SEC probe of Kandi Technologies has risen to a formal investigation

The Securities and Exchange Commission is conducting a formal investigation of Kandi Technologies Corp. (Nasdaq: KNDI), a Chinese company that has been the subject of several Sharesleuth stories.

Kandi did not mention the investigation in the press release it issued last week to announce its fourth-quarter and full-year earnings. Instead, it disclosed the probe in its annual SEC filing, in the middle of a long list of potential risk factors.

Kandi offered no details on the nature of the investigation, which began in November. It said only that it was furnishing documents and other information to the SEC’s regional office in Denver.

“As indicated in the subpoena, the investigation is a fact-finding inquiry and does not mean that the Company or anyone has broken the law,’’ Kandi said in the filing. “The Company has cooperated, and is cooperating fully, with the SEC in this matter and will continue to supply the SEC with whatever additional information and material that is requested.”

The fact that the SEC has issued a subpoena indicates that the probe has moved beyond the informal stage and now is classified as a formal investigation; According to a guide on the SEC’s website, its enforcement attorneys cannot issue subpoenas unless the commission authorizes a formal investigation.

A formal order of investigation allows the SEC’s enforcement staff to compel testimony from officers, directors and employees, as well as third parties, such as suppliers, customers and other business partners.

Kandi noted in the annual filing that it does not anticipate a negative result. But it also said it could provide 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.”

STOCK HITS NEW HIGH

Kandi’s stock jumped more than $4 last Monday, to a record closing price of $21.41, after the company put out its earnings release. Kandi said revenue for the fourth-quarter was up more than 90 percent from the same period a year earlier, primarily because of a surge in electric vehicle sales tied to a Zipcar-like rental program in China.

Kandi said revenue for the full year rose 46 percent, to $94.5 million. But the company posted a net loss of $21.1 million, largely because of changes in the fair value of warrants issued in connection with share placements.

Kandi’s stock has given back most of the post-earnings gain, in part because the company announced the sale of 606,000 additional shares, priced at $18.24. The deal generated $11 million in proceeds, before fees and expenses.

Kandi’s stock closed Thursday at $15.70, giving the company a market capitalization of roughly $630 million. However, its shares moved sharply higher in early trading Friday, reaching a peak of $17.48.

QUESTIONS ABOUT VEHICLE SALES

A Sharesleuth investigation in 2011 raised questions about Kandi’s claim that it sold more than 3,700 of its electric vehicles in the United States the previous two years.

Our survey of dealers, distributors and others familiar with Kandi’s activities found that fewer than 1,000 Americans had purchased the company’s low-speed, golf cart-like vehicles in that period.

The wide discrepancy between the figures was significant because electric-vehicle sales accounted for roughly 20 percent of Kandi’s reported revenue for 2009 and 2010. In addition, Kandi raised more than $26 million through share placements that relied partly on representations about the progress of the car business.

Kandi said at the time that it stood by its sales numbers. But it later disclosed in a footnote in its 2012 annual report that more than half of the cars it sold in 2010 were actually gas-powered rather than electric.

That revelation meant that Kandi’s electric-vehicle sales dropped significantly from 2009. It also meant that it would have been impossible for the company to have sold 1,005 electric cars in the second quarter of 2010 — as it claimed in its earnings release for that period —  because the total number that it sold for the entire year was just 658.

Sharesleuth reported last year that U.S. customs records also contradicted the sales claims that Kandi made in its quarterly and annual SEC filings.

Kandi reported selling more than 4,600 electric cars from 2009 through 2011, primarily in the United States. But customs records showed that fewer than 1,200 Kandi-branded cars came through American ports in that time.

QUESTIONS ABOUT STOCK TRANSACTIONS

Sharesleuth also has reported extensively on certain elements of the reverse-merger transaction that gave Kandi a listing on the U.S. markets in 2007.

We found that a little-known Canadian named S. Paul Kelley and several equally anonymous partners helped package Kandi and other Chinese companies for reverse mergers, prepare them for U.S. listings and promote them afterward.

In some cases, the people behind the deals fronted the legal, accounting and investor-relations expenses for the companies.

In return for their assistance, Kelley and the other participants in the venture got millions of shares of stock at low, pre-market prices. Their roles were not discussed in the companies’ SEC filings, nor were the share deals disclosed.

Sharesleuth also found that millions of shares that purportedly went to the top officers of the shell companies used in the reverse-merger deals appear to have been transferred to other parties, with little or no disclosure.

AN UNPAID DEBT DISAPPEARS

Kandi’s latest annual filing contained another unusual note related to the 2007 reverse merger.

Kandi said it was unilaterally canceling an $841,251 debt it owed to a former shareholder that had covered certain expenses related to the merger and the company’s U.S. market listing.

Kandi said that the shareholder, Ever Lotts Investment Ltd., had provided the funding under an oral agreement and had never requested repayment. Kandi said it recently tried to contact Ever Lotts regarding the debt, but was unable to do so.

Kandi said that given the amount time that had elapsed since the money was advanced – and the inaction by Ever Lotts — any future claim for repayment would likely be barred by the statute of limitations.

HIDING IN PLAIN SIGHT?

When Sharesleuth went looking for Ever Lotts, we found its name in a January SEC filing related to another U.S.-listed Chinese company.

According to the filing, Ever Lotts purchased roughly 850,000 shares of China Recycling Energy Corp. (Nasdaq: CREG) from another entity that ranked among that company’s biggest shareholders.

The filing said that Ever Lotts paid $1.28 million, or $1.50 a share, to Great Essential Investments Ltd. under an agreement that was signed on Sept. 20.

The filing also said that a second entity, Keen Merit Investments Ltd., bought 2 million shares of China Recycling Energy from Great Essential Investments for $1.50 a share.

Sharesleuth’s previous investigation into Kandi and 10 other Chinese reverse-merger companies that were packaged and promoted by the same group of players found that Keen Merit was among the parties that received stock through those deals.

SEC filings show that Keen Merit got shares in at least three of those companies – Telestone Technologies Corp. (Nasdaq: TSTC), New Oriental Energy & Chemical Corp. (formerly Nasdaq: NOEC) and China INSOnline Corp. (formerly Nasdaq: CHIO).

Kandi’s inability to make contact with Ever Lotts is puzzling given that Kandi’s U.S. law firm, McKenna Long & Aldridge LLP, also represents China Recycling Energy and presumably could have asked that company for help.

The lawyer at the firm who usually represents Kandi did not respond to a request for comment.

China Recycling Energy’s stock has risen sharply since Ever Lotts and Keen Merit entered into their share purchase agreements. If the two are still holding their stock, they are ahead nearly $8 million on their original $4.3 million investment.

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