UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

2013

or

[_]TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to _____________

Commission file number 000-52186

KANDI TECHNOLOGIES CORP.

GROUP, INC.
(Exact name of registrant as specified in its charter)

Jinhua City Industrial Zone

Jinhua, Zhejiang Province

People’s
People's Republic of China

Post Code 321016

(Address of principal executive offices) (Zip Code)

(86-579) 82239856
(Registrant’sRegistrant's telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

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 ¨[_]      No þ

[X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.

Yes ¨[_]      No þ

[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 þ[X]      No ¨

[_]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).þ

Yes ¨[X]      No

[_]

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’sregistrant'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. þ

[_]

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes ¨[_]      No þ

[X]

The aggregate market value of thevoting common stock issued and outstanding and held by non-affiliates of the registrant based upon the closing sales price for the common stock on the NASDAQ Global Market onas of June 30, 2011,28, 2013, the last business day of the registrant’sregistrant's second fiscal quarter, was approximately $27,122,126. For the purposes$108,038,543.

The number of this calculation, executive officers, directors, and each person that owns 10% or more of our outstanding common stock are deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of March 26, 2012, the registrant had 27,447,593 shares of common stock par valueoutstanding as of $0.001 outstanding.

March 11, 2014 was 40,105,321.

DOCUMENTS INCORPORATED BY REFERENCE:

None.

None.  

TABLE OF CONTENTS

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K (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“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

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.Group, Inc. and its subsidiaries.

Item 1. Business.

Introduction

Our Corporate Structure

In 2013, the Company experienced growth in both its traditional off-road vehicle business and in its electric vehicle business, but the growth in the electric vehicle business was particularly significant and we believe validates the Company's increased focus on that business in the past several years. We first produced an electric automobile, the “Coco” in August 2008. We took initial steps toward expanding that effort in early 2010, when, on January 4, 2010, we announced we had forged “The Alliance for Chinese Electric Vehicle Development and Commercialization” with major Chines energy, IT and battery companies to help launch a new electric vehicle era in China.

Based upon market factors as we saw them, we expanded our operations in this market segment. The Company's shift in focus to the EV market has been the result of gradual and strategic efforts. We describe those factors below at “The Market For Electric Vehicles” and “Business Overview.” By mid-2012 we had begun programs for design, production and distribution of electric vehicles (which we sometimes refer to as “EVs” in this document). While we continue to actively engage in design, production and distribution of our traditional off-road vehicle products, we have greatly intensified our engagement in the EV market, principally in China. We believe our financial results in 2013 validate this expansion of our business strategy.

The Market for Electric Vehicles

Factors creating and driving the market

Research and Development of major EV technology projects in China began in 2001. Driven by two central government five-year plans for scientific and technological research as well as by the Olympics, World Expo and the “1000 cars in 10 cities” demonstration platform, the Chinese electric automobile sector was officially born. And the pressure to enhance relevant technologies continues. While the program for developing technology has been established, however, the market for EVs has developed slowly for various reasons.

There is growing consumer demand for motor vehicles in China and in connection with that demand, many cities are experiencing severe problems of pollution and traffic congestion. The major cities such as Beijing and Shanghai are already introducing policies restricting the purchase of cars and placing limits on their use. We expect that more cities will adopt such policies. Urban resources are limited and without effective urban transportation plans, central cities will face exhaustion of space available for traffic and ever-worsening environmental contamination. As a result, there may literally be insufficient road space for automobiles. Meanwhile, urban parking, other road and vehicle resources are wasting because they are not being effectively utilized.

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Issues confronting the market

We believe there are five major obstacles to extensive commercialization of EVs and the full development of the EV market: high cost, short driving range, long charging time, limited charging facilities, battery maintenance and pollution from non-recycling and improper disposition. We believe we have solutions and a strategy to address each of these issues.

Our Solutions and Growth Strategy

Given the economic and population growth in China, one solution to alleviate the increase in the number of resident-owned cars is to provide additional means of public transportation. Currently, subway, bus and taxi are the most common public transportation tools. The taxi is used by a small, subset of PRC residents. The subway and bus are used widely and are considered the main methods of mass public transportation. However, the cities lacks a form of capillary transportation that the residents need. Therefore, the Company provides a shared transportation platform for their convenience.

The best solution to slow an increase in the number of cars is to provide city public transportation. The taxi is relatively expensive compared to the mass transportation of subway or bus. However, these methods lack a form of specific transportation to meet residents' short-range transportation needs. A public EV sharing system, which we call “pure EV self-driving car rental sharing”, provides a shared transportation platform and commuting convenience to urban residents that is not afforded by or is complementary to that provided by mass transportation and is less expensive than taxis. Such a public EV leasing system, designed as a new business model for public transportation, maximizes the advantages of the EV and avoids its weakness compared to the traditional vehicles, will further stimulate the expansion of the EV market.

Kandi is the first in the market to have proposed the public pure electric vehicle sharing program (the “Car-Share” Project). Besides the zero-emission benefit, the Car-share Project combines city taxis, the resident cars, rental cars and traditional mass transportation advantages, along with vertical automatic charging/parking garage. It is a perfect transportation tool with all dynamics. This new business model for urban public transportation is designed to greatly improve the efficiency of urban car usage, ease traffic congestion, scarce parking resources, and the urban environment. Additionally, it will likely promote the global development of pure electric vehicles with significant impact.The project has already been launched in Hangzhou and, to date, it has been well received.

Individually driven pure EVs are utilized in the Car-Share Project. Its automated charging parking system is located at airports, train stations, hotels, business centers, selected residential areas and other places in the city that are the focus of commuter traffic. The network system provides EV rental service to individual drivers in and around the city. The network system also provides centralized management of EV maintenance, and battery charging to disperse self-service users. The EV rental station is the basic unit of the network system, providing a variety of services and transactions - - such as charging, maintenance, battery recycling and other services related to the rental of EVs. In addition, a tracking system allows the car-share project management to know at all times the precise location and the status of each vehicle.

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This Car-share Project model has been implemented since the second half of 2013 in Hangzhou. It has received significant recognition from a large group of well-known national and international press, such as China Central Television (CCTV), Xinhua News Agency, Associated Press (AP), Agence France Presse (AFP), Bloomberg, Forbes, China Information Daily. Furthermore, representatives from China's new energy vehicle pilot cities have come to visit us in recent months to learn more about this project and expressed their interest in partnering with us. Currently, we have been in discussion with Beijing, Shanghai, Chengdu, and Nantong City about expanding the Car-share.

The Joint Venture with Geely

As a part of our EV strategy, we concluded that we needed to have additional resources to respond effectively and timely to market needs. In November 2012, we started negotiating a joint venture arrangement with Shanghai Maple Guorun Automobile Co., Ltd., a 99% owned subsidiary of Geely Automobile Holdings Ltd. (“Geely”) for the design, production and distribution of EVs. Geely is the one of the largest automobile manufacturers in China. After careful negotiation, the companies entered into a joint venture agreement in March 2013 and established Zhejiang Kandi Electric Vehicles Investment Co, Ltd. (the "JV Company") in April 2013. The JV Company's mission is to utilize the advanced technologies, modern operational model and management methods to invest, develop, produce and sell EVs to satisfy the consumers' needs, and to maximize the return on the investors.

The Operations of the JV

The business scope of JV is to develop, manufacture and sell EVs and to develop, purchase, manufacture and sell auto parts, and invest in other companies which engage in such businesses. Each party agreed to establish a new wholly owned subsidiary, and contributed its EVs assets and businesses to such subsidiary. After each party established such subsidiary, the JV entered into transfer agreements with the parties to acquire and become the 100% shareholder of these subsidiaries. The parties agreed that the JV can use certain of their trademarks, patents and technologies free of charge and have entered into trademark and patent license agreements with the JV. The board of the JV consists of four members and each party has the right to assign two members to the board. Mr. Li Shufu, the Chairman of Geely was appointed as the first Chairman of the JV and Mr. Hu Xiaoming, the Chairman and CEO of Kandi, was appointed as the first general manager and the legal representative of the JV. The term of the JV is twenty years from the date of issuance of its business license and the parties may discuss the extension of the term at least two years prior to expiration.

Understanding the Contribution of the JV to the Financial Results of the Company

The economic impact of the Company's participation in the JV is reflected in its 50% ownership of the JV through its subsidiary Kandi Vehicles.All of the Company's production and development efforts for the whole cars of EV is conducted through the JV Company, and revenue generated from the sale of electric vehicles is received by the JV Company and then distributed pursuant to the Joint Venture Agreement.

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This means that the financial results of the JV are reflected as the results of an investment in the JV. Under existing accounting treatment for a joint venture position of 50% such as the Company's in the JV, it is difficult to discern in the Company's financial statements the effect of the financial results of the JV. These results are to some extent provided in Note 23 to the audited financial statements of the Company which are included as a part of this report and are discussed further at “Management's Discussion and Analysis – Financial results of the JV”, below.

Pure Electric Vehicle Subsidies

The process of receiving government subsidies is as follows: manufacturers receive central government subsidies through application and sell the EVs to local dealers at a price reflecting the deduction of the central government subsidy from the normal sale price. Local dealers establish their retail price based upon their purchase price from the manufacturers, then deduct the local government subsidy from the retail price before selling the EVs to consumers. Through the above steps, consumers receive two subsidies – from the central and local governments when they purchase EVs.

Because the central and local government subsidy amounts and policies are open and disclosed to the public and all the subsidies are reviewed and verified by the respective governments, consumers know what subsidized prices they will receive and pay for EVs. Therefore, even though dealers can sell vehicles at prices established at their discretion, programs are designed to assure that consumers should receive the entire benefit from both subsidies.

Currently, there are two subsidies from central and local governments for the pure electric vehicles (the “EVs”) in China – one from each of the central and local governments. The ultimate beneficiary for these subsidies is the consumer and the actual prices that consumers pay reflect the deduction of both subsidies.

(a) The central government provides a subsidy to manufacturers paid in advance quarterly upon application and approval and settled annually. After selling product to dealers, manufacturers can submit subsidy payment applications with invoices and other supporting documents at the end of each quarter to the requisite central government agencies through their regional offices. After the review and approval by the agencies, the central government makes advance subsidy payments to the manufacturers. At the end of the year, the final subsidy amounts are verified, reconciled according to the number of vehicles actually sold to consumers and settled on an annual basis.

(b) Pursuant to the requirement of the central government, the local governments provide a subsidy to consumers who purchase EVs by a price reduction from the dealer. After the consumer purchases an EV at a reduced selling price from the dealer, the dealer submits a subsidy application to the local government, including a consumer authorization letter for subsidy application, consumer personal I.D., EV Vehicle License, EV purchase invoice and other required documents and requests reimbursement (to the dealer) for the local government subsidy.

Our Organizational Structure

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

on August 13, 2007. On June 29, 2007, Continental Development Limited, a Hong Kong corporation (“Continental”) became a wholly owned subsidiary of Stone Mountain. Thereafter, the business ofDecember 21, 2012, the Company was thatchanged its name to Kandi Technologies Group, Inc.

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Headquartered in the Jinhua city, Zhejiang Province, China, the Company is a producer and manufacturer of Continental’s wholly ownedelectrical vehicles, all-terrain vehicles, go-karts, specialized utility vehicles and a variety of other specialty vehicles for sale in the PRC and global markets. The Company conducts its primary business operations through its wholly-owned subsidiary, Zhejiang Kandi Vehicles Co., Ltd. (“Kandi Vehicles”).

On June 24, 2008, and the Company acquired 100% of the sharespartial and wholly-owned subsidiaries of Kandi Special Vehicles Co., Ltd (“KSV”), after which KSV became a wholly-owned subsidiary of the Company. On December 21, 2011, KSV formally merged into Kandi Vehicles and, as a result of the merger, KSV ceased to exist as a separate entity.

On December 31, 2010, Jinhua Three Parties New Energy Vehicles Service Co., ltd. (“Jinhua Service”) was formed by a joint venture among the State Grid Power Corporation, Tianneng Power International, Inc. and Kandi Vehicles. The joint venture established the first Chinese electric super-mini automobile battery replacement service provider. The Company owns 30% of Jinhua Service.

In the first fiscal quarter of 2011, Jinhua Kandi New Energy Vehicles Co., Ltd. (“Kandi New Energy”) was incorporated by Kandi Vehicles and Mr. Xiaoming Hu, the Chairman and CEO of the Company. The establishment of Kandi New Energy is to comply with Chinese regulation that foreign investor can own no more than 50% of an automobile manufacturing company in China with the objective to sell automobile products in China. Mr. Hu, as a Chinese citizen and Kandi Vehicles as a foreign investment entity each owns 50% of Kandi New Energy to comply with such regulation. Kandi Vehicles made its contribution in kind and Mr. Hu made his contribution in cash loaned by Kandi Vehicles. Mr. Hu’s entire equity in Kandi New Energy is put in escrow and trust with Kandi Vehicles. Therefore, Kandi Vehicles effective controls 100% of Kandi New Energy. All profits of Kandi New Energy will be distributed to Kandi Vehicles.

To comply with the Peoples Republic of China (“PRC” of “China”)) regulation, under the Agreement, the parties jointly invested to establish Kandi New Energy. Each party contributed 50% of such investment. Kandi Vehicles made its contribution in kind, and Mr. Hu made his contribution in cash, pursuant to a loan by Kandi Vehicles. As a result, each party has a 50% ownership interest in Kandi New Energy.

The Company’sCompany's organizational chart is as follows:

Operating Subsidiaries

ZhejiangIn January 2011, pursuant to relevant agreements, Kandi Vehicles Co. Ltd. has a 50% ownership and controlled the Board of Directors in Kandi New Energy. Under Share Escrow and Trust Agreement, Loan Agreement, Contractor Agreement, between Zhejiang Kandi and other equity owner, Zhejiang Kandi Vehicles Co. Ltd. is entitled to 100% of the economic benefits, voting rights and residual interests (100% profits and loss absorption rate) inof Kandi New Energy.

Jinhua Three Parties New Energy Vehicles Service Co., ltd. (“Jinhua Service”) was formed as a joint venture, by and among our wholly-owned subsidiary, Kandi Vehicles, the State Grid Power Corporation and Tianneng Power International. The Company, indirectly through Kandi Vehicles, has a 30% ownership interest in Jinhua Service.

The primary operations ofIn April 2012, pursuant to a share exchange agreement, the Company are designing,acquired 100% of Yongkang Scrou Electric Co. (“Yongkang Scrou”), a manufacturer of driving motor, air-conditioning and controllers for electric vehicles and auto generators.

In March 2013, pursuant to a joint venture agreement (the “JV Agreement”) entered into between Kandi Vehicles and Shanghai Maple Guorun Automobile Co., Ltd. (“Shanghai Maple”), a 99% owned subsidiary of Geely Automobile Holdings Ltd. (“Geely”), the parties established Zhejiang Kandi Electric Vehicles Co., Ltd. (the “JV Company”) in connection with developing, manufacturing and commercializing all-terrain vehicles (“ATVs”), go-karts, and specialized automobiles, such as electricselling electrical vehicles (“EVs”) forand related auto parts. Each of Kandi Vehicles and Shanghai Maple has a 50% ownership interest in the PRCJV Company. The strategic purpose of the JV Company is to increase the development and global markets.use of neighborhood electric vehicles, which that parties believe address a growing and necessary market, particularly considering their relatively low price and the notorious street congestion and pollution of China's largest cities

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In March 2013, Kandi Vehicles formed Kandi Electric Vehicles (Changxing) Co., Ltd. (“Kandi Changxing”) in the Changxing (National) Economic and Technological Development Zone. Kandi Changxing specializes in the production of EVs. In fourth quarter of 2013, Kandi Vehicle entered into an ownership transfer agreement with JV Company to transfer 100% ownership to Kandi Changxing to the JV Company. The Company, indirectly, through its wholly-owned subsidiary, Kandi Vehicles, has a 50% ownership interest in Kandi Changxing.

Business OverviewIn April 2013, Kandi Electric Vehicles (Wanning) Co., Ltd. (“Kandi Wanning”) was formed by Kandi Vehicles and Jinhua Kandi New Energy Vehicles Co., Ltd. (“Kandi New Energy”) in Wanning City of Hainan Province. Kandi Vehicles has a 90% ownership in Kandi Wanning, and Kandi New Energy has the remaining 10% interest. However, Kandi Vehicles is, effectively, entitled to 100% of the economic benefits, voting rights and residual interests (100% profits and loss absorption rate) of Kandi Wanning, since it is entitled to 100% of the economic benefits, voting rights and residual interests (100% profits and loss absorption rate) of Kandi New Energy.

In July 2013, Zhejiang ZuoZhongYou Electric Vehicle Service Co., Ltd. (the “Service Company”) was formed The JV Company has a 19% ownership interest in the Service Company. The Company, indirectly, through its wholly-owned subsidiary, Kandi Vehicles, has a 9.5% ownership interest in the Service Company.

In November 2013, Zhejiang Kandi Electric Vehicles Jinhua Co., Ltd. (“Kandi Jinhua”) was formed by the JV Company. The JV Company has 100% ownership interest in Kandi Jinhua, and the Company, indirectly, through its wholly-owned subsidiary, Kandi Vehicles, has a 50% ownership interest in Kandi Jinhua.

In November 2013, Zhejiang JiHeKang Electric Vehicle Sales Co., Ltd. (“JiHeKang”) was formed by the JV Company. The JV Company has 100% ownership interest in JiHeKang, and the Company, indirectly, through its wholly-owned subsidiary, Kandi Vehicles, has a 50% ownership interest in JiHeKang.

In December 2013, the JV Company entered into an ownership transfer agreement with Shanghai Maple in connection with acquiring 100% ownership of Kandi Electric Vehicles (Shanghai) Co., Ltd. (“Kandi Shanghai”). Kandi Shanghai is a wholly-owned subsidiary of the JV Company, and the Company, indirectly, through its 50% ownership interest in the JV Company owns 50% of Kandi Shanghai.

Our Vehicles and Products

General

Kandi’sKandi's products include EVs, off-road vehicles (which include ATVs, utility vehicles (“UTVs”), and go-karts), motorcycles refitted carsetc. According to our market research on consumer demand trends, the Company has adjusted its production line strategically and super-mini-cars.continues to develop and manufacture new products in an effort to meet market demands and better serve its customers.

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Off-Road Vehicles

Kandi producesIn 2013, our ATVs experienced an increase in revenue of $4,005,105 or 62.6%, a wide range of go-karts, from26.5% increase in unit sales, and a 28.5% increase in the 90cc classaverage unit price compared to fiscal year 2012. The increase in revenue was primarily attributable to the 1,000cc class in cylinder displacement. Kandi also produces four-wheeled ATVs and specialized UTVs, which are ATVs special-fitted for agricultural and industrial use. Kandi started mass production of its go-karts in 2006; in previous quarterly and annual reports, we inadvertently statedfact that production of these go-karts started in 2003.

During the twelve months ended December 31, 2011, the market condition for ATV products continued to recover. The Company continued to developrecover and the increase in the average unit price competitiveis because a higher percentage of high-end and middle-end products to meet market demands, causing good results and successfully increasing the Company’s sales. Revenues fromwere sold in 2013.

In 2013, our ATVsgo-karts experienced an increase in revenue of $1,133,532$2,393,462, or 30.5% in fiscal year ended December 31, 2011 from the previous year; this increase is primarily attributable to7.8%, a 70%5.7% increase in unit sales, from 5,868 unitsand a 1.9% increase in the average unit price compared to fiscal year 20102012. The increase in revenue was mainly attributable to 9,958 unitsthe relatively stable growth in 2011,go-karts sales. The Company manufactures both high-end, more expensive go-kart products and less expensive go-kart products to meet customers' various needs. The Company manufactures go-kart products at a range of prices to meet the various needs and budgets of our diverse customer base.

In 2013, our utility vehicles (“UTVs”) experienced an increase in revenue of $836,207 or 262.1%, a 373.1% increase in unit sales, and a 23.5% decrease in the average unit price compared to fiscal year 2012. The increase in revenue was mainly attributable to the increase of UTV orders. The decrease in the average unit price was due to the fact that cheaper model UTVs took a higher percentage of sales in year 2013.

EV Products

In 2013, our EV products experienced an increase in revenue of $27,584,267 or 144.9%, a 19.9% increase in unit sales, and a 104.3% increase in the average unit price compared to fiscal year 2012. In the fourth quarter, the EV revenues increased $26,382,915, or 193.7% compared to the same period of 2012. The unit sales grew by 27.2% and the effect of a 23%average unit price reduction.increased by 130.9% . The significant increase was mainly attributable tothe newly added EV models –Kandi Brand SMA7000BEV, a five-door & five-seat vehicle and SMA7001BEV, an improved model of electric vehicle, were both sold at a higher price. The increasing sales were driven by Hangzhou Public EV Sharing System (the “Car share” Project). Thanks to the renewal of national subsidy policy in September of 2013, most of our EV sales occurred in the fourth quarter. We believe that sales in the first three quarters were negatively affected by the delay of the subsidy policy.

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Motorcycles

In 2011,2013, our go-karts segmentTT experienced a slight decrease in revenue of $2.5 million,$889,138 or 10% from fiscal year 2010. This slight decrease was mainly attributable to69.9%, a 9%77.1% decrease in unit sales, from 28,366 units in 2010 to 25,757 units in 2011.  We experienced slightly higher sales in 2010, especiallyand a 31.5% increase in the fourth quarter of 2010, dueaverage unit price compared to improved market conditions, which had been suppressed during the financial crisis; the improved market conditions, during the later periods of 2010, resulted in an increase in demand, especially for middle and small size products; whereas, in year 2011, demand slightly retreated after the peak in 2010.

Utility vehicles (UTVs) experienced a significant decrease in revenue from $4,839,256 to $2,696,106. This 44% decrease is due to a 47% drop in unit sales from 2,270 units in 2010 to 1,198 units in 2011. This significant decrease in sales is primarily attributable to high competition in this UTV market, and the fact that the UTVs manufactured by the Company are relatively high end and more expensive than comparable products offered by our competitors. At this moment, the Company continues to develop new products and enhance existing products to meet future demands in the UTV market. Further, many of the new products that we introduced to the market generated positive feedback. During the second half of 2011, there were some signs of improvement in the UTV sales market.

Super-Mini-Car Products

In August 2008, Kandi began selling its gas-powered super-mini-car. In fiscal year 2010, due to the Chinese government’s initiative and promotion of new energy cars, the Company shifted its target market, for its EV products, from the United States to China. As a result of the above mentioned shift in our target market, and the fact that governments (local and national) did not finalize their supporting policies until October 2011, the Company did not realize mass unit sales during fiscal year 2011. For the fiscal year ended December 31, 2011, revenues from our super-mini car, dropped by $546,483, or 8% from the same period in 2010. This2012. The decrease was primarily attributable to athe change in the product structure. There were less TTs manufactured and we may decrease or stop manufacturing such products. The increase in gas powered super-mini-cars (a decrease of 959 units); however, our unit sales of EVs increased by 418 units in comparison to 2010. With respect to aggregate super-mini-car unit sales (gas powered super-mini-cars and EVs), we experienced an overall decrease from 1,618 units in 2010 to 1,077 in 2011. For the twelve months ended December 31, 2011, the average unit price in 2013 was due to the fact that a higher percentage of TTs sold were more expensive models.

Refitted Car

In 2013, our super-mini-cars increased 38%, because super-mini cars sold by the Company during this period had enhanced features and improved performance and werefitted car experienced a changedecrease in revenue of $2,114,322, or 66.6%, a decrease of 66.1% in unit sales and a 1.7% decrease in the percentage of gas powered super-mini-cars and EVs sold. Starting on October 12, 2011, the Zhejiang Province government and Jinhua City government adopted formal policies and started providing subsidiesaverage unit price compared to purchasers of our super-mini cars. As a result of (i) developments in the Jinhua market, as well as our expected launch in the Hangzhou market, (ii) new molds that were developed by the Company with funds raised in the previous year, and (iii) the gradual use of these molds in 2012, which are expected to improve the quality of our EVs, the Company remains optimistic about future EV sales.

Motorcycles

The three-wheeled motorcycle (TT) is changing from a recreational vehicle that is not street legal to a formal vehicle that is subject to additional regulations and certifications. This role-changing period caused the revenues from our TT to drop by $496,578, or 24%, from fiscal year 2010 to $1,592,770 in fiscal year 2011. This2012. The decrease in revenue was primarily attributablemainly because the Company decided to discontinue this business during the third quarter of 2013 and focus its efforts on increasing its electric vehicles revenue in the Chinese market. “Refitted Car” is a term used by the Company to describe a line of business, where the Company modifies (refits) vehicles manufactured by unrelated, other companies to meet the special requirements of our customers. For example, the Company may make exterior changes, refit AMWS, or install nonstandard features, including, but not limited to, a 15%rearview camera, TPMS, drive recorder, anti-theft device, reversing radar and DVD player.

Auto generator

In 2013, our auto generator experienced a decrease in revenue of $1,793,206 or 51.0%, a 45.0% decrease in unit sales from 917 units in 2010 to 782 units in 2011. In responding to this market situation, the Company modified and improved the TT’s design and qualitya 10.8% decrease in the first half of 2011, which resulted in a good sales performance in the second half of 2011average unit price compared to the comparable period in 2010, but this increase in sales performance was not enough to offset the lower sales performance the Company experienced during the first six months of 2011. Currently the Company is preparing for the above-mentioned certification, and the Company believes that obtaining the necessary certifications will positively impact our future performance.

Refitted Car

For the fiscal year ended December 31, 2011,2012. The decrease in revenue was due to the Company refitted other companies’adjustment in Yongkang Scrou's product offering from a manufacturer of auto alternators to a wide range of main products, such as driving motor, air-conditioning and controller for electric vehicles now. Yongkang Scrou provides these products for use with our vehicles. Sales in connection with providing these products to meet special requirements for certain customers. The Company expects to expand this new businessour vehicles are categorized as inter-company transactions and stimulate development.

have been eliminated in consolidation.

The following table shows the breakdown of Kandi’sKandi's revenues from its customers by geographic markets based on the locationmarkets:

The majority of distributors, during the fiscal years ended December 31, 2011 and 2010:

For the year ended December 31, 2011, about 90% of sales in Chinaour legacy products were sold to Chinese export agents, who resell the Company’sCompany's products to North America, Europe, and other regions. The Company experienced similar sales in the above listed geographic markets in fiscal years ended 2010 and 2009.

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Recent Development Activities

On March 14, 2011, the Company finalizedAs disclosed on a Strategic Cooperation Agreement with Share s.r.l corporation (“SHARE”), a Rome, Italy based EV distributor. Under the terms of the strategic cooperation agreement, Kandi will provide 1,000 EVs for export to Italy. To better protect and preserve the ancient city of Rome, its city government has planned to gradually employ EVs to restrict gasoline cars’ entrance into the city, which will substantially reduce pollution from automobile emissions. This commitment brings a unique opportunity for Kandi’s pure EVs in the European market. According to the cooperative agreement signed by the companies, Kandi and SHARE will cooperate to expand sales of Kandi’s pure electric vehicles in the European market, with Rome as a starting point.

On March 29, 2011, Kandis' New Lithium-Ion EV was unveiled at Hangzhou's First New Energy Vehicle Showroom. The KD 5011 is available for sale to consumers in Hangzhou. The new model KD 5011 EV is approved for a national subsidy of RMB60,000, providing average consumers with a low-cost, eco-friendly alternative for urban transportation.

On April 25, 2011, Vice Governor Mao of Zhejiang Province visited Kandis' facilities, along with other provincial and Jinhua city government officials. Mr. Mao encouraged Kandi to continue its innovative focus on pure EV business development while maintaining overall quality and competitiveness within the marketplace.

On June 13, 2011, the Company received formal provincial government approval on the Company’s application for a new EV pilot program in Jinhua City, including RMB 15 million ($2.3 million U.S.) per year in government subsidies to 3,000 local residents that purchase Kandi clean EVs through 2012.

On July 5, 2011, the Company signed a strategic cooperation agreement with a State Grid affiliate, Hangzhou Electric Vehicle Service Co., Ltd., for promoting the launch of a 20,000 EV pilot program by Hangzhou Municipal City through the end of fiscal year 2012.

On August 14, 2011, a team was formally formed in Hangzhou City by the Development Research Center of the State Council, the Society of Automotive Engineers of China (SAEC), and Zhejiang University in connection with researching a subject proposed by the Company: the feasibility of building a 100,000 pure EV renting network in Hangzhou City and the related supporting policies required. The objective of this research is to help resolve the problem of the industrialization of pure EV, traffic jam problems and parking difficulties in current Chinese cities.

On October 12, 2011, an inauguration ceremony for a new EV promotional campaign of Jinhua City was sponsored and held by Jinhua Municipal City at the facility of the Company. The ceremony was hosted by the Director and the Deputy Director of Economic and Information Technology Commission of Jinhua, Mr. Hongshen Jin and Mr. Zhongjun Li. The Deputy Mayor of Jinhua City, Mr. Zhongliang Jin, and the Chairman and CEO of Kandi, Mr. Xiaomin Hu, attended the ceremony and delivered keynote speeches. Other distinguished guests included the heads of the Municipal City Development and Reform Commission, the Economic and Information Technology Commission, the Public Security Bureau, the Finance Department, the Technology Department, and other relevant departments of the Jinhua Municipal City. The objective of the ceremony was to promote sales of our EVs in Jinhua City through government financial subsidies to consumers who purchase the Kandi pure EV. A Kandi pure EV is priced at 43,000 RMB (approximately $6,750). To encourage consumers to purchase the electric vehicles, Zhejiang Provincial Government and Jinhua Municipal Government will provide subsidies of 32,000 RMB (approximately $5,024) for each of the first 500 Kandi pure EV purchased, 20,000 RMB (approximately $3,140) for each of the next 1,000 Kandi pure EV purchased, and 16,000 RMB (approximately $2,512) for each of the following 1,500 of Kandi pure EV purchased.

On November 9, 2011, the Company signed a Framework Agreement on Cooperation with TongXu AoXing Vehicle Co., Ltd. for the purpose of brand building, enhancing competitive capability and exploring market quickly. This agreement includes: (1) the Company authorizing TongXu AoXing Vehicle Co., Ltd. to establish a sales company in TongXu County, KaiFeng City, HeNan Province to sell Kandi brand products in KaiFeng area; (2) when the cooperation comes to certain level, both parties agree to reorganize the assets to realize the sharing of resources if necessary.

On February 13, 2012,Form 8-K, filed January 16, 2014, the Company entered into a Share Exchange Agreementwarrant subscription agreements (the “Exchange Agreement”“Subscription Agreements”) with KO NGA Investment Limited (“KO NGA”) and each of the shareholders of KO NGA (“KO NGA Shareholders,” and, together with KO NGA, the “Sellers”certain institutional investors (the “Investors”). Pursuant to the terms ofSubscription Agreements, the Exchange Agreement,Company issued and sold to the Sellers will exchangeInvestors private placement warrants to purchase an aggregate of 2531,429,393 shares of KO NGA, representing 100% of the issued and outstanding shares of KO NGA,Company's common stock at an exercise price equal to the Company$15.00 (the “Private Warrants”) for a total of 2,354,211 shares (the “Exchange Shares”) of the Company’s common stock (the “Exchange”), representing an aggregate exchange purchase price of approximately $7,952,524, which is primarily derived$14,294. Because this transaction was a private placement made in reliance upon exemptions from KO NGA’s indirect, wholly-owned operating entity Yongkang Scrou Electric. Co., Ltd. in China.  Upon consummationregistration pursuant to Section 4(2) of the Exchange, KO NGA will become a wholly-owned subsidiarySecurities Act, neither the Private Warrants nor the underlying shares of common stock issuable upon the exercise of the Company. The Exchange Shares willPrivate Warrants have been registered under the Securities Act, and neither may be offered or sold in the United States absent registration or an applicable exemption from registration.

Immediately prior to entering into the Subscription Agreements, the Investors exercised then outstanding Series A Warrants and Series C Warrants (the “Registered Warrants”) that were issued to the Investors by the Company in relianceconnection with a direct registered offering that, as reported on a Form 8-K, filed on June 26, 2013, were entered into on June 26, 2013 (the “Registered Offering”). As a result of such exercise, the Investors purchased an exemption fromaggregate of: (i) 1,750,415 shares of our common stock at an exercise price of $7.24 per share (pursuant to the registration requirementsSeries A Warrants) and (ii) 291,574 shares of our common stock at an exercise price of $8.69 per share (pursuant to the Series C Warrants). On January 3, 2014, and, January 6, 2014, respectively, the Investors exercised all of the Securities Act forSeries B Warrants issued to them in the private placementRegistered Offering, and, as a result of our securities pursuantsuch exercise, purchased a total of 728,936 shares of common stock at an exercise price of $7.24 per share.

During January to Regulation SMarch of 2014, the President of the Securities Act.  The Exchange Shares will be issuedCompany Mr. Hu Xiaoming accepted special interviews respectively from multiple news organizations such as China Central Televsion (CCTV), the Xinhua News Agency, Agence France Press(AFP), Associated Press (AP) etc. to non-U.S. persons (as such term is defined in Regulation S) in an offshore transaction relying on Regulation S.

On February 29, 2012,introduce them the Ministry of Industry and Information Technology of China issued the “Energy-Saving and New Energy Vehicle Demonstration and Promotion for Use Project” list; Kandi's pure electric cargo vehicle model KD5021XXYBEV was included on this list.

On March 6, 2012, the Ministry of Finance, the Ministry of State Administration of Taxationbusiness model- Mini-Public Transportation Pure EVs Program and the Ministryprogress updates.

During January to March of Industry2014, the Company hosted respectively the researches on Hangzhou Mini-Public Transportation EVs Program from more than 60 fund anyalists both domestic and Information Technologyabroad from JP Morgan Securities, Schroders Equity Research, Morgan Stanley, China Merchants Securites, Shenyin & Wanguo Securities and so on.

During Janurary to March of 2014, the Company also received a visiting delegation , consisting of local leaders from more than 20 new energy vehicle pilot cities in China, collectively, issuedwho came to examine and released a list of Energy-Saving and Newlearn Hangzhou Mini-Public Transportation Pure EVs that qualify for the recently enacted Registration Tax Reduction and Exemption. Kandi's pure EV (model number KD5011XXYEV) was among the first vehicles included on this list. Consumers that purchase the KD5011XXYEV model are exempt from paying the annual registration tax required of other vehicle owners starting January 1, 2012.Program.

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Sales and Distribution

Kandi’s sales are made through trading companies, which distribute Kandi’sThe Company sells its products to localexporters (from China), to importers (including U.S. importers) and globalto distributors or dealers or our business partners (in China); the Company does not sell its products to retail (or end-user) customers. Independent third-party intermediaries distribute and resell our products on terms and conditions determined in their sole discretion. For example, the products exported to the U.S. market are sold to our U.S. importers. This model is used for all of our products, including the Semi Knocked Down (“SKD”) sets sold in our domestic market. SKD sets are complete sets of the main parts that can be assembled into whole vehicles. The SKD sets we sell are very close to the final whole vehicles, so we categorize them as vehicle products. The Company sells SKD sets to our regional partners (manufacturers or dealers), who then assemble, customize and resell the cars.

The terms of the products that we sell to our U.S. importers are similar to those for products that we export to other countries and regions where we sell to the independent intermediary companies. The re-sale terms of these products are determined by the intermediary companies and U.S. importers.

Customers

As of December 31, 2013, our major customers, in the aggregate, accounted for 78% and 91%, respectively, of our sales and accounts receivable. Currently, the Company is developing new business partners and clients for our legacy products to reduce our dependence on existing customers. New business development efforts, combined with our strategic focus on our Pure Electric Vehicles business, which includes a Pure Electric Vehicles Mini Public Transportation Program that has exhibited promising growth potential, should, hopefully, reduce our dependence on our legacy products and our current major customers.

The Company's major customers, each of whom accounted for more than 10% of our consolidated revenue, were as follows:

During fiscal year ended December 31, 2013, the Company sold products to Kandi USA Inc. carrying trade name of Eliteway Motorsports (“Eliteway”) amounting to $6,906,807 (2012:$5,297,548). At the fiscal year ended 2013, outstanding receivable due from Eliteway was $2,800,958 (2012: $2,678,349).

Mr. Hu Wangyuan was the sole shareholder and officer of Eliteway which served as a US 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 year ended December 31, 2013, Eliteway and Mr. Hu Wangyuan were financially independent from the Company. The transactions between the Company and Eliteway were carried at arm's-length without preferential terms comparing with other customers at the comparative order size or volume.

Sources of Supply

Kandi manufacturesAll the raw materials are purchased from the suppliers. The major componentsparts of its vehiclesour products are mainly manufactured by itself.Kandi. Other components and parts that are needed are purchased from expertise suppliers and specialized manufacturers.third-party suppliers. Kandi does not have, and does not anticipate having, any difficulty in obtaining its required materials from suppliers; inits suppliers. In reaching this determination, we considered our current contracts and our current satisfactory business relationshiprelationships with our suppliers.

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Competition

The global off-road vehicle market and new EV market are both highly competitive. Competition in such markets is based upon a numberCompany's material suppliers, each of factors, including price, quality, reliability, styling, product features and warranties. We are a relatively new entrant into the market, and manywhom accounted for more than 10% of our total purchases, were as follows:

Competitors

Despite the fact that we have other competitors, some of whom are larger and have greater financial and marketing resources that are substantially greater than Kandi; however, we do, we continue to believe that with respect to the Chinese domestic pure EV industry, we are one of the industry leaders. 

leaders with respect to the Chinese pure EV industry.

Employees

As of December 31, 2011,2013, excluding the contractors and employees in the JV Company, Kandi had a total of 447 full time430 full-time employees. None of our employees are represented by any collective bargaining agreements.

Pure Electric Vehicles Subsidies

Currently, there are two subsidies from central and local governments for the pure electric vehicles (the “EVs”) in China – one from each of the central and local governments. The ultimate beneficiary for these subsidies is the consumer and the actual prices that consumers pay reflect the deduction of both subsidies.

a) The central government provides a subsidy to manufacturers paid in advance quarterly upon application and approval and settled annually. After selling product to dealers, manufacturers can submit subsidy payment applications with invoices and other supporting documents at the end of each quarter to the requisite central government agencies through their regional offices. After the review and approval by the agencies, the central government makes advance subsidy payments to the manufacturers. At the end of the year, the final subsidy amounts are verified, reconciled according to the number of vehicles actually sold to consumers and settled on an annual basis.

b) Pursuant to the requirement of the central government, the local governments provide a subsidy to consumers who purchase EVs by a price reduction from the dealer. After the consumer purchases an EV at a reduced selling price from the dealer, the dealer submits a subsidy application to the local government, including a consumer authorization letter for subsidy application, consumer personal I.D., EV Vehicle License, EV purchase invoice and other required documents and requests reimbursement (to the dealer) for the local government subsidy.

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Environmental and Safety Regulation

Emissions

TheOur products are all subject to international laws and emissions related regulations, including regulations and related standards established by China Environmental Protection Agency, the United States Environmental Protection Agency (“EPA”) and, the California Air Resources Board (“CARB”) have adopted, Europe and Canada.

All Kandi's products comply with all applicable emissions regulations applicable to Kandi’s products. CARB has emissions regulations for ATVs and off-road vehicles which the Company already meets. In October 2002, the EPA established new corporate average emission standards effective for model years 2006 through 2012 for non-road recreational vehicles, including ATVs and off-road vehicles.

Kandi’s motorcycles are also subject to EPA and CARB emission standards. Kandi believes that its motorcycles have always complied with these standards. The CARB regulations required additional motorcycle emission reductions in model year 2008, which the Company met. The EPA adopted the CARB emission limits in a January 2004 rule that allows an additional two model years to meet these new CARB emission requirements on a nationwide basis.

Kandi’s products are also subject to international laws and regulations related to emissions in places where it sells its products outside the United States. Europe currently regulates emissions from certain of the Company’s ATV-based products, motorcycles, and super-mini-cars and the Company meets these requirements. Canada’s emission regulations for motorcycles are similar to those in the U.S. In December 2006, Canada proposed a new regulation that would essentially adopt the U.S. emission standards for ATVs and off-road vehicles. These regulations became effective in 2009 and the Company meets this standard.

Kandi believes that its off-road vehicles and super-mini-cars comply with applicable emission standards and related regulations inChina Environmental Protection Agency, the United States and internationally. Kandi isinternationally, the California Air Resources Board (“CARB”), Europe and Canada. However, we are unable to predict the ultimate impact of standards and regulations adopted in the adoptedfuture or proposed regulations on Kandi and its business.

Use regulation

The sale and use of products must be subject to the "Traffic Law" and relevant laws & regulations in China. National, State, and federal laws and regulations have been promulgated, or are under consideration, relating tothat impact the use or manner of use of Kandi’sKandi's products. SomeCertain states and localitieslocal authorities have adopted, or are considering the adoption of, legislation and local ordinances which restrict the use of ATVs and off-road vehicles to specified hours and locations. The federal government also has restricted the use of ATVs and off-road vehicles in some national parks and federal lands. In several instances, thisthe restriction has been a complete ban on the recreational use of these vehicles. Kandi is unable to predict the outcome of such actions or the possible effect on its business. Kandi believes that its business would be no more adversely affected than those of its competitors by the adoption of any such pending laws or regulations.

Product Safety and Regulation

Safety Regulation

The U.S. federal government and individual states have promulgatedadopted, or are considering promulgatingthe adoption of, laws and regulations relating to the use and safety of Kandi’sKandi's products. The federal government is the primary regulator of product safety. The Consumer Product Safety Commission (“CPSC”) has federal oversight over product safety issues related to ATVs and off-road vehicles. The National Highway Transportation Safety Administration (“NHTSA”) has federal oversight over product safety issues related to on-road motorcycles.

In August 2008, the Consumer Product Safety Improvement Act (the “Act”) was passed. The Act includes a provision that requires all manufacturers and distributors who import into or distribute ATVs within the United States to comply with the ANSI/SVIA safety standards, which were previously voluntary. The Act also requires the same manufacturers and distributors to have ATV action plans filed with the CPSC that are substantially similar to the voluntary action plans that were previously in effect. Kandi currently complies with the ANSI/SVIA standard.standards.

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Kandi’sKandi's motorcycles are subject to federal vehicle safety standards administered by NHTSA. Kandi’sKandi's motorcycles are also subject to various state vehicle safety standards. Kandi believes that its motorcycles comply with safety standards relevantapplicable to motorcycles.

Kandi’sKandi's products are also subject to international safety standards related to safety in places where it sells its products outside the United States. Kandi believes that its motorcycles and super-mini-carsEVs comply with applicable safety standards in the United States and internationally.

Principal Executive Offices

Our principal executive office is located in the Jinhua City Industrial Zone in Jinhua, Zhejiang Province, PRC, 321016 and our telephone number (86-579)82239856.

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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 annual report on Form 10-KAnnual Report 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

We may not be able to comply with all applicable government regulations.

We are subject to extensive governmental regulation by the central, regional and local authorities in the PRC, where our business operations take place. We believe that we are currently in substantial compliance with all laws and governmental regulations and that we have all material permits and licenses required for our operations. Nevertheless, we cannot assure investors that we will continue to be in substantial compliance with current laws and regulations, or that we will be able to comply with any future laws and regulations. To the extent that new regulations are adopted, we willmay be required to conform our 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 our 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.

Our business operations generate noise, waste water, and gaseous byproduct and other industrial wastes.waste. We are required to comply with all national and local regulations regarding protection of the environment. We are in compliance with current 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. Additionally, if we fail to comply with present or future environmental regulations, we may be required to pay substantial fines, suspend production or cease operations. Any failure by us to control the use of, or to adequately restrict adequately the unauthorized discharge of, hazardous substances could subject us to potentially significant monetary damages and fines or suspensions to our business operations. Certain laws, ordinances and regulations could limit our ability to develop, use, or sell our products.

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 Chairman of the Board of Directors, Mr. Hu Xiaoming. We do not maintain key man life insurance on any of our executive officers. Although this possibility is low, ifIf any 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 executivesexecutive officers joins a competitor or forms a competing company, we may lose some of our customers.

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We may be subject to product liability claims, recalls or warranty claims,recalls which could be expensive, damage our reputation and result in a diversion of management resources.

The Company may be subject to lawsuits resulting from injuries associated with the use of the vehicles that it sells. The Company may incur losses relating to these claims or the defense of these claims. There is a risk that claims or liabilities will exceed our insurance coverage. In addition, the Company may be unable to retain adequate liability insurance in the future.

The Company may also be required to participate in recalls involving our vehicles, if any prove to be defective, or we may voluntarily initiate a recall or make payments related to such claims as a result of various industry or business practices or the need to maintain good customer relationships. Such a recall would result in a diversion of resources. While we do maintain product liability insurance, we cannot assure you that it will be sufficient to cover all product liability claims, that such claims will not exceed our insurance coverage limits or that such insurance will continue to be available on commercially reasonable terms, if at all. Any product liability claim brought against us could have a material adverse effect on our results of operations.

In recent years, the economy of China has experienced unprecedented growth. This growth has slowed in the last year, and if the growth of the economy continues to slow or if the economy contracts, our financial condition may be materially and adversely affected.

The rapid growth of the PRC economy has historically resulted in widespread growth opportunities in industries across China. As a result of the global financial crisis and the inability of enterprises to gain comparable access to the same amounts of capital available in past years, there may be an adverse effect on the business climate and growth of private enterprise in the PRC. An economic slowdown could have an adverse effect on our sales and may increase our costs. Further, if economic growth slows, and if, in conjunction, inflation is allowed to proceed unchecked, our costs would likely increase, and there can be no assurance that we would be able to increase our prices to an extent that would offset the increase in our expenses.

In addition, a tightening of the labor markets in our geographic region may result in fewer qualified applicants for job openings in our facilities. Further, higher wages, related labor costs and other increasing cost trends may negatively impact our results.

Government policies may negatively affect our results.

Currently, the Company's EV products are mainly sold to in the Chinese domestic market, and the EV industry is supported by the Chinese central and local governments. Therefore, our EV products' performance is significantly affected by the policies adopted by governmental authorities in China. Any significant adverse changes in the Chinese government's supporting policies may negatively affect our results.

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The audit report included in this Annual Report was prepared by auditors who are not inspected by the Public Company Accounting Oversight Board and, as a result, you are deprived of the benefits of such inspection

The independent registered public accounting firm that issues the audit reports included in our annual reports filed with the SEC, as auditors of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), or the “PCAOB”, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards. Because our auditors are located in the PRC, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the PRC authorities, our auditors are not currently inspected by the PCAOB.

Inspections of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms' audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The inability of the PCAOB to conduct inspections in China prevents the PCAOB from regularly evaluating our auditor's statements, audits and quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.

The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor's quality control and audit procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.

We face risks related to the ongoing SEC investigation

In November 2013, the SEC Denver office informed the Company that it was conducting an investigation of the Company and made a request for the production of documents and information. The Company is cooperating fully with the SEC in this matter. The Company is unable to predict what action, if any, might be taken in the future by the SEC as a result of the matters that are the subject of the investigation or what impact, if any, the cost of responding to the investigation might have on the Company's financial condition or results of operations. A protracted investigation could impose substantial costs and distractions, regardless of its outcome. There can be no assurance that any final resolution of this investigation will not have a material and adverse effect on the Company's financial condition and results of operations.

Risks Relating to Our Vehicle Machinery Production Operations

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

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

With respect to certain general liability exposures, including manufacturing defect and product liability, interpretation of underlying current and future trends, assessment of claims and the related liability and reserve estimation process is highly subjective due to the complex nature of these exposures, with each exposure exhibiting unique circumstances. Furthermore, once claims are asserted for constructionmanufacturing 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 to cover any or all liability for damages, the cost of repairs, and/or the expense of litigation surrounding such claims, and future claims may arise out of events or circumstances not covered by insurance and not subject to effective indemnification agreements with our subcontractors.

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The Company and its subsidiary, Kandi Vehicles, are defendants in two lawsuits alleging product defects as described below at “Legal Proceedings”. While the Company and Kandi Vehicles have denied liability and will vigorously defend the lawsuits, and the Company believes it has no liability, an adverse decision could have a material adverse affect on the Company.

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

The vehicle machinery industry is highly competitive, and our continued success depends upon our ability to compete effectively in markets that contain numerous competitors, some of which have significantly greater financial, marketing and other resources than we have. Competition may reduceaffect our pricing structures, potentially causing us to lower our prices, which may adversely impact our profits. New 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.

Our high concentration of sales to relatively few customers may result in significant uncollectible accounts receivable exposure, which may adversely impact our liquidity, business, results of operations and financial condition.

As of December 31, 2011,2013, our top threefive customers, in the aggregate, accounted for 74%78% and 75%91%, respectively, of our sales and accounts receivable. Due to the concentration of sales to relatively few customers, we face credit exposure from our customers and may experience uncollectible receivables fromloss of one or more of these customers should they face financial difficulties. If these customers fail to pay their accounts receivable, file for bankruptcy or significantly reduce their purchases of our programming, it wouldwill have an adverse effectrelatively high impact on our business, financial condition, results of operations, and liquidity.operational results.

The Company’s major customers for the year ended December 31, 2011 accounted for the following percentages of total sales and accounts receivable as follows:

Our business is subject to the risk of supplier concentrations.

We depend on a limited number of suppliers for the sourcing of major components and parts and principal raw materials. As ofFor the years ended December 31, 20112013 and 2010, one supplier2012, the top two suppliers accounted for 61%65% and 84%58% of our purchases, respectively. As a result of this concentration in our supply chain, our business and operations would be negatively affected if any of our key suppliers were to experience significant disruption affecting the price, quality, availability or timely delivery of their products. The partial or complete loss of these suppliers, or a significant adverse change in our relationship with any of these suppliers, could result in lost revenue, added costs and distribution delays that could harm our business and customer relationships. In addition, concentration in our supply chain can exacerbate our exposure to risks associated with the termination by key suppliers of our distribution agreements or any adverse change in the terms of such agreements, which could have a negative impact on our revenues and profitability.

The Company’s major suppliers for the twelve months ended December 31, 2011 accounted for the following percentage of total purchases and accounts payable as follows:

General economic conditions may negatively impact our results.  

The consumption of entertainment products, such as go-karts, and super-mini-cars depends on continued economic growth. Due to the European Debt Crisis and the slow global economy, the uncertainty of the current economic environment remains. 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 qualified applicants for job openings in our facilities. Higher wages, related labor costs and other increasing cost trends may negatively impact our results.

Risks Related to Doing Business in China

Changes in political and economic conditions may affect our business operations and profitability.

Since our business operations are primarily located in China, our business operations and financial position are subject, to a significant degree, to the economic, political and legal developments in China.

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China’s government started implementing its economic reform policy in 1978, which 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 experienced accelerated development of a market economy. A noteworthy recent phenomenon is that non-state owned enterprises, such as private enterprises, play an increasingly important role in the Chinese economy and the degree of direct control by the PRC government over the economy is gradually declining.

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

ChangeChanges in tax laws and regulations in China may affect our business operations.

Various tax reform policies have been implemented in the PRC in recent years. However, 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’sChina's legal system is based on statutory law. Unlike the common law system, statutory law is based primarily on written statutes. Previous 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 is not always uniform and enforcement of these laws, regulations and rules involves uncertainties, which may limit legal protections available to us.

In addition, any litigation in China may be protracted and may result in substantial costs and diversion of resources and management’smanagement's attention. The legal system in China cannot provide investors with the same level of protection as in the U.S. The Company is governed by the lawlaws and regulations generally applicable to local enterprises in China. 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 laws and regulations can be uncertain and unpredictable and therefore may restrict the legal protections ofavailable to foreign investors.

Changes in Currency Conversion Policies in China may have a material adverse effect on us.

Renminbi (“RMB”) is still 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 enhance verification of foreign exchange payments under a Chinese entity’sentity's current account items, and has imposed strict requirements on borrowing and repayments of foreign exchange debts from and to foreign creditors under the capital account items and on the creation of foreign security in favor of foreign creditors.

This may complicate foreign exchange payments to foreign creditors under the current account items and thus willmay affect the ability to borrow under international commercial loans, the creation of foreign security, and the borrowing of RMB under guarantees in foreign currencies. Furthermore,Moreover, the value of RMB may become subject to supply and demand, which could be largely impacted by international economic and political environments. Any fluctuations in the exchange rate of RMB could have an adverse effect on the operational and financial condition of the Company and its subsidiaries in China.

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You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions 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 substantiallyalmost all of our assets are located in China. In addition, almost all of our senior executive officers reside in China. As a result, it may not be possible to effect service of process on our senior executive officers 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. 

court orders and final judgments.

Risks Relating to Ownership of Our Securities

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 and trading volumes of companies listed on the NASDAQ CapitalGlobal Market and the NASDAQ Global Select Market have been volatile in the past and have experienced sharp share price and trading volume changes.volatile. Although our stock iswas listed on the NASDAQ Global Market and upgraded to the NASDAQ Global Select Market on January 2, 2014, the trading price of our common stock is likely to be volatile and could fluctuate widelysignificantly in response to many factors, including the following, some of which are beyond our control:

• variations in our operating results;

  ·

  variations in our operating results;

• changes in expectations of our future financial performance, including financial estimates by securities analysts and investors;

  ·

  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;

  ·

  changes in operating and stock price performance of other companies in our industry;

  ·

  additions or departures of key personnel; and

• additions or departures of key personnel; and

  ·

  future sales of our common stock.

• 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.

Mr. Hu, our CEO, President and Chairman of our Board of Directors is the beneficial owner of a substantial portion of our outstanding common stock, which may enable Mr. Hu to exert significant influence on corporate actions.

Excelvantage Group Limited controls approximately 43.7%32.4% of our outstanding shares of common stock as of December 31, 2011.2013. On March 29, 2010, Hu Xiaoming, the Company’sCompany's Chief Executive Officer, President and Chairman of the Board of Directors, became the sole stockholder of Excelvantage Group Limited. Excelvantage Group Limited has a substantial impact on matters requiring the vote of theour shareholders, including the election of our directors and most corporate actions. This control could delay, defer or prevent others from initiating a potential merger, takeover or other change in our control, even if these actions would benefit our other shareholders and the Company. This control could adversely affect the voting and other rights of our other shareholders and could depress the market price of our common stock.

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Our common shares may become thinly traded and you may be unable to sell your shares readilyreadily.

We cannot predict the extent to which an active public market for trading our common stock will be sustained. Although our trading volume has increased gradually in recent years, our stock has historically been sporadic or “thinly-traded,” meaning that the number of persons interested in purchasing our common shares at any given time may be relatively small.

This situation is attributable to a number of factors, including the fact that we are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community who generate or influence sales volume. Even if we came to the attention of such persons, those persons tend to be risk-averse and may be reluctant to follow, purchase, or recommend the purchase of shares of an unprovenunseasoned company such as ours 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, 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, which could lead to widesignificant fluctuations in our share price. You may be unable to sell your common stock, if at all, at or above your purchase price, if at all, which may result in substantial losses to you.

Substantial exercise of warrants could adversely affect our stock price or our ability to raise additional financing in the public capital markets.

As of December 31, 2011, there are 2,827,975 shares of warrants outstanding. If the warrant holders exercise the warrants and sell a substantial number of shares of our Common Stock in the future, or if investors perceive that these sales may occur, the market price of our Common Stock could decline or market demand for our Common Stock could be sharply reduced. The exercise of warrants and subsequent sale of a substantial number of shares of our Common Stock could also adversely affect demand for, and the market price of, our Common Stock. Each of these transactions could adversely affect our ability to raise additional financing by issuing equity or equity-based securities in the public capital markets.

We do not anticipate paying any cash dividends to our common shareholders.

We presently do not anticipate that we will pay dividends on any of our common stock in the foreseeable future. If payment of dividends does occur at some point in the future, it would be contingent upon our revenues and earnings, if any, capital requirements, and general financial condition. The payment of any common stock dividends will be within the discretion of our Board of Directors. We presently intend to retain all earnings after paying the interest for the preferred stock, if any, to implement our business plan; accordingly, we do not anticipate the declaration of any dividends for common stock in the foreseeable future.

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

The change in value of the RMB against the U.S. dollar, the Euro and other currencies is affected by changes in China’sChina's political and economic conditions, among other things. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. While the international reaction to the RMB 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 RMB against the U.S. dollar. As a portion of our costs and expenses is denominated in RMB, the revaluation in July 2005 and potential future revaluation has and could further increase our costs. In addition, any significant revaluation of the RMB may have a material adverse effect on our financial condition. For example, to the extent that we need to convert U.S. dollars we receive from financings into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we receive from the conversion. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of making payments for business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us.

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We may be unable to maintain compliance with NASDAQ Marketplace Rules which could causeVolatility in our common stock to be delisted from the NASDAQ Global Market. This could result in the lack of a market for our common stock, cause a decrease in the value of our common stock, and adversely affect our business, financial condition and results of operations.

Under the NASDAQ Marketplace Rules our common stock must maintain a minimumshare price of $1.00 per share for continued inclusion on the NASDAQ Global Market. We cannot guarantee that our stock price will remain at or above $1.00 per share and if the price again drops below $1.00 per share, the stock could becomemay subject to delisting. If our common stock is delisted, trading of the stock will most likely take place on an over-the-counter market established for unlisted securities. An investor is likely to find it less convenient to sell, or to obtain accurate quotations in seeking to buy, our common stock on an over-the-counter market, and many investors may not buy or sell our common stock due to difficulty in accessing over-the-counter markets, or due to policies preventing them from trading in securities not listed on a national exchange or other reasons. For these reasons and others, delisting would adversely affect the liquidity, trading volume and price of our common stock, causing the value of an investment in us to decrease and having an adverse effect on our business, financial condition and results of operations by limiting our ability to attract and retain qualified executives and employees and limiting our ability to raise capital.

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

The market for our common stock is characterized by significant price volatility as 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’smanagement's attention and resources.

The Eliminationlimitation of Monetary Liability Againstmonetary liability against our Directors, Officersdirectors, officers and Employeesemployees under Delaware law and the Existenceexistence of Indemnification Rightsstatutory indemnification rights of our Directors, Officersdirectors, officers and Employees May Resultemployees may result in Substantial Expendituressubstantial expenditures by our Company and may Discourage Lawsuits Againstdiscourage lawsuits against our Directors, Officersdirectors, officers and Employees.employees.

Our articles of incorporation do not contain any specific provisions that eliminatelimit the liability of our directors for monetary damages to our companyCompany and shareholders; however, we are prepared to give such indemnification toindemnify our directors and officers to the extent provided for by Delaware law. We may also have include contractual indemnification obligations underin our employment agreements with our officers. The foregoing indemnification obligations could result in our companythe Company incurring substantial expenditures to cover the cost of settlement or damage awards against its directors and officers, which we may be unable to recoup. These provisions and resultant costs may also discourage our companyCompany 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 companyCompany and shareholders.

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

On January 21, 2010, we entered into a Securities Purchase Agreement with certain institutional accredited investors pursuant to which the Company sold to these investors $10 million of senior secured convertible notes and warrants exercisable for an aggregate of 1,379,148 shares of the Company’s common stock. As of December 31, 2011, $9,999,000 senior secured convertible notes have been converted to common stock. On January 19, 2012, the rest of the $1,000 senior secured convertible notes were converted into common stock.

On December 21, 2010, we agreed to sell to certain institutional investors up to 3,027,272 shares of the Company’s common stock and warrants to purchase up to 1,210,912 shares of common stock.

As of December 31, 2011, none of the warrants mentioned above have been exercised. The exercise of these warrants will result in dilution.

In the future, we may 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 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, if at all, in amounts or on terms acceptable to us, if at all. us.

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Our business is subject to changing regulations related to corporate governance and public disclosure that have increased both our costs and the risk of noncompliance.

Because our common stock is publicly traded, we are subject to certain rules and regulations of federal, state and financial market exchange entities charged with the protection of investors and the oversight of companies whose securities are publicly traded. These entities, including the Public Company Accounting Oversight Board, the SEC and NASDAQ, have issued requirements and regulations and continue to develop additional regulations and requirements in response to corporate scandals and laws enacted by Congress, most notably the Sarbanes-Oxley Act of 2002.Congress. Our efforts to comply with these regulations have resulted in, and are likely to continue resulting in, increased general and administrative expenses and diversion of management time and attention from revenue-generating activities to compliance activities. Because new and modified laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This evolution may result in continuing uncertainty regarding compliance matters and additional costs necessitated by ongoing revisions to our disclosure and governance practices.

Item 1B. Unresolved Staff Comments.

Not applicable.

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Item 2. Properties.

All land in the PRC is owned by the government and its ownership cannot be sold or transferred by or to any individual or private 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;

  ·

  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

• 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 ways 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 withinduring the term of the grant. Land is granted for a fixed term, -which is generally 70 years for residential use, 50 years for industrial use, and 40 years for commercial andor other use. The term is renewable in theory. Unlike the usual case in Western nations, grantedGranted land must be used for the specific purpose for which it was granted.

Allocated land use rights cannot be pledged, mortgaged, leased, or transferred. They 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:

Item 3. Legal Proceedings.

There are two lawsuits currently pending in state court inIn July 2013, Judge Michael M. Pritchett of the Circuit Court of Ripley County Missouri against the Company and its subsidiary, Kandi Vehicles as well as other third parties, Kandi Investment Group and SunL Group, in connection with the death of two individuals who died on March 3, 2006, while operating a go-cart that was allegedly manufactured by Kandi Vehicles.  Kandi Investment Group was a major shareholder of Kandi Vehicles but it transferred all its equity in Kandi Vehicles to Continental Development Limited in November 2006. Since then, Kandi Investment Group has been unrelated to the Company or its affiliates.

The cases were filed in 2009 and are identified as Elder vs. SunL Group and Griffen vs. SunL Group. In March 2010, the local trial court entered two default judgments, each in the amount of $20,000,000, against our subsidiary, Kandi Vehicles as well as other parties including Kandi Investment. A default judgment was not entered against the Company. The lawsuit and default judgments were not brought to the Company or Kandi Vehicles’ attention until May or June 2010; the Company was not served with the complaint or notified of the lawsuitsState of Missouri (the “Court”) entered final orders and only learned of their existence and of the default judgments in the coursefavor of commercial discussions with another of the defendants in the cases. The Company and Kandi Vehicles have filed answersand against plaintiffs Griffin and Elder, respectively, pursuant to the complaint denying any culpability. In addition,jury verdicts rendered in the Company requested that the court set aside the default judgments against Kandi Vehicles, a request granted, by the court, on February 28, 2011.following two cases: Griffin v. SunL Group, et al., and Elder v. SunL Group, et al. On March 3, 2011,October 31, 2013, the plaintiffs subsequently appealed the court order vacating the default judgments; however, the plaintiffs have since voluntarily withdrawn their appeal.

these decisions. The Company intends to defendcontinue its defense of these cases vigorouslythrough the appeals process and believesexpects to prevail again in both cases.

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The Company has been furnishing documents to the Denver Regional Office of the Securities and Exchange Commission in response to a favorable resultdocument subpoena issued on November 21, 2013 regarding a matter known as In the Matter of Kandi Technologies Group, Inc. As indicated in the subpoena, the investigation is likelya fact-finding inquiry and does not mean that the Company or anyone has broken the law. The Company has cooperated, and is cooperating fully, with the SEC in this lawsuit sincematter and will continue to supply the Company including its subsidiaries did not manufacture the subject vehicle in the accident.SEC with whatever additional information and material that is requested. The Company intends to propound discovery on the plaintiffs and will attempt to have the cases dismissed by summary judgment, if possible.

At the present time, we believe that resolving the above matters willdoes not have any information, at present, as to the duration or outcome of this investigation. The Company does not anticipate a material adverse effect on our financial position, our results of operations, or our cash flows; however, these matters are subject to inherent uncertainties and our view of these matters may change in the future.negative result.

Item 4. Mine Safety Disclosures.

Not applicable.

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PART II

Item 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

OurOn January 2, 2014, our common stock began trading on the NASDAQ Capital Market on March 18, 2008, and on January 10, 2011, our common stock began trading on NASDAQ Global Select Market. The following are the high and low prices for our common stock for each quarter from January 1, 20092012 to December 31, 2011.2013.

Holders of Common Stock

As of December 31, 2011,March 11, 2014, there were 2,96919 shareholders of 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.

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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 CompanyOverview

Our core business is designing, developing, manufacturing and the notes thereto appearing elsewhere herein. Readers should carefully review the risk factors disclosed in this Form 10-Kcommercializing pure electric vehicles (“EVs”), all-terrain vehicles (“ATVs”), go-karts, three-wheeled motorcycles 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 Policiesspecialized vehicles. We conduct our business primarily through our wholly-owned subsidiaries that operate 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.

Accounts receivable are recognized and carried at net realizable value.  An allowance for doubtful accounts will be recorded in the period when a loss is probable based on an assessment of specific evidence indicating troubled collection, historical experience, accounts aging, ongoing business relationChina and other factors.  Accounts are written off after exhaustive efforts at collection.  If accounts receivable areglobal markets, and most typically, we sell our non-EV products to be provided for, or written off, they would be recognizedChinese export agents who then resell our products in North America, Europe, and other regions.

During the consolidated statement of operations within operating expenses. Atyear ended December 31, 2011 and 2010, the Company has2013, we recognized total revenues of $94,536,045, an allowance for doubtful accountsincrease of $0 and $0 respectively, as per the management’s judgment based on their best knowledge.

Inventory is stated at the lower of cost, determined on a weighted average basis,$30,022,375, 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 was a $72,487 decline in net realizable value of inventory46.5%, over total revenues for the year ended of December 31, 20112012. The majority of our revenues are generated by the sales of EV products, which account for 49% of the total revenue in 2013. The main reason of significant increase in revenue generated by EV business is becausethe newly added EV models –Kandi Brand SMA7000BEV, a five-door & five-seat vehicle and SMA7001BEV, an improved model of electric vehicle, were both sold at a higher price. In 2013, the Company recorded $21,742,528 gross profit, increased 68.6% from 2012, primarily due to the increase of revenue. However, we recorded a net loss in 2013, this is mainly because of the loss caused by the fair value change of financial instruments. After excluding the effects of fair value change of financial instruments and stock award, we still recorded a Non-GAAP net income, increased 23.9% compared to 2012.

The vehicle manufacturing industry is highly competitive. Current and future factors impacting our reserve for slow moving inventory.industry include: (i) the exponential growth of electrical vehicle sales and dedicated platforms in the global market place, (ii) the consolidation of supply chains and costs of components, (iii) rapid technology developments (including 3D printing technology) and (iv) emerging strategic partnerships and joint ventures in the automotive industry generally.

WhileOur business strategy includes our efforts to provide our customers with high-quality products and to expand our footprint in new and existing markets. As part of these efforts, we have invested in a joint venture company called Zhejiang Kandi Electric Vehicles Co., Ltd. (the “JV Company”), which develops, manufactures and sells EVs and related products. In December 2013, our EV business was recognized as producing the Company currently believes that there is little likelihood that actual results will differ materially from these current estimates, if customertop two model types of EVs in China. These EV model types have an impressive driving range of 150 kilometers or more, which entitles them to a higher rebate or subsidy than older models under Chinese policy. We are also advancing the profile and demand for our EV products decreases significantlythrough the EV sharing project. To further this initiative, we are working with our business partners to build a network of public EV sharing stations (for charging and parking) and partnering with high-end hotels in the near future, or ifHangzhou area of China to provide energy-efficient, convenient travel options for local citizens and tourists. We anticipate that our pure EV business in China, through operations of the financial conditionJV Company and the support of our customers deterioratesnew Chinese subsidy policies, will continue to develop and thrive in the near future, the Company could realize significant write downs for slow-moving inventories or uncollectible accounts receivable.future.

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Policy affecting recognitionResults of revenueOperations

Among the most important accounting policies affecting our consolidated financial statements is our policy of recognizing revenue. Revenues represent the invoiced value of goods sold, recognized upon the shipment of goods to customers, and are recognized when all of the following criteria are met:

Policy affecting options, warrants and convertible notes

The Company’s stock option cost is recorded in accordance with ASC 718 and ASC 505.

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

The Company’s warrant costs are recorded in liabilities and equities, respectively, in accordance with ASC 480, ASC 505 and ASC 815.

The Company estimates the fair value of warrants that are classified as a liability using a Black-Scholes-Merton model. The Company’s expected volatility assumption is based on the historical volatility of the Company’s stock. The expected life assumption is primarily based on the expiration date of the 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. Warrants that are freestanding derivatives and 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.

For those warrants that are not considered derivatives under ASC 815, the Company estimates that the fair value of equity based warrants using the Black-Scholes-Merton model. The Company’s expected volatility assumption is based on the historical volatility of the Company’s stock. The expected life assumption is primarily based on the expiration date of the 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.

In accordance with ASC 815, the conversion feature of the Convertible Notes is separated from the debt instrument and accounted for separately as a derivative instrument. On the date the Convertible Notes are issued, the conversion feature was recorded as a liability at its fair value, and future decreases in fair value are recognized in earnings while increases in fair values are recognized in expenses. The Company used the Black-Scholes-Merton option-pricing model to obtain the fair value of the conversion feature. The Company’s expected volatility assumption is based on the historical volatility of the Company’s stock. The expected life assumption is primarily based on the expiration date of the conversion features. The risk-free interest rate for the expected term of the conversion features is based on the U.S. Treasury yield curve in effect at the time of measurement.

RECENT ACCOUNTING PRONOUNCEMENTS

Recently Implemented Standards

ASC 105, Generally Accepted Accounting Principles (“ASC 105”) (formerly Statement of Financial Accounting Standards No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162) reorganized by topic existing accounting and reporting guidance issued by the Financial Accounting Standards Board (“FASB”) into a single source of authoritative generally accepted accounting principles (“GAAP”) to be applied by nongovernmental entities. All guidance contained in the Accounting Standards Codification (“ASC”) carries an equal level of authority. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. Accordingly, all other accounting literature will be deemed “non-authoritative.” ASC 105 is effective on a prospective basis for financial statements issued for interim and annual periods ending after September 15, 2009. The Company has implemented the guidance included in ASC 105 as of July 1, 2009. The implementation of this guidance changed the Company’s references to GAAP authoritative guidance but did not impact the Company’s financial position or results of operations.

ASC 855, Subsequent Events (“ASC 855”) (formerly Statement of Financial Accounting Standards No. 165, Subsequent Events) includes guidance that was issued by the FASB in May 2009, and is consistent with current auditing standards in defining a subsequent event. Additionally, the guidance provides for disclosure regarding the existence and timing of a company’s evaluation of its subsequent events. ASC 855 defines two types of subsequent events, “recognized” and “non-recognized.” Recognized subsequent events provide additional evidence about conditions that existed at the date of the balance sheet and are required to be reflected in the financial statements. Non-recognized subsequent events provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date and, therefore, are not required to be reflected in the financial statements. However, certain non-recognized subsequent events may require disclosure to prevent the financial statements from being misleading. This guidance was effective prospectively for interim or annual financial periods ending after June 15, 2009. The Company implemented the guidance included in ASC 855 as of July 1, 2009. The effect of implementing this guidance was not material to the Company’s financial position or results of operations.

Recent Accounting Pronouncements

In April 2011, the Financial Accounting Standard Board (“FASB”) issued Accounting Standard Update (“ASU”) ASU 2011-03, Consideration of Effective Control on Repurchase Agreements, which deals with the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. ASU 2011-03 changes the rules for determining when these transactions should be accounted for as financings, as opposed to sales. The guidance in ASU 2011-03 is effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The adoption of ASU 2011-03 is not expected to have a material impact on the Company’s financial condition or results of operation.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”). ASU 2011-04 clarifies some existing concepts, eliminates wording differences between U.S. GAAP and IFRS, and in some limited cases, changes some principles to achieve convergence between U.S. GAAP and IFRS. ASU 2011-04 results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. ASU 2011-04 will be effective for the Company beginning after December 15, 2011. The Company does not expect the adoption of ASU 2011-04 to have a material effect on its operating results or financial position.

In June 2011, FASB issued ASU 2011-05, Presentation of Comprehensive Income, which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income, or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of equity. ASU 2011-05 will be effective for the Company beginning after December 15, 2011. The Company does not expect the adoption of ASU 2011-05 to have a material effect on its operating results or financial position.

In September 2011, the FASB has issued ASU No. 2011-08,Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU 2011-08 is intended to simplify how entities, both public and nonpublic, test goodwill for impairment. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is "more likely than not" that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350,Intangibles-Goodwill and Other. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance.

In December 2011, the FASB has issued ASU No. 2011-11,Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.ASU No. 2011-11 is intended to provide enhanced disclosures that will enable users of its financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position. This includes the effect or potential effect of rights of setoff associated with an entity’s recognized assets and recognized liabilities within the scope of this Update. The amendments require enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either (i) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (ii) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with either Section 210-20-45 or Section 815-10-45. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company is evaluating whether the adoption of ASU 2011-04 will have a material effect on its operating results or financial position; however, the Company does not expect the adoption of ASU No. 2011-11 to have a material effect on its operating results or financial position.

In December 2011, the FASB has issued ASU No. 2011-12,Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.ASU No. 2011-11 is intended to supersede certain pending paragraphs in Accounting Standards Update No. 2011-05,Comprehensive Income (Topic 220): Presentation of Comprehensive Income, to effectively defer only those changes in Update 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. The amendments will be temporary to allow the Board time to redeliberate the presentation requirements for reclassifications out of accumulated other comprehensive income for annual and interim financial statements for public, private, and non-profit entities. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company does not expect the adoption of ASU No. 2011-11 to have a material effect on its operating results or financial position.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s financial statements upon adoption.

RESULTS OF OPERATIONS – YEAR ENDED DECEMBER 31, 2011 AS COMPARED TO YEAR ENDED DECEMBER 31, 2010

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, 20112013 and 2010:2012:

For The Years Ended

December 31, 20112013 and 20102012

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Revenues

For the twelve monthsyear ended December 31, 2011,2013, our revenues decreasedincreased by 6%46.5%, from $42,880,300$64,513,670 in 2012 to $40,177,148,$94,536,045 in 2013.

In 2013, our ATVs experienced an increase in revenue of $4,005,105 or 62.6%, a 26.5% increase in unit sales, and a 28.5% increase in the average unit price compared to 2010. Thisfiscal year 2012. The increase in revenue was primarily dueattributable to the decreased sales of UTVs and go-karts, which was affected by the global economic fluctuations; details are described below.

During the twelve months ended December 31, 2011, the market condition for ATV products, which continued to recover. The Company continued to developrecover and the increase in the average unit price competitiveis because a higher percentage of high-end and middle-end products to meet market demands, causing good results and successfully increasing the Company’s sales. Revenues fromwere sold in 2013.

In 2013, our ATVsgo-karts experienced an increase in revenue of $1,133,532,$2,393,462, or 30.5% in fiscal year ended December 31, 2011 over the comparable period, which was attributable to7.8%, a 70%5.7% increase in unit sales, from 5,868 unitsand a 1.9% increase in the average unit price compared to fiscal year 2012. The increase in revenue was mainly attributable to the relative stable growth in go-karts sales. The Company manufactures both high-end, more expensive go-kart products and less expensive go-kart products to meet customers' various needs.

In 2013, our utility vehicles (“UTVs”) experienced an increase in revenue of 2010 to 9,958 units$836,207 or 262.1%, a 373.1% increase in 2011,unit sales, and a 23.5% decrease in the effect of a 23%average unit price reduction.

Because the Company has shifted its focus of super-mini cars from the overseas marketcompared to fiscal year 2012. The increase in revenue was mainly attributable to the domestic Chinese market, and as governments at different levels had not determinedincrease of UTV orders. The decrease in the supporting policies until October 2011,average unit price was due to the Company has not realized massfact that cheaper model UTVs took a higher percentage of sales in year 2013

EV Products

In 2013, our EV products experienced an increase in revenue of $27,584,267 or 144.9%, a 19.9% increase in unit sales, during this reporting period. Forand a 104.3% increase in the average unit price compared to fiscal year ended December 31, 2011,2012. In the fourth quarter, the EV revenues from our super-mini car, dropped by $546,483,increased $26,382,915, or 8% from193.7% compared to the same period in 2010, which was attributable to a 33% decrease inof 2012. The unit sales from 1,618 units in the year of 2010 to 1,077 units in 2011. For the twelve months ended December 31, 2011,grew by 27.2% and the average unit price increased 38%, primarily becauseby 130.9% . The significant increase was mainly attributable tothe newly added EV model –Kandi Brand SMA7000BEV, a five-door & five-seat vehicle and SMA7001BEV, an improved model of electric vehicle, are both sold at a much higher price. The increasing sales were driven by Hangzhou Public EV Sharing System (the “Carshare” Project). Thanks to the super-mini cars the Company sold during this period have enhanced features and performance. Since October 12, 2011, the Zhejiang Province government and Jinhua City government have formally begun to provide subsidies to buyers that purchaserenewal of national subsidy policy in September of 2013, most of our super-mini cars. The Company remains optimistic about EV sales based on developmentsoccurred in the Jinhua market, as well as the expected launchfourth quarter. We believe that sales in the Hangzhou market.first three quarters were negatively affected by the delay of the subsidy policy.

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Motorcycles

In 2011,2013, our go-kartsTT experienced a decrease in revenue of $2.5 million$889,138 or 10% from fiscal year 2010, which was mainly attributable to69.9%, a 9%77.1% decrease in unit sales, from 28,366 units in 2010 to 25,757 units in 2011.  This is because in year 2010, especiallyand a 31.5% increase in the fourth quarter of 2010,average unit price compared to fiscal year 2012. The decrease was primarily attributable to the improved market condition, which had been suppressed duringchange in the financial crisis, had created a largeproduct structure. There were less TTs manufactured and we may decrease or stop manufacturing such products. The increase in demand, especially for middle and small size products, whilethe average unit price in year 2011, this demand retreated a bit after the peak.2013 was because higher percentage of TTs sold were more expensive models.

Refitted Car

UTVsIn 2013, our refitted car experienced a significant decrease in revenues from $4,839,256 to $2,696,106. This 44%revenue of $2,114,322, or 66.6%, a decrease is due to a 47% dropof 66.1% in unit sales from 2,270 unitsand a 1.7% decrease in 2010the average unit price compared to 1,198 unitsfiscal year 2012. The decrease in 2011. This significant droprevenue was mainly because that the Company decided to discontinue this business during the third quarter of 2013 and focus its efforts on increasing its electric vehicles revenue in China market. “Refitted Car” is primarily because of the continuing high competition in this UTV market. Additionally, the UTV manufactureda term used by the Company is relatively high end and more expensive, which affected the sales. At this moment,to describe a line of business, where the Company continues to develop new products and enhance existing productsmodifies (refits) vehicles manufactured by unrelated, other companies to meet the future demands in UTV markets. Those new products that have been introduced tospecial requirements of our customers. For example, the market have generated positive feedback. The UTVs’ sales in the second half of 2011 have shown signs of reversing the decreasing trend of UTV sales.

The TT is changing from a recreational vehicle that isCompany may make exterior changes, refit AMWS, or install nonstandard features, including, but not street legallimited to, a formal vehicle subject to additional certification. This role-changing period caused the revenues fromrearview camera, TPMS, drive recorder, anti-theft device, reversing radar and DVD player.

Auto generator

In 2013, our TT to drop by $496,578,auto generator experienced a decrease in revenue of $1,793,206 or 24%51.0%, from the fiscal year 2010 to $1,592,770 in fiscal year 2011, which was attributable to a 15%45.0% decrease in unit sales from 917 units in 2010 to 782 units in 2011. In responding to this market situation, the Company modified and improved the TT’s design and qualitya 10.8% decrease in the first half of 2011, which resulted in a good sales performance in the second half of 2011average unit price compared to 2010, but this was not enough to make up for the significant decrease caused in the first six months of 2011. Currently the Company is preparing for the above-mentioned certification and the Company believes obtaining certification will positively impact the Company’s future performance.

Refitted car

For the fiscal year ended December 31, 2011,2012. The decrease in revenue was due to the Company also refitted other companies’adjustment in yongkang Scrou's product offering from a manufacturer of auto alternator to a wide range of main products, such as driving motor, air-conditioning system and controller for electric vehicles now. Yongkang Scrou provides these products for use with our vehicles; sales in connection with providing these products to meet special requirements for certain customers. The Company expects to expand this new businessour vehicles are categorized as inter-company transactions and stimulate the Company’s development.

have been eliminated in consolidation.

The following table listsshows the numberbreakdown of vehicles sold and sales revenue, categorizedKandi's revenues from its customers by vehicle type, within the twelve months ended December 31, 2011 and 2010:geographic markets:

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Cost of Goods Sold

Cost of goods sold during the year ended December 31, 20112013 was $30,964,173$72,793,517, representing a 7% decrease41.0% increase from $33,257,851 last year, which corresponds$51,620,280 in 2012. This was the result of an increase in our sales.

However, sales increased by a higher percentage than related costs. Our sales had a 46.5% increase in 2013 compared to the decrease in sales. Cost2012; whereas our cost of goods sold only increased by 41.0% in 2013 compared to 2012. The main reasons that our costs increased by only 41.0% in 2013 compared to 2012 are as follows:

In consideration of the cost increase resulting from the increase of sales volume, the actual cost increase in 2013 is 5.5% less when compared to the increase in sales. This was the result of the following three factors:

1. In 2013, the cost of raw materials had a relatively slower increase, which is 5.7% less than the percentage of revenues was 77.1% for 2011 asour sales increase in the same period of time, mainly because (i) the new products, especially our EV products were sold at higher price compared to 77.6%2012, therefore those products raw material costs had a relative low increase percentage compared to their sale increase; and (ii) the Company strengthened its cost control, reduced the waste of raw materials in manufacturing process.
   

2. With the labor cost increase in China, due to short supply and higher standard wages, our labor costs also increased. Total wages and salaries had a relatively higher increase of 0.3% in 2013, compared to the sale increase in the same period of time.
   

3. Our other overhead costs in 2013 had a relatively slower increase of 0.1% in 2013 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 2013. The wear and tear costs for tools in the year 2010, which reflectsworkshops booked in accounting increased in a slower pace compared to the Company’s increased operating efficiency and manufacturing cost management.pace of increase of our sale.

Gross profitProfit

Gross profits decreasedincreased by $409,474,$8,849,138, or 4%68.6%, for the year ended December 31, 2011in 2013 as compared to the year ended December 31, 2010. This decrease was primarily due to the decreaseda result of increased net sales althoughsales. During 2013, the gross margin has increased from 22.4%20.0% in year 20102012 to 22.9%23.0% in year 2011.2013. This is3% increase in our gross margin resulted mainly because in 2013 we adjusted our product structure and more high price products, especially the Company has put more efforts and resources into developing and promotingEV products, are sold, while those high price products generally with higher gross margins, and more importantly, the Company has achieved more effective manufacturing cost management.margin.

SellingSales and Marketing

SellingSales and distribution expenses were $414,255$399,504 for fiscal year ended December 31, 2011,2013, as compared to $1,120,739$455,983 from the same period in 2010,2012, representing a 63%12.4% decrease. The significantThis decrease in these expenses wasis primarily attributable to the inclusion of expenses related to the options issued to consultants for their services assisting the Company in expanding within the Chinese market for the year ended December 31, 2010, which was not present in the corresponding 2011 period. Excluding the $808,223 option related expense, the net selling and distribution expense for fiscal year 2010 was $312,516, which represents a 33% increase in selling and distribution expense for the year 2011 compared to the year 2010, primarily attributable to the increasesdecrease in our sales force, higher advertisingexport and customs inspection fees transportation fees and custom inspection fees.

during this reporting period.

General and Administrative

General and administrative expenses increased 3%277.7% during the fiscal year ended December 31, 2011,2013, from $3,371,829$4,250,832 to $3,458,388.$16,056,107. In addition to cash cost related to general and administrative expenses, in 2010,2012, the general and administrative expenses included $549,494$85,558 stock awards related expense, whereas in expenses2013, the expense for common stock awards to consultants for financingdirectors and investor relations services, whilecertain employees was $9,658,320. Additionally, in fiscal year 2011, the stock awards related expense was $70,781. Additionally,2012 the general and administrative expenses also included $252,632$19,053 in stock-based compensation costs for the options issued to the Company’sCompany's executives and managerial level employees, while for the same period of last year 2013, this stock option based compensation cost was $630,350.$0. Excluding the effect of stock award cost and option cost, the net general and administrative expenses for the year ended December 31, 20112013 was $3,134,975,$6,397,787, increased 43%54.3% from $2,191,985$4,146,221 for the same period in 2010.2012. This increase was primarily dueattributable to costs related to the increase in expenses incurred by the Company’s increased activities in capital markets, such as legal fees and investor relations costs, and a land use tax charged by the government, which the Company began payingraise that occurred in the third quarter of 2011. In addition, in 2011, the general2013, and administrative expenses included an expense for slow moving inventory.higher depreciation and amortization costs.

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Research and Development

For the year ended December 31, 2011,2013, research and development expenses increased $396,239 ,$851,447, or 21%29.6%, to $2,304,373$3,728,730 from $1,908,134$2,877,283 for the year ended December 31, 2010.2012. This increase was primarily due to additional research and development efforts on new products and on quality improvement on existing products. In the fiscal year 2011, the Company strengthened its research and development for EVs equipped with lithium batteries in order to seek the leading position in the fourth quarter of 2013 for developing new EV market. Currently, there are two new models of EVs equipped with lithium batteries that are in the process of being researched and developed, both of which we expectproducts to launch in 2013 or 2014. In addition, the Company successfully developed new models of ATVs, go-karts and other products.

meet market demands.

Government grantsGrants

Government grants totaled $298,072$228,396 for the year ended December 31, 2011,2013, representing a 15% decrease72.8% increase over the same period in 2010.2012. For the year ended December 31, 2011,2013, the government grants included $277,129$1,694 in subsidies for technology innovation and patent applications, $182,287 subsidies for supporting companies that have competitive advantages and $20,943$44,415 export subsidies.

Investment income (loss)Share of (Loss) of Associated Company

Investment lossShare of (loss) of associated company was ($43,043)69,056) for the year ended December 31, 2011,2013, compared to loss of ($1,771)69,429) for the corresponding period in 2010.2012. For the twelve monthsyears ended December 31, 2011, the investment loss included a loss of ($52,696) as a result of2013 and 2012, these losses were attributable to our 30% equity interest investment in Jinhua Service and an income of $9,653 from trading securities, which was ($1,771) for year 2010. During the fiscal year 2011, Jinhua Service was in the initial launching period, so Jinhua Service recorded a net loss; however, the Company believes Jinhua Service should, in the near future, generate a profit.

Service.

Other Income (Expense), Net

Net other income was $717,495$676,257 for the year ended December 31, 2011,2013, compared to $761,960$332,936 for the year ended December 31, 2010, a decrease2012, representing an increase of $44,465$343,321 or 6%103.1% . This decreaseincrease is primarily because comparedthe Company wrote off $841,251 payable to fiscal year 2010, the write off of other payablesEver Lotts Investment Limited, which had not been claimed for more than 3three (3) years as of December 31, 2011 has decreased $322,225 compared to year 2010.

2013. Additional details regarding this write-off are set forth in Note 14 of our financial statements.

Interest Income (Expense), Net

Net interest incomeexpense was $255,418($2,878,876) for the year ended December 31, 2011, significantly changed2013, a significant change from a net expense of ($2,153,018)117,787) for the year ended December 31, 2010. For the fiscal year ended December 31, 2011,2012. In 2013, the interest expense for convertible notes was $0, and the interest incurred by the amortization of debt discount was $0, since the last $1,000 of convertible notes we previously issued were converted in the first quarter of 2012. The interest for the convertible notes in 2012 was ($135)2), and the interest incurred by the amortization of debt discount was ($659) since only $1,000 of convertible notes were outstanding as of December 31, 2011. For the same period of last year, the interest for the convertible notes was ($355,727), and the interest incurred by the amortization of debt discount was ($855,696)43). Excluding the effects of interest expense related to convertible notes, the net interest incomeexpense for this reporting period was $256,212,($2,878,876), a significant change from ($941,595)117,742) net interest expense for the same period in 2010.2012. This changeincrease was mainly attributed to the interestprimarily attributable to: (i) a decrease in interest-related income generated from the notes receivableearned on note receivables issued to third parties which was $2,066,941 for fiscal year 2011.and (ii) bond interest expenses incurred by the Company.

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Change in Fair Value of Financial Instruments

For the year ended December 31, 2011,2013, the interest income,expense which was caused by the decreaseincrease of fair value of warrants issued to certain investors and placement agents and the changes of fair value of conversion features embedded in convertible notes, was $5,401,929,($16,647,283), while for the same period last year, the interest expense, which wasincome caused by the increase in fair value change of financial instruments was ($2,725,987).$1,986,063. This significant change was primarily due to the lowera significant increase in our stock price in 2013 and the fact that there were more warrants outstanding as of December 31, 2011.2013 compared to December 31, 2012.

Income Taxes

On March 16, 2007, the National People’s CongressShare of Profit (Loss) after Tax of the PRC adoptedJV Company

The Company has absorbed a new corporate income tax lawprofit (loss) in fiscal year 2013 due to its fifth plenary session.50% interest in the JV Company. The new corporate income tax law unifiesJV Company recorded a loss in 2013 because it is still in the application scope, tax rate, tax deductionstart-up phase, though the Company believes it will generate profit in the near future, particularly as demand for our EV products continues to build in China. We believe this is reflected by the fact that if the subsidies receivable from the relevant government agencies for vehicles sold by the JV in 2013 had been paid in 2013, the JV would have experienced a profit instead of a loss; these subsidies are scheduled to be received by the JV in April, 2014. The financial results of the JV and preferential policy for both domestic and foreign-invested enterprises.  The new corporate income tax law took effect on January 1, 2008. their relationship to the Company's investment in the JV are more fully described in Note 23.

Income Taxes

In accordance with the relevant tax laws and regulations of the PRC, Kandi’sour applicable corporate income tax rate is 25%. However, Kandi Vehicle is a foreign-investedqualified as a high technology company which registeredin China and is therefore entitled to pay a reduced income tax rate of 15%.

Each of Kandi New Energy, Yongkang Scrou, and Kandi Wanning is a wholly-owned subsidiary of the Company with the PRC government before March 16, 2007 is still permitted to apply the formeran applicable corporate income tax rules. Thus, ourrate of 25%.

The Company was exempt fromhas a 50% ownership interest in the JV Company and its applicable corporate income tax for 2007 and 2008 and is also entitled to a 50% tax reduction for 2009, 2010 and 2011, for which the tax rate is 12.5%25%.

Kandi New EnergyZhejiang ZuoZhongYou Electric Vehicle Service Co., Ltd. is a subsidiary19% investment of the JV Company and its applicable corporate income tax rate is 25%. However, because

Each of Kandi New Energy’s profit was belowElectric Vehicles (Changxing) Co., Ltd., Zhejiang Kandi Electric Vehicles Jinhua Co., Ltd., Zhejiang JiHeKang Electric Vehicle Sales Co., Ltd. and Kandi Electric Vehicles (Shanghai) Co., Ltd. is a special standard amount in 2010, which rendered it to enjoywholly-owned subsidiary of the JV Company with an initial tax benefit of 50% reduction in taxableapplicable corporate income and tax at 20% reduced rate in 2011, with effective tax rate at 10%. The special reduced CIT tax rate benefit is only lasts for one year. In 2012, the tax rate will go back to normal atof 25%.

The Company, hadqualified as a high technology company in China, was entitled to pay a reduced income tax expenserate of $551,060 for15%. After combining with the year ended December 31, 2011research and had adevelopment tax expensecredit of $405,713 for25% on certain qualified research and development expenses, the year ended December 31, 2010.final effective reduced income tax rate was 16.68%. The combined tax benefits were 50.1%. The actual effective income tax rate was reduced from 25% to 12.48% of the 2013 taxable corporate income.

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Net Income (Loss)

For the fiscal year ended December 31, 2011,2013, the Company generated a net incomeloss of $9,114,770,($21,140,723), a significant improvementchange from a net lossincome of ($951,439)$6,049,479 in year 2010.2012. The improvementdecrease was primarily caused by (i) changes in the change in fair value of financial derivatives, (ii) increases in general and due to the significant decreases inadministrative expenses, and (iii) interest expense, and selling and distribution expenses, which included higher option related expenses in the year in 2010.

expenses.

Excluding the effects of option related(i) option-related expenses, which was $252,632were $0 and $1,438,573$19,053 for the fiscal year 20112013 and 20102012, respectively, (ii) the stock award expense, which was $70,781$9,658,320 and $549,494$85,558 for the year 20112013 and 20102012, respectively, (iii) the Convertible Note’sNote's interest expense, which was $135$0 and $355,727$2 for years 20112013 and 2010,2012, respectively, (iv) the effect caused by amortization of discount on Convertible Notes, which was $659$0 and $855,696$43 for year 20112013 and 2010,2012, respectively, and (v) the change of the fair value of financial derivatives, which was $5,401,929a ($16,647,283) expense and a $1,986,063 income for 2013 and $2,725,987 expense for years 2011 and 2010,2012, respectively, the Company’sCompany's net income for the year ended December 31, 2011,2013, was $4,037,048, a decrease$5,164,880. This net income figure represents an increase of 19%23.9% as compared with net income of $4,975,809$4,168,072 for the same period of 20102012, excluding the same effects. This decreaseincrease is primarily due to our increased sales and gross profit.

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Summary of Fourth Quarter Results

Comparison of Three Months Ended December 31, 2013 and 2012

The following table sets forth the increaseamounts and percentage relationship to revenue of generalcertain items in our condensed consolidated statements of income and administrative expenses, research and development expenses, andcomprehensive income

34

For the decreasethree months ended December 31, 2013, our revenue increased by 92.0% from $26,331,459 to $50,560,582 due to the fact the Company sold more higher-priced EV products in the fourth quarter of 2013. The cost of goods sold also increased 79.5% during the same period, while gross profit although it was also offset byincreased $6,899,837, or 152.0%, from $4,540,276 in the increasecorresponding period last year to $11,440,113 in interest income generated from the notes receivable issued to third parties. Asfourth quarter of January 19, 2012, all of the Convertible Notes had been converted.

Summary of 4th Quarter Results

2013.

For the three months ended December 31, 2011, our revenue decreased by 21% from $14,345,3682013, the general and administrative expenses increased 549.0% to $11,387,382,$11,229,485, mainly duebecause of the expense related to the decreased sales of go-kart products.  The cost of goods sold also decreased 21% during the same period, while gross profit decreased $619,762, or 20%, from 3,103,859stock awarded to directors and certain employees. Research and development expenses increased 114.2% as we engaged in the corresponding period last yearadditional research and development efforts for developing new EV products to $2,484,097 in the fourth quarter of 2011.

meet market demands. For the three months ended December 31, 2011, the general and administrative expenses decreased 16% to $889,971, mainly because of the decrease of expenses of options issued to directors and employees. Selling and distribution expenses increased 47%, primarily due to more advertising and exhibition related activities. For the three months ended December 31, 2011,2013, we incurred a non-cash chargeexpense of $2,079,063($9,690,320) relating to the change in fair value of financial instruments, which was an expensea non-cash income of $1,923,103907,268 for the same period in 2010.

2012.

For the three months ended December 31, 2011,2013, the company recorded a net loss of ($829,831)14,671,319), compared to a net lossincome of ($219,138)$2,166,781 for the same period of last year. Excluding the effects of option relatedoption-related expenses, stock award expenses, Convertible Notes interest expense, the effects caused by the amortization of discount on Convertible Notes, and the change in the fair value of financial derivative, for the three months ended December 31, 2011,2013, the Company recorded a net income of $1,346,907,$4,596,279, a 31% decreasesignificant increase from net income of $1,940,413$1,279,338 for the same period in 2010,2012, excluding the same effects. This decreaseincrease is primarily due to the decreasedincreased revenue and gross profit.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow

Net cash provided by operating activities was $12,642,070$14,687,446 for the year ended December 31, 2011,2013, as compared to net cash provided byused in operating activities of $4,440,551($10,721,895) for the year ended December 31, 2010.2012. The difference is mainlyin cash flow was because forin 2013, (i) the year ended December 31, 2011,Company focused more on collecting accounts receivable, and the change in accounts receivable caused a net cash inflow of $4,647,184,$3,251,168, compared to a net cash outflow of ($1,572,489)20,513,099) for the same reporting period in 2010.

2012, and (ii) the change in accounts payable caused a net cash inflow of $13,699,528, which was an increase from a net cash inflow of $3,566,354 in 2012.

Net cash used in investing activities was ($22,330,894)59,844,162) for the year ended December 31, 20112013 as compared to net cash flow used in investing activities of ($25,821,359)4,751,858) for the same reporting period in 2010.2012. This was primarily due to (1)the ($9,839,388) net80,668,972) cash outflow for purchasesthe JV Company in 2013: The Company made a ($24,383,529) deposit to acquire certain assets in 2012, and spent an ($39,673,000) to acquire additional assets in 2013, all of construction in progress, and (2) a netwhich were transferred to Kandi Changxing; Kandi Changxing was then sold to the JV Company. In 2013, the Company recorded $64,535,177 cash outflowinflow caused by the transfer of ($11,845,363) in note receivable, as comparedKandi Changxing to a net cash outflow in notes receivable of ($21,966,427) for the same period last year.

JV Company.

Net cash flow provided by financing activities was $4,333,237$46,317,978 for the year ended December 31, 2011, as2013, compared to net cash flow provided by financing activities of $28,960,121$25,622,819 for the same period of 2010.2012. This change is primarily attributable to (i) a net cash inflow of $26,387,498 through issuing common stock and warrants, and (ii) a decrease in restricted cash for 2013 compared to 2012, which caused a cash inflow of $16,135,044, in contrast to 2012, when the Company’s completionCompany recorded a net cash outflow of two rounds($9,143,907) for restricted cash (though these effects are partially offset by the net cash outflow ($9,357,601) caused by notes payable in 2013, compared to the net cash inflow of financing through direct stock market financing and converting the Convertible Notes$19,427,972 in year 2010, while there was no fund raising in year 2011.2012).

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Working Capital

The Company had a working capital surplusdeficit of $17,466,812 ($6,631,680)as of December 31, 2011,2013, a decrease from a working capital surplus of $18,522,694$35,898,297 as of December 31, 2010, which was principally due to the Company using part of the proceeds raised in the Company’s equity offerings in 2010 to purchase construction in progress and fixed assets.2012.

As of December 31, 2011,2013, the amount of advances to suppliers was $8,867,074, which included the advance of a RMB 47 million ($7,687,275) deposit by Kandi Electric Vehicles (Wanning) Co., Ltd (“Kandi Wanning”) to Nanjing Shangtong Auto Technologies Co., Ltd. (“Nanjing Shangton”) for an equipment purchase. Kandi Wanning and Nanjing Shangtong entered into a letter of intent contemplating the purchase of equipment up to RMB 180 million. The equipment will be purchased and delivered according to the construction schedule and development of Kandi Wanning. This advance will be used to offset the equipment purchase price upon delivery.

In fiscal year 2013, Kandi Changxing prepaid RMB 130 million to Zhejiang New Energy Auto System Co., Ltd. (“Zhejiang New Energy”) with the intent to acquire molds and equipment from Zhejiang New Energy, but the transaction did not close, and the advance was returned in full to Kandi Changxing.

As of December 31, 2013, the Company had credit lines from commercial banks for $44,306,880,in the total amount of $56,100,752, of which $33,230,160$34,020,281 had been used as of December 31, 2011.2013. The Company believes that its cash flows generated internally may not be sufficient to support growth of future operations and repay short termshort-term bank loans for the next twelve (12) months, if needed. However, the Company believes its access to existing financing sources and established relationships with PRC banks will enable it to meet its obligations and fund its ongoing operations.

The Company has historically financed itself 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 respective loan, the banks have typically rolled over the loans for additional one-year terms, with adjustments made to the interest rate to reflect prevailing market rates. The Company believes this situation has not changed and is confident that the short-term bank loans will be available on normal trademarket terms if needed.

On June 26, 2013, the Company entered into a securities purchase agreement with certain institutional investors (the “Investors”) that closed on July 1, 2013, pursuant to which the Company sold to the Investors, in a registered direct offering, an aggregate of 4,376,036 shares of our common stock at a negotiated purchase price of $6.03 per share, for aggregate gross proceeds of approximately $26,387,500, before deducting fees to the placement agent and other estimated offering expenses payable by the Company. As part of the transaction, the Investors also received (i) Series A warrants for the purchase of up to 1,750,415 shares of our common stock at an exercise price of $7.24 per share; (ii) Series B warrants to purchase a maximum aggregate of 728,936 shares of our common stock at an exercise price of $7.24 per share; and (iii) Series C warrants to purchase a maximum aggregate of 291,574 shares of our common stock at an exercise price of $8.69.

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Off-balance Sheet Arrangements

As of December 31, 2011,2013, the Company provided guarantees for the following third parties:

(1) Guarantees for bank loans

On December 4, 2011,27, 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 $4,713,498$4,906,771 by Zhejiang Kangli Metal Manufacturing CompanyCompany. (“ZKMMC”) for the period from December 4, 201127, 2013 to December 4, 2012.27, 2014. ZKMMC is not related to the Company. Under this guarantee contract, the Company shallagrees to perform all obligations of ZKMMC under the loan contract if ZKMMC fails to perform its obligations as set forth in the loan contract.

therein.

On October 9, 2011 and December 8, 2011, the Company entered into two guarantee contracts to serve as the guarantor for the bank loans borrowed from Shenzhen Development Bank Hangzhou branch and Huaxia Bank Hangzhou branch in the amount of $4,713,498 and $3,142,332 by Zhejiang Shuguang industrial Co., Ltd. (“ZHICL”) for the period from October 9, 2011 to October 9, 2012 and from December 8, 2011 to December 8, 2012, respectively. ZHICL is not related to the Company. Under these guarantee contracts, the Company shall perform all obligations of ZHICL under the loan contracts, if ZHICL fails to perform its obligations as set forth in the loan contracts.

On April 25, 2011,February 26, 2013, the Company entered into a guarantee contract to serve as the guarantor for the bank loansloan borrowed from Shanghai Pudong DevelopmentPingAn Bank Hangzhou branch in the amount of $1,571,166$4,906,771 by Zhejiang Yiran Auto Sales Company (“ZYASC”) for the period April 25, 2011 to April 25, 2012. ZYASC is not related to the Company. Under these guarantee contracts, the Company shall perform all obligations of ZYASC under the loan contracts, if ZYASC fails to perform its obligations as set forth in the loan contracts.

On December 4, 2011, the Company entered into a guarantee contract to serve as the guarantor for the bank loans borrowed from Shanghai Bank Hangzhou branch in the amount of $3,142,332 by Zhejiang Taiping Shengshi IndustrialShuguang industrial Co., Ltd. (“ZTSICL”ZSICL”) for the period from December 4, 2011February 26, 2013 to December 4, 2012. ZTSICLFebruary 26, 2014. ZSICL is not related to the Company. Under this guarantee contract, the Company shallagrees to perform all obligations of ZTSICLZSICL under the loan contract,contracts if ZTSICLZSICL fails to perform its obligations as set forth in the loan contract.

therein. This guarantee contract has been renewed for an additional one-year term.

On August 12, 2011,January 6, 2013, the Company entered into a guarantee contract to serve as the guarantor for the bank loans borrowed from ICBC Wuyi branch in the amount of $3,613,682 by Zhejiang Taiping Trade Co., Ltd (“ZTTCL”) for the period from August 12, 2011 to August 8, 2013. ZTTCL is not related to the Company. Under this guarantee contract, the Company shall perform all obligations of ZTTCL under the loan contract, if ZTTCL fails to perform its obligations as set forth in the loan contract.

On January 7, 2011, the Company entered into two guarantee contracts to serve as the guarantor for the bank loans borrowed from China Communication Bank Jinhua Branch in the amount of $157,117 and $628,466, respectively,$817,795 by Yongkang Angtai Trade Co., Ltd. (“YATCL”) for the period from January 7, 20116, 2013 to December 31, 2012.January 6, 2014. YATCL is not related to the Company. Under thesethis guarantee contracts,contract, the Company shallagrees to perform all obligations of YATCL under the loan contracts if YATCL fails to perform its obligations as set forth in the loan contracts.

therein. This guarantee contract was not renewed.

On August 24, 2010,March 15, 2013 and December 27, 2013, the Company entered into atwo guarantee contractcontracts to serve as the guarantor for the bank noteloans borrowed from HuaxiaShanghai Pudong Development Bank Jinhua Branch and Shanghai Bank Hangzhou branch in the amountamounts of $1,256,933$3,271,181 and $6,542,362, respectively, by Zhejiang Mengdeli ElectricNanlong Group Co., Ltd. (“ZMEC”NGCL”) for the periodperiods from August 24, 2010March 15, 2013 to August 24, 2012. ZMECMarch 15, 2016, and December 27, 2013 to December 27, 2014, respectively. NGCL is a supplier but not related to the Company. Under thisthese guarantee contract,contracts, the Company shallagrees to perform all obligations of ZMECNGCL under the loan contract,contracts if ZMECNGCL fails to perform its obligations as set forth in the loan contract.therein.

As of December 31, 2011,2013, none of the Company pledged itsCompany's land use rights andor plant and equipment were pledged as collateral forsecuring bank loans to third parties.

37

Critical Accounting Policies and Related Estimates That Could Have a Material Effect on OurConsolidated Financial Statements

This section should be read together with the following third party:

It is a common business practice among companiesSummary of Significant Accounting Policies in the regionattached consolidated financial statements included in this Annual Report.

Estimates affecting accounts receivable and inventories

The preparation of Chinaour 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 Kandi 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 bythey affect the lending banks as in these cases. These companies provided guarantees for the Company’s bank loans as well. The banks involved in these guarantee transactions typically allow a maximum loan amount based on a 30% to 70% discount on thereported net bookrealizable value of the pledged collateral. For additional detailsCompany's 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. The Company had an allowance for doubtful accounts of $0 for the years ended December 31, 2013 and 2012, in accordance with our management's judgment 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. There was a $352,734 decline in net realizable value of inventory for the year ended of December 31, 2013 due to our provision for slow moving inventory.

Although the Company believes 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, the Company could realize significant write downs for slow-moving inventories or uncollectible accounts receivable.

Policy affecting recognition of revenue

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:

38

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 the Company recognizes revenue.

Policy affecting options, warrants and convertible notes

The Company's stock option cost is recorded in accordance with ASC 718 and ASC 505. The fair value of stock options is estimated using the Black-Scholes-Merton model. The Company's expected volatility assumption is based on the guarantees, see Note 15historical volatility of the Company's stock. The expected life assumption is primarily based on the expiration date of the option. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Stock option expense 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 Note 20revised in subsequent periods, if necessary, if actual forfeitures differ from those estimates.

The Company's warrant costs are recorded in liabilities and equities, respectively, in accordance with ASC 480, ASC 505 and ASC 815. The fair value of a warrant, which is classified as a liability, is estimated using the Black-Scholes-Merton model and the lattice valuation model. The Company's expected volatility assumption is based on the historical volatility of the Company's stock. The expected life assumption is primarily based on the expiration date of the 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. The Company's expected volatility assumption is based on the historical volatility of the Company's stock. The expected life assumption is primarily based on the expiration date of the 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.

In accordance with ASC 815, the conversion feature of the convertible notes is separated from the debt instrument and accounted for separately as a derivative instrument. On the date the convertible notes are issued, the conversion feature is recorded as a liability at its fair value, and future decreases in fair value are recognized in earnings while increases in fair values are recognized in expenses. The Company used the Black-Scholes-Merton option-pricing model to obtain the fair value of the conversion feature. The Company's expected volatility assumption is based on the historical volatility of the Company's stock. The expected life assumption is primarily based on the expiration date of the conversion features. The risk-free interest rate for the expected term of the conversion features is based on the U.S. Treasury yield curve in effect at the time of measurement.

39

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 Company’s Consolidated Financial Statement.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 3 year or 50,000 kilometer manufacturer warranty. This warranty affects the Company through our participation and investment in the JV Company, which manufactures the EVs.

Not applicable.

Item 8.Financial Statements and Supplementary Data.

40

KANDI TECHNOLOGIES CORP.

GROUP, INC.

AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED

DECEMBER 31, 20112013 AND 20102012

KANDI TECHNOLOGIES CORP.

GROUP, INC.
AND SUBSIDIARIES

CONTENTS

F-1

Report of Independent Registered Public Accounting Firm

We have audited the accompanying consolidated balance sheet of Kandi Technologies Corp.Group, Inc. and subsidiaries (“("the Company”Company") as of December 31, 20112013 and 20102012 and the related consolidated statements of income, stockholders’stockholders' equity and cash flow for the years then ended. TheseWe have also audited the internal control over financial reporting of Kandi Technologies Group, Inc. and subsidiaries ("the Company") as of December 31, 2013, based on criteria established in the 1992 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these consolidated financial statements, are the responsibilityfor maintaining effective internal control over financial reporting and for its assessment of the Company’s management.effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company's internal control over financial reporting based on our audit.

Our audit of, and opinion on, Kandi Technologies Group, Inc.'s internal control over financial reporting did not include internal control over financial reporting of Zhejiang Kandi Electric Vehicles Co. Ltd., a joint venture. As indicated in Management's Report, Zhejiang Kandi Electric Vehicles Co., Ltd. is a 50% owned joint venture of the Company established in March 2013 and is accounted as an equity method investment. The main operations of Zhejiang Kandi Electric Vehicles Co.,Ltd started on December 2013, and therefore, management's assertion of the effectiveness of Kandi Technologies Group, Inc.'s internal control over financial reporting excluded internal control over financial reporting of Zhejiang Kandi Electric Vehicles Co. Ltd.

We conducted our auditaudits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includesstatements, assessing the accounting principles used and significant estimates made by management, as well asand evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.opinions.

We were not engaged to examine management’s assertion about the effectiveness of the Company’sA company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

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

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness and significant deficiencies have been identified and included in management's assessment as of December 31, 2011 included2013:

• Ineffective control environment — significant control deficiencies were identified in various components of internal control, which, in aggregate, lead us to conclude that a material weakness exist in the Company’s Item 9A “Controls and Procedures”control environment. The significant deficiencies noted in the Annual Reportcontrol environment are summarized 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. The internal control audit department reported to the CEO instead of the Audit Committee. Such reporting structure impaired the independence and objectivity of the internal control audit department.
   

4. Inadequate design of internal controls over the approval procedures for related party transactions.

The material weakness or significant deficiencies were considered in determining the nature, timing and extent of audit tests applied in our audit of the Company's consolidated financial statements for the year ended December 31, 2013, and our opinion regarding the effectiveness of the Company's internal control over financial reporting does not affect our opinion on Form 10-K and, accordingly, we do not express an opinion thereon.

those consolidated financial statements.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Kandi Technologies Corp.Group, Inc. as of December 31, 20112013 and 20102012 and the consolidated results of its operations and its cash flow for the years then ended in conformity with accounting principles generally accepted in the United States of America.

In our opinion, because of the effect of the material weakness describe above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2013, based on criteria established in the 1992 Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

F-2

KANDI TECHNOLOGIES, CORP.

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS