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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