I wonder how many here who think they know about the mechanics of Shelf registrations ever took the time to read KNDI's? Here is a link to the Form S-3 filing that was submitted to the SEC on Nov. 19, 2009. Now this filing is just a first draft that is filed with the SEC.
On Dec. 15th, a further filing of Form S-3A was filed which is a second draft. These are usually filed with amendments after receiving comments from the SEC on the first draft.
On Dec. 24th, the SEC ruled the offering "Effective" which means that the Company can now, on a moments notice issue registered stock, Preferred stock, Warrants, Debt, Rights or even use this registered stock to make an acquisition. All they have to do is to have a current audited financial statement in effect.
If you think these are rare, here is a list of Shelf Registration deals done just last week.
Below is an excerpt from a Primer on Shelf Registrations with the operative part being this line: "Since the SEC does not review the supplement, the issuer can usually file it, then market and price the offering, all in one day."
… As soon as the shelf registration is effective, the issuer can offer any of the registered securities at any time simply by filing a prospectus supplement that provides the offering terms and delivering it to the investors with the base prospectus. Since the SEC does not review the supplement, the issuer can usually file it, then market and price the offering, all in one day. Sales may be underwritten, made directly to buyers after negotiations or competitive bids, or made through agents or dealers. Prices may be fixed, changeable, at the market, or negotiated. Direct costs of issuance are usually lower than in other types of offerings, notes the author. Security holders doing resales, as well as the issuer, may use a shelf.
Now that you know what a Shelf Registration is, let’s try to apply some logic to the current situation.
One might think "why would a fund who bought the stock at 5.50 be willing to sell below the purchase price?" Well a lot of these funds have and want to keep "standing" with the Placement Agent (in this case WT Global-Patrick Ko's firm) To keep "standing" they have to pretty much agree to take a piece of ALL deals presented to them. In other words if they want to be sure to get a "piece" of a hot issue like YouKu or Dangdang that more then doubled on the opening, they also have to agree to take stock in a Bona Film Group whose shares immediately cratered. Though in the case of the first two everyone new they would be hot and in the second the street new it would be cold.
In KNDi's case due to the heavy volume following, I am sure that a good bit of the stock was immediately flushed out of lack of knowledge of the Company, but the fact that there were also $6.20 warrants issued, IMO, is a good thing in that the funds that may have already sold the shares now still own a share of these warrants. Forcing them to now pay some attention to the Company. These "knee jerk" sellers, since they do still own the warrants might just decide to turn into future buyers of the stock as the business plan becomes more clear to the public.
Again, as I mentioned earlier, if any of the funds who purchased the stock are reporting investment funds and they still own stock on Jan. 1, they will be required to report their position sometime in the first quarter.
Hope this helps clarify.
wtblanch5-Good to see you here from the JP's SA article.
What IR told me was that if either of the prior two funds were in the deal, it would only be for a small minority of this deal. (They really don't know who bought the deal either, only general hints from the broker)
I know the fact that we don't know at this time who bought the S-3 sounds confusing but it is the "nature of the beast" in this type of registered offering.
Most small companies raising more than a million dollars do not have the luxury of using a Shelf Registration and therefore use a more common type of Private Placement like a Reg. D Form 505 (up to $5 million) or Form 506 (unlimited). These truly are private placements where the investors have to meet suitability requirements and either have hold their stock for at least six months (12 in certain circumstance)or the Issuing Company has to file a registration statement. In these cases, particularly if a registration requirement is part of the deal, then all investors are publicly named. (Understandable since their names are going to be disclosed in the Registration Statement that will show up on the SEC Edgar files)
An S-3 is more similar to an Initial Public Offering (IPO) where the Company first must clear registration with the SEC before the stock can be offered. And again, as I mentioned in a prior post. An S-3 Shelf is effectively a "pre-registered" omnibus block of stock that went through all of the same registration requirements of an IPO but is held on the "shelf" for the company to freely sell at a moments notice.
In an IPO type of offering it could easily take from two to six months of back and forth with the SEC before the shares are authorized for sale. But once they are, and the shares are sold through a broker, privacy issues come into play, just like any free trade buys and sells of an open market stock. Only if an investor acquires more than 5% of the total shares outstanding is there a requirement for the investor to be named in that such investor has to file a form 13D or 13G with the SEC.
I am either directly or indirectly in contact with several institutions and brokers that are interested in KNDI. Several of which were quite irritated that they were not given the opportunity to participate in the direct placement. Their concern is understandable in that several were loyal open market purchasers of the stock and had expressed an interest to the Company at some prior date that if they Company did do an offering that they be allowed to participate. The feelings they expressed to me was that if they bought the deal, it would be put away in firm hands that like the stock, not in "transactional" hands that just buy the stock for a quick flip that really don't know the company and its potential.
While I do totally sympathize with them and would have loved to see it put away like that, in this particular situation where we have a basically non-English speaking top management and BOD, and a need to get this done quickly before word of an offering starts leaking around an causing downward pressure on the stock, the Company decided to go with their US based, Bi-lingual Investment Banker who assured them he could place the whole deal in just a matter of hours. So that decision was made, and all this volume we are seeing is the result.
But before the logic, let me give my take on why the funding was done so quickly. Now this is my conjecture from putting parts of the story that we know together. The Friday our group met with Mr. Hu he told us he was going to Beijing the following Monday with the main reason being to get the Gov to include the KD5010 in the PRC jumbo subsidy. I believe that was rejected due to confusion it might cause with other Lead Acid cars, but with a "wink and a nod" he was most likely told that if he wanted to modify the 5010 to Lithium, there was a good chance that would be approved with a fast track.
Even when we asked him about the lithium, he said it could easily be modified, but he didn't see an economic reason for the change. So what happened next was that he did submit the modified KD and to his total surprise, (and backed up by Struff's research here) he was given almost instant approval. When he told us that he would automate by June, he knew he had a lot of time to get the cash from non equity sources. But when the PRC says “jump”, you don’t say “when”, you say “how high”?
But lets throw in a hypothetical. Let say shortly after approval he was asked by some Gov entity as to how long it would take him to build 5000 cars? I can’t see him saying “well, if I go triple shifts seven days a week I can do it in five months”. I can see him saying “I’ll get back to you”. Then call up his Securities counsel who told him that he could sell anytime he wanted under the Shelf”. I suspect this happened Monday.. IMO, there is no way that any of the funds who bought into this deal knew about it before the close of business Monday. If they had, there would have been no way that the stock would have closed at its all time closing high the day before the announcement. The way I see it was done something like this.
As you are now aware, a shelf can happen in a day. I believe after speaking with his Securities Counsel, after Monday’s close, he then called up his Contracted Investment Banker, a bi-lingual Chinese American by the name of Patrick Ko (FT Global) and asked him how much time would it take for him to sell 3 million shares with warrants at $5.50. Ko like any seasoned broker has a list of Institutional clients. With all the cash that these institutions are sitting on, I would think he could move the whole position in less than an hour. From what I understand it was basically all placed with seven funds. Due to privacy rules, since this a sale of registered shares, it would be no more legal to disclose who these purchasers were than it would be for your own broker to publicly disclose shares you bought. If the funds were “reporting investment funds”, then we will know some time after the first of the year. If not and they don’t own over 5% we may never know.
Now let’s look at the positives of the timing. Firstly it is much better to get this done before the end of the year in that as of the close of business today, the $17 million will be put in KNDI’s account. Which means they will have a year end financial balance sheet loaded with cash when reported. Perhaps finally quieting down those funds and others who didn’t like the balance sheet. Secondly, Unless the company can be pretty sure on how to break up Use of Proceeds, their attorney would tell them to just call it all “General Corporate Purposes”. By doing it in such close conjunction with the mega-announcement, the correct supposition would be that the funds are being raised to support the awesome event. And the wild trading could also drag in many new eyeballs. Thirdly, no one knows for sure how favorable the reaction might be at some future date to get any funding done at any price. Particularly after Tuesdays WSJ article badmouthing China RTO’s.
(Continued on next post)
One important point. I have had several tell me that now the stock is just “dead money”. They give me TSTC who a couple of weeks ago did a $20 million shelf at $12 a share or less than 6 x this years projected earnings as an example. Now the stock is stuck between $10-11. BAD example. IMO, for any Company to do a follow-up funding with their stock trading at 6 times earnings is unquestionably dilutive. If the market doesn’t like their current business plan enough to trade at a higher multiple, what good is raising more money at that low PE? In KNDI’s case they raised their $17 million with the stock at maybe 50x’s GAAP earnings and 20-25 times Operating earnings. Now that is a smart use of a public offering.
I can’t say where the stock is going over the next few weeks, but one thing for sure, it will not be dead money. My own guess is that right now the liquidation by funds of all China stocks is continuing. They just don’t want them on their books to report to their investors. But I still firmly believe that we will see a strong rally in many of the better issues right after the first of the year. And this charge will have KNDI as a leader. I can’t say it whether it will just start performing better due to firm knowledgeable shareholder base, and the new and growing audience, or if it will wait to be news driven. But I can tell you that five fund managers that I am aware of all met yesterday with US Company representatives. A couple already had shares, the balance certainly had enough interest to meet. The consensus seemed to be that all were fascinated by the story, but still needed to have a few questions answered by the home office. Answers that I am sure they will soon be happy with.
The real head scratcher has been were all of the volume has come from over the past two days. In almost the same breath, pros that I speak with tell me they believe it was short covering, but they then admit it almost has to be new shorting. I can tell you that no-one that I know well, either individual or institution based has done anything but buy more. They may not have been happy with the loss of momentum, but they do know that this financing will eventually make the company much stronger and likely to fast track their exciting business model.
I told several this morning that what I hoped for today was a significant quieting of the stock with a small advance. I was saying 300k volume and up a nickel to a dime would IMO be perfect to confirm a new up trend. As of now it looks like the volume will be a bit more than that, but we will see how the close turns out.