Do cbdMD Inc.’s celebrity endorsers know who they’re doing business with?


Jim McNair contributed to this report

Two-time Masters champion Bubba Watson, who refers to himself on Twitter as a Christian, husband, daddy and golfer – in that order — has lent his name and reputation to a public company run jointly by a pornographer and a promoter with ties to multiple business failures and frauds. So have volleyball player Kerri Walsh Jennings, a three-time Olympic gold medalist, and retired NFL player Steve Smith Sr., a five-time pro bowl pick.

They are among more than 40 current or former athletes who signed endorsement deals with cbdMD Inc. (AMEX: YCBD), a Charlotte, N.C.-based company that markets cannabinoid oils, lotions, bath bombs, tinctures and even pet treats.

R. Scott Coffman, who became cbdMD’s co-chief executive in July, also operates the Adult Entertainment Broadcast Network. It offers streaming porn on a pay-per-minute basis and produces its own adult videos. His connection to AEBN was not disclosed in the biographies that cbdMD included in key Securities and Exchange Commission filings, such as the proxy statement for its annual meeting or the prospectus for a recent stock offering.

Coffman also was one of the creators of the blu e-cigarette brand, which helped usher in the vaping trend that has led to a surge in nicotine use by American teens.

Coffman is cbdMD’s biggest shareholder. SEC filings show that he owns or controls at least 11.6 million shares, or 42 percent of the total outstanding. He stands to receive as many as 14 million additional shares if the company hits certain revenue targets..

The other co-CEO, Martin A. Sumichrast, was the subject of a Sharesleuth investigation in 2008. It detailed his links to fraud schemes dating back to the early 1990s and the “Wolf of Wall Street,” Jordan Belfort, whose corrupt brokerage manipulated the public offerings of more than 30 companies, including one in which Sumichrast and his father were officers.

Since we published those findings, the share prices of five Sumichrast-connected companies featured in that report have fallen to zero, or something very close to it. Three were Chinese companies that gained listings on U.S. exchanges through reverse mergers. They no longer file financial reports and have all but vanished.

A fourth, Heart Tronics Inc. (OTC: HRTT) was charged with fraud by the SEC in 2011. An attorney who secretly controlled the company and created false press releases to boost the stock price while he dumped shares also was charged criminally. He is now in prison.

The fifth company, House of Taylor Jewelry (formerly AMEX: HOTJ) filed for bankruptcy just a few years after going public. In short, none of the public companies that Sumichrast has helped to launch or finance over the past 25 years has been a long-term success. And although those ventures helped to enrich Sumichrast and other early backers who got stock on the cheap, they have been losers for buy-and-hold retail investors.

More recently, Sumichrast was co-founder of Siskey Capital LLC (now Stone Street Partners LLC). Its namesake, Richard Siskey, committed suicide in December 2016 while under investigation for orchestrating a Ponzi scheme that took in tens of millions of dollars from investors. Sumichrast said in court filings that he was unaware of Siskey’s activities.

Sumichrast has never been charged with wrongdoing by the Securities and Exchange Commission or other regulatory or law-enforcement agency. But the Nasdaq did delist the shares of a brokerage firm he headed after an internal investigation concluded that he sold ownership interests to at least two financial felons who served time in prison.

Nasdaq officials never publicly revealed the reason for the delisting of that company, Global Capital Partners Inc. (formerly Nasdaq: GCAP) .

 

A NEW GOLD RUSH

cbdMD is trying to cash in on the growing popularity of hemp-based CBD products, which got a boost in December from federal legislation that removed hemp from the government’s list of controlled substances.

CBD’s proponents have claimed, often without evidence, that cannabidiol helps relieve anxiety and depression, reduces nerve and muscle pain and even inhibits the progression of cancer and Alzheimer’s disease.

Although sales of hemp-based CBD products in the United States were well under $1 billion in 2018, some market research firms have projected that total revenue could reach or exceed $20 billion by the middle of the decade. That figure, however fanciful, would exceed the domestic market for chocolate, for energy drinks and perhaps even for medical and recreational cannabis, now legal in more than half of the country.

cbdMD is trying to differentiate itself from rivals through endorsements from athletes and other influencers, including Internet-famous cats. It also is trying to set itself apart through representations about the quality and purity of its products. It says that all of its CBD comes from organically grown hemp and is free of synthetic pesticides. It also says that batches of all of its products are tested by a third-party laboratory.

cbdMD reported net sales of $8 million for the three months that ended June 30. That was up more than 40 percent from the previous quarter.

But the company also posted an operating loss of $8 million, and a net loss of $29 million. The bigger number reflected liabilities for additional shares it might have to issue to Coffman, Sumichrast and perhaps others. Those shares would have a current market value of $60 million. Based on the financial guidance that executives provided in a conference call last month, many of them could be earned by the end of next year.

At the rate cbdMD is burning cash, it will have to raise more capital or reverse its losses to survive that long. According to its latest quarterly financial report, the company had $11.6 million in cash as of June 30.

That meant it used up all of the $4.6 million it had on March 31, plus some of the $12.5 million it netted from a stock offering in May.

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Former Trump cabinet member has $90,000 consulting deal with questionable mining company

Jim McNair contributed to this report

Former Interior Secretary Ryan K. Zinke, who resigned last year amid multiple ethics investigations, is a consultant for a mining company created and financed by people now facing fraud charges.

Zinke also is on the board of directors at the company, U.S. Gold Corp. (Nasdaq: USAU). It controls undeveloped mineral properties in Nevada and Wyoming. A Securities and Exchange Commission filing shows that Zinke is to receive $90,000 annually in cash and stock, plus up to $30,000 for expenses. His consulting agreement calls for him to assist the company with investor relations, government relations and other tasks.

U.S. Gold went public in May 2017 by combining with Dataram Corp., a struggling maker of computer memory products whose shares were listed on the Nasdaq exchange. The so-called reverse merger was engineered by financier Barry C. Honig, who has created or bankrolled dozens of small public companies over the past decade.

Sharesleuth’s investigation found that Honig and several associates had acquired a large stake in Dataram prior to the deal, and that one of them – John R. Stetson – also managed a limited liability company that was U.S. Gold’s principal shareholder. Their role on both sides of the transaction was not disclosed in SEC filings, nor was their sale of millions of dollars in stock in the months before and after the merger.

We also found that U.S. Gold’s top executives previously were officers or directors of numerous other companies backed by Honig’s group – none of which produced long-term gains for ordinary shareholders.

The SEC brought fraud charges last September against Honig, Stetson and 18 other individuals and entities in connection with alleged “pump and dump” schemes at three other public companies. The complaint said the group concealed its control of those companies, failed to disclose significant share transactions, manipulated stock prices and secretly paid writers to produce misleading promotional articles.

The SEC said the schemes generated $27.1 million between September 2013 and May 2016. The Dataram-U.S. Gold merger was announced in June 2016. It touched off a surge in trading that allowed Honig and a handful of associates to unload most of their stock, likely collecting more than $5 million.

U.S. Gold’s stock has declined by more than 90 percent from its peak that year (when adjusted for two splits), meaning any retail investors who bought on news of the merger and held their shares have lost nearly all of their investment.

A lawyer for one of the defendants in the SEC case said in a court proceeding that the Justice Department is conducting a parallel criminal investigation into the Honig group’s activities.

Honig agreed to a settlement with the SEC last month that bars him from acquiring more than 4.99 percent of any penny stock company’s shares, from marketing or promoting any penny stock company, or from exerting control over any penny stock company. The amount he must pay in disgorgement, penalties and interest will be determined later, but easily could exceed $10 million, based on his share of the stock sales.

Two of Honig’s co-defendants — who also were big Dataram shareholders at the time of the U.S. Gold deal – settled earlier this year, agreeing to pay a combined $2 million.

 

THE ZINKE EFFECT?

U.S. Gold’s stock gained 50 percent in the first six weeks after Zinke’s appointment, topping out at $1.53 on May 21. Spot and futures prices for gold were little changed in that period.

U.S. Gold has played up Zinke’s ties to President Donald Trump. Soon after he joined the company, he and Chief Executive Edward M. Karr participated in a livestreamed investor presentation titled “Making American Mining Great Again.”

The presentation was hosted by a stock-promotion site, MiningStockEducation.com. U.S. Gold’s prospects also were touted in recent months by three other promotion sites, all of which share common ownership.

Each reported in disclosure statements that they had received $15,000 as compensation for their campaigns. Continue reading

Marathon Patent Group: Chronology of share transactions shows group facing SEC charges cleared more than $20 million from financing scheme

Marathon Patent Group Inc.’s latest financial reports provide new details on suspect securities transactions by financier Barry C. Honig and his associates, and raise more questions about the company’s activities and disclosures.

Marathon Patent’s (Nasdaq: MARA) 10-K filing with the Securities and Exchange Commission in March listed all of the dates on which members of Honig’s group converted notes, warrants and preferred stock into common shares.

Sharesleuth’s analysis found that members of that group wound up with almost 11.9 million shares, which they likely sold for $26 million or more. Those transactions took place between September 2017 and August 2018.

Most of that stock appears to have gone to a limited partnership managed by John R. O’Rourke III, a longtime Honig lieutenant and the former chairman and chief executive of Riot Blockchain Inc. (Nasdaq: RIOT).

O’Rourke and Honig were among 10 individuals charged by the SEC last September in connection with alleged pump-and-dump schemes at three other small public companies. The SEC asserted in its complaint that Honig was the “primary strategist” of those schemes, which generated more than $27 million in proceeds from 2013 to 2016.

The ownership tables in Marathon Patent’s proxy statements and annual filings never listed the limited partnership managed by O’Rourke — Revere Investments LP — among its top shareholders. And the company’s filings mentioned that entity by name just once after 2017, even though Revere (and perhaps some unidentified affiliates) later got at least 9.2 million common shares through the conversion of notes and preferred stock.

Those shares represent more than a third of the total now outstanding.

Similarly, Revere never filed anything with the SEC acknowledging ownership of 5 percent or more of Marathon Patent’s stock. That suggests that Revere (and possibly some affiliates) sold the shares almost immediately upon receiving them via the conversions — as part of a strategy to avoid triggering disclosure requirements.

Marathon Patent declined to answer our questions about its dealings with O’Rourke and other members of Honig’s group, and about whether management raised any objections to the manner in which the notes and preferred stock were converted.

Sharesleuth previously reported on the Honig group’s hidden activities at Marathon Patent in a two-part series last year (see the stories here and here).

Those articles also analyzed unusual share transactions at two more companies, Riot Blockchain and PolarityTE Inc. (Nasdaq: COOL).  Both have disclosed that they are the subjects of SEC investigations.

Marathon Patent’s 10-K filing and 10-Q filing did not include any mention of an SEC inquiry or subpoena.

Marathon Patent’s shares followed a similar trajectory to those of the companies at the heart of the September pump-and-dump case — Mabvax Therapeutics Holdings Inc. (OTC: MBVXQ); MGT Capital Investments Inc. (OTC: MGTI) and BioZone Pharmaceuticals Inc., now Cocrystal Pharma Inc. (Nasdaq: COCP).

All had temporary surges in their share price and trading volumes, which the SEC says were aided by promotional campaigns and manipulative trading.

Marathon Patent’s stock shot from just under $2 on Nov. 1, 2017 to just over $10 on Nov. 27, 2017, largely because its deal to acquire a brand new bitcoin-mining company called Global Bit Ventures Inc. caught the attention of investors seeking cryptocurrency plays.

The two companies repeatedly delayed the closing of their merger, and finally called it off last summer, citing a general weakness in the bitcoin market. By that time, Marathon Patent’s stock price was down to $1 a share.

Marathon Patent’s 10-K filing shows that it generated only $2 million in total revenue in 2017 and 2018, and had more than $43 million in losses.

The company said in a quarterly financial report last week that it had $230,694 in revenue — all from currency mining — for the three months that ended March 31, and a further $1 million in losses.

Our analysis of share transactions suggests that, since mid-2017, members of Honig’s group collected:

  • Nearly $17 million by converting notes into common stock and selling the shares into the market.
  • Around $8.5 million by converting preferred stock into common stock and selling the shares into the market.
  • Between $700,000 and $1.6 million by exchanging warrants for common stock and selling the shares into the market.

The group’s original investment in those securities was somewhere between $5 million and  $6 million.

Our calculations of the proceeds assume that the recipients sold the most of the stock upon receiving it. For the price per share, we used the average of the high, low and closing prices on the conversion dates, or the next available trading day.

Marathon Patent’s quarterly financial report shows that the limited partnership managed by O’Rourke still had almost $1 million in unconverted notes as of March 31. The underlying stock had a market value of $910,000 at last Friday’s closing price. Continue reading

Cool Mara Riot, Part Two: Securities-fraud case against South Florida group reverberates through additional companies

By Chris Carey

Jim McNair and Kevin O’Connor contributed to this report

When financier Barry C. Honig was waging a proxy fight for control of the company that became Riot Blockchain Inc. (Nasdaq: RIOT), he demanded that it return excess capital to shareholders through a special dividend.

But once Honig and his allies took over, they did exactly the opposite. The Colorado-based company, then known as Bioptix Inc., raised an additional $7 million last spring through two private placements. Honig, his business partners and other associates bought nearly all of the stock, warrants and convertible notes sold in those deals, which were priced at a 30 percent discount to the market.

By the second week of October, they had turned those securities into 4.7 million common shares. That stock, combined with earlier purchases, gave them nearly two-thirds of the company, on a fully diluted basis.

Only then did Riot Blockchain pay the special dividend, distributing $1 per share or share equivalent, or a little less than $10 million. And in the six weeks that followed, the company’s stock price nearly tripled, as deals with two bitcoin-related businesses in which Honig and his associates had undisclosed stakes attracted investors who were seeking cryptocurrency plays. When Riot Blockchain’s stock hit $24 on the day after Thanksgiving, the shares issued through the April placement were worth more than $100 million.

A Securities and Exchange Commission filing from April shows that Honig sold nearly all of his Riot Blockchain shares in October and November, collecting more than $17 million. He failed to promptly report those sales, as required under SEC rules for non-passive investors who own 5 percent or more of a company’s stock.

Our investigation found that three Honig associates – his brother, Jonathan Honig, and longtime partners Mark E. Groussman and John R. Stetson – likely sold more than $20 million of Riot Blockchain stock from October to January. Its shares peaked at $46.20 in December, then came crashing back to earth. They now trade for less than $4. The company is dangerously low on cash and the SEC is conducting a formal investigation.

Riot Blockchain stock sales chart

As Sharesleuth reported in July, it appears that the group’s activities at Riot Blockchain, PolarityTE Inc. (Nasdaq: PTE, formerly Nasdaq: COOL) and Marathon Patent Group Inc. (Nasdaq; MARA) were part of a broader web of questionable dealings.

On Sept. 7, the SEC brought fraud charges against Barry Honig, Groussman, Stetson and 17 others individuals and entities, including John R. O’Rourke III, another longtime associate who was chairman and chief executive of Riot Blockchain.

The SEC alleged that the defendants participated in so-called “pump and dump” schemes at three other companies:

– BioZone Pharmaceuticals Inc., now Cocrystal Pharma Inc. (Nasdaq: COCP)

MGT Capital Investments Inc. (OTC: MGTI)

Mabvax Therapeutics Holdings Inc. (OTC: MBVX)

According to the SEC’s complaint, those schemes generated more than $27 million.

Stetson was, until Sept. 7, executive vice president and chief investment officer of PolarityTE, a Utah-based biotech company whose predecessor was headed by Honig.  Our investigation found that the Honig group’s actions at PolarityTE and before that, Majesco Entertainment Inc., mirrored their moves at Riot Blockchain, right down to private placement-and-special dividend maneuver.

The SEC also brought charges against Dr. Phillip Frost, the billionaire chairman and chief executive of Opko Health Inc. (Nasdaq: OPK), and against Opko itself. It alleged that Frost and Opko were part of an undisclosed “control group” at BioZone and Mabvax, and that they either participated in the group’s wrongful activities or aided and abetted them.

Our analysis of SEC filings showed that Honig and Frost sold more than $20 million of their PolarityTE stock between February 2017 and February 2018, with most of those sales coming in the second half of last year.

Once again, Honig failed to promptly report his sales, as required under SEC rules.

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Cool Mara Riot: The big money, bitcoin-biotech daisy chain

By Chris Carey

Jim McNair contributed to this report

(First of two parts)

Three companies whose stock made big moves last year are linked by undisclosed relationships that raise numerous red flags about the deals that helped attract investors, boost share prices and enrich certain players.

A Sharesleuth investigation found that financier Barry C. Honig and a handful of associates sold at least $70 million of stock in those companies — PolarityTE Inc. (Nasdaq: COOL), Marathon Patent Group Inc. (Nasdaq: MARA), and Riot Blockchain Inc. (Nasdaq: RIOT) –- as their share prices rose by triple digits, then tumbled from those highs.

The companies, by comparison, had less than $1 million in combined revenue in fiscal 2017, and $180 million in losses. Our investigation found that surges in their share prices were aided by a daisy chain of deals involving Honig and a recurring cast of business partners and investors. They included John R. Stetson, PolarityTE’s executive vice president and chief investment officer; John R. O’Rourke III, Riot Blockchain’s chairman and chief executive, and Mark E. Groussman, who once headed Marathon Patent’s predecessor and was a large shareholder in all three companies.

Our investigation found that Honig personally sold at least $30 million of stock in PolarityTE and Riot Blockchain from late August to mid-December without reporting those sales, as required under Securities and Exchange Commission rules for non-passive investors who own 5 percent or more of a company’s shares.

We found that Honig and his associates stood to receive more than $40 million in new shares through the acquisition of two bitcoin companies in which they had undisclosed stakes. The largest of those deals was cancelled late last month.

Our analysis of SEC filings and other documents found that:

– Honig and his associates were among the biggest investors in Riot Blockchain, Marathon Patent AND two new bitcoin companies they agreed to acquire for stock initially valued at $197 million. Those deals were struck on consecutive days in early November. Honig’s network was to get more than half of the shares to be issued for the bitcoin companies, which had little, if any, revenue and modest assets. Their presence on both sides of the deals was not disclosed at the time, and has not been fully explained since.

–  A limited partnership headed by O’Rourke provided $5.3 million in financing to Marathon Patent in August and September, in return for convertible notes and warrants. It wound up with the equivalent of 11.8 million shares, which soared in value after Marathon Patent said it was getting into the cryptocurrency game by merging with one of the bitcoin companies, Global Bit Ventures Inc. The closing of that deal was delayed repeatedly, and Marathon Patent announced on June 28 that it had decided to walk away. Our analysis suggests that Revere already had sold at least 3.6 million of its shares, some during last November’s surge. We estimate that the proceeds were around $13.9 million (see calculations here). The rest of the stock would be worth $6.7 million at the current market price, although it’s possible that some of those shares have been sold as well. SEC filings show that more than 8 million of the 11.8 million shares — or nearly 40 percent of Marathon Patent’s total outstanding — have been issued to Revere or other unknown parties. Revere has not filed a Form 13D or Form 13G reporting ownership of those securities, nor has anyone else.

– Honig and a limited liability company managed by Stetson provided cash to Global Bit Ventures in September, in return for convertible notes. That was less than six weeks before Marathon Patent finalized the merger agreement. A later SEC filing showed that the notes somehow found their way to a second limited liability company, managed by O’Rourke. That entity also had preferred stock in Global Bit Ventures, and stood to receive 20.5 million of the 70 million shares that were to be issued to the bitcoin company’s investors. Its stake would have been worth $17.5 million at the current market price.

– Honig, Groussman and another longtime associate, Michael H. Brauser, were shareholders in Kairos Global Technology Inc., the bitcoin miner that Riot Blockchain bought on Nov. 1 for roughly $12 million. Kairos’ owners exchanged their 1.75 million shares of common stock for 1.75 million shares of Riot Blockchain’s convertible preferred stock valued at $6.80 a share. Honig, Groussman, Brauser and two other large Riot Blockchain shareholders owned more than 50 percent of Kairos. Riot Blockchain did not disclose that cross-ownership at the time of the deal. We found that Honig, Groussman and the other investors had purchased their Kairos stock just a day or two before the acquisition. A financial statement in a January SEC filing showed that Kairos sold 750,000 shares for 10 cents a share on Oct. 30 and 1 million shares for $3.10 on Oct. 31.

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Pretenders and Ghosts: Stealth promotion network exploits financial sites to tout stocks

By Chris Carey

Kevin O’Connor, Jim McNair and Russell Carrollo contributed to this report

 

Meet George Ronan.  Again and again and again.

The George Ronan who talked up a succession of small public companies at SeekingAlpha.com described himself as a university lecturer in the United Kingdom with an interest in technology stocks.

George Ronan I

The George Ronan whose articles appear on MarketExclusive.com – as well as Gurufocus.com — is billed as an author, journalist and public speaker who focuses mainly on health care stocks.

George Ronan II

A third George Ronan, with no bio but a decidedly different headshot, was briefly among the contributors to Benzinga.com.

George Ronan IIIAll three are fictitious. A Sharesleuth investigation found that they are part of a small army of writers, both real and imaginary, who have systematically posted hundreds of bullish analysis pieces about the same small companies across numerous investment sites.

Just as certain individuals and organizations circulated false or misleading political stories in an effort to sway the 2016 presidential election, internet-savvy promoters are using fake writers, planted articles and even illusory “news” sites to surreptitiously tout stocks. The purported analysis pieces by the multiple George Ronans are a prime example. Sharesleuth turned up more than 140 articles with that byline, on seven different sites.

Most of the original Ronan’s 11 articles at Seeking Alpha called attention to companies that were created or bankrolled by Barry C. Honig, a South Florida financier who figures into at least two Securities and Exchange Commission investigations. So did six of the seven Ronan articles on four other sites, including Investing.com and Trefis.com.

RONAN AS ROADMAP

Using the Ronan stories as markers, we found more than 60 other writers who have systematically promoted companies connected to Honig and his associates, including longtime business partner Michael H. Brauser and billionaire entrepreneur Dr. Phillip Frost, chairman and chief executive of Opko Health Inc. (Nasdaq: OPK).

Sharesleuth determined that the majority of those writers also were fake — part of an elaborate, long-running effort to spark interest in obscure public companies by creating bullish stories that were posted and reposted across the internet.

The stealth promotion network includes a handful of real people who have touted the same stocks with such regularity that it is impossible to view their posts as a coincidence. All told, we turned up nearly 600 bullish articles about Honig-related companies that fit the pattern of stealth promotional pieces.

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Kandi Technologies Group Inc.: Where are the Go-Karts?

When the global economy collapsed in the fall of 2008, the sharp drop in consumer spending threw the power sports industry into a steep decline. Sales of motorcycles, go-karts and all-terrain vehicles each plunged by 30 percent or more, causing many dealerships to shut their doors and forcing some manufacturers to do the same.

But if the numbers in its Securities and Exchange Commission filings are to be believed, Kandi Technologies Group Inc. (Nasdaq: KNDI) not only bucked the trend but seized a much bigger share of the international go-kart market.

Kandi said in those filings that it sold more than 177,000 go-karts in its past six fiscal years, collecting $147 million in revenue. That represented nearly half of the Chinese company’s reported sales, at a time in which it was struggling to establish itself as a maker of low-speed electric cars, first in the United States and then at home.

But a Sharesleuth investigation found that fewer than one-fifth of those karts were delivered to Kandi’s U.S. distributors and other major U.S. customers. Industry experts told us the import total was far too low for Kandi’s 177,000 sales figure to be accurate, given that the United States represents the vast majority of all international kart sales.

Those experts, who included some of Kandi’s competitors, added that Kandi’s reported unit sales were impossibly high relative to the overall size of the market and the share held by other manufacturers.

The numbers suggest that Kandi has been greatly overstating its sales of go-karts and other power sports products — just as it did with its early electric-vehicle sales in the United States. We believe that Kandi’s apparent exaggeration of its go-kart sales casts doubt on all of its financial reporting, including the triple-digit revenue gains it recently announced for the third quarter and first nine months of 2014.

Kandi already is the subject of a formal SEC investigation. That probe appears to be linked to a fraud case the agency brought in May against a promoter who helped the company go public via a reverse merger in 2007. However, we believe the SEC might also be looking into Kandi’s reported sales, earnings and other public disclosures.

DISCREPANCIES BETWEEN SALES AND SHIPMENTS

Shipping data compiled by ImportGenius.com show that from 2008 through 2013, only about 30,000 Kandi go-karts were delivered to its U.S. distributors and other big buyers. The records, which originated with the Customs and Border Protection service, raise the question of where the remaining karts could have gone.

Even allowing for shipments to additional U.S. buyers who sold the vehicles under the Kandi name or their own brand names, there is no good explanation for the huge discrepancy. Kandi told us that the other 147,000 go-karts “were sold to domestic trading companies and manufacturers for distribution and resale.’’

SEC filings show that most of Kandi’s go-kart and ATV sales in 2012 and 2013 went to a pair of Chinese companies that purportedly resold them to customers in North America, Europe and other parts of the world. But our investigation found no sign of either company – or obvious affiliates – on any of the business-to-business sites that link Chinese manufacturers and distributors to global buyers.

Nor did ImportGenius’ database show any shipments to the United States from those companies, Jinhua Baoxiang Import & Export Co. Ltd. and Zhejiang Jin Li Ma Trading Co. Ltd.

When we asked Kandi how Jinhua Baoxiang and Zhejiang Jin Li Ma marketed the karts they purchased, it said: “These companies are our intermediate brokers, they cannot share with us their sales channels.’’

Our search of ImportGenius’ Customs data did not turn up any large shipments of Kandi karts from other Chinese companies that might have bought them from Jinhua Baoxiang or Zhejiang Jin Li Ma.

Industry experts told us there’s no way that all the karts reportedly sold to Jinhua Baoxiang and Zhejiang Jin Li Ma could have found their way to buyers in Europe, Australia, Latin America and other non-U.S. markets.

Indeed, our search found few dealers in those parts of the world that even advertise Kandi’s products.

The go-karts that cannot easily be accounted for represent tens of millions of dollars of Kandi’s reported revenue, as well as a healthy portion of the operating profits the company reported from 2008 through 2013.

Kandi’s shares closed Tuesday at $14.24, giving the company a market capitalization of almost $660 million. The company’s stock reached a high of $22.49 in July.

(Disclosure: Mark Cuban, majority owner of Sharesleuth.com LLC, has a short position in Kandi’s shares. Chris Carey, editor of Sharesleuth, does not invest in individual stocks and has no position in any company mentioned in this story.)

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Customs records contradict Kandi Technologies Corp.’s electric-vehicle sales claims

Customs records do not support Kandi Technologies Corp.’s (Nasdaq: KNDI) claim that it sold thousands of electric cars in the United States, a Sharesleuth investigation found.

The records, which originated with the Department of Homeland Security, reinforce our earlier findings that Kandi greatly exaggerated the sales of those vehicles.

The Chinese company has said in Securities and Exchange Commission filings that it sold more than 4,600 of its mini cars from 2009 through 2011. For most of that period, the United States was the main market for the vehicles.

But a database containing detailed cargo information for vessels delivering goods to U.S. ports shows that fewer than 1,100 of Kandi’s cars were ever shipped here.

The database was created by ImportGenius.com, an Arizona company that helps businesses find sales prospects, evaluate suppliers and monitor rivals. It contains more than 79 million records drawn from the bills of lading for all ocean-freight imports.

Sharesleuth’s investigation turned up a number of discrepancies between Kandi’s reported sales of its low-speed, battery-powered cars and the actual deliveries of those vehicles to American ports.

For example:

– Kandi said in an SEC filing and an earnings release that it sold 1,141 cars in the United States in the first nine months of 2009. But the Customs records show that only 203 were delivered to American ports in that period. They also show that just 143 additional vehicles were delivered in the last three months of that year.

– Kandi said in an earnings release in 2010 that one of the main contributors to its revenue and income growth was a “strong second quarter contribution from U.S. sales of the super mini Kandi Coco.” Kandi previously had reported selling 1,005 electric-powered Cocos in that quarter, primarily in the United States. But Import Genius’ database shows that just 156 of the cars were delivered to American ports that year.

– Kandi disclosed in its annual SEC filing last year that only 658 of the 1,618 cars that it reported selling in 2010 were actually electric, and that the rest were gasoline-powered. That unexplained revision means it would have been mathematically impossible for Kandi to have sold 1,005 electric cars in the second quarter of that year, as it claimed.

The above examples suggest that the gains in electric-car sales that Kandi reported during pivotal periods in 2009 and 2010 were illusory. The company’s public statements regarding those sales contributed to spikes in its stock price and trading volume, and allowed certain parties to sell shares at peak levels.

Kandi, through its U.S. law firm, declined to comment on the discrepancies.

Kandi has said that because it sells its vehicles to middlemen who export them to the United States, Europe and other markets, it has no specific knowledge of where those products end up. Nevertheless, the company expressly stated in its SEC filings and earnings releases that the bulk of its car sales in 2009 and 2010 were “U.S. sales.”

The Customs data shows that although Kandi reported selling around 2,000 electric cars in the United States in the first nine months of 2009 and the second quarter of 2010, only about 500 were delivered to American ports in those years..

 

mini2Kandi said in an SEC filing that it sold 1,077 cars in 2011. It did not specifically say that those sales were in the United States. But with the exception of a purported order from Italy that has yet to materialize, it did not report any large sales elsewhere in the world.

Our analysis of the records in Import Genius’ database showed that 290 of Kandi’s mini cars were delivered to American ports in 2011.

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Small Companies, Big Questions: Chinese toll road and shipping companies take North American investors on strange trips

(Part three of a three-part series)

To U.S. investors, buying a piece of a toll road company in one of China’s fastest-growing provinces might have seemed like a pretty safe bet.

But the twists and turns at China Infrastructure Investment Ltd. (Pink Sheets: CIIC) have taken the company from the Nasdaq to the Pink Sheets and wiped out much of its market capitalization, which once topped $400 million.

A Sharesleuth investigation found that certain undisclosed parties profited handsomely  from the reverse merger that brought the company public, by buying 21.9 million shares from the former chief executive of the U.S. shell it combined with.

Securities and Exchange Commission filings show that the ex-CEO, Fred L. Hall, sold the stock for $72,500 just days after the reverse merger, in February 2008.

The sale price translates to less than 0.4 cents a share. At the time, the company’s stock was trading on the open market for more than $4.

Whoever got Hall’s stock appears to have resold much of it during periodic surges in trading volume in 2009 and 2010. Based on China Infrastructure Investment’s share prices in those periods, it’s possible that the seller or sellers could have collected $20 million or more.

Our investigation also found that the holding company that owned a majority stake in China Infrastructure Investment at the time it went public might have ended up with some of Hall’s stock.

SEC filings show that the holding company boosted its stake by more than 13 million shares over a two-year period, without disclosing any changes in its ownership, as required under federal securities law.

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