|
How U.S. Investors Got Punk'd By Kandi
Jul 10 2013, 19:49 | 35 comments | about: KNDI
Disclosure: I am short KNDI. (More...)
(Editors' Note: This article mentions micro-cap stocks. Please be aware of the risks associated with these stocks.)
When I last wrote about Kandi Technologies (KNDI), the stock had been sitting at roughly 50% above where it is currently. The stock has now fallen from the $7-8 range down to the $4-5 range due to subsequent events. During this time, shares of Tesla Motors (TSLA) have continued to hit new highs, recently breaking above $125. As I have stated before, Tesla and Kandi have virtually nothing in common, so this divergence should not have come as a surprise. Yet it had previously been the case that numerous articles had suggested that there should be a direct correlation between Kandi and Tesla share prices.
The purpose of this article is not to say "I told you so." Instead it is to encourage investors to further reevaluate the "facts" upon which they have been relying regarding Kandi.
My last article was long, but the key points can be summarized as follows:
Kandi had $25 million in debt coming due during the week of June 24th -- but lacked the money to pay these debts
In anticipation, Kandi filed an S3 registration statement in April -- but the stock lacked both the price and the volume to sell enough stock
Just two days after the S3 was filed, a highly organized promotion campaign was begun in order to lift the price and volume
The promotion consisted of the following:
Aggressive articles predicting a meteoric rise in the stock
Press placements of headlines with sites such as Motley Fool and CNN Money
Press releases by Kandi touting minor non-events
All of a, b and c were synced with a coordinated buying campaign, temporarily increasing both the price and volume of Kandi stock
This plan worked quite well. Kandi's stock more than doubled. Volume increased by as much as 400-fold.
As predicted, within 3 days of my article, Kandi issued $26 million in stock. The amount coincided precisely with what was needed by Kandi for debts. The date coincided perfectly with the timing of these debts. Despite these coincidences, Kandi has stated that the proceeds of this financing will only be used for "general corporate purposes."
Just two days prior to announcing the financing, Kandi put out a press release in response to my article. It basically told investors the following:
- Kandi's debts had been paid
- Kandi didn't need to raise money
- Kandi had not been selling stock under the S3
For those who were still on the fence, Kandi included a punchy last paragraph to their press release to remove all doubt that it was safe to continue buying Kandi. Kandi stated that:
"The Company filed a similar shelf S-3 registration statement with the SEC on November 19, 2009 which became effective December 24, 2009. Almost one year after that S-3 registration statement became effective, on December 21, 2010, the Company raised approximately $16 million with a shelf take down."
This reassurance clearly worked well. Apparently Kandi didn't need any money and was unlikely to be selling stock for up to a year. The stock quickly rose back to $7.18 that Tuesday. However, on Wednesday, Kandi announced that it had already sold over $26 million in stock at $6.03 plus millions of shares in warrants. The stock quickly fell to $6.03 and then continued its descent back into the $4-5 range.
US retail investors who fell for this ruse are now likely feeling "punk'd." There were several months of promotion leading up to this moment. But the last minute reassuring press release from Kandi was clearly the crescendo.
We can see from the disclosed engagement letter that FT Global had already been signed up as a "placement agent" on the fundraising, a full week before the reassuring press release was issued by Kandi. FT Global was appointed on June 18th.
But some investors continue to search for excuses on how this farce is actually great news for Kandi.
The truth of the matter is that the "institutional" investors received so many warrants in the offering that their real effective purchase price is just $4.37. This was a no brainer trade for any institution when the stock was sitting at $6.50. Even when selling at $5.00 (or below), these investors will pocket millions with minimal risk.
If I had been given the opportunity to buy a $6.50 stock for $4.37, I would have participated in the deal and happily made a few million dollars in risk free profits as well. I would have gladly done so even though I am extremely bearish on Kandi's business prospects, because it was a "free money" trade.
This was an easy arbitrage, not an investment in Kandi.
By giving out free warrants, the company is subsidizing the purchase of the stock. As shown below, the warrants are worth around $7 million. These investors were therefore paying $26.3 million, but receiving $7 million in warrants back immediately. Their net cost on the stock is around $19 million. Therefore, the actual amount that they are paying for each share is just $4.37.
As an investment banker, I spent years demonstrating similar economics to CEOs of multi-billion dollar public companies. The full calculations are demonstrated in Appendix I, along with the assumptions used for the Black-Scholes model. They are all consistent with prices demonstrated by Kandi's current options trading.
For some reason, some small retail investors seem to think that several "institutions" are making a bullish bet on Kandi at $6.03. They also think that these warrants at $7.24 imply that Kandi is expected to actually rise to that level.
Neither is the case. Instead, this was a predatory financing.
The negative impact on other shareholders has already begun to demonstrate itself. And if history is any guide, Kandi will fall much further.
The fund that participated in the deal was a Cayman Islands based fund called Capital Ventures. Their "investment manager" is Heights Capital Management of San Francisco. We can see by looking at the past 13Gs filed by this fund that they are a financier of last resort for companies that are either in distress or are otherwise unable to raise new funding.
They specialize in engineering highly dilutive deals for "new energy" companies that appear to be in terminal condition.
Examples of past investments include the following:
- B456 Systems - Formerly A123 Systems (AONEQ.PK). Last traded for 3 cents with a market cap of $6 million. Was once a multi-billion dollar battery supplier to EV manufacturers.
- Tengion (TNGN.OB). An OTC BB company developing "artificial organs." The stock has traded down 80% to 50 cents. Market cap of $1 million.
- Wireless Ronin (RNIN). A "digital media" company with a 70 cent share price and a $4 million market cap. Stock is down 70% this year.
- Plug Power (PLUG). A 38 cent "alt energy" stock that is down 70% in the past year.
- Alamo Energy (ALME.OB). A pink sheets oil and gas stock with a price of below 1 cent.
The key point to take away from these deals is that Capital is a predatory financier that profits by getting into extremely cheap deals from companies who are desperate enough to offer them terms. Capital profits by selling these cheaply acquired stocks on the way down, not by picking winners who are about to go up. This is what explains to tremendous warrant coverage and the $4.37 effective purchase price that Kandi gave up to these investors.
Additional examples are numerous and can be found by viewing the filings.
Capital's only other Chinese investment was in China Medicine Corp. This company ended up defaulting on its debts and being delisted to the pink sheets. It subsequently conducted a voluntary withdrawal from the pink sheets and is no longer traded.
With Kandi, Capital made sure that there were enough warrants included in the deal to ensure that nothing could go wrong for their investment -- even as Kandi plunged.
In fact, there appears to be a built in incentive for the fund to sell Kandi stock sooner rather than later. In looking at the Form of Warrant document, we can see the following limitations, which would prevent the holder from exercising his warrant.
Notwithstanding anything to the contrary contained in this Warrant, this Warrant shall not be exercisable by the Holder hereof to the extent (but only to the extent) that the Holder together with any of its affiliates would beneficially own in excess of 4.99% (the "Maximum Percentage") of the Common Stock after giving effect to such exercise.
Capital had already purchased over 5% of the outstanding share count of Kandi common stock in the offering. Obviously the easy way to ensure that the warrants can be exercised is for the fund to simply sell all of the stock that it purchased.
The point from this is that this "institution" did not invest in Kandi to take a long-term view on share price appreciation. They simply received so many shares and warrants from the trade that they were nearly guaranteed to make a substantial profit, even when selling into a falling share price.
Investors who have been on this wild ride may now be asking what was the point of "running the stock" to $8.50 if Kandi would just end up handing shares to investors for $4.37.
The point is that when the stock was at $3.70 and trading on around 60,000 shares per day, no equity financing was possible. The share price was too low and the volume was too light to issue a meaningful number of shares.
Sadly, getting the stock up to $8.50 was the only way for Kandi to get investors to buy in at a still low share price of $4.37.
Now that Kandi has this money, there remains very little incentive for the company and its promoters to continue "running the stock." This should be self evident given the share price declines that have followed the huge equity and warrant offering.
Even bigger problems for Kandi
There have been many pump articles that caused Kandi to rise dramatically over the past few weeks. However, it remains the case that the only real "news" that might have an impact on Kandi's future came solely in the form of two press releases.
On June 5th, Kandi announced the MIIT approval of the Kandi Geely sedan. The share price quickly doubled, briefly hitting $8.50.
When the share price quickly faded to around $6.00 (a 30% decline), Kandi quickly issued a second press release on June 17th, which stated that HangZhou had started construction on a charging facility that would use 5,000-10,000 Kandi cars. Kandi soared by 30% once again, hitting $8.30.
In both cases, the "news" was released weeks after the developments actually occurred. Kandi simply selected the optimal time to put out these press releases. The timing worked well in terms of raising the share price right before the equity offering.
In my last article, I already described how each of these events are (in reality) non-events for Kandi.
The MIIT approval applies to hundreds of other EV manufacturers and their models. None of them trumpeted the "news" with a press release. Even Geely's stock did not budge on the news. Yet Kandi's trumpeting (along with promotional articles) caused the stock to double (temporarily).
The HangZhou news had been announced a year earlier as 20,000 vehicles. The new news was actually a decline of as much as 75%. Yet for some reason it still caused the shares to jump to $8.30 (temporarily).
Neither of these "news events" should have resulted in a significant boost in Kandi's share price from its then level of around $3.70.
But in fact, the reality of this "news" is actually much worse.
The Geely partnership was originally announced in February, causing Kandi's stock to rise by 11%. As with the recent developments, the timing of this news also appears to have been correlated with warrant activity and Kandi's attempts to raise money. Just prior to the news, Kandi had amended a warrant purchase agreement with two investors. The warrants on over 300,000 shares were set to expire worthless on January 22nd, so Kandi voluntarily extended the term of the warrants to March. The intent was to allow warrant holders to make money while Kandi would end up issuing over 300,000 new shares and receive proceeds. The warrants had a resettable price to as low as $2.75, but would have been exercisable ultimately at around $4.00-5.00.
Although much hype has been given to the Geely partnership, it seems that no one has bothered to read the disclosure that came from Geely.
The JV Company will be owned as to 50% by Shanghai Maple of the JV Company: Guorun and as to 50% by Kandi Vehicles.
The JV Company will not become a subsidiary of the Group or Kandi Group and its financial results will not be consolidated into the financial statements of either the Group or Kandi Group or their respective subsidiaries.
The fact that the Geely JV Company will not be a Kandi sub and will not even consolidate the financial results has not been mentioned by Kandi or its promoters. But the financial implications for Kandi should be painfully obvious to Kandi shareholders.
In addition, this agreement still requires a capital contribution of $80 million by Kandi, which Kandi clearly does not have.
To be clear, Kandi needs Geely in order to proceed. Geely does not need Kandi. The EV that received MIIT approval was model number JL7001BEV. The "JL" stands for JiLi (吉利), which is Geely's name in Chinese. From the attachment on the MIIT website, we can see that the vehicle is registered to Geely and not to Kandi.
In fact, Kandi's other promising vehicle candidate was also not even a Kandi vehicle.
Kandi first announced the HangZhou "contract" in October of 2012. The "buyer" was China Aviation Lithium Battery (CALB, 中航锂电(杭州)有限公司), which is a subsidiary of a Sichuan Company called "ChengFei" (四川成飞集成科技股份有限公司).
The model number was quoted as JNJ6290EV. But we can once again see from the MIIT website that this model is actually owned by a different car company called Zotye (pronounced ZhongTai in Chinese, 众泰汽车). The models, which were to be supplied to the HangZhou rental project, are in fact ZhongTai models, not Kandi models.
This problem likely stems from the fact that Kandi is not even licensed in China to make Electric Vehicles for use on roads (i.e., non go carts or ATVs).
We can see from Kandi's filings with China's State Administration for Industry and Commerce ("SAIC") filings that Kandi is licensed to make the types of golf carts and go carts that are not highway legal. In Chinese these are shown on the filing as 电动车、专用车. But Kandi's license also specifically says (不含汽车), which means "does not include automobiles." 汽车 is Chinese for street legal automobiles. The filing can be found here.
This would help to explain why Kandi keeps effectively "renting" the right to make licensed vehicles from other companies such as Geely and ZhongTai, who are allowed to do so.
From the Kandi announcement regarding CALB and HangZhou, we can see that:
Under the sales contract, the temporarily scheduled deliveries of the 5,000 vehicles will occur from September 29th to December 31st, 2012.
Yet according to its 10K filing for 2012, Kandi only sold a TOTAL of 3,915 "Super-mini cars" for the entire year of 2012. All of its other stated sales are for go carts and ATV type vehicles. It is important to note that the 3,915 total included all cars made before September 29, along with any and all cars sold pursuant to the "contract" with CALB.
The biggest problem here is that Kandi had stated that
Zhejiang Kandi Vehicles Co., Ltd. ('Kandi Vehicles') has signed the sales contract with China Aviation Lithium Battery (Hangzhou) Co., Ltd. ('CALB Hangzhou') to provide the first 5,000 EVs
But when we look at the actual documents in Chinese (put out by ChengFei, not by Kandi) , we can see that it is in fact only a "cooperation letter of intent" (合作意向协议, subject to competitive bidding (中标) and lacks legal binding (不确定性).
This now explains why the sales never materialized. The "contract" was not a contract.
The two press releases issued in June (along with heavy promotion) caused Kandi's shares to double. Volume increased by 100-400x. This all occurred just in time for Kandi to complete a much needed (and very predictable) financing.
But with the Geely approval announcement, any results will not even end up within Kandi's financials. Shareholders will not benefit.
With the latest HangZhou news, we can see from the past that the "sales contract" was actually a not a contract at all.
Fortunately, Kandi was very quick in cashing in on the share price spike, raising $26 million in new money and allowing new investors to get in with an in price of just $4.37.
But now there is a predatory fund, which is likely putting pressure on Kandi's share price. At the same time, investors are gaining an understanding that the two "news" releases did not merit a substantial rise in the stock from its then level of around $3.70.
Based on these factors, I strongly expect the share price to return to below $4.00 and volume to quickly subside to less than 100,000 shares per day once again.
Conclusion
Those who benefit from a rise in Kandi's stock price have been quick and brutal in their criticism of my findings.
Over the years I have written many cautious articles regarding pumps, promotions and outright frauds in the US and in China. On many occasions I have received death threats and threats of lawsuits from those who wanted to see my articles pulled. I have never agreed to pull any of my articles.
Some of the more problematic companies I have highlighted include China Media Express (CHMD.PK), China Biotics (CHBT.PK), Ziopharm Oncology (ZIOP) and Uni-Pixel (UNXL).
These are just a few notable examples. There are many, many more.
Once the dust settles and people have a chance to get a clearer perspective, I often receive a small number of thank you notes and an even smaller number of apologies from my critics.
When I wrote my first article on Kandi, I made it clear that a large financing was imminent. This was simply what the facts should have led us to conclude. The financing happened just 3 days later.
I do not simply write my own musings about what I "think." I write about situations where I can demonstrate adequate basis. I continue to receive new information on Kandi from readers in China almost every day. I expect to continue sorting out these new findings and will hopefully provide one or more additional updates in the next few weeks.
Investors in Kandi should strongly consider reviewing all possible findings with a critical eye to determine the validity of the hyper-bull thesis that caused the stock to double just in time for the $26 million financing. They should also consider the negative implications of having just completed a highly dilutive and predatory warrant financing.
Now that Kandi has gotten the money it was after, there is no near-term incentive to hype the story or promote the stock. As in the past, Kandi's share price will likely fall back to below $4.00.
Appendix I - calculating the value of the free warrants
In connection with the offering of stock at $6.03 per share, Kandi offered two classes of warrants. There were 1,750,415 warrants offered with a 30 month maturity and a strike price of $7.24. There were also 728,936 warrants offered with a 60 day maturity and a strike price of $7.24.
Investors who wish to independently value these warrants can refer to the current prices and volatility numbers for Kandi's existing options which are actively traded.
(click to enlarge) |
楼主: 金融角斗士
