66.2% of our research and development expenses were spent on the research
and development of EV product model at Hainan facility, respectively.
Sales and Marketing
Selling and distribution expenses were $4,070,001 for the year ended December
31, 2019 , compared to $3,189,022 for the year ended December 31, 2018 ,
representing an increase of $880,979 , or 27.6% from 2018. This increase compare
to 2018 was primarily attributable to the increasing labor and advertising
expenses in connection with the expansion the U.S. electric vehicle market of $
2 million offset by the decreasing after sales service fee in 2019.
General and Administrative Expenses
General and administrative expenses were$14,243,625 for the year endedDecember 31, 2019 , compared to$8,612,393 for the year endedDecember 31, 2018 , representing an increase of$5,631,232 or 65.4% from 2018. For the year endedDecember 31, 2019 , general and administrative expenses included$1,360,258 as expenses for common stock awards and stock options to employees and Board members, compared to$285,609 for the years endedDecember 31 2018 , representing the result of$2,930,486 as expenses for common stock awards and stock options to employees and Board members net of$2,644,877 of reversal of previously accrued stock option expenses for forfeited stock option. Excluding stock compensation expenses, our net general and administrative expenses for the year endedDecember 31, 2019 were$ 12,883,367 , an increase of$ 4,556,583 , or 54.7%, compared to$8,326,784 for the year endedDecember 31, 2018 . The increase compared to 2018 was largely due to the increased operation costs of the Company since Hainan facility has been put into production in the third quarter of
2018. Interest Income
Interest income was$791,888 for the year endedDecember 31, 2019 , compared to$1,324,812 for the year endedDecember 31, 2018 , representing a decrease of$532,924 , or 40.2%, from 2018. The decrease as compared to 2018 was primarily attributable to the decreased interest earned on loans to theAffiliate Company since Kandi Vehicles' loan to theAffiliate Company converted to equity in
the second quarter of 2018. Interest Expense Interest expense was$4,822,734 for the year endedDecember 31, 2019 , compared to$1,871,851 for the year endedDecember 31, 2018 , representing an increase of$2,950,883 , or 157.6% from 2018. The increase compared to 2018 was primarily due to the interest expense of Hainan factory's long-term debt. Of the interest expenses,$0 and$145,411 , respectively, were the discounts associated with the settlement of bank acceptance notes for the years endedDecember 31, 2019 and 2018.
Change in fair value of contingent consideration
For the year endedDecember 31, 2019 , the loss related to changes in the fair value of contingent consideration was$1,107,427 , representing a decrease of$4,513,291 or 132.5% compared to the gain related to changes in the fair value of contingent consideration of$3,405,864 for the year endedDecember 31, 2018 , which was mainly due to the adjustment of the fair value of the contingent consideration liability associated with remaining shares of restrictive common stock. (Please refer to NOTE 21 - CONTINGENT CONSIDERATION LIABILITY). The fair value of the contingent consideration liability was estimated at each reporting date by using the Monte Carlo simulation method, which took into account all possible scenarios. 24 Government Grants Government grants totaled$792,628 for the year endedDecember 31, 2019 , compared to$17,787,445 for the year endedDecember 31, 2018 , representing a decrease of$16,994,817 , or 95.5% from 2018. The decrease from 2018 was primarily due to the subsidies we received from the Hainan provincial government to assist our development of K23 model, among which$15,368,774 was recognized as income in 2018, and we did not receive such subsidies in connection with the development of K23 model during 2019.
Gain from equity dilution in the
Gain from equity dilution was$4,263,764 for the year endedDecember 31, 2019 , which was primarily due to gain from the March Affiliate Loan to Equity Conversion. Pursuant to the Transfer Agreement, theAffiliate Company converted a loan ofRMB 314 million (approximately$45.7 million ) fromGeely Group last year to equity in order to increase its cash flow. As a result, our equity interests in theAffiliate Company decreased to 43.47% in March, 2019.
Gain from equity sale in the
Gain from equity sale was$20,438,986 for the year endedDecember 31, 2019 , which was due to the Affiliate Equity Transfer. In March, 2019, Kandi Vehicles agreed to sell 21.47% of its equity interests in theAffiliate Company to Geely for a total amount ofRMB 516 million (approximately$72.3 million ). As ofSeptember 30, 2019 , the equity transfer had been completed. Therefore, in the third quarter of 2019, the Company has recognized the gain from equity sale.
Share of Income (Loss) after Tax of the
For the year endedDecember 31, 2019 , our share of loss after tax of theAffiliate Company was$30,716,938 compared to loss of$17,888,706 for year endedDecember 31,2018 . The increased losses incurred by theAffiliate Company were largely attributable to theAffiliate Company's temporary declining sales, which was caused by its product adjustments. Other Income (Expense), Net Net other income was$1,569,311 for the year endedDecember 31, 2019 , compared to net other income of$956,839 for the year endedDecember 31, 2018 , representing an increase of$612,472 from 2018. The increase from 2018 was primarily due to the reversal of accrued other payable, which has been evaluated by management in 2019, which subsequently concluded that this accrued liability will not be incurred, offset by the fees earned on technology development services in 2018. Income Taxes In accordance with the relevant Chinese tax laws and regulations, our applicable corporate income tax rate is 25%. However, Kandi Vehicles and Jinhua An Kao are qualified as high technology companies inChina and are therefore entitled to a reduced corporate income tax rate of 15%.
Each of our wholly-owned subsidiaries, Kandi New Energy, Yongkang Scrou and
We have a 22% ownership interest in the
Our actual effective income tax rate for 2019 was a tax benefit of 8.78% on a
reported loss before taxes of approximately
Net Income (Loss)
We recorded net loss of
25
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
Year Ended
December 31, December 31,
2019 2018
Net cash (used in) provided by operating activities $ (29,886,272 ) $ 13,587,621
Net cash provided by (used in) investing activities 31,252,624 (947,441 )
Net cash used in financing activities
(6,980,649 ) (5,297,724 ) Net (decrease) increase in cash and cash equivalents and restricted cash
(5,614,297 ) 7,342,456
Effect of exchange rate changes on cash (226,139 ) (1,099,881 ) Cash and cash equivalents and restricted cash at beginning of year
22,353,071 16,110,496 Cash and cash equivalents and restricted cash at end of year 16,512,635 22,353,071
For the year endedDecember 31, 2019 , cash used in operating activities was$29,886,272 , as compared to cash provided in operating activities was$13,587,621 for the year endedDecember 31, 2018 . Our operating cash inflows include cash received primarily from sales of our EV parts and off-road vehicles. These cash inflows are offset largely by cash paid primarily to our suppliers for production materials and parts used in our manufacturing process, operation expenses, employee compensation, and interest expenses of our financings. The major operating activities that provided cash for the year endedDecember 31, 2019 were an increase of accounts payable of$10,440,338 . The major operating activity that used cash for year endedDecember 31, 2019 was an increase of accounts receivable of$40,123,966 . For the year endedDecember 31, 2019 , cash provided in investing activities was$31,252,624 , as compared to cash used from investing activities of$947,441 for the year endedDecember 31, 2018 . The major investing activities that provided cash for the year endedDecember 31, 2019 were an increase of cash received from equity sale in theAffiliate Company of$ 31,850,822 . The major investing activities that used cash for the year endedDecember 31, 2019 were$526,336 used for the purchases of property, plant and equipment. For the year endedDecember 31, 2019 , cash used in financing activities was$6,980,649 , as compared to cash used in financing activities of$5,297,724 for the year endedDecember 31, 2018 . The major financing activities that provided cash for the year endedDecember 31, 2019 were proceeds from short-term bank loans of$34,746,352 . The major financing activities that used cash for year endedDecember 31, 2019 were repayments of short-term bank loans of$38,944,869 . Working Capital
We had a working capital of
After two years of negotiation, onMarch 9, 2020 , a real estate repurchase agreement was entered into by and between between Kandi Vehicles andJinhua Economic and Technological Development Zone that will enable Kandi Vehicles to optimize its production efficiency, lower operating costs, and generate a substantial cash inflow ofRMB 525 million (USD 75.6 million ) and will get no less thanRMB 500 million (USD 71.9 million ) subsidies based on Kandi Vehicle's financial contribution to the local department of finance within the next eight years by monetizing one of its largest assets. 26
Contractual Obligations and Off-balance Sheet Arrangements
Short-term and long-term Loans:
For the discussion of guarantees for bank loans, please refer to Note 17 - Short-term and long-term Loans under Item 8 Notes to Consolidated Financial Statements.
Notes payable:
For the discussion of guarantees for bank loans, please refer to Note 18 - Notes payable under Item 8 Notes to Consolidated Financial Statements.
Guarantees and pledged collateral for third party bank loans
For the discussion of guarantees for bank loans, please refer to Note 24 - COMMITMENTS AND CONTINGENCIES under Item 8 Notes to Consolidated Financial Statements.
Critical Accounting Policies and Related Estimates That Could Have a Material Effect on Our Consolidated Financial Statements
This section should be read together with the Summary of Significant Accounting Policies in the attached consolidated financial statements included in this Annual Report.
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 our accounts receivable and inventories. 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. As ofDecember 31, 2019 andDecember 31, 2018 , credit terms with the Company's customers were typically 180 to 360 days after delivery. As ofDecember 31, 2019 and 2018, the Company had a$254,665 and$120,010 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 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. Although we believe that there is little likelihood that actual results will differ materially from our 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, we could realize significant write downs for slow-moving inventories or uncollectible accounts receivable. 27
Policy affecting recognition of revenue
Our revenue recognition policy plays a key role in our consolidated financial statements.
The Company adopted ASC Topic 606 Revenue from Contracts with Customers with a date of the initial application ofJanuary 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. Policy affecting leases
EffectiveJanuary 1, 2019 , the Company adopted ASC 842 using the effective date approach. The Company elected to adopt both the transition relief provided in ASU 2018-11 and the package of practical expedients which allowed us, among other things, to retain historical lease classifications and accounting for any leases that existed prior to adoption of the standard. Additionally, the management elected the practical expedients allowing the Company not to separate lease and non-lease components and not record leases with an initial term of twelve months or less ("short-term leases") on the balance sheet across all existing asset classes. Per ASU 2018-01, the management elected the practical expedient that permits the Company to continue applying our current policy of accounting for land use rights that existed as of, or expired before, the effective date of ASC 842. We have applied this policy to all of our existing land use rights that were not previously accounted for under ASC 840. Adoption of the new standard resulted in the recording of operating lease assets (grouped in other long term assets of balance sheet) of$10 ,743and operating lease liabilities (grouped in other current liability of balance sheet)of$11,509 , respectively, as ofDecember 31, 2019 based on the present value of the lease payments for the remaining lease term of the Company's existing leases. The assets and liabilities recognized upon application of the transition provisions were primarily associated to the corporate office leases for SC Autosports. The standard did not materially impact the condensed consolidated statements of operations or cash flows. Adopting the new standard did not have a material impact on the accounting for leases under which the Company is the lessee.
Policy affecting options, warrants and convertible notes
Our 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. Our expected volatility assumption is based on the historical volatility of our 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 theU.S. Treasury yield curve in effect at the time of grant. Stock option expense recognition is based on awards expected to vest. There were no estimated forfeitures. 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 endedDecember 31, 2019 and 2018 were$0 ,$1,586,926 net of a reversal for forfeited stock options of$2,644,877 , respectively. There were no forfeitures estimated during the reporting period. Our 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 Binomial Tree model and the lattice valuation model. Our expected volatility assumption is based on the historical volatility of our common 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 theU.S. Treasury yield curve in effect at the time of measurement. Our warrants, which are freestanding derivatives classified as liabilities on the balance sheet, are measured at fair value on each reporting date, with decreases in fair value recognized in earnings and increases in fair values recognized in expenses. 28 The fair value of equity-based warrants, which are not considered derivatives under ASC 815, is estimated using the Black-Scholes -Merton model. Our expected volatility assumption is based on the historical volatility of our common 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 theU.S. Treasury yield curve in effect at the time of grant. In accordance with ASC 815, the conversion feature of the convertible notes is separated from the debt instrument and accounted for separately as a derivative instrument. On the date the convertible notes are issued, the conversion feature is recorded as a liability at its fair value, and future decreases in fair value are recognized in earnings while increases in fair values are recognized in expenses. We used the Black-Scholes -Merton option-pricing model to obtain the fair value of the conversion feature. The expected volatility assumption is based on the historical volatility of our common stock. The expected life assumption is primarily based on the expiration date of the conversion features. The risk-free interest rate for the expected term of the conversion features is based on theU.S. Treasury yield curve in effect at the time of measurement. Warranty Liability Most of our non-EV products ("Legacy Products") are exported out ofChina to foreign countries that have legal and regulatory requirements with which we are not familiar. The development of warranty policies for our Legacy Products in each of these countries would be virtually impossible and prohibitively expensive. Therefore, we provide price incentives and free parts to our customers and in exchange, our customers establish appropriate warranty policies and assume warranty responsibilities. Consequently, warranty issues are taken into consideration during price negotiations for our products. Free parts are delivered along with the products, and when products are sold, the related parts are recorded as cost of goods sold. Due to the reliability of our products, we have been able to maintain this warranty policy and we have not had any product liability attributed to our products. For the EV products that we sell inChina , we provide a three year or 50,000 kilometer manufacturer warranty. This warranty affects the Company through our participation and investment in theAffiliate Company , which manufactures the EV products.U.S. Corporate Income Tax
OnDecember 22, 2017 , theSEC staff issued Staff Accounting Bulletin (SAB) No. 118, which provides guidance on accounting for the tax effects of the Tax Act.SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance withSAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company's accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. If a company cannot determine a provisional estimate to be included in its financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
Pursuant to the disclosure provision ofSAB 118, the Company has completed and recorded provisional amounts for the income tax effects of the TCJA for the
year endedDecember 31st, 2019 .
Based onFinancial Accounting Standards Board ("FASB") staff Q&A Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income (GILTI), the FASB staff noted that the Company must make an accounting policy election to either (1) recognize taxes due on futureU.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the "period cost method") or (2) factor such amount into the Company's measure of its deferred taxes (the "deferred method"). The Company elected to treat the guilty as a current-period expense when incurred.
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