Short Kandi - Raised Bet Or A Lonely Game?

|
 |  About: Kandi Technologies Group, Inc. (KNDI)
by: Gerald Klein

Summary

Kandi short interest reaches another new high, 26% of the float now short.

Average daily volume continues to decline.

Company and market developments portend sharp revenue growth.

A short squeeze likely.

"I'm afraid sometimes you'll play lonely games too,
games you can't win because you'll play against you."
- Dr. Seuss

As promised, following up on my Seeking Alpha article published last week, "Short Kandi - A Misplaced Bet" detailing the case for a possible short squeeze. The short interest reported this week for the settlement date of June 13, 2014 increases the likelihood of a short squeeze.

Recapping the fundamentals, Kandi Technologies Group, Inc. is a Nasdaq-listed (NASDAQ:KNDI) China-based leader in Pure Electric Vehicle (EV) technology and production.

KNDI is rolling out an intra-city EV transportation system, resolving the issues of range anxiety, ownership, insurance, battery charging, environmental disposition, and parking or garaging - its Public EV sharing system.

Last month, in the Company's announcement of its first-quarter results ending March 31, 2014, KNDI reported an increase in first-quarter revenues of 174% year-over-year. More importantly, combined electric vehicle sales increased to $33.4 million from $1.7 million year-over-year, an increase of 1,865%. KNDI has now reported two consecutive quarters of revenues over $40 million ($50.5 million for Q4 of 2013 and $40.2 million for Q1 of 2014). Revenues for all of 2013 were $94.5 million. KNDI's first quarter has always been its slowest quarter of the year, so one could easily speculate Kandi could achieve revenues of $200 to $300 million for all of 2014, assuming accelerating EV sales.

Short interest at June 13 (a Friday 13, no less), was reported at 6,670,156, or a 5.87% increase, with days to cover now standing at 7.06. What I consider more revealing is average daily share volume declined to 944,397 shares, a 32% decline from the May 30 settlement date.

I believe the declining average daily share volume is the very beginning of the revelation. Consider this, since June 5, 2013, KNDI's trading volume has been a statistical anomaly - and for those statisticians reading this, I realize "statistical anomaly" is a mild understatement.

From its first day of trading on August 27, 2007 until June 4, 2013, KNDI traded roughly 117,000 shares a day, with a "generous" float during that period of approximately 19 million shares. The short interest at the time was about 700,000 shares. On June 5, 2013, KNDI traded 18 million shares, almost the entire float. From August 27, 2007 through June 4, 2013, KNDI traded a total of 170,077,133 shares, or average daily trading volume of 117,133 shares for the 1,719 trading days during that period. From June 5, 2013 through June 24, 2014, KNDI has traded 606,117,687 shares, or average daily trading volume of 2,270,104 for the past 267 trading days.

Granted, during the past 267 trading days, the float has increased to 25.5 million shares, or about a 34% increase. Meanwhile, the average daily trading volume has increased 1,838% - a statistical anomaly, but only to the untrained eye.

During the past 267 trading days, KNDI appeared on the SEC Reg SHO Threshold list during two different periods, first for ten days from September 11, 2013 through September 24, 2013, and then again for eight days from November 20, 2013 through November 30, 2013. The purpose of the Reg SHO Threshold list is to reveal abusive naked short selling, otherwise known as counterfeiting shares.

As defined in Rule 203(c)(6) of Regulation SHO, a "threshold security" is any equity security of any issuer that is registered under Section 12 of the Exchange Act, or that is required to file reports under Section 15(d) of the Exchange Act, and KNDI is a reporting company under Section 15(d), where, for five consecutive settlement days, there are aggregate fails to deliver at a registered clearing agency of 10,000 shares or more per security; the level of fails is equal to at least one-half of one percent of the issuer's shares outstanding (approximately 185,000 shares, since KNDI had about 37 million shares outstanding during the periods in the preceding paragraph); and, the security is included on a list published by a self-regulatory organization (the securities industry is essentially a self-regulating organization).

The important point above is that the Reg SHO Threshold list is triggered after failing to deliver the required securities after five consecutive days. Having appeared on the Reg SHO Threshold list a total of eighteen days beginning September 11, 2013, we know KNDI shares have been counterfeited. One might wonder how many consecutive four-day periods have occurred where the required securities failed to be delivered. Or even three days, two days, one day?

I ponder the question because, despite a series of negative hit pieces triggered by a dubious "hurry" sell recommendation on March 31, 2014 by a noted celebrity commentator, and the short interest increasing 2,462,853 or 59% since then, KNDI has experienced higher lows since bottoming out at $10.70 on April 28, 2014.

The volume since June 5, 2013 has been... right, a statistical anomaly. Considering all the private placements and warrants since that date, 1% of the float changing hands in a day would be about 260,000 shares - (the historical market average is 1%), 2% would be about 500,000 shares per day. We are now settling at about 4% of the float trading per day, which is at a low for KNDI since June 5, 2013.

With all the volume, two tours on the Reg SHO Threshold list, increasing the short percentage to 26% of the float, and a "hurry" sell recommendation accompanied by a parade of hit pieces, why is KNDI still trading at higher lows?

What Now?

Let's try this. How about if we return to pre-June 5, 2013 average daily trading volume of 117,000 shares, with a float of about 19 million shares. With a 25.5 million float today, that would equate to an average daily trading volume of about 157,000 shares - and days to cover of about 42 days...

The $300 million mixed shelf registration filed June 20, 2014 should quiet any questions about the SEC investigation. Prestigious New York law firms do not undertake filing a registration statement on behalf of a client under a dark cloud of an SEC investigation. And you do not file a $300 million mixed shelf registration unless the future portends positive fundamental developments.

The Company's announcement today about the continuing development of the Hangzhou car share project bodes well for the remainder of 2014 and for 2015. The real catalyst remains the EV subsidies, which should be forthcoming any day now.

So... are we looking at a raised bet or a lonely game?

Disclosure: The author is long KNDI. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.