Unassociated Document

0001144204-11-064158.txt : 20111114 0001144204-11-064158.hdr.sgml : 20111111 20111114145933 ACCESSION NUMBER: 0001144204-11-064158 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20110930 FILED AS OF DATE: 20111114 DATE AS OF CHANGE: 20111114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Kandi Technologies Corp CENTRAL INDEX KEY: 0001316517 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLES & PASSENGER CAR BODIES [3711] IRS NUMBER: 870700927 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-33997 FILM NUMBER: 111201419 BUSINESS ADDRESS: STREET 1: JINHUA CITY INDUSTRIAL ZONE STREET 2: ZHEJIANG PROVINCE CITY: JINHUA STATE: F4 ZIP: 321016 BUSINESS PHONE: (86-0579) 82239851 MAIL ADDRESS: STREET 1: JINHUA CITY INDUSTRIAL ZONE STREET 2: ZHEJIANG PROVINCE CITY: JINHUA STATE: F4 ZIP: 321016 FORMER COMPANY: FORMER CONFORMED NAME: STONE MOUNTAIN RESOURCES INC DATE OF NAME CHANGE: 20050203 10-Q 1 v240131_10q.htm FORM 10-Q Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______to______

Commission file number 001-52186

Kandi Technologies, Corp.

(Exact name of registrant as specified in charter)

Delaware			90-0363723
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

Jinhua City Industrial Zone

Jinhua, Zhejiang Province

People’s Republic of China

Post Code 321016

(Address of principal executive offices)

(86 - 0579) 82239856

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act 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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨	Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

As of November 10, 2011 the registrant had issued and outstanding 27,445,600 shares of common stock, par value $0.001 per share.

TABLE OF CONTENTS

		Page
PART I-- FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets as of September 30, 2011 (unaudited) and December 31, 2010		3

	Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) (unaudited)–Ended September 30, 2011 and September 30, 2010		5

	Condensed Consolidated Statements of Cash Flows (unaudited)–Nine months Ended September 30, 2011 and September 30, 2010		7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		34

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		43

Item 4.	Controls and Procedures		43


PART II-- OTHER INFORMATION

Item 1	Legal Proceedings	44

Item 1A.	Risk Factors	44

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44

Item 3.	Defaults Upon Senior Securities	44

Item 4.	[Removed and Reserved]	44

Item 5.	Other information	44

Item 6.	Exhibits	45

PART I-- FINANCIAL INFORMATION

Item 1. Financial Statements. (Unaudited)

KANDI TECHNOLOGIES, CORP.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

	September 30,		December 31,
	2011		2010
	(Unaudited)
CURRENT ASSETS
Cash and cash equivalents	$	1,881,477	$	7,754,166
Restricted cash		26,359,171		17,398,087
Accounts receivable		9,306,111		16,999,430
Inventories		8,675,723		5,886,506
Notes receivable		20,540,160		24,865,989
Other receivables		1,735,805		814,327
Prepayments and prepaid expenses		201,100		97,298
Due from employees		22,730		36,385
Advances to suppliers		3,436,136		188,585
Marketable securities (trading)		-		300,675
Due from related party		-		-
Total Current Assets		72,158,413		74,341,448

LONG-TERM ASSETS
Plant and equipment, net		21,577,293		23,911,626
Land use rights, net		10,994,004		10,833,452
Construction in progress		6,117,082		-
Deferred taxes		204,397		255,948
Investment in associated companies		250,900		272,241
Total Long-Term Assets		39,143,676		35,273,267

TOTAL ASSETS	$	111,302,089	$	109,614,715

See accompanying notes to condensed consolidated financial statements

KANDI TECHNOLOGIES, CORP.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS’ EQUITY

	September 30,		December 31,
	2011		2010
	(Unaudited)
CURRENT LIABILITIES
Accounts payable	$	5,209,813	$	6,452,652
Other payables and accrued expenses		651,693		794,625
Short-term bank loans		32,272,173		28,434,012
Customer deposits		59,634		82,127
Notes payable (net of discount of $324 and $0 as of September 30, 2011and December 31, 2010 respectively)		13,858,029		19,039,898
Income tax payable		117,197		127,339
Due to employees		8,882		12,767
Due to related party		841,251		841,251
Deferred taxes		203,591		34,083
Financial derivative		75		-
Total Current Liabilities		53,222,338		55,818,754

LONG-TERM LIABILITIES
Note payable, (net of discount of $0 and $730 as of September 30, 2011 and December 31, 2010 respectively)		-		270
Financial derivative		1,840,487		9,321,553
Total Long-Term Liabilities		1,840,487		9,321,823

TOTAL LIABILITIES		55,062,825		65,140,577

STOCKHOLDERS’ EQUITY
Common stock, $0.001 par value; 100,000,000 shares authorized; 27,445,600 and 27,396,101 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively		27,446		27,396
Additional paid-in capital		31,386,164		31,090,100
Retained earnings (the restricted portion is $1,319,067 at September 30, 2011 and December 31, 2010)		20,040,161		10,095,560
Accumulated other comprehensive income		4,785,493		3,261,082
TOTAL STOCKHOLDERS’ EQUITY		56,239,264		44,474,138
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	111,302,089	$	109,614,715

See accompanying notes to condensed consolidated financial statements

KANDI TECHNOLOGIES, CORP.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

	Three Months Ended						Nine Months Ended
	September 30, 2011			September 30, 2010			September 30, 2011			September 30, 2010
REVENUES, NET	$	10,310,558		$	10,478,224		$	28,789,766		$	28,637,863
COST OF GOODS SOLD		(7,984,828	)		(8,140,771	)		(22,060,888	)		(22,098,905	)
GROSS PROFIT		2,325,730			2,337,453			6,728,878			6,538,958
Research and development		(608,463	)		(459,935	)		(1,695,003	)		(1,203,270	)
Selling and distribution expenses		(85,239	)		(58,121	)		(234,854	)		(1,000,187	)
General and administrative expenses		(1,067,021	)		(516,929	)		(2,568,417	)		(2,315,088	)
INCOME (LOSS) FROM OPERATIONS		565,007			1,302,468			2,230,604			2,020,413
Interest income (expense), net		117,353			(572,032	)		95,549			(2,015,516	)
Change in fair value of financial instruments		(271,780	)		(2,578,693	)		7,480,992			(802,884	)
Government grants		9,235			191,934			289,962			266,911
Investment (loss) income		(12,905	)		-			(20,181	)
Other income, net		95,067			33,249			262,299			91,088
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES		501,977			(1,623,074	)		10,339,225			(439,988	)
INCOME TAX (EXPENSE) BENEFIT		(117,119	)		(94,282	)		(394,624	)		(269,338	)
NET INCOME (LOSS)		384,858			(1,717,356	)		9,944,601			(709,326	)

See accompanying notes to condensed consolidated financial statements

KANDI TECHNOLOGIES, CORP.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND

COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

	Three Months Ended					Nine Months Ended
	September 30, 2011		September 30, 2010			September 30, 2011		September 30, 2010
OTHER COMPREHENSIVE INCOME
Foreign currency translation		377,991		595,771			1,524,411		726,711
COMPREHENSIVE INCOME (LOSS)		762,849		(1,121,585	)		11,469,012		17,385

WEIGHTED AVERAGE SHARES OUTSTANDING BASIC		27,445,600		22,570,140			27,436,434		21,139,827
WEIGHTED AVERAGE SHARES OUTSTANDING DILUTED		28,617,870		22,570,140			28,740,204		21,139,827

NET INCOME (LOSS) PER SHARE, BASIC	$	0.01	$	(0.08	)	$	0.36	$	(0.03	)
NET INCOME (LOSS) PER SHARE, DILUTED	$	0.01	$	(0.08	)	$	0.35	$	(0.03	)

See accompanying notes to condensed consolidated financial statements

KANDI TECHNOLOGIES, CORP.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine Months Ended September 30
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	9,9,44,601		$	(709,326	)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization		3,501,765			3,105,355
Deferred taxes		236,939			(10,549	)
Option and warrant expense		195,474			2,198,961
Change of derivative instrument’s fair value		(7,480,992	)		2,434,909
Investment loss (income) in associated company		29,786			-

Changes in operating assets and liabilities:
(Increase) Decrease In:
Accounts receivable		8,118,796			1,014,365
Inventories		(2,554,537	)		(5,403,855	)
Other receivables		(880,750	)		(573,000	)
Due from employees		10,376			(91,416	)
Prepayments and prepaid expenses		(3,290,026	)		823,785
Marketable equity securities (trading)		305,564			-

Increase (Decrease) In:
Accounts payable		(1,431,210	)		5,230,579
Other payables and accrued liabilities		(156,970	)		(480,855	)
Customer deposits		(24,783	)		(35,308	)
Income tax payable		(14,090	)		(108,396	)
Net cash (used in) provided by operating activities	$	6,509,943		$	7,395,249

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of plant and equipment		(240,954	)		(750,553	)
Purchase of construction in progress		(6,019,101	)		-
Issuance of notes receivable		7,810,463			(13,623,804	)
Repayments of notes receivable		(2,751,302	)		2,274,519
Net cash provided by (used in) investing activities	$	(1,200,894	)	$	(12,099,838	)

See accompanying notes to condensed consolidated financial statements

KANDI TECHNOLOGIES, CORP.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine Months Ended September 30
	2011			2010
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted cash	$	(8,255,977	)	$	(3,964,344	)
Proceeds from short-term bank loans		25,607,093			23,619,506
Repayments of short-term bank loans		(22,748,197	)		(26,553,606	)
Proceeds from notes payable		33,309,509			23,860,959
Repayments of notes payable		(39,023,610	)		(7,955,742	)
Option exercise and other financing		65,544			(932,425	)
Repayments of advances to related parties		-			-
Net cash provided by financing activities		(11,045,638	)		8,074,348

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(5,736,589	)		3,369,759
Effect of exchange rate changes on cash		(136,100	)		(176,124	)
Cash and cash equivalents at beginning of period		7,754,166			218,207
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	1,881,477		$	3,411,842

SUPPLEMENTARY CASH FLOW INFORMATION
Income taxes paid	$	408,714		$	388,351
Interest paid	$	1,776,835		$	1,331,792

SUPPLEMENTAL NON-CASH DISCLOSURE:

During the nine months ended September 30, 2011 and 2010, $0 and $0 were transferred from construction in progress to plant and equipment, respectively.

See accompanying notes to condensed consolidated financial statements

KANDI TECHNOLOGIES, CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011 (UNAUDITED)

NOTE 1 - ORGANIZATION AND PRINCIPAL ACTIVITIES

Kandi Technologies, Corp. (the “Company” or “Kandi”, formally known as Stone Mountain Resources Inc.) was incorporated under the laws of the State of Delaware on March 31, 2004. On August 13, 2007, the Company changed its name from Stone Mountain Resources, Inc. to Kandi Technologies, Corp.

The company’s organizational chart is as follows:

As the organizational chart reflects, Zhejiang Kandi Vehicles Co. Ltd. has a 50% ownership (voting) interest in Jinhua Kandi New Energy Vehicle Co. Ltd.; however, per the terms and conditions of its contractual arrangement with the other equity owner, Zhejiang Kandi Vehicles Co. Ltd. is entitled to 100% of the economic rights and interests (profits and loss absorption) in Jinhua Kandi New Energy Vehicle Co. Ltd.

The primary operations of the Company are the design, development, manufacturing, and commercializing of all-terrain vehicles, go-karts, and specialized automobiles such as Electric Vehicles (“EVs”) for the People’s Republic of China (“PRC”) and global export markets. Sales are mainly made to trading companies in China, then distributed throughout the world.

NOTE 2 – LIQUIDITY

The Company had a working capital surplus of $18,936,075 at September 30, 2011, an improvement from a working capital surplus of $3,044,974 as of September 30, 2010, which was principally due to the Company’s additional equity offering in December 2010 and the conversion of the January 2010 convertible notes to common stock. The Company used part of these proceeds in the Company’s working capital and used part of these proceeds in the prepayment for purchasing fixed assets used for production.

As of September 30, 2011, the Company has credit lines from commercial banks for $44,050,111, of which $30,928,801 had been drawn as of September 30, 2011. The Company believes that its cash flows generated internally may not be sufficient to sustain operations and repay short term bank loans for the next twelve months. However, the Company believes its access to existing financing sources and established relationships with PRC banks will enable it to meet its obligations and fund its ongoing operations.

The Company has historically financed itself through short-term commercial bank loans from PRC banks. Normally, the term of these loans are for one year, and upon the repayment of all outstanding principal and interest in a respective loan, PRC banks roll the loans over for additional one-year terms, with adjustments made to the interest rate to reflect prevailing market rates. The Company believes this situation has not changed and the short-term bank loans will be available on normal trade terms if needed.

KANDI TECHNOLOGIES, CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011 (UNAUDITED)

NOTE 3 - BASIS OF PRESENTATION

The Company maintains its general ledger and journals with the accrual method of accounting for financial reporting purposes. The financial statements and notes are representations of management. These condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accounting policies adopted by the Company conform to U.S. generally accepted accounting principles (“GAAP”) and have been consistently applied in the presentation of financial statements. The financial information included herein for the three and nine month periods ended September 30, 2011 and 2010 is unaudited; however, such information reflects all adjustments, consisting of normal recurring adjustments, that are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows of the Company for these interim periods. The results of operations for the nine month period ended September 30, 2011 are not necessarily indicative of the results expected for the entire fiscal year ending December 31, 2011.

NOTE 4 – PRINCIPLES OF CONSOLIDATION

The consolidated financial statements reflect the accounts of Kandi and its ownership in the following subsidiaries:

(i)	Continental Development, Ltd. (“Continental”) (a wholly-owned subsidiary of the Company)

(ii)	Zhejiang Kandi Vehicles Co., Ltd. (“Kandi Vehicles”) (a wholly-owned subsidiary of Continental)

(iii)

Kandi Special Vehicles Co., Ltd. (“KSV”) (a wholly-owned subsidiary of Kandi Vehicles)

(iv)	Jinhua Three Parties New Energy Vehicles Service Co., Ltd. (“Jinhua Service”) (a 30% owned subsidiary of Kandi Vehicles)

(v)	Jinhua Kandi New Energy Vehicles Co., Ltd. (“Kandi New Energy”) (a 50% owned subsidiary of Kandi Vehicles with 100% profits and loss absorption due to contractual agreement).

Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such regulations, although we believe that the disclosures provided are adequate to prevent the information presented from being misleading. Specifically, inter-company accounts and transactions have been eliminated in consolidation.

NOTE 5 – USE OF ESTIMATES

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Management makes these estimates using the best information available at the time the estimates are made; however, actual results, when ultimately realized, could differ from management estimates.

NOTE 6 – RISKS AND UNCERTAINTIES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Economic; Exchange Rate; 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.

Our operations are conducted mainly in the PRC. As such, our earnings are subject to movements in foreign currency exchange rates when transactions are denominated in Renminbi (“RMB”), which is our functional currency. Accordingly, our operating results are affected by changes in the exchange rate between the U.S. dollar and those currencies.

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

KANDI TECHNOLOGIES, CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011 (UNAUDITED)

NOTE 6 – RISKS AND UNCERTAINTIES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

others, the political, economic and legal environment and foreign currency exchange. The Company’s performance 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.

(b) Fair Value of Financial Instruments

ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market.

These tiers include:

·	Level 1—defined as observable inputs such as quoted prices in active markets;

·	Level 2—defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and

·	Level 3—defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The assets measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820 as of September 30, 2011 are as follows:

	Fair Value Measurements at Reporting Date Using Quoted Prices in
	Carrying value as of September 30, 2011		Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and cash equivalents		1,881,477		1,881,477				-
Restricted cash		26,359,171		26,359,171				-
Conversion features		75				75		-
Warrants		1,840,487				1,840,487		-

Cash and cash equivalents consist primarily of highly rated money market funds at a variety of well-known institutions with original maturities of three months or less. Restricted cash represents time deposits on account to secure short-term bank loans and notes payable. The original cost of these assets approximates fair value due to their short term maturity.

Warrants and conversion features embedded in the convertible notes, which are accounted as liabilities, are treated as derivative instruments, which will be measured at each reporting date for their fair value using Level 2 inputs. Also see Note 6 section (s) and (t).

The Company’s non-financial assets are measured on a recurring basis. These non-financial assets are measured for impairment annually on the Company’s measurement date at the reporting unit level using Level 3 inputs. For most assets, ASC 820 requires that the impact of changes resulting from its application be applied prospectively in the year in which the statement is initially applied.

The Company’s non-financial assets measured on a non-recurring basis include the Company’s property, plant and equipment and finite-use intangible assets which are measured for recoverability when indicators for impairment are present. ASC 820 requires companies to disclose assets and liabilities measured on a non-recurring basis in the period in which a fair value re-measurement is performed. The Company has reviewed its long-lived assets as of September 30, 2011 and determined that there are no significant assets to be tested for recoverability under ASC 360 and as such, no fair value measurements related to non-financial assets have been made during the nine months ended September 30, 2011.

KANDI TECHNOLOGIES, CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011 (UNAUDITED)

NOTE 6 – RISKS AND UNCERTAINTIES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The Company considers highly liquid investments purchased with original maturities of three months or less to be cash equivalents.

Restricted cash on September 30, 2011 and December 31, 2010 represent time deposits on account to secure short-term bank loans and notes payable. Also see Notes 14 and 15.

(d) 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 labor 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.

(e) Accounts Receivable

Accounts receivable are recognized and carried at net realizable value. An allowance for doubtful accounts will be recorded in the period when a loss is probable based on an assessment of specific evidence indicating troubled collection, historical experience, accounts aging, ongoing business relation and other factors. Accounts are written off after exhaustive efforts at collection. If accounts receivable are to be provided for, or written off, they would be recognized in the consolidated statement of operations within operating expenses. At September 30, 2011 and December 31, 2010, the Company has an allowance for doubtful accounts of $0, as per the management's judgment based on their best knowledge.

As of each of September 30, 2011 and December 31, 2010, the longest credit term for certain customers was 120 days.

(f) Notes Receivable

Notes receivable represents short-term loans to third parties with the maximum term of one year. Interest income is recognized according to each agreement between a borrower and the Company on an accrual basis. If notes receivable are to be provided for, or written off, they are recognized in the relevant year if the loan default is probable, reasonably sure and the loss can be reasonably estimated. The Company recognizes income if the written-off loan is recovered at a future date. In case of foreclosure procedures or legal actions being taken, the Company provides accrual for the related foreclosure expense and related litigation expenses.

(g) Prepayments

Prepayments represent cash paid in advance to suppliers for raw materials used in the manufacturing process. For the fiscal quarter ended September 30, 2011, prepayments were primarily comprised of advances to mold manufactures. However, prepaid expenses, such as water and electricity fees, also contributed to the total number.

KANDI TECHNOLOGIES, CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011 (UNAUDITED)

NOTE 6 – RISKS AND UNCERTAINTIES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(h) Plant and Equipment

Plant and equipment are carried at cost less accumulated depreciation. Depreciation is provided over the estimated useful lives of the assets, 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 and equipment	10 years
Office equipment	5 years
Motor vehicles	5 years
Molds	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.

(i) Construction in Progress

Construction in progress represents direct costs of construction or the acquisition costs 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.

(j) 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.

(k) Accounting for the Impairment of Long-Lived Assets

The Company periodically evaluates the carrying value of long-lived assets to be held and used, including intangible assets subject to amortization, when events and circumstances warrant such a review, pursuant to the guidelines established in ASC No. 350. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair market values are reduced for the cost to dispose. During the reporting period, there was no impairment loss.

(l) Revenue Recognition

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

· Persuasive evidence of an arrangement exists;

· Delivery has occurred or services have been rendered;

· The seller’s price to the buyer is fixed or determinable; and

· Collectability is reasonably assured.

KANDI TECHNOLOGIES, CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011 (UNAUDITED)

NOTE 6 – RISKS AND UNCERTAINTIES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(m) Research and Development

Expenditures relating to the development of new products and processes, including significant improvement to existing products, are expensed as incurred. Research and development expenses were $1,695,003 and $1,203,270 for the nine months ended September 30, 2011 and 2010, respectively.

(n) 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.

For the nine months ended September 30, 2011 and 2010, $289,962 and $266,911, respectively, was received from the PRC government for the Company’s contribution to the local economy.

(o) Income Taxes

The Company accounts for income tax using an asset and liability approach and allows for recognition of deferred tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. 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 realization is uncertain.

(p) 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 reporting period, which was obtained from website: http://www.oanda.com

	September 30, 2011		December 31, 2010		September 30, 2010
Period end RMB : USD exchange rate		6.4018		6.6118		6.6981
Average period RMB : USD exchange rate		6.5060		6.7788		6.8164

(q) 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 changes.

KANDI TECHNOLOGIES, CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011 (UNAUDITED)

NOTE 6 – RISKS AND UNCERTAINTIES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(r) Stock Option Cost

The Company’s stock option cost is recorded in accordance with ASC 718 and ASC 505.

Stock option expense recognized is based on awards expected to vest, and there were no estimated forfeitures. ASC standards require forfeitures to be estimated at the time of grant and revised in subsequent periods, if necessary, if actual forfeitures differ from those estimates.

The stock based compensation expense for the period ended September 30, 2011 is $195,474. Also see Note 17.

(s) Warrant Cost

The Company’s warrant costs are recorded in liabilities and equities respectively in accordance with ASC 480, ASC 505 and ASC 815.

The fair value of warrant is estimated using the Black-Scholes-Merton model. The Company’s expected volatility assumption is based on the historical volatility of the Company’s stock. The expected life assumption is primarily based on the expiration date of the warrant. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of measurement.

The Company determined that the equity based warrants are not considered derivatives under ASC 815, while the warrants, which are freestanding derivatives and are classified as liabilities on the balance sheet, will be measured at fair value on each reporting date.

(t) Fair Value of Conversion features

The Company used the Black-Scholes-Merton option-pricing model to obtain the fair value of the conversion feature. The Company’s expected volatility assumption is based on the historical volatility of the Company’s stock. The expected life assumption is primarily based on the expiration date of the conversion features. The risk-free interest rate for the expected term of the conversion features is based on the U.S. Treasury yield curve in effect at the time of measurement.

NOTE 7 – NEW ACCOUNTING PRONOUNCEMENTS

Recent Accounting Pronouncements

In April 2011, the Financial Accounting Standard Board (“FASB”) issued Accounting Standard Update (“ASU”) ASU 2011-03, Consideration of Effective Control on Repurchase Agreements, which deals with the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. ASU 2011-03 changes the rules for determining when these transactions should be accounted for as financings, as opposed to sales. The guidance in ASU 2011-03 is effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The adoption of ASU 2011-03 is not expected to have a material impact on the Company’s financial condition or results of operation.

KANDI TECHNOLOGIES, CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011 (UNAUDITED)

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”). ASU 2011-04 clarifies some existing concepts, eliminates wording differences between U.S. GAAP and IFRS, and in some limited cases, changes some principles to achieve convergence between U.S. GAAP and IFRS. ASU 2011-04 results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. ASU 2011-04 will be effective for the Company beginning after December 15, 2011. The Company does not expect the adoption of ASU 2011-04 to have a material effect on its operating results or financial position.

In June 2011, FASB issued ASU 2011-05, Presentation of Comprehensive Income, which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income, or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of equity. ASU 2011-05 will be effective for the Company beginning after December 15, 2011. The Company does not expect the adoption of ASU 2011-05 to have a material effect on its operating results or financial position. The Company is currently evaluating ASU 2011-05’s potential impact on its presentation of comprehensive income.

In September 2011, the FASB has issued Accounting Standards Update (ASU) No. 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU 2011-08 is intended to simplify how entities, both public and nonpublic, test goodwill for impairment. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is "more likely than not" that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350, Intangibles-Goodwill and Other. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance.

NOTE 8 – CONCENTRATIONS

(a) Customers

The Company’s major customers for the period ended September 30, 2011 accounted for the following percentages of total sales and accounts receivable as follows:

	Sales						Accounts Receivable
Major Customers	Nine Months Ended September 30, 2011			Nine Months Ended September 30, 2010			September 30, 2011			December 31, 2010
Company A		41	%		38	%		15	%		61	%
Company B		19	%		13	%		31	%		14	%
Company C		16	%		42	%		24	%		20	%
Company D		9	%		-			7	%		-
Company E		7	%		-			9	%		-

KANDI TECHNOLOGIES, CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011 (UNAUDITED)

(b) Suppliers

The Company’s major suppliers for the nine months ended September 30, 2011 accounted for the following percentage of total purchases and accounts payable as follows:

	Purchases						Accounts Payable
Major Suppliers	Nine Months Ended September 30, 2011			Nine Months Ended September 30, 2010			September 30, 2011			December 31, 2010
Company F		66	%		82	%		3	%		26	%
Company G		3	%		-			11	%		1	%
Company H		2	%		2	%		1	%		4	%
Company I		2	%		-			-			1	%
Company J		2	%		-			4	%		-

Because the Company is dependent on a small number of suppliers and customers, it is reasonably possible that a permanent or temporary disruption in these relationships could result in a severe impact on our results of operations.

NOTE 9 –INCOME (LOSS) PER SHARE

The Company calculates earnings per share in accordance with ASC 260, Earnings Per Share, which requires a dual presentation of basic and diluted earnings per share. Basic earnings per share are computed using the weighted average number of shares outstanding during the fiscal year. Diluted earnings per share represents basic earnings per share adjusted to include the potentially dilutive effect of outstanding stock options, warrants and convertible note (using the if-converted method). For the nine months ended September 30, 2011, there are 1,304,091 potentially dilutive common shares. Also see Note 17.

The following table sets forth the computation of basic and diluted net income per common share:

Nine months Ended September 30,	2011		2010
Net income (loss)	$	9,944,601	$	(709,326	)
Weighted – average shares of common stock outstanding
Basic		27,436,434		21,139,827
Dilutive shares		1,303,770		-
Diluted		28,740,204		21,139,827
Basic income (loss) per share	$	0.36	$	(0.03	)
Diluted income (loss) per share	$	0.35	$	(0.03	)

KANDI TECHNOLOGIES, CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011 (UNAUDITED)

NOTE 10 - INVENTORIES

Inventories are summarized as follows:

	September 30, 2011		December 31, 2010
	(Unaudited)
Raw material	$	1,566,100	$	1,754,216
Work-in-progress		5,367,801		3,668,104
Finished goods		1,741,822		464,186
		8,675,723		5,886,506
Less: reserve for slow moving inventories		-		-
Inventories, net	$	8,675,723	$	5,886,506

Net inventories increased $2,789,217 from December 31, 2010 to September 30, 2011. This increase resulted primarily

from the mass production of EV for the Chinese market.

NOTE 11 - NOTES RECEIVABLE

Notes receivable are summarized as follows:

	September 30, 2011		December 31, 2010
	(Unaudited)
Notes receivable from unrelated companies:
Due March 3, 2011, interest at 6.0% per annum 1	$	-	$	1,205,026
Due March 5, 2011, interest at 6.0% per annum 2		-		423,168
Due April 13, 2011, interest at 9.6% per annum 3		-		1,512,448
Due April 29, 2011, interest at 5.31% per annum 4		-		756,224
Due September 30, 2011, interest at 9.6% per annum 5		-		20,969,123
Due September 30, 2012, interest at 9.6% per annum 6		20,540,160		-
		20,540,160		24,865,989

Bank acceptance notes:
Bank acceptance notes		-		-
Notes receivable	$	20,540,160	$	24,865,989

Details of Notes receivable from unrelated parties as of December 31, 2010

Index	Amount ($)	Counter party	Relationship	Purpose of Loan	Manner of settlement
1	1,205,026	Hangzhou YuanHai Property Co., Ltd.	No relationship beyond loan	Receive interest income	Repaid in cash
2	423,168	Hangzhou YuanHai Property Co., Ltd.	No relationship beyond loan	Receive interest income	Repaid in cash
3	1,512,448	Yongkang BoTao Trading Co., Ltd.	No relationship beyond loan	Receive interest income	Repaid in cash
4	756,224	JiangXi De’er Chemical Co., Ltd. (*)	No relationship beyond loan	Receive interest income	Repaid in cash
5	20,969,123	Yongkang HuiFeng Guarantee Co., Ltd.	No relationship beyond loan	Receive interest income	Repaid part in cash and renewed the rest

(*)

JiangXi De’er Chemical Co., Ltd. is 85% owned by Kandi Investment Group Co. (“KIGC”). KIGC is the guarantor of the Company’s bank loan of $4,234,853 and was also a lender of the note payable of $134,305 as of December 31, 2010. Also see note 15 and note 16 of Form 10-K, as amended, for fiscal year ended December 31, 2010. KIGC was a major shareholder of Kandi Vehicles but it transferred all its equity in Kandi Vehicles to Continental Development Limited in November 2006. Since then, KIGC has been unrelated to the Company or its affiliates.

KANDI TECHNOLOGIES, CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011 (UNAUDITED)

Details of Notes receivable from unrelated parties as of September 30, 2011

Index		Amount ($)		Counter party		Relationship		Purpose of Loan		Manner of settlement
6		20,540,160		Yongkang HuiFeng Guarantee Co., Ltd.		No relationship beyond loan		Receive interest income		Not due

For the nine months ended September 30, 2011, the interest income generated from the notes receivable issued to third parties was $1,434,885.

NOTE 12 – LAND USE RIGHTS

Land use rights consist of the following:

	September 30, 2011			December 31, 2010
	(Unaudited)
Cost of land use rights	$	11,927,984		$	11,549,134
Less: Accumulated amortization		(933,980	)		(715,682	)
Land use rights, net	$	10,994,004		$	10,833,452

As of September 30, 2011 and December 31, 2010, the net book value of land use rights pledged as collateral for the Company’s bank loans was $4,058,024 and $3,998,555 respectively. Also see Note 15.

As of September 30, 2011 and December 31, 2010, the net book value of land use rights and plant and equipment pledged as collateral for bank loans borrowed by Zhejiang Mengdeli Electronic Co., Ltd. (“ZMEC”), an unrelated party of the Company was $6,935,980 and $4,640,069. Also see Note 19.

It is a common business practice among companies in the region of China where Kandi is located to exchange guarantees for bank debt with no consideration given. It is considered a “favor for favor” business practice and is commonly required by the lending banks as in these cases. ZMEC has provided a guarantee for certain of the Company’s bank loans. As of September 30, 2011, ZMEC guaranteed bank loans of the Company for a total of $12,496,485. In exchange, the Company guaranteed bank loans of ZMEC and allowed ZMEC to pledge the Company’s assets. Please see note 14.

The amortization expense for the nine months ended September 30, 2011 and 2010 was $191,700 and $186,203 respectively.

Amortization expense for the next five years and thereafter is as follows:

2011 (three months)	$	63,900
2012		255,600
2013		255,600
2014		255,600
2015		255,600
Thereafter		9,907,704
Total	$	10,994,004

KANDI TECHNOLOGIES, CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011 (UNAUDITED)

NOTE 13 – PLANT AND EQUIPMENT

Plant and equipment consist of the following:

	September 30, 2011			December 31, 2010
	(Unaudited)
At cost:
Buildings	$	13,618,832		$	13,073,777
Machinery and equipment		10,055,798			9,733,241
Office equipment		181,331			153,441
Motor vehicles		243,957			188,277
Moulds		14,830,046			14,307,730
		38,929,964			37,456,466
Less : Accumulated depreciation
Buildings	$	(1,824,464	)	$	(1,437,172	)
Machinery and equipment		(7,732,022	)		(6,755,599	)
Office equipment		(125,567	)		(108,034	)
Motor vehicles		(163,600	)		(129,113	)
Moulds		(7,507,018	)		(5,114,921	)
		(17,352,671	)		(13,544,840	)
Plant and equipment, net	$	21,577,293		$	23,911,626

As of September 30, 2011 and December 31, 2010, the net book value of plant and equipment pledged as collateral for the bank loans was $7,154,299 and $7,002,375, respectively. Also see Note 14.

As of September 30, 2011 and December 31, 2010, the net book value of plant and equipment pledged as collateral for bank loans borrowed by Zhejiang Mengdeli Electronic Co., Ltd. (“ZMEC”), a supplier but unrelated party of the Company was $4,640,069 and $4,634,487. Also see Note 19.

Depreciation expense for nine months ended September 30, 2011 and 2010 was $3,309,659 and $2,919,152 respectively.

NOTE 14 – SHORT TERM BANK LOANS

Short-term loans are summarized as follows:

	September 30, 2011		December 31, 2010
	(Unaudited)
Loans from China Communication Bank-Jinhua Branch
Monthly interest only payments at 5.84% per annum, due February 4, 2011, guaranteed by Zhejiang Shuguang industrial Co., Ltd. Mr. Hu Xiaoming, and Mr. Yan Guanwei.	$	-	$	756,224
Monthly interest only payments at 7.87% per annum, due September 19, 2012, guaranteed by Kandi Investment Group Co.		781,030		-

Loans from Commercial Bank-Jiangnan Branch
Monthly interest only payments at 5.84% per annum, due January 5, 2011, guaranteed by Zhejiang Kangli Metal Manufacturing Company, Mr. Hu Xiaoming, Lv Qingjiang, Lv Qingbo, and Ms. Ling Yueping. and pledged by the assets of Jingdezheng Changzhou Export & Import Company		-		3,024,895
Monthly interest only payments at 5.84% per annum, due October 15, 2011, guaranteed by Mr. Hu Xiaoming, and Ms. Ling Yueping. and pledged by Company’s assets. Also see Note 12 and Note 13.		1,562,061		1,512,447

KANDI TECHNOLOGIES, CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011 (UNAUDITED)

NOTE 14 - SHORT TERM BANK LOANS (CONTINUED)

Monthly interest only payments at 5.84% per annum, due December 5, 2011, guaranteed by Mr. Hu Xiaoming, and Ms. Ling Yueping, and pledged by Company’s asset. Also see Note 12 and Note 13.	781,030	756,224
Monthly interest only payments at 5.81% per annum, due January 3, 2012, guaranteed by Zhejiang Kangli Metal Manufacturing Company, Mr. Hu Xiaoming, Lv Qingjiang, and Ms. Ling Yueping. and pledged by the assets of Jingdezheng De’er Investment Industrial Co. Ltd.	3,124,121	-

Loans from Huaxia Bank
Monthly interest only payments at 5.73% per annum, due September 20, 2011, secured by the assets of the Company, guaranteed by Mr.Hu Xiaoming, Ms.Ling Yueping, Zhejiang Kangli Metal Manufacturing Company and Kandi Investment Group Co.	-	4,234,853
Monthly interest only payments at 7.22% per annum, due September 23, 2012, secured by the assets of the Company, guaranteed by Zhejiang Kangli Metal Manufacturing Company and Kandi Investment Group Co.	4,373,771

Loans from China Ever-bright Bank
Monthly interest only payments at 5.84% per annum, due April 7, 2011, secured by the assets of the Company, guaranteed by Mr. Hu Xiaoming, Ms. Ling Yueping, Nanlong Group Co., Ltd. and Zhejiang Mengdeli Electric Co., Ltd.	-	4,537,342
Monthly interest only payments at 5.84% per annum, due October 11, 2011, secured by the assets of the Company, guaranteed by Mr. Hu Xiaoming, Ms. Ling Yueping, Nanlong Group Co., Ltd. and Zhejiang Mengdeli Electric Co., Ltd.	4,686,182	4,537,342
Monthly interest only payments at 5.10% per annum, due November 1, 2011, secured by the assets of the Company, guaranteed by Mr. Hu Xiaoming, Ms. Ling Yueping, Nanlong Group Co., Ltd. and Zhejiang Mengdeli Electric Co., Ltd.	-	3,024,895
Monthly interest only payments at 5.10% per annum, due September 30, 2011, secured by the assets of the Company, guaranteed by Mr. Hu Xiaoming, Ms. Ling Yueping, Nanlong Group Co., Ltd. and Zhejiang Mengdeli Electric Co., Ltd.	-	-

KANDI TECHNOLOGIES, CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011 (UNAUDITED)

NOTE 14 - SHORT TERM BANK LOANS (CONTINUED)

	September 30, 2011		December 31, 2010
	(Unaudited)
Monthly interest only payments at 6.16% per annum, due October 2, 2011, secured by the assets of the Company, guaranteed by Mr. Hu Xiaoming, Ms. Ling Yueping, Nanlong Group Co., Ltd. and Zhejiang Mengdeli Electric Co., Ltd.		4,686,182		-
Interest only payment at 6.71% per annum, due February 15, 2012.		1,343,372		-

Loans from Shanghai Pudong Development Bank
Monthly interest only payments at 6.10% per annum, due December 28, 2011, secured by the property of Mr. Hu Xiaoming and Ms. Ling Yueping, guaranteed by Nanlong Group Co., Ltd. and Mr. Hu Xiaoming		3,124,121		3,024,895

Loans from Bank of Shanghai
Monthly interest only payments at 6.1% per annum, due December 8, 2011, guaranteed by Mr. Hu Xiaoming, Zhejiang Kangli Metal Manufacturing Company and Zhejiang Taiping Shengshi Industrial Co., Ltd.		4,686,182

Loans from China Ever-growing Bank
Monthly interest only payments at 5.61% per annum, due April 27, 2011, guaranteed by Zhejiang Shuguang industrial Co., Ltd. and Zhejiang Mengdeli Electric Company.		-		3,024,895
Monthly interest only payments at 7.57% per annum, due April 27, 2012, guaranteed by Mr. Hu Xiaoming, Ms. Ling Yueping, Zhejiang Shuguang industrial Co., Ltd. and Zhejiang Mengdeli Electric Company.		3,124,121		-
Total	$	32,272,173	$	28,434,012

Short term bank loans interest expense for the nine months ended September 30, 2011 and 2010 was $1,416,698, and $1,128,437, respectively. As of September 30, 2011, the aggregate amount of short-term loans that are guaranteed by various third parties is $30,928,801.

Of this amount, $12,496,485 is guaranteed by Zhejiang Mengdeli Electric Co., Ltd. whose bank loans of $4,311,287 and bank note of $1,249,649 are guaranteed by the Company, or secured by the Company’s assets; the net book value of plant and equipment pledged as collateral is $4,640,069, and the net book value of land use right pledged as collateral is $6,935,980. Also see Note 19.

Of this amount, $12,184,074 is guaranteed by Zhejiang Kangli Metal Manufacturing Company, whose bank loans of $4,686,182 are guaranteed by the Company. Also see Note 19. $3,124,121 is guaranteed by Lv Qingjiang, the major shareholder of Zhejiang Kangli Metal Manufacturing Company.

Of this amount, $3,124,121 is guaranteed by Zhejiang Shuguang industrial Co., Ltd. whose bank loans of $3,124,121 are also guaranteed by the Company. Also see Note 19.

Of this amount, $4,686,182 is guaranteed by Zhejiang Taiping Shengshi Industrial Co., Ltd. whose bank loans of $3,124,121 are also guaranteed by the Company. Also see Note 19.

This is a common business practice among companies in the region of China where Kandi is located to exchange guarantees for bank debt with no consideration given. It is considered a “favor for favor” business practice and is commonly required by the lending banks as in these cases.

KANDI TECHNOLOGIES, CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011 (UNAUDITED)

NOTE 15 – NOTES PAYABLE

By issuing bank note payables rather than paying cash to suppliers, the Company can defer the payments until the date bank note payable is due. Simultaneously, the Company needs to deposit restricted cash in banks to back up the bank note payable, while the restricted cash deposited in banks at the rate of 3.05% annually for this reporting period will generate interest income

Notes payable are summarized as follows:

	September 30, 2011		December 31, 2010
	(Unaudited)
Bank acceptance notes:
Due January 13, 2011	$	-	$	1,512,447
Due March 2, 2011		-		1,209,958
Due March 13, 2011		-		1,512,447
Due March 16, 2011		-		1,209,958
Due April 18, 2011		-		1,134,336
Due April 18, 2011		-		930,155
Due April 18, 2011		-		960,404
Due April 20, 2011		-		1,361,203
Due April 26, 2011		-		2,268,671
Due May 5, 2011		-		756,224
Due May 10, 2011		-		3,024,895
Due May 16, 2011		-		3,024,895
Due October 18, 2011		3,124,121		-
Due October 20, 2011		1,562,061		-
Due October 21, 2011		2,343,091		-
Due November 20, 2011		3,124,121		-
Due January 19,2012		148,396		-
Due March 26, 2012		14,059		-
Due March 26, 2012		15,621		-
Due March 26, 2012		37,489		-
Due March 26, 2012		15,621
Due March 26, 2012		17,183
Due March 26, 2012		15,621
Due March 26, 2012		14,059		-
Due March 26, 2012		7,810		-
Due March 26, 2012		6,248
Due March 26, 2012		15,621
Due March 26, 2012		15,621
Due March 26, 2012		7,810
Due March 26, 2012		31,241
Due March 26, 2012		9,685
Due March 26, 2012		9,372
Due March 26, 2012		10,934
Due March 26, 2012		31,241
Due March 26, 2012		51,548
Due March 26, 2012		46,862
Due March 26, 2012		15,621
Due March 26, 2012		4,686
Due March 26, 2012		3,124
Due March 26, 2012		3,124
Due March 26, 2012		12,496
Due March 26, 2012		15,621
Due March 26, 2012		3,124
Due March 26, 2012		3,124,121		-
Subtotal	$	13,857,353	$	18,905,593

KANDI TECHNOLOGIES, CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011 (UNAUDITED)

NOTE 15 – NOTES PAYABLE (CONTINUED)

	September 30, 2011		December 31, 2010
	(Unaudited)
Notes payable to unrelated companies:
Due April 24, 2011 (Interest rate 6.0% per annum)	$	-	$	134,305
Due January 20, 2012 (Interest rate 6.0% per annum)		1,000		1,000
Subtotal		1,000		135,305
Total	$	13,858,353	$	19,040,898

All the bank acceptance notes do not bear interest, but are subject to bank charges of 0.005% of the principal as commission on each transaction.

Restricted cash of $12,295,292 is held as collateral for the following notes payable at September 30, 2011:

Due October 18, 2011	$	3,124,121
Due October 20, 2011		1,562,061
Due October 21, 2011		2,343,091
Due November 20, 2011		3,124,121
Due January 19,2012		148,396
Due March 26, 2012		14,059
Due March 26, 2012		15,621
Due March 26, 2012		37,489
Due March 26, 2012		15,621
Due March 26, 2012		17,183
Due March 26, 2012		15,621
Due March 26, 2012		14,059
Due March 26, 2012		7,810
Due March 26, 2012		6,248
Due March 26, 2012		15,621
Due March 26, 2012		15,621
Due March 26, 2012		7,810
Due March 26, 2012		31,241
Due March 26, 2012		9,685
Due March 26, 2012		9,372
Due March 26, 2012		10,934
Due March 26, 2012		31,241
Due March 26, 2012		51,548
Due March 26, 2012		46,862
Due March 26, 2012		15,621
Due March 26, 2012		4,686
Due March 26, 2012		3,124
Due March 26, 2012		3,124
Due March 26, 2012		12,496
Due March 26, 2012		15,621
Due March 26, 2012		3,124
Due March 26, 2012		3,124,121
Subtotal	$	13,857,353

KANDI TECHNOLOGIES, CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011 (UNAUDITED)

NOTE 16 – TAX

(a) Corporation Income Tax

On March 16, 2007, the National People’s Congress of China approved the Corporate Income Tax Law of the PRC (the “new CIT law”), which went into effect on January 1, 2008. In accordance with the relevant tax laws and regulations of the PRC, the applicable corporate income tax rate is 25%. Prior to January 1, 2008, the corporation income tax (“CIT”) rate applicable to the Company was 33%. As a foreign-invested company, the income tax rate of Kandi is entitled to a 50% tax holiday based on 25% for the years from 2009 through 2011. During the transition period, the above tax concession granted to the Company prior to the new CIT law will be grandfathered according to the interpretations of the new CIT law. KSV and KNE are subsidiaries of the Company and their applicable corporate income tax rates are both 25%.

According to the PRC CIT reporting system, the CIT sales cut-off base is concurrent with the value added tax (“VAT”) which will be reported to the State Administration of Taxation (“SAT”) on a quarterly basis. Since the VAT and CIT are accounted for on a VAT tax basis that recorded all sales on a “State provided official invoices” reporting system, the Company is reporting the CIT according to the SAT prescribed tax reporting rules. Under the VAT tax reporting system, sales cut-off did not take the accrual base but rather on a VAT taxable reporting basis. Therefore, when the company adopted US GAAP on accrual basis, the sales cut-off CIT timing difference which derived from the VAT reporting system will create a temporary sales cut-off timing difference and this difference is reflected in the deferred tax assets or liabilities calculations on the income tax estimation reported in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2010.

Effective January 1, 2007, the Company adopted ASC 740, Income Taxes. The interpretation addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of September 30, 2011, the Company does not have a liability for unrecognized tax benefits. The Company files income tax returns with the Internal Revenue Service (“IRS”) and states on such returns where it has operations. The Company is subject to U.S. federal or state income tax examinations by IRS and relevant state tax authorities for years after 2006. During the periods open to examination, the Company has net operating loss carry forwards (“NOLs”) for U.S. federal and state tax purposes that have attributes from closed periods. Since these NOLs may be utilized in future periods, they remain subject to examination. The Company also files certain tax returns in China. As of September 30, 2011 the Company was not aware of any pending income tax examinations by China tax authorities. The Company's policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of September 30, 2011, the Company has no accrued interest or penalties related to uncertain tax positions. The Company has not recorded a provision for U.S federal income tax for the nine months ended September 30, 2011 due to the net operating loss carry forward in the United States Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of September 30, 2011, the Company does not have a liability for unrecognized tax benefits. The Company files income tax returns with the Internal Revenue Service (“IRS”) and states on such returns where it has operations. The Company is subject to U.S. federal or state income tax examinations by IRS and relevant state tax authorities for years after 2006. During the periods open to examination, the Company has net operating loss carry forwards (“NOLs”) for U.S. federal and state tax purposes that have attributes from closed periods. Since these NOLs may be utilized in future periods, they remain subject to examination. The Company also files certain tax returns in China. As of September 30, 2011 the Company was not aware of any pending income tax examinations by China tax authorities. The Company's policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of September 30, 2011, the Company has no accrued interest or penalties related to uncertain tax positions. The Company has not recorded a provision for U.S federal income tax for the nine months ended September 30, 2011 due to the net operating loss carry forward in the United States.

KANDI TECHNOLOGIES, CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011 (UNAUDITED)

NOTE 16 – TAX (CONTINUED)

Income tax expense (benefit) for the nine months ended September 30, 2011 and 2010 is summarized as follows:

	For the Nine Months Ended September 30,
	(Unaudited)
	2011		2010
Current:
Provision for CIT	$	394,624	$	279,955
Provision for Federal Income Tax				-
Deferred:
Provision for CIT				(10,617	)
Income tax expense (benefit)	$	394,624	$	269,338

The Company’s income tax expense (benefit) differs from the “expected” tax expense for the nine months ended September 30, 2011 and 2010 (computed by applying the CIT rate of 25%, respectively, to income before income taxes) as follows:

	For the Nine Months Ended September 30,
	(Unaudited)
	2011			2010
Computed "expected" (benefit) expense	$	551,691		$	(109,997	)
Favorable tax rate		(394,624	)		236,834
Permanent differences		33,723			58,159
Valuation allowance		203,834			84,342
Income tax expense (benefit)	$	394,624		$	269,338

KANDI TECHNOLOGIES, CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011 (UNAUDITED)

NOTE 16 – TAX (CONTINUED)

The tax effects of temporary differences that give rise to the Company’s net deferred tax assets and liabilities as of September 30, 2011 and December 31, 2010 are summarized as follows:

	September 30, 2011 (Unaudited)			December 31, 2010
Current portion:
Deferred tax assets:
Expense	$	(9,422	)	$	(10,042	)
Subtotal		(9,422	)		(10,042	)

Deferred tax liabilities:
Sales cut-off (CIT tax reporting on VAT tax system)		2,236			(24,041	)
Other		(196,405	)		-
Subtotal		(194,169	)		(24,041	)

Total deferred tax liabilities – current portion		(203,591	)		(34,083	)

Non-current portion:
Deferred tax assets:
Depreciation		425,296			476,847
Loss carried forward		203,834			3,524,145
Valuation allowance		(203,834	)		(3,524,145	)
Subtotal		425,296			476,847

Deferred tax liabilities:
Accumulated other comprehensive gain		(220,899	)		(220,899	)
Subtotal		(220,899	)		(220,899	)
Total deferred tax assets – non-current portion		204,397			255,948

Net deferred tax assets	$	806		$	221,865

KANDI TECHNOLOGIES, CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011 (UNAUDITED)

NOTE 16 – TAX (CONTINUED)

(b) Tax Holiday Effect

For the nine months ended September 30, 2011 and 2010 the PRC corporate income tax rate was 25%. Certain subsidiaries of the Company are entitled to tax holidays for the nine months ended September 30, 2011 and 2010.

The combined effects of the income tax expense exemptions and reductions available to the Company for the nine months ended September 30, 2011 and 2010 are as follows:

	For the Nine Months Ended September 30 (Unaudited)
	2011			2010
Tax holiday credit	$	(394,624	)	$	(236,834	)
Basic net income per share effect	$	(0.01	)	$	(0.01	)

NOTE 17 - STOCK OPTIONS, WARRANTS AND CONVERTIBLE NOTES

(a) Stock Options

On February 11, 2009, the Compensation Committee of the Board of Directors of the Company approved the grant of stock options for 2,600,000 shares of common stock to ten of the Company's employees and directors. The stock options vest ratably over three years and expire in ten years from the grant date. The Company valued the stock options at $2,062,964 and amortizes the stock compensation expense using the straight-line method over the service period from February 11, 2009 through February 11, 2012. The value of the options was estimated using the Black Scholes Model with an expected volatility of 164%, expected life of 10 years, risk-free interest rate of 2.76% and expected dividend yield of 0.00%. On June 30, 2011, one of the Company’s directors resigned, and his 6,668 unexercised options were forfeited.

The following is a summary of the stock option activities of the Company:

	Activity		Weighted Average Exercise Price
Outstanding as of January 1, 2011		1,833,304	$	0.84
Granted		-		-
Exercised		39,999		0.80
Cancelled		6,668		0.80
Outstanding as of September 30, 2011		1,786,637		0.84

KANDI TECHNOLOGIES, CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011 (UNAUDITED)

NOTE 17 - STOCK OPTIONS, WARRANTS AND CONVERTIBLE NOTES (CONTINUED)

The following table summarizes information about stock options outstanding as of September 30, 2011:

Options Outstanding						Options Exercisable
Number of shares		Exercise Price		Remaining Contractual life (in years)		Number of shares		Exercise Price
	1,686,637	$	0.80		7.50		1,686,637	$	0.80
	100,000		1.50		8.00		100,000		1.50

The fair value per share of the 2,600,000 options issued to the employees and directors is $0.7934 per share. The fair value per share of the unexercised 100,000 options issued to Wang Rui and Li Qiwen, which became exercisable on June 6, 2010, is $3.44.

(b) Warrants and Convertible Notes

On September 21, 2009, the Company executed an agreement (“Consulting Agreement”) with a third-party consultant, whereby the consultant is to provide management consulting and advisory services for a period of 12 months, beginning on September 22, 2009, and ending on September 22, 2010. As compensation for the services provided, the Company agreed to issue 200,000 warrants to purchase the Company’s common stock, with 100,000 of these warrants issued at an exercise price of $2.00 per share and 100,000 of these warrants issued at an exercise price of $2.50 per share. All of the warrants have a five year contractual term and were granted on October 22, 2009. The warrants vested in full and became exercisable on January 21, 2010, upon the closing of an initial round of financing. The fair value per share of the 100,000 warrants issued under the Consulting Agreement with an exercise price of $2.00 is $4.56, and the fair value per share of the 100,000 warrants issued under the Consulting Agreement with an exercise price of $2.50 is $4.48. As of September 30, 2011, the consultant had cashless exercised the 100,000 warrants with the exercise price of $2.50 per share.

Under a Securities Purchase Agreement, dated as of January 21, 2010, by and among the Company and certain investors thereto, the Company issued a total of $10 million of senior secured convertible notes (the “Convertible Notes”) and warrants exercisable for an aggregate of 800,000 shares of the Company’s Common Stock (the “Investor Warrants”), for gross proceeds of $10 million. The Convertible Notes, which accrue interest at a rate of 6% per annum, will mature in two years following the closing date of the offering and are initially convertible, at the option of the holders, into shares of Common Stock at $6.25 per share. As of January 21, 2010, at the price of $6.25 per share, the Convertible Notes were convertible into 1,600,000 shares of Common Stock. The Investor Warrants, which are exercisable for a period of three years following the closing date, are initially exercisable for shares of Common Stock at an exercise price of $6.5625 per share as of January 21, 2010. Included in the associated issuance costs is the fair value of 80,000 warrants issued to placement agents. These warrants have the same terms and conditions as the Investor Warrants issued to the investors.

KANDI TECHNOLOGIES, CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011 (UNAUDITED)

NOTE 17 - STOCK OPTIONS, WARRANTS AND CONVERTIBLE NOTES (CONTINUED)

Pursuant to the terms of the Convertible Notes and the Investor Warrants, on May 18, 2010, the conversion price of the Convertible Notes was adjusted to $3.5924 per share and the exercise price of the Investor Warrants and warrants issued to the placement agent was adjusted to $4.3907 per share. On August 19, 2010, the conversion price of the Convertible Notes was adjusted to $3.1146 per share and the exercise price of the Investor Warrants and warrants issued to the placement agent was adjusted to $3.8067 per share. As a result, the number of Investor Warrants and warrants issued to the placement agent were adjusted to 1,379,147 and 137,915 respectively. As of September 30, 2011, the investors had converted $9,999,000 of the principal amount and $159,507 of accrued interest of the Convertible Notes into an aggregate of 3,120,795 shares of Common Stock.

As of September 30, 2011, the fair value of the Investor Warrants and the warrants issued to the placement agent is $0.64 per share, and the fair value of conversion features is $0.23 per share.

On December 21, 2010, the Company agreed to sell to certain institutional investors up to 3,027,272 shares of the Company’s common stock and warrants to purchase up to 1,210,912 shares of the Company’s common stock in fixed combination, with each combination consisting of one share of common stock and a warrant to purchase 0.40 shares of common stock in a registered direct public offering (“Second round warrants”). The warrants became exercisable immediately following the closing date of the offering and remain exercisable for three years thereafter at an exercise price of $6.30 per share. As of September 30, 2011, the fair value of Second round warrants is $0.72 per share.

NOTE 18 – STOCK AWARDS

According to that certain Consulting Agreement dated as of September 21, 2009, the Company agreed to issue the consultant 100,000 shares of Company’s Common Stock upon the achievement of certain conditions. Pursuant to the terms of the Consulting Agreement, the Company issued an aggregate of 100,000 restricted shares of Common Stock to the consultant and certain of its employees on April 14, 2010.

According to that certain consulting agreement dated as of March 1, 2010, between the Company and DGI Investor Relations, Inc., the Company agreed to compensate the consultant in payments of 2,000 shares of Company’s Common Stock per quarter for the term of the agreement in exchange for the consultant providing investor relations services. Pursuant to the terms of the agreement, as of September 30, 2011 the Company has issued 11,340 shares of Common Stock for services rendered from January 1, 2010 to the end of the agreement – May 31, 2011.

According to the employment agreement between the Company and Cathy Cao, Executive VP of Finance, as part of her compensation package, the Company agreed to compensate Cathy Cao’s service in payments of 2,500 shares of Common Stock per quarter until September 15, 2011.

The fair value of stock awarded is determined by the closing price of the common stock on the date of stock awarded.

KANDI TECHNOLOGIES, CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011 (UNAUDITED)

NOTE 19 – COMMITMENTS AND CONTINGENCIES

(a) Guarantees and Pledged collateral for third party bank loans

(1) Guarantees for third party bank loans

As of September 30, 2011, the Company provided guarantee for the following third parties:

Guarantee provided to	Amount
Zhejiang Kangli Metal Manufacturing Company.	$	4,686,182
Zhejiang Shuguang industrial Co., Ltd.		3,124,121
Zhejiang Yiran Auto Sales Company		2,343,091
Zhejiang Taiping Shengshi Industrial Co., Ltd.		3,124,121
Zhejiang Taiping Trade Co., Ltd		3,592,740
Yongkang Angtai Trade Co., Ltd.		781,030
Total	$	17,651,285

On December 8, 2010, the Company entered into a guarantee contract to serve as the guarantor for the bank loan borrowed from Shanghai Bank Hangzhou branch in the amount of $4,686,182 by Zhejiang Kangli Metal Manufacturing Company. (“ZKMMC”) for the period from December 8, 2010 to December 8, 2011. ZKMMC is not related to the Company. Under this guarantee contract, the Company shall perform all obligations of ZKMMC under the loan contract if ZKMMC fails to perform its obligations as set forth in the loan contract.

On December 7, 2010, the Company entered into a guarantee contract to serve as the guarantor for the bank loans borrowed from Huaxia Bank Hangzhou branch in the amount of $3,124,121 by Zhejiang Shuguang industrial Co., Ltd. (“ZHICL”) for the period from December 7, 2010 to December 7, 2011. ZHICL is not related to the Company. Under these guarantee contracts, the Company shall perform all obligations of ZHICL under the loan contracts if ZHICL fails to perform its obligations as set forth in the loan contracts.

On September 29, 2010 and April 25, 2011, the Company entered into two guarantee contracts to serve as the guarantor for the bank loans borrowed from Bank of Hangzhou and Shanghai Pudong Development Bank Hangzhou branch in the amount of $781,030 and $1,562,061 by Zhejiang Yiran Auto Sales Company (“ZYASC”) for the period from September 29, 2010 to October 30, 2011 and from April 25, 2011 to April 25, 2012 respectively. ZYASC is not related to the Company. Under these guarantee contracts, the Company shall perform all obligations of ZYASC under the loan contracts if ZYASC fails to perform its obligations as set forth in the loan contracts.

KANDI TECHNOLOGIES, CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011 (UNAUDITED)

NOTE 19 – COMMITMENTS AND CONTINGENCIES (CONTINUED)

On December 8, 2010, the Company entered into a guarantee contract to serve as the guarantor for the bank loans borrowed from Shanghai Bank Hangzhou branch in the amount of $3,124,121 by Zhejiang Taiping Shengshi Industrial Co., Ltd. (“ZTSICL”) for the period from December 8, 2010 to December 8, 2011. ZTSICL is not related to the Company. Under this guarantee contract, the Company shall perform all obligations of ZTSICL under the loan contract if ZTSICL fails to perform its obligations as set forth in the loan contract.

On August 9, 2011, the Company entered into a guarantee contract to serve as the guarantor for the bank loans borrowed from ICBC Wuyi branch in the amount of $3,592,740 by Zhejiang Taiping Trade Co., Ltd (“ZTTCL”) for the period from August 9, 2011 to August 9, 2013. ZTTCL is not related to the Company. Under this guarantee contract, the Company shall perform all obligations of ZTTCL under the loan contract if ZTTCL fails to perform its obligations as set forth in the loan contract.

On January 7, 2011, the Company entered into two guarantee contracts to serve as the guarantor for the bank loans borrowed from China Communication Bank Jinhua Branch in the amount of $156,206 and $624,824 respectively by Yongkang Angtai Trade Co., Ltd. (“YATCL”) for the period from January 7, 2011 to December 31, 2012. YATCL is not related to the Company. Under these guarantee contracts, the Company shall perform all obligations of YATCL under the loan contracts if YATCL fails to perform its obligations as set forth in the loan contracts.

(2) Guarantees for third party bank notes

Guarantee provided to	Amount
Zhejiang Mengdeli Electric Co., Ltd.	$	1,249,649
Total	$	1,249,649

On August 24, 2010, the Company entered into a guarantee contract to serve as guarantor for the bank note borrowed from Huaxia Bank Hangzhou branch in the amount of $1,249,649 by Zhejiang Mengdeli Electric Co., Ltd. (“ZMEC”) for the period from August 24, 2010 to August 24, 2012. ZMEC is a supplier but not related to the Company. Under this guarantee contract, the Company shall perform all obligations of ZMEC under the loan contract if ZMEC fails to perform its obligations as set forth in the loan contract.

(3) Pledged collateral for a third party’s bank loans

As of September 30, 2011, the Company provided the land use rights and plant and equipment pledged as collateral for the following third party:

Zhejiang Mengdeli Electric Co., Ltd.
Land use rights net book value	$	$	6,935,980
Plant and equipment net book value		$	4,640,069

KANDI TECHNOLOGIES, CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011 (UNAUDITED)

NOTE 19 – COMMITMENTS AND CONTINGENCIES (CONTINUED)

It is a common business practice among companies in the region of China where Kandi is located to exchange guarantees for bank debt with no consideration given. It is considered a “favor for favor” business practice and is commonly required by the lending banks as in these cases. These companies provided guarantees for the Company’s bank loans as well. The banks involved in these guarantee transactions typically allow a maximum loan amount based on a 30% to 70% discount on the net book value of the pledged collateral. Also see Note 14.

(b) Pending litigation

There are two lawsuits currently pending in state court in Ripley County, Missouri against the Company and its subsidiary, Kandi Vehicles, Kandi Investment Group, SunL Group and other third parties, in connection with the death of two individuals who died on March 3, 2006, while operating a go-cart that was allegedly manufactured by Kandi Vehicles. Kandi Investment Group was a major shareholder of Kandi Vehicles but it transferred all its equity in Kandi Vehicles to Continental Development Limited in November 2006. Since then, Kandi Investment Group has been unrelated to the Company or its affiliates.

The cases were filed in 2009 and are identified as Elder vs. SunL Group and Griffen vs. SunL Group. In March 2010, the local trial court entered two default judgments, each in the amount of $20,000,000, against our subsidiary, Kandi Vehicles, Kandi Investment and other parties. A default judgment was not entered against the Company. The lawsuit and default judgments were not brought to the Company’s or Kandi Vehicles’ attention until May or June 2010; the Company was not served with the complaint or notified of the lawsuits and only learned of their existence and of the default judgments in the course of commercial discussions with another of the defendants in the cases. The Company and Kandi Vehicles have filed answers to the complaint denying any culpability. In addition, the Company requested that the court set aside the default judgments against Kandi Vehicles, a request granted, by the court, on February 28, 2011. On March 3, 2011, the plaintiffs subsequently appealed the court order vacating the default judgments; however, the plaintiffs have since voluntarily withdrawn their appeal.

The Company intends to defend these cases vigorously and believes a favorable result is likely in this lawsuit since the Company including its subsidiaries did not manufacture the subject vehicle in the accident. The Company intends to propound discovery on the plaintiffs and will attempt to have the cases dismissed by summary judgment, if possible. At the present time, we believe that resolving the above matters will not have a material adverse effect on our financial position, our results of operations, or our cash flows; however, these matters are subject to inherent uncertainties and our view of these matters may change in the future.

During the first nine months of 2011, certain mold manufacturing contracts were executed. The total amount of executed mold contracts was $12,576,150, of which $9,978,473 had been paid as of September 30, 2011. Of the remaining balance of $2,597,677, we plan on paying $2,039,004 within the next twelve months and the rest in March of 2013.

NOTE 20 COMPARATIVE AMOUNTS

Prior year comparative amounts have been reclassified to conform to the current year’s presentation. In the condensed consolidated statements of Income (loss) and comprehensive income (loss) (unaudited), the amount of change in fair value of financial instruments, which is included in Interest expense, net in 2010, has been separated in this reporting.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the federal securities laws that relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology, such as "may," "will," "should," "could," "expect," "plan," "anticipate," "believe," "estimate," "project," "predict," "intend," "potential" or "continue" or the negative of such terms or other comparable terminology, although not all forward-looking statements contain such terms.

In addition, these forward-looking statements include, but are not limited to, statements regarding implementing our business strategy; development and marketing of our products; our estimates of future revenue and profitability; our expectations regarding future expenses, including research and development, sales and marketing, manufacturing and general and administrative expenses; difficulty or inability to raise additional financing, if needed, on terms acceptable to us; our estimates regarding our capital requirements and our needs for additional financing; attracting and retaining customers and employees; sources of revenue and anticipated revenue; and competition in our market.

Forward-looking statements are only predictions. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. All of our forward-looking information is subject to risks and uncertainties that could cause actual results to differ materially from the results expected. Although it is not possible to identify all factors, these risks and uncertainties include the risk factors and the timing of any of those risk factors described in the Company’s Form 10-K, as amended, for the year ended December 31, 2010 and those set forth from time to time in our filings with the SEC. These documents are available on the SEC’s Electronic Data Gathering and Analysis Retrieval System at http://www.sec.gov.

Critical Accounting Policies and Estimates

Policy affecting options, warrants and convertible notes

The Company’s stock option cost is recorded in accordance with ASC 718 and ASC 505.

The fair value of stock options is estimated using the Black-Scholes-Merton model. The Company’s expected volatility assumption is based on the historical volatility of the Company’s stock. The expected life assumption is primarily based on the expiration date of the option. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Stock option expense recognized is based on awards expected to vest, and there were no estimated forfeitures. ASC standards requires forfeitures to be estimated at the time of grant and revised in subsequent periods, if necessary, if actual forfeitures differ from those estimates.

The Company’s warrant costs are recorded in liabilities and equities, respectively, in accordance with ASC 480, ASC 505 and ASC 815.

The fair value of warrants, which is classified as a liability, is estimated using a Black-Scholes-Merton model. The Company’s expected volatility assumption is based on the historical volatility of the Company’s stock. The expected life assumption is primarily based on the expiration date of the warrant. The risk-free interest rate for the expected term of the warrant is based on the U.S. Treasury yield curve in effect at the time of measurement. The warrants, which are freestanding derivatives and are classified as liabilities on the balance sheet, will be measured at fair value on each reporting date, with decreases in fair value recognized in earnings and increases in fair value recognized in expenses.

The Company estimates the fair value of equity based warrants, which are not considered derivatives under ASC 815, using the Black-Scholes-Merton model. The Company’s expected volatility assumption is based on the historical volatility of the Company’s stock. The expected life assumption is primarily based on the expiration date of the warrant. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

In accordance with ASC 815, the conversion feature of the Convertible Notes is separated from the debt instrument and accounted for separately as a derivative instrument. On the date the Convertible Notes are issued, the conversion feature was recorded as a liability at its fair value, and future decreases in fair value recognized in earnings while increases in fair values recognized in expenses. The Company used the Black-Scholes-Merton option-pricing model to obtain the fair value of the conversion feature. The Company’s expected volatility assumption is based on the historical volatility of the Company’s stock. The expected life assumption is primarily based on the expiration date of the conversion features. The risk-free interest rate for the expected term of the conversion features is based on the U.S. Treasury yield curve in effect at the time of measurement.

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.

Accounts receivable are recognized and carried at net realizable value. An allowance for doubtful accounts will be recorded in the period when a loss is probable based on an assessment of specific evidence indicating troubled collection, historical experience, accounts aging, ongoing business relation and other factors. Accounts are written off after exhaustive efforts at collection. If accounts receivable are to be provided for, or written off, they would be recognized in the consolidated statement of operations within operating expenses. At September 30, 2011 and December 31, 2010, the Company has an allowance for doubtful accounts of $0 and $0 respectively, as per management’s judgment and based on their best knowledge.

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 nine months ended September 30, 2011.

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.

Revenue Recognition

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

·	Persuasive evidence of an arrangement exists;

·	Delivery has occurred or services have been rendered;

·	The seller’s price to the buyer is fixed or determinable; and

·	Collectability is reasonably assured.

Results of Operations

Comparison of Nine Months Ended September 30, 2011 and 2010

The following table sets forth the amounts and percentage relationship to revenue of certain items in our condensed consolidated statements of income and comprehensive income

	For Nine Months Ended September 30, 2011			% Of Revenue			For Nine Months Ended September 30, 2010			% Of Revenue			Change In Amount			Change In %
REVENUES, NET	$	28,789,766			100.0	%	$	28,637,863			100.0	%	$	151,903			0.5	%
COST OF GOODS SOLD		(22,060,888	)		(76.6	%)		(22,098,905	)		(77.2	%)		38,017			(0.2	%)
GROSS PROFIT		6,728,878			23.4	%		6,538,958			22.8	%		189,920			2.9	%
Research and development		(1,695,003	)		(5.9	%)		(1,203,270	)		(4.2	%)		(491,733	)		40.9	%
Selling and distribution expenses		(234,854	)		(0.8	%)		(1,000,187	)		(3.5	%)		765,333			(76.5	%)
General and administrative expenses		(2,568,417	)		(8.9	%)		(2,315,088	)		(8.1	%)		(253,329	)		10.9	%
INCOME (LOSS) FROM OPERATIONS		2,230,604			7.7	%		2,020,413			7.1	%		210,191			10.4	%
Interest income (expense), net		95,549			0.3	%		(2,015,516	)		(7.0	%)		2,111,065			(104.7	%)
Change in fair value of financial instruments		7,480,992			26.0	%		(802,884	)		(2.8	%)		8,283,876			(1,031.8	%)
Government grants		289,962			1.0	%		266,911			0.9	%		23,051			8.6	%
Investment (loss) income		(20,181	)		(0.1	%)		-			0.0	%		(20,181	)		(100.0	%)
Other income, net		262,299			0.9	%		91,088			0.3	%		171,211			188.0	%
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES		10,339,225			35.9	%		(439,988	)		(1.5	%)		10,779,213			(2,449.9	%)
INCOME TAX BENEFIT (EXPENSE)		(394,624	)		(1.4	%)		(269,338	)		(0.9	%)		(125,286	)		46.5	%

NET INCOME (LOSS)		9,944,601			34.5	%		(709,326	)		(2.5	%)		10,653,927			(1,502.0	%)

(a) Net Revenue

For the nine months ended September 30, 2011, our net revenue increased by 0.5%, from $28,637,863 to $28,789,766 as compared to the nine months ended September 30, 2010. The increase in net revenues was primarily due to increased sales of the Company’s legacy product lines of ATVs and GoKarts, offset by decreases in sales of super mini cars, utility vehicles and three-wheeled motorcycles as described in more detail below.

The following table lists the number of vehicles sold and sales revenue, categorized by vehicle types, within the nine months ended September 30, 2011 and 2010:

	Nine Months Ended September 30
	2011				2010
	Unit		Sales		Unit		Sales
ATV		4,695		2,770,356		2,756	$	1,985,008
Super-Mini-Car 1		840		4,920,718		1,592		6,635,008
GoKart		16,907		16,916,590		14,943		15,064,736
Utility vehicles (“UTVs”)		853		1,854,771		1,397		2,970,300