Kewa Luo - Investor Relations Manager Hu Xiaoming - Chairman, President and Chief Executive Officer Bing Mei - Chief Financial Officer

Arthur Porcari - Corporate Strategies Michael Pfeffer - Oppenheimer & Co. Inc. Walter Hill - Carty & Company, Inc.

Greetings and welcome to Kandi Technologies Second Quarter 2017 Financial Results Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Kewa Luo, IR Manager. Please go ahead.

Thank you, operator. Hello, everyone, and welcome to Kandi Technologies Group second quarter 2017 earnings call. The Company distributed its earnings press release earlier today and you can find a copy on Kandi's website at www.kandivehicle.com. With us today are Kandi's Founder, Chairman and Chief Executive Officer, Mr. Hu Xiaoming; and Chief Financial Officer, Mr. Bing Mei. Both will deliver prepared remarks followed by a question-and-answer session. Before we get started, I'm going to review the Safe Harbor statement regarding today's conference call. Please note that the discussions today will contain forward-looking statements made under the Safe Harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's future results may differ materially from the views expressed today. Further information regarding these and other risks and uncertainties is included in the company's annual report on Form 10-K for the fiscal year ended March 31, 2017 and in other documents filed with the U.S. Securities and Exchange Commission. Kandi does not assume any obligation to update any forward-looking statements except as required under applicable law. As a reminder, this conference call is being recorded. In addition, an audio webcast of this conference will be available on Kandi's investor relations website. I will now turn the call over to Kandi's Founder, Chairman and CEO, Mr. Hu Xiaoming.

[Interpreted] Greetings to all the participants. Thank you for joining our second quarter 2017 earnings call. Today, we will discuss our second quarter financial results. The detailed financial information will be delivered by our CFO, Mr. Mei later in the conference call. 2017 has been a challenging year for Kandi due to the battery exchange caused confusion surrounding the subsidy heavily impacted the company's business last year. And we have been trying to regain the momentum this year and management team is working hard to explore better growth opportunities. Despite second quarter losses, we have been talking with several strategic investing partners. Kandi Vehicles' estimated value now has exceeded RMB 4 billion. The management team will actively seek strategic investors based upon this estimated value to increase its competitive advantages. The efforts the company has made will lay a solid foundation to achieve strong business results. Now, I would like to turn the call to our Chief Financial Officer, Mr. Bing Mei, to give you more details on our financial highlights.

[Interpreted] Thank you, Mr. Hu, and hello to everyone on this call. I would like to provide a brief overview of our financial results for the second quarter of 2017. Please note that all the numbers I will discuss today are in the U.S. dollars unless otherwise noted. First, let me walk you through second quarter financial results. Total net revenues for the second quarter were $27.3 million, a decrease of 50.5% from total net revenues of $55.2 million for the same quarter of 2016. The decrease in revenues was mainly due to decrease in EV parts sales during this quarter. The decrease in revenues was primarily due to the decrease in sales volumes. The confusion surrounding the subsidy heavily impacted the company's business last year and now we are still trying to recover, therefore the second quarter wasn't in the normal production pace. EV parts sales were approximately $26.2 million for the second quarter of 2017 or 95.9% of our total net revenues, a decrease of $27.6 million or 51.3% compared with the same quarter of 2016. Gross profit for the second quarter was $3.8 million, a decrease of 55.6% from $8.5 million for the same quarter of 2016. Gross margin decreased to 13.7% in the second quarter as compared to 15.3% in the same quarter of 2016. The decrease in our gross margin was mainly due to the decrease in selling prices of battery to JV company in the three months ended June 30, 2017 and the increase to manufacturing overhead per unit, because of decreased sales volume offset by decreased raw material purchase prices during the period, and the increased gross margin of off-road vehicles from export sales. Total operating expenses in the second quarter was $7.1 million compared to - compared with total operating expenses of $10.8 million in the same quarter of 2016. The decrease in total operating expenses was largely due to a decrease of $6.3 million of stock award expenses offset by increase of $4.6 million of R&D expenses in the second quarter of 2017. Net loss was $11.6 million in the second quarter compared with net income of $2.8 million in the same quarter of 2016. The negative change was primarily attributable to the losses from the JV Company, and significantly increased research and development expenses of approximately $5.1 million. Non-GAAP net loss in the second quarter was $9.5 million, a negative change of 190.6% from non-GAAP net income of $10.5 million in the same quarter of 2016. The decrease in non-GAAP net income was due to the JV Company's net losses and significantly increased research and development expenses made in an effort to prepare the company for future business growth. Let me now touch on the JV Company's financials in the second quarter of 2017, the JV Company sold 365 units of EV products. For the second quarter 2017, the JV Company's net sales were $18.7 million, gross loss was $1.5 million, and net loss was $14.6 million. We are coming for our investments in the JV Company under the equity method of accounting, because we have 50% ownership interest in the JV Company. As a result, we recorded 50% of the JV Company losses for a total loss of $7.3 million for the second quarter of 2017. After eliminating intra-entity profits and losses, our share of the JV Company's after-tax loss was $8.7 million for this quarter. Next, I will review the company's cash flow. For the first half year of 2017, cash used in operating activities was $1.7 million, as compared to $3.7 million for the same period of last year. The major operating activities that provided cash for the first half year of 2017 were a decrease in advances to suppliers and prepayment in the prepaid expenses of $23.9 million and the increase in accounts payable of $25 million. The major operating activities that used cash for this period were net loss of $35.7 million and an increase in amounts due from the JV company of $21.9 million. For the first half year of 2017, cash provided by investing activities were $3.4 million as compared to cash provided by investing activities of $5.2 million for the same period of last year. The major investing activities are provided cash for the first half of the year of 2017 was a decrease in short-term investments of $4.5 million. The major investing activities that used cash in this period were $1.0 million of purchases of construction in progress. For the first half year of 2017, cash used in financing activities was $6.6 million, as compared to cash provided by financing activities of $1.7 million for the same period of last year. The major financing activities that provided cash for the first half of 2017 were the proceeds from notes payable of $5.7 million and the proceeds from short-term bank loans of $14 million. The major financing activities that used cash for this period were $17 million of prepayment of short-term bank loans and $9.3 million of increase in restricted cash for issuing notes payable. Thank you. Now, we can take some questions. Operator?

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question today comes from [Robert Lambert of Robert Lambert, Co] [ph]. Please go ahead.

Good morning. The K17A looks very nice but my question has to do - can you update or subsidy payments, how much is still owed to the JV for 2015 and 2016? And any estimate of future payments?

[Foreign Language]

[Interpreted] The payment received in April only covers the partial sales in 2015. There will be an annual settlement afterwards. In terms of when we are going to receive the rest, it's - the rest of 2015 and 2016, we are not too sure. As you know, the government has their own payment schedule. But as far as I know, the process should start soon. There should be probably around RMB 400 million left that we should be receiving for 2015. And in terms of the schedule for 2016, we haven't received any notice yet.

Okay. Thank you.

Thank you.

The next question comes from [Carl Scherer of Rangring Consulting] [ph]. Please go ahead.

Good morning or good evening. I have two questions. One is with all the problems Kandi has encountered recently, this China subsidy, why hasn't Kandi, who does have a long history of exporting off-road vehicles before EV, started exporting EVs yet?

[Foreign Language]

[Interpreted] China is the world's fastest growing and largest EV market. The government has estimated that by 2020 China's EV market will reach 5 million EV units. Kandi is the frontrunner of China's renewable energy vehicles. Despite the current difficult situation regarding to the government subsidy temporary delay, but the opportunities and potentials ahead are still huge. Of course, when the time is ready and the conditions are allowed we will consider the expanding our footprint in the overseas market including our MPT program as well.

I see, thank you. Talking about the vast growth potential in China, there has been recent articles in China about BAIC being the largest car share company in China, this 8,000 vehicles on the road. No mention is being made anywhere about Kandi, the Kandi joint venture or ZZY who I believe have at least 12,000 vehicles on the road alone in Hangzhou. And also there seems to be a new government guideline out there, which pretty much copies Mr. Hu's visionary car-sharing concept for the micro-bus, even uses to micro-bus. And no mention is made of Kandi once more. So is Kandi being disenfranchised or is Kandi still in the middle of this moment? And why are we not hearing about all this partnerships that have been announced over the years? We don't hear any news about more deployments of more vehicles to any of these partners in various cities?

[Foreign Language]

[Interpreted] Okay. This is a very good question. As I keep mentioning earlier, last year we were heavily impacted by the subsidy delay and very gladly the matter has been solved. But however, I have to say, we are still recovering and there is a program that featured - there is a TV program from CCTV and is the very prestigious news program in China. July 28, they have featured a ZZY MPT program. You probably haven't seen it. This has been broadcasted nationwide. So it doesn't mean that you didn't read the news that our program hasn't been mentioned in the media in China. As I mentioned right now, this year we're still recovering, and I believe that with the gradual recovery in the production and sales, we are going to catch up with other peers. You mentioned that they are about 8,000 EV from BAIC on the road, and up to today, they are about 30,000 of our vehicles that running on the road. And from 2013 to 2015, Kandi always have been the first in China in terms of pure EV, I believe next year, we are going to become the leading players in this industry again.

Thank you. I am not doubting that we have 30,000 vehicles on the road. I was just wondering, why do we not hear about it and ready only about BAIC and such? And also why are we having no updates into various partner cities that have contracts for 10,000, 20,000 or 30,000 vehicles to be deployed?

[Foreign Language]

[Interpreted] I already said on the July 28 CCTV, it's the signature TV station in China, has specially featured, so that has indicated that we are in the process of recovering.

Okay. Thank you.

Thank you.

The next question is from Ted Schwartz, a private investor. Please go ahead.

Recently the China news is that articles about two new Kandi EVs, one is the upgraded K17AS, which the company did put out a PR about last week, and the second, called spy shot, an EV who is apparently patented, it's the K23. Is the K23 which you're going to be producing in Hainan or can you at least tell us something about the K23 and how come you decided to actually get a patent on that particular car?

[Foreign Language]

[Interpreted] On the K23 is a mid-tier pure electric vehicle designed for our targeted market with innovative built-in technology, and [sales to arch] [ph] body and interior designs to meet the preferences and demands of today's customers. In November last year, we filed an application of patent for exterior design of EV model K23 with the Chinese government. This year, in July 14, this patent application was approved by the State Intellectual Property Office. And the patent was granted to us. We expect that this new model will be well received by the public. And will become a new revenue growth engine for our business going forward. And, yes, this model will be manufactured at Hainan facility.

Well, thank you for that. Now, the K17AS has gotten a lot of favorable publicity. What's Mr. Hu's expectation? And I did notice that they also had the battery exchange, the same as BAIC did. Is there some kind of connection with or are we getting back into the battery exchange process?

[Foreign Language]

[Interpreted] I think, there were some misunderstanding regarding to our battery exchange. Since, we're beginning we always have had this battery - quick battery exchange, installed in our all EV models, because recently this battery exchange caused the confusion by the government. So it's not that, right now, where we tend to battery exchange gain. And as you can see, right now, company including BAIC also start using very similar technologies. So I believe this going to be ultimate path for electric vehicle. And in the future, this is going to be more and more popular and they acknowledges by the consumers. And it's going to be very beneficiary for the EV development. So fact that even BAIC right now using this kind of technology - quick battery exchange that indicates that what we have been doing is very good. So I believe that, we are going to be quickly returning to our leading position in the EV sector.

All right. One last thing here, you mentioned, everybody is aware of the problems that the company has had over the last year or so. But I think it would be important to mention that in the first quarter of this year, they only did $4.3 million in revenue. The second quarter, they did $27.3 million in revenue. Do you expect the continued substantial increases in revenue in the third and fourth quarter?

[Foreign Language]

[Interpreted] The first two quarters apparently we have been losing, but I've very confident, this year we are going to put even. For the rest of the year, we are - we should have very modest sales, but in terms of exact numbers, I don't feel comfortable to disclose now.

Okay, did Mr. Hu said that you will be expecting breakeven for the year? Is that what you just said, you are?

Excuse me, say one more time?

Did Mr. Hu said he expects to break even for the year, is that what he said?

[Foreign Language]

[Interpreted] Yes, based on our plan by the end of the year, we should have some surprise for the shareholders.

Okay.

[Interpreted] But I don't want to promise right now, and under-deliver. I want to wait till we deliver results. Then everyone will see what we have been planning and been doing.

Okay. Thank you.

Thank you.

The next question is from Harold Gavori, a private investor. Please go ahead.

Yes, hello. As recently as quarter one, China government has been projecting the start of carbon credit trading by the first half of this year. Do you have any updates on both the time in general, and the Kandi participation in particular?

[Foreign Language]

[Interpreted] On carbon trading, as the development plan confirmed by the central government, I haven't heard, just rumor says that, at the end of this month there should be some procedures that is released, but I am not sure. I believe that the trials will start in 2018. This were surely benefit the renewable energy industry and provide favorable policy to support in Kandi's business growth.

Thank you, Mr. Hu, and thank you, everyone.

Thank you.

The next question is from Steve Miller, a private investor. Please go ahead.

Good morning or good evening. I have got two questions. The first one is with all the recent acquisitions that Li Shufu has been making globally, there seems to be a distinct feeling that he is in no great rush for the Kandi JV to become a top priority for growth. If there is any truth in that speculation or understanding, is there any way that Kandi can acquire part of Geely and Li Shufu's position and regain control of the JV? Presumably, that would be very significant once the JV becomes profitable again to the extent that Kandi could then consolidate revenues bidding over 50% owned? Thanks.

[Foreign Language]

[Interpreted] Our collaboration with Geely has always been very close. The development of the JV Company is also very important to Mr. Li. And Li Shufu, Mr. Li is just our partner, and of course, JV Company is not the priority that for sure, just Geely has a lot of other businesses. And in terms of acquiring more JV equity for now, I don't see a - it's a necessary, but going forward for the growth of the JV Company. They might be other investors to be part of it. By the time - when the time is ready maybe the equity restructuring will be necessary. But for now, we don't have any plan yet.

Okay. And then my second question is into this press release, you shared a valuation for Kandi. Can you share what that calculation or determination was based on? Thank you.

[Foreign Language]

[Interpreted] This estimate value is based on the conversation we have had with several investing partners. So in regarding to how this being calculated will be disclosed when the time is right.

That's all. Thank you.

Thank you.

The next question is from [Li Go] [ph] a private investor. Please go ahead.

Good morning, good afternoon, good evening. So I have two questions. The first one is about the K12, recently we have seen several times Chinese media articles about the Lugo [ph] factory. It has been noted that many of the EV's being made our K12. But primarily, the color is red, not the green and white color, which ZZY already has. Can you please tell us who are the buyers of these cars? [Foreign Language]

[Interpreted] Our K12 model comes with many colors to me different customers' preferences probably there are seven colors in total. So I guess, the picture you have seen is just red, and maybe the photographer only likes to take the pictures of the red cars. But that's just one of the seven colors for the K12.

Thank you. My second question is about the JV manufacturing license. Could you please give us some update over to the progress, so when do you expect, which JV - which [indiscernible] license? [Foreign Language]

[Interpreted] In terms of license approval process, we actually Kandi is waiting in the 16 place in this process. And so far, the government - the National Development and Reform Commission has granted safety manufactures to license. So we are basically the next one. However, recently they have been conducted a comprehensive inspection in evaluation of the company's R&D trial production, manufacturing capability. So these have caused the temporarily halted granting license process. And we are expecting this to be finished by October 31 of this year. So if everything goes right, after October 31, the process will be resumed. And during the last two months, I have been very actively talking with the government. And the conversation, I believe, I have with them is very effective. And they also promised me that once the process is resumed, which will be the next one to be granted the license. So of course, we are going to expect some delay, but it shouldn't be impacting that, not being getting the manufacturing license.

And I have another question, so I heard a lot of news on the website. Because of the Beijing Winter Olympics in 2022, the government are pushing very hard to convert the traditional taxi into the new EV around the Beijing and many cities in the area, so how that needs to plan to capitalize at this moment? [Foreign Language]

[Interpreted] Well, since you're Chinese, I can tell you my feeling. Last year because of these matters regarding to the subsidy delay, we were very severely hurt by the situation. So I believe that giving us couple of years will be best to the leading position. So it doesn't matter what sector, I'm sure we are going to get certain market share.

[Foreign Language] Thank you.

Thank you.

The next question comes from Arthur Porcari of Corporate Strategies. Please go ahead.

Hello, all. Excuse my voice. I have a bad case of laryngitis. I hope I am understandable. I'll keep it very short. It was good to see the almost 4.5 fold increase of revenues first quarter to second. Since obviously selling parts is a pre-harbinger of selling cars. And I wish the company would have highlighted that more in the press release. It's something I think about in the future. But my real tangible question has to do - we now have about 400,000 car capacity in place through the four facilities. Is it realistic to assume a 20%-utilization, which should be about 80,000 unit pace by year end 2018. In other words, by the fourth quarter, 20,000 cars of 2018, I'll give a little more time on that. And the 50% utilization, which should be 200,000 cars unit pace by year end 2020, which means by fourth quarter 2020 about 50,000 cars. And is the company now confident that all significant problems are behind and the clear path for growth is now ahead? Thank you.

[Foreign Language]

[Interpreted] We are working diligently on the strategic business plan for the next few years and really trying hard to get back to the leading position. The EV industry in China is in full potential. We really hope to grab this opportunity and increase our market share, so that the company can have a long-term sustainable growth in the near future and reward our loyal shareholders by delivering the real impressive business results. And by 2020, the goal of 200,000 vehicles, I only can say while we're trying to achieve that.

Thank you very much. Just one last question, is Mr. Hu going to be buying some more stock as he did in the two prior quarters of this year?

[Foreign Language]

[Interpreted] Mr. Hu is saying that, we will see, wish you have some plans, and some…

Thank you very much.

Thank you.

Thank you very much. Bye-bye.

The next question is from Michael Pfeffer of Oppenheimer. Please go ahead.

Hi, thanks for taking my call. Last year, two major multi-year sales agreements were signed and announced with the Kandi JV together valued at US$1.5 billion, with Pang Da for 60,000 EVs over four years, Shanksdi [ph] co-investment for 50,000 EVs over five years. Can you give us an update as to the status of each of these deals and any new MPT programs? Thank you.

[Foreign Language]

[Interpreted] These two companies are our very important partners, because we didn't have normal production in the first half of 2017, therefore there is no substantial progress. Our belief there will be some substantial progress in the second half of this year. Regarding to MPT program, the business model and the city extension should have a greater breakthrough in the second half of 2017.

Hello?

[Foreign Language]

The next question is from Mark Miller, a private investor.

Hi, thanks for taking my question. Just for FYI, can you guys, if you're going to quote big facts, put them in U.S.? I kind of buy your stock in U.S. dollars. So when he said, 4 billion dollar value basing to the Kandi Company is that approximately just under US$600 million?

Are you talking about the press release we sent earlier just today?

Yes.

That will be about - so just basically divided by 7 or 6.9.

Right. So what does that come out to, I don't have my handy-dandy calculator in front of me?

Okay, so about US$570 million.

So, just under $600 million approximate value.

Yes.

Okay. All right, I just have one question here. And in quarter one Kandi announced that the Kandi Geely JV had received a supply chain finance agreement for up to $106 million from the city of Rugao government entity. Since Kandi is a major parts supplier to the JV, it is now been having to carry over $130 million in JV parts receivables for extended periods of time, obviously restricted in its liquidity. With this agreement, would it appear this agreement would be a big win, specifically for Kandi who will receive cash instead of paper for its sales in the future? Can you guys expand on this? Thank you.

Okay. [Foreign Language]

[Interpreted] On this Rugao government initiated supply-chain finance is an indicator of the local government support. And the program is - there are manifold to the local enterprises too. And so far, this kind of facility is only available in Rugao. We haven't had any similar agreement made in other cities at this moment.

You receive any cash?

[Foreign Language]

[Interpreted] Yes, we do receive cash for this.

All right, thank you. That's all I have.

Thank you.

The next question is from Walter Hill of Carty & Company. Please go ahead.

This December, Mr. Hu's bought approximately 400,000 shares for almost US$2 million. And Director Yu, he's bought like 27,000 shares, all on the open market at prices basically as high as $5.15 a share. While we much appreciate the show of confidence to shareholder by management as to the future of the company, it has no material effect in increasing shareholder value. As subsidy payments are being made and supply-chain financing is in effect, Kandi's own need to preserve liquidity has been significantly relieved. With the stock trading well below book-value, it would appear that now is a perfect time to start rewarding all shareholders by the company itself buying back shares in the open market. If the company would attempt to buy back up to 10% at an average price of $5 to $6 a share, it would only cost less than 25% of just what the JV alone owes Kandi or the cost of just a few thousand EVs. Would Mr. Hu please comment as to the consideration of the company initiating a buyback?

[Foreign Language]

[Interpreted] In the past, like what you said, I have been buying back of the individuals, so that's my personal behavior, and this also strongly indicating my confidence in the company's future. But if the company decides to buy back shares, the purchase back agreement will be based on the capital needs of our business operations. So we will report to the market if the company decides to proceed with this purchase plan.

Our next question is from Frank Vladermann [ph], a private investor. Please go ahead.

Yes, thank you very much and good evening to you. I have actually two questions. First question, has trial production started at this time on the factory under construction on Hainan Island? And if not, what factors contributed to the delay?

Hello, hi, Frank, can you say one more time, you were kind of far away.

Yes, this phone is not too good. Has trial production started at this time on the factory under construction on Hainan Island? And if not, what factors contributed to the delay.

Okay. [Foreign Language]

[Interpreted] Right now, the construction improvement of Hainan facility is underway. The company started to assemble the prototype modeling in the end of July and plans to send it to national testing center for inspection in the coming months. Once the prototype passes the inspection, the company will launch the trial production the year after.

Okay. Thank you. And my second question, I expect the recently introduced K17AS to have a huge demand, especially with such a great price point after subsidies. The question is will the joint venture have to fund the subsidies until payment from the government agencies is received? And if so, are monies available to do so?

I'm sorry, can you say one more time about the question regarding the K17AS?

Yes, will the joint venture have to fund the subsidies until payment from the government agencies is received? And if so, are monies available to do so?

To produce K17AS?

Yes, in other words, do you have the monies or we got to have to subsidize subsidies until we get paid?

Yes, yes, I got it. [Foreign Language]

[Interpreted] The K17AS is actually already started its production this month.

Hello.

I understand that, but the question is do we have to fund the subsidies until the actual subsidy money is received? And are monies available to sell the product at the price point announced or are we going to have to limit production because not enough money is available to subsidize the subsidies until they are received?

[Foreign Language]

[Foreign Language]

Mr. Hu's answer is this car is eligible for all the subsidies including tax credits, so when the subsidy is available we of course have to take the opportunity. And it's eventually this car is not just going to rely on the subsidy payment.

Okay. Thank you.

Thank you.

There are no additional questions at this time. I would like to turn the call back Mr. Hu, for closing remarks.

[Interpreted] And thank you for all the questions you have asked. I know that the first half has been very tough. But like I emphasized, we are trying really hard and working hard to get back to the leading position. So ladies and gentlemen, thank you for attending our 2017 second quarter earnings call. In closing, allow me to represent the Board of Directors and the management team of Kandi Technologies Group in reaffirming our commitment that we will continue to work diligently to maximize shareholders' value by focusing on strategically growing our EV business, and actively seek strategic investing partners to increase our competitive advantages while delivering strong operational results. Thank you very much for your support. We look forward to talking with you again next quarter. If you have any additional questions, please don't hesitate to contact our Investor Relations department. Good-bye.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.