UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K




(Mark
One)





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


For
the fiscal year ended December 31, 2009





or





 ̈
            TRANSITION REPORT UNDER 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 its 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) (Zip Code)




(86-579)
82239856




(Registrant’s
telephone number, including area code)




Securities
Registered Pursuant to Section 12(b) of the Act:





Common
      Stock, Par Value $0.001 Per Share
                
                NASDAQ
      Capital Market(Title
      of each class)
                
                (Name
      of exchange on which
registered)




Securities Registered Pursuant to
Section 12(g) of the Act:   None.




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes   ̈
No þ




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes   ̈
No þ




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes þ  No 
 ̈




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this
chapter) 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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.   ̈




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





Large
      accelerated filer  ̈
            Accelerated
      filer  ̈Non-accelerated
      filer  ̈
              (Do
      not check if a smaller reporting company)
            Smaller
      reporting company þ




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes   ̈
No  þ




The
aggregate market value of the outstanding common equity of the registrant held
by non-affiliates as of the last business day of the registrant’s most recently
completed second fiscal quarter was $12,021,110.  Affiliates of the
Company beneficially own, in the aggregate, 12,000,000 shares of the Company’s
common stock.  There were 19,961,000 shares of voting common stock
with a par value of $0.001 outstanding at March 26, 2010.




DOCUMENTS
INCORPORATED BY REFERENCE: none.











TABLE OF
CONTENTS





PART
      IItem 1.
                  Business.
                  1-4Item 1A.
                  Risk
      Factors.
                  5-13Item 1B.
                  Unresolved
      Staff Comments.
                  13Item 2.
                  Properties.
                  13Item 3.
                  Legal
      Proceedings.
                  13PART IIItem 5.
                  Market
      for Registrant's Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.
                  14Item 6.
                  Selected
      Financial Data.
                  14Item 7.
                  Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations.
                  14-24Item 7A.
                  Quantitative
      and Qualitative Disclosures about Market Risk.
                  24Item 8.
                  Financial
      Statements and Supplementary Data.
                  24Item 9.
                  Changes
      In and Disagreements With Accountants on Accounting and Financial
      Disclosure.
                  25Item 9A.
                  Controls
      and Procedures.
                  25Item
      9B.
                  Other
      Information.
                  26PART IIIItem 10.
                  Directors,
      Executive Officers and Corporate Governance.
                  27-28Item 11.
                  Executive
      Compensation.
                  28-30Item 12.
                  Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.
                  30Item 13.
                  Certain
      Relationships and Related Transactions and Director
      Independence.
                  30Item 14.
                  Principal
      Accounting Fees and Services.
                  31PART IVItem 15.
                  Exhibits,
      Financial Statement Schedules.
                  32SIGNATURES
                  33









SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS




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





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









PART I




Item 1.
            Business.




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





Introduction




On June
29, 2007, Stone Mountain Resources, Inc., a Delaware corporation (“Stone
Mountain”) executed a share exchange agreement (the “Exchange Agreement”) with
Continental Development Limited, a Hong Kong corporation (“Continental”) and
Excelvantage Group Limited, a British Virgin Islands Company which owned 100% of
Continental (the “Continental Shareholder”). Pursuant to the Exchange Agreement,
Stone Mountain issued 12,000,000 shares of its common stock to the Continental
Shareholder, in exchange for 100% of the common stock of Continental. After the
closing of the Exchange Agreement, Stone Mountain had a total of 19,961,000
shares of common stock outstanding, with the Continental Shareholder owning
60.12% of the total issued and outstanding shares of Stone Mountain’s common
stock, and the remaining shares outstanding were held by those who held shares
of Stone Mountain’s common stock prior to the closing.




As a
result of this transaction, Continental became a wholly owned subsidiary of
Stone Mountain. Thereafter, the business of the Company was that of
Continental’s wholly owned subsidiary, Zhejiang Kandi Vehicles Co., Ltd. On
August 13, 2007, we changed our name from Stone Mountain Resources, Inc. to
Kandi Technologies, Corp.




Stone
Mountain was a public shell company prior to the closing of the Exchange
Agreement. Stone Mountain was originally incorporated on March 31, 2004 in the
State of Delaware, and operated as a gold exploration company exploring Nevada
mineral properties before ceasing operations in May 30, 2007.




Business
Overview





General




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





The
      year ended December 312009
                                                                  
                                                                  
                                                                  2008Unit
                                                                  
                                                                  
                                                                  Revenue
                                                                  
                                                                  
                                                                  Unit
                                                                  
                                                                  
                                                                  RevenueAll-terrain
      Vehicles (ATVs)
                                                                  
                                                                  
                                                                  6,194
                                                                  
                                                                  
                                                                  $
                                                                  3,021,352
                                                                  
                                                                  
                                                                  
                                                                  6,022
                                                                  
                                                                  
                                                                  $
                                                                  4,981,792Super-mini
      car (CoCo) (1)
                                                                  
                                                                  
                                                                  2,110
                                                                  
                                                                  
                                                                  
                                                                  8,508,451
                                                                  
                                                                  
                                                                  
                                                                  2,125
                                                                  
                                                                  
                                                                  
                                                                  9,140,919Go-Kart
                                                                  
                                                                  
                                                                  13,673
                                                                  
                                                                  
                                                                  
                                                                  13,487,087
                                                                  
                                                                  
                                                                  
                                                                  38,644
                                                                  
                                                                  
                                                                  
                                                                  20,818,651Mini
      Pick-up
                                                                  
                                                                  
                                                                  1
                                                                  
                                                                  
                                                                  
                                                                  4,365
                                                                  
                                                                  
                                                                  
                                                                  25
                                                                  
                                                                  
                                                                  
                                                                  45,974Utility
      vehicles (UTVs)
                                                                  
                                                                  
                                                                  3,509
                                                                  
                                                                  
                                                                  
                                                                  8,478,679
                                                                  
                                                                  
                                                                  
                                                                  2,759
                                                                  
                                                                  
                                                                  
                                                                  4,741,704Three-wheeled
      motorcycle (TT)
                                                                  
                                                                  
                                                                  458
                                                                  
                                                                  
                                                                  
                                                                  327,828
                                                                  
                                                                  
                                                                  
                                                                  481
                                                                  
                                                                  
                                                                  
                                                                  784,748Total
                                                                  
                                                                  
                                                                  25,945
                                                                  
                                                                  
                                                                  $
                                                                  33,827,762
                                                                  
                                                                  
                                                                  
                                                                  50,056
                                                                  
                                                                  
                                                                  $
                                                                  40,513,788


(1) The
Company had previously categorized the predecessor generation CoCo as a UTV in
the 2008 Form 10-K, but has adjusted the categorization in this report to
clarify year over year comparisons.




- 1
-


Off-Road
Vehicles





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





For the
year ended December 31, 2009, sales of ATVs dropped 61% from $4,981,793 in
2008 to $3,021,352. UTV sales also decreased from $13,026,428 to $8,478,679,
representing a 65% drop. Go-kart sales decreased 65% from $20,818,650 in
2008 to $13,487,087 for 2009.  The decreases are mainly attributable
to the decreased demand from the U.S market as a result of the financial
crisis.





The
Company had a strong fourth quarter in 2009, resulting in a 46% increase in
revenues and a 73% increase in gross profits compared to the fourth quarter
results of 2008, signaling a recovery in the sales of our products corresponding
with the broader global economic recovery.





Mini-Car
Products





Kandi
began sales of its gas-powered Super-mini car, CoCo, in August 2008. The first
generation  CoCo was designed for local neighborhood driving, with a 250cc
single cylinder, 4-stroke water-cooled engine with a top speed of 25 mph,
achieving 60 mpg. In 2009, the Company launched the battery powered all-electric
CoCo. The electric CoCo is designed to achieve a top speed of 25 mph, and will
have a driving range of 80 miles on a single full charge. The Company expects
significant growth in the sales of the CoCo and expects to expand the product
line in the near term.





The
following table shows the breakdown of Kandi’s revenues from its customers by
geographical markets based on the location of the customer during the fiscal
years ended December 31, 2009 and 2008:





The Years Ended of December 312009
                        
                        
                        2008Sales Revenue
                        
                        
                        Percentage
                        
                        
                        Sales Revenue
                        
                        
                        PercentageNorth
      America
                        
                        
                        3,967,536
                        
                        
                        
                        12
                        %
                        
                        
                        7,292,482
                        
                        
                        
                        18
                        %Europe
                        
                        
                        660,476
                        
                        
                        
                        2
                        %
                        
                        
                        -
                        
                        
                        
                        -China
                        
                        
                        29,199,750
                        
                        
                        
                        86
                        %
                        
                        
                        32,816,168
                        
                        
                        
                        81
                        %Other
      Regions
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        405,138
                        
                        
                        
                        1
                        %Total
                        
                        
                        33,827,762
                        
                        
                        
                        100
                        %
                        
                        
                        40,513,788
                        
                        
                        
                        100
                        %





For the
year ended December 31, 2009, sales to North America dropped significantly
due to the financial crisis. The Company expanded its sales to Europe,
which began producing revenue in 2009. We expect continued sales growth in
this region in the future.  For the year ended December 31, 2009,
about 95% of sales to China are sales to Chinese export agents, who resell the
Company’s products to North America, Europe, and other regions.




Sales and
Distribution




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




- 2
-




Components
and Parts, Raw Materials and Sources of Supply





Kandi
manufactures the frames of its vehicles and assembles the vehicles in its
factory in Jinhua, China.  Other components and parts, such as
engines, shock absorbers, electrical equipment and tires, are purchased from
numerous suppliers.  The principal raw materials used by Kandi are
steel plate, aluminum, special steels, steel tubes, paints, and plastics, which
are purchased from several local suppliers.  The most important raw
material purchased is steel plate. There is only one supplier who accounted for
more than 5% of the Company’s purchases of major components and parts and
principal raw materials during the fiscal year ended December 31, 2009. Kandi
does not have and does not anticipate having any difficulty in obtaining its
required materials from suppliers and considers its contracts and business
relations with the suppliers to be satisfactory.




Seasonality




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




Competition





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




Employees




As of
December 31, 2009, Kandi had a total of 329 full time employees. None of our
employees are represented by any collective bargaining agreements.




Environmental
and Safety Regulation




Emissions




The
United States Environmental Protection Agency (“EPA”) and the California Air
Resources Board (“CARB”) have adopted emissions regulations applicable to
Kandi’s products. CARB has emissions regulations for ATVs and off-road vehicles
which the Company already meets. In October 2002, the EPA established new
corporate average emission standards effective for model years 2006 through 2012
for non-road recreational vehicles, including ATVs and off-road
vehicles.




Kandi’s
motorcycles are also subject to EPA and CARB emission standards. Kandi believes
that its motorcycles have always complied with these standards. The CARB
regulations required additional motorcycle emission reductions in model year
2008 which the Company met. The EPA adopted the CARB emission limits in a
January 2004 rulemaking that allows an additional two model years to meet these
new CARB emission requirements on a nationwide basis.




Kandi’s
products are also subject to international laws and regulations related to
emissions in places where it sells its products outside the United States.
Europe currently regulates emissions from certain of the Company’s ATV-based
products, motorcycles, and mini-cars and the Company meets these requirements.
Canada’s emission regulations for motorcycles are similar to those in the U.S.
In December 2006 Canada proposed a new regulation that would essentially adopt
the U.S. emission standards for ATVs and off-road vehicles. These regulations
became effective in 2009 and the Company meets this standard.




- 3
-


Kandi
believes that its off-road vehicles, motorcycles and mini-cars have always
complied with applicable emission standards and related regulations in the
United States and internationally. Kandi is unable to predict the ultimate
impact of the adopted or proposed regulations on Kandi and its
business.




Use
regulation




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




Product
Safety and Regulation





Safety
Regulation




The
federal government and individual states have promulgated or are considering
promulgating laws and regulations relating to the use and safety of Kandi’s
products. The federal government is the primary regulator of product safety. The
Consumer Product Safety Commission (“CPSC”) has federal oversight over product
safety issues related to ATVs and off-road vehicles. The National Highway
Transportation Safety Administration (“NHTSA”) has federal oversight over
product safety issues related to on-road motorcycles.




In August
2008, the Consumer Product Safety Improvement Act (the “Act”) was passed. The
Act includes a provision that requires all manufacturers and distributors who
import into or distribute ATVs in the United States to comply with the ANSI/SVIA
safety standards which were previously voluntary. The Act also requires the same
manufacturers and distributors to have ATV action plans filed with the CPSC that
are substantially similar to the voluntary action plans that were previously in
effect. Kandi currently complies with the ANSI/SVIA standard.




Kandi’s
motorcycles are subject to federal vehicle safety standards administered by
NHTSA. Kandi’s motorcycles are also subject to various state vehicle safety
standards. Kandi believes that its motorcycles have always complied with safety
standards relevant to motorcycles.




Kandi’s
products are also subject to international standards related to safety in places
where it sells its products outside the United States. Kandi believes that its
motorcycles and mini-cars have always complied with applicable safety standards
in the United States and internationally.





Principal
Executive Offices





Our
principal executive office is located in the Jinhua City Industrial Zone in
Jinhua, Zhejiang Province, PRC, 321016 and our telephone number
(86-579)82239856.


- 4
-





Item 1A.
            Risk
      Factors.





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





Risks
Relating to Our Overall Business Operations





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





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





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





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





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





Our
business operations generate noise, waste water, and gaseous and other
industrial wastes. We are required to comply with all national and local
regulations regarding protection of the environment. We are in compliance with
current environmental protection requirements and have all necessary
environmental permits to conduct our business. However, if more stringent
regulations are adopted in the future, the costs of compliance with these new
regulations could be substantial. Additionally, if we fail to comply with
present or future environmental regulations, we may be required to pay
substantial fines, suspend production or cease operations. Any failure by us to
control the use of or to restrict adequately the discharge of, hazardous
substances could subject us to potentially significant monetary damages and
fines or suspensions in our business operations. Certain laws, ordinances and
regulations could limit our ability to develop, use, or sell our
products.





- 5
-




Our
business depends substantially on the continuing efforts of our executive
officers, and our business may be severely disrupted if we lose their
services.





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





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





The Company may be subject to lawsuits
resulting from injuries associated with the use of the vehicles that it sells.
The Company may incur losses relating to these claims or the defense of these
claims. There is a risk that claims or liabilities will exceed our insurance
coverage. In addition, the Company may be unable to retain adequate liability
insurance in the future.




The Company may also be required to
participate in recalls involving our vehicles if any prove to be defective, or
we may voluntarily initiate a recall or make payments related to such claims as
a result of various industry or business practices or the need to maintain good
customer relationships. Such a recall would result in a diversion of resources.
While we do maintain product liability insurance, we cannot assure you that it
will be sufficient to cover all product liability claims, that such claims will
not exceed our insurance coverage limits or that such insurance will continue to
be available on commercially reasonable terms, if at all. Any product liability
claim brought against us could have a material adverse effect on our results of
operations.




Risks
Relating to Our Vehicle Machinery Production Operations




We
may be subject to significant potential liabilities as a result of defects in
production and product liability.




Through
our machinery production operations, we may be subject to production defect and
product liability arising in the ordinary course of business. These claims are
common to the machinery production industry and can be costly.




With respect to certain general
liability exposures, including manufacturing defect and product liability,
interpretation of underlying current and future trends, assessment of claims and
the related liability and reserve estimation process is highly subjective due to
the complex nature of these exposures, with each exposure exhibiting unique
circumstances. Furthermore, once claims are asserted for construction defects,
it is difficult to determine the extent to which the assertion of these claims
will expand geographically. We may not have sufficient funds available to cover
any liability for damages, the cost of repairs, and/or the expense of litigation
surrounding such claims, and future claims may arise out of events or
circumstances not covered by insurance and not subject to effective
indemnification agreements with our subcontractors.




The
vehicle machinery industry is highly competitive and we are subject to risks
relating to competition that may adversely affect our performance.




The
vehicle machinery industry is highly competitive, and our continued success
depends upon our ability to compete effectively in markets that contain numerous
competitors, some of which have significantly greater financial, marketing and
other resources than we have. Competition may reduce fee structures, potentially
causing us to lower our fees or prices, which may adversely impact our profits.
New or existing competition that uses a business model that is different from
our business model may put pressure on us to change our model so that we can
remain competitive.




- 6
-


Our
business is subject to the risk of supplier concentrations.




We depend
on a limited number of suppliers for the sourcing of major components and parts
and principal raw materials. As a result of this concentration in our supply
chain, our business and operations would be negatively affected if any of our
key suppliers were to experience significant disruption affecting the price,
quality, availability or timely delivery of their products. The partial or
complete loss of these suppliers, or a significant adverse change in our
relationship with any of these suppliers, could result in lost revenue, added
costs and distribution delays that could harm our business and customer
relationships. In addition, concentration in our supply chain can exacerbate our
exposure to risks associated with the termination by key suppliers of our
distribution agreements or any adverse change in the terms of such agreements,
which could have a negative impact on our revenues and
profitability.





General economic
conditions may negatively impact our results.





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




Risks
Related to Doing Business in China




Change
in political and economic conditions may affect our business operations and
profitability.




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





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




While the
Chinese government has not halted its economic reform policy since 1978, any
significant adverse changes in the social, political and economic conditions of
China may fundamentally impact China’s economic reform policies, and thus the
Company's operations and profits may be adversely affected.




Change
in tax laws and regulations in China may affect our business
operations.




Various
tax reform policies have been implemented in the PRC in recent years. However,
there can be no assurance that the existing tax laws and regulations will not be
revised or amended in the future.




- 7
-




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





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





In
addition, any litigation in China may be protracted and may result in
substantial costs and diversion of resources and management attention. The legal
system in the China cannot provide the investors with the same level of
protection as in the U.S. The Company is governed by the law and regulations
generally applicable to local enterprises in China. Many of these laws and
regulations were recently introduced and remain experimental in nature and
subject to changes and refinements. Interpretation, implementation and
enforcement of the existing laws and regulations can be uncertain and
unpredictable and therefore may restrict the legal protections of foreign
investors.




Changes
in Currency Conversion Policies in China may have a material adverse effect on
us.




Renminbi
(“RMB”) is not a freely exchangeable currency. Since 1998, the State
Administration of Foreign Exchange of China has promulgated a series of
circulars and rules in order to enhance verification of foreign exchange
payments under a Chinese entity’s current account items, and has imposed strict
requirements on borrowing and repayments of foreign exchange debts from and to
foreign creditors under the capital account items and on the creation of foreign
security in favor of foreign creditors.





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





You
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions based on United States or other
foreign laws against us, our management or the experts named in the
prospectus.




We
conduct substantially all of our operations in China and substantially all of
our assets are located in China. In addition, all of our senior executive
officers reside in China. As a result, it may not be possible to effect service
of process within the United States or elsewhere outside China upon our senior
executive officers, including with respect to matters arising under U.S. federal
securities laws or applicable state securities laws. Moreover, our PRC counsel
has advised us that the PRC does not have treaties with the United States or
many other countries providing for the reciprocal recognition and enforcement of
judgment of courts.





- 8
-




Risks
Relating to Ownership of Our Securities





Our
stock price may be volatile, which may result in losses to our
shareholders.




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





o
            variations
      in our operating results;





o
            changes
      in expectations of our future financial performance, including financial
      estimates by securities analysts and
investors;





o
            changes
      in operating and stock price performance of other companies in our
      industry;





o
            additions
      or departures of key personnel; and





o
            future
      sales of our common stock.




Domestic
and international stock markets often experience significant price and volume
fluctuations. These fluctuations, as well as general economic and political
conditions unrelated to our performance, may adversely affect the price of our
common stock.





One
stockholder owns a substantial portion of our outstanding common stock, which
may enable this stockholder to influence many significant corporate
actions.





Excelvantage
Group Limited controls approximately 60.12% of our outstanding shares of common
stock as of December 31, 2009. As a result, Excelvantage Group Limited could
have a substantial impact on matters requiring the vote of the shareholders,
including the election of our directors and most corporate actions. This control
could delay, defer or prevent others from initiating a potential merger,
takeover or other change in our control, even if these actions would benefit our
other shareholders and the Company. This control could adversely affect the
voting and other rights of our other shareholders and could depress the market
price of our common stock.




Our
common shares may become thinly traded and you may be unable to sell at or near
ask prices, or at all.





We cannot
predict the extent to which an active public market for trading our common stock
will be sustained. Although our common share’s trading volume increase
significantly recently, it has historically been sporadically or
“thinly-traded,” meaning that the number of persons interested in purchasing our
common shares at or near bid prices at certain given time may be relatively
small or non-existent.





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





- 9
-




The
market price for our common stock is particularly volatile given our status as a
relatively small company, which could lead to wide fluctuations in our share
price. You may be unable to sell your common stock at or above your purchase
price if at all, which may result in substantial losses to you.





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





Substantial
sales of the shares of our Common Stock issuable upon conversion of our senior
secured convertible notes or exercise of warrants could adversely affect our
stock price or our ability to raise additional financing in the public capital
markets.





We issued
$10,000,000 2-year senior secured convertible notes and warrants to purchase an
aggregate of 800,000 shares of Common Stock to certain institutional investors
on January 21, 2010.  Under the terms of the notes, the maximum number
of shares of Common Stock issuable upon conversion is 3,636,364 shares (not
including any shares of Common Stock which the Company may issue as interest
payments in lieu of cash), representing approximately 13% of our outstanding
Common Stock on a fully diluted basis.





If the
note holders convert their notes or if they exercise the warrants and sell a
substantial number of shares of our Common Stock in the future, or if investors
perceive that these sales may occur, the market price of our Common Stock could
decline or market demand for our Common Stock could be sharply reduced. The
conversion of the notes and subsequent sale of a substantial number of shares of
our Common Stock could also adversely affect demand for, and the market price
of, our Common Stock. Each of these transactions could adversely affect our
ability to raise additional financing by issuing equity or equity-based
securities in the public capital markets.





Antidilution
and other provisions in the senior secured convertible notes and the warrants
issued to the note holders may also adversely affect our stock price or our
ability to raise additional financing.





The
senior secured convertible notes and the warrants issued to the institutional
holders described above contains antidilution provisions that provide for
adjustment of the note conversion price and the warrant exercise price, and the
number of shares issuable under the warrants, upon the occurrence of certain
events. If we issue shares of our Common Stock, or securities convertible into
our Common Stock, at prices below the conversion price or exercise price, as
applicable, the conversion price of the notes will be reduced and the warrant
exercise price will be reduced and the number of shares issuable under the
warrant will be increased. The amount of such adjustment if any, will be
determined pursuant to a formula specified in the note and the warrant and will
depend on the number of shares issued and the offering price of the subsequent
issuance of securities. Adjustments to the warrant pursuant to these
antidilution provisions may result in significant dilution to the interests of
our existing stockholders and may adversely affect the market price of our
Common Stock. The antidilution provisions may also limit our ability to obtain
additional financing on terms favorable to us.





- 10
-




Moreover,
we may not realize any cash proceeds from the exercise of the warrants. A holder
of the warrant may opt for a cashless exercise of all or part of the warrant
under certain circumstances. In a cashless exercise, the holder of the warrant
would make no cash payment to us, and would receive a number of shares of our
common stock having an aggregate value equal to the excess of the then-current
market price of the shares of our common stock issuable upon exercise of the
warrant over the exercise price of the warrant. Such an issuance of common stock
would be immediately dilutive to the interests of other
stockholders.





We
do not anticipate paying any cash dividends to our common
shareholders.





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





Fluctuation
in the value of the RMB may have a material adverse effect on your
investment.




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





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





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




- 11
-





Volatility
in Our Common Share Price May Subject Us to Securities Litigation.




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





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





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




Past
Activities Of Stone Mountain and Our Affiliates May Lead to Future
Liability.




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





We
may need additional capital, and the sale of additional shares or other equity
securities could result in additional dilution to our shareholders.





On
January 21, 2010, we entered into a Securities Purchase Agreement with certain
institutional accredited investors pursuant to which the Company offered for
sale to these investors $10 million of senior secured convertible notes and
warrants exercisable for an aggregate of 800,000 shares of the Company’s common
stock. The conversion of convertible notes and the exercise of these warrants
will result in dilution.




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





- 12
-




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




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





Item 1B.
            Unresolved
      Staff Comments.


Not
applicable.




Item 2.
            Properties.





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




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




In
comparison with Western common law concepts, granted land use rights are similar
to life estates and allocated land use rights are in some way similar to
leaseholds.




Granted
land use rights are provided by the government in exchange for a grant fee, and
carry the rights to pledge, mortgage, lease, and transfer within the term of the
grant. Land is granted for a fixed term - generally 70 years for residential
use, 50 years for industrial use, and 40 years for commercial and other use. The
term is renewable in theory. Unlike the usual case in Western nations, granted
land must be used for the specific purpose for which it was
granted.





Allocated
land use rights are generally provided by the government for an indefinite
period (usually to state-owned entities) and cannot be pledged, mortgaged,
leased, or transferred by the user. Furthermore, allocated land can be reclaimed
by the government at any time. Allocated land use rights may be converted into
granted land use rights upon the payment of a grant fee to the
government.




Kandi has
the following granted land use rights:





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





Item 3.
            Legal
      Proceedings.


None.




- 13
-


PART II




Item 5.
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.




Market
Information




Our
common stock began trading on the OTCBB under the symbol “KNDI” on July 6, 2007.
Prior to this date, no liquid market had existed for our common stock. Our
common stock began trading on the NASDAQ Capital Market on March 18, 2008. The
following are the high and low bid prices for our common stock for each quarter
from July 6, 2007 to December 31, 2009.





HIGH
                
                
                LOWFISCAL 2009Fourth
      Quarter (through December 31, 2009)
                
                $
                6.20
                
                
                $
                1.78Third
      Quarter (through September 30, 2009)
                
                $
                2.47
                
                
                $
                1.10Second
      Quarter (through June 30, 2009)
                
                $
                1.74
                
                
                $
                0.78First
      Quarter (through March 31, 2009)
                
                $
                1.05
                
                
                $
                0.46FISCAL
      2008Fourth
      Quarter (through December 31, 2008)
                
                $
                2.40
                
                
                $
                0.72Third
      Quarter (through September 30, 2008)
                
                $
                4.30
                
                
                $
                1.75Second
      Quarter (through June 30, 2008)
                
                $
                7.25
                
                
                $
                4.09First
      Quarter (through March 31, 2008)
                
                $
                5.65
                
                
                $
                4.28FISCAL
      2007Fourth
      Quarter (through December 31, 2007)
                
                $
                5.30
                
                
                $
                3.72Third
      Quarter (through September 30, 2007)
                
                $
                4.25
                
                
                $
                3.25




Holders
of Common Stock




As of
March 15, 2010, there were 1,817 record holders of our common
stock.




Dividends




We have
never paid a dividend on our common stock. At present, we intend to retain any
earnings for use in our business and do not anticipate paying cash dividends in
the foreseeable future.





Item 6.
            Selected
      Financial Data.





Not
applicable.





Item 7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation.







The
following discussion should be read in conjunction with the information
contained in the consolidated financial statements of the Company and the notes
thereto appearing elsewhere herein. Readers should carefully review the risk
factors disclosed in this Form 10-K and other documents filed by the Company
with the SEC.




- 14
-




CRITICAL ACCOUNTING POLICIES
AND ESTIMATES




This
section should be read together with the Summary of Significant Accounting
Policies in the attached consolidated financial statements included in this
report.




Estimates
affecting accounts receivable and inventories




The
preparation of our consolidated financial statements requires management to make
estimates and assumptions that affect our reporting of assets and liabilities
(and contingent assets and liabilities). These estimates are particularly
significant where they affect the reported net realizable value of the Company’s
accounts receivable and inventories.




Accounts receivables are recognized and carried at
original invoice amount less allowance for any uncollectible amounts. An
estimate for doubtful accounts is made when collection of the full amount is no
longer probable. There was an allowance for doubtful accounts of $7,141 in 2009,
$7,123 in 2008 and $3,701 for 2007.





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 inventoriesare 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 $152,278 is write downs in 2009 for slow moving inventory in
the year ended of December 31, 2009, and no declines in net realizable value of
inventory for the years ended of December 31, 2008 and 2007.




While the
Company currently believes that there is little likelihood that actual results
will differ materially from these current estimates, if customer demand for our
products decreases significantly in the near future, or if the financial
condition of our customers deteriorates in the near future, the Company could
realize significant write downs for slow-moving inventories or uncollectible
accounts receivable.





Policy
affecting recognition of revenue




Among the
most important accounting policies affecting our consolidated financial
statements is our policy of recognizing revenue. Revenues represent the invoiced
value of goods sold, recognized upon the shipment of goods to customers, and are
recognized when all of the following criteria are met:




1.
              Persuasive
      evidence of an arrangement
exists;


2.
              Delivery
      has occurred or services have been
rendered;


3.
              The
      seller’s price to the buyer is fixed or determinable;
  and


4.
              Collectability
      is reasonably assured.




The
majority of the Company’s revenue results from sales contracts with
distributors. Revenue is recorded upon the shipment of goods. Management
conducts credit background checks for new customers as a means to reduce the
subjectivity of assuring collectability. Based on these factors, the Company
believes that it can apply the provisions of SAB 104 with minimal
subjectivity.




- 15
-


RECENT ACCOUNTING
PRONOUNCEMENTS





Recently
Implemented Standards





ASC 105,
Generally Accepted Accounting Principles (“ASC 105”) (formerly Statement of
Financial Accounting Standards No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles a
replacement of FASB Statement No. 162) reorganized by topic existing
accounting and reporting guidance issued by the Financial Accounting Standards
Board (“FASB”) into a single source of authoritative generally accepted
accounting principles (“GAAP”) to be applied by nongovernmental entities. All
guidance contained in the Accounting Standards Codification (“ASC”) carries an
equal level of authority. Rules and interpretive releases of the Securities and
Exchange Commission (“SEC”) under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. Accordingly, all other
accounting literature will be deemed “non-authoritative.” ASC 105 is effective
on a prospective basis for financial statements issued for interim and annual
periods ending after September 15, 2009. The Company has implemented the
guidance included in ASC 105 as of July 1, 2009. The implementation of this
guidance changed the Company’s references to GAAP authoritative guidance but did
not impact the Company’s financial position or results of
operations.




ASC 855,
Subsequent Events (“ASC 855”) (formerly Statement of Financial Accounting
Standards No. 165, Subsequent Events) includes guidance that was issued by
the FASB in May 2009, and is consistent with current auditing standards in
defining a subsequent event. Additionally, the guidance provides for disclosure
regarding the existence and timing of a company’s evaluation of its subsequent
events. ASC 855 defines two types of subsequent events, “recognized” and
“non-recognized.” Recognized subsequent events provide additional evidence about
conditions that existed at the date of the balance sheet and are required to be
reflected in the financial statements. Non-recognized subsequent events provide
evidence about conditions that did not exist at the date of the balance sheet
but arose after that date and, therefore; are not required to be reflected in
the financial statements. However, certain non-recognized subsequent events may
require disclosure to prevent the financial statements from being misleading.
This guidance was effective prospectively for interim or annual financial
periods ending after June 15, 2009. The Company implemented the guidance
included in ASC 855 as of July 1, 2009. The effect of implementing this
guidance was not material to the Company’s financial position or results of
operations.




Recent
Accounting Pronouncements





In August 2009, the FASB issued
ASC Update No. 2009-05, Fair Value Measurements and Disclosures (Topic
820): Measuring Liabilities at Fair Value (“ASC Update No. 2009-05”). This
update amends ASC 820, Fair Value Measurements and Disclosures and provides
further guidance on measuring the fair value of a liability. The guidance
establishes the types of valuation techniques to be used to value a liability
when a quoted market price in an active market for the identical liability is
not available, such as the use of an identical or similar liability when traded
as an asset. The guidance also further clarifies that a quoted price in an
active market for the identical liability at the measurement date and the quoted
price for the identical liability when traded as an asset in an active market
when no adjustments to the quoted price of the asset are required are both Level
1 fair value measurements. If adjustments are required to be applied to the
quoted price, it results in a level 2 or 3 fair value measurement. The guidance
provided in the update is effective for the first reporting period (including
interim periods) beginning after issuance. The Company does not expect that the
implementation of ASC Update No. 2009-05 will have a material effect on its
financial position or results of operations.





- 16
-




In
September 2009, the FASB issued ASC Update No. 2009-12, Fair Value
Measurements and Disclosures (Topic 820): Investments in Certain Entities that
Calculate Net Asset Value per Share (or Its Equivalent) (“ASC Update
No. 2009-12”). This update sets forth guidance on using the net asset value
per share provided by an investee to estimate the fair value of an alternative
investment. Specifically, the update permits a reporting entity to measure the
fair value of this type of investment on the basis of the net asset value per
share of the investment (or its equivalent) if all or substantially all of the
underlying investments used in the calculation of the net asset value is
consistent with ASC 820. The update also requires additional disclosures by each
major category of investment, including, but not limited to, fair value of
underlying investments in the major category, significant investment strategies,
redemption restrictions, and unfunded commitments related to investments in the
major category. The amendments in this update are effective for interim and
annual periods ending after December 15, 2009 with early application
permitted. The Company does not expect that the implementation of ASC Update
No. 2009-12 will have a material effect on its financial position or
results of operations.





In June
2009, FASB issued Statement of Financial Accounting Standards No. 167,
Amendments to FASB Interpretation No. 46(R) (“Statement No. 167”).
Statement No. 167 amends FASB Interpretation No. 46R, Consolidation of
Variable Interest Entities an interpretation of ARB No. 51 (“FIN 46R”) to
require an analysis to determine whether a company has a controlling financial
interest in a variable interest entity. This analysis identifies the primary
beneficiary of a variable interest entity as the enterprise that has (a) the
power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance and (b) the obligation to
absorb losses of the entity that could potentially be significant to the
variable interest entity or the right to receive benefits from the entity that
could potentially be significant to the variable interest entity. The statement
requires an ongoing assessment of whether a company is the primary beneficiary
of a variable interest entity when the holders of the entity, as a group, lose
power, through voting or similar rights, to direct the actions that most
significantly affect the entity’s economic performance. This statement also
enhances disclosures about a company’s involvement in variable interest
entities. Statement No. 167 is effective as of the beginning of the first
annual reporting period that begins after November 15, 2009. Although
Statement No. 167 has not been incorporated into the Codification, in
accordance with ASC 105, the standard shall remain authoritative until it is
integrated. The Company does not expect the adoption of Statement No. 167
to have a material impact on its financial position or results of
operations.





In June
2009, the FASB issued Statement of Financial Accounting Standards No. 166,
Accounting for Transfers of Financial Assets an amendment of FASB Statement
No. 140 (“Statement No. 166”). Statement No. 166 revises FASB
Statement of Financial Accounting Standards No. 140, Accounting for
Transfers and Extinguishment of Liabilities a replacement of FASB Statement 125
(“Statement No. 140”) and requires additional disclosures about transfers
of financial assets, including securitization transactions, and any continuing
exposure to the risks related to transferred financial assets. It also
eliminates the concept of a “qualifying special-purpose entity,” changes the
requirements for derecognizing financial assets, and enhances disclosure
requirements. Statement No. 166 is effective prospectively, for annual
periods beginning after November 15, 2009, and interim and annual periods
thereafter. Although Statement No. 166 has not been incorporated into the
Codification, in accordance with ASC 105, the standard shall remain
authoritative until it is integrated. The Company does not expect the adoption
of Statement No. 166 will have a material impact on its financial position
or results of operations.




- 17
-




RESULTS OF OPERATIONS –
YEAR ENDED DECEMBER 31, 2009 AS COMPARED TO YEAR ENDED DECEMBER 31,
2008




The
following table sets forth the amounts and the percentage relationship to
revenues of certain items in our consolidated statements of income for the years
ended December 31, 2009 and 2008:




For The Years
Ended


December 31, 2009 and
2008




2009
                    
                    
                    2008
                    
                    
                    ComparisonsAmount
                    
                    
                    % of
                      Revenue
                    
                    
                    Amount
                    
                    
                    % of
                      Revenue
                    
                    
                    Change in
                      Amount
                    
                    
                    Change
                      In %REVENUES
                    
                    $
                    33,827,762
                    
                    
                    
                    100.0
                    %
                    
                    $
                    40,513,788
                    
                    
                    
                    100.0
                    %
                    
                    $
                    (6,686,026
                    )
                    
                    
                    (16.5
                    )%COST
      OF GOODS SOLD
                    
                    
                    25,613,087
                    
                    
                    
                    75.7
                    %
                    
                    
                    30,919,868
                    
                    
                    
                    76.3
                    %
                    
                    
                    (5,306,781
                    )
                    
                    
                    (17.2
                    )%GROSS
      PROFIT
                    
                    
                    8,214,675
                    
                    
                    
                    24.3
                    %
                    
                    
                    9,593,920
                    
                    
                    
                    23.7
                    %
                    
                    
                    (1,379,245
                    )
                    
                    
                    (14.4
                    )%Research
      and Development
                    
                    
                    2,341,393
                    
                    
                    
                    6.9
                    %
                    
                    
                    839,989
                    
                    
                    
                    2.1
                    %
                    
                    
                    1,501,404
                    
                    
                    
                    178.7
                    %Selling
      and Marketing
                    
                    
                    1,023,210
                    
                    
                    
                    3.0
                    %
                    
                    
                    477,413
                    
                    
                    
                    1.2
                    %
                    
                    
                    545,797
                    
                    
                    
                    114.3
                    %General
      and Administration
                    
                    
                    2,573,509
                    
                    
                    
                    7.6
                    %
                    
                    
                    1,836,394
                    
                    
                    
                    4.5
                    %
                    
                    
                    737,115
                    
                    
                    
                    40.2
                    %INCOME
      FROM OPERATIONS
                    
                    
                    2,276,563
                    
                    
                    
                    6.8
                    %
                    
                    
                    6,440,124
                    
                    
                    
                    15.9
                    %
                    
                    
                    (4,163,561
                    )
                    
                    
                    (64.7
                    )%Government
      Grants
                    
                    
                    127,347
                    
                    
                    
                    0.4
                    %
                    
                    
                    64,595
                    
                    
                    
                    0.2
                    %
                    
                    
                    62,752
                    
                    
                    
                    97.2
                    %Forfeiture
      of Customer Deposits and Forgiveness of Debt
                    
                    
                    -
                    
                    
                    
                    0.0
                    %
                    
                    
                    16,235
                    
                    
                    
                    0.0
                    %
                    
                    
                    (16,235
                    )
                    
                    
                    (100.0
                    )%Other
      (Expense) Income, Net
                    
                    
                    361,745
                    
                    
                    
                    1.1
                    %
                    
                    
                    100,331
                    
                    
                    
                    0.2
                    %
                    
                    
                    261,414
                    
                    
                    
                    260.6
                    %Interest
      Expense, Net
                    
                    
                    (1,478,276
                    )
                    
                    
                    (4.4
                    )%
                    
                    
                    (2,017,323
                    )
                    
                    
                    (5.0
                    )%
                    
                    
                    539,047
                    
                    
                    
                    (26.7
                    )%INCOME
      BEFORE INCOME TAX
                    
                    
                    1,287,379
                    
                    
                    
                    3.9
                    %
                    
                    
                    4,603,962
                    
                    
                    
                    11.3
                    %
                    
                    
                    (3,316,583
                    )
                    
                    
                    (72.0
                    )%INCOME
      TAX (EXPENSE) BENEFIT
                    
                    
                    (287,578
                    )
                    
                    
                    (0.9
                    )%
                    
                    
                    (9,605
                    )
                    
                    
                    0.0
                    %
                    
                    
                    (277,973
                    )
                    
                    
                    (2894.0
                    )%NET
      INCOME FROM CONTINUING OPERATIONS
                    
                    
                    999,801
                    
                    
                    
                    3.0
                    %
                    
                    
                    4,594,357
                    
                    
                    
                    11.3
                    %
                    
                    
                    (3,594,556
                    )
                    
                    
                    (78.2
                    )%INCOME
      FROM DISCONTINUED OPERATION
                    
                    
                    -
                    
                    
                    
                    0.0
                    %
                    
                    
                    327,721
                    
                    
                    
                    0.8
                    %
                    
                    
                    (327,721
                    )
                    
                    
                    (100.0
                    )%NET
      INCOME
                    
                    $
                    999,801
                    
                    
                    
                    3.0
                    %
                    
                    $
                    4,922,078
                    
                    
                    
                    12.1
                    %
                    
                    $
                    (3,982,826
                    )
                    
                    
                    (81.0
                    )%




Revenues




Total
revenues of $33,827,762 for the year ended December 31, 2009 decreased by 16.5%
as compared to the same period of 2008. The global economic crisis continuing
from 2008 negatively affected sales of all of our vehicles, particularly our
recreational vehicle lines.




Based on
a determination that China will be among the first markets to recover from the
global economic crisis, we have spent much time and resources on developing
products targeting the Chinese market.  In addition to the relative
health of the Chinese economy, the Company expects to also benefit from the
stimulus package enacted by the PRC government in November 2008.  The
November stimulus package includes cash subsidies of 60,000 RMB (approximately
$8,775) provided to the purchaser of each renewable energy
vehicle.  We believe that our electric CoCo super-mini car will
qualify for such subsidies.




- 18
-





For the
year ended December 31, 2009, sales of ATVs dropped 61% from $4,981,793 in 2008
to $3,021,352.  UTV sales also decreased from $13,026,428 to
$8,478,679, representing a 65% drop.  Go-kart sales also dropped 65%
from $20,818,650 in 2008 to $13,487,087 in 2009. The decreases are mainly
attributable to the decreased demand from the U.S. market as a result of the
financial crisis.




Kandi
began sales of its gas-powered super-mini car, CoCo, in August
2008.  In 2009, the Company launched the battery powered all-electric
CoCo. The Company expects significant growth in the sales of the CoCo in China
and expects to expand the product line in the near term.





Cost of Goods
Sold





Cost of
goods sold during the year ended December 31, 2009 was $25,613,087 representing
a 17.2% decrease from last year, which corresponds to the decrease in sales.
Cost of goods sold as a percentage of revenues was 75.7% for 2009 as compared to
76.3% for the year 2008 which reflects the Company’s continued focus on cost
control and sourcing and operational efficiencies.





Gross
profit





Gross
profit decreased by $1,379,245, or 14.4%, for the year ended December 31, 2009
as compared to the year ended December 31, 2008. This decrease reflected lower
net sales and decreased cost of goods sold across our
businesses.





Selling and
Marketing





Selling and marketing expenses, which
include distribution expenses, increased significantly during the fiscal year
ended December 31, 2009, from $447,413 to $1,023,210.  This 113.4%
increase is primarily due to a one-time expense of $673,265 associated with
issuing options to purchase shares of the Company's common stock to two
consultants as compensation for providing business development
services.  Excluding this one-time expense, selling and marketing
expenses decreased by 21.8% from the fiscal year ended December 31, 2008 because
of lower shipping expenses.  The Company shipped fewer vehicles
overseas during 2009, partly because of a decrease in sales and partly because
the Company stopped exporting vehicles directly and began using an export agent
who bears shipping expenses.





- 19
-




General and
Administrative





General
and administrative expenses increased 40.2% during the fiscal year ended
December 31, 2009, from $1,836,394 to $2,573,509, primarily due to the stock
based compensation expense associated with issuing options to the Company’s
employees.  In February 2009, the Company issued options to purchase a
total of 2,600,000 shares of common stock to ten executives and managerial level
employees. The fair value of the stock option on the grant date was
$2,062,964.  The Company amortized the stock compensation expense
using the straight-line method over the service period from February 11, 2009
through February 11, 2012. During the year ended December 31, 2009, the
compensation expense was $1,155,642, accounting for 3.4% of the total revenue of
the reporting period. Excluding this compensation cost, general and
administrative expenses decreased from $1,836,394 in 2008 to $1,417,867 in 2009,
a 22.8% decrease, representing the Company’s continuous effort on cutting cost
and improving operation efficiency to deal with the difficult economy
environment.





Research and
Development





For the
year ended December 31, 2009, research and development expenses increased
$1,501,404 to $2,341,393 from $839,989 for the year ended December 31, 2008. The
increase is attributed to the significant research and development expenses
required for the electric-powered CoCo and a new diesel powered farmer pick up
truck.




Government
grants





Government
grants totaled $127,347 for the year ended December 31, 2009, representing a
97.2% increase over the same period in 2008, primarily due to the PRC
government’s grant of subsidies for research related to electric-powered
vehicles.  The government grants consist of $38,007 in subsidies for
supporting companies that have competitive advantages, $71,409 in subsidies for
technological innovation and patent application, $1,462 in subsidies for IT
development, and $16,470 in export subsidies.  Our electric-powered
vehicles were launched in October 2008 and will continue to be our focus product
in 2010.




Interest Expense,
Net





Net
interest expense was $1,478,276 for the year ended December 31, 2009, compared
to $2,017,323 for the year ended December 31, 2008, a decrease of
26.7%.  This decrease is mainly the result of the decrease in interest
expense of $568,902 paid for short term bank loans due to lower interest
rates.





Income
Taxes




On March
16, 2007, the National People’s Congress of the PRC determined to adopt a new
corporate income tax law in its fifth plenary session. The new corporate income
tax law unifies the application scope, tax rate, tax deduction and preferential
policy for both domestic and foreign-invested enterprises.  The new
corporate income tax law took effect on January 1, 2008. In accordance with the
relevant tax laws and regulations of the PRC, the applicable corporate income
tax rate of Kandi is 25%. However, a foreign-invested company which registered
with the PRC government before March 16, 2007 is still permitted to apply the
former corporate income tax rules. Thus, our company was exempt from corporate
income tax for 2007 and 2008 and is also entitled to a 50% tax reduction for
2009, 2010 and 2011, of which the tax rate is 12.5%. The Company had a tax
expense of $287,578 for the year ended December 31, 2009 and had a tax expense
of $9,605 for the year ended December 31, 2008.




- 20
-




Net
Income




Net
income for the year ended December 31, 2009 was $999,801, which was a
significant decrease of 78% as compared to 2008. The decrease is primarily due
to a decrease in sales and the increase in research and development expense. The
net profit also includes the option related cost of $1,828,907 incurred during
the year 2009 for the issuance of options to purchase 2,600,000 shares of common
stock to Company employees and directors, as well as the issuance of options to
purchase 350,000 shares of common stock to consultants as payment for business
development services to the Company. In the year ended 2009, the Company also
incurred a write down of $152,282 for slow moving inventory.




RESULTS OF OPERATIONS –
THREE MONTHS ENDED DECEMBER 31, 2009 AS COMPARED TO THREE MONTHS ENDED DECEMBER
31, 2008





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 Three
                      Months Ended
                      December 31,
                      2009
                    
                    
                    % Of
                      Revenue
                    
                    
                    For Three
                      Months Ended
                      December 31,
                      2008
                    
                    
                    % Of
                      Revenue
                    
                    
                    Change In
                      Amount
                    
                    
                    Change
                      In %REVENUES,
      NET
                    
                    $
                    14,716,645
                    
                    
                    
                    100.0
                    %
                    
                    $
                    10,078,810
                    
                    
                    
                    100.0
                    %
                    
                    $
                    4,645,835
                    
                    
                    
                    46.1
                    %COST
      OF GOODS SOLD
                    
                    
                    (11,286,010
                    )
                    
                    
                    (76.7
                    )%
                    
                    
                    (8,082,043
                    )
                    
                    
                    (80.3
                    )%
                    
                    
                    (3,203,967
                    )
                    
                    
                    39.7
                    %GROSS
      PROFIT
                    
                    
                    3,430,635
                    
                    
                    
                    23.3
                    %
                    
                    
                    1,988,767
                    
                    
                    
                    19.7
                    %
                    
                    
                    1,441,867
                    
                    
                    
                    72.5
                    %Research
      and development
                    
                    
                    574,183
                    
                    
                    
                    3.9
                    %
                    
                    
                    363,995
                    
                    
                    
                    3.6
                    %
                    
                    
                    210,188
                    
                    
                    
                    57.7
                    %Selling
      and distribution expenses
                    
                    
                    760,230
                    
                    
                    
                    5.2
                    %
                    
                    
                    120,945
                    
                    
                    
                    1.2
                    %
                    
                    
                    639,285
                    
                    
                    
                    528.6
                    %General
      and administrative expenses
                    
                    
                    606,927
                    
                    
                    
                    4.1
                    %
                    
                    
                    563,410
                    
                    
                    
                    5.6
                    %
                    
                    
                    43,517
                    
                    
                    
                    7.7
                    %INCOME
      FROM OPERATIONS
                    
                    
                    1,489,295
                    
                    
                    
                    10.1
                    %
                    
                    
                    940,416
                    
                    
                    
                    9.3
                    %
                    
                    
                    548,879
                    
                    
                    
                    58.4
                    %Interest
      expense, net
                    
                    
                    (617,513
                    )
                    
                    
                    (4.2
                    )%
                    
                    
                    (492,551
                    )
                    
                    
                    (4.9
                    )%
                    
                    
                    (124,962
                    )
                    
                    
                    25.4
                    %Government
      grants
                    
                    
                    -
                    
                    
                    
                    0
                    %
                    
                    
                    7,295
                    
                    
                    
                    0.1
                    %
                    
                    
                    (7,295
                    )
                    
                    
                    (100
                    )%Forgiveness
      of debt
                    
                    
                    -
                    
                    
                    
                    0
                    %
                    
                    
                    10,385
                    
                    
                    
                    0.1
                    %
                    
                    
                    (10,385
                    )
                    
                    
                    (100
                    )%Forfeiture
      of customer deposits
                    
                    
                    -
                    
                    
                    
                    0
                    %
                    
                    
                    6,393
                    
                    
                    
                    0.1
                    %
                    
                    
                    (6,393
                    )
                    
                    
                    (100
                    )%Other
      income, net
                    
                    
                    49,712
                    
                    
                    
                    0.4
                    %
                    
                    
                    62,763
                    
                    
                    
                    0.6
                    %
                    
                    
                    (13,051
                    )
                    
                    
                    (20.8
                    )%INCOME
      FROM OPERATIONS BEFORE INCOME TAXES
                    
                    
                    921,493
                    
                    
                    
                    6.3
                    %
                    
                    
                    534,702
                    
                    
                    
                    5.3
                    %
                    
                    
                    386,791
                    
                    
                    
                    72.3
                    %INCOME
      TAX (EXPENSE) BENEFIT
                    
                    
                    (140,973
                    )
                    
                    
                    (1.0
                    )%
                    
                    
                    (93,687
                    )
                    
                    
                    (0.9
                    )%
                    
                    
                    (47,286
                    )
                    
                    
                    50.5
                    %INCOME
      FROM CONTINUING OPERATIONS
                    
                    
                    780,520
                    
                    
                    
                    5.3
                    %
                    
                    
                    441,014
                    
                    
                    
                    4.4
                    %
                    
                    
                    339,506
                    
                    
                    
                    77.0
                    %DISCONTINUED
      OPERATIONNET
      GAIN FROMDISCONTINUED
      OPERATION
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -NET
      (LOSS) INCOME
                    
                    
                    780,520
                    
                    
                    
                    5.3
                    %
                    
                    
                    441,014
                    
                    
                    
                    4.4
                    %
                    
                    
                    339,506
                    
                    
                    
                    77.0
                    %




- 21
-


(a)
Revenue




For the
three months ended December 31, 2009, our revenue increased by 46% from
$10,070,810 to $14,716,645 as compared to the three months ended December 31,
2008. The global economic crisis which significantly impacted 2008 has eased,
and the global economy, especially the Chinese economy, has shown strong
recovery and enhanced the Company’s sales.





(b) Cost of goods
sold





Cost of
goods sold during the three months ended December 31, 2009 was $11,286,010,
representing a 39.6% increase from the three months ended December 31, 2008,
which corresponds to the Company’s continuous effort on improving the production
efficiency.





(c) Gross
profit





Gross
profit for the three months ended December 31, 2009 has increased $1,441,867,
72.5% from 1,988,767 of the same period of last year, primarily due to the
Company’s promotion and focus on higher margin, higher price
products.





(d) Selling and distribution
expenses





Selling
and distribution expenses were $760,230 for the three months ended December 31,
2009. The significant increase in these expenses was the result of the $673,265
expense for the options issued to consultants for their assistance in exploring
the Chinese market.





(e) General and
administrative expenses





General
and administrative expenses were $606,927 for the three months ended December
31, 2009, as compared to $563,410 for the same period in 2008, representing a
7.7% increase.  Excluding the $315,176 share based compensation
related to options issued to employees, the general and administrative expense
for the three months ended December 31, 2009 decreased 65.4% from same period of
last year.  This decrease reflects the Company’s continuing effort on
cost cutting in this period.





(f) Research and
development





Research
and development expenses were $574,183 for the three months ended December 31,
2009, as compared to $363,995 from the same period in 2008, representing a 57.7%
increase.  The increase was due to additional research and development
efforts on new products and the quality improvements on existing
products.




- 22
-


(g) Net interest
expense





Net
interest expense was $617,513 for the three months ended December 31, 2009, as
compared to $492,551 for the same period last year, an increase of 25.4%. This
increase was primarily due to the decreased interest income generated from note
receivables during the three months ended December 31, 2009.  At
December 31, 2009, the balance of the Company’s note receivables were
$2,267,599, a significant decrease from $13,235,961 as of December 31,
2008.





(h) Net (loss)
income





The
operating performance of the Company for the three months ended December 31,
2009 resulted in a net profit of $780,520 as compared to $441,104 for the same
period last year, an increase of 170%.  This increase was particularly
significant considering it takes into account an expense of
$988,399 related to options issued to consultants and
employees.




LIQUIDITY
AND CAPITAL RESOURCES





Cash
Flow





Net cash
flow used in operating activities was ($8,531,606) for the year ended December
31, 2009, as compared to net cash flow provided by operating activities of
$15,147,665 for the year ended December 31, 2008. The difference is mainly
attributable to the decrease of net income and net cash outflow caused by
increase in account receivable, inventory, prepayments, and decrease in account
payable. For the year ended December 31, 2009, the change in account receivable
and account payable caused a net cash outflow of ($7,141,861) and ($4,653,358)
respectively, compared to a net cash inflow of $3,680,979 and $3,048,097
respectively for the same reporting period of 2008.





Net cash
flow provided by investing activities was $5,864,137 for the year ended December
31, 2009 as compared to net cash flow used in investing activities of
($22,020,980) for the same reporting period in 2008. This was primarily due to a
net cash inflow from notes receivable of $10,995,353, as compared to a net cash
outflow in notes receivable of ($13,188,108) for the same period last
year.





Net cash
flow provided by financing activities was $2,057,648 for the year ended December
31, 2009, as compared to net cash flow provided by financing activities of
$6,290,243 for the same period of 2008. This is mainly because during the year
ended December 31, 2009, the Company repaid notes payable of ($24,654,718) and
received proceeds from notes payable of $19,475,495, whereas during the same
period in 2008, the Company received an inflow of cash $11,604,426 from the
notes payable.




Working
Capital





The
Company had a working capital deficit of $12,102,868 at December 31, 2009,
which was a decrease from a working capital deficit of $13,949,253 as of
December 31, 2008. The working capital deficit was principally due to the
Company using its own cash and the cash borrowed from bank loans to support the
new plant construction to prepare for the launch of new products targeting the
Chinese market.





As of
December 31, 2009, the Company has credit lines from commercial banks for
$37,003,452, of which $26,326,566 was used at December 31, 2009.





- 23
-




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. Therefore, from time to time, the Company may require extra funding
through short term borrowing from PRC banks or other financing activities if
needed in the near future. On January 21, 2010, the Company issued a total of
$10 million of senior secured convertible notes and warrants exercisable for an
aggregate of 800,000 shares of the Company’s Common Stock, for the use of
working capital.





The
Company has historically financed itself through short-term commercial bank
loans from PRC banks.  The term of these loans are typically for one
year, and upon the payment of all outstanding principal and interest in a
respective loan, the banks have typically rolled over the loans for additional
one-year terms, with adjustments made to the interest rate to reflect prevailing
market rates. We believe that short term bank loans will be available on normal
trade terms if needed.





Off-balance Sheet
Arrangements





As of
December 31, 2009, the aggregated amount of short-term bank loans that are
guaranteed by third parties was $5,850,348, of which $2,925,174 is guaranteed by
Zhejiang Mengdeli Electric Company whose bank loans of $2,486,397 are also
guaranteed by the Company.





On July
21, 2009, Kandi entered into a guarantee contract to serve as guarantor for the
bank loans borrowed from Huaxia Bank Hangzhou branch in the amount of $2,486,397
during the period from July 21, 2009 to July 20, 2010 by Zhejiang Mengdeli
Electronic Co. Ltd (“ZMEC”), a company unrelated to Kandi. Under this guarantee
contract, Kandi shall perform all obligations of ZMEC under the loan contract if
ZMEC fails to perform its obligations as set forth in the loan
contract.





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







Item
      7A.
            Quantitative
      and Qualitative Disclosures About Market
Risk.





Not
applicable.





Item
      8.
            Financial
      Statements and Supplementary Data.




- 24
-




KANDI
TECHNOLOGIES, CORP.




AND
SUBSIDIARIES


CONSOLIDATED
FINANCIAL STATEMENTS




FOR
THE YEARS ENDED




DECEMBER
31, 2009 AND 2008









KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES





CONTENTS





PAGE
              F-1-2
              REPORTS
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMSPAGES
              F-3-4
              CONSOLIDATED
      BALANCE SHEETS AS OF DECEMBER 31, 2009 AND 2008PAGES
              F-5-6
              CONSOLIDATED
      STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER
      31, 2009 AND 2008PAGE
              F-7
              CONSOLIDATED
      STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER
      31, 2009 AND 2008PAGES
              F-8-9
              CONSOLIDATED
      STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2009 AND
      2008PAGES
              F-10-35
              NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2009
      AND 2008









ALBERT
WONG & CO.


CERTIFIED
PUBLIC ACCOUNTANTS


7th
Floor, Nan Dao Commercial Building


359-361
Queen’s Road Central


Hong
Kong


Tel :
2851 7954


Fax: 2545
4086





ALBERT
WONG


B.Soc.,
Sc., ACA., LL.B.,


CPA(Practising)







To:
            The
      board of directors and stockholders
of


Kandi
Technologies, Corp. and Subsidiaries





Report of Independent
Registered Public Accounting Firm





We have
audited the accompanying consolidated balance sheet of Kandi Technologies, Corp.
and subsidiaries (“the Company”) as of December 31, 2009 and the related
consolidated statements of income, stockholders' equity and cash flow for the
year then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.





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





We were
not engaged to examine management’s assertion about the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2009
included in the Company’s Item 9A “Controls and Procedures” in the Annual
Report on Form 10-K and, accordingly, we do not express an opinion
thereon.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Kandi
Technologies, Corp. as of December 31, 2009 and the results of its operations
and its cash flow for the year then ended in conformity with accounting
principles generally accepted in the United States of America.





Hong
      Kong, China
            Albert
      Wong & Co.March
      31, 2010
            Certified
      Public Accountants


F-1




Report
of Independent Registered Public Accounting Firm




To the
Board of Directors and Shareholders of:


Kandi
Technologies Corp. and Subsidiaries





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





We
conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
was not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our
opinion.





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





Weinberg
& Company, P.A.





Boca
Raton, Florida


March 6,
2009




F-2




KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 CONSOLIDATED BALANCE
SHEETS




ASSETS





December 31,
                  
                  
                  December 31,2009
                  
                  
                  2008CURRENT
      ASSETSCash
      and cash equivalents
                  
                  $
                  218,207
                  
                  
                  $
                  141,380Restricted
      cash
                  
                  
                  5,704,984
                  
                  
                  
                  12,550,685Accounts
      receivable, net of allowance for doubtful accounts of $0 and $7,123 as of
      December 31, 2009 and 2008, respectively
                  
                  
                  14,879,968
                  
                  
                  
                  7,715,081Inventories,
      net of reserve for slow moving inventories of $152,278 and $0 as of
      December 31, 2009 and 2008, respectively
                  
                  
                  5,382,760
                  
                  
                  
                  3,207,571Notes
      receivable
                  
                  
                  2,267,599
                  
                  
                  
                  13,235,961Other
      receivables
                  
                  
                  321,336
                  
                  
                  
                  289,315Prepayments
      and prepaid expenses
                  
                  
                  30,083
                  
                  
                  
                  60,017Due
      from employees
                  
                  
                  28,228
                  
                  
                  
                  19,805Advances
      to suppliers
                  
                  
                  1,164,672
                  
                  
                  
                  -Total
      Current Assets
                  
                  
                  29,997,837
                  
                  
                  
                  37,219,815LONG-TERM
      ASSETSPlant
      and equipment, net
                  
                  
                  23,146,833
                  
                  
                  
                  20,832,549Land
      use rights, net
                  
                  
                  10,719,528
                  
                  
                  
                  9,368,403Construction
      in progress
                  
                  
                  -
                  
                  
                  
                  1,913,456Deferred
      taxes
                  
                  
                  207,747
                  
                  
                  
                  265,243Total
      Long-Term Assets
                  
                  
                  34,074,108
                  
                  
                  
                  32,379,651TOTAL
      ASSETS
                  
                  $
                  64,071,945
                  
                  
                  $
                  69,599,466




See notes
to consolidated financial statements




F-3


KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 CONSOLIDATED BALANCE
SHEETS


LIABILITIES AND
STOCKHOLDERS’ EQUITY




December
      31,
                  
                  
                  December
      31,2009
                  
                  
                  2008CURRENT
      LIABILITIESAccounts
      payable
                  
                  $
                  4,738,543
                  
                  
                  $
                  9,371,105Other
      payables and accrued expenses
                  
                  
                  1,871,020
                  
                  
                  
                  1,151,245Short-term
      bank loans
                  
                  
                  26,326,566
                  
                  
                  
                  26,115,375Customer
      deposits
                  
                  
                  39,371
                  
                  
                  
                  676,548Notes
      payable
                  
                  
                  7,931,540
                  
                  
                  
                  13,081,026Income
      tax payable
                  
                  
                  201,564
                  
                  
                  
                  -Due
      to employees
                  
                  
                  88,306
                  
                  
                  
                  10,502Due
      to related party
                  
                  
                  841,251
                  
                  
                  
                  623,767Deferred
      taxes
                  
                  
                  62,544
                  
                  
                  
                  139,500Total
      Current Liabilities
                  
                  
                  42,100,705
                  
                  
                  
                  51,169,068LONG-TERM
      LIABILITIESTotal
      Long-Term Liabilities
                  
                  
                  -
                  
                  
                  
                  -TOTAL
      LIABILITIES
                  
                  
                  42,100,705
                  
                  
                  
                  51,169,068CONMMITMENTS
      AND CONTINGENCIES
                  
                  
                  -
                  
                  
                  
                  -STOCKHOLDERS’
      EQUITYCommon
      stock, $0.001 par value; 100,000,000 shares authorized; 19,961,000 and
      19,961,000 shares issued and outstanding at December 31, 2009 and December
      31, 2008, respectively
                  
                  
                  19,961
                  
                  
                  
                  19,961Additional
      paid-in capital
                  
                  
                  8,967,012
                  
                  
                  
                  7,138,105Retained
      earnings (the restricted portion is $890,912 and $534,040 at December 31,
      2009 and December 31, 2008, respectively)
                  
                  
                  11,046,999
                  
                  
                  
                  10,047,198Accumulated
      other comprehensive income
                  
                  
                  1,937,268
                  
                  
                  
                  1,225,134TOTAL
      STOCKHOLDERS’ EQUITY
                  
                  
                  21,971,240
                  
                  
                  
                  18,430,398TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                  
                  $
                  64,071,945
                  
                  
                  $
                  69,599,466




See notes
to consolidated financial statements




F-4




KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 FOR THE YEARS ENDED DECEMBER
31, 2009 AND 2008




2009
              
              
              2008REVENUES,
      NET
              
              $
              33,827,762
              
              
              $
              40,513,788COST
      OF GOODS SOLD
              
              
              25,613,087
              
              
              
              30,919,868GROSS
      PROFIT
              
              
              8,214,675
              
              
              
              9,593,920Research
      and development
              
              
              2,341,393
              
              
              
              839,989Selling
      and marketing
              
              
              1,023,210
              
              
              
              477,413General
      and administrative
              
              
              2,573,509
              
              
              
              1,836,394INCOME
      FROM CONTINUING OPERATIONS
              
              
              2,276,563
              
              
              
              6,440,124Interest
      expense
              
              
              (1,811,930
              )
              
              
              (2,334,097
              )Interest
      income
              
              
              333,654
              
              
              
              316,774Government
      grants
              
              
              127,347
              
              
              
              64,595Forfeiture
      of customer deposits
              
              
              -
              
              
              
              6,186Forgiveness
      of debt
              
              
              -
              
              
              
              10,049Other,
      net
              
              
              361,745
              
              
              
              100,331INCOME
      FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
              
              
              1,287,379
              
              
              
              4,603,962INCOME
      TAX EXPENSE
              
              
              (287,578
              )
              
              
              (9,605
              )INCOME
      FROM CONTINUING OPERATIONS
              
              
              999,801
              
              
              
              4,594,357DISCONTINUED
      OPERATIONLoss
      from discontinued operation
              
              
              -
              
              
              
              (33,398
              )Gain
      from disposition of discontinued operation
              
              
              -
              
              
              
              361,119NET
      GAIN FROMDISCONTINUED
      OPERATION
              
              
              -
              
              
              
              327,721NET
      INCOME
              
              
              999,801
              
              
              
              4,922,078OTHER
      COMPREHENSIVE INCOMEForeign
      currency translation
              
              
              712,134
              
              
              
              466,779




See notes
to consolidated financial statements




F-5




KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 FOR THE YEARS ENDED DECEMBER
31, 2009 AND 2008




2009
                
                
                2008COMPREHENSIVE
      INCOME
                
                $
                1,711,935
                
                
                $
                5,388,857WEIGHTED
      AVERAGE SHARES OUTSTANDING BASIC
                
                
                19,961,000
                
                
                
                19,961,000DILUTED
                
                
                21,478,717
                
                
                
                19,961,000INCOME
      PER SHARE FROM CONTINUING OPERATIONS, BASIC
                
                $
                0.05
                
                
                $
                $0.23DILUTED
                
                $
                0.05
                
                
                $
                0.23INCOME
      PER SHARE FROM NET GAIN FROM DISCONTINUED OPERATION, BASIC AND
      DILUTED
                
                $
                -
                
                
                $
                0.02NET
      INCOME PER SHARE, BASIC
                
                $
                0.05
                
                
                $
                0.25NET
      INCOME PER SHARE, DILUTED
                
                $
                0.05
                
                
                $
                0.25




See notes
to consolidated financial statements




F-6


KANDI TECHNOLOGIES,
CORP.


AND
SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY


FOR THE YEARS ENDED DECEMBER
31, 2009 AND 2008




Common Stock
                            
                            
                            Additional
                            
                            
                            
                            
                            
                            Accumulated
                              OtherShares
                            
                            
                            Par Value
                            
                            
                            Paid-in
                              Capital
                            
                            
                            Retained
                              Earnings
                            
                            
                            Comprehensive
                              Income
                            
                            
                            TotalBALANCE AT DECEMBER 31,
2007
                            
                            
                            19,961,000
                            
                            
                            $
                            19,961
                            
                            
                            $
                            7,138,105
                            
                            
                            $
                            5,125,120
                            
                            
                            $
                            758,355
                            
                            
                            $
                            13,041,541Foreign
      currency translation gain
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            466,779
                            
                            
                            
                            466,779Net
      income
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            4,922,078
                            
                            
                            
                            -
                            
                            
                            
                            4,922,078BALANCE AT DECEMBER 31,
2008
                            
                            
                            19,961,000
                            
                            
                            $
                            19,961
                            
                            
                            $
                            7,138,105
                            
                            
                            $
                            10,047,198
                            
                            
                            $
                            1,225,134
                            
                            
                            $
                            18,430,398Stock
      option issuance
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            1,828,907
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            1,828,907Foreign
      currency translation gain
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            712,134
                            
                            
                            
                            712,134Net
      income
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            999,801
                            
                            
                            
                            -
                            
                            
                            
                            999,801BALANCE AT DECEMBER 31,
2009
                            
                            
                            19,961,000
                            
                            
                            $
                            19,961
                            
                            
                            $
                            8,967,012
                            
                            
                            $
                            11,046,999
                            
                            
                            $
                            1,937,268
                            
                            
                            $
                            21,971,240




See notes
to consolidated financial statements




F-7




KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOW
 FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008




2009
                  
                  
                  2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                  
                  $
                  999,801
                  
                  
                  $
                  4,922,078Net
      gain from discontinued operation
                  
                  
                  -
                  
                  
                  
                  (327,721
                  )Income
      from continuing operations
                  
                  
                  999,801
                  
                  
                  
                  4,594,357Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                  
                  
                  3,436,004
                  
                  
                  
                  1,976,369Provision
      for doubtful accounts
                  
                  
                  -
                  
                  
                  
                  5,308Deferred
      taxes
                  
                  
                  (19,460
                  )
                  
                  
                  9,605Forgiveness
      of debt
                  
                  
                  -
                  
                  
                  
                  (10,049
                  )Forfeiture
      of customer deposits
                  
                  
                  -
                  
                  
                  
                  (6,186
                  )Option
      issue cost
                  
                  
                  1,828,907
                  
                  
                  
                  -Changes
      in operating assets and liabilities, net of effects of
      acquisition:(Increase)
      Decrease In:Accounts
      receivable
                  
                  
                  (7,141,861
                  )
                  
                  
                  3,680,979Inventories
                  
                  
                  (2,166,048
                  )
                  
                  
                  85,959Other
      receivables
                  
                  
                  (31,284
                  )
                  
                  
                  127,137Due
      from employees
                  
                  
                  69,367
                  
                  
                  
                  320Prepayments
      and prepaid expenses
                  
                  
                  (1,133,979
                  )
                  
                  
                  (42,243
                  )Increase
      (Decrease) In:Accounts
      payable
                  
                  
                  (4,653,358
                  )
                  
                  
                  3,048,097Other
      payables and accrued liabilities
                  
                  
                  717,365
                  
                  
                  
                  772,570Customer
      deposits
                  
                  
                  (638,515
                  )
                  
                  
                  199,412Income
      tax payable
                  
                  
                  201,455
                  
                  
                  
                  -Net
      cash (used in) provided by operating activities from continuing
      operations
                  
                  
                  (8,531,606
                  )
                  
                  
                  14,441,635Net
      cash provided by operating activities from discontinued
      operation
                  
                  
                  -
                  
                  
                  
                  706,030Net
      cash (used in) provided by operating activities
                  
                  
                  (8,531,606
                  )
                  
                  
                  15,147,665CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of plant and equipment
                  
                  
                  (1,856,993
                  )
                  
                  
                  (482,581
                  )Addition
      to construction in progress
                  
                  
                  (2,382,372
                  )
                  
                  
                  (8,427,605
                  )Purchase
      of a subsidiary, net of cash acquired
                  
                  
                  -
                  
                  
                  
                  (44,129
                  )Issuance
      of notes receivable
                  
                  
                  (10,013,921
                  )
                  
                  
                  (19,284,461
                  )Proceeds
      from disposal of fixed assets
                  
                  
                  -
                  
                  
                  
                  121,443Repayments
      of notes receivable
                  
                  
                  21,009,274
                  
                  
                  
                  6,096,353Purchase
      of land use right
                  
                  
                  (891,851
                  )
                  
                  
                  -Net
      cash provided by (used in) investing activities from continuing
      operations
                  
                  
                  5,864,137
                  
                  
                  
                  (22,020,980
                  )Net
      cash provided by investing activities from discontinued
      operation
                  
                  
                  -
                  
                  
                  
                  -Net
      cash provided by (used in) investing activities
                  
                  
                  5,864,137
                  
                  
                  
                  (22,020,980
                  )




See notes
to consolidated financial statements




F-8




KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOW
 FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008




2009
                  
                  
                  2008CASH
      FLOWS FROM FINANCING ACTIVITIES:Restricted
      cash
                  
                  
                  6,873,207
                  
                  
                  
                  (11,183,462
                  )Proceeds from short-term bank loans
                  
                  
                  32,159,605
                  
                  
                  
                  37,099,213Repayments of short-term bank loans
                  
                  
                  (32,013,425
                  )
                  
                  
                  (31,853,701
                  )Proceeds
      from notes payable
                  
                  
                  19,475,495
                  
                  
                  
                  13,063,385Repayments
      of notes payable
                  
                  
                  (24,654,718
                  )
                  
                  
                  (1,458,959
                  )Repayments of advances to related parties
                  
                  
                  217,484
                  
                  
                  
                  623,767Net cash provided by financing activities from continuing
      operations
                  
                  
                  2,057,648
                  
                  
                  
                  6,290,243Net cash used in financing activities from discontinued
      operation
                  
                  
                  -
                  
                  
                  
                  -Net
      cash provided by financing activities
                  
                  
                  2,057,648
                  
                  
                  
                  6,290,243NET
      DECREASE IN CASH AND CASH EQUIVALENTS
                  
                  
                  (609,821
                  )
                  
                  
                  (583,072
                  )Effect
      of exchange rate changes on cash
                  
                  
                  686,648
                  
                  
                  
                  (424,688
                  )Cash and cash equivalents at beginning of year
                  
                  
                  141,380
                  
                  
                  
                  1,149,140CASH AND CASH EQUIVALENTS AT END OF
      YEAR
                  
                  $
                  218,207
                  
                  
                  $
                  141,380SUPPLEMENTARY
      CASH FLOW INFORMATIONIncome
      taxes paid
                  
                  $
                  105,474
                  
                  
                  
                  -Interest
      paid
                  
                  $
                  1,566,904
                  
                  
                  $
                  2,204,006




SUPPLEMENTAL
NON-CASH DISCLOSURES:




During
the years ended December 31, 2009 and 2008, $4,299,554 and $7,835,980 were
transferred from construction in progress to plant and equipment,
respectively.


See notes
to consolidated financial statements


F-9




KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
 
 NOTE
1 - ORGANIZATION AND PRINCIPAL ACTIVITIES
 
 Stone
Mountain Resources, Inc. (“Stone Mountain “) was incorporated under the laws of
the State of Delaware on March 31, 2004. On August 13, 2007, Stone Mountain
Resources, Inc. changed its name to Kandi Technologies, Corp. (the
“Company”).
 
 On June
29, 2007, pursuant to the share exchange agreement between Stone Mountain
Resources, Inc., Continental Development Limited, (“Continental”) and
Excelvantage (Continental’s sole shareholder), Stone Mountain issued 12,000,000
shares of its common stock to Excelvantage, in exchange for 100% of the common
stock of Continental. As a result of the share exchange, Continental became a
wholly-owned subsidiary of Stone Mountain. Kandi Technologies, Corp. conducts
its operations through its wholly owned subsidiary, Zhejiang Kandi Vehicles Co.
Ltd., a People’s Republic of China (“PRC”) company.
 
 On June
24, 2008 the Company closed its acquisition of 100% of the shares of Kandi
Special Vehicles Co., Ltd (“KSV”), after which KSV became a wholly-owned
subsidiary of the Company. The acquisition was accounted for as a purchase in
accordance with Accounting Standards Codification (“ASC”) 805 “Business
Combinations.” The consolidated statements of income include the results of
operations of KSV at the date of acquisition. On March 10, 2009, KSV changed its
name to Kandi New Energy Vehicles Co., Ltd, (“KNE”). On June 11, 2009, KNE
changed its name back to KSV.
 
 On May 9,
2008, the Company sold Zhejiang Yongkang Top Import & Export Co., Ltd.
(“Dingji”), a subsidiary of the Company, to certain individuals. In accordance
with ASC 360, “Property, Plant, and Equipment,” the results of operations of
Dingji as of the disposal date May 9, 2008 are removed from the detailed
financial statement line items to the “discontinued operation” of the Company’s
financial statements.
 
 The
primary operations of the Company are the design, development, manufacturing,
and commercializing of electrical vehicle, all-terrain vehicles, go-karts, and
specialized automobile related products for the PRC and global export markets.
Sales are made to dealers in Asia, North America, Europe and
Australia.
 
 NOTE
2 - LIQUIDITY
 
 The
Company’s working capital deficit is $12,102,868 as of December 31, 2009. As of
December 31, 2009, the Company has credit lines from commercial banks for
$37,003,452, of which $26,326,566 was used at December 31, 2009.
 
 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. Therefore, from time to time, the Company may require additional funding
through short term borrowing from PRC banks or other financing activities if
needed in the near future. Nevertheless, the Company believes that financing
will be available on normal trade terms if needed.
 
 NOTE
3 - BASIS OF PRESENTATION
  The
Company maintains its general ledger and journals with the accrual method
accounting for financial reporting purposes. The financial statements and notes
are representations of management. Accounting policies adopted by the Company
conform to generally accepted accounting principles in the United States of
America and have been consistently applied in the presentation of financial
statements.
   F-10
  KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
 
 NOTE
4 – PRINCIPLES OF CONSOLIDATION
 
 The
consolidated financial statements include the accounts of Kandi Technologies,
Corp., and the following subsidiaries:
 
 (i)
              Continental
      Development Ltd., (“Continental”) (a wholly-owned subsidiary of the
      Company)
 (ii)
              Zhejiang
      Kandi Vehicles Co. Ltd., (“Zhejiang Kandi”) (a wholly-owned subsidiary of
      Continental)
 (iii)
              Kandi
      Special Vehicles Co., Ltd, (“KSV”, formerly known as Kandi New Energy
      Vehicles Co. Ltd.) (a wholly-owned subsidiary of the
    Company)
 
 Inter-company
accounts and transactions have been eliminated in consolidation.
 
 NOTE
5 – USE OF ESTIMATES
 
 The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States 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 those estimates.
 
 NOTE
6 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 (a)  Economic
and Political Risks
 
 The
Company’s operations are conducted in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC, and by the general state
of the PRC economy.
 
 The
Company’s operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, the
political, economic and legal environment and foreign currency exchange. The
Company’s results may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency
conversion, remittances abroad, and rates and methods of taxation, among other
things.
  F-11
  KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
 
 NOTE
6 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
 (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 December 31, 2009 are as follows:
 
 Fair Value Measurements at Reporting Date Using Quoted Prices inCarrying value as
                        of December 31,
                      
                      
                      Active Markets
                        for Identical
                        Assets
                      
                      
                      Significant Other
                        Observable Inputs
                      
                      
                      Significant
                        Unobservable
                        Inputs2009
                      
                      
                      (Level 1)
                      
                      
                      (Level 2)
                      
                      
                      (Level 3)Cash
      and cash equivalents
                      
                      $
                      218,207
                      
                      
                      $
                      218,207
                      
                      
                      
                      -
                      
                      
                      
                      -Restricted
      cash
                      
                      $
                      5,704,984
                      
                      
                      $
                      5,704,984
                      
                      
                      
                      -
                      
                      
                      
                      -
 
 Cash and
cash equivalents consist primarily of high 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.
 
 (c)
Cash and Cash Equivalents
 
 The
Company considers highly liquid investments purchased with original maturities
of three months or less to be cash equivalents.
 
 Restricted
cash on December 31, 2009 and 2008 represent time deposits on account to secure
short-term bank loans and notes payable. Also see Notes 15 and 16.
 
 (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.
  F-12
  KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
 
 NOTE
6 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
 (e)
Accounts Receivable
 
 Accounts
receivable are recognized and carried at original invoice amount less allowance
for any uncollectible amounts. An estimate for doubtful accounts is made when
collection of the full amount is no longer probable. At December 31, 2009 and
2008, the Company has an allowance for doubtful accounts of $0 and $7,123,
respectively.
 
 (f)
Prepayments
 
 Prepayments
represent cash paid in advance to suppliers for raw materials
purchases.
 
 (g)
Plant and Equipment
 
 Plant and
equipment are carried at cost less accumulated depreciation and amortization.
Depreciation is provided over their estimated useful lives, using the
straight-line method. Leasehold improvements are amortized over the life of the
asset or the term of the lease, whichever is shorter. Estimated useful lives are
as follows:
 
 Buildings
                30
      yearsMachinery
                10
      yearsMotor
      vehicles
                5
      yearsOffice
      equipment
                5
      yearsMoulds
                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.
 
 (h)
Construction in Progress
 
 Construction
in progress represents direct costs of construction or the acquisition cost of
buildings or machinery and design fees. Capitalization of these costs ceases and
the construction in progress is transferred to plant and equipment when
substantially all the activities necessary to prepare the assets for their
intended use are completed. No depreciation is provided until the assets are
completed and ready for their intended use.
 
 (i)
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.
  F-13
  KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
 
 NOTE
6 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
 (j)
Accounting for the Impairment of Long-Lived Assets
 
 The Group
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.
 
 (k)
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.
 
 The
majority of the Company’s revenue results from sales contracts with distributors
and revenue are recorded upon the shipment of goods. Management conducts credit
background checks for new customers as a means to reduce the subjectivity of
assuring collectibility.
 
 (l)
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 $2,341,393 and $839,989 for the years ended December
31, 2009 and 2008, respectively.
 
 (m)
Government Grant
 
 Grants
received from the PRC Government for assisting in the Company’s technical
research and development efforts are netted against the relevant research and
development costs incurred when the proceeds are received or
collectible.
 
 During
2009 and 2008, $127,347 and $64,595 was received from the PRC Government as a
reward for the Company’s contribution to the local economy.
  F-14
  KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
 
 NOTE
6 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
 (n)
Retirement Benefits
 
 Retirement
benefits in the form of contributions under defined contribution retirement
plans to the relevant authorities are charged as expenses as incurred. The
retirement benefits expense for 2009 and 2008 are $87,214 and $69,990
respectively and are included in general and administrative
expenses.
 
 (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
year.
 
 December 31,
                      2009
                    
                    
                    December 31,
                      2008Period
      end RMB : USD exchange rate
                    
                    
                    6.8372
                    
                    
                    
                    6.8542Average
      yearly RMB : USD exchange rate
                    
                    
                    6.8409
                    
                    
                    
                    7.0842
 
 (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.
  F-15
  KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
 
 NOTE
6 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
 (r)
Segments
 
 The
Company operates in one business segment, development, manufacturing, and
commercialization of mini cars, all-terrain vehicles, go-karts, and special
automobile related products.
 
 (s)
Stock Option Cost
 
 The
Company’s stock option cost is recorded in accordance with ASC 718.
 
 The fair
value of stock options is estimated using the Black-Scholes model. The Company’s
expected volatility assumption is based on the historical volatility of 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
compensation expense recognized is based on awards expected to vest, and there
were no estimated forfeitures. ASC 718 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 stock
option based expense for the year ended December 31, 2009 is $1,828,907. Also
see Note 18.
  F-16
  KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
 
 NOTE
7 – NEW ACCOUNTING PRONOUNCEMENTS
 
 Recently
Implemented Standards
 
 ASC 105,
Generally Accepted Accounting Principles (“ASC 105”) (formerly Statement of
Financial Accounting Standards No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles a
replacement of FASB Statement No. 162) reorganized by topic existing
accounting and reporting guidance issued by the Financial Accounting Standards
Board (“FASB”) into a single source of authoritative generally accepted
accounting principles (“GAAP”) to be applied by nongovernmental entities. All
guidance contained in the Accounting Standards Codification (“ASC”) carries an
equal level of authority. Rules and interpretive releases of the Securities and
Exchange Commission (“SEC”) under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. Accordingly, all other
accounting literature will be deemed “non-authoritative.” ASC 105 is effective
on a prospective basis for financial statements issued for interim and annual
periods ending after September 15, 2009. The Company has implemented the
guidance included in ASC 105 as of July 1, 2009. The implementation of this
guidance changed the Company’s references to GAAP authoritative guidance but did
not impact the Company’s financial position or results of
operations.
 
 ASC 855,
Subsequent Events (“ASC 855”) (formerly Statement of Financial Accounting
Standards No. 165, Subsequent Events) includes guidance that was issued by
the FASB in May 2009, and is consistent with current auditing standards in
defining a subsequent event. Additionally, the guidance provides for disclosure
regarding the existence and timing of a company’s evaluation of its subsequent
events. ASC 855 defines two types of subsequent events, “recognized” and
“non-recognized.” Recognized subsequent events provide additional evidence about
conditions that existed at the date of the balance sheet and are required to be
reflected in the financial statements. Non-recognized subsequent events provide
evidence about conditions that did not exist at the date of the balance sheet
but arose after that date and, therefore; are not required to be reflected in
the financial statements. However, certain non-recognized subsequent events may
require disclosure to prevent the financial statements from being misleading.
This guidance was effective prospectively for interim or annual financial
periods ending after June 15, 2009. The Company implemented the guidance
included in ASC 855 as of July 1, 2009. The effect of implementing this
guidance was not material to the Company’s financial position or results of
operations.
  Recent
Accounting Pronouncements
 
 In August
2009, the FASB issued ASC Update No. 2009-05, Fair Value Measurements and
Disclosures (Topic 820): Measuring Liabilities at Fair Value (“ASC Update
No. 2009-05”). This update amends ASC 820, Fair Value Measurements and
Disclosures and provides further guidance on measuring the fair value of a
liability. The guidance establishes the types of valuation techniques to be used
to value a liability when a quoted market price in an active market for the
identical liability is not available, such as the use of an identical or similar
liability when traded as an asset. The guidance also further clarifies that a
quoted price in an active market for the identical liability at the measurement
date and the quoted price for the identical liability when traded as an asset in
an active market when no adjustments to the quoted price of the asset are
required are both Level 1 fair value measurements. If adjustments are required
to be applied to the quoted price, it results in a level 2 or 3 fair value
measurement. The guidance provided in the update is effective for the first
reporting period (including interim periods) beginning after issuance. The
Company does not expect that the implementation of ASC Update No. 2009-05
will have a material effect on its financial position or results of
operations.
  F-17
  KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
 
 NOTE
7 – NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
  Recent
Accounting Pronouncements (Continued)
 
 In
September 2009, the FASB issued ASC Update No. 2009-12, Fair Value
Measurements and Disclosures (Topic 820): Investments in Certain Entities that
Calculate Net Asset Value per Share (or Its Equivalent) (“ASC Update
No. 2009-12”). This update sets forth guidance on using the net asset value
per share provided by an investee to estimate the fair value of an alternative
investment. Specifically, the update permits a reporting entity to measure the
fair value of this type of investment on the basis of the net asset value per
share of the investment (or its equivalent) if all or substantially all of the
underlying investments used in the calculation of the net asset value is
consistent with ASC 820. The update also requires additional disclosures by each
major category of investment, including, but not limited to, fair value of
underlying investments in the major category, significant investment strategies,
redemption restrictions, and unfunded commitments related to investments in the
major category. The amendments in this update are effective for interim and
annual periods ending after December 15, 2009 with early application
permitted. The Company does not expect that the implementation of ASC Update
No. 2009-12 will have a material effect on its financial position or
results of operations.
 
 In June
2009, FASB issued Statement of Financial Accounting Standards No. 167,
Amendments to FASB Interpretation No. 46(R) (“Statement No. 167”).
Statement No. 167 amends FASB Interpretation No. 46R, Consolidation of
Variable Interest Entities an interpretation of ARB No. 51 (“FIN 46R”) to
require an analysis to determine whether a company has a controlling financial
interest in a variable interest entity. This analysis identifies the primary
beneficiary of a variable interest entity as the enterprise that has (a) the
power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance and (b) the obligation to
absorb losses of the entity that could potentially be significant to the
variable interest entity or the right to receive benefits from the entity that
could potentially be significant to the variable interest entity. The statement
requires an ongoing assessment of whether a company is the primary beneficiary
of a variable interest entity when the holders of the entity, as a group, lose
power, through voting or similar rights, to direct the actions that most
significantly affect the entity’s economic performance. This statement also
enhances disclosures about a company’s involvement in variable interest
entities. Statement No. 167 is effective as of the beginning of the first
annual reporting period that begins after November 15, 2009. Although
Statement No. 167 has not been incorporated into the Codification, in
accordance with ASC 105, the standard shall remain authoritative until it is
integrated. The Company does not expect the adoption of Statement No. 167
to have a material impact on its financial position or results of
operations.
 
 In June
2009, the FASB issued Statement of Financial Accounting Standards No. 166,
Accounting for Transfers of Financial Assets an amendment of FASB Statement
No. 140 (“Statement No. 166”). Statement No. 166 revises FASB
Statement of Financial Accounting Standards No. 140, Accounting for
Transfers and Extinguishment of Liabilities a replacement of FASB Statement 125
(“Statement No. 140”) and requires additional disclosures about transfers
of financial assets, including securitization transactions, and any continuing
exposure to the risks related to transferred financial assets. It also
eliminates the concept of a “qualifying special-purpose entity,” changes the
requirements for derecognizing financial assets, and enhances disclosure
requirements. Statement No. 166 is effective prospectively, for annual
periods beginning after November 15, 2009, and interim and annual periods
thereafter. Although Statement No. 166 has not been incorporated into the
Codification, in accordance with ASC 105, the standard shall remain
authoritative until it is integrated. The Company does not expect the adoption
of Statement No. 166 will have a material impact on its financial position
or results of operations.
  F-18
  KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
 
 NOTE
8 – CONCENTRATIONS
 
 (a)
Customers
 
 The
Company’s major customers for the years ended December 31, 2009 and 2008
accounted for the following percentages of total sales and accounts receivable
as follows:
 
 Sales
                    
                    
                    Accounts ReceivableMajor
                      Customers
                    
                    Year Ended
                      December 31,
                      2009
                    
                    
                    Year Ended
                      December 31,
                      2008
                    
                    
                    December 31,
                      2009
                    
                    
                    December 31,
                      2008Company
      A
                    
                    
                    89
                    %
                    
                    
                    75
                    %
                    
                    
                    91
                    %
                    
                    
                    52
                    %Company
      B
                    
                    
                    8
                    %
                    
                    
                    6
                    %
                    
                    
                    9
                    %
                    
                    
                    8
                    %Company
      C
                    
                    
                    1
                    %
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Company
      D
                    
                    
                    1
                    %
                    
                    
                    1
                    %
                    
                    
                    -
                    
                    
                    
                    1
                    %Company
      E
                    
                    
                    1
                    %
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Company
      F
                    
                    
                    -
                    
                    
                    
                    7
                    %
                    
                    
                    -
                    
                    
                    
                    1
                    %Company
      G
                    
                    
                    -
                    
                    
                    
                    2
                    %
                    
                    
                    -
                    
                    
                    
                    9
                    %
 
 (b)
Suppliers
 
 The
Company’s major suppliers for the years ended December 31, 2009 and 2008
accounted for the following percentage of total purchases and accounts payable
as follows:
 
 Purchases
                    
                    
                    Accounts PayableMajor Suppliers
                    
                    Year Ended
                      December 31,
                      2009
                    
                    
                    Year Ended
                      December 31,
                      2008
                    
                    
                    December 31,
                      2009
                    
                    
                    December 31,
                      2008Company
      I
                    
                    
                    75
                    %
                    
                    
                    79
                    %
                    
                    
                    39
                    %
                    
                    
                    9
                    %Company
      J
                    
                    
                    3
                    %
                    
                    
                    -
                    
                    
                    
                    1
                    %
                    
                    
                    1
                    %Company
      K
                    
                    
                    1
                    %
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Company
      L
                    
                    
                    2
                    %
                    
                    
                    1
                    %
                    
                    
                    1
                    %
                    
                    
                    3
                    %Company
      M
                    
                    
                    1
                    %
                    
                    
                    2
                    %
                    
                    
                    1
                    %
                    
                    
                    2
                    %Company
      N
                    
                    
                    1
                    %
                    
                    
                    2
                    %
                    
                    
                    1
                    %
                    
                    
                    4
                    %Company
      O
                    
                    
                    1
                    %
                    
                    
                    4
                    %
                    
                    
                    2
                    %
                    
                    
                    4
                    %Company
      P
                    
                    
                    -
                    
                    
                    
                    4
                    %
                    
                    
                    -
                    
                    
                    
                    4
                    %Company
      Q
                    
                    
                    1
                    %
                    
                    
                    1
                    %
                    
                    
                    -
                    
                    
                    
                    3
                    %
  F-19
  KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
 
 NOTE
9 – INCOME PER SHARE
 
 Basic
income (loss) per share is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding during
the period. Diluted income 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 stock options
were exercised and if the additional common shares were dilutive. For the year
ended December 31, 2009, Company’s net income is $939,252, and for this period,
and the Company’s average stock price during this period was
$1.92.  If all of the options were exercised, the number of shares of
common stock outstanding would increase to 21,478,717. Also see Note
18.
 
 NOTE
10 - INVENTORIES
 
 Inventories
are summarized as follows:
 
 December 31, 2009
                      
                      
                      December 31, 2008Raw
      material
                      
                      $
                      956,378
                      
                      
                      $
                      988,426Work-in-progress
                      
                      
                      3,785,506
                      
                      
                      
                      1,980,413Finished
      goods
                      
                      
                      793,154
                      
                      
                      
                      238,732Total
      inventories
                      
                      
                      5,535,038
                      
                      
                      
                      3,207,571Less:
      reserve for slowing moving inventories
                      
                      
                      (152,278
                      )
                      
                      
                      -Inventories,
      net
                      
                      $
                      5,382,760
                      
                      
                      $
                      3,207,571
  F-20
  KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
 
 NOTE
11 - NOTES RECEIVABLE
 
 Notes
receivable are summarized as follows:
 
 December 31,
                          2009
                        
                        
                        December 31,
                          2008Notes
      receivable from unrelated companies:Due
      March 31, 2009, interest at 7.2% per annum
                        
                        $
                        -
                        
                        
                        $
                        3,928,997Due
      April 29, 2009, interest at 7.2% per annum
                        
                        
                        -
                        
                        
                        
                        729,480Due
      June 30, 2009, interest at 5.31% per annum
                        
                        
                        -
                        
                        
                        
                        8,147,091Due
      February 24, 2010, interest at 5.0% per annum (subsequently settled on its
      due date)
                        
                        
                        1,146,574
                        
                        
                        
                        -Due
      February 24, 2010, interest at 5.0% per annum (subsequently settled on its
      due date)
                        
                        
                        389,731
                        
                        
                        
                        -Due
      April 29, 2010, interest at 5.31% per annum
                        
                        
                        731,294
                        
                        
                        
                        -Notes
      receivable from unrelated companies
                        
                        
                        2,267,599
                        
                        
                        
                        12,805,568Bank
      acceptance notes:Due
      January 5, 2009
                        
                        
                        -
                        
                        
                        
                        430,393Bank
      acceptance notes
                        
                        
                        -
                        
                        
                        
                        430,393Notes
      receivable
                        
                        $
                        2,267,599
                        
                        
                        $
                        13,235,961
 
 Notes
receivable are unsecured.
  F-21
  KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
 
 NOTE
12 – LAND USE RIGHTS
 
 Land use
rights consist of the following:
 
 December 31, 2009
                    
                    
                    December 31, 2008Cost
      of land use rights
                    
                    $
                    11,168,397
                    
                    
                    $
                    9,575,316Less:
      Accumulated amortization
                    
                    
                    (448,869
                    )
                    
                    
                    (206,913
                    )Land
      use rights, net
                    
                    $
                    10,719,528
                    
                    
                    $
                    9,368,403
 
 On June
24, 2008, the Company acquired a land use right, which expires on December 31,
2053, with a net book value of $9,114,373 in the acquisition of
KSV.
 
 On
December 8, 2009, the Company acquired a land use right, which expires on
December 7, 2059, with a net book value of $891,851.
 
 As of
December 31, 2009 and 2008, the net book value of land use rights pledged as
collateral for bank loans was $2,456,811 and $374,454 respectively. Also see
Note 15.
 
 As of
December 31, 2009 and 2008, the net book value of land use rights pledged as
collateral for bank loans borrowed by Zhejiang Mengdeli Electronic Co., Ltd.
(“ZMEC”), an unrelated party of the Company was $6,274,601 and $8,993,949. Also
see Notes 15 and 19.
 
 The
amortization expense for the years ended December 31, 2009 and 2008 was $241,956
and $131,509, respectively.
 
 Amortization
expense for the next five years and thereafter is as follows:
  2010
                    
                    $
                    259,2402011
                    
                    
                    259,2402012
                    
                    
                    259,2402013
                    
                    
                    259,2402014
                    
                    
                    259,240Thereafter
                    
                    
                    9,423,328Total
                    
                    $
                    10,719,528
  F-22
  KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
 
 NOTE
13 – PLANT AND EQUIPMENT
 
 Plant and
equipment consist of the following:
 
 December 31, 2009
                    
                    
                    December 31, 2008At
      cost:Buildings
                    
                    $
                    12,413,935
                    
                    
                    $
                    8,139,972Machinery
      and equipment
                    
                    
                    9,252,390
                    
                    
                    
                    9,150,387Office
      equipment
                    
                    
                    114,380
                    
                    
                    
                    107,574Motor
      vehicles
                    
                    
                    166,616
                    
                    
                    
                    166,203Moulds
                    
                    
                    10,715,666
                    
                    
                    
                    9,590,51932,662,987
                    
                    
                    
                    27,154,655Less
      : Accumulated depreciationBuildings
                    
                    $
                    (970,725
                    )
                    
                    $
                    (664,872
                    )Machinery
      and equipment
                    
                    
                    (5,601,424
                    )
                    
                    
                    (4,677,133
                    )Office
      equipment
                    
                    
                    (95,295
                    )
                    
                    
                    (85,826
                    )Motor
      vehicles
                    
                    
                    (95,697
                    )
                    
                    
                    (67,049
                    )Moulds
                    
                    
                    (2,753,013
                    )
                    
                    
                    (827,226
                    )(9,516,154
                    )
                    
                    
                    (6,322,106
                    )Plant
      and equipment, net
                    
                    $
                    23,146,833
                    
                    
                    $
                    20,832,549
 
 As of
December 31, 2009 and 2008, the net book value of plant and equipment pledged as
collateral for bank loans was $4,308,435 and $1,404,236, respectively. Also see
Note 14. Depreciation expense for the years ended December 31, 2009 and 2008 was
$3,194,048 and $1,844,860, respectively.
 
 On June
24, 2008, the Company acquired plant and equipment with a fair value of
$3,200,615 in the acquisition of KSV.
  F-23
  KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
 
 NOTE
14 - DUE TO/FROM RELATED PARTIES
 
 (I)  Due
To Related Party
 
 2009
                    
                    
                    2008ELIL
                    (a)
                    
                    $
                    841,251
                    
                    
                    $
                    623,767Total
      due to related party
                    
                    
                    $
                    841,251
                    
                    
                    $
                    623,767
 
 
 (II)  Due
To Employees
 
 2009
                    
                    
                    2008Current
                    
                    
                    $
                    88,306
                    
                    
                    $
                    10,502Total
      due to employees
                    (b)
                    
                    $
                    88,306
                    
                    
                    $
                    10,502
 
 (III)  Due
From Employees
 
 2009
                    
                    
                    2008Current
                    
                    
                    $
                    28,228
                    
                    
                    $
                    19,805Total
      due from employees
                    (c)
                    
                    $
                    28,228
                    
                    
                    $
                    19,805
 
 (a)
              Ever
      Lotts Investment Limited (“ELIL”), is owned by a shareholder of the
      Company.
 
 (b)
              Due
      to employees are interest-free, unsecured and have no fixed repayment
      term.
 
 (c)
              Due
      from employees are interest-free, unsecured and have no fixed repayment
      term. The Company provides these advances for business-related purposes
      only, including for the purchases of raw materials and
      business-related travel in the ordinary course of
      business.
  F-24
  KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
  NOTE
15 – SHORT-TERM BANK LOANS
  Short-term
loans are summarized as follows:
 December 31,
                      2009
                    
                    
                    December 31,
                      2008Loans
      from ICBC-Exploration Zone BranchMonthly
      interest only payments at 6.21% per annum, due March 18, 2009.
      Collateralized by a time deposit.
                    
                    $
                    -
                    
                    
                    $
                    656,532Monthly
      interest only payments at 6.21% per annum, due March 23, 2009.
      Collateralized by a time deposit.
                    
                    
                    -
                    
                    
                    
                    656,532Monthly
      interest only payments at 7.84% per annum, due April 7, 2009, secured by
      the assets of the Company.
                    
                    
                    -
                    
                    
                    
                    729,480Monthly
      interest only payments at 7.47% per annum, due June 4, 2009, secured by
      the assets of the Company.
                    
                    
                    -
                    
                    
                    
                    729,480Monthly
      interest only payments at 7.47% per annum, due August 4, 2009, secured by
      the assets of the Company.
                    
                    
                    -
                    
                    
                    
                    437,688Monthly
      interest only payments at 7.47% per annum, due September 2, 2009, secured
      by the assets of the Company.
                    
                    
                    -
                    
                    
                    
                    393,919Monthly
      interest only payments at 6.93% per annum, due October 8, 2009, secured by
      the assets of the Company.
                    
                    
                    -
                    
                    
                    
                    437,688Monthly
      interest only payments at 6.93% per annum, due October 14, 2009, secured
      by the assets of the Company.
                    
                    
                    -
                    
                    
                    
                    554,405Monthly
      interest only payments at 6.93% per annum, due October 22, 2009, secured
      by the assets of the Company.
                    
                    
                    -
                    
                    
                    
                    510,636Monthly
      interest only payments at 5.58% per annum, due December 4, 2009, secured
      by the assets of the Company.
                    
                    
                    -
                    
                    
                    
                    583,584Monthly
      interest only payments at 5.84% per annum, due April 6, 2010, secured by
      the assets of the Company. Also see Notes 12 and 13.
                    
                    
                    731,294
                    
                    
                    
                    -Monthly
      interest only payments at 5.31% per annum, due April 15,
      2010.  Collateralized by a time deposit. Also see Notes 12 and
      13.
                    
                    
                    1,316,328
                    
                    
                    
                    -Monthly
      interest only payments at 5.31% per annum, due June 3, 2010, secured by
      the assets of the Company. Also see Notes 12 and 13.
                    
                    
                    731,294
                    
                    
                    
                    -Monthly
      interest only payments at 5.31% per annum, due August 10, 2010, secured by
      the assets of the Company. Also see Notes 12 and 13.
                    
                    
                    394,899
                    
                    
                    
                    -
  F-25
  KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
 
 NOTE
15 – SHORT-TERM BANK LOANS (CONTINUED)
 
 December 31,
                    2009
                  
                  
                  December 31,
                    2008Monthly
      interest only payments at 5.31% per annum, due August 11, 2010, secured by
      the assets of the Company. Also see Notes 12 and 13.
                  
                  
                  438,776
                  
                  
                  
                  -Monthly
      interest only payments at 5.31% per annum, due October 11, 2010, secured
      by the assets of the Company. Also see Notes 12 and 13.
                  
                  
                  658,164
                  
                  
                  
                  -Monthly
      interest only payments at 5.31% per annum, due October 13, 2010, secured
      by the assets of the Company. Also see Notes 12 and 13.
                  
                  
                  702,042
                  
                  
                  
                  -Monthly
      interest only payments at 5.31% per annum, due November 12, 2010, secured
      by the assets of the Company. Also see Notes 12 and 13.
                  
                  
                  146,259
                  
                  
                  
                  -Monthly
      interest only payments at 5.31% per annum, due December 3, 2010, secured
      by the assets of the Company. Also see Notes 12 and 13.
                  
                  
                  585,035
                  
                  
                  
                  -Loans
      from Commercial Bank-Jiangnan BranchMonthly
      interest only payments at 8.22% per annum, due January 10, 2009,
      guaranteed by Yongkang Tangxian Colour Metal Die-casting Company and
      pledged by Jingdezhen De'er Industrial Investment Co.,
Ltd.
                  
                  
                  -
                  
                  
                  
                  2,917,919Monthly
      interest only payments at 8.22% per annum, due May 9, 2009, secured by the
      assets of the Company.
                  
                  
                  -
                  
                  
                  
                  1,458,959Monthly
      interest only payments at 5.84% per annum, due January 5, 2010, guaranteed
      by Yongkang Kangli Metal Manufacturing Co. and pledged by Jingdezhen De'er
      industrial investment Co., Ltd. (repaid on its due date).
                  
                  
                  2,925,174
                  
                  
                  
                  -Monthly
      interest only payments at 5.84% per annum, due May 5, 2010, secured by the
      assets of the Company. Also see Notes 12 and 13.
                  
                  
                  1,462,587
                  
                  
                  
                  -
  F-26
  KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
 
 NOTE
15 – SHORT-TERM BANK LOANS (CONTINUED)
 December 31,
                        2009
                      
                      
                      December 31,
                        2008Loans
      from Huaxia BankMonthly
      interest only payments at 8.22% per annum, due September 12, 2009, pledged
      by construction in progress of the Company, Jiangxi De'er Industrial
      Investment Co., Ltd., guaranteed by Zhejiang Kangli Metal Manufacturing
      Company and Kandi Investment Group Co.
                      
                      
                      -
                      
                      
                      
                      2,480,231Monthly
      interest only payments at 5.58% per annum, due September 21, 2010, secured
      by the assets of the Company, guaranteed by Mr.Hu, Zhejiang Kangli Metal
      Manufacturing Company and Kandi Investment Group Co.
                      
                      
                      3,948,985
                      
                      
                      
                      -Loans
      from China Everbright BankMonthly
      interest only payments at 7.23% per annum, due February 5, 2009, pledged
      office building of Mr. Hu Xiaoming and Ms. Ling Yueping, guaranteed by
      Nanlong Group Co., Ltd. and Mr. Hu.
                      
                      
                      -
                      
                      
                      
                      4,376,878Monthly
      interest only payments at 5.58% per annum, due February 22, 2010, pledged
      office building of Mr. Hu Xiaoming and Ms. Ling Yueping, guaranteed by
      Nanlong Group Co., Ltd., and Zhejiang Mengdeli Electric Co., Ltd. (repaid
      on its due date).
                      
                      
                      4,387,761
                      
                      
                      
                      -Loans
      from Shanghai Pudong Development BankMonthly
      interest only payments at 6.72% per annum, due April 8, 2009.
      Collateralized by a time deposit.
                      
                      
                      -
                      
                      
                      
                      1,313,064Monthly
      interest only payments at 6.72% per annum, due April 9, 2009.
      Collateralized by a time deposit.
                      
                      
                      -
                      
                      
                      
                      1,313,064Monthly
      interest only payments at 7.28% per annum, due May 21, 2009, guaranteed by
      Nanlong Group Co., Ltd. and Mr. Hu Xiaoming.
                      
                      
                      -
                      
                      
                      
                      2,917,918Monthly
      interest only payments at 4.78% per annum, due April 28, 2010.
      Collateralized by a time deposit.
                      
                      
                      1,316,328
                      
                      
                      
                      -Monthly
      interest only payments at 5.10% per annum, due November 27, 2010,
      guaranteed by Nanlong Group Co., Ltd. and Mr. Hu Xiaoming.
                      
                      
                      2,925,174
                      
                      
                      
                      -
  F-27
  KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
 
 NOTE
15 – SHORT-TERM BANK LOANS (CONTINUED)
 
 December 31,
                        2009
                      
                      
                      December 31,
                        2008Loans
      from Evergrowing BankMonthly
      interest only payments at 7.62% per annum, due October 23, 2009,
      guaranteed by Zhejiang Shuguang industrial Co., Ltd., Zhejiang Mengdeli
      Electric Company and Mr. Hu Xiaoming.
                      
                      
                      -
                      
                      
                      
                      2,917,918Monthly
      interest only payments at 5.84% per annum, due October 27, 2010,
      guaranteed by Zhejiang Shuguang industrial Co., Ltd., and Zhejiang
      Mengdeli Electric Company.
                      
                      
                      2,925,173
                      
                      
                      
                      -Loans from China Communication Bank-Jinhua
      BranchMonthly
      interest only payments at 8.96% per annum, due February 18, 2009,
      guaranteed by Zhejiang Shuguang industrial Co., Ltd. and Mr. Hu
      Xiaoming.
                      
                      
                      -
                      
                      
                      
                      729,480Monthly
      interest only payments at 5.58% per annum, due February 15, 2010,
      guaranteed by Zhejiang Shuguang industrial Co., Ltd. and Mr. Hu Xiaoming.
      (repaid on its due date)
                      
                      
                      731,293
                      
                      
                      
                      -Total
                      
                      $
                      26,326,566
                      
                      
                      $
                      26,115,375
 
 Interest
expense for the years ended December 31, 2009 and 2008 was $1,571,617, and
$2,140,519, respectively.
 
 As of
December 31, 2009, the aggregated amount of short-term loans that are guaranteed
by various third parties is $5,850,348, among which $2,925,173 is guaranteed by
Zhejiang Mengdeli Electric Co Ltd, whose bank loans of $2,486,397 are also
guaranteed by the Company. Also see Note 18.
  F-28
  KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
 
 NOTE
16 – NOTES PAYABLE
 
 Notes
payable are summarized as follows:
  December 31,
                      2009
                    
                    
                    December 31,
                      2008Bank
      acceptance notes:Due
      January 18, 2009
                    
                    $
                    -
                    
                    
                    $
                    1,458,959Due
      January 31, 2009
                    
                    
                    -
                    
                    
                    
                    875,378Due
      March 17, 2009
                    
                    
                    -
                    
                    
                    
                    1,458,959Due
      March 17, 2009
                    
                    
                    -
                    
                    
                    
                    4,376,878Due
      March 18, 2009
                    
                    
                    -
                    
                    
                    
                    729,480Due
      March 23, 2009
                    
                    
                    -
                    
                    
                    
                    1,458,959Due
      June 12, 2009
                    
                    
                    -
                    
                    
                    
                    1,458,959Due
      June 19, 2009
                    
                    
                    -
                    
                    
                    
                    437,688Due
      March 8, 2010 (subsequently repaid on its due date)
                    
                    
                    1,462,587
                    
                    
                    
                    -Due
      March 24, 2010 (subsequently repaid on its due date)
                    
                    
                    1,462,587
                    
                    
                    
                    -Due
      April 14, 2010
                    
                    
                    1,316,328
                    
                    
                    
                    -Subtotal
                    
                    $
                    4,241,502
                    
                    
                    $
                    12,255,260Notes
      payable to unrelated companies:Due
      March 25, 2009
                    
                    $
                    -
                    
                    
                    $
                    825,766Due
      December 1, 2010
                    
                    
                    3,690,038
                    
                    
                    
                    -Subtotal
                    
                    
                    3,690,038
                    
                    
                    
                    825,766Total
                    
                    $
                    7,931,540
                    
                    
                    $
                    13,081,026
 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 loan transaction. Bank charges for
notes payable were $7,894 and $20,384 in 2009 and 2008,
respectively.
 
 Restricted
cash of $1,462,587 is held as collateral for the following notes payable at
December 31, 2009:
 
 Due
      March 8, 2010 (subsequently repaid on its due date)
                    
                    $
                    1,462,587Due
      March 24, 2010 (subsequently repaid on its due date)
                    
                    
                    1,462,587Total
                    
                    $
                    2,925,174
  F-29
  KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
 
 NOTE
17 – TAXES
 
 (a)
Corporation Income Tax (“CIT”)
 
 On March
16, 2007, the National People’s Congress of China approved the Corporate Income
Tax Law of the People’s Republic of China (the “new CIT law”), which went into
effect on January 1, 2008. In accordance with the relevant tax laws and
regulations of the PRC, the applicable corporate income tax rate is
25%.
 
 Prior to
January 1, 2008, the CIT rate applicable to the Company is 33%. Kandi’s first
profitable tax year for income tax purposes as a foreign-invested company was
2007. 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 is a
subsidiary of the Company and its applicable corporate income tax rate is
25%.
 
 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
790, 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. FIN 48 also
provides guidance on de-recognition, classification, interest and penalties on
income taxes, accounting in interim periods and requires increased disclosures.
As of December 31, 2009, the Company does not have a liability for unrecognized
tax benefits. The Company files income tax returns in the U.S. federal
jurisdiction and various states. The Company is subject to U.S. federal or state
income tax examinations by tax authorities for years after 2005. During the
periods open to examination, the Company has net operating loss 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 December 31, 2009 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
December 31, 2009, 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 year ended December 31, 2009 due to the net operating
loss carry forward in the United States.
  F-30
  KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
 
 NOTE
17 – TAXES (CONTINUED)
 
 Income
tax expense for the years ended December 31, 2009 and 2008 is summarized as
follows:
 
 For the Year Ended
                      December 31,2009
                    
                    
                    2008Current:Provision
      for CIT
                    
                    $
                    307,078
                    
                    
                    $
                    -Deferred:Provision
      for CIT
                    
                    
                    (19,500
                    )
                    
                    
                    9,605Income
      tax expense
                    
                    $
                    287,578
                    
                    
                    $
                    9,605
  The
Company’s income tax expense differs from the “expected” tax expense for the
year ended December 31, 2009 and 2008 (computed by applying the CIT rate of 25%,
respectively to income before income taxes) as follows:
 
 For the Year Ended
                      December 31,2009
                    
                    
                    2008Computed
      "expected" expense
                    
                    $
                    321,845
                    
                    
                    $
                    1,150,990Favorable
      tax rate
                    
                    
                    (307,078
                    )
                    
                    
                    (1,389,213
                    )Permanent
      differences
                    
                    
                    197,414
                    
                    
                    
                    191,896Valuation
      Allowance
                    
                    
                    75,397
                    
                    
                    
                    55,932Income
      tax expense
                    
                    $
                    287,578
                    
                    
                    $
                    9,605
 
 The tax
effects of temporary differences that give rise to the Company’s net deferred
tax assets and liabilities as of December 31, 2009 and 2008 are summarized as
follows:
  F-31
  KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
 
 NOTE
17 – TAXES (CONTINUED)
  December 31,
                    2009
                  
                  
                  December 31,
                    2008Current
      portion:Deferred
      tax assets:Expense
                  
                  $
                  23,028
                  
                  
                  $
                  23,026Subtotal
                  
                  
                  23,028
                  
                  
                  
                  23,026Deferred
      tax liabilities:Sales
      cut-off
                  
                  
                  (85,572
                  )
                  
                  
                  (104,783
                  )Other
                  
                  
                  -
                  
                  
                  
                  (57,743
                  )Subtotal
                  
                  
                  (85,572
                  )
                  
                  
                  (162,526
                  )Total
      deferred tax liabilities – current portion
                  
                  
                  (62,544
                  )
                  
                  
                  (139,500
                  )Non-current
      portion:Deferred
      tax assets:Depreciation
                  
                  
                  504,258
                  
                  
                  
                  561,754Loss
      carried forward
                  
                  
                  75,397
                  
                  
                  
                  55,932Valuation
      allowance
                  
                  
                  (75,397
                  )
                  
                  
                  (55,932
                  )Subtotal
                  
                  
                  504,258
                  
                  
                  
                  561,754Deferred
      tax liabilities:Accumulated
      other comprehensive gain
                  
                  
                  (296,511
                  )
                  
                  
                  (296,511
                  )Subtotal
                  
                  
                  (296,511
                  )
                  
                  
                  (296,511
                  )Total
      deferred tax assets – non-current portion
                  
                  
                  207,747
                  
                  
                  
                  265,243Net
      deferred tax assets
                  
                  $
                  145,203
                  
                  
                  $
                  125,743
  (b)
Tax Holiday Effect
 
 For the
years ended December 31, 2009 and 2008 the PRC corporate income tax rate was
25%. Certain subsidiaries of the Company are entitled to tax exemptions (tax
holidays) for the years ended December 31, 2009 and 2008.
 
 The
combined effects of the income tax expense exemptions and reductions available
to the Company for the years ended December 31, 2009 and 2008 are as
follows:
  For the Year Ended
                        December 312009
                      
                      
                      2008Tax
      holiday effect
                      
                      $
                      307,078
                      
                      
                      $
                      1,389,213Basic
      net income per share effect
                      
                      $
                      0.02
                      
                      
                      $
                      0.07
  F-32
  KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
  NOTE
18 - STOCK OPTIONS AND WARRANTS
 
 (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
October 6, 2009, the Company executed an agreement (“Cooperation Agreement”)
with Wang Rui and Li Qiwen, third-party consultants, whereby Mr. Wang and Mr. Li
are to provide business  development services in China to the Company
in exchange for options to purchase 350,000 shares of the Company’s common stock
at an exercise price of $1.50 per share.   Per the agreement,
250,000 of these options will vest and become exercisable on March 6, 2010, and
100,000 will vest and become exercisable on June 6, 2010.  The options
will expire after ten years.  The options are issued under and subject
to the terms of the Company’s 2008 Omnibus Long-Term Incentive
Plan.  No required dates of service are specified on the consulting
agreement.  No repurchase features or cash settlement provisions are
specified in the terms and conditions of the Notice of Grant of Stock
Option.
 
 The
following is a summary of the stock option activities of the
Company:
 
 Activity
                    
                    
                    Weighted Average
                      Exercise PriceOutstanding
      as of January 1, 2009
                    
                    
                    
                    
                    $Granted
                    
                    
                    2,950,000
                    
                    
                    
                    0.88Exercised
                    
                    
                    -
                    
                    
                    
                    -Cancelled
                    
                    
                    -
                    
                    
                    
                    -Outstanding
      as of December 31, 2009
                    
                    
                    2,950,000
                    
                    
                    
                    0.88
 
 The
following table summarizes information about stock options outstanding as of
December 31, 2009:
 
 Options Outstanding
                    
                    
                    Options ExercisableNumber of
                      shares
                    
                    Exercise
                      Price
                    
                    
                    Remaining
                      Contractual life
                      (in years)
                    
                    
                    Number of
                      shares
                    
                    
                    Exercise
                      Price2,600,000
                    
                    $
                    0.80
                    
                    
                    
                    10
                    
                    
                    
                    2,600,000
                    
                    
                    $
                    0.80350,000
                    
                    
                    1.50
                    
                    
                    
                    10
                    
                    
                    
                    350,000
                    
                    
                    
                    1.50
 
 The fair
value per share of the 2,600,000 options issued to the employees and directors
is $0.7934 per share, while the fair value per share of 350,000 options issued
to Wang Rui and Li Qiwen is $4.25.
 
 These
share-based compensation costs were allocated to selling and marketing expenses
and general and administrative expenses for $673,265 and $1,155,642
respectively.
  F-33
  KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
  NOTE
18 - STOCK OPTIONS AND WARRANTS (CONTINUED)
 
 (b)
Warrants
 
 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 will vest in full and become exercisable upon the
closing of an initial round of financing, as contemplated in the Consulting
Agreement.
 
 Because
the warrant vests only at the date on which an initial round of financing is
closed, the Company will consider the services received only upon such
date.  Prior to the closing of such financing, the warrants and any
related expense will not be recognized. Because the initial round of financing
closed on January 21, 2010, the warrants have no accounting impact in
2009.
 
 NOTE
19 – COMMITMENTS AND CONTINGENCIES
 
 On July 21, 2009, the Company entered
into a guarantee contract to serve as guarantor for the bank loans borrowed from
Huaxia Bank Hangzhou branch in the amount of $2,486,397 during the period from
July 21, 2009 to July 20, 2010 by Zhejiang Mengdeli Electronic Co. Ltd (“ZMEC”),
a company unrelated 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. Also see Note 12 and
Note 15.
 
 NOTE
20 - DISCONTINUED OPERATION
 
 On May 9,
2008, the Company, through its PRC subsidiary Zhejiang Kandi Vehicles Co. Ltd.,
entered into a disposition agreement with certain individuals. Pursuant to the
agreement, the Company agreed to sell all of its interest in Dingji to certain
individuals for $729,480 resulting in a gain of $361,119. This transaction was
completed on May 9, 2008. Thereafter, Dingji was no longer a consolidated
subsidiary of Kandi. In accordance with SFAS 144, “Accounting for the Impairment
or Disposal of Long-Lived Assets,” the results of operations of Dingji are
removed from the detail line items in the Company's financial statements and
presented separately as “discontinued operation”. The loss from discontinued
operation was $33,398 and $329,450 for the years ended December 31, 2008 and
2007, respectively. The gains from disposition of discontinued operation of
$361,119 are reflected in the Company’s consolidated statement of income and
comprehensive income for the years ended December 31, 2008.
  F-34
  KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
 
 NOTE
21 - GEOGRAPHICAL SALES
 
 The
following table shows the breakdown of Kandi’s revenues from its customers by
geographical markets based on the location of the customer during the fiscal
years ended December 31, 2009 and 2008:
  The Years Ended of December 312009
                              
                              
                              2008Sales Revenue
                              
                              Percentage
                              
                              
                              Sales Revenue
                              
                              PercentageNorth
      America
                              
                              
                              3,967,536
                              
                              
                              
                              12
                              %
                              
                              
                              7,292,482
                              
                              
                              
                              18
                              %Europe
                              
                              
                              660,476
                              
                              
                              
                              2
                              %
                              
                              
                              -
                              
                              
                              
                              -China
                              
                              
                              29,199,750
                              
                              
                              
                              86
                              %
                              
                              
                              32,816,168
                              
                              
                              
                              81
                              %Other
      Regions
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              405,138
                              
                              
                              
                              1
                              %Total
                              
                              
                              33,827,762
                              
                              
                              
                              100
                              %
                              
                              
                              40,513,788
                              
                              
                              
                              100
                              %
  NOTE
22 - SUBSEQUENT EVENT
 
 In
preparing these financial statements, the Company evaluated the events and
transactions that occurred from January 1, 2010 through March 31, 2010, the date
these financial statements were issued. The Company has made the required
additional disclosures in reporting periods in which subsequent events
occur.
 
 Under a
Securities Purchase Agreement (“SPA”) among the Company and the investors,
executed on January 21, 2010, the Company issued a total of $10 million of
senior secured convertible notes and warrants exercisable for an aggregate of
800,000 shares of the Company’s Common Stock, for gross proceeds of $10 million
(with expenses totaling $1,137,583).  The 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 the execution
date, the notes were convertible into 1,600,000 shares of Common
Stock.  The 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.  Included in the
associated issuance costs is the fair value of 80,000 warrants issued to a
placement agent.  These warrants have the same terms and conditions as
the warrants issued to the investors.
 
 On March
29, 2010, Hu Xioaming, the Chief Executive Officer, President and Chairman of
the Board of the Company, acquired all of the outstanding shares of ExcelVantage
Group Limited pursuant to a Transfer of Equity Agreement between Mr. Hu and Tim
Ho Man.  As a result, Mr. Hu became the beneficial owner of 12,000,000
shares of the Company’s Common Stock held by ExcelVantage Group
Limited.
 F-35
 
 Item
      9.
                Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure.
 
 None.
 
 Item
      9A.
                Controls
      and Procedures.
 
 (a)
Evaluation of
Disclosure Controls and Procedures
 
 The
Company maintains a system of disclosure controls and procedures that is
designed to ensure that information required to be disclosed by the Company in
this Form 10-K, and in other reports required to be filed under the Securities
Exchange Act of 1934 (the “Exchange Act”), is recorded, processed, summarized
and reported within the time periods specified in the rules and forms for such
filings. Management of the Company, under the direction of the Company's Chief
Executive Officer and Chief Financial Officer, reviewed and performed an
evaluation of the effectiveness of the Company's disclosure controls and
procedures (as defined in Rules 13a-15a(e) and 15d-15(e) under the Exchange Act)
as of December 31, 2009. Based on that review and evaluation, the Chief
Executive Officer and Chief Financial Officer, along with other key management
of the Company, have determined that the disclosure controls and procedures were
effective as of such date.
 
 (b)
Management’s Annual
Report on Internal Control Over Financial Reporting
  Management
is responsible for establishing and maintaining adequate internal control over
financial reporting of the Company. Internal control over financial reporting is
a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the
United Sates of America.
  The
Company’s internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the Company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States of
America, and that receipts and expenditures of the Company are being made only
in accordance with authorizations of management and directors of the Company;
and (iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the Company’s assets that
could have a material effect on the financial statements.
  Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the polices or procedures may deteriorate.
  Management
conducted an evaluation of the effectiveness of internal control over financial
reporting based on the framework in Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on this evaluation, management concluded that the Company’s internal
control over financial reporting was effective as of December 31,
2009.
  Changes
in Internal Control Over Financial Reporting
  In
connection with the evaluation described above, we identified no change in our
internal control over financial reporting (as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended)
during our fiscal year ended December 31, 2009 that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
  - 25
-
 
 Item 9B.
                Other
      Information.
  Submission
of Matters to a Vote of Security Holders
  Two
proposals were submitted to a vote of, and approved by, the stockholders of the
Company at the 2009 annual meeting of stockholders, which was held on December
18, 2009.  The first proposal was for the election of seven nominees
to serve as directors until the end of their respective terms.  The
second proposal was to ratify the appointment of Albert Wong & Co., P.A. as
the Company’s independent registered public accountants for the fiscal year
ending December 31, 2009. Additional information about the proposals can be
found in the Company’s definitive proxy statement filed with the Securities and
Exchange Commission on November 6, 2009.
  Of the
19,961,000 shares of stock issued and outstanding and entitled to vote at the
annual meeting, 17,121,902 shares were represented in person or by proxy, which
constituted approximately 85.7% of the total votes entitled to be cast at the
meeting.  Each share of common stock outstanding is entitled to one
vote.
  Proposal
1 – Election of Directors
  The
voting results for the election of Directors were as follows:
  Number of
                  
                  
                  Number ofShares Voted for
                  
                  
                  Shares WithheldHu
      Xiaoming
                  
                  
                  16,943,468
                  
                  
                  
                  178,434Zhu
      Xiaoying
                  
                  
                  16,943,468
                  
                  
                  
                  178,434Hu
      Wangyuan
                  
                  
                  16,943,468
                  
                  
                  
                  178,434Fong
      Heung Sang
                  
                  
                  16,943,468
                  
                  
                  
                  178,434Zheng
      Mingyang
                  
                  
                  16,943,468
                  
                  
                  
                  178,434Yao
      Zhengming
                  
                  
                  16,928,468
                  
                  
                  
                  193,434Qian
      Min
                  
                  
                  16,943,468
                  
                  
                  
                  178,434
  No
stockholders withheld their votes, and no other person received any
votes.
  Proposal
2  – Ratification of the Appointment of Albert Wong & Co., P.A. to
serve as the Company’s Independent Registered Public Accountants for its year
ending December 31, 2009
  The
voting results for the ratification of the 2009 directors were as
follows:
  For:16,723,476
                  Against:156,546
                  Abstain:241,878
  Although
ratification of the Board’s appointment of the Company’s independent public
accountants by stockholders is not required by our bylaws or otherwise, the
Board of Directors submitted the selection of Albert Wong & Co. to our
stockholders for ratification as a matter of good corporate practice. Prior to
ratification of the appointment by stockholders, the Board’s Audit Committee had
selected and appointed Albert Wong & Co. as the Company’s independent
registered public accountants for the fiscal year ended December 31,
2009.
  Other Items.
  On March
29, 2010, Hu Xioaming, the Chief Executive Officer, President and Chairman of
the Board of the Company, acquired all of the outstanding shares of ExcelVantage
Group Limited pursuant to a Transfer of Equity Agreement between Mr. Hu and Tim
Ho Man.  As a result, Mr. Hu became the beneficial owner of 12,000,000
shares of the Company’s Common Stock held by ExcelVantage Group
Limited.
  - 26
-
  PART
III
 
 Item
      10.
                Directors,
      Executive Officers and Corporate
Governance.
  As of the
date of this report, our directors and executive officers, their ages, positions
with Kandi, and the dates of their initial election or appointment as director
or executive officer are as follows:
 
 Name
                
                Age
                
                Position With Kandi
                
                Served FromHu
      Xiaoming
                
                53
                
                Chairman
      of the Board, President and
                  Chief
      Executive Officer
                
                June
      2007Zhu
      Xiaoying
                
                39
                
                Chief
      Financial Officer, Director
                
                June
      2007Zheng
      Mingyang
                
                56
                
                Director
      (Independent)
                
                June
      2007Fong
      Heung Sang (Dexter)
                
                49
                
                Director
      (Independent)
                
                June
      2007Hu
      Wangyuan
                
                31
                
                Vice
      President, Director
                
                June
      2007Yao
      Zhengming
                
                45
                
                Director
      (Independent)
                
                May
      2008Qian
      Min
                
                46
                
                Director
      (Independent)
                
                May
      2008
  Business
Experience of Directors and Executive Officers
 
 Biographical
Information
 
 Hu
Xiaoming, age 53, has been our Chief Executive Officer, President and Chairman
of the Board of Directors since March 2002.  From October 2003 to
April 2005, Mr. Hu was the Project Manager (Chief Scientist) in WX Pure Electric
Vehicle Development Important Project of Electro-vehicle in State 863
Plan.  Prior to that, from October 1984 to March 2003, Mr. Hu was a
Factory Director in Yongkang Instrument Factory, Factory Director in Yongkang
Mini Car Factory, Chairman and General Manager in Yongkang Vehicle Company,
General Manager in Wan Xiang Electric Vehicle Developing Center, and General
Manager in Wan Xiang Battery Company. He personally owns 3 invention patents, 5
utility model patents and over 10 appearance design patents.
 
 Hu
Wangyuan, age 31, is our Vice President and Director and has been a director and
economist at Kandi since March 2002. Mr. Hu received his MBA at of Hong Kong
Polytechnic University in November 2002.  Mr. Hu has 6 years of
working experience in go-kart marketing, and retains close cooperative
relationships with many suppliers and distributors.
 
 Zhu
Xiaoying, age 39, is our Chief Financial Officer and director.  Ms.
Zhu received a bachelor’s degree in accounting from Hangzhou Electronic
Engineering University and joined Kandi in September 2003 and was appointed
acting CFO and director of the Company.  From January 2000 to
September 2003, she worked as accounting manager for Zhejiang Yongkang
Automobile Manufacture Co.
 
 Zheng
Mingyang, age 56, has been a director of Kandi since 2003.  From May
1992 to September 2003 he worked as the vice president of Yongkang Automobile
Manufacture Co.
 
 Fong
Heung Sang (Dexter), age 49, has been a director of Kandi since July 2007. Mr.
Fong, a U.S. CPA, served as Executive Vice President of Corporate Development of
FUQI International, Inc., a leading designer of high quality precious metal
jewelry in China. From January 2004 to November 2006, Mr. Fong served as the
managing partner of Iceberg Financial Consultants, a financial advisory firm
based in China that advises Chinese clients in capital raising activities in the
United States. From December 2001 to December 2003, Mr. Fong was the Chief
Executive Officer of Holley Communications, a Chinese company that engaged in
CDMA chip and cell phone design. From March 2002 to March 2004, he served as
Chief Executive Officer of Pacific Systems Control Technology, Inc.
(NASDAQ:PFSY), a Chinese company listed on NASDAQ. From May 2001 to November
2001, Mr. Fong was the Director of Finance of PacificeNet, Inc. (NASDAQ:PACT), a
customer relationship management, mobile internet, e-commerce and gaming
technology based in China. From December 1998 to April 2001, he was the Group
Financial Controller of Oregon Scientific, a wholly-owned subsidiary of IDT, a
Hong Kong Stock Exchange-listed company. Mr. Fong also held various positions
with accounting firms in the United States and Hong Kong including Deloitte and
Touche, Ernst and Young, and KPMG. Mr. Fong is also currently serving as an
independent director and audit committee member of a Hong Kong public company,
Universal Technology Inc. Mr. Fong graduated from the Baptist University with a
bachelor’s degree in history in 1982. He also has an MBA from the University of
Nevada at Reno and Masters in Accounting from the University of Illinois at
Urbana Champaign.
 
 Yao
Zhengming, a director of Kandi since May 2008, is the Director of the
Development Bureau of the PRC. Over the course of his career, Mr. Yao worked in
several capacities for the Chinese government, including as Vice Director of the
Finance Bureau in Yongkang (1988-1996), Director of Foreign Trade Bureau
(1996-1997), Director of the Communications Bureau (1998-2003) and Director of
the Science and Technology Bureau (2003-2007). Mr. Yao graduated from the
Zhejiang Institute of Finance and Economics in January 1980.
  - 27
-
 
 Qian Min,
a director of Kandi since May 2008, is the General Manager of Zheshang Bank Co.,
Ltd. Over the course of his career, Mr. Qian worked as a Director and Vice
President of the Agricultural Bank of China, Yongkang Branch from 1990 to 2008.
Mr. Qian received his B.A. from the Southwest University of Science and
Technology, located in Minyang, China in 2005.
 
 Family
Relationships
 
 Hu
Xiaoming, our Chairman, CEO and President is the father of Hu Wangyuan, our Vice
President and Director.
 
 Audit
Committee Financial Expert
 
 Our audit
committee consists of Dexter Fong (Chair), Zheng Mingyang and Yao Zhengming. The
Board has determined that Mr. Fong qualifies as an “audit committee financial
expert,” as defined in applicable SEC rules. The Board made a qualitative
assessment of Mr. Fong’s level of knowledge and experience based on a number of
factors, including formal education and business experience.
 
 Section
16(a) Beneficial Ownership Reporting Compliance
 
 To our
knowledge, the officers, directors and beneficial owners of more than 10% of our
common stock have filed their initial statements of ownership on Form 3 on a
timely basis with respect to fiscal 2009, and the officers, directors and
beneficial owners of more than 10% of our common stock have also filed the
required Forms 4 or 5 on a timely basis with respect to fiscal 2009, except as
follows:
  Number
                    of
                    Late
                    Reports
                  
                  Number of
                    Transactions
                    Not
                    Reported
                    TimelyQian
      Min
                  
                  
                  2
                  
                  2Yao
      Zhengming
                  
                  
                  2
                  
                  2Fong
      Heung Sang
                  
                  
                  1
                  
                  1Hu
      Xiaoming
                  
                  
                  1
                  
                  1Zhu
      Xiaoying
                  
                  
                  1
                  
                  1Hu
      Wangyuan
                  
                  
                  1
                  
                  1Zheng
      Mingyang
                  
                  
                  1
                  
                  1
  Code
of Ethics
 
 Kandi has
adopted a code of ethics that applies to all of our directors and employees,
including our principal executive officer and principal financial officer. A
copy of the Code of Ethics is included as an exhibit to the 8-K filed with the
SEC on November 5, 2007, and is incorporated by reference herein. A copy of our
code of ethics will be provided without charge upon written request to Hu
Xiaoming, Chief Executive Officer, Kandi Technologies, Corp., Jinhua City
Industrial Zone, Jinhua, Zhejiang Province, People’s Republic of China,
321016.
  Item 11.   Executive
Compensation
 
 Compensation
Discussion and Analysis
 
 Executive
Compensation Philosophy
 
 Our
compensation program is designed to attract, retain and motivate highly
qualified executives and drive sustainable growth.  We compensate our
executives named in the summary compensation table, which we refer to as “named
executive officers” or “NEOs,” through a combination of base salary and long
term equity incentive awards. This compensation program is designed to be
competitive with comparable companies and to align executive compensation with
the long-term interests of our stockholders.  Base salary is designed
to reward current performance. Incentive compensation is earned on the basis of
achieving Company and operating level performance objectives, personal
performance objectives, and the executive’s adherence to our core
values.
  - 28
-




Compensation Setting
Process
 
 Compensation decisions regarding our
NEOs are made by our Compensation Committee based on a collective evaluation of
all components of executive pay.  In reviewing the compensation of our
NEOs, the Compensation Committee reviews compensation practices within our
industry, as well as the NEO’s background and experience within our industry, to
determine appropriate market-based compensation levels for base annual salary
and long-term incentives.
 Salary and Incentive
Compensation
 Salary
  Salary is an important element in
attracting highly qualified executives and provides a base level of
compensation.  At the end of the year, each executive’s performance is
evaluated by our Compensation Committee which takes into account the
individual’s performance, responsibilities of the position, adherence to our
core values, experience, and external market conditions and
practices.
  Long-Term
Compensation
 
 We believe it is a customary and
competitive practice to include an equity-based element of compensation to the
overall compensation package for NEOs.  In addition, we believe that a
significant portion of the compensation of our executives, which is the level of
management with the greatest ability to influence our performance, should be
performance-based and therefore at risk.
 
 Awards will be made under the Omnibus
Long-Term Incentive Plan (“LTIP”), which was approved by our stockholders in
December 2008.  As of December 31, 2009, 2,600,000 options have been
granted under the LTIP.
 
 Summary Compensation
Table
 
 The
following table summarizes all compensation received by our current chief
executive officer, President and Chief Financial Officer for the fiscal year
ended December 31, 2009 and December 31, 2008.
  Name and
                                          principal
                                          position
                                        
                                        Year
                                        
                                        Salary
                                          ($)
                                        
                                        Bonus
                                          ($)
                                        
                                        Stock
                                          Awards
                                          ($)
                                        
                                        Option
                                          Awards
                                          ($)
                                        
                                        Non-Equity
                                          Incentive
                                          Plan
                                          Compensation
                                          ($)
                                        
                                        Nonqualified
                                          Deferred
                                          Compensation
                                          Earnings
                                          ($)
                                        
                                        All Other
                                          Compensation
                                          ($)
                                        
                                        Total
                                          ($)Hu
      Xiaoming, CEO and President (1)
                                        
                                        
                                        2009
                                        
                                        26,312
                                        
                                        
                                        —
                                        
                                        —
                                        
                                        355,582
                                        
                                        —
                                        
                                        
                                        —
                                        
                                        —
                                        
                                        381,8942008
                                        
                                        19,231
                                        
                                        
                                        —
                                        
                                        —
                                        
                                        
                                        —
                                        
                                        —
                                        
                                        
                                        —
                                        
                                        —
                                        
                                        19,231Zhu
      Xiaoying,CFO
      (2)
                                        
                                        
                                        2009
                                        
                                        17,542
                                        
                                        
                                        —
                                        
                                        —
                                        
                                        231,128
                                        
                                        —
                                        
                                        
                                        —
                                        
                                        —
                                        
                                        248,6702008
                                        
                                        16,939
                                        
                                        
                                        —
                                        
                                        —
                                        
                                        
                                        —
                                        
                                        —
                                        
                                        
                                        —
                                        
                                        —
                                        
                                        16,939
  (1)
              Mr.
      Hu was appointed as CEO and President of the Company on June 29,
      2007.(2)
              Ms.
      Zhu was appointed as CFO of the Company on June 29,
  2007
  - 29
-
 Director
Compensation
 
 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 following table lists the
number of options each director granted:
  Name
                    
                    OptionsHu
      Xiaoming
                    
                    
                    800,000Zhu
      Xiaoying
                    
                    
                    520,000Hu
      Wangyuan
                    
                    
                    500,000Fong
      Heung Sang
                    
                    
                    20,000Zheng
      Mingyang
                    
                    
                    20,000Yao
      Zhengming
                    
                    
                    20,000Qian
      Min
                    
                    
                    20,000
  Item
      12.
              Security Ownership of Certain
      Beneficial Owners and Management and Related Stockholder
      Matters
  The
following table sets forth information known to us, as of the date of this
report, relating to the beneficial ownership of shares of common stock by each
person who is known by us to be the beneficial owner of more than five percent
of the outstanding shares of common stock; each director; each executive
officer; and all executive officers and directors as a group. We believe that
all persons named in the table have sole voting and investment power with
respect to all shares of common stock shown as being owned by them.
 
 Title of Class
                        
                        Name of Beneficial Owner
                        
                        Amount and Nature
                          of Beneficial
                          Ownership
                        
                        
                        Percent of
                          ClassCommon
      Stock
                        
                        Excelvantage
      Group Limited
                        
                        
                        12,000,000
                        
                        
                        
                        60.12
                        %Common
      Stock
                        
                        Hu
      Xioaming (1)
                        
                        
                        12,000,000
                        
                        
                        
                        60.12
                        %All
      officers and directors
                        
                        
                        
                        
                        12,000,000
                        
                        
                        
                        60.12
                        %
  (1) As
disclosed in Item 9B of this Annual Report, on March 29, 2010, Hu Xiaoming, the
Company’s Chief Executive Officer, President and Chairman of the Board, became
the sole stockholder of Excelvantage Group Limited. Through his position as the
sole stockholder in Excelvantage Group Limited, Mr. Hu has the power to dispose
of or direct the disposition of the one (1) share of common stock he owns in
Excelvantage Limited Group. As a result, Mr. Hu may, under the rules of the
Securities and Exchange Commission, be deemed to be the beneficial owner of the
shares of common stock.
 
 Item
      13.
              Certain
      Relationships and Related Transactions, and Director
      Independence.
 
 Transactions with Related
Persons
 
 None.
 
 Director
Independence
 
 Messrs.
Dexter Fong, Zheng Mingyang, Yao Zhengming and Qian Min are all non-employee
directors, all of whom our Board of Directors has determined are independent
pursuant to NASDAQ rules. All of the members of members of our Audit Committee,
Nominating/Corporate Governance Committee and Compensation Committee are
independent pursuant to NASDAQ rules.
 
 - 30
-
  Item 14.   Principal Accounting Fees and
Services.
  The
following table represents the aggregate fees from our principal accountant,
Albert Wong & Co., and Weinberg & Company, P.A. for years ended December
31, 2009 and 2008 respectively.
 
 2009
                          
                          
                          2008Audit
      Fees
                          
                          $
                          85,000
                          
                          
                          $
                          270,402Audit
      Related Fees
                          
                          
                          -
                          
                          
                          $
                          1,556All
      Other Fees
                          
                          $
                          8,000
                          
                          
                          $
                          3,250TOTAL
      FEES
                          
                          $
                          93,000
                          
                          
                          $
                          275,208
 
 Fees for
audit services include fees associated with the annual audit and reviews of our
quarterly reports, as well as services performed in conjunction with our filing
of the registration statement on Form S-8.  The Audit Committee has
reviewed the above fees for non-audit services and believes such fees are
compatible with the independent registered public accountants’
independence.
 
 Audit Committee Pre-Approval Policies
and Procedures
 
 The Audit
Committee’s policy is to pre-approve all audit and non-audit services by
category, including audit-related services, tax services, and other permitted
non-audit services, to be provided by the independent registered public
accounting firm to the Company.  In accordance with the policy, the
Audit Committee regularly reviews and receives updates on specific services
provided by the independent registered public accounting firm, and the Company’s
management may present additional services for approval.
 
 The Audit
Committee may delegate pre-approval authority to one or more of its
members.  The member to whom such authority is delegated must report,
for informational purposes only, any pre-approval decisions to the Audit
Committee at its next scheduled meeting.
 
 All
services rendered by Albert Wong & Co. and Weinberg & Company, P.A. to
the Company are permissible under any applicable laws and
regulations.  During 2009, all services performed by Albert Wong &
Co. were approved in advance by the Audit Committee in accordance with the
pre-approval policy.
  - 31
-
 
 PART
IV
 
 Item 15. Exhibits, Financial Statement
Schedules.
 
 Exhibit
                        Number
                      
                      Description2.1
      1
                      
                      Share
      Exchange Agreement, dated June 29, 2007, among Stone Mountain Resources,
      Inc., Continental Development Limited and Excelvantage Group
      Limited.3.1
      2
                      
                      Certificate
      of Incorporation.3.2
      3
                      
                      By-laws.10.1
      4
                      
                      Agreement
      on Business Operations between Zhejiang Kandi Vehicles Co., Ltd. and
      Zhejiang Yongkang Top Import & Export Co., Ltd.10.2
      5
                      
                      Employment
      Contract, dated June 10, 2004, by and between Zhejiang Kandi Vehicles Co.,
      Ltd. and Mr. Hu Xiaoming.10.3
      6
                      
                      Employment
      Contract, dated July 10, 2004, by and between Zhejiang Kandi Vehicles Co.,
      Ltd. and Ms. Zhu Xiaoying.16.1
      7
                      
                      Letter
      from Gately & Associates, LLC.21.1
      8
                      
                      List
      of Subsidiaries.23.1
                      
                      Consent
      of Albert Wong & Co.23.2
                      
                      Consent
      of Weinberg & Company, P.A.31.1
                      
                      Certification
      of CEO pursuant to Rule 13a-14 under the Securities Exchange Act of
      1934.31.2
                      
                      Certification
      of CFO pursuant to Rule 13a-14 under the Securities Exchange Act of
      1934.32.1
                      
                      Certification
      s of CEO and CFO Pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to
      Section 906 of the Sarbanes-Oxley Act of
2002.
 1Incorporated by reference from Exhibit
2.1 to the Company’s Current Report on Form 8-K filed on July 6,
2007.
 2Incorporated by reference from Exhibit
3.1 to Form SB-2 filed by the Company on April 1,
2005.
 3Incorporatedby reference from Exhibit 3.2 to Form
SB-2 filed by the Company on April 1, 2005.
 4Incorporated by reference from Exhibit
10.1 to the Company’s Current Report on Form 8-K filed on July 6,
2007.
 5Incorporated by reference from Exhibit
10.2 to the Company’s Current Report on Form 8-K filed on July 6,
2007.
 6Incorporated by reference from Exhibit
10.3 to the Company’s Current Report on Form 8-K filed on July 6,
2007.
 7Incorporated by reference
from Exhibit 16.1 to the Company’s Current Report on Form 8-K filed on August
14, 2007.
 8 Incorporated by reference from Exhibit
21.1 to the Company’s Annual Report on Form 10-K filed on March 31,
2008.
 - 32
-
  SIGNATURES
  Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934 (the “Exchange Act”), the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
 
 KANDI
      TECHNOLOGIES, CORP.March
      31, 2010
                  By:
                  /s/
      Hu XiaomingHu
      XiaomingPresident
      and Chief Executive
Officer
 
 Pursuant to the requirements of the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
 
 /s/
      Hu Xiaoming
                                                
                                                President,
      Chief Executive Officer and
                                                
                                                March
      31, 2010Hu
      Xiaoming
                                                
                                                Chairman
      of the Board (Principal Executive Officer)/s/
      Zhu Xiaoying
                                                
                                                Chief
      Financial Officer and Director
                                                
                                                March
      31, 2010(Principal
      Financial Officer and Principal Accounting Officer)/s/
      Zheng Mingyang
                                                
                                                Director
                                                
                                                March
      31, 2010/s/
      Qian Min
                                                
                                                Director
                                                
                                                March
      31, 2010/s/
      Yao Zhengming
                                                
                                                Director
                                                
                                                March
      31, 2010/s/
      Fong Heung Sang
                                                
                                                Director
                                                
                                                March
      31, 2010/s/
      Hu Wangyuan
                                                
                                                Director
                                                
                                                March
      31,
2010