10-K 1 v144326_10k.htm Unassociated Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
 
Commission file number 000-52186
 
KANDI TECHNOLOGIES, CORP.
 
(Exact name of registrant as specified in its 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)
 
(86-579) 83906856
 
(Registrant’s telephone number, including area code)
 
Securities Registered Pursuant to Section 12(b) of the Act:

Common Stock, Par Value $0.001 Per Share
 
NASDAQ Capital Market
(Title of each class)
 
(Name of exchange on which registered)
 
Securities Registered Pursuant to Section 12(g) of the Act:   None.
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes   No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes   No þ
 
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 of 1934 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 þ  No  
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  
 

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 the 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 
(Do not check if a smaller reporting company)
Smaller reporting company þ
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes   No  þ
 
As of March 31, 2009, there were 19,961,000 shares of the registrant’s common stock, $0.001 par value, issued and outstanding and no shares of the registrant’s preferred stock, $0.001 par value, issued and outstanding. The aggregate market value of the shares of common stock held by non-affiliates of the registrant on July 6, 2007* was approximately $10,180,110.
 
DOCUMENTS INCORPORATED BY REFERENCE: none.

* Prior to this date, the registrant was a shell company.
 

TABLE OF CONTENTS

PART I
   
     
 
Item 1.
Business.
1-5
 
Item 1A.
Risk Factors.
5-13
 
Item 1B.
Unresolved Staff Comments.
13
 
Item 2.
Properties.
13-14
 
Item 3.
Legal Proceedings.
14
 
Item 4.
Submission of Matters to a Vote of Security Holders.
15-16
       
PART II
   
     
 
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
16
 
Item 6.
Selected Financial Data.
17
 
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
17-23
 
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk.
23
 
Item 8.
Financial Statements and Supplementary Data.
23
 
Item 9.
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.
24
 
Item 9A.
Controls and Procedures.
24
       
PART III
   
     
 
Item 10.
Directors, Executive Officers and Corporate Governance.
25-26
 
Item 11.
Executive Compensation.
27-28
 
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
28
 
Item 13.
Certain Relationships and Related Transactions and Director Independence.
28
 
Item 14.
Principal Accounting Fees and Services.
29
       
PART IV
   
     
 
Item 15.
Exhibits, Financial Statement Schedules.
30-34
       
SIGNATURES
 
 

 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This Annual Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as “anticipate,” “expect,” “intend,” “plan,” “will,” “we believe,” “our company believes,” “management believes” and similar language. These forward-looking statements are based on our current expectations and are subject to certain risks, uncertainties and assumptions, including those set forth in the discussion under Item 1, “Business”, Item 1A, “Risk Factors” and Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations.” Our actual results may differ materially from results anticipated in these forward-looking statements. We base our forward-looking statements on information currently available to us, and we assume no obligation to update them. In addition, our historical financial performance is not necessarily indicative of the results that may be expected in the future and we believe such comparisons cannot be relied upon as indicators of future performance.

Although we believe that the expectations reflected in the forward looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

 

 
Item 1.      
Business.

Except as otherwise indicated by the context, references in this Annual Report to “we,” “us,” “our,” “Kandi,” or the “Company” are to the combined businesses of Kandi Technologies, Corp.

Introduction
 
On June 29, 2007, Stone Mountain Resources, Inc., a Delaware corporation (“Stone Mountain”) executed a share exchange agreement (the “Exchange Agreement”) with Continental Development Limited, a Hong Kong corporation (“Continental”) and Excelvantage Group Limited, a British Virgin Islands Company which owned 100% of Continental (the “Continental Shareholder”). Pursuant to the Exchange Agreement, Stone Mountain issued 12,000,000 shares of its common stock to the Continental Shareholder, in exchange for 100% of the common stock of Continental. After the closing of the Exchange Agreement, Stone Mountain had a total of 19,961,000 shares of common stock outstanding, with the Continental Shareholder owning 60.12% of the total issued and outstanding shares of Stone Mountain’s common stock, and the remaining shares outstanding were held by those who held shares of Stone Mountain’s common stock prior to the closing.
 
As a result of this transaction, Continental became a wholly owned subsidiary of Stone Mountain. Thereafter, the business of the Company was that of Continental’s wholly owned subsidiary, Zhejiang Kandi Vehicles Co., Ltd. On August 13, 2007, we changed our name from Stone Mountain Resources, Inc. to Kandi Technologies, Corp.
 
Stone Mountain was a public shell company prior to the closing of the Exchange Agreement. Stone Mountain was originally incorporated on March 31, 2004 in the State of Delaware, and operated as a gold exploration company exploring Nevada mineral properties, before ceasing operations in May 30, 2007.

Business Overview

General

Kandi’s products include off-road vehicles (which includes ATVs, UTVs, and go-karts), motorcycles and mini-cars.

   
The Years Ended of December 31
 
   
2008
   
2007
 
   
Sales Revenue
   
Costs
   
Sales Revenue
   
Costs
 
Off-Road Business
  $ 39,654,296     $ 30,263,909     $ 33,434,662     $ 26,294,696  
Motorcycle Business
    3,297       4,227       -       -  
Mini-Car Business
    856,195       651,732       -       -  
Total
  $ 40,513,788     $ 30,919,868     $ 33,434,662     $ 26,294,696  

 
- 1 -


 
Off-Road Vehicles

In 2003 Kandi began mass production of go-karts. The Company is now one of the leading manufacturers of go-karts in the People’s Republic of China (PRC), producing approximately 15% of China’s global exports of this popular recreational vehicle. Kandi produces a wide range of go-karts, from the 90cc class to the 1,000cc class in cylinder displacement. Kandi also produces four-wheeled all-terrain vehicles (ATVs) and specialized utility vehicles (UTVs), which are ATVs special-fitted for agricultural and industrial use.
 
Motorcycle Products

In late 2008, Kandi began sales of its newest motorcycle, the three-wheeled “TT,” which was designed for enhanced safety and comfort, while maintaining the convenience and fuel efficiency of a motorcycle.
The Company expects significant growth in the sales of the TT and expects to expand the product line in the near term.

Mini-Car Products

Kandi began sales of its gas-powered Super-mini car (“CoCo”) in August 2008. The first generation of CoCo was designed for local neighborhood driving, with a 250cc single cylinder, 4-stroke water-cooled engine with a top speed of 25 mph, achieving 60 mpg. In 2009, the Company will launch the electric CoCo, a stylish mini-car which will run on electrical power. The electric CoCo is designed to achieve a top speed of 25mph, and will have a driving range of 80 miles on a single full charge. The Company expects to sell 50% of the electric CoCo it produces in China, with the rest exported to markets in North America.

The following table shows the breakdown of Kandi’s revenues from its customers by geographical markets based on the location of the customer during the fiscal years ended December 31, 2008 and 2007:
 
   
The Years Ended of December 31
 
   
2008
   
2007
 
   
Sales Revenue
   
Units
   
Percentage
   
Sales Revenue
   
Units
   
Percentage
 
North America
  $ 7,292,482       9,010       18 %   $ 23,889,263       33,446       72 %
Europe
    -       -       -       6,264,492       8,246       19 %
China1
    32,816,168       40,545       81 %     2,783,342       3,665       8 %
Other Regions
    405,138       501       1 %     497,565       458       1 %
Total
  $ 40,513,788       50,056       100 %   $ 33,434,662       45,815       100 %
 
1 Products were sold to a third party distributor based in China, however, the Company believes these products were ultimately exported out of China.
Sales and Distribution

Kandi’s sales are made through third-party distributors, which distribute Kandi’s products to local wholesalers and retail dealers. Worldwide, Kandi sells its products through six main independent distributors for off-road vehicles.

 
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Components and Parts, Raw Materials and Sources of Supply

Kandi manufactures the frames of its vehicles and assembles the vehicles in its factory in Jinhua, China.  Other components and parts, such as engines, shock absorbers, electrical equipment and tires, are purchased from numerous suppliers.  The principal raw materials used by Kandi are steel plate, aluminum, special steels, steel tubes, paints, and plastics, which are purchased from several suppliers.  The most important raw material purchased is steel plate.There were six suppliers who accounted for more than 5% of the Company’s purchases of major components and parts and principal raw materials during the fiscal year ended December 31, 2008. Kandi does not have and does not anticipate having any difficulty in obtaining its required materials from suppliers and considers its contracts and business relations with the suppliers to be satisfactory.

Seasonality

Kandi’s motorcycle and off-road vehicle businesses have historically experienced some seasonality.  However, this seasonality has not generally been material to our financial results.

Competitive Strengths

The global small vehicle markets are highly competitive. Competition in such markets is based upon a number of factors, including price, quality, reliability, styling, product features and warranties. As a relatively new entrant into the market, many of our competitors are more diversified and have financial and marketing resources that are substantially greater than those of Kandi.

Employees
 
As of December 31, 2008, Kandi had a total of 562 employees. None of our employees are represented by any collective bargaining agreements.
 
Environmental and Safety Regulation
 
Emissions
 
The United States Environmental Protection Agency (“EPA”) and the California Air Resources Board (“CARB”) have adopted emissions regulations applicable to Kandi’s products. CARB has emissions regulations for ATVs and off-road vehicles which the Company already meets. In October 2002, the EPA established new corporate average emission standards effective for model years 2006 through 2012 for non-road recreational vehicles, including ATVs and off-road vehicles.
 
Kandi’s motorcycles are also subject to EPA and CARB emission standards. Kandi believes that its motorcycles have always complied with these standards. The CARB regulations required additional motorcycle emission reductions in model year 2008 which the Company met. The EPA adopted the CARB emission limits in a January 2004 rulemaking that allows an additional two model years to meet these new CARB emission requirements on a nationwide basis.
 
Kandi’s products are also subject to international laws and regulations related to emissions in places where it sells its products outside the United States. Europe currently regulates emissions from certain of the Company’s ATV-based products, motorcycles, and mini-cars and the Company meets these requirements. Canada’s emission regulations for motorcycles are similar to those in the U.S. In December 2006 Canada proposed a new regulation that would essentially adopt the U.S. emission standards for ATVs and off-road vehicles. These regulations are expected to become effective in 2009.
 
- 3 -

 
Kandi believes that its off-road vehicles, motorcycles and mini-cars have always complied with applicable emission standards and related regulations in the United States and internationally. Kandi is unable to predict the ultimate impact of the adopted or proposed regulations on Kandi and its business.
 
Use regulation
 
State and federal laws and regulations have been promulgated or are under consideration relating to the use or manner of use of Kandi’s products. Some states and localities have adopted, or are considering the adoption of, legislation and local ordinances which restrict the use of ATVs and off-road vehicles to specified hours and locations. The federal government also has restricted the use of ATVs and off-road vehicles in some national parks and federal lands. In several instances this restriction has been a ban on the recreational use of these vehicles. Kandi is unable to predict the outcome of such actions or the possible effect on its business. Kandi believes that its business would be no more adversely affected than those of its competitors by the adoption of any pending laws or regulations.
 
Product Safety and Regulation

Safety Regulation
 
The federal government and individual states have promulgated or are considering promulgating laws and regulations relating to the use and safety of Kandi’s products. The federal government is the primary regulator of product safety. The Consumer Product Safety Commission (“CPSC”) has federal oversight over product safety issues related to ATVs and off-road vehicles. The National Highway Transportation Safety Administration (“NHTSA”) has federal oversight over product safety issues related to on-road motorcycles.
 
In August 2008, the Consumer Product Safety Improvement Act (the “Act”) was passed. The Act includes a provision that requires all manufacturers and distributors who import into or distribute ATVs in the United States to comply with the ANSI/SVIA safety standards which were previously voluntary. The Act also requires the same manufacturers and distributors to have ATV action plans filed with the CPSC that are substantially similar to the voluntary action plans that were previously in effect. Kandi currently complies with the ANSI/SVIA standard.
 
Kandi’s motorcycles are subject to federal vehicle safety standards administered by NHTSA. Kandi’s motorcycles are also subject to various state vehicle safety standards. Kandi believes that its motorcycles have always complied with safety standards relevant to motorcycles.
 
Kandi’s products are also subject to international standards related to safety in places where it sells its products outside the United States. Kandi believes that its motorcycles and mini-cars have always complied with applicable safety standards in the United States and internationally.
 
- 4 -

 
Principal Executive Offices

Our principal executive office is located in the Jinhua City Industrial Zone in Jinhua, Zhejiang Province, PRC, 321016 and our telephone number (86-579) 83906856.
 
Item 1A.      
Risk Factors.

You should carefully consider the risks described below together with all of the other information included in this report before making an investment decision with regard to our securities.  The statements contained in or incorporated into this annual report on Form 10-K that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements.  If any of the following risks actually occur, our business, financial condition or results of operations could be harmed. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

Risks Relating to Our Overall Business Operations

Our limited operating history may not serve as an adequate basis to judge our future prospects and results of operations.

We have a limited operating history because we have only been in operation since 2003.  This limited operating history, and the unpredictability of the machinery production industry, makes it difficult for investors to evaluate our businesses and predict future operating results. An investor in our securities must consider the risks, uncertainties and difficulties frequently encountered by companies in new and rapidly evolving markets.  The risks and difficulties we face include challenges in accurate financial planning as a result of limited historical data and the uncertainties resulting from having had a relatively limited time period in which to implement and evaluate our business strategies as compared to older companies with longer operating histories.

We may not be able to comply with all applicable government regulations.

We are subject to extensive governmental regulation by the central, regional and local authorities in the PRC, where our business operations take place. We believe that we are currently in substantial compliance with all laws and governmental regulations and that we have all material permits and licenses required for our operations. Nevertheless, we cannot assure investors that we will continue to be in substantial compliance with current laws and regulations, or that we will be able to comply with any future laws and regulations. To the extent that new regulations are adopted, we will be required to conform our activities in order to comply with such regulations. Failure to comply with applicable laws and regulations could subject us to civil remedies, including fines, injunctions, recalls or seizures, as well as potential criminal sanctions, which could have a material adverse effect on its business, operations and finances.

 
- 5 -

 
Compliance with environmental regulations can be expensive, and noncompliance with these regulations may result in adverse publicity and potentially significant monetary damages and fines.

We use, generate and discharge toxic, volatile and otherwise hazardous chemicals and wastes in our research and development and manufacturing activities, and our business operations generate noise, waste water, and gaseous and other industrial wastes. We are therefore required to comply with all national and local regulations regarding protection of the environment. We are in compliance with current environmental protection requirements and have all necessary environmental permits to conduct our business. However, if more stringent regulations are adopted in the future, the costs of compliance with these new regulations could be substantial. Additionally, if we fail to comply with present or future environmental regulations, we may be required to pay substantial fines, suspend production or cease operations. Any failure by us to control the use of, or to restrict adequately the discharge of, hazardous substances could subject us to potentially significant monetary damages and fines or suspensions in our business operations. Certain laws, ordinances and regulations could limit our ability to develop, use, or sell our products.
 
We rely on third party distributors to sell and service a significant portion of our products.
 
The majority of the Company's revenues results from sales contracts with distributors. These third party distributors may terminate their relationships with us, or fail to commit the necessary resources to sell or service our products to the level of our expectations. If current or future third party dealers or distributors do not perform adequately, or if we fail to maintain our existing relationships with them or fail to recruit and retain distributors in particular markets or geographic areas, our revenues may be adversely affected and our operating results could suffer.
 
Our business depends substantially on the continuing efforts of our executive officers, and our business may be severely disrupted if we lose their services.

Our future success depends substantially on the continued services of our executive officers, especially our CEO and President, Mr. Hu Xiaoming. We do not maintain key man life insurance on any of our executive officers.  If any of our executive officers are unable or unwilling to continue in their present positions, we may not be able to replace them readily, if at all.  Therefore, our business may be severely disrupted, and we may incur additional expenses to recruit and retain new officers.  In addition, if any of our executives joins a competitor or forms a competing company, we may lose some of our customers.  

We may be subject to product liability claims, recalls or warranty claims, which could be expensive, damage our reputation and result in a diversion of management resources.

The Company may be subject to lawsuits resulting from injuries associated with the use of the vehicles that it sells. The Company may incur losses relating to these claims or the defense of these claims. There is a risk that claims or liabilities will exceed our insurance coverage. In addition, the Company may be unable to retain adequate liability insurance in the future.
 
The Company may also be required to participate in recalls involving our vehicles if any prove to be defective, or we may voluntarily initiate a recall or make payments related to such claims as a result of various industry or business practices or the need to maintain good customer relationships. Such a recall would result in a diversion of resources. While we do maintain product liability insurance, we cannot assure you that it will be sufficient to cover all product liability claims, that such claims will not exceed our insurance coverage limits or that such insurance will continue to be available on commercially reasonable terms, if at all. Any product liability claim brought against us could have a material adverse effect on our results of operations.
 
- 6 -

.   
Risks Relating to Our Vehicle Machinery Production Operations
 
We may be subject to significant potential liabilities as a result of defects in production and  product liability.
 
Through our machinery production operations, we may be subject to production defect and product liability arising in the ordinary course of business. These claims are common to the machinery production industry and can be costly.
 
With respect to certain general liability exposures, including manufacturing defect and product liability, interpretation of underlying current and future trends, assessment of claims and the related liability and reserve estimation process is highly subjective due to the complex nature of these exposures, with each exposure exhibiting unique circumstances. Furthermore, once claims are asserted for construction defects, it is difficult to determine the extent to which the assertion of these claims will expand geographically. We may not have sufficient funds available to cover any liability for damages, the cost of repairs, and/or the expense of litigation surrounding such claims, and future claims may arise out of events or circumstances not covered by insurance and not subject to effective indemnification agreements with our subcontractors.
 
The vehicle machinery industry is highly competitive and we are subject to risks relating to competition that may adversely affect our performance.

The vehicle machinery industry is highly competitive, and our continued success depends upon our ability to compete effectively in markets that contain numerous competitors, some of which have significantly greater financial, marketing and other resources than we have. Competition may reduce fee structures, potentially causing us to lower our fees or prices, which may adversely impact our profits. New or existing competition that uses a business model that is different from our business model may put pressure on us to change our model so that we can remain competitive.
 
Our business is subject to the risk of supplier concentrations.
 
We depend on a limited number of suppliers for the sourcing of major components and parts and principal raw materials. As a result of this concentration in our supply chain, our business and operations would be negatively affected if any of our key suppliers were to experience significant disruption affecting the price, quality, availability or timely delivery of their products. The partial or complete loss of one of these suppliers, or a significant adverse change in our relationship with any of these suppliers, could result in lost revenue, added costs and distribution delays that could harm our business and customer relationships. In addition, concentration in our supply chain can exacerbate our exposure to risks associated with the termination by key suppliers of our distribution agreements or any adverse change in the terms of such agreements, which could have a negative impact on our revenues and profitability.

General economic conditions may negatively impact our results.  

The consumption of entertainment products such as go-karts and mini-cars is dependant on continued economic growth, and the duration, pace and full extent of the current economic environment remains unclear. Moderate or severe economic downturns or adverse conditions may negatively affect our operations. These conditions may be widespread or isolated to one or more geographic regions. A tightening of the labor markets in one or more geographic regions may result in fewer qualified applicants for job openings in our facilities. Higher wages, related labor costs and other increasing cost trends may negatively impact our results as wages and related labor costs.
 
- 7 -

 
Risks Related to Doing Business in China
 
Change in political and economic conditions may affect our business operations and profitability.

Since our business operations are primarily located in China, our business operations and financial position are subject, to a significant degree, to the economic, political and legal developments in China.

China's government started implementing its economic reform policy in 1978, which enabled China’s economy to gradually transform from a "planned economy" to a "socialist market economy." In 1993, the concept of the socialist market economy was introduced into the Constitution of China, and the country has since experienced accelerated development of a market economy. A noteworthy recent phenomenon is that non-state owned enterprises, such as private enterprises, play an increasingly important role in the Chinese economy and the degree of direct control by the PRC government over the economy is gradually declining.

While the Chinese government has not halted its economic reform policy since 1978, any significant adverse changes in the social, political and economic conditions of China may fundamentally impact China’s economic reform policies, and thus the Company's operations and profits may be adversely affected.
 
Change in tax laws and regulations in China may affect our business operations.
 
Various tax reform policies have been implemented in the PRC in recent years. Businesses are still awaiting guidance from the government in interpreting certain PRC tax policies. Moreover, there can be no assurance that the existing tax laws and regulations will not be revised or amended in the future.

Uncertainties with respect to the Chinese legal system could have a material adverse effect on us and may restrict the level of legal protections to foreign investors.

China's legal system is based on statutory law. Unlike the common law system, statutory law is based primarily on written statutes. Previous court decisions may be cited as persuasive authority but do not have a binding effect. Since 1979, the PRC government has been promulgating and amending the laws and regulations regarding economic matters, such as corporate organization and governance, foreign investment, commerce, taxation and trade.  However, since these laws and regulations are relatively new, and the PRC legal system continues to rapidly evolve, the interpretation of many laws, regulations and rules is not always uniform and enforcement of these laws, regulations and rules involves uncertainties, which may limit legal protections available to us.
 
- 8 -

 
In addition, any litigation in China may be protracted and may result in substantial costs and diversion of resources and management attention. The legal system in the China cannot provide the investors with the same level of protection as in the U.S. The Company is governed by the law and regulations generally applicable to local enterprises in China. Many of these laws and regulations were recently introduced and remain experimental in nature and subject to changes and refinements. Interpretation, implementation and enforcement of the existing laws and regulations can be uncertain and unpredictable and therefore may restrict the legal protections of foreign investors.
 
Changes in Currency Conversion Policies in China may have an material adverse effect on us.
 
Renminbi (“RMB”) is not a freely exchangeable currency. Since 1998, the State Administration of Foreign Exchange of China has promulgated a series of circulars and rules in order to enhance verification of foreign exchange payments under a Chinese entity’s current account items, and has imposed strict requirements on borrowing and repayments of foreign exchange debts from and to foreign creditors under the capital account items and on the creation of foreign security in favor of foreign creditors.

This may complicate foreign exchange payments to foreign creditors under the current account items and thus will affect the ability to borrow under international commercial loans, the creation of foreign security, and the borrowing of RMB under guarantees in foreign currencies. Furthermore, the value of RMB may become subject to supply and demand, which could be largely impacted by international economic and political environments.  Any fluctuations in the exchange rate of RMB could have an adverse effect on the operational and financial condition of the Company and its subsidiaries in China.

You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions based on United States or other foreign laws against us, our management or the experts named in the prospectus.
 
We conduct substantially all of our operations in China and substantially all of our assets are located in China. In addition, all of our senior executive officers reside in China. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon our senior executive officers, including with respect to matters arising under U.S. federal securities laws or applicable state securities laws. Moreover, our PRC counsel has advised us that the PRC does not have treaties with the United States or many other countries providing for the reciprocal recognition and enforcement of judgment of courts. 
 
- 9 -

 
Risks Relating to Ownership of Our Securities

 
Our stock price may be volatile, which may result in losses to our shareholders.
 
The stock markets have experienced significant price and trading volume fluctuations, and the market prices of companies listed on the NASDAQ Capital Market, the stock market in which shares of our common stock are listed, have been volatile in the past and have experienced sharp share price and trading volume changes. The trading price of our common stock is likely to be volatile and could fluctuate widely in response to many factors, including the following, some of which are beyond our control:

 
variations in our operating results;
     
 
changes in expectations of our future financial performance, including financial estimates by securities analysts and investors;
     
 
changes in operating and stock price performance of other companies in our industry;
     
 
additions or departures of key personnel; and
     
 
future sales of our common stock.
 
Domestic and international stock markets often experience significant price and volume fluctuations. These fluctuations, as well as general economic and political conditions unrelated to our performance, may adversely affect the price of our common stock.  

One stockholder owns a substantial portion of our outstanding common stock, which may enable this stockholder to influence many significant corporate actions and in certain circumstances may prevent a change in control that would otherwise be beneficial to our other shareholders.

Excelvantage Group Limited controls approximately 60.12% of our outstanding shares of common stock. As a result, Excelvantage Group Limited could have a substantial impact on matters requiring the vote of the shareholders, including the election of our directors and most corporate actions. This control could delay, defer or prevent others from initiating a potential merger, takeover or other change in our control, even if these actions would benefit our other shareholders and the Company. This control could adversely affect the voting and other rights of our other shareholders and could depress the market price of our common stock.
 
Our common shares are thinly traded and you may be unable to sell at or near ask prices, or at all.

We cannot predict the extent to which an active public market for trading our common stock will be sustained. Our common shares have historically been sporadically or “thinly-traded,” meaning that the number of persons interested in purchasing our common shares at or near bid prices at any given time may be relatively small or non-existent.

This situation is attributable to a number of factors, including the fact that we are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community who generate or influence sales volume.  Even if we came to the attention of such persons, those persons tend to be risk-averse and may be reluctant to follow, purchase, or recommend the purchase of shares of an unproven company such as ours until such time as we become more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give you any assurance that a broader or more active public trading market for our common stock will develop or be sustained, or that current trading levels will be sustained.
 
- 10 -

 
Shareholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities. The occurrence of these patterns or practices could increase the volatility of our share price.

We do not anticipate paying any cash dividends.

We presently do not anticipate that we will pay dividends on any of our capital stock in the foreseeable future. If payment of dividends does occur at some point in the future, it would be contingent upon our revenues and earnings, if any, capital requirements, and general financial condition. The payment of any dividends will be within the discretion of our Board of Directors. We presently intend to retain all earnings, if any, to implement our business plan; accordingly, we do not anticipate the declaration of any dividends in the foreseeable future.

Fluctuation in the value of the RMB may have a material adverse effect on your investment.
 
The change in value of the RMB against the U.S. dollar, the Euro and other currencies is affected by changes in China’s political and economic conditions, among other things. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in approximately 2.1% appreciation of RMB against the U.S. dollar. While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the RMB against the U.S. dollar. As a portion of our costs and expenses is denominated in RMB, the revaluation in July 2005 and potential future revaluation has and could further increase our costs. In addition, any significant revaluation of the RMB may have a material adverse effect on our financial condition. For example, to the extent that we need to convert U.S. dollars we receive from this offering into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we receive from the conversion. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us.
   
- 11 -

 
If the Company were to be delisted from NASDAQ, our common stock could be subject to “penny stock” rules which could negatively impact our liquidity and our shareholders’ ability to sell their shares.

Our common stock is currently listed on the NASDAQ Capital Market. We must comply with numerous NASDAQ MarketPlace rules in order to maintain the listing of our common stock on NASDAQ. There can be no assurance that we can continue to meet the requirements to maintain the NASDAQ listing of our common stock. If we are unable to maintain our listing on NASDAQ, the market liquidity of our common stock may be severely limited.
 
Volatility in Our Common Share Price May Subject Us to Securities Litigation.

The market for our common stock is characterized by significant price volatility as compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management's attention and resources.

The Elimination of Monetary Liability Against our Directors, Officers and Employees under Delaware law and the Existence of Indemnification Rights of our Directors, Officers and Employees May Result in Substantial Expenditures by our Company and may Discourage Lawsuits Against our Directors, Officers and Employees.

Our articles of incorporation do not contain any specific provisions that eliminate the liability of our directors for monetary damages to our company and shareholders; however, we are prepared to give such indemnification to our directors and officers to the extent provided for by Delaware law. We may also have contractual indemnification obligations under our employment agreements with our officers. The foregoing indemnification obligations could result in our company incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers, which we may be unable to recoup. These provisions and resultant costs may also discourage our company from bringing a lawsuit against directors and officers for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our shareholders against our directors and officers even though such actions, if successful, might otherwise benefit our company and shareholders.
 
Past Activities Of Stone Mountain and Our Affiliates May Lead to Future Liability.

Prior to Stone Mountain entering into the share exchange agreement with Continental on June 29, 2007, Stone Mountain engaged in businesses unrelated to our current operations. Any liabilities relating to such prior business against which we are not completely indemnified may have a material adverse effect on us.
  
- 12 -


We may need additional capital, and the sale of additional shares or other equity securities could result in additional dilution to our shareholders.
 
We believe that our current cash, cash equivalents, and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs for the near future. We may, however, require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities could result in dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.

Our business is subject to changing regulations related to corporate governance and public disclosure that have increased both our costs and the risk of noncompliance.

Because our common stock is publicly traded, we are subject to certain rules and regulations of federal, state and financial market exchange entities charged with the protection of investors and the oversight of companies whose securities are publicly traded. These entities, including the Public Company Accounting Oversight Board, the SEC and NASDAQ, have issued requirements and regulations and continue to develop additional regulations and requirements in response to corporate scandals and laws enacted by Congress, most notably the Sarbanes-Oxley Act of 2002. Our efforts to comply with these regulations have resulted in, and are likely to continue resulting in, increased general and administrative expenses and diversion of management time and attention from revenue-generating activities to compliance activities. Because new and modified laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This evolution may result in continuing uncertainty regarding compliance matters and additional costs necessitated by ongoing revisions to our disclosure and governance practices.
Item 1B.      
Unresolved Staff Comments.
 

Item 2.      
 Properties.

 
All land in the PRC is owned by the government and cannot be sold to any individual or entity. Instead, the government grants or allocates landholders a “land use right.” There are four methods to acquire land use rights:

 
grant of the right to use land;
 
assignment of the right to use land;
 
lease of the right to use land; and
 
allocated land use rights
 
- 13 -

 
In comparison with Western common law concepts, granted land use rights are similar to life estates and allocated land use rights are in some way similar to leaseholds.
 
Granted land use rights are provided by the government in exchange for a grant fee, and carry the rights to pledge, mortgage, lease, and transfer within the term of the grant. Land is granted for a fixed term - generally 70 years for residential use, 50 years for industrial use, and 40 years for commercial and other use. The term is renewable in theory. Unlike the usual case in Western nations, granted land must be used for the specific purpose for which it was granted.
 
Allocated land use rights are generally provided by the government for an indefinite period (usually to state-owned entities) and cannot be pledged, mortgaged, leased, or transferred by the user. Furthermore, allocated land can be reclaimed by the government at any time. Allocated land use rights may be converted into granted land use rights upon the payment of a grant fee to the government.

Kandi has the following granted land use rights:

Location
 
Area (square meters)
 
Term and Expiration
 
Certificate No.
Zhejiang Jinhua Industrial Park
 
72900.88
 
Nov 13, 2002 - Nov 13, 2052
 
10-15-0-203-1
Zhejiang Jinhua Industrial Park
 
39490.64
 
Nov 13, 2002 - Nov 13, 2052
 
10-15-0-203-2
Zhejiang Jinhua Industrial Park
 
46650.70
 
Dec 30, 2003 - Dec 30, 2053
 
10-15-0-16
Zhejiang Jinhua Industrial Park
 
37515.00
 
Dec 30, 2003 - Dec 30, 2053
 
10-15-0-17
Zhejiang Jinhua Industrial Park
 
49162.00
 
Dec 30, 2003 - Dec 30, 2053
 
10-15-0-18
 
Item 3.      
Legal Proceedings.    
 
 
- 14 -

 
Item 4.      
Submission of Matters to a Vote of Security Holders.
 
Three proposals were submitted to a vote of, and approved by, the stockholders of the Company at the 2008 annual meeting of stockholders, which was held on December 19, 2008.  The first proposal was for the election of seven nominees to serve as directors until the end of their respective terms.  The second proposal was to approve the Company’s 2008 Omnibus Long-Term Incentive Plan.  The third proposal was to ratify the appointment of Weinberg & Company, P.A. as the Company’s independent registered public accountants for 2008. Additional information about the proposals can be found in the Company’s definitive proxy statement filed with the Securities and Exchange Commission on November 24, 2008.
 
Of the 19,961,000 shares of stock issued and outstanding and entitled to vote at the annual meeting, 17,706,532 shares were represented in person or by proxy, which constituted approximately 89% of the total votes entitled to be cast at the meeting.  Each share of common stock outstanding is entitled to one vote.
 
The votes for each proposal were cast as follows:
 
Proposal 1 – Election of Directors
 
   
Number of
   
Number of
 
   
Shares Voted for
   
Shares Withheld
 
                 
Hu Xiaoming
   
17,575,218
     
98,434
 
Zhu Xiaoying
   
17,575,218
     
98,434
 
Hu Wangyuan
   
17,575,218
     
98,434
 
Fong Heung Sang
   
17,575,218
     
98,434
 
Zheng Mingyang
   
17,575,218
     
98,434
 
Yao Zhengming
   
17,575,218
     
98,434
 
Qian Min
   
17,575,218
     
98,434
 

 
- 15 -

 
Proposal 2 – Approval of the Company’s 2008 Omnibus Long-Term Incentive Plan
 
For: 12,351,983
Against: 373,387
Abstain: 2,793               

 
Proposal 3 – Ratification of the Appointment of Weinberg & Company, P.A. to serve as the Company’s Independent Registered Public Accountants for its year ending December 31, 2008
 
For: 17,578,667
Against: 94,785
Abstain: 200               
 
 
PART II
 
Item 5.      
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
Market Information
 
Our common stock began trading on the OTCBB under the symbol “KNDI” on July 6, 2007. Prior to this date, no liquid market had existed for our common stock. Our common stock began trading on the NASDAQ Capital Market on March 18, 2008. The following are the high and low bid prices for our common stock for each quarter from July 6, 2007 to December 31, 2008.

   
HIGH
   
LOW
 
FISCAL 2008
           
Fourth Quarter (through December 31, 2008)
  $ 2.40     $ 0.72  
Third Quarter (through September 30, 2008)
  $ 4.30     $ 1.75  
Second Quarter (through June 30, 2008)
  $ 7.25     $ 4.09  
First Quarter (through March 31, 2008)
  $ 5.65     $ 4.28  
FISCAL 2007
               
Fourth Quarter (through December 31, 2007)
  $ 5.30     $ 3.72  
Third Quarter (through September 30, 2007)
  $ 4.25     $ 3.25  
 
Holders of Common Stock
 
As of December 31, 2008, there were ten record holders of our common stock.
 
Dividends
 
We have never paid a dividend on our common stock. At present, we intend to retain any earnings for use in our business and do not anticipate paying cash dividends in the foreseeable future.

 
- 16 -


Item 6.      
Selected Financial Data.

Not applicable.
Item 7.      
Management’s Discussion and Analysis of Financial Condition and Results of Operation.
 
The following discussion should be read in conjunction with the information contained in the consolidated financial statements of the Company and the notes thereto appearing elsewhere herein. Readers should carefully review the risk factors disclosed in this Form 10-K and other documents filed by the Company with the SEC.
 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
This section should be read together with the Summary of Significant Accounting Policies in the attached consolidated financial statements included in this 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 the Company’s accounts receivable and inventories.
 

Inventories are stated at the lower of cost, determined on a weighted average basis, or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated costs necessary to make the sale.  When inventories are sold, their carrying amount is charged to expense in the year in which the revenue is recognized. Write-downs for declines in net realizable value or for losses of inventories are recognized as an expense in the year the impairment or loss occurs. There were no declines in net realizable value of inventory for the years ended of December 31, 2008 and 2007.
 
While the Company currently believes that there is little likelihood that actual results will differ materially from these 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, the Company could realize significant write downs for slow-moving inventories or uncollectible accounts receivable.
 
- 17 -

 
Policy affecting recognition of revenue
 
Among the most important accounting policies affecting our consolidated financial statements is our policy of recognizing revenue in accordance with the SEC’s Staff Accounting Bulletin (“SAB”) No. 104. Under this policy, all of the following criteria must be met in order for us to recognize revenue:
 
 
1.       Persuasive evidence of an arrangement exists;
 
2.       Delivery has occurred or services have been rendered;
 
3.       The seller’s price to the buyer is fixed or determinable; and
 
4.       Collectibility is reasonably assured.
 
The majority of the Company’s revenue results from sales contracts with distributors. Revenue is recorded upon the shipment of goods. Management conducts credit background checks for new customers as a means to reduce the subjectivity of assuring collectibility. Based on these factors, the Company believes that it can apply the provisions of SAB 104 with minimal subjectivity.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2007, the FASB issued SFAS No. 141 (R), Business Combinations. 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. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. SFAS No.141 (R) is effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption is prohibited. 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 parents 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 entitys 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.

 
- 18 -

 
RESULTS OF OPERATIONS – YEAR ENDED DECEMBER 31, 2008 AS COMPARED TO YEAR ENDED DECEMBER 31, 2007
 
The following table sets forth the amounts and the percentage relationship to revenues of certain items in our consolidated statements of income for the years ended December 31, 2008 and 2007:
 
  For The Years Ended December 31, 2008 and 2007
 
   
2008
   
2007
   
Comparisons
 
   
Amount
   
% of
Revenue
   
Amount
   
% of
Revenue
   
Change in
Amount
   
Change
In %
 
REVENUES
  $ 40,513,788       100.0 %   $ 33,434,662       100.0 %   $ 7,079,126       21.2 %
COST OF GOODS SOLD
    30,919,868       76.3 %     26,244,696       78.5 %     4,675,172       17.8 %
GROSS PROFIT
    9,593,920       23.7 %     7,189,966       21.5 %     2,403,954       33.4 %
Research and Development
    839,989       2.1 %     108,399       0.3 %     731,590       674.9 %
Selling and Marketing
    477,413       1.2 %     730,609       2.2 %     (253,196 )     (34.7 %)
General and Administration
    1,836,394       4.5 %     936,224       2.8 %     900,170       96.1 %
INCOME FROM OPERATIONS
    6,440,124       15.9 %     5,414,734       16.2 %     1,025,390       18.9 %
Government Grants
    64,595       0.2 %     -       0.0 %     64,595       100 %
Forfeiture of Customer Deposits and Forgiveness of Debt
    16,235       0.0 %     667,041       2.0 %     (650,806 )     (97.6 %)
Other (Expense) Income, Net
    100,331       0.2 %     143       0.0 %     100,188       70061.5 %
Interest Expense, Net
    (2,017,323 )     (5.0 %)     (1,115,132 )     (3.3 %)     (902,191 )     80.9 %
INCOME BEFORE INCOME TAX
    4,603,962       11.4 %     4,966,786       14.9 %     (362,824 )     (7.3 %)
INCOME TAX (EXPENSE) BENEFIT
    (9,605 )     0.0 %     391,760       1.2 %     (401,365 )     (102.5 %)
NET INCOME FROM CONTINUING OPERATIONS
    4,594,357       11.3 %     5,358,546       16.0 %     (764,189 )     (14.3 %)
INCOME FROM DISCONTINUED OPERATION
    327,721       0.8 %     (329,450 )     (1.0 %)     657,171       (199.5 %)
NET INCOME
  $ 4,922,078       12.1 %   $ 5,029,096       15.0 %   $ (107,018 )     (2.1 %)
 
Revenues
 
Total revenue of $40,513,788 for the year ended December 31, 2008 increased by 21.2% as compared to the same period of 2007. Such increase is mainly attributed to the increase in sales of Go-karts and UTVs by 115% and 69% respectively, despite the sharp fall in ATV business sales by 62.47% due to the economic downturn resulting from the global financial crisis.
 
- 19 -

 
Cost of Goods Sold

Cost of goods sold during the year ended December 31, 2008 was $30,919,868 representing a 17.8% increase from last year, which corresponds to the increase in sales. Cost of goods sold as a percentage of revenues was 76.3% for 2008 as compared to 78.5% for the year 2007 which reflects the Company’s continued focus on cost control and sourcing and operational efficiencies.

Gross profit

Gross profit increased by $2,403,954, or 33.4%, for the year ended December 31, 2008 as compared to the year ended December 31, 2007. This increase reflected higher net sales, improved margins and operating efficiencies generally across our go-karts businesses and was due to improvements in product quality, improvements in energy efficiency in our manufacturing process and our ability to sell our vehicles at higher price.

Selling and Marketing

Selling and marketing expenses, including distribution expenses, decreased significantly to $477,413 from $730,609 for the previous year, representing a 34.7% decrease primarily due to a significant decrease in promotional expenses resulting from the global financial downturn.

General and Administrative

General and administrative expenses increased from $936,224 in 2007 to $1,836,394 in 2008, a 96.1% increase. The increase was primarily due to our use of legal and accounting services in connection with the listing of our stock on the capital market of NASDAQ.

Research and Development

For the year ended December 31, 2008, research and development expenses increased $731,590 to $839,989 from $108,399 for the year ended December 31, 2007. The increase is attributed to the significant research and development expenses required for the initial stage of the CoCo and the TT.

Interest Expense, Net

Net interest expense was $2,017,323 for the year ended December 31, 2008, compared to $1,115,132 for the year ended December 31, 2007, an increase of 80.9%.  This increase was mainly the result of the increase in short-term loans borrowed to satisfy the increased working capital needs for the expansion of production.

 
- 20 -

 
Income Taxes
 
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 took effect on January 1, 2008. In accordance with the relevant tax laws and regulations of PRC, the applicable corporate income tax rate of Kandi is 25%. However, a foreign-invested company which registered with the PRC government before March 16, 2007 is still permitted to apply the former corporate income tax rules. Thus, our company was exempt from corporate income tax for 2007 and 2008 and is also entitled to a 50% tax reduction for 2009, 2010 and 2011, of which the tax rate is 16.5%. The Company had a tax expense of $9,605 for the year ended December 31, 2008 and had a tax benefit of $391,760 for the year ended December 31, 2007.
 
Net Income
 
  Net income for the year ended December 31, 2008 was $4,922,078, which was a slight decrease of 2.1% as compared to 2007. The decrease is primarily due to higher research and development expenditure, financing interest and professional fees incurred in the stock listing on the NASDAQ capital market during the fiscal year.
 
LIQUIDITY AND CAPITAL RESOURCES

Cash Flow

Net cash flow provided by operating activities was $15,147,665 for the year ended December 31, 2008, as compared to $7,827,141 for the year ended December 31, 2007. The increase of net cash flow provided by operating activities was mainly due to the increase in accounts payable of $3,048,097 and the decrease in accounts receivable of $3,680,979.
 
Net cash flow used in investing activities was $22,020,980 for the year ended December 31, 2008 as compared to $16,037,469 for the year ended December 31, 2007. Cash flow used in investing activities in 2008 was for the purchase of construction in progress of $8,427,605 and issuance of notes receivable of $19,284,461 offset by a repayment of notes receivable of $6,096,353.
 
Net cash flow provided by financing activities was $6,290,243 in the year ended December 31, 2008, as compared to $8,344,744 for the year ended December 31, 2007. The decrease in net cash flow provided by financing activities was mainly due to the repayment of short-term bank loans. Those loans are used for the company to expand their output and distributions in the next year.
 
Working Capital

While the Company had net income of $4,922,078 and cash flows from operations of $15,147,665 for the year ended of December 31, 2008, the Company also had a working capital deficit of $13,949,253 at December 31, 2008, which principally due to the Company using the cash proceeds borrowed from short-term loans to invest in fixed assets and land use rights. The Company has a credit line for $21,322,693, $10,504,509 of which was used at December 31, 2008, from commercial banks. Subsequent to December 31, 2008, the Company collected approximately $10 million of its notes receivable. The Company expects to collect the remaining notes receivable by June 30, 2009 according to the terms of the written agreements.
 
- 21 -

 
The Company believes that its cash flows generated from operations will be sufficient to sustain operations for the next twelve months.  From time to time, the Company may require extra funding through financing activities and investments for expansion, and may, from time to time, consider new expansion opportunities for which our management may consider seeking external funding and financing.

Contractual Obligations
 
We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows. 

The following tables summarize our contractual obligations as of December 31, 2008, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.

 
Payments Due by Period
 
     
Less than 1
 
 
Total
 
Year
 
Contractual Obligations:
       
Bank Indebtedness
  $ 26,115,375     $ 26,115,375  
Other Indebtedness
    13,081,026       13,081,026  
Construction In Processing Leases
    190,395       190,395  
Total Contractual Obligations:
  $ 39,386,796     $ 39,386,796  

Bank indebtedness consists of secured and unsecured borrowings from China Communication Bank Jinhua Branch, ICBC Jinhua Economic Exploration Zone Branch, China Every-growing Bank, China Every-bright Bank, Huaxia Bank, Shanghai Pudong Development Bank and Commercial Bank Jiangnan Branch.

Other indebtedness includes bank acceptance notes and a loan from an unrelated company.

As of December 31, 2008, the aggregated amount of short-term bank loans that are guaranteed by third parties was $16,340,344, of which $2,917,918 is guaranteed by Zhejiang Mengdeli Electric Company whose bank loans of $6,245,820 are also guaranteed by the Company.
 
- 22 -

 
Off-balance Sheet Arrangements

Other than the arrangement described above, we have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
 
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.
 
Item 8.
Financial Statements and Supplementary Data.
 
 
- 23 -

 

KANDI TECHNOLOGIES, CORP.
 
AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED

DECEMBER 31, 2008 AND 2007
 
 

KANDI TECHNOLOGIES, CORP.
AND SUBSIDIARIES

 
CONTENTS

 
PAGE
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
PAGES
F-2-3
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2008 AND 2007
 
 
PAGES
F-4-5
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
 
 
PAGE
F-6
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
 
 
PAGES
F-7-8
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
 
 
PAGES
F-9-31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
 

 
Report of Independent Registered Public Accounting Firm
 

To the Board of Directors and Shareholders of:
Kandi Technologies Corp. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Kandi Technologies Corp. and subsidiaries (the “Company”) as of December 31, 2008 and 2007, and the related consolidated statements of income and comprehensive income, changes in shareholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

We were not engaged to examine management’s assertion about the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008 included in the Company’s Item 9A “Controls and procedures” in the Annual Report on Form 10-K and, accordingly, we do not express an opinion thereon.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Kandi Technologies Corp. and subsidiaries as of December 31, 2008 and 2007 and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting policies generally accepted in the United States of America.
 

 
/s/ Weinberg & Company, P.A.
Weinberg & Company, P.A.

Boca Raton, Florida
March 6, 2009

F-1

 
KANDI TECHNOLOGIES, CORP.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
 
ASSETS
   
             
   
December 31,
   
December 31,
 
   
2008
   
2007
 
             
CURRENT ASSETS
           
Cash and cash equivalents
  $ 141,380     $ 1,149,140  
Restricted cash
    12,550,685       1,367,222  
Accounts receivable, net of allowance for doubtful accounts of $7,123 and $3,701 as of December 31, 2008 and December 31, 2007, respectively
    7,715,081       11,401,367  
Inventories
    3,207,571       3,293,529  
Notes receivable
    13,235,961       47,853  
Other receivables
    289,315       416,454  
Prepayments and prepaid expenses
    60,017       17,774  
Due from employees
    19,805       9,932  
Discontinued operation
    -       15,000,567  
Total Current Assets
    37,219,815       32,703,838  
                 
LONG-TERM ASSETS
               
Plant and equipment, net
    20,832,549       10,427,176  
Land use rights, net
    9,368,403       385,539  
Construction in progress
    1,913,456       1,321,832  
Deposit for acquisition
    -       12,270,859  
Deferred taxes
    265,243       108,495  
Discontinued operation
    -       506,526  
Total Long-Term Assets
    32,379,651       25,020,427  
                 
TOTAL ASSETS
  $ 69,599,466     $ 57,724,265  

See notes to consolidated financial statements
 
F-2

 
KANDI TECHNOLOGIES, CORP.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
             
   
December 31,
   
December 31,
 
   
2008
   
2007
 
CURRENT LIABILITIES
           
Accounts payable
  $ 9,371,105     $ 6,333,057  
Other payables and accrued expenses
    1,151,245       378,675  
Short-term bank loans
    26,115,375       20,869,862  
Customer deposits
    676,548       483,320  
Notes payable
    13,081,026       1,476,600  
Due to employees
    10,502       310  
Due to related party
    623,767       -  
Deferred taxes
    139,500       -  
Discontinued operation
    -       15,138,249  
Total Current Liabilities
    51,169,068       44,680,073  
                 
LONG-TERM LIABILITIES
               
Discontinued operation
    -       2,651  
Total Long-Term Liabilities
    -       2,651  
                 
TOTAL LIABILITIES
    51,169,068       44,682,724  
                 
CONMMITMENTS AND CONTINGENCIES
               
                 
STOCKHOLDERS’ EQUITY
               
Common stock, $0.001 par value; 100,000,000 shares authorized; 19,961,000 and 19,961,000 shares issued and outstanding at December 31, 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 December 31, 2008 and December 31, 2007, respectively)
    10,047,198       5,125,120  
Accumulated other comprehensive income
    1,225,134       758,355  
TOTAL STOCKHOLDERS’ EQUITY
    18,430,398       13,041,541  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 69,599,466     $ 57,724,265  
 
See notes to consolidated financial statements
F-3

 
KANDI TECHNOLOGIES, CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
 
 
   
2008
   
2007
 
REVENUES, NET
  $ 40,513,788     $ 33,434,662  
                 
COST OF GOODS SOLD
    30,919,868       26,244,696  
                 
GROSS PROFIT
    9,593,920       7,189,966  
                 
Research and development
    839,989       108,399  
Selling and marketing
    477,413       730,609  
General and administrative
    1,836,394       936,224  
INCOME FROM CONTINUING OPERATIONS
    6,440,124       5,414,734  
                 
Interest expense, net
    (2,017,323 )     (1,115,132 )
Government grants
    64,595       -  
Forfeiture of customer deposits
    6,186       505,207  
Forgiveness of debt
    10,049       161,834  
Other, net
    100,331       143  
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
    4,603,962       4,966,786  
                 
INCOME TAX (EXPENSE) BENEFIT
    (9,605 )     391,760  
                 
INCOME FROM CONTINUING OPERATIONS
    4,594,357       5,358,546  
                 
DISCONTINUED OPERATION
               
                 
Loss from discontinued operation
    (33,398 )     (329,450 )
Gain from disposition of discontinued operation
    361,119       -  
                 
NET GAIN (LOSS) FROM DISCONTINUED OPERATION
    327,721       (329,450 )
                 
NET INCOME
    4,922,078       5,029,096  
                 
OTHER COMPREHENSIVE INCOME
               
                 
Foreign currency translation
    466,779       443,810  
 
See notes to consolidated financial statements
 
F-4

 
KANDI TECHNOLOGIES, CORP.
 AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
 
 
   
2008
   
2007
 
             
COMPREHENSIVE INCOME
  $ 5,388,857     $ 5,472,906  
                 
WEIGHTED AVERAGE SHARES OUTSTANDING BASIC AND DILUTED
    19,961,000       16,056,838  
                 
INCOME PER SHARE FROM CONTINUING OPERATIONS, BASIC AND DILUTED
  $ 0.23     $ 0.33  
                 
INCOME (LOSS) PER SHARE FROM NET GAIN (LOSS) FROM DISCONTINUED OPERATION, BASIC AND DILUTED
  $ 0.02     $ (0.02 )
                 
NET INCOME PER SHARE, BASIC AND DILUTED
  $ 0.25     $ 0.31  
 
See notes to consolidated financial statements
 
F-5

 
 KANDI TECHNOLOGIES, CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
 
 
   
Common Stock
   
Additional Paid-
   
Retained
   
Accumulated
Other
Comprehensive
       
   
Shares
   
Par Value
   
in Capital
   
Earnings
   
Income
   
Total
 
BALANCE AT JANUARY 1, 2007
    12,000,000     $ 12,000     $ 7,154,193     $ 96,024     $ 392,463     $ 7,654,680  
                                                 
Recapitalization
    7,961,000       7,961       (16,088 )     -       -       (8,127 )
                                                 
Foreign currency translation gain
    -       -       -       -       662,403       662,403  
                                                 
Income tax expense related to other comprehensive income
    -       -       -       -       (296,511 )     (296,511 )
                                                 
Net income
    -       -       -       5,029,096       -       5,029,096  
                                                  
BALANCE AT DECEMBER 31, 2007
    19,961,000     $ 19,961     $ 7,138,105     $ 5,125,120     $ 758,355     $ 13,041,541  
                                                 
Foreign currency translation gain
    -       -       -       -       466,779       466,779  
                                                 
Net income
    -       -       -       4,922,078       -       4,922,078  
                                                 
BALANCE AT DECEMBER 31, 2008
    19,961,000     $ 19,961     $ 7,138,105     $ 10,047,198     $ 1,225,134     $ 18,430,398  
 
See notes to consolidated financial statements
 
F-6

 
KANDI TECHNOLOGIES, CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
 
 
   
2008
   
2007
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 4,922,078     $ 5,029,096  
Net (gain) loss from discontinued operation
    (327,721 )     329,450  
Income from continuing operations
    4,594,357       5,358,546  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    1,976,369       1,321,382  
Provision for doubtful accounts
    5,308       3,701  
Loss on disposal of fixed assets
    -       35,049  
Deferred taxes
    9,605       (391,760 )
Forgiveness of debt
    (10,049 )     (161,834 )
Forfeiture of customer deposits
    (6,186 )     (505,207 )
                 
Changes in operating assets and liabilities, net of effects of acquisition:
               
(Increase) Decrease In:
               
 Accounts receivable
    3,680,979       (4,615,544 )
 Inventories
    85,959       2,169,649  
 Other receivables
    127,137       241,555  
Due to employees
    320       174,598  
 Prepayments and prepaid expenses
    (42,243 )     266,056  
                 
Increase (Decrease) In:
               
Accounts payable
    3,048,097       522,919  
Other payables and accrued liabilities
    772,570       116,359  
Customer deposits
    199,412       478,249  
Net cash provided by operating activities from continuing operations
    14,441,635       5,013,718  
Net cash provided by operating activities from discontinued operation
    706,030       2,813,423  
Net cash provided by operating activities
    15,147,665       7,827,141  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchases of plant and equipment
    (482,581 )     (2,821,010 )
Addition to construction in progress
    (8,427,605 )     (1,334,438 )
Reverse merger with SMOU, net of cash acquired
    -       373  
Purchase of a subsidiary, net of cash acquired
    (44,129 )     -  
Issuance of notes receivable
    (19,284,461 )     (5,638,027 )
Proceeds from disposal of fixed assets
    121,443       -  
Repayments of notes receivable
    6,096,353       5,937,746  
Deposit for acquisition
    -       (12,270,859 )
Net cash used in investing activities from continuing operations
    (22,020,980 )     (16,126,215 )
 Net cash provided by investing activities frm discontinued operation
    -       88,746  
Net cash used in investing activities
    (22,020,980 )     (16,037,469 )
 
See notes to consolidated financial statements
 
F-7

 
KANDI TECHNOLOGIES, CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
 
 
   
2008
   
2007
 
CASH FLOWS FROM FINANCING ACTIVITIES:
           
Restricted cash
    (11,183,462 )     (1,367,222 )
Proceeds from short-term bank loans
    37,099,213       26,902,520  
Repayments of short-term bank loans
    (31,853,701 )     (15,631,588 )
Proceeds from notes payable
    13,063,385       1,476,600  
Repayments of notes payable
    (1,458,959 )     (117,057 )
Repayments of advances to related parties
    623,767       17,288  
Net cash provided by financing activities from continuing operations
    6,290,243       11,280,541  
Net cash used in financing activities from discontinued operation
    -       (2,935,797 )
Net cash provided by financing activities
    6,290,243       8,344,744  
                 
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    (583,072 )     134,416  
Effect of exchange rate changes on cash
    (424,688 )     649,157  
Cash and cash equivalents at beginning of year
    1,149,140       365,567  
CASH AND CASH EQUIVALENTS AT END OF YEAR
  $ 141,380     $ 1,149,140  
                 
SUPPLEMENTARY CASH FLOW INFORMATION
               
Income taxes paid
  $ -     $ -  
Interest paid
  $ 2,204,006     $ 1,007,597  
 
SUPPLEMENTAL NON-CASH DISCLOSURES:
 
1.
During the year ended December 31, 2008 and 2007, $7,835,980 and $319,763 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 2007)
  $ 12,314,988  
 
See notes to consolidated financial statements
 
F-8

 
KANDI TECHNOLOGIES, CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
 
 
NOTE 1 – ORGANIZATION AND PRINCIPAL ACTIVITIES

Stone Mountain Resources, Inc. (“Stone Mountain “) 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. (the “Company”).
 
On June 29, 2007, pursuant to the share exchange agreement between Stone Mountain Resources, Inc., 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. Kandi Technologies, Corp. conducts its operations through its wholly owned subsidiary, Zhejiang Kandi Vehicles Co. Ltd., a People’s Republic of China (“PRC”) company.
 
The Company closed on its acquisition of 100% shares of Kandi Special Vehicles Co., Ltd. (“KSV”) on June 24, 2008 after which KSV became a wholly-owned subsidiary of the Company. The acquisition was accounted for as purchase in accordance with Statements of Financial Accounting Standards (“SFAS”) No. 141 “Business Combinations”, the consolidated statements of income include the result of operations of Kandi Special Vehicle Co., Ltd. from the acquisition date through December 31, 2008.

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

The primary operations of Kandi Technologies, Corp. and subsidiaries (the Company”) is the design, development, 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.
 
NOTE 2 – LIQUIDITY
 
While the Company had net income of $4,922,078 and cash flows from operations of $15,147,665 for the year ended of December 31, 2008, the Company also had a working capital deficit of $13,949,253 at December 31, 2008, which was principally due to the Company using the cash proceeds borrowed from short-term loans to invest in fixed assets and land use rights. The Company has a credit line for $21,322,693, $10,504,509 of which was used at December 31, 2008, from commercial banks. Subsequent to December 31, 2008, the Company collected approximately $10 million of its notes receivable. The Company expects to collect the remaining notes receivable by June 30, 2009 according to written agreements.
 
F-9

 
KANDI TECHNOLOGIES, CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)
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 Top Import and Export Co. Ltd., (“Dingji”) (100% subsidiary of Kandi)
 
As of May 9, 2008, Dingji was sold and is presented in the financial statements as a discontinued operation. Also see Note 14.
(iv)
Kangdi Special Vehicle Co. Ltd., (“KSV”) (100% subsidiary of the Company)

Intercompany accounts and transactions have been eliminated in consolidation.

(b)
Concentrations
 
The Company’s major customers for the years ended December 31, 2008 and 2007, accounted for the following percentages of total sales and accounts receivable as follows:

 
   
Sales
 
Accounts Receivable
Major Customers
 
2008
2007
 
December 31, 2008
December 31, 2007
Company A
 
75%
-
 
52%
-
Company B
 
7%
18%
 
1%
40%
Company C
 
6%
15%
 
8%
19%
Company D
 
-
14%
 
-
11%
Company E
 
2%
8%
 
9%
8%
Company F
1%
5%
1%
7%
 
The Company’s major suppliers for the years ended December 31, 2008 and 2007, accounted for the following percentage of total purchases and accounts payable as follows:
 
   
Purchases
 
Accounts Payable
Major Suppliers
 
2008
2007
 
December 31, 2008
December 31, 2007
Company G
 
79%
2%
 
9%
7%
Company H
 
2%
2%
 
4%
6%
Company I
 
4%
2%
 
4%
5%
Company J
 
4%
4%
 
4%
5%
Company K
 
1%
1%
 
3%
4%
 
F-10

 
KANDI TECHNOLOGIES, CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
 
 
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(c)
Economic and Political Risks

The Company’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC economy.

The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.

(d)
Use of Estimates

The preparation of the 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 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.
 
F-11

 
KANDI TECHNOLOGIES, CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

 
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(e)
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 bank loans, and customer deposits. Management has estimated that the carrying amount approximates fair value due to their short-term nature.

(f)
Cash and Cash Equivalents

For financial reporting purposes, the Company considers all highly liquid investments purchased with original maturity of three months or less to be cash equivalents.

Restricted cash at December 31, 2008 and 2007 represents time deposits on account to secure short-term bank loans and notes payable. Also see Note 9 and Note 10.

(g)
Inventories

Inventories are stated at the lower of cost or net realizable value (market value). The cost of raw materials is determined on the basis of weighted average. The cost of finished goods is determined on the weighted average basis and comprises direct materials, direct labour and an appropriate proportion of overhead.

Net realizable value is based on estimated selling prices less any further costs expected to be incurred for completion and selling expense.

(h)
Accounts Receivable

Accounts receivable are recognized and carried at original invoice amount less allowance for any uncollectible amounts. An estimate for doubtful accounts is made when collection of the full amount is no longer probable. At December 31, 2008 and 2007, the Company has an allowance for doubtful accounts of $7,123 and $3,701, respectively.

(i)
Prepayments

Prepayments represent cash paid in advance to suppliers for raw materials purchases.
 
F-12

 
KANDI TECHNOLOGIES, CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 

 
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(j)
Plant and Equipment

Plant and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is provided over their estimated useful lives, using the straight-line method. Leasehold improvements are amortized over the life of the asset or the term of the lease, whichever is shorter.  Estimated useful lives are as follows:
 
Buildings   
30 years
Machinery 
10 years
Motor vehicles
5 years
Office equipment 
5 years
Moulds 
5 years

The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statement of income. The cost of maintenance and repairs is charged to expense as incurred, whereas   significant renewals and betterments are capitalized. Also see Note 8.
 
(k)
Construction in Progress

Construction in progress represents direct costs of construction or the acquisition cost of buildings or machinery and design fees. Capitalization of these costs ceases and the construction in progress is transferred to plant and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is provided until the assets are completed and ready for their intended use.

 (l)
Land Use Rights

According to the laws of China, land in the PRC is owned by the Government and cannot be sold to an individual or a company.  However, the government grants the user a “land use right” to use the land.   The land use rights granted to the Company are being amortized using the straight-line method over the lease term of fifty years.

(m)
Impairment of Long-Term Assets

Long-term assets of the Company are reviewed annually as to whether their carrying value has become impaired, pursuant to the guidelines established in SFAS No. 144. The Company considers assets to be impaired if the carrying value exceeds the future projected cash flows from the related operations.  The Company also re-evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. There were no impairments in 2008 and 2007.
 
F-13

 
KANDI TECHNOLOGIES, CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(n)
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:

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

The majority of the Company’s revenue results from sales contracts with distributors and revenue are recorded upon the shipment of goods. Management conducts credit background checks for new customers as a means to reduce the subjectivity of assuring collectibility.

(o)
Government Grants

Grants received from the PRC Government for assisting in the Company’s technical research and development efforts are netted against the relevant research and development costs incurred when the proceeds are received or collectible.

During 2008 and 2007, $64,595 and $0 was received from the PRC Government as a reward for the Company’s contribution to the local economy.

(p)
Research and Development

Expenditures relating to the development of new products and processes, including significant improvements to existing products are expensed as incurred.  Research and development expenses were $839,989 and $108,399 for the years ended December 31, 2008 and 2007, respectively.

(q)
Retirement Benefits

Retirement benefits in the form of contributions under defined contribution retirement plans to the relevant authorities are charged as expenses as incurred. The retirement benefits expense for 2008 and 2007 are $69,990 and $79,628 respectively and are included in general and administrative expenses.

(r)
Taxes

Deferred tax assets and liabilities are recognized for the future tax consequence attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statement of income in the period that includes the enactment date. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.
 
F-14

 
KANDI TECHNOLOGIES, CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
 
 
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
(s)
Foreign Currency Translation

The accompanying consolidated financial statements are presented in United States dollars. The functional currency of the Company is the Renminbi (RMB). Capital accounts of the consolidated financial statements are translated into United States dollars from RMB at their historical exchange rates when the capital transactions occurred.
 
Assets and liabilities are translated at the exchange rates as of balance sheet date. Income and expenditures are translated at the average exchange rate of the year.
 
 
2008
 
2007
Year end RMB: US$ exchange rate
6.8542
 
7.3141
Average yearly RMB:  US$ exchange rate
7.0842
 
7.5614
 
(t)
Comprehensive Income

Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive income are required to be reported in a financial statement that is presented with the same prominence as other financial statements. Comprehensive income includes net income and the foreign currency translation gain, net of tax.
 
(u)
Segments

The Company operates in one business segment, development, manufacturing, and commercialization of all-terrain vehicles, go-karts, and special automobile related products. Also see Note 15.
 
(v)
Stock-Based Compensation
 
The Company’s stock-based compensation is recorded in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123R.
 
The Company estimates fair value of restricted stock based on the number of shares granted and the quoted price of the Company’s common stock on the date of grant. The fair value of stock options is estimated using the Black-Scholes model. The Company’s expected volatility assumption is based on the historical volatility of Company’s stock. The expected life assumption is primarily based on historical exercise patterns and post-vesting termination behavior. The risk-free interest rate for the expected term of the option is based on the U.S. treasury yield curve in effect at the time of grant. There were no estimated forfeitures as the current options outstanding were only issued to founders and senior management of the Company. SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised in subsequent periods, if necessary, if actual forfeitures differ from those estimates.

F-15

 
KANDI TECHNOLOGIES, CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(w)
Earnings Per Share

Basic earnings per share is 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 2008 and 2007.

(x)
Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141 (R), Business Combinations. 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. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. SFAS No.141 (R) is effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption is prohibited. 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 parents 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 entitys 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.

 
F-16

 
KANDI TECHNOLOGIES, CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 

 
NOTE 4 – INVENTORIES
 
Inventories are summarized as follows:

   
December 31,
2008
   
December 31,
2007
 
Raw materials
  $ 988,426     $ 1,534,448  
Work-in-progress
    1,980,413       1,402,073  
Finished goods
    238,732       357,008  
Total inventories
  $ 3,207,571     $ 3,293,529  
 
NOTE 5 – NOTES RECEIVABLE

Notes receivable consist of the following:

   
December 31,
2008
   
December 31,
2007
 
Notes receivable from unrelated companies:
           
Due March 31, 2009, interest at 7.2% per annum (subsequently settled on its due date)
  $ 3,928,997     $ -  
Due April 29, 2009, interest at 7.2% per annum
    729,480       -  
Due June 30, 2009, interest at 5.31% per annum
    8,147,091       -  
Notes receivable from unrelated companies
    12,805,568       -  
                 
Bank acceptance notes:
               
Due January 5, 2009 (subsequently settled on its due date)
    430,393       47,853  
Bank acceptance notes
    430,393       -  
Notes receivable
  $ 13,235,961     $ 47,853  

Notes receivable from unrelated companies are unsecured.
 
F-17

 
KANDI TECHNOLOGIES, CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007