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

Our future success depends substantially on the continued services of our executive officers, especially our CEO and President, Mr. Hu Xiaoming. We do not maintain key man life insurance on any of our executive officers.  If one or more of our executive officers are unable or unwilling to continue in their present positions, we may not be able to replace them readily, if at all.  Therefore, our business may be severely disrupted, and we may incur additional expenses to recruit and retain new officers.  In addition, if any of our executives joins a competitor or forms a competing company, we may lose some of our customers.  However, if any disputes arise between our executive officers and us, we cannot assure you, in light of uncertainties associated with the PRC legal system, the extent to which any of these agreements could be enforced in China, where some of our executive officers reside and hold some of their assets. See “—Risks Related to Doing Business in China— Uncertainties with respect to the PRC legal system could have a material adverse effect on us.”

Our success depends on attracting and retaining qualified personnel

 

We depend on a core management team.  The loss of any of these individuals could prevent us from achieving our business objective.  Our future success will depend in large part on our continued ability to attract and retain other highly qualified technical and management personnel, as well as personnel with expertise in government regulation.  We face competition for personnel from other companies, domestically, and abroad.  If our recruitment and retention efforts are unsuccessful, our business operations could suffer. 

 

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Lack of property and general liability insurance.

We do not carry any property insurance, general liability insurance, or any other insurance that covers the risks of our business operations. As a result, any material loss or damage to its properties or other assets, or personal injuries arising from its business operations would have a material adverse affect on its financial condition and operations.

  

Risks Relating to Our Vehicle Machinery Production Operations

 

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

 

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

 

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

 

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

We will be adversely impacted if we cannot compete effectively in the highly competitive vehicle machinery industry. Our continued success depends upon our ability to compete effectively in markets that contain numerous competitors, some of which may have significantly greater financial, marketing and other resources than we have. Competition may reduce fee structures, potentially causing us to lower our fees or prices, which may adversely impact our profits. New competition or existing competition that uses a business model that is different from our business model may put pressure on us to change our model so that we can remain competitive.

 

General economic conditions may negatively impact our results. 

The consumption of entertainment products such as go-karts is dependant on continued economic growth, and the duration, pace and full extent of the current growth environment remains unclear. Moderate or severe economic downturns or adverse conditions may negatively affect our operations. These conditions may be widespread or isolated to one or more geographic regions. A tightening of the labor markets in one or more geographic regions may result in fewer and/or less qualified applicants for job openings in our facilities. Higher wages, related labor costs and the increasing cost trends in the may negatively impact our results as wages and related labor costs.

 

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We must compete for customers.

 

The vehicle machinery industry is highly competitive. Some of our competitors may have substantially greater marketing and financial resources than we do, and they may improve their products, reduce their prices or expand or improve their marketing programs in ways that adversely affect our operating results.

 

Because we face intense competition from other machinery vehicle producers and many of our competitors have greater resources than we do, we may not be able to compete successfully and we may lose or be unable to gain market share.

 

The vehicle machinery production business is highly competitive and, therefore, we face substantial competition in connection with the marketing and sale of its projects. In general, such vehicles are price sensitive and affected by many factors beyond our control, including changes in consumer tastes, fluctuation commodity prices and changes in supply due to weather, production, and natural disaster. Our products face competition from other producers in the industry.   Most of our competitors are well established, have greater financial, marketing, personnel and other resources, have been in business for longer periods of time than we have, and have projects that have gained wide customer acceptance in the marketplace.

 

Risks Related to Doing Business in China

 

Change in political and economic conditions.

Since our main country of business operations is China, our business operations and financial position are subject, to a significant degree, to the economic, political and legal developments in China.

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

China’s government has been taking macro-economic austerity measures to suppress inflation and curb the pace of economic growth since July 1993. These measures include raising interest rates, tightening credit supply, delaying implementation of certain reform policies on pricing, enhancing financial supervision as well as tightening control on the granting of approval for property and infrastructure projects. However, since 1998, there has been deflation in China’s economy and the current economic policies of China mainly focus on stimulating consumption and expansion of domestic demand.

 

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

 

Change in tax laws and regulations in China.

 

Various tax reform policies have been implemented in China in recent years. Interpretation of certain PRC tax policies is still awaiting guidance from the government. Moreover, there can be no assurance that the existing tax laws and regulations will not be revised or amended in the future.

 

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

China's legal system is based on statutory law. Unlike the common law system, statutory law is based primarily on written statutes. Prior court decisions may be cited as persuasive authority but do not have a binding effect. Since 1979, the PRC government has been promulgating and amending the laws and regulations regarding economic matters, such as corporate organization and governance, foreign investment, commerce, taxation and trade.

 

However, since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretation of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit legal protections available to us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention. The legal system in the China cannot provide the investors with the same level of protection as in the U.S. The Company is governed by the law and regulations generally applicable to local enterprises. Many of these laws and regulations were recently introduced and remain experimental in nature and subject to changes and refinements. Interpretation, implementation and enforcement of the existing law and regulations can be uncertain and unpredictable and therefore have restrictions on legal protections of foreign investors.

 

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Changes in Currency Conversion Policies in China.

 

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

This may cause complicated procedures in foreign exchange payments to foreign creditors under the current account items and thus will affect the restrictions on borrowing of international commercial loans, creation of foreign security and borrowing of RMB under guarantees in foreign currencies. Furthermore, the value of RMB may become subject to supply and demand, which could be largely affected by the international economic and political environment and any fluctuations in the exchange rate of RMB could have an adverse effect on the operational and financial condition of its subsidiaries in China.

 

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

 

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

Risks Relating to Ownership of Our Securities

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and related rules and regulations, are creating uncertainty for public companies. We are presently evaluating and monitoring developments with respect to new and proposed rules and cannot predict or estimate the amount of the additional compliance costs we may incur or the timing of such costs. These new or changed laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by courts and regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.

 

Maintaining appropriate standards of corporate governance and public disclosure may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. In addition, if we fail to comply with new or changed laws, regulations and standards, regulatory authorities may initiate legal proceedings against us and our business and our reputation may be harmed.

 

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

 

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

	·	variations in our operating results;
	·	changes in expectations of our future financial performance, including financial estimates by securities analysts and investors;
	·	changes in operating and stock price performance of other companies in our industry;
	·	additions or departures of key personnel; and
	·	future sales of our common stock.

 

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

 

One stockholder owns a substantial portion of our outstanding common stock, which may enable this stockholder to influence many significant corporate actions and in certain circumstances may prevent a change in control that would otherwise be beneficial to our other shareholders.

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

 

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If we fail to maintain the adequacy of our internal controls, our ability to provide accurate financial statements and comply with the requirements of the Sarbanes-Oxley Act of 2002 could be impaired, which could cause our stock price to decrease substantially.

Since, prior to becoming a public company in 2007, Kandi operated as a private company without public reporting obligations, and it had committed limited personnel and resources to the development of the external reporting and compliance obligations that would be required of a public company. Recently, we have taken measures to address and improve our financial reporting and compliance capabilities and we are in the process of instituting changes to satisfy our obligations in connection with joining a public company, when and as such requirements become applicable to us. Prior to taking these measures, we did not believe we had the resources and capabilities to do so. We plan to obtain additional financial and accounting resources to support and enhance our ability to meet the requirements of being a public company. We will need to continue to improve our financial and managerial controls, reporting systems and procedures, and documentation thereof. If our financial and managerial controls, reporting systems or procedures fail, we may not be able to provide accurate financial statements on a timely basis or comply with the Sarbanes-Oxley Act of 2002 as it applies to us. Any failure of our internal controls or our ability to provide accurate financial statements could cause the trading price of our common stock to decrease substantially.

 

Our common shares are thinly traded and, you may be unable to sell at or near ask prices or at all if you need to sell your shares to raise money or otherwise desire to liquidate such shares.

We cannot predict the extent to which an active public market for its common stock will be sustained. Our common shares have historically been sporadically or “thinly-traded,” meaning that the number of persons interested in purchasing our common shares at or near bid prices at any given time may be relatively small or non-existent.

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

The market price for our common stock is particularly volatile given our status as a relatively small company with a small and thinly traded “float” and lack of current revenues that could lead to wide fluctuations in our share price. You may be unable to sell your common stock at or above your purchase price if at all, which may result in substantial losses to you.

The market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. The volatility in our share price is attributable to a number of factors. First, as noted above, our common shares are sporadically and/or thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by its shareholders may disproportionately influence the price of those shares in either direction. The price for its shares could, for example, decline precipitously in the event that a large number of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer which could better absorb those sales without adverse impact on its share price. Secondly, an investment in our company  is a speculative or “risky” investment due to our lack of revenues or profits to date and uncertainty of future market acceptance for current and potential products. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer.

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

We do not anticipate paying any cash dividends.

We presently do not anticipate that we will pay any dividends on any of our capital stock in the foreseeable future. The payment of dividends, if any, would be contingent upon our revenues and earnings, if any, capital requirements, and general financial condition. The payment of any dividends will be within the discretion of our Board of Directors. We presently intend to retain all earnings, if any, to implement our business plan; accordingly, we do not anticipate the declaration of any dividends in the foreseeable future.

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

 

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

 

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

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

 

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

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

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

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

 

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

Prior to Stone Mountain’s entry into the share exchange agreement with Continental on June 29, 2007, Stone Mountain engaged in businesses unrelated to our current operations. Although the Stone Mountain Shareholders are providing certain indemnifications against any loss, liability, claim, damage or expense arising out of or based on any breach of or inaccuracy in any of their representations and warranties made regarding such acquisition, any liabilities relating to such prior business against which we are not completely indemnified may have a material adverse effect on us.

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

 

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

We have identified material weaknesses in our internal control over financial reporting which could continue to negatively impact our ability to report our results of operations and financial condition accurately and in a timely manner.

We have identified a number of material weaknesses in our internal control over financial reporting.

         We have concluded that our internal control over financial reporting was not effective as of December 31, 2007 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations by the Treadway Commission. For a detailed description of these material weaknesses, see Item 9A(T), "Management's Report on Internal Controls over Financial Reporting." Each of our material weaknesses results in more than a remote likelihood that a material misstatement of the annual or interim financial statements that we prepare will not be prevented or detected. As a result, we must perform extensive additional work to obtain reasonable assurance regarding the reliability of our financial statements. Even with this additional work, given the number of material weaknesses identified, there is a risk of additional errors not being prevented or detected. Moreover, other material weaknesses may be identified.

 

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We have extensive work remaining to remedy the material weaknesses in our internal control over financial reporting.

As noted in Item 9A(T), "Management's Report on Internal Controls over Financial Reporting" we have significant work remaining to remediate the material weaknesses in our internal control over financial reporting. There can be no assurance as to when all of the material weaknesses will be remediated. Until our remediation efforts are completed, management will continue to devote significant time and attention to these efforts, and we will continue to incur expenses associated with the additional procedures and resources required to prepare our consolidated financial statements. Certain of our remediation activities, such as training of our personnel to implement our reconciliation and review procedures, will result in additional costs.

If our internal control over financial reporting remains ineffective, our business and prospects may suffer.

        If we are unsuccessful in implementing or following our remediation plan, or fail to update our internal control over financial reporting as our business evolves, we may not be able to timely or accurately report our financial condition, results of operations or cash flows or to maintain effective disclosure controls and procedures. If we are unable to report financial information in a timely and accurate manner or to maintain effective disclosure controls and procedures, we could be subject to, among other things, regulatory or enforcement actions, including a delisting from NASDAQ, securities litigation and a general loss of investor confidence, any one of which could adversely affect our business prospects and the market value of our common stock.

          Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

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Item 8.    Financial Statements and Supplementary Data

KANDI TECHNOLOGIES, CORP.

 

(FORMERLY STONE MOUNTAIN RESOURCES, INC.)

AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED

DECEMBER 31, 2007 AND 2006

 

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of:

Kandi Technologies Corp. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Kandi Technologies Corp. (Formerly Stone Mountain Resources, Inc.) and subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the related consolidated statements of income and comprehensive income, changes in shareholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

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

We were not engaged to examine management’s assertion about the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007 included in the Company’s Item 9A(T) “Controls and Procedures” in the Annual Report on Form 10-K/A and, accordingly, we do not express an opinion thereon.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Kandi Technologies Corp. (Formerly Stone Mountain Resources, Inc.) and subsidiaries as of December 31, 2007 and 2006 and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting policies generally accepted in the United States of America.

 

/s/ Weinberg & Company, P.A.

 

Weinberg & Company, P.A.

Boca Raton, Florida

March 17, 2008

 

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KANDI TECHNOLOGIES, CORP.

(FORMERLY STONE MOUNTAIN RESOURCES, INC.)

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

		December 31,			December 31,
		2007			2006
CURRENT ASSETS
Cash and cash equivalents		$	1,322,782		$	1,034,017
Restricted cash			12,305,000			9,092,423
Accounts receivable, net of allowance for doubtful accounts of $4,819 and $0 as of December 31, 2007 and 2006, respectively			11,113,355			7,572,565
Inventories			3,293,529			5,463,179
Notes receivable			1,223,664			430,811
Other receivables			913,791			2,988,016
Prepayments and prepaid expenses			49,706			332,556
Deposit for acquisition			12,270,859			-
Due from employees			91,590			184,221
Due from related parties			-			31,901
Deferred taxes			-			99
Total Current Assets			42,584,276			27,129,788
LONG-TERM ASSETS
Plant and equipment, net			10,933,702			9,224,935
Land use rights, net			385,539			395,926
Construction in progress			1,321,832			307,158
Deferred taxes			405,006			2,784
Total Long-Term Assets			13,046,079			9,930,803
TOTAL ASSETS		$	55,630,355		$	37,060,591

 

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KANDI TECHNOLOGIES, CORP.

(FORMERLY STONE MOUNTAIN RESOURCES, INC.)

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

		December 31,			December 31,
		2007			2006
CURRENT LIABILITIES
Accounts payable		$	6,425,261		$	6,626,826
Other payables and accrued expenses			406,357			307,453
Tax payable			-			2,953
Short-term bank loans			22,373,807			9,163,737
Current portion of long-term bank loan			-			1,920,934
Customer deposits			742,195			601,168
Notes payable			12,324,047			10,779,563
Deferred taxes			17,676			-
Due to employees			310			-
Total Current Liabilities			42,289,653			29,402,634
LONG-TERM LIABILITIES
Deferred taxes			299,161			81,195
Total Long-Term Liabilities			299,161			81,195
TOTAL LIABILITIES			42,588,814			29,483,829
COMMITMENTS
SHAREHOLDERS’ EQUITY
Common stock, $0.001 par value; 100,000,000 shares authorized; 19,961,000 and 12,000,000 shares issued and outstanding at December 31, 2007 and December 31, 2006, respectively			19,961			12,000
Additional paid-in capital			7,138,105			7,154,193
Retained earnings			5,125,120			96,024
Accumulated other comprehensive income			758,355			314,545
TOTAL SHAREHOLDERS’ EQUITY			13,041,541			7,567,762
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	55,630,355		$	37,060,591

See notes to consolidated financial statements

 

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KANDI TECHNOLOGIES, CORP.

(FORMERLY STONE MOUNTAIN RESOURCES, INC.)

  AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006

 

		2007			2006
REVENUES		$	34,702,168		$	14,480,836
COST OF GOODS SOLD			27,235,275			11,884,462
GROSS PROFIT			7,466,893			2,596,374
Research and development			112,489			103,785
Selling and marketing			1,137,493			289,408
General and administrative			1,027,843			411,306
TOTAL OPERATING EXPENSES			2,277,825			804,499
INCOME FROM OPERATIONS			5,189,068			1,791,875
Interest expense, net			(1,206,299	)		(836,056	)
Government grants			15,430			97,806
Forgiveness of debt			161,835			29,324
Forfeiture of customer deposits			505,207			-
Other expense, net			(8,650	)		(3,725	)
INCOME BEFORE INCOME TAXES			4,656,591			1,079,224
INCOME TAX (BENEFIT) EXPENSE			(372,505	)		69
NET INCOME			5,029,096			1,079,155
OTHER COMPREHENSIVE INCOME
Foreign currency translation gain			662,403			236,114
Income tax expense related to other comprehensive income			(218,593	)		(77,918	)
OTHER COMPREHENSIVE INCOME, NET OF TAX			443,810			158,196
COMPREHENSIVE INCOME		$	5,472,906		$	1,237,351
WEIGHTED AVERAGE SHARES OUTSTANDING BASIC AND DILUTED			16,056,838			12,000,000
NET INCOME PER COMMON SHARE, BASIC AND DILUTED		$	0.31		$	0.10

See notes to consolidated financial statements

20

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KANDI TECHNOLOGIES, CORP.

(FORMERLY STONE MOUNTAIN RESOURCES, INC.)

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006

		Common Stock						Additional			Retained			Accumulated Other
					Par			Paid-in			Earnings			Comprehensive
		Shares			Value			Capital			(Deficit)			Income			Total
BALANCE AT JANUARY 1, 2006			12,000,000			12,000		$	7,154,193		$	(983,131	)	$	156,349		$	6,339,411
Foreign currency translation gain			-			-			-			-			158,196			236,114
Net income			-			-			-			1,079,155			-			1,079,155
BALANCE AT DECEMBER 31, 2006			12,000,000		$	12,000		$	7,154,193		$	96,024		$	314,545		$	7,654,680
Recapitalization			7,961,000			7,961			(16,088	)		-			-			(8,127	)
Foreign currency translation gain			-			-			-			-			443,810			662,403
Net income			-			-			-			5,029,096			-			5,029,096
BALANCE AT DECEMBER 31, 2007			19,961,000		$	19,961		$	7,138,105		$	5,125,120		$	758,355		$	13,338,052

See notes to consolidated financial statements

21

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KANDI TECHNOLOGIES, CORP.

(FORMERLY STONE MOUNTAIN RESOURCES, INC.)

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW

FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006

 

		2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	5,029,096		$	1,079,155
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization			1,453,253			943,827
Provision for doubtful accounts			4,819			-
Loss on disposal of fixed assets			35,049			(1,049	)
Deferred taxes			(385,074	)		(2,842	)
Forgiveness of debt			(161,834	)		(48,467	)
Forfeiture of customer deposits			(505,207	)		-
Changes in operating assets and liabilities, net of effects of acquisition:
(Increase) Decrease In:
Accounts receivable			(3,545,609	)		(4,361,476	)
Inventories			2,169,649			(2,574,313	)
Other receivables			2,074,226			(521,897	)
Due from employees			-			(156,831	)
Due to employees			92,941			-
Prepayments and prepaid expenses			282,850			919,267
Increase (Decrease) In:
Accounts payable			(39,730	)		3,876,269
Other payables and accrued liabilities			90,405			(1,044,175	)
Tax payable			(2,953	)		-
Customer deposits			646,235			301,943
Net cash provided by (used in) operating activities			7,238,116			(1,590,589	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of plant and equipment			(2,866,548	)		(861,407	)
Purchases of construction in progress			(1,334,437	)		(1,145,390	)
Deposit for acquisition			(12,270,859	)		-
Purchase of a subsidiary, net of cash acquired			-			(69,391	)
Issuance of notes receivable			(5,726,898	)		(430,811	)
Due from related parties			-			816,823
Repayment of notes receivable			4,934,046			351,457
Compensation received for land use right			-			165,757
Net cash used in investing activities			(17,264,696	)		(1,172,962	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted cash			(3,212,577	)		5,819,379
Proceeds from short term bank loans			29,005,594			12,054,339
Repayment of short term bank loans			(17,716,459	)		(9,108,549	)
Proceeds from notes payable			12,324,047			10,677,113
Repayment of notes payable			(10,779,564	)		(16,884,382	)
Repayment of advances to related parties			31,901			-
Net cash provided by financing activities			9,652,942			2,557,900

 

See notes to consolidated financial statements

22

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KANDI TECHNOLOGIES, CORP.

(FORMERLY STONE MOUNTAIN RESOURCES, INC.)

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW

FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006

		2007			2006
DECREASE IN CASH AND CASH EQUIVALENTS			(373,638	)		(205,651	)
Effect of exchange rate changes on cash			662,403			362,679
Cash and cash equivalents at beginning of year			1,034,017			876,989
CASH AND CASH EQUIVALENTS AT END OF YEAR		$	1,322,782		$	1,034,017
SUPPLEMENTARY CASH FLOW INFORMATION
Income taxes paid		$	-		$	-
Interest paid		$	1,007,597		$	695,850

 

SUPPLEMENTAL NON-CASH DISCLOSURES:

 

On September 25, 2006, the Company acquired a 100% interest in Zhejiang Yongkang Import & Export Co., Ltd. (Dingji) for $632,215 in cash and Dingji became a 100% owned subsidiary of the Company. The following represents the assets purchased and liabilities assumed at the acquisition date:

 

Cash and cash equivalents		$	562,824
Restricted cash			13,080,930
Accountants receivable			2,595,165
Plant and equipment, net			312,311
Other receivables and prepayments			1,756,798
Other assets			19,910
Total assets purchased			18,327,938
Accounts payable			(1,624,432	)
Other payable and accrued liabilities			(1,095,986	)
Short-term bank loans			(1,719,918	)
Notes payable			(13,086,854	)
Deferred taxes			(3,236	)
Other liabilities			(165,297	)
Total liabilities assumed			(17,695,723	)
Total net assets		$	632,215
Share percentage			100	%
Net assets acquired and consideration paid		$	632,215
Cash acquired		$	562,824
Net cash consideration paid		$	69,391

 

See notes to consolidated financial statements

23

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KANDI TECHNOLOGIES, CORP.

(FORMERLY STONE MOUNTAIN RESOURCES, INC.)  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006

 

NOTE 1 – ORGANIZATION AND PRINCIPAL ACTIVITIES

Kandi Technologies, Corp. (formerly Stone Mountain Resources, Inc.) (the “Company”) was incorporated under the laws of the State of Delaware on March 31, 2004. On June 29, 2007, the Company changed its name to Kandi Technologies, Corp.

 

On June 29, 2007, pursuant to the share exchange agreement between Stone Mountain Resources, Inc. (“Stone Mountain”), 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. The Company conducts its operations through its wholly owned subsidiary, Zhejiang Kandi Vehicles Co. Ltd., a People’s Republic of China (“PRC”) company.

 

The exchange transaction was accounted for as a reverse acquisition in accordance with Statements of Financial Accounting Standards (“SFAS”)   No. 141. “ Business Combinations”. Accordingly, the consolidated statements of income include the results of operations of Kandi Technologies, Inc. from the acquisition date through December 31, 2007 and 2006.

 

The primary operations of the Company is design, developing, manufacturing, and commercializing all-terrain vehicles, go-karts, and specialized automobile related products for the People’s Republic of China (“PRC”) and global export markets. Sales are made to dealers in China, United States, Europe and Australia.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

(a) Principles of Consolidation

 

The consolidated financial statements  include the accounts of Kandi Technologies Corp. (formerly Stone Mountain Resource, Inc.), and the following subsidiaries:

	(i)	Continental Development Ltd., (“Continental”) (100% subsidiary of the Company)
	(ii)		Zhejiang Kandi Vehicles Co. Ltd., (“Kandi”) (100% subsidiary of Continental)
	(iii)			Zhejiang Yongkong Import and Export Co. Ltd., (“Dingji”) (100% subsidiary of Kandi)

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

 

24

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(b)   Concentration

The Company’s major customers for the years ended December 31, 2007 and 2006, respectively who accounted for the following percentage of total sales and accounts receivable are as follows:

25

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KANDI TECHNOLOGIES, CORP.

(FORMERLY STONE MOUNTAIN RESOURCES, INC.)  

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

		Sales						Accounts Receivable
Major Customers		2007			2006			December 31, 2007			December 31, 2006
Company A			18	%		-			40	%		-
Company B			15	%		2	%		19	%		2	%
Company C			14	%		14	%		11	%		27	%
Company D			8	%		11	%		8	%		26	%
Company E			5	%		7	%		7	%		13	%

The Company’s major suppliers for the years ended December 31, 2007 and 2006, respectively who accounted for the following percentage of total purchases and accounts payable are as follows:

 

		Purchases						Accounts Payable
Major Suppliers			2007			2006			December 31, 2007			December 31, 2006
Company F			2	%		48	%		7	%		37	%
Company G			2	%		4	%		6	%		3	%
Company H			2	%		13	%		5	%		9	%
Company I			4	%		7	%		5	%		5	%
Company J			1	%		-			4	%		-

(c)   Economic and Political Risks

The Company’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC economy.

The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.

26

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(d)   Use of Estimates

The preparation of the financial statements in conformity with generally accepted accounting principles in the United States of America 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 financial statements and the reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however actual results could differ materially from those estimates.

27

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KANDI TECHNOLOGIES, CORP.

(FORMERLY STONE MOUNTAIN RESOURCES, INC.)  

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006

NOTE 9 – NOTES PAYABLE

 

Notes payable consist of the following:

 

		December 31, 2007			December 31, 2006
Notes payable to unrelated companies:
Due November 11, 2007 (subsequently settled on its due date)		$	-		$	102,450
Due May 30, 2007 (subsequently settled on its due date)			-			14,608
Due September 18, 2008			683,611			-
Due April 17, 2008			683,611			-
Due November 8, 2008			109,379			-
Due January 15, 2008 (subsequently settled on its due date)			683,611			-
Due December 15, 2008			730,002			-
Subtotal		$	2,890,214		$	117,058
Notes payable to related companies:
Bank acceptance notes
Due October 30, 2007 (subsequently settled on its due date)		$	-		$	1,570,083
Due January 4, 2007 (subsequently settled on its due date)			-			960,467
Due February 12, 2007 (subsequently settled on its due date)			-			1,280,623
Due February 10, 2007 (subsequently settled on its due date)			-			1,280,623
Due January 26, 2007 (subsequently settled on its due date)			-			640,311
Due January 5, 2007 (subsequently settled on its due date)			-			960,467
Due March 11, 2007 (subsequently settled on its due date)			-			1,152,560
Due March 25, 2007 (subsequently settled on its due date)			-			1,024,498
Due March 28, 2007 (subsequently settled on its due date)			-			1,280,623
Due January 3, 2007 (subsequently settled on its due date)			-			512,250
Due February 6, 2008 (subsequently settled on its due date)			1,093,778			-
Due February 6, 2008 (subsequently settled on its due date)			683,611			-
Due January 30, 2008 (subsequently settled on its due date)			546,888			-
Due January 26, 2008 (subsequently settled on its due date)			820,333			-
Due January 26, 2008 (subsequently settled on its due date)			820,333			-
Due March 20, 2008 (subsequently settled on its due date)			957,057			-
Due April 23, 2008			1,093,778			-
Due June 27, 2008			683,611			-
Due February 20, 2008 (subsequently settled on its due date)			1,367,222			-
Due February 21, 2008 (subsequently settled on its due date)			1,367,222			-
Subtotal			9,433,833			10,662,505
Total		$	12,324,047		$	10,779,563

All the bank acceptance notes are subject to bank charges of 0.005% of the principal as commission on each loan transaction. Bank charges for notes payable were $11,074 and $9,048 in 2007 and 2006, respectively.

 

41

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In accordance with the relevant tax laws and regulations of PRC, the applicable corporate income tax rate of the Company is 33%. However, according to certain rules in the tax laws, from the time that the Company has its first profitable tax year, a foreign-invested company is exempt from corporate income tax for the following two years of operations and is then entitled to a 50% tax reduction for the succeeding three years. The Company’s first profitable year for income tax purposes as a foreign-invested company was 2007. Dingji is a subsidiary of the Company and its applicable corporate income tax rate is 33%.

43

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For 2007 and 2006 the PRC corporate income tax rate was 33%. Certain subsidiaries of the Company are entitled to tax exemptions (tax holidays) for 2007 and 2006.

Income before income tax expense of $4,656,946 and $1,079,224 for 2007 and 2006, respectively, was attributed to subsidiaries with operations in China. Income tax (benefit) expense related to China income for 2007 and 2006 is $(372,505) and $69, respectively.

45

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Enterprises or individuals, who sell commodities, engage in repair and maintenance or import or export goods in the PRC are subject to a value added tax in accordance with Chinese Laws. The VAT standard rate is 17% of the gross sale price. A credit is available whereby VAT paid on the purchases of semi-finished products or raw materials used in the production of the Company’s finished products can be used to offset the VAT due on the sales of the finished products.

 

On January 1, 2002, the export policy of VAT "Exemption, Credit and Refund" began to apply to all exports by manufacture-based enterprises. In accordance with this policy, exported goods are exempted from output VAT and the input VAT charged for purchases of the raw materials, components and power consumed for the production of the exported goods may be refunded. Beginning July 1, 2007, the refund rates of vehicle related products applicable to Kandi and Dingji were changed form 17% to 9%.

The refundable VAT of $542,874 and $2,171,195 at December 31, 2007 and 2006, respectively, are included in other receivables in the accompanying consolidated balance sheets.

46

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