UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





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




For the
quarterly period ended March 31, 2010




or




o
            TRANSITION
      REPORT PURSUANTTO SECTION 13
      OR 15(d) OF THE
      SECURITIES EXCHANGE ACT OF
1934




For the
transition period from ______to______




Commission
file number 001-33997





Kandi
Technologies, Corp.


(Exact
name of registrant as specified in charter)




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





Jinhua
City Industrial Zone


Jinhua,
Zhejiang Province


People’s
Republic of China


Post
Code 321016


(Address
of principal executive offices)







(86
- 0579) 82239856


(Registrant’s
telephone number, including area code)





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




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such
files).                                                                                                                                             
                  Yes  þ No o




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




Large
      accelerated filer o
                Accelerated
      filer oNon-accelerated
      filer  o
                Smaller
      reporting company þ




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




Yes  o No þ




As of May
14, 2010 the registrant had issued and outstanding 20,338,203 shares of
common stock, par value $.001 per share.





TABLE
OF CONTENTS




PagePART
      I— FINANCIAL INFORMATIONItem
      1.
                Condensed
      Consolidated Financial Statements
                
                2Item
      2.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                
                34Item
      3.
                Quantitative
      and Qualitative Disclosures about Market Risk
                
                45Item
      4.
                Controls
      and Procedures
                
                46PART
      II— OTHER INFORMATIONItem
      1A.
                Risk
      Factors
                
                II-1Item
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                
                II-1Item
      3.
                Defaults
      Upon Senior Securities
                
                II-1Item
      4.
                Submission
      of Matters to a Vote of Security Holders
                
                II-1Item
      5.
                Other
      information
                
                II-1Item
      6.
                Exhibits
                
                II-1





PART
I— FINANCIAL INFORMATION




Item
1.  Financial Statements. (Unaudited)





KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


CONDENSED CONSOLIDATED
BALANCE SHEETS





ASSETS





March 31,
                    2010
                  
                  
                  December 31,(Unaudited)
                  
                  
                  2009CURRENT
      ASSETSCash
      and cash equivalents
                  
                  $
                  2,461,084
                  
                  
                  $
                  218,207Restricted
      cash
                  
                  
                  6,437,314
                  
                  
                  
                  5,704,984Accounts
      receivable, net of allowance for doubtful accounts of $0 as of March 31,
      2010 and December 31, 2009
                  
                  
                  11,651,311
                  
                  
                  
                  14,879,968Inventories,
      net of reserve for slow moving inventories of $152,303 and $152,278 as of
      March 31, 2010 and December 31, 2009, respectively
                  
                  
                  8,809,240
                  
                  
                  
                  5,382,760Notes
      receivable
                  
                  
                  9,483,766
                  
                  
                  
                  2,267,599Other
      receivables
                  
                  
                  278,050
                  
                  
                  
                  321,336Prepayments
      and prepaid expenses
                  
                  
                  30,088
                  
                  
                  
                  30,083Due
      from employees
                  
                  
                  38,611
                  
                  
                  
                  28,228Advances
      to suppliers
                  
                  
                  522,976
                  
                  
                  
                  1,164,672Total
      Current Assets
                  
                  
                  39,712,440
                  
                  
                  
                  29,997,837LONG-TERM
      ASSETSPlant
      and equipment, net
                  
                  
                  22,434,334
                  
                  
                  
                  23,146,833Land
      use rights, net
                  
                  
                  10,660,438
                  
                  
                  
                  10,719,528Deferred
      tax asset
                  
                  
                  207,747
                  
                  
                  
                  207,747Total
      Long-Term Assets
                  
                  
                  33,302,519
                  
                  
                  
                  34,074,108TOTAL
      ASSETS
                  
                  $
                  73,014,959
                  
                  
                  $
                  64,071,945




See
accompanying notes to condensed consolidated financial
statements


2


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


CONDENSED CONSOLIDATED
BALANCE SHEETS





LIABILITIES AND
STOCKHOLDERS’ EQUITY




March 31,2010
                  
                  
                  December 31,(Unaudited)
                  
                  
                  2009CURRENT
      LIABILITIESAccounts
      payable
                  
                  $
                  4,670,288
                  
                  
                  $
                  4,738,543Other
      payables and accrued expenses
                  
                  
                  2,081,784
                  
                  
                  
                  1,871,020Short-term
      bank loans
                  
                  
                  27,939,907
                  
                  
                  
                  26,326,566Customer
      deposits
                  
                  
                  23,291
                  
                  
                  
                  39,371Notes
      payable
                  
                  
                  5,705,007
                  
                  
                  
                  7,931,540Income
      tax payable
                  
                  
                  60,943
                  
                  
                  
                  201,564Due
      to employees
                  
                  
                  43,894
                  
                  
                  
                  88,306Due
      to related party
                  
                  
                  841,251
                  
                  
                  
                  841,251Deferred
      tax liability
                  
                  
                  51,927
                  
                  
                  
                  62,544Total
      Current Liabilities
                  
                  
                  41,418,292
                  
                  
                  
                  42,100,705LONG
      TERM LIABILITIESNote
      payable,  net of discount of $8,849,457 and $0 as of March 31,
      2010 and December 31, 2009, respectively
                  
                  
                  1,150,543
                  
                  
                  
                  -Warrant
      liabilities
                  
                  
                  6,747,535
                  
                  
                  
                  -Total
      Long-Term Liabilities
                  
                  
                  7,898,078
                  
                  
                  
                  -TOTAL
      LIABILITIES
                  
                  
                  49,316,370
                  
                  
                  
                  42,100,705COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDERS’
      EQUITYCommon
      stock, $0.001 par value; 100,000,000 shares authorized; 19,994,350 and
      19,961,000 shares issued and outstanding at March 31, 2010 and December
      31, 2009, respectively
                  
                  
                  19,994
                  
                  
                  
                  19,961Additional
      paid-in capital
                  
                  
                  10,878,775
                  
                  
                  
                  8,967,012Retained
      earnings (the restricted portion is $890,912 at March 31, 2010 and
      December 31, 2009)
                  
                  
                  10,869,104
                  
                  
                  
                  11,046,999Accumulated
      other comprehensive income
                  
                  
                  1,930,716
                  
                  
                  
                  1,937,268TOTAL
      STOCKHOLDERS’ EQUITY
                  
                  
                  23,698,589
                  
                  
                  
                  21,971,240TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                  
                  $
                  73,014,959
                  
                  
                  $
                  64,071,945




See
accompanying notes to condensed consolidated financial
statements


3


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF (LOSS) INCOME AND


COMPREHENSIVE (LOSS)
INCOME


(UNAUDITED)





Three
      Months EndedMarch
      31, 2010
                                              
                                              
                                              March
      31, 2009REVENUES,
      NET
                                              
                                              $
                                              8,254,624
                                              
                                              
                                              $
                                              4,005,904COST
      OF GOODS SOLD
                                              
                                              
                                              (6,404,615
                                              )
                                              
                                              
                                              (3,025,722
                                              )GROSS
      PROFIT
                                              
                                              
                                              1,850,009
                                              
                                              
                                              
                                              980,182Research
      and development
                                              
                                              
                                              343,407
                                              
                                              
                                              
                                              526,201Selling
      and distribution expenses
                                              
                                              
                                              852,326
                                              
                                              
                                              
                                              86,184General
      and administrative expenses
                                              
                                              
                                              650,812
                                              
                                              
                                              
                                              777,932INCOME
      (LOSS) INCOME FROM OPERATIONS
                                              
                                              
                                              3,464
                                              
                                              
                                              
                                              (410,135
                                              )Interest
      expense, net
                                              
                                              
                                              (207,926
                                              )
                                              
                                              
                                              (309,304
                                              )Government
      grants
                                              
                                              
                                              29,842
                                              
                                              
                                              
                                              99,053Other
      income, net
                                              
                                              
                                              47,051
                                              
                                              
                                              
                                              56,214LOSS
      FROM OPERATIONS BEFORE INCOME TAXES
                                              
                                              
                                              (127,569
                                              )
                                              
                                              
                                              (564,172
                                              )INCOME
      TAX EXPENSE
                                              
                                              
                                              (50,326
                                              )
                                              
                                              
                                              (18,727
                                              )




See
accompanying notes to condensed consolidated financial
statements


4




KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF (LOSS) INCOME AND


COMPREHENSIVE (LOSS)
INCOME


(UNAUDITED)




Three Months EndedMarch 31, 2010
                  
                  
                  March 31, 2009NET
      (LOSS)
                  
                  
                  (177,895
                  )
                  
                  
                  (582,899
                  )OTHER
      COMPREHENSIVE INCOMEForeign
      currency translation
                  
                  
                  6,552
                  
                  
                  
                  12,298COMPREHENSIVE
      (LOSS)
                  
                  
                  (171,343
                  )
                  
                  
                  (570,601
                  )WEIGHTED
      AVERAGE SHARES OUTSTANDING BASIC
                  
                  
                  19,972,117
                  
                  
                  
                  19,961,000WEIGHTED
      AVERAGE SHARES OUTSTANDING DILUTED
                  
                  
                  19,972,117
                  
                  
                  
                  19,961,000NET
      (LOSS) PER SHARE, BASIC
                  
                  $
                  (0.01
                  )
                  
                  $
                  (0.03
                  )NET
      (LOSS) PER SHARE, DILUTED
                  
                  
                  (0.01
                  )
                  
                  
                  (0.03
                  )




See
accompanying notes to condensed consolidated financial
statements


5


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS


(UNAUDITED)





Three Months Ended March 312010
                    
                    
                    2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      (loss) income
                    
                    $
                    (177,895
                    )
                    
                    $
                    (582,899
                    )Adjustments
      to reconcile net (loss) income to net cash (used in) provided by operating
      activities:Depreciation
      and amortization
                    
                    
                    942,537
                    
                    
                    
                    844,728Deferred
      taxes
                    
                    
                    (10,617
                    )
                    
                    
                    18,727Option
      and warrant expense
                    
                    
                    1,885,117
                    
                    
                    
                    210,117Inventory
      reserve
                    
                    
                    -
                    
                    
                    
                    151,996Change
      of derivative instrument’s fair value
                    
                    
                    (2,101,922
                    )
                    
                    
                    -Changes
      in operating assets and liabilities:(Increase)
      Decrease In:Accounts
      receivable
                    
                    
                    3,231,085
                    
                    
                    
                    701,590Inventories
                    
                    
                    (3,425,649
                    )
                    
                    
                    (586,108
                    )Other
      receivables and prepaid expenses
                    
                    
                    43,338
                    
                    
                    
                    82,563Due
      from employees
                    
                    
                    (54,806
                    )
                    
                    
                    (5,736
                    )Prepayments
      and prepaid expenses
                    
                    
                    641,890
                    
                    
                    
                    (471,406
                    )Increase
      (Decrease) In:Accounts
      payable
                    
                    
                    (69,018
                    )
                    
                    
                    (4,308,304
                    )Other
      payables and accrued liabilities
                    
                    
                    210,518
                    
                    
                    
                    (103,813
                    )Customer
      deposits
                    
                    
                    (16,086
                    )
                    
                    
                    (656,498
                    )Income
      tax payable
                    
                    
                    (140,655
                    )
                    
                    
                    -Net
      cash (used in) provided by operating activities
                    
                    $
                    957,837
                    
                    
                    $
                    (4,705,043
                    )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of plant and equipment
                    
                    
                    (163,970
                    )
                    
                    
                    (23,333
                    )Purchase
      of construction in progress
                    
                    
                    -
                    
                    
                    
                    (30,971
                    )Issuance
      of notes receivable
                    
                    
                    (8,752,445
                    )
                    
                    
                    (5,203,029
                    )Repayments
      of notes receivable
                    
                    
                    1,536,569
                    
                    
                    
                    11,462,957




See
accompanying notes to condensed consolidated financial
statements


6


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS


(UNAUDITED)




Three Months Ended March 312010
                      
                      
                      2009Net
      cash provided by (used in) investing activities
                      
                      $
                      (7,379,846
                      )
                      
                      $
                      6,205,624CASH
      FLOWS FROM FINANCING ACTIVITIES:Restricted
      cash
                      
                      
                      (731,419
                      )
                      
                      
                      1,740,822Proceeds
      from short-term bank loans
                      
                      
                      9,654,727
                      
                      
                      
                      9,349,071Repayments
      of short-term bank loans
                      
                      
                      (8,045,605
                      )
                      
                      
                      (9,316,263
                      )Proceeds
      from notes payable
                      
                      
                      14,388,512
                      
                      
                      
                      9,511,583Repayments
      of notes payable
                      
                      
                      (6,616,344
                      )
                      
                      
                      (11,198,429
                      )Option
      exercise
                      
                      
                      26,680
                      
                      
                      
                      -Repayments
      of advances to related parties
                      
                      
                      -
                      
                      
                      
                      52,315Net
      cash provided by financing activities
                      
                      
                      8,676,551
                      
                      
                      
                      139,099NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                      
                      
                      2,254,542
                      
                      
                      
                      1,639,680Effect
      of exchange rate changes on cash
                      
                      
                      (11,665
                      )
                      
                      
                      (13,366
                      )Cash
      and cash equivalents at beginning of period
                      
                      
                      218,207
                      
                      
                      
                      141,380CASH AND CASH EQUIVALENTS AT END OF
      PERIOD
                      
                      $
                      2,461,084
                      
                      
                      $
                      1,767,694SUPPLEMENTARY
      CASH FLOW INFORMATIONIncome
      taxes paid
                      
                      $
                      201,598
                      
                      
                      $
                      -Interest
      paid
                      
                      $
                      378,315
                      
                      
                      $
                      425,186




SUPPLEMENTAL
NON-CASH DISCLOSURE:


During
the three months ended March 31, 2010 and 2009, $0 and $57,059 were transferred
from construction in progress to plant and equipment, respectively.




See
accompanying notes to condensed consolidated financial
statements


7


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31, 2010
(UNAUDITED)





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 Statements of Financial Accounting Standards (“SFAS”) No. 141
“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 SFAS 144, “Accounting for the Impairment or Disposal of Long−Lived Assets,”
the results of operations of Dingji as of the disposal date May 9, 2008 are
removed from the 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 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.


8


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31, 2010
(UNAUDITED)




NOTE
2 – LIQUIDITY




The
Company’s working capital deficit is $1,705,852 as of March 31,
2010.




As of
March 31, 2010, the Company has credit lines from commercial banks for
$37,003,452, of which $27,939,907 was used at March 31, 2010.





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. Nevertheless, the Company believes that financing
will be available on normal trade terms if needed.





NOTE
3 - BASIS OF PRESENTATION





The
Company’s unaudited condensed consolidated financial statements for the three
months ended March 31, 2010 and 2009 have been prepared in accordance with
generally accepted accounting principles for interim financial information and
pursuant to the requirements for reporting on Rule 8-03 of Regulation S-X.
Accordingly, they do not include all the information and footnotes required by
accounting principles generally accepted in the United States of America for
complete financial statements.





However,
such information reflects all adjustments (consisting solely of normal recurring
adjustments), which are, in the opinion of management, necessary for the fair
presentation of the consolidated financial position and the consolidated results
of operations. Results shown for interim periods are not necessarily indicative
of the results to be obtained for a full year. The condensed consolidated
balance sheet information as of December 31, 2009 was derived from the audited
consolidated financial statements included in the Company’s Annual Report on
Form 10-K. These interim condensed consolidated financial statements should be
read in conjunction with that report.





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., (“Kandi”) (a wholly-owned subsidiary of
      “Continental”)


(iii)
            Kandi
      Special Vehicles Co., Ltd, (“KSV”, formerly known as Kandi New Energy
      Vehicles Co. Ltd. “KNE”) (a wholly-owned subsidiary of the
      Company)





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


9


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31, 2010
(UNAUDITED)




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.


10


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31, 2010
(UNAUDITED)




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 March 31, 2010 are as follows:





FairValueMeasurementsatReportingDateUsingQuotedPricesinCarryingvalue
                  asofMarch31,
                
                
                ActiveMarkets
                  forIdentical
                  Assets
                
                
                SignificantOther
                  Observable
                  Inputs
                
                
                Significant
                  Unobservable
                  Inputs2010
                
                
                (Level1)
                
                
                (Level2)
                
                
                (Level3)Cash
      and cash equivalents
                
                $
                2,461,084
                
                
                $
                2,461,084
                
                
                
                -
                
                
                
                -Restricted
      cash
                
                $
                6,437,314
                
                
                $
                6,437,314
                
                
                
                -
                
                
                
                -Conversion
      features
                
                $
                4,067,925
                
                
                
                -
                
                
                $
                4,067,925
                
                
                
                -Warrants
                
                $
                2,679,610
                
                
                
                -
                
                
                $
                2,679,610
                
                
                
                -





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.





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





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





The
Company’s non-financial assets measured on a non-recurring basis include the
Company’s property, plant and equipment and finite-use intangible assets which
are measured for recoverability when indicators for impairment are present. ASC
820 requires companies to disclose assets and liabilities measured on a
non-recurring basis in the period in which the remeasurement at fair value is
performed. The Company has reviewed its long-lived assets as of March 31, 2010
and determined that there are no significant assets to be tested for
recoverability under ASC 360 and as such, no fair value measurements related to
non-financial assets have been made during the three months ended March 31,
2010.


11


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31, 2010
(UNAUDITED)




NOTE
6 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





(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 March 31, 2010 and December 31, 2009 represent time deposits on account
to secure short-term bank loans and notes payable. Also see Notes 14 and
15.





(d)
Inventories





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





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





(e)
Accounts Receivable





Accounts
receivable are recognized and carried at 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 March 31, 2010 and
December 31, 2009, the Company has an allowance for doubtful accounts of
$0.





(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. 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
      and equipment
                            10
      yearsOffice
      equipment
                            5
      yearsMotor
      vehicles
                            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.


12


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31, 2010
(UNAUDITED)




NOTE
6 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





(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.





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





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





During
the reporting period, there was no impairment loss.





(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.


13


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31, 2010
(UNAUDITED)




NOTE
6 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





(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 $343,407 and $526,201 for the three months ended March
31, 2010 and 2009, 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.





For the
three months ended March 31, 2010 and 2009, $29,842 and $99,053 was received
from the PRC government for the Company’s contribution to the local
economy.





(n)
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.





(o)
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.





March31,
                    2010
                  
                  
                  December31,
                    2009
                  
                  
                  March31,
                    2009Period
      end RMB : USD exchange rate
                  
                  
                  6.8361
                  
                  
                  
                  6.8372
                  
                  
                  
                  6.8456Average
      quarterly RMB : USD exchange rate
                  
                  
                  6.8360
                  
                  
                  
                  6.8409
                  
                  
                  
                  6.8499





(p)
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.


14


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31, 2010
(UNAUDITED)




NOTE
6 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





(q)
Stock Option Cost





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





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





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





The stock
based compensation expense for the period ended March 31, 2010 is $981,468. Also
see Note 17.





(r)
Warrant Cost





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





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





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





(s)
Fair Value of Conversion features





In
accordance with ASC 815, the conversion feature of the convertible note is
separated from the debt instrument and accounted for separately as a derivative
instrument. On the date the notes are issued, the conversion feature was
recorded as a liability at its fair value, and future changes in fair value will
be recognized in earnings as interest expense.





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


15


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31, 2010
(UNAUDITED)




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.


16


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31, 2010
(UNAUDITED)




NOTE
7 – NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)





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 has implemented ASC Update No. 2009-05 as of March 31,
2010.





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.


17


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31, 2010
(UNAUDITED)




NOTE
7 – NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)





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.


18


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31, 2010
(UNAUDITED)




NOTE
8 – CONCENTRATIONS





(a)
Customers





The
Company’s major customers for the period ended March 31, 2010 accounted for the
following percentages of total sales and accounts receivable as
follows:





Sales
                  
                  
                  Accounts ReceivableMajor
                    Customers
                  
                  Three Months
                    Ended March
                    31, 2010
                  
                  
                  Three Months
                    Ended March
                    31, 2009
                  
                  
                  March 31, 2010
                  
                  
                  December 31,
                    2009Company
      A
                  
                  
                  93
                  %
                  
                  
                  64
                  %
                  
                  
                  90
                  %
                  
                  
                  91
                  %Company
      B
                  
                  
                  3
                  %
                  
                  
                  35
                  %
                  
                  
                  6
                  %
                  
                  
                  9
                  %Company
      C
                  
                  
                  3
                  %
                  
                  
                  -
                  
                  
                  
                  3
                  %
                  
                  
                  -Company
      D
                  
                  
                  1
                  %
                  
                  
                  -
                  
                  
                  
                  1
                  %
                  
                  
                  -Company
      E
                  
                  
                  -
                  
                  
                  
                  1
                  %
                  
                  
                  -
                  
                  
                  
                  -





(b)
Suppliers





The
Company’s major suppliers for the three months ended March 31, 2010 accounted
for the following percentage of total purchases and accounts payable as
follows:





Purchases
                  
                  
                  Accounts PayableMajor
                    Suppliers
                  
                  Three Months
                    Ended March
                    31, 2010
                  
                  
                  Three Months
                    Ended March
                    31, 2009
                  
                  
                  March 31, 2010
                  
                  
                  December 31,
                    2009Company
      F
                  
                  
                  90
                  %
                  
                  
                  84
                  %
                  
                  
                  7
                  %
                  
                  
                  39
                  %Company
      G
                  
                  
                  2
                  %
                  
                  
                  2
                  %
                  
                  
                  2
                  %
                  
                  
                  1
                  %Company
      H
                  
                  
                  1
                  %
                  
                  
                  1
                  %
                  
                  
                  2
                  %
                  
                  
                  1
                  %Company
      I
                  
                  
                  1
                  %
                  
                  
                  -
                  
                  
                  
                  1
                  %
                  
                  
                  2
                  %Company
      J
                  
                  
                  1
                  %
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -


19


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31, 2010
(UNAUDITED)





NOTE
9 – (LOSS) INCOME PER SHARE





The
Company calculates earnings per share in accordance with ASC 260, Earnings Per
Share, which requires a dual presentation of basic and diluted earnings per
share. Basic earnings per share are computed using the weighted average number
of shares outstanding during the fiscal year. Diluted earnings per share
represents basic earnings per share adjusted to include the potentially dilutive
effect of outstanding stock options, warrants and convertible note (using the
if-converted method). For the three months ended March 31, 2010, there are no
potentially dilutive common shares because all the options, warrants and
convertible notes were anti-dilutive.





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





Three months Ended March 31,
                
                2010
                
                
                2009Net
      (loss)
                
                $
                (177,895
                )
                
                $
                (582,899
                )Weighted
      – average shares of common stock outstandingBasic
                
                
                19,972,117
                
                
                
                19,961,000Dilutive
      shares
                
                
                -
                
                
                
                -Diluted
                
                
                19,972,117
                
                
                
                19,961,000Basic
      (loss) per share
                
                $
                (0.01
                )
                
                $
                (0.03
                )Diluted
      (loss) per share
                
                $
                (0.01
                )
                
                $
                (0.03
                )





Also see
Note 17.





NOTE
10 - INVENTORIES





Inventories
are summarized as follows:





March31,2010
                    (Unaudited)
                  
                  
                  December31,2009Raw
      material
                  
                  $
                  839,019
                  
                  
                  $
                  956,378Work-in-progress
                  
                  
                  7,459,366
                  
                  
                  
                  3,785,506Finished
      goods
                  
                  
                  663,158
                  
                  
                  
                  793,1548,961,543
                  
                  
                  
                  5,535,038Less:
      reserve for slow moving inventories
                  
                  
                  (152,303
                  )
                  
                  
                  (152,278
                  )Inventories,
      net
                  
                  $
                  8,809,240
                  
                  
                  $
                  5,382,760


20


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31, 2010
(UNAUDITED)




NOTE
11 - NOTES RECEIVABLE





Notes
receivable are summarized as follows:





March 31,
                  2010
                  (Unaudited)
                
                
                December 31,
                  2009Notes
      receivable from unrelated companies:Due
      February 24, 2010, interest at 5.0% per annum
                
                $
                -
                
                
                $
                1,146,574Due
      February 24, 2010, interest at 5.0% per annum
                
                
                -
                
                
                
                389,731Due
      April 29, 2010, interest at 5.31% per annum (subsequently settled on its
      due date)
                
                
                731,410
                
                
                
                731,294Due
      March 3, 2011, interest at 6.0% per annum
                
                
                1,165,488
                
                
                
                -Due
      March 7, 2011, interest at 6.0% per annum
                
                
                409,284
                
                
                
                -Due
      September 24, 2010, interest at 6.0% per annum
                
                
                2,043,077
                
                
                
                -Due
      September 30, 2010, interest at 8.0% per annum
                
                
                5,134,507
                
                
                
                -Notes
      receivable from unrelated companies
                
                
                9,483,766
                
                
                
                2,267,599Bank
      acceptance notes:Bank
      acceptance notes
                
                
                -
                
                
                
                -Notes
      receivable
                
                $
                9,483,766
                
                
                $
                2,267,599





Notes
receivable are unsecured.


21


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31, 2010
(UNAUDITED)




NOTE
12 – LAND USE RIGHTS





Land use
rights consist of the following:





March 31, 2010
                      (Unaudited)
                    
                    
                    December 31, 2009Cost
      of land use rights
                    
                    $
                    11,196,541
                    
                    
                    $
                    11,168,397Less:
      Accumulated amortization
                    
                    
                    (536,103
                    )
                    
                    
                    (448,869
                    )Land
      use rights, net
                    
                    $
                    10,660,438
                    
                    
                    $
                    10,719,528





As of
March 31, 2010 and December 31, 2009, the net book value of land use rights
pledged as collateral for bank loans was $3,934,500 and $2,456,811 respectively.
Also see Note 14.





As of
March 31, 2010 and December 31, 2009, 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 $6,725,938 and
$6,274,601. Also see Notes 14 and 18.





The
amortization expense for the three months ended March 31, 2010 and 2009 was
$60,815 and $56,241 respectively.





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





2010
      (nine months)
                  
                  $
                  182,4452011
                  
                  
                  243,2602012
                  
                  
                  243,2602013
                  
                  
                  243,2602014
                  
                  
                  243,260Thereafter
                  
                  
                  9,504,953Total
                  
                  $
                  10,660,438


22


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31, 2010
(UNAUDITED)




NOTE
13 – PLANT AND EQUIPMENT





Plant and
equipment consist of the following:





March 31, 2010
                            (Unaudited)
                          
                          
                          December 31, 2009At
      cost:Buildings
                          
                          $
                          12,518,880
                          
                          
                          $
                          12,413,935Machinery
      and equipment
                          
                          
                          9,311,399
                          
                          
                          
                          9,252,390Office
      equipment
                          
                          
                          117,898
                          
                          
                          
                          114,380Motor
      vehicles
                          
                          
                          166,643
                          
                          
                          
                          166,616Moulds
                          
                          
                          10,717,390
                          
                          
                          
                          10,715,66632,832,210
                          
                          
                          
                          32,662,987Less
      : Accumulated depreciationBuildings
                          
                          $
                          (1,074,347
                          )
                          
                          $
                          (970,725
                          )Machinery
      and equipment
                          
                          
                          (5,833,802
                          )
                          
                          
                          (5,601,424
                          )Office
      equipment
                          
                          
                          (97,233
                          )
                          
                          
                          (95,295
                          )Motor
      vehicles
                          
                          
                          (103,110
                          )
                          
                          
                          (95,697
                          )Moulds
                          
                          
                          (3,289,384
                          )
                          
                          
                          (2,753,013
                          )(10,397,876
                          )
                          
                          
                          (9,516,154
                          )Plant
      and equipment, net
                          
                          $
                          22,434,334
                          
                          
                          $
                          23,146,833





As of
March 31, 2010 and December 31, 2009, the net book value of plant and equipment
pledged as collateral for bank loans was $6,394,737 and $4,308,435,
respectively. Also see Note 14.





As of
March 31, 2010, the net book value of land use rights pledged as collateral for
bank loans borrowed by ZMEC, an unrelated party of the Company was $4,638,102.
Also see Notes 14 and 18.





Depreciation
expense for three months ended March 31, 2010 and 2009 was $881,722 and $788,487
respectively.


23


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31, 2010
(UNAUDITED)




NOTE
14 – SHORT TERM BANK LOANS




Short-term
loans are summarized as follows:




March
      31,
                  2010
                  (Unaudited)
                
                
                December
      31,
                  2009Loans
      from ICBC-Exploration Zone BranchMonthly
      interest only payments at 5.841% per annum, due April 2, 2010, secured by
      the assets of the Company. Also see Notes 12 and 13 (subsequently repaid
      on its due date).
                
                $
                1,609,105
                
                
                $
                -Monthly
      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 (subsequently repaid
      on its due date).
                
                
                731,411
                
                
                
                731,294Monthly
      interest only payments at 5.31% per annum, due April 15,
      2010.  Collateralized by a time deposit. Also see Notes 12 and
      13 (subsequently repaid on its due date).
                
                
                1,316,540
                
                
                
                1,316,328Monthly
      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.
                
                
                731,411
                
                
                
                731,294Monthly
      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.
                
                
                394,962
                
                
                
                394,899Monthly
      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.
                
                
                438,847
                
                
                
                438,776Monthly
      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.
                
                
                658,270
                
                
                
                658,164Monthly
      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
                
                
                702,155
                
                
                
                702,042Monthly
      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
                
                
                146,282
                
                
                
                146,259Monthly
      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
                
                
                585,129
                
                
                
                585,035


24


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31, 2010
(UNAUDITED)





NOTE
14 - SHORT TERM BANK LOANS (CONTINUED)




March
      31,
                  2010
                  (Unaudited)
                
                
                December
      31,
                  2009Loans
      from Commercial Bank-Jiangnan BranchMonthly
      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.
                
                
                -
                
                
                
                2,925,174Monthly
      interest only payments at 5.84% per annum, due May 5, 2010, secured by the
      assets of the Company, and guaranteed by Mr. Hu Xiaoming and Ms. Ling
      Yueping. Also see Notes 12 and 13.
                
                
                1,462,822
                
                
                
                1,462,587Monthly
      interest only payments at 5.84% per annum, due January 5, 2011, guaranteed
      by Mr. Hu Xiaoming, Mr. Lu Qinjiang, Mr. Lu Qinbo, Ms. Ling Yueping and
      Yongkang Kangli Metal Manufacturing Co. and pledged by Jingdezhen De'er
      industrial investment Co., Ltd.
                
                
                2,925,645
                
                
                
                -Loans
      from Huaxia BankMonthly
      interest only payments at 5.58% per annum, due September 21, 2010, secured
      by the assets of the Company, guaranteed by Mr.Hu Xiaoming, Yongkang
      Kangli Metal Manufacturing Co. and Kandi Investment Group
    Co.
                
                
                3,949,620
                
                
                
                3,948,985Loans
      from China Every-bright BankMonthly
      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 Yongkang Kangli Metal Manufacturing
      Co.
                
                
                -
                
                
                
                4,387,761Monthly
      interest only payments at 5.20% per annum, due August 4, 2010, pledged
      office building of Mr. Hu Xiaoming and Ms. Ling Yueping, guaranteed by
      Nanlong Group Co., Ltd., and Zhejiang Mengdeli Electric
      Company.
                
                
                4,388,467
                
                
                
                -Loans
      from Shanghai Pudong Development BankMonthly
      interest only payments at 4.78% per annum, due April 28, 2010.
      Collateralized by a time deposit (Subsequently repaid on its due
      date).
                
                
                1,316,540
                
                
                
                1,316,328Monthly
      interest only payments at 5.58% per annum, due December 8, 2010,
      guaranteed by Nanlong Group Co., Ltd. and Mr. Hu Xiaoming.
                
                
                2,925,645
                
                
                
                2,925,174


25


KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31, 2010
(UNAUDITED)




NOTE
14 - SHORT TERM BANK LOANS (CONTINUED)




March 31,
                                  2010
                                  (Unaudited)
                                
                                
                                December 31,
                                  2009Loans
      from China Every-growing BankMonthly
      interest only payments at 5.84% per annum, due October 27, 2010,
      guaranteed by Zhejiang Shuguang industrial Co., Ltd., and Zhejiang
      Mengdeli Electric Company.
                                
                                
                                2,925,645
                                
                                
                                
                                2,925,173Loans from China Communication Bank-Jinhua
      BranchMonthly
      interest only payments at 5.58% per annum, due February 15, 2010,
      guaranteed by Zhejiang Shuguang industrial Co., Ltd. and Mr. Hu
      Xiaoming.
                                
                                
                                -
                                
                                
                                
                                731,293Monthly
      interest only payments at 5.84% per annum, due February 04, 2010,
      guaranteed by  Mr. Hu Xiaoming, Mr. Yan Guanwei and Zhejiang
      Shuguang industrial Co., Ltd.
                                
                                
                                731,411
                                
                                
                                
                                -Total
                                
                                $
                                27,939,907
                                
                                
                                $
                                26,326,566





Interest
expense for the three month ended March 31, 2010 and 2009 was $372,878, and
$516,869, respectively.





As of
March 31, 2010, the aggregated amount of short term loans that are guaranteed by
various third parties is $19,309,255. Also see Note 18.




26




KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31, 2010
(UNAUDITED)




NOTE
15 – NOTES PAYABLE





Notes
payable are summarized as follows:





March 31,
                      2010
                      (Unaudited)
                    
                    
                    December 31,
                      2009Bank
      acceptance notes:Due
      March 8, 2010
                    
                    $
                    -
                    
                    
                    $
                    1,462,587Due
      March 24, 2010
                    
                    
                    -
                    
                    
                    
                    1,462,587Due
      April 14, 2010 (subsequently repaid  on its due
      date)
                    
                    
                    1,316,541
                    
                    
                    
                    1,316,328Due
      July 6, 2010
                    
                    
                    1,462,822
                    
                    
                    
                    -Due
      September 9, 2010
                    
                    
                    1,462,822
                    
                    
                    
                    -Due
      September 23, 2010
                    
                    
                    1,462,822
                    
                    
                    
                    -Subtotal
                    
                    $
                    5,705,007
                    
                    
                    $
                    4,241,502Notes
      payable to unrelated companies:Due
      December 1, 2010
                    
                    $
                    -
                    
                    
                    $
                    3,690,038Due
      January 20, 2012
                    
                    
                    1,150,543
                    
                    
                    
                    -Subtotal
                    
                    
                    1,150,543
                    
                    
                    
                    3,690,038Total
                    
                    $
                    6,855,550
                    
                    
                    $
                    7,931,540





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.





Restricted
cash of $3,510,774 is held as collateral for the following notes payable at
March 31, 2010:





Due
      April 14, 2010 (subsequently repaid on its due date)
                    
                    $
                    1,316,541Due
      July 6, 2010
                    
                    
                    1,462,822Due
      September 9, 2010
                    
                    
                    1,462,822Due
      September 23, 2010
                    
                    
                    1,462,822Subtotal
                    
                    $
                    5,705,007




27




KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2010 (UNAUDITED)




NOTE
16 – TAX





(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 March 31, 2010, 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 March
31, 2010 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 March 31,
2010, 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 three months ended March 31, 2010 due to the net operating loss carry
forward in the United States.




28




KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31, 2010
(UNAUDITED)




NOTE
16 – TAX (CONTINUED)





Income
tax expense (benefit) for the three months ended March 31, 2010 and 2009 is
summarized as follows:




For the Three Months Ended
                        March 31,(Unaudited)2010
                      
                      
                      2009Current:Provision
      for CIT
                      
                      $
                      60,943
                      
                      
                      $
                      -Deferred:Provision
      for CIT
                      
                      
                      (10,617
                      )
                      
                      
                      18,727Income
      tax expense (benefit)
                      
                      $
                      50,326
                      
                      
                      $
                      18,727




The
Company’s income tax expense (benefit) differs from the “expected” tax expense
for the three months ended March 31, 2010 and 2009 (computed by applying the CIT
rate of 25%, respectively to income before income taxes) as
follows:





For the Three Months Ended
                    March 31,(Unaudited)2010
                  
                  
                  2009Computed "expected" (benefit) expense
                  
                  $
                  (31,892
                  )
                  
                  $
                  (141,043
                  )Favorable
      tax rate
                  
                  
                  (60,943
                  )
                  
                  
                  (123,021
                  )Permanent
      differences
                  
                  
                  58,159
                  
                  
                  
                  276,160Valuation
      allowance
                  
                  
                  85,002
                  
                  
                  
                  6,631Income
      tax expense (benefit)
                  
                  $
                  50,326
                  
                  
                  $
                  18,727





The tax
effects of temporary differences that give rise to the Company’s net deferred
tax assets and liabilities as of March 31, 2010 and December 31, 2009 are
summarized as follows:


29




KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31, 2010
(UNAUDITED)




NOTE
16 – TAX (CONTINUED)





March 31, 2010
                    (Unaudited)
                  
                  
                  December 31,
                    2009Current
      portion:Deferred
      tax assets:Expense
                  
                  $
                  -
                  
                  
                  $
                  23,028Subtotal
                  
                  
                  -
                  
                  
                  
                  23,028Deferred
      tax liabilities:Sales
      cut-off
                  
                  
                  (51,927
                  )
                  
                  
                  (85,572
                  )Other
                  
                  
                  -
                  
                  
                  
                  -Subtotal
                  
                  
                  (51,927
                  )
                  
                  
                  (85,572
                  )Total
      deferred tax liabilities – current portion
                  
                  
                  (51,927
                  )
                  
                  
                  (62,544
                  )Non-current
      portion:Deferred
      tax assets:Depreciation
                  
                  
                  504,258
                  
                  
                  
                  504,258Loss
      carried forward
                  
                  
                  160,399
                  
                  
                  
                  75,397Valuation
      allowance
                  
                  
                  (160,399
                  )
                  
                  
                  (75,397
                  )Subtotal
                  
                  
                  504,258
                  
                  
                  
                  504,258Deferred
      tax liabilities:Accumulated
      other comprehensive gain
                  
                  
                  (296,511
                  )
                  
                  
                  (296,511
                  )Subtotal
                  
                  
                  (296,511
                  )
                  
                  
                  (296,511
                  )Total
      deferred tax assets – non-current portion
                  
                  
                  207,747
                  
                  
                  
                  207,747Net
      deferred tax assets
                  
                  $
                  155,820
                  
                  
                  $
                  145,203





(b)
Tax Holiday Effect





For the
three months ended March 31, 2010 and 2009 the PRC corporate income tax rate was
25%. Certain subsidiaries of the Company are entitled to tax exemptions (tax
holidays) for the three months ended March 31, 2010 and 2009.





The
combined effects of the income tax expense exemptions and reductions available
to the Company for the three months ended March 31, 2010 and 2009 are as
follows:




For the Three Months Ended
                    March 31
                    (Unaudited)2010
                  
                  
                  2009Tax holiday credit
                  
                  $
                  60,943
                  
                  
                  $
                  123,021Basic net (loss) income per share effect
                  
                  $
                  (0.00
                  )
                  
                  $
                  (0.01
                  )




30





KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31, 2010
(UNAUDITED)




NOTE
17 - STOCK OPTIONS, WARRANTS AND CONVERTIBLE NOTES




(a)
Stock Options





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





On
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 vested and became 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
                  
                  
                  WeightedAverage
                    ExercisePriceOutstandingasofJanuary1,2010
                  
                  
                  2,950,000
                  
                  
                  $
                  0.88Granted
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  33,350
                  
                  
                  
                  0.80Cancelled
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      as of March 31, 2010
                  
                  
                  2,916,650
                  
                  
                  
                  0.88





The
following table summarizes information about stock options outstanding as of
March 31, 2010:





OptionsOutstanding
                  
                  
                  OptionsExercisableNumberof
                    shares
                  
                  Exercise
                    Price
                  
                  
                  Remaining
                    Contractuallife
                    (inyears)
                  
                  
                  Numberof
                    shares
                  
                  
                  Exercise
                    Price2,566,650
                  
                  $
                  0.80
                  
                  
                  
                  9
                  
                  
                  
                  2,566,650
                  
                  
                  $
                  0.80350,000
                  
                  
                  1.50
                  
                  
                  
                  10
                  
                  
                  
                  350,000
                  
                  
                  
                  1.50




31




KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31, 2010
(UNAUDITED)
  NOTE
17 - STOCK OPTIONS, WARRANTS AND CONVERTIBLE NOTES
(CONTINUED)





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.





(b)
Warrants and Convertible Notes





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





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. As of March 31, 2010, the fair value of
the warrants issued to investors and placement agents is $3.05, and the fair
value of conversion features is $2.54 per share.




32




KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31, 2010
(UNAUDITED)




NOTE
18 – COMMITMENTS AND CONTINGENCIES





As of
March 31, 2010, the Company provided guarantee for the following third
parties:





Guarantee
      provided to
                      
                      AmountYongkang
      Kangli Metal Manufacturing Co.
                      
                      $
                      4,388,467Zhejiang
      Mengdeli Electric Company
                      
                      
                      2,486,798Zhejiang
      Shuguang industrial Co., Ltd.
                      
                      
                      2,925,645Zhejiang
      Yiran Auto Sales Company
                      
                      
                      731,411Zhejiang
      Taiping Trade Co., Ltd
                      
                      
                      3,364,491Total
                      
                      $
                      13,896,812





NOTE
19 – SUBSEQUENT EVENTS




Pursuant
to that certain Consulting Agreement dated as of September 21, 2009, the Company
issued 100,000 shares of the Company's common stock to a consulting firm for
financial advisory services.






33




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





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





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





Forward-looking
statements are only predictions. Although we believe that the expectations
reflected in these forward-looking statements are reasonable, we cannot
guarantee future results, levels of activity, performance or achievements. All
of our forward-looking information is subject to risks and uncertainties that
could cause actual results to differ materially from the results expected.
Although it is not possible to identify all factors, these risks and
uncertainties include the risk factors and the timing of any of those risk
factors described in the Company’s Form 10-K for the year ended December 31,
2009 and those set forth from time to time in our filings with the Securities
and Exchange Commission (“SEC”). These documents are available on the SEC’s
Electronic Data Gathering and Analysis Retrieval System
athttp://www.sec.gov.





Critical
Accounting Policies and Estimates




Stock
Option Cost




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





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





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





34


The stock
based compensation expense for the period ended March 31, 2010 is $981,468,
among which $780,902 and $200,566 was allocated to Selling expense and
distribution expenses, and General and administrative expenses
respectively.




Warrant
Cost




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





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





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





As of
March 31, 2010, The fair value per share of the warrants issued under the
Consulting Agreement with the exercise price of $2.00 is $4.56, the fair value
per share of the warrants issued under the Consulting Agreement with the
exercise price of $2.50 is $4.48, and the fair value per share of the warrants
issued to investors and placement agents of convertible notes is
$3.05




Fair
Value of Conversion features




In
accordance with ASC 815, the conversion feature of the convertible note is
separated from the debt instrument and accounted for separately as a derivative
instrument. On the date the notes are issued, the conversion feature was
recorded as a liability at its fair value, and future changes in fair value will
be recognized in earnings as interest expense.





The
Company used the Black-Scholes-Merton option-pricing model to obtain the fair
value of the conversion feature. The Company’s expected volatility assumption is
based on the historical volatility of the Company’s stock. The expected life
assumption is primarily based on the expiration date of the warrant. The
risk-free interest rate for the expected term of the option is based on the U.S.
Treasury yield curve in effect at the time of measurement. As of March 31, 2010,
the fair value of conversion features is $2.54 per share





Fair
Value of Financial Instruments





The
Company measured the fair value of warrants and conversion features embedded in
the convertible notes as of March 31, 2010 using the Black-Scholes-Merton model
with the inputs effective at measurement date. For the three months ended March
31, 2010, the fair value of warrants issued to investors and placement agent has
decreased $208,804, and the fair value of conversion features has decreased
$353,835.





35


The
Company’s non-financial assets measured on a non-recurring basis include the
Company’s property, plant and equipment and finite-use intangible assets which
are measured for recoverability when indicators for impairment are present. ASC
820 requires companies to disclose assets and liabilities measured on a
non-recurring basis in the period in which the remeasurement at fair value is
performed. The Company has reviewed its long-lived assets as of March 31, 2010
and determined that there are no significant assets to be tested for
recoverability under ASC 360 and as such, no fair value measurements related to
non-financial assets have been made during the three months ended March 31,
2010.





Debt
discount





Since the
objective of the services provided by the consultant was to help the Company to
close a financing, the expense of warrants issued to consultants, which is
measured at the date when the consultant’s services are considered to be
performed using the Black-Scholes model, is included in the debt discount,
together with the expense of conversion features embedded in the convertible
notes and expense of warrants issued to investors and placement agents, which
are measured as of the issuance date of convertible notes. The debt discount is
amortized to Interest expense over the life of the notes payable using the
effective interest method. As of March 31, 2010, the amount of debt discount is
$8,849,457.





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.





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.





36


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 has implemented ASC Update No. 2009-05 as of March 31,
2010.





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.





37


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.




38


Results
of Operations





Comparison
of Three Months Ended March 31, 2010 and 2009





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





ForThree
                      MonthsEnded
                      March31,
                      2010
                    
                    
                    %Of
                      Revenue
                    
                    
                    ForThree
                      MonthsEnded
                      March31,
                      2009
                    
                    
                    %Of
                      Revenue
                    
                    
                    ChangeIn
                      Amount
                    
                    
                    Change
                      In%REVENUES,
      NET
                    
                    $
                    8,254,624
                    
                    
                    
                    100
                    %
                    
                    $
                    4,005,904
                    
                    
                    
                    100.0
                    %
                    
                    $
                    4,248,720
                    
                    
                    
                    106.1
                    %COST
      OF GOODS SOLD
                    
                    
                    (6,404,615
                    )
                    
                    
                    (77.6
                    )%
                    
                    
                    (3,025,722
                    )
                    
                    
                    (75.5
                    )%
                    
                    
                    (3,378,893
                    )
                    
                    
                    111.
      7
                    %GROSS
      PROFIT
                    
                    
                    1,850,009
                    
                    
                    
                    22.4
                    %
                    
                    
                    980,182
                    
                    
                    
                    24.5
                    %
                    
                    
                    869,827
                    
                    
                    
                    88.7
                    %Research
      and development
                    
                    
                    343,407
                    
                    
                    
                    4.2
                    %
                    
                    
                    526,201
                    
                    
                    
                    13.1
                    %
                    
                    
                    (182,794
                    )
                    
                    
                    (34.7
                    )%Selling
      and distribution expenses
                    
                    
                    852,326
                    
                    
                    
                    10.3
                    %
                    
                    
                    86,184
                    
                    
                    
                    2.2
                    %
                    
                    
                    766,142
                    
                    
                    
                    889.0
                    %General
      and administrative expenses
                    
                    
                    650,812
                    
                    
                    
                    7.9
                    %
                    
                    
                    777,932
                    
                    
                    
                    19.4
                    %
                    
                    
                    (127,120
                    )
                    
                    
                    (16.3
                    )%(LOSS)
      INCOME FROM OPERATIONS
                    
                    
                    3,464
                    
                    
                    
                    0.0
                    %
                    
                    
                    (410,135
                    )
                    
                    
                    (10.2
                    )%
                    
                    
                    413,599
                    
                    
                    
                    (100.8
                    )%Interest
      expense, net
                    
                    
                    (207,926
                    )
                    
                    
                    (2.5
                    )%
                    
                    
                    (309,304
                    )
                    
                    
                    (7.7
                    )%
                    
                    
                    101,378
                    
                    
                    
                    (32.8
                    )%Government
      grants
                    
                    
                    29,842
                    
                    
                    
                    0.4
                    %
                    
                    
                    99,053
                    
                    
                    
                    2.5
                    %
                    
                    
                    (69,211
                    )
                    
                    
                    (69.9
                    )%Other
      income, net
                    
                    
                    47,051
                    
                    
                    
                    0.6
                    %
                    
                    
                    56,214
                    
                    
                    
                    1.4
                    %
                    
                    
                    (9,163
                    )
                    
                    
                    (16.3
                    )%(LOSS)
      INCOME FROM OPERATIONS BEFORE INCOME TAXES
                    
                    
                    (127,569
                    )
                    
                    
                    (1.5
                    )%
                    
                    
                    (564,172
                    )
                    
                    
                    (14.1
                    )%
                    
                    
                    436,603
                    
                    
                    
                    (77.4
                    )%INCOME
      TAX (EXPENSE) BENEFIT
                    
                    
                    (50,326
                    )
                    
                    
                    (0.6
                    )%
                    
                    
                    (18,727
                    )
                    
                    
                    (0.5
                    )%
                    
                    
                    (31,599
                    )
                    
                    
                    (168.7
                    )%NET
      (LOSS) INCOME
                    
                    
                    (177,895
                    )
                    
                    
                    (2.2
                    )%
                    
                    
                    (582,899
                    )
                    
                    
                    (14.6
                    )%
                    
                    
                    405,004
                    
                    
                    
                    (69.5
                    )%




39


(a)
Revenue





For the
three months ended March 31, 2010, our revenue increased by 106.1% from
$4,005,904 to $8,254,624 as compared to the three months ended March 31, 2009.
This is primarily due to the Company’s continuing effort to develop new markets
outsides North America and the recovery of global economy, which has enhanced
the customer demands for the Company’s products, particularly the recreational
vehicle lines.





The
following table lists the number of vehicles sold, categorized by vehicle types,
within the three months ended March 31, 2010 and 2009:





ThreeMonthsEndedMarch312010
                  
                  
                  2009Unit
                  
                  
                  Sales
                  
                  
                  Unit
                  
                  
                  SalesATV
                  
                  
                  1053
                  
                  
                  $
                  1,001,153
                  
                  
                  
                  746
                  
                  
                  $
                  440,799CoCo
                  
                  
                  372
                  
                  
                  
                  1,679,458
                  
                  
                  
                  169
                  
                  
                  
                  440,142GoKart
                  
                  
                  3,602
                  
                  
                  
                  3,764,963
                  
                  
                  
                  275
                  
                  
                  
                  138,422Utility
      vehicles (“UTVs”)
                  
                  
                  567
                  
                  
                  
                  1,295,573
                  
                  
                  
                  1039
                  
                  
                  
                  2,726,769Three
      wheeled motorcycle
                  
                  
                  217
                  
                  
                  
                  513,477
                  
                  
                  
                  198
                  
                  
                  
                  259,772





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 3 months
ended March 31, 2010 and 2009:





ThreeMonthsEndedMarch312010
                  
                  
                  2009Sales
                  
                  
                  Percentage
                  
                  
                  Sales
                  
                  
                  PercentageNorth
      America
                  
                  $
                  1,021,999
                  
                  
                  
                  12
                  %
                  
                  $
                  414,991
                  
                  
                  
                  10
                  %China
                  
                  
                  7,128,516
                  
                  
                  
                  86
                  %
                  
                  
                  3,548,016
                  
                  
                  
                  89
                  %Europe
                  
                  
                  104,109
                  
                  
                  
                  2
                  %
                  
                  
                  42,897
                  
                  
                  
                  1
                  %Total
                  
                  $
                  8,254,624
                  
                  
                  
                  100
                  %
                  
                  $
                  4,005,904
                  
                  
                  
                  100
                  %





For the
three months ended March 31, 2010, 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.





(b)
Cost of goods sold





Cost of
goods sold during the three months ended March 31, 2010 was $6,404,615
representing a 111.7% increase of $3,025,722 from the three months ended March
31, 2009, which corresponded with the increase in sales. Cost of goods sold was
77.6% of the total revenue for the period as compared to 75.5% of the comparable
period, reflecting the increased price of raw manufacturing materials whose
costs were comparatively higher than those of previous year.





40


(c)
Gross profit





Gross
profit for the first quarter of 2010 is the result of the increase in revenue,
increasing 88.7% from $980,182 to $1,850,009 from the same period in
2009.





(d)
Selling and distribution expenses





Selling
and distribution expenses were $853,326 for the three months ended March 31,
2010, as compared to $86,184 from the same period in 2009, representing an 889%
increase.  The significant increase in these expenses was the result
of the expense related to the options issued to consultants for their services
assisting the Company in expanding within the Chinese market. Excluding the
$780,902 option related expense, the net Selling and distribution expenses for
the three months ended March 31, 2010 was 71,424, a 17.1% decrease from the same
period of 2009, primarily due to the $30,027 decrease in insurance
expense.





(e)
General and administrative expenses





General
and administrative expenses were $650,812 for the three months ended March 31,
2010, as compared to $777,932 for the same period in 2009, representing a 16.3%
decrease.  For the three months ended March 31, 2010, the general and
administrative expenses included $200,566 in stock-based compensation cost for
the options issued to the Company’s executives and managerial level employees,
while for the same period of last year, this stock based compensation cost was
$210,117. Excluding the effect of stock based compensation cost, the net general
and administrative expenses for the three months ended March 31, 2010 was
$450,246, a decrease of 20.7% from $567,815 for the same period of 2009. This
decrease was primarily the result of the $151,996 inventory write down occurred
in the three months ended March 31, 2009. Excluding the effects of stock based
compensation cost and expense related to inventory write down, the general and
administrative expenses for this reporting period increased $34,427 compared to
the same period of last year, mainly due to the increase of expenses incurred by
the Company’s more activities in capital markets, although the legal fees
charged by attorneys for the financing that closed on January 21, 2010 was
amortized to the life of convertible notes.





(f)
Research and development





Research
and development expenses were $343,407 for the three months ended March 31,
2010, as compared to $526,201 from the same period in 2009, representing a 34.7%
decrease.  The decrease was due to a significant curtailment of
research and development expenses associated with the electric-powered
super-mini car (“CoCo”).





(g)
Government grants





The
Chinese government awarded grants to companies that exported goods the prior
year. The Company had exported goods directly in 2008, but used an export
agent in 2009, thus disqualifying the Company from the grant. The Company also
received a one-time technology grant during the quarter ended March 31,
2009.





41


(h)
Net interest expense





Net
interest expense was $207,926 for the three months ended March 31, 2010, as
compared to $309,304 for the same period last year, representing a decrease of
32.8%. For the three months ended March 31, 2010, the interests for the
convertible notes was $117,742, and the interests incurred by the amortization
of debt discount was $239,366, while the interests income, which was caused by
the changes of fair value of warrants issued to convertible notes investors and
placement agents, and the changes of fair value of conversion features embedded
in convertible notes, was $562,639. Excluding the effects of interest expense
related to convertible notes, the interest expense for this reporting period was
$413,459, increased 34% from $309,304 for the same period of 2009, this was
primarily due to the decrease of interest income earned from the note
receivables issued to third parties, which decreased $122,208 compared to the
same period of 2009.





(i)
Net (loss) income





The
operating performance of the Company for the three months ended March 31, 2010
reflected a net loss of $177,895, significantly improved from a net loss of
$582,899 for the same period of last year, primarily due to the increase of
sales and gross profit.





For the
three months ended March 31, 2010, the $981,468 stock option related expense,
particularly the $780,902 option cost included in the selling and distribution
expenses, significantly effects the Company’s profit and caused the Company
recorded a net loss in this reporting period.




42


Financial
Condition





Working
Capital





The
Company had a working capital deficit of $1,705,852 at March 31, 2010, an
improvement from a working capital deficit of $13,457,954 as of March 31, 2009,
which was principally due to the Company’s issuance of $10,000,000 long-term
convertible notes in January 2010 and using the proceeds in the Company’s
working capital. In addition, for the three months ended March 31, 2010, the
Company also recorded a net cash inflow from the operating activities, which
also improved the Company’s working capital situation.





As of
March 31, 2010, the Company had credit lines from commercial banks for
$37,003,452, of which $27,939,907 was used at March 31, 2010. 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.





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. The Company believes this situation has not changed and the
short-term bank loan will be available on normal trade terms if
needed.


43


Capital
Requirements and Capital Provided





Capital
requirements and capital provided for the three months ended March 31, 2010 is
as follows:





Three Months Ended
                              March 31, 2010
                              (Inthousands)CapitalrequirementsPurchase
      of plant and equipment
                            
                            $
                            164Issuance
      of notes receivable
                            
                            
                            8,752Repayments
      of short-term bank loans
                            
                            
                            8,046Repayments
      of notes payable
                            
                            
                            6,616Increase
      in restricted cash
                            
                            
                            731Increase
      in cash
                            
                            
                            2,243Total
      capital requirements
                            
                            $
                            26,552Capital
      providedInternal
      cash provided by operation
                            
                            
                            958Proceeds
      from short-term bank loan
                            
                            
                            9,655Proceeds
      from notes payable
                            
                            
                            14,389Repayments
      of notes receivable
                            
                            
                            1,537Other
      financing activities
                            
                            
                            27Total
      capital provided
                            
                            $
                            26,566




For
further information, see the Statement of Cash Flows.





Cash
Flow





Net cash
flow provided by operating activities was $957,837 for the three months ended
March 31, 2010, as compared to net cash flow used in operating activities of
$4,705,043 in the same period in 2009. The increase of net cash flow by
operating activities was mainly due to the improvement of $405,004 in net
income, the cash inflow caused by change of account receivable has increased
from $701,590 to $3,231,085, and the cash outflow from account payable has
decreased from $4,308,304 to $69,018.





Net cash
flow used in investing activities was $7,379,846 for the three months ended
March 31, 2010 as compared to net cash flow provided by investing activities of
$6,205,624 for the same reporting period in 2009. For the three months ended
March 31, 2010, the Company issued $8,752,445 note receivables, and collected
$1,536,569 repayment of note receivables, which caused a net cash outflow
$7,215,876 in note receivable. While for the same period of last year, the
Company recorded a net cash inflow $6,259,928 in note receivable, due to the
$11,462,957 repayment of note receivables and $5,203,029 issuance of note
receivables.





Net cash
flow provided by financing activities was $8,676,551 for the three months ended
March 31, 2010, as compared to net cash flow provided by financing activities of
$139,099 for the three months ended March 31, 2009. Cash flow provided by
financing activities in this quarter was primarily due to net cash inflow from
notes payable of $7,772,168.




44





Item
3. Quantitative and Qualitative Disclosures About Market Risk.





Not
applicable.




45


Item
4. Controls and Procedures.





The
Company maintains a system of disclosure controls and procedures that is
designed to ensure that information required to be disclosed by the Company in
this Form 10-Q, and in other reports required to be filed under the Securities
Exchange Act of 1934 (the “Exchange Act”), is recorded, processed, summarized
and reported within the time periods specified in the rules and forms for such
filings. Management of the Company, under the direction of the Company's Chief
Executive Officer and Chief Financial Officer, reviewed and performed an
evaluation of the effectiveness of the Company's disclosure controls and
procedures (as defined in Rules 13a-15a(e) and 15d-15(e) under the Exchange Act)
as of March 31, 2010. 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.





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 the quarter ended March 31, 2010 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.




46


PART
II – OTHER INFORMATION





Item
1.  Legal Proceedings.





None.





Item
1A.  Risk Factors.





As of the
date of this filing, there have been no material changes from the risk factors
previously disclosed in our “Risk Factors” in the Form 10-K for the period ended
December 31, 2009. An investment in our common stock involves various risks.
When considering an investment in our company, you should consider carefully all
of the risk factors described in our most recent Form 10-K. These risks and
uncertainties are not the only ones facing us and there may be additional
matters that we are unaware of or that we currently consider immaterial. All of
these could adversely affect our business, financial condition, results of
operations and cash flows and, thus, the value of an investment in our
company.





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





None.





Item
3.  Defaults Upon Senior Securities.





None.





Item
4.  Submission of Matters to a Vote of Security Holders.





None.





Item
5.  Other Information.





None.





Item
6. Exhibits





Exhibit
      Number
            Description31.1
            Certification
      pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of
      193431.2
            Certification
      pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of
      193432.1
            Certification
      of CEO and CFO pursuant to 18 U.S.C.§ 1350,
      as Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of
    2002




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SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.





Kandi
      Technologies, Corp.Date:
      May 17, 2010
                    By:
                    /s/
      Hu XiaomingHu
      XiaomingPresident
      and Chief Executive Officer
                      (Principal
      Executive Officer)Date:
      May 17, 2010
                    By:
                    /s/
      Zhu XiaoyingZhu
      XiaoyingChief
      Financial Officer
                      (Principal
      Financial and Accounting Officer)




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