Hall of Shame
Kandi Technologies (KNDI US)
Kandi Technologies Group, Inc. (Kandi) is a China-based company principally engaged in the development, production and distribution of the electric vehicle (EV) products, EV parts and off-road vehicle products. The Company’s products consist of EV parts, EV products, and off-road vehicles including ATVs, utility vehicles (UTVs), go-karts, and others vehicles. The Company operates its business both in the domestic market and overseas markets.
The company listed on the OTC via a reverse Merger with Stone Mountain Resources, Inc in June 2007. It uplisted to the NASDAQ in March 2008. Between 2010 and 2020, in additional share offerings, the Company raised US$285.09M (Dec.2010: US$16.65M, Jun.2013: US$26.39M, Mar.2014: US$11.05M, Aug.2014: US$71.00M, Nov.2020: US$60.00M, Nov.2020: US$100.00M).
Kandi retained a supposedly independent, outside auditor, Albert Wong & Co, but that auditor had no other clients. In the course of its yearly audits from 2011 through 2016, that auditor identified a number of concerns with respect to certain related party transactions, including those involving the CEO’s son and the personal bank accounts of officers and employees. The auditor either rebooked certain transactions and eliminated references to them from its audit trail, failed to report the transactions involving the CEO to the audit committee, or did not investigate the matters further.
March 17, 2014 Kandi filed its 2013 10-K (Annual Report) and stated therein that its “disclosure controls and procedures were not effective as of December 31, 2013, due to a material weakness.” The Company announced a number of efforts to fix its deficiencies, including its intention to revise its audit committee charter and to subject all related-party transactions to review by its audit committee.
March 13, 2017 The Company announced that its financial statements from 2014 through the third quarter of 2016 could not be relied upon and would be restated. The Company filed its 2016 Annual Report shortly thereafter, which disclosed that the Company lacked expertise regarding matters such as US GAAP and SEC disclosure requirements and the proper disclosure of related-party transactions.
February 14, 2019, A shareholder filed a plenary action against the company; the members of the Audit Committee (Yu, Chen, and Lewin), CEO Hu, and the Company’s three successive CFOs (Zhu, Wang, and Mei). The complaint asserted that the defendants “individually and collectively, breached their fiduciary duties by wilfully failing to maintain an adequate system of oversight, disclosure controls and procedures, and internal controls over financial reporting.” A second complaint asserted a claim for unjust enrichment. The Complaint alleged that the defendants “either benefitted financially” from the conduct or benefitted indirectly from “unjustly lucrative bonuses tied to the false and misleading statements, or received bonuses, stock options, or similar compensation that was tied to the performance or artificially inflated valuation, or received compensation that was unjust in light of Defendants’ bad faith conduct.”
May 14, 2014 The SEC charged a Toronto based consultant and four others with multiple Chinese reverse merger schemes, In addition, the complaint alleged that from approximately June 2009 through at least December 2010, Tazbaz, Lockhart, and Becker also engaged in a separate scheme to artificially inflate the price and volume of the stock of Kandi Technologies Group Inc.
November 30, 2020 Hindenburg Research released a report "Kandi: How This China-Based NASDAQ Listed Company Used Fake Sales, EV Hype to Nab $160 Million From U.S. Investors". Hindenburg revealed what It believed to be a brazen scheme by Kandi to falsify revenue using fake sales to undisclosed affiliates. Some of the issues it raised were:
- Hindenburg unmasked Kandi’s “unnamed” top customers and found that almost 64% of Kandi’s last twelve months (LTM) sales had been to undisclosed related parties.
- The company’s largest customer, representing approx. 55% of last twelve months (LTM) sales, shared a phone number with a Kandi subsidiary, and shared an executive with Kandi. It was based in a tiny building right next to Kandi’s factory with a sign indicating that it’s a Kandi company.
- The same building housed another entity used by Kandi as part of a separate fake sales scheme to collect illegitimate subsidies from the Chinese government, for which it was fined and sanctioned.
- Kandi’s second largest customer, representing approx. 9% of LTM sales, was once wholly owned by the company. Its website still integrated the Kandi logo with the customer name.
- Export records showed that 91% of the U.S. exports by the “customer” went to undisclosed related party entities based out of Kandi’s U.S. headquarters and warehouses.
- The company had consistently booked revenue it cannot collect, a classic hallmark of fake revenue. Its Days Sales Outstanding (DSO) a common measure of revenue collection, was 278 days in the previous quarter, about 5.6x worse than its closest auto peer.
- The company has had 3 auditors in the past 5 years, and 4 Chief Financial Officers in the past 4 years. Kandi’s auditor, Marcum, was just handed a 3-year ban from auditing Chinese companies by the Public Company Accounting Oversight Board (PCAOB).
- Kandi had a reputation in China for poor quality vehicles and failing to honour service warranties. The company had reported no domestic EV sales for years outside of its minority stake in a joint venture.
- The company’s much-touted battery swap program, which was preliminary and hopelessly behind peers, including Kandi’s own partner Geely. Without a meaningful number of cars on the road Kandi’s battery swap efforts simply did not make sense.
Hindenburg concluded that Kandi had raised $160 million from U.S. investors this month (Nov. 2020) alone. All told, Hindenburg thought Kandi had engaged in a major fake revenue scheme, hyping its story to U.S. investors, in order to take advantage of regulatory gaps enabling China-based companies to siphon cash from U.S. capital markets with impunity. Hindenburg said that through the course of It's research it contacted the company asking several questions about its financials and product initiatives. It received no response, so it listed 25 questions to which it believed that investors deserved the answers.
December 1, 2020 Kandi Technologies responded to the report saying that it believed that the report contained numerous errors, misstatements of historical facts, inaccurate conclusions, and superfluous opinions. Kandi said it takes seriously any accusations of impropriety and intended to address the key issues raised by the report. The Company planned to study the report in depth, isolate the key inaccuracies, and prepare detailed explanations that would be presented in the near future.
Forbes: Kandi Technologies - Weighing The Evidence, 31 May 2013
US-SEC: SEC Charges Toronto-Based Consultant & 4 Others with Multiple Chinese Reverse Merger Schemes, 7 May 2014
Kandi Technologies: Non-Reliance on Previous Financial Statements, 7 Mar 2017
US-Court: Kandi - Memorandum Opinion, 27 Apr 2020
National Law Review: Delaware Court Ruling in China-based Kandi Technologies, 2 Jun 2020
Hindenburg Research: Kandi - How This Company Used Fake Sales to Nab $160 Million, 30 Nov 2020
Kandi Technologies: Annual Report - Ye Dec. 2019
Kandi Technologies: Annual Report - Ye Dec. 2018
Kandi Technologies: Annual Report - Ye Dec. 2017
Kandi Technologies: Annual Report - Ye Dec. 2016
Kandi Technologies: Annual Report - Ye Dec. 2013