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.)
FAMILY TIES
Kandi’s current U.S. distributor is a California company headed by Wangyuan Hu. He is the son of Kandi’s chairman and chief executive, Xiaoming Hu, and previously was a vice president and director of Kandi Technologies.
Import records show that Wangyuan Hu’s company, Kandi USA Inc., never has accounted for more than 25 percent of Kandi’s reported annual go-kart sales.
Kandi USA says on its website that it also is the factory distributor for Central America, South America and the Caribbean. It would appear, then, that shipments to those regions also would have flowed through its operations.
PREVIOUS EXAGGERATIONS
Sharesleuth previously reported that Kandi overstated its electric-vehicle sales in the United States (See Kandi Technologies: Where are the Cocos?). The company claimed to have sold more than 3,500 cars in 2009 and 2010 — primarily in America — and booked revenue reflecting those sales.
But import records show that fewer than 600 were delivered to this country in those two years. What’s more, we contacted all official Kandi dealers and found that they had sold well under 1,000 cars through May 2011.
Although Kandi said in a letter to shareholders that it stood by its numbers, it offered no evidence to support its figures, or to disprove ours.
A RECENT AND RECURRING ISSUE
Unlike the questions surrounding Kandi’s U.S. car sales, the discrepancies in its go-kart sales are both recent and recurring.
Our search of the ImportGenius database found that Kandi’s American distributor, Kandi USA, likely received no more than 7,000 karts last year. That raises the question of what happened to the other 29,000 that Kandi reported selling.
We found numerous other discrepancies between the numbers in Kandi’s SEC filings and the numbers drawn from the Customs data. For example:
- Kandi said it sold 13,423 go-karts in fourth quarter of 2010. But ImportGenius’ data shows that Kandi USA received fewer than 1,500 karts in that period, or just over one-tenth of the total.
- Kandi said it sold 5,366 karts in the first quarter of 2011. However, the import data shows that fewer than 600 were delivered to Kandi USA. In other words, Kandi reported selling more than 18,000 karts over two consecutive quarters, but shipments to its U.S. distributor barely topped 2,000 vehicles.
- Kandi said it sold nearly 13,000 karts in the first quarter of 2012. Again, the import data shows that Kandi USA got roughly one-tenth of that number.
- Kandi said it sold 10,296 go-karts in the third quarter of 2013. But the import data shows that only about 2,200 karts were delivered to Kandi USA.
Our search of the import data turned up no other U.S. customer that got more than 200 karts in any of the quarters mentioned above. It also showed that the discrepancies between Kandi’s reported sales and the deliveries to Kandi USA could not be explained away by large numbers of vehicles arriving in subsequent quarters.
MARKET DYNAMICS
The United States is far and away the world’s biggest go-kart market, owing to the size and relative wealth of its population, the abundance of open land and the affordability of fuel. But because the industry is so fragmented, there is no trade group or other central source for information on annual sales or business trends.
Power Products Marketing, a research firm, reported that U.S. go-kart sales totaled 38,000 units in 2008, down almost two-thirds from their peak in 2004. It said that figure was based on data from manufacturers, distributors and dealers.
Kandi said in an SEC filing at around the same time that it had a 15 percent share of the world market, which would suggest that its share of the U.S. market was comparable to that.
SEC INVESTIGATION
Kandi disclosed in March that the SEC had subpoenaed documents and other material as part of an investigation titled “In the Matter of Kandi Technologies Group Inc.” The fact that the SEC issued a subpoena indicates that the probe had risen to the level of a formal investigation, rather than a simple fact-finding exercise.
In May, the SEC brought fraud charges against S. Paul Kelley, one of the architects of the reverse-merger deal that brought Kandi public in the United States in 2007. As Sharesleuth previously reported, he also played a key role in 10 similar deals.
The SEC alleged in its complaint that Kelley and four co-defendants concealed their ownership stakes in two of the other Chinese reverse-merger companies – China Auto Logistics Inc. (Nasdaq: CALI) and Guanwei Recycling Corp. (Nasdaq: GPRC). The SEC said they artificially inflated those companies’ share prices through manipulative trading, then made millions of dollars by dumping their stock in public and private sales.
Kelley and another defendant, Roger D. Lockhart, quickly settled the charges by agreeing to pay more than $9.3 million in disgorgement, penalties and interest.
The SEC also alleged in its complaint that Lockhart and two other defendants engaged in a scheme to manipulate Kandi’s stock price in the fall of 2009.
ALLEGED MANIPULATION SCHEME
Kandi’s stock price plunged during the financial crisis. The company’s shares fell from a high of $3.57 in September 2008 to a low of 44 cents in March 2009.
The SEC said in its complaint that Xiaoming Hu met with Lockhart and another defendant, George Tazbaz, in September 2009. According to the complaint, Hu agreed that Kandi would provide 350,000 shares to help pay for a program intended to lift the company’s stock price back above $3 a share.
The SEC said that Tazbaz later provided 350,000 shares to stock promoters; Tazbaz acknowledged in a subsequent court filing that he transferred the shares to others, but stated that he did not know whether they were promoters.
Kandi’s share price and trading volume surged in the final three months of 2009, briefly topping $6 in December. That peak came shortly after the company announced that revenue for the third quarter was up slightly from the same period in 2008, and that the effects of the global recession appeared to be easing.
Kandi said in its earnings release that go-kart sales had improved significantly from the start of 2009. It reported selling 4,795 karts, compared with just 275 in the first quarter.
But Customs records show that Kandi USA got no more than 900 go-karts in the third quarter of 2009. That included a sizable number of vehicles whose types were not specified in the cargo manifests; some could have been ATVs instead of karts.
Kandi said in the same release that it had sold 1,141 electric cars in the first nine months of 2009, primarily in the United States. But as we reported previously, Customs records show that only 346 cars were delivered to America that year.
Thus, it appears that the gains in Kandi’s share price in late 2009 were based partly on go-kart and electric-vehicle sales numbers that are not supported by import data and appear to have been materially overstated.
THE LEGACY BUSINESS
Although Kandi has been emphasizing the electric-vehicle side of its business, the sale of go-karts, ATVs, utility vehicles and three-wheeled motorcycles was its main source of revenue until the final quarter of 2013.
In January, Kandi said in response to a query from the SEC that four customers of its so-called “legacy business” accounted for more than 80 percent of its revenue in the first half of 2013. It said that the biggest of those customers, Jinhua Baoxiang, was responsible for 45 percent of its total sales in that period.
Kandi said Zhejiang Jin Li Ma was responsible for 19 percent of its revenue in the first half of last year. In other words, those two companies accounted for nearly two-thirds of Kandi’s revenue in that period.
SEC filings show that those companies provided 38 percent of Kandi’s full-year revenue, which means they bought $36 million of goods. Based on the average selling price of Kandi’s go-karts and ATVs, that dollar figure equates to more than 45,000 go-karts and ATVs, out of the 55,000 it reported selling.
It seems to us that if those companies were responsible for buying and reselling that many of Kandi’s go-karts and ATVs, then they or their agents should have a noticeable presence on Alibaba.com, Globalsources.com, Made-in-China.com and similar sales sites.
Our search turned up no pages on those sites for Jinhua Baoxiang or any related entity. And although we found some outdated pages for a company called Zhejiang Jinli Industrial & Trading Co. Ltd. that listed go-karts among its offerings, its web site currently features only children’s scooters and skateboards.
We did find a sales page on Alibaba for Zhejiang Kangdi Vehicles Co. Ltd., one of Kandi’s subsidiaries. In addition to offering the regular lineup of go-karts and ATVs, its product list included gas-powered scooters and electric bicycles.
Kandi has never mentioned selling scooters or bikes, and it has never reported any revenue from those products in its SEC filings. After we asked its investor-relations representative about that, the images and descriptions were deleted.
Kandi later said in response to our questions that although it has the capability to manufacture scooters and bikes and once marketed them on the Internet, it does not currently produce them.
TRACKING THE IMPORTS
To test whether Kandi’s reported go-kart sales were accurate, we used ImportGenius’ database to conduct a wide range of searches for deliveries to the United States.
First, we searched for all shipments to Kandi USA and two previous American distributors, Solus International Corp. and Seaseng Inc. We also searched for shipments to several other entities we had previously identified as major customers, including SunL Group Inc. (via Ham Trading Inc.) and Legacy Powersports Inc.
Next, we searched for shipments from Kandi Technologies, its subsidiaries, or associated companies such as Zhejiang Yongkang Top Import & Export Co. Ltd., which was a distribution arm of Kandi until it was sold in 2008.
Then, we searched for individual models of Kandi go-karts, so that we could check the deliveries for each type against the total number of deliveries to Kandi USA and other recipients. We also searched by alternate cargo descriptions, such as dune buggy or off-road vehicle, in case certain shipments were labeled differently.
In addition, we searched by the originating port. Most of Kandi’s vehicles are sent to the United States via Ningbo, a coastal city in Zhejiang province, where the company is based.
Finally, we searched for shipments to distributors or dealers who sell Kandi karts under other brand names, including Roketa and Cougar. In addition to searching by business name, we searched by business address, vehicle model and other variables.
Kandi said in response to our questions that private-label sales represented 30 percent of its go-kart business. That would translate to more than 10,000 units last year alone. However, the import data we searched showed that the total number of vehicles shipped to U.S. recipients other than Kandi USA in 2013 was negligible relative to overall sales.
Determining exact import figures from the Customs records was impossible because some shipping containers held an unspecified mix of go-karts and other vehicles. In those cases, we used the sales ratios in Kandi’s SEC filings as a guide and made the assumption that roughly two-thirds of the vehicles in each shipment were karts.
Some of the entries in the import database listed the total number of vehicles in a shipment but did not identify their type. For those entries — which totaled about 2,000 vehicles — we applied the same assumption about the percentage of karts.
The results from the various searches pointed to the same conclusion – that the number of Kandi go-karts shipped to the United States was an inexplicably small fraction of the company’s reported global sales.
We also searched for imports to other major go-kart companies and found that their deliveries numbers generally tracked with their relative prominence in the U.S. market.
A SHARP DROP AND A SWIFT RECOVERY
Kandi did not claim to be immune from the effects of the global financial crisis. The company said in SEC filings that its go-kart sales fell by almost two-thirds in 2009, to 13,618 units. But it said sales rebounded strongly in 2010, to 28,366 karts.
Again, that does not square with Customs records compiled by Import Genius. Those records, based on detailed freight manifests collected at American ports of entry, show that Kandi USA received fewer than 3,500 go-karts in both 2009 and 2010.
Thus, despite Kandi’s assertion that its global go-kart sales more than doubled, deliveries to its main American buyer were essentially flat.
Kandi’s narrative also does not square with the business trends reported by U.S. power sports dealers, who suffered through a prolonged slump in demand. Because the collapse of Lehman Brothers Inc. and other financial firms was followed by a credit crunch, dealers found loans for inventory and customer purchases harder to come by. What’s more, many Americans simply cut back on discretionary spending, adding to the difficult conditions.
The downturn led several noted American go-kart makers to leave the business. Those that survived shifted their manufacturing to China, or started importing key components from China and assembling them here.
Kandi said that its sales rose during the height of the economic crisis because makers of low-quality karts failed and its products offered better value.
Kandi explained: “Our company was benefited (sic) from engaging the automobile manufacturing capability to enhance the go-carts qualities, as a result, we were able to offer the competing products that fit the market, therefore we were able to improve our sales during the downturn.’’
Curiously, Kandi reported in SEC filings that its average selling price per go-kart rose more than 50 percent in 2009, despite the steep drop in its unit sales, the financial difficulties at dealerships and the discounts other manufacturers were offering to keep orders flowing.
It told us that its average price per unit rose “due to the higher-end products the company developed.’’
The U.S. import records, however, show no appreciable change in the mixture of products sent to Kandi USA or other large customers from 2008 to 2009.
POST-CRISIS GAINS
Kandi reported in SEC filings and earnings reports that its go-kart business gained additional ground from 2011 through 2013. It said unit sales reached 36,499 karts last year – the highest level since the economic collapse.
But as we noted previously, Customs records show that Kandi USA received only about 7,000 karts, leaving 29,000 unaccounted for.
THROTTLING BACK
Kandi said in SEC filings that it decided to downsize its power sports business this year to focus more resources on its electric-car business.
Kandi reported selling 10,727 karts in the first nine months of this year, off more than 60 percent from the same period last year. The company said it sold 10,301 ATVs, a decline of nearly 30 percent.
The latest quarterly SEC filing shows that sales of those vehicles now account for less than one-fifth of the company’s revenue, which totaled $117 million for the first nine months.
The same filings show that Kandi USA’s purchases fell sharply in the third quarter, to just $600,000. However, Kandi reported a big jump in direct sales to European buyers. It said they bought $2 million of vehicles in the quarter, more than five times the dollar amount it reported for the same period a year earlier.
The $2 million in sales also was twice the dollar amount that Kandi said it sold to European buyers in the first half of this year. The narrative sections of the company’s SEC filings did not offer an explanation for either revenue increase. In fact, it did not even say whether those sales came from the legacy side of the business. But Kandi has not announced any sales of electric vehicles or related products to Europe this year.
Even with the surge, the $2.6 million in revenue Kandi reported from direct buyers in North America and Europe in the third quarter translates to roughly 3,500 go-karts and ATVs. That amounts to a little more than a third of its total reported unit sales.
MAJOR CUSTOMERS
According to SEC filings, a few major customers have accounted for the bulk of Kandi’s sales since 2008, its first full year as a publicly traded company.
Kandi said its annual SEC filing for 2009 that a single company was responsible for 89 percent of its sales. We identified that company as Zhejiang Yongkang Top Import & Export, also known as Dingji.
Kandi adjusted that figure without explanation in its next annual filing. It reported that its biggest customer had accounted for just 56 percent of sales in 2009, and said the same customer’s share fell to 35 percent in 2010.
Kandi did not respond to our question seeking an explanation for that revision.
Kandi said a second company, which it did not identify, accounted for 46 percent of sales in 2010. The annual SEC filing showed that the new top customer had purchased no products from the company the previous year.
Kandi reported $42.9 million in revenue for 2010. That means Kandi’s new top customer would have been responsible for $19.7 million in purchases, while Zhejiang Yongkang would have been responsible for $15 million.
ImportGenius’ Customs records show that two shippers accounted for nearly all deliveries of Kandi go-karts and ATVs to the United States that year. They were Zhejiang Yongkang and a Kandi subsidiary called Zhejiang Kangdi Vehicles Co. Ltd.
Those two companies delivered somewhere in the neighborhood of 6,000 go-karts, ATVs, utility vehicles and three-wheeled motorcycles, compared with the more than 37,000 that Kandi reported selling during the year.
Kandi said in its annual SEC filing for 2011 that its top three customers accounted for 74 percent of its revenue. According to the filing, the unidentified company that was Kandi’s top customer the previous year accounted for 29 percent of its sales.
Zhejiang Yongkang’s share slipped to 20 percent; meanwhile, another unidentified company’s share rose to 25 percent, up from 15 percent the previous year.
SEC filings show that Jinhua Baoxiang emerged as Kandi’s top customer in 2012, accounting for 33 percent of its sales, or $21.3 million. That was an increase from 8 percent in 2011.
Jinhua Baoxiang’s share of Kandi’s sales dipped to 24 percent last year, but only because Kandi reported significantly larger revenue from the sale of electric vehicles and electric-vehicle compenents. Kanji’s annual SEC filing shows that dollar amount of Jinhua Baoxiang’s reported purchases rose slightly, to $22.7 million. That pushed its total for the past two fiscal years to $44 million, or the equivalent of nearly 60,000 go-karts and ATVs, based on the average wholesale prices and product mixes for those years.
DIRECT SALES TO NORTH AMERICA AND EUROPE
SEC filings show that Kandi sold about $40 million of vehicles directly to wholesale customers in North America, Europe and other regions from 2008 through 2013.
Kandi USA was responsible for most of the direct sales to North America in the past few years. It also accounted for the biggest percentage of sales outside China.
SEC filings show that Kandi USA bought $6.9 million of vehicles last year, on top of $5.3 million the previous year. The filings show it bought an additional $2.8 million worth in the first nine months of this year, pushing its purchases since the start of 2012 to $15 million.
It is unclear whether that total includes any of Kandi’s electric cars. The Customs data shows that Kandi USA received shipments of those vehicles in both 2012 and 2013.
PREVIOUS QUESTIONS
Sharesleuth previously raised questions about Kandi’s claim that it sold more than 3,500 of its low-speed electric cars in the United States in 2009 and 2010.
We surveyed all of Kandi’s American dealers in the spring of 2011 and found that they had sold well under 1,000 of those vehicles. We later reported that Customs records showed only about 800 cars were delivered to U.S. ports in that time.
Kandi initially targeted the American market with its electric vehicles because of a lack of charging infrastructure in its home country. It shifted its focus to China toward the end of 2011.
According to SEC filings, Kandi sold 8,600 cars in 2012 and 2013. It has since formed a joint venture with Geely Automobile Holdings Ltd. to design and produce electric vehicles. Kandi said that operation sold 7,279 cars in the first nine months of this year, primarily to a company that rents them by the hour in Hangzhou, Shanghai, Wuhan and other cities.
Earlier this week, Kandi announced that its joint venture with Geely had delivered 1,000 electric vehicles to a car-share operation in Chengdu, under an agreement that calls for 5,000 to be in service by the end of 2015.
On Dec. 18, Kandi announced the delivery of 700 vehicles to a longer-term leasing operation Guangzhou.
The joint venture is building a new assembly plant in Rugao that is scheduled to open next year and will have a production capacity of 100,000 vehicles per year. Kandi says it is building a second plant on Hainan Island that also is slated to produce 100,000 vehicles a year. It says that operation will become part of the joint venture when it is completed.
