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 June 30, 2010




or




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




For the
transition period from ______ to______




Commission
file number 001-33997





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 þNo  ̈




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 þNo  ̈




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




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




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


Yes  ̈No þ




As of
June 30, 2010 the registrant had issued and outstanding 21,692,787 shares of
common stock, par value $.001 per share.









TABLE
OF CONTENTS




PagePART
      I-- FINANCIAL INFORMATIONItem
      1.
              Condensed
      Consolidated Financial Statements
              
              1Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              
              31Item
      3.
              Quantitative
      and Qualitative Disclosures about Market Risk
              
              44Item
      4.
              Controls
      and Procedures
              
              45PART
      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-2









PART
I-- FINANCIAL INFORMATION




Item
1.  Financial Statements. (Unaudited)




KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


CONDENSED CONSOLIDATED
BALANCE SHEETS




ASSETS





June
      30,
                2010(Unaudited)
            
            
            December
      31,2009CURRENT
      ASSETSCash
      and cash equivalents
            
            $
            879,564
            
            
            $
            218,207Restricted
      cash
            
            
            8,080,492
            
            
            
            5,704,984Accounts
      receivable, net of allowance for doubtful accounts of $0 as of June 30,
      2010 and December 31, 2009
            
            
            12,174,776
            
            
            
            14,879,968Inventories,
      net of reserve for slow moving inventories of $152,918 and $152,278 as of
      June, 30, 2010 and December 31, 2009, respectively
            
            
            9,596,453
            
            
            
            5,382,760Notes
      receivable
            
            
            17,234,751
            
            
            
            2,267,599Other
      receivables
            
            
            520,994
            
            
            
            321,336Prepayments
      and prepaid expenses
            
            
            34,702
            
            
            
            30,083Due
      from employees
            
            
            58,761
            
            
            
            28,228Advances
      to suppliers
            
            
            534,708
            
            
            
            1,164,672Total
      Current Assets
            
            
            49,115,201
            
            
            
            29,997,837LONG-TERM
      ASSETSPlant
      and equipment, net
            
            
            22,173,396
            
            
            
            23,146,833Land
      use rights, net
            
            
            10,642,435
            
            
            
            10,719,528Deferred
      tax asset
            
            
            210,021
            
            
            
            207,747Total
      Long-Term Assets
            
            
            33,025,852
            
            
            
            34,074,108TOTAL
      ASSETS
            
            $
            82,141,053
            
            
            $
            64,071,945





See
accompanying notes to condensed consolidated financial statements
  1


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


CONDENSED CONSOLIDATED
BALANCE SHEETS




LIABILITIES AND
STOCKHOLDERS’ EQUITY





June,
      30,2010(Unaudited)
            
            
            December
      31,2009CURRENT
      LIABILITIESAccounts
      payable
            
            $
            7,920,356
            
            
            $
            4,738,543Other
      payables and accrued expenses
            
            
            1,590,368
            
            
            
            1,871,020Short-term
      bank loans
            
            
            27,465,265
            
            
            
            26,326,566Customer
      deposits
            
            
            149,976
            
            
            
            39,371Notes
      payable
            
            
            10,281,115
            
            
            
            7,931,540Income
      tax payable
            
            
            125,197
            
            
            
            201,564Due
      to employees
            
            
            7,010
            
            
            
            88,306Due
      to related party
            
            
            841,251
            
            
            
            841,251Deferred
      tax liability
            
            
            52,492
            
            
            
            62,544Total
      Current Liabilities
            
            
            48,433,030
            
            
            
            42,100,705LONG
      TERM LIABILITIESNote
      payable,  net of discount of $6,997,517 and $0 as of June, 30,
      2010 and December 31, 2009, respectively
            
            
            1,177,483
            
            
            
            -Warrant
      liabilities
            
            
            4,791,969
            
            
            
            -Total
      Long-Term Liabilities
            
            
            5,969,452
            
            
            
            -TOTAL
      LIABILITIES
            
            
            54,402,482
            
            
            
            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 June, 30, 2010 and December
      31, 2009, respectively
            
            
            21,693
            
            
            
            19,961Additional
      paid-in capital
            
            
            13,590,889
            
            
            
            8,967,012Retained
      earnings (the restricted portion is $890,912 at June, 30, 2010 and
      December 31, 2009)
            
            
            12,057,780
            
            
            
            11,046,999Accumulated
      other comprehensive income
            
            
            2,068,209
            
            
            
            1,937,268TOTAL
      STOCKHOLDERS’ EQUITY
            
            
            27,738,571
            
            
            
            21,971,240TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            82,141,053
            
            
            $
            64,071,945


See
accompanying notes to condensed consolidated financial statements
  2




KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF (LOSS) INCOME AND


COMPREHENSIVE (LOSS)
INCOME


(UNAUDITED)





Three
      Months Ended
            
            
            Six
      Months EndedJune
      30,
              2010
            
            
            June
      30,
              2009
            
            
            June
      30,
              2010
            
            
            June
      30,
              2009REVENUES,
      NET
            
            $
            9,911,884
            
            
            $
            5,481,551
            
            
            $
            18,166,224
            
            
            $
            9,487,455COST
      OF GOODS SOLD
            
            
            (7,559,235
            )
            
            
            (4,037,629
            )
            
            
            (13,963,654
            )
            
            
            (7,063,351
            )GROSS
      PROFIT
            
            
            2,352,649
            
            
            
            1,443,922
            
            
            
            4,202,570
            
            
            
            2,424,104Research
      and development
            
            
            400,370
            
            
            
            580,772
            
            
            
            743,768
            
            
            
            1,106,973Selling
      and distribution expenses
            
            
            89,685
            
            
            
            97,810
            
            
            
            942,013
            
            
            
            183,994General
      and administrative expenses
            
            
            1,147,061
            
            
            
            678,278
            
            
            
            1,797,872
            
            
            
            1,456,210INCOME
      (LOSS) FROM OPERATIONS
            
            
            715,533
            
            
            
            87,062
            
            
            
            718,917
            
            
            
            (323,073
            )Interest
      income (expense), net
            
            
            541,224
            
            
            
            (109,253
            )
            
            
            333,273
            
            
            
            (418,557
            )Government
      grants
            
            
            45,950
            
            
            
            24,951
            
            
            
            75,789
            
            
            
            124,005Other
      income, net
            
            
            10,801
            
            
            
            245,971
            
            
            
            57,859
            
            
            
            302,185INCOME
      (LOSS) FROM OPERATIONS BEFORE INCOME TAXES
            
            
            1,313,508
            
            
            
            248,731
            
            
            
            1,185,838
            
            
            
            (315,440
            )INCOME
      TAX (EXPENSE) BENEFIT
            
            
            (124,741
            )
            
            
            (22,358
            )
            
            
            (175,056
            )
            
            
            (41,085
            )INCOME
      (LOSS) FROM CONTINUING OPERATIONS
            
            
            1,188,767
            
            
            
            226,373
            
            
            
            1,010,782
            
            
            
            (356,525
            )NET
      INCOME (LOSS)
            
            
            1,188,767
            
            
            
            226,373
            
            
            
            1,010,782
            
            
            
            (356,525
            )








3




Three
      Months Ended
            
            
            Six
      Months EndedJune
      30,
              2010
            
            
            June
      30,
              2009
            
            
            June
      30,
              2010
            
            
            June
      30,
              2009OTHER
      COMPREHENSIVE INCOMEForeign
      currency translation
            
            
            137,493
            
            
            
            16,121
            
            
            
            130,941
            
            
            
            28,419COMPREHENSIVE
      INCOME  (LOSS)
            
            
            1,326,260
            
            
            
            242,494
            
            
            
            1,141,723
            
            
            
            (328,106
            )WEIGHTED
      AVERAGE SHARES OUTSTANDING BASIC
            
            
            20,866,109
            
            
            
            19,961,000
            
            
            
            20,424,671
            
            
            
            19,961,000WEIGHTED
      AVERAGE SHARES OUTSTANDING DILUTED
            
            
            24,677,264
            
            
            
            21,126,517
            
            
            
            22,004,992
            
            
            
            19,961,000NET
      INCOME (LOSS) PER SHARE FROM CONTINUING OPERATIONS, BASIC
            
            $
            0.06
            
            
            $
            0.01
            
            
            $
            0.05
            
            
            $
            (0.02
            )NET
      INCOME (LOSS) PER SHARE FROM CONTINUING OPERATIONS,
DILUTED
            
            $
            0.05
            
            
            $
            0.01
            
            
            $
            0.05
            
            
            $
            (0.02
            )NET
      INCOME (LOSS) PER SHARE, BASIC
            
            $
            0.06
            
            
            $
            0.01
            
            
            $
            0.05
            
            
            $
            (0.02
            )NET
      INCOME (LOSS) PER SHARE, DILUTED
            
            $
            0.05
            
            
            $
            0.01
            
            
            $
            0.05
            
            
            $
            (0.02
            )


4




KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS


(UNAUDITED)




Six
      Months Ended
              June,
      302010
            
            
            2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      (loss) income
            
            $
            1,010,782
            
            
            $
            (356,525
            )Adjustments
      to reconcile net (loss) income to net cash (used in) provided by operating
      activities:Depreciation
      and amortization
            
            
            1,935,980
            
            
            
            1,630,498Deferred
      taxes
            
            
            (10,549
            )
            
            
            41,
      085Option
      and warrant expense
            
            
            2,055,699
            
            
            
            525,292Inventory
      reserve
            
            
            -
            
            
            
            152,109Change
      of derivative instrument’s fair value
            
            
            (2,205,548
            )
            
            
            -Changes
      in operating assets and liabilities:(Increase)
      Decrease In:Accounts
      receivable
            
            
            2,757,111
            
            
            
            1,085,132Inventories
            
            
            (4,175,053
            )
            
            
            (6,907,531
            )Other
      receivables and prepaid expenses
            
            
            (197,550
            )
            
            
            (1,227,810
            )Due
      from employees
            
            
            (111,654
            )
            
            
            (28,499
            )Prepayments
      and prepaid expenses
            
            
            627,935
            
            
            
            (1,963,636
            )Increase
      (Decrease) In:Accounts
      payable
            
            
            3,149,816
            
            
            
            (511,665
            )Other
      payables and accrued liabilities
            
            
            (285,960
            )
            
            
            1,109,534Customer
      deposits
            
            
            110,017
            
            
            
            (654,013
            )Income
      tax payable
            
            
            (76,918
            )
            
            
            -Net
      cash (used in) provided by operating activities
            
            $
            4,584,108
            
            
            $
            (7,106,029
            )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of plant and equipment
            
            
            (700,530
            )
            
            
            (23,718
            )Purchase
      of construction in progress
            
            
            -
            
            
            
            (2,110,952
            )Issuance
      of notes receivable
            
            
            (17,168,835
            )
            
            
            (18,490,767
            )Repayments
      of notes receivable
            
            
            2,268,415
            
            
            
            28,545,269Net
      cash provided by (used in) investing activities
            
            $
            (15,600,950
            )
            
            $
            7,919,832


5
  KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
 (UNAUDITED)




Six
      Months Ended
              June,
      302010
            
            
            2009CASH
      FLOWS FROM FINANCING ACTIVITIES:Restricted
      cash
            
            $
            (2,342,549
            )
            
            $
            3,200,521Proceeds
      from short-term bank loans
            
            
            19,166,786
            
            
            
            17,829,741Repayments
      of short-term bank loans
            
            
            (18,142,607
            )
            
            
            (19,145,049
            )Proceeds
      from notes payable
            
            
            20,241,794
            
            
            
            10,084,034Repayments
      of notes payable
            
            
            (7,934,394
            )
            
            
            (13,102,078
            )Option
      exercise
            
            
            744,911
            
            
            
            -Repayments
      of advances to related parties
            
            
            -
            
            
            
            199,358Net
      cash provided by financing activities
            
            
            11,733,941
            
            
            
            (933,473
            )NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
            
            
            717,099
            
            
            
            (119,670
            )Effect
      of exchange rate changes on cash
            
            
            (55,742
            )
            
            
            62,346Cash
      and cash equivalents at beginning of period
            
            
            218,207
            
            
            
            141,380CASH AND CASH
      EQUIVALENTS AT END OF PERIOD
            
            $
            879,564
            
            
            $
            84,056SUPPLEMENTARY
      CASH FLOW INFORMATIONIncome
      taxes paid
            
            $
            262,591
            
            
            $
            -Interest
      paid
            
            $
            891,042
            
            
            $
            808,100


SUPPLEMENTAL
NON-CASH DISCLOSURE:
  During
the six months ended June, 30, 2010 and 2009, $0 and $57,120 were transferred
from construction in progress to plant and equipment, respectively.
  6


KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 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.





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.  In
recent years, an increased focus of the Company has been on the development of
products for its domestic market in China, particularly battery powered all
electric super-mini automobiles (EVs).  In November, 2009, the Company
sold 30 specially designed low speed EVs to the Postal Service in Jinhua, and in
July, 2010, the Company announced that it received an order from the Postal
Service in Hangzhou, Zhejiang Province, for 60 all electric
vehicles.





On
January 4, 2010, the Company announced that it formed an alliance with major
Chinese energy, IT and battery companies to help launch a new business model for
the mass commercialization of EVs to be expanded on a city by city basis,
addressing key concerns relating to EVs, including high purchase costs, limited
driving ranges and convenience and safety matters with respect to the charging,
maintenance and disposal of batteries.  Under this new business model,
consumer costs will be reduced as a result of government cooperation and
subsidies, and driving ranges will be extended through the establishment of a
network of battery stations where batteries may be rented and exchanged
utilizing Kandi technology.  Central to the new business strategy,
batteries will be made available on a rental basis separate from the sale of
each vehicle.  An initial goal of the Alliance is the establishment of
a revolutionary comprehensive model EV city in Jinhua to be followed by other
model cities in Zhejiang Province with the assistance and participation of the
local and regional governments.  The core members of the alliance with
the Company are China Potevio/CNOOC New Energy and Power Ltd. (a joint venture
between China National Offshore Oil Corporation and China Potevio Co.) and
Tianneng Power International, Ltd.




7


KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2010
(UNAUDITED)


In April,
2010, the Company announced that it anticipated that government funded subsidies
for up to 50% of the purchase price of EVs would be made available to the first
3,000 purchasers of the Company’s EVs.  On April 30, 2010, China’s
Ministry of Industry and Information and Technology qualified the Company’s low
speed vehicle (KD5020X) for China’s energy conserving and new energy
projects.   The vehicle was placed on its list of vehicles in its
10th catalogue of recommended car types which meet requirements for sales to the
public.  On June 1, 2010, the Chinese Ministry of Finance (MOF)
announced planned trial subsidies for China’s EV and hybrid car manufacturers of
up to RMB 60,000 and RMB 50,000, respectively, as part of an effort to stimulate
purchases of these vehicles to help reduce emissions and gasoline
consumption.  Additionally, the announcement indicated there will be
government investment and policy support for EV infrastructure, such as battery
charging stations.  The announcement noted that the trial will be
initiated in five Chinese cities: Shanghai, Hangzhou, Changchun, Shenzen and
Hefei.  On June 21, 2010, the Company announced that another EV
product, Model KD 5010XXYEV, was also approved for sale in China.





On July
16, 2010, the Company announced that construction of the first battery charging
station was underway in Jinhua.  The State Grid Corporation of China,
China’s largest electric power and transmission company, is funding the project
and is responsible for construction, which is expected to be completed before
the end of 2010.





NOTE
2 – LIQUIDITY




The
Company’s working capital surplus is $682,171 as of June 30, 2010.




As of
June 30, 2010, the Company had credit lines from commercial banks for
$34,808,918, of which $27,465,265 was used at June 30, 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 six
months ended June 30, 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.




8


KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2010
(UNAUDITED)


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; and


(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.





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.





(b)
Fair Value of Financial Instruments





SFAS 157
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.




9


KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2010
(UNAUDITED)
  NOTE
6 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





The
assets measured at fair value on a recurring basis subject to the disclosure
requirements of SFAS 157 as of June 30, 2010 are as follows:





Fair
      Value Measurements at Reporting
              Date
      Using Quoted Prices inCarrying
              value
      as of
              June
      30,
              2010
            
            
            Active
      Markets for Identical Assets
            
            
            Significant
      Other Observable Inputs
            
            
            Significant
      Unobservable Inputs(Level
      1)
            
            
            (Level
      2)
            
            
            (Level
      3)Cash
      and cash equivalents
            
            $
            879,564
            
            
            $
            879,564
            
            
            
            -
            
            
            
            -Restricted
      cash
            
            $
            8,080,492
            
            
            $
            8,080,492
            
            
            
            -
            
            
            
            -Conversion
      features
            
            $
            3,284,395
            
            
            
            -
            
            
            $
            3,284,395
            
            
            
            -Warrants
            
            $
            1,507,574
            
            
            
            -
            
            
            $
            1,507,574
            
            
            
            -





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, SFAS 157 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. SFAS
157 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 June 30, 2010
and determined that there are no significant assets to be tested for
recoverability under SFAS 144 and as such, no fair value measurements related to
non-financial assets have been made during the six months ended June 30,
2010.





(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 June 30, 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.




10


KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2010
(UNAUDITED)


NOTE
6 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





(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 June 30, 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.




(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.




11


KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2010
(UNAUDITED)


NOTE
6 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





(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.





(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 $743,768 and $1,106,973 for the six months ended June
30, 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 costs incurred
when the proceeds are received or collectible.





For the
six months ended June 30, 2010 and 2009, $75,789 and $124,005 was received
from the PRC government for the Company’s contribution to the local
economy.




12


KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2010
(UNAUDITED)


NOTE
6 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





(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.





June
      30,
              2010
            
            
            December
      31,
              2009
            
            
            June
      30,
              2009Period
      end RMB : USD exchange rate
            
            
            6.8086
            
            
            
            6.8372
            
            
            
            6.8448Average
      quarterly RMB : USD exchange rate
            
            
            6.8347
            
            
            
            6.8409
            
            
            
            6.8425





(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.





(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
option related expense for the six months ended June 30, 2010 is $1,152,050.
Also see Note 17.




13


KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2010
(UNAUDITED)


NOTE
6 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





(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 grant.





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 Notes is
separated from the debt instrument and accounted for separately as a derivative
instrument. On the date the Convertible Notes are issued, the conversion feature
was recorded as a liability at its fair value, and future 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 conversion features.
The risk-free interest rate for the expected term of the conversion features is
based on the U.S. Treasury yield curve in effect at the time of
grant.




14


KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 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.




15


KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 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 June 30,
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.




16


KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 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.




NOTE
8 – CONCENTRATIONS





(a)
Customers





The
Company’s major customers for the period ended June 30, 2010 accounted for the
following percentages of total sales and accounts receivable as
follows:





Sales
            
            
            Accounts
      ReceivableMajor
      Customers
            
            Six
      Months Ended
              June,
      30,
              2010
            
            
            Six
      Months Ended
              June,
      30,
              2009
            
            
            June,
      30,
              2010
            
            
            December
      31,
              2009Company
      A
            
            
            63
            %
            
            
            77
            %
            
            
            49
            %
            
            
            92
            %Company
      B
            
            
            27
            %
            
            
            -
            
            
            
            44
            %
            
            
            -Company
      C
            
            
            6
            %
            
            
            22
            %
            
            
            -
            
            
            
            7
            %Company
      D
            
            
            2
            %
            
            
            -
            
            
            
            3
            %
            
            
            -Company
      E
            
            
            2
            %
            
            
            -
            
            
            
            3
            %
            
            
            -





(b)
Suppliers





The
Company’s major suppliers for the six months ended June 30, 2010 accounted for
the following percentage of total purchases and accounts payable as
follows:





Purchases
            
            
            Accounts
      PayableMajor
      Suppliers
            
            Six
      Months Ended
              June,
      30,
              2010
            
            
            Six
      Months Ended
              June,
      30,
              2009
            
            
            June,
      30,
              2010
            
            
            December
      31,
              2009Company
      F
            
            
            87
            %
            
            
            76
            %
            
            
            44
            %
            
            
            -Company
      G
            
            
            2
            %
            
            
            1
            %
            
            
            4
            %
            
            
            5
            %Company
      H
            
            
            1
            %
            
            
            1
            %
            
            
            -
            
            
            
            -Company
      I
            
            
            1
            %
            
            
            -
            
            
            
            2
            %
            
            
            4
            %Company
      J
            
            
            1
            %
            
            
            1
            %
            
            
            1
            %
            
            
            3
            %




17


KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2010
(UNAUDITED)


NOTE
9 – INCOME (LOSS) PER SHARE





The
Company calculates earnings per share in accordance with ASC 260, Earnings Per
Share, which requires a dual presentation of basic and diluted earnings per
share. Basic earnings per share are computed using the weighted average number
of shares outstanding during the fiscal year. Diluted earnings per share
represents basic earnings per share adjusted to include the potentially dilutive
effect of outstanding stock options, warrants and convertible note (using the
if-converted method).





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





Six
      months Ended June 30,
            
            2010
            
            
            2009Net
      income (loss)
            
            $
            1,010,782
            
            
            $
            (356,525
            )Weighted
      – average shares of common stock outstandingBasic
            
            
            20,424,671
            
            
            
            19,961,000Dilutive
      shares
            
            
            1,580,321
            
            
            
            -Diluted
            
            
            22,004,992
            
            
            
            19,961,000Basic
      earning(loss) per share
            
            $
            0.05
            
            
            $
            (0.02
            )Diluted
      earning (loss) per share
            
            $
            0.05
            
            
            $
            (0.02
            )





Also see
Note 17.





NOTE
10 - INVENTORIES





Inventories
are summarized as follows:





June
      30,
              2010
              (Unaudited)
            
            
            December
      31,
              2009Raw
      material
            
            $
            1,029,636
            
            
            $
            956,378Work-in-progress
            
            
            8,035,177
            
            
            
            3,785,506Finished
      goods
            
            
            684,558
            
            
            
            793,1549,749,370
            
            
            
            5,535,038Less:
      reserve for slow moving inventories
            
            
            (152,918
            )
            
            
            (152,278
            )Inventories,
      net
            
            $
            9,596,453
            
            
            $
            5,382,760




18


KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2010
(UNAUDITED)


NOTE
11 - NOTES RECEIVABLE





Notes
receivable are summarized as follows:




June
      30,
              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
            
            
            -
            
            
            
            731,294Due
      September 29, 2010, interest at 6.0% per annum
            
            
            3,595,339
            
            
            
            -Due
      September 30, 2010, interest at 8.0% per annum
            
            
            3,245,895
            
            
            
            -Due
      December 30, 2010, interest at 8.0% per annum
            
            
            8,078,019
            
            
            
            -Due
      March 3, 2011, interest at 6.0% per annum
            
            
            1,170,195
            
            
            
            -Due
      March 5, 2011, interest at 6.0% per annum
            
            
            410,937
            
            
            
            -Due
      April 29, 2011, interest at 5.31% per annum
            
            
            734,366
            
            
            
            -Notes
      receivable from unrelated companies
            
            
            17,234,751
            
            
            
            2,267,599Bank
      acceptance notes:Bank
      acceptance notes
            
            
            -
            
            
            
            -Notes
      receivable
            
            $
            17,234,751
            
            
            $
            2,267,599





Notes
receivable are unsecured.





NOTE
12 – LAND USE RIGHTS





Land use
rights consist of the following:





June
      30,
              2010
              (Unaudited)
            
            
            December
      31,
              2009Cost
      of land use rights
            
            $
            11,241,764
            
            
            $
            11,168,397Less:
      Accumulated amortization
            
            
            (599,329
            )
            
            
            (448,869
            )Land
      use rights, net
            
            $
            10,642,435
            
            
            $
            10,719,528





As of
June 30, 2010 and December 31, 2009, the net book value of land use rights
pledged as collateral for bank loans was $3,927,920 and $2,456,811,
respectively. Also see Note 14.





As of
June 30, 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 $6,714,515 and
$6,274,601. Also see Notes 14 and 18.





The
amortization expense for the six months ended June 30, 2010 and 2009 was
$122,121 and $112,411, respectively.




19


KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2010
(UNAUDITED)


NOTE
12 – LAND USE RIGHTS (CONTINUED)





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




2010
      (six months)
            
            $
            122,1202011
            
            
            244,2412012
            
            
            244,2412013
            
            
            244,2412014
            
            
            244,241Thereafter
            
            
            9,543,351Total
            
            $
            10,642,435




NOTE
13 – PLANT AND EQUIPMENT





Plant and
equipment consist of the following:





June
      30,
              2010
              (Unaudited)
            
            
            December
      31,
              2009At
      cost:Buildings
            
            $
            12,695,884
            
            
            $
            12,413,935Machinery
      and equipment
            
            
            9,349,008
            
            
            
            9,252,390Office
      equipment
            
            
            119,153
            
            
            
            114,380Motor
      vehicles
            
            
            167,316
            
            
            
            166,616Moulds
            
            
            11,172,048
            
            
            
            10,715,66633,503,409
            
            
            
            32,662,987Less
      : Accumulated depreciationBuildings
            
            $
            (1,183,783
            )
            
            $
            (970,725
            )Machinery
      and equipment
            
            
            (6,091,331
            )
            
            
            (5,601,424
            )Office
      equipment
            
            
            (98,724
            )
            
            
            (95,295
            )Motor
      vehicles
            
            
            (108,615
            )
            
            
            (95,697
            )Moulds
            
            
            (3,847,560
            )
            
            
            (2,753,013
            )(11,330,013
            )
            
            
            (9,516,154
            )Plant
      and equipment, net
            
            $
            22,173,396
            
            
            $
            23,146,833





As of
June 30, 2010 and December 31, 2009, the net book value of plant and equipment
pledged as collateral for bank loans was $8,314,433 and $4,308,435,
respectively. Also see Note 14.





As of
June 30, 2010, the net book value of plant and equipment pledged as collateral
for bank loans borrowed by ZMEC, an unrelated party of the Company was
$3,197,668. Also see Notes 14 and 18.





Depreciation
expense for six months ended June 30, 2010 and 2009 was $1,813,859 and
$1,518,087, respectively.




20


KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2010
(UNAUDITED)


NOTE
14 – SHORT TERM BANK LOANS




Short-term
loans are summarized as follows:




June
      30,
              2010
              (Unaudited)
            
            
            December
      31,
              2009Loans
      from ICBC-Exploration Zone BranchMonthly
      interest only payments at 6.43% per annum, due April 6, 2010, secured by
      the assets of the Company.
            
            $
            -
            
            
            $
            731,294Monthly
      interest only payments at 5.31% per annum, due April 15,
      2010.  Collateralized by a time deposit.
            
            
            -
            
            
            
            1,316,328Monthly
      interest only payments at 5.31% per annum, due June 3, 2010, secured by
      the assets of the Company.
            
            
            -
            
            
            
            731,294Monthly
      interest only payments at 5.31% per annum, due August 10, 2010, secured by
      the assets of the Company (repaid before its due date).
            
            
            -
            
            
            
            394,899Monthly
      interest only payments at 5.31% per annum, due August 11, 2010, secured by
      the assets of the Company (repaid before its due date).
            
            
            -
            
            
            
            438,776Monthly
      interest only payments at 5.31% per annum, due October 11, 2010, secured
      by the assets of the Company (repaid before its due date).
            
            
            -
            
            
            
            658,164Monthly
      interest only payments at 5.31% per annum, due October 13, 2010, secured
      by the assets of the Company (repaid before its due date).
            
            
            -
            
            
            
            702,042Monthly
      interest only payments at 5.31% per annum, due November 12, 2010, secured
      by the assets of the Company (repaid before its due date).
            
            
            -
            
            
            
            146,259Monthly
      interest only payments at 5.31% per annum, due December 3, 2010, secured
      by the assets of the Company (repaid before its due date).
            
            
            -
            
            
            
            585,035Loans
      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.
            
            
            3,965,574
            
            
            
            3,948,985




21
 KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2010
(UNAUDITED)
 NOTE
14 - SHORT TERM BANK LOANS (CONTINUED)




June
      30,
              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.
            
            
            -
            
            
            
            1,462,587Monthly
      interest only payments at 5.10% per annum, due October 15, 2010, secured
      by the assets of the Company.
            
            
            1,468,731
            
            
            
            -Monthly
      interest only payments at 5.10% per annum, due December 10, 2010, secured
      by the assets of the Company, and guaranteed by Mr. Hu Xiaoming and Ms.
      Ling Yueping.
            
            
            734,365
            
            
            
            -Monthly
      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.
            
            
            2,937,461
            
            
            
            -Loans
      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.
            
            
            4,406,193
            
            
            
            -Monthly
      interest only payments at 5.35% per annum, due October 13, 2010, secured
      by the assets of the Company, and guaranteed by Nanlong Group Co., Ltd.,
      Zhejiang Mengdeli Electric Company Mr. Hu Xiaoming and Ms. Ling
      Yueping.
            
            
            4,406,193
            
            
            
            -Monthly
      interest only payments at 4.86% per annum, due October 13, 2010, secured
      by the Company’s account receivables.
            
            
            2,937,461
            
            
            
            -




22
 KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2010
(UNAUDITED)
 NOTE
14 - SHORT TERM BANK LOANS (CONTINUED)


June
      30,
              2010
              (Unaudited)
            
            
            December
      31,
              2009Loans
      from Shanghai Pudong Development BankMonthly
      interest only payments at 4.78% per annum, due April 28, 2010,
      collateralized by a time deposit.
            
            
            -
            
            
            
            1,316,328Monthly
      interest only payments at 5.58% per annum, due December 8, 2010, pledged
      house of Hu Xiaoming and Ms. Ling Yueping, guaranteed by Nanlong Group
      Co., Ltd. and Mr. Hu Xiaoming.
            
            
            2,937,461
            
            
            
            2,925,174Loans
      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.
            
            
            2,937,461
            
            
            
            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 4, 2011,
      guaranteed by  Mr. Hu Xiaoming, Mr. Yan Guanwei and Zhejiang
      Shuguang industrial Co., Ltd.
            
            
            734,365
            
            
            
            -Total
            
            $
            27,465,265
            
            
            $
            26,326,566





Short
term bank loans interest expense for the six month ended June 30, 2010 and 2009
was $749,407, and $848,450, respectively.





As of
June 30, 2010, the aggregated amount of short term loans that are guaranteed by
various third parties is $23,059,072. Also see Note 19.




23


KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2010
(UNAUDITED)


NOTE
15 – NOTES PAYABLE





Notes
payable are summarized as follows:





June
      30,
              2010
              (Unaudited)
            
            
            December
      31,
              2009Bank
      acceptance notes:Due
      March 8, 2010
            
            $
            -
            
            
            $
            1,462,587Due
      March 24, 2010
            
            
            -
            
            
            
            1,462,587Due
      April 14, 2010
            
            
            -
            
            
            
            1,316,328Due
      July 6, 2010
            
            
            1,468,731
            
            
            
            -Due
      September 9, 2010
            
            
            1,468,731
            
            
            
            -Due
      September 23, 2010
            
            
            1,468,731Due
      October 26, 2010
            
            
            2,203,095Due
      November 5, 2010
            
            
            734,365Due
      November 5, 2010
            
            
            1,468,731Due
      November 12, 2010
            
            
            1,468,731
            
            
            
            -Subtotal
            
            $
            10,281,115
            
            
            $
            4,241,502Notes
      payable to unrelated companies:Due
      December 1, 2010
            
            $
            -
            
            
            $
            3,690,038Due
      January 20, 2012
            
            
            1,177,483
            
            
            
            -Subtotal
            
            
            1,177,483
            
            
            
            3,690,038Total
            
            $
            11,458,598
            
            
            $
            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 $8,078,019 is held as collateral for the following notes payable at June
30, 2010:





Due
      July 6, 2010
            
            $
            1,468,731Due
      September 9, 2010
            
            
            1,468,731Due
      September 23, 2010
            
            
            1,468,731Due
      October 26, 2010
            
            
            2,203,095Due
      November 5, 2010
            
            
            734,365Due
      November 5, 2010
            
            
            1,468,731Due
      November 12, 2010
            
            
            1,468,731Subtotal
            
            $
            10,281,115




24


KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 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
740, the Company may recognize the tax benefit from an uncertain tax position
only if it is more likely than not that the tax position will be sustained on
examination by the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements from such a
position should be measured based on the largest benefit that has a greater than
fifty percent likelihood of being realized upon ultimate settlement. 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 June 30, 2010, the Company does not have a liability for unrecognized tax
benefits. The Company files income tax returns in the U.S. federal jurisdiction.
The Company is subject to U.S. federal 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 June 30, 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 June 30, 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 six
months ended June 30, 2010 due to the net operating loss carry forward in the
United States.




25


KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2010
(UNAUDITED)


NOTE
16 – TAX (CONTINUED)





Income
tax expense (benefit) for the six months ended June 30, 2010 and 2009 is
summarized as follows:




For
      the Six Months
                EndedJune
      30,(Unaudited)2010
            
            
            2009Current:Provision
      for CIT
            
            $
            185,673
            
            
            $
            -Deferred:Provision
      for CIT
            
            
            (10,617
            )
            
            
            41,085Income
      tax expense (benefit)
            
            $
            175,056
            
            
            $
            41,085




The
Company’s income tax expense (benefit) differs from the “expected” tax expense
for the six months ended June 30, 2010 and 2009 (computed by applying the CIT
rate of 25%, respectively to income before income taxes) as
follows:





For
      the Six Months
                EndedJune
      30,(Unaudited)2010
            
            
            2009Computed
      "expected" (benefit) expense
            
            $
            221,568
            
            
            $
            (78,860
            )Favorable
      tax rate
            
            
            (185,673
            )
            
            
            83,196Permanent
      differences
            
            
            58,159
            
            
            
            30,118Valuation
      allowance
            
            
            81,002
            
            
            
            6,631Income
      tax expense (benefit)
            
            $
            175,056
            
            
            $
            41,085





The tax
effects of temporary differences that give rise to the Company’s net deferred
tax assets and liabilities as of June 30, 2010 and December 31, 2009 are
summarized as follows:




26


KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2010
(UNAUDITED)


NOTE
16 – TAX (CONTINUED)





June
      30,
              2010
              (Unaudited)
            
            
            December
      31,
              2009Current
      portion:Deferred
      tax assets:Expense
            
            $
            6,710
            
            
            $
            23,028Subtotal
            
            
            6,710
            
            
            
            23,028Deferred
      tax liabilities:Sales
      cut-off
            
            
            (59,202
            )
            
            
            (85,572
            )Other
            
            
            -
            
            
            
            -Subtotal
            
            
            (59,202
            )
            
            
            (85,572
            )Total
      deferred tax liabilities – current portion
            
            
            (52,492
            )
            
            
            (62,544
            )Non-current
      portion:Deferred
      tax assets:Depreciation
            
            
            506,600
            
            
            
            504,258Loss
      carried forward
            
            
            160,399
            
            
            
            75,397Valuation
      allowance
            
            
            (160,399
            )
            
            
            (75,397
            )Subtotal
            
            
            506,600
            
            
            
            504,258Deferred
      tax liabilities:Accumulated
      other comprehensive gain
            
            
            (296,579
            )
            
            
            (296,511
            )Subtotal
            
            
            (296,579
            )
            
            
            (296,511
            )Total
      deferred tax assets – non-current portion
            
            
            210,021
            
            
            
            207,747Net
      deferred tax assets
            
            $
            157,529
            
            
            $
            145,203





(b)
Tax Holiday Effect





For the
six months ended June 30, 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 six months ended June 30, 2010 and 2009.





The
combined effects of the income tax expense exemptions and reductions available
to the Company for the six months ended June 30, 2010 and 2009 are as
follows:




For
      the Six Months
              EndedJune
      30
              (Unaudited)2010
            
            
            2009Tax
      holiday credit
            
            $
            185,673
            
            
            $
            (83,196
            )Basic
      net (loss) income per share effect
            
            $
            0.01
            
            
            $
            (0.00
            )




27


KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 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 vested and became exercisable on June 6, 2010.  The options
will expire after ten years.  The options are issued under and subject
to the terms of the Company’s 2008 Omnibus Long-Term Incentive
Plan.  No required dates of service are specified on the consulting
agreement.  No repurchase features or cash settlement provisions are
specified in the terms and conditions of the Notice of Grant of Stock
Option.





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





Activity
            
            
            Weighted
      Average
              Exercise
      PriceOutstanding
      as of January 1, 2010
            
            
            2,950,000
            
            
            $
            0.88Granted
            
            
            -
            
            
            
            -Exercised
            
            
            1,116,696
            
            
            
            0.96Cancelled
            
            
            -
            
            
            
            -Outstanding
      as of June 30, 2009
            
            
            1,833,304
            
            
            
            0.84





The
following table summarizes information about stock options outstanding as of
June 30, 2010:





Options
      Outstanding
            
            
            Options
      ExercisableNumber
      of
              shares
            
            
            Exercise
              Price
            
            
            Remaining
              Contractual
              life(in
      years)
            
            
            Number
      of
              shares
            
            
            Exercise
              Price1,733,304
            
            
            $
            0.80
            
            
            
            9
            
            
            
            1,733,304
            
            
            $
            0.80100,000
            
            
            
            1.50
            
            
            
            10
            
            
            
            100,000
            
            
            
            1.50




28


KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 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. The fair value per share of 250,000 options issued to Wang
Rui and Li Qiwen, which became exercisable on March 6, 2010, is $4.55, while the
fair value per share of 100,000 options issued to Wang Rui and Li Qiwen, which
became exercisable on June 6, 2010, is $3.44.





(b)
Warrants and Convertible Notes





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





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





Pursuant
to the terms of the Convertible Notes and the Investor Warrants, on May 18,
2010, the conversion price of the Convertible Notes was adjusted to $3.5924 per
share and the exercise price of the Investor Warrants and warrants issued to the
placement agent was adjusted to $4.3907 per share. As of June 30, 2010, the
investors had converted $1,825,000 of the principal amount of the Convertible
Notes into an aggregate of 508,507 shares of Common Stock, of which 260,000
shares were converted at the initial conversion price of $6.25, and 248,507
additional shares of Common Stock were issued at the adjusted conversion price
of $3.5924.




29


KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2010
(UNAUDITED)


As of
June 30, 2010, the fair value of the Investor Warrants and the warrants issued
to the placement agent is $1.71 per share, and the fair value of conversion
features is $1.44 per share.





NOTE
18 – STOCK AWARDS





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





According
to that certain consulting agreement dated as of March 1, 2010, between the
Company and DGI Investor Relations, Inc., the Company agreed to compensate the
consultant in payments of 2,000 shares of Company’s Common Stock per quarter for
the term of the agreement in exchange for the consultant providing investor
relations services. Pursuant to the terms of the agreement, the Company issued
3,340 shares of Common Stock on April 27, 2010 for services rendered from
January 2010 to May 31, and 2,000 shares of Common Stock on June 1, 2010 for
services rendered from June 1, 2010 to August 31, 2010.





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





NOTE
19 – COMMITMENTS AND CONTINGENCIES





As of
June 30, 2010, the Company provided guarantee for the following third
parties:





Guarantee
      provided to
            
            AmountYongkang
      Kangli Metal Manufacturing Co.
            
            $
            4,406,192Zhejiang
      Mengdeli Electric Company
            
            
            2,496,842Zhejiang
      Shuguang industrial Co., Ltd.
            
            
            2,937,461Zhejiang
      Yiran Auto Sales Company
            
            
            734,365Wuyi
      Qilong Vehicle Co., Ltd.
            
            
            1,321,858Zhejiang
      Taiping Trade Co., Ltd
            
            
            3,378,081Total
            
            $
            15,274,799




30




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.




31





The stock
based compensation expense for the six months ended June 30, 2010 is $1,152,050,
among which $808,223 and $343,827 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 grant.





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
June 30, 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 Investor
Warrants and the warrants issued to placement agents of the Convertible Notes is
$1.71.




Fair
Value of Conversion Features




In
accordance with ASC 815, the conversion feature of the Convertible Notes is
separated from the debt instrument and accounted for separately as a derivative
instrument. On the date the Convertible Notes are issued, the conversion feature
was recorded as a liability at its fair value, and future 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 grant. As of June 30, 2010, the
fair value of conversion features is $1.44 per share.





Remeasurement
at Fair Value of Financial Instruments & Non-Financial Assets





The
Company measured the fair value of warrants and conversion features embedded in
the Convertible Notes as of June 30, 2010 using the Black-Scholes-Merton model
with the inputs effective at measurement date. For the six months ended June 30,
2010, the fair value of Investor Warrants and warrants issued to placement
agents has decreased $1,380,840, and the fair value of conversion features has
decreased $394,969. For the six months ended June 30, 2010, $742,396 of the
value of the conversion features has been exercised to convert $1,825,000
principal of the Convertible Notes into the Company’s Common Stock.




32





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. SFAS
157 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 June 30, 2010
and determined that there are no significant assets to be tested for
recoverability under SFAS 144 and as such, no fair value measurements related to
non-financial assets have been made during the six months ended June 30,
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 Investor Warrants and warrants issued to 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 Convertible Notes
payable using the effective interest method. As of June 30, 2010, the amount of
debt discount is $6,997,517.





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.




33





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 June 30,
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.




34





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.




35





Results
of Operations





Comparison
of Six Months Ended June 30, 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





For
      Six Months Ended
              June
      30,
              2010
            
            
            %
      Of
              Revenue
            
            
            For
      Six Months Ended
              June
      30,
              2009
            
            
            %
      Of
              Revenue
            
            
            Change
      In Amount
            
            
            Change
              In %REVENUES,
      NET
            
            $
            18,166,224
            
            
            
            100.0
            %
            
            $
            9,487,455
            
            
            
            100.0
            %
            
            $
            8,678,769
            
            
            
            91.5
            %COST
      OF GOODS SOLD
            
            
            (13,963,654
            )
            
            
            (76.9
            %)
            
            
            (7,063,351
            )
            
            
            (74.4
            %)
            
            
            (6,900,303
            )
            
            
            97.7
            %GROSS
      PROFIT
            
            
            4,202,570
            
            
            
            23.1
            %
            
            
            2,424,104
            
            
            
            25.6
            %
            
            
            1,778,466
            
            
            
            73.4
            %Research
      and development
            
            
            743,768
            
            
            
            4.1
            %
            
            
            1,106,973
            
            
            
            11.7
            %
            
            
            (363,205
            )
            
            
            (32.8
            %)Selling
      and distribution expenses
            
            
            942,013
            
            
            
            5.1
            %
            
            
            183,994
            
            
            
            1.9
            %
            
            
            758,019
            
            
            
            412.0
            %General
      and administrative expenses
            
            
            1,797,872
            
            
            
            9.9
            %
            
            
            1,456,210
            
            
            
            15.3
            %
            
            
            341,662
            
            
            
            23.5
            %INCOME
      (LOSS) FROM OPERATIONS
            
            
            718,917
            
            
            
            4.0
            %
            
            
            (323,073
            )
            
            
            (3.4
            %)
            
            
            1,041,990
            
            
            
            (322.5
            %)Interest
      income (expense), net
            
            
            333,273
            
            
            
            1.8
            %
            
            
            (418,557
            )
            
            
            (4.4
            %)
            
            
            751,830
            
            
            
            (179.6
            %)Government
      grants
            
            
            75,789
            
            
            
            0.4
            %
            
            
            124,005
            
            
            
            1.3
            %
            
            
            (48,216
            )
            
            
            38.9
            %Other
      income, net
            
            
            57,859
            
            
            
            0.3
            %
            
            
            302,185
            
            
            
            3.2
            %
            
            
            (244,326
            )
            
            
            (80.9
            %)INCOME
      (LOSS) FROM OPERATIONS BEFORE INCOME TAXES
            
            
            1,185,838
            
            
            
            6.5
            %
            
            
            (315,440
            )
            
            
            (3.3
            %)
            
            
            1,501,278
            
            
            
            (475.9
            %)INCOME
      TAX BENEFIT (EXPENSE)
            
            
            (175,056
            )
            
            
            (0.9
            %)
            
            
            (41,085
            )
            
            
            (0.2
            %)
            
            
            (133,971
            )
            
            
            (326.1
            %)INCOME
      (LOSS) FROM CONTINUING OPERATIONS
            
            
            1,010,782
            
            
            
            5.6
            %
            
            
            (356,525
            )
            
            
            (3.5
            %)
            
            
            1,367,307
            
            
            
            (383.5
            %)NET
      INCOME (LOSS)
            
            
            1,010,782
            
            
            
            5.6
            %
            
            
            (356,525
            )
            
            
            (3.5
            %)
            
            
            1,367,307
            
            
            
            (383.5
            %)




36




(a)
Revenue





For the
six months ended June 30, 2010, our revenue increased by 91.5%, from $9,487,455
to $18,166,224 as compared to the six months ended June 30, 2009. This is
primarily due to the Company’s continuing efforts to develop new markets outside
North America and due to the recovery of global economy, which has enhanced the
customer demands for the Company’s products, particularly the recreational
vehicle lines. In addition, the sales of the Company’s electric vehicle has
grown significantly in 2010, which has contributed to the increase in
revenue.





The
following table lists the number of vehicles sold and sales revenue, categorized
by vehicle type, within the six months ended June 30, 2010 and
2009:





Six
      Months Ended June 302010
            
            
            2009Unit
            
            
            Sales
            
            
            Unit
            
            
            SalesATV
            
            
            2,184
            
            
            $
            1,595,181
            
            
            
            1,774
            
            
            $
            1,053,633CoCo
            
            
            1,377
            
            
            
            5,810,682
            
            
            
            474
            
            
            
            1,704,025GoKart
            
            
            6,387
            
            
            
            6,906,990
            
            
            
            2,563
            
            
            
            2,380,224Utility
      vehicles (“UTVs”)
            
            
            1,052
            
            
            
            2,301,724
            
            
            
            1,458
            
            
            
            3,671,762Three-wheeled
      motorcycle (“TT”)
            
            
            678
            
            
            
            1,551,647
            
            
            
            336
            
            
            
            677,812





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 six months
ended June 30, 2010 and 2009:





Six
      Months Ended June 302010
            
            
            2009Sales
            
            
            Percentage
            
            
            Sales
            
            
            PercentageNorth
      America
            
            $
            2,363,454
            
            
            
            13
            %
            
            $
            1,262,506
            
            
            
            13
            %China
            
            
            15,577,145
            
            
            
            86
            %
            
            
            8,071,643
            
            
            
            85
            %Europe
            
            
            255,625
            
            
            
            1
            %
            
            
            153,306
            
            
            
            2
            %Total
            
            $
            18,166,224
            
            
            
            100
            %
            
            $
            9,487,455
            
            
            
            100
            %





For the
six months ended June 30, 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 six months ended June 30, 2010 was $13,963,654,
representing a 97.7% increase of $7,063,351 from the six months ended June 30,
2009, which corresponded with the increase in sales. Cost of goods sold was
76.9% of the total revenue for the period, as compared to 74.5% of the
comparable period, reflecting the increased price of raw manufacturing materials
whose costs were comparatively higher than those of previous year.




37





(c)
Gross profit





Gross
profit for the first half of 2010 increased 73.4%, from $2,424,104 to $4,202,570
from the same period in 2009, as a result of the increase in revenue, although
higher material costs caused the increase in gross profit to lag behind the
increase in revenue.





(d)
Selling and distribution expenses





Selling
and distribution expenses were $942,013 for the six months ended June 30, 2010,
as compared to $183,994 from the same period in 2009, representing a 412%
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
$808,223 option related expense, the net selling and distribution expenses for
the six months ended June 30, 2010 was $133,790, a 27.3% decrease from the same
period of 2009, primarily due to the $30,060 decrease in insurance expense and
$57,082 decrease in advertising fee, although this decrease was partially offset
by an increase in shipping costs of $15,295, about 36%, compared to the same
period of 2009, due to the increased sales.





(e)
General and administrative expenses





General
and administrative expenses were $1,797,872 for the six months ended June 30,
2010, as compared to $1,456,210 for the same period in 2009, representing a
23.5% increase.  For the six months ended June 30, 2010, the general
and administrative expenses included $522,646 expenses for shares of common
stock awards to consultants for financing and investor relations services. In
addition to the stock award expense, the general and administrative expenses
also included $343,827 in stock-based compensation costs 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 $525,292. Excluding
the effect of stock award cost and option cost, the net general and
administrative expenses for the six months ended June 30, 2010 was $931,399,
almost equal to $930,918 for the same period of 2009.





(f)
Research and development





Research
and development expenses were $743,768 for the six months ended June 30, 2010,
as compared to $1,106,973 from the same period in 2009, representing a 32.8%
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





Government
grants totaled $75,789 for the six months ended June 30, 2010, representing a
38.9% decrease over the same period in 2009.




38




(h)
Other income, Net





Net other
income was $57,859 for the six months ended June 30, 2010, a decrease of 80.9%
from $302,185 for the same period of 2009. This is primarily due to a damage
award amount of $216,034 that the Company received in the second quarter of 2009
from a lawsuit against Zhejiang Yuegong Steel Structure Co. and Zhejiang Jinhua
No.1 Construction Co., Ltd. for their delay in the construction in the Jinhua
Industrial District.





(i) Net
interest income (expense)





Net
interest income was $333,273 for the six months ended June 30, 2010, as compared
to $418,557 interest expense for the same period last year, representing a
significant change. For the six months ended June 30, 2010, the interest expense
for the Convertible Notes was $253,425, and the interest expense incurred by the
amortization of debt discount was $492,099, while the interest income, which was
caused by the changes of fair value of Investor Warrants issued to Convertible
Notes investors and placement agents, and the changes of fair value of
conversion features embedded in Convertible Notes, was $1,775,809. Excluding the
effects of interest expense and interest income related to Convertible Notes,
the interest expense for this reporting period was $697,012, increased 66.5%
from $418,557 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 and from bank deposits, which decreased $359,927 compared to the same
period of 2009.





(j)
Net income (loss)





The
operating performance of the Company for the six months ended June 30, 2010
reflected a net income of $1,010,782, significantly improved from a net loss of
$356,525 for the same period of last year, primarily due to the increase of
sales and gross profit, and the significant decrease in interest
expense.





Excluding
the effects of option related expenses, the effects caused by the Convertible
Notes, and the change of the fair value of financial derivative, for the six
months ended June 30, 2010, the Company’s net income was $1,655,193, while the
net income was only $168,767 for the same period of 2009 excluding same
effects.




39




Comparison
of Three Months Ended June 30, 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





For
      Three Months Ended June 30,
              2010
            
            
            %
      Of
              Revenue
            
            
            For
      Three Months Ended June 30,
              2009
            
            
            %
      Of
              Revenue
            
            
            Change
      In Amount
            
            
            Change
              In %REVENUES,
      NET
            
            $
            9,911,884
            
            
            
            100.0
            %
            
            $
            5,481,551
            
            
            
            100.0
            %
            
            $
            4,430,333
            
            
            
            80.8
            %COST
      OF GOODS SOLD
            
            
            (7,559,235
            )
            
            
            (76.3
            %)
            
            
            (4,037,629
            )
            
            
            (73.7
            %)
            
            
            (3,521,606
            )
            
            
            87.2
            %GROSS
      PROFIT
            
            
            2,352,649
            
            
            
            23.7
            %
            
            
            1,443,922
            
            
            
            26.3
            %
            
            
            908,727
            
            
            
            62.9
            %Research
      and development
            
            
            400,370
            
            
            
            4.0
            %
            
            
            580,772
            
            
            
            10.6
            %
            
            
            (180,402
            )
            
            
            (31.1
            %)Selling
      and distribution expenses
            
            
            89,685
            
            
            
            0.9
            %
            
            
            97,810
            
            
            
            1.8
            %
            
            
            (8,125
            )
            
            
            (8.3
            %)General
      and administrative expenses
            
            
            1,147,061
            
            
            
            11.6
            %
            
            
            678,278
            
            
            
            12.3
            %
            
            
            468,783
            
            
            
            69.1
            %INCOME
      FROM OPERATIONS
            
            
            715,533
            
            
            
            7.2
            %
            
            
            87,062
            
            
            
            1.6
            %
            
            
            628,471
            
            
            
            721.9
            %Interest
      income (expense), net
            
            
            541,224
            
            
            
            5.5
            %
            
            
            (109,253
            )
            
            
            (2.0
            %)
            
            
            650,477
            
            
            
            (595.4
            %)Government
      grants
            
            
            45,950
            
            
            
            0.5
            %
            
            
            24,951
            
            
            
            0.5
            %
            
            
            20,999
            
            
            
            84.2
            %Other
      income, net
            
            
            10,801
            
            
            
            0.1
            %
            
            
            245,971
            
            
            
            4.5
            %
            
            
            (235,170
            )
            
            
            (95.6
            %)INCOME
      FROM OPERATIONS BEFORE INCOME TAXES
            
            
            1,313,508
            
            
            
            13.3
            %
            
            
            248,731
            
            
            
            4.5
            %
            
            
            1,064,777
            
            
            
            428.1
            %INCOME
      TAX (EXPENSE) BENEFIT
            
            
            (124,741
            )
            
            
            1.3
            %
            
            
            (22,358
            )
            
            
            (0.4
            %)
            
            
            (102,383
            )
            
            
            (457.9
            %)INCOME
      (LOSS) FROM CONTINUING OPERATIONS
            
            
            1,188,767
            
            
            
            12.0
            %
            
            
            226,373
            
            
            
            4.1
            %
            
            
            962,394
            
            
            
            425.1
            %NET
      (LOSS) INCOME
            
            
            1,188,767
            
            
            
            12.0
            %
            
            
            226,373
            
            
            
            4.1
            %
            
            
            962,394
            
            
            
            425.1
            %




40




(a)
Revenue





For the
three months ended June 30, 2010, our revenue increased by 80.8%, from
$5,481,551 to $9,911,884 as compared to the three months ended June 30, 2009.
This is primarily due to the Company’s continued efforts to maintain the growth
achieved so far in 2010, through developing new markets and promoting the
Company’s new products, such as the Company’s electric vehicle.





The
following table lists the number of vehicles sold and sales revenues,
categorized by vehicle type, within the three months ended June 30, 2010 and
2009:





Three
      Months Ended June 302010
            
            
            2009Unit
            
            
            Sales
            
            
            Unit
            
            
            SalesATV
            
            
            1,131
            
            
            $
            593,949
            
            
            
            1,028
            
            
            $
            612,841CoCo
            
            
            1,005
            
            
            
            4,131,674
            
            
            
            305
            
            
            
            1,264,406GoKart
            
            
            2,785
            
            
            
            3,141,901
            
            
            
            2,288
            
            
            
            2,243,425Utility
      vehicles (“UTVs”)
            
            
            485
            
            
            
            1,006,094
            
            
            
            419
            
            
            
            942,789Three-wheeled
      motorcycle (“TT”)
            
            
            461
            
            
            
            1,038,266
            
            
            
            138
            
            
            
            418,089





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 three
months ended June 30, 2010 and 2009:





Three
      Months Ended June 302010
            
            
            2009Sales
            
            
            Percentage
            
            
            Sales
            
            
            PercentageNorth
      America
            
            $
            1,341,512
            
            
            
            14
            %
            
            $
            847,736
            
            
            
            15
            %China
            
            
            8,448,853
            
            
            
            85
            %
            
            
            4,523,364
            
            
            
            83
            %Europe
            
            
            121,519
            
            
            
            1
            %
            
            
            110,451
            
            
            
            2
            %Total
            
            $
            9,911,884
            
            
            
            100
            %
            
            $
            5,481,551
            
            
            
            100
            %





For the
three months ended June 30, 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 June 30, 2010 was $7,559,235,
representing an 87.2% increase of $4,037,629 from the three months ended June
30, 2009, which corresponds with the increase in sales. Cost of goods sold was
76.3% of the total revenue for the period, as compared to 73.7% of the
comparable period last year, which is primarily due to the increased price of
raw manufacturing materials.





(c)
Gross profit





Gross
profit for the three months ended June 30, 2010 increased 62.9%, from $1,443,922
to $2,352,649 from the same period in 2009, which is mainly the result of the
increase in revenue. Although for the three months ended June 30, 2010, the
gross margin dropped to 23.7% from 26.3% for the same period of last year,
largely due to the higher material cost, the gross margin for the second quarter
of 2010 increased from 22.4% for the first quarter of 2010, reflecting the
Company’s cost management efforts in this environment of increasing
manufacturing cost.




41





(d)
Selling and distribution expenses





Selling
and distribution expenses were $89,685 for the three months ended June 30, 2010,
as compared to $97,810 from the same period in 2009, representing an 8.3%
decrease.  Excluding the $27,321 expense related to options issued to
consultants for their services assisting the Company in expanding into the
Chinese market, the net selling and distribution expenses for the three months
ended June 30, 2010 was $62,364, a 36.2% decrease from the same period of 2009,
primarily because the advertising fee for the three months ended June 30, 2010
was $36,550 lower than the amount occurred for the same period of last
year.





(e)
General and administrative expenses





General
and administrative expenses were $1,147,061 for the three months ended June 30,
2010, as compared to $678,278 for the same period in 2009, representing a 69.1%
increase.  For the three months ended June 30, 2010, the general and
administrative expenses included $522,646 expenses for shares of common stock
awarded to consultants financing and investor relations services. In addition to
the stock award expense, the general and administrative expenses also included
$143,261 in stock-based compensation costs 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 $315,175. Excluding the
effect of stock award cost and option cost, the net general and administrative
expenses for the three months ended June 30, 2010 was $481,154, an increase of
32.5% from $363,103 for the same period of 2009. This increase was primarily the
result of the increase of expenses incurred by the Company’s increased
activities in investor relations and capital markets compared to the same period
of 2009.





(f)
Other income, Net





Net other
income was $10,801 for the three months ended June 30, 2010, a decrease of 95.6%
from $245,971 for the same period of 2009, mainly due to a damage award in the
amount of $216,034 that the Company received in the second quarter of 2009 from
a lawsuit against Zhejiang Yuegong Steel Structure Co. and Zhejiang Jinhua No.1
Construction Co., Ltd. for their delay in the construction in the Jinhua
Industrial District.





(g)
Net interest expense





Net
interest income was $541,224 for the three months ended June 30, 2010, compared
to $109,253 for the same period last year. For the three months ended June 30,
2010, the interest expense on the Convertible Notes was $135,683, and the
interest expense incurred by the amortization of debt discount was $252,733,
while the interest income, which was affected by the changes of fair value of
Investor Warrants and warrants issued to placement agents, and the changes of
fair value of conversion features embedded in Convertible Notes, was $1,213,169.
Excluding the effects of interest expense related to Convertible Notes, the net
interest expense for the three months ended June 30, 2010 was $283,529, an
increase of 159.5% from $109,253 for the same period of 2009. This was primarily
due to the decrease in interest income earned from the note receivables issued
to third parties and from bank term deposits, which decreased $152,048 compared
to the same period of 2009.




42





(h)
Net (loss) income





The
operating performance of the Company for the three months ended June 30, 2010
reflected a net income of $1,188,767, which is significantly improved from a net
income of $226,373 for the same period of last year, primarily due to the
increase in sales and gross profit, and the improvement in interest
income.





Excluding
the effects of option related expenses, the effects caused by the Convertible
Notes, and the change of the fair value of financial derivative, for the three
months ended June 30, 2010, the Company’s net income was $1,057,242, while the
net income was $541,548 for the same period of 2009 excluding same
effects.





Financial
Condition





Working
Capital





The
Company had a working capital surplus of $682,171 at June 30, 2010, an
improvement from a working capital deficit of $14,140,556 as of June 30, 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 six months ended June 30, 2010, the
Company also recorded a net cash inflow from the operating activities, which
also increased the Company’s working capital.





As of
June 30, 2010, the Company had credit lines from commercial banks for
$34,808,918, of which $27,465,265 was used at June 30, 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 six months ended June 30, 2010 is as
follows:





Capital requirements
            
            Six
      months
              Ended
              June
      30,
              2010
              (In
      thousands)Purchase
      of plant and equipment
            
            $
            701Purchase
      of construction in progress
            
            
            -Issuance
      of notes receivable
            
            
            17,169Repayments
      of short-term bank loans
            
            
            18,143Repayments
      of notes payable
            
            
            7,934Increase
      in restricted cash
            
            
            2,343Increase
      in cash
            
            
            717Total
      capital requirements
            
            $
            47,007




Capital providedInternal
      cash provided by operation
            
            
            4,584Proceeds
      from short-term bank loan
            
            
            19,167Proceeds
      from notes payable
            
            
            20,242Repayments
      of notes receivable
            
            
            2,269Other
      financing activities
            
            
            745Total
      capital provided
            
            $
            47,007








Cash
Flow





Net cash
flow provided by operating activities was $4,584,109 for the six months ended
June 30, 2010, as compared to net cash flow used in operating activities of
$7,106,029 in the same period in 2009. The increase of net cash flow provided by
operating activities was mainly due to (i) the improvement in net income of
$1,367,307, (ii) a net cash inflow of $3,149,816 for the six months ended June
30, 2010 caused by the change of accounts payable, rather than a net cash
outflow of $511,665 for the same period of last year, (iii) a decrease in the
prepayment amount, which caused a net cash inflow of $627,935 for this reporting
period, largely improving from a net cash outflow of $1,963,636, and (iv) a
decrease in the cash outflow for inventory from $6,907,531  to
$4,175,053.





Net cash
flow used in investing activities was $15,600,950 for the six months ended June
30, 2010 as compared to net cash flow provided by investing activities of
$7,919,832 for the same reporting period in 2009. For the six months ended June
30, 2010, the Company issued $17,168,835 in notes receivable, and collected
$2,268,415 repayment of notes receivable, which caused a net cash outflow
$14,900,420 in notes receivable. While for the same period of last year, the
Company recorded a net cash inflow $10,054,502 in note receivable, primarily due
to the $28,545,269 repayment of notes receivable.





Net cash
flow provided by financing activities was $11,733,940 for the six months ended
June 30, 2010, as compared to net cash flow used in financing activities of
$933,473 for the six months ended June 30, 2009. Cash flow provided by financing
activities in this quarter was primarily due to net cash inflow from notes
payable of $10,482,400.





Item
3. Quantitative and Qualitative Disclosures About Market Risk.





Not
applicable.




44




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 June 30, 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 June 30, 2010 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.




45





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.




II-1





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




II-2




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:
      August 16, 2010
            By:
            /s/
      Hu XiaomingHu
      XiaomingPresident
      and Chief Executive Officer
              (Principal
      Executive Officer)


Date:
      August 16, 2010
              By:
              /s/
      Zhu XiaoyingZhu
      XiaoyingChief
      Financial Officer
                  (Principal
      Financial and Accounting Officer)


II-3