UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q




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




For the
quarterly period ended September 30, 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 its charter)




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





Jinhua
City Industrial Zone


Jinhua,
Zhejiang Province


People’s
Republic of China


Post
Code 321016


(Address
of principal executive offices)








(86
- 0579) 82239856


(Registrant’s
telephone number, including area code)





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




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




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




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
November 10, 2010 the registrant had issued and
outstanding  24,305,831 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
                      
                      
                      33Item
      3.
                      Quantitative
      and Qualitative Disclosures about Market Risk
                      
                      
                      48Item
      4.
                      Controls
      and Procedures
                      
                      
                      49PART
      II— OTHER INFORMATIONItem
      1.
                      Legal
      Proceedings
                      
                      II-1Item
      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.
                      Removed
      and Reserved
                      
                      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





September 30,
                    2010
                  
                  
                  December 31,
                    2009(Unaudited)
                  
                  
                  (Audited)CURRENT
      ASSETSCash
      and cash equivalents
                  
                  $
                  3,411,842
                  
                  
                  $
                  218,207Restricted
      cash
                  
                  
                  9,857,822
                  
                  
                  
                  5,704,984Accounts
      receivable, net of allowance for doubtful accounts of $0 as of September
      30, 2010 and December 31, 2009
                  
                  
                  14,156,701
                  
                  
                  
                  14,879,968Inventories,
      net of reserve for slow moving inventories of $155,441 and $152,278 as of
      September, 30, 2010 and December 31, 2009, respectively
                  
                  
                  10,993,840
                  
                  
                  
                  5,382,760Notes
      receivable
                  
                  
                  13,864,424
                  
                  
                  
                  2,267,599Other
      receivables
                  
                  
                  911,130
                  
                  
                  
                  321,336Prepayments
      and prepaid expenses
                  
                  
                  30,708
                  
                  
                  
                  30,083Due
      from employees
                  
                  
                  42,452
                  
                  
                  
                  28,228Advances
      to suppliers
                  
                  
                  350,525
                  
                  
                  
                  1,164,672Total
      Current Assets
                  
                  
                  53,619,444
                  
                  
                  
                  29,997,837LONG-TERM
      ASSETSPlant
      and equipment, net
                  
                  
                  21,669,805
                  
                  
                  
                  23,146,833Land
      use rights, net
                  
                  
                  10,755,939
                  
                  
                  
                  10,719,528Deferred
      tax asset
                  
                  
                  219,351
                  
                  
                  
                  207,747Total
      Long-Term Assets
                  
                  
                  32,645,095
                  
                  
                  
                  34,074,108TOTAL
      ASSETS
                  
                  $
                  86,264,539
                  
                  
                  $
                  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




September, 30,
                  
                  
                  December 31,2010
                  
                  
                  2009(Unaudited)
                  
                  
                  (Audited)CURRENT
      LIABILITIESAccounts
      payable
                  
                  $
                  10,159,908
                  
                  
                  $
                  4,738,543Other
      payables and accrued expenses
                  
                  
                  1,414
      ,921
                  
                  
                  
                  1,871,020Short-term
      bank loans
                  
                  
                  23,887,371
                  
                  
                  
                  26,326,566Customer
      deposits
                  
                  
                  4,257
                  
                  
                  
                  39,371Notes
      payable
                  
                  
                  14,105,767
                  
                  
                  
                  7,931,540Income
      tax payable
                  
                  
                  95,439
                  
                  
                  
                  201,564Due
      to employees
                  
                  
                  10,748
                  
                  
                  
                  88,306Due
      to related party
                  
                  
                  841,251
                  
                  
                  
                  841,251Deferred
      tax liability
                  
                  
                  54,808
                  
                  
                  
                  62,544Total
      Current Liabilities
                  
                  
                  50,574,470
                  
                  
                  
                  42,100,705LONG
      TERM LIABILITIESNote
      payable,  net of discount of $3,302,508 and $0 as of September,
      30, 2010 and December 31, 2009, respectively
                  
                  
                  807,278
                  
                  
                  
                  -Warrant
      liabilities
                  
                  
                  5,737,418
                  
                  
                  
                  -Total
      Long-Term Liabilities
                  
                  
                  6,544,696
                  
                  
                  
                  -TOTAL
      LIABILITIES
                  
                  
                  57,119,166
                  
                  
                  
                  42,100,705COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDERS’
      EQUITYCommon
      stock, $0.001 par value; 100,000,000 shares authorized; 22,960,266 and
      19,961,000 shares outstanding at September, 30, 2010 and December 31,
      2009, respectively
                  
                  
                  22,960
                  
                  
                  
                  19,961Additional
      paid-in capital
                  
                  
                  16,120,761
                  
                  
                  
                  8,967,012Retained
      earnings (the restricted portion is $890,912 at September, 30, 2010 and
      December 31, 2009)
                  
                  
                  10,337,673
                  
                  
                  
                  11,046,999Accumulated
      other comprehensive income
                  
                  
                  2,663,979
                  
                  
                  
                  1,937,268TOTAL
      STOCKHOLDERS’ EQUITY
                  
                  
                  29,145,373
                  
                  
                  
                  21,971,240TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                  
                  $
                  86,264,539
                  
                  
                  $
                  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
                        
                        
                        Nine Months EndedSeptember 30,
                          2010
                        
                        
                        September30,
                          2009
                        
                        
                        September 30,
                          2010
                        
                        
                        September30,
                          2009REVENUES,
      NET
                        
                        $
                        10,478,224
                        
                        
                        $
                        9,626,593
                        
                        
                        $
                        28,637,863
                        
                        
                        $
                        19,114,049COST
      OF GOODS SOLD
                        
                        
                        (8,140,771
                        )
                        
                        
                        (7,266,052
                        )
                        
                        
                        (22,098,905
                        )
                        
                        
                        (14,329,404
                        )GROSS
      PROFIT
                        
                        
                        2,337,453
                        
                        
                        
                        2,360,541
                        
                        
                        
                        6,538,958
                        
                        
                        
                        4,784,645Research
      and development
                        
                        
                        459,935
                        
                        
                        
                        660,108
                        
                        
                        
                        1,203,270
                        
                        
                        
                        1,767,081Selling
      and distribution expenses
                        
                        
                        58,121
                        
                        
                        
                        79,310
                        
                        
                        
                        1,000,187
                        
                        
                        
                        263,304General
      and administrative expenses
                        
                        
                        516,929
                        
                        
                        
                        510,212
                        
                        
                        
                        2,315,088
                        
                        
                        
                        1,966,422INCOME
      (LOSS) FROM OPERATIONS
                        
                        
                        1,302,468
                        
                        
                        
                        1,110,911
                        
                        
                        
                        2,020,413
                        
                        
                        
                        787,838Interest
      income (expense), net
                        
                        
                        (572,032
                        )
                        
                        
                        (442,315
                        )
                        
                        
                        (2,015,516
                        )
                        
                        
                        (860,872
                        )Change
      of fair value of financial instruments
                        
                        
                        (2,578,693
                        )
                        
                        
                        -
                        
                        
                        
                        (802,884
                        )
                        
                        
                        -Government
      grants
                        
                        
                        191,934
                        
                        
                        
                        3,312
                        
                        
                        
                        266,911
                        
                        
                        
                        127,317Other
      income, net
                        
                        
                        33,249
                        
                        
                        
                        9,800
                        
                        
                        
                        91,088
                        
                        
                        
                        311,984(LOSS)
      INCOME FROM OPERATIONS BEFORE INCOME TAXES
                        
                        
                        (1,623,074
                        )
                        
                        
                        681,708
                        
                        
                        
                        (439,988
                        )
                        
                        
                        366,267INCOME
      TAX (EXPENSE) BENEFIT
                        
                        
                        (94,282
                        )
                        
                        
                        (105,558
                        )
                        
                        
                        (269,338
                        )
                        
                        
                        (146,642
                        )(LOSS)
      INCOME FROM CONTINUING OPERATIONS
                        
                        
                        (1,717,356
                        )
                        
                        
                        576,150
                        
                        
                        
                        (709,326
                        )
                        
                        
                        219,625NET
      INCOME (LOSS)
                        
                        
                        (1,717,356
                        )
                        
                        
                        576,150
                        
                        
                        
                        (709,326
                        )
                        
                        
                        219,625




See
accompanying notes to condensed consolidated financial statements




3




Three Months Ended
                
                
                Nine Months EndedSeptember 30,
                  2010
                
                
                September 30,
                  2009
                
                
                September 30,
                  2010
                
                
                September 30,
                  2009OTHER
      COMPREHENSIVE INCOMEForeign
      currency translation
                
                
                595,771
                
                
                
                (2,070
                )
                
                
                726,711
                
                
                
                26,349COMPREHENSIVE
      (LOSS) INCOME
                
                
                (1,121,585
                )
                
                
                574,080
                
                
                
                17,385
                
                
                
                245,974WEIGHTED
      AVERAGE SHARES OUTSTANDING BASIC
                
                
                22,570,140
                
                
                
                19,961,000
                
                
                
                21,139,827
                
                
                
                19,961,000WEIGHTED
      AVERAGE SHARES OUTSTANDING DILUTED
                
                
                22,570,140
                
                
                
                21,155,595
                
                
                
                21,139,827
                
                
                
                20,856,082NET
      INCOME (LOSS) PER SHARE FROM CONTINUING OPERATIONS, BASIC
                
                $
                (0.08
                )
                
                $
                0.03
                
                
                $
                (0.03
                )
                
                $
                0.01NET
      INCOME (LOSS) PER SHARE FROM CONTINUING OPERATIONS,
DILUTED
                
                $
                (0.08
                )
                
                $
                0.03
                
                
                $
                (0.03
                )
                
                $
                0.01NET
      INCOME (LOSS) PER SHARE, BASIC
                
                $
                (0.08
                )
                
                $
                0.03
                
                
                $
                (0.03
                )
                
                $
                0.01NET
      INCOME (LOSS) PER SHARE, DILUTED
                
                $
                (0.08
                )
                
                $
                0.03
                
                
                $
                (0.03
                )
                
                $
                0.01




See
accompanying notes to condensed consolidated financial statements




4




KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS


(UNAUDITED)




Nine Months Ended September, 302010
                    
                    
                    2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      (loss) income
                    
                    $
                    (709,326
                    )
                    
                    $
                    219,625Adjustments
      to reconcile net (loss) income to net cash (used in) provided by operating
      activities:Depreciation
      and amortization
                    
                    
                    3,105,355
                    
                    
                    
                    2,529,981Deferred
      taxes
                    
                    
                    (10,549
                    )
                    
                    
                    41,085Option
      and warrant expense
                    
                    
                    2,198,961
                    
                    
                    
                    840,468Change
      of financial instrument’s fair value
                    
                    
                    2,434,909
                    
                    
                    
                    -Changes
      in operating assets and liabilities:(Increase)
      Decrease In:Accounts
      receivable
                    
                    
                    1,014,365
                    
                    
                    
                    652,827Inventories
                    
                    
                    (5,403,855
                    )
                    
                    
                    (11,232,447
                    )Other
      receivables
                    
                    
                    (573,000
                    )
                    
                    
                    172,147Due
      from employees
                    
                    
                    (91,416
                    )
                    
                    
                    50,393Prepayments
      and prepaid expenses
                    
                    
                    823,785
                    
                    
                    
                    (596,614
                    )Increase
      (Decrease) In:Accounts
      payable
                    
                    
                    5,230,579
                    
                    
                    
                    1,225,909Other
      payables and accrued liabilities
                    
                    
                    (480,855
                    )
                    
                    
                    1,404,305Customer
      deposits
                    
                    
                    (35,308
                    )
                    
                    
                    (650,636
                    )Income
      tax payable
                    
                    
                    (108,396
                    )
                    
                    
                    105,558Net
      cash provided by (used in) operating activities
                    
                    $
                    7,395,249
                    
                    
                    $
                    (5,237,399
                    )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of plant and equipment
                    
                    
                    (750,553
                    )
                    
                    
                    (3,059,687
                    )Purchase
      of construction in progress
                    
                    
                    -
                    
                    
                    
                    (553,545
                    )Issuance
      of notes receivable
                    
                    
                    (13,623,804
                    )
                    
                    
                    (10,011,535
                    )Repayments
      of notes receivable
                    
                    
                    2,274,519
                    
                    
                    
                    19,330,289Net
      cash (used in) provided by investing activities
                    
                    $
                    (12,099,838
                    )
                    
                    $
                    5,705,522




See
accompanying notes to condensed consolidated financial statements




5




KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS


(UNAUDITED)




Nine Months Ended September, 302010
                            
                            
                            2009CASH
      FLOWS FROM FINANCING ACTIVITIES:Restricted
      cash
                            
                            $
                            (3,964,344
                            )
                            
                            $
                            4,680,286Proceeds
      from short-term bank loans
                            
                            
                            23,619,506
                            
                            
                            
                            24,216,260Repayments
      of short-term bank loans
                            
                            
                            (26,553,606
                            )
                            
                            
                            (22,900,953
                            )Proceeds
      from notes payable
                            
                            
                            23,860,959
                            
                            
                            
                            14,468,375Repayments
      of notes payable
                            
                            
                            (7,955,742
                            )
                            
                            
                            (20,410,634
                            )Option
      exercise and Note conversion
                            
                            
                            (932,425
                            )
                            
                            
                            -Repayments
      of advances to related parties
                            
                            
                            -
                            
                            
                            
                            217,484Net
      cash provided by financing activities
                            
                            
                            8,074,348
                            
                            
                            
                            270,818NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                            
                            
                            3,369,759
                            
                            
                            
                            738,942Effect
      of exchange rate changes on cash
                            
                            
                            (176,124
                            )
                            
                            
                            1,163Cash
      and cash equivalents at beginning of period
                            
                            
                            218,207
                            
                            
                            
                            141,380CASH AND CASH EQUIVALENTS AT END OF
      PERIOD
                            
                            $
                            3,411,842
                            
                            
                            $
                            881,485SUPPLEMENTARY
      CASH FLOW INFORMATIONIncome
      taxes paid
                            
                            $
                            388,351
                            
                            
                            $
                            -Interest
      paid
                            
                            $
                            1,331,792
                            
                            
                            $
                            1,354,460




SUPPLEMENTAL
NON-CASH DISCLOSURE:


During
the nine months ended September, 30, 2010 and 2009, $0 and $1,301,166 were
transferred from construction in progress to plant and equipment,
respectively.




See
accompanying notes to condensed consolidated financial statements




6




KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 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. (“Kandi” or 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 construction of
“battery farms” which will allocate power to a network of “express change”
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


SEPTEMBER 30, 2010
(UNAUDITED)




In April,
2010, the Company announced that it anticipated that local and regional
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 in the Jinhua
EV model city.





Most
significantly, 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, and this will likely be the primary model available
to the EV buyers 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.





Most
recently, (also see Note 20 - “Subsequent Events”), the Company announced a
joint venture with a subsidiary of China’s largest power transmission company,
State Grid Power Corporation, and China’s leading lead motive battery maker,
Tianneng Power International, Inc., to establish the first China EV battery
replacement services Company.  Kandi’s 30% share of this Company is
expected to provide an additional new revenue stream for
Kandi’s  EVand recreational vehicles product lines.  Kandi’s
initial EV sales under its new business model will start in Jinhua and is
anticipated to launch in the final quarter of this year.





NOTE
2 – LIQUIDITY




The
Company’s working capital surplus is $3,044,974 as of September 30,
2010.




As of
September 30, 2010, the Company had credit lines from commercial banks for
$37,622,609, of which $23,887,371 was used at September 30, 2010.





The
Company believes that its cash flows generated internally may not be sufficient
to support the growth of the operations and repay short term bank loans for the
next twelve months if needed. 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.




8




KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30, 2010
(UNAUDITED)




NOTE
3 - BASIS OF PRESENTATION





The
Company’s unaudited condensed consolidated financial statements for the nine
months ended September 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.





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.




9




KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30, 2010
(UNAUDITED)




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





ASC 820
“Fair Value Measurement and Disclosures” codified SFAS 157 that establishes a
three-tier fair value hierarchy, which prioritizes the inputs used in measuring
fair value. The hierarchy prioritizes the inputs into three levels based on the
extent to which inputs used in measuring fair value are observable in the
market.





These
tiers include:





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


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


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





The
assets and liabilities measured at fair value on a recurring basis subject to
the disclosure requirements of ASC 820 as of September 30, 2010 are as
follows:





Fair Value Measurements at Reporting Date Using Quoted Prices inCarrying value
                    as of September
                  
                  
                  Active Markets
                    for Identical
                    Assets
                  
                  
                  Significant Other
                    Observable
                    Inputs
                  
                  
                  Significant
                    Unobservable
                    Inputs30, 2010
                  
                  
                  (Level 1)
                  
                  
                  (Level 2)
                  
                  
                  (Level 3)Cash
      and cash equivalents
                  
                  $
                  3,411,842
                  
                  
                  $
                  3,411,842
                  
                  
                  
                  -
                  
                  
                  
                  -Restricted
      cash
                  
                  $
                  9,857,822
                  
                  
                  $
                  9,857,822
                  
                  
                  
                  -
                  
                  
                  
                  -Conversion
      features
                  
                  $
                  2,553,237
                  
                  
                  
                  -
                  
                  
                  $
                  2,553,237
                  
                  
                  
                  -Warrants
                  
                  $
                  3,184,181
                  
                  
                  
                  -
                  
                  
                  $
                  3,184,181
                  
                  
                  
                  -




10




KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30, 2010
(UNAUDITED)




NOTE
6 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





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





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





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





The
Company’s non-financial assets measured on a non-recurring basis include the
Company’s property, plant and equipment and finite-use intangible assets which
are measured for recoverability when indicators for impairment are present. ASC
820 requires companies to disclose assets and liabilities measured on a
non-recurring basis in the period in which the remeasurement at fair value is
performed. The Company has reviewed its long-lived assets as of September 30,
2010 and determined that there are no significant assets to be tested for
recoverability under ASC 360 (formerly SFAS 144) and as such, no fair value
measurements related to non-financial assets have been made during the nine
months ended September 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 September 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.





(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.




11




KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30, 2010
(UNAUDITED)




NOTE
6 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





(e)
Accounts Receivable





Accounts
receivable are recognized and carried at original invoice amount less allowance
for any uncollectible amounts. An estimate for doubtful accounts is made when
collection of the full amount is no longer probable. At September 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.


12




KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 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 $1,203,270 and $1,767,081 for the nine months ended
September 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
nine months ended September 30, 2010 and 2009, $266,911 and $127,317 was
received from the PRC government for the Company’s contribution to the local
economy.


13




KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 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.





September 30,
                    2010
                  
                  
                  December 31,
                    2009
                  
                  
                  September 30,
                    2009Period
      end RMB : USD exchange rate
                  
                  
                  6.6981
                  
                  
                  
                  6.8372
                  
                  
                  
                  6.8376Average
      quarterly RMB : USD exchange rate
                  
                  
                  6.8164
                  
                  
                  
                  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 nine months ended September 30, 2010 is
$1,295,312. Also see Note 17.




14




KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 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 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 adjusted by average volatility of companies in automotive
industry. 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 decreases in fair value recognized in earnings and
increases in fair values recognized in expenses 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 decreases in fair
value recognized in earnings while increases in fair values recognized in
expenses 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 adjusted by average
volatility of companies in automotive industry. 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.




15




KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 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.




16




KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 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 September 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.





ASC
810-10-30 & 10-65 codified 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. The Company does not expect the adoption of ASC 810-10-30
& 10-65 to have a material impact on its financial position or results of
operations.




17




KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30, 2010
(UNAUDITED)




NOTE
7 – NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)





ASC
860-10-65 codified 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. The Company does not expect the adoption of ASC860-10-65 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 September 30, 2010 accounted for
the following percentages of total sales and accounts receivable as
follows:





Sales
                  
                  
                  Accounts ReceivableMajor
                    Customers
                  
                  Nine Months
                    Ended
                    September, 30,
                    2010
                  
                  
                  Nine Months
                    Ended
                    September, 30,
                    2009
                  
                  
                  September, 30,
                    2010
                  
                  
                  December 31,
                    2009Company
      A
                  
                  
                  42
                  %
                  
                  
                  89
                  %
                  
                  
                  9
                  %
                  
                  
                  92
                  %Company
      B
                  
                  
                  38
                  %
                  
                  
                  -
                  
                  
                  
                  61
                  %
                  
                  
                  -Company
      C
                  
                  
                  13
                  %
                  
                  
                  14
                  %
                  
                  
                  23
                  %
                  
                  
                  7
                  %Company
      D
                  
                  
                  2
                  %
                  
                  
                  -
                  
                  
                  
                  1
                  %
                  
                  
                  -Company
      E
                  
                  
                  2
                  %
                  
                  
                  -
                  
                  
                  
                  5
                  %
                  
                  
                  -





(b)
Suppliers





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





Purchases
                  
                  
                  Accounts PayableMajor
                    Suppliers
                  
                  Nine Months
                    Ended
                    September, 30,
                    2010
                  
                  
                  Nine Months
                    Ended
                    September, 30,
                    2009
                  
                  
                  September, 30,
                    2010
                  
                  
                  December 31,
                    2009Company
      F
                  
                  
                  82
                  %
                  
                  
                  77
                  %
                  
                  
                  54
                  %
                  
                  
                  -Company
      G
                  
                  
                  2
                  %
                  
                  
                  1
                  %
                  
                  
                  2
                  %
                  
                  
                  5
                  %Company
      H
                  
                  
                  1
                  %
                  
                  
                  1
                  %
                  
                  
                  -
                  
                  
                  
                  -Company
      I
                  
                  
                  1
                  %
                  
                  
                  1
                  %
                  
                  
                  2
                  %
                  
                  
                  4
                  %Company
      J
                  
                  
                  1
                  %
                  
                  
                  1
                  %
                  
                  
                  1
                  %
                  
                  
                  3
                  %


18




KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 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). Because for this reporting period, the Company recorded a
net loss, outstanding stock options, warrants and convertible note are
anti-dilutive.





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





Nine months Ended September 30,
                
                2010
                
                
                2009Net
      (loss) income
                
                $
                (709,326
                )
                
                $
                219,625Weighted
      – average shares of common stock outstandingBasic
                
                
                21,139,827
                
                
                
                19,961,000Dilutive
      shares
                
                
                -
                
                
                
                895,082Diluted
                
                
                21,139,827
                
                
                
                20,856,082Basic
      (loss) earning per share
                
                $
                (0.03
                )
                
                $
                0.01Diluted
      (loss) earning per share
                
                $
                (0.03
                )
                
                $
                0.01





Also see
Note 17.





NOTE
10 - INVENTORIES





Inventories
are summarized as follows:





September 30, 2010
                    (Unaudited)
                  
                  
                  December 31, 2009Raw
      material
                  
                  $
                  1,250,589
                  
                  
                  $
                  956,378Work-in-progress
                  
                  
                  9,251,710
                  
                  
                  
                  3,785,506Finished
      goods
                  
                  
                  646,982
                  
                  
                  
                  793,15411,149,281
                  
                  
                  
                  5,535,038Less:
      reserve for slow moving inventories
                  
                  
                  (155,441
                  )
                  
                  
                  (152,278
                  )Inventories,
      net
                  
                  $
                  10,993,840
                  
                  
                  $
                  5,382,760




19




KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30, 2010
(UNAUDITED)




NOTE
11 - NOTES RECEIVABLE





Notes
receivable are summarized as follows:




September 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
      December 30, 2010, interest at 8.0% per annum
                  
                  
                  8,211,284
                  
                  
                  
                  -Due
      March 3, 2011, interest at 6.0% per annum
                  
                  
                  1,189,501
                  
                  
                  
                  -Due
      March 5, 2011, interest at 6.0% per annum
                  
                  
                  417,716
                  
                  
                  
                  -Due
      April 29, 2011, interest at 5.31% per annum
                  
                  
                  746,480
                  
                  
                  
                  -Due
      September 30, 2011, interest at 8.0% per annum
                  
                  
                  3,299,443
                  
                  
                  
                  -Notes
      receivable from unrelated companies
                  
                  
                  13,864,424
                  
                  
                  
                  2,267,599Bank
      acceptance notes:Bank
      acceptance notes
                  
                  
                  -
                  
                  
                  
                  -Notes
      receivable
                  
                  $
                  13,864,424
                  
                  
                  $
                  2,267,599





Notes
receivable are unsecured.





NOTE
12 – LAND USE RIGHTS





Land use
rights consist of the following:





September 30,
                      2010
                      (Unaudited)
                    
                    
                    December 31, 2009Cost
      of land use rights
                    
                    $
                    11,427,222
                    
                    
                    $
                    11,168,397Less:
      Accumulated amortization
                    
                    
                    (671,283
                    )
                    
                    
                    (448,869
                    )Land
      use rights, net
                    
                    $
                    10,755,939
                    
                    
                    $
                    10,719,528





As of
September 30, 2010 and December 31, 2009, the net book value of land use rights
pledged as collateral for Company’s bank loans was $1,312,806 and $2,456,811,
respectively. Also see Note 14.





As of
September 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 $6,786,060 and
$6,274,601. Also see Notes 14 and 18.





The
amortization expense for the nine months ended September 30, 2010 and 2009 was
$186,203 and $168,617, respectively.


20




KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30, 2010
(UNAUDITED)




NOTE
12 – LAND USE RIGHTS (CONTINUED)





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




2010
      (three months)
                  
                  $
                  62,0672011
                  
                  
                  248,2702012
                  
                  
                  248,2702013
                  
                  
                  248,2702014
                  
                  
                  248,270Thereafter
                  
                  
                  9,700,792Total
                  
                  $
                  10,755,939




NOTE
13 – PLANT AND EQUIPMENT





Plant and
equipment consist of the following:





September 30,
                            2010
                            (Unaudited)
                          
                          
                          December 31, 2009At
      cost:Buildings
                          
                          $
                          12,905,331
                          
                          
                          $
                          12,413,935Machinery
      and equipment
                          
                          
                          9,516,442
                          
                          
                          
                          9,252,390Office
      equipment
                          
                          
                          135,991
                          
                          
                          
                          114,380Motor
      vehicles
                          
                          
                          176,134
                          
                          
                          
                          166,616Moulds
                          
                          
                          11,371,213
                          
                          
                          
                          10,715,66634,105,111
                          
                          
                          
                          32,662,987Less
      : Accumulated depreciationBuildings
                          
                          $
                          (1,310,857
                          )
                          
                          $
                          (970,725
                          )Machinery
      and equipment
                          
                          
                          (6,429,983
                          )
                          
                          
                          (5,601,424
                          )Office
      equipment
                          
                          
                          (101,824
                          )
                          
                          
                          (95,295
                          )Motor
      vehicles
                          
                          
                          (113,634
                          )
                          
                          
                          (95,697
                          )Moulds
                          
                          
                          (4,479,008
                          )
                          
                          
                          (2,753,013
                          )(12,435,306
                          )
                          
                          
                          (9,516,154
                          )Plant
      and equipment, net
                          
                          $
                          21,669,805
                          
                          
                          $
                          23,146,833





As of
September 30, 2010 and December 31, 2009, the net book value of plant and
equipment pledged as collateral for Company’s bank loans was $5,260,700 and
$4,308,435, respectively. Also see Note 14.





As of
September 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 $4,615,419. Also see Notes 14 and 18.





Depreciation
expense for nine months ended September 30, 2010 and 2009 was $2,919,152 and
$2,361,364, respectively.


21




KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30, 2010
(UNAUDITED)




NOTE
14 – SHORT TERM BANK LOANS




Short-term
loans are summarized as follows:




September
      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.
                  
                  
                  -
                  
                  
                  
                  3,948,985




22




KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30, 2010
(UNAUDITED)




NOTE
14 – SHORT TERM BANK LOANS (CONTINUED)




September 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 (repaid on its due date).
                  
                  
                  1,492,961
                  
                  
                  
                  -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.
                  
                  
                  746,481
                  
                  
                  
                  -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.
                  
                  
                  2,985,921
                  
                  
                  
                  -Loans
      from China Ever-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 5.35% 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
      (repaid on its due date).
                  
                  
                  4,478,882
                  
                  
                  
                  -Monthly
      interest only payments at 4.86% per annum, due October 15, 2010, secured
      by the Company’s account receivables (repaid on its due
    date).
                  
                  
                  2,985,921
                  
                  
                  
                  -Monthly
      interest only payments at 5.84% per annum, due April.7, 2011, pledged
      office building of Mr. Hu Xiaoming and Ms. Ling Yueping, guaranteed by
      Nanlong Group Co., Ltd., and Zhejiang Mengdeli Electric
      Company.
                  
                  
                  4,478,882
                  
                  
                  
                  -




23




KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30, 2010
(UNAUDITED)




NOTE
14 - SHORT TERM BANK LOANS (CONTINUED)




September 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.
                    
                    
                    2,985,921
                    
                    
                    
                    2,925,174Loans
      from China Ever-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 (repaid on its due date).
                    
                    
                    2,985,921
                    
                    
                    
                    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.
                    
                    
                    746,481
                    
                    
                    
                    -Total
                    
                    $
                    23,887,371
                    
                    
                    $
                    26,326,566





Short
term bank loans interest expense for the nine months ended September 30, 2010
and 2009 was $1,128,437, and $1,241,166, respectively.





As of
September 30, 2010, the aggregated amount of short term loans that are
guaranteed by various third parties is $18,662,009. Also see Note
19.




24




KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30, 2010
(UNAUDITED)




NOTE
15 – NOTES PAYABLE





Notes
payable are summarized as follows:





September 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
      October 26, 2010 (repaid on its due date)
                    
                    
                    2,239,441Due
      November 5, 2010 (repaid on its due date)
                    
                    
                    746,480Due
      November 5, 2010 (repaid on its due date)
                    
                    
                    1,492,961Due
      November 12, 2010 (repaid on its due date)
                    
                    
                    1,492,961Due
      January 13, 2011
                    
                    
                    1,492,961Due
      March 2, 2011
                    
                    
                    1,194,368Due
      March 13, 2011
                    
                    
                    1,492,961Due
      March 16, 2011
                    
                    
                    1,194,368
                    
                    
                    
                    -Subtotal
                    
                    $
                    11,346,501
                    
                    
                    $
                    4,241,502Notes
      payable to unrelated companies:Due
      December 1, 2010
                    
                    $
                    -
                    
                    
                    $
                    3,690,038Due
      December 31, 2010
                    
                    
                    128,395
                    
                    
                    
                    -Due
      December 31, 2010
                    
                    
                    2,630,871
                    
                    
                    
                    -Due
      January 20, 2012
                    
                    
                    807,278
                    
                    
                    
                    -Subtotal
                    
                    
                    3,566,544
                    
                    
                    
                    3,690,038Total
                    
                    $
                    14,913,045
                    
                    
                    $
                    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 $9,853,541 is held as collateral for the following notes payable at
September 30, 2010:





Due
      October 26, 2010 (repaid on its due date)
                  
                  
                  2,239,441Due
      November 5, 2010 (repaid on its due date)
                  
                  
                  746,480Due
      November 5, 2010 (repaid on its due date)
                  
                  
                  1,492,961Due
      November 12, 2010 (repaid on its due date)
                  
                  
                  1,492,961Due
      January 13, 2011
                  
                  
                  1,492,961Due
      March 2, 2011
                  
                  
                  1,194,368Due
      March 13, 2011
                  
                  
                  1,492,961Due
      March 16, 2011
                  
                  
                  1,194,368Subtotal
                  
                  $
                  11,346,501




25




KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 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 September 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 September 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 September 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 nine
months ended September 30, 2010 due to the net operating loss carry forward in
the United States.




26




KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2010
(UNAUDITED)
 
 NOTE
16 – TAX (CONTINUED)
 
 Income
tax expense (benefit) for the nine months ended September 30, 2010 and 2009 is
summarized as follows:
  For the Nine Months Ended
                      September 30,(Unaudited)2010
                    
                    
                    2009Current:Provision
      for CIT
                    
                    $
                    279,955
                    
                    
                    $
                    -Deferred:Provision
      for CIT
                    
                    
                    (10,617
                    )
                    
                    
                    146,642Income
      tax expense (benefit)
                    
                    $
                    269,338
                    
                    
                    $
                    146,642
 
 The
Company’s income tax expense (benefit) differs from the “expected” tax expense
for the nine months ended September 30, 2010 and 2009 (computed by applying the
CIT rate of 25%, respectively to income before income taxes) as
follows:
 
 For the Nine Months Ended
                      September 30,(Unaudited)2010
                    
                    
                    2009Computed "expected"
      (benefit) expense
                    
                    $
                    (109,997
                    )
                    
                    $
                    91,567Favorable
      tax rate
                    
                    
                    236,834
                    
                    
                    
                    18,326Permanent
      differences
                    
                    
                    58,159
                    
                    
                    
                    30,118Valuation
      allowance
                    
                    
                    84,342
                    
                    
                    
                    6,631Income
      tax expense (benefit)
                    
                    $
                    269,338
                    
                    
                    $
                    146,642
 
 The tax
effects of temporary differences that give rise to the Company’s net deferred
tax assets and liabilities as of September 30, 2010 and December 31, 2009 are
summarized as follows:
  27
  KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2010
(UNAUDITED)
 
 NOTE
16 – TAX (CONTINUED)
 
 September 30,
                      2010
                      (Unaudited)
                    
                    
                    December 31,
                      2009Current portion:Deferred
      tax assets:Expense
                    
                    $
                    (285,813
                    )
                    
                    $
                    23,028Subtotal
                    
                    
                    (285,813
                    )
                    
                    
                    23,028Deferred
      tax liabilities:Sales
      cut-off
                    
                    
                    231,005
                    
                    
                    
                    (85,572
                    )Other
                    
                    
                    -
                    
                    
                    
                    -Subtotal
                    
                    
                    231,005
                    
                    
                    
                    (85,572
                    )Total
      deferred tax liabilities – current portion
                    
                    
                    (54,808
                    )
                    
                    
                    (62,544
                    )Non-current
      portion:Deferred
      tax assets:Depreciation
                    
                    
                    515,930
                    
                    
                    
                    504,258Loss
      carried forward
                    
                    
                    160,399
                    
                    
                    
                    75,397Valuation
      allowance
                    
                    
                    (160,399
                    )
                    
                    
                    (75,397
                    )Subtotal
                    
                    
                    515,930
                    
                    
                    
                    504,258Deferred
      tax liabilities:Accumulated
      other comprehensive gain
                    
                    
                    (296,579
                    )
                    
                    
                    (296,511
                    )Subtotal
                    
                    
                    (296,579
                    )
                    
                    
                    (296,511
                    )Total
      deferred tax assets – non-current portion
                    
                    
                    219,351
                    
                    
                    
                    207,747Net
      deferred tax assets
                    
                    $
                    164,543
                    
                    
                    $
                    145,203
 
 (b)
Tax Holiday Effect
 
 For the
nine months ended September 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 nine months ended September 30, 2010 and 2009.
 
 The
combined effects of the income tax expense exemptions and reductions available
to the Company for the nine months ended September 30, 2010 and 2009 are as
follows:
  For the Nine Months Ended
                      September 30
                      (Unaudited)2010
                    
                    
                    2009Tax holiday credit
                    
                    $
                    (236,834
                    )
                    
                    $
                    (18,326
                    )Basic
      net (loss) income per share effect
                    
                    $
                    (0.01
                    )
                    
                    $
                    (0.00
                    )
  28
  KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 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 September 30, 2010
                    
                    
                    1,833,304
                    
                    
                    $
                    0.84
 
 The
following table summarizes information about stock options outstanding as of
September 30, 2010:
 
 Options Outstanding
                            
                            
                            Options ExercisableNumber of
                              shares
                            
                            
                            Exercise
                              Price
                            
                            
                            Remaining
                              Contractual life
                              (in years)
                            
                            
                            Number of
                              shares
                            
                            
                            Exercise
                              Price1,733,304
                            
                            
                            $
                            0.80
                            
                            
                            
                            8.5
                            
                            
                            
                            1,733,304
                            
                            
                            $
                            0.80100,000
                            
                            
                            
                            1.50
                            
                            
                            
                            9
                            
                            
                            
                            100,000
                            
                            
                            
                            1.50
  29
  KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 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. On August 19, 2010, the
conversion price of the Convertible Notes was adjusted to $3.1146 per share and
the exercise price of the Investor Warrants and warrants issued to the placement
agent was adjusted to $3.8067 per share. As of September 30, 2010, the investors
had converted $5,890,214 of the principal amount and $83,625 accrued interest of
the Convertible Notes into an aggregate of 1,777,230 shares of Common
Stock.
  30
  KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2010
(UNAUDITED)
 
 As of
September 30, 2010, the fair value of the Investor Warrants and the warrants
issued to the placement agent is $2.10 per share, and the fair value of
conversion features is $1.93 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
September 30, 2010, the Company provided guarantee for the following third
parties:
 
 Guarantee provided to
                        
                        AmountYongkang Kangli
      Metal Manufacturing Co.
                        
                        $
                        4,478,882Zhejiang
      Mengdeli Electric Company
                        
                        
                        2,538,033Zhejiang
      Shuguang industrial Co., Ltd.
                        
                        
                        2,985,921Zhejiang
      Yiran Auto Sales Company
                        
                        
                        1,940,849Wuyi
      Qilong Vehicle Co., Ltd.
                        
                        
                        1,343,665Zhejiang
      Taiping Trade Co., Ltd
                        
                        
                        3,433,810Total
                        
                        $
                        16,721,160
  31
  KANDI
TECHNOLOGIES, CORP.
 AND
SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2010
(UNAUDITED)
 
 NOTE
20 – SUBSEQUENT EVENTS
 
 New Joint
Venture
 
 On
October 5, 2010, the Company announced a joint venture with Tianneng Power
International, Ltd., a battery manufacturer, and Jinhua Bada Group, a subsidiary
of the State Grid Power Corporation, to create an electric vehicle battery
rental and replacement services company, which will provide battery changing
stations for the Company’s electric vehicle users.  The Company will
own 30% of the new company; Tinneng will own 30%, and Bada Group will own
40%.
 
 Convertible Notes
Conversion
 
 As stated
in Note 17 above, as of September 30, 2010, investors in the convertible notes
and investor warrants issued under a January 21, 2010 Securities Purchase
Agreement had converted $5,890,214 of the principal amount of $10 million and
$83,625 accrued interest of the Convertible Notes into an aggregate of 1,777,230
shares of Common Stock.
 
 As of
November 10, 2010, the investors have converted an additional $4,108,786 of the
principal amount and $75,882 accrued interest of the Convertible Notes into an
aggregate of 1,343,565 shares of Common Stock.  There were 24,305,831
shares of the Company’s Common Stock outstanding as of November 10, 2010,
reflecting the additional shares issued pursuant to the conversion of the
Convertible Notes.  As of the date of this Form 10-Q filing, all but
$1,000 of the Convertible Notes has been converted.
  32
  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.
  33
  The stock
based compensation expense for the nine months ended September 30, 2010 is
$1,295,312, among which $808,223 and $487,089 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 adjusted by average volatility of companies in automotive
industry. 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 decreases in fair value recognized in earnings and
increases in fair value recognized in expenses as interest expense.
 
 As of
September 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
$2.10.
 
 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 decreases in fair
value recognized in earnings, while increases in fair value recognized in
expenses 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 adjusted by average
volatility of companies in automotive industry. 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 September 30, 2010, the fair value
of conversion features is $1.93 per share.
  34
  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 September 30, 2010 using the Black-Scholes-Merton
model with the inputs effective at measurement date. For the nine months ended
September 30, 2010, the fair value of Investor Warrants and warrants issued to
placement agents has increased $295,767, and the fair value of conversion
features has increased $507,117. For the nine months ended September 30, 2010,
$2,375,640 of the value of the conversion features has been exercised to convert
$5,890,214 principal of the Convertible Notes into the Company’s Common
Stock.
 
 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 September 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 nine months ended September 30,
2010.
 
 Debt
Discount
 
 Since the
objective of the services provided by the consultants 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 September 30, 2010, the
amount of debt discount is $3,302,508.
 
 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.
 35
  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 September 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.
  36
  ASC
810-10-30 & 10-65 codified 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. The Company does not expect the adoption of ASC 810-10-30
& 10-65 to have a material impact on its financial position or results of
operations.
 
 ASC
860-10-65 codified 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. The Company does not expect the adoption of ASC 860-10-65 will
have a material impact on its financial position or results of
operations.
  37
  Results
of Operations
 
 Comparison
of Nine Months Ended September 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 Nine
                    Months Ended
                    September 30,
                    2010
                  
                  
                  % Of
                    Revenue
                  
                  
                  For Nine
                    Months Ended
                    September 30,
                    2009
                  
                  
                  % Of
                    Revenue
                  
                  
                  Change In
                    Amount
                  
                  
                  Change
                    In %REVENUES,
      NET
                  
                  $
                  28,637,863
                  
                  
                  
                  100.0
                  %
                  
                  $
                  19,114,049
                  
                  
                  
                  100.0
                  %
                  
                  $
                  9,523,814
                  
                  
                  
                  49.8
                  %COST
      OF GOODS SOLD
                  
                  
                  (22,098,905
                  )
                  
                  
                  (77.2
                  )%
                  
                  
                  (14,329,404
                  )
                  
                  
                  (75.0
                  )%
                  
                  
                  (7,769,501
                  )
                  
                  
                  54.2
                  %GROSS
      PROFIT
                  
                  
                  6,538,958
                  
                  
                  
                  22.8
                  %
                  
                  
                  4,784,645
                  
                  
                  
                  25.0
                  %
                  
                  
                  1,754,313
                  
                  
                  
                  36.7
                  %Research
      and development
                  
                  
                  1,203,270
                  
                  
                  
                  4.2
                  %
                  
                  
                  1,767,081
                  
                  
                  
                  9.2
                  %
                  
                  
                  (563,811
                  )
                  
                  
                  (31.9
                  )%Selling
      and distribution expenses
                  
                  
                  1,000,187
                  
                  
                  
                  3.5
                  %
                  
                  
                  263,304
                  
                  
                  
                  1.4
                  %
                  
                  
                  736,883
                  
                  
                  
                  279.9
                  %General
      and administrative expenses
                  
                  
                  2,315,088
                  
                  
                  
                  8.1
                  %
                  
                  
                  1,966,422
                  
                  
                  
                  10.3
                  %
                  
                  
                  348,666
                  
                  
                  
                  17.7
                  %INCOME
      (LOSS) FROM OPERATIONS
                  
                  
                  2,020,413
                  
                  
                  
                  7.1
                  %
                  
                  
                  787,838
                  
                  
                  
                  4.1
                  %
                  
                  
                  1,232,575
                  
                  
                  
                  156.5
                  %Interest
      income (expense), net
                  
                  
                  (2,015,516
                  )
                  
                  
                  (7.0
                  )%
                  
                  
                  (860,872
                  )
                  
                  
                  (4.5
                  )%
                  
                  
                  (1,154,644
                  )
                  
                  
                  134.1
                  %Change
      of fair value of financial instruments
                  
                  
                  (802,884
                  )
                  
                  
                  (2.8
                  )%
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (802,884
                  )
                  
                  
                  100
                  %Government
      grants
                  
                  
                  266,911
                  
                  
                  
                  0.9
                  %
                  
                  
                  127,317
                  
                  
                  
                  0.7
                  %
                  
                  
                  139,594
                  
                  
                  
                  109.6
                  %Other
      income, net
                  
                  
                  91,088
                  
                  
                  
                  0.3
                  %
                  
                  
                  311,984
                  
                  
                  
                  1.6
                  %
                  
                  
                  (220,896
                  )
                  
                  
                  (70.8
                  )%(LOSS)
      INCOME FROM OPERATIONS BEFORE INCOME TAXES
                  
                  
                  (439,988
                  )
                  
                  
                  (1.5
                  )%
                  
                  
                  366,267
                  
                  
                  
                  1.9
                  %
                  
                  
                  (806,255
                  )
                  
                  
                  (220.1
                  )%INCOME
      TAX BENEFIT (EXPENSE)
                  
                  
                  (269,338
                  )
                  
                  
                  (0.9
                  )%
                  
                  
                  (146,642
                  )
                  
                  
                  (0.8
                  )%
                  
                  
                  (122,696
                  )
                  
                  
                  83.7
                  %(LOSS)
      INCOME FROM CONTINUING OPERATIONS
                  
                  
                  (709,326
                  )
                  
                  
                  (2.5
                  )%
                  
                  
                  219,625
                  
                  
                  
                  1.1
                  %
                  
                  
                  (928,951
                  )
                  
                  
                  (423.0
                  )%NET
      (LOSS) INCOME
                  
                  
                  (709,326
                  )
                  
                  
                  (2.5
                  )%
                  
                  
                  219,625
                  
                  
                  
                  1.1
                  %
                  
                  
                  (928,951
                  )
                  
                  
                  (423.0
                  )%
  38
  (a)
Revenue
 
 For the
nine months ended September 30, 2010, our revenue increased by 49.8%, from
$19,114,049 to $28,637,863 year over year. This was primarily due to the
continued strengthening of the Company’s traditional recreational vehicle
market, led by a 167% year over year increase in go kart sales and 86% year over
year increase in sales of the CoCo super mini auto, primarily in the
U.S.  The Company noted that sales of go karts historically were
stronger ahead of the Christmas season and it has also focused on expanding
sales to new locations.  While sales of other recreational products
were weaker than anticipated, the Company anticipates gradual strengthening in
the months ahead.  The Company also is continuing to focus on
developing what it sees as a potentially large new market for certain of its
recreational vehicles in its domestic market, as part of a continuing goal to
shift 50% of product sales to China over time.
 
 With
respect to EV sales, the Company believes the strengthening of the Yuan versus
the dollar has had a negative effect in recent months on U.S. sales of its
“CoCo”.  The Company has shifted the focus of its EV sales to China,
where we are pursuing our new EV business model, consisting of a network of
“express charge” battery stations, among other things.  While the
Company anticipates a modest recovery for “CoCo” EV sales in the U.S., it is
focusing on beginning retail sales of EVs in Jinhua before year end, after the
anticipated completion of the “battery farm” and several “express change”
stations,. The Company anticipates the development of additional EV model cities
and expanded sales of EVs.
 
 The
following table lists the number of vehicles sold and sales revenue, categorized
by vehicle type, within the nine months ended September 30, 2010 and
2009:
 
 Nine Months Ended September 302010
                    
                    
                    2009Unit
                    
                    
                    Sales
                    
                    
                    Unit
                    
                    
                    SalesATV
                    
                    
                    2,756
                    
                    
                    $
                    1,985,008
                    
                    
                    
                    2,598
                    
                    
                    $
                    1,623,635CoCo
                    
                    
                    1,592
                    
                    
                    
                    6,635,008
                    
                    
                    
                    896
                    
                    
                    
                    3,563,550GoKart
                    
                    
                    14,943
                    
                    
                    
                    15,064,736
                    
                    
                    
                    6,098
                    
                    
                    
                    5,650,243Utility
      vehicles (“UTVs”)
                    
                    
                    1,397
                    
                    
                    
                    2,970,300
                    
                    
                    
                    2,582
                    
                    
                    
                    6,468,654Three-wheeled
      motorcycle (“TT”)
                    
                    
                    862
                    
                    
                    
                    1,982,811
                    
                    
                    
                    896
                    
                    
                    
                    1,803,603Pick
      - up
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1
                    
                    
                    
                    4,364
 
 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 nine
months ended September 30, 2010 and 2009:
 
 Nine Months Ended September 302010
                    
                    
                    2009Sales
                    
                    
                    Percentage
                    
                    
                    Sales
                    
                    
                    PercentageNorth
      America
                    
                    $
                    3,391,508
                    
                    
                    
                    12
                    %
                    
                    $
                    2,321,372
                    
                    
                    
                    12
                    %China
                    
                    
                    24,908,400
                    
                    
                    
                    87
                    %
                    
                    
                    16,518,443
                    
                    
                    
                    86
                    %Europe
                    
                    
                    337,955
                    
                    
                    
                    1
                    %
                    
                    
                    274,234
                    
                    
                    
                    2
                    %Total
                    
                    $
                    28,637,863
                    
                    
                    
                    100
                    %
                    
                    $
                    19,114,049
                    
                    
                    
                    100
                    %
  39
  For the
nine months ended September 30, 2010, over 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 nine months ended September 30, 2010 was $22,098,905,
representing a 54.2% increase of $7,769,501 from the nine months ended September
30, 2009, which corresponded with the increase in sales. Cost of goods sold was
77.2% of the total revenue for the period, as compared to 75% of the comparable
period, reflecting the increased price of raw manufacturing materials whose
costs were comparatively higher than those of previous year.
 
 (c)
Gross profit
 
 Gross
profit for the nine months ended September 30, 2010 increased 36.7%, from
$4,784,645 to $6,538,958 compared to 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 $1,000,187 for the nine months ended September
30, 2010, as compared to $263,304 from the same period in 2009, representing a
280% increase.  The significant increase in these expenses was the
result of the expense related to the options issued to consultants for their
sales and marketing services assisting the Company in expansion within the
Chinese market. Excluding the $808,223 option related expense, the net selling
and distribution expenses for the nine months ended September 30, 2010 was
$191,964, a 27.1% decrease from $263,304 for the same period of 2009, primarily
due to the $30,175 decrease in insurance expense and $86,432 decrease in
advertising and announcement fee, although this decrease was partially offset by
an increase in shipping costs of $43,528, compared to the same period of 2009,
due to the increased sales.
 
 (e)
General and administrative expenses
 
 General
and administrative expenses were $2,315,088 for the nine months ended September
30, 2010, as compared to $1,966,422 for the same period in 2009, representing a
17.7% increase.  For the nine months ended September 30, 2010, the
general and administrative expenses included $527,139 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 $487,089 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
$840,468. Excluding the effect of stock award cost and option cost, the net
general and administrative expenses for the nine months ended September 30, 2010
was $1,300,860, increased 15.5% from $1,125,954 for the same period of 2009,
primarily due to the increase of expenses incurred by the Company’s increased
activities in investor relations and capital markets compared to the same period
of 2009..
  40
  (f)
Research and development
 
 Research
and development expenses were $1,203,270 for the nine months ended September 30,
2010, as compared to $1,767,081 from the same period in 2009, representing a 32%
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 $266,911 for the nine months ended September 30, 2010,
representing a 110% increase over the same period in 2009, primarily due to the
PRC government’s grant of subsidies for Company’s continuous efforts on research
and patent development. The government grants consist of $230,033 in subsidies
for patent applications and other intellectual property expenses, and $36,878 in
subsidies for supporting companies that have competitive
advantages.
 
 (h)
Other income, Net
 
 Net other
income was $91,088 for the nine months ended September 30, 2010, a decrease of
70.8% from $311,984 for the same period of 2009. This is primarily due to a
damage award amount of $216,861 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 expense was $2,015,516 for the nine months ended September 30, 2010, as
compared to $860,872 interest expense for the same period last year,
representing a significant change of 134%. For the nine months ended September
30, 2010, the interest expense for the Convertible Notes was $343,267, and the
interest expense incurred by the amortization of debt discount was $799,128.
However, excluding the effects of interest expense related to Convertible Notes,
the interest expense for this reporting period was $873,121, almost equal to
$860,872 for the same period of 2009.  As of the date of this Form
10-Q filing, all but $1,000 of the Convertible Notes have already been
converted.
 
 (j)
Change of fair value of financial instruments
 
 For the
nine months ended September 30, 2010, the cost caused by the changes in fair
value of Warrants issued to Convertible Notes investors and placement agents,
and the changes in fair value of conversion features embedded in Convertible
Notes, was $802,884.
  41
  (k)
Net income (loss)
 
 The
operating performance of the Company for the nine months ended September 30,
2010 reflected a net loss of $709,326, down from a net income of $219,625 for
the same period of last year, primarily due to the significant non-cash expense
caused by the changes of fair value of Warrants issued to Convertible Notes
investors and placement agents, and the changes of fair value of conversion
features embedded in Convertible Notes.
 
 Excluding
the effects of option related expenses, the Convertible Note’s interest expense,
the effect caused by amortization of discount on Convertible Notes, and the
change of the fair value of financial derivatives, for the nine months ended
September 30, 2010, the Company’s net income was $3,058,404, up 188.5% as
compared with net income of $1,060,093 for the same period of 2009 excluding the
same effects. As of the date of this Form 10-Q filing, all but $1,000 of the
Convertible Notes have already been converted.
  42
  Comparison
of Three Months Ended September 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
                    MonthsEnded
                    September 30,
                    2010
                  
                  
                  % Of
                    Revenue
                  
                  
                  For Three
                    Months Ended
                    September 30,
                    2009
                  
                  
                  % Of
                    Revenue
                  
                  
                  Change In
                    Amount
                  
                  
                  Change
                    In %REVENUES,
      NET
                  
                  $
                  10,478,224
                  
                  
                  
                  100.0
                  %
                  
                  $
                  9,626,593
                  
                  
                  
                  100.0
                  %
                  
                  $
                  851,631
                  
                  
                  
                  8.8
                  %COST
      OF GOODS SOLD
                  
                  
                  (8,140,771
                  )
                  
                  
                  (77.7
                  )%
                  
                  
                  (7,266,052
                  )
                  
                  
                  (75.5
                  )%
                  
                  
                  (874,719
                  )
                  
                  
                  12.0
                  %GROSS
      PROFIT
                  
                  
                  2,337,453
                  
                  
                  
                  22.3
                  %
                  
                  
                  2,360,541
                  
                  
                  
                  24.5
                  %
                  
                  
                  (23,088
                  )
                  
                  
                  (1.0
                  )%Research
      and development
                  
                  
                  459,935
                  
                  
                  
                  4.4
                  %
                  
                  
                  660,108
                  
                  
                  
                  6.9
                  %
                  
                  
                  (200,173
                  )
                  
                  
                  (30.3
                  )%Selling
      and distribution expenses
                  
                  
                  58,121
                  
                  
                  
                  0.6
                  %
                  
                  
                  79,310
                  
                  
                  
                  0.8
                  %
                  
                  
                  (21,189
                  )
                  
                  
                  (26.7
                  )%General
      and administrative expenses
                  
                  
                  516,929
                  
                  
                  
                  4.9
                  %
                  
                  
                  510,212
                  
                  
                  
                  5.3
                  %
                  
                  
                  6,717
                  
                  
                  
                  1.3
                  %INCOME
      FROM OPERATIONS
                  
                  
                  1,302,468
                  
                  
                  
                  12.4
                  %
                  
                  
                  1,110,911
                  
                  
                  
                  11.5
                  %
                  
                  
                  191,557
                  
                  
                  
                  17.2
                  %Interest
      (expense) income, net
                  
                  
                  (572,032
                  )
                  
                  
                  (5.5
                  )%
                  
                  
                  (442,315
                  )
                  
                  
                  (4.6
                  )%
                  
                  
                  (129,717
                  )
                  
                  
                  (29.3
                  )%Change
      of fair value of financial instruments
                  
                  
                  (2,578,693
                  )
                  
                  
                  (24.6
                  )%
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (2,578,693
                  )
                  
                  
                  100
                  %Government
      grants
                  
                  
                  191,934
                  
                  
                  
                  1.8
                  %
                  
                  
                  3,312
                  
                  
                  
                  0
                  %
                  
                  
                  188,622
                  
                  
                  
                  5,696.1
                  %Other
      income, net
                  
                  
                  33,249
                  
                  
                  
                  0.3
                  %
                  
                  
                  9,800
                  
                  
                  
                  0.1
                  %
                  
                  
                  23,449
                  
                  
                  
                  239.3
                  %(LOSS)
      INCOME FROM OPERATIONS BEFORE INCOME TAXES
                  
                  
                  (1,623,074
                  )
                  
                  
                  (25.6
                  )%
                  
                  
                  681,708
                  
                  
                  
                  7.0
                  %
                  
                  
                  (2,304,782
                  )
                  
                  
                  (338.1
                  )%INCOME
      TAX (EXPENSE) BENEFIT
                  
                  
                  (94,282
                  )
                  
                  
                  (0.9
                  )%
                  
                  
                  (105,558
                  )
                  
                  
                  (1.1
                  )%
                  
                  
                  11,276
                  
                  
                  
                  (10.7
                  )%(LOSS)
      INCOME FROM CONTINUING OPERATIONS
                  
                  
                  (1,717,356
                  )
                  
                  
                  (16.4
                  )%
                  
                  
                  576,150
                  
                  
                  
                  6.0
                  %
                  
                  
                  (2,293,506
                  )
                  
                  
                  (398.1
                  )%NET
      (LOSS) INCOME
                  
                  
                  (1,717,356
                  )
                  
                  
                  (16.4
                  )%
                  
                  
                  576,150
                  
                  
                  
                  6.0
                  %
                  
                  
                  (2,293,506
                  )
                  
                  
                  (398.1
                  )%
  43
  (a)
Revenue
 
 For the
three months ended September 30, 2010, our revenue increased by 8.8%, to
$10,478,224 from $9,626,593 as compared to the three months ended September 30,
2009. This was primarily due to the continuing strengthening of the Company’s
traditional recreational vehicle market, led by a 150% year over year increase
in go kart sales. The Company noted that sales of this product historically were
stronger ahead of the Christmas season and it has also focused on expanding
sales to new locations.  While sales of other recreational products
were weaker than anticipated, the Company anticipates a gradual strengthening in
the months ahead.  The Company also is continuing to focus on
developing what it sees as a potentially large new market for certain of its
recreational vehicles in its domestic market, as part of a continuing goal to
shift 50% of product sales to China over time.
 
 The
following table lists the number of vehicles sold and sales revenues,
categorized by vehicle type, within the three months ended September 30, 2010
and 2009:
 
 Three Months Ended September 302010
                    
                    
                    2009Unit
                    
                    
                    Sales
                    
                    
                    Unit
                    
                    
                    SalesATV
                    
                    
                    572
                    
                    
                    $
                    387,587
                    
                    
                    
                    824
                    
                    
                    $
                    570,002CoCo
                    
                    
                    215
                    
                    
                    
                    812,996
                    
                    
                    
                    422
                    
                    
                    
                    1,859,525GoKart
                    
                    
                    8,556
                    
                    
                    
                    8,182,472
                    
                    
                    
                    3,535
                    
                    
                    
                    3,270,019Utility
      vehicles (“UTVs”)
                    
                    
                    345
                    
                    
                    
                    665,908
                    
                    
                    
                    1,124
                    
                    
                    
                    2,796,892Three-wheeled
      motorcycle (“TT”)
                    
                    
                    184
                    
                    
                    
                    429,261
                    
                    
                    
                    560
                    
                    
                    
                    1,125,791Pick-up
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1
                    
                    
                    
                    4,364
 
 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 September 30, 2010 and 2009:
 
 Three Months Ended September 302010
                    
                    
                    2009Sales
                    
                    
                    Percentage
                    
                    
                    Sales
                    
                    
                    PercentageNorth
      America
                    
                    $
                    1,027,131
                    
                    
                    
                    10
                    %
                    
                    $
                    1,058,865
                    
                    
                    
                    11
                    %China
                    
                    
                    9,338,775
                    
                    
                    
                    89
                    %
                    
                    
                    8,446,800
                    
                    
                    
                    88
                    %Europe
                    
                    
                    112,318
                    
                    
                    
                    1
                    %
                    
                    
                    120,928
                    
                    
                    
                    1
                    %Total
                    
                    $
                    10,478,224
                    
                    
                    
                    100
                    %
                    
                    $
                    9,626,593
                    
                    
                    
                    100
                    %
 
 For the
three months ended September 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 September 30, 2010 was $8,140,771,
representing a 12% increase of $874,718 from the three months ended September
30, 2009, which corresponds with the increase in sales. Cost of goods sold was
77.7% of the total revenue for the period, as compared to 75.5% of the
comparable period last year, which is primarily due to the increased price of
raw manufacturing materials.
  44
  (c)
Gross profit
 
 Gross
profit for the three months ended September 30, 2010 decreased 1%, from
$2,360,541 to $2,337,453 from the same period in 2009, which is mainly due to
the increase in revenue was not enough to compensate for the increase in the
costs of raw material.
 
 (d)
Selling and distribution expenses
 
 Selling
and distribution expenses were $58,121 for the three months ended September 30,
2010, as compared to $79,310 from the same period in 2009, representing a 26.7%
decrease, primarily because the advertising fee and announcement fee for the
three months ended September 30, 2010 were $29,352 lower than the amount
incurred for the same period of last year.
 
 (e)
General and administrative expenses
 
 General
and administrative expenses were $516,929 for the three months ended September
30, 2010, as compared to $510,212 for the same period in 2009, representing a
1.3% increase.  For the three months ended September 30, 2010, the
general and administrative expenses included $143,262 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 $315,176. Without the effect of stock award cost and
option cost, the net general and administrative expenses for the three months
ended September 30, 2010 would be $373,667, an increase of 91.6% from $195,036
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, as well as the higher depreciation expense
compared to the same period of 2009.
 
 (f)
Government grants
 
 Government
grants totaled $191,934 for the three months ended September 30, 2010,
significantly increased from $3,312 for the same period in 2009. The government
grants for the three months ended September 30, 2010 consist of $154,860 in
subsidies for patent applications and other intellectual property expenses, and
$37,074 in subsidies for companies that have competitive
advantages.
 
 (g)Other
income, Net
 
 Net other
income was $33,249 for the three months ended September 30, 2010, an increase of
239% from $9,800 for the same period of 2009, mainly due to the income from
leasing the Company’s facilities .
  45
  (h)
Net interest expense
 
 Net
interest expense was $572,032 for the three months ended September 30, 2010,
compared to $442,315 for the same period last year. For the three months ended
September 30, 2010, the interest expense on the Convertible Notes was $89,842,
and the interest expense incurred by the amortization of debt discount was
$307,029. Excluding the effects of interest expense related to Convertible
Notes, the net interest expense for the three months ended September 30, 2010
would be $175,161, a decrease of 60% from $442,315 for the same period of 2009.
This was primarily due to the increase in interest income earned from the note
receivables issued to third parties, which increased $225,341 compared to the
same period of 2009.
 
 (i)
Change of fair value of financial instruments
 
 For the
three months ended September 30, 2010, the cost caused by the changes in fair
value of Investor Warrants and warrants issued to placement agents, and the
changes in fair value of conversion features embedded in Convertible Notes, was
$2,578,693.
 
 (j)
Net (loss) income
 
 The
operating performance of the Company for the three months ended September 30,
2010 reflected a net loss of $1,717,356, which is significantly changed from a
net income of $576,150 for the same period of last year. This is primarily due
to the significant increase in fair value of financial instruments, which
include 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.
 
 Excluding
the effects of option related expenses, Convertible Notes’ interest expense, the
effects caused by the amortization of discount on Convertible Notes, and the
change of the fair value of financial derivative, for the three months ended
September 30, 2010, the Company recorded a net income of $1,401,470, up 57.2%
from net income of $891,326 for the same period of 2009 excluding the same
effects.
 
 As of the
date of this Form 10-Q filing, all but $1,000 of the Convertible Notes have
already been converted.
  46
  Financial
Condition
 
 Working
Capital
 
 The
Company had a working capital surplus of $3,044,974 at September 30, 2010, an
improvement from a working capital deficit of $13,859,809 as of September 30,
2009, which was principally due to the Company’s issuance of $10,000,000
long-term Convertible Notes in January 2010 and using part of the proceeds in
the Company’s working capital. In addition, for the nine months ended September
30, 2010, the Company also recorded a net cash inflow of $7,395,249 from the
operating activities, which also increased the Company’s working
capital.
 
 As of
September 30, 2010, the Company had credit lines from commercial banks for
$37,622,609, of which $23,887,371 was used at September 30, 2010. The Company
believes that its cash flows generated internally may not be sufficient to
support growth of future operations and repay short term bank loans for the next
twelve months if needed. 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.
  47
  Capital
Requirements and Capital Provided
 
 Capital
requirements and capital provided for the nine months ended September 30, 2010
is as follows:
 
 Capital requirements
                                      
                                      Nine months Ended
                                        September 30, 2010
                                        (In thousands)Purchase
      of plant and equipment
                                      
                                      $
                                      751Purchase
      of construction in progress
                                      
                                      
                                      -Issuance
      of notes receivable
                                      
                                      
                                      13,624Repayments
      of short-term bank loans
                                      
                                      
                                      26,554Repayments
      of notes payable
                                      
                                      
                                      7,956Increase
      in restricted cash
                                      
                                      
                                      3,964Increase
      in cash
                                      
                                      
                                      3,194Other
      financing activities
                                      
                                      
                                      932Total
      capital requirements
                                      
                                      $
                                      56,975Capital providedInternal
      cash provided by operation
                                      
                                      
                                      7,395Proceeds
      from short-term bank loan
                                      
                                      
                                      23,620Proceeds
      from notes payable
                                      
                                      
                                      23,861Repayments
      of notes receivable
                                      
                                      
                                      2,275Other
      financing activities
                                      
                                      
                                      -Total
      capital provided
                                      
                                      $
                                      57,151For
      further information, see the Statement of Cash Flows.
                                        The
      difference between capital provided and capital requirement is the effect
      of exchange rate changes over the past nine
  months
 
 Cash
Flow
 
 Net cash
flow provided by operating activities was $7,395,249 for the nine months ended
September 30, 2010, as compared to net cash flow used in operating activities of
($5,237,399) in the same period in 2009. The increase of net cash flow provided
by operating activities was mainly due to (i) the non-cash cost related to
option, warrant and other financial derivative was $4,633,871 for the nine
months ended September 30, 2010, much higher than $840,468 for the same period
of last year; (ii) a net cash inflow of $5,230,579 for the nine months ended
September 30, 2010 caused by the change of accounts payable, improved from a net
cash inflow of $1,225,909 for the same period of last year, and (iii) a decrease
in the cash outflow for inventory from ($11,232,447)  to
($5,403,855).
 
 Net cash
flow used in investing activities was ($12,099,838) for the nine months ended
September 30, 2010 as compared to net cash flow provided by investing activities
of $5,705,522 for the same reporting period in 2009. For the nine months ended
September 30, 2010, the Company issued $13,623,804 in notes receivable, and
collected $2,274,519 repayment of notes receivable, which caused a net cash
outflow ($11,349,285) in notes receivable. While for the same period of last
year, the Company recorded a net cash inflow $9,318,754 in note receivable,
primarily due to the $28,545,269 repayment of notes receivable.
 
 Net cash
flow provided by financing activities was $8,074,348 for the nine months ended
September 30, 2010, increased by $7,803,530 as compared to net cash flow
provided by financing activities of $270,818 for the nine months ended September
30, 2009. Increase in cash flow provided by financing activities in this quarter
was primarily due to net cash inflow from notes payable of
$15,905,217.
 
 Item
3. Quantitative and Qualitative Disclosures About Market Risk.
 
 Not
applicable.
  48
  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 September 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 September 30, 2010 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
  49
  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.  Removed and Reserved.
  Item
5.  Other Information.
  
  II-1
  Item
6. Exhibits
 
 Exhibit Number
                
                Description10.1
                
                Joint
      Venture Agreement, dated September 28, 2010, by and among Jinhua Bada
      Group, Zhejiang Kandi Vehicles Co., Ltd., and Tianneng Power International
      Co., Ltd.31.1
                
                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:
      November 15, 2010
                    By:
                    /s/
      Hu XiaomingHu
      XiaomingPresident
      and Chief Executive Officer
                      (Principal
      Executive Officer)Date:
      November 15, 2010
                    By:
                    /s/
      Zhu XiaoyingZhu
      XiaoyingChief
      Financial Officer
                      (Principal
      Financial and Accounting
Officer)
  II-3