10-Q 1 v123053_10q.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 10-Q
 
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended June 30, 2008 
 
or
 
¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from ______to______
 
Commission file number 000-52186

Kandi Technologies, Corp.
(Exact name of registrant as specified in charter)
 
Delaware
 
87-0700927
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)

Jinhua City Industrial Zone
Jinhua, Zhejiang Province
People’s Republic of China
Post Code 321016
 (Address of principal executive offices)
 


(86 - 0579) 82239700
 (Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No ¨  
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
 
Yes ¨  No x
 
As of August 14, 2008 the registrant had issued and outstanding 19,961,000 shares of common stock, par value $.001 per share.
 


PART I— FINANCIAL INFORMATION
 
Item 1. Financial Statements. (Unaudited)
 
In the opinion of management, the accompanying unaudited condensed consolidated financial statements included in this Form 10-Q reflect all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations for the periods presented. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year.

KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS
 
   
June 30,
     
   
2008
 
December 31,
 
   
(Unaudited)
 
2007
 
           
CURRENT ASSETS
         
Cash and cash equivalents
 
$
156,896
 
$
1,149,140
 
Restricted cash
   
6,548,503
   
1,367,222
 
Accounts receivable, net of allowance for doubtful accounts of $1,634 and $3,701 as of June 30, 2008 and December 31, 2007, respectively
   
14,501,396
   
11,401,367
 
Inventories
   
5,425,919
   
3,293,529
 
Notes receivable, net of discount of $68,285 and $0 as of June 30, 2008 and December 31, 2007, respectively
   
6,506,108
   
47,853
 
Other receivables
   
131,281
   
416,454
 
Deposit for acquisition
         
12,270,859
 
Prepayments and prepaid expenses
   
68,919
   
17,774
 
Due from employees
   
-
   
9,932
 
Discontinued operation
   
-
   
14,158,890
 
Total Current Assets
   
33,339,022
   
44,133,020
 
               
LONG-TERM ASSETS
             
Plant and equipment, net
   
16,245,693
   
10,427,176
 
Land use rights, net
   
9,477,194
   
385,539
 
Construction in progress
   
1,253,868
   
1,321,832
 
Deferred taxes
   
480,986
   
405,006
 
Discontinued operation
   
-
   
506,526
 
Total Long-Term Assets
   
27,457,741
   
13,046,079
 
               
TOTAL ASSETS
 
$
60,796,763
 
$
57,179,099
 

See accompanying notes to condensed consolidated financial statements
 
2

 
KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
   
June 30,
     
   
2008
 
December 31,
 
   
(Unaudited)
 
2007
 
CURRENT LIABILITIES
         
Accounts payable
 
$
11,397,872
 
$
6,333,057
 
Other payables and accrued expenses
   
603,159
   
378,675
 
Short-term bank loans
   
27,139,905
   
20,869,862
 
Customer deposits
   
789,933
   
483,320
 
Notes payable
   
3,463,430
   
1,476,600
 
Due to employees
   
37,086
   
310
 
Due to related party
   
164,250
   
-
 
Discontinued operation
   
-
   
14,296,572
 
Total Current Liabilities
   
43,595,635
   
43,838,396
 
               
LONG-TERM LIABILITIES
             
Deferred taxes
   
296,511
   
296,511
 
Discontinued operation
   
-
   
2,651
 
Total Long-Term Liabilities
   
296,511
   
299,162
 
               
TOTAL LIABILITIES
   
43,892,146
   
44,137,558
 
               
CONTINGENCIES
             
               
SHAREHOLDERS’ EQUITY
             
Common stock, $0.001 par value; 100,000,000 shares authorized; 19,961,000 and 19,961,000 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively
   
19,961
   
19,961
 
Additional paid-in capital
   
7,138,105
   
7,138,105
 
Retained earnings (the restricted portion is $534,040 and $0 at June 30, 2008 and December 31, 2007, respectively)
   
8,635,534
   
5,125,120
 
Accumulated other comprehensive income
   
1,111,017
   
758,355
 
TOTAL SHAREHOLDERS’ EQUITY
   
16,904,617
   
13,041,541
 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
60,796,763
 
$
57,179,099
 
 
See accompanying notes to condensed consolidated financial statements
 
3


KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(UNAUDITED
 
   
Three Months Ended
 
Six Months Ended
 
   
June 30, 2008
 
June 30, 2007
 
June 30, 2008
 
June 30, 2007
 
                           
REVENUES, NET
$
12,424,373
$
11,109,555
 
$
21,753,075
 
$
16,471,019
 
                           
COST OF GOODS SOLD
   
(9,139,131
)
 
(8,468,179
)
 
(16,316,178
)
 
(12,861,099
)
                           
GROSS PROFIT
   
3,285,242
   
2,641,376
   
5,436,897
   
3,609,920
 
                           
Research and development
   
224,146
   
40,749
   
264,816
   
52,615
 
Selling and marketing
   
180,596
   
107,756
   
409,102
   
188,354
 
General and administrative
   
432,238
   
142,060
   
704,682
   
285,346
 
INCOME FROM CONTINUING OPERATIONS
   
2,448,262
   
2,350,811
   
4,058,297
   
3,083,605
 
                           
Interest expense, net
   
(395,087
)
 
(160,938
)
 
(1,009,699
)
 
(295,748
)
Government grants
   
17,274
   
-
   
40,574
   
-
 
Forfeiture of customer deposits
   
-
   
-
   
-
   
267,673
 
Other, net
   
(1,948
)
 
(70,254
)
 
20,047
   
(69,694
)
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
   
2,068,501
   
2,119,619
   
3,109,219
   
2,985,836
 
                           
INCOME TAX BENEFIT
   
33,920
   
-
   
73,660
   
-
 
                           
INCOME FROM CONTINUING OPERATIONS
   
2,102,421
   
2,119,619
   
3,182,879
   
2,985,836
 
                           
DISCONTINUED OPERATION
                         
Loss from discontinued operation
   
(34,219
)
 
(212,568
)
 
(33,379
)
 
(140,200
)
Gain from disposition of discontinued operation
   
368,249
   
-
   
360,913
   
-
 
NET GAIN (LOSS) FROM DISCONTINUED OPERATION
   
334,030
   
(212,568
)
 
327,534
   
(140,200
)
                           
NET INCOME
   
2,436,451
   
1,907,052
   
3,510,413
   
2,845,636
 
                           
OTHER COMPREHENSIVE INCOME
                         
                           
Foreign currency translation
   
93,622
   
75,376
   
350,834
   
136,385
 

See accompanying notes to condensed consolidated financial statements
 
4


KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(UNAUDITED)

   
Three Months Ended
 
Six Months Ended
 
   
June 30, 2008
 
June 30, 2007
 
June 30, 2008
 
June 30, 2007
 
                           
COMPREHENSIVE INCOME
 
$
2,530,073
 
$
1,982,426
 
$
3,861,247
 
$
2,982,021
 
                           
WEIGHTED AVERAGE SHARES OUTSTANDING BASIC AND DILUTED
   
19,961,000
   
12,176,911
   
19,961,000
   
12,088,456
 
                           
INCOME PER SHARE FROM CONTINUING OPERATION, BASIC AND DILUTED
 
$
0.11
 
$
0.17
 
$
0.16
 
$
0.25
 
                           
INCOME (LOSS) PER SHARE FROM GAIN (LOSS) FROM DISCONTINUED OPERATION, BASIC AND DILUTED
 
$
0.01
 
$
(0.01
)
$
0.02
 
$
(0.01
)
                           
NET INCOME PER COMMON SHARE, BASIC AND DILUTED
$
0.12
$
0.16
$
0.18
$
0.24
 
 
See accompanying notes to condensed consolidated financial statements
 
5


KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

   
Six Months 
Ended June 30,
 
   
2008
 
2007
 
CASH FLOWS FROM OPERATING ACTIVITIES:
         
Net income
 
$
3,510,413
 
$
2,845,636
 
Net (gain) loss from discontinued operation
   
(327,534
)
 
140,200
 
Income from continuing operations
   
3,182,879
   
2,985,836
 
Adjustments to reconcile net income to net cash provided by operating activities:
             
Depreciation and amortization
   
749,994
   
561,203
 
Deferred taxes
   
(75,980
)
 
-
 
Forfeiture of customer deposits
   
-
   
(267,673
) 
               
Changes in operating assets and liabilities, net of effects of acquisition:
             
(Increase) Decrease In:
             
Accounts receivable
   
(3,100,029
)
 
(5,894,263
)
Inventories
   
(2,132,390
)
 
877,564
 
Other receivables
   
285,175
   
(102,954
)
Due to employees
   
46,708
   
139,928
 
Prepayments and prepaid expenses
   
(51,145
)
 
(347,195
)
               
Increase (Decrease) In:
             
Accounts payable
   
5,064,815
   
1,943,480
 
Other payables and accrued liabilities
   
224,483
   
208,276
 
Customer deposits
   
306,612
   
859,386
 
Net cash provided by operating activities from continuing operations
   
4,501,122
   
963,588
 
Net cash provided by (used in) operating activities from discontinued operation
   
738,472
   
(14,276
)
Net cash provided by operating activities
   
5,239,594
   
949,312
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
             
Purchases of plant and equipment
   
(1,887,802
)
 
(513,916
)
Purchases of construction in progress
   
(545,134
)
 
(161,849
)
Reverse merger with SMOU, net of cash acquired
   
-
   
373
 
Purchase of a subsidiary, net of cash acquired
   
(44,129
)
 
-
 
Issuance of notes receivable
   
(6,477,313
)
 
(4,986,053
)
Repayment of notes receivable
   
19,057
   
2,016,236
 
Net cash used in investing activities from continuing operations
    (8,935,321
)
  (3,645,209
)
Net cash provided by investing activities from discontinued operation
   
-
   
-
 
Net cash used in investing activities
   
(8,935,321
)
 
(3,645,209
)
 
See accompanying notes to condensed consolidated financial statements
 
6

 
KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

   
Six Months 
Ended June 30, 
 
   
2008
 
2007
 
CASH FLOWS FROM FINANCING ACTIVITIES:
         
Restricted cash
   
(5,181,280
)
 
-
 
Proceeds from short-term bank loans
   
20,197,548
   
7,869,059
 
Repayment of short-term bank loans
   
(13,927,505
)
 
(5,008,645
)
Proceeds from notes payable
   
3,442,053
   
822,934
 
Repayment of notes payable
   
(1,455,223
)
 
(12,137
)
Repayment of advances to related parties
   
164,249
   
17,288
 
Net cash provided by financing activities from continuing operations
   
3,239,842
   
3,688,499
 
Net cash provided by financing activities from discontinued operation
   
-
   
-
 
Net cash provided by financing activities
   
3,239,842
   
3,688,499
 
               
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
   
(489,262
)
 
992,602
 
Effect of exchange rate changes on cash
   
(502,982
)
 
203,560
 
Cash and cash equivalents at beginning of period
   
1,149,140
   
365,567
 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
156,896
 
$
1,561,729
 
               
SUPPLEMENTARY CASH FLOW INFORMATION
             
Income taxes paid
 
$
-
 
$
-
 
Interest paid
 
$
937,362
 
$
1,895,643
 

SUPPLEMENTAL NON-CASH DISCLOSURES:
1.
During the six months ended June 30, 2008 and 2007, $613,097 and $12,117 were transferred from construction in progress to plant and equipment, respectively.
2.
On June 24, 2008, the Company acquired 100% interest of Zhejiang Kandi Special Vehicles Co.,Ltd. ("KSV") for $12,314,988 in cash and KSV became a 100% owned subsidiary of the Company. The following represents the assets purchased and liabilities assumed at the acquisition date:

Plant and equipment, net
 
$
3,200,615
 
Land use rights, net
   
9,114,373
 
Total assets purchased
   
12,314,988
 
Total liabilities assumed
   
-
 
         
Total net assets
 
$
12,314,988
 
         
Share percentage
   
100
%
         
Net assets acquired
 
$
12,314,988
 
         
Total consideration paid (including the deposit of $12,270,859 paid in prior periods)
 
$
12,314,988
 
 
See accompanying notes to condensed consolidated financial statements

7


KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
 
NOTE 1 – ORGANIZATION AND PRINCIPAL ACTIVITIES

Kandi Technologies, Corp. (formerly Stone Mountain Resources, Inc.) (the “Company”) was incorporated under the laws of the State of Delaware on March 31, 2004. On June 29, 2007, Stone Mountain Resources, Inc. changed its name to Kandi Technologies, Corp.
 
On June 29, 2007, pursuant to the share exchange agreement among Stone Mountain Resources, Inc. (“Stone Mountain”), Continental Development Limited, (“Continental”) and Excelvantage (Continental’s sole shareholder), Stone Mountain issued 12,000,000 shares of its common stock to Excelvantage, in exchange for 100% of the common stock of Continental. As a result of the share exchange, Continental became a wholly-owned subsidiary of Stone Mountain. The Company conducts its operations through its wholly owned subsidiary, Zhejiang Kandi Vehicles Co. Ltd., a People’s Republic of China (“PRC”) company.
 
The exchange transaction was accounted for as a reverse acquisition in accordance with Statements of Financial Accounting Standards (“SFAS”) No. 14 “Business Combinations.” Accordingly, the consolidated statements of income include the results of operations of Kandi Technologies, Inc. from the acquisition date through June 30, 2008.

The Company closed on its acquisition of 100% shares of Kandi Special Vehicles Co., Ltd. (“KSV”) on June 24, 2008. Kandi Special Vehicles Co., Ltd. became a wholly-owned subsidiary of the Company, in accordance with SFAS No. 14 “Business Combinations,” the consolidated statements of income include the result of operations of Kandi Special Vehicle Co., Ltd. from the acquisition date through June 30, 2008.

On May 9, 2008, the Company sold its wholly-owned subsidiary, Zhejiang Yongkang Top Import & Export Co., Ltd. (“Dingji”), to certain individuals. In accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long−Lived Assets,” the results of operations of Dingji as of the disposal date May 9, 2008 are removed from the detail line items to the “discontinued operation” of the Company’s financial statements.

The primary operations of Kandi Technologies, Corp. and subsidiaries is the design, developing, manufacturing, and commercializing of all-terrain vehicles, go-karts, and specialized automobile related products for the People’s Republic of China and global export markets. Sales are made to dealers in Asia, North America, Europe and Australia.
 
8


KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)

NOTE 2 – BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements as of June 30, 2008 and for the six months ended June 30, 2008 and 2007 of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the requirements for reporting on Rule 8.03 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. However, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for the fair presentation of the consolidated financial position and the consolidated results of operations. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full year. The condensed consolidated balance sheet information as of December 31, 2007 was derived from the audited consolidated financial statements included in the Company’s Annual Report Form 10-K. These interim condensed consolidated financial statements should be read in conjunction with that report.
 
NOTE 3 – PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Kandi Technologies, Corp. and the following subsidiaries:

(i)
Continental Development Ltd., (“Continental”) (100% subsidiary of the Company)
(ii)
Zhejiang Kandi Vehicles Co. Ltd., (“Kandi”) (100% subsidiary of Continental)
(iii)
Zhejiang Yongkong Import and Export Co. Ltd., (“Dingji”) (100% subsidiary of Kandi)
(see below)
(iv)
Kandi Special Vehicle Co. Ltd., (“KSV”) (100% subsidiary of the Company)

Inter-company accounts and transactions have been eliminated in consolidation.

As of May 9, 2008, Dingji was sold and is presented in the financial statements as a Discontinued Operation. See Note 19.
 
9

 
KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)

NOTE 4 – USE OF ESTIMATES

The preparation of the unaudited condensed consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.

Management makes these estimates using the best information available at the time the estimates are made. Actual results could differ materially from those estimates.
 
NOTE 5 – CONCENTRATIONS

The Company has major customers who accounted for the following percentage of total sales and accounts receivable:

   
Sales
     
   
For the Six 
 
For the Six 
 
Accounts Receivable 
 
Major
Customers
 
Months Ended
June 30, 2008
 
Months Ended
June 30, 2007
 
June 30,
2008
 
December 31,
2007
 
Company A
   
73
%
 
47
%
 
59
%
 
40
%
Company B
   
7
%
 
20
%
 
17
%
 
19
%
Company C
   
4
%
 
6
%
 
0
%
 
11
%
Company D
   
4
%
 
3
%
 
15
%
 
8
%
Company E
   
1
%
 
-
   
3
%
 
7
%

The Company has major suppliers who accounted for the following percentage of total purchases and accounts payable:

   
Purchases
     
   
For the Six 
 
For the Six 
 
Accounts Payable
 
Major
Suppliers
 
Months Ended
June 30, 2008
 
Months Ended
June 30, 2007
 
June 30,
2008
 
December 31,
2007
 
Company F
   
7
%
 
7
%
 
-
   
7
%
Company G
   
7
%
 
5
%
 
1
%
 
6
%
Company H
   
7
%
 
4
%
 
-
   
5
%
Company I
   
6
%
 
3
%
 
2
%
 
5
%
Company J
   
55
%
 
-
   
29
%
 
4
%
 
10

 
KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)

NOTE 6—FOREIGN CURRENCY TRANSLATION

The accompanying condensed consolidated financial statements are presented in United States dollars. The functional currency of the Company is the Renminbi (RMB). The condensed consolidated financial statements are translated into United States dollars from RMB at period end exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses. Capital accounts are translated into United States dollars from RMB at their historical exchange rates when the capital transactions occurred.

 
 
June 30,
2008
 
December 31,
2007
 
June 30,
2007
 
Period end RMB : US$ exchange rate
   
6.8718
   
7.3141
   
7.6155
 
Average period RMB : US$ exchange rate
   
7.0882
   
7.5614
   
7.7121
 
 
NOTE 7 – EARNINGS PER SHARE

Basic earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. There were no potentially dilutive securities for the six month ended June 30, 2008 and 2007.
 
11


KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)

NOTE 8 – FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company’s financial instruments include cash and cash equivalents, restricted cash, accounts receivable, notes receivable, prepayments and prepaid expenses, other receivables due from employees, accounts payable due to employees and to related parties, other payables and accrued liabilities, notes payable, short-term band loans, and customer deposits. Management has estimated that the carrying amount approximates fair value due to their short-term nature.
 
NOTE 9 – NEW ACCOUNTING PRONOUNCEMENTS

In December 2007, the FASB issued SFAS No. 141 (R), Business Combinations, and SFAS No.160, Non-controlling Interests in Consolidated Financial Statements. SFAS No. 141 (R) requires an acquirer to measure the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. SFAS No.160 clarifies that a non-controlling interest in a subsidiary should be reported as equity in the consolidated financial statement. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. SFAS No.141 (R) and SFAS No.160 are effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption is prohibited. We have not yet determined the effect on our consolidated financial statements, if any, upon adoption of SFAS No.141 (R) or SFAS No. 160. We are aware that our accounting for minority interest will change and we are considering those effects now but believe the effects will only be a reclassification of minority interest from mezzanine equity to our stockholder's equity section in the balance sheet, in any case we do not believe the implementation of SFAS 160 will be material to our financial position, SFAS 141(R) will significantly affect the accounting for future business combinations and we will determine the accounting as new combinations are determined.
 
12


KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)

NOTE 9 – NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. This Statement establishes accounting and reporting standards that require the ownership interests in subsidiaries’ non-parent owners be clearly presented in the equity section of the balance sheet; requires the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; requires that changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently; requires that when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value and the gain or loss on the deconsolidation of the subsidiary be measured using the fair value of any noncontrolling equity; requires that entities provide disclosures that clearly identify the interests of the parent and the interests of the noncontrolling owners. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after December 15, 2008. The Company has not determined the impact, if any, SFAS No. 160 will have on its financial statements.

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS No. 161"), which amends SFAS No.133 and expands disclosures to include information about the fair value of derivatives, related credit risks and a company's strategies and objectives for using derivatives. SFAS No. 161 is effective for fiscal periods beginning on or after November 15, 2008. The Company is currently in the process of assessing the impact that SFAS No. 161 will have on the disclosures in its financial statements.
 
13

 
KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)

NOTE 10 – INVENTORIES
 
Inventories consist of the following:
 
   
June 30,
2008
 
December 31,
2007
 
   
(Unaudited)
     
Raw materials
 
$
1,712,892
 
$
1,534,448
 
Work-in-progress
   
3,218,822
   
1,402,073
 
Finished goods
   
494,205
   
357,008
 
Total inventories
 
$
5,425,919
 
$
3,293,529
 
 
NOTE 11 – NOTES RECEIVABLE
 
Notes receivable consist of the following:
 
   
June 30,
2008
 
December 31,
2007
 
   
(Unaudited)
     
Notes receivable from unrelated companies:
         
Due June 27, 2008
 
$
-
 
$
47,853
 
Due January 1, 2009
   
188,888
   
-
 
Due March 2, 2009
   
654,695
   
-
 
Due March 30, 2009
   
647,698
   
-
 
Due March 31, 2009
   
3,918,934
   
-
 
Due April 29, 2009
   
727,611
   
-
 
Due May 12, 2009
   
436,567
   
-
 
Subtotal
   
6,574,393
   
47,853
 
Notes receivable-discount
   
(68,285
)
 
-
 
Notes receivable, net
 
$
6,506,108
 
$
47,853
 

In 2008, interest-free notes were provided to companies for their assistance in developing distribution channels and new markets for the Company. The Company recorded selling and distribution expense and a discount on the notes receivable of $100,161 based on the present value of the notes receivable using a rate of 7.2% interest rate per annum.

During the six months ended June 30, 2008 and 2007, $90,108 and $133,014 of interest expense was recognized in the accompanying consolidated statement of income from the amortization of the discount.
 
14


KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)

NOTE 12 – LAND USE RIGHTS

Land use rights consist of the following:

   
June 30, 
2008
 
December 31,
2007
 
   
(Unaudited)
     
Cost of land use rights
 
$
9,606,486
 
$
460,943
 
Less: Accumulated amortization
   
(129,292
)
 
(75,404
)
Land use rights, net
 
$
9,477,194
 
$
385,539
 

During the six months ended June 30, 2008, the Company acquired a land use right, which expires on December 30, 2053, with a net book value of $9,114,373 in the acquisition of KSV completed on June 24, 2008. Also see Note 18.

The total amortization expense for the six months ended June 30, 2008 and 2007 was $22,718 and $4,371, respectively.

The total amortization expense for the next five years and thereafter is as follows:

2008 within one year
 
$
112,125
 
2009
   
224,247
 
2010
   
224,247
 
2011
   
224,247
 
2012
   
224,247
 
Thereafter
   
8,468,081
 
Total
 
$
9,477,194
 
 
15

 
KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)

NOTE 13 –  PLANT AND EQUIPMENT
 
Plant and equipment consist of the following:
 
   
June 30,
2008
 
December 31,
2007
 
   
(Unaudited)
     
At cost:
         
Buildings
 
$
7,669,736
 
$
3,911,944
 
Machinery and equipment
   
9,125,979
   
8,572,451
 
Office equipment
   
2,663,624
   
93,840
 
Transportation
   
107,299
   
254,885
 
Patterns
   
1,854,256
   
1,742,125
 
     
21,420,894
   
14,575,245
 
Less : Accumulated depreciation
             
Buildings
   
(535,851
)
 
(428,834
)
Machinery and equipment
   
(4,205,788
)
 
(3,520,084
)
Office equipment
   
(72,635
)
 
(64,427
)
Transportation
   
(78,688
)
 
(43,765
)
Patterns
   
(282,239
)
 
(90,959
)
     
(5,175,201
)
 
(4,148,069
)
Plant and equipment, net
 
$
16,245,693
 
$
10,427,176
 

During the six months ended June 30, 2008, the Company acquired manufacturing facilities with a net book value of $3,200,615 in the acquisition of KSV completed on June 24, 2008. Also see Note 18.

The net book value of plant and equipment are pledged for certain bank loans at June 30, 2008 and December 31, 2007 was $1,809,239 and $1,652,616, respectively. Also see note 14.

Depreciation expense for the six months ended June 30, 2008 and 2007 was $727,276 and $618,477, respectively.
 
16

 
KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
 
NOTE 14 – SHORT TERM BANK LOANS
 
Short-term bank loans consist of the following:
 
   
June 30,
2008
 
December 31,
2007
 
   
(Unaudited)
     
Loans from ICBC-Development Zone Branch
             
               
Monthly interest only payments at 7.88% per annum, due April 10, 2008, secured by the assets of the Company. Also see Notes 12 and 13 (subsequently repaid on its due date).
 
$
-
 
$
683,611
 
               
Monthly interest only payments at 7.88% per annum, due June 5, 2008, secured by the assets of the Company. Also see Notes 12 and 13 (subsequently repaid on its due date).
   
-
   
683,611
 
               
Monthly interest only payments at 8.75% per annum, due August 5, 2008, secured by the assets of the Company. Also see Notes 12 and 13 (subsequently repaid on its due date).
   
436,567
   
410,167
 
               
Monthly interest only payments at 8.75% per annum, due September 5, 2008, secured by the assets of the Company. Also see Notes 12 and 13.
   
392,910
   
369,150
 
               
Monthly interest only payments at 8.75% per annum, due October 10, 2008, secured by the assets of the Company. Also see Notes 12 and 13.
   
436,567
   
410,167
 
               
Monthly interest only payments at 8.75% per annum, due October 16, 2008, secured by the assets of the Company. Also see Notes 12 and 13.
   
552,985
   
519,544
 
               
Monthly interest only payments at 8.75% per annum, due October 23, 2008, secured by the assets of the Company. Also see Notes 12 and 13.
   
509,328
   
478,528
 
               
Monthly interest only payments at 8.75% per annum, due November 24, 2008, secured by the assets of the Company. Also see Notes 12 and 13.
   
582,089
   
546,889
 
               
Monthly interest only payments at 8.28% per annum, due September 17, 2008, secured by the assets of the Company. Also see Notes 12 and 13.
   
654,850
   
-
 
               
Monthly interest only payments at 6.90% per annum, due September 19, 2008, impawned by time deposit.
   
654,850
   
-
 
 
17


KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
 
NOTE 14 – SHORT TERM BANK LOANS (CONTINUED)

   
June 30,
2008
 
December 31,
2007
 
   
(Unaudited)
     
Loans from ICBC-Development Zone Branch
             
               
Monthly interest only payments at 6.90% per annum, due September 24, 2008, impawned by time deposit.
   
654,850
   
-
 
               
Monthly interest only payments at 7.47% per annum, due June 4, 2009, secured by the assets of the Company. Also see Notes 12 and 13.
   
727,611
   
-
 
 
             
Monthly interest only payments at 7.84% per annum, due April 7, 2009, secured by the assets of the Company. Also see Notes 12 and 13.
   
727,611
   
-
 
               
Loans from Commercial Bank-Jiangnan Branch
             
               
Monthly interest only payments at 7.58 % per annum, due January 10, 2008, secured by the assets of the Company. Also see Notes 12 and 13 (subsequently repaid on its due date).
   
-
   
2,734,444
 
               
Monthly interest only payments at 7.67 % per annum, due May 10, 2008, secured by the assets of the Company. Also see Notes 12 and 13 (subsequently repaid on its due date).
   
-
   
1,367,222
 
               
Monthly interest only payments at 8.22% per annum, due January 10, 2009 secured by the assets of the Company. Also see Notes 12 and 13.
   
2,910,446
   
-
 
               
Monthly interest only payments at 7.67% per annum, due May 9, 2009 secured by the assets of the Company. Also see Notes 12 and 13.
   
1,455,223
   
-
 
               
Loans from ICBC-Jinhua Branch
             
               
Monthly interest only payments at 6.88% per annum, due January 18, 2008, secured by the assets of the Company. Also see Notes 12 and 13 (subsequently repaid on its due date).
   
-
   
189,753
 
               
Monthly interest only payments at 6.58% per annum, due February 1, 2008, secured by the assets of the Company. Also see Notes 12 and 13 (subsequently repaid on its due date).
   
-
   
948,766
 
 
18


KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
 
NOTE 14 – SHORT TERM BANK LOANS (CONTINUED)

   
June 30,
2008
 
December 31,
2007
 
   
(Unaudited)
     
Loans from ICBC-Jinhua Branch
             
               
Monthly interest only payments at 6.88% per annum, due March 3, 2008, secured by the assets of the Company. Also see Notes 12 and 13 (subsequently repaid on its due date).
   
-
   
858,883
 
               
Monthly interest only payments at 7.88% per annum, due March 21, 2008, secured by the assets of the Company. Also see Notes 12 and 13 (subsequently repaid on its due date).
   
-
   
1,098,571
 
               
Loans from Huaxia Bank
             
               
Monthly interest only payments at 9.86% per annum, due December 24, 2008. Guaranteed by Yongkang Tangxian Colour Metal Die-casting Company.
   
2,910,446
   
2,734,444
 
               
Loans from China Everybright Bank
             
               
Monthly interest only payments at 8.22% per annum, due August 9, 2008, secured by the assets of the Company. Guaranteed by Nanlong Group Co.,Ltd & Zhejiang Mengdeli Electric Company (subsequently repaid on its due date).
   
4,365,668
   
4,101,668
 
               
Loans from Shanghai Pudong Development Bank
             
               
Monthly interest only payments at 6.33 % per annum, due February 14, 2008, secured by the assets of the Company. Also see Notes 12 and 13 (subsequently repaid on its due date).
   
-
   
2,734,444
 
               
Monthly interest only payments at 7.84 % per annum, due October 1, 2008, guaranteed by Nanlong Group Co.,Ltd & Zhejiang Mengdeli Electric Company.
   
2,910,446
   
-
 
               
Monthly interest only payments at 6.72 % per annum, due April 9, 2009, impawned by time deposit.
   
2,619,401
   
-
 
 
19


KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
 
NOTE 14 – SHORT TERM BANK LOANS (CONTINUED)

   
June 30,
2008
 
December 31,
2007
 
   
(Unaudited)
     
Loans from Bank of Communication
             
               
Monthly interest only payments at 8.96% per annum, due February 18, 2009, secured by the assets of the Company. Also see Notes 12 and 13.
   
727,611
   
-
 
               
Loans from HengFeng Bank
             
               
Monthly interest only payments at 7.88% per annum, due October 24, 2008, secured by the assets of the Company. Also see Notes 12 and 13.
   
2,910,446
   
-
 
               
Total short-term bank loans
 
$
27,139,905
 
$
20,869,862
 
 
Interest expense for the six months ended June 30, 2008 and 2007 was $1,013,464 and $374,508, respectively.

20


KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
 
NOTE 15 – NOTES PAYABLE
 
Notes payable consist of the following:

   
June 31,
2008
 
December 31,
2007
 
   
(Unaudited)
     
Notes payable to unrelated companies:
             
Due April 17, 2008 (subsequently repaid on its due date)
 
$
-
 
$
683,611
 
Due August 26, 2008
   
1,455,223
   
-
 
Due September 19, 2008
   
1,455,223
   
683,611
 
Due November 8, 2008
   
116,418
   
109,378
 
Due December 18, 2008
   
436,566
   
-
 
Total
 
$
3,463,430
 
$
1,476,600
 
 
All the bank acceptance notes are subject to bank charges of 0.05% of the principal as commission on each loan transaction. Bank charges for notes payable were $1,732 and $7,440 for the six months ended June 30, 2008 and 2007, respectively.
 
Restricted cash of $6,548,503 and $1,367,222 is held as collateral for the following notes payable, letter of credit and bank loan at June 30, 2008 and December 31, 2007, respectively:

   
June 30,
2008
 
December 31,
2007
 
   
(Unaudited)
     
Due April 17, 2008 (subsequently repaid on its due date)
 
$
-
 
$
683,611
 
Due September 19, 2008
   
727,611
   
683,611
 
Due September 19, 2008
   
727,611
   
-
 
Due August 26, 2008
   
727,611
   
-
 
Due September 24, 2008
   
727,611
   
-
 
Due November 1, 2008
   
727,611
   
-
 
Due April 9, 2009
   
2,910,448
   
-
 
Total
 
$
6,548,503
 
$
1,367,222
 
 
21


KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
 
NOTE 16 – INCOME TAXES

(a) Corporation Income Tax (“CIT”)

Effective January 1, 2007, the Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"), an interpretation of FASB statement No. 109, Accounting for Income Taxes. The interpretation addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements.

Under FIN 48, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of June 30, 2008, the Company does not have a liability for unrecognized tax benefits. The Company files income tax returns in the U.S. federal jurisdiction and various states. The Company is subject to U.S. federal or state income tax examinations by tax authorities for years after 2005. During the periods open to examination, the Company has net operating loss and tax credit carry forwards for U.S. federal and state tax purposes that have attributes from close June 30, 2008 the Company was not aware of any pending income tax examinations by China tax authorities.  The Company's policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of June 30, 2008, the Company has no accrued interest or penalties related to uncertain tax positions.

On March 16, 2007, the National People’s Congress of China approved the Corporate Income Tax Law of the People’s Republic of China (the “new CIT law”), which went into effect on January 1, 2008. In accordance with the relevant tax laws and regulations of PRC, the applicable corporate income tax rate of the Company is 33%. However, according to certain rules in the tax laws, from the time that the Company has its first profitable tax year, a foreign-invested company is exempt from corporate income tax for the following two years of operations and is then entitled to a 50% tax reduction for the succeeding three years. The Company’s first profitable year for income tax purposes as a foreign-invested company was 2007. Dingji is a subsidiary of the Company and its applicable corporate income tax rate is 33%.
 
22


KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
 
Under the new CIT law, the corporate income tax rate applicable to the Company starting from January 1, 2008 is 25%. The Company believes some of the tax concession granted to eligible companies prior to the new CIT law will be grandfathered. Income tax benefit for the six months ended June 30, 2008 and 2007 are summarized as follows:

   
For The Six Months Ended
June 30,
(Unaudited)
 
   
2008
 
2007
 
Current:
             
Provision for CIT
 
$
-
 
$
-
 
               
Deferred:
             
Provision for CIT
   
(73,660
)
 
-
 
               
Income tax benefit
 
$
(73,660
)
$
-
 

23


KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
 
NOTE 16 – INCOME TAXES (CONTINUED)

The Company’s income tax benefit differs from the “expected” tax expense for the six months ended June 30, 2008 and 2007 (computed by applying the CIT rate of 25% to income before income taxes) as follows:

   
For The Six Months Ended
June 30,
(Unaudited)
 
   
2008
 
2007
 
Computed “expected” expense
 
$
767,791
 
$
937,795
 
Permanent difference
   
(41,417
)
 
-
 
Tax exemption
   
(800,034
)
 
(937,795
)
Income tax benefit
 
$
(73,660
)
$
-
 

The tax effects of temporary differences that give rise to the Company's net deferred tax assets and liabilities as of June 30, 2008 and 2007 are as follows:

   
June 30,
2008
 
 
December 31,
2007
 
   
(Unaudited)
 
Deferred tax assets:
             
Non-current portion:
             
Depreciation
 
$
770,492
 
$
694,512
 
Valuation allowance
   
(289,506
)
 
(289,506
)
Subtotal
   
480,986
   
405,006
 
Total deferred tax assets
   
480,986
   
405,006
 
               
Deferred tax liabilities:
             
Non-current portion:
             
Accumulated other comprehensive gain
   
(296,511
)
 
(296,511
)
Subtotal
   
(296,511
)
 
(296,511
)
Total deferred tax liabilities
   
(296,511
)
 
(296,511
)
               
Net deferred tax assets
 
$
184,475
 
$
108,495
 
 
(b)
Tax Holiday Effect

For 2008 and 2007 the PRC corporate income tax rate was 25% and 33%, respectively. Certain subsidiaries of the Company are entitled to tax exemptions (tax holidays) for the six months ended June 30, 2008 and December 31, 2007.

Income before income tax expense of $3,109,219 and $2,985,836 for the six months ended June 30, 2008 and 2007 respectively was attributed to subsidiaries with operations in China. Income tax benefit related to China income for June 30, 2008 and 2007 is $73,660 and $0, respectively.
 
24


KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
 
NOTE 16 – INCOME TAXES (CONTINUED)
 
The combined effects of the income tax expense exemptions and reductions available to the Company for the six months ended June 30, 2008 and 2007 are as follows:

   
For The Six Months Ended
June 30,
(Unaudited)
 
   
2008
 
2007
 
Tax holiday effect
 
$
800,034
 
$
937,795
 
Basic net income per share effect
 
$
0.04
 
$
0.08
 


NOTE 17 – CONTINGENCIES

(a)
In 2006, the Company brought a legal action against Weifang Rongda Automobile Trading Co., Ltd. for returned goods that were damaged. As the plaintiff, the Company has claimed for compensation. According to the judge's report from the local court in Jinhua, PRC, on December 8, 2006, the Company prevailed in the lawsuit and Weifang Rongda Automobile Trading Co., Ltd. was required to pay approximately $26,408 as compensation to the Company. However, the defendant appealed the ruling to a higher level court and the Company has not received the compensation as of June 30, 2008. Considering the uncertainties of the legal proceeding, the Company did not record a contingent gain for this at June 30, 2008.

(b)
In 2006, the Company brought a legal action against Zhejiang Yuegong Steel Structure Co. Ltd. and Zhejiang Jinhua No.1 Construction Co., Ltd. for their delay in the construction in Jinhua Industrial district. As the plaintiff, the Company claimed for compensation. According to the judge's report from the local court in Jinhua, PRC, on December 5, 2006, the Company prevailed in the lawsuit and Zhejiang Yuegong steel Structure Co. and Zhejiang Jinhua No.1 Construction Co., Ltd. will be required to pay $186,331 as compensation to the Company. However, the two defendants appealed the ruling to a higher level court and the Company has not received the compensation as of June 30, 2008. Considering the uncertainties of the legal proceeding, the Company did not record a contingent gain for this at June 30, 2008

NOTE 18 – BUSINESS COMBINATION

In November 2007, the Company signed a letter of intent with the shareholders of Kandi Special Vehicles Co., Ltd., by which the Company would acquire 100% of Kandi Special Vehicles Co., Ltd. The Company paid $12,270,859 as a deposit in 2007. The total consideration for the acquisition was $12,314,988. All the transactions of this acquisition were completed in June 24, 2008. There is no materiel relationship between the Company and Kandi Special Vehicles Co., Ltd.
 
25


KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
 
NOTE 18 – BUSINESS COMBINATION (CONTINUED)

The following unaudited pro forma combined condensed statement of income for the three months ended March 31, 2008 was prepared as if the acquisition had occurred on January 1, 2008. The pro forma information may not be indicative of the results that actually would have occurred if the acquisition had been in effect from and on the dates indicated or which may be obtained in the future.

   
Pro Forma Combined
 (Unaudited)
 
       
REVENUES
 
$
9,487,285
 
         
GROSS PROFIT
 
$
2,182,008
 
         
INCOME FROM OPERATIONS
 
$
1,640,502
 
         
NET INCOME
 
$
1,110,176
 
         
NET INCOME PER SHARE
BASIC AND DILUTED
 
$
0.07
 
 
NOTE 19 – DISCONTINUED OPERATION

On May 9, 2008, the Company, through its PRC subsidiary Zhejiang Kandi Vehicles Co. Ltd., entered into a disposition agreement with certain individuals. Pursuant to the agreement, the Company agreed to sell all of its interest in Dingji to such individuals for $727,611, resulting in a gain of $360,913. This transaction was completed on May 9, 2008. Thereafter, Dingji was no longer a consolidated a subsidiary of Kandi. In accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the results of operations of Dingji are removed from the detail line items in the Company's financial statements and presented separately as “discontinued operation.” The loss from discontinued operations were $33,379 and $140,200 for the six months ended June 30, 2008 and 2007, respectively. The gains from disposition of discontinued operations of $360,913 are reflected in the Company’s condensed consolidated statement of income for the six months ended June 30, 2008.

26


Item 2. Management’s Discussion and Analysis of Financial Condition and Result of Operations.
 
This report contains forward-looking statements within the meaning of the federal securities laws that relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology, such as "may," "will," "should," "could," "expect," "plan," "anticipate," "believe," "estimate," "project," "predict," "intend," "potential" or "continue" or the negative of such terms or other comparable terminology, although not all forward-looking statements contain such terms.
 
In addition, these forward-looking statements include, but are not limited to, statements regarding implementing our business strategy; development and marketing of our products; our estimates of future revenue and profitability; our expectations regarding future expenses, including research and development, sales and marketing, manufacturing and general and administrative expenses; difficulty or inability to raise additional financing, if needed, on terms acceptable to us; our estimates regarding our capital requirements and our needs for additional financing; attracting and retaining customers and employees; sources of revenue and anticipated revenue; and competition in our market.
 
Forward-looking statements are only predictions. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. All of our forward-looking information is subject to risks and uncertainties that could cause actual results to differ materially from the results expected. Although it is not possible to identify all factors, these risks and uncertainties include the risk factors and the timing of any of those risk factors described in the Company’s Form 10-K for the year ended December 31, 2007 and those set forth from time to time in our filings with the Securities and Exchange Commission (“SEC”). These documents are available on the SEC’s Electronic Data Gathering and Analysis Retrieval System at http://www.sec.gov.

27


Results of Operations

Comparison of Three Months Ended June 30, 2008 and June 30, 2007.

The following table sets forth the amounts and percentage relationship to revenue of certain items in our consolidated statements of income and comprehensive income for the three months ended June 30, 2008 and 2007:

 
 
Three Month Comparison
 
 
                         
 
 
For the
three
months
ended
June 30,
2008
Amount
 
  % of
Revenue
 
For the
three
months
ended
June 30,
2007
Amount
 
  % of
Revenue
 
Growth in
Amount
 
  Increase
in %
 
REVENUES
 
$
12,424,373
   
100.0
%
$
11,109,555
   
100.0
%
$
1,314,818
   
11.8
%
COST OF GOODS SOLD
   
9,139,131
   
73.6
%
 
8,468,179
   
76.2
%
 
670,952
   
7.9
%
GROSS PROFIT
   
3,285,242
   
26.4
%
 
2,641,376
   
23.8
%
 
643,866
   
24.4
%
Selling and Marketing
   
180,596
   
1.5
%
 
107,756
   
0.4
%
 
72,840
   
67.6
%
General and Administrative
   
432,238
   
3.5
%
 
142,060
   
1.0
%
 
295,178
   
204.3
%
Research and Development
   
224,146
   
1.8
%
 
40,749
   
1.3
%
 
183,397
   
450.1
%
INCOME FROM CONTINUING OPERATIONS
   
2,448,262
   
19.6
%
 
2,350,811
   
21.2
%
 
92,451
   
4.1
%
Government Grants
   
17,274
   
0.1
%
 
-
   
0.0
%
 
17,274
   
100
%
Interest Expense, Net
   
(395,087
)
 
-3.2
%
 
(160,938
)
 
-1.4
%
 
(234,149
)
 
145.5
%
Other, Net
   
(1,948
)
 
0.0
%
 
(70,254
)
 
-0.6
%
 
68,305
   
-97.2
%
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
   
2,068,501
   
16.5
%
 
2,119,619
   
19.1
%
 
(56,119
)
 
-2.4
%
INCOME TAX BENEFIT
   
33,920
   
0.3
%
 
-
   
0.0
%
 
33,920
   
100
%
NET INCOME FROM CONTINUING OPERATIONS
   
2,102,421
   
16.8
%
 
2,119,619
   
19.1
%
 
(17,198
)
 
-0.1
%
INCOME FROM DISCONTINUED OPERATION
   
334,030
   
2.7
%
 
(212,568
)
 
-1.9
%
 
546,598
   
257.1
%
NET INCOME
 
$
2,436,451
   
19.5
%
$
1,907,052
   
17.2
%
$
524,399
   
27.8
%
 
 Revenues. For the three months ended June 30, 2008, our revenues increased approximately 12% from $11,109,555 to $12,424,373 relative to the same period ended June 30, 2007. The increase in revenues is attributable to increased sales of our go-karts.

Cost of Sales. Cost of sales increased from $8,468,179 for the three months ended June 30, 2007 to $9,139,131, or approximately 8%, for the same period in 2008. In terms of cost of sales as a percentage of net revenues, our cost of sales for this quarter in 2008 was approximately 74% of net revenues as compared to approximately 76% of net revenues for the same quarter in 2007. The main reason for the improvement in cost of sales was due to tighter cost controls and discounts obtained in raw materials because of the increase in purchase volume as sales increased.

Gross Profit. Gross profit increased approximately 24% from $2,641,376 for the three months ended June 30, 2007 to $3,285,242 for the three months ended June 30, 2008. This increase in gross profit was primarily due to the increased revenues and reduction in cost of sales.

Selling and Marketing Expenses. For the three months ended June 30, 2008, selling and marketing expenses increased approximately 67.6% from $107,756 to $180,596 relative to the three months ended June 30, 2007. The increase was primarily due to the expansion of our sales department.

28

 
General and Administrative Expenses. For the three months ended June 30, 2008, general and administrative expenses increased approximately 204% from $142,060 to $432,238 relative to the three months ended June 30, 2007. The increase was primarily due to the expansion of our admin department.

Research and Development Expenses. For the three months ended June 30, 2008, research and development expenses increased approximately 450% from $40,749 to $224,146 relative to the three months ended June 30, 2007. The increase is attributable to the expenses incurred in conjunction with the launch of our three wheeled motorcycle.

Discontinued Operation. For the three months ended June 30, 2008, discontinued operations income increased approximately 257% from $(212,568) to $334,030. Dingji was sold to certain individuals as of May 9, 2008. See Note 19.

Income Tax Provision. On March 16, 2007, the National People’s Congress of the PRC adopted a new corporate income tax law in its fifth plenary session. The new corporate income tax law unifies the application, scope, tax rate, tax deduction and preferential policy for both domestic and foreign-invested enterprises.  The new corporate income tax law became effective on January 1, 2008. Under the new law, the Company had a tax benefit of $33,920 for the three months ended June 30, 2008, compared to a tax expenses of $NIL for the same period of 2007.
 
Net Income.  Net income increased approximately 28% from $1,907,052 for the three months ended June 30, 2007 to $2,436,451 for the three months ended June 30, 2008.  This increase in net income was due primarily to the increase in both our revenues and gross profits.
 
Comparison of Six Months Ended June 30, 2008 and June 30, 2007.

        The following table sets forth the amounts and percentage relationship to revenue of certain items in our consolidated statements of income and comprehensive income for the six months ended June 30, 2008 and 2007:
 
   
Six Month Comparison
 
 
 
For the six
months
ended
June 30,
2008
Amount
 
  % of
Revenue
 
For the six
months
ended
June 30,
2007
Amount
 
  % of
Revenue
 
Growth in
Amount
 
Increase in
%
 
REVENUES
 
$
21,753,075
   
100.0
%
$
16,471,019
   
100.0
%
$
5,282,056
   
32.1
%
COST OF GOODS SOLD
   
16,316,178
   
75.0
%
 
12,861,099
   
78.1
%
 
3,455,079
   
26.9
%
GROSS PROFIT
   
5,436,897
   
25.0
%
 
3,609,920
   
21.9
%
 
1,826,977
   
50.6
%
Selling and Marketing
   
409,102
   
1.9
%
 
188,354
   
1.1
%
 
220,748
   
117.2
%
General and Administrative
   
704,682
   
3.2
%
 
285,346
   
1.7
%
 
419,336
   
147.0
%
Research and Development
   
264,816
   
1.2
%
 
52,615
   
0.3
%
 
212,201
   
403.3
%
INCOME FROM CONTINUING OPERATIONS
   
4,058,297
   
18.7
%
 
3,083,605
   
18.7
%
 
974,692
   
31.6
%
Government Grants
   
40,574
   
0.2
%
 
-
   
0.0
%
 
40,574
   
100
%
Interest Expense, Net
   
(1,009,699
)
 
-4.6
%
 
(295,748
)
 
-1.8
%
 
(713,951
)
 
241.4
%
Forfeiture of customer deposits
   
-
   
0.0
%
 
267,673
   
1.6
%
 
(267,673
)
 
-100.0
%
Other Income (Expense), Net
   
20,047
   
0.1
%
 
(69,694
)
 
-0.4
%
 
89,741
   
-128.8
%
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX
   
3,109,219
   
14.3
%
 
2,985,836
   
18.1
%
 
123,383
   
4.1
%
INCOME TAX BENEFIT
   
73,660
   
0.3
%
 
-
   
0.0
%
 
73,660
   
100
%
NET INCOME FROM CONTINUING OPERATIONS
   
3,182,879
   
14.7
%
 
2,985,836
   
18.1
%
 
197,043
   
6.60
%
GAIN (LOSS) FROM DISCONTINUED OPERATIONS
   
327,534
   
1.5
%
 
(140,200
)
 
-0.9
%
 
467,734
   
333.6
%
NET INCOME
 
$
3,510,413
   
16.1
%
$
2,845,636
   
17.3
%
$
664,777
   
23.4
%
 
29


Revenues. For the six months ended June 30, 2008, our revenues increased approximately 32.1% from $16,471,019 to $21,753,075 relative to the same period ended June 30, 2007. The increase revenue is attributable to the increased sales of our go-karts.

Cost of Sales. Cost of sales increased from $12,861,099 for the six months ended June 30, 2007 to $16,316,178 for the same period in 2008, in terms of cost of sales as a percentage of net revenues, our cost of sales for the six months ended June 30, 2008 was approximately 75%, which remained unchanged from the same period in 2007.

Gross Profit. Gross profit increased approximately 51% from $3,609,920 for the six months ended June 30, 2007 to $5,436,897 for the six months ended June 30, 2008. This increase in gross profit was primarily due to the increased revenues.

Selling and Marketing Expenses. For the six months ended June 30, 2008, selling and marketing expenses increased approximately 117% from $188,354 to $409,102 relative to the six months ended June 30, 2007. The increase was primarily due to the expansion of our sales department.

General and Administrative Expenses. For the six months ended June 30, 2008, general and administrative expenses increased approximately 147% from $285,346 to $704,682 relative to the six months ended June 30, 2007. The increase was primarily due to the expansion of our admin department.

Research and Development Expenses. For the six months ended June 30, 2008, research and development expenses increased approximately 403% from $52,615 to $264,816 relative to the six months ended June 30, 2007. The increase is attributable to the expenses incurred in conjunction with the launch of our three wheeled motorcycle.

Discontinued Operation. For the three months ended June 30, 2008, discontinued operations income increased approximately 334% from $(140,200) to $327,534. Dingji was sold to certain individuals as of May 9, 2008. See Note 19.

Income Tax Provision. On March 16, 2007, the National People’s Congress of the PRC determined to adopt a new corporate income tax law in its fifth plenary session. The new corporate income tax law unifies the application, scope, tax rate, tax deduction and preferential policy for both domestic and foreign-invested enterprises.  The new corporate income tax law became effective on January 1, 2008. Under the new tax law, the Company had a tax benefit of $73,660 for the six months ended June 30, 2008, compared to a tax expenses of $NIL for the same period of 2007.
 
Net Income.  Net income increased approximately 24% from $2,845,636 for the six months ended June 30, 2007 to $3,520,413 for the six months ended June 30, 2008.  This increase in net income was due primarily to the increase in both our revenues and gross profits.

Liquidity and Capital Resources
 
Cash Flows

Six Months ended June 30, 2008 and 2007
        
      Net cash flow provided by operating activities was $4,478,605 for the six months ended June 30, 2008 as compared to $907,525 in cash flow used in operating activities in the same period of 2007. The increase of net cash flow provided in operating activities was mainly due to increased sales, the collection of outstanding loans and cash inflows generated by incremental operations.

      Net cash flow used in investing activities was $8,207,710 for the six months ended June 30, 2008 as compared to $3,603,422 in the same period of 2007. Uses of cash flow for investing activities off set in the six months period ended June 30, 2008 included the construction of manufacturing facilities, the purchase of associated machinery and equipment, and repayment of notes receivables.

30


Net cash flow provided by financing activities was $3,239,843 in the six months ended June 30, 2008, as compared to $3,688,499 in the same period of 2007. The net cash flow provided by financing activities was mainly due to the collection of loan payments and interest owed to the Company for the six months ended June 30, 2008 and 2007. 

Working Capital
 
Our working capital was $(10,256,613) at June 30, 2008, as compared to $294,624 at December 31, 2007.  The decrease in working capital at June 30, 2008 was mainly attributed to the completed acquisition of Kandi Special Vehicles Ltd. (“KSV”) on June 24, 2008. As a result, KSV is now a wholly-owned subsidiary of the Company with assets that include PRC land rights.
 
The Company currently generates its cash flow through operations and the Company believes that its cash flow generated from operations will be sufficient to sustain operations for the next twelve months.  Also, from time to time, the Company may require extra funding through financing activities and investments for expansion.
 
Accounting Policies

Revenue Recognition

Revenue represents the invoiced value of goods sold, recognized upon the shipment of goods to customers. Revenue is recognized when all of the following criteria are met:

·
Persuasive evidence of an arrangement exists;
 
·
Delivery has occurred or services have been rendered;
 
·
The seller's price to the buyer is fixed or determinable; and
 
·
Collectibility is reasonably assured.
 
Use of Estimates

The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.
 
Management makes these estimates using the best information available at the time the estimates are made.  Actual results could differ materially from those estimates.
 
Fair Value of Financial Instruments
 
The Company’s financial instruments include cash and cash equivalents, restricted cash, accounts receivable, notes receivable due from related parties, prepayments and prepaid expenses, other receivables due from employees, accounts payable due to employees, other payables and accrued liabilities, notes payable, short-term band loans, and customer deposits. Management has estimated that the carrying amount approximates fair value due to their short-term nature.
 
31

Recent Accounting Pronouncements
 
In December 2007, the FASB issued SFAS No. 141 (R), Business Combinations, and SFAS No.160, Non-controlling Interests in Consolidated Financial Statements. SFAS No. 141 (R) requires an acquirer to measure the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquire at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. SFAS No.160 clarifies that a non-controlling interest in a subsidiary should be reported as equity in the consolidated financial statement. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. SFAS No.141 (R) and SFAS No.160 are effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption is prohibited. We have not yet determined the effect on our consolidated financial statements, if any, upon adoption of SFAS No.141 (R) or SFAS No. 160. We are aware that our accounting for minority interest will change and we are considering those effects now but believe the effects will only be a reclassification of minority interest from mezzanine equity to our stockholder's equity section in the balance sheet, in any case we do not believe the implementation of SFAS 160 will be material to our financial position, SFAS 141(R) will significantly affect the accounting for future business combinations and we will determine the accounting as new combinations are determined.
 
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. This Statement establishes accounting and reporting standards that require the ownership interests in subsidiaries’ non-parent owners be clearly presented in the equity section of the balance sheet; requires the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; requires that changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently; requires that when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value and the gain or loss on the deconsolidation of the subsidiary be measured using the fair value of any noncontrolling equity; requires that entities provide disclosures that clearly identify the interests of the parent and the interests of the noncontrolling owners. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after December 15, 2008. The Company has not determined the impact, if any, SFAS No. 160 will have on its financial statements.
 
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS No. 161"), which amends SFAS No.133 and expands disclosures to include information about the fair value of derivatives, related credit risks and a company's strategies and objectives for using derivatives. SFAS No. 161 is effective for fiscal periods beginning on or after November 15, 2008. The Company is currently in the process of assessing the impact that SFAS No. 161 will have on the disclosures in its financial statements.
 
32

 
Item 4T. Controls and Procedures.
 
The Company maintains a system of disclosure controls and procedures that is designed to ensure that information required to be disclosed by the Company in this Form 10-Q, and in other reports required to be filed under the Securities Exchange Act of 1934 (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms for such filings. Management of the Company, under the direction of the Company's Chief Executive Officer and Chief Financial Officer, reviewed and performed an evaluation of the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15a(e) and 15d-15(e) under the Exchange Act) as of June 30, 2008. Based on that review and evaluation, the Chief Executive Officer and Chief Financial Officer, along with other key management of the Company, have determined that the disclosure controls and procedures were and are effective as designed to ensure that material information relating to the Company and its consolidated subsidiaries required to be disclosed by the Company by the Exchange Act, was recorded, processed, summarized and reported within the applicable time periods.
 
Management’s Report on Internal Control over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of our management, including the principal executive officer and principal financial officer, we are conducting an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
Prior to July 2007, the Company was a reporting shell company with no operations. In July 2007, as a result of the Exchange Agreement, the Company acquired Zhejiang Kandi Vehicles Co., Ltd. The operations of Zhejiang Kandi Vehicles Co., Ltd. represent primarily all the operations of the Company on a consolidated basis and is excluded from management’s assessment of internal control over financial reporting. Due to the recent nature of the acquisition, it was not feasible for the Company to complete its review and assessment. The Company expects to complete the review of its internal control over financial reporting in 2008.
 
This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.
 
There were no changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls over financial reporting that occurred during the second quarter of fiscal 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
33

 
PART II - OTHER INFORMATION
 
Item 1. Legal Proceedings.
 
None.
 
Item 1A. Risk Factors.
 
As of the date of this filing, there have been no material changes from the risk factors previously disclosed in our “Risk Factors” in the Form 10-K for the period ended December 31, 2007. An investment in our common stock involves various risks. When considering an investment in our company, you should consider carefully all of the risk factors described in our most recent Form 10-K. These risks and uncertainties are not the only ones facing us and there may be additional matters that we are unaware of or that we currently consider immaterial. All of these could adversely affect our business, financial condition, results of operations and cash flows and, thus, the value of an investment in our company.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 
None.
 
Item 3. Defaults Upon Senior Securities.
 
None.
 
Item 4. Submission of Matters to a Vote of Security Holders.
 
None.
 
Item 5. Other Information.
 
None
 
Item 6. Exhibits.
 
31.1 Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.
 
31.2 Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.
 
32.1 Certifications of CEO and CFO pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002
 
II-1

 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
    Kandi Technologies, Corp.
     
Date: August 14, 2008
By:  
/s/ Hu Xiaoming   
 
 
Hu Xiaoming  
 
 
President and Chief Executive Officer 
(Principal Executive Officer)  
 
 
 
Date: August 14, 2008
By:  
/s/ Zhu Xiaoying   
 
 
Zhu Xiaoying  
 
 
Chief Financial Officer 
(Principal Financial and Accounting Officer)