Kandi Technologies Group, Inc. (NASDAQ:KNDI) Q3 2022 Earnings Conference Call November 8, 2022 8:00 AM ET
Company Participants
Kewa Luo – Manager-Investor Relations
Hu Xiao Ming – President and Chief Executive Officer
Conference Call Participants
Harold Gaboury – Private Investor
Frank Blatterman – Private Investor
Mike Pfeffer – Oppenheimer
Arthur Porcari – Corporate Strategies
Mark Miller – Private Investor
Operator
Good day and welcome to Kandi Technologies Third Quarter 2022 Financial Results Call. [Operator instructions] Please note this event is being recorded.
I would now like to turn the conference over to the Kewa Luo, Manager, Investor Relations at Kandi Technologies Group. Please go ahead.
Kewa Luo
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.
Hu Xiao Ming
[Foreign Language] 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 versus last year growing to $33.7 million from $16.8 million in Q3 2021. This was our highest quarterly sales since the start of 2021.
As important, if not more so, net income turned positive in many ways through the quarter. We are excited about this performance considering the global economic slowdown, and ongoing supply chain demand, as well as resurgence of COVID. The solid performance was driven by the strategic pivot we initiated a couple years ago when we redirected resources in reaction to the pandemic.
I would like to thank all our shareholders for their understanding and support during this transitional period. Also, I’m grateful to our dedicated employees for their hard work in delivering this positive performance.
[Foreign Language] The swing to positive net income was a function of better margins. Gross margin improved largely due to the higher growth margin earned by off-road vehicles and associated parts. Disciplined operating expense control also contributed to the bottom line performance.
[Foreign Language] We were pleased with the product mix, which improved as we executed our strategy. Off-road vehicles and associated parts sales contributed over 60% of total revenue in the third quarter. Rising sales were primarily driven by our strategic pivot and the onboarding of new sales channel in the U.S. established by Kandi America. Consumer interest is accelerating for our golf cart, UTVs and other off-road vehicles; we expect to see higher sales and net income in 2023.
[Foreign Language] Finally, we believe that our healthy cash position enables us to be open to opportunities. We expect more top-line growth based on our diversified and resilient business model. Despite possible economic weakness that could affect consumer demand, we will constantly launch new products in electric vehicle business to gain market share and create more value for our shareholders.
[Foreign Language] Let’s now start the QA Session. Kewa will take any English questions and translate for me. Operator, please go ahead. Operator, please go ahead we can start QA Session.
Question-and-Answer Session
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Harold Gaboury, a Private Investor. Please go ahead.
Harold Gaboury
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 a 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.
Kewa Luo
Thanks for your question.
[Foreign Language]
Hu Xiao Ming
[Foreign Language] So first of all, thank you for your questions. So regarding the production conditions for the K32 off-road trucks, we have been refining the whole production workflow in the past few months. And right now we are capable of the full and mass productions. As a matter of fact, we have gradually started to ship in a normal process and we will arrange the production plan according to the market demand.
And as for the go-karts powered by gas, indeed the sales volume also for the whole market has declined this year. And so all vehicles, including the go-karts, are currently produced by us will be gradually electrified, which is the trend for the whole market. But we are in the more advanced position. And besides we do not produce the electric bicycles at the moment.
And finally, our focus really stick on the pure electric highway vehicles. As for the disclosure issues, we actually stick with the requirements and the guidance from the SEC. We’ll make sure we have accurate reporting and disclosure. But we would consider your points and consider how we can find down the road. And thanks again.
Harold Gaboury
Thank you very much.
Operator
The next question comes Frank Blatterman a Private Investor. Please go ahead.
Frank Blatterman
Yes, good evening to those in China. And good morning to those in the other time zones. I have two questions. Has Kandi solved the airbag issue regarding the K23 and K27 and either self-certified or submitted to the DoT for certification for highway use?
And number two, on July the 19, 2021, a press release was issued announcing the purchase of [indiscernible] forgive my pronunciation, what was the contribution of revenue of that acquired company in the third quarter?
Kewa Luo
Thank you for your questions.
[Foreign Language]
Hu Xiao Ming
[Foreign Language] So thanks for the questions. The first question regarding the airbag problem for K23 and K27, at the moment we have not been able to resolve that and we are trying hard to do so. We’ll keep it posted for any new update. As for the sales revenue from the Jiangxi Huiyi, the revenue generated for the third quarter was about US$6.3 million. Thank you.
Frank Blatterman
Okay, thank you very much.
Operator
Just one moment. The next question comes from Mike Pfeffer with Oppenheimer. Please go ahead.
Mike Pfeffer
Good morning. Based on Q3 2022 financials to date, it appears that the 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 PR announced, Kandi enters framework agreement to produce battery swap enabled electric vehicles, referencing has signed 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 parts and then Hengrun will take our parts and assemble to be 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 assembly to be a whole vehicle. What is the difference between production by Kandi and assembly by Hengrun? Is the final assembly by Hengrun or Kandi Haiku facility? If this is a JV, what is the detailed sharing arrangement?
Kewa Luo
Thank you for your question. Let me translate to right you now. Then you can ask after that. Okay?
[Foreign Language]
Hu Xiao Ming
[Foreign Language] Okay. So the corporation, it really depends on the regulation from China system. So, the way we work is basically for all the key and main components are produced by us of the Kandi Hainan. And our partner, Hengrun is responsible for the final assemble of the vehicles, and those vehicles are sold with Hengrun’s production qualifications or the license. So that’s how we cooperate.
Mike Pfeffer
Okay. One other question from a PR by Hengrun on its website in China, October 13, 2022, they announced their Hengrun H23, formally the Kandi K23 with quick battery exchange has been officially released for sale at RMB139,800 around US$19,800. Can you give us some details on this? And if true, why didn’t Kandi put this news out in U.S.? U.S. holders have been waiting for years for Kandi to be backed in the China EV market.
Kewa Luo
[Foreign Language]
Hu Xiao Ming
[Foreign Language] Okay. So the update is the model H23 that we manufactured along with Hengrun was actually announced by the Ministry of Industry and Information Technology on May this this year. So basically, we approved and qualified to produce a manufacturer such model in the PLC market. And there were small amount of the sales that incurred in the second and third quarters of this year.
At the moment the China’s domestic electric vehicle market is still not in the healthy or orderly development stage. The companies, they even try to sell with deficit or loss in order to occupy the market. So right now, we will keep track and try to improve. However, we starting to keep and retain the small scale operation at the moment in order to keep our budget and our cash. And we will definitely accelerate that progress when the China market become more healthy and profitable. And we will keep you posted for any further update, of course. Thank you.
Mike Pfeffer
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.
Kewa Luo
[Foreign Language]
Hu Xiao Ming
[Foreign Language] So first of all, our corporation with Hengrun means now our electric model H23 produced by our corporation, or sorry, announced by the Ministry of Industry and Information Technology, so meaning we are now officially approved and capable of manufacturing and selling such model in the PLC market. We don’t have such qualification ourselves. That’s why we are working with a Hengrun to work together in order to get such qualified process in place.
As for the income and the revenue, we basically get all the income generated from the complete steps of this parts we sell to Hengrun. Unlike the cooperation with Gilly, which we are in the joint venture relationship, meaning we will share and split whether there’s profit or loss. The relationship with Hengrun is a partnership and then the trading relationship, meaning we will generate the revenue as long as we deliver the sales of the EV parts to them. And then they will go and sell from their own resources. But basically the revenue is generated once we deliver to Hengrun.
Hope that can address your questions.
Mike Pfeffer
Thank you.
Operator
Just one moment. The next question comes from Arthur Porcari with Corporate Strategies. Please go ahead.
Arthur Porcari
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 is primarily 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.
Kewa Luo
Thank you for your question. [Foreign Language] Go ahead.
Arthur Porcari
Okay. On our last conference call, Mr. Hu confirmed that in the earlier 10-Q also the Kandi had at that time received two contracts for electric golf carts, totaling some US$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 on info I got from an exciting Kandi independent 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.
Kewa Luo
Okay. [Foreign Language]
Hu Xiao Ming
[Foreign Language] Go ahead Luo.
Arthur Porcari
Okay. I went back into the store Okay. I went back into the store in the garden section; saw a second similar car parked there both were priced at 9,999, which was under the Kandi’s 10,999 MSRP that you have on your website. And then checked YouTube and can 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 in 25 to 30-mile an hour top speed. Go ahead and pass that on.
Kewa Luo
Why do you keep going then? Let finish this part.
Arthur Porcari
You want me to finish it?
Kewa Luo
Finish this part. Yes, please.
Arthur Porcari
Okay. I learned from these videos that the Lowe’s carts were cheaper than the independent dealers due to less 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 reporting back that golf carts were also in many, but not all of their local Lowe’s stories. 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.
Kewa Luo
Okay. [Foreign Language] Go ahead, please.
Arthur Porcari
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’ve put news out on something like this.
Kewa Luo
[Foreign Language]
Hu Xiao Ming
[Foreign Language] So for such transaction even though we have not released individual news separately about the mentioned, we did include such transaction in the online press release of the first quarterly report of this year that was released back in May 2022. But ongoing, we will consider such transaction and maybe consider how to improve our press release channel. Thank you.
Arthur Porcari
Okay. Well, here’s something else too, you may or may not – you might 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 the 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, 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 the second half of this year, surprising all of last year’s revenues.
I mean, you’ve already said earlier in the year where we should do 70 million on the first two contracts, and we did about 20 some 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’s 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.
Kewa Luo
[Foreign Language] Go ahead.
Hu Xiao Ming
[Foreign Language] So go ahead.
Arthur Porcari
Okay. In addition to the Kandi, yes, 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 be taken on these new variations or this be mainly for independent dealers?
Hello?
Kewa Luo
[Foreign Language]
Hu Xiao Ming
[Foreign Language] Okay. First of all about the self-information and any update development, even though we may not have the individual press release separately. However, we have always disclosed such that self-information and related analysis in our quarterly reports. And based on your opinion, we’ll definitely take consider that and try to refine our disclosure as much as possible in the future.
And regarding the product information that, and the questions that the models that you talk about, I guess we are still working on the details with our partners in U.S. market. So we may not be able to disclose too much at the moment, but please pay attention to upcoming disclosure for new development. So stay tuned, please. Thank you.
Arthur Porcari
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 cards and what are each company’s responsibility, each company’s revenue and profit sharing terms and percentages?
Kewa Luo
[Foreign Language]
Hu Xiao Ming
[Foreign Language] So as for questions, our partner is called Jiangsu Xingchi. Regarding such transaction we have actually fully disclosed in our quarterly report since the first quarter of this year. In February of this year, we and Jiangsu seems to sign a joint venture agreement. They jointly invest approximately US$4.6 million to establish a new entity. It’s called Hainan Kandi Holding New Energy Technology Company Limited at the Haikou city of Hainan province. So Wealth Group, Kandi Hainan holds 66.7% of such entity, whereas the Jiangsu Xingchi holds 33.3% of the entity. At the moment such a – the crossover golf cart is manufactured by the new entity, Hainan Kandi Holding even though the production was taking place in our Hainan facilities of Kandi. The public sharing scale is based on the shareholding ratio of such entity. So meaning we will have 66.7% of such revenue generated from this entity.
Arthur Porcari
That’s excellent. I remember Jiangsu [ph], 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 he doesn’t like giving forecast, but I can ask?
Kewa Luo
[Foreign Language]
Hu Xiao Ming
[Foreign Language] Okay. As for the major customers there are some parties they’re working with and in the negotiation, so please stay tuned to upcoming disclosure for further development and details. For the 2023 as we mentioned in the past we do believe that there will be a large increase of the revenue for upcoming year. However, we don’t have such detail focus at the moment.
Arthur Porcari
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 stock broker analyst symposium of sorts. Any particular reason why it was quietly put out now?
Kewa Luo
[Foreign Language]
Hu Xiao Ming
[Foreign Language] Thanks for your attention to our website. Actually from time-to-time we are updating the content and the information on the website according to the key development of the company. It just a routine process and without really a specific reason of doing that, it just routine task force for us to update the website.
Arthur Porcari
Okay, looks very good. Anyway, congratulations 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.
Kewa Luo
[Foreign Language]
Hu Xiao Ming
[Foreign Language] Thanks again for your opinion and suggestions.
Arthur Porcari
Thank you all.
Operator
[Operator Instructions] The next question comes from Mark Miller, a Private Investor. Please go ahead.
Mark Miller
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. 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 the Kandi’s shareholders. Was the sales decline in Q2, what was the reason for it? You had 8 million in quarter one and 6.3 million in quarter two? Go ahead.
Kewa Luo
[Foreign Language]
Hu Xiao Ming
[Foreign Language] Yes. About the issue you mentioned due to the continuous impact of the pandemic and the lockdown, their disruption of the market for the demand and the whole production chain. So it brings the whole decline of the supply and domain in market and subsequently, of course, a sale of the lithium batteries was impacted proportionally. Although we have a more stable revenue since quarter three compared to quarter two, which stays around US$6.3 million for the whole fiscal year of 2022 we expect to generate roughly US$27 million or US$28 million of the sales from this Jiangxi Huiyi entity.
Mark Miller
Well, that’s good news. Okay, one quick one here. Are – does Kandi OEM, do they make their own batteries for their own golf carts, bikes, cars, et cetera?
Kewa Luo
[Foreign Language]
Hu Xiao Ming
[Foreign Language] Yes. So basically the golf cart they adopt two types of the battery. One is the lead-acid battery and another one is the lithium battery. So we now gradually switch the models from lead-acid battery to the lithium battery, so upcoming Huawei [ph] we will manufacture more batteries for our golf cart.
Mark Miller
Okay, great. And then last one here. How am I pronouncing the subsidiary name Huiye? How are we pronouncing that name?
Kewa Luo
Huiye.
Mark Miller
Huiye. Okay. Do they do any private labeling for other battery companies?
Kewa Luo
[Foreign Language]
Hu Xiao Ming
[Foreign Language] Yes. So Huiye, they have their own market share and so they have their own brand. That’s why they usually just manufacture their own brand of batteries without the OEM for other companies.
Mark Miller
Okay, great. Listen, thanks for taking my question. I wish you guys all the best and keep up the great work.
Kewa Luo
Thank you.
Hu Xiao Ming
Thank you.
Operator
The next question comes from Frank Blatterman, a Private Investor. Please go ahead.
Frank Blatterman
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 to 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 number 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?
Kewa Luo
Thank you for your questions.
[Foreign Language] I’m sorry; can you repeat your last question?
Frank Blatterman
Yes. What will be the impact on Kandi filing and communicating quarterly earnings reports?
Kewa Luo
[Foreign Language]
Hu Xiao Ming
[Foreign Language] So regarding the status of the reorganization and a thermostat to BVI, our company is still in the progress of taking such task. In the meantime, we are completing the Form F-4 the filing that is necessary for the organization plan. Once the Form F-4 gets effective we will then plan to hold a journal meeting for the shareholders at what time, that time we will have the voting to determine whether the registration to BVI and the thermostat can be completed.
And once that the organization plan is approved by the general meeting of the shareholders, our listing status on the NASDAQ actually remain un-change. So basically it actually – the legal structures can be more accurately – we flat our operations, our development, and then our other plans are coming and we believe with such reorganization can protect the long-term interest of the shareholders to a great extent.
And even though we don’t worry, we are still a regular NASDAQ listed company. So our communication and the disclosure to the shareholders actually will make pretty much the same without much material changes. Because for all the disclosures and such as the financial reports we have to file quarterly or we regularly based on the NASDAQ requirements. And all other public informations will be submitted and filed to the public as per the requirements of the SEC regulations. So that’s pretty much it for our status update for the recanalization plan. Thank you.
Frank Blatterman
Thank you. Thank you very much.
Operator
The conference call is coming to an end. I would like to turn the conference back over to Kewa Luo for any closing remarks.
Kewa Luo
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.
Operator
Again, the conference has concluded. You may now disconnect. Thank you.
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