10QSB 1 f10qsb0607_kandi.htm QUARTERLY REPORT FOR THE PERIOD ENDING 06/07 f10qsb0607_kandi.htm


 
 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________
 
FORM 10-QSB
 
þ
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 
For the quarterly period ended June 30, 2007 
 
or
 
o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the transition period from ______to______.
 
                                                                        Commission file number 000-52186

Kandi Technologies, Corp.
(Exact name of registrant as specified in Charter)
 
Delaware
 
333-123735 
 
87-0700927
(State or other jurisdiction of
incorporation or organization)
 
(Commission File No.)
 
(IRS Employee Identification No.)

Jinhua City Industrial Zone
Jinhua, Zhejiang Province
People’s Republic of China
Post Code 321016
 (Address of Principal Executive Offices)
 ___________

(86 - 0579) 82239700
 (Issuer Telephone number)
___________

Stone Mountain Resources, Inc
 701 North Green Valley Parkway #200
Henderson, Nevada 89074
(Former Name or Former Address if Changed Since Last Report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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oNoo
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filero
 
Accelerated filero
 
Non-accelerated filer o
 
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 September 21, 2007 the registrant had issued and outstanding 19,961,000 shares of common stock, par value $.001 per share.
 
 
1

 
 
 
TABLE OF CONTENTS
 
 
PART I-- FINANCIAL INFORMATION  
 
 
Page
Item 1.
Condensed Consolidated Financial Statements                                                 
3
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
19
 
 
 
Item 3.
Controls and Procedures                                                                                            
24
 
 
PART II-- OTHER INFORMATION
     
 Item 1.
Unregistered Sales of Equity Securities and Use of Proceeds
25
 
 
 
 Item 2.
Defaults Upon Senior Securities                                       
25
 
 
 
 Item 3.
Submission of Matters to a Vote of Security Holders
25
 
 
 
 Item 4.
Other Information                                   
25
 
 
 
 Item 5.
Exhibits and Reports on Form 8-K
25
 
 
 
SIGNATURE
 
26
  
 
2


 
PART I-- FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
KANDI TECHNOLOGIES, CORP.
 
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
 
AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEET
 
 
 
June 30,
 
 
 
2007
 
                                      ASSETS
 
(Unaudited)
 
CURRENT ASSETS
 
 
 
Cash and cash equivalents
 
$
1,603,871
 
Restricted cash
 
 
12,852,796
 
Accounts receivable
 
 
12,104,410
 
Inventories
 
 
4,585,697
 
Notes receivables
 
 
4,091,178
 
Other receivables
 
 
2,635,401
 
Prepayment for goods and deposits
 
 
677,947
 
Due from employees
 
 
44,293
 
Deferred tax assets
 
 
9,964
 
Total Current Assets
 
 
38,605,557
 
NON CURRENT ASSETS
 
 
 
 
Plant and equipment, net
 
 
9,139,128
 
Land use rights, net
 
 
391,555
 
Construction in progress
 
 
 
469,007
 
Deferred tax assets
 
 
3,888
 
Total Non Current Assets
 
 
10,003,578
 
        TOTAL ASSETS
 
$
48,609,135
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
 
CURRENT LIABILITIES
 
 
 
 
Accounts payable and accrued expenses
 
$
8,580,780
 
Short-term bank loans
 
 
13,034,060
 
Notes payable
 
 
15,068,594
 
Advance from customers
 
 
1,211,348
 
Due to related parties
 
 
2,438
 
Deferred tax liabilities
 
 
12,809
 
Total Current Liabilities
 
 
37,910,029
 
NON CURRENT LIABILITIES
 
 
 
 
Deferred tax liabilities
 
 
3,357
 
       Total Non Current Liabilities
 
 
3,357
 
       TOTAL LIABILITIES
 
 
37,913,386
 
 
 
 
 
 
 CONTINGENCIES
 
 
 
 
 
 
 
 
 
SHAREHOLDERS' EQUITY
 
 
 
 
Common stock, $0.001 par value, 100,000,000 shares authorized;
 
 
19,961
 
      19,961,000 shares issued and outstanding at June 30, 2007
 
 
 
 
Additional paid-in capital
 
 
7,138,105
 
Retained earnings
 
 
2,941,660
 
Accumulated other comprehensive income
 
 
596,023
 
Total Shareholders' Equity
 
 
10,695,749
 
        TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
48,609,135
 
 
 
 
 
 
 
 
See accompanying notes to the condensed consolidated financial statements
 
 
 
3

 

 
 
KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30,
 
 
Six Months Ended June 30,
 
 
2007
 
 
2006
 
 
2007
 
 
2006
 
 
 
 
 
 
 
 
 
 
 
 
REVENUES
 
$
11,155,508
 
 
$
2,859,686
 
 
$
17,148,966
 
 
$
4,756,821
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
COST OF GOODS SOLD
 
 
8,445,862
 
 
 
2,620,490
 
 
 
13,292,442
 
 
 
4,283,201
 
 
GROSS PROFIT
 
 
2,709,646
 
 
 
239,196
 
 
 
3,856,524
 
 
 
473,620
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling and marketing
 
 
202,538
 
 
 
39,989
 
 
 
366,578
 
 
 
85,035
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
General and administrative
 
 
170,936
 
 
 
101,031
 
 
 
342,320
 
 
 
219,175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
 
 
40,749
 
 
 
25,948
 
 
 
52,615
 
 
 
49,608
 
 
Total operating expenses
 
 
414,223
 
 
 
166,968
 
 
 
761,513
 
 
 
353,818
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
INCOME FROM OPERATIONS
 
 
2,295,423
 
 
 
72,228
 
 
 
3,095,011
 
 
 
119,802
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FORFEITURE OF CUSTOMER DEPOSIT
 
 
-
 
 
 
-
 
 
 
267,673
 
 
 
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GOVERNMENT GRANT
 
 
12,191
 
 
 
-
 
 
 
12,132
 
 
 
65,946
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
INTEREST EXPENSES, NET
 
 
(361,748
)
 
 
(156,309
)
 
 
(450,441
)
 
 
(275,007
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSES), NET
 
 
(72,228
)
 
 
422
 
 
 
(76,851
)
 
 
565
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
INCOME (LOSS) BEFORE INCOME TAXES
 
 
1,873,638
 
 
 
(83,659
)
 
 
2,847,524
 
 
 
(88,694
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
INCOME TAXES
 
 
33,412
 
 
 
-
 
 
 
(1,888
)
 
 
-
 
 
NET INCOME (LOSS)
 
 
1,907,050
 
 
 
(83,659
)
 
 
2,845,636
 
 
 
(88,694
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation gain (loss)
 
 
112,502
 
 
 
(4,492
)
 
 
203,560
 
 
 
45,780
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income tax expense related to other comprehensive  income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income
 
 
(37,126
)
 
 
-
 
 
 
(67,175
)
 
 
(15,107
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS), NET
 
 
75,376
 
 
 
(4,492
)
 
 
136,385
 
 
 
30,673
 
 
OF TAX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME (LOSS)
 
$
1,982,426
 
 
$
(88,151
)
 
$
2,982,021
 
 
$
(58,021
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 NET INCOME (LOSS) PER SHARE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
          BASIC AND DILUTED
 
$
0.16
 
 
$
(0.01
)
 
$
0.24
 
 
$
(0.01
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
          BASIC AND DILUTED
 
 
12,176,911
 
 
 
12,000,000
 
 
 
12,088,456
 
 
 
12,000,000
 
 
 
 
See accompanying notes to the condensed consolidated financial statements
 
 
 
4


 
KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2007
(UNAUDITED)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
Additional
 
 
 
 
 
Other
 
 
 
 
 
 
Common Stock
 
 
Paid-in
 
 
Retained
 
 
Comprehensive
 
 
 
 
 
 
Shares
 
 
Par Value
 
 
Capital
 
 
Earnings
 
 
Income
 
 
Total
 
BALANCE AT JANUARY 1, 2007
 
 
12,000,000
 
 
$
12,000
 
 
$
7,154,193
 
 
$
96,024
 
 
$
392,463
 
 
$
7,654,680
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recapitalization
 
 
7,961,000
 
 
 
7,961
 
 
 
(16,088
)
 
 
-
 
 
 
-
 
 
 
(8,127
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation gain
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
203,560
 
 
 
203,560
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income
 
 
-
 
 
 
-
 
 
 
-
 
 
 
2,845,636
 
 
 
-
 
 
 
2,845,636
 
BALANCE AT JUNE 30, 2007
 
 
19,961,000
 
 
$
19,961
 
 
$
7,138,105
 
 
$
2,941,660
 
 
$
596,023
 
 
$
10,695,749
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
See accompanying notes to the condensed consolidated financial statements
 

5

 


 
KANDI TECHNOLOGIES, CORP.
 
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
 
AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(UNAUDITED)
 
 
 
Six Months Ended June 30,
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
2007
 
 
2006
 
Net income (loss)
 
$
2,845,636
 
 
$
(88,694
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
622,848
 
 
 
471,768
 
Deferred taxes
 
 
1,920
 
 
 
-
 
Forfeiture of customer deposit
 
 
(267,673
)
 
 
-
 
 
 
 
 
 
 
 
 
 
Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
(Increase) Decrease in:
 
 
 
 
 
 
 
 
Accounts receivable
 
 
(4,531,844
)
 
 
(604,459
)
Inventories
 
 
877,482
 
 
 
(293,808
)
Other receivables
 
 
352,614
 
 
 
42,097
 
Prepayment for goods and deposits
 
 
(345,392
)
 
 
(385,732
)
Due from employees
 
 
139,928
 
 
 
845
 
 
 
 
 
 
 
 
 
 
Increase (Decrease) in:
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses
 
 
1,638,004
 
 
 
1,397,929
 
Advance from customers
 
 
877,853
 
 
 
263,893
 
Taxes payable
 
 
(2,953
)
 
 
-
 
Net cash provided by operating activities
 
 
2,208,423
 
 
 
803,839
 
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
 
Purchases of fixed assets and construction in progress
 
 
(694,519
)
 
 
(962,623
)
Reverse merger, net of cash acquired
 
 
373
 
 
 
-
 
Restricted cash
 
 
(3,760,374
)
 
 
1,982,603
 
Issuances of notes receivable
 
 
(5,759,844
)
 
 
(609,310
)
Repayments of notes receivable
 
 
2,099,477
 
 
 
52,117
 
Grant received for land use right
 
 
-
 
 
 
171,609
 
Net cash (used in) provided by investing activities
 
 
(8,114,887
)
 
 
634,396
 
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
 
 
Proceeds from short term bank loans
 
 
8,863,589
 
 
 
7,493,911
 
Repayments of short term bank loans
 
 
(6,914,200
)
 
 
(4,483,242
)
Proceeds from notes payable
 
 
14,331,485
 
 
 
99,919
 
Repayments of notes payable
 
 
(10,042,454
)
 
 
(3,899,978
)
Advance from related parties
 
 
34,338
 
 
 
-
 
Repayment of advances to related parties
 
 
-
 
 
 
(1,433,472
)
Net cash provided by (used in) financing activities
 
 
6,272,758
 
 
 
(2,222,862
)
 
 
 
 
 
 
 
 
 
 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
 
 
366,294
 
 
 
(784,627
)
        Effect of exchange rate changes on cash
 
 
203,560
 
 
 
45,780
 
        Cash and cash equivalents, beginning
 
 
1,034,017
 
 
 
876,989
 
CASH AND CASH EQUIVALENTS, END OF PERIOD
 
$
1,603,871
 
 
$
138,142
 
 
 
 
 
 
 
 
 
 
SUPPLEMENTARY CASH FLOW INFORMATION
 
 
 
 
 
 
 
 
         Income taxes paid
 
$
2,988
 
 
$
-
 
         Interest paid
 
$
1,895,643
 
 
$
296,147
 
 
 
 
 
 
 
 
 
 
SUPPLEMENTAL NON-CASH DISCROSURES:
 
 
 
 
 
 
 
 
 
For the six months ended June 30, 2007 and 2006, $12,117 and $811,063 were transferred from construction in progress to plants and equipment, respectively.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to the condensed consolidated financial statements.
 
 
 
6

 
 
 
KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)
 
NOTE 1. ORGANIZATION AND PRINCIPAL ACTIVITIES
 
Kandi Technologies, Corp (Formerly Stone Mountain Resources, Inc.) (“KNDI”) was incorporated under the laws of the State of Delaware on March 31, 2004. On August 29, 2007, KNDI changed its name to Kandi Technologies, Corp.
 
On June 29, 2007, a share exchange agreement was reached between Stone Mountain Resources, Inc., Continental Development Limited, (“Continental”) and Continental’s shareholder. At the consummation, 12,000,000 shares of common stock held by KNDI’s sole director and majority shareholder were cancelled, which was a condition of the closing as stated in the share exchange agreement. The Company issued 12,000,000 shares representing 60.12% of its total common stock in exchange for 100% of the common stock of Continental. Zhejiang Kandi Vehicles Co. Ltd (“Kandi”) is a wholly owned subsidiary of Continental. Kandi is the principal operating subsidiary of Continental.
 
After the share exchange, Continental and its wholly owned subsidiary Kandi became a wholly-owned subsidiary of KNDI, and Kandi became the principal operating subsidiary. The exchange transaction was accounted for as a reverse acquisition in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141. “Business Combinations”.  The acquisition is accounted for as the recapitalization of Kandi. Accordingly, the condensed consolidated statements of income include the results of operations of Kandi from January 1, 2007 and 2006, and the results of operations of Kandi Technologies, Corp from the acquisition date through June 30, 2007.
 
The primary operations of Kandi Techologies, Corp and Subsidiaries (the “Company”)  is developing, manufacturing, and commercializing terrain vehicles, go-karts, and specialized automobile related products in the People’s Republic of China (“PRC”). Sales are also made to dealers in Europe, North America and Southeast Asia.
 
NOTE 2. BASIS OF PRESENTATION
 
The unaudited condensed consolidated financial statements of the Kandi Technologies, Corp and subsidiaries (“the Company”) have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the requirements for reporting on Form 10-QSB and Item 310(b) of Regulation S-B.  Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  However, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for the fair presentation of the condensed consolidated financial position and the condensed consolidated results of operations.  Results shown for interim periods are not necessarily indicative of the results to be obtained for a full year.  The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the accompanying notes, included in Form 8-K, filed with the Securities and Exchange Commission on July 6, 2007.
 
NOTE 3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
(a)   Cash and Cash Equivalents
 
For financial reporting purpose, the Company considers all highly liquid investments purchased with original    maturity of three months or less to be cash equivalents. 
 
Restricted cash represents time deposits on account to secure notes payable.  See Note 11. These balances are subject to withdrawal restrictions and  totaled  $12,852,796 at June 30, 2007.
 
 
 
7


KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)
 
NOTE 3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
(b)       Use of Estimates
 
The preparation of financial statements in conformity with the generally accepted accounting principles of the United States enquires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Management makes these estimates using the best information available at the date of the estimates are made; however, actual results could differ materially from those estimates.
 
(c)        Earnings (loss) Per Share
 
Basic earning (loss) per share is computing by dividing income (loss) available to common shareholders by the weighted-average number of common shares outstanding during the periods. Diluted earnings  (loss) per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. There were no dilutive securities outstanding for the periods presented.
 
(d)       Accounts Receivable
 
Trade receivables are recognized and carried at the original invoice amount less allowance for any uncollectible amounts. An estimate for doubtful accounts is made when collection of the full amount is no longer probable. Bad debts are written off as incurred. For the six months ended June 30, 2007 and 2006 there were no bad debts.
 
Trade receivable due from three customers comprise 68% of total accounts receivable at June 30, 2007, also see Note 5.
 
(e)       Inventories
  
Inventories are stated at the lower of cost, determined on a weighted average basis, or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated costs necessary to make the sale.
 
When inventories are sold, their carrying amount is charged to expense in the year in which the revenue is recognized. Write-downs for declines in net realizable value or for losses of inventories are recognized as an expense in the year the impairment or loss occurs. There were no declines in net realizable value of inventory for the three and six months ended June 30, 2007 and 2006.
 
 (f)      Revenue Recognition
 
Revenue represents the invoiced value of goods sold recognized upon the delivery of goods to customers. Revenue is recognized when all of the following criteria are met: 
 
-Persuasive evidence of an arrangement exists,
 
-Delivery has occurred or services have been rendered,
 
-The seller's price to the buyer is fixed or determinable, and
 
-Collectibility is reasonably assured.
 
Also see Note 5.
 
 

 
8

 
 
KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)
NOTE 3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
(g)       Foreign Currency Translation
 
The accompanying condensed consolidated financial statements are presented in United States dollars. The functional currency of the Company is the Renminbi (RMB), the official currency of the People’s Republic of China. The consolidated financial statements are translated into United States dollars from RMB at balance sheet date exchange rates as to assets and liabilities and average exchange rates of the quarter as to revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.
 
 
 
June 30, 2007
 
 
June 30, 2006
 
Period end RMB: US$ exchange rate
 
 
7.6248
 
 
 
8.0065
 
Average period RMB: US$ exchange rate
 
 
7.7168
 
 
 
8.0384
 
 
(h)        Income taxes
 
Deferred tax assets and liabilities are recognized for the future tax consequence attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in the statement of income in the period that includes the enactment date. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realized their benefits, or that future deductibility is uncertain.
 
The Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109 ,” (“FIN 48”), on January 1, 2007. The Company did not have any material unrecognized tax benefits and there was no effect on its financial condition or results of operations as a result of implementing FIN 48.
 
The Company files income tax returns in the PRC jurisdictions. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months.
 
The Company's policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of adoption of FIN 48, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the quarter. The Company's effective tax rate differs from the federal statutory rate primarily due to non-deductible expenses, temporary differences, and preferential tax treatment.
 
On March 16, 2007, the National People's Congress of the People of Republic China (“PRC”) determined to adopt a new corporate income tax law in its fifth plenary session. The new corporate income tax law unifies the application scope, tax rate, tax deduction and preferential policy for both domestic and foreign-invested enterprises.  The new corporate income tax law will be effective on January 1, 2008.  According to the new corporate income tax law, the applicable income tax rate for our operating subsidiaries may be subject to change.  As the implementation detail has not yet been announced, we cannot be sure of the potential impact of such new corporate income tax law on our financial position and operating results.
 
 
 
9


KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)
 
NOTE 3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
(i)         Fair Value of Financial Instruments
 
The Company's financial instruments include cash and cash equivalents, restricted cash, notes receivable,     accounts receivable, other receivables and prepaid expenses, due from employees, prepayments for goods, accounts payable and accrued expenses,  debt, taxes payables, customer deposits and  due to related parties. Management has estimated that the carrying amount approximates fair value due to their short-term nature.
 
 (j)        Principles of Consolidation
 
The unaudited condensed consolidated financial statements include the accounts of Kandi Technologies, Corp and its wholly owned subsidiaries Zhejiang Kandi Vehicles Co., Ltd. and Zhejiang Yongkang Import & Export Co., Ltd. (Dingji).
 
All significant inter-company accounts and transactions have been eliminated in consolidation.
 
NOTE 4. NEW ACCOUNTING PRONOUNCEMENTS
 
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," which provides enhanced guidance for using fair value to measure assets and liabilities. SFAS No. 157 provides a common definition of fair value and establishes a framework to make the measurement of fair value in generally accepted accounting principles more consistent and comparable. SFAS No. 157 also requires expanded disclosures to provide information about the extent to which fair value is used to measure assets and liabilities, the methods and assumptions used to measure fair value, and the effect of fair value measures on earnings. SFAS No. 157 is effective for financial statements issued in fiscal years beginning after November 15, 2007 and to interim periods within those fiscal years. The Company is currently in the process of evaluating the effect, if any, the adoption of SFAS No. 157 will have on its consolidated results of operations, financial position, or cash flows.
 
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements". SAB No. 108 was issued in order to eliminate the diversity in practice surrounding how public companies quantify financial statement misstatements. SAB No. 108 requires that registrants quantify errors using both a balance sheet (iron curtain) approach and an income statement (rollover) approach then evaluate whether either approach results in a misstated amount that, when all relevant quantitative and qualitative factors are considered, is material. SAB No. 108 is effective for fiscal years ending after November 15, 2006. The Company has adopted the bulletin during 2006. The adoption did not have a material effect on results of operations, financial position, or cash flows.
 
In February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities −− Including an amendment of FASB Statement No. 115 (“FAS 159”). FAS 159, which becomes effective for the Company on January 1, 2008. This standard permits companies to choose to measure many financial instruments and certain other items at fair value and report unrealized gains and losses in earnings. Such accounting is optional and is generally to be applied instrument by instrument. The Company does not anticipate that election, if any, of this fair−value option will have a material effect on the consolidated results or operations or financial position.

 

 
10


KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)
 
NOTE 5. CONCENTRATIONS
 
       The Company has major customers and suppliers who accounted for the following percentages of total sales, accounts receivable, purchases and accounts payable in 2007 and 2006
 
 
 
Sales
 
Accounts Receivable
 
 
 
 
 
 
 
Major Customers
 
For the Six Months Ended June 30, 2007
 
For the Six Months Ended June 30, 2006
 
June 30, 2007
Company A
 
47%
 
55%
 
23%
Company B
 
20%
 
21%
 
23%
Company C
 
6%
 
6%
 
22%
Company D
 
3%
 
3%
 
15%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchases
 
Accounts Payable
 
 
 
 
 
 
 
Major  Suppliers
 
For the Six Months Ended June 30, 2007
 
For the Six Months Ended June 30, 2006
 
June 30, 2007
Company E
 
6.9%
 
8.35%
 
23.59%
Company F
 
4.46%
 
4.75%
 
3.33%
Company G
 
4.19%
 
4.49%
 
3.01%
Company H
 
3.26%
 
2.64%
 
2.07%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NOTE 6.   INVENTORIES                                                      
 
      Inventories consist of the following as of June 30, 2007:
 
  
 
June 30, 2007
 
 
 
(Unaudited)
 
Raw materials
 
$
851,937
 
Work in progress
 
 
3,455,333
 
Finished goods
 
 
278,427
 
Total
 
$
4,585,697
 

 

11

 
KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)
NOTE 7.  NOTES RECEIVABLE
 
             Notes receivable are from unrelated companies and consist of the following at June 30, 2007:
 
 
 
June 30, 2007
 
 
 
(Unaudited)
 
 
 
 
 
Due September 30, 2007, quarterly interest only payments at 6.0% per annum
 
$
3,226,552
 
Due March 8, 2008,
 
 
77,720
 
Due December 20, 2007
 
 
13,115
 
Due July 3, 2007 (subsequently settled at its due date)
 
 
209,842
 
Due August 6, 2007 (subsequently settled at its due date)
 
 
262,302
 
Due July 25, 2007 (subsequently settled at its due date)
 
 
301,647
 
Total
 
$
4,091,178
 

 Interest income for the six months ended June 30, 2007 and 2006 was $133,014 and NIL, respectively.
 
NOTE 8.  PLANT AND EQUIPMENT
 
             Plant and equipment at June 30, 2007 consist of the following:
 
  
 
 
 
June 30, 2007
 
At cost:
 
(Unaudited)
 
Buildings
 
$
3,554,626
 
Machinery and equipment
 
 
8,233,009
 
Motor vehicles
 
 
98,791
 
Office equipment
 
 
734,260
 
 
 
 
12,620,686
 
Less: accumulated depreciation
 
 
 
 
Buildings
 
 
(354,593
)
Machinery and equipment
 
 
(2,971,923
)
Motor vehicles
 
 
(54,243
)
Office equipment
 
 
(100,799
)
 
 
 
(3,481,558
)
Plant and equipment, net
 
$
9,139,128
 
 
 
 
 
 
 
The net book value of plant and equipment pledged for certain short-term bank loans at June 30, 2007 was $9,139,128.  Also see Note 10.  Depreciation expense for six months ended June 30, 2007 and 2006 was $618,477 and $465,463, respectively.
 

 
12

 
KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)
 
NOTE 9.    LAND USE RIGHTS
 
                    Land use rights consist of the following at June 30, 2007:
 
 
 
June 30, 2007
 
 
 
(Unaudited)
 
 
 
 
 
Cost of land use rights
 
$
460,943
 
Less: Accumulated amortization
 
 
(69,388
)
Land use rights, net
 
$
391,555
 
 
Amortization expense for the six months ended June 30, 2007 and 2006 was $4,371 and $6,305, respectively.
 
Amortization expense for the next five years and thereafter is as follows:
 
 
 
June 30, 2007
 
 
 
(Unaudited)
 
 
 
 
 
2007 (remaining 6 months)
 
$
4,371
 
2008
 
 
8,742
 
2009
 
 
8,742
 
2010
 
 
8,742
 
2011
 
 
8,742
 
Thereafter
 
 
352,216
 
Total
 
$
391,555
 

 

 

13

 
KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)
 
 
NOTE 10.    SHORT TERM BANK LOANS
 
             Short term bank loans consist of the following as of June 30, 2007:
 
  
 
June 30, 2007
 
 
 
(Unaudited)
 
Loans from Industrial and Commercial Bank of China-Exploration Zone Branch :
 
 
 
Monthly interest only payments at 5.85% per annum, due July 24, 2007, secured by a land use right and plant and equipment owned by the Company. (subsequently settled)
 
$
393,453
 
Monthly interest only payments at 6.12% per annum, due September 7, 2007, secured by a land use right and plant and equipment owned by the Company. (subsequently settled)
 
 
354,108
 
Monthly interest only payments at 6.12% per annum, due October 17, 2007, secured by a land use right and plant and equipment owned by the Company.
 
 
891,827
 
Monthly interest only payments at 6.12% per annum, due November 1, 2007, secured by a land use right and plant and equipment owned by the Company.
 
 
459,028
 
Monthly interest only payments at 6.12% per annum, due November 27, 2007, secured by a land use right and plant and equipment owned by the Company.
 
 
524,604
 
Monthly interest only payments at 6.57% per annum, due April 10, 2008, secured by a land use right and plant and equipment owned by the Company.
 
 
655,755
 
Monthly interest only payments at 6.57% per annum, due June 5, 2008, secured by a land use right and plant and equipment owned by the Company.
 
 
655,755
 
Loans from Commercial Bank -- Jiangnan Branch:
 
 
 
 
Monthly interest only payments at 7.56% per annum, due January 10, 2008, secured by a land use right and plant and equipment owned by the Company.
 
 
2,623,020
 
Monthly interest only payments at 7.605% per annum, due May 10, 2008. And secured by a land use right and plant and equipment owned by the Company
 
 
1,311,510
 
Loan from Agricultural Bank:
 
 
 
 
Monthly interest only payments at 7.7% per annum, due July 27, 2008.
 
 
574,715
 
Loan from Shanghai Pudong Development Bank:
 
 
 
 
Monthly interest only payments at 5.61 % per annum, due August 12, 2008, guaranteed by Nan Long Group
 
 
2,623,020
 
Loan from Huaxia Bank Hangzhou Jianguo Branch:
 
 
 
 
Quarterly interest only payments at 6.336 % per annum, due November 22, 2007, guaranteed by a land use right and plant and equipment owned by the Company
 
 
1,967,265
 
Total
 
$
13,034,060
 
 
Interest expense for the six months ended June 30, 2007 and 2006, was $436,088 and $296,147, respectively.  Also see Note 8.
 
 
 
14

 
KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)
 
NOTE 11. NOTES PAYABLE
 
       Notes payable consist of the following as of June 30, 2007: 
 
 
 
June 30, 2007
 
 
 
(Unaudited)
 
Bank acceptance notes:
 
 
 
Due July 23, 2007 (subsequently settled)
 
$
2,623,020
 
Due July 23, 2007 (subsequently settled)
 
 
786,906
 
Due July 25, 2007 (subsequently settled)
 
 
655,755
 
Due July 25, 2007 (subsequently settled)
 
 
655,755
 
Due July 22, 2007 (subsequently settled)
 
 
1,049,208
 
Due July 22, 2007 (subsequently settled)
 
 
918,057
 
Due September 8, 2007 (subsequently settled)
 
 
1,311,510
 
Due September 9, 2007 (subsequently settled)
 
 
1,311,510
 
Due September 28, 2007
 
 
983,632
 
Due September 28, 2007
 
 
983,632
 
Due September 15, 2007
 
 
918,056
 
Due December 27, 2007
 
 
655,755
 
Subtotal
 
$
12,852,796
 
 
 
 
 
 
Notes payable (interest-free and unsecured) to unrelated companies:
 
 
 
 
Due November 8, 2007
 
$
104,921
 
Due November 19, 2007
 
 
632,188
 
Due December 31, 2007
 
 
655,755
 
Due February 22, 2008
 
 
822,934
 
Subtotal
 
$
2,215,798
 
 
 
 
 
 
Total
 
$
15,068,594
 
 
All the bank acceptance notes are subject to bank charges of 0.05% of the principal as a commission on each loan transaction. Bank charges for notes payable were $7,440 and $Nil for six months ended June 30, 2007 and 2006, respectively. Restricted cash of $12,852,796 was held as collateral for notes payable at June 30, 2007.  Also see Note 3(a).
 
 
15

 
KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)
NOTE 12. INCOME TAXES
 
                   (a)    Corporation Income Tax (“CIT”)

In accordance with the relevant tax laws and regulations of PRC, the applicable corporation income tax (“CIT”)   rate of the Company  is 33%. However, in accordance with the relevant taxation laws in the PRC, from the time that a company has its first profitable tax year, a foreign investment company is exempt from corporate income tax for its first two years and is then entitled to a 50% tax reduction for the succeeding three years. For Kandi the first profitable year for income tax purposes as a foreign investment company was 2006. Dingji is a subsidiary of Kandi and its applicable corporate income tax rate is at progressive from 18% to 33%.
 
Income tax expense for the six months ended June 30, 2007 and 2006 are summarized as follows:
 
 
 
For the Six Months Ended June 30,
 
 
 
2007
 
 
2006
 
 
 
(Unaudited)
 
Current:
 
 
 
 
 
 
Provisions for CIT
 
$
32
 
 
$
-
 
 
 
 
 
 
 
 
 
 
Deferred:
 
 
 
 
 
 
 
 
Provisions for CIT
 
$
(1,920
)
 
$
-
 
 
 
 
 
 
 
 
 
 
Income tax expense
 
$
(1,888
)
 
$
-
 

 
The Company’s income tax expense differs from the “expected” tax expense for the six months ended June 30, 2007 (computed by applying the CIT rate of 33% percent to income before income taxes) as follows:

 
 
For the Six Months Ended June 30,
 
 
 
2007
 
 
2006
 
 
 
(Unaudited)
 
Provisions for CIT
 
$
(939,683
)
 
$
-
 
Tax exemption
 
$
937,795
 
 
 
-
 
 
 
 
 
 
 
 
 
 
Income tax expense
 
$
(1,888
)
 
$
-
 


 
16


KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)
 
NOTE 12.    INCOME TAXES (CONTINUED)
 
The tax effects of temporary differences that give rise to the Company's net deferred tax assets and liabilities as of   June 30, 2007 are as follows:

 
 
June 30, 2007
 
 
 
(Unaudited)
 
    Deferred tax assets:
 
 
 
    Current portion:
 
 
 
    Other
 
$
9,964
 
    Subtotal
 
 
9,964
 
 
 
 
 
 
    Non-current portion:
 
 
 
 
    Depreciation
 
 
3,888
 
    Subtotal
 
 
3,888
 
 
 
 
 
 
    Total deferred tax assets
 
 
13,852
 
 
 
 
 
 
    Deferred tax liabilities:
 
 
 
 
    Current portion:
 
 
 
 
    Other
 
 
12,809
 
    Subtotal
 
 
12,809
 
 
 
 
 
 
    Deferred tax liabilities:
 
 
 
 
    Non-current portion:
 
 
 
 
    Others
 
 
3,357
 
    Subtotal
 
 
3,357
 
 
 
 
 
 
 
 
 
 
 
    Total deferred tax liabilities
 
 
16,166
 
 
 
 
 
 
                    Net deferred tax liabilities
 
$
(2,314
)

                         (b)  Value Added Tax (“VAT”)
 
Enterprises or individuals, who sell commodities, engage in repair and maintenance or import or export goods       in the PRC are subject to a value added tax in accordance with Chinese Laws. The value added tax standard rate is 17% of the gross sale price. A credit is available whereby VAT paid on the purchases of semi-finished products or raw materials used in the production of the Company’s finished products can be used to offset the VAT due on the sales of the finished products.
 
On January 1, 2002, the export policy of VAT "Exemption, Credit and Refund" began to apply to all exports by manufacture-based enterprises. In accordance with this policy, exported goods are exempted from output VAT and the input VAT charged for purchases of the raw materials, components and power consumed for the production of the exported goods may be refunded. The refund rates of vehicle related products applicable to the company are from 13% to 17%.

The refundable VAT of $1,705,450 at June 30, 2007 is included in other receivables in the accompanying condensed consolidated balance sheet.



17


KANDI TECHNOLOGIES, CORP.
(FORMERLY STONE MOUNTAIN RESOURCES, INC.)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)
 
NOTE 13.  CONTINGENCIES
 
 
(I) In 2006, the Company brought a legal action against Zhejiang Yuegong steel Structure Co. and Zhejiang Jinhua   No.1 Construction Co., Ltd. for their delay in the contruction in Jinhua Industrial district. As the plaintiff, the Company claimed for compensation. According to the judge's report from the local court in Jinhua, PRC, on December 5, 2006, the Company won the lawsuit and Zhejiang Yuegong Steel Structure Co. and Zhejiang Jinhua No.1 Construction Co., Ltd. will be required to pay $186,331 as compensation to the Company. However, the two defendants appealed the ruling to a higher level court and the Company has not received the compensation as of the date this report is filed. Considering the uncertainties of the legal proceeding, the Company did not record a contingent gain for this at June 30, 2007.

 
(II) In 2006, the Company brought a legal action against Weifang Rongda Automobile Trading Co., Ltd.(“Rongda”) for goods returned from Rongda that were damaged. As the plaintiff, the Company has claimed for compensation. According to the judge's report from the local court in Jinhua, PRC, on December 8, 2006, the Company won the lawsuit and Weifang Rongda Automobile Trading Co., Ltd. was required to pay approximately $26,408 as compensation to the Company. However, the defendant appealed the ruling to a higher level court and the Company has not received the compensation as of the date this report is filed. Considering the uncertainties of the legal proceeding, the Company did not record a contingent gain for this at June 30, 2007.
 
NOTE 14. FORFEITURE OF CUSTOMER DEPOSIT
 
The forfeiture of the customer deposit resulted from the customer’s breach of the contract.
 

18

 
 
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
This report contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended, which are based on management’s exercise of business judgment as well as assumptions made by and information currently available to, management. When used in this document, the words “may”, “will”, “anticipate”, “believe”, “estimate”, “expect”, “intend” and words of similar import, are intended to identify any forward-looking statements. You should not place undue reliance on these forward-looking statements. These statements reflect our current view of future events and are subject to certain risks and uncertainties as described in this Report on Form 10-QSB as well as other periodic reports, filed with the Securities and Exchange Commission, and as noted below. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results could differ materially from those anticipated in these forward-looking statements. We undertake no obligation, and do not intend, to update, revise or otherwise publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof, or to reflect the occurrence of any unanticipated events. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that our expectations will materialize.

Overview

        Kandi Technologies, Corp (formerly Stone Mountain Resources, Inc., the “Company”) was originally incorporated on March 31, 2004.  As a result of the share exchange transaction that was completed on June 29, 2007, Stone Mountain Resources, Inc. (“Stone Mountain”) issued 12,000,000 shares of its common stock to the sole shareholder of Continental Development Limited (“Continental”), in exchange for 100% of the common stock of Continental.  Continental conducts its business operations through its wholly owned subsidiary Zhejiang Kandi Vehicles Co., Ltd. (“Kandi”), a People’s Republic of China (“PRC” or “China”) company.  As a result of the Closing, Continental became a wholly owned subsidiary of Stone Mountain. From and after the Closing Date, the business of the Company is that of Continental’s wholly owned subsidiary, Kandi.

 
        The transaction was accounted for as a reverse merger.  In accordance with the Accounting and Financial Reporting Interpretations and Guidance provided by the staff of the U.S. Securities and Exchange Commission, Stone Mountain (the legal acquirer) is considered the accounting acquiree and Continental (the legal acquiree) was considered the accounting acquirer. The consolidated financial statements of the combined entity are in substance be those of Continental, with the assets and liabilities, and revenues and expenses, of Stone Mountain being included effective from the date of consummation of the Share Exchange Transaction. Stone Mountain is deemed to be a continuation of the business of Continental. The outstanding stock of Stone Mountain prior to the Share Exchange Transaction was accounted for at its net book value and no goodwill will be recognized.

Results of Operations

Comparison of Three Months Ended June 30, 2007 and June 30, 2006.

The following table sets forth the amounts and percentage relationship to revenue of certain items in our consolidated statements of income and comprehensive income for the three months ended June 30, 2007 and 2006:
 
 
 
For the Three Months Ended
 
 
 
 
 
June 30,
 
 
 
 
 
2007
(Unaudited)
 
 
2006
(Unaudited)
 
 
Comparisons
 
 
Amount
 
 
% of Revenue
 
 
Amount
 
 
% of Revenue
 
 
Growth in Amount
 
 
Increase in %
REVENUES
 
 
11,155,508
 
 
 
100.00
%
 
 
2,859,686
 
 
 
100.00
%
 
 
8,295,822
 
 
 
290.10
%
COST OF GOODS SOLD
 
 
8,445,862
 
 
 
75.71
%
 
 
2,620,490
 
 
 
91.64
%
 
 
5,825,372
 
 
 
222.30
%
GROSS PROFIT
 
 
2,709,646
 
 
 
24.29
%
 
 
239,196
 
 
 
8.36
%
 
 
2,470,450
 
 
 
1,032.81
%
Selling and Marketing
 
 
202,538
 
 
 
1.82
%
 
 
39,989
 
 
 
1.40
%
 
 
162,549
 
 
 
406.48
%
General and Administrative
 
 
170,936
 
 
 
1.53
%
 
 
101,031
 
 
 
3.53
%
 
 
69,905
 
 
 
69.19
%
Research and Development
 
 
40,749
 
 
 
0.37
%
 
 
25,948
 
 
 
0.91
%
 
 
14,801
 
 
 
57.04
%
INCOME FROM OPERATIONS
 
 
2,295,423
 
 
 
20.58
%
 
 
72,228
 
 
 
2.53
%
 
 
2,223,195
 
 
 
3,078.02
%
Government Grants
 
 
12,191
 
 
 
0.11
%
 
 
-
 
 
 
0.00
%
 
 
12,191
 
 
 
100.00
%
Interest Expense, Net
 
 
(361,748
)
 
 
(3.24
%)
 
 
(156,309
)
 
 
(5.47
%)
 
 
(205,439
)
 
 
131.43
%
Other Income (Expense), Net
 
 
(72,228
)
 
 
(0.65
%)
 
 
422
 
 
 
0.01
%
 
 
(72,650
)
 
 
(17,215.64
%
INCOME BEFORE INCOME TAX
 
 
1,873,638
 
 
 
16.80
%
 
 
(83,659
)
 
 
(2.93
%)
 
 
1,957,297
 
 
 
2,339.61
%
INCOME TAX
 
 
33,412
 
 
 
0.30
%
 
 
-
 
 
 
0.00
%
 
 
33,412
 
 
 
100.00
%
NET INCOME
 
 
1,907,050
 
 
 
17.10
%
 
 
(83,659
)
 
 
(2.93
%)
 
 
1,990,709
 
 
 
2,279.55
%
 
 
 
19

 
 Revenues. For the three months ended June 30, 2007, our revenues increased approximately 290% from $2,859,686 to $11,115,508 relative to the same period ended June 30, 2006. The biggest factor in the increase of our revenues was the increased sales of the Go-kart, the beach vehicles developed and introduced by the Company.  Go-kart was introduced in 2006 and it was well received by customers because of its low cost, good performance and reliability. This reputation has helped boost the sale in this particular product. Furthermore, the export tax rebate was reduced from 17% to 9% beginning July 1, 2007, therefore, the Company pushed most of its orders originally scheduled to be shipped in the third quarter this year to the month of June. This is one of the main reasons for the sharp increase in sales in the second quarter ended June 30, 2007.

Cost of Sales. Cost of sales increased from $2,620,490 for the three months ended June 30, 2006 to $8,445,862, or approximately 222%,  for the same period in 2007, reflecting the increase in production manufacturing associated with the manufacturing of the beach vehicles during the quarter as discussed above. However, in terms of cost of sales as a percentage of net revenues, our cost of sales for this quarter in 2007 was approximately 76% of net revenues as compared to approximately 92% of net revenues for the same quarter in 2006. The main reason for the improvement in cost of sales was due to tighter cost controls and discounts obtained in raw materials because of the increase in purchase volume as sales increased.

Gross Profit. Gross profit increased approximately 1,033% from $239,196 for the three months ended June 30, 2006 to $2,709,646 for the three months ended June 30, 2007. This increase in gross profit was primarily due to the increased revenues and reduction in cost of sales.

Selling and Marketing Expenses. For the three months ended June 30, 2007, selling and marketing expenses increased approximately 406% from $39,989 to $202,538 relative to the three months ended June 30, 2006. The increase was primarily due to increase in the expansion of the sales department because of the sharp increase in sales revenue.

General and Administrative Expenses. For the three months ended June 30, 2007, general and administrative expenses increased approximately 69% from $101,031 to $170,936 relative to the three months ended June 30, 2006. The increase was primarily due to increase in headcount of the administration department as the Company went public in June 2007.

Research and Development Expenses. For the three months ended June 30, 2007, research and development expenses increased approximately 57% from $25,948 to $40,749 relative to the three months ended June 30, 2006. The increase was primarily due to the continuing effort the Company spent on improvement of its existing products.

   Income Tax Provision. On March 16, 2007, the National People’s Congress of the PRC determined to adopt a new corporate income tax law in its fifth plenary session. The new corporate income tax law unifies the application scope, tax rate, tax deduction and preferential policy for both domestic and foreign-invested enterprises.  The new corporate income tax law will be effective on January 1, 2008.  According to the new corporate income tax law, the applicable income tax rate for our operating subsidiaries may be subject to change.  As the implementation detail has not yet been announced, we cannot be sure of the potential impact of such new corporate income tax law on our financial position and operating results. Under the new law, the Company had a tax benefit of $33,412 for the three months ended June 30, 2007, compared to a tax expenses of $NIL for the same period of 2006.
 
Net Income.  Net income increased approximately 2,280% from a loss of $83,659 for the three months ended June 30, 2006 to an income of $1,907,050 for the three months ended June 30, 2007.  This increase in net income was due primarily to the increase in both our revenues and gross profits.
 
Comparison of Six Months Ended June 30, 2007 and June 30, 2006.

        The following table sets forth the amounts and percentage relationship to revenue of certain items in our consolidated statements of income and comprehensive income for the six months ended June 30, 2007 and 2006:
 
 
 
For the Six Months Ended
 
 
 
 
 
 
June 30,
 
 
 
 
 
 
2007
 
2006
 
 
 
 
 
 
(Unaudited)
 
(Unaudited)
 
Comparisons
 
 
Amount
 
 
% of Revenue
 
Amount
 
% of Revenue
 
Growth in Amount
Increase in %
REVENUES
 
17,148,966
 
 
100
%
 
 
4,756,821
 
 
100
%
 
12,392,145
 
260.51
%
COST OF GOODS SOLD
 
13,292,442
 
 
77.51
%
 
 
4,283,201
 
 
90.04
%
 
9,009,241
 
210.34
%
GROSS PROFIT
 
3,856,524
 
 
22.49
%
 
 
473,620
 
 
9.96
%
 
3,382,904
 
714.27
%
Selling and Marketing
 
366,578
 
 
2.14
%
 
 
85,035
 
 
1.79
%
 
281,543
 
331.09
%
General and Administrative
 
342,320
 
 
2.00
%
 
 
219,175
 
 
4.61
%
 
123,145
 
56.19
%
Research and Development
 
52,615
 
 
0.31
%
 
 
49,608
 
 
1.04
%
 
3,007
 
6.06
%
INCOME FROM OPERATIONS
 
3,095,011
 
 
18.05
%
 
 
119,802
 
 
 2.52
%
 
2,975,209
 
2,483.44
%
Forfeiture of Customer Deposit
 
267,673
 
 
1.56
%
 
 
-
 
 
0.00
%
 
267,673
 
100.00
%
Government Grants
 
12,132
 
 
0.07
%
 
 
65,946
 
 
1.39
%
 
(53,814
(81.60
%)
Interest Expense, Net
 
(450,441
)
 
(2.63
%)
 
 
(275,007
 
(5.78
%)
 
(175,434
63.79
%
Other Income (Expense), Net
 
(76,851
)
 
(0.45
%)
 
 
565