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Kandi Technologies, Corp. (NASDAQ:KNDI) is located in the People's Republic of China ("PRC"). The company designs, develops, manufactures and commercializes all-terrain vehicles, go-carts, and specialized automobile related products for the PRC and global markets. We felt research on KNDI was warranted due in part to the entity that helped bring the company public - Winner International. Winner was the key financial middleman in the reverse mergers that turned Telestone (NASDAQ:TSTC), New Oriental Energy (OTCPK:NOEC) and Orsus Xelent (ORSX.pk) into publicly traded companies. The stocks of all three of those companies were decimated after allegations of deception in their business practices surfaced.

So as it goes, KNDI is the latest Chinese small cap RTO that the GeoTeam has discovered with curious transactions with undisclosed related parties that not only bring into question the nature of the transactions but the credibility of the company itself. Given this backdrop it is not surprising that KNDI makes the dubious portrayal of a bright future for its electric vehicle ("EV") business. The facts on the ground clearly indicate KNDI's EV business hasn't gotten off the ground and we question its viability.

The transactions we analyzed involved at least nine individuals with connections to KNDI and its Chairman, and seven different entities. The transactions all appeared to be planned well in advance and involved individuals who were senior executives of KNDI's management team either at the time of or shortly before the transactions were completed. When all was said and done two of the transactions resulted in the transfer of $20 million in cash and stock to individuals influenced or controlled by KNDI's chairman. The other transaction involved the sale of KNDI's import and export business to individuals who also had close ties to KNDI and its Chairman. It seems KNDI's Chairman prefers dealing with individuals he may know, influence or control. We highly doubt that any of the transactions we analyzed were negotiated on an arm's length basis.

Investors should take note of the fact that the referenced individuals controlled two entities that were party to the transactions. One of the entities became KNDI's largest supplier and the other one of its largest customers. The chain of events is suspicious given the related parties involved in the transactions, leading us to ponder whether they were possibly planned, structured, and staged in a manner intended to confuse regulators and investors attempting to perform due diligence on the company.

We evaluated three transactions made by KNDI after its reverse merger. For one, the 2008 acquisition of Kandi Special Vehicles Co., Ltd., the company falsely claimed that no material related party relationship was involved in the transaction. The company also failed to disclose related party relationships regarding the acquisition of Scrou in February 2012 and the disposition of Dingji in 2008. Details regarding the transactions we evaluated follow:

  • The acquisition of Kandi Special Vehicles Co., Ltd. ("KSV") in April 2008. KSV was owned by Lang Jianfeng and Hu Xintao, two gentlemen with connections to KNDI both before and since the transaction. KNDI claimed (incorrectly) that these two individuals had "no material relationship" with KNDI. The KSV acquisition had a curious set of circumstances that make it appear as if the transaction was planned and staged:
    • Six months before KNDI's reverse merger in 2007, KNDI's Chairman and vice president (Hu Xiaoming and Hu Wangyuan, father and son) owned 100% of Kandi Investment Group Co., Ltd. ("KIG"). For unknown reasons and apparently without consideration, the chairman transferred ownership of KIG to Lang Jianfeng and Hu Xintao on October 18, 2006.
    • Adding further intrigue, KNDI signed a letter of intent to acquire KSV with Lang Jianfeng and Hu Xintao in November 2007, only four months after KNDI's reverse merger and, remarkably, before KSV was formally established in March 2008. Almost immediately after KSV was established, KNDI disclosed the acquisition of the company for $12.3 million in April 2008. The transaction closed in June 2008.
    • KIG and KNDI have the same official address. We confirmed this by calling KNDI and verifying that Lang Jianfeng has or had an office in KNDI's facility and he is/was in charge of the company's SAIC and other corporate matters.
    • It should be noted that KIG owns 100% of another company called Zhejiang Mengdeli Electric Co., Ltd. ("ZEMC").
  • Acquisition of Scrou, a manufacturer of electric motors in February 2012 from shareholders of KO NGA for 2.3 million shares ($7,952,524) of KNDI. Scrou was spun off as a separate entity from ZMEC in November 2011 apparently to facilitate its sale to KNDI. ZMEC had been and still is 100% owned by KIG. As previously noted, KIG was owned by KNDI's chairman and vice president before he transferred ownership to Lang Jianfeng and Hu Xintao, the same gentlemen who formed KSV to facilitate the previously described $12.3 million acquisition of that company by KNDI. Furthermore, KNDI also discloses ZMEC as one of its largest suppliers. ZMEC is not only a supplier, it is also a competitor as the company manufactures the same products (ATV and go-carts) as KNDI and sells those products into the same markets.
  • The sale of KNDI's import/export business called Dingji in 2008 to Lu Erwa and Zhu Bilian, two individuals with close ties to KNDI. One was a former director of Kandi Vehicle; the primary operating entity of KNDI, before the reverse merger and the other is the supervisor of ZMEC. However, we found that Lu Erwa and Lang Jianfeng, rather than Zhu Bilian, really acquired Dingji three months before the disclosure by KNDI.

The relationship among these related entities and individuals can be summarized under this chart:

(click to enlarge)

"C" denotes current relationship (ownership, director or supervisor) between the person and the company .

"F" denotes former relationship (ownership, director or supervisor) between the person and the company .

Following is what we learned about the related companies that were party to and the key individuals who facilitated the KNDI transactions. We also discuss the current state of KNDI operations and provide recordings to support our findings.

I. Related Companies Involved In The KNDI Case

Zhejiang Kandi Vehicle Co., Ltd.

Zhejiang Kandi Vehicle CO., Ltd. ("Kandi Vehicle") is the primary operating entity of KNDI located in the Jinhua City Industrial Zone, Jinhua City, Zhejiang province. Information obtained from Kandi Vehicle's SAIC filing is enclosed as Exhibit A. Our Investigator visited Kandi Vehicle in August 2012. Based on conversations with several different Kandi Vehicle employees, there are around 450 employees at the facility. This finding is consistent with the 447 of employees reported by KNDI in its Form 10K filing at December 31, 2011.

The employees also confirmed that the main products of Kandi Vehicle are all terrain vehicles ("ATV"), go-carts, and electric vehicles ("EV") and that most ATV and go-carts are built for export. The employees further confirmed that Kandi Vehicle is promoting EV with the brand "Kandi" in China.

We found four production facilities on Kandi Vehicle's property. The facilities cover around 250 to 300 meters by 80 to 100 meters. There are also two seven-floor dormitories, a four-floor office building, and a two-floor activity building on the site. Pictures of the buildings of Kandi Vehicle follow:

(click to enlarge)

Kandi Investment Group Co., Ltd.

Kandi Investment Group Co., Ltd. ("KIG") was established on July 3, 2003 by father and son, Hu Xiaoming (83%) and Hu Wangyuan (17%). Hu Xiaoming currently controls KNDI. On December 28, 2006, six months before KNDI's reverse merger, Hu Xiaoming and Hu Wangyuan transferred ownership of KIG to Lang Jianfeng (83%) and Hu Xintao (17%). KIG's SAIC file is included with this report as Exhibit B.

Both before and after the transfer of KIG's ownership, Ling Li (following the last name of her mother, Ling Yueping, the daughter of Hu Xiaoming and sister of Hu Wangyuan) served as supervisors of KIG.

Examination of SAIC filings revealed that KIG shares the same registered address as Kandi Vehicle at Jinhua City Industrial Zone (industrial zone of Jinhua City development zone), Jinhua City, Zhejiang province. Our investigator called KNDI to confirm that Lang Jianfeng, the chairman of KIG has/had an office at KNDI's campus and is/was in charge of the company's SAIC matters. The recording of that conversation can be heard here. (Read transcript)

In April, 2012, Hu Wangyuan, the vice president of KNDI visited Huiyuan County apparently representing himself as the chairman of China Kandi Investment Group to make an investment (Bing translated) in an electric vehicle project.

KIG currently owns 100% of Zhejiang Mengdeli Electric Co., Ltd. ("ZMEC").

Zhejiang Mengdeli Electric Co., Ltd.

ZMEC is a Chinese company with its registered address at Huajie Industrial District, Huajie Town, Yongkang City, Zhejiang province.

ZMEC was 100% owned by KIG before September 10, 2008. On September 10, 2008, a group of 25 individual investors jointly owned 48.13% of ZMEC, while KIG owned the remaining 51.87%:

(click to enlarge)

On August 24, 2009, the group of 25 individual investors transferred 100% of their ZMEC ownership to a company called Changzhou Tianfa Donglizongcheng Zhizao Co., Ltd. ("Changzhou").

On June 1, 2010, Changzhou transferred 100% ownership of Mengdeli to a company called Yongkang K S Electric Co., Ltd. We also found that Yongkang K S Electric Co., Ltd. was established on May 25, 2010 by K S Asia Limited (Hong Kong), only five days before its acquisition of ZMEC.

On November 18, 2011, Scrou was spun off from ZMEC as an independent company. On February 9, 2012, Yongkang K S Electric Co., Ltd. transferred 100% ownership of ZMEC back to KIG. ZEMC's SAIC file is included with this report as Exhibit C.

Our investigator visited ZMEC in August 2012 and learned that ZMEC shares the site with another company called Kandi Door. There are several signs for "Kandi Door" (康迪门业) (KandiHome Door (康迪红门业) next to ZMEC's sign at the entrance of the building. There is also a clear sign reading "Kandi Group" (康迪集团), which indicates ZMEC and Kandi Door are associated with "Kandi Group" (康迪集团).

Our investigator spoke to some of ZMEC's employees. They said that ZMEC manufactures two-wheel scooters, all terrain vehicles (ATV) and go-carts. Our investigator also saw a small chalk board on the security gate that was being used to recruit 2 ATV inspectors.

ZMEC's SAIC file describes the company's business scope as follows:

"Electric Vehicle, ATV, off-road two wheel vehicle (except car and motor cycle), vehicle appliance, vehicle parts (except vehicle engine) hardware tool, scooter, Electronic shower, toy, toy motorboat, go-cart, exercise equipment and its parts development, manufacture, and sales."

In additional to the sign identifying Kandi Group at ZMEC's entrance, we found numerous online sources citing ZMEC as a subsidiary of Kandi Group, including the following:

  1. As a subsidiary of KIG, ZMEC executed an agreement with Huaiyuan County Government to invest in an electric scooter, electric vehicle, and golf cart production line in Huaiyuan County.

    http://www.ahhy.gov.cn/tzdt/article.jsp?articleId=187206 (Bing translated)

  2. ZMEC and several others. Here are some relevant links:

    http://jiaotong.cciru.com/corp-146544.html (Bing translated)

    http://yongkang.11467.com/14931 (Bing translated)

    http://www.yk0579.com/company5806/ (Bing translated)

    http://china.amb2b.com/corp.php?sname=zjmengdeli (Bing translated)

  3. On various internet web pages, ZMEC's contact person is Hu Wangyuan, the vice president of KNDI and the son of Hu Xiaoming, the chairman of KNDI. Here are some relevant links:

    http://china.alibaba.com/company/detail/contact/mengdeli.html (Bing translated)

    http://www.xiemaowang.com/detail/1145055.html (Bing translated)

    http://jiaotong.cciru.com/corp-20892.html (Bing translated)

You may also use the Chinese spelling to search Mengdeli "梦得力" and Kandi "康迪" in any search engine, such as Google, Baidu or Bing. You will find that ZMEC is associated with Kandi Group and is described as a subsidiary of Kandi Group.

Since ZMEC and Kandi Door occupy the same building and the two companies may very well share production lines, we are unable to verify the size of ZMEC's production facilities. Pictures of buildings housing ZMEC and KandiHome Door follow:

(click to enlarge)

Yongkang Scrou Electric Co., Ltd.

"Scrou was part of ZMEC before it was spun off from ZMEC on November 18, 2011. Before the official separation, ZMEC made an announcement on the Yong Kang Daily as follows:

(click to enlarge)

The translation of the announcement:

The Separation announcement of Zhejiang Mengdeli Electric Co., Ltd.

Based upon the decision of the shareholders, this company will be divided into Zhengjiang Mengdeli Electric Co., Ltd. and Yongkang City Scrou Electric Co., Ltd. The registered capital of the original Zhejiang Mengdeli Electric Co., Ltd. is RMB 80 million. After the separation, the registered capital of Zhejiang Mengdeli Electric Co., Ltd. is RMB 40 million and the registered capital of Yongkang City Scrou Electric Co., Ltd. is RMB 40 million. Within 45 days after this announcement, creditors have the right to request our company to pay the liability and/or provide relevant guarantees. The creditors may not claim the guarantee after the mentioned time limit.

Zhejiang Mengdeli Electric Co., Ltd.

September 8, 2011

It is noteworthy that Scrou's separation from ZMEC as an independent company was only three months before it was acquired by KNDI. Scrou's SAIC file information is included with this report as Exhibit D.

Our investigator visited Scrou in August 2012. Scrou has around 60 employees (58 was the count given by Scrou's security guard). The security guard also confirmed that Scrou was previously part of ZMEC and has been independent of ZMEC since the end of 2011. Scrou has three four-floor buildings on the site, shown in the pictures below. The security guard also confirmed that the company's main products are electric motors, which is also claimed by KNDI in its press release.

Pictures of Scrou's facilities:

(click to enlarge)

II. The Key Persons Involved in the KNDI Case

Hu Xiaoming and His Family, Hu Wangyuan ("son"), Ling Li ("daughter")

Hu Xiaoming is the chairman of KNDI and is the father of Hu Wangyuan, the director and vice president of KNDI.

Hu Xiaoming and Hu Wangyuan jointly owned 100% of KIG until November 8, 2006, six months before KNDI's reverse merger. Even though Hu Xiaoming and Hu Wangyuan jointly transferred 100% ownership of KIG to Lang Jianfeng and Hu Xintao on December 28, 2006, six months before the KNDI reverse merger, Ling Li, the daughter of Hu Xiaoming continues to serve as the supervisor of KIG. Hu Wangyuan and his family's personal information are enclosed as Exhibit I.

Lang Jianfeng

Lang Jianfeng was born and lives in Yongkang City, Zhejiang province. His home address is No. 171-1-1, Chengbei West Road, Xicheng Street, Yongkang City.

Currently, Lang Jianfeng owns 87% of KIG and serves as the chairman and legal representative of that company and ZMEC. Lang Jianfeng's personal information is enclosed as Exhibit II.

Most importantly, from November 3, 2006 to April 30, 2008, Lang Jianfeng served as the director of Kandi Vehicle, which was the primary operating subsidiary of KNDI after the reverse merger on June 29, 2007.

Hu Xintao

Hu Xintao was also born in Yongkang City, Zhejiang province. He lives in Building 8, No. 3222, Jiulingdong Road, Dongcheng Street, Yongkang City, Zhejiang province. Hu Xintao's personal information is enclosed as Exhibit III.

In fact, Hu Xintao is a neighbor of Hu Xiaoming, the Chairman of KNDI. The map showing the neighbor relationship between Hu Xintao and Hu Xiaoming is as follows:

(click to enlarge)

Zhu Bilian

Ms. Zhu Bilian was also born in Yongkang city and lives on No. 28, Yaxidong road, Xiaxici village, Gushan town, Yongkang City, Zhejiang province. Zhu Bilian's personal information is enclosed as Exhibit IV.

Ms. Bilian serves as the supervisor of ZMEC. Since the separation of Scrou from ZMEC, she has also served as the supervisor of that company. Even after KNDI acquired Scrou, Zhu Bilian continued to serve as the supervisor of Scrou.

Gao Shuping

Gao Shuiping was born in Yongkang city and lives at No. 33 Shanfangjian Xitian Village, Longshan Town, Yongkang city, Zhejiang province. Before moving to the current address, Hu Xiaoming, the Chairman of KNDI, also lived in Xitian Village with the address of No. 18, Xitian Village, Longshan Town, Yongkang City.

Along with Lu Erwa, Ms. Gao Shuping served as the director of Kandi Vehicle, the operating entity of KNDI, from April 30, 2004 to November 3, 2006, six months before KNDI's reverse merger.

From December 15, 2011, Gao Shuping has served as the chairman and legal representative of Scrou. Gao Shuping is one of seven people who received shares of KNDI as the consideration for the acquisition of Scrou.

Zheng Mingyang

Zheng Mingyang served as the director of KNDI till April 26, 2012. He also served as the director of KIG until November 18, 2006 and director of ZMEC until September 10, 2008.

The relationship among these companies and persons can be explained with the chart as follows:

(click to enlarge)

Note: Solid lines denote current relationships; dotted lines denote former relationships; Green blocks denote different people; gray blocks different companies.

The chart is explained as follows:

  1. Hu Xiaoming and Hu Wangyuan owned KIG before November 2006 and transferred the ownership to Lang Jianfeng and Hu Xintao.
  2. Lang Jianfeng owned KSV and transferred KSV to KNDI for around $12.3 million.
  3. Kandi Vehicle owned Dingji for its import and export business and transferred ownership of Dingji to Lu Erwa and Zhu Bilian for around $700,000.
  4. Gao Shuping and Lu Erwa were directors/supervisors of Kandi Vehicle, the primary operating entity of KNDI.
  5. Gao Shuping and Zhu Bilian are also directors/supervisors of Scrou. Gao Shuping and six other individuals sold Scrou to Kandi Vehicle .
  6. Zheng Mingyang, the director of KNDI, was the director of Kandi Investment Group and ZMEC.
  7. Kandi Investment Group and Kandi Vehicle share the same office.

III. Two Acquisitions and One Disposition of KNDI were Among these Related Parties

After its reverse merger, KNDI made two major acquisitions and one disposition with the aforementioned related parties. The timeline regarding the complex relationship among these related companies and persons is as follows:

(click to enlarge)

Following are detailed descriptions of the transactions analyzed in this report:

On April 18, 2008, KNDI acquired KSV from Lang Jianfeng and Hu Xintao

Based on KNDI's April 18, 2008 8K, Lang Jianfeng and Hu Xintao formed a company called Kandi Special Vehicles Co., Ltd. ("KSV") in February 2008 which held 200 acres of land and a newly constructed 24,560 square meter workshop and unique ATV testing center in Zhejiang province.

On April 18, 2008, while Lang Jianfeng was serving as the director of Kandi Vehicle, he, along with Hu Xintao, sold KSV to KNDI for $12,314,988.

In KNDI's 2008 2nd quarter 10-Q, the acquisition described as follows:

"In November 2007, the Company signed a letter of intent with the shareholders of Kandi Special Vehicles Co., Ltd., by which the Company would acquire 100% of Kandi Special Vehicles Co., Ltd. The Company paid $12,270,859 as a deposit in 2007. The total consideration for the acquisition was $12,314,988. All the transactions of this acquisition were completed in June 24, 2008. There is no material relationship between the Company and Kandi Special Vehicles Co., Ltd."

In KNDI's 2009 10-K, the company disclosed the acquisition as follows:

"KSV is located in the Jinhua city of Zhejiang province of China and is registered under the laws of the PRC. KSV was established on March 17, 2008 and is at its development state. KSV plans to produce special vehicles, electric vehicles, and automobile parts and sell the products in the PRC market."

The acquisition of KSV can be explained as follows:

KNDI signed a letter of intent to acquire KSV, a non-established company, from Lang Jianfeng and Hu Xintao (neighbor of Hu Xiaoming) in November 2007, four months after the reverse merger which happened on June 29, 2007. On April 18, 2008, one month after the establishment of KSV, KNDI disclosed the acquisition. At the same time, KNDI claimed that there was no material relationship between Lang Jianfeng, Hu Xintao and KNDI. This statement, however, is not true since from November 3, 2006 to April 30, 2008, Lang Jianfeng was director of Kandi Vehicle, the primary operating entity of KNDI.

Lang Jianfeng is also the owner and chairman of Kandi Investment, which Lang Jianfeng and Hu Xintao (neighbor of Hu Xiaoming) obtained apparently without consideration from Hu Xiaoming, chairman of KNDI and Hu Wangyuan, vice president of KNDI on October 18, 2006, six months before KNDI's reverse merger.

Also noteworthy is that KIG shares the same business address as KNDI. So the management of Kandi Investment, Lang Jianfeng and Hu Xintao share office space with the management of KNDI, Hu Xiaoming and Hu Wangyuan.

KNDI claimed to sell Dingji to Lu Erwa and Zhu Bilian on May 8, 2008

Based on its May 9, 2008 press release, KNDI sold Yongkang Dingji Import & Export Co., Ltd. ("Dingji") to Lu Erwa and Zhu Bilian for RMB 5,000,000 ($712,027)

As previously noted, Lu Erwa served as the supervisor of Kandi Vehicle, the operating entity of KNDI, from April 30, 2004 to Nov. 3, 2006, six months before the reverse merger with KNDI. Zhu Bilian also currently serves as the supervisor of both ZMEC and Scrou.

However, based on Dingji's SAIC file, KNDI (Kandi Vehicle) had already transferred 100% ownership of Dingji to Lang Jianfeng (30%) and Lu Erwa (70%) on February 5, 2008, three months before the disclosure made by KNDI. Zhu Bilian was not and is not the owner of Dingji. The SAIC file of Dingji is enclosed as Exhibit E.

We believe that as of April 18, 2008, KNDI already disclosed that Lang Jianfeng and Hu Xintao sold KSV to KNDI. In an apparent effort to avoid referencing Lang Jianfeng again KNDI forged the information stating that Zhu Bilian, rather than Lang Jianfeng, acquired Dingji from KNDI along with Lu Erwa.

KNDI acquired Scrou on Feb. 8, 2012 for 2,354,211 shares ($7,952,524)

On Feb. 17, 2012, KNDI disclosed in an 8K the acquisition of Yong Kang Scrou Electric Co., Ltd. ("Scrou") with 2,354,211 shares of KNDI:

"On February 13, 2012, Kandi Technologies Corp., a Delaware corporation (the "Company"), entered into a Share Exchange Agreement (the "Agreement") with KO NGA Investment Limited, a British Virgin Islands corporation ("KONGA") and each of the shareholders of KO NGA ("KO NGA Shareholders," and, together with KONGA, the "Sellers"). Pursuant to the terms of the Agreement, the Sellers will exchange an aggregate of 253 shares of KO NGA, representing 100% of the issued and outstanding shares of KO NGA, to the Company for a total of 2,354,211 shares (the "Exchange Shares") of the company's common stock (the "Exchange"), representing an aggregate exchange purchase price of RMB 50,052,387.66 (approximately $7,952,524), which is primarily derived from KO NGA's indirect, wholly-owned operating entity Yongkang Scrou Electric. Co., Ltd. in China and based upon a valuation report by an independent, third party valuation firm. Upon consummation of the Exchange, KO NGA will become a wholly-owned subsidiary of the Company. The Company is obligated to file a registration statement on Form S-3 (or if Form S-3 is not available another appropriate form) registering the resale of the Exchange Shares that are to be issued to the Sellers."

KNDI filed the share exchange agreement concerning the acquisition of Scrou as exhibit 10.1 of its annual report filed on March 30, 2012. Based upon this agreement, the 2,354,211 shares were issued to the following members:

(click to enlarge)

As previously noted, Scrou was part of ZMEC and was spun off as an independent entity on November 18, 2011, three months before being acquired by KNDI. At the time of the spin off, Lang Jianfeng was the chairman of Scrou and Zhu Bilian was the supervisor. Gao Shuping only became the chairman of Scrou after December 15, 2011, two months before the acquisition. As already noted in this report, Gaqo Shuping was a director of Kandi Vehicle with Lu Erwa from April 30, 2004 to November 3, 2006, six months before the reverse merger. Zhu Bilian and Lu Erwa acquired Dingji from KNDI in 2008. Zhu Bilian is still the supervisor of Scrou.

We also found in our research of ZMEC that from September 10, 2008 to August 24, 2009, there were 25 individual investors who jointly owned 48.13% of ZMEC. All seven members who received shares from KNDI as the consideration for the acquisition of Scrou were among the 25 individual investors that held equity in ZMEC.

IV. ZMEC: A Supplier, Competitor and Related Party of KNDI

In the 10K, KNDI did not disclose the names its major customers and suppliers. Instead KNDI lists unnamed companies based on the % of business it does with them:

We don't know why KNDI is reluctant to disclose the names of its major customers and suppliers as most other public companies do unless such disclosures would raise issues and questions the company would like to avoid. We note, however, that KNDI did reference ZMEC in the SEC filing as follows:

"On August 24, 2010, the Company entered into a guarantee contract to serve as guarantor for the bank note borrowed from Huaxia Bank Hangzhou branch in the amount of $1,256,933 by Zhejiang Mengdeli Electric Co., Ltd. ("ZMEC") for the period from August 24, 2010 to August 24, 2012. ZMEC is a supplier but not related to the Company."

Given the amount of the bank note and close relationship with KNDI, it is reasonable to assume that ZMEC is KNDI's largest supplier that accounted for 61% of total purchases in 2011 and 84% in 2010. As we detailed in this report, ZMEC is a related party of KNDI. This related party relationship has not been properly disclosed by KNDI.

Of more relevance is that based on our on-the-ground due diligence, ZMEC manufactures ATV and go-carts under the "Mengdeli" and "Kandi" brands. We have a recording with the front desk operator(0086-579-87293399) of ZMEC to further support our thesis (Read transcript). ZMEC is therefore directly competing with KNDI for the manufacturing and sale of ATVs and go-carts.

It is curious that ZMEC is both a competitor and a business partner of KNDI. In fact, ZMEC's marketing materials refer to the company as a subsidiary of Kandi Group along with Kandi Vehicle, the principal operating subsidiary of KNDI. We can't explain why these companies are manufacturing the same products to directly compete with each other. In such circumstances, how can US investors know their best interests are being protected given ZMEC is controlled by the Chairman of KNDI whose daughter, Ling Li, is the supervisor of KIG, the sole owner of ZMEC? What is in the Chairman's and his daughter's best interest may not coincide with what is in the best interest of US investors.

V. Dingji, Claimed to Having Been Sold to Lu Erwa and Zhu Bilian, is Now One of KNDI's Top Customers

We researched Dingji, which is claimed to having been sold to Lu Erwa and Zhu Bilian (two senior executives of KNDI) on May 8, 2008. We found that Dingji continues to export go-carts and motorcycles to several customers in the United States, including a company called Kandi USA Inc. in 2010 and 2011.

We also found the website of Kandi USA Inc. The description of Kandi USA Inc. on its website is as follows:

"About Kandi USA, Inc.:

Kandi USA, Inc., a California corporation with a large office and warehouse in the Los Angeles area, is a factory power sports distributor for the dealer network throughout North America, Central America, the Caribbean region and South America.

About Manufacturer

Established in the 80's, Zhejiang Kandi Vehicles Co., Ltd., wholly owned by Kandi Technologies, Corp. , engages in the design, development,..."

KNDI is the manufacturer for the products sold by Kandi USA Inc. Dingji is the import and export agent for KNDI's ATVs and go-carts sold to Kandi USA Inc. So we can therefore conclude that Dingji is one of KNDI's key customers for ATVs and go-carts.

However, in the annual report, KNDI disclosed only the rankings but not the names of its top customers:

We believe that based on our research that Dingji, a related party of KNDI, is one of the company's largest customers. The related party relationship between KNDI and Dingji has not been properly disclosed.

VI. KNDI's EV Business Far From Successful

On July 16, 2012, KNDI issued a press release with the title "Kandi Vehicles Co., Ltd. Signed a Cooperative Letter of Intent With China Aviation Lithium Battery Co., Ltd. to Promote 20,000 Pure Electric Vehicles in Hangzhou" including the following excerpt:

"Under the project, AVIC/CALB will be responsible to produce automobile-use lithium batteries and purchase 20,000 electric vehicles for personal leasing, while the State Grid will be responsible for the construction and supply of the charging network to power the operation of 20,000 EVs as well as the procurement of integrated automobile-use power battery sets. The Hangzhou municipal government will provide financial subsidies and create supporting policies that are beneficial for the promotion of EVs."

On Aug. 13, 2012, KNDI issued another press release with the title "Kandi Signed Cooperative Framework Agreement With Zhejiang Guoxin Vehicle Leasing Company to Promote Self-Driving Pure Electric Vehicles Rental for Public Transportation in Hangzhou Project", including the following excerpts:

1. Parties will cooperate according to The Feasibility Study of a Public Transportation Project of 100,000 Self-driving Rental EVs in Five Years in Hangzhou City…

2. Parties intend to launch the preparation work for the Project immediately after signing the cooperative framework agreement. Guoxin Leasing will first purchase 200 EVs from Kandi Vehicles to launch the project, and the final terms and time for delivery have yet to be determined.

KNDI's press release conveys a very promising outlook for this project. Following these news stories, an article was published on Seeking Alpha by Perry Coleman to tout KNDI - Kandi Technologies: A practical Approach to the EV market.

Kandi's actual business is, however, anything but successful at this stage. In the 10-Q for the second quarter of 2012, KNDI states:

"For the EV products, the Company has not realized mass unit sales during this reporting period. For the six months ended June 30, 2012, revenues from our Super-mini car decreased by $771,005, or 22.6% from the same period of 2011, which was attributable to an increase in unit sales of 17.9% from 542 units in the first six months of 2011 to 639 units in 2012. For the six months ended June 30, 2012, the average unit price of our super-mini-cars decreased 34.4%, because during this reporting period, the Company adopted the sales mode of charging or exchanging batteries to sell the super-mini-cars without batteries."

An online report at sina.com.cn (Bing translate) regarding the EV lease business was published on August 20, 2012. The key information of the report follows:

  1. The original subsidy plan of Hangzhou city will expire at the end of 2012. The new subsidy plan has not been released yet. Under the original plan, the rental price of an EV can range from around RMB 800 to RMB 1,000 per month. However, without the subsidy, the rental price will be RMB 2,000 per month, too high for most consumers to rent the car.
  2. The battery of KNDI's EV is flat while the traditional batteries used by other EVs are rectangular. So far there is only one recharge station (Gucui Road Station) that can be used by KNDI's EV. All other recharge stations would have to be remodeled to accommodate KNDI's EV.
  3. The first 100 vehicles allocated for the rental project are still in KNDI's factory. To date, there hasn't been a single vehicle delivered to a customer under the rental project and there is no timeline for future deliveries. The entire 200,000 EV leasing project is still in the planning stage and is far from implementation.
  4. Although there have been some inquiries regarding KNDI's EV rental business, a new subsidy plan and additional recharge stations that can accommodate KNDI's batteries are needed to make the company's EV viable.

To further develop this story, we had our investigator visit Hangzhou City to investigate KNDI's actual business at the end of August 2012. Our investigator talked to a manager of Hangzhou Electric Vehicle Enterprise Development Co., Ltd. ("EV Enterprise"), the company that is promoting the KNDI's EV rental business. Click here to listen to a recording of the conversation with the officer of the EV Enterprise. (Read transcript)

Our investigator also visited Hangzhou Guoxin Vehicle Leasing Co., Ltd.("Guoxin") and found that there are still no EVs available for lease. Further, the company hasn't even established a leasing price for the EV or set a timeline for delivery of the vehicles.

It is therefore apparent that implementation of KNDI's EV business plan in Hangzhou City is far from reality and the entire project depends on generous government subsidies that do not appear likely to be renewed after they expire at the end of 2012.

VII. Conclusion

  • Two transactions, the acquisition of KSV from Lang Jianfeng and Hu Xintao for $12,314,988 and the acquisition of Scrou for 2,345,211 shares ($7,952,524) from Gao Shuping and others, accounted for the payment of over $21 million to individuals who either worked for KNDI at the time of or just prior to when the transactions were completed. Those transactions were executed without necessary disclosure of the relationships the individuals involved in the transactions had with KNDI and its chairman.
  • KNDI claimed to sell Dingji, its import and export business, to Lu Erwa and Zhu Bilian, two individuals related to KNDI for only $712,027. However, based on the SAIC file, KNDI sold Dingji to Lu Erwa and Lang Jianfeng. As Lang Jianfeng sold KSV to KNDI on April 18, 2008, only 20 days before the sale of Dingji, it is likely that for the purpose of avoiding using the same name again, KNDI referenced Zhu Bian instead of Lang Jianfeng, the actual person involved in the transaction. Furthermore, Dingji continues to operate the import/export business and even sells products to a company called Kandi USA Inc. Given the close ties of the individuals involved in the transaction it would be easy for KNDI's management to set pricing at levels that would facilitate the transfer of gross margins to Dingji.
  • ZMEC, one of KNDI's largest suppliers is also a direct competitor. We do not know how under the circumstances KNDI's chairman can guarantee ZMEC is not taking business from KNDI. At the same time, ZMEC is also one of KNDI's major suppliers. There is no way for investors to know business between the entities is being conducted on an arm's length basis and that margins that should rightfully accrue to the benefit of KNDI's shareholders are not going to Dingji.
  • ZMEC continues to grow its business and just signed a contract to expand production (Bing translate) of its electric scooters, electric vehicles, golf carts and more in Huaiyuan County, Anhui province with a planned investment of RMB 1 billion. ZMEC also plans to develop a real estate complex zoning for hotel, commercial building, and residential buildings in Huaiyuan County, Anhui province with a total investment of RMB 1 billion. It is entirely possible that KNDI's chairman could use KNDI as a vehicle to finance ZMEC's expansion plans in Huaiyuan County.
  • KNDI's EV business is still far from viable in Hangzhou City. The entire 20,000 KNDI's EV rental business is still in the planning stage and the first 100 vehicles promised to consumers have not been delivered. KNDI's EV rental business depends on subsidies from Hangzhou City, which are going to expire at the end of 2012. Currently, there is no new subsidy plan to replace the existing one.
Source: Connecting The Dots: Kandi's Clever But Apparent Related Party Transactions