Kandi Technologies Group, Inc. Q3 FY2022 Earnings Call

Good day and welcome to Kandi Technologies Third Quarter 2022 Financial Results Call. Please note this event is being recorded. I would now like to turn the conference over to Kewa Luo, Manager, Investor Relations at Kandi Technologies Group. Please go ahead.

Thank you, operator. Hello, everyone. Thank you all for joining us on today’s conference call to discuss Kandi's results for the third 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 from newswire services. On the call with me today are Mr. Hu Xiao Ming, 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 Q&A 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 obligation to update any forward-looking statements, except as required under applicable law. Please note that unless otherwise stated, all figures mentioned during the call today are in U.S. dollars. With that, let me now turn the call over to our CEO, Hu Xiao Ming. Go ahead, Mr. Hu.

Thank you, Kewa. Hello everyone and welcome to Kandi's earnings conference call today. Let's start with financial results, which were promising. We doubled Q3 revenue compared to last year, increasing to $33.7 million from $16.8 million in Q3 2021. This was our highest quarterly sales since the start of 2021. Importantly, net income turned positive in many ways throughout the quarter. We are excited about this performance considering the global economic slowdown, ongoing supply chain demand, as well as the resurgence of COVID. The solid performance was driven by the strategic pivot we initiated a couple of years ago when we redirected resources in response to the pandemic. I would like to thank all our shareholders for their understanding and support during this transitional period. I am also grateful to our dedicated employees for their hard work in delivering this positive performance. The shift to positive net income was a result of improved margins. Gross margin increased primarily due to the higher margins earned by off-road vehicles and associated parts. Careful control of operating expenses also contributed to the bottom line performance. We were pleased with the product mix, which improved as we executed our strategy. Sales of off-road vehicles and associated parts accounted for over 60% of total revenue in the third quarter. The increase in sales was primarily driven by our strategic pivot and the establishment of new sales channels in the U.S. by Kandi America. Consumer interest is rising for our golf carts, UTVs, and other off-road vehicles; we expect to see higher sales and net income in 2023. Finally, we believe that our healthy cash position allows us to seize opportunities. We expect more top-line growth based on our diversified and resilient business model. Despite potential economic weakness that could impact consumer demand, we will continuously launch new products in the electric vehicle market to gain market share and create more value for our shareholders. Let’s now begin the Q&A session. Kewa will take any English questions and translate for me. Operator, please go ahead.

Thank you. We will now begin the question-and-answer session. The first question comes from Harold Gaboury, a Private Investor. Please go ahead.

Thank you. Hello to everyone. My questions have to do with the status of Kandi's off-road products like the K32 off-road truck or bikes. I heard that dealers want the K32 truck, but it's not yet available almost a year later. If true, why? Besides that, I have three short questions. How about the various go-karts, which I believe are gas-powered? Are we considering making an electric go-kart? Another question, what about our electric bikes? Are they currently available for purchase? And how are the sales doing? And my last question is, since off-road looks like a major primary business in the U.S. for Kandi, I would think it's time for the company to start breaking down each of the segments in the security filings instead of all together under off-road vehicles. I see some of the stuff has been done in the latest quarter three report, but still we think that we should separate go-karts, golf carts, bikes, and scooters so that we see the numbers reach each group. Thank you.

Thank you for your question.

Thank you for your questions. Regarding the production conditions for the K32 off-road trucks, we have been refining the entire production workflow in the past few months. We are now capable of full and mass production. In fact, we have gradually started to ship regularly and will adjust the production plan based on market demand. This year, the sales volume for gas-powered go-karts has indeed declined across the market. As a result, all vehicles, including the go-karts we produce, will be gradually electrified, aligning with overall market trends. We are in a more advanced position concerning this transition. Additionally, we do not currently produce electric bicycles. Our main focus is on pure electric vehicles. Regarding disclosure issues, we comply with SEC requirements and guidelines, ensuring accurate reporting and disclosure. We will consider your points and think about ways to improve in the future. Thank you again.

Thank you very much.

The next question comes from Frank Blatterman, a Private Investor. Please go ahead.

Yes, good evening to those in China and good morning to others in different time zones. I have two questions. Has Kandi addressed the airbag issue related to the K23 and K27, and has it either self-certified or submitted to the Department of Transportation for certification for highway use? Secondly, on July 19, 2021, a press release was issued regarding a purchase; could you clarify what the revenue contribution from that acquired company was in the third quarter?

Thank you for your questions.

Thank you for the questions. Regarding the airbag issue with the K23 and K27, we have not yet resolved it, but we are working diligently on it. We will keep you informed of any updates. In terms of sales revenue from Jiangxi Huiyi, the revenue for the third quarter was approximately $6.3 million. Thank you.

Okay, thank you very much.

Just one moment. The next question comes from Mike Pfeffer with Oppenheimer. Please go ahead.

Good morning. Based on Q3 2022 financials to date, it appears that 2022 could be the strongest year ever for Kandi. Year-to-date the company has only put out one breaking news type of PR back on January 10, 2022, Kandi announced it entered a framework agreement to produce battery swap enabled electric vehicles, referencing having signed a framework agreement with Hunan Hengrun Automobile Company to jointly produce battery swap enabled pure electric vehicles. So let me ask a few questions regarding this relationship. First, on the last conference call, Mr. Hu said, our cooperation with Hengrun is mainly that we are responsible for the production of the electric vehicles that enable that battery swap mode. We produce the motors and parts and then Hengrun will take our parts and assemble them into a whole vehicle. What does it mean that we are responsible for the production of the electric vehicles? But on the next line, you say, Hengrun will take our parts and assemble them into a whole vehicle. What is the difference between production by Kandi and assembly by Hengrun? Is the final assembly by Hengrun or Kandi's Haikou facility? If this is a joint venture, what is the detailed sharing arrangement?

Thank you for your question. Let me translate for you now. Okay?

The cooperation is largely influenced by the regulations set by the Chinese system. We manufacture all the key and main components at Kandi Hainan, while our partner Hengrun is tasked with the final assembly of the vehicles. These vehicles are then sold under Hengrun’s production qualifications or license. This outlines our cooperative process.

Okay. One other question from a PR by Hengrun on its website in China, October 13, 2022, they announced their Hengrun H23, formerly the Kandi K23, with quick battery exchange has been officially released for sale at RMB139,800 around $19,800. Can you give us some details on this? And if true, why didn't Kandi put this news out in the U.S.? U.S. holders have been waiting for years for Kandi to be back in the China EV market.

One other question regarding a PR by Hengrun on its website in China, dated October 13, 2022, they announced their Hengrun H23, previously known as the Kandi K23, which features a quick battery exchange and has officially launched for sale at RMB139,800, approximately $19,800. Can you provide some details on this? If this is accurate, why didn't Kandi share this news in the U.S.? U.S. investors have been waiting for years for Kandi to re-enter the China EV market.

Okay. The update is that the model H23, which we manufactured in collaboration with Hengrun, was officially announced by the Ministry of Industry and Information Technology in May of this year. We are approved and qualified to manufacture and sell this model in the PLC market. There were small sales in the second and third quarters of this year. Currently, China's domestic electric vehicle market is not developing in a healthy or orderly manner. Companies are even selling at a loss to gain market share. We will continue to monitor the situation and work on improvements. For now, we are maintaining a small-scale operation to manage our budget and cash flow. Once the Chinese market becomes more stable and profitable, we will accelerate our efforts and keep you updated on any further developments. Thank you.

All right. Just the last question and thanks for your time. What does this really mean to Kandi, i.e., is this part of the 300,000 EV program? What specific revenue amount sources does Kandi get from each sale? With Gilly, we knew we got paid for the parts and 50% initially of the profits and loss. How is this the same or different? Thank you.

The Chinese market is becoming healthier and more profitable, and we will keep you updated with any further information. Thank you. Mike Pfeffer from Oppenheimer here. Just one last question and I appreciate your time. What does this mean for Kandi? Is this related to the 300,000 EV program? What specific revenue sources does Kandi obtain from each sale? With Gilly, we understood that we received payment for parts and initially 50% of the profits and losses. How does this situation compare? Thank you.

So first of all, our collaboration with Hengrun means that our electric model H23, which is announced by the Ministry of Industry and Information Technology, is now officially approved for manufacturing and sale in the PLC market. We do not have the necessary qualification ourselves, which is why we are partnering with Hengrun to establish a qualified process. In terms of income and revenue, we receive all the income generated from the complete steps of the parts we sell to Hengrun. This is different from our relationship with Gilly, which is a joint venture where we share any profits or losses. Our relationship with Hengrun is more of a partnership and trading arrangement, meaning we generate revenue once we deliver the EV parts to them, after which they will sell using their own resources. Essentially, revenue is realized once we deliver to Hengrun. Hope that answers your questions.

Thank you.

Just one moment. The next question comes from Arthur Porcari with Corporate Strategies. Please go ahead.

Good morning, Mr. Hu. Really nice quarter. I'm glad to see you beat the Street estimate by about 15% and went from a negative to a positive on net. But that brings me to my question today. It's going to be a little lengthy. I know they usually are, but this one is important because this primarily has to do with new U.S. Kandi electric golf cart crossovers, and some recent discoveries made. So this may require me to lay down some background first. So let's start with that. Kewa, tell him that.

Thank you for your question. Please go ahead.

Okay. On our last conference call, Mr. Hu confirmed that in the earlier 10-Q also Kandi had at that time received two contracts for electric golf carts totaling about $70 million for this year with almost all in the second half. He told us he was anticipating strong immediate production in the vicinity of 2,000 golf carts per month. What he didn't tell us was who was going to be buying all those golf carts. A few weeks ago, I got information from an independent Kandi dealer, who was patiently waiting for his own golf cart order, and the truck, by the way, said Lowe's Corp. was now selling Kandi's golf carts. Initially, I doubted him as I couldn't conceive such a huge contract would not have been announced by the company. As a regular at Lowe's, I had never seen golf carts of any brand there being sold. This time, to my surprise, a really sharp golf cart was right outside the front door. A quick look around, I noticed the front plate said Coleman. Then I saw a small inspection plate behind the front right wheel, to my amazement it said Kandi Kruiser with a K and SC Autosports, which is Kandi’s subsidiary company along with Kandi America's Dallas address. I'll stop right now. You can pass that on to Mr. Hu and I have more to say.

Okay.

Go ahead, Luo.

Okay. I went back into the store; saw a second similar car parked there. Both were priced at $9,999, which was under Kandi's $10,999 MSRP that you have on your website. I then checked YouTube and found that actually a couple of very positive reviews had already come out on the Coleman Kandi electric cart purchased at Lowe's. Positive in both price and quality by several YouTube providers and most impressive was confirming its 35-mile range and 25 to 30-mile an hour top speed. Go ahead and pass that on.

Why don't you keep going then? Let's finish this part.

You want me to finish it?

Finish this part. Yes, please.

Okay. I learned from these videos that the Lowe's carts were cheaper than the independent dealers due to fewer features, front rack, ice chest, and only two colors. I then went to two other Lowe's in my area, both had the golf carts. One of them actually had four on site just received. The carts are also available through Lowe's online. The U.S. alone has some 2,250 Lowe's stores. I posted on the private chat board about this, and shortly members from all over the country reported back that golf carts were also in many, but not all of their local Lowe's stores. With this setup, I have more to add on the subject, but let me stop now here and I'll have a question for Ming.

I've noticed that two Lowe's locations near me both have golf carts, one of which just got four delivered. Customers can also find these carts available online through Lowe's. There are approximately 2,250 Lowe's stores across the U.S. I shared this information on a private chat board, and soon after, members from various parts of the country responded that many, though not all, of their local Lowe's stores also had golf carts. I have more to say on this topic, but I'll pause here and ask Ming a question.

Go ahead, please.

Okay. My first question is why were shareholders not told about this? It's incomprehensible that Kandi would do a private label deal with multi-billion dollar Coleman for Lowe's, one of the world's largest big box stores, and not put out a press release. I'm sure even EasyGo, the largest golf cart maker in the world would have put news out on something like this.

My first question is why were shareholders not informed about this? It's hard to understand why Kandi would enter into a private label deal with the multi-billion dollar Coleman for Lowe's, which is one of the world's largest big box retailers, without issuing a press release. Even EasyGo, the largest golf cart manufacturer globally, would have announced news like this.

For this transaction, although we haven't released individual news updates about it, we did mention it in the online press release of our first quarterly report for this year, which was released in May 2022. Moving forward, we will consider such transactions and may explore ways to enhance our press release efforts. Thank you.

Okay. Well, here's something else too, you may or may not have heard about it now, but you probably know about it, but you probably didn't know the shareholders could get access to this. Additionally, members of the private chat board recently discovered a publicly available subscription service tracking all commercial container movements globally. Through this service, it appears that Kandi has already shipped almost 500 containers in the past four months with either 20 or 12 carts in each container depending on whether they were four-seater carts or six-seater. With this level of information easily available to the public for a few dollars subscription, it seems almost unfair to unaware shareholders to be left in the dark on the information. So I appreciate the fact you say you're going to start looking at putting out more news on this. But let me go on a few weeks ago with Kandi in the low twos and 30% discount to cash, 60% discount to book value with no news for eight months, it appeared to many that Kandi was going out of business. I even know some long-term holders that threw in the towel and sold the stock. However, with this information available, it's easy to see that Kandi has already embarked on an incredible future in just this very hot sector alone that could pass $80 million in sales in the second half of this year, surprising all of last year's revenues. I mean, you've already said earlier in the year that we should do $70 million on the first two contracts, and we did about $20 million so far, so we should probably do the balance, I'm sure for a quarter. Anyway, it's very rare that blue-chip companies such as Coleman and Lowe's would risk their reputation and give such a vote of confidence on such a new provider like Kandi in this high-ticket market unless they saw a bright future together. So let me wrap this up with a few more questions. So go ahead and pass that on to Mr. Hu, then I'll have just three more quick questions.

We secured the first two contracts and have generated around $20 million so far, so we are likely to complete the remaining amount in a quarter. It's quite unusual for reputable companies like Coleman and Lowe's to risk their reputation and show such confidence in a new provider like Kandi in this premium market unless they foresee a promising future together. To conclude, I have just a few more questions, so please relay this to Mr. Hu, and I will ask three more quick questions.

Go ahead.

Okay. In addition to the Kandi four-seater crossover cart, some independent dealers are also on the Kandi America website are now showing two additional variations. The six-seater I have mentioned and a new modified version of the four-seater, which gives up the backseat and replaces it with a hydraulic dump bed and includes a 3,000-pound electric winch on the front. This utility version would seem like a natural for Lowe's. Do you anticipate that Coleman Lowe's would also take on these new variations or would this be mainly for independent dealers? Hello?

The independent dealers featured on the Kandi America website are now displaying two new variations. One is the six-seater I previously mentioned, and the other is a modified four-seater that sacrifices the backseat for a hydraulic dump bed and includes a 3,000-pound electric winch at the front. This utility model appears to be a good fit for Lowe's. Do you expect that Coleman Lowe's will also offer these new variations, or will they primarily be available through independent dealers? Hello?

Okay. First of all, regarding self-information and any updates, even though we may not have individual press releases, we have consistently disclosed such self-information and related analysis in our quarterly reports. We will certainly take your feedback into account and aim to improve our disclosures in the future. As for product information and the questions about the models you mentioned, we are still finalizing details with our partners in the U.S. market, so we may not be able to share much right now, but please stay tuned for future disclosures about new developments. Thank you.

That's very encouraging, okay. A couple more; I seem to remember from a prior call that Kandi has a China partner with this project. If so, who is it? What facility is making the carts and what is each company's responsibility, including revenue and profit-sharing terms and percentages?

We cannot provide extensive details at this time due to the U.S. market, but we encourage you to look out for upcoming announcements regarding new developments. Thank you. Arthur Porcari from Corporate Strategies finds this very promising. I recall from a previous call that Kandi has a partner in China for this project. Can you share the name of that partner? Which facility is producing the carts, and what will be the responsibilities of each company, including revenue and profit-sharing agreements and percentages?

So as for the questions, our partner is called Jiangsu Xingchi. We have fully disclosed this transaction in our quarterly report since the first quarter of this year. In February, we signed a joint venture agreement with Jiangsu. They are jointly investing approximately $4.6 million to establish a new entity called Hainan Kandi Holding New Energy Technology Company Limited in Haikou city, Hainan province. Kandi Hainan holds 66.7% of this entity, while Jiangsu Xingchi holds 33.3%. Currently, the crossover golf cart is manufactured by the new entity, Hainan Kandi Holding, even though the production is happening in our Hainan facilities. The revenue sharing structure is based on the shareholding ratio of the entity, meaning we will receive 66.7% of the revenue generated from it.

That's excellent. I remember Jiangsu, that's a huge operation. Remember we talked about dealing with them a few years back, fantastic. Okay, just about finished here. Are there any more major clients like this expected in the near future? Can you give the shareholders and company's revenue growth forecast for Q4, and you already said 2023, we should continue into. So maybe a forecast for 2023 as well, I know you don't like giving forecasts, but I can ask?

That's excellent. I remember Jiangsu, that's a huge operation. We talked about dealing with them a few years back, fantastic. Okay, just about finished here. Are there any more major clients like this expected in the near future? Can you give the shareholders and company's revenue growth forecast for Q4, and you already mentioned 2023, we should continue into. So maybe a forecast for 2023 as well, I know you don't like giving forecasts, but I can ask?

Okay. Regarding major customers, we are currently in discussions with several parties, so please stay tuned for future updates. For 2023, as we have indicated previously, we anticipate a significant increase in revenue for the upcoming year, although we do not have specific details at this time.

Well, fantastic. Finally, it looks like you've hit your stride and Mr. Hu has handled this COVID situation magnificently in spite of what the stock has done. Okay, my last question is just; it's kind of off topic. I noticed that Kandi has put out an excellent new investor presentation deck on its parent website IR section recently without any shareholder notice. Usually, Kandi does this when they're getting ready to attend a stockbroker analyst symposium of sorts. Any particular reason why it was quietly put out now?

It seems like you've really found your rhythm, and Mr. Hu has managed the COVID situation remarkably well, regardless of the stock's performance. My last question is a bit off topic. I saw that Kandi recently released an impressive new investor presentation on its parent company's investor relations section without notifying shareholders. Typically, Kandi does this when preparing for a stockbroker analyst symposium. Is there a specific reason it was released quietly this time?

Thank you for your interest in our website. We periodically update the content and information in response to key developments within the company. This is a standard procedure for us and is not driven by any specific event; it is simply part of our routine process to keep the website current.

Okay, looks very good. Anyway, congratulations to both Ms. Hu and the quiet person back in the U.S. Johnny Tai. I think maybe Mr. Hu should bring him on the next conference call and introduce him to the shareholders. It seems like he has done a pretty phenomenal job.

The update to the website is a routine process without any specific reason behind it. It’s just a regular task for us. Congratulations to both Ms. Hu and Johnny Tai in the U.S. I think Mr. Hu should include him in the next conference call and introduce him to the shareholders, as he seems to have done an impressive job.

Thanks again for your opinion and suggestions.

Thank you all.

The next question comes from Mark Miller, a Private Investor. Please go ahead.

Good evening, Kandi Management. Just a quick one here; on your wholly owned battery subsidiary that you announced in December 2021 and your first quarter filings, you achieved $8 million in revenue from it. There was a slight drop-off in quarter two and in comparison to what you guys paid, it seems like you did a really great transaction here for Kandi's shareholders. Was the sales decline in Q2 the reason for it? You had $8 million in quarter one and $6.3 million in quarter two? Go ahead.

Good evening, Kandi Management. I have a quick question regarding your wholly owned battery subsidiary that you announced in December 2021. In your first quarter filings, you reported $8 million in revenue from it. There was a slight decline in the second quarter, and it seems like you made a great transaction for Kandi's shareholders based on what you paid. Was the sales decline in Q2 the reason for this? You reported $8 million in the first quarter and $6.3 million in the second quarter. Please go ahead.

Yes. Regarding the issue you mentioned, the ongoing effects of the pandemic and lockdown have disrupted the market, impacting both demand and the entire production chain. This has led to a decline in supply and demand, which subsequently affected sales of lithium batteries. While we have seen more stable revenue since the third quarter compared to the second quarter, staying around $6.3 million for the entire fiscal year of 2022, we anticipate generating approximately $27 million or $28 million in sales from the Jiangxi Huiyi entity.

Well, that's good news. Okay, one quick one here. Does Kandi OEM their own batteries for their golf carts, bikes, cars, etc.?

Market conditions affected sales of lithium batteries. While our revenue has stabilized since the third quarter, averaging around $6.3 million for the entire fiscal year of 2022, we anticipate generating approximately $27 million or $28 million in sales from the Jiangxi Huiyi entity.

Yes. The golf cart uses two types of batteries: lead-acid and lithium. We are currently in the process of transitioning from lead-acid batteries to lithium batteries. In the near future, we plan to produce more batteries for our golf carts.

Okay, great. And then the last one here. How am I pronouncing the subsidiary name Huiye? How are we pronouncing that name?

Huiye.

Huiye. Okay. Do they do any private labeling for other battery companies?

We are currently transitioning from lead-acid batteries to lithium batteries. In the near future, we will produce more batteries for our golf carts. Mark Miller, a private investor, asked about the pronunciation of our subsidiary name Huiye, and Kewa Luo, our Manager of Investor Relations, confirmed it is pronounced Huiye. Mark Miller then inquired if Huiye engages in private labeling for other battery companies.

Yes. Huiye has its own market share and brand. That's why they typically manufacture their own batteries instead of producing for other companies.

Okay, great. Listen, thanks for taking my question. I wish you guys all the best and keep up the great work.

Thank you.

Thank you.

The next question comes from Frank Blatterman, a Private Investor. Please go ahead.

Yes. Thank you for taking my second major question here. With regard to your reorganization plan; part one, what is the current status? Part two, if it goes forward, will your shares continue to be listed on the NASDAQ, and if not, where, and at what stage will shareholders know? Part three, what is the legal impact of Kandi incorporated in the British Virgin Islands on its obligations to keep shareholders appraised of material development? Legal obligations aside, what do you intend to do once you're incorporated in the British Virgin Islands with communication to shareholders? And part four here, the last part, what will be the impact on Kandi filing and communicating quarterly earnings reports once you are incorporated in the BVI?

Thank you for your questions. I'm sorry; can you repeat your last question?

Yes. What will be the impact on Kandi filing and communicating quarterly earnings reports?

Thank you for your questions. I'm sorry; can you repeat your last question?

So regarding the status of the reorganization and incorporation to the BVI, our company is still in the process of undertaking this task. In the meantime, we are completing the Form F-4 filing that is necessary for the reorganization plan. Once the Form F-4 becomes effective, we will then plan to hold a general meeting for the shareholders at which time we will have a vote to determine whether the reorganization to the BVI can be completed. Once that reorganization plan is approved by the general meeting of the shareholders, our listing status on the NASDAQ will remain unchanged. Basically, the legal structure can be more accurate; we will streamline our operations, development, and other plans, and we believe that such reorganization can protect the long-term interests of the shareholders to a great extent. Even though we don't worry, we are still a regular NASDAQ listed company. Our communication and disclosure to the shareholders will remain largely the same without much material changes. For all the disclosures, such as the financial reports that we have to file quarterly or regularly based on NASDAQ requirements, all other public information will be submitted and filed to the public as per the SEC regulations. So that's pretty much it for our status update on the reorganization plan. Thank you.

Thank you. Thank you very much.

The conference call is coming to an end. I would like to turn the conference back over to Kewa Luo for any closing remarks.

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. You can also contact our IR advisor Blueshirt. We look forward to updating you on our next earnings call. This concludes our call for today. You may now all disconnect. Thank you.

Again, the conference has concluded. You may now disconnect. Thank you.