Join The Revolution!
Followers | 6 |
Posts | 310 |
Boards Moderated | 0 |
Alias Born | 03/15/2018 |
Twitter Profile: | Temporarily Unavailable |
Follow on Twitter: | Follow @ Temporarily Unavailable |
Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
https://stockmarketrevolution.com/archives/33560
Currently with a valuation of more than $400 million, Ozop Energy Solutions (OZSC) reports sales of less than $10 million and negative book value per share. I researched some of the addresses given by the company. Google maps indicates that some of the offices are located in apartments. I dislike the reverse merger executed with Power Conversion Technologies, Inc. The company reported a goodwill of $11 million, which was rapidly impaired. I believe that the current valuation is the result of significant social media activity. When investors learn about the company’s fundamentals, the share price will most likely fall.
The Reverse Merger Agreement Of Ozop Energy Solutions
Ozop Energy Solutions executed a stock purchase agreement with Power Conversion Technologies, Inc., which offers Battery Chargers, DC Power Supplies, and other tools for military/industrial applications:
On July 10, 2020, the Company entered into a Stock Purchase Agreement (the “SPA”) with Power Conversion Technologies, Inc., a Pennsylvania corporation (“PCTI”), and Catherine Chis (“Chis”), PCTI’s Chief Executive Officer (“CEO”) and its sole shareholder. Source: 10-k
As a result of the merger agreement, the owner of Power Conversion Technologies obtained more than 73% of the total share count. I believe that Ozop Energy Solutions sold itself for a small amount of money:
Source: 10-k
In July, Ozop Energy Solutions had a total market capitalization of $20-$30 million. I reviewed carefully the assets acquired, which, in my opinion, were worth less than $20-$30 million.
Source: Ycharts
According to the last annual report, Ozop Energy Solutions acquired total assets worth $1.2 million, and assumed liabilities worth $11.6 million. It means that the book value of Power Conversion Technologies was negative. I don’t really see why Ozop Energy agreed to buy the company. Interestingly, the goodwill reported was equal to $11.2 million. It looks an enormous amount of goodwill:
Source: 10-k
Once the acquisition was executed, Ozop Energy Solutions reported that the goodwill had to be impaired. In my opinion, minority shareholders lost a fortune with the transaction. It is quite unfair:
Pursuant to that review, management has determined that the goodwill arising from the above transaction has been impaired and accordingly $11,201,145 has been recorded as an impairment expense for the year ended December 31, 2020. Source: 10-k
I reviewed the numbers reported by Power Conversion Technologies. According to Dun & Bradstreet, Power Conversion had, in 2020, sales of $6.59 million. Ozop Energy Solutions had a market capitalization of $20-$30 million when it executed the merger agreement. With these figures, I assume that Ozop Energy gave its shares at 0.21x-0.3x sales, and the company obtained liabilities of $11 million. It looks like a very bad deal.
Source: Power Conversion Technologies, Inc. Company Profile
Power Conversion Technologies makes money from federal contract awards. However, in the last ten years, the previous awards obtained were worth around $6-$10 million. I don’t think that the Ozop Energy Solutions executed proper due diligence on Power Conversion Technologies:
Source: Awards – GovTribe
Source: Funding – GovTribe
In March, Ozop Energy Solutions, Inc. Was Accused Of Fraud
OZOP and the CEO were accused of fraud in the United States District Court for the Southern District of New York. According to the company’s annual report, the complaint alleges that a press release related to a Master Supply Agreement with WESCO International, Inc. (NYSE: WCC) contained false and misleading information:
On March 4, 2021 a Complaint and Demand for Jury Trial (the “Complaint”) was filed by a plaintiff (the “Plaintiff”) in the United States District Court for the Southern District of New York. The Complaint named Ozop Energy Solutions, Inc. (“OZOP”) and Brian Conway, Ozop’s Chief Executive Officer, (the “CEO”). OZOP and the CEO are collectively referred to herein as “Defendants”. The Complaint alleges that the Plaintiff’s purchase and sale of OZOP’s securities, and damages caused by OZOP and its CEO, were violations of federal and state securities law and common laws. This securities fraud complaint is based on two (2) press releases issued by OZOP: the first dated January 12, 2021, which the complainant alleges contained materially false and misleading information about the execution of a Master Supply Agreement. Source: 10-k
Notice that the company first communicated the agreement with WESCO, and later said that it had no authorization to issue the press release. Ozop Energy Solutions issued another press release noting that the agreement had been terminated:
Ozop Energy Solutions retracts the press release it issued on January 12, 2021 regarding Ozop Energy Solutions entering into a Master Supply Agreement. Ozop did not have authorization to issue the press release, and the agreement referred to in the release has been terminated. Source: 10-k
Total Assets Worth $2 Million, And Market Capitalization Of $400 Million
I am concerned about the current valuation of the company. In December 2020, Ozop Energy Solutions reported cash of $1.8 million and total assets worth $2.3 million. The company’s market capitalization is more than 170x its assets:
Source: 10-k
As said, the acquisition of Power Conversion Technologies, Inc. was very detrimental for the company’s balance sheet. In 2020, the total amount of liabilities increased from $2.2 million to more than $7.3 million. As of today, the company’s asset/liability ratio is equal to 0.31x. In the near future, as more investors study the company, in my opinion, the share price will fall.
Source: 10-k
Ozop Energy Solutions Trades At More Than 133x Forward Sales
Ozop Energy Solutions reported sales of $0.8 million and $1.4 million in 2019 and 2020 respectively. After the acquisition, I was expecting a larger amount of revenue. I believed that the company would generate $6 million or even $10 million. Taking into account these numbers and the current sales growth, I could expect forward sales of $3-$4 million. If we assume a future market capitalization of more than $400 million, Ozop Energy trades at more than 133x sales.
Source: 10-k
The company’s income statement does not look good either. In 2020, the company reported sales of only $1.4 million, and the management decided to have stock-based compensation of $4.2 million. I wouldn’t want to be a shareholder of Ozop Energy Solutions. However, there is more. The company’s impairment represents 65% of the total amount of operating expenses. The company recorded goodwill of $11.5 when the acquisition was executed. In less than two years, the company decided that the target was not worth that much. Notice that Ozop Energy Solutions may pay less taxes because of the goodwill impairment. When the valuation of the target is not properly done, society as a whole pays for it.
Source: 10-k
The Businesses In Which The CEO Was Involved: Ngen Technologies
From 2014 to 2019, the CEO of Ozop Energy Solutions was also the CEO of Ngen Technologies, Inc. I believe that by understanding the stock price dynamics of Ngen Technologies, we may see what can happen to Ozop Energy’s stock price:
From October 1, 2014, through August 31, 2019, Mr. Conway was the CEO, CFO and Director of Ngen Technologies, Inc. (f/k/a/ Liberated Solutions, Inc.). His relationships and experience with investment bankers, non-dilutive financing, and public relations should be instrumental in moving the Company forward in the upcoming months. Source: 8-k
The graph below offers information on the valuation loss of Ozop Energy Solutions. From 2017 to 2019, investors saw the share price going from more than $200 to less than $1. I wonder whether the following office address is correct. I obtained it from Ngen’s annual report.
Source: Ycharts
My Due Diligence On Ozop Energy Solutions
Since I disliked quite a bit the transaction executed with Power Conversion, I decided to study Ozop Energy. I don’t expect the reader to like what I found out. In the last annual report, the company provided an address of New York. Many websites including Google Maps and Compass indicate that the address indicated is an apartment. I don’t have anything against companies being run from home. However, Ozop Energy currently has a market capitalization of more than $400 million. A few months ago, the company had a total valuation of more than $1.2 billion. I don’t know whether traders would have bought and sold shares worth $1.2 billion with this information in mind:
Source: SEC Filing
Source: Google Maps
Source: Google Maps – 26 N Main St, Florida, NY 10921, United States
Ozop gives a different address at the company’s website. However, many websites indicate that the given address is a house.
Source: Company’s Website
Source: Google Maps
Source: Google Maps
Previous Office And Change Of The Business Model
Ozop Energy Solutions was previously called Ozop Surgical Corp. The business model was different from that of Ozop Energy. I also researched the address given by Ozop Surgical. According to Google Maps, the address given by the company is a house:
Source: Previous 10-k
Source: 31 Sandfort Ln – Google Maps
Ozop Received Awards From Large Organizations, But The Company Does Not Give The Value Of The Contracts
I researched the contracts obtained by Ozop Energy Solutions in the past. The company worked for the NAVY, NASA, General Motors, and other large organizations:
Source: Company’s Website
However, the company does not seem to explain in its press releases the money received. The recent contract received from the US Navy for a 160KVA 400Hz Frequency Converter is a clear example. Ozop Energy issued a press release to let the world know that the company signed a $6k contract with the NAVY:
Ozop Energy Solutions. (OZSC), (“Ozop” or the “Company”), announced today that its wholly owned subsidiary, Power Conversion Technologies, Inc. (PCTI), has received an order from the US Navy for a 160KVA 400Hz Frequency Converter used for aircraft ground support to power the plane on the ground for a variety of purposes in lieu of using the engine and burning jet fuel. Source: Press Release
Source: Purchase Order N0010421PXA09 – GovTribe
According to GovTribe, Ozop Energy received the contract in January, but issued a press release on March 8, 2021. I don’t like that the company waited for a long time to release the information. Notice that stock price increased from January to March. Having said that, the company’s total valuation increased to more than $1.2 billion, which I cannot really justify:
Source: Ycharts
The number of people talking about Ozop Energy Solutions in social media is very impressive. I wonder whether they are aware of the company’s balance sheet and current operations. I could identify facebook groups with more than 4k members. I believe that the valuation increased because of the number of traders and social media actors:
Source: (1) Ozop Energy Solutions Investors #OZSC | Facebook
Source: (1) Ozop energy Solutions public Room | Facebook
I also researched the location of Power Conversion Technologies. There is a lot of information in the Facebook groups about Ozop Energy Solutions. Unfortunately, given the state of the balance sheet and the inventory, there is no way to justify the company’s current valuation of more than $400 million. Notice that the company does not own the properties; the management has a leasing agreement:
Source: Power Conversion Technologies, Inc. – Google Maps
Source: Facebook
Source: Facebook
My Takeaway
Currently trading with a market capitalization of more than $400 million, Ozop Energy Solutions will most likely trade significantly lower in the future. With negative book value and revenue below $10 billion, the company could be trading at less than $20 million soon. I am also very concerned about the fact that the transaction included a goodwill of $11 million. The valuation of the target was not properly assessed. Finally, please notice that we contacted the company with questions about the offices and the goodwill. Unfortunately, we did not receive any answer.
Currently trading at 9x-11x CFO, AEGN is not only an undervalued company. AEGN also signed a merger agreement, and received interest from another third party. The conditions in the merger agreement are standard. Thus, if AEGN does not sign a merger agreement with the third party, the merger with New Mountain Capital will most likely close. As a result, the downside in the share price is limited.
https://stockmarketrevolution.com/archives/28455
New Article https://stockmarketrevolution.com/archives/26736
Net 1 UEPS Technologies Inc $UEPS: Cash per share is equal to $3, and the stock price is $5.65.
Good feedback, have you ever written anything ? Show it !
We published research about $LTNC in stockmarketrevolution.com, do you guys know any other good play ?
Article About NIO NIO Appears To Be A Long Term Opportunity
NIO traders are buying shares at 6x-7.7x 2022 sales. I believe that the company is not that expensive with triple digit sales growth and double digit gross profit margin. However, shareholders need to understand that there are significant risks to factor in. Conservative individuals who don’t like share price volatility should pass on NIO. The company will most likely deliver stock returns in the long term.
NIO’s Business Model, Vehicle Production, And Partners
Founded in 2014, NIO designs and offers smart electric vehicles in China. With a significant number of investors from the United States and the government in China, the company is said to be the new Tesla (TSLA) in Asia. NIO has offices in the United States, Europe, and China:
https://stockmarketrevolution.com/archives/15621
New Article by StockMarketRevolution.com
Shareholders of Second Sight Medical Products, Inc. (NASDAQ: EYES) appear to be the happiest on Wall Street. A few days ago, the FDA approved the company’s Argus 2s Retinal Prosthesis System to treat retinitis pigmentosa (RP). As a result, in a few days, the share price increased more than 100%. I believe that the share price may continue its upward trend. Let’s see why.
https://stockmarketrevolution.com/archives/15609
New Article
In 2021, Naked Brand Group Limited (NASDAQ: NAKD), the intimate apparel and swimwear company, saw its share price increase more than 100%. And that’s not all. After disclosing a new deal for aggregate gross proceeds of approximately $100 million, Naked Brand Group Limited appears to be under the radar of many investors. There is stock demand.
https://stockmarketrevolution.com/archives/15593
New Article StockMarketRevolution.com
With the price of Bitcoin going to the moon, many investors are looking to buy shares of Cryptocurrency brokers. The IPO of Coinbase could be an interesting play, but we don’t know when the company will become public. Today, let’s discuss another cryptocurrency and digital asset technology business, Net Savings Link, Inc. (OTC Pink: NSAV).
The Acquisition Of VirtuaBroker Ltd.
The company delivered a press release announcing the acquisition of VirtuaBroker Ltd. As a result, in February 2021, NSAV shareholders saw the share price increase more than 100%. The corporate transaction is exciting.
READ MORE
https://stockmarketrevolution.com/archives/15573
Consumption Trends During Chinese New Year Will Push Dada’s Sales Up
China’s on-demand delivery group Dada (DADA) recently announced the release of a new report. Traders will most likely be looking carefully at the numbers released. Notice that Dada provided sales data from January 4 to February 4.
https://stockmarketrevolution.com/archives/15533
New Article About The TSNP Stock Revolution
https://stockmarketrevolution.com/archives/15550
Tesoro Enterprises came significantly under the limelight after its merger with HUMBL LLC. The newly combined duo expanded their business into sectors such as Humbl Pay, Humble Market for merchandise, and Humble blockchain finance.
People knew Tesoro as a home renovation company providing interior decor, wall covers, tiles, and a variety of natural stone products for flooring. After their merger, the stock value of TSNP rose by leaps and bounds. <strong>HUMBL is a public company that drives blockchain investment products. With a net valued worth of $8 billion, Tesoro Enterprises stands second in equity trading over the counter, second only to Grayscale Bitcoin Trust.
Kuke Music Holding (KUKE) operates in a growing market and shows significant gross profit margin. There are several risks that investors need to understand. The company has one large supplier, which I don’t appreciate. I also believe that the recent acquisition made by KUKE was too expensive. Hence, in my opinion, this is a company that only institutional investors will study. In my view, KUKE will most likely trade with a total valuation of $74-$300 million. I would buy if the market capitalization crosses the $74 million mark.
https://stockmarketrevolution.com/archives/15254
Business
Kuke Music Holding offers classical music licensing and subscription in China. According to Frost & Sullivan, the company is one of the largest classical music subscription providers in China. Taking into account only this fact, I think that the company will be very interesting for institutional investors:
Powered by our rich and diverse content offerings, we were the largest classical music licensing service provider and the second largest online classical music subscription service provider in China in 2019, according to Frost & Sullivan, representing 46.6% and 13.8%, respectively, of the market share in terms of revenue.
Kuke Music Holding appears to be having good relationships with some of the most well-known music labels in the world. We are talking about Naxos, which helped Kuke create what appears to be the largest library of classical music content in China. The company owns exclusive rights of over 1.8 million music tracks.
The number of Kuke’s clients also appears very overwhelming. As of September 30, 2020, the company reported 743 743 institutional subscribers with 444 universities in China.
With regards to Kuke’s target market, the company is operating in a growing industry. The global music streaming market was valued at USD 20.9 billion in 2019, and is expected to increase at a CAGR of 17.8% from 2020 to 2027.
If we talk about the market in China, the numbers are also beneficial. Digital music is expected to show a growth rate of 12.3% CAGR from 2020 to 2025. I would expect the company’s sales growth to be close to this figure.
Specifically, the classical music market in China is expected to grow at a CAGR of 9.3% from 2020 to 2025. If the company performs better than the market, Kuke could be delivering sales growth of more than 9.3% y/y. However, I don’t believe that most investors will expect Kuke to do much more than that. Notice that the company did not deliver organic sales growth in 2019.
Its market size, as measured by total revenue generated from classical music licensing, paid subscription of online classical music subscription service providers and box office receipts of classical music performances, grew from RMB1,040.4 million in 2015 to RMB1,738.4 million in 2019, at a CAGR of 13.7%, and is expected to reach RMB2,396.6 million by 2025, at a CAGR of 9.3% from 2020 to 2025. Source: Prospectus
Large Gross Profit Margin
Kuke does not report sales growth, but it does report massive gross profit margin. In 2019, the gross profit margin was equal to 66%, which is quite large as compared to other companies. The gross profit margin of Spotify (SPOT) is close to 21%.
As far as the balance sheet is concerned, in 2020, Kuke enhanced its financial shape quite a bit. The total amount of assets increased by 56% in the 9M 2020. At the same time, total liabilities decreased by 14%. With that, certain shareholders may not appreciate the transactions that generated such impressive financial gain.
https://stockmarketrevolution.com/archives/15254
Currently trading with a valuation of $100 million, Artemis Resources (ARTTF) disclosed, in its annual report, a total of 480k gold ounces in inferred resources. Investors pay $1,859 for one gold ounce. Therefore, the company’s resources are estimated to be close to $892 million. Two large asset management firms, Jupiter Asset Management and Ruffer, bought shares of the company. In our view, when more investors get to know the company’s projects, the share price will trade higher.
https://stockmarketrevolution.com/archives/15517
From Yahoo Finance ... SCARED PEOPLE OUT THERE!
A HEAVY CORRECTION is COMING!
FINANCIAL CRISIS IS COMING!!! US STOCKS WILL COLLAPSE BIG TIME!
A HEAVY CORRECTION IS IMMINENT! The US Stocks are EXTREMELY OVERVALUED and OVERBOUGHT!
SELL ALL US Stocks in this TULIP MANIA BUBBLE!
INFLATION IS SKYROCKETING as the FED continues to PUMP the Price of everything, stocks, oil, gold, home, land, commodities, utilities, food prices and everything!
The World Economy is Collapsing, people are starving, but the US Market Makers are too busy in printing money and PUMPING the Stock prices Artificially to make insiders trillionaire without working!
Enjoy Free Capital Gains in the US Stock Market while the Corporate Revenues are tanking and the Economy is Collapsing! US Stock Market is a “GET QUICK RICH” Scheme!
Dow Jones Industrial Average (^DJI) was 17,000 in 2016, with better economic fundamentals and higher corporate earnings. However, thanks to the Collapsing Economy, Coronavirus Pandemic, Tanking Corporate revenues and earnings, Skyrocketing unemployment, Trade Wars, Record INFLATION levels, and Heavy Stock Dilutions, Dow Jones Industrial Average (^DJI) BUBBLE has almost Doubled!
S&P 500 (^GSPC) was at 1600.00 with better fundamentals and higher corporate earnings in 2016. Now it is sitting at ABSURD 3700.00 with TERRIBLE Fundamentals, Collapsing Economy, HEAVIER Corporate and National Debt and way lower corporate revenues and earnings!
The World Countries are refusing to accept the US Dollar as international reserve currency due to the HEAVY Dollar PRINTING!
US Stocks are INSANELY OVERVALUED and OVERBOUGHT! US Stock Market is a MEGA BUBBLE right now!!!
bought this ! We are going to see a massive amount of news about MODERNA and its vaccine.
News will make the stock price jump !
Bought this one day ago. In the next four months we are about to see a massive amount of news about the vaccine. That's gasoline for the stock price. Stay safe. Don't get COVID19.
This is going to be good!
http://moneymaudes.com/2021/01/will-we-see-another-short-squeeze-in-eastman-kodak/
With a significant short volume ratio, most robin hood traders will most likely expect another short squeeze in Eastman Kodak (KODK). If this is the case, traders need to buy before everybody else. That’s critical if you want to make money in these markets. When everybody knows the trade, the opportunity is gone.
Business Model And New Business Model
Kodak offers software, hardware, consumables, and services primarily to clients in commercial, print, manufacturing, and entertainment.
The company was created more than one hundred years ago. The brand is extremely well-known, which explains why so many traders like the shares.
I know that some traders don’t even look at the company’s business models. They buy or sell when they feel the momentum in their trading desks. In my view, that can be a bit risky while trading KODK.
http://moneymaudes.com/2021/01/will-we-see-another-short-squeeze-in-eastman-kodak/
From Seeking Alpha
Dada, The Chinese Uber, Trades At 7x Sales With 57% Sales Growth
Dada delivered more than 90% sales growth in the nine months ended September 30, 2020. The company shows a significant amount of cash in hand, and there is large stock demand. I don’t believe that the company is cheap at 7x sales because Uber trades at a similar valuation. With that, investors will do good by looking very carefully at the new developments to be delivered by Dada’s management. If the new cash is used for new technology or marketing expenditures, the revenue may increase even at a larger pace.
Double Digit Sales Growth
Financed by Walmart (WMT) and JD (JD), Dada Nexus provides on-demand delivery in China.
The CEO and founder is an engineer from MIT, who sold AdChina to Alibaba and Anjuke to 58.com. In our view, the business profile of Mr Kuai, who is only 37 years old, will attract the attention of investors:
The company intends to integrate its Dada Now and JDDJ platforms into a new platform offerging on-demand retail and delivery in China. The number of tools offered to clients is overwhelming. With data mining and AI technologies, Dada offers smart order recommendations and automated order pricing technologies. On the top of it, the company also offers a rider management system that manages the behavior of millions of riders:
10% of the market cap. is represented by cash !
plus +5% today this is going mad ! Go $DADA !!
I hope you guys buy this before everybody in Wall Street
Seeking Alpha Dada: The Chinese Uber Trades At 7x Sales With 57% Sales Growth
Dada Nexus (DADA) delivered more than 90% sales growth in the nine months ended September 30, 2020. The company shows a significant amount of cash in hand, and there is large stock demand. I don't believe that the company is cheap at 7x sales because Uber trades at a similar valuation. With that, investors will do well by looking very carefully at the new developments from Dada's management. If the new cash is used for new technology or marketing expenditures, the revenue may increase even at a larger pace.
https://seekingalpha.com/article/4401339-dada-chinese-uber-trades-7x-sales-57-sales-growth
Dada Nexus Finds Momentum In Q3 2020: Good Time To Buy
Seeking Alpha Article
https://seekingalpha.com/article/4393628-dada-nexus-finds-momentum-in-q3-2020-good-time-to-buy
On November 20, Chinese on-demand retail and delivery platform Dada Nexus (NASDAQ:DADA) announced its 3Q 2020 financial results, reporting strong earnings. The stellar business performance spurred investors' optimism, boosting the company's market capitalization to $11.69 billion at the end of the trading session on November 23.
What do you think about the Seeking Alpha article?
New Article Enzolytics Inc. (ENZC) Spikes Up
https://stockmarketrevolution.com/archives/15457
With more than 1500% stock returns in 2020 and 2021, Enzolytics Inc. (ENZC) continues to amaze the investment community. The company owns licensing rights of the Irreversible Pepsin Fraction peptide molecule, a new treatment of HIV/AIDS. Currently at a clinical stage, Enzolytics has made an investment in an european entity, which is conducting trials to prove the new treatment. Given the stock returns, many traders seem to believe that the results will be a success.
New Article https://stockmarketrevolution.com/archives/15454
Very recently, the company announced a new positive development. TSNP or HUMBL, Inc. noted the launch of a new division called HUMBL Financial. According to the press release, from now onwards, the company will offer blockchain-based financial services in new areas like credit card services and lending.
The company disclosed a target market with thousands of potential customers. According to the press release, TSNP expects to be a competitor of ANT Financial and AliPay ($BABA):
Article: The Convertible Debt Sold By NIO Is Beneficial For Shareholders
https://stockmarketrevolution.com/archives/15324
NIO (NIO) just announced a new offering of convertible senior notes valued at $650 million. I appreciate that the company will use the new financing for general corporate purposes besides strengthening its balance sheet. NIO is not using the new financing to pay existing debt, which I appreciate.
PSYC Spikes Up https://stockmarketrevolution.com/archives/15243
After the new announcement of the formation of the advisory board, Global Trac Solutions, Inc. (PSYC) saw a significant share price spike. We are talking about double digit stock returns in a one month time period. Given the current COVID19 crisis, shareholders will most likely appreciate the stock performance. With that, let’s review a bit the new directors elected.
George Y. Salameh, Hyder A. Khoja, PhD, And Kelli Foulkroud
With more than 35 years of expertise within the medical community, Dr. Salameh also brings expertise as an entrepreneur and real estate developer. According to the company’s press release, he has collaborated with San Diego venture capitalists for the past ten years.
$NIU going mad
Article: Niu’s Earnings Push The Share Price Up https://stockmarketrevolution.com/archives/15248
Tesoro Enterprises Share Price Goes Wild - New Article
If you are looking for the 2021 Unicorn, you may be assessing electric vehicle businesses or marijuana companies. I cannot blame you. Right now, those two sectors are performing well. With that, let me discuss an industry and a stock that traders will most likely push up in 2021. The name of the company is HUMBL. It is an app developer offering digital payments all over the world:
The mission of HUMBL® and HUMBL Hubs™ is to deliver high quality, low cost digital payments and financial services. The HUMBL network was designed to support vertical markets such as government, banking, wireless and merchants in locations like Latin America, Caribbean, Asia and Africa who are seeking to migrate to digital payment and financial technologies, to help reduce costs and improve settlement speeds for customers.
The Deal With Tesoro Enterprises, Inc. (OTCMKT: TSNP)
On December 9, 2020, the company released a deal with TSNP, which would give HUMBL, LLC access to the financial markets in the United States. In my view, the deal is exciting for employees and shareholders. Notice that the company is about to receive equity financing of $50 million, which will be used for marketing and app development. In my opinion, not a lot of traders know the company. Most traders don’t know about this deal. If we can buy shares before the public gets to know about the business, we may make good stock returns.
As a result of the completion of the merger, HUMBL was able to consummate November 23, 2020 agreements to raise funding through the cash sale of warrants. As these warrants are exercised, HUMBL will access up to $50 million in equity funding, to be used for marketing of the HUMBL global brand; the HUMBL® mobile app and HUMBL Hubs® merchant software; as well as distribution and partnerships around the world.
That’s not all. The share count is also decreasing, which will most likely make the intrinsic valuation of each share increase. The President of the company, Brian Foote, announced that the company would convert 318 million shares. As a result, the company is expecting to reduce the share count by over 860 million shares. According to the OTC Markets website, the current share count is equal to 3,907 million shares. The management announced that in 2020 and 2021, the total amount of shares outstanding is not expected to increase. That’s quite ideal for traders buying shares right now:
Tesoro Enterprises, Inc. announced today that the company’s CEO and President, Brian Foote, has agreed to convert over 318 million shares. Upon completion of the conversion, Tesoro’s issued and outstanding number of common shares will have been reduced by over 860 million shares since Mr. Foote became President of Tesoro.The company does not anticipate that the number of common shares outstanding will increase during the remainder of 2020 and throughout 2021.
More in SMR
nitial Disclosure: After extensive research, we have taken a short position in shares of Kandi Technologies. This report represents our opinion, and we encourage every reader to do their own due diligence. Please see our full disclaimer at the bottom of the report.
Introduction: Electric Vehicle Euphoria
Many investors have come to the realization that electric vehicles are the future of the auto industry. In rational times, such investors might express this view by picking companies that are best-of-breed; the likely industry winners.
But this is 2020, so instead, a psychotic flood of speculative capital has lifted all companies in the sector, regardless of quality.
Readers of this piece are likely familiar with our views on Nikola, the electric vehicle brainchild of Trevor Milton, a man who has forever enshrined “gravity” in the list of zero-emission energy sources (perhaps the company’s only genuine innovation to date).[1]
Many investors avoided Nikola due to its speculative status as a pre-revenue newcomer. Some of these investors may have instead found Kandi, seeing it as a revenue generating EV manufacturer with a long history.
Background: Basics on the Business
Before we dive into the specifics, let’s review the basics.
Kandi went public in the U.S. in mid-2007 via reverse merger onto the Over the Counter (“OTC”) market. It then uplisted and has traded on the NASDAQ since March 2008. [Pg. 14] The company has been run since its inception as a public company by Xiaoming Hu (???) who serves as Chairman, CEO & President. [Pg. 33]
Historically, the company manufactured and sold ATVs, go-karts, and electric vehicles. Currently, Kandi’s main focus is electric cars and related parts.
Kandi has announced several initiatives that are key to its business case (which we will review thoroughly):
The “U.S. Launch” of Kandi’s small, low-cost electric cars;
China’s domestic rideshare market, which Kandi hopes to significantly participate in; and
The company’s battery swap technology, which it has indicated will be spun off and taken public in Shanghai
The company’s market cap has expanded to over $1 billion as of this writing, trading ~$13.62 per share, more than 6x its 52-week lows. The company has raised $160 million from U.S. public market investors this month alone. [1,2]
Part I: Kandi’s Extensive History of Fraud Allegations
Investors in Kandi seem largely unaware of the company’s history of credible fraud allegations during its tenure as a public company.
2014: The Architects of Kandi’s Reverse Merger Deal to Go Public Were Charged With Fraud by the SEC For, Among Other Things, Engaging in A Scheme With Kandi’s Chairman/CEO To Artificially Inflate Its Stock Price
According to an SEC complaint, Kandi was taken public on the OTC by a group of individuals that engaged in multiple market manipulation schemes. [Pg. 3]
The architects of the scheme were charged with fraud by the SEC in 2014.
The complaint included allegations that the individuals had engaged in a fraudulent scheme to inflate the price and volume of Kandi. [Pg. 43] According to SEC prosecutors, the scheme was concocted with the help of Kandi’s CEO:
The individuals settled the charges in December 2019. Despite the Chairman/CEO of Kandi being identified as playing a critical role in a conspiracy to manipulate his own stock, neither he nor the company were ever charged by the SEC.
2016: Kandi’s Long-Serving Auditor Had Its Registration Revoked by the Public Company Accounting Oversight Board (“PCAOB”) Specifically for Failing to Catch Obvious Signs of Fraud at Kandi
Kandi’s auditor for most of its publicly traded existence was Albert Wong & Co. (“AWC”), a small auditor based in Hong Kong. AWC served as Kandi’s auditor from mid-2009 until its dismissal in April 2016.
A month after its dismissal, in May 2016, the PCAOB issued an order revoking AWC’s registration, fining it $10,000 and barring its principals from associating with any registered public accounting firm due to its failure to catch obvious signs of fraud at Kandi.
The order focused on AWC’s audit failures relating to Kandi, mentioning the company by name 151 times.
The PCAOB found, among other failures, that AWC failed to implement procedures designed to provide reasonable assurance of detecting material fraud or illegal acts. [Pg. 4]
The PCAOB Report Went Into Detail About Obvious Signs of Theft by Kandi’s Chairman/CEO And Undisclosed Related Party Transactions
The PCAOB found that AWC failed to take issue with Kandi’s Chairman and at least one Kandi finance employee (referred to as “Cashier”) reporting cash held in their personal accounts as belonging to the business. The auditors simply included the cash held in personal accounts in the company’s reported cash balance.
The effect of this was likely a reporting of an inflated cash balance while direct evidence of misappropriation was ignored. Per the report:
The PCAOB report referred to Kandi’s responses as “evasive” [Pg. 12] and repeatedly called into question the reliability of its representations and integrity. [Pgs. 8-9, 13]
The PCAOB Report Went into Further Detail About Obvious Undisclosed Related Party Transactions At Kandi, Including Those Relating to Kandi USA
The report also suggested that management made adjustments to disguise recognition of related party revenue:
“Respondents failed to assess the risk of fraud related to these last-minute adjustments to reflect the Kandi USA revenue as being from Dingji, including whether these adjustments were motivated by management’s desire to conceal Kandi’s transactions with Kandi USA in order to avoid related party disclosures.” [Pgs. 12-13]
Note that elsewhere in this report, we have detailed specific and obvious signs that Kandi is still engaging in extensive undisclosed-related party transactions through its U.S. operations.
Despite the PCAOB barring AWC and its principals from auditing public companies for failing to identify clear signs of fraud at Kandi, domestic regulators have not brought any enforcement action against Kandi.
2016: The Chinese Government Announced That Kandi Had Been Involved in a Scheme Through its Joint Venture to Obtain Illegitimate EV Subsidies Through the Use of Sham Sales to Related Parties
In 2013, the Chinese government announced large subsidies to producers of electric vehicles. That same year, Kandi and Chinese EV manufacturer Geely established a joint venture to produce electric vehicles.
According to Chinese media, the joint venture generated subsidies through a scheme involving buying and selling to/from related parties.
The gist of the scheme was as follows: China provided subsidies to both to producers and purchasers of electric vehicles. Kandi gained one subsidy through its manufacturing joint venture with Geely, then sold the cars to a related party entity that purported to be in the rental/car sharing business, collecting the other.
The scheme worked because Kandi’s cars were so cheap. The cost to build the vehicles was actually less than the subsidies, so Kandi just needed to build as many cheap cars as possible to cash in on the government money.
In 2016-2017, media reported on the results of a Chinese government investigation which found that Kandi and its JV partner (among others) had thousands of idled vehicles and was involved in fraudulently obtaining state subsidies.
As a result, Kandi’s JV partner was fined and Kandi was forced to write off $3.3 million in subsidies.
In 2019, media stumbled across a car lot where thousands of Kandi cars were apparently sitting unused and had been deteriorating for years, believed to be part of the same scheme.
(Pictured: A car cemetery filled with thousands of unused Kandi vehicles. Source)
2017: Kandi Restated Its Financials to Account for Previously Undisclosed Related-Party Deals and Promised to Mend its Ways
On March 7, 2017, the company acknowledged in an SEC filing that in response to questions from the SEC’s Division of Corporate Finance, it needed to restate its historical financials to “separately identify certain related party accounts” and make “corrections to the classification of notes receivable and notes payable in the Company’s statements of cash flow”.
The filing stated that investors should not rely on its financial reporting “or any earnings releases or other communications” from 2014-2016.
The same filing disclosed that Kandi’s accounting may have material weaknesses and that the PCAOB revoked the registration of its prior auditor due to deficiencies.
Part II: We Think Most of Kandi’s Sales Are Fabricated
Kandi was not charged by regulators for any undisclosed self-dealing, despite extensive historical evidence suggesting a pervasive pattern.
Part of the issue, we think, is that U.S. regulators have limited access to audit and regulatory information from China, leaving them hamstrung in their overseas enforcement efforts.
In 2017, the company promised to do better going forward, but given the lack of regulatory oversight and consequences: why would it?
Background: Kandi’s Top “Customer” From 2014-2017, Representing 63%-97% of its Sales, Was its Joint Venture Partner
But Following the Subsidy Scandal, Sales to the JV Partner Evaporated
Since 2014, Kandi’s reported EV sales had been driven by its joint venture with domestic auto manufacturer Geely.[2] [Pg. 11] But Kandi’s sales to its JV partner declined sharply by the end of 2018 following revelations of a Chinese subsidy scandal and subsequent subsidy policy adjustments.
Through its overgenerous subsidies, the Chinese government inadvertently acted as a dedicated “buyer” of Kandi’s cars (many of which ended up just rusting in a parking lot, as shown above). Without the subsidy scheme run through its joint venture entity, Kandi needed legitimate buyers for its products.
In Q1 2019, Kandi acknowledged on its quarterly investor call that it didn’t sell any EV products due to a “transitional period”. Kandi’s financials show that its proportion of sales to its joint venture rapidly declined and have essentially vanished in 2020.
(Source: SEC filings)
This is corroborated by Chinese media sources, which reported that the company sold zero vehicles domestically in 2019 and early 2020. [1,2,3]
Kandi’s joint venture with Geely was originally 50/50, but Geely bought most of Kandi’s stake in 2019, leaving Kandi with 22%. The entity is now focused on manufacturing an electric SUV called the Maple 30X. Given Kandi’s lack of reported revenues from the affiliate, it is unclear what current role, if any, Kandi plays in its manufacturing.
Despite the Virtual Elimination of Kandi’s Major Customer, Kandi’s Revenue Somehow Remained Stable…With the Help of Two Unnamed Mystery Customers
Usually sales drop when a firm suddenly loses its business from a customer comprising 63%-97% of sales.
Incredibly, that has not been the case with Kandi. Its sales actually rose slightly following the 2018 decline of its top customer, then leveled off.
(Source: SEC filings)
Kandi Redacts the Names of its New Top “Customers” Which Have Accounted for Almost 64% of Last Twelve Months (LTM) Sales
Two unnamed customers have played a big role in plugging up the sales “hole” left behind by the decline of Kandi’s JV. Kandi redacts the name of these key customers on its financials, referring to them as “Customer A” and “Customer B”.
(Source: Kandi’s SEC filings)
We Have Identified the Names of Kandi’s Top Customers
Prior to September 2019, Kandi disclosed the names of its top customers. Here is an example from June 2019:
As of September 2019, the company began redacting the names of its top customers, except for the name of its related party joint venture partner:
The remaining customers, according to Kandi’s disclosures, are sales to unrelated party customers.
We were able to identify Kandi’s top customers by connecting the dots between the percentage of sales associated with each customer in the prior periods when the names were unredacted.
For example, customer concentration disclosures from June 2020 referenced the customer concentration numbers from the prior year (when the names were unredacted). [Pg. 10, Pg. 17]
Once unmasked, we examined the customer relationships more closely and found alarmingly close ties to Kandi.
Kandi’s New Top Customer, Accounting for 55% of LTM Sales, Shares a Phone Number with a Kandi Subsidiary
According to Chinese corporate records available through corporate records service QCC, key customer Jinhua Chaoneng Automobile Sales (?????????????) shares its phone number with a 100% Kandi-owned subsidiary.
Here is Jinhua’s corporate record, with its phone number highlighted, including an indication that it shares the number with three other entities:
The second name on the list of shared numbers is Zhejiang Kangdi Intelligent Power Exchange Technology Co., Ltd. (??????????????), which is 100% owned by Kandi.
We called the number to see which (if any) company the phone number belonged to. This was the conversation (which we recorded):
HER: Hello
US: Hello. Are you Jinhua Chaoneng?
HER: No
US: What company are you?
HER: Who are you?
US: I’m looking for Jinhua Chaoneng and had this number
HER: They moved away many years ago
US: Oh, then are you Kandi?
HER: Who are you?
US: I’m looking for these companies. I want to check if this phone number belongs to Chaoneng or Kandi or who?
(HANGS UP)
We Visited the Address of the Customer and Found Them Based in a Small Building Adjacent to a Kandi Factory
The “Customer” Had Kandi’s Name in Its Signage, Indicating That it is Part of Kandi
The addresses of the 2 companies are also almost identical, per the same corporate records. Both are based at plots “G-01-03 and G-02-01” in an industrial park in Jinhua City, per QCC records.
First, we viewed the customer address using Baidu maps. It shows a Kandi factory:
(Source: Baidu Maps)
Then, we sent an investigator to the industrial park several months ago in order to confirm ourselves:
(Source: Hindenburg investigator, Summer 2020)
We asked the security guard working the Kandi gate about Chaoneng (the customer) and he had never heard of them.
However, we found a small building adjacent to the factory with a sign that named the purported customer as “Jinhua Kandi Electric Vehicle Chaoneng”.
(Source: Hindenburg investigator, Summer 2020)
The “Customer” Address Matched the Address of the Key Undisclosed Related Party Entity Involved Kandi’s Earlier Fake Sales/Subsidy Scheme
As noted above, the Chinese government had previously sanctioned Kandi and its JV partner over a scheme to collect illegitimate government subsidy payments through fake EV sales.
The entity used to generate the fake sales in that scheme was named “Left Middle Right, Co. Ltd” (???????????????), and is based out of the exact same small building as Kandi’s new top “customer”.
(Source: Hindenburg investigator, Summer 2020)
Here is an overhead view of the Kandi factory and its purported customer/subsidy scheme entities.
Kandi appears to simply be recycling its old fake sales playbook (except this time the target is U.S. investors rather than the Chinese government.)
Kandi’s New Top Customer Shared an Executive with Kandi, Further Evidencing Close Ties Between the Two Companies
Further evidencing a long connection, a 2010 article detailed how an individual named Hu Yiheng, a Kandi employee, held a senior position at Kandi acting as “???” or “Office Director”.
Hu YiHeng[3] is the name of Chaoneng’s legal representative since June 17, 2013 and is also a 30% shareholder of Chaoneng, per corporate records through QCC.com:
In short, Kandi’s largest “customer” is (a) based at a Kandi factory; (b) shares a phone number with a Kandi subsidiary; (c) integrates Kandi into its own signage; (d) is based in the same building as another entity involved in a fake sale scheme for Kandi; and (e) shares or shared a key executive with Kandi.
We do not think sales to this entity are legitimate.
Kandi’s Second Largest Customer, Named “Kuke”, Accounts for 9% of LTM Sales. It Was Previously Wholly Owned by Kandi And Still Has an Unusually Tight Relationship
Kandi’s 2nd largest customer is Zhejiang Kuke Sports Technology Co., Ltd. (????????????) (“Kuke”). The customer accounted for 11% of last quarter’s sales and 9% of Kandi’s LTM sales.
In an obvious link between the two entities, we found that Kandi previously owned Kuke up until 2008, right around the time of Kandi’s IPO, when it was sold to 2 private individuals.
In fact, corporate records on QCC.com still refer to the company as being a part of Kandi:
Kuke’s website still shows close ties to Kandi. The homepage features a large image of Kandi’s factory, and the company’s logo integrates Kandi with its corporate name. The site also features the brand name “Jasscol”, which is a registered trademark owned by Kandi. [Pg. 5]
(Source: Kukesport.com, accessed 11/25/2020)
Export Records Show ~91% Of Kuke’s U.S. Exports Have Gone to Three Entities Based Out of Kandi America’s Addresses
In Other Words, Kuke is “Buying” From Kandi Then Selling Right Back to Obvious Undisclosed Related Parties of Kandi
Kuke’s website indicates that exports to North America comprise the vast majority of its business.
(Source: KukeSport About Us Web Page)
We reviewed export records through data aggregator Import Genius. Using the earliest records available, dating back to October 2017, we found that over 90.9% of Kuke’s exports to the U.S. by weight went to three entities:
(1) Massimo Motor Sports LLC
(2) Lil Pick Up Inc.; and
(3) Jass Motorsports Inc.
Here is a sample of the records, showing Kuke shipping to Massimo, Lil Pick Up, and Jass:
(Source: ImportGenius export records)
As we will show momentarily, state corporate records and litigation documents reveal that Massimo, Jass and Lil Pick Up are based out of addresses associated with Kandi America, making them clear related parties.
30% of Kuke’s Historical Exports Were to Massimo Motor Sports LLC, An Entity Based Out of Kandi America’s Headquarters and Owned by the Founder and Manager of Kandi America
Massimo Motor Sports is based out of Kandi’s U.S. headquarters in Texas and is owned by David (Jianxun) Shan, a founder and current manager of Kandi’s U.S. subsidiary.
Here are Massimo’s corporate records showing the address matching Kandi’s U.S. headquarters:
(Source: Texas Corporate Records and Kandi America website)
After Buying Kandi Product’s Through Kandi’s “Customer”, Massimo Motor Sports Then Sells Products Right Back to Kandi.
Massimo, An Undisclosed Related-Party Entity of Kandi America, Is Therefore Both a Top Customer and a Top Supplier Of/To Kandi.
We View This as a Brazen, Clear Circular Sales (i.e. Fake Revenue) Scheme
Once Massimo receives product from Kandi’s key “customer” Kuke, who does it sell its products to? Evidence shows that one of Massimo’s key customers… is Kandi.
Kandi began redacting the names of its suppliers in late 2019. Using the same trick we used to unredact its customer names, we see that Massimo has been Kandi’s “Supplier C”, representing 25% of Kandi’s purchases in the first six months of 2020, and 15% in the same 2019 period.
To recap, Kandi sells to top “customer” Kuke à which then exports to Massimo (based out of Kandi’s U.S. headquarters) à then Massimo sells products right back to Kandi.
52% of Kuke’s Historical Exports Were to Jass Motorsports Inc., An Entity That Shared an Executive With Kandi and Was Based Out of the Exact Same Address As a Branch of Kandi USA
Moving right along, Kandi’s “customer” Kuke also exports to an entity called Jass Motorsports.
Jass Motorsports’ incorporation documents list a Rancho Cucamonga, California address that matches the address previously listed for a branch of Kandi USA. Both entities shared an executive officer as well.
(Pictured: Jass Motorsports and Kandi USA Corporate records via California Corporate Records and OpenCorporates)
9% of Kuke’s Historical Exports Went to Lil Pick Up, Inc., An Entity That Also Leases Warehouse Space at Kandi America’s Headquarters
We Have Photographic Evidence Showing Lil Pick Up Inventory Sitting in Kandi America’s Warehouse, Covered with a Tarp
Export records show that Kuke also regularly exports to Lil Pick Up, a company run by Renfeng Wang, who appears to share a business relationship with Kandi America Founder & Manager David Shan. [1,2,3]
Recent litigation records revealed that Lil Pick Up, LLC rents space at 3101 West Miller Road in Garland Texas, the headquarters for Kandi America. [Pg. 8]
The records even include a picture of Lil Pick Up inventory sitting in the warehouse covered with a tarp, dated from July of this year.
(Pictured: Inventory owned by Lil Pick Up Inc., a supposed Kandi customer, covered in a tarp at Kandi’s U.S. headquarters, dated July 17, 2020, per litigation records [Pg. 9])
Kandi Has Consistently Booked Revenue That it Can’t Collect, A Classic Sign of Fake Revenue.
Kandi Had 278 Days of Sales Outstanding—5.6x Higher Than its Closest Competitor.
Kandi’s financial statements support our findings.
When most companies sell a product, they eventually collect the revenue and convert it into cash. This is especially true in the auto industry where cars are usually financed or paid for on the spot, before they are driven off the lots at dealerships.
Kandi seems to sell plenty of product, but then appears to have an incredibly difficult time collecting and converting it into cash.
The key measure of revenue collection is days sales outstanding (“DSO”), which measures the average days it takes to convert accounts receivable into cash. Kandi’s DSO in the previous June quarter was 278 days, 5.6x its closest auto manufacturing competitor, making it an outrageous outlier.
(Source: Author calculations based on SEC filings)
The company has attempted to justify its revenue collection failure by stating that its credit terms are “typically 180 to 360 days after delivery.” [Pg. 27] This doesn’t add up—very few industries allow customers to pay a year after they’ve received a product, and as seen above, automobiles clearly aren’t one of them.
In Kandi’s most recent September quarter, its trade receivables balance declined, but a new category of unusual receivable that has ballooned in its place. Kandi recorded a ~$51 million “loan to third party” as an “other receivable” in the most recent quarter, up from $13.7 million in the prior quarter.
This mystery loan did not seem to exist a year ago.
(Source: Kandi’s SEC filings)
Most businesses generating $106 million in LTM revenue don’t suddenly loan $51 million to unnamed third parties without explanation. Once again, these major balance sheet irregularities are hallmarks of fake revenue. When factoring in the new mystery receivable, Kandi’s DSO in its most recent quarter is a whopping 429 days.
Kandi’s Payables Are Similarly Outrageously High at 338 Days Outstanding—1.8x Its Closest Competitor.
Are Suppliers Awarding Kandi the Most Generous Payment Terms in the Industry—Or Are Circular Sales Resulting in Fake Payables Along with Fake Receivables?
Typically, large, established market participants can demand better terms for amounts owed to suppliers due to their size and financial strength. Kandi is a fraction of the size of its larger auto peers and is generally a cash burning enterprise.
Despite this, Kandi’s financials indicate that its payment terms with suppliers are the most generous in the industry. Its Days Payables Outstanding (“DPO”) in the prior June quarter was 338 days, almost a full year.
That is 1.8x its closest auto manufacturing competitor, again making Kandi a clear outlier within its industry.
(Source: Author calculations based on SEC filings)
Why might this be the case? Another hallmark of fake revenue is when companies have large unexplained payables alongside large unexplained receivables.
Companies engaging in circular sales schemes may sell and later repurchase its own product, such as appears to be the case with Kandi and its relationship with Massimo, which we have shown above to be both an undisclosed related-party customer AND supplier of Kandi’s products.
The result of all this is the generation of fake revenue, fake earnings, and fake receivables/payables from/to the undisclosed related entities.
Some readers might be wondering—isn’t this all the sort of thing auditors are supposed to catch?
Kandi Has Had 3 Auditors in the Past 5 Years and Has Regularly Reported Weaknesses in Its Financial Controls
Frequent changes with a company’s auditor are another red flag for accounting issues.
Kandi has taken this red flag to another level. As described above, Kandi’s long-serving auditor Albert Wong & Co. was ejected from the industry following its well documented failures to catch clear signs of fraud at Kandi. The firm was dismissed as Kandi’s auditor in April 2016 and was replaced by BDO.
2016: In BDO’s first year as Kandi’s auditor, it identified 5 entire categories of material accounting weaknesses. These included material weaknesses in its disclosure of related party transactions. [Pg. 45]
2017: Kandi reported that it had instituted a plan to “remediate” the material weaknesses in its internal controls over financial reporting. [Pg. F-3] BDO’s audit opinion for the year said that the weaknesses had “not yet been fully remediated” as of the end of 2017. [Pg. F-3]
2018: BDO issued a clean audit opinion, [Pg. F-3] but then was subsequently replaced in October 2019 after BDO and the company “mutually elected not to continue the engagement”. BDO was replaced with Marcum Bernstein & Pinchuk, marking Kandi’s 3rd auditor in under 5 years.
So, how are things going with Marcum so far?
Two Months Ago, Kandi’s Current Auditor Marcum Was Handed a 3 Year Ban From Auditing Chinese Companies by the Public Company Accounting Oversight Board Due To Violating Audit Standards
Kandi’s current choice of auditor comes as no surprise. Marcum had already been disciplined and sanctioned by the PCAOB in 2019 violating rules on independence:
The 2019 order sanctioned Marcum in connection with its “China Best Ideas Investment Conference”, where it “endeavored to create a perception that the China Conference was an event featuring companies—some of which were Marcum issuer audit clients—that were high-quality investment opportunities”.
In September 2020, Marcum was handed a three year ban on auditing Chinese companies as a result of violating PCAOB rules and auditing standards.
Upon seeing this news, a reputable company would have likely fired Marcum immediately so as to disassociate from its soiled reputation. But on November 17th, six weeks after the PCAOB prohibition announcement, Kandi filed proxy documents seeking to reappoint Marcum as its auditor for the year.
It Hasn’t Just Been Auditors That Have Been A Revolving Door: Kandi Has Had 4 CFOs Over the Past 4 Years, Another Major Red Flag
Kandi’s Chairman/CEO has maintained his position since inception, but the company’s top accounting rank has seen extensive turnover.
2016: In November, Kandi’s CFO Wang Chen resigned and was replaced with Mei Bing.
2019: In January, Mei Bing resigned as CFO for “personal reasons” and was replaced with interim CFO Zhu Xiaoying.
2020: In May, Kandi appointed Jehn Ming (Alan) Lim as CFO, who is currently serving in the role, after Zhu Xiaoying was said to have “completed her responsibilities” as interim CFO.
Kandi’s New CFO: Prior Work History Included Working at (i) An Accounting Firm Ejected by the PCAOB and (ii) an Affiliate of Kandi’s Current Auditor
Of the two recent firms Kandi’s newly-appointed CFO worked at, one had its registration revoked by the PCAOB and the other is affiliated with Kandi’s auditor.
According to his biography in SEC filings, Kandi’s CFO worked at accounting firm Stonefield Josephson from 2006 to 2008. The firm later merged with Marcum, Kandi’s new auditor through its Chinese joint venture.
Lim later served at Kabani & Company from 2008 to 2012, per his biography in SEC filings. (He left this out of his LinkedIn profile for understandable reasons.)
Kabani had its registration revoked after PCAOB inspectors found a “wide-spread and resource-intensive effort” to alter documents in audit files in order to pass inspection in 2008:
Part III: Kandi Has Been “Launching” in the U.S. for 12 Years. We Expect its Efforts Will Continue to Sputter
Investors of late have been drawn to Kandi’s much-touted “U.S. launch”. The pitch by Kandi is that it aims to provide a low-cost electric vehicle that is attractive to value-oriented U.S. consumers.
Typically, companies expand to new markets after they have developed a strong presence in their domestic markets. Not the case with Kandi. The company operates in China, the largest EV market in the world, yet Kandi has reported a grand total of zero domestic Chinese EV automobile sales since the end of 2018. [Pg. 24, Pg. 32, Pg. 28, Pg. 22]
We spoke with several former employees of Kandi America to learn what is going on. We were told that the latest “launch” is nothing new. For years, the company has failed to deliver the number of cars and failed to sign up the number of dealerships necessary to succeed. Several referred to Kandi’s U.S. efforts as “smoke and mirrors” and openly speculated that it could be a strategy to lift its stock price.
Kandi “Launched” in the U.S. in 2008. Its First Batch of Cars Were Seized by U.S. Customs After Being Imported Illegally. The Launch Failed
New investors in Kandi may not realize that the company has attempted to launch in the U.S. multiple times over the past 12 years. Each attempt has sputtered.
Kandi began seeking to expand its presence to the U.S. as early as 2006. [Pg. 4] By late 2008/early 2009, the company introduced the “Coco” to the U.S. market, a golf cart-like vehicle that could reach maximum speeds of about 25 mph, but was intended for street use.
One major problem emerged: the initial vehicles had been imported illegally. Customs officials identified that Kandi and its distributor had misclassified the vehicles as ATVs. The EPA intervened, fined Kandi $40,000, and ordered the company to destroy or export the vehicles back out of the country.
The company eventually sorted out the problem and, in 2008, a smattering of U.S. dealerships attempted to sell the car, as shown in this example video:
Federal and state tax credits made the car as cheap as $865 for Oklahoma residents. (Joe Exotic from the popular Netflix series Tiger King, an Oklahoma resident, purchased a Coco.) But the company eventually stopped reporting sales of the Coco after 2012 and the car quietly disappeared from the market.
We Asked Kandi’s 2008 U.S. Distribution Partner About the Vehicles: “They Didn’t Run, Every Single One Broke”
To learn what happened with the company’s original U.S. launch, we spoke with a founding partner of Kandi’s U.S. importer and distributor for its 2008 Coco release.:
“We brought in our first 200 vehicles and had nothing but problems. They didn’t run, every single one broke…The prototype was excellent but when they started shipping these vehicles nothing but problems. Engines weren’t working, batteries were burning up.”
“I had three big distributors that took in the first allotment of cars. I had them set up to buy 2,000 vehicles in the first year from Kandi. We had the documentation but from what I understood they forged it, they faked it……Customs got them and said if you don’t get these cars out of the US then you’re going to be fined and they will be destroyed.”
We asked how many of Kandi’s cars had issues when they finally made it into the country:
“Every single one…I’m a salesman and I was running round the country like a mechanic. I was flying all around the country trying to fix these things and it just got to the point ‘I’m out, I can’t do this anymore… I left because I the whole process was horrible, too secretive, a lot of side deals I didn’t know about. I said you guys handle it, I’m out.”
Kandi Tried to Launch U.S. Operations Again in 2018, But Plans Were Delayed
After the failure of the “Coco”, Kandi planned another U.S. launch in 2018.
Kandi bought a U.S. company in early 2018 known for sales of ATVs and recreational vehicles, then renamed it Kandi America. In June 2018, Kandi formally announced its expansion into the U.S. market, starting with 3 prototype vehicles. (A Model K22 and 2 Model EX3s.)
In August, Kandi held a launch event to showcase its cars to dealers in the hopes of developing a distribution network. We spoke with a former employee who worked for the company at the time, who told us:
“They had a press release at a hotel in Frisco and they set up the cars in a nice display room and Chamber of Commerce folks from Garland came and there was all this big to-do. And I thought great it’s going to happen. But from that point, no cars and no nothing. Nothing ever showed up and nothing ever happened”.
We asked if any dealers signed up:
“No not to my knowledge. To my knowledge we never had anybody to invest and go forward with that. And luckily so, because they still wouldn’t have any vehicles to sell.”
On a conference call at the time, Kandi’s Chairman/CEO had alluded to U.S. sales kicking off near the end of 2018, but that didn’t pan out.
Kandi Tried a U.S. Launch Again in 2019, But Those Plans Were Again Delayed
In January 2019, Kandi’s Chairman/CEO told Bloomberg in an interview that the company planned to ship cars to the U.S. that year.
In February 2019, Kandi announced the National Highway Traffic Safety Administration (“NHTSA”) had “approved” its two electric vehicle models, claiming:
“The NHTSA approval is an assurance that Kandi’s two EV models conform to NHTSA standards and are registered in the U.S.”
The stock soared over 40% on news of the government approval. Yet, despite the claims, we found that the NHTSA doesn’t actually approve cars. Instead, manufacturers self-certify. Per the NHTSA spokesperson we contacted (emphasis added):
“By Federal law all vehicles sold in the U.S. must be certified by the manufacturer as meeting all applicable Federal Motor Vehicle Safety Standards (FMVSS). NHTSA does not certify vehicles prior to sale – doing so is the manufacturer’s responsibility..”
In either case, investors likely expected the news would lead to an imminent U.S. sales ramp. That didn’t happen.
Kandi’s Latest 2020 U.S. Launch Efforts Appear to Be Delayed
Former Kandi America Employee: “If You Never Produce the Product Then It’s Just Smoke And Mirrors…”.
In July 2020, Kandi once again announced the “formal launch” of its vehicles in the U.S., and held a virtual launch event in August to re-introduce the cars.
So far, several reviewers have tested the cars, and several dozen vehicles are sitting in the company’s Texas lot. The company received EPA certification for its vehicles this month, clearing the path to potentially sell vehicles.
Kandi targeted deliveries by year-end, but the company now expects to begin deliveries in early 2021, according to a recent reviewer that spoke with the company.
The company seems to be struggling to find dealer distributors. A November 23, 2020, Barron’s article identified only one authorized Kandi EV dealer, a Denver pharmacist who approached the company about purchasing an EV and then decided he wanted to invest $30,000 to open his own dealership.
We spoke with a former employee this month who keeps in touch with Kandi. They described how the company has continuously struggled to bring in enough cars and to find dealers to sell them:
“I was talking to a gentleman there (at Kandi America) the other day and he said ‘still trying to get the cars here’…what’s crazy is we’re almost in 2021 and I was there in 2017, waiting and waiting and we’re still waiting and still in exact same holding pattern…
“…if you never produce the product then it’s just smoke and mirrors as far as I’m concerned.”
Kandi’s Chairman/CEO Expressed Uncertainty on Its U.S. Launch “The U.S. Market Is Not Familiar with Our Products”
Kandi is Recognized in China However, and Has a Reputation for Poor Quality
Kandi’s own Chairman/CEO didn’t seem to have much confidence in the reception of its cars in the U.S. market, expressing uncertainty in a recent Barron’s interview:
“We are not very certain about it,” he says. “The U.S. market is not familiar with our products.”
Domestically in China, Kandi is somewhat known, but not for the right reasons.
Multiple Chinese media outlets reported that historical customers had batteries fail after mere days, while other customers complained that the company refused to honor warranties after various product failures. [1,2,3,4]
Two Years Ago, Angry Kandi Customers Held a Protest at Kandi’s Headquarters, Complaining About Shoddy Vehicles and the Company’s Failure to Honor Its Service Warranties
A December 2018 news article reported that more than 10 buyers of Kandi’s EVs held a protest at its headquarters in Hangzhou because Kandi refused to provide after-sales service, despite having warranties.
Protesters brought banners to Kandi’s headquarters, which read:
“The quality of Kandi EVs is severely below standard, Kandi cheated the government for subsidies and defrauded customers; we want our rights exerted, the manufacturer [Kandi] needs to take responsibility for after-sales service”.
(Pictured: Angry Chinese Kandi consumers protesting the company’s poor quality products and failure to honor warranties at Kandi’s China headquarters. Source)
We believe this may be one reason why the company has reported no domestic auto sales in China in the past several years.
Despite the Lack of Vehicle Sales to U.S. Customers, Kandi Appears to Be Booking Sales of Its U.S. Vehicles Through an Undisclosed Related Party Anyway
Oddly, the company appears to be booking sales from its auto exports to the U.S. despite acknowledging that sales to U.S. customers have not yet begun. [Pg. 16]
Kandi has reported $878,000 in EV Product (i.e. vehicle) sales since Q4 2018, all of which have been exports from the company’s Hainan factory, per Kandi’s SEC filings. [Pg. 24, Pg. 32, Pg. 28, Pg. 22]
The company has not announced entering any new markets aside from the U.S., so we can presume that all of the export sales are to the U.S. So how is the company booking years of revenue from sales that haven’t happened?
Normally, companies that manufacture products will ship the products to its foreign subsidiary then sell the products to end users. Not the case with Kandi apparently.
We checked import records through ImportGenius and found that Kandi’s Hainan factory has been shipping cars to Massimo Motor Sports LLC. This same entity turned up in the section above about Kandi’s undisclosed related-party customer relationships.
(Source: ImportGenius)
As a reminder, Massimo Motor Sports is based out of the Kandi USA headquarters in Texas and is owned by David (Jianxun) Shan, a founder and current manager of Kandi’s U.S. subsidiary.
In sum, Kandi appears to be booking illegitimate U.S. sales to an undisclosed related party before formal U.S. customer sales have even begun.
Part IV: Kandi’s Rideshare and Battery Swap Initiatives
In addition to Kandi’s much-anticipated U.S. launch, the company has repeatedly touted plans to (a) sell up to 300,000 vehicles domestically through a rideshare partner; and (b) roll out domestic quick battery swap stations to make EV charging fast and efficient.
Investors have viewed both endeavors with excitement, but a quick review shows both ventures are either devoid of substance or hopelessly behind competitors.
Kandi’s Rideshare Partner Ruibo Has Virtually No Presence in a Market Already Dominated by Didi And Other Rideshare Apps
In January 2019, Kandi announced an agreement to join forces with rideshare company Ruibo to deliver 300,000 cars to the Chinese rideshare market in 5 years.
The company has repeatedly indicated that it may deliver hundreds of thousands of EVs to the venture in the coming years, an exciting prospect for investors. (1,2,3,4)
Progress has been slow. Kandi formally established the rideshare joint venture with Ruibo in October of this year.
China’s rideshare market is huge, but much like the U.S., it is controlled by top players. In the U.S., the market is dominated by Uber and Lyft. In China, ~90% of the market by revenue is dominated by Didi, (1,2) with the next closest competitor commanding only about 4%.
Kandi has chosen to partner with Ruibo, a company that doesn’t even appear on lists of the top 77 or top 50 rideshare apps in China.
On China’s most popular app stores like Huawei and Xiaomi we see that Ruibo’s downloads barely even register.[4]
We had a local consultant test Ruibo in major cities Beijing, Hangzhou, Jinhua and Xiamen. The app failed to find a driver each time. Here is a video of our investigator attempting (and failing) to hail a ride in Hangzhou, where Ruibo is headquartered, during normal daytime hours.
(Pictured: One of multiple Ruibo ride requests in Hangzhou that failed. Click for brief video)
We reached out to customer service for help. The rep suggested we try to hail a ride through a separate app called Gaode Maps, which is an aggregator of multiple platforms (i.e. Didi, Ruibo, and other rideshare apps). In other words, they suggested we use a competitor.
We followed up by asking if the platform had really been launched yet and received no reply.
On Kandi’s most recent Q3 2020 investor call, CFO Alan Lim was asked about the 300,000 rideshare vehicle estimate and essentially walked the claim back, referring to the number as really just a conceptual goal:
“(It) is rather an idea of the program but not entirely or necessarily means that there will for sure put 300,000 EVs to the market. So how many EVs will be supplied to the market at the end of the program? We are not 100% sure. But the so-called 300,000 is sort of like a slogan or an idea.”
We conclude that Ruibo is mostly vaporware, with slim to no shot at competing in China’s intensely competitive rideshare market.
Kandi’s Battery Swap Program Is Well Behind Competitors Such As Nio, BJEV, And Even Its Own Partner Geely
China’s domestic electric vehicle industry has heavily invested in battery swap stations in order to minimize charging wait times. Major EV manufacturers that dwarf Kandi in size and scale are well along the path.
Manufacturer NIO, for example, has already completed its one millionth battery swap and had – at the end of last year – swap stations in 51 cities, including Beijing, Shanghai and Guangzhou.
Manufacturer BJEV has also secured a broad footprint with 160 stations across the nation. Alibaba backed Xpeng Motors launched a battery leasing service in September 2020. Kandi’s partner Geely also has a competing service, having launched its first battery swap station in October 2020 with plans to expand aggressively.
Kandi has thrust itself into this competitive part of the market as well. In January 2018, Kandi acquired battery swap technology company Jinhua An Kao (“An Kao”) for approximately $4 million in cash and ~2.96 million shares (valued at $20.7 million at the time). Currently the company has one pilot charging station.
Kandi Lacks Enough Vehicles on the Road for a Battery Swap Program to Make Sense
As detailed above, Kandi has reported no domestic sales of EVs in the past several years outside of its minority stake in an affiliate entity with Geely.
The company is manufacturing model K23s in its Hainan facility for inventory, though until recently it lacked a sales certificate to be able to sell the cars itself, according to former employees we interviewed.
Despite a lack of cars on the road needing battery swaps, Kandi announced on November 2, 2020, that it aims to list its battery swap subsidiary on Shanghai’s STAR Exchange and it has already engaged CITIC to help it IPO. We do not envision this being a successful endeavor.
THEY KNEW IT ...
While KNDI (KNDI) appears quite cheap at 1.5x 2020 sales, I am quite skeptical about the company’s future. Both the Coronavirus and the decline in the oil price are not great for the stock. The company has not clearly stated it in the last annual report. Besides, the way KNDI presents its net income figure does not look good to me. Adding the most recent debt conversion and sale of assets, KNDI is not a buy, but may be a short.
Kandi Technologies And The Most Recent Sales Report
Kandi Technologies designs, manufactures and commercializes electric vehicle products (“EV”) in China.
I know that American investors are sometimes skeptical about financial figures communicated by the Chinese companies. While I understand their concerns, analysts should continue to assess the numbers released by Chinese companies. In 2019, the company’s most relevant products were EV parts, which represented 81% of the total amount of sales. Besides, 81% of the total sales originated from China. As mentioned in the last annual report, I appreciate that the amount of sales from one of the company’s affiliate companies was reduced to 11.7% of the revenue. With that, I encourage investors to review the amount of sales from affiliated companies. We don’t know Kandi’s influence over these parties. Remark that in 2018, the total amount of sales from an affiliate was equal to 43%.
With regards to the bottom line, investors need to be very careful. The company included two non-recurring items; the gain from equity dilution in the affiliate company and gain from equity sale. Including these two items, we get a net loss of -$7.18 million. However, if we don’t take into account these gains, I get a net loss of approximately -$31 million. It is a bit worrying. As compared to 2019, net losses multiplied by more than 5x. In my view, the fact that Kandi did not want to show the net income without non-recurring items makes it even worse.
Let’s understand a bit more the non-recurring items. It may give us information on the current operations of Kandi. As shown in the text below, the company is converting debt into equity. Shareholders will most likely not appreciate it. The larger the amount of shares, the less significant the intrinsic valuation of the shares.
“Gain from equity dilution was $4,263,764 for the year ended December 31, 2019, which was primarily due to gain from the March Affiliate Loan to Equity Conversion. Pursuant to the Transfer Agreement, the Affiliate Company converted a loan of RMB 314 million from Geely Group last year to equity in order to increase its cash flow. As a result, our equity interests in the Affiliate Company decreased to 43.47% in March, 2019.” Source: 10-k
Also, the sale of equity is worrying. Kandi sold 21.47% stake of one of its affiliate companies. With the company converting debt and selling assets, investors may believe that the company is not growing as it used to do:
“Gain from equity sale was $20,438,986 for the year ended December 31, 2019, which was due to the Affiliate Equity Transfer. In March, 2019, Kandi Vehicles agreed to sell 21.47% of its equity interests in the Affiliate Company to Geely for a total amount of RMB 516 million (approximately $72.3 million).” Source: 10-k
The Government And The Price Of Oil
After the coronavirus, I would expect the Chinese government to continue investing in pure electric vehicles. Notice that the Chinese government confirmed in a recent communication that the promotion of the automobile consumption will continue in 2020:
“On March 31, 2020, in order to promote automobile consumption, the executive meeting of the State Council decided to extend two preferential policies of new energy vehicle purchase subsidy and vehicle purchase tax exemption for another two years, which were originally due at the end 2020.” Source: 10-k
Besides, in the last annual report, Kandi does appear to be very optimistic about the future of the EV industry. Have a look at the following text. The company expects the EV market to increase in 2020. Also, please remark that the annual report was published once the coronavirus crisis had hit China:
“We believe China is the most prospective market for pure electric vehicles. According to a government forecast, China’s new energy vehicle sales are projected to grow to 2.1 million units in 2020, and its penetration is expected to reach 7% by 2020. We also believe that in the global automobile industry, there is great development space for the Chinese electric vehicle and core parts industry in the future.” Source: 10-k
What’s my opinion about this information? I don’t know whether the company and the Chinese Government got to know what happened to the oil price in April. In my view, with the oil price at its minimum level, I doubt that any market related to the energy industry will flourish.
Besides, the Chinese government may continue to invest. However, if there is no demand at all for such types of vehicles, I wonder whether politicians will decrease the amount of investment. Finally, in this regard, let’s point out that the annual report does not say anything about the most recent collapse in the price of oil. Should the company mention that the decline may diminish the amount of EV sales?
A Few Customers Account For A Significant Amount Of Shares
There is another risk that we need to point out. Kandi Technologies does not only finance its operations through government funds. In 2019, three customers represented 51%, 15% and 12% of the total amount of sales. This is a serious issue. If one of the clients or the government decides not to buy Kandi´s EV products, the decline in sales could be quite significant. On top of it, the trade receivable account also shows a significant customer concentration. Again, if one of the clients decides not to pay, the company’s net income could be drastically diminished.
The Balance Sheet Looks Solid
The current state of the balance sheet does not seem worrying. As of December 31, 2019, the company reported cash and restricted cash of $16 million, which is below the total amount of accounts payable of $72 million. It means that the company may have a liquidity issue. However, I don’t see a lot of debt. Loans, notes payable and bank loans are equal to $64 million. Kandi could easily obtain debt if it is required.
As per the last annual report, I am assuming 52.3 million shares outstanding. At $3.97, the market capitalization equals $207 million. If we add debt of $64 million and take into account cash of $16 million, the enterprise value equals $255 million. 2019 sales were $135 million with 20% revenue growth. Let’s assume the same revenue growth for 2020, so I obtain sales of $162 million. Hence, the EV/Forward Sales is equal to 1.5x. It looks extremely cheap, which makes me wonder whether the market believes the company’s financials. I am a bit skeptical.
Kandi Technologies And The Coronavirus – It Is A Risk
KNDI offered a bit of information with regards to the coronavirus. The company expects the automobile industry to return to the track. In my view, KNDI has not explained very well that the Coronavirus may create one of the most serious crises in the last one hundred years. In my opinion, it is a bit naive thinking that China will not suffer from a global financial crisis.
“COVID-19 has had a significant impact on the global economy and many industries, including the automobile and parts industry. However, as the outbreak in China has been gradually managed under control, the automobile and parts industry has also begun to resume productions. Stimulated by the various preferential policies of the Chinese government to promote economic development, we believe the automobile and its parts industry will return onto the track for the next development.” Source: 10-k
Kandi Disclosed That Short Sellers May Attack The Company
It’s interesting that KNDI has warned about short sellers in the last 10-k. Why would a short seller publish negative opinions about the company? If KNDI’s business model grows as the company expects, I would not expect a lot of short sellers.
“Techniques employed by manipulative short sellers in Chinese small cap stocks may drive down the market price of our common stock. As it is therefore in the short seller’s best interests for the price of the stock to decline, many short sellers publish, or arrange for the publication of, negative opinions or reports regarding the relevant issuer and its business prospects in order to create negative market momentum and generate profits for themselves after selling a stock short.” Source: 10-k
Conclusion
KNDI is trading very cheap at 1.5x 2020 sales. However, I don’t think that investors should buy the stock. I doubt that the company’s future sales will not be impacted by the decline in crude oil. In fact, I have not seen the decline in share price when the oil price declined. Also, I dislike that the company provides a net income figure including non-recurring items. Finally, the recent debt conversion and sale of assets do not look great. I would not short sell the stock, but I may understand those who do so.
NIO Is Not Investing Enough In Marketing - ARTICLE FROM SMR
With the recent stock dilution generated by NIO, I believe that we need to explain what’s going on. Recently, NIO decided to sell shares because other EV manufacturers sold the shares. I don’t think the company needs new financing. That’s not all. The company has no plan to invest the new dollars in marketing. Instead, it will use the proceeds to finance its research and development activities. I don’t see why the company does not invest in marketing. Shareholders expecting massive sales in the near future will not be happy. Without marketing efforts, sales never increase.
The Sale Of Equity At $39 Per Share
In December 2020, the company announced the sale of $2.7 billion in equity. Many other electric vehicle manufacturers like Tesla (TSLA), Xpev (XPEV), or Li Auto (LI) announced similar transactions. I believe that NIO did not really need the money. But, it of course looks like a good time to sell shares. It is easy for the management to explain a sale of equity when everybody else in the industry is selling shares.
Taking into account the sale of equity, I believe that retail investors need to understand what may happen next. Most analysts out there don’t talk about NIO’s dilution risk. Learn the following concept. NIO may become a profitable EV seller. However, if the company sells too many shares, you will never see an increase in the share price. To sum up, shareholders may not make a penny if NIO continues to issue shares.
Let’s understand the total amount of shares outstanding. In 2018 and 2019, the share count was below 1 billion shares. The company has not really issued new shares. Instead, when the management needed money to increase production, it signed deals with the Government of China.
Under the Hefei Investment Agreement, the Hefei Strategic Investors agreed to invest an aggregate of RMB7 billion in cash into NIO China. We agreed to inject our core businesses and assets in China, including vehicle research and development, supply chain, sales and services and NIO Power, or together as the Asset Consideration, into NIO China. The Asset Consideration is valued at RMB17.77 billion, as calculated based on 85% of the market value of our company (calculated based on our average ADS trading price over the thirty public trading days preceding April 21, 2020). Further, we agreed to invest RMB4.26 billion in cash into NIO China. Pursuant to the Hefei Shareholders Agreement, upon the completion of the investments, we will hold 75.885% of controlling equity interests in NIO China, and the Hefei Strategic Investors will collectively hold the remaining 24.115%. Source: Prospectus
In 2020, things started to change. With many retail investors buying shares of the company, NIO decided to sell shares at an extremely fast pace. In 2020, the share count went from less than 1 billion to more than 1.4 billion, which represents an increase of more than 40%. Clearly, there is some demand for the shares because the share price did not decline. With that, I wonder when investors will understand the massive creation of equity.
In addition, our future capital needs and other business reasons could require us to issue additional equity or debt securities or obtain a credit facility. The sale of additional equity or equity-linked securities could dilute our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations or our ability to pay dividends to our shareholders. Source: Prospectus
The Use Of Proceeds: More Research And Development
The company expects to use 60% of the money raised for research and development. It is quite frustrating. The company commenced its operations in 2014. It has used a significant amount of dollars in R&D. It has not sold a significant amount of cars. Its 2020 sales will be less than $2 billion. I don’t really understand why it doesn’t commence to make massive expenses in marketing. Research and development is always interesting. However, at some point, shareholders and investors want to make money. I see that the management does not seem very interested in generating dollars for investors.
(i) Approximately 60% for research and development of new products and next generations of autonomous driving technologies; (ii)approximately 30% for sales and service network expansion and market penetration; and (iii) the remaining 10% for general corporate purposes.
Conclusion
First of all, I don’t really understand why NIO sells equity. The company received a significant amount of money from the Government of China. It did not need that massive amount of cash. Besides, I dislike the fact that NIO expects to use the money for research and development. Shareholders will soon understand that the company does not really want to sell cars. It only wants to do research and development. I would ask the management to explain why the marketing expenditure is that low. Without marketing expenditures, the company will never report a decent amount of revenue. To sum up, many things need to change inside NIO.
Shorts Target Electric Vehicle Stock NIO
http://stockmarketrevolution.com/archives/15065
Shorts Target Electric Vehicle Stock NIO
It is not a secret that in the last a few months, NIO’s short interest increased a lot. Most traders will be wondering why a growth stock like NIO receives that amount of attention from short sellers. I do believe that Citron’s comment on the stock explains the current amount of short interest. However, that’s not all. I carefully studied the company’s estimates and financials. In my opinion, the risks noted by Citron are no more than market rumours.
Total Amount Of Assets, Cash And Total Market Capitalization
In the last annual report, NIO reported cash in hand of $2.8 billion and total assets of $5 billion. The current amount of property, plant and equipment is equal to $0.75 billion. These assets are quite small as compared to the total market capitalization of $65-$71 billion. Most analysts may claim that the company expects to report a significant amount of sales and cash flow in the future. That’s correct. However, nobody seems to understand that NIO will need to raise capital. The company will soon need additional cash to finance its new factories. Remember, if NIO has to sell additional shares, the share count will increase, which will lead to stock dilution. As a result, I would expect the share price to decrease.
The Market Expects A Lot From NIO
At the end of the year, NIO expects to produce 48k-50k. The company sells most of its cars at $50k-$60k. It means that the company will be making close to $2.6 billion in sales by the end of the year. With a market capitalization of $65-$71 billion, the market is expecting the company to deliver many more cars in the future. We are talking about a Market Cap/Sales ratio of more than 25x, which is extremely high. I admire the confidence given by market analysts. However, there are many things that may go wrong. If you really want to buy shares at the current price, first read the following risks disclosed by the company:
We have limited experience to date in high volume manufacturing of our electric vehicles. We cannot assure you that we will be able to develop efficient, automated, cost-efficient manufacturing capability and processes, and reliable sources of component supply that will enable us to meet the quality, price, engineering, design and production standards, as well as the production volumes required to successfully mass market the ES8, the ES6, the EC6 and future vehicles.
Chinese Accounting: Kandi (KNDI) and Luckin Coffee Inc. (LKNCY)
Many companies from China were accused of fraud from 2014 to 2016. As a result, many investors are currently reluctant to buy shares of the companies from China. That’s not all. Very recently, other companies like KNDI or LKNCY were accused by short sellers. Their share price suffered massive declines:
Kandi: How This China-Based NASDAQ-Listed Company Used Fake Sales, EV Hype to Nab $160 Million From U.S. Investors Source: Hindenburg Research
Muddy Waters published an anonymous short report on Luckin Coffee, leading to major sell-off on the stock. Source: SA
NIO is more serious than KNDI and LKNCY. However, if investors start to be afraid of the accounting standards in China, NIO’s share price may decline too. It is sad that a few companies have destroyed the reputation of China.
If You Are A Shareholder Of NIO, The Government Of China Is Your Partner.
There is another clear risk about NIO that shareholders need to know. The Government of China finances the company’s operations. There are clear risks when you have to deal with politicians and governments. Most investors would be afraid of China not financing NIO’s operations any more. As a result, I would expect the share price to decline. But, that’s not all. According to documents provided by NIO, if the state of China incurs in operating losses, the company will have to pay some money. I don’t think most NIO shareholders know this:
We have entered into an arrangement with Jianghuai Automobile Group Co., Ltd., or JAC, for manufacturing the ES8 for five years starting from 2018.
JAC is a major state-owned automobile manufacturer in China and it constructed such Hefei manufacturing plant for the production of the ES8 (with a modified production line for the ES6) and potentially other future vehicles with us. Pursuant to our arrangement with JAC with respect to the ES8, ES6 and EC6, we pay JAC for each vehicle produced on a per-vehicle basis monthly for the first three years.
In addition, for the first 36 months after the start of production, which commenced on April 10, 2018, to the extent the Hefei manufacturing plant incurs any operating losses, we have agreed to compensate JAC for such operating losses.
My Take
I still remember the time when we could buy NIO’s shares at $17. NIO represented a fantastic opportunity for investors in the United States. Right now, the share price is at more than $45, and many short sellers are targeting both NIO and other stocks from China. In my opinion, there are clear risks for shareholders. Notice that the amount of cash and assets appear to be very small as compared to the total market capitalization. In addition, the state of China is actually your partner if you are a NIO’s shareholder. Most investors will not be interested to be engaged in businesses with governments like China. To sum up, I like the business model of NIO, but I also see a significant number of risks. Be careful!
Short NIO Now!
http://stockmarketrevolution.com/archives/15127
NIO Is Not Investing Enough In Marketing
With the recent stock dilution generated by NIO, I believe that we need to explain what’s going on. Recently, NIO decided to sell shares because other EV manufacturers sold the shares. I don’t think the company needs new financing. That’s not all. The company has no plan to invest the new dollars in marketing. Instead, it will use the proceeds to finance its research and development activities. I don’t see why the company does not invest in marketing. Shareholders expecting massive sales in the near future will not be happy. Without marketing efforts, sales never increase.
The Sale Of Equity At $39 Per Share
In December 2020, the company announced the sale of $2.7 billion in equity. Many other electric vehicle manufacturers like Tesla (TSLA), Xpev (XPEV), or Li Auto (LI) announced similar transactions. I believe that NIO did not really need the money. But, it of course looks like a good time to sell shares. It is easy for the management to explain a sale of equity when everybody else in the industry is selling shares.
Taking into account the sale of equity, I believe that retail investors need to understand what may happen next. Most analysts out there don’t talk about NIO’s dilution risk. Learn the following concept. NIO may become a profitable EV seller. However, if the company sells too many shares, you will never see an increase in the share price. To sum up, shareholders may not make a penny if NIO continues to issue shares.
Let’s understand the total amount of shares outstanding. In 2018 and 2019, the share count was below 1 billion shares. The company has not really issued new shares. Instead, when the management needed money to increase production, it signed deals with the Government of China.
Under the Hefei Investment Agreement, the Hefei Strategic Investors agreed to invest an aggregate of RMB7 billion in cash into NIO China. We agreed to inject our core businesses and assets in China, including vehicle research and development, supply chain, sales and services and NIO Power, or together as the Asset Consideration, into NIO China. The Asset Consideration is valued at RMB17.77 billion, as calculated based on 85% of the market value of our company (calculated based on our average ADS trading price over the thirty public trading days preceding April 21, 2020). Further, we agreed to invest RMB4.26 billion in cash into NIO China. Pursuant to the Hefei Shareholders Agreement, upon the completion of the investments, we will hold 75.885% of controlling equity interests in NIO China, and the Hefei Strategic Investors will collectively hold the remaining 24.115%. Source: Prospectus
In 2020, things started to change. With many retail investors buying shares of the company, NIO decided to sell shares at an extremely fast pace. In 2020, the share count went from less than 1 billion to more than 1.4 billion, which represents an increase of more than 40%. Clearly, there is some demand for the shares because the share price did not decline. With that, I wonder when investors will understand the massive creation of equity.
In addition, our future capital needs and other business reasons could require us to issue additional equity or debt securities or obtain a credit facility. The sale of additional equity or equity-linked securities could dilute our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations or our ability to pay dividends to our shareholders. Source: Prospectus
The Use Of Proceeds: More Research And Development
The company expects to use 60% of the money raised for research and development. It is quite frustrating. The company commenced its operations in 2014. It has used a significant amount of dollars in R&D. It has not sold a significant amount of cars. Its 2020 sales will be less than $2 billion. I don’t really understand why it doesn’t commence to make massive expenses in marketing. Research and development is always interesting. However, at some point, shareholders and investors want to make money. I see that the management does not seem very interested in generating dollars for investors.
(i) Approximately 60% for research and development of new products and next generations of autonomous driving technologies; (ii)approximately 30% for sales and service network expansion and market penetration; and (iii) the remaining 10% for general corporate purposes.
Conclusion
First of all, I don’t really understand why NIO sells equity. The company received a significant amount of money from the Government of China. It did not need that massive amount of cash. Besides, I dislike the fact that NIO expects to use the money for research and development. Shareholders will soon understand that the company does not really want to sell cars. It only wants to do research and development. I would ask the management to explain why the marketing expenditure is that low. Without marketing expenditures, the company will never report a decent amount of revenue. To sum up, many things need to change inside NIO.
Disclosure: We don’t hold NIO Shares