Kandi Technologies Group, Inc. - Annual Report: 2007 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2007
Commission
file number 000-52186
KANDI
TECHNOLOGIES, CORP.
(Exact
name of registrant as specified in its charter)
|
Delaware
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87-0700927
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|
|
(State
or other jurisdiction of incorporation
or
organization)
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(I.R.S.
Employer Identification No.)
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Jinhua
City Industrial Zone
Jinhua,
Zhejiang Province
People’s
Republic of China
Post
Code 321016
(Address
of principal executive offices)
(86-0579)
882239700
(Registrant’s
telephone number, including area code)
Securities
Registered Pursuant to Section 12(b) of the Act:
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Common
Stock, Par Value $0.001 Per Share
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NASDAQ
Capital Market
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|
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(Title
of each class)
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(Name
of exchange on which registered)
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Securities
Registered Pursuant to Section 12(g) of the Act: None.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. Yes o No x
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 x No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
the definitions of “large accelerated filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act. (check one):
|
Large
accelerated filer o
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Accelerated
filer o
|
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Non-accelerated
filer o
(Do
not check if a smaller reporting company)
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Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o No x
As
of
March 31, 2008, there were 19,961,000 shares
of
the registrant’s common stock issued and outstanding and 1,000,000 shares of the
registrant’s preferred stock, $0.001 par value, issued and outstanding. The
aggregate market value of the shares of common stock held by non-affiliates
of
the registrant on July 6, 2007 was approximately $10,180,110*.
*Prior
to
July 6, 2007, no liquid market had existed for our common stock.
DOCUMENTS
INCORPORATED BY REFERENCE: none.
TABLE
OF CONTENTS
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PART
I
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1
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Item 1.
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Business
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1
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Item 1A.
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Risk
Factors
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4
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Item 1B.
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Unresolved
Staff Comments
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13
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Item 2.
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Properties
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13
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Item 3.
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Legal
Proceedings
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13
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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13
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PART II
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14
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Item 5.
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Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases
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14
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Item 6.
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Selected
Financial Data
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14
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Item 7.
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Management's
Discussion and Analysis of Financial Condition and Results of Operations
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14
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Item 7A.
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Quantitative
and Qualitative Disclosures about Market Risk
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21
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Item 8.
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Financial
Statements and Supplementary Data
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21
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Item 9.
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Changes
and Disagreements With Accountants on Accounting and Financial
Disclosure
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22
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Item 9A.
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Controls
and Procedures.
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22
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PART III
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23
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Item 10.
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Directors
and Executive Officers of the Registrant
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23
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Item 11.
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Executive
Compensation
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26
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Item 12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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27
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Item 13.
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Certain
Relationships and Related Transaction and Director
Independence
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28
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Item 14.
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Principal
Accounting Fees and Services
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28
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PART IV
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29
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Item 15.
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Exhibits
and Financial Statement Schedules
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29
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SIGNATURES
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30
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SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report contains certain forward-looking statements within the meaning
of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These include statements about
our
expectations, beliefs, intentions or strategies for the future, which we
indicate by words or phrases such as “anticipate,” “expect,” “intend,” “plan,”
“will,” “we believe,” “our company believes,” “management believes” and similar
language. These forward-looking statements are based on our current expectations
and are subject to certain risks, uncertainties and assumptions, including
those
set forth in the discussion under Item 1, “Business”, Item 1A, “Risk Factors”
and Item 7, “Management's Discussion and Analysis of Financial Condition and
Results of Operations.” Our actual results may differ materially from results
anticipated in these forward-looking statements. We base our forward-looking
statements on information currently available to us, and we assume no obligation
to update them. In addition, our historical financial performance is not
necessarily indicative of the results that may be expected in the future and
we
believe such comparisons cannot be relied upon as indicators of future
performance.
Although
we believe that the expectations reflected in the forward looking statements
are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Except as required by applicable law, including the securities
laws of the United States, we do not intend to update any of the forward-looking
statements to conform these statements to actual results.
PART
I
| Item 1. |
Business.
|
Except
as
otherwise indicated by the context, references in this Annual Report to “we,”
“us,” “our,” “Kandi,” or the “Company” are to the combined businesses of Kandi
Technologies, Corp.
Introduction
On
June
29, 2007, Stone Mountain Resources, Inc., a Delaware corporation (“Stone
Mountain”) executed a share exchange agreement (the “Exchange Agreement”) with
Continental Development Limited, a Hong Kong corporation (“Continental”) and
Excelvantage Group Limited, a British Virgin Islands Company which owned 100%
of
Continental (the “Continental Shareholder”). Pursuant to the Exchange Agreement,
Stone Mountain issued 12,000,000 shares of its common stock to the Continental
Shareholder, in exchange for 100% of the common stock of Continental. After
the
closing of the Exchange Agreement, Stone Mountain had a total of 19,961,000
shares of common stock outstanding, with the Continental Shareholder owning
60.12% of the total issued and outstanding shares of Stone Mountain’s common
stock, and the remaining shares outstanding were held by those who held shares
of Stone Mountain’s common stock prior to the closing.
As
a
result of this transaction, Continental became a wholly owned subsidiary of
Stone Mountain. Thereafter, the business of the Company was that of
Continental’s wholly owned subsidiary, Zhejiang Kandi Vehicles Co., Ltd.. On
August 13, 2007, we changed our name from Stone Mountain Resources, Inc. to
Kandi Technologies, Corp.
Stone
Mountain was a public shell company prior to the closing of the Exchange
Agreement. Stone Mountain was originally incorporated on March 31, 2004 in
the
State of Delaware, and operated as a gold exploration company exploring Nevada
mineral properties, before ceasing operations in May 30, 2007.
Description
of Business
We
are a
PRC-based manufacturer of small vehicle production, including all terrain
vehicles (“ATVs”), golf carts, motor cycles, motor scooters and approximately
15% China’s global export market of go-karts. Focusing on China's rapid economic
development, the Company also sees an increasing need for transportation
vehicles for specific purposes, in particular, mini pesticide spraying vehicles
and mini service vehicles. The
Company produces a wide and growing range of ATVs which it believes represent
the highest quality vehicles of this type in China, aimed at the export market
as well as the rapidly growing market in the People’s Republic of China (the
“PRC”). The Company also is focused on the development of fashionable, energy
saving mini-cars. We have produced mini-cars that have completed the trial
stage
and are now preparing to start mass production. We expect to begin exporting
these cars to the U.S. market in 2008, followed by sales in China when the
domestic market is more mature. The full range of the Company's products can
be
viewed at http://www.kandivehicle.com.
1
OVERVIEW
OF OUR INDUSTRY
The
Small Vehicle Market in China
With
increased demand and limited supply for oil worldwide, and the resulting
increases in oil price, promoting energy-saving vehicles has become one of
China's basic national policies for the future development of the automobile
industry. In the coming years, the Chinese government plans to devote time
and
energy to research and implementation of tax policies geared toward the
development of energy-saving cars and decreasing energy consumption through
a
comparatively lower consumption tax on fuel-efficient vehicles. Based on this
new domestic focus, we believe that the mini-sized casual vehicle market will
become a popular choice for the Chinese people because of the vehicles’
practicality and energy-efficient performance capabilities.
The
Chinese government has also implemented new agriculture policies, creating
huge
growth in agricultural industrialization. Farmers’ incomes are increasing,
rapidly creating demand for improvements in working conditions, especially
after
the recently completed reconstruction of large farmland areas in the developed
coastal areas in southeast China. We believe that these factors have created
a
demand for a safe and comfortable mini-sized pesticide-spraying vehicle,
specialized for agricultural purposes, to reduce manual labor and to increase
efficiency. Additionally, forestation is required for many big urban
construction projects, creating parks and gardens in the city, and therefore
another sizable market for a specialized pesticide-spraying vehicle.
We
also
believe that with the rapid development of the market economy in China, there
is
an increasing need for transportation vehicles for specific purposes, such
as
vehicles for delivering express mail, food delivery vehicles, maintenance
vehicles, and other short-distance service vehicles. Previously, delivery by
foot and bicycle has been widely accepted in the market. We believe that our
vehicles will provide efficient, safe transportation, and provide an
energy-efficient way to modernize the urban environment in China.
As
China
continues forward in its rapid development, the Chinese people are also spending
more money on fitness and entertainment. Our go-karts provide a fun, novel
way
to be active and relax.
The
development of super mini-cars is a trend of the future. Because the number
of
cars on the road has increased year-by-year, reducing the area that motor
vehicles require will help to alleviate growing space concerns. Super mini-cars
were first developed in Europe and Japan in recent years, and its market has
been gaining momentum ever since. They are marketed as the young adventure
car,
the second car of car owners and the energy-efficient traveling tool of the
urban working people. They have been described as "future city vehicles", and
their cartoon-like design has attracted large numbers of young buyers in Europe.
In only a few years, more than 100 million units have been sold in nine
countries in the European market and the market is expected to continue to
grow.
We expect to begin exporting to the U.S. market in 2008, and later begin selling
the cars in China, once the PRC market is more mature. At present, the U.S.
SunL
Group, Inc. is our largest distributor.
Competitive
Strengths
Our
super
mini-car is expected to be priced much lower than similar models produced by
other vehicle manufacturers in the international market since we have the
capability to mass-produce at a lower cost. Therefore, the development of our
super mini-car will not only satisfy domestic consumers, but will also have
a
strong competitive edge in the international market, which has tremendous
potential for development.
Additionally,
we know of no other company that produces a mini-size vehicle for the specific
purpose of pesticide spraying in China, and few producers of mini-vehicles
of
any type within China. There is one factory, Nanjing No. 1 Automobile Plant,
which produces the same type of general mini-size car as ours, but its annual
production capacity is significantly lower than ours. Thus, we believe that
we
are better equipped to meet market needs with our product.
2
Presently,
we have more than 30 distribution partners, including Hebei Hengshui Wei’ er
Trading Company, Hebei Handan An’da Vehicle Trading Co., Ltd., and Kunming
Chibao Automobile Part Co., Ltd, covering a large part of the market in China.
Current
and Future Projects
Our
company's products are developed in accordance with the procedures of the
Quality Management System of the PRC and implemented by our development
department. To date, we have developed and produced 25 go-kart models with
power
displacement from 90 ml to 100 ml, covering the most popular go-kart series
in
the international market. We have also developed several different models of
special purpose mini-vehicles: a mini pickup truck, a mini pesticide spraying
vehicle, minivans and other special purpose mini vehicles. Super mini-cars
have
completed the trial stage, and we are preparing to begin exporting our
super-mini cars to the U.S. in 2008.
We
hold
the intellectual property rights for all of our products, comprised of
thirty-five state patents, including two invention patents and utility patents
and five practical patents. The continuous development and production of new
products has contributed greatly to our economic growth and fuel efficiency
improvement, and has laid a good foundation for future development.
We
will
conduct further research and development of casual sports vehicles and increase
the variety and output of products, making good use of the current growing
international market demands and the prospective new markets in countries such
as China. We also plan to continue research and development of various casual
entertainment sports products and super mini-cars with multi-purpose usage.
The
future development plan of products is as follows:
1.
Further broaden the adaptability of products and enhance the specification
and
variety of products, improve the suspension system, driving structure, power
performance, and emission standards in order to improve the overall product
performance. New materials and technology will be focused on lightening the
car
body, updating the vehicle appearance, and implementing a new vehicle structure.
We plan to present over ten new vehicle models annually to stay current with
market changes.
2.
Increase product output to keep pace with new technology and work towards
technical and quality improvement of our go-karts. We hope to achieve annual
production capacity of 30,000 go-karts, and to obtain the biggest market share
in China. We will further enhance the research and development and production
of
super mini-cars and make good use of PRC state policy support in order to
steadily increase the economic profitability of our company.
Employees
As
of
December 31, 2007, Kandi had a total of 578 employees, of which 570 were
full-time employees. None of our employees are represented by any collective
bargaining agreements.
3
Environmental
Matters
None.
Principal
Executive Offices
Our
principal executive office is located in the Jinhua City Industrial Zone in
Jinhua, Zhejiang Province, 321016 and our telephone number (86-0579)
88-2239700.
| Item 1A. |
Risk
Factors.
|
You
should carefully consider the risks described below together with all of the
other information included in this report before making an investment decision
with regard to our securities. The statements contained in or
incorporated into this offering that are not historic facts are forward-looking
statements that are subject to risks and uncertainties that could cause actual
results to differ materially from those set forth in or implied by
forward-looking statements. If any of the following risks actually
occurs, our business, financial condition or results of operations could be
harmed. In that case, the trading price of our common stock could decline,
and
you may lose all or part of your investment.
Risks
Relating to Our Overall Business Operations
Our
limited operating history may not serve as an adequate basis to judge our future
prospects and results of operations.
We
have a
limited operating history, and have been in operation only since
2003. This limited operating history and the unpredictability of the
machinery production industry, makes it difficult for investors to evaluate
our
businesses and future operating results. An investor in our securities must
consider the risks, uncertainties and difficulties frequently encountered by
companies in new and rapidly evolving markets. The risks and
difficulties we face include challenges in accurate financial planning as a
result of limited historical data and the uncertainties resulting from having
had a relatively limited time period in which to implement and evaluate our
business strategies as compared to older companies with longer operating
histories.
We
may not be able to maintain and/or comply with all applicable government
regulation.
We
are
subject to extensive regulation by the central government and by the regional
and local authorities of the People’s Republic of China, where our business
operations take place. We believe that we are currently in substantial
compliance with all material governmental laws and regulations and maintain
all
material permits and licenses relating to our operations. Nevertheless, there
can be no assurance that we will continue to be in substantial compliance with
current laws and regulations, or whether we will be able to comply with any
future laws and regulations. To the extent that new regulations are adopted,
we
will be required to conform its activities in order to comply with such
regulations. Failure to comply with applicable laws and regulations could
subject us to civil remedies, including fines, injunctions, recalls or seizures,
as well as potential criminal sanctions, which could have a material adverse
effect on its business, operations and finances.
Compliance
with environmental regulations can be expensive, and noncompliance with these
regulations may result in adverse publicity and potentially significant monetary
damages and fines.
As
our
business operations generate noise, waste water, gaseous and other industrial
wastes, we are required to comply with all national and local regulations
regarding protection of the environment. We are in compliance with present
environmental protection requirements and have all necessary environmental
permits to conduct our business. However, if more stringent regulations are
adopted in the future, the costs of compliance with these new regulations could
be substantial. We believe that we have all necessary permits to conduct our
business as it is presently conducted. If we fail to comply with present or
future environmental regulations, however, we may be required to pay substantial
fines, suspend production or cease operations. We use, generate and discharge
toxic, volatile and otherwise hazardous chemicals and wastes in our research
and
development and manufacturing activities. Any failure by us to control the
use
of, or to restrict adequately the discharge of, hazardous substances could
subject us to potentially significant monetary damages and fines or suspensions
in our business operations. Certain laws, ordinances and regulations could
limit
our ability to develop, use, or sell our products.
4
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.
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.
5
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.
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.
6
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.
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.
7
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.
8
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.
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.
9
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.
10
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.
11
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.
Past
Activities Of Stone Mountain and Our Affiliates May Lead to Future
Liability.
Prior
to
our Stone Mountain’s 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.
12
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.
| Item 1B. |
Unresolved
Staff Comments.
|
Not
applicable.
| Item 2. |
Properties.
|
All
land
in the PRC is owned by the government and cannot be sold to any individual
or
entity. Instead, the government grants or allocates landholders a “land use
right.” There are four methods to acquire land use rights:
|
|
·
|
grant
of the right to use land;
|
|
|
·
|
assignment
of the right to use land;
|
|
|
·
|
lease
of the right to use land; and
|
|
|
·
|
allocated
land use rights
|
In
comparison with Western common law concepts, granted land use rights are similar
to life estates and allocated land use rights are in some way similar to
leaseholds.
Granted
land use rights are provided by the government in exchange for a grant fee,
and
carry the rights to pledge, mortgage, lease, and transfer within the term of
the
grant. Land is granted for a fixed term - generally 70 years for residential
use, 50 years for industrial use, and 40 years for commercial and other use.
The
term is renewable in theory. Unlike the usual case in Western nations, granted
land must be used for the specific purpose for which it was
granted.
Allocated
land use rights are generally provided by the government for an indefinite
period (usually to state-owned entities) and cannot be pledged, mortgaged,
leased, or transferred by the user. Furthermore, allocated land can be reclaimed
by the government at any time. Allocated land use rights may be converted into
granted land use rights upon the payment of a grant fee to the
government.
Kandi
has
the following granted land use rights:
|
Location
|
Area (square
meters)
|
Term and Expiration
|
|
Certificate No.
|
||
|
Zhejiang
Jinhua Industrial Park
|
72900.88
|
Nov 13, 2002 - Nov 13, 2052
|
|
10-15-0-203-1
|
||
|
Zhejiang
Jinhua Industrial Park
|
39490.64
|
Nov 13, 2002 - Nov 13, 2052
|
10-15-0-203-2
|
| Item 3. |
Legal
Proceedings. None.
|
| Item 4. |
Submission
of Matters to a Vote of Security
Holders.
|
No
matters were submitted to a vote of our security holders during the fourth
quarter of the fiscal year ended December 31, 2007.
13
PART
II
| Item 5. |
Market
for Common Equity, Related Stockholder Matters and Issuer Purchases
of
Equity Securities.
|
Market
Information
Our
common stock began trading on the OTCBB under the symbol “KNDI” on July 6, 2007.
Prior to this date, no liquid market had existed for our common stock. Our
common stock began trading on the NASDAQ Capital Market on March 18, 2008.
The
following are the high and low bid prices for our common stock for each quarter
from July 6, 2007 to December 31, 2007.
|
HIGH
|
LOW
|
||||||
|
FISCAL
2007
|
|||||||
|
Fourth
Quarter (through December 31, 2007)
|
$
|
5.40
|
$
|
3.90
|
|||
|
Third
Quarter (through September 30, 2007)
|
$
|
4.25
|
$
|
2.10
|
|||
Holders
of Common Stock
As
of
December 31, 2007, there are approximately 132 record holders of our common
stock.
Dividends
We
have
never paid a dividend on our common stock. At present, we intend to retain
any
earnings for use in our business and do not anticipate paying cash dividends
in
the foreseeable future.
| Item 6. |
Selected
Financial Data.
|
Not
applicable.
| Item 7. |
Management’s
Discussion and Analysis of Financial Condition and Results of
Operation.
|
The
following discussion should be read in conjunction with the information
contained in the consolidated financial statements of the Company and the notes
thereto appearing elsewhere herein. Readers should carefully review the risk
factors disclosed in this Form 10-K and other documents filed by the Company
with the SEC.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
This
section should be read together with the Summary of Significant Accounting
Policies in the attached consolidated financial statements included in this
report.
Estimates
affecting accounts receivable and inventories
The
preparation of our consolidated financial statements requires management to
make
estimates and assumptions that affect our reporting of assets and liabilities
(and contingent assets and liabilities). These estimates are particularly
significant where they affect the reported net realizable value of the Company’s
accounts receivable and inventories.
14
Inventories
are stated at the lower of cost, determined on a weighted average basis, or
net
realizable value. Net realizable value is the estimated selling price in the
ordinary course of business less the estimated cost of completion and the
estimated costs necessary to make the sale. When
inventories are sold, their carrying amount is charged to expense in the year
in
which the revenue is recognized. Write-downs for declines in net realizable
value or for losses of inventories are recognized as an expense in the year
the
impairment or loss occurs. There were no declines in net realizable value of
inventory for the years ended of December 31, 2007 and 2006.
While
the
Company currently believes that there is little likelihood that actual results
will differ materially from these current estimates, if customer demand for
our
products decreases significantly in the near future, or if the financial
condition of our customers deteriorates in the near future, the Company could
realize significant write downs for slow-moving inventories or uncollectible
accounts receivable.
Policy
affecting recognition of revenue
Among
the
most important accounting policies affecting our consolidated financial
statements is our policy of recognizing revenue in accordance with the SEC’s
Staff Accounting Bulletin (“SAB”) No. 104. Under this policy, all of the
following criteria must be met in order for us to recognize
revenue:
1. Persuasive
evidence of an arrangement exists;
2. Delivery
has occurred or services have been rendered;
3. The
seller’s price to the buyer is fixed or determinable; and
4. Collectibility
is reasonably assured.
The
majority of the Company’s revenue results from sales contracts with
distributors. Revenue is recorded upon the shipment of goods. Management
conducts credit background checks for new customers as a means to reduce the
subjectivity of assuring collectibility. Based on these factors, the Company
believes that it can apply the provisions of SAB 104 with minimal
subjectivity.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
which
provides enhanced guidance for using fair value to measure assets and
liabilities. SFAS No. 157 provides a common definition of fair value and
establishes a framework to make the measurement of fair value in generally
accepted accounting principles more consistent and comparable. SFAS No. 157
also
requires expanded disclosures to provide information about the extent to
which
fair value is used to measure assets and liabilities, the methods and
assumptions used to measure fair value, and the effect of fair value measures
on
earnings. SFAS No. 157 is effective for financial statements issued in fiscal
years beginning after November 15, 2007 and to interim periods within those
fiscal years. The Company is currently in the process of evaluating the effect,
if any, the adoption of SFAS No. 157 will have on its consolidated results
of
operations, financial position, or cash flows.
In
February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option
for
Financial Assets and Financial Liabilities — including an amendment of FASB
Statement No. 115 (“FAS 159”). FAS 159, which becomes effective for the Company
on January 1, 2008. This standard permits companies to choose to measure many
financial instruments and certain other items at fair value and report
unrealized gains and losses in earnings. Such accounting is optional and is
generally to be applied instrument by instrument. The Company does not
anticipate that election, if any, of this fair-value option will have a material
effect on the consolidated results or operations or financial
position.
15
In
December 2007, the FASB issued SFAS No. 141 (R), Business Combinations, and
SFAS
No.160, Non-controlling Interests in Consolidated Financial Statements. SFAS
No.
141 (R) requires an acquirer to measure the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the acquired entity
at
their fair values on the acquisition date, with goodwill being the excess value
over the net identifiable assets acquired. SFAS No.160 clarifies that a
non-controlling interest in a subsidiary should be reported as equity in the
consolidated financial statement. The calculation of earnings per share will
continue to be based on income amounts attributable to the parent. SFAS No.141
(R) and SFAS No.160 are effective for financial statements issued for fiscal
years beginning after December 15, 2008. Early adoption is prohibited. We have
not yet determined the effect on our consolidated financial statements, if
any,
upon adoption of SFAS No.141 (R) or SFAS No. 160. We are aware that our
accounting for minority interest will change and we are considering those
effects now but believe the effects will only be a reclassification of minority
interest from mezzanine equity to our stockholder's equity section in the
balance sheet; in any case, we do not believe the implementation of SFAS 160
will be material to our financial position. SFAS 141(R) will significantly
affect the accounting for future business combinations and we will determine
the
accounting as new combinations are determined.
RESULTS
OF OPERATIONS – YEAR ENDED DECEMBER 31, 2007 AS COMPARED TO YEAR ENDED
DECEMBER 31, 2006
The
following table sets forth the amounts and the percentage relationship to
revenues of certain items in our consolidated statements of income for the
years
ended December 31, 2007 and 2006:
For
The Years Ended
December
31, 2007 and 2006
|
|
2007
|
2006
|
Comparisons
|
||||||||||||||||
|
|
Amount
|
% of
Revenue
|
Amount
|
% of
Revenue
|
Growth in
Amount
|
Increase
in %
|
|||||||||||||
|
REVENUES
|
$
|
34,702,168
|
100.0
|
%
|
$
|
14,480,836
|
100.0
|
%
|
$
|
20,221,332
|
139.6
|
%
|
|||||||
|
COST
OF GOODS SOLD
|
27,235,275
|
78.5
|
%
|
11,884,462
|
82.1
|
%
|
15,350,813
|
129.2
|
%
|
||||||||||
|
GROSS
PROFIT
|
7,466,893
|
21.5
|
%
|
2,596,374
|
17.9
|
%
|
4,870,519
|
187.6
|
%
|
||||||||||
|
Research
and Development
|
112,489
|
0.3
|
%
|
103,785
|
0.7
|
%
|
8,704
|
8.4
|
%
|
||||||||||
|
Selling
and Marketing
|
1,137,493
|
3.3
|
%
|
289,408
|
2.0
|
%
|
848,085
|
293.0
|
%
|
||||||||||
|
General
and Administration
|
1,027,843
|
3.0
|
%
|
411,306
|
2.8
|
%
|
616,537
|
149.8
|
%
|
||||||||||
|
INCOME
FROM OPERATIONS
|
5,189,068
|
15.0
|
%
|
1,791,875
|
12.4
|
%
|
3,397,193
|
189.6
|
%
|
||||||||||
|
Government
Grants
|
15,430
|
0.0
|
%
|
97,806
|
0.7
|
%
|
82,376
|
-84.2
|
%
|
||||||||||
|
Forfeiture
of Customer Deposits
|
505,207
|
1.5
|
%
|
29,324
|
0.2
|
%
|
475,883
|
1,622.8
|
%
|
||||||||||
|
Forgiveness
of debt
|
161,835
|
0.5
|
%
|
-
|
0.0
|
%
|
161,834
|
100
|
%
|
||||||||||
|
Other
(Expense) Income, Net
|
(8,650
|
)
|
0.0
|
%
|
(3,725
|
)
|
0.0
|
%
|
-4,925
|
132.2
|
%
|
||||||||
|
Interest
Expense, Net
|
(1,206,299
|
)
|
-3.5
|
%
|
(836,056
|
)
|
-5.8
|
%
|
-370,243
|
44.3
|
%
|
||||||||
|
INCOME
BEFORE INCOME TAX
|
4,656,591
|
13.4
|
%
|
1,079,224
|
7.5
|
%
|
3,577,367
|
331.5
|
%
|
||||||||||
|
INCOME
TAX
|
372,505
|
1.1
|
%
|
(69
|
)
|
0.0
|
%
|
372,574
|
539,962.3
|
%
|
|||||||||
|
NET
INCOME
|
$
|
5,029,096
|
14.5
|
%
|
$
|
1,079,155
|
7.5
|
%
|
$
|
3,950,687
|
366.0
|
%
|
|||||||
16
Revenues
Revenues
for the year ended 2007 were $34,702,168, versus $14,480,836 in revenues for
the
year ended 2006, an increase of 140%.
The
increase in revenues was mainly due to the consequent results of successful
market penetration and mass production achievements in the year 2007. In 2006,
we were still producing in small quantities and promotion of our products had
just begun.
Cost
of Goods Sold and Gross Profit
Cost
of
goods sold was $27,235,275 for the year ended December 31, 2007, compared to
$11,884,462 for the year ended December 31, 2006. Expressed as a percentage
of
revenues, cost of goods sold was 78.5% for the year ended December 31, 2007,
compared to 82.1% for the year ended December 31, 2006. The similarity in cost
of goods sold as a percentage of revenues reflected a continued focus on
operating cost management, sourcing efficiencies and operation
efficiencies.
The
cost
of goods sold of products increased by 129% in the year ended December 31,
2007
compared to the year ended December 31, 2006. These increases are attributed
to
our increase in sales.
Gross
profit increased $4,870,519, or 188%, for the year ended December 31, 2007
over
the year ended December 31, 2006. This increase reflected higher net sales,
improved margins and operating efficiencies generally across our sports vehicles
businesses.
Selling
and Marketing
Selling
and marketing expenses, including distribution expenses, increased from $289,408
in the year ended December 31, 2006 to $1,137,493 in the year of 2007,
representing
a 293% increase. The increase in selling and marketing expenses was primarily
due to the following factors:
|
§
|
Shipping
expenses increased by 430% in 2007 compared to 2006. The increases
resulted primarily from the growth in sales volume in the U.S.
|
|
§
|
Custom
claim expenses and export inspection fees also grew in line with
the
increase of sales volume.
|
|
§
|
Promotion
expenses were increased significantly to launch new products and
increase
market awareness of our brand and products.
|
General
and Administrative
General
and administrative expenses grew from $411,306 in 2006 to $1,027,843 in 2007,
a
150% increase. The increase was primarily due to the addition of several
managers and technical experts.
Research
and Development
For
the
year ended December 31, 2007, research and development expenses increased $8,704
from $112,489 to $103,785 relative to the year ended December 31, 2006. The
increase was attributed to the significant research and development expenses
required in the initial stage of product development, while such expenses were
gradually increased due to improvements on its existing products.
17
Interest
Expense, Net
Net
interest expense was $1,206,299 for the year ended December 31, 2007, compared
to $836,056 for the year ended December 31, 2006, an increase of 46.4%. This
increase was mainly the result of an increase in short-term loans taken to
satisfy increased working capital needs for the expansion in production volume
and the appreciation of the Renminbi (RMB) relative to U.S dollars that
triggered a foreign currency exchange loss.
Other
Income (Expenses)
Other
income (including government grants, forgiveness of debt and forfeiture of
customer deposits) were $637,822 for the year ended December 31, 2007, compared
to $123,405 for the year ended December 31, 2006. A major contributing factor
was the significant increase in the forfeiture of customer deposits.
Income
Taxes
In
accordance with the relevant tax laws and regulations of the 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 2006. Dingji is a subsidiary
of
the Company and its applicable corporate income tax rate is 33%.
18
On
March
16, 2007, the National People’s Congress of the PRC determined to adopt a new
corporate income tax law in its fifth plenary session. The new corporate income
tax law unifies the application scope, tax rate, tax deduction and preferential
policy for both domestic and foreign-invested enterprises. The new
corporate income tax law took effect on January 1, 2008. However, a
foreign-invested company which registered with the PRC government before March
16, 2007 may still apply the former corporate income tax rule. Thus, our company
is exempt from corporate income tax for the fiscal year 2007 and 2008 and then
is entitled to a 50% tax reduction for 2009, 2010 and 2011. As a result, the
Company had an income tax benefit of $(372,505) at December 31, 2007 and there
was a $69 income tax expense for 2006. For further details, please see Note
11
of the financial statements included in this report.
Net
Income
Net
income increased approximately 466% from $1,079,155 for the year ended December
31, 2006 to $5,029,096 for the year ended December 31, 2007. This
increase in net income was due primarily to the increase in our sales revenue
especially because of the surge in demand for our sports vehicles, while the
ratio of cost of sales to sales revenue remained stable during the
period.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
Flow
Net
cash
flow provided by operating activities was $7,238,116 for the year ended December
31, 2007 as compared to $(1,590,589) in cash flow used in operating
activities in the same period of 2006. The increase of net cash flow used
in operating activities was mainly due to the increase in sales revenue.
Net
cash
flow used in investing activities was $17,264,696 for the year ended December
31, 2007 as compared to $1,172,962 in cash flow used by investing activities
in
the same period of 2006. Cash flow used in investing activities in 2007 was
for
the deposit for the acquisition of Kandi Special Vehicles co., Ltd. and the
purchase of associated machinery and equipment. Also see note 13 of the
financial statements included in this report.
Net
cash
flow provided by financing of net cash used in financing activities was
$9,652,942 in the year ended December 31, 2007, as compared to $2,557,900 in
the
same period in 2006. The increase in net cash flow provided by financing
activities was mainly due to the receipt of loans. Those loans are used for
the
company to expand their output and distributions in the next year.
Working
Capital
The
Company’s working capital increased by $2,567,469 to $294,623 at December 31,
2007, as compared to a working capital deficit of $2,272,846 at December 31,
2006. The increase in working capital was mainly caused by the
Company’s expanded capacity in 2007.
The
Company currently generates its cash flow through operations and the Company
believes that its cash flows generated from operations will be sufficient to
sustain operations for the next twelve months. Also, from time to
time, the Company may require extra funding through financing activities and
investments for expansion. Also, from time to time, the Company may
consider new expansion opportunities for which our management may consider
seeking external funding and financing. However, as of December 31,
2007, the Company did not have any plans for additional capital through external
funding and financing.
19
Contractual
Obligations
We
have
certain fixed contractual obligations and commitments that include future
estimated payments. Changes in our business needs, cancellation provisions,
changing interest rates, and other factors may result in actual payments
differing from the estimates. We cannot provide certainty regarding the timing
and amounts of payments. We have presented below a summary of the most
significant assumptions used in our determination of amounts presented in the
tables, in order to assist in the review of this information within the context
of our consolidated financial position, results of operations, and cash
flows.
The
following tables summarize our contractual obligations as of December 31, 2007,
and the effect these obligations are expected to have on our liquidity and
cash
flows in future periods.
|
|
Payments Due by Period
|
|||||||||
|
|
Total
|
Less
than 1
Year
|
1
- 3 Years
|
|||||||
|
Contractual
Obligations:
|
|
|
|
|||||||
|
Bank
Indebtedness
|
$
|
22,373,807
|
$
|
22,373,807
|
$
|
-
|
||||
|
Other
Indebtedness
|
12,324,047
|
12,324,047
|
-
|
|||||||
|
Operating
Leases
|
34,265
|
18,690
|
15,575
|
|||||||
|
Total
Contractual Obligations:
|
$
|
34,732,119
|
$
|
34,716,544
|
$
|
15,575
|
||||
Bank
indebtedness consists of secured and unsecured borrowings from Industrial and
Commercial Bank of China Limited, ICBC Jinhua Economic Exploration Zone Branch,
Shanghai Pudong Development Bank and Commercial Bank, Jiangnan
Branch.
Other
indebtedness includes short-term loans and loans from individuals.
Operating
leases consists of outstanding commitments with respect to non-cancelable
operating leases for real estate.
Off-balance
Sheet Arrangements
Other
than the arrangement described above, we have not entered into any other
financial guarantees or other commitments to guarantee the payment obligations
of any third parties. We have not entered into any derivative contracts for
currency hedges, interest rate hedges or instruments that are indexed to our
shares and classified as shareholder’s equity or that are not reflected in our
consolidated financial statements. Furthermore, we do not have any retained
or
contingent interest in assets transferred to an unconsolidated entity that
serves as credit, liquidity or market risk support to such entity. We do not
have any variable interest in any unconsolidated entity that provides financing,
liquidity, market risk or credit support to us or engages in leasing, hedging
or
research and development services with us.
20
|
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market
Risk.
|
Not
applicable.
|
Item
8.
|
Financial
Statements and Supplementary
Data
|
21
KANDI
TECHNOLOGIES, CORP.
(FORMERLY
STONE MOUNTAIN RESOURCES, INC.)
AND
SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
FOR
THE YEARS ENDED
DECEMBER
31, 2007 AND 2006
KANDI
TECHNOLOGIES, CORP.
(FORMERLY
STONE MOUNTAIN RESOURCES, INC.)
AND
SUBSIDIARIES
CONTENTS
|
PAGE F-i
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
|
|
(b)
|
PAGES F-1 – F-2
|
CONSOLIDATED
BALANCE SHEETS AS OF DECEMBER 31, 2007 AND 2006
|
|
(c)
|
PAGE F-3
|
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE YEARS ENDED
DECEMBER
31, 2007 AND 2006
|
|
(d)
|
PAGE F-4
|
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER
31, 2007 AND 2006
|
|
(e)
|
PAGES F-5 – F-6
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2007 AND
2006
|
|
(f)
|
PAGES F-7 – F-26
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER
31, 2007
AND 2006
|
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 “Controls
and
Procedures”
in the Annual Report on Form 10-K 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
F-i
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
|
25,316,938
|
9,930,803
|
|||||
|
TOTAL
ASSETS
|
$
|
55,630,355
|
$
|
37,060,591
|
|||
F-1
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
F-2
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
F-3
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
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
||||||||
|
|
|
Common
Stock
|
|
Additional
|
|
Retained
|
|
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
F-4
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
F-5
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
F-6
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
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.
(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:
F-7
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.
(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.
F-8
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)
(e)
Fair
Value of Financial Instruments
The
Company’s financial instruments include cash and cash equivalents, restricted
cash, accounts receivable, notes receivable, due from related parties,
prepayments and prepaid expenses, other receivables, due from employees,
accounts payable, due to employees, other payables and accrued liabilities,
notes payable, short-term band loans, and customer deposits. Management has
estimated that the carrying amount approximates fair value due to their
short-term nature.
(f) Cash
and
Cash Equivalents
For
financial reporting purposes, the Company considers all highly liquid
investments purchased with original maturity of three months or less to be
cash
equivalents.
Restricted
cash at December 31, 2007 and 2006 represents time deposits on account to secure
a short-term loan and notes payable. Also see Notes 8 and 9.
(g) Inventories
Inventories
are stated at the lower of cost or net realizable value (market value). The
cost
of raw materials is determined on the basis of weighted average. The cost of
finished goods is determined on the weighted average basis and is comprised
of
direct materials, direct labor and an appropriate proportion of
overhead.
Net
realizable value is based on estimated selling prices less any further costs
expected to be incurred for completion and disposal.
(h)
Accounts
Receivable
Accounts
receivable are recognized and carried at original invoice amount less allowance
for any uncollectible amounts. An estimate for doubtful accounts is made when
collection of the full amount is no longer probable. At December 31, 2007 and
2006, the Company has an allowance for doubtful accounts of $4,819 and $0,
respectively.
(i)
Prepayments
Prepayments
represent cash paid in advance to suppliers for raw materials purchases.
F-9
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)
(j)
Plant
and Equipment
Plant
and
equipment are carried at cost less accumulated depreciation and amortization.
Depreciation is provided over their estimated useful lives, using the
straight-line method. Leasehold improvements are amortized over the life of
the
asset or the term of the lease, whichever is shorter. Estimated useful lives
are
as follows:
|
Buildings
|
30
years
|
|
|
Machinery
|
10
years
|
|
|
Motor
vehicles
|
5
years
|
|
|
Office
equipment
|
5
years
|
|
|
Patterns
|
5
years
|
The
cost
and related accumulated depreciation of assets sold or otherwise retired are
eliminated from the accounts and any gain or loss is included in the statement
of income. The cost of maintenance and repairs is charged to expense as
incurred, whereas significant renewals and betterments are capitalized. Also
see
note 7.
(k) Construction
in Progress
Construction
in progress represents direct costs of construction or the acquisition cost
of
buildings or machinery and design fees. Capitalization of these costs ceases
and
the construction in progress is transferred to plant and equipment when
substantially all the activities necessary to prepare the assets for their
intended use are completed. No depreciation is provided until the assets are
completed and ready for their intended use.
(l) Land
Use
Rights
According
to the laws of China, land
in
the PRC is owned by the Government and cannot be sold to an individual or a
company. However, the government grants the user a “land use right” to use
the land.
The land
use rights granted to the Company are being amortized using the straight-line
method over the lease term of fifty years.
(m) Impairment
of Long-Term Assets
Long-term
assets of the Company are reviewed annually as to whether their carrying value
has become impaired, pursuant to the guidelines established in SFAS No.
144. The
Company considers assets to be impaired if the carrying value exceeds the future
projected cash flows from the related operations. The Company also
re-evaluates the periods of amortization to determine whether subsequent events
and circumstances warrant revised estimates of useful lives. There were no
impairments in 2007 and 2006.
F-10
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)
(n)
Revenue Recognition
Revenue
represents the invoiced value of goods sold, recognized upon the shipment of
goods to customers. Revenue is recognized when all of the following criteria
are
met:
|
à
|
Persuasive
evidence of an arrangement exists,
|
|
à
|
Delivery
has occurred or services have been
rendered,
|
|
à
|
The
seller's price to the buyer is fixed or determinable,
and
|
|
à
|
Collectibility
is reasonably assured.
|
The
majority of the Company’s revenue results from sales contracts with distributors
and revenue are recorded upon the shipment of goods. Management conducts credit
background checks for new customers as a means to reduce the subjectivity of
assuring collectibility.
(o) Government
Grants
Grants
received from the PRC Government for assisting in the Company’s technical
research and development efforts are netted against the relevant research and
development costs incurred when the proceeds are received or
collectible.
During
2007 and 2006, $15,430 and $97,806 was received from the PRC Government as
a
reward for the Company’s contribution to the local economy.
(p) Research
and Development
Expenditures
relating to the development of new products and processes, including significant
improvements to existing products are expensed as incurred. Research and
development expenses were $112,489 and $103,785 for the years ended December
31,
2007 and 2006, respectively.
(q) Retirement
Benefits
Retirement
benefits in the form of contributions under defined contribution retirement
plans to the relevant authorities are charged as expenses as incurred. The
retirement benefits expense for 2007 and 2006 are $79,628 and $71,441
respectively and are included in general and administrative
expenses.
F-11
KANDI
TECHNOLOGIES, CORP.
(FORMERLY
STONE MOUNTAIN RESOURCES, INC.)
AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
NOTE
2 – SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(r) Taxes
Deferred
tax assets and liabilities are recognized for the future tax consequence
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to be
applied to taxable income in the years in which those temporary differences
are
expected to reverse. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the statement of income in the period
that
includes the enactment date. A valuation allowance is provided for deferred
tax
assets if it is more likely than not these items will either expire before
the
Company is able to realize their benefits, or that future deductibility is
uncertain.
(s) Foreign
Currency Translation
The
accompanying consolidated financial statements are presented in United States
dollars. The functional currency of the Company is the Renminbi (RMB). Capital
accounts of the consolidated financial statements are translated into United
States dollars from RMB at their historical exchange rates when the capital
transactions occurred.
Assets
and liabilities are translated at the exchange rates as of balance sheet date.
Income and expenditures are translated at the average exchange rate of the
year.
|
2007
|
2006
|
||||||
|
Year
end RMB: US$ exchange rate
|
7.3141
|
7.8087
|
|||||
|
Average
yearly RMB: US$ exchange rate
|
7.5614
|
7.9395
|
|||||
(t) 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 gain, net of tax.
(u)
Segments
The
Company operates in one business segment, developing, manufacturing, and
commercializing all-terrain
vehicles, go-karts, and special automobiles related products.
Also see
note 15.
(v)
Earnings Per Share
Basic
earnings per share is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding during
the period. Diluted earnings 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
potential common shares had been issued and if the additional common shares
were
dilutive. There were no potentially dilutive securities for 2007 and
2006.
F-12
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)
|
(w)
|
Recent
Accounting Pronouncements
|
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," which
provides enhanced guidance for using fair value to measure assets and
liabilities. SFAS No. 157 provides a common definition of fair value and
establishes a framework to make the measurement of fair value in generally
accepted accounting principles more consistent and comparable. SFAS No. 157
also
requires expanded disclosures to provide information about the extent to which
fair value is used to measure assets and liabilities, the methods and
assumptions used to measure fair value, and the effect of fair value measures
on
earnings. SFAS No. 157 is effective for financial statements issued in fiscal
years beginning after November 15, 2007 and to interim periods within those
fiscal years. The Company is currently in the process of evaluating the effect,
if any, the adoption of SFAS No. 157 will have on its consolidated results
of
operations, financial position, or cash flows.
In
February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option
for
Financial Assets and Financial Liabilities −− including an amendment of FASB
Statement No. 115 (“FAS 159”). FAS 159, which became effective for the Company
on January 1, 2008. This standard permits companies to choose to measure many
financial instruments and certain other items at fair value and report
unrealized gains and losses in earnings. Such accounting is optional and is
generally to be applied instrument by instrument. The Company does not
anticipate that election, if any, of this fair-value option will have a material
effect on the consolidated results or operations or financial
position.
In
December 2007, the FASB issued SFAS No. 141 (R), Business Combinations, and
SFAS
No.160, Non-controlling Interests in Consolidated Financial Statements. SFAS
No.
141 (R) requires an acquirer to measure the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the acquire at their
fair values on the acquisition date, with goodwill being the excess value over
the net identifiable assets acquired. SFAS No.160 clarifies that a
non-controlling interest in a subsidiary should be reported as equity in the
consolidated financial statement. The calculation of earnings per share will
continue to be based on income amounts attributable to the parent. SFAS No.141
(R) and SFAS No.160 are effective for financial statements issued for fiscal
years beginning after December 15, 2008. Early adoption is prohibited. We have
not yet determined the effect on our consolidated financial statements, if
any,
upon adoption of SFAS No.141 (R) or SFAS No. 160. We are aware that our
accounting for minority interest will change and we are considering those
effects now but believe the effects will only be a reclassification of minority
interest from mezzanine equity to our stockholder's equity section in the
balance sheet, in any case we do not believe the implementation of SFAS 160
will
be material to our financial position, SFAS 141(R) will significantly affect
the
accounting for future business combinations and we will determine the accounting
as new combinations are determined.
The
implementation of the above pronouncements is not expected to have a material
effect on the Company’s consolidated financial statements or
disclosures.
F-13
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
3 – INVENTORIES
Inventories
are summarized as follows:
|
December 31,
2007
|
December 31,
2006
|
||||||
|
Raw
materials
|
$
|
1,534,448
|
$
|
2,186,339
|
|||
|
Work-in-progress
|
1,402,073
|
2,576,071
|
|||||
|
Finished
goods
|
357,008
|
700,769
|
|||||
|
Total
inventories
|
$
|
3,293,529
|
$
|
5,463,179
|
|||
NOTE
4 – NOTES
RECEIVABLE
Notes
receivable consist of the following:
|
December 31,
2007
|
December 31,
2006
|
||||||
|
Notes
receivable from unrelated companies:
|
|||||||
|
Due
June 27, 2008
|
$
|
47,853
|
$
|
-
|
|||
|
Due
Dec 25, 2008
|
13,672
|
-
|
|||||
|
Due
March 25, 2008 (subsequently settled on its due date)
|
957,056
|
-
|
|||||
|
Due
Jan 4, 2008 (subsequently settled on its due date)
|
205,083
|
-
|
|||||
|
Due
March 19, 2007 (subsequently settled on its due date)
|
-
|
97,327
|
|||||
|
Due
May 30, 2007 (subsequently settled on its due date)
|
-
|
333,484
|
|||||
|
Total
|
$
|
1,223,664
|
$
|
430,811
|
|||
Notes
receivable from unrelated companies are interest-free and
unsecured.
NOTE
5 – DUE
TO/FROM RELATED PARTIES
(I)
Due
From Related Parties
|
2007
|
2006
|
||||||
|
Hu
Wangyuan(a)
|
$
|
-
|
$
|
21,015
|
|||
|
Hu
Xiaoming(b)
|
-
|
10,886
|
|||||
|
Total
due from related parties
|
$
|
-
|
$
|
31,901
|
|||
(II)
Due
To Employees
|
2007
|
2006
|
||||||
|
Current
|
$
|
310
|
$
|
-
|
|||
|
Total
due from employees(c)
|
$
|
310
|
$
|
-
|
|||
(II)
Due
From Employees
|
2007
|
2006
|
||||||
|
Current
|
$
|
91,590
|
$
|
184,221
|
|||
|
Total
due from employees(c)
|
$
|
91,590
|
$
|
184,221
|
|||
F-14
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
5 – DUE
TO/FROM RELATED PARTIES (CONTINUED)
| (a) |
Hu
Wangyuan is the chairman of Dingji, a subsidiary of the Company.
The
balance as of December 31, 2006 represented advances, which were
unsecured, interest-free and collected in
2007.
|
|
(b)
|
Hu
Xiaoming is the chairman of the Company. The balance as of December
31,
2006 represented a traveling advance, which was unsecured, interest-free
and collected in 2007.
|
|
(c)
|
Due
to employees are interest-free, unsecured and have no fixed repayment
term.
|
|
(d)
|
Due
from employees are interest-free, unsecured and have no fixed repayment
term. The
Company provides these advances for business-related purposes only,
including for the purchases of raw materials and business-related
travel in the ordinary course of
business.
|
NOTE
6 – LAND
USE RIGHTS
Land
use
rights consist of the following:
|
December
31, 2007
|
December
31,
2006
|
||||||
|
Cost
of land use rights
|
$
|
460,943
|
$
|
460,943
|
|||
|
Less:
Accumulated amortization
|
(75,404
|
)
|
(65,017
|
)
|
|||
|
Land
use rights, net
|
$
|
385,539
|
$
|
395,926
|
|||
During
2006, $165,757 was received from the finance bureau of Jinhua City, Zhejiang
Province, PRC, as compensation due to the delay in completion of the development
of the land by the government. The amount was netted against the original cost
of the land use rights.
Amortization
expense for the years ended December 31, 2007 and 2006 was $10,386 and $9,652,
respectively.
Amortization
expense for the next five years and thereafter is as follows:
|
2008
|
$
|
10,386
|
||
|
2009
|
10,386
|
|||
|
2010
|
10,386
|
|||
|
2011
|
10,386
|
|||
|
2012
|
10,386
|
|||
|
Thereafter
|
333,609
|
|||
|
Total
|
$
|
385,539
|
F-15
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
7 – PLANT
AND EQUIPMENT
Plant
and
equipment consist of the following:
|
December 31,
2007
|
December 31,
2006
|
||||||
|
At
cost:
|
|||||||
|
Buildings
|
$
|
3,911,944
|
$
|
3,371,280
|
|||
|
Machinery
and equipment
|
8,572,451
|
7,955,806
|
|||||
|
Office
equipment
|
103,091
|
81,376
|
|||||
|
Transportation
|
900,644
|
679,554
|
|||||
|
Patterns
|
1,742,124
|
-
|
|||||
|
15,230,254
|
12,088,016
|
||||||
|
Less
: Accumulated depreciation
|
|||||||
|
Buildings
|
(428,834
|
)
|
(289,224
|
)
|
|||
|
Machinery
and equipment
|
(3,520,084
|
)
|
(2,498,695
|
)
|
|||
|
Office
equipment
|
(66,358
|
)
|
(44,115
|
)
|
|||
|
Transportation
|
(190,317
|
)
|
(31,047
|
)
|
|||
|
Patterns
|
(90,959
|
)
|
-
|
||||
|
(4,296,552
|
)
|
(2,863,081
|
)
|
||||
|
Plant
and equipment, net
|
$
|
10,933,702
|
$
|
9,224,935
|
|||
As
of
December 31, 2007, the net book value of plant and equipment pledged as
collateral for bank loans was $1,652,616. Also see Notes 8 and 10
Depreciation
expense for the years ended December 31, 2007 and 2006 was $1,442,867 and
$934,175, respectively.
F-16
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
8 – SHORT
TERM BANK LOANS
Short-term
bank loans consist of the following:
|
December 31,
2007
|
|
December 31,
2006
|
|||||
|
Loans
from ICBC-Exploration Zone Branch
|
|||||||
|
Monthly
interest only payments at 7.29% per annum, due November 24, 2008,
secured
by certain assets owned by the Company.
|
$
|
546,889
|
$
|
-
|
|||
|
|
|||||||
|
Monthly
interest only payments at 6.57% per annum, due April 10, 2008, secured
by
certain assets owned by the Company.
|
683,611
|
-
|
|||||
|
Monthly
interest only payments at 6.57% per annum, due June 5, 2008, secured
by
certain assets owned by the Company.
|
683,611
|
-
|
|||||
|
Monthly
interest only payments at 7.29% per annum, due September 5, 2008,
secured
by certain assets owned by the Company.
|
410,167
|
-
|
|||||
|
Monthly
interest only payments at 7.29% per annum, due September 5, 2008,
secured
by certain assets owned by the Company.
|
369,150
|
-
|
|||||
|
Monthly
interest only payments at 7.29% per annum, due October 16, 2008,
secured
by certain assets owned by the Company.
|
929,711
|
-
|
|||||
|
Monthly
interest only payments at 7.29% per annum, due October 23, 2008,
secured
by certain assets owned by the Company.
|
478,528
|
-
|
|||||
|
Monthly
interest only payments at 5.85% per annum, due June 5, 2007, secured
by
certain assets owned by the Company. (subsequently repaid on its
due
date)
|
1,280,623
|
||||||
|
Monthly
interest only payments at 5.85% per annum, due July 24, 2007, secured
by
certain assets owned by the Company. (subsequently repaid on its
due
date)
|
-
|
384,187
|
|||||
|
Monthly
interest only payments at 6.12% per annum, due September 7, 2007,
secured
by certain assets owned by the Company. (subsequently repaid on its
due
date)
|
-
|
345,768
|
|||||
|
Monthly
interest only payments at 6.12% per annum, due October 17, 2007,
secured
by certain assets owned by the Company. (subsequently repaid on its
due
date)
|
-
|
870,824
|
|||||
|
Monthly
interest only payments at 6.12% per annum, due November 1, 2007,
secured
by certain assets owned by the Company. (subsequently repaid on its
due
date)
|
-
|
448,218
|
|||||
|
Monthly
interest only payments at 6.12% per annum, due November 27, 2007,
secured
by certain assets owned by the Company. (subsequently repaid on its
due
date)
|
-
|
512,249
|
|||||
F-17
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
8 – SHORT TERM BANK LOANS (CONTINUED)
|
December 31,
2007
|
December 31,
2006
|
||||||
|
Loans
from Commercial Bank-Jiangnan Branch
|
|||||||
|
Monthly
interest only payments at 7.58 % per annum, due January 10, 2008,
secured
by certain assets owned by the Company (subsequently repaid on its
due
date)
|
2,734,444
|
-
|
|||||
|
Monthly
interest only payments at 7.67% per annum, due May 10, 2008, secured
by
certain assets owned by the Company.
|
1,367,222
|
-
|
|||||
|
Monthly
interest only payments at 7.254 % per annum, due January 15, 2007,
guaranteed by Jindezhen De'er Investment Co.Ltd and Yongkang Tangxin
Metal
Foundry Company (subsequently repaid on its due date)
|
-
|
2,561,246
|
|||||
|
Monthly
interest only payments at 7.605% per annum, due May 11, 2007 secured
by
certain assets owned by the Company (subsequently repaid on its due
date)
|
-
|
1,280,622
|
|||||
|
Loans
from ICBC-Jinhua Branch
|
|||||||
|
Monthly
interest only payments at 6.88% per annum, due January 18, 2008,
secured
by certain assets owned by the Company. (subsequently repaid on its
due
date)
|
189,753
|
-
|
|||||
|
Monthly
interest only payments at 6.58% per annum, due February 1, 2008,
secured
by certain assets owned by the Company. (subsequently repaid on its
due
date)
|
948,766
|
-
|
|||||
|
Monthly
interest only payments at 6.88% per annum, due March 3, 2008, secured
by
certain assets owned by the Company. (subsequently repaid on its
due
date)
|
858,883
|
-
|
|||||
|
Monthly
interest only payments at 7.88% per annum, due March 21, 2008, secured
by
certain assets owned by the Company. (subsequently repaid on its
due
date)
|
1,098,571
|
-
|
|||||
F-18
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
8 – SHORT
TERM BANK LOANS (CONTINUED)
|
December
31,
2007
|
December
31,
2006
|
||||||
|
Loans
from Huaxia Bank
|
|||||||
|
Monthly
interest only payments at 8.22% per annum, due December 24, 2008.
Guaranteed by Yongkang Tangxian Colour Metal Die-casting
Company.
|
2,734,444
|
-
|
|||||
|
Monthly
interest only payments at 5.83% per annum, due May 19, 2008. And
secured
by restricted cash of the Company.
|
1,503,945
|
-
|
|||||
|
Loans
from China Guangda Bank
|
|||||||
|
Monthly
interest only payments at 7.18% per annum, due August 9, 2008. And
secured
by certain assets owned by the Company. Guaranteed by Nanlong Group
Co.,Ltd & Zhejiang Mengdeli Electric Company.
|
4,101,668
|
-
|
|||||
|
Loans
from Shanghai Pudong Development Bank
|
|||||||
|
Monthly
interest only payments at 6.33 % per annum, due February 14, 2008,
secured
by certain assets owned by the Company. (subsequently repaid on its
due
date)
|
2,734,444
|
-
|
|||||
|
Loans
from Agricultural bank, Yongkang branch secured by account receivable
of
$5,096,049
|
|||||||
|
Monthly
interest only payments at 6.39% per annum, due February 2, 2007
(subsequently repaid on its due date)
|
-
|
330,000
|
|||||
|
Monthly
interest only payments at 6.36063% per annum, due March 12, 2007
(subsequently repaid on its due date)
|
-
|
700,000
|
|||||
|
Monthly
interest only payments at 6.36% per annum, due January 13, 2007
(subsequently repaid on its due date)
|
-
|
450,000
|
|||||
|
Total
|
$
|
22,373,807
|
$
|
9,163,737
|
|||
Interest
expense for short-term loans during 2007 and 2006 were $1,103,489 and $459,948,
respectively.
F-19
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.
F-20
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 (CONTINUED)
Restricted
cash of $10,801,055 is held as collateral for the following notes payable at
December 31, 2007:
|
Due
January 26, 2008 (subsequently settled on its due date)
|
$
|
1,640,667
|
||
|
Due
January 30, 2008 (subsequently settled on its due date)
|
546,889
|
|||
|
Due
February 6, 2008 (subsequently settled on its due date)
|
1,777,389
|
|||
|
Due
February 20, 2008 (subsequently settled on its due date)
|
1,367,222
|
|||
|
Due
February 20, 2008 (subsequently settled on its due date)
|
1,367,222
|
|||
|
Due
March 20, 2008 (subsequently settled on its due date)
|
957,055
|
|||
|
Due
April 17, 2008
|
683,611
|
|||
|
Due
April 23, 2008
|
1,093,778
|
|||
|
Due
June 27, 2008
|
683,611
|
|||
|
Due
September 18, 2008
|
683,611
|
|||
|
Total
|
$
|
10,801,055
|
NOTE
10 – LONG
TERM DEBT
Long-term
debt consists of the following:
|
December
31,
2007
|
December
31,
2006
|
||||||
|
Loans
from Huaxia bank Hangzhou Jianguo branch, due November 22, 2007,
quarterly
interest only payments at 6.336% per annum, secured by the assets
owned by
the Company (subsequently settled on its due date)
|
$
|
-
|
$
|
1,920,934
|
|||
|
Total
long-term bank loan
|
-
|
1,920,934
|
|||||
|
Less:
current portion
|
-
|
(1,920,934
|
)
|
||||
|
Total
long-term portion
|
$
|
-
|
$
|
-
|
|||
Interest
expense for long-term debt in 2007 and 2006 was $0 and $123,711,
respectively.
NOTE
11 – INCOME
TAXES
| (a) |
Corporation
Income Tax (“CIT”)
|
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%.
F-21
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
11 –
INCOME
TAXES (CONTINUED)
Effective
January 1, 2007, the Company adopted Financial Accounting Standards Board
(“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN
48"), an interpretation of FASB statement No. 109, Accounting for 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, we 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
December 31, 2007, 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 and tax credit carry forwards
for U.S. federal and state tax purposes that have attributes from closed
periods. Since these NOLs and tax credit carry forwards may be utilized in
future periods, they remain subject to examination. The Company also files
certain tax returns in China. As of December 31, 2007 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 December 31, 2007, the Company has no accrued
interest or penalties related to uncertain tax positions.
On
March
16, 2007, the National People’s Congress of the PRC determined to adopt a new
corporate income tax law in its fifth plenary session. The new corporate income
tax law unifies the application scope, tax rate, tax deduction and preferential
policy for both domestic and foreign-invested enterprises. The new
corporate income tax law takes effect on January 1, 2008. However, the
foreign-invested company which registered before March 16, 2007 still can be
applied with the ex-corporate income tax law. Thus, Kandi is exempt from
corporate income tax for the fiscal year 2007 and 2008 then is entitled to
a 50%
tax reduction for 2009, 2010 and 2011. Under the corporate income tax law,
the
Company had deferred tax in the year ended of December 31, 2007 and 2006 as
follows:
|
2007
|
2006
|
||||||
|
Current:
|
|||||||
|
Provision
for CIT
|
$
|
12,569
|
$
|
2,911
|
|||
|
12,569
|
2,911
|
||||||
|
Deferred:
|
|||||||
|
Provision
for CIT
|
(385,074
|
)
|
(2,842
|
)
|
|||
|
(385,074
|
)
|
(2,842
|
)
|
||||
|
Income
tax (benefit) expense
|
$
|
(372,505
|
)
|
$
|
69
|
||
F-22
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
11 – INCOME
TAXES (CONTINUED)
The
Company’s income tax (benefit)/expense differs from the “expected” tax
(benefit)/expense for the years ended December 31, 2007 and 2006 (computed
by
applying the CIT rate of 33% percent to income before income taxes) as
follows:
|
2007
|
2006
|
||||||
|
Computed
“expected” expense
|
$
|
1,536,675
|
$
|
356,144
|
|||
|
Permanent
difference
|
(401,841
|
)
|
(5,198
|
)
|
|||
|
Tax
rate adjustment
|
(53
|
)
|
-
|
||||
|
Tax
exemption
|
(1,517,420
|
)
|
(350,877
|
)
|
|||
|
Valuation
allowance
|
10,134
|
-
|
|||||
|
Income
tax (benefit) expense
|
$
|
(372,505
|
)
|
$
|
69
|
||
The
tax
effects of temporary differences that give rise to the Company's net deferred
tax assets and liabilities as of December 31, 2007 and 2006 are as
follows:
|
2007
|
2006
|
||||||
|
Deferred
tax assets:
|
|||||||
|
Current
portion:
|
|||||||
|
Expense
|
$
|
5,702
|
$
|
99
|
|||
|
Valuation
allowance
|
(5,702
|
)
|
-
|
||||
|
Subtotal
|
-
|
99
|
|||||
|
Non-current
portion:
|
|||||||
|
Depreciation
|
698,944
|
292,290
|
|||||
|
Valuation
allowance
|
(293,938
|
)
|
(289,506
|
)
|
|||
|
Subtotal
|
405,006
|
2,784
|
|||||
|
Total
deferred tax assets
|
405,006
|
2,883
|
|||||
|
Deferred
tax liabilities:
|
|||||||
|
Current
portion:
|
|||||||
|
Expense
|
(17,676
|
)
|
-
|
||||
|
Subtotal
|
(17,676
|
)
|
-
|
||||
|
Non-current
portion:
|
|||||||
|
Other
|
(299,161
|
)
|
(81,195
|
)
|
|||
|
Subtotal
|
(299,161
|
)
|
(81,195
|
)
|
|||
|
Total
deferred tax liabilities
|
(316,837
|
)
|
(81,195
|
)
|
|||
|
Net
deferred tax assets (liabilities)
|
$
|
88,169
|
$
|
(78,312
|
)
|
||
| (b) |
Tax
Holiday Effect
|
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.
F-23
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
11 – INCOME
TAXES (CONTINUED)
The
combined effects of the income tax expense exemptions and reductions available
to the Company for the years ended December 31, 2007 and 2006 are as follows:
|
2007
|
2006
|
||||||
|
Tax
holiday effect
|
1,517,420
|
350,877
|
|||||
|
Basic
net income per share effect
|
$
|
0.09
|
$
|
0.03
|
|||
| (c) |
Value
Added Tax (“VAT”)
|
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.
F-24
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
12 – COMMITMENTS
The
Company occupies office space leased from a third party. For the years ended
December 31, 2007 and 2006 the Company recognized rental expense of $18,235
and
$0, respectively.
As
of
December 31, 2007, the Company has outstanding commitments with respect to
non-cancelable operating leases for real estate, which are due in the as
following amounts:
|
Years
Ending December 31
|
Amount
|
|||
|
2008
|
$
|
18,690
|
||
|
2009
|
15,575
|
|||
|
Total
|
$
|
34,265
|
NOTE
13 – DEPOSIT
FOR ACQUISITION
In
November 2007, the Company signed a letter of intent with the shareholders
of
Kandi Special Vehicles Co., Ltd, by which the Company would acquire 100% of
Kandi Special Vehicles Co., Ltd. The Company paid a refundable deposit
of $12,270,859 as of December 31, 2007. The total consideration for the
acquisition is $12,314,988 and the acquisition is expected to be completed
in
April of 2008.
NOTE
14 – FORFEITURE
OF CUSTOMER DEPOSITS
The
forfeitures of customer deposits resulted from the customers’ breach of mutual
contracts (the customers had declared bankruptcy). During the year ended
December 31, 2007 and 2006, $505,207 and $0, were forfeited and recorded in
the
accompanying consolidated statements of income and comprehensive income as
other
income.
F-25
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
15 – GEOGRAPHICAL
SALES
The
following are the geographical sales of the Company:
|
2007
|
2006
|
||||||||||||
|
Area
|
Amounts
|
Percentage
|
Amounts
|
Percentage
|
|||||||||
|
United
States
|
$
|
17,499,043
|
50
|
%
|
$
|
2,238,143
|
15
|
%
|
|||||
|
North
American
|
6,390,220
|
18
|
%
|
1,126,484
|
8
|
%
|
|||||||
|
China
|
6,264,492
|
18
|
%
|
10,087,327
|
70
|
%
|
|||||||
|
Europe
|
2,783,342
|
8
|
%
|
609,767
|
4
|
%
|
|||||||
|
Others
|
1,765,071
|
6
|
%
|
419,115
|
3
|
%
|
|||||||
|
Total
|
$
|
34,702,168
|
100
|
%
|
$
|
14,480,836
|
100
|
%
|
|||||
F-26
|
Item
9.
|
Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
|
None.
|
Item
9A.
|
Controls
and Procedures.
|
Evaluation
of Disclosure 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-K, 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 December 31, 2007. 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
and are effective as designed to ensure that material information relating
to
the Company and its consolidated subsidiaries required to be disclosed by the
Company by the Exchange Act, was recorded, processed, summarized and reported
within the applicable time periods.
Changes
in Internal Controls
In
conjunction with the evaluation and review of the internal controls over
financial reporting which commenced in October of 2007, the Company also
undertook to improve the disclosure controls and procedures by:
|
·
|
hiring
more experienced personnel with expertise in public company financial
reporting;
|
|
·
|
hiring
advisors with extensive experience in dealing with public company
disclosure issues; and
|
|
·
|
properly
documenting and formalizing internal controls and
procedures.
|
22
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rule 13a-15(f)
under the Securities Exchange Act of 1934. Under the supervision and
with the participation of our management, including the principal executive
officer and principal financial officer, we are conducting an evaluation
of the
effectiveness of our internal control over financial reporting based on the
framework in Internal Control-Integrated Framework issued by the Committee
of
Sponsoring Organizations of the Treadway Commission.
Prior
to July 2007, the Company was a reporting shell company with no
operations. In July 2007, as a result of the Exchange Agreement, the
Company acquired Zhejiang Kandi Vehicles Co., Ltd. The operations of Zhejiang
Kandi Vehicles Co., Ltd. represent primarily all the operations of the Company
on a consolidated basis and is excluded from management’s assessment of internal
control over financial reporting. Due to the recent nature of the
acquisition, it was not feasible for the Company to complete its review and
assessment. The Company expects to complete the review of its internal
control over financial reporting in 2008.
This
annual report does not include an attestation report of the Company's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the Company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management's
report
in this annual report.
PART
III
|
Item
10.
|
Directors,
Executive Officers and Corporate
Governance
|
As
of
March 31, 2008, our directors and executive officers, their ages, positions
with
Kandi, and the dates of their initial election or appointment as director or
executive officer are as follows:
|
Name
|
|
Age
|
|
Position
With Kandi
|
|
Served
From
|
|
Hu
Xiaoming
|
|
51
|
|
Chairman
of the Board, President and
Chief
Executive Officer
|
|
March
2002
|
|
Zhu
Xiaoying
|
|
37
|
|
Chief
Financial Officer, Director
|
|
September
2003
|
|
Zheng
Mingyang
|
|
54
|
|
Director
(Independent)
|
|
September
2003
|
|
Ying
Jinfeng
|
|
43
|
|
Director
(Independent)
|
|
March
2002
|
|
Xie
Keipei
|
|
44
|
|
Director
(Independent)
|
|
December
2003
|
|
Fong
Heung Sang (Dexter)
|
|
47
|
|
Director
(Independent)
|
|
July
2007
|
|
Hu
Wangyuan
|
29
|
Vice
President, Director
|
March
2002
|
23
Business
Experience of Directors and Executive Officers
Biographical
Information
Hu
Xiaoming, age 50, has been our Chief Executive Officer, President and Chairman
of the Board of Directors since March 2002. From October 2003 to
April 2005, Mr. Hu was the Project Manager (Chief Scientist) in WX Pure Electric
Vehicle Development Important Project of Electro-vehicle in State 863
Plan. Prior to that, from October 1984 to March 2003, Mr. Hu was a
Factory Director in Yongkang Instrument Factory, Factory Director in Yongkang
Mini Car Factory, Chairman and General Manager in Yongkang Vehicle Company,
General Manager in Wan Xiang Electric Vehicle Developing Center, and General
Manager in Wan Xiang Battery Company. He personally owns 3 invention patents,
5
utility model patents and over 10 appearance design patents.
Hu
Wangyuan, age 28, is our Vice President and Director and has been a director
and
economist at Kandi since March 2002. Mr. Hu received his MBA at of Hong Kong
Polytechnic University in November 2002. Mr. Hu has 3-years of
working experience in go-kart marketing, and retains close cooperative
relationships with many suppliers and distributors.
Ying
Jinfeng, age 42, has been a director and Senior Engineer at Kandi since March
2002. Prior to that, from June 1990 to December 1997, Mr. Ying was Manager
of Engineering Technology Dept, Senior Project Manager, Chief Management
Executive of Product Planning and Project Management, Vice Factory Director
in
Yongkang Mini Car Factory. Prior to that, from January 1998 to
February 2002, he was Vice General Manager in Yongkang Vehicle Company, and
was
in charge of technology, supply, sales and production. Mr. Ying has
over 20 years working experience, mostly in Production Operation Management,
HR
and Project Corporation.
Zhu
Xiaoying, age 36, is our Chief Financial Officer and director. Ms.
Zhu received a bachelor’s degree in accounting from Hangzhou Electronic
Engineering University and joined Kandi in September 2003 and was appointed
acting CFO and director of the Company. From January 2000 to
September 2003, she worked as accounting manager for Zhejiang Yongkang
Automobile Manufacture Co.
Zheng
Mingyang, age 53, has been a director of Kandi since 2003. From May
1992 to September 2003 he worked as the vice president of Yongkang Automobile
Manufacture Co.
24
Xie
Kepei, age 43, has been a director of Kandi since December 2003. From
August 2001 to November 2003 she worked as the Manager of General Administration
for Zhejiang Sifang Group Transportation Machinery Co.
Fong
Heung Sang (Dexter), age 46, has been a director of Kandi since July 2007.
Mr.
Fong, a U.S. CPA, serves as the Executive Vice President of Corporate
Development of Fuqi International, Inc.—a position he has held since December
2006. From January 2004 to November 2006, Mr. Fong served as the managing
partner of Iceberg Financial Consultants, a financial advisory firm based in
China that advises Chinese clients in capital raising activities in the United
States. From December 2001 to December 2003, Mr. Fong was the Chief Executive
Officer of Holley Communications, a Chinese company that engaged in CDMA chip
and cell phone design. From March 2002 to March 2004, he served as Chief
Executive Officer of Pacific Systems Control Technology, Inc. (NASDAQ:PFSY),
a
Chinese company listed on NASDAQ. From May 2001 to November 2001, Mr. Fong
was
the Director of Finance of PacificeNet, Inc. (NASDAQ:PACT), a customer
relationship management, mobile internet, e-commerce and gaming technology
based
in China. From December 1998 to April 2001, he was the Group Financial
Controller of Oregon Scientific, a wholly-owned subsidiary of IDT, a Hong King
Stock Exchange-listed company. Mr. Fong also held various positions with
accounting firms in the United States and Hong Kong including Deloitte and
Touche, Ernst and Young, and KPMG. Mr. Fong is also currently serving as an
independent director and audit committee member of a Hong Kong public company,
Universal Technology Inc. Mr. Fong graduated from the Baptist University with
a
bachelor’s degree in history in 1982. He also has an MBA from the University of
Nevada at Reno and Masters in Accounting from the University of Illinois at
Urbana Champaign.
Family
Relationships
Hu
Xiaoming, our Chairman, CEO and President is the father of Hu Wangyuan, our
Vice
President and Director.
Audit
Committee Financial Expert
Our
audit
committee consists of Dexter Fong (Chair), Zheng Mingyang and Xie Keipei. The
Board has determined that Mr. Fong qualifies as an “audit committee financial
expert,” as defined in applicable SEC rules. The Board made a qualitative
assessment of Mr. Fong’s level of knowledge and experience based on a number of
factors, including formal education and business experience.
Section
16(a) Beneficial Ownership Reporting Compliance
To
our
knowledge the officers, directors and beneficial owners of more than 10% of
our
common stock have filed their initial statements of ownership on Form 3 on
a
timely basis with respect to fiscal 2007, and the officers, directors and
beneficial owners of more than 10% of our common stock have also filed the
required Forms 4 or 5 on a timely basis with respect to fiscal 2005, except
as
follows:
25
|
|
Number
of
Late
Reports
|
Number
of
Transactions
Not
Reported
Timely
|
|||||
|
Fong
Heung Sang
|
1
|
1
|
|||||
Code
of Ethics
Kandi
has
adopted a code of ethics that applies to all of our directors and employees,
including our principal executive officer and principal financial officer.
A
copy of the Code of Ethics is included as an exhibit to the 8-K filed with
the
SEC on November 5, 2007, and is incorporated by reference herein.
Item
11. Executive
Compensation
None
of
our executive officers received compensation in excess of $100,000 for the
fiscal years ended December 31, 2007 or 2006. The following table summarizes
all
compensation received by our previous and current chief executive officer,
President and Chief Financial Officer for the fiscal year ended December 31,
2007.
|
Name
and principal position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive
Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
All
Other
Compensation
($)
|
Total
($)
|
|||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
|
Peter
Dodge (1)
|
2007
|
0
|
—
|
—
|
—
|
—
|
—
|
—
|
$
|
0
|
||||||||||||||||||
|
2006
|
0
|
—
|
—
|
—
|
—
|
—
|
—
|
$
|
0
|
|||||||||||||||||||
|
Hu
Xiaoming, CEO and President (2)
|
2007
|
19,231
|
19,231
|
|||||||||||||||||||||||||
|
2006
|
19,231
|
19,231
|
||||||||||||||||||||||||||
26
|
(1)
|
Mr.
Dodge resigned as the Company’s President, Chief Executive Officer, Chief
Financial Officer, Secretary and Treasurer on June 29,
2007.
|
|
(2)
|
Mr.
Hu was appointed as CEO and President of the Company on June 29,
2007.
|
Director
Compensation
No
compensation was paid to any of the Company’s directors for their services as a
director in 2007. Neither were there any outstanding equity awards to any
officer of the Company during the period covered by this report.
|
ITEM
12.
|
Security
Ownership of Certain Beneficial Owners and Management
and Related Stockholder
Matters
|
The
following table sets forth information known to us, as of the date of this
report, relating to the beneficial ownership of shares of common stock by each
person who is known by us to be the beneficial owner of more than five percent
of the outstanding shares of common stock; each director; each executive
officer; and all executive officers and directors as a group. We believe that
all persons named in the table have sole voting and investment power with
respect to all shares of common stock shown as being owned by them.
|
Title
of Class
|
Name
of Beneficial Owner
|
Amount
and Nature of Beneficial Ownership
|
Percent
of Class
|
|||||||
|
Common
Stock
|
Excelvantage
Group Limited
|
12,000,000
|
60.12
|
%
|
||||||
|
Common
Stock
|
Ho
Man Tim(1)
|
|
12,000,000
|
60.12
|
%
|
|||||
|
All
officers and directors
|
||||||||||
(1)
Ho
Man Tim is the sole stockholder of Excelvantage Group Limited. Through his
position as the sole stockholder in Excelvantage Group Limited, Ho Man Tim
has
the power to dispose of or direct the disposition of the one (1) share of common
stock he owns in Excelvantage Limited Group. As a result, Ho Man Tim may, under
the rules of the Securities and Exchange Commission, be deemed to be the
beneficial owner of the shares of common stock. Ho Man Tim disclaims beneficial
ownership of the shares of common stock reported as beneficially owned by him,
except to the extent of his pecuniary interest as a stockholder of Excelvantage
Group Limited.
27
|
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
None.
Director
Independence
Messrs.
Dexter Fong, Zheng Mingyang, Xie Keipei and Ying Jingfeng are all non-employee
directors, all of whom our Board of Directors has determined are independent
pursuant to the NASDAQ rules the rules of the Securities and Exchange
Commission. All of the members of members of our Board of Directors Audit
Committee, Nominating/Corporate Governance Committee and Compensation Committee
are independent pursuant to the rules of NASDAQ and the Securities and Exchange
Commission.
Item
14. Principal
Accounting Fees and Services.
Audit
Fees
The
aggregate fees for each of the last two years for professional services rendered
by the principal accountant for our audits of our annual financial statements
and interim reviews of our financial statements included in our fillings with
Securities and Exchange Commission on Form 10-Ks and 10-Qs services that are
normally provided by the accountant in connection with statutory and regulatory
filings or engagements for those years were approximately:
|
2007
|
$
|
215,083
|
Weinberg
& Company, P.A.
|
||||
|
2006
|
$
|
0
|
Audit
Committee Approval
Our
Audit
Committee must pre-approve all audit and permissible non-audit services
performed by the independent registered public accounting firm. These services
may include audit services, audit-related services, tax services and other
services.
All
of
the services described herein were approved by the Audit Committee pursuant
to
its pre-approval policies. None of the hours expended on the principal
accountant’s engagement to audit the Company’s financial statements for the most
recent fiscal year were attributed to work performed by persons other than
the
principal accountant’s full-time permanent employees.
28
PART
IV
Item
15. Exhibits,
Financial Statement Schedules.
|
Exhibit
Number
|
Description
|
|
|
2.1
|
Share
Exchange Agreement, dated June 29, 2007, among Stone Mountain Resources,
Inc., Continental Development Limited and Excelvantage Group Limited
(incorporated by reference from Exhibit 2.1 to the Company’s Current
Report on Form 8-K filed on July 6, 2007).
|
|
|
3.1
|
Certificate
of Incorporation (incorporated by reference from Exhibit 3.1 to Form
SB-2
filed by the Company on April 1, 2005).
|
|
|
3.2
|
By-laws
(incorporated by reference from Exhibit 3.2 to Form SB-2 filed by
the
Company on April 1, 2005).
|
|
|
10.1
|
Agreement
on Business Operations between Zhejiang Kandi Vehicles Co., Ltd.
and
Zhejiang Yongkang Top Import & Export Co., Ltd. (incorporated by
reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed on July 6, 2007).
|
|
|
10.2
|
Employment
Contract, dated June 10, 2004, by and between Zhejiang Kandi Vehicles
Co.,
Ltd. and Mr. Hu Xiaoming (incorporated by reference from Exhibit
10.2 to
the Company’s Current Report on Form 8-K filed on July 6,
2007).
|
|
|
10.3
|
Employment
Contract, dated July 10, 2004, by and between Zhejiang Kandi Vehicles
Co.,
Ltd. and Ms. Zhu Xiaoying (incorporated by reference from Exhibit
10.3 to
the Company’s Current Report on Form 8-K filed on July 6,
2007)..
|
|
|
16.1
|
Letter
from Gately & Associates, LLC (incorporated by reference from Exhibit
16.1 to the Company’s Current Report on Form 8-K filed on August 14,
2007).
|
|
|
21.1
|
List
of Subsidiaries.
|
|
|
31.1
|
Certification
of CEO pursuant to Rule 13a-14 under the Securities Exchange Act
of
1934.
|
|
|
31.2
|
Certification
of CFO pursuant to Rule 13a-14 under the Securities Exchange Act
of
1934.
|
|
|
32.1
|
Certification
s of CEO and CFO Pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
|
29
SIGNATURES
Pursuant
to the requirements of Section 13 of the Securities Exchange Act of 1934 (the
“Exchange Act”), the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
|
KANDI
TECHNOLOGIES, CORP.
|
||
|
March
31, 2008
|
By:
|
/s/
Hu Xiaoming
|
|
Hu
Xiaoming
|
||
|
President
and Chief Executive Officer
|
||
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the
dates indicated.
|
/s/
Hu Xiaoming
|
President,
Chief Executive Officer and
|
March
31, 2008
|
||
|
Hu
Xiaoming
|
Chairman
of the Board (Principal Executive Officer)
|
|||
|
/s/
Zhu Xiaoying
|
Chief
Financial Officer and Director
|
March
31, 2008
|
||
|
(Principal
Financial Officer and Principal Accounting Officer)
|
||||
|
/s/
Zheng Mingyang
|
Director
|
March
31, 2008
|
||
|
/s/
Ying Jinfeng
|
Director
|
March
31, 2008
|
||
|
/s/
Xie Keipei
|
Director
|
March
31, 2008
|
||
|
/s/
Fong Heung Sang
|
Director
|
March
31, 2008
|
||
|
/s/
Hu Wangyuan
|
Director
|
March
31, 2008
|
30