Kandi Technologies Group, Inc. - Quarter Report: 2014 March (Form 10-Q)

Buildings	30 years
Machinery and equipment	10 years
Office equipment	5 years
Motor vehicles	5 years
Molds	5 years

	Sales		Accounts Receivable
	Three Months	Three Months
	Ended March 31,	Ended March 31,		December 31,
Major Customers	2014	2013	March 31, 2014	2013
Kandi Electric Vehicles (Changxing) Co., Ltd.	43%	-	-	-
Shanghai Huapu Auto Co., Ltd	19%	-	22%	52%
Kandi Electric Vehicles (Shanghai) Co., Ltd.	17%	-	-	-

	Purchases		Accounts Payable
	Three Months	Three Months
	Ended March 31,	Ended March 31,		December 31,
Major Suppliers	2014	2013	March 31, 2014	2013
Zhejiang Wanxiang Yineng Power Battery Co., Ltd	18%	-	18%	3%
Zhongju (Tianjin) New Energy Investment Co., Ltd.	15%	-	13%	-
Zhejiang Mengdeli Electric Co., Ltd.	14%	49%	-	13%
Shandong Henyuan New Energy Tech Co., Ltd.	14%	-	12%	-

16

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KANDI TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 9 –INCOME (LOSS) PER SHARE

The Company calculates earnings per share in accordance with ASC 260, Earnings Per Share, which requires a dual presentation of basic and diluted earnings per share. Basic earnings per share are computed using the weighted average number of shares outstanding during the reporting period. Diluted earnings per share represents basic earnings per share adjusted to include the potentially dilutive effect of outstanding stock options, warrants and convertible notes (using the if-converted method). For the three months ended March 31, 2014 and 2013, the number of potentially dilutive common shares was 0 and 240,507, respectively.

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

Three months Ended March 31,			2014			2013
Net (loss) income		$	(14,086,160	)	$	2,236,873
Weighted – average shares of common stock outstanding
Basic			39,597,785			32,298,832
Dilutive shares			-			240,507
Diluted			39,597,785			32,539,339
Basic (loss) income per share		$	(0.36	)	$	0.07
Diluted (loss) income per share		$	(0.36	)	$	0.07

Also see Note 18.

NOTE 10 - INVENTORIES

Inventories are summarized as follows:

		March 31, 2014
		(Unaudited)			December 31, 2013
Raw material	$	7,150,481		$	2,646,041
Work-in-progress		5,458,551			5,065,126
Finished goods		1,387,816			1,829,281
		13,996,848			9,540,448
Less: reserve for slow moving
inventories		(349,850	)		(352,734	)
Inventories, net	$	13,646,998		$	9,187,714

NOTE 11 - NOTES RECEIVABLE

Notes receivable are summarized as follows:

17

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KANDI TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

		March 31, 2014			December 31,
		(Unaudited)			2013
Notes receivable from unrelated companies:
Due September 30, 2014, interest at 9.6% per annum 1	$	27,193,957		$	13,794,094
Due September 30, 2014, interest at 7.2% per annum 2		6,262,802			-
Due September 30, 2014, interest at 36.0% per annum 3		1,622,218			-
		35,078,977			13,794,094
Bank acceptance notes:
Bank acceptance notes		-			-
Notes receivable	$	35,078,977		$	13,794,094

Details of Notes receivable from unrelated parties as of December 31, 2013

Details of Notes receivable from unrelated parties as of March 31, 2014

NOTE 12 – LAND USE RIGHTS

Land use rights consisted of the following:

		March 31, 2014
		(Unaudited)			December 31, 2013
Cost of land use rights	$	16,090,568		$	16,223,208
Less: Accumulated amortization		(1,844,422	)		(1,770,017	)
Land use rights, net	$	14,246,146		$	14,453,191

18

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KANDI TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

As of March 31, 2014 and December 31, 2013, the net book value of land use rights pledged as collateral for the Company’s bank loans was $9,839,526 and $9,983,647, respectively. Also see Note 14.

The amortization expense for the three months ended March 31, 2014 and 2013 was $89,523 and $87,160, respectively.

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

2014 (nine months)	$	268,570
2015		358,093
2016		358,093
2017		358,093
2018		358,093
Thereafter		12,545,204
Total	$	14,246,146

NOTE 13 – PLANT AND EQUIPMENT

Plant and equipment consisted of the following:

		March 31, 2014
		(Unaudited)			December 31, 2013
At cost:
Buildings	$	14,467,322		$	14,514,873
Machinery and equipment		10,719,013			10,771,899
Office equipment		258,379			251,690
Motor vehicles		286,559			288,004
Moulds		33,952,746			34,230,014
		59,684,019			60,056,480
Less : Accumulated depreciation
Buildings	$	(3,107,795	)	$	(3,010,451	)
Machinery and equipment		(10,226,031	)		(10,278,409	)
Office equipment		(201,897	)		(196,303	)
Motor vehicles		(234,080	)		(228,442	)
Moulds		(17,611,346	)		(16,648,583	)
		(31,381,149	)		(30,362,188	)
Less: provision for impairment for
fixed assets		(357,826	)		(360,776	)
Plant and equipment, net	$	27,945,044		$	29,333,516

As of March 31, 2014 and December 31, 2013, the net book value of plant and equipment pledged as collateral for bank loans was $11,153,071 and $11,292,649, respectively.

Depreciation expense for three months ended March 31, 2014 and 2013 was $1,276,480 and $2,002,293, respectively.

19

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KANDI TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 14 – SHORT TERM BANK LOANS

Short-term loans are summarized as follows:

		March 31,
		2014			December 31,
		(Unaudited)			2013
Loans from Jinhua Bank
Monthly interest only payments at 6.30% per annum, due October 10, 2014, guaranteed by Mr. Hu Xiaoming and Ms. Ling Yueping, and secured by the assets of the Company. Also see Note 12 and Note 13	$	1,622,217		$	1,635,590
Monthly interest only payments at 6.30% per annum, due December 2, 2014, guaranteed by Mr. Hu Xiaoming and Ms. Ling Yueping, and secured by the assets of the Company. Also see Note 12 and Note 13		811,109			817,795
Monthly interest only payments at 6.30% per annum, due December 2, 2014, guaranteed by Zhejiang Kangli Metal Manufacturing Company, Mr. Hu Xiaoming, Ms. Ling Yueping, Mr. Lv Qingbo and Mr. Lv Qingjiang, and secured by the assets of the Company. Also see Note 12 and Note 13		3,244,436			3,271,181
Loans from Yongkang Rural Cooperative Bank
Monthly interest only payments at 0.927% per month, due January 31, 2015, guaranteed by Yongkang Sanli Metal Co., Ltd.		811,109			817,795
Loans from China Ever-bright Bank
Monthly interest only payments at 6.94% per annum, due May 14, 2014, secured by the assets of the Company, guaranteed by Mr. Hu Xiaoming, Mr. Hu Wangyuan, Nanlong Group Co., Ltd. and Zhejiang Mengdeli Electric Co., Ltd. Also see Note 12 and Note 13.		12,653,300			12,757,606
Loans from Shanghai Pudong Development Bank
Monthly interest only payments at 6.60% per annum, due September 4, 2014, secured by the assets of the Company, guaranteed by Mr. Hu Xiaoming. Also see Note 12 and Note 13.		6,488,871			6,542,362
Loans from Bank of Shanghai
Monthly interest only payments at 6.60% per annum, due December 27, 2014, guaranteed by Mr. Hu Xiaoming, Ms. Ling Yueping, Zhejiang Kangli Metal Manufacturing Company and Nanlong Group Co., Ltd.		4,866,654			4,906,771
Loans from China Ever-growing Bank
Monthly interest only payments at 7.20% per annum, due April 22, 2014, guaranteed by Mr. Hu Xiaoming, Ms. Ling Yueping, Zhejiang Shuguang industrial Co., Ltd. and Zhejiang Mengdeli Electric Company.		3,244,436			3,271,181
Total	$	33,742,132		$	34,020,281

Interest expense for the three month ended March 31, 2014 and 2013 was $578,647, and $552,930, respectively.

20

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KANDI TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

As of March 31, 2014, the aggregate amount of short-term loans that was guaranteed by various third parties was $27,253,260.

       -        $15,897,736 was guaranteed by Zhejiang Mengdeli Electric Co Ltd (“ZMEC”).

       -        $8,111,090 was guaranteed by Zhejiang Kangli Metal Manufacturing Company, whose bank loan of $4,866,654 was guaranteed by the Company. Also see Note 23. $3,244,436 of the $8,111,090 was guaranteed by Lv Qingjiang and Lv Qingbo, two major shareholders of Zhejiang Kangli Metal Manufacturing Company. Also see Note 23.

       -        $3,244,436 was guaranteed by Zhejiang Shuguang industrial Co., Ltd., whose bank loan of $4,866,654 was guaranteed by the Company. Also see Note 23.

       -        $17,519,954 was guaranteed by Nanlong Group Co., Ltd., whose bank loans of $9,733,307 was also guaranteed by the Company. Also see Note 23.

       -        $811,109 was guaranteed by Yonnkang Sanli Metal Co., Ltd.

It is a common business practice among companies in the region of the PRC in which the Company is located to exchange guarantees for bank debt with no consideration given. It is considered a “favor for favor” business practice and is commonly required by Chinese lending banks, as in these cases.

NOTE 15 – NOTES PAYABLE

By issuing bank note payables rather than paying cash to suppliers, the Company can defer the payments until the date the bank note payable is due. Simultaneously, the Company needs to deposit restricted cash in banks to back up the bank note payable, while the restricted cash deposited in banks will generate interest income.

Notes payable are summarized as follows:

		March 31,2014			December 31,
		(Unaudited)			2013
Bank acceptance notes:
Due March 18, 2014	$	-		$	1,962,709
Due May 19, 2014		8,111,089			8,177,952
Due May 21, 2014		6,488,872			6,542,362
Subtotal	$	14,599,961		$	16,683,023
Notes payable to unrelated companies:
	$	-		$	-
Subtotal	$	-		$	-
Total	$	14,599,961		$	16,683,023

All of the bank acceptance notes do not bear interest, but are subject to bank charges of 0.05% of the principal as a commission on each transaction. Bank charges for notes payable were $0 for the three months ended March 31, 2014.

No restricted cash was held as collateral for the notes payable as of March 31, 2014.

21

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KANDI TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 16 – BOND PAYABLE

Due Date

Face Value

Coupon rate

Interest record date

Interest pay date

December 27, 2016

$

12,977,743

11.5%

December 27

December 27

Total face value

$

12,977,743

On December 27, 2013, the Company issued the bond in the aggregate principal amount of RMB 80,000,000 to China Ever-bright Securities Co. Ltd. and CITIC Securities Company Limited. The maturity of this bond is 3 years, and the material terms of this bond are similar to the terms of the bond issued in 2012 and repaid in August 2013, except that the interest rate is reduced to 11.5% . Bond interest is payable on December 27 in each of 2014, 2015 and 2016.

NOTE 17 – TAX

(a) Corporation Income Tax (“CIT”)

In accordance with the relevant tax laws and regulations of the PRC, the applicable CIT rate is 25%. However, Kandi Vehicle is qualified as a high technology company in the PRC and is entitled to pay a reduced income tax rate of 15%.

Kandi New Energy is a subsidiary of the Company and its applicable CIT rate is 25%.

Yongkang Scrou is a subsidiary of the Company and its applicable CIT rate was 25%.

Kandi Wanning is a subsidiary of the Company and its applicable CIT rate is 25%.

The Company has a 50% ownership interest in the JV Company and the JV Company’s applicable CIT rate is 25%.

Kandi Changxing is a subsidiary of the JV Company and its applicable CIT rate is 25%.

Service Company is a 19% investment of the JV Company and its applicable CIT rate is 25%.

Kandi Jinhua is a subsidiary of the JV Company and its applicable CIT rate is 25%.

JiHeKang is a subsidiary of the JV Company and its applicable CIT rate is 25%.

Kandi Shanghai is a subsidiary of the JV Company and its applicable CIT rate is 25%.

Kandi Jiangsu is a subsidiary of the JV Company and its applicable CIT rate is 25%.

The Company qualifies as a high technology company in the PRC and is entitled to pay CIT at the reduced rate of 15%. However, as the tax policy in the PRC does not allow double tax benefits, the Company’s high technology tax benefit of 10% must be reduced by the research and development tax benefits to which the Company also is entitled, which amount to 25% of an amount equal to 50% of allowable research and development expenses. For the three months ended March 31, 2014, the Company’s CIT before reduction for the Company’s high technology tax benefit was $240,434, or 25% of the Company’s $961,736 of taxable income for such period reduced to $377,040 after giving effect to the Company’s research and development tax credit of $146,174 (25% of 50% of $1,169,395 allowable research and development expenses) for such period. To comply with the PRC policy prohibiting double tax benefits, the Company’s high technology tax benefit for the three months ended March 31, 2014 was reduced from $96,174, or 10% of the Company’s $961,736 of taxable income for such period, to $37,704, or 3.92% of such taxable income. As a result, the Company’s effective income tax rate for the three months ended March 31, 2014 was 5.88% after the research and development credit and high technology tax reduction.

22

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KANDI TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

According to the PRC CIT reporting system, the CIT sales cut-off base is concurrent with the value-added tax (“VAT”), which will be reported to the State Administration of Taxation (“SAT”) on a quarterly basis. Since the VAT and CIT are accounted for on a VAT tax basis that recorded all sales on a “State provided official invoices” reporting system, the Company is reporting the CIT according to the SAT prescribed tax reporting rules. Under the VAT tax reporting system, sales cut-off is not done on an accrual basis but rather on a VAT taxable reporting basis. Therefore, when the Company adopted U.S. GAAP using an accrual basis, the sales cut-off CIT timing (due to the VAT reporting system) created a temporary sales cut-off timing difference. This difference is reflected in the deferred tax assets or liabilities calculations on the income tax estimate reported in the Company’s Annual Report on Form 10-K.

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

Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.

As of March 31, 2014, the Company did not have a liability for unrecognized tax benefits. The Company files income tax returns to the U.S. Internal Revenue Services (“IRS”) and to states in which the Company has operations. The Company is subject to U.S. federal or state income tax examinations by the IRS and relevant state tax authorities for years after 2006. During the periods open to examination, the Company had net operating loss carry forwards (“NOLs”) for U.S. federal and state tax purposes that have attributes from closed periods. Since these NOLs may be utilized in future periods, they remain subject to examination. The Company also files certain tax returns in the PRC. As of March 31, 2014, the Company was not aware of any pending income tax examinations by the PRC tax authorities. The Company’s policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of March 31, 2014, the Company had no accrued interest or penalties related to uncertain tax positions. The Company has not recorded a provision for U.S. federal income tax for the three months ended March 31, 2013 due to the net operating loss carry forward in the United States.

Income tax expense (benefit) for the three months ended March 31, 2014 and 2013 is summarized as follows:

		For the Three Months Ended
		March 31,
		(Unaudited)
		2014			2013
Current:
Provision for CIT	$	108,101		$	91,444
Provision for Federal Income Tax		-			-
Deferred:
Provision for CIT		-			-
Income tax expense (benefit)	$	108,101		$	91,444

23

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KANDI TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The Company’s income tax expense (benefit) differs from the “expected” tax expense for the three months ended March 31, 2014 and 2013 (computed by applying the U.S. Federal Income Tax rate of 34% and PRC CIT rate of 25%, respectively, to income before income taxes) as follows:

		For the Three Months Ended
		March 31,
		(Unaudited)
		2014			2013
Computed “expected” expense	$	(3,776,682	)	$	204,940
Favorable tax rate		(183,878	)		(124,314	)
Permanent differences		(79,804	)		10,803
Valuation allowance		4,148,465			15
Income tax expense (benefit)	$	108,101		$	91,444

The tax effects of temporary differences that give rise to the Company’s net deferred tax assets and liabilities as of March 31, 2014 and December 31, 2013 are summarized as follows:

		March 31, 2014			December 31,
		(Unaudited)			2013
Current portion:
Deferred tax assets (liabilities):
Expense	$	(21,626	)	$	47,224
Subtotal		(21,626	)		47,224
Deferred tax assets (liabilities):
Sales cut-off (CIT tax reporting on VAT tax system)		147,302			(33,518	)
Other		105,382
Subtotal		252,684			(33,518	)
Total deferred tax assets (liabilities) – current portion		231,058			13,706
Non-current portion:
Deferred tax assets (liabilities):
Depreciation		(1,788	)		81,076
Loss carried forward		4,148,465			3,992,906
Valuation allowance		(4,148,465	)		(3,992,906	)
Subtotal		(1,788	)		81,076
Deferred tax liabilities:
Accumulated other comprehensive gain		(1,192,636	)		(1,009,477	)
Subtotal		(1,192,636	)		(1,009,477	)
Total deferred tax assets – non-current portion		(1,194,424	)		(928,401	)
Net deferred tax assets (liabilities)	$	(963,366	)	$	(914,695	)

(b) Tax Benefit (Holiday) Effect

For the three months ended March 31, 2014 and 2013, the PRC CIT rate was 25%. Certain subsidiaries of the Company are entitled to tax benefit (holidays) for the three months ended March 31, 2014 and 2013.

24

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KANDI TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The combined effects of the income tax expense exemptions and reductions available to the Company for the three months ended March 31, 2014 and 2013 are as follows:

		For the Three Months Ended
		March 31,
		(Unaudited)
		2014			2013
Tax benefit (holiday) credit	$	183,878		$	124,314
Basic net income per share effect	$	0.005		$	0.004

NOTE 18 - STOCK OPTIONS, WARRANTS AND CONVERTIBLE NOTES

(a) Stock Options

On February 11, 2009, the Compensation Committee of the Board of Directors of the Company approved the grant of stock options to purchase 2,600,000 shares of common stock at an exercise price of $.80 per share to ten of the Company’s employees and directors. The stock options vested ratably over three years and expire on the tenth anniversary of the grant date. The Company valued the stock options at $2,062,964 and amortized the stock compensation expense using the straight-line method over the service period from February 11, 2009 through February 11, 2012. The value of the options was estimated using the Black Scholes Model with an expected volatility of 164%, expected life of 10 years, risk-free interest rate of 2.76% and expected dividend yield of 0.00% . As of March 31, 2014, options for 2,366,672 shares had been exercised and options for 6,668 shares had been forfeited.

On October 6, 2009, the Company executed an agreement with Wang Rui and Li Qiwen, third-party consultants, whereby Mr. Wang and Mr. Li are to provide to the Company business development services in China in exchange for options to purchase 350,000 shares of the Company’s common stock at an exercise price of $1.50 per share. Per the agreement, options to purchase 250,000 shares vested and became exercisable on March 6, 2010, and options to purchase 100,000 shares vested and became exercisable on June 6, 2010. The options will expire after ten years. The options are issued under and subject to the terms of the Company’s 2008 Omnibus Long-Term Incentive Plan.

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

					Weighted Average
		Number of Shares			Exercise Price
Outstanding as of January 1, 2014		326,660		$	1.01
Granted		-			-
Exercised		-			-
Cancelled		-			-
Outstanding as of March 31, 2014		326,660			1.01

The following table summarizes information about stock options outstanding as of March 31, 2014:

Options Outstanding								Options Exercisable
					Remaining
Number of		Exercise			Contractual life			Number of			Exercise
Shares		Price			(in years)			Shares			Price
226,660		$ 0.80			5			226,660			$ 0.80
100,000		1.50			5.5			100,000			1.50

25

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KANDI TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The fair value per share of the 2,600,000 options issued to the employees and directors in February 2009 is $0.7934 per share. The fair value per share of the unexercised 100,000 options issued to Wang Rui and Li Qiwen, which became exercisable on June 6, 2010, is $3.44.

(b) Warrants and Convertible Notes

On September 21, 2009, the Company executed an agreement with a third-party consultant, whereby the consultant was to provide management consulting and advisory services for a period of 12 months, beginning on September 22, 2009 and ending on September 22, 2010. As compensation for the services provided, the Company issued 200,000 warrants to purchase the Company’s common stock, with 100,000 of these warrants issued at an exercise price of $2.00 per share and 100,000 of these warrants issued at an exercise price of $2.50 per share. All of the warrants have a five year contractual term and were granted on October 22, 2009. The warrants vested in full and became exercisable on January 21, 2010, upon the closing of an initial round of financing. As of August 10, 2012, the consultant had cashless exercised all the 200,000 warrants.

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

Pursuant to the terms of the Convertible Notes and the Investor Warrants, on May 18, 2010, the conversion price of the Convertible Notes was adjusted to $3.5924 per share and the exercise price of the Investor Warrants and warrants issued to the placement agent was adjusted to $4.3907 per share. On August 19, 2010, the conversion price of the Convertible Notes was adjusted to $3.1146 per share and the exercise price of the Investor Warrants and warrants issued to the placement agent was adjusted to $3.8067 per share. As a result, the number of Investor Warrants and warrants issued to the placement agent were adjusted to 1,379,148 and 137,915 respectively. As of January 12, 2012, the investors had converted all $10,000,000 principal amount and $159,522 of accrued interest of the Convertible Notes into an aggregate of 3,121,121 shares of Common Stock.

As of January 22, 2013, 1,162,073 Investor Warrants and 124,123 warrants issued to the placement agent had been exercised. The remaining 217,075 Investor Warrants and 13,792 warrants issued to the placement agent were forfeited.

On December 21, 2010, the Company sold to certain institutional investors 3,027,272 shares of the Company’s common stock and warrants to purchase up to 1,210,912 shares of the Company’s common stock in fixed combination, with each combination consisting of one share of common stock and a warrant to purchase 0.40 shares of common stock in a registered direct public offering (the “Second Round Warrants”). The Second Round Warrants became exercisable immediately following the closing date of the offering and initially were exercisable for three years thereafter at an exercise price of $6.30 per share. The exercise price of the Second Round Warrants was adjusted to $5.40 on September 9, 2013 as a result of the registered direct offering that closed on July 1, 2013. On December 12, 2013, the expiration date of the Second Round Warrants was extended to June 30, 2014. As of March 31, 2014, the fair value of the Second Round Warrants was $11.00 per share, and 847,276 of the Second Round Warrants had been exercised.

26

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KANDI TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

On June 26, 2013, the Company entered into a Securities Purchase Agreement (the “2013 Securities Purchase Agreement”) with certain institutional investors (the “Third Round Investors”) that closed on July 1, 2013 pursuant to which the Company sold to the Third Round Investors, in a registered direct offering, an aggregate of 4,376,036 shares of the Company’s common stock at a negotiated purchase price of $6.03 per share. Under the 2013 Securities Purchase Agreement, the Third Round Investors also received Series A warrants for the purchase of up to 1,750,415 shares of the Company’s common stock at an exercise price of $7.24 per share and an option to make an additional investment in the form of Series B warrants and Series C warrants: Series B warrants to purchase a maximum aggregate of 728,936 shares of the Company’s common stock at an exercise price of $7.24 per share and the Series C warrants to purchase a maximum aggregate of 291,574 shares of the Company’s common stock at an exercise price of $8.69 (the “Third Round Warrants”). In addition, the placement agent for this transaction also received warrants for the purchase of up to 262,562 shares of the Company’s common stock at an exercise price of $7.24 per share (the “Third Round Placement Agent Warrants”). As of March 31, 2014 all the Third Round Warrants had been exercised on a cash basis, and the Third Round Placement Agent ’Warrants had a fair value of $10.83 per share.

On January 15, 2014, the Company sold to certain institutional investors warrants to purchase an aggregate of 1,429,393 shares of the Company’s common stock at an exercise price of $15 per share (the “Fourth Round Warrants”) for a total purchase price of approximately $14,294. The Fourth Round Warrants were immediately exercisable and will expire on January 30, 2015. As of March 31, 2014, the fair value of the Fourth Round Warrants was $12.12.

On March 19, 2014, the Company entered into a Securities Purchase Agreement with certain purchasers (the “4th round investors”) pursuant to which the Company sold to the 4th round investors, in a registered direct offering, an aggregate of 606,000 shares of common stock, at a negotiated purchase price of $18.24 per share, for aggregate gross proceeds to the Company of approximately $11,053,440, before deducting fees to the placement agent and other estimated offering expenses payable by the Company. As part of the transaction, the 4th round investors also received warrants for the purchase of up to 90,900 shares of the Company’s common stock at an exercise price of $22.80 per share (the “Fifth Round Warrants”). In addition, the placement agent for this transaction also received warrants for the purchase of up to 36,360 shares of the Company’s common stock at an exercise price of $22.80 per share. The Fifth Round Warrants have a term of eighteen months and are exercisable by the holders at any time after the date of issuance. As of March 31, 2014, the fair value of the Fifth Round Warrants was $9.20.

NOTE 19 – STOCK AWARD

In connection with his appointment to the Board of Directors, and as compensation for serving, the Board of Directors has authorized the issuance by the Company to Mr. Henry Yu of 5,000 shares of Company’s restricted common stock every six months from July 2011.

As compensation for his services, the Board of Directors has authorized the issuance by the Company to Mr. Jerry Lewin of 5,000 shares of Company’s restricted common stock every six months, from August 2011.

As compensation for her services, the Board of Directors authorized the issuance by the Company to Ms. Kewa Luo of 5,000 shares of Company’s common stock every six months, beginning in September 2013.

As compensation for her services, the Board of Directors authorized the issuance by the Company to Mr. Wei Chen of 2,500 shares of Company’s common stock every three months, beginning in January 2014.

27

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KANDI TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The fair value of stock awards based on service is determined based on closing price of the common stock on the date the shares are granted. The compensation cost for awards of common stock are recognized over the requisite service period of six months.

On December 30, 2013, the Board of Directors approved a proposal (as submitted by the Compensation Committee) of an award for selected executives and other key employees comprising a total of 335,000 shares of common stock for each fiscal year, beginning with the 2013 fiscal year, under the Company’s 2008 Omnibus Long-Term Incentive Plan (the “Plan”), if the Company’s determination that the Company’s “Non-GAAP Net Income” for the fiscal year increased by 10% comparing to that of the prior year’s. The specific number of shares of common stock to be issued in respect of such award could proportionally increase or decrease if the actual Non-GAAP Net Income increase is more or less than 10%. “Non-GAAP Net Income” means the Company’s net income for a particular year calculated in accordance with GAAP, excluding option-related expenses, stock award expenses, and the effects caused by the change of fair value of financial derivatives. For example, if Non-GAAP Net Income for the 2014 fiscal year increases by 10% compared to the Non-GAAP Net Income for the 2013 fiscal year, the selected executives and other key employees will each be granted his or her target amount of common stock of the Company. If Non-GAAP Net Income in 2014 is less than Non-GAAP Net Income in 2013, then no common stock will be granted. If Non-GAAP Net Income in 2014 increases compared to Non-GAAP Net Income in 2013 but the increase is less than 10%, then the target amount of the common stock grant will be proportionately decreased. If Non-GAAP Net Income in 2014 increases compared to Non- GAAP Net Income in 2013 but the increase is more than 10%, then the target amount of the common stock grant will be proportionately increased. Any such increase in the grant will be subject to the total number of shares available under the Plan, and the Company’s Board of Directors and shareholders will need to approve an increase in the number of shares reserved under the Plan if the number of shares originally reserved is used up.

The fair value of each award granted under the Plan is determined based on the closing price of the Company’s stock on the date of grant of the award. To the extent that the performance goal is not met and so no shares become due, no compensation cost is recognized and any recognized compensation cost during the applicable year is reversed. The number of shares of common stock granted under the Plan with respect to fiscal 2014 would be 1,018,839 shares according to the estimation of Non-GAAP Net Income of the whole year of 2014 based on the Non-GAAP Net Income of the first quarter of 2014. The compensation expense is recognized in General and Administrative Expenses.

NOTE 20 – INTANGIBLE ASSETS

The following table provides the gross carrying value and accumulated amortization for each major class of intangible assets other than goodwill:

		Remaining useful
		life as of March			March 31, 2014
		31, 2014			(Unaudited)			December 31, 2013
Gross carrying amount:
Trade name		7.75 years		$	492,235			492,235
Customer relations		7.75 years			304,086			304,086
					796,321			796,321
Less : Accumulated amortization
Trade name				$	(97,263	)		(84,576	)
Customer relations					(60,086	)		(52,249	)
					(157,349	)		(136,825	)
Intangible assets, net				$	638,972			659,496

The aggregate amortization expense for those intangible assets that continue to be amortized is reflected in amortization of intangible assets in the consolidated statements of income, and comprehensive income was $20,524 and $20,524 for the three months ended March 31, 2014 and 2013, respectively.

28

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KANDI TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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

2014 (nine months)	$	61,571
2015		82,095
2016		82,095
2017		82,095
2018		82,095
Thereafter		249,021
Total	$	638,972

NOTE 21 –SUMMARIZED INFORMATION OF INVESTMENT IN THE JV COMPANY

The Company’s investment in the JV Company, which was organized in March 2013, is accounted for using the equity method of accounting. As of March 31, 2014, the JV Company had consolidated the following: (1) 100% interest in Kandi Changxing; (2) 100% interest in Kandi Jinhua; (3) 100% interest in JiHeKang; (4) 100% interest in Kandi Shanghai; (5) 100% interest in Kandi Jiangsu, and 19% interest in the Service Company.

The combined results of operations and financial position of the JV Company are summarized below:

		Three months ended March 31,
		2014			2013
Condensed income statement information:
Net sales	$	34,860,044		$	-
Gross income (loss)		4,287,928			-
Net income (loss)		1,656,824			-
Company’s equity in net income of JV		828,412			-

		March 31, 2014			December 31, 2013
Condensed balance sheet information:
Current assets	$	93,135,402		$	108,139,053
Noncurrent assets		160,094,993			146,130,466
Total assets	$	253,230,395		$	254,269,519
Current liabilities		92,401,059			93,772,816
Noncurrent liabilities		-			-
Equity		160,829,336			160,496,703
Total liabilities and equity	$	253,230,395		$	254,269,519

Note: The following table illustrates the captions used in the Company’s Income Statements for its equity basis investments in the JV Company.

Changes in the Company’s investment in JV Company for the three months ended March 31, 2014 and 2013 are as follows:

Condensed income statement information:		Three Months Ended March 31,
		2014			2013
Investment in JV Company, beginning of the period,	$	79,331,930		$	-
Income (loss) from equity investment		828,412			-
Intercompany transaction unrealized gain effects		899,943			-
Exchange difference		(661,106	)		-
Investment in JV Company, end of the period	$	80,399,179		$	-

29

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KANDI TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following tables summarize the effects of transactions, including sales and purchases with the JV Company:

		Three Months Ended March 31,
		2014			2013
Sales to Kandi Changxing.	$	17,226,293		$	-
Sales to Kandi Shanghai.		6,901,779			-
Sales to Service Company		594,210			-
Purchase from Kandi Changxing		45,422
Purchase from Service Company		1,509,304			-

As of March 31, 2014 and December 31, 2013, significant balances with the JV Company were as follows:

		March 31,			December 31,
		2014			2013
Due from the JV Company	$	4,087,989		$	4,121,688
Due from Kandi Changxing		14,459,553			1,576,408
Due from Kandi Shanghai		6,985,818			-
Due (to) Kandi Jinhua		(3,001,103	)		(2,780,504	)
Due (to) the Service Company		(906,499	)		-
	$	21,625,758		$	2,917,592

The amounts due from the JV Company as of March 31, 2014 and December 31, 2013 were not collateralized, were interest-free and had normal business payment terms.

NOTE 22 –ACCOUNTS RECEIVABLE

Accounts receivable are summarized as follows:

		March 31,
		2014			December 31,
		(Unaudited)			2013
Accounts receivable	$	22,674,057		$	31,370,862
Less: Provision for doubtful debts		-			-
Accounts receivable, net	$	22,674,057		$	31,370,862

During the three months ended March 31, 2014 and 2013, the Company sold products to Kandi USA Inc, a company that operates under the trade name of Eliteway Motorsports (“Eliteway”), amounting to $559,019 and $1,184,180, respectively. As of March 31, 2014 and December 31, 2013, outstanding receivables due from Eliteway was $2,039,176 and $ 2,800,958, respectively.

Mr. Hu Wangyuan is the sole shareholder and officer of Eliteway, which serves as a U.S. importer of the Company’s products. Mr. Hu Wangyuan is the adult son of the Company’s chairman and Chief Executive Officer, Mr. Hu Xiaoming. As of and for the three months ended March 31, 2014, Eliteway and Mr. Hu Wangyuan were financially independent from the Company. The transactions between the Company and Eliteway were carried out at arm’slength without preferential terms compared with other customers that placed orders comparable in size or volume.

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KANDI TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 23 – COMMITMENTS AND CONTINGENCIES

Guarantees and Pledged collateral for third party bank loans

As of March 31, 2014, the Company provided guarantees for the following third parties:

(1) Guarantees for bank loans

Guarantee provided to			Amount
Zhejiang Kangli Metal Manufacturing Company.		$	4,866,654
Zhejiang Shuguang industrial Co., Ltd.			4,866,654
Nanlong Group Co., Ltd.			9,733,307
Total		$	19,466,615

On December 27, 2013, the Company entered into a guarantee contract to serve as the guarantor for the bank loan borrowed from Shanghai Bank Hangzhou branch in the amount of $4,866,654 by Zhejiang Kangli Metal Manufacturing Company (“ZKMMC”) for the period from December 27, 2013 to December 27, 2014. ZKMMC is not related to the Company. Under this guarantee contract, the Company agrees to perform all obligations of ZKMMC under the loan contract if ZKMMC fails to perform its obligations as set forth therein.

On March 4, 2014, the Company entered into a guarantee contract to serve as the guarantor for the bank loan borrowed from PingAn Bank in the amount of $4,866,654 by Zhejiang Shuguang industrial Co., Ltd. (“ZSICL”) for the period from March 4, 2014 to March 4, 2015. ZSICL is not related to the Company. Under this guarantee contract, the Company agrees to perform all obligations of ZSICL under the loan contracts if ZSICL fails to perform its obligations as set forth therein.

On March 15, 2013 and December 27, 2013, the Company entered into two guarantee contracts to serve as the guarantor for the bank loans borrowed from Shanghai Pudong Development Bank Jinhua Branch and Shanghai Bank Hangzhou branch in the amount of $3,244,436 and $6,488,871, respectively, by Nanlong Group Co., Ltd. (“NGCL”) for the period from March 15, 2013 to March 15, 2016, and December 27, 2013 to December 27, 2014, respectively. NGCL is not related to the Company. Under these guarantee contracts, the Company agrees to perform all obligations of NGCL under the loan contracts if NGCL fails to perform its obligations as set forth therein.

(2) Pledged collateral for a third party’s bank loans

As of March 31, 2014, none of the Company’s land use rights or plant and equipment were pledged as collateral securing bank loans to third parties.

NOTE 24 –SEGMENT REPORTING

The Company has only one single operating segment. The Company’s revenue and long-lived assets are primarily derived from and located in the PRC. The Company only has operations in the PRC.

The following table sets forth revenues by geographic area

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KANDI TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

		Three Months Ended March 31
					2014			2013
											Long Lived
		Sales Revenue			Long Lived Assets			Sales Revenue			Assets
North America	$	569,218			-		$	1,628,080			-
Europe and other region		526,602			-			410,717			-
China
		39,075,484			123,648,510			12,623,724			49,449,558
Total	$	40,171,304			123,648,510		$	14,662,521			49,449,558

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This report contains forward-looking statements within the meaning of the federal securities laws that relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology, such as “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “intend,” “potential” or “continue” or the negative of such terms or other comparable terminology, although not all forward-looking statements contain such terms.

In addition, these forward-looking statements include, but are not limited to, statements regarding implementing our business strategy; development and marketing of our products; our estimates of future revenue and profitability; our expectations regarding future expenses, including research and development, sales and marketing, manufacturing and general and administrative expenses; difficulty or inability to raise additional financing, if needed, on terms acceptable to us; our estimates regarding our capital requirements and our needs for additional financing; attracting and retaining customers and employees; sources of revenue and anticipated revenue; and competition in our market.

Forward-looking statements are only predictions. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. All of our forward-looking information is subject to risks and uncertainties that could cause actual results to differ materially from the results expected. Although it is not possible to identify all factors, these risks and uncertainties include the risk factors and the timing of any of those risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2013 and those set forth from time to time in our other filings with the Securities and Exchange Commission (“SEC”). These documents are available on the SEC’s Electronic Data Gathering and Analysis Retrieval System at http://www.sec.gov.

Critical Accounting Policies and Estimates

This section should be read together with the Summary of Significant Accounting Policies in the attached condensed consolidated financial statements included in this report.

Policy affecting options and warrants

Our stock option cost is recorded in accordance with ASC 718 and ASC 505. The fair value of stock options is estimated using the Black-Scholes-Merton model. Our expected volatility assumption is based on the historical volatility of ’our common stock. The expected life assumption is primarily based on the expiration date of the option. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Stock option expense recognition is based on awards expected to vest. There were no estimated forfeitures. ASC standards require forfeitures to be estimated at the time of grant and revised in subsequent periods, if necessary, if actual forfeitures differ from those estimates.

Our warrant costs are recorded in liabilities and equities, respectively, in accordance with ASC 480, ASC 505 and ASC 815. The fair value of a warrant, which is classified as a liability, is estimated using the Black-Scholes-Merton model and the lattice valuation model. Our expected volatility assumption is based on the historical volatility of our common stock. The expected life assumption is primarily based on the expiration date of the warrant. The risk-free interest rate for the expected term of the warrant is based on the U.S. Treasury yield curve in effect at the time of measurement. The warrants, which are freestanding derivatives classified as liabilities on the balance sheet, are measured at fair value on each reporting date, with decreases in fair value recognized in earnings and increases in fair values recognized in expenses.

The fair value of equity-based warrants, which are not considered derivatives under ASC 815, is estimated using the Black-Scholes-Merton model. Our expected volatility assumption is based on the historical volatility of our common stock. The expected life assumption is primarily based on the expiration date of the warrant. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

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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 our accounts receivable and inventories.

Accounts receivable are recognized and carried at net realizable value. An allowance for doubtful accounts is recorded in the period when a loss is probable based on an assessment of specific factors, such as troubled collection, historical experience, accounts aging, ongoing business relations and other factors. Accounts are written off after exhaustive efforts at collection. If accounts receivable are to be provided for, or written off, they would be recognized in the consolidated statement of operations within operating expenses. As of March 31, 2014 and December 31, 2013, we recorded no allowance for doubtful accounts. This determination was made per our management’s judgment, which was based on their best knowledge.

Inventory is 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. Adjustments to reduce the cost of inventory to its net realizable value are made, if required, for estimated excess, obsolescence, or impaired balances. 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.

Although we believe that there is little likelihood that actual results will differ materially from 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, we could realize significant write downs for slow-moving inventories or uncollectible accounts receivable.

Revenue Recognition

Our revenue recognition policy plays a key role in our consolidated financial statements. Revenues represent the invoiced value of goods sold, recognized upon the shipment of goods to customers, and revenues are recognized when all of the following criteria are met:

Persuasive evidence of an arrangement exists;
Delivery has occurred or services have been rendered;
The seller’s price to the buyer is fixed or determinable; and
Collectability is reasonably assured.

The revenue recognition policies for our legacy products, including ATVs, go-karts and EVs, are the same: When the products are delivered, the associated risk of loss is deemed transferred, and at that time we recognize revenue.

Warranty Liability

Most of our non-EV products (the “Legacy Products”) are exported out of China to foreign countries that have legal and regulatory requirements with which we are not familiar. Development of warranty policies for our Legacy Products in each of these countries would be virtually impossible and prohibitively expensive. Therefore, we provide price incentives and free parts to our customers and in exchange, our customers establish appropriate warranty policies and assume warranty responsibilities. Consequently, warranty issues are taken into consideration during the price negotiation for our products. The free parts are delivered along with the products, and when products are sold, the related parts are recorded as cost of goods sold. Due to the reliable quality of our products, we have been able to maintain this warranty policy and we have not had any product liability attributed to the quality of our products.

For the EV products that we sell in China, there is a three year or 50,000 kilometer manufacturer warranty. This warranty affects us through our participation and investment in the JV Company, which manufactures the EVs.

Results of Operations

34

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Comparison of Three Months Ended March 31, 2014 and 2013

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

35

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(a) Revenue

For the three months ended March 31, 2014, our revenue increased by 174.0% as compared to the three months ended March 31, 2013 from $14,662,521 to $40,171,304.

The following table lists the number of vehicles sold, categorized by vehicle types, within the three months ended March 31, 2014 and 2013:

		Three Months Ended March 31,
		2014						2013
		Unit			Sales			Unit			Sales
EV parts		18,153		$	25,014,066			-			-
EV products		620			8,368,088			302		$	1,727,034
Go-Kart		3,836			3,392,649			9,911			8,523,394
ATV		5,229			3,337,550			4,934			2,549,510
Auto generator		1,664			57,933			19,339			633,936
Three wheeled motorcycle		2			1,018			98			67,663
Utility vehicles (“UTVs”)		-			-			240			578,673
Refitted car		-			-			22			582,311
Total
		29,504		$	40,171,304			34,846		$	14,662,521

EV Parts

During the three months ended March 31, 2014, our revenues from the sale of EV parts was $25,014,066. We started this business in the first quarter of 2014, and our business has consisted primarily of the sale of battery packs and related parts.

EV Products

During the three months ended March 31, 2014, our revenues from the sale of EV products increased by $6,641,054, or 384.5%, as a result of a 105.3% increase in unit sales and a 136.0% increase in the average unit price compared to the same period of last year. The significant increase was mainly attributable to the newly-added EV model –Kandi Brand SMA7000BEV, a five-door and five-seat vehicle, and SMA7001BEV, an improved model of electric vehicle, both of which are sold at a significantly higher prices. The increased unit sales were driven by sales to Hangzhou Public EV Sharing System (the “Carshare” Project).

Go-Karts

During the three months ended March 31, 2014, our revenues from the sale of go-karts declined by $5,130,746, or 60.2%, as a result of a 61.3% decrease in unit sales that was partially offset by a 2.8% increase in the average unit price, in each case compared to the same period of last year. The decrease in go-Kart Sales was primarily due to the significant increase in our EV parts business in the first quarter of 2014, which was the focus of much of management’s attention.

ATV

During the three months ended March 31, 2014, we increased our revenues from the sale of ATVs by $788,040, or 30.9%, as a result of a 6.0% increase in unit sales and a 23.5% increase in the average unit price compared to the same period of 2013. The increase in revenue was primarily attributable to the market condition for ATV products, which continued to recover, and to the increase in the average unit price resulting from a higher percentage of high-end and middle-end products sold in this reporting period.

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Auto Generators

During the three months ended March 31, 2014, our auto generators experienced a decrease in revenue of $576,003, or 90.9%, as a result of a 91.4% decrease in unit sales that was partially offset by a 6.2% increase in the average unit price compared to the same period of last year. The decrease in revenue was due to the adjustment in Yongkang Scrou’s product offering from a limited offering of auto alternators to a an offering of wider range of products, such as automobile motors, air-conditioning systems and controllers for electric vehicles. In addition to the 1,664 units of auto alternators, during the first three months ended March 31, 2014, Yongkang Scrou also sold 2,556 automobile motors, 2,800 air-conditioning systems, 2,270 EV controllers, and 2,120 sets of accelerator pedals, and recorded revenues of $3,228,327. Yongkang Scrou provides these products for use with our vehicles and JV Company’s EVs. Sales of these products to our affiliates are categorized as inter-company transactions and have been eliminated in consolidation.

Motorcycles

During the three months ended March 31, 2014, our revenues from the sale of three-wheeled motorcycles declined by $66,645, or 98.5%, as a result of a 98.0% decrease in unit sales and a 26.3% decrease in the average unit price compared to the same period of last year. The decrease was primarily because we adjusted our product offering and focused our efforts on increasing EV revenues in the China market.

UTV

During the three months ended March 31, 2014, our utility vehicles (“UTVs”) revenue was nil. This is mainly because we adjusted our product offering and focused our efforts on increasing our EV revenues in the China market. We plan to decrease or stop manufacturing UTV products.

Refitted Car

During the three months ended March 31, 2014, we did not record any revenue from this business as we decided to discontinue this business during the third quarter of 2013 and to focus our efforts on increasing our revenues from the sale of EVs in the China market.

The following table shows the breakdown of our revenues from our customers by geographical markets based on the location of the customer during the three months ended March 31, 2014 and 2013:

		Three Months Ended March 31,
		2014						2013
		Sales			Percentage			Sales			Percentage
North America	$	569,218			2%		$	1,628,080			11%
China		39,075,484			97%			12,623,724			86%
Europe & other region		526,602			1%			410,717			3%
Total	$	40,171,304			100%		$	14,662,521			100%

(b) Cost of goods sold

Cost of goods sold during the three months ended March 31, 2014 was $35,310,895, representing a 212.7% increase from $11,290,490 in the corresponding period of 2013. This increase was primarily due to the increase in our sales. However, our sales increased by a lower percentage than our related costs. Our sales had a 174.0% increase in the first three months of 2014 compared to the same period of 2013; whereas our cost of goods sold increased by 212.7% in the first three months of 2014 compared to the same period of 2013. The principal reason that the percentage increase in our cost of goods sold is 38.7% higher than the percentage increase of our revenues in the same period of time is because $22,856,643 of revenue generated by our EV parts business related to products that were purchased and resold by us from third-party manufacturers with only a small mark-up over our purchase price (corresponding cost of goods sold was $22,252,987) without our accrual of labor or overhead costs. Excluding the effects caused by these transactions, the percentage increase in cost of goods sold was $2.43% less than the percentage increase of our revenue in the same period.

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During the three months ended March 31, 2014, excluding the transactions mentioned above, our cost of raw materials was kept steady as the same period of last year. The percentage increase in our cost of raw materials was only 0.45% higher than the percentage increase of our revenues in the same period of time.

Excluding the transactions mentioned above, total wages and salaries only changed slightly in the three months ended March 31, 2014, had a relatively slower increase of 0.16% compared to the sale increase in the same period of time because the worker efficiency increase a little.

Excluding the transactions mentioned above, our other overhead costs in the three months ended March 31, 2014 had a relatively slower increase of 2.73% compared to the sales increase in the same period of time, because some low value consumption goods, such as tools, which were acquired in previous years were still being used in the three months ended March 31, 2014. The wear and tear costs for tools in the workshops booked in accounting increased in a slower pace compared to the pace of increase of our sale.

(c) Gross profit

Gross profit for the first quarter of 2014 increased 44.1% to $4,860,409, compared to $3,372,031 for the same period last year. This was attributable to our increase in revenue. However, our gross margin in the first quarter of 2014 decreased to 12.1% compared to 23.0% for the same period of 2013. This decrease was primarily due to the fact that we only recently commenced our business of selling EV parts, and related components are relatively expensive at the starting phase, therefore, sales of EV parts have a lower gross margin compared to other products.

(d) Selling and distribution expenses

Selling and distribution expenses were $71,257 for the three months ended March 31, 2014, compared to $89,614 for the same period in 2013, a 20.5% decrease. This decrease is primarily attributable to a decrease in our product insurance expenses, transportation expenses and customs inspection expenses during this reporting period.

(e) General and administrative expenses

General and administrative expenses were $6,470,766 for the three months ended March 31, 2014, compared to $692,964 for the same period in 2013, a 833.8% increase. For the three months ended March 31, 2014, general and administrative expenses included $3,420,631 in expenses for common stock awards to employees and consultants for their services, compared to $17,692 for the same period in 2013. Excluding stock award costs, our net general and administrative expenses for the three months ended March 31, 2014 were $3,050,135, an increase of 351.7% over the $675,272 of such expenses for the same period of 2013. This increase was primarily attributable to costs related to the capital raise that occurred in the first quarter of 2014.

(f) Research and development

Research and development expenses were $1,172,257 for the three months ended March 31, 2014, compared to $689,665 from the same period in 2013, a 70.0% increase. This increase was primarily due to our increased expenses related to our development and commercialization of our new EV model - SMA7005BEV, the development of our new auto air conditioning system, and the development of our EV intelligent control system used in our EV products.

(g) Government grants

Government grants totaled $0 for the three months ended March 31, 2014, same as the corresponding period in 2013.

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(h) Net interest (expense) income

Net interest expense was $471,180 for the three months ended March 31, 2014, compared to $670,208 for the same period last year, or a decrease of 29.7% . This change was primarily attributable to an increase in interest income earned on loans made to third parties. For the three months ended March 31, 2014, we recorded interest income of $483,293, which included $471,142 earned on loans made to third parties and $12,151 earned on bank deposits. For the three months ended March 31, 2014, we recorded interest expense of $954,473, which included bank loan interest of $578,647 and bond interest of $375,826.

(i) Change in fair value of financial instruments

For the three months ended March 31, 2014, the expense related to changes in the fair value of warrants issued to investors and placement agents was $12,314,171, compared to income of $990,395 for the same period of last year.

(j) Share of (Loss) of Associated Company

Investment losses were $15,805 for the first three months ended March 31, 2014, compared to a loss of $14,023 for the corresponding period in 2013. For the three months ended March 31, 2014 and 2013, these losses were attributable to our 30% equity interest investment in Jinhua Service.

(k) Share of Profit (Loss) after Tax of the JV Company

The JV Company recorded income of $1,656,824 in the three-month period ended March 31, 2014. As a result, we had a profit of $828,412 in the three-month period ended March 31, 2014 due to our 50% interest in the JV Company. We believe the JV Company will continue to generate profits in the future, particularly as demand for our EV products continues to build in China. Also refer to Note 21.

(l) Other Income, Net

Other income was $59,580 for the three months ended March 31, 2014, compared to $122,365 for the same period of last year, a decrease of $62,785, or 51.3% . This decrease was primarily attributable to the decrease in lease income we received during this reporting period.

(m) Net income

For the three months ended March 31, 2014, we recorded a net loss of $14,086,160, compared to net income of $2,236,873 for the same period of last year. This decrease was primarily caused by changes relating to stock awards to management, changes in the fair value of financial derivatives and increases in our general and administrative expenses, as discussed above.

Excluding the effects of the stock award expense, which was $3,420,631 and $17,692 for the three months ended March 31, 2014 and 2013, respectively, and the change of the fair value of financial derivatives, which was an expense of $12,314,171 and income of $990,395 for the three months ended March 31, 2014 and 2013, respectively, for the three months ended March 31, 2014, our net income was $1,648,642, an increase 30.4% compared to net income of $1,264,170 for the same period of 2013, excluding the same effects. This increase is primarily attributable to the increase in gross profit and share of our profits of the JV Company, which were offset in part by the increased general and administrative expenses.

Financial Condition

Liquidity and Capital Resources

Working Capital

We had a working capital surplus of $13,652,145 as of March 31, 2014, compared to a working capital surplus of $43,892,558 as of March 31, 2013.

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As of March 31, 2014, the amount of advances to suppliers was $16,470,855, which included the advance paid to raw material suppliers, mold manufactures, and suppliers of equipment.

As of March 31, 2014, we had credit lines from commercial banks of $53,208,747, of which $33,742,132 was used as of March 31, 2014.

We believe that our cash flows generated internally may not be sufficient to support the future growth in our operations and to repay short-term bank loans for the next twelve (12) months, if needed. However, we believe our access to existing financing sources and established relationships with PRC banks will enable us to meet our obligations and fund our ongoing operations.

We have historically financed our operations through short-term commercial bank loans from PRC banks. The term of these loans is typically for one year, and upon the payment of all outstanding principal and interest in a particular loan, the banks have typically rolled over the loan for additional one-year terms, with adjustments made to the interest rate to reflect prevailing market rates. We believe this situation has not changed and that short-term bank loans will be available on normal trade terms if needed.

On March 24, 2014, we raised approximately $11.05 million by selling an aggregate of 606,000 shares of our common stock to two institutional investors at a price of $18.24 per share. As part of the transaction, we also issued to the investors warrants for the purchase of up to 90,900 shares of common stock at an exercise price of 22.80 per share, which warrants have a term of 18 months from the date of issuance.

Capital Requirements and Capital Provided

Capital requirements and capital provided for the three months ended March 31, 2014 are as follows:

		Three Months Ended
		March 31, 2014
Capital requirements		(In thousands)
Purchase of plant and equipment	$	119
Issuance of notes receivable		21,553
Repayments of short-term bank loans		817
Repayments of notes payable		1,961
Internal cash used in operations		3,046
Increase in cash		7,736
Total capital requirements	$	35,232
Capital provided
Decrease in restricted cash		2
Proceeds from short-term bank loan		817
Common stock and warrants issued		11,068
Warrant exercise		20,484
Other financing activities		3,066
Total capital provided	$	35,437

For further information, see the Statement of Cash Flows.

The difference between capital provided and capital requirement is the effect of exchange rate changes over the past three months.

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Cash Flow

Net cash flow used in operating activities was ($3,046,451) for the three months ended March 31, 2014, compared to net cash flow used in operating activities of ($278,152) for the same period in 2013. This change was mainly attributable to changes in our cash flow caused by prepayments and prepaid expenses. The account has changed to a cash outflow of (7,691,861) for the three months ended 2014, compared to a cash inflow of $2,717,021 for the same period last year. This change was mainly attributable to our prepayment of a significant percentage of our equipment purchases and an increase in the amount due from JV Company.

Net cash flow used in investing activities was ($21,672,906) for the three months ended March 31, 2014, compared to ($16,052,560) used in the same reporting period of last year. This increase was mainly attributable to the fact that we made loans in the principal amount of ($21,553,430) to unrelated third parties during the 2014 period, while during the three months ended March 31, 2013, we made third-party loans of only $(1,940,690).

Net cash flow provided by financing activities was $32,658,896 for the three months ended March 31, 2014, compared to net cash flow provided by financing activities of $8,055,062 for the three months ended March 31, 2013. Cash flow provided by financing activities in the 2014 quarter was primarily attributable to the financing we closed in March 2014 and the cash received upon the exercise of warrants during the first quarter of 2014.

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Recent Development Activities:

In March 2014, we entered into a Securities Purchase Agreement with certain purchasers (the “4th round investors”) pursuant to which we sold to the 4th round investors, in a registered direct offering, an aggregate of 606,000 shares of common stock at a negotiated purchase price of $18.24 per share, for aggregate gross proceeds to our company of approximately $11,053,440, before deducting fees to the placement agent and other estimated offering expenses payable by us. As part of the transaction, the 4th round investors also received warrants for the purchase of up to 90,900 shares of our common stock at an exercise price of $22.80 per share (the “Fifth Round Warrants”). The Fifth Round Warrants have a term of eighteen months and are exercisable by the holders at any time after the date of issuance.

In April 2014, to meet the market demands for pure EVs, Kandi Vehicles, our wholly-owned subsidiary in China, signed a one-year supply contract with Lishen Battery System Co., Ltd ("Tianjin Lishen"), China’s largest producer of rechargeable lithium-ion batteries, for a minimum of 25,000 cases of 80V/70AH lithium-ion batteries starting in May 2014. The contract is valued roughly at RMB360 million or approximately $58.5 million when all the purchase orders have been fulfilled. We also signed a supply contract with Tianjin SinoPoly New Energy Technology Co., Ltd.(“Tianjin SinoPoly”) for supplying 300,000 units of 3.2V -66AH lithium-ion batteries, which valued at approximately RMB 135 million or approximately $22 million.

At the end of April 2014, the board of JV Company came to a decision to initiate the negotiations with Jiaxin Jiale Investment Partnership Co., Ltd. to acquire 51% ownership of Zhejiang ZuoZhongYou Electric Vehicle Service Co., Ltd., or the Service Company (as defined elsewhere in this report) it holds. If this acquisition is accomplished, the JV Company will have a 70% ownership interest in the Service Company, and the Company will indirectly own a 35% interest. We believe this acquisition would help the expansion of the “Carshare” Projects in China, and enable our Company to have a larger percentage of any profits earned by that entity. We anticipate to release news in time when this acquisition is accomplished.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Exchange Rate Risk

Our operations are conducted mainly in the PRC. As such, our earnings are subject to movements in foreign currency exchange rates when transactions are denominated in RMB, which is our functional currency. Accordingly, our operating results are affected by changes in the exchange rate between the U.S. dollar and those currencies.

Economic and Political Risks

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 performance 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.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The Company has evaluated, under the supervision of the Company’s Chief Executive Officer and the Chief Financial Officer, the effectiveness of disclosure controls and procedures as of March 31, 2014. This is done in order to ensure that information the Company is required to disclose in reports that are filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is: (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure.

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Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of March 31, 2014, due to significant deficiencies in internal controls, which, in the aggregate, lead to a conclusion that a material weakness exists in the control environment as follows:

	1.	Lack of adequate policies and procedures in internal audit function, which may potentially result in: (1) lack of communication between internal audit department and the Audit Committee and the Board of Directors; (2) insufficient internal audit work to ensure that the Company's policies and procedures have been carried out as planned.
	2.	There was no self-assessment performed by the Audit Committee to assess the effectiveness of the Audit Committee in oversight of management.
	3.	Inadequate design of internal controls over the approval procedures for related party transactions.

Changes in Internal Control over Financial Reporting

During the first quarter of 2014, we made arrangements to insure the efficient and timely communication between the internal control audit department and the Audit Committee. The internal audit department was restructured that its head has reported directly to Audit Committee on major accounting items to enhance the independence and objectivity of the department. Currently, the internal audit department has also revaluated the policies and procedures in internal audit function, and made necessary remediation. The new internal audit policies and procedures are in the process of approval and are expected to be approved by the end of May 2014.

During the first quarter of 2014, our Board of Directors also revaluated the approval procedures for related party transactions, and has prepared a new detail approval procedure for related party transactions. This is in the process of finalization, which is expected to be approved by our Board of Directors by the end of May 2014.

Other than with respect to the ongoing remediation of the material weakness pursuant to the plan described above, there were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 6. Exhibits

Exhibit Number	Description
31.1	Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934
31.2	Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934
32.1	Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of 2002**
Exhibit 101.INS	XBRL Instance Document.**
Exhibit 101.SCH	XBRL Taxonomy Extension Schema Document.**
Exhibit 101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.**
Exhibit 101.LAB	XBRL Taxonomy Extension Label Linkbase Document.**
Exhibit 101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.**
Exhibit 101.DEF	XBRL Taxonomy Definitions Linkbase Document.**

_____________________

**

Furnished and not deemed filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise not subject to liability under these sections.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Kandi Technologies Group, Inc.

Date: May 12, 2014	By:	/s/ Hu Xiaoming
		Hu Xiaoming
		President and Chief Executive Officer
		(Principal Executive Officer)
Date: May 12, 2014	By:	/s/ Zhu Xiaoying
		Zhu Xiaoying
		Chief Financial Officer
		(Principal Financial Officer and Principal
		Accounting Officer)

 

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