Kandi Technologies Group, Inc. Q1 FY2022 Earnings Call

Greetings. Welcome to Kandi Technologies First Quarter 2022 Financial Results Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to Kewa Luo, Director of Investor Relations. Thank you. You may now begin.

Thank you, Operator. Hello, everyone. Thank you all for joining today’s conference call to discuss Kandi’s results for the first quarter of 2022. Earlier today, we issued a press release covering the results; you can find the press release on the company’s website as well as on the Newswire services. On the call with me today are Mr. Hu Xiaoming, Chief Executive Officer; and Mr. Alan Lim, Chief Financial Officer. Mr. Hu will deliver prepared remarks in Chinese, which I will then translate. After that, we will have a question-and-answer session. Before we continue, please note that today’s discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties; as such, the company’s actual results may be materially different from the expectations expressed today. Further information regarding these and other risks and uncertainties is included in the company’s public filings with the SEC. The company does not assume any obligations to update any forward-looking statements, except as required under applicable law. Please note that unless otherwise stated, all figures mentioned during the conference call are in US dollars. With that, let me now turn the call over to our CEO, Hu Xiaoming. Go ahead, Mr. Hu.

Hello, everyone. Good morning to those in the US, and good evening to those in Asia. This quarter, our business performance has been outstanding, with nearly $25 million in revenue, reflecting a 56% year-over-year increase. This marks a strong start to the year. Last year at this time, we focused on expanding our business by leveraging technology to create new products and enter new markets, and we are now announcing the results of those efforts. Specifically, we have introduced new oil and electric luxury crossover vehicles, which are in high demand and generating sales revenue. We plan to continue launching more all-electric and battery-powered models throughout the year to drive significant growth. In February 2022, we established Hainan Kandi Holding New Energy Technology Company Limited in Hainan Province to manufacture crossover electric golf cars. On February 22, our US subsidiary, SC Autosports, signed a contract to supply Coleman Powersports with 5,000 vehicles and secured a deal with over 20 other distributors for an additional 5,000 units on March 3. Hainan Kandi Holding is already in production, and by the end of April, we had delivered 778 units to our US subsidiary, with another 2,000 expected to ship in May. We are optimistic that this marks the beginning of a significant business opportunity for us. Looking forward, we have confidence in Kandi's potential in the all-electric off-road vehicle sector. We also believe that our EV, supported by our battery swapping technology, will gain traction as the China EV market stabilizes. We will continue to focus on innovative research and development to enhance our technology and create new prospects for our off-road and electric vehicles with battery swapping capabilities. Now, let's begin the Q&A session. Kewa will handle any English questions and translate for me, and our CFO will provide the answers.

Our first question is from Harald Kobori, a private investor. Please proceed.

Hello. Hello, everyone. On January 10, Kandi PR announced the Kandi enters Framework Agreement to produce battery swap enabled electric vehicles, referencing has signed Framework Agreement with Hunan Hengrun Automobile Limited to jointly produce battery swap-enabled pure electric vehicles. At first glance, it looks very positive as it appeared to provide Kandi earlier access to a required China EV license originally projected in the last call, not to be expected until April. This was the requirement that was holding back Kandi from building and selling passenger EVs in China to outfits, such as the 300,000 EV government-accredited EV-only ride-hailing program. But upon further reading, it appears that vehicles in the JV will all carry the Hengrun brand, not the Kandi brand name. Now I have four questions. Firstly, has the deal been activated? That’s the first question: has the deal been activated?

Okay. Let me translate what you have so far.

First of all, thank you for your questions. The first question regarding the progress of our cooperation. The agreement indeed is in place, and we are working with them orderly. The application is already basically approved and is in the public pronouncement stage right now in the China government agency center.

Okay. Did I misinterpret that the Kandi brand in China will not be used even in the Kandi-founded ride-hailing program?

Even though we are collaborating with Hengrun, the vehicles we are working on will carry the Henghe name. Kandi will play a significant role in the overall partnership and the manufacturing process.

Okay. Now, about the 300,000 ride-hailing program and the quick battery exchange, also talked about in the aforementioned PR. What exactly does Hengrun contribute to Kandi's practice in quick battery exchange?

We are collaborating with Hengrun on the majority of the manufacturing process, which includes producing all the essential components for the battery swap electric vehicles. Once we provide them with the parts, Hengrun will assemble them. They have the license to sell in the Chinese market, and after assembly, they will market the brand under Henghe to their PLC market. This outlines the entire sales process.

One last question. What does each partner primarily contribute? What percentage goes to Hengrun and what specific products and services? The PR seems enticing but left a lot of questions. Hopefully, management can clear this up?

In our collaboration with Hengrun, the share distribution is not predetermined. We don't focus on the percentage of contribution or profit sharing; instead, we handle different aspects of the partnership. We are responsible for producing all the parts and components, allowing us to earn margins from the sales of those products to Hengrun. They will then assemble the parts and apply their own markup when selling to the PLC market, generating their own margin. Therefore, we each play distinct roles in the entire manufacturing and sales process, emphasizing individual profit processes rather than a fixed percentage of sales.

Thank you very much.

Thank you.

Our next question is from Arthur Porcari with Corporate Strategies Incorporated. Please proceed.

Okay. Well, my primary area I was going to try to get more information on is a quick battery exchange. We talked about it last month, and I'm not sure anybody really understands where we stand in that. But let me first say, congratulations on an all-time record first quarter. With all the negativity in the US and China economies, it's incredible to think that we actually did a $25 million quarter in the first quarter. It's about the Chinese New Year and all the rest that go along with it. But why did you – why is it that we find out now that you have some $70 million in contracts you just signed just over the new electric golf carts? We haven't seen any press releases on that. That's that question first, to Mr. Hu, please.

In the past, we issued various press releases regarding our news and developments. As we continue to execute our strategies, we aim to enhance our core businesses and operations. Once we achieve significant milestones, we will share a press release with all our investors. Our goal is to present a more positive outlook. Thank you.

Well, I'm not sure we’ve done much good in the market environment we've been having lately anyway, but it's nice to know for the longer haul. Also, we didn't see anything in the press release on share buyback. Did we buy any shares back over the past quarter? Do we continue with the program?

Thank you. I'm not certain that we've done much good in the current market environment, but it's reassuring for the long term. Additionally, I didn't notice any mention of share buybacks in the press release. Did we repurchase any shares in the past quarter? Are we still continuing the program?

Yes, we did. In fact, we disclosed our share buyback in the subsequent event note in our 10-Q. There’s a release on the SEC website. The shares we repurchased from April 1 to May 5 totaled 603,000 shares of the company's stock.

Okay. Thank you. Let me get on to my main area of discussion here. So my primary question, as I said, has to do with Kandi's decade-old discussion regarding its Quick Battery Exchange. And a little bit of background first, since I've been around long enough to see it from the beginning. Over a dozen years ago, Kandi patented China's first Quick Battery Exchange program in Jinhua. Even today, there are a few YouTube videos accessible that I personally posted a decade ago showing Kandi battery exchange in action, both robotically and at a changing terminal in around 60 seconds, as well as a roadside mobile exchange in just moments. The mobile feature to this day, to my knowledge, has not been replicated by any subsequent competitors. What made this possible with Kandi's patented QBX, Quick Battery Exchange, which allowed the batteries to be exchanged simply by sliding in under the car doors between the wheels, rather than requiring a car to be lifted or the battery turned with specialized stations like Nio and all the rest of them seem to have to do. This was considered so revolutionary at the time that the PRC government published a white paper in September 2012, recommending for all of China only three charging methods as the preferred mode for EVs: the plug-in, which we still have today; lease the battery, but the third one actually named Kandi in the official name of the project was called the Hanju Kandi lease and battery swap mode. Not surprising, it was the only mode that could allow a battery to be exchanged in minutes anywhere at any time by a mobile unit. Needless to say, this was an exciting time for Kandi stock were announced by the government. With this background reminder, I've got a few questions from Mr. Hu on the subject. Kewa, could you go ahead and share that with him? And I’ll get my questions.

Okay, sure. Go ahead, Art.

Okay. Okay. There are about five sub-questions here. First, two I'll take together. What happened at that time because Kandi lost momentum after its incredible nationwide government endorsement? And does Kandi QBX still use the slide-in between the tires exchange model, which allows for the mobile change on the roadside as well as mechanical station?

To answer your questions, our Smart Battery Swap Technology was recognized for its advanced nature and practicality by the related government agency at that time. However, before 2020, those government departments mainly focused their support on rechargeable electric vehicles instead of battery swap vehicles. Essentially, our battery-swappable electric vehicles were able to come into existence. The agencies acknowledged that these vehicles are more advanced and practical. Until April 2020, four major state ministries and commissions announced their support for the battery swap model. The progress in this area has been relatively slow because it takes years for them to innovate and develop EV models that can utilize battery swapping; therefore, that won’t happen immediately, but it will take time. However, we expect improvements to progress. Currently, our intelligent battery swap equipment still uses the original slide-in technology. We are confident that this technology is the best path for our future development. We will continue to pursue advancements in this technology in the future.

Well, I'm really happy to hear that. In fact, one of the YouTube videos that's up there shows the mobile unit being used in downtown with the change made in about two minutes, 2.5 minutes with two guys in a little hand lift. I mean, if you could break down, you can run out of charge anywhere. Any other battery change programs seem to have to tow the car into the station. Here, it can be done in a couple of minutes. But aside from that, let me expand on that; I'm really happy to hear that. Okay, so it can still control this patent. What that means is third-party automakers who use the technology would have to pay royalties to Kandi to use this slide-in mode, and you've already said this is the same one the China Battery Exchange is using, so I'll skip that part of my question. By saying, can the China Battery Exchange subsidiary also custom-make QBX stations for other battery exchange modes?

Our company currently holds the patent for all slide-in battery swap technology. However, in the Chinese market, there aren't many products utilizing this technology at present. Instead, more vehicles are using battery exchange from other formats. Consequently, the impact of our slide-in battery swap patent is not substantial at this time. Regarding our subsidiary, the China Battery Exchange Technology Company Limited, we are indeed working on product commercialization, utilizing the standard slide-in battery swap model. We are also exploring optimal ways to develop third-party commercialization for our pure electric vehicles using the slide-in battery swap technology.

I thought I was going to finish, but I won't elaborate on that. It seems to me that no other model could be implemented where changes could be made on-site. You can call for roadside assistance on your cell phone, and they can have a unit there to swap batteries in just a few minutes, even in downtown Beijing. Why isn't such logical technology being utilized, endorsed, or promoted? It seems like it could work with any size vehicle. Please address that, if you could.

I can't follow up on that. It seems to me that no other model could be implemented where they could change it on-site. For example, you can call roadside assistance on your cell phone, and they can have a unit there to replace the batteries in a few minutes, even in downtown Beijing. Why isn't such a logical technology being used, endorsed, or promoted? It appears to be feasible for any size vehicle. Please try to address that.

So as for the development in the China market, as you may know, back in maybe a decade or more than 15 years ago, EV technology was a new topic in China. At that time, the development government agency may not have had too much experience in this aspect; they didn't really buy into the idea of the battery swap mode. Even though they recognized it; it was not their focus. Through the experience over the past decade, since 2020, they've finally recognized that rechargeable EV may not be the ideal optimal way of promoting EV in the market. That's when they started to recognize and promote the battery swap mode. The four major state-owned commissions and ministries released their pronouncement to support the battery swap mode. Since it has been in the rechargeable EV market for the last decade, it does take time for them to change. Besides, the current market is not quite healthy yet. You may see many companies trying to compete for market share, spending a lot of money, and selling other products with a negative margin. To us, that doesn't make sense; in order to protect our investors, we have to expand wisely. We cannot just go in and compete like there’s no tomorrow. We are waiting for the development to become healthier and more orderly. We think it will be soon. Once that healthy market becomes more apparent and viable, we will then go in and compete with others. That's our plan for market development.

Okay. Well, I can't argue with that. I think it's wise. But it's just amazing to see the stock trading at a $50 million, $60 million under cash in the bank, with hardly any debt. I mean, at least at the rate you're going, it will take hundreds of years to use up the cash you have in the bank. If you keep having losses of only $600,000 with all that cash. It’s just frustrating, but great quarter, and we’re looking forward to a great year. Thank you.

Thank you.

If we have more participants in the queue, please proceed. One moment, please. Our next question is from Fred Thacher with CleanTech Equities. Please go ahead.

Good morning. Congratulations on a great quarter considering everything happening in China. This is just fantastic. Several years ago, with the stock trading at well over double the current price, the company contracted with an IR firm. Aside from the fact that the stock is now trading at a five-year low, while top and bottom line have improved considerably and Kandi is trading at a huge discount to both book value and even cash. They seem to be on the payroll. Why is that? They put out a monthly market letter of highlighted stocks. Kandi is nowhere to be seen. You would think they would be able to get the attention, at least one or two legitimate analysts to look at Kandi with such an undervalued profile. This is especially true with this current quarter. What does management plan to do to get this message out? Thank you.

Thank you for your question.

Thank you for your question. Our main focus is to execute our business operations effectively and strengthen our fundamentals. It's true that the current market trend is not favorable for Chinese stocks, but we believe our company is undervalued. We trust that by performing well and continuing to deliver strong financial results, our share price will eventually rise to a more appropriate level. We have been collaborating with our investor relations firm for several years, and they have a solid reputation in the US capital market, working with leading companies in our sector. Their expertise and network are impressive, and we are pleased with our partnership. While they provide valuable advice and insights, management always makes the final decisions, also taking into account input from our lawyers, auditors, relevant departments, and our operations team. We are committed to the success of our company and our investors, and we hope to see our share price return to a reasonable level in the near future. Thank you.

Thank you.

Our next question is from Frank Batterman, Private Investor. Please proceed.

Yes. Good morning. Can you hear me okay?

Yes.

Okay. Just my first question was already answered. I have one question. A while back, you had mentioned the K23 and K27 coming into the US. However, that was halted because of an airbag problem. So my question is, do you have an expected time frame for the full-speed K23 and K27 to be released to America with the airbag problem resolved to the satisfaction of US regulators?

Yes. Currently, our safety standards have not yet met the requirements set by the Department of Transportation in the US. We believe that these standards are excessively high. Other Chinese companies with more than a hundred autonomous vehicle tests have also not succeeded. At this point, we cannot provide a specific timeline for when we will meet the regulatory requirements. However, to adjust our strategy and market approach, we have modified our K23 and K27 models to Neighborhood Electric Vehicles, and sales are currently stable. That's the update on this matter.

I understand about the NEVs, but I'm really surprised that the regulations are so difficult for Kandi because other companies appear to be selling into the United States satisfactorily. They have met the regulations. It seems to me, if you bought a Chevrolet car, you could reverse engineer the airbag description and mechanism. But okay, would you like to comment on that?

The main reason we cannot meet the standards is not only related to Kandi but applies to all electric vehicle manufacturers in the PLC market. The requirements and standards for FX safety differ between the United States, China, and European countries, with the latter having more rigorous criteria based on the size or weight of the driver and passengers. Currently, no manufacturers of electric or gasoline vehicles in China are selling their products in the US market.

Okay. That will have to do. Thank you.

Thank you.

Thank you. Our next question is from Francis, Private Investor. Please proceed.

Thank you. Hello, Kewa.

Hi.

A while ago, the company spent about $40 million or more on a design contract for a new EV model, and I wondered if Hengrun will be assembling that model or if there are some other plans for that expenditure? Thank you.

Thank you. Hello, Kewa. A while ago, the company spent about $40 million or more on a design contract for a new EV model, and I wondered if Hengrun will be assembling that model or if there are some other plans for that expenditure? Thank you.

So Mr. Hu is saying that any cars that will be sold in the China market will be sold to Hengrun.

Okay. And will this model be sold in the China market?

Yes, it will be.

Any time frame on that?

Like I mentioned earlier on the call, in China right now, it's again about being cautious to avoid losing money in order to achieve certain sales volume in the market. We are definitely not in that kind of game, and we just don't have that kind of money to compete with these peers. However, we're not out of the game; we are still going to try to test the waters to start with a small volume of EV products in China. I don't have an exact time frame as of when, but this is our plan. You are not going to see a large volume of the EV models we’re going to launch.

Okay. And what is the status of that very important strategic cooperation agreement between Kandi and the Xinjiang State Grid EV service Company? It was announced in 2020, and Mr. Hu emphasized how important this agreement is to the future of Kandi and QBEX. So what's the status of that now?

Just let me clarify that you are inquiring about the strategic partnership with Xinjiang?

Yes. I'm asking about the status of the strategic cooperation agreement between Kandi and the State Grid.

That's really good. Okay.

The scope of work for this strategic agreement is to implement the battery exchange. However, it hasn't been launched in significant volume yet because, as I mentioned earlier, the market is not ready for us. We have conducted some trial projects in Shaoxing. Looking ahead, I believe that as market conditions stabilize, the State Grid will play a crucial role in this project by providing substantial investment to promote battery exchange, as this will be essential for electric vehicles.

Great. I'm glad to hear that it's still alive at least.

Yes.

Last quick question. When the F4 is approved at some point in the future, does the company plan to call a special meeting for shareholders to vote on the reincorporation in BVI?

Okay.

We are currently in the process of reviewing the F4. It has not yet been approved, but once it is approved, we will need to hold a shareholder meeting to get the necessary approval to proceed.

Okay. Thank you very much.

Thank you for your question.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Kewa for closing comments.

Thank you, again, for attending today's conference call. If you have any more questions, please feel free to contact us via the email ir@kandigroup.com or you can also contact our IR consultant. We look forward to updating you on our next earnings call in August. This will conclude our call for today. You may now all disconnect.