Why Kandi Technologies Group Inc Shares Dropped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Kandi Technologies Group Inc  (NASDAQ: KNDI  ) were screeching to a halt today, falling as much as 11% after announcing a direct placement of common stock and warrants, and revealing an SEC investigation.

So what: The Chinese electric-vehicle maker said it agreed to sell $11.05 million worth of shares to two institutional investors at a price of $18.24 a share, and issue warrants for 90,900 shares at an exercise price of $22.80 with a term of 18 months. Management said the proceeds from the placement would be used for general working capital purposes. In its 10-K report, the company also said it was being investigated by the SEC, and that a drawn-out investigation "could impose substantial costs and distractions, regardless of its outcome." 

Now what: Kandi did not reveal the cause or any details of the investigation other than it began last November, so it's hard to speculate on where it will go. As for the direct placement, investors were likely turned off not only by the dilution, which increases shares outstanding by about 1.5%, but also by the discounted price offered, as shares closed at $21.16 yesterday. Kandi shares are up more than five times from a year ago, so management may just be wisely taking advantage of the recent share appreciation; but in 2013, the company saw an approximate $16 million loss on the change in fair value of warrants due to the stock's rise, so investors may fear a repeat of that occurrence. 

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