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, 2009




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) 82239851


(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
 ̈  No þ




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




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




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




As of
September 30, 2009 the registrant had issued and outstanding 19,961,000 shares
of common stock, par value $.001 per share.





TABLE
OF CONTENTS




PagePART
      I— FINANCIAL INFORMATIONItem
      1.
                  
                  Condensed
      Consolidated Financial Statements
                  
                  
                  2Item
      2.
                  
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  
                  
                  30Item
      3.
                  
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  
                  
                  44Item
      4.
                  
                  Controls
      and Procedures
                  
                  
                  45PART
      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.
                  
                  Submission
      of Matters to a Vote of Security Holders
                  
                  II-1Item
      5.
                  
                  Other
      Information
                  
                  II-1Item
      6.
                  
                  Exhibits
                  
                  II-1







PART
I— FINANCIAL INFORMATION




Item
1.  Financial Statements. (Unaudited)





KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


CONDENSED CONSOLIDATED
BALANCE SHEETS





September 30,
                      2009
                    
                    
                    December 31,
                      2008(Unaudited)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                    
                    $
                    881,485
                    
                    
                    $
                    141,380Restricted
      cash
                    
                    
                    7,897,508
                    
                    
                    
                    12,550,685Accounts
      receivable, net of allowance for doubtful accounts of  $0 as of
      September 30, 2009 and $7,123 as of December 31, 2008
                    
                    
                    7,080,515
                    
                    
                    
                    7,715,081Inventories,
      net of reserve for slow moving inventories of $152,269 and $0 as of
      September 30, 2009 and December 31, 2008
                    
                    
                    14,455,871
                    
                    
                    
                    3,207,571Notes
      receivable
                    
                    
                    3,942,649
                    
                    
                    
                    13,235,961Other
      receivables
                    
                    
                    117,746
                    
                    
                    
                    289,315Prepayments
      and prepaid expenses
                    
                    
                    112,747
                    
                    
                    
                    60,017Due
      from employees
                    
                    
                    52,293
                    
                    
                    
                    19,805Advances
      to suppliers
                    
                    
                    544,458
                    
                    
                    
                    -Total
      Current Assets
                    
                    
                    35,085,272
                    
                    
                    
                    37,219,815LONG-TERM
      ASSETSPlant
      and equipment, net
                    
                    
                    21,581,951
                    
                    
                    
                    20,832,549Land
      use rights, net
                    
                    
                    9,199,786
                    
                    
                    
                    9,368,403Construction
      in progress
                    
                    
                    2,472,043
                    
                    
                    
                    1,913,456Deferred
      tax asset
                    
                    
                    122,869
                    
                    
                    
                    265,243Total
      Long-Term Assets
                    
                    
                    33,376,649
                    
                    
                    
                    32,379,651TOTAL
      ASSETS
                    
                    $
                    68,461,921
                    
                    
                    $
                    69,599,466





See
accompanying notes to condensed consolidated financial
statements


2


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


CONDENSED CONSOLIDATED
BALANCE SHEETS





September
      30,2009
                    
                    
                    December 31,(Unaudited)
                    
                    
                    2008LIABILITIES AND STOCKHOLDERS’
      EQUITYCURRENT
      LIABILITIESAccounts
      payable
                    
                    $
                    10,620,645
                    
                    
                    $
                    9,371,105Other
      payables and accrued expenses
                    
                    
                    2,558,584
                    
                    
                    
                    1,151,245Short-term
      bank loans
                    
                    
                    27,495,027
                    
                    
                    
                    26,115,375Customer
      deposits
                    
                    
                    27,087
                    
                    
                    
                    676,548Notes
      payable
                    
                    
                    7,166,256
                    
                    
                    
                    13,081,026Due
      to employees
                    
                    
                    93,397
                    
                    
                    
                    10,502Due
      to related party
                    
                    
                    841,252
                    
                    
                    
                    623,767Income
      tax payable
                    
                    
                    105,634
                    
                    
                    
                    -Deferred
      tax liability
                    
                    
                    37,199
                    
                    
                    
                    139,500Total
      Current Liabilities
                    
                    
                    48,945,081
                    
                    
                    
                    51,169,068TOTAL
      LIABILITIES
                    
                    
                    48,945,081
                    
                    
                    
                    51,169,068COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDERS’
      EQUITYCommon
      stock, $0.001 par value; 100,000,000 shares authorized; 19,961,000 and
      19,961,000 shares issued and outstanding at September 30, 2009 and
      December 31, 2008, respectively
                    
                    
                    19,961
                    
                    
                    
                    19,961Additional
      paid-in capital
                    
                    
                    7,978,573
                    
                    
                    
                    7,138,105Retained
      earnings (the restricted portion is $534,040 at September 30, 2009 and
      December 31, 2008)
                    
                    
                    10,266,823
                    
                    
                    
                    10,047,198Accumulated
      other comprehensive income
                    
                    
                    1,251,483
                    
                    
                    
                    1,225,134TOTAL
      STOCKHOLDERS’ EQUITY
                    
                    
                    19,516,840
                    
                    
                    
                    18,430,398TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                    
                    $
                    68,461,921
                    
                    
                    $
                    69,599,466


See
accompanying notes to condensed consolidated financial
statements


3


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND


COMPREHENSIVE INCOME
(LOSS)


(UNAUDITED)





Three
      Months Ended
                                      
                                      
                                      Nine
      Months EndedSeptember
      30,
                                        2009
                                      
                                      
                                      September
      30,
                                        2008
                                      
                                      
                                      September
      30,
                                        2009
                                      
                                      
                                      September
      30,
                                        2008REVENUES,
      NET
                                      
                                      $
                                      9,626,593
                                      
                                      
                                      $
                                      9,261,033
                                      
                                      
                                      $
                                      19,114,049
                                      
                                      
                                      $
                                      30,767,280COST
      OF GOODS SOLD
                                      
                                      
                                      (7,266,052
                                      )
                                      
                                      
                                      (6,966,103
                                      )
                                      
                                      
                                      (14,329,404
                                      )
                                      
                                      
                                      (23,098,186
                                      )GROSS
      PROFIT
                                      
                                      
                                      2,360,541
                                      
                                      
                                      
                                      2,294,930
                                      
                                      
                                      
                                      4,784,645
                                      
                                      
                                      
                                      7,669,094Research
      and development
                                      
                                      
                                      660,108
                                      
                                      
                                      
                                      230,023
                                      
                                      
                                      
                                      1,767,081
                                      
                                      
                                      
                                      487,755Selling
      and distribution expenses
                                      
                                      
                                      79,310
                                      
                                      
                                      
                                      229,795
                                      
                                      
                                      
                                      263,304
                                      
                                      
                                      
                                      632,132General
      and administrative expenses
                                      
                                      
                                      195,036
                                      
                                      
                                      
                                      324,672
                                      
                                      
                                      
                                      1,125,954
                                      
                                      
                                      
                                      1,019,385Stock
      based compensation expense
                                      
                                      
                                      315,176
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      840,468
                                      
                                      
                                      
                                      -INCOME
      (LOSS) FROM OPERATIONS
                                      
                                      
                                      1,110,911
                                      
                                      
                                      
                                      1,510,440
                                      
                                      
                                      
                                      787,838
                                      
                                      
                                      
                                      5,529,822Interest
      expense, net
                                      
                                      
                                      (442,315
                                      )
                                      
                                      
                                      (547,511
                                      )
                                      
                                      
                                      (860,872
                                      )
                                      
                                      
                                      (1,540,631
                                      )Government
      grants
                                      
                                      
                                      3,312
                                      
                                      
                                      
                                      17,484
                                      
                                      
                                      
                                      127,317
                                      
                                      
                                      
                                      57,533Other
      income, net
                                      
                                      
                                      9,800
                                      
                                      
                                      
                                      26,551
                                      
                                      
                                      
                                      311,984
                                      
                                      
                                      
                                      39,599INCOME
      (LOSS) FROM OPERATIONS BEFORE INCOME TAXES
                                      
                                      
                                      681,708
                                      
                                      
                                      
                                      1,006,964
                                      
                                      
                                      
                                      366,267
                                      
                                      
                                      
                                      4,086,323INCOME
      TAX (EXPENSE) BENEFIT
                                      
                                      
                                      (105,558
                                      )
                                      
                                      
                                      7,581
                                      
                                      
                                      
                                      (146,642
                                      )
                                      
                                      
                                      81,042INCOME
      (LOSS) FROM CONTINUING OPERATIONS
                                      
                                      
                                      576,150
                                      
                                      
                                      
                                      1,014,545
                                      
                                      
                                      
                                      219,625
                                      
                                      
                                      
                                      4,167,365DISCONTINUED
      OPERATIONLoss
      from discontinued operation
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (33,396
                                      )Gain
      from disposition of discontinued operation
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      361,096NET
      GAIN FROMDISCONTINUED
      OPERATION
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      327,700NET
      INCOME (LOSS)
                                      
                                      
                                      576,150
                                      
                                      
                                      
                                      1,014,545
                                      
                                      
                                      
                                      219,625
                                      
                                      
                                      
                                      4,495,065




See
accompanying notes to condensed consolidated financial
statements


4


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND


COMPREHENSIVE INCOME
(LOSS)


(UNAUDITED)




Three
      Months Ended
                    
                    
                    Nine
      Months EndedSeptember
      30,
                    
                    
                    September
      30,
                    
                    
                    September
      30,
                    
                    
                    September 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008OTHER
      COMPREHENSIVE (LOSS) INCOMEForeign
      currency translation
                    
                    
                    (2,070
                    )
                    
                    
                    51,770
                    
                    
                    
                    26,349
                    
                    
                    
                    404,432COMPREHENSIVE
      (LOSS) INCOME
                    
                    
                    574,080
                    
                    
                    
                    1,066,315
                    
                    
                    
                    245,974
                    
                    
                    
                    4,899,497WEIGHTED
      AVERAGE SHARES OUTSTANDING BASIC
                    
                    
                    19,961,000
                    
                    
                    
                    19,961,000
                    
                    
                    
                    19,961,000
                    
                    
                    
                    19,961,000WEIGHTED
      AVERAGE SHARES OUTSTANDING DILUTED
                    
                    
                    21,155,595
                    
                    
                    
                    19,961,000
                    
                    
                    
                    20,856,082
                    
                    
                    
                    19,961,000NET
      INCOME PER SHARE FROM CONTINUING OPERATIONS, BASIC
                    
                    $
                    0.03
                    
                    
                    $
                    0.05
                    
                    
                    $
                    0.01
                    
                    
                    $
                    0.21NET
      INCOME PER SHARE FROM CONTINUING OPERATIONS, DILUTED
                    
                    $
                    0.03
                    
                    
                    $
                    0.05
                    
                    
                    $
                    0.01
                    
                    
                    $
                    0.21NET
      INCOME PER SHARE FROM DISCONTINUED OPERATIONS, BASIC AND
      DILUTED
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    0.02NET
      INCOME PER SHARE, BASIC
                    
                    $
                    0.03
                    
                    
                    $
                    0.05
                    
                    
                    $
                    0.01
                    
                    
                    $
                    0.23NET
      INCOME PER SHARE, DILUTED
                    
                    $
                    0.03
                    
                    
                    $
                    0.05
                    
                    
                    $
                    0.01
                    
                    
                    $
                    0.23




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 302009
                      
                      
                      2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                      
                      $
                      219,625
                      
                      
                      $
                      4,495,065Net
      (gain) from discontinued operation
                      
                      
                      -
                      
                      
                      
                      (327,700
                      )Income
      from continuing operations
                      
                      
                      219,625
                      
                      
                      
                      4,167,365Adjustments
      to reconcile net (loss) income to net cash (used in) provided by operating
      activities:Depreciation
      and amortization
                      
                      
                      2,529,981
                      
                      
                      
                      1,318,510Deferred
      taxes
                      
                      
                      41,085
                      
                      
                      
                      (83,755
                      )Stock
      based compensation expense
                      
                      
                      840,468
                      
                      
                      
                      -Changes
      in operating assets and liabilities:(Increase)
      Decrease In:Accounts
      receivable
                      
                      
                      652,827
                      
                      
                      
                      164,913Inventories
                      
                      
                      (11,232,447
                      )
                      
                      
                      (5,265,108
                      )Other
      receivables
                      
                      
                      172,147
                      
                      
                      
                      195,263Due
      from employees
                      
                      
                      50,393
                      
                      
                      
                      19,175Prepayments
      and prepaid expenses
                      
                      
                      (596,614
                      )
                      
                      
                      (93,885
                      )Increase
      (Decrease) In:Accounts
      payable
                      
                      
                      1,225,909
                      
                      
                      
                      2,794,238Other
      payables and accrued liabilities
                      
                      
                      1,404,305
                      
                      
                      
                      98,964Income
      tax payable
                      
                      
                      105,558
                      
                      
                      
                      -Customer
      deposits
                      
                      
                      (650,636
                      )
                      
                      
                      955,914Net
      cash (used in) provided by operating activities from continuing
      operations
                      
                      
                      (5,237,399
                      )
                      
                      
                      4,271,594Net
      cash provided by operating activities from discontinued
      operation
                      
                      
                      -
                      
                      
                      
                      739,378Net
      cash (used in) provided by operating activities
                      
                      $
                      (5,237,399
                      )
                      
                      $
                      5,010,972CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of plant and equipment
                      
                      
                      (3,059,687
                      )
                      
                      
                      (2,767,161
                      )Purchase
      of construction in progress
                      
                      
                      (553,545
                      )
                      
                      
                      (1,049,862
                      )Purchase
      of a subsidiary, net of cash acquired
                      
                      
                      -
                      
                      
                      
                      (44,129
                      )Issuance
      of notes receivable
                      
                      
                      (10,011,535
                      )
                      
                      
                      (6,493,209
                      )Repayments
      of notes receivable
                      
                      
                      19,330,289
                      
                      
                      
                      2,352,054




See
accompanying notes to condensed consolidated financial
statements


6


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS


(UNAUDITED)




Nine
      Months Ended September 302009
                    
                    
                    2008Net
      cash provided by (used in) investing activities from continuing
      operations
                    
                    
                    5,705,522
                    
                    
                    
                    (8,002,307
                    )Net
      cash provided by investing activities from discontinued
      operation
                    
                    
                    -
                    
                    
                    
                    -Net
      cash provided by (used in) investing activities
                    
                    $
                    5,705,522
                    
                    
                    $
                    (8,002,307
                    )CASH
      FLOWS FROM FINANCING ACTIVITIES:Decrease
      (Increase) in restricted cash
                    
                    
                    4,680,286
                    
                    
                    
                    (9,719,414
                    )Proceeds
      from short-term bank loans
                    
                    
                    24,216,260
                    
                    
                    
                    29,170,492Repayments
      of short-term bank loans
                    
                    
                    (22,900,953
                    )
                    
                    
                    (23,928,409
                    )Proceeds
      from notes payable
                    
                    
                    14,468,375
                    
                    
                    
                    11,386,698Repayments
      of notes payable
                    
                    
                    (20,410,634
                    )
                    
                    
                    (1,458,768
                    )Repayments
      of advances to related parties
                    
                    
                    217,484
                    
                    
                    
                    180,659Net
      cash provided by (used in) financing activities from continuing
      operations
                    
                    
                    270,818
                    
                    
                    
                    5,631,258Net
      cash (used in) financing activities from discontinued
      operation
                    
                    
                    -
                    
                    
                    
                    -Net
      cash provided by (used in) financing activities
                    
                    
                    270,818
                    
                    
                    
                    5,631,258NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                    
                    
                    738,941
                    
                    
                    
                    2,639,923Effect
      of exchange rate changes on cash
                    
                    
                    1,164
                    
                    
                    
                    (511,974
                    )Cash
      and cash equivalents at beginning of period
                    
                    
                    141,380
                    
                    
                    
                    1,149,140CASH AND CASH EQUIVALENTS AT END OF
      PERIOD
                    
                    $
                    881,485
                    
                    
                    $
                    3,277,089SUPPLEMENTARY
      CASH FLOW INFORMATIONIncome
      taxes paid
                    
                    $
                    -
                    
                    
                    $
                    -Interest
      paid
                    
                    $
                    1,354,460
                    
                    
                    $
                    1,612,853SUPPLEMENTAL
      NON-CASH DISCLOSURE:


During
the nine months ended September 30, 2009 and 2008, $1,301,166 and $1,510,197
were transferred from construction in progress to plant and equipment,
respectively.




See
accompanying notes to condensed consolidated financial
statements


7


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30, 2009
(UNAUDITED)





NOTE
1 - ORGANIZATION AND PRINCIPAL ACTIVITIES





Stone
Mountain Resources, Inc. (“Stone Mountain “) was incorporated under the laws of
the State of Delaware on March 31, 2004. On August 13, 2007, Stone Mountain
Resources, Inc. changed its name to Kandi Technologies, Corp. (the
“Company”).





On June
29, 2007, pursuant to the share exchange agreement between Stone Mountain
Resources, Inc., Continental Development Limited, (“Continental”) and
Excelvantage (Continental’s sole shareholder), Stone Mountain issued 12,000,000
shares of its common stock to Excelvantage, in exchange for 100% of the common
stock of Continental. As a result of the share exchange, Continental became a
wholly-owned subsidiary of Stone Mountain. Kandi Technologies, Corp. conducts
its operations through its wholly owned subsidiary, Zhejiang Kandi Vehicles Co.
Ltd., a People’s Republic of China (“PRC”) company.





On June
24, 2008 the Company closed its acquisition of 100% of the shares of Kandi
Special Vehicles Co., Ltd (“KSV”), after which KSV became a wholly-owned
subsidiary of the Company. The acquisition was accounted for as a purchase in
accordance with Accounting Standards Codification (“ASC”) 805 “Business
Combinations.” The consolidated statements of income include the results of
operations of KSV at the date of acquisition. On March 10, 2009, KSV changed its
name to Kandi New Energy Vehicles Co., Ltd, (“KNE”). On June 11, 2009, KNE
changed its name back to KSV.





On May 9,
2008, the Company sold Zhejiang Yongkang Top Import & Export Co., Ltd.
(“Dingji”), a subsidiary of the Company, to certain individuals. In accordance
with ASC 360, “Property, Plant, and Equipment,” the results of operations of
Dingji as of the disposal date May 9, 2008 are removed from the detailed
financial statement line items to the “discontinued operation” of the Company’s
financial statements.





The
primary operations of the Company are the design, development, manufacturing,
and commercializing of electrical vehicle, all-terrain vehicles, go-karts, and
specialized automobile related products for the PRC and global export markets.
Sales are made to dealers in Asia, North America, Europe and
Australia.


8


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30, 2009
(UNAUDITED)




NOTE
2 – LIQUIDITY




The
Company’s working capital deficit is $ 13,859,809 as of September 30,
2009.




As of
September 30, 2009, the Company has credit lines from commercial banks for
$37,001,287, of which $27,495,027 was used at September 30, 2009.





The
Company believes that its cash flows generated internally may not be sufficient
to sustain operations and repay short term bank loans for the next twelve
months. Therefore, from time to time, the Company may require additional funding
through short term borrowing from PRC banks or other financing activities if
needed in the near future. Nevertheless, the Company believes that financing
will be available on normal trade terms if needed.





NOTE
3 - BASIS OF PRESENTATION





The
Company’s unaudited condensed consolidated financial statements for the nine
months ended September 30, 2009 and 2008 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, 2008 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.


9


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30, 2009
(UNAUDITED)




NOTE
4 – PRINCIPLES OF CONSOLIDATION




The
consolidated financial statements include the accounts of Kandi Technologies,
Corp., and the following subsidiaries:





(i)
            Continental
      Development Ltd., (“Continental”) (a wholly-owned subsidiary of the
      Company)


(ii)
            Zhejiang
      Kandi Vehicles Co. Ltd., (“Zhejiang Kandi”) (a wholly-owned subsidiary of
      “Continental”)


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





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





NOTE
5 – USE OF ESTIMATES





The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amounts of revenue and expenses during
the reporting period. Management makes these estimates using the best
information available at the time the estimates are made; however actual results
when ultimately realized could differ from those estimates.





NOTE
6 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





(a)
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.





(b)
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 $1,767,081 and $487,755 for the nine months ended
September 30, 2009 and 2008, respectively.


10


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30, 2009
(UNAUDITED)




NOTE
6 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





(c)
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,
                
                
                December
      31,
                
                
                September
      30,2009
                
                
                2008
                
                
                2008Period
      end RMB : USD exchange rate
                
                
                6.8376
                
                
                
                6.8542
                
                
                
                6.8551Average
      quarterly RMB : USD exchange rate
                
                
                6.8411
                
                
                
                7.0842
                
                
                
                7.0846





(d)
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.





(e)
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.





(f)
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, 2009 and December 31, 2008 represent time deposits on
account to secure short-term bank loans and notes payable. Also see Notes 14 and
15.


11


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30, 2009
(UNAUDITED)




NOTE
6 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





(g)
Fair Value of Financial Instruments





ASC 820
establishes a three-tier fair value hierarchy, which prioritizes the inputs used
in measuring fair value. The hierarchy prioritizes the inputs into three levels
based on the extent to which inputs used in measuring fair value are observable
in the market.





These
tiers include:





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


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


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





The
assets measured at fair value on a recurring basis subject to the disclosure
requirements of ASC 820 as of September 30, 2009 are as follows:





Fair
      Value Measurements at Reporting Date Using Quoted Prices
inActive
      Markets
                  
                  
                  Significant
      Other
                  
                  
                  SignificantCarrying
      value
                  
                  
                  for
      Identical
                  
                  
                  Observable
                  
                  
                  Unobservableas
      of September
                  
                  
                  Assets
                  
                  
                  Inputs
                  
                  
                  Inputs30,
      2009
                  
                  
                  (Level
      1)
                  
                  
                  (Level
      2)
                  
                  
                  (Level
      3)Cash
      and cash equivalents
                  
                  $
                  881,485
                  
                  
                  $
                  881,485
                  
                  
                  
                  -
                  
                  
                  
                  -Restricted
      cash
                  
                  $
                  7,897,508
                  
                  
                  $
                  7,897,508
                  
                  
                  
                  -
                  
                  
                  
                  -





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.





(h)
Stock Based Compensation





The
Company stock based compensation is recorded in accordance with ASC
718.





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





Stock
compensation expense recognized is based on awards expected to vest, and there
were no estimated forfeitures as the current options outstanding were only
issued to founders, directors and senior management of the Company. ASC 718
requires forfeitures to be estimated at the time of grant and revised in
subsequent periods, if necessary, if actual forfeitures differ from those
estimates.





The stock
based compensation expense for the nine months ended September 30, 2009 is
$840,468. Also see Note 17.


12





KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30, 2009
(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.





Recent
Accounting Pronouncements





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


13


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30, 2009
(UNAUDITED)




NOTE
7 – NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)





Recent
Accounting Pronouncements (Continued)





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





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





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


14


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30, 2009
(UNAUDITED)




NOTE
8 – CONCENTRATIONS





(a)
Customers





The
Company’s major customers for the period ended September 30, 2009 accounted for
the following percentages of total sales and accounts receivable as
follows:





Sales
                  
                  
                  Accounts ReceivableMajor
                    Customers
                  
                  Nine Months
                    Ended
                    September 30,
                    2009
                  
                  
                  Nine Months
                    Ended
                    September 30,
                    2008
                  
                  
                  September 30,
                    2009
                  
                  
                  December 31,
                    2008Company
      A
                  
                  
                  84
                  %
                  
                  
                  71
                  %
                  
                  
                  81
                  %
                  
                  
                  78
                  %Company
      B
                  
                  
                  11
                  %
                  
                  
                  9
                  %
                  
                  
                  18
                  %
                  
                  
                  13
                  %Company
      C
                  
                  
                  3
                  %
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Company
      D
                  
                  
                  1
                  %
                  
                  
                  2
                  %
                  
                  
                  -
                  
                  
                  
                  -Company
      E
                  
                  
                  1
                  %
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -





(b)
Suppliers





The
Company’s major suppliers for the nine months ended September 30, 2009 accounted
for the following percentage of total purchases and accounts payable as
follows:





Purchases
                  
                  
                  Accounts PayableMajor
                    Suppliers
                  
                  Nine Months
                    Ended
                    September 30,
                    2009
                  
                  
                  Nine Months
                    Ended
                    September 30,
                    2008
                  
                  
                  September 30,
                    2009
                  
                  
                  December 31,
                    2008Company
      F
                  
                  
                  79
                  %
                  
                  
                  60
                  %
                  
                  
                  47
                  %
                  
                  
                  21
                  %Company
      G
                  
                  
                  3
                  %
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1
                  %Company
      H
                  
                  
                  1
                  %
                  
                  
                  -
                  
                  
                  
                  1
                  %
                  
                  
                  3
                  %Company
      I
                  
                  
                  1
                  %
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Company
      J
                  
                  
                  1
                  %
                  
                  
                  -
                  
                  
                  
                  1
                  %
                  
                  
                  2
                  %


15


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30, 2009
(UNAUDITED)





NOTE
9 – INCOME PER SHARE





Basic
income (loss) per share is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding during
the period. Diluted income per share is computed similar to basic earnings per
share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the stock options
were exercised and if the additional common shares were dilutive. For the nine
months ended September 30, 2009, Company’s net income is $219,625, and for this
period, and the Company’s average stock price during this period was
$1.22.  If all of the options were exercised, the number of shares of
common stock outstanding would increase to 20,856,082.





For the
three months ended September 30, 2009, the Company’s net income was $576,150,
and for this period, the Company’s average stock price was $1.48, if all of the
options were exercised, the number of shares of common stock outstanding would
increase to 21,155,595. Also see Note 17.





NOTE
10 - INVENTORIES





Inventories
are summarized as follows:





September
      30, 2009
                    (Unaudited)
                  
                  
                  December
      31, 2008Raw
      material
                  
                  $
                  4,202,854
                  
                  
                  $
                  988,426Work-in-progress
                  
                  
                  9,629,583
                  
                  
                  
                  1,980,413Finished
      goods
                  
                  
                  775,703
                  
                  
                  
                  238,73214,608,140
                  
                  
                  
                  3,207,571Less:
      reserve for slowing moving inventories
                  
                  
                  (152,269
                  )
                  
                  
                  -Inventories,
      net
                  
                  
                  14,455,871
                  
                  
                  
                  3,207,571


16


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30, 2009
(UNAUDITED)




NOTE
11 - NOTES RECEIVABLE





Notes
receivable are summarized as follows:





September 30,
                      2009
                      (Unaudited)
                    
                    
                    December 31,
                      2008Notes
      receivable from unrelated companies:Due
      March 31, 2009, interest at 7.2% per annum
                    
                    $
                    -
                    
                    
                    $
                    3,928,997Due
      April 29, 2009, interest at 7.2% per annum
                    
                    
                    -
                    
                    
                    
                    729,480Due
      June 30, 2009, interest at 5.31% per annum (subsequently settled on
      October 29, 2009)
                    
                    
                    212,681
                    
                    
                    
                    8,147,091Due
      October 9, 2009, interest at 24.0% per annum (subsequently settled on its
      due date)
                    
                    
                    1,462,502
                    
                    
                    
                    -Due
      February 24, 2010, interest at 5.0% per annum
                    
                    
                    1,146,507
                    
                    
                    
                    -Due
      February 24, 2010, interest at 5.0% per annum
                    
                    
                    389,708
                    
                    
                    
                    -Due
      April 29, 2010, interest at 5.31% per annum
                    
                    
                    731,251
                    
                    
                    
                    -Notes
      receivable from unrelated companies
                    
                    
                    3,942,649
                    
                    
                    
                    12,805,568Bank
      acceptance notes:Due
      January 5, 2009
                    
                    
                    -
                    
                    
                    
                    430,393Bank
      acceptance notes
                    
                    
                    -
                    
                    
                    
                    430,393Notes
      receivable
                    
                    $
                    3,942,649
                    
                    
                    $
                    13,235,961





Notes
receivable are unsecured.


17


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30, 2009
(UNAUDITED)




NOTE
12 – LAND USE RIGHTS





Land use
rights consist of the following:





September 30,
                        2009
                        (Unaudited)
                      
                      
                      December 31, 2008Cost
      of land use rights
                      
                      $
                      9,575,316
                      
                      
                      $
                      9,575,316Less:
      Accumulated amortization
                      
                      
                      (375,530
                      )
                      
                      
                      (206,913
                      )Land
      use rights, net
                      
                      $
                      9,199,786
                      
                      
                      $
                      9,368,403





On June
24, 2008, the Company acquired a land use right, which expires on December 31,
2053, with a net book value of $9,114,373 in the acquisition of
KSV.





As of
September 30, 2009 and December 31, 2008, the net book value of land use rights
pledged as collateral for bank loans was $2,869,865 and $374,454 respectively.
Also see Note 14.





As of
September 30, 2009 and December 31, 2008, the net book value of land use rights
pledged as collateral for bank loans borrowed by Zhejiang Mengdeli Electronic
Co., Ltd. (“ZMEC”), an unrelated party of the Company was $6,329,921 and
$6,463,282. Also see Notes 14 and 18.





The
amortization expense for the nine months ended September, 2009 and 2008 was
$168,617 and $77,123, respectively.





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





2009
      (three months)
                      
                      $
                      56,2062010
                      
                      
                      224,8232011
                      
                      
                      224,8232012
                      
                      
                      224,8232013
                      
                      
                      224,823Thereafter
                      
                      
                      8,244,288Total
                      
                      $
                      9,199,786


18


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30, 2009
(UNAUDITED)





NOTE
13 – PLANT AND EQUIPMENT





Plant and
equipment consist of the following:





September 30,
                          2009
                          (Unaudited)
                        
                        
                        December 31, 2008At
      cost:Buildings
                        
                        $
                        11,137,220
                        
                        
                        $
                        8,139,972Machinery
      and equipment
                        
                        
                        9,251,622
                        
                        
                        
                        9,150,387Office
      equipment
                        
                        
                        113,214
                        
                        
                        
                        107,574Motor
      vehicles
                        
                        
                        166,606
                        
                        
                        
                        166,203Molds
                        
                        
                        9,613,802
                        
                        
                        
                        9,590,51930,282,464
                        
                        
                        
                        27,154,655Less
      : Accumulated depreciationBuildings
                        
                        $
                        (877,786
                        )
                        
                        $
                        (664,872
                        )Machinery
      and equipment
                        
                        
                        (5,369,807
                        )
                        
                        
                        (4,677,133
                        )Office
      equipment
                        
                        
                        (93,070
                        )
                        
                        
                        (85,826
                        )Motor
      vehicles
                        
                        
                        (88,546
                        )
                        
                        
                        (67,049
                        )Molds
                        
                        
                        (2,271,304
                        )
                        
                        
                        (827,226
                        )(8,700,513
                        )
                        
                        
                        (6,322,106
                        )Plant
      and equipment, net
                        
                        $
                        21,581,951
                        
                        
                        $
                        20,832,549





As of
September 30, 2009 and December 31, 2008, the net book value of plant and
equipment pledged as collateral for bank loans was $9,376,222 and $3,000,733,
respectively. Also see Note 14. Depreciation expense for the nine months ended
September 30, 2009 and 2008 was $2,361,364 and $1,241,387,
respectively.


19


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30, 2009
(UNAUDITED)




NOTE
14 – SHORT TERM BANK LOANS




Short-term
loans are summarized as follows:


September
                  30,
                  2009
                  (Unaudited)
                
                
                December 31,
                  2008Loans
      from ICBC-Exploration Zone BranchMonthly
      interest only payments at 6.21% per annum, due March 18, 2009.
      Collateralized by a time deposit (repaid on its due date).
                
                $
                -
                
                
                $
                656,532Monthly
      interest only payments at 6.21% per annum, due March 23, 2009.
      Collateralized by a time deposit (repaid on its due date).
                
                
                -
                
                
                
                656,532Monthly
      interest only payments at 7.84% per annum, due April 7, 2009, secured by
      the assets of the Company (repaid on its due date).
                
                
                -
                
                
                
                729,480Monthly
      interest only payments at 7.47% per annum, due June 4, 2009, secured by
      the assets of the Company (repaid on its due date).
                
                
                -
                
                
                
                729,480Monthly
      interest only payments at 7.47% per annum, due August 4, 2009, secured by
      the assets of the Company (repaid on its due date).
                
                
                -
                
                
                
                437,688Monthly
      interest only payments at 7.47% per annum, due September 2, 2009, secured
      by the assets of the Company (repaid on its due date).
                
                
                -
                
                
                
                393,919Monthly
      interest only payments at 6.93% per annum, due October 8, 2009, secured by
      the assets of the Company (repaid on September 29, 2009).
                
                
                -
                
                
                
                437,688Monthly
      interest only payments at 6.93% per annum, due October 14, 2009, secured
      by the assets of the Company (repaid on its due date). Also see Notes 12
      and 13.
                
                
                555,750
                
                
                
                554,405Monthly
      interest only payments at 6.93% per annum, due October 22, 2009, secured
      by the assets of the Company (repaid on its due date). Also see Notes 12
      and 13.
                
                
                511,876
                
                
                
                510,636Monthly
      interest only payments at 2.10% per annum, due November 6, 2009, secured
      by the accounts receivable of the Company (repaid on its due
      date).
                
                
                1,608,752
                
                
                
                -Monthly
      interest only payments at 5.58% per annum, due December 4, 2009, secured
      by the assets of the Company. Also see Notes 12 and 13.
                
                
                585,001
                
                
                
                583,584




20


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30, 2009
(UNAUDITED)




NOTE
14 - SHORT TERM BANK LOANS (CONTINUED)




September
                    30,
                    2009
                    (Unaudited)
                  
                  
                  December 31,
                    2008Monthly
      interest only payments at 5.84% per annum, due April 6, 2010, secured by
      the assets of the Company. Also see Notes 12 and 13.
                  
                  
                  731,251
                  
                  
                  
                  -Monthly
      interest only payments at 5.31% per annum, due April 15,
      2010.  Collateralized by a time deposit. Also see Notes 12 and
      13.
                  
                  
                  1,316,251
                  
                  
                  
                  -Monthly
      interest only payments at 5.31% per annum, due June 3, 2010, secured by
      the assets of the Company. Also see Notes 12 and 13.
                  
                  
                  731,251
                  
                  
                  
                  -Monthly
      interest only payments at 5.31% per annum, due August 10, 2010, secured by
      the assets of the Company. Also see Notes 12 and 13.
                  
                  
                  394,875Monthly
      interest only payments at 5.31% per annum, due August 11, 2010, secured by
      the assets of the Company. Also see Notes 12 and 13.
                  
                  
                  438,750
                  
                  
                  
                  -Loans
      from Commercial Bank-Jiangnan BranchMonthly
      interest only payments at 8.22% per annum, due January 10, 2009,
      guaranteed by Yongkang Tangxian Colour Metal Die-casting Company and
      pledged by Jingdezhen De'er Industrial Investment Co., Ltd. (repaid on its
      due date).
                  
                  
                  -
                  
                  
                  
                  2,917,919Monthly
      interest only payments at 8.22% per annum, due May 9, 2009, secured by the
      assets of the Company. Also see Notes 12 and 13 (repaid on its due
      date).
                  
                  
                  -
                  
                  
                  
                  1,458,959Monthly
      interest only payments at 5.84% per annum, due January 5, 2010, guaranteed
      by Yongkang Kangli Metal Manufacturing Co. and pledged by Jingdezhen De'er
      industrial investment Co., Ltd.
                  
                  
                  2,925,003
                  
                  
                  
                  -Monthly
      interest only payments at 5.84% per annum, due May 5, 2010, secured by the
      assets of the Company. Also see Notes 12 and 13.
                  
                  
                  1,462,501
                  
                  
                  
                  -




21


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30, 2009
(UNAUDITED)




NOTE
14 - SHORT TERM BANK LOANS (CONTINUED)




September
                  30,
                  2009
                  (Unaudited)
                
                
                December 31,
                  2008Loans
      from Huaxia BankMonthly
      interest only payments at 6.13% per annum, due September 12, 2009, pledged
      by construction in progress of the Company, Jiangxi De'er Industrial
      Investment Co., Ltd., guaranteed by Zhejiang Kangli Metal Manufacturing
      Company and Kandi Investment Group Co. (repaid on its due
      date)
                
                
                -
                
                
                
                2,480,231Monthly
      interest only payments at 5.58% per annum, due September 21, 2010, secured
      by the assets of the Company, guaranteed by Mr.Hu, Zhejiang Kangli Metal
      Manufacturing Company and Kandi Investment Group Co.
                
                
                3,948,754
                
                
                
                -Loans
      from China Everbright BankMonthly
      interest only payments at 7.23% per annum, due February 5, 2009, pledged
      office building of Mr. Hu Xiaoming and Ms. Ling Yueping, guaranteed by
      Nanlong Group Co., Ltd. and Mr. Hu (repaid on its due
    date).
                
                
                -
                
                
                
                4,376,878Monthly
      interest only payments at 5.58% per annum, due February 22, 2010, pledged
      office building of Mr. Hu Xiaoming and Ms. Ling Yueping, guaranteed by
      Nanlong Group Co., Ltd., and Zhejiang Mengdeli Electric Co.,
      Ltd.
                
                
                4,387,504
                
                
                
                -Loans
      from Shanghai Pudong Development BankMonthly
      interest only payments at 6.72% per annum, due April 8, 2009.
      Collateralized by a time deposit (repaid on its due date).
                
                
                -
                
                
                
                1,313,064Monthly
      interest only payments at 6.72% per annum, due April 9, 2009.
      Collateralized by a time deposit (repaid on its due date).
                
                
                -
                
                
                
                1,313,064Monthly
      interest only payments at 7.28% per annum, due May 21, 2009, guaranteed by
      Nanlong Group Co., Ltd. and Mr. Hu Xiaoming (repaid on its due
      date).
                
                
                -
                
                
                
                2,917,918Monthly
      interest only payments at 4.78% per annum, due April 28, 2010.
      Collateralized by a time deposit.
                
                
                1,316,251
                
                
                
                -Monthly
      interest only payments at 5.10% per annum, due November 27, 2010,
      guaranteed by Nanlong Group Co., Ltd. and Mr. Hu Xiaoming.
                
                
                2,925,003
                
                
                
                -




22


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30, 2009
(UNAUDITED)




NOTE
14 - SHORT TERM BANK LOANS (CONTINUED)




September
                      30,
                      2009
                      (Unaudited)
                    
                    
                    December 31,
                      2008Loans
      from Evergrowing BankMonthly
      interest only payments at 7.62% per annum, due October 23, 2009,
      guaranteed by Zhejiang Shuguang industrial Co., Ltd., Zhejiang Mengdeli
      Electric Company and Mr. Hu Xiaoming.
                    
                    
                    2,925,003
                    
                    
                    
                    2,917,918Loans from China Communication Bank-Jinhua
      BranchMonthly
      interest only payments at 8.96% per annum, due February 18, 2009,
      guaranteed by Zhejiang Shuguang industrial Co., Ltd. and Mr. Hu Xiaoming.
      (repaid on its due date).
                    
                    
                    -
                    
                    
                    
                    729,480Monthly
      interest only payments at 5.58% per annum, due February 15, 2010,
      guaranteed by Zhejiang Shuguang industrial Co., Ltd. and Mr. Hu
      Xiaoming.
                    
                    
                    731,251
                    
                    
                    
                    -Total
                    
                    $
                    27,495,027
                    
                    
                    $
                    26,115,375





Interest
expense for the nine month ended September 30, 2009 and 2008 was $1,241,166, and
$1,654,002, respectively.





As of
September 30, 2009, the aggregated amount of short term loans that are
guaranteed by various third parties is $17,842,518. Also see Note
18.


23


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30, 2009
(UNAUDITED)




NOTE
15 – NOTES PAYABLE





Notes
payable are summarized as follows:





September
                      30,
                      2009
                      (Unaudited)
                    
                    
                    December 31,
                      2008Bank
      acceptance notes:Due
      January 18, 2009 (repaid on its due date)
                    
                    $
                    -
                    
                    
                    $
                    1,458,959Due
      January 31, 2009 (repaid on its due date)
                    
                    
                    -
                    
                    
                    
                    875,378Due
      March 17, 2009 (repaid on its due date)
                    
                    
                    -
                    
                    
                    
                    1,458,959Due
      March 17, 2009 (repaid on its due date)
                    
                    
                    -
                    
                    
                    
                    4,376,878Due
      March 18, 2009 (repaid on its due date)
                    
                    
                    -
                    
                    
                    
                    729,480Due
      March 23, 2009 (repaid on its due date)
                    
                    
                    -
                    
                    
                    
                    1,458,959Due
      June 12, 2009 (repaid on its due date)
                    
                    
                    -
                    
                    
                    
                    1,458,959Due
      June 19, 2009 (repaid on its due date)
                    
                    
                    -
                    
                    
                    
                    437,688Due
      October 9, 2009 (subsequently repaid on its due date)
                    
                    
                    658,126
                    
                    
                    
                    -Due
      October 9, 2009 (subsequently repaid on its due date)
                    
                    
                    658,126
                    
                    
                    
                    -Due
      December 15, 2009
                    
                    
                    1,462,501
                    
                    
                    
                    -Due
      March 8, 2010
                    
                    
                    1,462,501
                    
                    
                    
                    -Due
      March 24, 2010
                    
                    
                    1,462,501
                    
                    
                    
                    -Due
      March 25, 2010
                    
                    
                    1,462,501
                    
                    
                    
                    -Subtotal
                    
                    $
                    7,166,256
                    
                    
                    $
                    12,255,260Notes
      payable to unrelated companies:Due
      March 25, 2009
                    
                    $
                    -
                    
                    
                    $
                    825,766Subtotal
                    
                    
                    -
                    
                    
                    
                    825,766Total
                    
                    $
                    7,166,256
                    
                    
                    $
                    13,081,026





All the
bank acceptance notes do not bear interest, but are subject to bank charges of
0.005% of the principal as commission on each loan transaction.





Restricted
cash of $4,972,506 is held as collateral for the following notes payable at
September 30, 2009:





Due
      October 9, 2009 (subsequently repaid on its due date)
                  
                  $
                  658,126Due
      October 9, 2009 (subsequently repaid on its due date)
                  
                  
                  658,126Due
      December 15, 2009
                  
                  
                  1,462,501Due
      March 8, 2010
                  
                  
                  731,251Due
      March 24, 2010
                  
                  
                  731,251Due
      March 25, 2010
                  
                  
                  731,251Total
                  
                  $
                  4,972,506


24


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30, 2009
(UNAUDITED)





NOTE
16 – TAXES





(a)
Corporation Income Tax (“CIT”)





On March
16, 2007, the National People’s Congress of China approved the Corporate Income
Tax Law of the People’s Republic of China (the “new CIT law”), which went into
effect on January 1, 2008. In accordance with the relevant tax laws and
regulations of the PRC, the applicable corporate income tax rate is
25%.





Prior to
January 1, 2008, the CIT rate applicable to the Company is 33%. Kandi’s first
profitable tax year for income tax purposes as a foreign-invested company was
2007. As a foreign-invested company, the income tax rate of Kandi is entitled to
a 50% tax holiday based on 25% for the years from 2009 through 2011. During the
transition period, the above tax concession granted to the Company prior to the
new CIT law will be grandfathered according to the interpretations of the new
CIT law.





KSV is a
subsidiary of the Company and its applicable corporate income tax rate is
25%.





Effective
January 1, 2007, the Company adopted ASC 740, Income Taxes. The interpretation
addresses the determination of whether tax benefits claimed or expected to be
claimed on a tax return should be recorded in the financial
statements.





Under FIN
48, 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, 2009, the Company does not have a liability for unrecognized
tax benefits. The Company files income tax returns in the U.S. federal
jurisdiction and various states. The Company is subject to U.S. federal or state
income tax examinations by tax authorities for years after 2005. During the
periods open to examination, the Company has net operating loss carry forwards
(“NOLs”) for U.S. federal and state tax purposes that have attributes from
closed periods. Since these NOLs may be utilized in future periods, they remain
subject to examination. The Company also files certain tax returns in China. As
of September 30, 2009 the Company was not aware of any pending income tax
examinations by China tax authorities. The Company's policy is to record
interest and penalties on uncertain tax provisions as income tax expense. As of
September 30, 2009, the Company has no accrued interest or penalties related to
uncertain tax positions. The Company has not recorded a provision for U.S
federal income tax for the nine months ended September 30, 2009 due to the net
operating loss carry forward in the United States.





25




KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30, 2009
(UNAUDITED)




NOTE
16 – TAXES (CONTINUED)





Income
tax expense (benefit) for the nine months ended September 30, 2009 and 2008 is
summarized as follows:




For the Nine Months Ended
                      September 30,(Unaudited)2009
                    
                    
                    2008Current:Provision
      for CIT
                    
                    $
                    -
                    
                    
                    $
                    -Deferred:Provision
      for CIT
                    
                    
                    146,642
                    
                    
                    
                    (81,042
                    )Income
      tax expense (benefit)
                    
                    $
                    146,642
                    
                    
                    $
                    (81,042
                    )





The
Company’s income tax expense (benefit) differs from the “expected” tax expense
for the nine months ended September 30, 2009 and 2008 (computed by applying the
CIT rate of 25%, respectively to income before income taxes) as
follows:





For the Nine Months Ended
                      September 30,(Unaudited)2009
                    
                    
                    2008Computed
      "expected" (benefit) expense
                    
                    $
                    91,567
                    
                    
                    $
                    1,021,581Favorable
      tax rate
                    
                    
                    18,326
                    
                    
                    
                    (1,193,315
                    )Permanent
      differences
                    
                    
                    30,118
                    
                    
                    
                    90,692Valuation
      Allowance
                    
                    
                    6,631
                    
                    
                    
                    -Income
      tax expense (benefit)
                    
                    $
                    146,642
                    
                    
                    $
                    (81,042
                    )





The tax
effects of temporary differences that give rise to the Company’s net deferred
tax assets and liabilities as of September 30, 2009 and December 31, 2008 are
summarized as follows:


26


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30, 2009
(UNAUDITED)





NOTE
16 – TAXES (CONTINUED)





September 30,
                  2009
                  (Unaudited)
                
                
                December 31,
                  2008Current
      portion:Deferred
      tax assets:Expense
                
                $
                43,619
                
                
                $
                23,026Subtotal
                
                
                43,619
                
                
                
                23,026Deferred
      tax liabilities:Sales
      cut-off
                
                
                (62,486
                )
                
                
                (104,783
                )Other
                
                
                (18,332
                )
                
                
                (57,743
                )Subtotal
                
                
                (80,818
                )
                
                
                (162,526
                )Total
      deferred tax liabilities – current portion
                
                
                (37,199
                )
                
                
                (139,500
                )Non-current
      portion:Deferred
      tax assets:Depreciation
                
                
                419,380
                
                
                
                561,754Loss
      carried forward
                
                
                62,563
                
                
                
                55,932Valuation
      allowance
                
                
                (62,563
                )
                
                
                (55,932
                )Subtotal
                
                
                419,380
                
                
                
                561,754Deferred
      tax liabilities:Accumulated
      other comprehensive gain
                
                
                (296,511
                )
                
                
                (296,511
                )Subtotal
                
                
                (296,511
                )
                
                
                (296,511
                )Total
      deferred tax assets – non-current portion
                
                
                122,869
                
                
                
                265,243Net
      deferred tax assets
                
                $
                85,670
                
                
                $
                125,743





(b)
Tax Holiday Effect





For the
nine months ended September 30, 2009 and 2008 the PRC corporate income tax rate
was 25%. Certain subsidiaries of the Company are entitled to tax exemptions (tax
holidays) for the nine months ended September 30, 2009 and 2008.





The
combined effects of the income tax expense exemptions and reductions available
to the Company for the nine months ended September 30, 2009 and 2008 are as
follows:




For the Nine Months Ended
                    September 30
                    (Unaudited)2009
                  
                  
                  2008Tax
      holiday effect
                  
                  $
                  18,326
                  
                  
                  $
                  1,193,315Basic
      net income per share effect
                  
                  $
                  0.00
                  
                  
                  $
                  0.06


27


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30, 2009
(UNAUDITED)




NOTE
17 - 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%.





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





Activity
                  
                  
                  Weighted
      Average
                    Exercise
      PriceOutstanding
      as of January 1, 2009
                  
                  
                  
                  
                  $Granted
                  
                  
                  2,600,000
                  
                  
                  
                  0.80Exercised
                  
                  
                  -
                  
                  
                  
                  -Cancelled
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      as of September 30, 2009
                  
                  
                  2,600,000
                  
                  
                  
                  0.80





The
following table summarizes information about stock options outstanding as of
September 30, 2009:





Options Outstanding
                  
                  
                  Options ExercisableNumber of
                    shares
                  
                  
                  Exercise
                    Price
                  
                  
                  Remaining
                    Contractual life
                    (in years)
                  
                  
                  Number of
                    shares
                  
                  
                  Exercise
                    Price2,600,000
                  
                  
                  $
                  0.80
                  
                  
                  
                  10
                  
                  
                  
                  2,600,000
                  
                  
                  $
                  0.80





All the
options were granted with an exercise price equal to the market price and
therefore there was no intrinsic value at the grant date. The fair value per
share of the 2,600,000 options issued under the agreement is $0.7934 per
share.


28


KANDI
TECHNOLOGIES, CORP.


AND
SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30, 2009
(UNAUDITED)




NOTE
18 – COMMITMENTS AND CONTINGENCIES





(a)                On
July 21, 2009, Kandi entered into a guarantee contract to serve as guarantor for
the bank loans borrowed from Huaxia Bank Hangzhou branch in the amount of
$2,486,252 during the period from July 21, 2009 to July 20, 2010 by Zhejiang
Mengdeli Electronic Co. Ltd (“ZMEC”), a company unrelated to Kandi. Under this
guarantee contract, Kandi shall perform all obligations of ZMEC under the loan
contract if ZMEC fails to perform its obligations as set forth in the loan
contract. Also see Note 12.


29





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,
2008 and those set forth from time to time in our filings with the SEC. These
documents are available on the SEC’s Electronic Data Gathering and Analysis
Retrieval System at http://www.sec.gov.





Critical
Accounting Policies and Estimates




Stock
Based Compensation




The
Company’s stock based compensation is recorded in accordance with ASC
718.





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





Stock
compensation expense recognized is based on awards expected to vest, and there
were no estimated forfeitures as the current options outstanding were only
issued to founders and senior management of the Company. ASC 718 requires
forfeitures to be estimated at the time of grant and revised in subsequent
periods, if necessary, if actual forfeitures differ from those
estimates.


30





The stock
based compensation expense for the period ended September 30, 2009 is
$840,468.





Fair
Value of Financial Instruments





ASC 820
establishes a three-tier fair value hierarchy, which prioritizes the inputs used
in measuring fair value. The hierarchy prioritizes the inputs into three levels
based on the extent to which inputs used in measuring fair value are observable
in the market.





These
tiers include:





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


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


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





The
assets measured at fair value on a recurring basis subject to the disclosure
requirements of ASC 820 as of September 30, 2009 are as follows:





Fair
      Value Measurements at Reporting Date Using Quoted Prices
inActive
      Markets
                  
                  
                  Significant
      Other
                  
                  
                  SignificantCarrying
      value
                  
                  
                  for
      Identical
                  
                  
                  Observable
                  
                  
                  Unobservableas
      of September
                  
                  
                  Assets
                  
                  
                  Inputs
                  
                  
                  Inputs30,
      2009
                  
                  
                  (Level
      1)
                  
                  
                  (Level
      2)
                  
                  
                  (Level
      3)Cash
      and cash equivalents
                  
                  $
                  881,485
                  
                  
                  $
                  881,485
                  
                  
                  
                  -
                  
                  
                  
                  -Restricted
      cash
                  
                  $
                  7,897,508
                  
                  
                  $
                  7,897,508
                  
                  
                  
                  -
                  
                  
                  
                  -





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 represent 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.


31


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.





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.


32





Recent
Accounting Pronouncements





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





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





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


33





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


34


Results
of Operation


Comparison
of Nine Months Ended September 30, 2009 and 2008





The
following table sets forth the amounts and percentage relationship to revenue of
certain items in our condensed consolidated statements of income and
comprehensive income





For Nine
                            Months Ended
                            September 30,
                            2009
                          
                          
                          % Of
                            Revenue
                          
                          
                          For Nine
                            Months Ended
                            September 30,
                            2008
                          
                          
                          % Of
                            Revenue
                          
                          
                          Change In
                            Amount
                          
                          
                          Change
                            In %REVENUES,
      NET
                          
                          $
                          19,114,049
                          
                          
                          
                          100.0
                          %
                          
                          $
                          30,767,280
                          
                          
                          
                          100.0
                          %
                          
                          $
                          (11,653,231
                          )
                          
                          
                          (37.9
                          )%COST
      OF GOODS SOLD
                          
                          
                          (14,329,404
                          )
                          
                          
                          (75.0
                          )%
                          
                          
                          (23,098,186
                          )
                          
                          
                          (75.1
                          )%
                          
                          
                          8,768,782
                          
                          
                          
                          (38.0
                          )%GROSS
      PROFIT
                          
                          
                          4,784,645
                          
                          
                          
                          25.0
                          %
                          
                          
                          7,669,094
                          
                          
                          
                          24.9
                          %
                          
                          
                          (2,884,449
                          )
                          
                          
                          (37.6
                          )%Research
      and development
                          
                          
                          1,767,081
                          
                          
                          
                          9.2
                          %
                          
                          
                          487,755
                          
                          
                          
                          1.6
                          %
                          
                          
                          1,279,326
                          
                          
                          
                          262.3
                          %Selling
      and distribution expenses
                          
                          
                          263,304
                          
                          
                          
                          1.4
                          %
                          
                          
                          632,132
                          
                          
                          
                          2.1
                          %
                          
                          
                          (368,828
                          )
                          
                          
                          (58.3
                          )%General
      and administrative expenses
                          
                          
                          1,125,954
                          
                          
                          
                          5.9
                          %
                          
                          
                          1,019,385
                          
                          
                          
                          3.3
                          %
                          
                          
                          106,569
                          
                          
                          
                          10.5
                          %Stock
      based compensation expense
                          
                          
                          840,468
                          
                          
                          
                          4.4
                          %
                          
                          
                          -
                          
                          
                          
                          0.0
                          %
                          
                          
                          840,468
                          
                          
                          
                          100
                          %INCOME
      FROM OPERATIONS
                          
                          
                          787,838
                          
                          
                          
                          4.1
                          %
                          
                          
                          5,529,822
                          
                          
                          
                          18.0
                          %
                          
                          
                          (4,741,984
                          )
                          
                          
                          (85.8
                          )%Interest
      expense, net
                          
                          
                          (860,872
                          )
                          
                          
                          (4.5
                          )%
                          
                          
                          (1,540,631
                          )
                          
                          
                          (5.0
                          )%
                          
                          
                          679,759
                          
                          
                          
                          (44.1
                          )%Government
      grants
                          
                          
                          127,317
                          
                          
                          
                          0.7
                          %
                          
                          
                          57,533
                          
                          
                          
                          0.2
                          %
                          
                          
                          69,784
                          
                          
                          
                          121.3
                          %Other
      income, net
                          
                          
                          311,984
                          
                          
                          
                          1.6
                          %
                          
                          
                          39,599
                          
                          
                          
                          0.1
                          %
                          
                          
                          272,385
                          
                          
                          
                          687.9
                          %INCOME
      FROM OPERATIONS BEFORE INCOME TAXES
                          
                          
                          366,267
                          
                          
                          
                          1.9
                          %
                          
                          
                          4,086,323
                          
                          
                          
                          13.3
                          %
                          
                          
                          (3,720,055
                          )
                          
                          
                          (91.0
                          )%INCOME
      TAX (EXPENSE) BENEFIT
                          
                          
                          (146,642
                          )
                          
                          
                          (0.8
                          )%
                          
                          
                          81,042
                          
                          
                          
                          0.3
                          %
                          
                          
                          (227,684
                          )
                          
                          
                          (280.9
                          )%(LOSS)
      INCOME FROM CONTINUING OPERATIONS
                          
                          
                          219,625
                          
                          
                          
                          1.1
                          %
                          
                          
                          4,167,365
                          
                          
                          
                          13.5
                          %
                          
                          
                          (3,947,740
                          )
                          
                          
                          (94.7
                          )%DISCONTINUED
      OPERATIONLoss
      from discontinued operation
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (33,396
                          )
                          
                          
                          (0.1
                          )%
                          
                          
                          33,396
                          
                          
                          
                          (100
                          )%Gain
      from disposition of discontinued operation
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          361,096
                          
                          
                          
                          1.2
                          %
                          
                          
                          (361,096
                          )
                          
                          
                          (100
                          )%NET
      GAIN FROMDISCONTINUED
      OPERATION
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          327,700
                          
                          
                          
                          1.1
                          %
                          
                          
                          (327,700
                          )
                          
                          
                          (100
                          )%NET
      INCOME
                          
                          
                          219,625
                          
                          
                          
                          1.1
                          %
                          
                          
                          4,495,065
                          
                          
                          
                          14.6
                          %
                          
                          
                          (4,275,440
                          )
                          
                          
                          (95.1
                          )%




35


(a)
Revenue





For the
nine months ended September 30, 2009, our revenue decreased by 37.9% from
$30,767,280 to $19,114,049 as compared to the nine months ended September 30,
2008. The global economic crisis continuing from 2008 negatively affected sales
of all of our vehicles, particularly our recreational vehicle
lines.





The
following table lists the number of vehicles sold, categorized by vehicle types,
within the nine months ended September 30, 2009 and 2008:





Nine
      Months Ended September 302009
                  
                  
                  2008All-terrain
      Vehicles(“ATV”)
                  
                  
                  3,098
                  
                  
                  
                  5,636Super-mini
      car (“CoCo”)
                  
                  
                  1,141
                  
                  
                  
                  1,344Go-Kart
                  
                  
                  7,735
                  
                  
                  
                  32,187Mini
      Pick-up
                  
                  
                  -
                  
                  
                  
                  25Utility
      vehicles (“UTVs”)
                  
                  
                  2,864
                  
                  
                  
                  1819Three-wheeled
      motorcycle (“TT”)
                  
                  
                  388
                  
                  
                  
                  1Total
                  
                  
                  15,226
                  
                  
                  
                  41,012





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





(b)
Cost of goods sold





Cost of
goods sold during the nine months ended September 30, 2009 was $14,329,404
representing a 38% decrease from $23,098,186 from the nine months ended
September 30, 2008, which corresponded with the decrease in sales. Cost of goods
sold was 75% of the total revenue for the nine-month period, remaining unchanged
from the comparable period of 2008.





(c)
Gross profit





Gross
profit for the first half of 2009 is consistent with the decrease in revenue,
falling 37.6% from $7,669,094 to $4,784,645 from the same period in
2008.


36


(d)
Selling and distribution expenses





Selling
and distribution expenses were $263,304 for the nine months ended September 30,
2009, as compared to $632,132 from the same period in 2008, representing a 58.4%
decrease.  The significant drop in these expenses was the result of
decreased shipping expenses as the Company shipped fewer vehicles overseas,
partly due to decreased sales and partly due to the Company's change from direct
exports to shipping through an export agent who will bear the shipping
expenses.





(e)
General and administrative expenses





General
and administrative expenses were $1,125,954 for the nine months ended September
30, 2009, as compared to $1,019,385 for the same period in 2008, representing a
10.5% increase.  The increase was primarily due to increased expenses
in reserves made for slow moving inventories, and the higher depreciation
expense caused by more fixed assets purchased since October of 2008. However,
simultaneously, the allowance for doubtful accounts for the nine months ended
September 30, 2009 has decreased compared to the corresponding period of the
prior year.





(f)
Research and development





Research
and development expenses were $1,767,081 for the nine months ended September 30,
2009, as compared to $487,755 from the same period in 2008, representing a
262.3% increase.  The increase was due to additional research and
development efforts associated with the electric-powered CoCo and a new diesel
powered farmer pick up truck, which included additional studies done to market
these vehicles in the PRC.





(g)
Stock-based compensation expense





In
February 2009, the Company issued options to purchase a total of 2,600,000
shares of common stock to 10 executives and managerial level employees. The fair
value of the stock option on the grant date was $2,062,964.  The
Company amortized the stock compensation expense using the straight-line method
over the service period from February 11, 2009 through February 11, 2011. During
the nine months ended September 30, 2009, the compensation expense was $840,468,
accounting for 4.4% of the total revenue of the reporting period.





(h)
Government grants





Government
grants totaled $127,317 for the nine months ended September 30, 2009,
representing a 121.3% increase over the same period in 2008, primarily due to
the PRC government’s grant of subsidies research related to electric-powered
vehicles.  The government grants consist of $37,779 in subsidies for
patent applications and other intellectual property expenses, $71,611 in
subsidies for technological innovation, $1,462 in subsidies for IT development,
and $16,465 in export subsidies.  Our electric-powered vehicles were
launched in October 2008 and will become our focus product in
2009.


37





(i)
Net interest expense





Net
interest expense was $860,872 for the nine months ended September 30, 2009, as
compared to $1,540,631 for the same period last year, a decrease of 44.1%. This
decrease is mainly the result of the decrease in interest expense of $412,836
paid for short term bank loans due to the lower interest rate.





(j)
Other income





Net other
income for the nine months ended September 30, 2009 was $311,984, an increase of
687.9% from $39,599 of the same period of last year. This is mainly due to the
damage award amount of $216,034 the Company received from the 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. The
Company has prevailed in the final ruling of court, and therefore recorded a
gain in the second quarter of 2009.





(k)
Net (loss) income





The
operating performance of the Company for the nine months ended September 30,
2009 resulted in a net profit of $219,625 as compared to a net profit of
$4,495,065 for the same period last year, primarily due to a decrease in sales
and the increase in research and development expense.  The net profit
also includes the compensation cost of $840,468 incurred during the first nine
months of 2009 for the issuance of options to purchase 2,600,000 shares of
common stock to Company employees and directors as well as the write down of
$152,269 for slow moving inventory.


38


Comparison
of Three Months Ended September 30, 2009 and 2008





The
following table sets forth the amounts and percentage relationship to revenue of
certain items in our condensed consolidated statements of income and
comprehensive income





For Three
                          Months Ended
                          September 30,
                          2009
                        
                        
                        % Of
                          Revenue
                        
                        
                        For Three
                          Months Ended
                          September 30,
                          2008
                        
                        
                        % Of
                          Revenue
                        
                        
                        Change In
                          Amount
                        
                        
                        Change
                          In %REVENUES,
      NET
                        
                        $
                        9,626,593
                        
                        
                        
                        100.0
                        %
                        
                        $
                        9,261,033
                        
                        
                        
                        100.0
                        %
                        
                        $
                        365,560
                        
                        
                        
                        4.0
                        %COST
      OF GOODS SOLD
                        
                        
                        (7,266,052
                        )
                        
                        
                        (75.5
                        )%
                        
                        
                        (6,966,103
                        )
                        
                        
                        (75.2
                        )%
                        
                        
                        (299,949
                        )
                        
                        
                        4.3
                        %GROSS
      PROFIT
                        
                        
                        2,360,541
                        
                        
                        
                        24.5
                        %
                        
                        
                        2,294,930
                        
                        
                        
                        24.8
                        %
                        
                        
                        65,611
                        
                        
                        
                        2.9
                        %Research
      and development
                        
                        
                        660,108
                        
                        
                        
                        6.9
                        %
                        
                        
                        230,023
                        
                        
                        
                        2.5
                        %
                        
                        
                        430,085
                        
                        
                        
                        187.0
                        %Selling
      and distribution expenses
                        
                        
                        79,310
                        
                        
                        
                        0.8
                        %
                        
                        
                        229,795
                        
                        
                        
                        2.5
                        %
                        
                        
                        (150,485
                        )
                        
                        
                        (65.5
                        )%General
      and administrative expenses
                        
                        
                        195,036
                        
                        
                        
                        2.0
                        %
                        
                        
                        324,672
                        
                        
                        
                        3.5
                        %
                        
                        
                        (129,636
                        )
                        
                        
                        (39.9
                        )%Stock
      based compensation expense
                        
                        
                        315,176
                        
                        
                        
                        3.3
                        %
                        
                        
                        -
                        
                        
                        
                        0.0
                        %
                        
                        
                        315,176
                        
                        
                        
                        100
                        %INCOME
      FROM OPERATIONS
                        
                        
                        1,110,911
                        
                        
                        
                        11.5
                        %
                        
                        
                        1,510,440
                        
                        
                        
                        16.3
                        %
                        
                        
                        (399,529
                        )
                        
                        
                        (26.5
                        )%Interest
      expense, net
                        
                        
                        (442,315
                        )
                        
                        
                        (4.6
                        )%
                        
                        
                        (547,511
                        )
                        
                        
                        (5.9
                        )%
                        
                        
                        105,196
                        
                        
                        
                        (19.2
                        )%Government
      grants
                        
                        
                        3,312
                        
                        
                        
                        0
                        %
                        
                        
                        17,484
                        
                        
                        
                        0.2
                        %
                        
                        
                        (14,172
                        )
                        
                        
                        (81.1
                        )%Other
      income, net
                        
                        
                        9,800
                        
                        
                        
                        0.1
                        %
                        
                        
                        26,551
                        
                        
                        
                        0.3
                        %
                        
                        
                        (16,751
                        )
                        
                        
                        (63.1
                        )%INCOME
      FROM OPERATIONS BEFORE INCOME TAXES
                        
                        
                        681,708
                        
                        
                        
                        7.0
                        %
                        
                        
                        1,006,964
                        
                        
                        
                        10.9
                        %
                        
                        
                        (325,256
                        )
                        
                        
                        (32.3
                        )%INCOME
      TAX (EXPENSE) BENEFIT
                        
                        
                        (105,558
                        )
                        
                        
                        (1.1
                        )%
                        
                        
                        7,581
                        
                        
                        
                        0.1
                        %
                        
                        
                        (113,139
                        )
                        
                        
                        (1492.4
                        )%INCOME
      FROM CONTINUING OPERATIONS
                        
                        
                        576,150
                        
                        
                        
                        6.0
                        %
                        
                        
                        1,014,545
                        
                        
                        
                        11.0
                        %
                        
                        
                        (438,395
                        )
                        
                        
                        (43.2
                        )%DISCONTINUED
      OPERATIONNET
      GAIN FROMDISCONTINUED
      OPERATION
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -NET
      (LOSS) INCOME
                        
                        
                        576,150
                        
                        
                        
                        6.0
                        %
                        
                        
                        1,014,545
                        
                        
                        
                        11.0
                        %
                        
                        
                        (438,395
                        )
                        
                        
                        (43.2
                        )%


39


(a)
Revenue





For the
three months ended September 30, 2009, our revenue increased by 4% from
$9,261,033 to $9,626,593 as compared to the three months ended September 30,
2008. The global economic crisis started from 2008 has eased, and the global
economy, especially the Chinese economy, has begun to show signs of
recovery.  The Company has adjusted its focus to the domestic Chinese
market in 2009.  Compared to the $5,481,551 revenue of second quarter
of this year, the increase of $4,415,042 to $9,626,593 in the three months ended
September, 2009 is particularly significant.





(b)
Cost of goods sold





Cost of
goods sold during the three months ended September 30, 2009 was $7,266,052,
representing a 4.3% increase from the three months ended September 30, 2008,
which corresponds to the increase in sales.





(c)
Selling and distribution expenses





Selling
and distribution expenses were $79,310 for the three months ended September 30,
2009, as compared to $229,795 from the same period in 2008, representing a 65.5%
decrease.  The significant drop in these expenses was the result of
decreased shipping expenses as the Company shifted its focus to the domestic
Chinese market and shipped fewer vehicles overseas.





(d)
General and administrative expenses





General
and administrative expenses were $195,036 for the three months ended September
30, 2009, as compared to $324,672 for the same period in 2008, representing a
40% decrease.  The decrease reflects the Company’s continuing effort
on cost saving in this challenging climate.





(e)
Research and development





Research
and development expenses were $660,108 for the three months ended September 30,
2009, as compared to $230,023 from the same period in 2008, representing a 187%
increase.  The increase was due to additional research and development
efforts associated with the products targeting the Chinese market.





(f)
Net interest expense





Net
interest expense was $442,315 for the three months ended September 30, 2009, as
compared to $547,511 for the same period last year, a decrease of 19%. This
decrease is mainly the result of the decrease of interest expense for short term
bank loans, and the decrease of interest expense that banks charge for payment
of bank notes prior to maturation.


40





(g)
Net (loss) income





The
operating performance of the Company for the three months ended September 30,
2009 resulted in a net profit of $576,150 as compared to $1,014,545 for the same
period last year. The drop was primarily due to the compensation cost of
$315,176 for stock options, and higher research and development
expenses.





Financial
Condition





Working
Capital





The
Company also had a working capital deficit of $13,859,809 at September 30, 2009,
which was a increase from a working capital deficit of $10,070,184 as of
September 30, 2008, which was principally due to the Company using its own cash
and the cash borrowed from bank loans to support the new plant construction to
prepare for the launch of new products targeting the Chinese
market.





As of
September 30, 2009, the Company has credit lines from commercial banks for
$37,001,287, of which $27,495,027 was used at September 30, 2009.





The
Company believes that its cash flows generated internally may not be sufficient
to sustain operations and repay short term bank loans for the next twelve
months. Therefore, from time to time, the Company may require 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.





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 following table lists all such loans obtained by
the Company within the past two years and the nine months of this
year:


41


2007
                                                            
                                                            2008
                                                            
                                                            2009 (By September 30)Bank
                                                            
                                                            Loan
                                                              amount
                                                            
                                                            Release date
                                                            
                                                            Due date
                                                            
                                                            Loan
                                                              amount
                                                            
                                                            Release date
                                                            
                                                            Due date
                                                            
                                                            Loan
                                                              amount
                                                            
                                                            Release date
                                                            
                                                            Due dateCommercial
      Bank
                                                            
                                                            
                                                            20,000
                                                            
                                                            01/19/07
                                                            
                                                            01/10/08
                                                            
                                                            
                                                            20,000
                                                            
                                                            01/16/08
                                                            
                                                            01/10/09
                                                            
                                                            
                                                            20,000
                                                            
                                                            01/19/09
                                                            
                                                            01/05/10-Jiangnan
      Branch
                                                            
                                                            
                                                            10,000
                                                            
                                                            05/14/07
                                                            
                                                            05/10/08
                                                            
                                                            
                                                            10,000
                                                            
                                                            05/09/08
                                                            
                                                            05/09/09
                                                            
                                                            
                                                            10,000
                                                            
                                                            05/13/09
                                                            
                                                            05/05/10ICBC-
                                                            
                                                            
                                                            5,000
                                                            
                                                            06/15/07
                                                            
                                                            04/10/08
                                                            
                                                            
                                                            5,000
                                                            
                                                            04/08/08
                                                            
                                                            04/07/09
                                                            
                                                            
                                                            5,000
                                                            
                                                            04/08/09
                                                            
                                                            04/06/10Exploration
      Zone Branch
                                                            
                                                            
                                                            5,000
                                                            
                                                            06/11/07
                                                            
                                                            06/05/08
                                                            
                                                            
                                                            5,000
                                                            
                                                            06/06/08
                                                            
                                                            06/04/09
                                                            
                                                            
                                                            5,000
                                                            
                                                            06/05/09
                                                            
                                                            06/03/103,000
                                                            
                                                            09/18/07
                                                            
                                                            08/05/08
                                                            
                                                            
                                                            3,000
                                                            
                                                            08/06/08
                                                            
                                                            08/04/09
                                                            
                                                            
                                                            3,000
                                                            
                                                            08/28/09
                                                            
                                                            08/11/102,700
                                                            
                                                            09/18/07
                                                            
                                                            08/05/08
                                                            
                                                            
                                                            2,700
                                                            
                                                            09/03/08
                                                            
                                                            09/02/09
                                                            
                                                            
                                                            2,700
                                                            
                                                            09/03/09
                                                            
                                                            08/10/103,000
                                                            
                                                            10/19/07
                                                            
                                                            10/16/08
                                                            
                                                            
                                                            3,000
                                                            
                                                            10/10/08
                                                            
                                                            10/08/093,800
                                                            
                                                            10/19/07
                                                            
                                                            10/16/08
                                                            
                                                            
                                                            3,800
                                                            
                                                            10/22/08
                                                            
                                                            10/14/093,500
                                                            
                                                            11/02/07
                                                            
                                                            10/23/08
                                                            
                                                            
                                                            3,500
                                                            
                                                            10/24/08
                                                            
                                                            10/22/094,000
                                                            
                                                            11/30/07
                                                            
                                                            11/24/08
                                                            
                                                            
                                                            4,000
                                                            
                                                            12/10/08
                                                            
                                                            12/04/094,500
                                                            
                                                            09/19/08
                                                            
                                                            03/18/09
                                                            
                                                            
                                                            9,000
                                                            
                                                            04/16/09
                                                            
                                                            04/15/104,500
                                                            
                                                            09/24/08
                                                            
                                                            03/23/0911,000
                                                            
                                                            07/10/09
                                                            
                                                            11/06/09Shanghai
      Pudong
                                                            
                                                            
                                                            20,000
                                                            
                                                            08/14/07
                                                            
                                                            02/14/08
                                                            
                                                            
                                                            20,000
                                                            
                                                            10/21/08
                                                            
                                                            05/21/09
                                                            
                                                            
                                                            20,000
                                                            
                                                            05/27/09
                                                            
                                                            11/27/10Development
      Bank
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            9,000
                                                            
                                                            04/08/08
                                                            
                                                            04/08/09
                                                            
                                                            
                                                            9,000
                                                            
                                                            04/29/09
                                                            
                                                            04/28/109,000
                                                            
                                                            04/09/08
                                                            
                                                            04/09/09China
      Everbright Bank
                                                            
                                                            
                                                            30,000
                                                            
                                                            08/10/07
                                                            
                                                            08/09/08
                                                            
                                                            
                                                            30,000
                                                            
                                                            09/06/08
                                                            
                                                            02/05/09
                                                            
                                                            
                                                            30,000
                                                            
                                                            02/23/09
                                                            
                                                            02/22/10China
      Communication Bank-Jinhua Branch
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            5,000
                                                            
                                                            02/26/08
                                                            
                                                            02/18/09
                                                            
                                                            
                                                            5,000
                                                            
                                                            02/19/09
                                                            
                                                            02/15/10HuaXia
      Bank
                                                            
                                                            
                                                            20,000
                                                            
                                                            12/24/07
                                                            
                                                            12/27/08
                                                            
                                                            
                                                            17,000
                                                            
                                                            09/12/08
                                                            
                                                            09/12/09
                                                            
                                                            
                                                            27,000
                                                            
                                                            09/24/09
                                                            
                                                            09/21/10Evergrowing
      Bank
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            20,000
                                                            
                                                            10/24/08
                                                            
                                                            10/23/09




Note: The
loan amount is in thousands of RMB


42


Capital
Requirements and Capital Provided





Capital
requirements and capital provided for the nine months ended September 30, 2009
is as follows:





Capital requirements
                          
                          Nine Months Ended
                            September 30, 2009
                            (In thousands)Purchase
      of plant and equipment
                          
                          $
                          3,060Purchase
      of construction in progress
                          
                          
                          554Issuance
      of notes receivable
                          
                          
                          10,012Repayments
      of short-term bank loans
                          
                          
                          22,901Repayments
      of notes payable
                          
                          
                          20,411Internal
      cash used in operation
                          
                          
                          5,237Total
      capital requirements
                          
                          $
                          62,175Capital provided(Increase)
      in cash
                          
                          
                          (739
                          )Decrease
      in restricted cash
                          
                          
                          4,680Proceeds
      from short-term bank loans
                          
                          
                          24,216Proceeds
      from notes payable
                          
                          
                          14,468Repayments
      of notes receivable
                          
                          
                          19,330Other
      financing activities
                          
                          
                          217Total
      capital provided
                          
                          $
                          62,172For
      further information, see the Statement of Cash Flows.





Cash
Flow





Net cash
flow used in operating activities was ($5,237,399) for the nine months ended
September 30, 2009, as compared to net cash flow provided by operating
activities of $5,010,972 in the same period in 2008. The difference is mainly
attributable to the decrease of net income and increase in cash outflow spent on
inventories of ($5,967,339) from ($5,265,108) for nine months ended September
30, 2008 to ($11,232,447) for the same reporting period of 2009.





Net cash
flow provided by investing activities was $5,705,522 for the nine months ended
September 30, 2009 as compared to net cash flow used in investing activities of
($8,002,307) for the same reporting period in 2008. This was primarily due to a
net cash inflow from notes receivable of $9,318,754, as compared to a net cash
outflow in notes receivable of ($4,141,155) for the same period last
year.





Net cash
flow provided by financing activities was $270,818 for the nine months ended
September 30, 2009, as compared to net cash flow provided by financing
activities of $5,631,258 for the nine months ended September 30, 2008. This is
mainly because during the nine months ended September 30, 2009, the Company
repaid notes payable of ($5,942,259), whereas during the same period in 2008,
the Company received an inflow of cash $9,927,930 from the notes
payable.


43


Item
3. Quantitative and Qualitative Disclosures About Market Risk.





Not
applicable.


44


Item
4. Controls and Procedures.





The
Company maintains a system of disclosure controls and procedures that is
designed to ensure that information required to be disclosed by the Company in
this Form 10-Q, and in other reports required to be filed under the Securities
Exchange Act of 1934 (the “Exchange Act”), is recorded, processed, summarized
and reported within the time periods specified in the rules and forms for such
filings. Management of the Company, under the direction of the Company's Chief
Executive Officer and Chief Financial Officer, reviewed and performed an
evaluation of the effectiveness of the Company's disclosure controls and
procedures (as defined in Rules 13a-15a(e) and 15d-15(e) under the Exchange Act)
as of September 30, 2009. Based on that review and evaluation, the Chief
Executive Officer and Chief Financial Officer, along with other key management
of the Company, have determined that the disclosure controls and procedures were
effective as of such date.





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, 2009 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.


45


PART
II – OTHER INFORMATION





Item
1.  Legal Proceedings.





None.





Item
1A.  Risk Factors.





As of the
date of this filing, there have been no material changes from the risk factors
previously disclosed in our “Risk Factors” in the Form 10-K for the period ended
December 31, 2008. An investment in our common stock involves various risks.
When considering an investment in our company, you should consider carefully all
of the risk factors described in our most recent Form 10-K. These risks and
uncertainties are not the only ones facing us and there may be additional
matters that we are unaware of or that we currently consider immaterial. All of
these could adversely affect our business, financial condition, results of
operations and cash flows and, thus, the value of an investment in our
company.





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





None.





Item
3.  Defaults Upon Senior Securities.





None.





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





None.





Item
5.  Other Information.





None.





Item
6. Exhibits.





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


II-1


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 16, 2009
                      By:
                      /s/
      Hu XiaomingHu
      XiaomingPresident
      and Chief Executive Officer
                        (Principal
      Executive Officer)Date:
      November 16, 2009
                      By:
                      /s/
      Zhu XiaoyingZhu
      XiaoyingChief
      Financial Officer
                        (Principal
      Financial and Accounting
Officer)


46