ITEM
3. KEY INFORMATION
3.A.
[Reserved]
3.B.
Capitalization and Indebtedness
Not
Applicable.
3.C.
Reasons For The Offer And Use Of Proceeds
Not
Applicable.
3.D.
Risk Factors
Investing
in our ordinary shares is highly speculative and involves a significant degree of risk. You should carefully consider the following risks
as well as all other information contained in this annual report, including the matters discussed under the headings “Forward-Looking
Statements” and “Operating and Financial Review and Prospects” before you decide to make an investment in our ordinary
shares. We are a holding company with substantial operations in China and are subject to a legal and regulatory environment that in many
respects differs from the United States. The risks discussed below could materially and adversely affect our business, prospects, financial
condition, results of operations, cash flows, ability to pay dividends and the trading price of our ordinary shares. Additional risks
and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business,
prospects, financial condition, results of operations, cash flows and ability to pay dividends, and you may lose all or part of your
investment.
RISK FACTORS SUMMARY
Our business is subject to numerous risks described
in the section titled “Risk Factors” and elsewhere in this prospectus. The main risks set forth below and others you should
consider are discussed more fully in the section entitled “Risk Factors”, which you should read in its entirety.
Risks Related to Our Business and Industry
Risks and uncertainties related to our business and industry include,
but are not limited to, the following:
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We may incur losses in the future.
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We are an early stage company of e-bicycle products and charging piles with a limited operating history. Our limited operating history in the industry may not provide an adequate basis to judge our future prospects and results of operations for this segment, and may increase the risk of your investment.
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If we fail to develop and introduce new models of e-bicycle products in anticipation of market demand in a timely and cost-effective manner, our competitive position and ability to generate revenues may be materially and adversely affected.
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If we fail to adopt new technologies or adapt our e-bicycles to changing customer requirements or the industry standards, our business may be materially and adversely affected.
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If we are unable to manage our growth or execute our strategies effectively, our business and prospects may be materially and adversely affected.
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Our marketing strategy of appealing to and growing sales to a more diversified group of users may not be successful.
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We face intense competition in the charging pile market, and if we fail to compete effectively, we may lose market share and customers.
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Our products and services may experience quality problems from time to time, which could result in decreased sales, adversely affect our results of operations and harm our reputation.
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We may be subject to product liability claims if people or properties are harmed by our products and we may be compelled to undertake product recalls or take other actions, which could adversely affect our brand image and results of operations.
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Our products are subject to safety and other standards and failure to satisfy such mandated standards would have a material adverse effect on our business and operating results.
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Risks Related to Our Corporate Structure
Risks and uncertainties relating to our corporate structure include,
but are not limited to, the following:
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Our current corporate structure and business operations may be affected by the newly enacted Foreign Investment Law which does not explicitly classify whether VIEs that are controlled through contractual arrangements would be deemed as foreign-invested enterprises if they are ultimately “controlled” by foreign investors.
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We rely on contractual arrangements with our consolidated VIE and its shareholders to operate our business, which may not be as effective as direct ownership in providing operational control and otherwise have a material adverse effect as to our business.
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Any failure by our consolidated VIE or its shareholders to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business.
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The shareholders of our consolidated VIE may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.
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If the PRC government deems that the contractual arrangements in relation to our consolidated VIE do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.
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Contractual arrangements in relation to our consolidated VIE may be subject to scrutiny by the PRC tax authorities and they may determine that our consolidated VIE owes additional taxes, which could negatively affect our financial condition and the value of your investment.
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We may lose the ability to use and enjoy assets held by our consolidated VIE that are material to the operation of our business if the entity goes bankrupt or becomes subject to a dissolution or liquidation proceeding.
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If the custodians or authorized users of our controlling non-tangible assets, including chops and seals, fail to fulfill their responsibilities, or misappropriate or misuse these assets, our business and operations may be materially and adversely affected.
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Risks Related to Doing Business in China
We are also subject to risks and uncertainties relating to doing business
in China in general, including, but are not limited to, the following:
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Uncertainties in the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to you and us.
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We may be adversely affected by the complexity, uncertainties, and changes in PRC regulation of internet retailers.
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Regulation and censorship of information disseminated over the Internet in China may adversely affect our business, and we may be liable for content that is displayed on our website.
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Changes in China’s economic, political, or social conditions or government policies could have a material adverse effect on our business and operations.
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Restrictions on currency exchange or outbound capital flows may limit our ability to utilize our PRC revenue effectively.
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PRC regulations relating to foreign exchange registration of overseas investment by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into these subsidiaries, limit PRC subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.
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PRC regulation on loans to, and direct investment in, PRC entities by offshore holding companies and governmental control in currency conversion may delay or prevent us from using the proceeds of this offering to make loans to or make additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.
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Our PRC subsidiary is subject to restrictions on paying dividends or making other payments to us, which may restrict our ability to satisfy our liquidity requirements, and any limitation on the ability of our PRC subsidiaries to make remittance to pay dividends to us could limit our ability to access cash generated by the operations of those entities.
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Regarding the Overseas Issuance and Listing of Securities by Domestic Enterprises (Draft for Comments) (the “Draft Administrative Provisions”) and the Measures for the Overseas Issuance of Securities and Listing Record-Filings by Domestic Enterprises (Draft for Comments) (the “Draft Filing Measures,” collectively with the Draft Administrative Provisions, the “Draft Rules Regarding Overseas Listing”). The Draft Rules Regarding Overseas Listing lay out the filing regulation arrangement for both direct and indirect overseas listing, and clarify the determination criteria for indirect overseas listing in overseas markets. Among other things, if a domestic enterprise intends to indirectly offer and list securities in an overseas market, the record-filing obligation is with a major operating entity incorporated in the PRC and such filing obligation shall be completed within three working days after the overseas listing application is submitted. The required filing materials for an initial public offering and listing shall include but not limited to: regulatory opinions, record-filing, approval and other documents issued by competent regulatory authorities of relevant industries (if applicable); and security assessment opinion issued by relevant regulatory authorities (if applicable). The Draft Rules Regarding Overseas Listing, if enacted, may subject us to additional compliance requirement in the future. Any failure of us to fully comply with new regulatory requirements may significantly limit or completely hinder our ability to offer or continue to offer our ordinary shares, cause significant disruption to our business operations, and severely damage our reputation, which would materially and adversely affect our financial condition and results of operations and cause our ordinary shares to significantly decline in value or become worthless.
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Our ordinary shares may be delisted under the Holding Foreign Companies Accountable Act if the PCAOB is unable to inspect our auditors. The delisting of our ordinary shares, or the threat of their being delisted, may materially and adversely affect the value of your investment. Furthermore, on June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act, which, if enacted, would amend the HFCA Act and require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years instead of three.
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Risks Related to Our Ordinary Shares
In addition to the risks and uncertainties described
above, we are subject to risks relating to our ordinary shares, including, but not limited to, the following:
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An active trading market for our ordinary shares may not continue and the trading price for our ordinary shares may fluctuate significantly.
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The trading price of our ordinary shares may be volatile, which could result in substantial losses to investors.
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We may not be able to maintain our listing on Nasdaq which could limit investors’ ability to make transactions in our securities and subject us to additional trading restrictions.
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Because we do not expect to pay dividends in the foreseeable future, you must rely on price appreciation of our ordinary shares for return on your investment.
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Restrictive covenants related to our previous registered direct offering may restrict our ability to obtain future financing.
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Risks Related to Our Business and Industry
We may incur losses in the future.
We had net income of approximately $2.19 million,
$0.28 million for the fiscal years ended September 30,2019 and 2020 respectively and we had net loss of approximately $3.41 million for
the fiscal years ended September 30, 2021. We anticipate that our operating expenses (such as sale expense, marketing expense and research
and development expense), together with the increased general administrative expenses of a growing public company, will increase in the
foreseeable future as we seek to maintain and continue to grow our business, attract potential customers and further enhance our product
offering. These efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently
to offset these higher expenses. As a result of the foregoing and other factors, we may incur net losses in the future and may be unable
to achieve or maintain profitability on an interim or annual basis for the foreseeable future.
We
are an early stage company of e-bicycle products and charging piles with a limited operating history. Our limited operating history
in the industry may not provide an adequate basis to judge our future prospects and results of operations for this segment, and
may increase the risk of your investment.
We launched our business in 2014 and started focusing on the
current business of electronic bicycle (“e-bicycle”) products and charging piles in August 2019. Our limited history
may not provide a meaningful basis for investors to evaluate our business, financial performance and prospects of our business.
Potential customers may not be familiar with our market and may have difficulty distinguishing our products and services from those
of our competitors. Convincing potential new customers of the value of our products and services is critical to increasing the
volume of sales facilitated through our website and to the success of our business. If we fail to educate potential customers about
the value of our products and services, if the market for our services does not develop as we expect, or if we fail to address
the needs of our target market in China or elsewhere, our business and results of operations will be harmed.
If
we fail to develop and introduce new models of e-bicycle products in anticipation of market demand in a timely and cost-effective
manner, our competitive position and ability to generate revenues may be materially and adversely affected.
Recently,
our primary focus has been new models of e-bicycle products. As a new
player in the e-bicycle industry, we face intense competition from current industry leaders. The introduction of new products is subject
to risks and uncertainties. Unexpected technical, operational, logistical, regulatory, or other problems could delay or prevent the introduction
of one or more new products. Moreover, we cannot assure you that any of these new products will match the quality or popularity of those
developed by our competitors, and achieve widespread market acceptance or generate the desired level of income for our customers.
Meanwhile,
offering new products requires us to make investments in research and development, recruit and train additional qualified workers,
and increase marketing efforts. In addition, some manufactures, including the large companies in this industry, like Aima and
Yadea, have developed low-end and low-cost models which are sold at approximate RMB1,000 per vehicle (without battery). Since
most of the e-bicycle users are low-income workers, we may encounter difficulties with the creation of the new products and in
offering new products, we may face new risks and challenges that we are not familiar with. Furthermore, we may experience difficulties
in recruiting or otherwise identifying qualified workers to develop the new products. If we are unable to offer new products in
a timely and cost-effective manner, our results of operations and financial condition could be adversely affected.
If
we fail to adopt new technologies or adapt our e-bicycles to changing customer requirements or the industry standards, our business
may be materially and adversely affected.
To remain competitive, we must continue
to enhance and improve the functionality and features of our e-bicycles. The production cycle of e-bicycles from research and development
stage to implementation stage takes significant time. The changes in customer requirements and preferences, frequent introductions
of new products and services embodying new technologies and the emergence of new industry standards and practices, any of which
could render our existing technologies and products obsolete. Our success will depend, in part, on our ability to identify, develop,
acquire or license leading technologies useful in our business, and respond to technological advances and new industry standards
and practices in a cost-effective and timely way. The development of e-bicycles or other proprietary technology entails significant
technical and business risks. We may not be able to use new technologies effectively or adapt our projects and proprietary technologies
to meet customer requirements or new industry standards. If we are unable to adapt in a cost-effective and timely manner a response
to changing market conditions or customer requirements, whether for technical, legal, financial, or other reasons, our business,
prospects, financial condition and results of operations may be materially and adversely affected.
If
we are unable to manage our growth or execute our strategies effectively, our business and prospects may be materially and adversely
affected.
To
accommodate our growth, we anticipate that we will need to implement a variety of new and upgraded operational and financial systems,
procedures, and controls, including the improvement of our accounting and other internal management systems. We will also need
to continue to expand, train, manage and motivate our workforce and manage our relationships with customers and third-party suppliers.
All of these endeavors involve risks, and will require substantial management effort and significant additional expenditures.
We may not be able to manage our growth or execute our strategies effectively, and any failure to do so may have a material adverse
effect on our business and prospects.
Our
marketing strategy of appealing to and growing sales to a more diversified group of users may not be successful.
Our
marketing is aimed at reinforcing customer perceptions of our brand as a premium e-bicycles brand and leasing service provider.
We aim to provide users with a good user experience, including by providing our users with access to a full suite of services
conveniently through our online website and services stores. We cannot assure you that our services or our efforts to engage with
our users using both our online and offline channels, will be successful, which could impact our revenues as well as our customer
satisfaction and marketing.
To
grow the business over the long term, we must be successful in selling products and services and promoting our brand experience
to a broader and more users. We must also execute our diversification strategy without adversely impacting the strength of the
brand with core users. Failure to successfully drive demand for our e-bicycles may have a material adverse effect on our business
and results of operations.
We face intense competition in the charging
pile market, and if we fail to compete effectively, we may lose market share and customers.
New and enhanced technologies may increase the competition in the
charging pile industry. Increased competition may reduce our profitability, market share, customer base and brand recognition. There
can be no assurance that we will be able to compete successfully against current or future competitors, and such competitive
pressures may have a material and adverse effect on our business, financial condition, and results of operations.
Our
products and services may experience quality problems from time to time, which could result in decreased sales, adversely affect
our results of operations and harm our reputation.
Our
products and services may contain design and manufacturing defects. There can be no assurance that we will be able to detect and
fix all defects in the products and services we offer. Failure to do so could result in lost in revenue, significant warranty
and other expenses and harm to our reputation.
Additionally,
we source and purchase key components in our operations and production of e-bicycles from third-party and related party suppliers,
such as tires, motors and controllers. Currently, we purchase most of the e-bicycles and components for Jiangsu Cenbird from a
related party. We cannot assure you that the quality and functions of these key components supplied by suppliers will be consistent
with and maintained at our high standard. Any defects or quality issues in these key components or any noncompliance incidents
associated with these third-party suppliers could result in quality issues with our e-bicycles and hence compromise our brand
image and results of operations.
We may be subject to product liability claims
if people or properties are harmed by our products and we may be compelled to undertake product recalls or take other actions, which could
adversely affect our brand image and results of operations.
We are subject to product liability claims for
our products sold or rented through online and offline channels. As a result, sales and/or rentals of such products on our platform could
expose us to product liability claims relating to personal injury or property damage and may require product recalls or other actions.
Third-parties subject to such injury or damage may bring claims or legal proceedings against us as retailer, and manufacturer and lessor
of the products. In the future, we may at various times, voluntarily or involuntarily, initiate a recall if any of our products, including
any systems or parts sourced from our suppliers, prove to be defective or noncompliant with applicable laws and regulations. Such recalls,
whether voluntary or involuntary or caused by systems or components engineered or manufactured by us or our suppliers, could involve significant
expense and could adversely affect our brand image in our target markets, as well as our business, prospects, financial condition and
results of operations.
Our
products are subject to safety and other standards and failure to satisfy such mandated standards would have a material adverse
effect on our business and operating results.
All
e-bicycles must comply with the safety and other standards of the market where the e-bicycles are sold. In China, e-bicycles must
meet or exceed all mandated safety and other standards, including national and local standards. Under these standards, the Company
is required to conduct rigorous testing and use approved materials and equipment. On April 15, 2019, the State Administration
for Market Regulatory and the National Standardization Administration of China jointly promulgated the Regulation on Safety Technical
Specification for Electric Bicycles and announced the new standard GB11761-2018 was effective, or the National New Standard, replacing
the old standard GB17761-1999. Although we follow the regulatory requirements and have obtained the 3C certificates issued by
Certification Center of Light Industry Council, our new models e-bicycles may fail to meet the National New Standard.
In
addition, our batteries must comply with the national standard GB/T 36972-2018 Lithium Batteries for Electric Bicycles, which
was officially released on December 28, 2018 and implemented on July 1, 2019. Lithium batteries that do not meet standard may
be returned by customers, harm our reputation and subject us to additional regulatory actions. While there is no national standard
for charging pile, if the customers are not satisfied with our products, the products may be returned. This could harm our relationship
with our business partners and reputation in the industry. Any of these occurrences could have a material adverse effect on our
operations and financial results.
The
wide variety of payment methods that we accept subjects us to third-party payment processing-related risks.
We
accept payments using a variety of methods, including bank transfers, online payments with debit cards issued by banks in China,
and payment through third-party online payment platforms such as Alipay and WeChat Pay. We may be subject to fraud and other illegal
activities in connection with the various payment methods we accept, including online payments. In addition, we are subject to
various rules, regulations and requirements, regulatory or otherwise, governing electronic funds transfers, which could change
or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements,
we may be subject to fines and higher transaction fees and lose our ability to accept debit card payments from our customers,
process electronic funds transfers or facilitate other types of online payments, and our business, financial condition and results
of operations could be materially and adversely affected.
We
are dependent upon our core customers for substantial portions of the sale and rental of our e-bicycles and batteries. Any interruption
in our relationship with our core customers could materially and adversely affect our growth and financial condition.
We have relied on our three major customers in
sales of batteries, including Zhejiang Weichen Technology Co., Ltd., Changzhou Copidi Energy Co., Ltd., and Guangxi Anneng Technology
Co., Ltd., each accounted for approximately 52%, 28% and 8%, respectively, of our sales of lithium batteries for the fiscal year ended
September 30, 2021. And we have relied on our three major customers in sales of batteries, including Beijing 70 Generation Co., Ltd.,
Hehai Jinsong Bicycle Sales Shop, and Shangchi Motors Co., Ltd., each accounted for approximately 20%, 19% and 10%, respectively, of our
sales of batteries for the fiscal year ended September 30, 2020. We have also relied on three other major customers in trading sales of
lithium battery cells, including Shanghai Yutu Industry Co., Ltd, Shanghai Jialongtai Industry Co., Ltd, and Jiangyin Zhuoao International
Trading Co., Ltd, each accounted for approximately 49%, 37% and 14%, respectively, of our trading sales of lithium battery cells for the
fiscal year ended September 30, 2019.
We have relied on three major customers, including
Henan Young Man Industries Trade Co., Ltd., Beijing 70 Generation Co., Ltd., and Wenzhou Longwan Yongzhong Tengbu Bicycle Firm, each accounted
for approximately 17%, 11% and 9%, respectively, of our e-bicycles sales revenue for the fiscal year ended September 30, 2021. And we
have relied on one major customer in e-bicycles sales business, Beijing 70 Generation Co., Ltd., accounted for approximately 31% of our
e-bicycles sales revenue for the fiscal year ended September 30, 2020, and we had immaterial revenue in such business in the same period
of 2019. Any disputes with our business partners could have a material adverse effect on our business and results of operations.
Our
success depends on our ability to retain our core management team and other key personnel.
Our
performance depends on the continued service and performance of our directors and senior management as they are expected to play
an important role in guiding the implementation of our business strategies and future plans. If any of our directors or any members
of our senior management were to terminate their service or employment, there can be no assurance that we would be able to find
suitable replacements in a timely manner, at acceptable cost or at all. The loss of services of key personnel or the inability
to identify, hire, train and retain other qualified and managerial personnel in the future may materially and adversely affect
our business, financial condition, results of operations and prospects. Additionally, we rely on our research and development
personnel for product development and technology innovation. If any of our key research and development personnel were to leave
us, we cannot assure you that we can secure equally competent research and development personnel in a timely manner, or at all.
Competition
for our employees is intense, and we may not be able to attract and retain the highly skilled employees needed to support our
business.
As
we continue to experience growth, we believe our success depends on the efforts and talents of our employees, including management
team and financial personnel. Our future success depends on our continued ability to attract, develop, motivate and retain highly
qualified and skilled employees. Competition for highly skilled personnel is extremely intense. We may not be able to hire and
retain these personnel at compensation levels consistent with our existing compensation and salary structure. Many of the companies
with which we compete for experienced employees have greater resources than we do and may be able to offer more attractive terms
of employment.
In
addition, we invest significant time and expense in training our employees, which increases their value to competitors who may
seek to recruit them. If we fail to retain our employees, we could incur significant expenses in hiring and training their replacements,
and the quality of our services and our ability to serve customers could diminish, resulting in a material adverse effect on our
business.
We
may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitive
position.
We
regard our trademarks, domain names, trade secrets, proprietary technologies and other intellectual property as critical to our
business. We rely on a combination of intellectual property laws and contractual arrangements, including confidentiality agreements
with our employees, partners and others, to protect our proprietary rights. As of the date of this report, we have obtained six
registered patents from the PRC related to technologies used in our battery cell manufacturing, battery packing and two-stroke
permanent magnet engines as well as e-bicycle manufacturing. We have also registered 14 trademarks with the China Trademark
Office and have right to use one registered “Cenbird” trademark, and 12 copyright registrations with the PRC. See
“Item 4B. Business Overview – Intellectual Property.”
It
is often difficult to register, maintain and enforce intellectual property rights in China. Statutory laws and regulations are
subject to judicial interpretation and enforcement and may not be applied consistently due to the lack of clear guidance on statutory
interpretation. Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce our contractual
rights in China. Policing any unauthorized use of our intellectual property is difficult and costly and the steps we have taken
may be inadequate to prevent the misappropriation of our intellectual property. In the event that we resort to litigation to enforce
our intellectual property rights, such litigation could result in substantial costs and a diversion of our managerial and financial
resources. We can provide no assurance that we will prevail in such litigation. In addition, our trade secrets may be leaked or
otherwise become available to, or be independently discovered by, our competitors. Any failure in protecting or enforcing our
intellectual property rights could materially and adversely affect our business, financial condition and results of operations.
As
our patents may expire and may not be extended, our patent applications may not be granted and our patent rights may be contested,
circumvented, invalidated or limited in scope, our patent rights may not protect us effectively.
As
of the date of this report, we owned six registered patents relating to various aspects of our operations. The rights granted
under any issued patents, however, may not provide us with proprietary protection or competitive advantages. The claims under
any patents that issue from our patent applications may not be broad enough to prevent others from developing technologies that
are similar or that achieve results similar to ours. It is also possible that the intellectual property rights of others will
bar us from licensing. Numerous patents owned by others exist in the fields in which we have developed and are developing our
technology. These patents and patent applications might have priority over our patent applications and could subject our patent
applications to invalidation. Finally, in addition to those who may claim priority, any of our existing patents may also be challenged
by others on the basis that they are otherwise invalid or unenforceable. Any failure in extending our existing patents, or if
our patent rights were to be contested, circumvented, invalidated or limited in scope could materially and adversely affect our
business, financial condition and results of operations.
We
may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt our business and
operations.
We
cannot be certain that our operations or any aspects of our business do not or will not infringe upon or otherwise violate patents,
copyrights or other intellectual property rights held by third parties. We have been, and from time to time in the future may
be, subject to legal proceedings and claims relating to the intellectual property rights of others. In addition, there may be
other third-party intellectual property that is infringed by our products, services or other aspects of our business. There could
also be existing patents of which we are not aware that our products may inadvertently infringe. Holders of patents purportedly
relating to some aspect of our products or business, if any such holders exist, may seek to enforce such patents against us in
China, the United States or any other jurisdictions. Further, the application and interpretation of China’s patent laws
and the procedures and standards for granting patents in China are still evolving and are uncertain, and PRC courts or regulatory
authorities may not agree with our analysis. If we are found to have violated the intellectual property rights of others, we may
be subject to liability for our infringement activities or may be prohibited from using such intellectual property, and we may
incur licensing fees or be forced to develop alternatives of our own. In addition, we may incur significant expenses, and may
be forced to divert management’s time and other resources from our business and operations to defend against these third-party
infringement claims, regardless of their merits. Infringement of our intellectual property rights or successful licensing claims
made against us may result in significant monetary liabilities and may materially disrupt our business and operations by restricting
or prohibiting our use of the intellectual property in question.
Our
business, financial condition and results of operations may be adversely affected by a downturn in the global or Chinese economies.
Because
our sales may depend on customers’ levels of disposable income,
perceived job prospects and willingness to spend, our business and prospects may be affected by economic conditions in China or globally.
Although the Chinese economy has grown steadily in the past decade, there is considerable uncertainty over the long-term effects of the
expansionary monetary and fiscal policies adopted by the People’s Bank of China and financial authorities of some of the world’s
leading economies, including the United States and China. There have been concerns over unrest and terrorist threats in the Middle East,
Europe, and Africa, which have resulted in volatility in oil and other markets. There have also been concerns on the relationship among
China and other Asian countries, which may result in or intensify potential conflicts in relation to territorial disputes. In addition,
the world economy has been facing the challenges of the COVID-19 pandemic since 2020. Economic conditions in China are sensitive to global
economic conditions, as well as changes in domestic economic and political policies and the expected or perceived overall economic growth
rate in China. A decline in the economic prospects in the mechanics and other industries could alter current or prospective customers’
spending priorities. We cannot assure you that e-bicycles’ spending in general or with respect to our product offerings in particular
will increase, or not decrease, from current levels. Therefore, a slowdown in China’s economy or the global economy may lead to
a reduction in demand for e-bicycles, which could materially and adversely affect our financial condition and results of operations.
We
have identified material weaknesses in our internal control over financial reporting. If we fail to develop and maintain an effective
system of internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud.
In connection with the preparation of our financial statements for the
fiscal years ended September 30, 2019, 2020 and 2021, we have identified material weaknesses and other control deficiencies including
significant deficiencies in our internal control over financial reporting. As defined in the standards established by the Public Company
Accounting Oversight Board of the United States, or PCAOB, a “material weakness” is a deficiency, or combination of deficiencies,
in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or
interim financial statements will not be prevented or detected on a timely basis.
As of and for the fiscal year ended September 30, 2021, one material weakness
that has been identified related to our lack of sufficient financial reporting and accounting personnel with appropriate knowledge of
accounting principles generally accepted in the United States of America (“U.S. GAAP”) and SEC reporting requirements to properly
address complex U.S. GAAP accounting issues and to prepare and review our consolidated financial statements and related disclosures to
fulfill U.S. GAAP and SEC financial reporting requirements. The other material weakness that has been identified related to our lack of
key monitoring mechanisms such as internal control department to oversee and monitor Company’s risk management, business strategies
and financial reporting procedures.
We have already taken some steps and have
continued to implement measures to remediate the material weakness identified, including but not limited to (a) hiring a Chief
Financial Officer on September 1, 2020 with adequate experience of U.S. GAAP and SEC reporting and compliance requirements,
and (b) continuing our efforts to set up the internal audit department, and enhance the effectiveness of the internal control system.
For details on these initiatives, please see “Item 15. Controls and Procedures — (b) Internal Control Over Financial
Reporting.”
Pursuant to Section 404 of the Sarbanes-Oxley
Act, we are required to file a report by our management on our internal control over financial reporting, including an attestation report
on internal control over financial reporting issued by our independent registered public accounting firm. However, while we remain an
emerging growth company, we will not be required to include an attestation report on internal control over financial reporting issued
by our independent registered public accounting firm.
We cannot be certain that these measures will successfully remediate the
material weakness or that other material weaknesses will not be discovered in the future. If we fail to achieve and maintain an effective
internal control environment, it could result material misstatements in our financial statements and we could fail to meet our reporting
obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our
access to capital markets, harm our results of operations, and lead to a decline in the trading price of our ordinary shares. Additionally,
ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject
us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may
also be required to restate our financial statements from prior periods.
Any
significant cybersecurity incident or disruption of our information technology systems or those of third-party partners could
materially damage user relationships and subject us to significant reputational, financial, legal and operation consequences.
We
depend on our information technology systems, as well as those of third parties, to develop new products and services, host and
manage our services, store data and process transactions. Any material disruption or slowdown of our systems or those of third
parties whom we depend upon could cause outages or delays in our services, particularly in the form of interruption of services
delivered by our website, which could harm our brand and adversely affect our operating results. If changes in technology cause
our information technology systems, or those of third parties whom we depend upon, to become obsolete, or if our or their information
systems are inadequate to handle our growth, we could lose users, and our business and operating results could be adversely affected.
We
have limited insurance coverage, which could expose us to significant costs and business disruption.
We
are exposed to various risks associated with our business and operations, and we have limited liability insurance coverage. A
successful liability claim against us due to injuries or damages suffered by our users could materially and adversely affect our
reputation, results of operations and financial conditions. Even if unsuccessful, such a claim could cause us adverse publicity,
require substantial costs to defend, and divert the time and attention of our management. In addition, we do not have any business
disruption insurance. Any business disruption event could result in substantial costs to us and a diversion of our resources.
We
are subject to a variety of costs and risks due to our continued expansion internationally that may not be successful and could
adversely affect our profitability and operating results.
Our
e-bicycles are manufactured for sales and distribution mostly
in China. We are continuing to expand the international market, although our current international market share is relatively small compared
to our domestic business. Currently, we promote our products to the international market through online promotion. Developing the international
market requires continuous investment in marketing expenses. International expansion represents a large opportunity to further grow our
business and enhance our competitive position, and is one of our core strategies.
We
may enter into new geographic markets where we have limited or no experience in marketing, selling, and localizing and deploying
our e-bicycles. International expansion has required and will continue to require us to invest significant capital and other resources
and our efforts may not be successful. International sales and operations may be subject to risks such as:
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limited
brand recognition (compared with our home market in China);
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costs
associated with establishing new distribution networks;
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difficulty
to find qualified partners for overseas distribution;
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inability
to anticipate foreign consumers’ preferences and customs;
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difficulties
in staffing and managing foreign operations;
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burdens
of complying with a wide variety of local laws and regulations, including personal data
protection, battery, motor, packaging and labelling;
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political
and economic instability;
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lesser
degrees of intellectual property protection;
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tariffs
and customs duties and the classifications of our goods by applicable governmental bodies;
and
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a
legal system subject to undue influence or corruption.
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The
occurrence of any of these risks could negatively affect our international business and consequently our business and operating
results. In addition, the concern over these risks may also prevent us from entering into or releasing certain of our e-bicycles
in certain markets.
Changes in U.S. and Chinese regulations
or in relations between the United States and China may adversely impact our business, our operating results, our ability to raise capital
and the market price of our ordinary shares. Any such changes may take place quickly and with very little notice.
The U.S. government, including the SEC, has recently
made statements and taken certain actions that may lead to significant changes to U.S. and international relations, and will impact companies
with connections to the United States or China. It is unknown whether and to what extent new tariffs (or other new laws or regulations
will be adopted, or the effect that any such actions would have on us or our industry and users. Although cross-border business may not
be an area of our major focus, if we increase the selling of our products internationally in the future, any unfavorable government policies
on international trade, such as capital controls or tariffs, may affect the demand for our products and services, impact the competitive
position of our products or prevent us from being able to sell products in certain countries. If any new tariffs, legislation and/or regulations
are implemented, or if existing trade agreements are renegotiated or, in particular, if the U.S. government takes retaliatory trade actions
due to the recent U.S.-China trade tension, such changes could have an adverse effect on our business, financial condition, results of
operations.
In addition, the SEC has issued statements primarily
focused on companies with significant China-based operations, such as us. For example, on July 30, 2021, Gary Gensler, Chairman of the
SEC, issued a Statement on Investor Protection Related to Recent Developments in China, pursuant to which Chairman Gensler stated that
he has asked the SEC staff to engage in targeted additional reviews of filings for companies with significant China-based operations.
The statement also addressed risks inherent in companies with VIE structures. It is possible that the Company’s filings with the
SEC may be subject to enhanced review by the SEC and this additional scrutiny could affect our ability to effectively raise capital in
the United States.
In response to the SEC’s July 30,
2021 statement, the CSRC announced on August 1, 2021, that “[i]t is our belief that Chinese and U.S. regulators shall continue to
enhance communication with the principle of mutual respect and cooperation, and properly address the issues related to the supervision
of China-based companies listed in the U.S. so as to form stable policy expectations and create benign rules framework for the market.”
While the CSRC will continue to collaborate “closely with different stakeholders including investors, companies, and relevant authorities
to further promote transparency and certainty of policies and implementing measures,” it emphasized that it “has always been
open to companies’ choices to list their securities on international or domestic markets in compliance with relevant laws and regulations.”
If any new legislation, executive orders, laws and/or regulations are implemented, if the U.S. or Chinese governments take retaliatory
actions due to the recent U.S.-China tension or if the Chinese government exerts more oversight and control over securities offerings
that are conducted in the United States, such changes could have an adverse effect on our business, financial condition and results of
operations, our ability to raise capital and the market price of our ordinary shares.
We
rely substantially on external suppliers and third-party delivery service providers for our e-bicycles, charging piles and batteries.
We
purchase certain key components and raw material, including tires, motors, headlight, panel frame and controllers, from external
suppliers for use in our production of e-bicycles on a purchase order basis. We also rely on external suppliers to manufacture
the charging piles and supply batteries or components of our batteries. The continuous and stable supply of these components,
raw materials and products that meet our standards is crucial to our operations and production. We cannot assure you that we will
be able to maintain our existing relationships with these suppliers and continue to be able to source key components and raw materials
we use in our e-bicycles on a stable basis and at a reasonable price or at all. For example, our suppliers may increase the prices
for the components or materials we purchase and/or experience disruptions in their production of the components or materials.
In addition, natural disasters or pandemics, such as the COVID-19 breakout, interrupted numerous supply chains in China, for companies
operating in China as well as for international companies.
We
also rely on third party delivery companies to delivery products sold on our online shops. Interacting with and coordinating the
activities of a number of delivery companies are complicated and any major interruptions to or failures in these third-parties’
shipping services could prevent the timely or successful delivery of our products. These interruptions may be due to unforeseen
events that are beyond our control or the control of these third-party delivery companies, such as inclement weather, natural
disasters, transportation interruptions or labor unrest or shortage. If our products are not delivered on time or are delivered
in a damaged state, customers may refuse to accept our products and have less confidence in our services. Thus, we may lose customers,
and our financial condition and reputation could suffer. Delivery of our products could also be affected or interrupted by the
merger, acquisition, insolvency or government shutdown of the delivery companies we engage to make deliveries, especially those
local companies with relatively small business scales. The occurrence of any of these problems, alone or together, could damage
our reputation and materially and adversely affect our business and results of operations.
We
incur significant costs related to procuring components and raw materials and delivery services. The prices for the components and raw
materials fluctuate depending on factors beyond our control including market conditions and demand for these components and materials.
Substantial increases in the prices for the components or raw materials we use in producing our e-bicycle or any interruptions of delivery
services would increase our costs and reduce our margins.
If our internal control over financial reporting
or our disclosure controls and procedures are not effective, we may not be able to accurately report our financial results, prevent fraud
or file our periodic reports in a timely manner, which may cause investors to lose confidence in our reported financial information and
may lead to a decline in the value of our securities.
Before completing our initial public offering
(“IPO”), we were a private company since our incorporation, and as such, we did not have the internal control and financial
reporting requirements that are required of a publicly traded company. As a publicly traded company, we are required to comply with the
SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act, which require that we maintain effective internal control
over financial reporting and disclosure controls and procedures. In particular, we must perform system and process evaluation, document
our controls and perform testing of our key controls over financial reporting to allow management and, once we are no longer an “emerging
growth company,” our independent registered public accounting firm to report on the effectiveness of our internal control over financial
reporting, as required by Section 404 of the Sarbanes-Oxley Act. In connection with the preparation of our financial statements for the
fiscal years ended September 30, 2019, 2020 and 2021, we identified material weaknesses and other control deficiencies including significant
deficiencies in our internal control over financial reporting. If we are not able to comply with the requirements of Section 404 in a
timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial
reporting that are deemed to be material weaknesses, the value of our securities would likely decline, and we could be subject to lawsuits,
sanctions or investigations by regulatory authorities, which would require additional financial and management resources.
Implementing the appropriate changes to our internal
controls may distract our senior management and employees, result in substantial costs to implement new processes or modify our existing
processes and require significant time to complete. Any difficulties or delays in implementing the system could impact our ability to
timely report our financial results. In addition, we currently rely on a manual process in some areas which increases our exposure to
human error or intervention in reporting our financial results. For these reasons, we may encounter difficulties in the timely and accurate
reporting of our financial results, which would impact our ability to provide our investors with information in a timely manner. As a
result, our investors could lose confidence in our reported consolidated financial information, and the value of our securities could
decline.
In addition, any such changes do not guarantee
that we will be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy could prevent
us from accurately reporting our financial results.
Operating as a publicly traded company in
the United States will subject us to additional rules and regulations, require us to incur substantial costs and require substantial management
attention. In addition, our management team has limited experience managing a public company.
As a publicly traded company in the United States,
we will incur substantial legal, accounting, director and officer insurance and other expenses that we did not incur as a private company.
For example, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), the applicable requirements of the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act,
and the rules and regulations of the SEC. The Nasdaq listing requirements, as well as other applicable securities rules and regulations,
also apply to us. As part of these new requirements, we will need to establish and maintain effective disclosure and financial controls
and make changes to our corporate governance practices. We expect that compliance with these requirements will increase our legal and
financial compliance costs and will make some activities more time consuming.
Most of our management and other personnel have
little experience managing a public company and preparing public filings. In addition, we expect that our management and other personnel
will need to divert attention from other business matters to devote substantial time to the reporting and other requirements of being
a public company. In particular, we expect to incur significant expense and devote substantial management effort to complying with the
requirements of Section 404 of the Sarbanes-Oxley Act. We may need to hire additional accounting and financial staff with appropriate
public company experience and technical accounting knowledge.
In addition, changing laws, regulations and standards
relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance
costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in
many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided
by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated
by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and
standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time
and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards
differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory
authorities may initiate legal proceedings against us and our business may be adversely affected.
These new rules and regulations may make it more
expensive for us to obtain director and officer liability insurance, and in the future, we may be required to accept reduced coverage
or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified
members of our board of directors, particularly to serve on our Audit Committee and Nominating, Governance and Compensation Committee,
and qualified senior management.
By disclosing information in this report and in
filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened
or actual litigation, including by competitors and other third parties. If those claims are successful, our business could be seriously
harmed. Even if the claims do not result in litigation or are resolved in our favor, the time and resources needed to resolve them could
divert our management’s resources and seriously harm our business.
The
outbreak of the recent COVID-19 in the PRC may materially and adversely affect our business, financial condition, and results of
operations.
Since
December 2019, there has been an outbreak of a highly contagious respiratory
disease COVID-19 which was first reported in Wuhan City, Hubei Province, the PRC and continues to spread within the PRC and globally (the
“Outbreak”). As a result of the Outbreak, factories in the certain cities were required by the relevant PRC authority to postpone
their resumption of operations indefinitely.
Following the Outbreak, countries have implemented
travel restrictions and/or mandatory quarantine measures on, among others, travelers coming from the PRC. Also, up to the date of this
report, certain cities in the PRC have been subject to travel restrictions by the relevant PRC authority to contain the Outbreak. If the
implementation of travel restrictions prolonged or if certain cities where our factories and our major customers are located are being
restricted to certain activities due to the Outbreak, there may be a decrease in or cancellation of purchase orders or delay in payments
from our customers. In addition, if any of our employees is contracted with COVID-19, the relevant PRC authority would require our employees
to be quarantined and/or our production facilities to be disinfected, which could disrupt our business operation and render us unable
to deliver our products in a timely manner, or at all. As our existing inventories may not be sufficient to fulfill the accepted sales
orders, this may lead to termination of orders from our customers. The Outbreak could, in extreme circumstances, lead to the forced suspension
or closure of our factories and/or our major customers as an attempt to contain the Outbreak. The continuing spread and prolonged occurrence
of COVID-19 could have an adverse effect on the overall economy in the PRC and worldwide. If the Outbreak is not alleviated in the foreseeable
future, our business, financial condition, and results of operations may be materially and adversely affected.
The
occurrence of natural disasters may adversely affect our business, financial condition, and results of operations.
The occurrence of natural disasters, including
hurricanes, floods, earthquakes, tornadoes, fires, and pandemic disease may adversely affect our business, financial condition, or results
of operations. The potential impact of a natural disaster on our results of operations and financial position is speculative and would
depend on numerous factors. The extent and severity of these natural disasters determines their effect on a given economy. Although the
long-term effect of diseases such as the COVID-19 “coronavirus,” H5N1 “avian flu,” or H1N1, the swine flu, cannot
currently be predicted, previous occurrences of avian flu and swine flu had an adverse effect on the economies of those countries in which
they were most prevalent. An outbreak of a communicable disease in our market could adversely affect our business, financial condition
and results of operations, and timely reporting obligations under Regulation S-X and Regulation S-K following our business combination.
We cannot assure you that natural disasters will not occur in the future or that our business, financial condition and results of operations
will not be adversely affected.
Risks Related to Our Corporate Structure
Our
current corporate structure and business operations may be affected by the newly enacted Foreign Investment Law which does not
explicitly classify whether VIEs that are controlled through contractual arrangements would be deemed as foreign-invested enterprises
if they are ultimately “controlled” by foreign investors.
On March 15, 2019, the National People’s
Congress, China’s national legislative body (the “NPC”) approved the Foreign Investment Law, which took effect on January
1, 2020. Since it is relatively new, uncertainties exist in relation to its interpretation. The Foreign Investment Law does not explicitly
classify whether variable interest entities that are controlled through contractual arrangements would be deemed as foreign-invested enterprises
if they are ultimately “controlled” by foreign investors. However, it has a catch-all provision under definition of “foreign
investment” that includes investments made by foreign investors in China through other means as provided by laws, administrative
regulations, or the State Council. Therefore, it still leaves leeway for future laws, administrative regulations, or provisions of the
State Council to provide for contractual arrangements being viewed as a form of foreign investment. Therefore, there can be no assurance
that our control over our consolidated VIE through contractual arrangements will not be deemed as foreign investment in the future.
The
Foreign Investment Law grants national treatment to foreign-invested entities, except for those foreign-invested entities that
operate in industries specified as either “restricted” or “prohibited” from foreign investment in a “negative
list” that is yet to be published. It is unclear whether the “negative list” to be published will differ from
the current Special Administrative Measures for Market Access of Foreign Investment (Negative List). The Foreign Investment Law
provides that foreign-invested entities operating in “restricted” or “prohibited” industries will require
market entry clearance and other approvals from relevant PRC government authorities. If our control over our consolidated VIE
through contractual arrangements are deemed as foreign investment in the future, and any business of our consolidated VIE is “restricted”
or “prohibited” from foreign investment under the “negative list” effective at the time, we may be deemed
to be in violation of the Foreign Investment Law, the contractual arrangements that allow us to have control over our consolidated
VIE may be deemed as invalid and illegal, and we may be required to unwind such contractual arrangements and/or restructure our
business operations, any of which may have a material adverse effect on our business operation.
Furthermore, if future laws, administrative regulations,
or provisions mandate further actions to be taken by companies with respect to existing contractual arrangements, we may face substantial
uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure to take timely and appropriate measures
to cope with any of these or similar regulatory compliance challenges could materially and adversely affect our current corporate structure
and business operations.
We
rely on contractual arrangements with our consolidated VIE and its shareholders to operate our business, which may not be as effective
as direct ownership in providing operational control and otherwise have a material adverse effect as to our business.
We
rely on contractual arrangements with our consolidated VIE and its
shareholders to operate our business. For a description of these contractual arrangements, see “Item 4A. History and Development
of the Company — Contractual Arrangements between Jiangsu EZGO and Its Shareholders.” All of our revenue is attributed to
our consolidated VIE. These contractual arrangements may not be as effective as direct ownership in providing us with control over our
consolidated VIE. If our consolidated VIE or its shareholders fail to perform their respective obligations under these contractual arrangements,
our recourse to the assets held by our consolidated VIE is indirect and we may have to incur substantial costs and expend significant
resources to enforce such arrangements in reliance on legal remedies under PRC law. These remedies may not always be effective, particularly
in light of uncertainties in the PRC legal system. Furthermore, in connection with litigation, arbitration or other judicial or dispute
resolution proceedings, assets under the name of any of record holder of equity interest in our consolidated VIE, including such equity
interest, may be put under court custody. As a consequence, we cannot be certain that the equity interest will be disposed pursuant to
the contractual arrangement or ownership by the record holder of the equity interest.
All
of these contractual arrangements are governed by PRC law and provide
for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC
laws and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed
as in other jurisdictions, such as the U.S. As a result, uncertainties in the PRC legal system could limit our ability to enforce these
contractual arrangements. In the event that we are unable to enforce these contractual arrangements, or if we encounter significant time
delays or other obstacles in the process of enforcing these contractual arrangements, it would be very difficult to exert effective control
over our consolidated VIE, and our ability to conduct our business and our financial condition and results of operations may be materially
and adversely affected. See “— Risks Related to Doing Business in China — Uncertainties in the interpretation and enforcement
of PRC laws and regulations could limit the legal protections available to you and us.”
Any
failure by our consolidated VIE or its shareholders to perform their obligations under our contractual arrangements with them
would have a material adverse effect on our business.
We,
through our wholly foreign-owned enterprise (“WFOE”) in
the PRC, have entered into a series of contractual arrangements with our consolidated VIE and its shareholders. For a description of these
contractual arrangements, see “Item 4A. History and Development of the Company — Contractual Arrangements with Jiangsu EZGO
and Its Shareholders” If our consolidated VIE or its shareholders fail to perform their respective obligations under these contractual
arrangements, we may incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on
legal remedies under PRC laws, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure
you will be effective under PRC laws. For example, if the shareholders of our consolidated VIE were to refuse to transfer their equity
interests in the consolidated VIE to us or our designee when we exercise the purchase option pursuant to these contractual arrangements,
or if they were otherwise to act in bad faith toward us, then we may have to take legal actions to compel them to perform their contractual
obligations.
All
the agreements under our contractual arrangements are governed by PRC
laws and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be interpreted in accordance
with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed
as in some other jurisdictions, such as the U.S. As a result, uncertainties in the PRC legal system could limit our ability to enforce
these contractual arrangements. Meanwhile, there are very few precedents and formal guidelines as to how contractual arrangements in the
context of a VIE should be interpreted or enforced under PRC laws. There remain significant uncertainties regarding the ultimate outcome
of such arbitration should legal action become necessary. In addition, under PRC laws, rulings by arbitrators are final and parties cannot
appeal arbitration results in court unless such rulings are revoked or determined unenforceable by a competent court. If the losing parties
fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards
in PRC courts through arbitration award recognition proceedings, which would require additional expenses and delay. In the event that
we are unable to enforce these contractual arrangements, or if we encounter significant delay or other obstacles in the process of enforcing
these contractual arrangements, we may not be able to exert effective control over our consolidated VIE and relevant rights and licenses
held by it which we require in order to operate our business, and our ability to conduct our business may be negatively affected. See
“— Risks Related to Doing Business in China — Uncertainties in the interpretation and enforcement of PRC laws and regulations
could limit the legal protections available to you and us.”
The arbitration provisions under these contractual
arrangements have no effect on the rights of our shareholders to pursue claims against us under the United States federal
securities laws.
The
shareholders of our consolidated VIE may have potential conflicts of interest with us, which may materially and adversely affect
our business and financial condition.
The
interests of the shareholders of our consolidated VIE in their capacities as such shareholders may differ from the interests of
our company as a whole, as what is in the best interests of our consolidated VIE, including matters such as whether to distribute
dividends or to make other distributions to fund our offshore requirement, may not be in the best interests of our company. There
can be no assurance that when conflicts of interest arise, any or all of these shareholders will act in the best interests of
our company or those conflicts of interest will be resolved in our favor. In addition, these shareholders may breach or cause
our consolidated VIE and its subsidiaries to breach or refuse to renew the existing contractual arrangements with us.
Currently,
we do not have arrangements to address potential conflicts of interest that the shareholders of our consolidated VIE may encounter,
on one hand, and as a beneficial owner of our company, on the other hand. We, however, could, at all times, exercise our option
under the exclusive option agreement to cause them to transfer all of their equity ownership in our consolidated VIE to a PRC
entity or individual designated by us as permitted by the then applicable PRC laws. In addition, if such conflicts of interest
arise, we could also, in the capacity of attorney-in-fact of the then existing shareholders of our consolidated VIE as provided
under the power of attorney, directly appoint new directors of our consolidated VIE. We rely on the shareholders of our consolidated
VIE to comply with PRC laws and regulations, which protect contracts and provide that directors and executive officers owe a duty
of loyalty to our company and require them to avoid conflicts of interest and not to take advantage of their positions for personal
gains, and the laws of the British Virgin Islands (“BVI”), which provide those directors have a duty of care and a
duty to act honestly in good faith with a view to our best interests. However, the legal frameworks of both China and BVI do not
provide guidelines on resolving conflicts with other corporate governance regimes. If we cannot resolve any conflicts of interest
or disputes between us and the shareholders of our consolidated VIE, we would have to rely on legal proceedings, which could result
in the disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.
If
the PRC government deems that the contractual arrangements in relation to our consolidated VIE do not comply with PRC regulatory
restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations
change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.
Because EZGO is a business company incorporated in the BVI, it is classified
as a foreign enterprise under PRC laws and regulations, and EZGO’s WFOE in the PRC is a foreign-invested enterprise (“FIE”).
Our PRC subsidiary has entered into a series of contractual arrangements with our consolidated VIE and its shareholders, which enable
us to (i) exercise effective control over the consolidated VIE, (ii) receive substantially all of the economic benefits of the consolidated
VIE, and (iii) have an exclusive option to purchase all or part of the equity interests and assets in the consolidated VIE when and to
the extent permitted by PRC law. As a result of these contractual arrangements, we have control over and are the primary beneficiary of
the consolidated VIE and hence consolidate its financial results as our consolidated VIE under U.S. GAAP. For a description of these contractual
arrangements, see “Item 4A. History and Development of the Company — Contractual Arrangements with Jiangsu EZGO and Its Shareholders.”
We believe that our corporate structure and contractual
arrangements comply with the current applicable PRC laws and regulations. Our PRC legal counsel, DeHeng Law Offices, based on its understanding
of the relevant laws and regulations, is of the opinion that each of the contracts among our wholly-owned PRC subsidiary, our consolidated
VIE and its shareholders is valid, binding and enforceable in accordance with its terms. However, there are substantial uncertainties
regarding the interpretation and application of PRC laws and regulations, including the Regulations on Mergers and Acquisitions of Domestic
Enterprises by Foreign Investors (the “M&A Rules”), and the Telecommunications Regulations and the relevant regulatory
measures concerning the telecommunications industry. There can be no assurance that the PRC government authorities, such as the Ministry
of Commerce (“MOFCOM”) or the Ministry of Industry and Information Technology (“MIIT”), or other authorities that
regulate online services providers and other participants in the telecommunications industry, would agree that our corporate structure
or any of the above contractual arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies
or with requirements or policies that may be adopted in the future. PRC laws and regulations governing the validity of these contractual
arrangements are uncertain and the relevant government authorities have broad discretion in interpreting these laws and regulations.
If
our corporate structure and contractual arrangements are deemed by the MIIT, the MOFCOM or other regulators that have competent
authority, to be illegal, either in whole or in part, we may lose control of our consolidated VIE and have to modify such structure
to comply with regulatory requirements. However, there can be no assurance that we can achieve this without material disruption
to our business. Further, if our corporate structure and contractual arrangements are found to be in violation of any existing
or future PRC laws or regulations, the relevant regulatory authorities would have broad discretion in dealing with such violations,
including:
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revoking
our business and operating licenses;
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confiscating
any of our income that they deem to be obtained through illegal operations;
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shutting
down our services;
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discontinuing
or restricting our operations in China;
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imposing
conditions or requirements with which we may not be able to comply;
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requiring
us to change our corporate structure and contractual arrangements;
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restricting
or prohibiting our use of the proceeds from overseas offering to finance our consolidated
VIE’s business and operations; and
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taking
other regulatory or enforcement actions that could be harmful to our business.
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Furthermore, new PRC laws, rules and regulations
may be introduced to impose additional requirements that may be applicable to our corporate structure and contractual arrangements. Occurrence
of any of these events could materially and adversely affect our business, financial condition and results of operations. In addition,
if the imposition of any of these penalties or requirement to restructure our corporate structure causes us to lose the rights to direct
the activities of our consolidated VIE or our right to receive their economic benefits, we would no longer be able to consolidate the
financial results of such VIE in our consolidated financial statements. See “Item 4A. History and Development of the Company —
Contractual Arrangements with Jiangsu EZGO and Its Shareholders.”
Contractual
arrangements in relation to our consolidated VIE may be subject to scrutiny by the PRC tax authorities and they may determine
that our consolidated VIE owes additional taxes, which could negatively affect our financial condition and the value of your investment.
Under applicable PRC laws and regulations, arrangements
and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. The PRC Enterprise Income Tax
Law, or the EIT Law, requires every enterprise in China to submit its annual enterprise income tax return together with a report on transactions
with its related parties to the relevant tax authorities. The tax authorities may impose reasonable adjustments on taxation if they identify
any related party transactions that are inconsistent with the arm’s length principles. We may face material and adverse tax consequences
if the PRC tax authorities determine that the contractual arrangements among our wholly-owned PRC subsidiary, our consolidated VIE and
its shareholders were not entered into on an arm’s length basis in such a way as to result in an impermissible reduction in taxes
under applicable PRC laws, regulations and rules, and adjust their income in the form of a transfer pricing adjustment. A transfer pricing
adjustment could, among other things, result in a reduction of expense deductions recorded by our wholly-owned PRC subsidiary or consolidated
VIE for PRC tax purposes, which could in turn increase their tax liabilities without reducing their tax expenses. Furthermore, the PRC
tax authorities may impose late payment fees and other penalties on our PRC subsidiary and consolidated VIE for adjusted but unpaid taxes
according to applicable regulations. Our financial position could be materially and adversely affected if the tax liabilities of our PRC
subsidiary and consolidated VIE increase, or if they are required to pay late payment fees and other penalties.
We
may lose the ability to use and enjoy assets held by our consolidated VIE that are material to the operation of our business if
the entity goes bankrupt or becomes subject to a dissolution or liquidation proceeding.
Our
consolidated VIE holds substantially all of our assets. Under the contractual arrangements, our consolidated VIE and its
shareholders may not cause it to, in any manner, sell, transfer, mortgage or dispose of its assets or its legal or beneficial
interests in the business without our prior consent. However, in the event that the shareholders of our consolidated VIE breach
these contractual arrangements and voluntarily liquidate our consolidated VIE, or our consolidated VIE declares bankruptcy and
all or part of its assets become subject to liens or rights of third-party creditors, or are otherwise disposed of without our
consent, we may be unable to continue some or all of our business activities, which could materially and adversely affect our
business, financial condition and results of operations. If our consolidated VIE undergoes a voluntary or involuntary liquidation
proceeding, independent third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to
operate our business, which could materially and adversely affect our business, financial condition and results of operations.
If
the custodians or authorized users of our controlling non-tangible assets, including chops and seals, fail to fulfill their responsibilities,
or misappropriate or misuse these assets, our business and operations may be materially and adversely affected.
Under
PRC law, legal documents for corporate transactions, including agreements and contracts that our business relies on, are executed
using the chop or seal of the signing entity or with the signature of a legal representative whose designation is registered and
filed with the relevant local branch of the State Administration for Market Regulation, formerly known as the State Administration
for Industry and Commerce (“SAIC”). We generally execute legal documents by affixing chops or seals, rather than having
the designated legal representatives sign the documents.
We
use two major types of chops: corporate chops and finance chops. Chops are seals or stamps used by a PRC company to legally authorize
documents, often in place of a signature. We use corporate chops generally for documents to be submitted to government agencies,
such as applications for changing business scope, directors or company name, and for legal letters. We use finance chops generally
for making and collecting payments, including issuing invoices. Use of corporate chops must be approved by our legal department
and administrative department, and use of finance chops must be approved by our finance department. The chops of our subsidiary
and consolidated VIE are generally held by the relevant entities so that documents can be executed locally. Although we usually
utilize chops to execute contracts, the registered legal representatives of our subsidiary and consolidated VIE have the apparent
authority to enter into contracts on behalf of such entities without chops, unless such contracts set forth otherwise.
In
order to maintain the physical security of our chops, we generally have them stored in secured locations accessible only to the
designated key employees of our legal, administrative or finance departments. Our designated legal representatives generally do
not have access to the chops. Although we have approval procedures in place and monitor our key employees, including the designated
legal representatives of our subsidiary and consolidated VIE, the procedures may not be sufficient to prevent all instances of
abuse or negligence. In addition, we also separate the authorized user of chops from the keeper of keys to the storage room and
install security camera for the storage room. There is a risk that our key employees or designated legal representatives could
abuse their authority, for example, by binding our subsidiary and consolidated VIE with contracts against our interests, as we
would be obligated to honor these contracts if the other contracting party acts in good faith in reliance on the apparent authority
of our chops or signatures of our legal representatives. If any designated legal representative obtains control of the chop in
an effort to obtain control over the relevant entity, we would need to have a shareholder or board resolution to designate a new
legal representative to take legal action to seek the return of the chop, apply for a new chop with the relevant authorities,
or otherwise seek legal remedies for the legal representative’s misconduct. If any of the designated legal representatives
obtains and misuses or misappropriates our chops and seals or other controlling intangible assets for whatever reason, we could
experience disruption to our normal business operations. We may have to take corporate or legal action, which could involve significant
time and resources to resolve the matter, while distracting management from our operations, and our business operations may be
materially and adversely affected.
Risks
Related to Doing Business in China
Uncertainties
in the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to you and us.
Our
PRC subsidiaries are subject to various PRC laws and regulations generally applicable to companies in China. The PRC legal system
is based on written statutes. Unlike common law systems, it is a system in which legal cases have limited value as precedents.
In the late 1970s, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters
in general. The overall effect of legislation over the past four decades has significantly increased the protections afforded
to various forms of foreign or private-sector investment in China.
As
relevant laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of
many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve
uncertainties.
From
time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. However, since PRC administrative
and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be
more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than
in more developed legal systems. Furthermore, the PRC legal system is based in part on government policies and internal rules (some
of which are not published in a timely manner or at all) that may have retroactive effect. As a result, we may not be aware of
our violation of these policies and rules until sometime after the violation. Such uncertainties, including uncertainty over
the scope and effect of our contractual, property (including intellectual property) and procedural rights, and any failure to
respond to changes in the regulatory environment in China could materially and adversely affect our business and impede our ability
to continue our operations.
Recently, the General Office of the Central Committee
of the Communist Party of China and the General Office of the State Council jointly issued the “Opinions on Severely Cracking Down
on Illegal Securities Activities According to Law,” or the Opinions, which was made available to the public on July 6, 2021. The
Opinions emphasized the need to strengthen the administration over illegal securities activities, and the need to strengthen the supervision
over overseas listings by Chinese companies. Effective measures, such as promoting the construction of relevant regulatory systems will
be taken to deal with the risks and incidents of China-concept overseas listed companies, and cybersecurity and data privacy protection
requirements and similar matters. The Opinions remain unclear on how the law will be interpreted, amended, and implemented by the relevant
PRC governmental authorities, but the Opinions and any related implementing rules to be enacted may subject us to compliance requirements
in the future.
On December 28, 2021, the Measures for Cybersecurity
Review (2021 version) was promulgated and will become effective on February 15, 2022, which iterates that any “online platform operators”
controlling personal information of more than one million users which seeks to list in a foreign stock exchange should also be subject
to cybersecurity review. We do not believe we are among the “operator of critical information infrastructure” or “data
processor” as mentioned above, however, the Measures for Cybersecurity Review (2021 version) was recently adopted and the Network
Internet Data Protection Draft Regulations (draft for comments) is in the process of being formulated and remains unclear on how it will
be interpreted, amended, and implemented by the relevant PRC governmental authorities. Thus, it is still uncertain how PRC governmental
authorities will regulate overseas listing in general and whether we are required to obtain any specific regulatory approvals. Furthermore,
if the China Securities Regulatory Commission (“CSRC”) or other regulatory agencies later promulgate new rules or explanations
requiring that we obtain their approvals for any follow-on offering, we may be unable to obtain such approvals which could significantly
limit or completely hinder our ability to offer or continue to offer securities to our investors.
On December 24, 2021, the CSRC released the Administrative
Provisions of the State Council Regarding the Overseas Issuance and Listing of Securities by Domestic Enterprises (Draft for Comments)
and the Measures for the Overseas Issuance of Securities and Listing Record-Filings by Domestic Enterprises (Draft for Comments), both
of which have a comment period that expires on January 23, 2022, and if enacted, may subject us to additional compliance requirement in
the future. See ” – CSRC has released for public consultation the draft rules for China-based companies seeking to conduct
initial public offerings in foreign markets. While such rules have not yet gone into effect, the Chinese government may exert more oversight
and control over offerings that are conducted overseas and foreign investment in China-based issuers, which could significantly limit
or completely hinder our ability to offer or continue to offer our ordinary shares to investors and could cause the value of our ordinary
shares to significantly decline or become worthless.”
Furthermore, the PRC government authorities may
strengthen oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers like us.
Such actions taken by the PRC government authorities may intervene or influence our operations at any time, which are beyond our control.
Therefore, any such action may adversely affect our operations and significantly limit or hinder our ability to offer or continue to offer
securities to you and reduce the value of such securities.
Uncertainties regarding the enforcement of laws
and the fact that rules and regulations in China can change quickly with little advance notice, along with the risk that the Chinese government
may intervene or influence our operations at any time, or may exert more control over offerings conducted overseas and/or foreign investment
in China-based issuers could result in a material change in our operations, financial performance and/or the value of our ordinary shares
or impair our ability to raise money.
The PRC government exerts substantial influence
over the manner in which we conduct our business activities. The PRC government may also intervene or influence our operations at any
time, which could result in a material change in our operations and our ordinary shares could decline in value or become worthless.
We are currently not required to obtain approval
from Chinese authorities for listing on U.S exchanges, nor the execution of a series of contractual arrangements (the “VIE Agreements”),
however, if our VIE or the holding company were required to obtain approval in the future and were denied permission from Chinese authorities
for listing on U.S. exchanges, we will not be able to continue listing on U.S. exchange, continue to offer securities to investors, or
materially affect the interest of the investors and cause significantly depreciation of our price of ordinary shares.
The Chinese government has exercised and continues
to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability
to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, environmental regulations,
land use rights, property, and other matters. The central or local governments of these jurisdictions may impose new, stricter regulations
or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance
with such regulations or interpretations. Accordingly, government actions in the future, including any decision not to continue to support
recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic
policies, could have a significant effect on economic conditions in China or particular regions thereof, and could require us to divest
ourselves of any interest we then hold in our operations in China.
For example, the Chinese cybersecurity regulator
announced on July 2, 2021, that it had begun an investigation of Didi Global Inc. (NYSE: DIDI) and two days later ordered that the company’s
app be removed from smartphone app stores. Similarly, our business segments may be subject to various government and regulatory interference
in the regions in which we operate. We could be subject to regulation by various political and regulatory entities, including various
local and municipal agencies and government sub-divisions. We may incur increased costs necessary to comply with existing and newly adopted
laws and regulations or penalties for any failure to comply.
Furthermore, it is uncertain when and whether
we will be required to obtain permission from the PRC government for listing on U.S. exchanges, or enter into VIE Agreements in the future,
and even when such permission is obtained, whether it will be denied or rescinded. Although we are currently not required to obtain permission
from any of the PRC central or local government and has not received any denial for listing on the U.S. exchange or enter into VIE Agreements,
our operations could be adversely affected, directly or indirectly, by existing or future laws and regulations relating to our business
or industry. Recent statements by the Chinese government indicating an intent, and the PRC government may take actions to exert more oversight
and control over offerings that are conducted overseas and/or foreign investment in China-based issuers, which could significantly limit
or completely hinder our ability to offer or continue to offer securities to investors and cause the value of our securities to significantly
decline or become worthless.
The CSRC has released for public consultation
the draft rules for China-based companies seeking to conduct initial public offerings in foreign markets. While such rules have not yet
gone into effect, the Chinese government may exert more oversight and control over offerings that are conducted overseas and foreign investment
in China-based issuers, which could significantly limit or completely hinder our ability to continue to offer our ordinary shares to investors
and could cause the value of our ordinary shares to significantly decline or become worthless.
On December 24, 2021, the CSRC released the Draft
Rules Regarding Overseas Listing, which have a comment period that expires on January 23, 2022. The Draft Rules Regarding Overseas Listing
lay out the filing regulation arrangement for both direct and indirect overseas listing, and clarify the determination criteria for indirect
overseas listing in overseas markets.
The Draft Rules Regarding Overseas Listing stipulate
that the Chinese-based companies, or the issuer, shall fulfill the filing procedures within three working days after the issuer makes
an application for initial public offering and listing in an overseas market. The required filing materials for an initial public offering
and listing should include at least the following: record-filing report and related undertakings; regulatory opinions, record-filing,
approval, and other documents issued by competent regulatory authorities of relevant industries (if applicable); and security assessment
opinion issued by relevant regulatory authorities (if applicable); PRC legal opinion; and prospectus.
In addition, an overseas offering and listing
is prohibited under any of the following circumstances: (1) if the intended securities offering and listing is specifically prohibited
by national laws and regulations and relevant provisions; (2) if the intended securities offering and listing may constitute a threat
to or endangers national security as reviewed and determined by competent authorities under the State Council in accordance with law;
(3) if there are material ownership disputes over the equity, major assets, and core technology, etc. of the issuer; (4) if, in the past
three years, the domestic enterprise or its controlling shareholders or actual controllers have committed corruption, bribery, embezzlement,
misappropriation of property, or other criminal offenses disruptive to the order of the socialist market economy, or are currently under
judicial investigation for suspicion of criminal offenses, or are under investigation for suspicion of major violations; (5) if, in past
three years, directors, supervisors, or senior executives have been subject to administrative punishments for severe violations, or are
currently under judicial investigation for suspicion of criminal offenses, or are under investigation for suspicion of major violations;
(6) other circumstances as prescribed by the State Council. The Draft Administration Provisions defines the legal liabilities of breaches
such as failure in fulfilling filing obligations or fraudulent filing conducts, imposing a fine between RMB 1 million and RMB 10 million,
and in cases of severe violations, a parallel order to suspend relevant business or halt operation for rectification, revoke relevant
business permits or operational license.
The Draft Rules Regarding Overseas Listing, if
enacted, may subject us to additional compliance requirement in the future, and we cannot assure you that we will be able to get the clearance
of filing procedures under the Draft Rules Regarding Overseas List on a timely basis, or at all. Any failure of us to fully comply with
new regulatory requirements may significantly limit or completely hinder our ability to continue to offer our ordinary shares, cause significant
disruption to our business operations, and severely damage our reputation, which would materially and adversely affect our financial condition
and results of operations and cause our ordinary shares to significantly decline in value or become worthless.
We may be adversely affected by the complexity,
uncertainties, and changes in PRC regulation of internet retailers.
The
PRC government extensively regulates the Internet industry, including foreign ownership of, and the licensing and permit requirements
pertaining to, companies in the Internet industry. These internet-related laws and regulations are relatively new and evolving,
and their interpretation and enforcement involve significant uncertainties. As a result, in certain circumstances it may be difficult
to determine what actions or omissions may be deemed to be in violation of applicable laws and regulations. Issues, risks, and
uncertainties relating to PRC government regulation of the Internet industry include, but are not limited to, the following:
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The
online commerce industry in China is still in an early stage of development and the PRC
laws applicable to the industry are still evolving. Due to the lack of clarity under
the existing PRC regulatory regime, we may be required to comply with additional legal
and licensing requirements. For example, we are providing mobile applications to mobile
device users and we are in the process of applying for the valued-added telecommunications
business operating license for electronic data interchange business, or the EDI License.
It is uncertain if our PRC subsidiaries will be required to obtain a separate valued-added
telecommunications business operating license for Internet content provision, or the
ICP License in addition to the EDI License. Although we believe that we are not required
to obtain such separate license which is in line with the current market practice, there
can be no assurance that we will not be required to apply for an operating license for
our mobile applications in the future.
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The
evolving PRC regulatory system for the Internet industry may lead to the establishment
of new regulatory agencies. For example, in May 2011, the State Council announced
the establishment of a new department, the State Internet Information Office (with the
involvement of the State Council Information Office, the MIIT, and the Ministry of Public
Security). The primary role of this new agency is to facilitate the policy-making and
legislative development in this field to direct and coordinate with the relevant departments
in connection with online content administration and to deal with cross-ministry regulatory
matters in relation to the Internet industry.
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New
laws and regulations may be promulgated that will regulate internet activities, including
online retail. If these new laws and regulations are promulgated, additional licenses
may be required for our operations. If our operations do not comply with these new regulations
at the time they become effective, or if we fail to obtain any licenses required under
these new laws and regulations, we could be subject to penalties.
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The
interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies relating
to the internet industry have created substantial uncertainties regarding the legality of existing and future foreign investments
in, and the businesses and activities of, internet businesses in China, including our business. We cannot assure you that we have
obtained all the permits or licenses required for conducting our business in China or will be able to maintain our existing licenses
or obtain new ones.
Regulation
and censorship of information disseminated over the Internet in China may adversely affect our business, and we may be liable
for content that is displayed on our website.
China has enacted laws
and regulations governing Internet access and the distribution of products, services, news, information, audio-video programs, and other
content through the Internet. In the past, the PRC government has prohibited the distribution of information through the internet that
it deems to be in violation of PRC laws and regulations. If any of our internet information was deemed by the PRC government to violate
any content restrictions, we would not be able to continue to display such content and could become subject to penalties, including confiscation
of income, fines, suspension of business and revocation of required licenses, which could materially and adversely affect our business,
financial condition, and results of operations. We may also be subject to potential liability for any unlawful actions of our customers
or users of our website or for content we distribute that is deemed inappropriate. It may be difficult to determine the type of content
that may result in liability to us, and if we are found to be liable, we may be prevented from operating our website in China.
The
enforcement of the PRC Labor Contract Law and other labor-related regulations in the PRC may adversely affect our business and
our results of operations.
The
PRC Labor Law and the Labor Contract Law require that employers must execute written employment contracts with full-time employees.
All employers must compensate their employees with wages equal to at least the local minimum wage standards. Violations of the
PRC Labor Law and the Labor Contract Law may result in the imposition of fines, compensations and other administrative sanctions,
and serious violations may constitute criminal offenses.
The
PRC Labor Contract Law became effective and was implemented on January 1, 2008, which was amended on December 28, 2012. It has
reinforced the protection of employees who, under the PRC Labor Contract Law, have the right, among others, to enter into written
labor contracts, to enter into labor contracts with no fixed terms under certain circumstances, to receive overtime wages and
to terminate or alter terms in labor contracts. According to the PRC Social Insurance Law, which became effective on July 1, 2011,
and the Administrative Regulations on the Housing Funds, companies operating in China are required to participate in pension insurance,
work-related injury insurance, medical insurance, unemployment insurance, maternity insurance and housing funds plans, and the
employers must pay all or a portion of the social insurance premiums and housing funds for their employees.
As
the interpretation and implementation of these laws and regulations are still evolving, our employment practice may not at all
times be deemed in compliance with the new laws and regulations. If we are subject to severe penalties or incur significant liabilities
in connection with labor disputes or investigations, our business and results of operations may be adversely affected.
Failure to make adequate contributions to
various employee benefit plans and withhold individual income tax on employees’ salaries as required by PRC regulations may subject
us to penalties.
Companies operating in China are required to participate in various
government-mandated employee benefit contribution plans, including certain social insurance, housing funds and other welfare-oriented
payment obligations, and contribute to the plans in amounts equal to certain percentages of salaries, including bonuses and allowances,
of our employees up to a maximum amount specified by the local government from time to time at locations where we operate our businesses.
The requirement of employee benefit contribution plans has not been implemented consistently by the local governments in China given the
different levels of economic development in different locations. Companies operating in China are also required to withhold individual
income tax on employees’ salaries based on the actual salary of each employee upon payment. We may be subject to late fees and fines
in relation to the underpaid employee benefits and under-withheld individual income tax, our financial condition and results of operations
may be adversely affected.
Changes
in China’s economic, political, or social conditions or government policies could have a material adverse effect on our business
and operations.
Currently all of our business operations are conducted
in China and all of our sales are made in China. Accordingly, our business, financial condition, results of operations and prospects may
be influenced to a significant degree by political, economic, and social conditions in China generally and by continued economic growth
in China as a whole.
China’s
economy differs from the economies of most developed countries in many respects, including the level of government involvement,
level of development, growth rate, control of foreign exchange and allocation of resources. Although the PRC government has implemented
measures since the late 1970’s emphasizing the utilization of market forces for economic reform, the reduction of state
ownership of productive assets, and the establishment of improved corporate governance in business enterprises, which are generally
viewed as a positive development for foreign business investment, a substantial portion of productive assets in China is still
owned by the PRC government. In addition, the PRC government continues to play a significant role in regulating industry development
by imposing industrial policies. The PRC government also exercises significant control over the PRC economic growth through allocating
resources, controlling payments of foreign currency-denominated obligations, setting monetary policy, and providing preferential
treatment to particular industries or companies.
While China’s economy has experienced significant
growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy, and the rate of growth
has been slowing down. Some of the governmental measures may benefit the overall Chinese economy, but may have a negative effect on us.
For example, our financial condition and results of operations may be adversely affected by government control over capital investments
or changes in tax regulations. Any stimulus measures designed to boost the Chinese economy may contribute to higher inflation, which could
adversely affect our results of operations and financial condition. For example, certain operating costs and expenses, such as employee
compensation and office operating expenses, may increase as a result of higher inflation. In addition, the PRC government has implemented
in the past certain measures to control the pace of economic growth. These measures may cause decreased economic activity, which in turn
could lead to a reduction in demand for our products and services, and consequently have a material adverse effect on our businesses,
financial condition, and results of operations.
Restrictions
on currency exchange or outbound capital flows may limit our ability to utilize our PRC revenue effectively.
All of our revenue is denominated in Renminbi.
The Renminbi is currently convertible under the “current account,” which includes dividends, trade, and service-related foreign
exchange transactions, but requires approval from or registration with appropriate government authorities or designated banks under the
“capital account,” which includes foreign direct investment and loans, such as loans we may secure from our onshore subsidiaries.
Currently, our PRC subsidiaries, a foreign invested enterprise, may purchase foreign currency for settlement of “current account
transactions,” including payment of dividends to us, without the approval of the State Administration of Foreign Exchange (“SAFE’)
by complying with certain procedural requirements. However, the relevant PRC governmental authorities may limit or eliminate our ability
to purchase foreign currencies in the future for current account transactions.
Since
2016, PRC governmental authorities have imposed more stringent restrictions on outbound capital flows, including heightened scrutiny
over “irrational” overseas investments for certain industries, as well as over four kinds of “abnormal”
offshore investments, which are:
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investments
through enterprises established for only a few months without substantive operation;
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investments
with amounts far exceeding the registered capital of onshore parent and not supported
by its business performance shown on financial statements;
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investments
in targets that are not related to onshore parent’s main business; and
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investments
with abnormal sources of Renminbi funding suspected to be involved in illegal transfer
of assets or illegal operation of underground banking.
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On
January 26, 2017, SAFE promulgated the Circular on Further Improving Reform of Foreign Exchange Administration and Optimizing
Genuineness and Compliance Verification, which tightened the authenticity and compliance verification of cross-border transactions
and cross-border capital flow. In addition, the Outbound Investment Sensitive Industry Catalogue (2018) lists certain sensitive
industries that are subject to NDRC pre-approval requirements prior to remitting investment funds offshore, which subjects us
to increased approval requirements and restrictions with respect to our overseas investment activity. Since a significant amount
of our PRC revenue is denominated in Renminbi, any existing and future restrictions on currency exchange or outbound capital flows
may limit our ability to utilize revenue generated in Renminbi to fund our business activities outside of the PRC, make investments,
service any debt we may incur outside of China or pay dividends in foreign currencies to our shareholders, including holders of
our ordinary shares.
PRC regulations relating to foreign exchange
registration of overseas investment by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiaries to liability
or penalties, limit our ability to inject capital into these subsidiaries, limit PRC subsidiaries’ ability to increase their registered
capital or distribute profits to us, or may otherwise adversely affect us.
On July 4, 2014, SAFE promulgated the Circular
on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles,
or SAFE Circular 37, which replaced the former Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents
to Engage in Financing and Inbound Investment via Overseas Special Purpose Vehicles (generally known as SAFE Circular 75) promulgated
by SAFE on October 21, 2005. On February 13, 2015, SAFE further promulgated the Circular on Further Simplifying and Improving the Administration
of the Foreign Exchange Concerning Direct Investment, or SAFE Circular 13, which took effect on June 1, 2015. This SAFE Circular 13 has
amended SAFE Circular 37 by requiring PRC residents or entities to register with qualified banks rather than SAFE or its local branch
in connection with their direct establishment or indirect control of an offshore entity established for the purpose of overseas investment
or financing with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests.
Qualified local banks will directly examine and accept foreign exchange registration for overseas direct investment, including the initial
foreign exchange registration and amendment registration, under SAFE Circular 37 from June 1, 2015.
These
circulars further require amendment to the registration in the event of any significant changes with respect to the special purpose
vehicle, such as an increase or decrease of capital contributed by PRC residents, share transfer or exchange, merger, division,
or other material events. In the event that a PRC resident holding interests in a special purpose vehicle fails to complete the
required SAFE registration, the PRC subsidiary of that special purpose vehicle may be prohibited from making profit distributions
to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle
may be restricted in its ability to contribute additional capital into its PRC subsidiary. Furthermore, it is unclear how this
regulation, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended, and implemented
by the relevant PRC government authorities, and we cannot predict how these regulations will affect our business operations or
future strategy. Failure to comply with the various SAFE registration requirements described above could result in liability under
PRC law for evasion of foreign exchange controls. This may have a material adverse effect on our business, financial condition,
and results of operations.
According
to SAFE Circular 37 and SAFE Circular 13, our shareholders or beneficial
owners who are PRC residents are subject to SAFE Circular 37 or other foreign exchange administrative regulations in respect of their
investment in our company. To the best of our knowledge, our PRC resident shareholders who directly or indirectly hold shares in our BVI
holding company and who are known to us have completed the application for foreign exchange registrations for their foreign investment
in our company in accordance with SAFE Circular 37 and SAFE Circular 13. We have taken steps to notify significant beneficial owners of
ordinary shares whom we know are PRC residents of their filing obligations. However, we may not at all times be fully aware or informed
of the identities of all our shareholders or beneficial owners that are required to make such registrations, and we may not always be
able to compel them to comply with all relevant foreign exchange regulations. As a result, we cannot assure you that all of our shareholders
or beneficial owners who are PRC residents will at all times comply with, or in the future make or obtain any applicable registrations
or approvals required by all relevant foreign exchange regulations. The failure or inability of such individuals to comply with the registration
procedures set forth in these regulations may subject us to fines or legal sanctions, restrictions on our cross-border investment activities
or our PRC subsidiaries’ ability to distribute dividends to, or obtain foreign-exchange-dominated loans from, our company, or prevent
us from making distributions or paying dividends. As a result, our business operations and our ability to make distributions to you could
be materially and adversely affected.
Furthermore,
as these foreign exchange regulations are still relatively new and their interpretation and implementation have been constantly
evolving, it is unclear how these regulations, and any future regulation concerning offshore or cross-border transactions, will
be interpreted, amended and implemented by the relevant government authorities. We cannot predict how these regulations will affect
our business operations or future strategy. In addition, if we decide to acquire a PRC domestic company, we cannot assure you
that we or the owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary
filings and registrations required by the foreign exchange regulations. This may restrict our ability to implement our acquisition
strategy and could adversely affect our business and prospects.
PRC regulation on loans to, and direct investment
in, PRC entities by offshore holding companies and governmental control in currency conversion may delay or prevent us from using the
proceeds of our initial public offering or follow-on offering to make loans to or make additional capital contributions to our PRC subsidiaries,
which could materially and adversely affect our liquidity and our ability to fund and expand our business.
EZGO is a company incorporated in the BVI structured
as a holding company conducting its operations in China through its PRC subsidiaries. As permitted under PRC laws and regulations, in
utilizing the proceeds of its initial public offering or follow-on offering, EZGO may make loans to its PRC subsidiaries subject to the
approval from governmental authorities and limitation of amount, or EZGO may make additional capital contributions to its PRC subsidiaries.
Furthermore, loans by EZGO to its PRC subsidiaries to finance their activities cannot exceed the difference between their respective total
project investment amount and registered capital or 2.5 times of their net worth and capital contributions to its PRC subsidiaries are
subject to the requirement of making necessary filings in the Foreign Investment Comprehensive Management Information System and registration
with other governmental authorities in China.
The SAFE promulgated the Notice of the State Administration
of Foreign Exchange on Reforming the Administration of Foreign Exchange Settlement of Capital of Foreign-invested Enterprises, or SAFE
Circular 19, effective on June 1, 2015, in replacement of the Circular on the Relevant Operating Issues Concerning the Improvement of
the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, the Notice from the State
Administration of Foreign Exchange on Relevant Issues Concerning Strengthening the Administration of Foreign Exchange Businesses, and
the Circular on Further Clarification and Regulation of the Issues Concerning the Administration of Certain Capital Account Foreign Exchange
Businesses. According to SAFE Circular 19, the flow and use of the RMB capital converted from foreign currency-denominated registered
capital of a foreign-invested company is regulated such that RMB capital may not be used for the issuance of RMB entrusted loans, the
repayment of inter-enterprise loans or the repayment of bank loans that have been transferred to a third party. Although SAFE Circular
19 allows RMB capital converted from foreign currency-denominated registered capital of a foreign-invested enterprise to be used for equity
investments within the PRC, it also reiterates the principle that RMB converted from the foreign currency-denominated capital of a foreign-invested
company may not be directly or indirectly used for purposes beyond its business scope. Thus, it is unclear whether the SAFE will permit
such capital to be used for equity investments in the PRC in actual practice. The SAFE promulgated the Notice of the State Administration
of Foreign Exchange on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account, or SAFE Circular
16, effective on June 9, 2016, which reiterates some of the rules set forth in SAFE Circular 19, but changes the prohibition against using
RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company to issue RMB entrusted loans
to a prohibition against using such capital to grant loans to non-associated enterprises. Violations of SAFE Circular 19 and SAFE Circular
16 could result in administrative penalties. SAFE Circular 19 and SAFE Circular 16 may significantly limit our ability to transfer any
foreign currency we hold, including the net proceeds from our initial public offering or follow-on offering, to our PRC subsidiaries,
which may adversely affect our liquidity and our ability to fund and expand our business in the PRC.
In light of the various requirements imposed by
PRC regulations on loans to, and direct investment in, PRC entities by offshore holding companies, we cannot assure you that we will be
able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with
respect to future loans by us to our PRC subsidiaries or with respect to future capital contributions by us to our PRC subsidiaries. If
we fail to complete such registrations or obtain such approvals, our ability to use the proceeds from our initial public offering or follow-on
offering and to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect
our liquidity and our ability to fund and expand our business.
Under
the PRC EIT Law, we may be classified as a PRC “resident enterprise” for PRC enterprise income tax purposes. Such
classification would likely result in unfavorable tax consequences to us and our non-PRC shareholders and has a material adverse
effect on our results of operations and the value of your investment.
Under
the PRC EIT Law, that became effective in January 2008 and was amended in February 2017 and December 2018, as well as its implementing
rules, an enterprise established outside the PRC with “de facto management bodies” within the PRC is considered a
“resident enterprise” for PRC enterprise income tax purposes and is generally subject to a uniform 25% enterprise
income tax rate on its worldwide income. Under the implementation rules to the EIT Law, a “de facto management body”
is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel
and human resources, finances and properties of an enterprise. In addition, a circular, known as SAT Circular 82, issued in April
2009 by the State Administration of Taxation, or the SAT, specifies that certain offshore incorporated enterprises controlled
by PRC enterprises or PRC enterprise groups will be classified as PRC resident enterprises if the following are located or resident
in the PRC: senior management personnel and departments that are responsible for daily production, operation and management; financial
and personnel decision making bodies; key properties, accounting books, company seal, and minutes of board meetings and shareholders’
meetings; and half or more of the senior management or directors having voting rights. Further to SAT Circular 82, the SAT issued
a bulletin, known as SAT Bulletin 45, which took effect in September 2011, to provide more guidance on the implementation of SAT
Circular 82 and clarify the reporting and filing obligations of such “Chinese-controlled offshore incorporated resident
enterprises.” SAT Bulletin 45 provides procedures and administrative details for the determination of resident status and
administration on post-determination matters. Although both SAT Circular 82 and SAT Bulletin 45 only apply to offshore enterprises
controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreign individuals, the determining
criteria set forth in SAT Circular 82 and SAT Bulletin 45 may reflect the SAT’s general position on how the “de facto
management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether
they are controlled by PRC enterprises, PRC enterprise groups or by PRC or foreign individuals.
We do not believe that EZGO, as a company incorporated
in the BVI, meets all of the conditions above thus we do not believe that EZGO is a PRC resident enterprise, though all members of our
management team as well as the management team of our offshore holding company are located in China. However, if the PRC tax authorities
determine that we are a PRC resident enterprise for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could
follow. First, we will be subject to the uniform 25% enterprise income tax on our world-wide income, which could materially reduce our
net income. In addition, we will also be subject to PRC enterprise income tax reporting obligations. However, the tax resident status
of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of
the term “de facto management body.”
Finally,
dividends payable by us to our investors and gains on the sale of our shares may become subject to PRC withholding tax, at a rate
of 10% in the case of non-PRC enterprises or 20% in the case of non-PRC individuals (in each case, subject to the provisions of
any applicable tax treaty), if such gains are deemed to be from PRC sources. It is unclear whether non-PRC shareholders of our
company would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event
that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment in the ordinary shares.
There are significant uncertainties under
the PRC EIT Law relating to the withholding tax liabilities of our PRC subsidiaries, and dividends payable by our PRC subsidiaries to
our offshore subsidiaries may not qualify to enjoy certain treaty benefits.
Under the PRC EIT Law and its implementation rules,
we, as a non-resident enterprise, that is, an enterprise lawfully incorporated pursuant to the laws of a foreign country (region) that
has an office or premises established in China with no actual management functions performed in China, or an enterprise that has income
derived from or accruing in China although it does not have an office or premises in China, will be subject to a withholding tax rate
of 10%. Pursuant to a special arrangement between Hong Kong and China, such rate may be reduced to 5% if a Hong Kong resident enterprise
owns more than 25% of the equity interest in the PRC company. Changzhou EZGO Enterprise Management Co., Ltd. (formerly known as Changzhou
Jiekai New Energy Technology Company) (“Changzhou EZGO”), is wholly owned by China EZGO Group Ltd. (formerly known as Hong
Kong JKC Group Co., Limited) (“EZGO HK”), EZGO’s wholly-owned subsidiary. Accordingly, EZGO HK may qualify for a 5%
tax rate in respect of distributions from Changzhou EZGO. Under the Notice of the State Administration of Taxation on Issues regarding
the Administration of the Dividend Provision in Tax Treaties promulgated on February 20, 2009, the taxpayer needs to satisfy certain conditions
to enjoy the benefits under a tax treaty. These conditions include: (1) the taxpayer must be the beneficial owner of the relevant dividends,
and (2) the corporate shareholder to receive dividends from the PRC subsidiaries must have continuously met the direct ownership thresholds
during the 12 consecutive months preceding the receipt of the dividends. Further, under Announcement of the State Administration of Taxation
on Issues Relating to “Beneficial Owner” in Tax Treaties, which took effect on April 1, 2018, a “Beneficial Owner”
shall mean a person who has ownership and control over the income and the rights and property from which the income is derived. To determine
the “beneficial owner” status of a resident of the treaty counterparty who needs to enjoy the tax treaty benefits, a comprehensive
analysis shall be carried out, taking into account actual conditions of the specific case.
Entitlement to a lower tax rate on dividends according
to tax treaties or arrangements between the PRC central government and governments of other countries or regions is subject to State Administration
of Taxation Circular 60 (“Circular 60”). Circular 60 provides that non-resident enterprises are not required to obtain pre-approval
from the relevant tax authority in order to enjoy the reduced withholding tax. Instead, non-resident enterprises and their withholding
agents may, by self-assessment and on confirmation that the prescribed criteria to enjoy the tax treaty benefits are met, directly apply
the reduced withholding tax rate, and file necessary forms and supporting documents when performing tax filings, which will be subject
to post-tax filing examinations by the relevant tax authorities. As a result, we cannot assure you that we will be entitled to any preferential
withholding tax rate under tax treaties for dividends received from WFOE.
Enhanced
scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may
pursue in the future.
Pursuant
to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or
SAT Circular 698, issued by the SAT on December 10, 2009, where a foreign investor transfers the equity interests of a resident
enterprise indirectly via disposition of the equity interests of an overseas holding company, or an “indirect transfer,”
and such overseas holding company is located in a tax jurisdiction that (i) has an effective tax rate less than 12.5% or (ii)
does not tax foreign income of its residents, the foreign investor shall report the indirect transfer to the competent tax authority.
The PRC tax authority will examine the true nature of the indirect transfer, and if the tax authority considers that the foreign
investor has adopted an “abusive arrangement” in order to avoid PRC tax, it may disregard the existence of the overseas
holding company and re-characterize the indirect transfer and as a result, gains derived from such indirect transfer may be subject
to PRC withholding tax at a rate of up to 10%.
On
February 3, 2015, the SAT issued the Announcement of the State Administration of Taxation on Several Issues Concerning the Enterprise
Income Tax on Indirect Property Transfer by Non-Resident Enterprises, or SAT Bulletin 7, to supersede existing provisions in relation
to the “indirect transfer” as set forth in SAT Circular 698, while the other provisions of SAT Circular 698 remain
in force. Pursuant to SAT Bulletin 7, where a non-resident enterprise indirectly transfers properties such as equity in PRC resident
enterprises without any justifiable business purposes and aiming to avoid the payment of enterprise income tax, such indirect
transfer must be reclassified as a direct transfer of equity in PRC resident enterprise. To assess whether an indirect transfer
of PRC taxable properties has reasonable commercial purposes, all arrangements related to the indirect transfer must be considered
comprehensively and factors set forth in SAT Bulletin 7 must be comprehensively analyzed in light of the actual circumstances.
SAT Bulletin 7 also provides that, where a non-PRC resident enterprise transfers its equity interests in a resident enterprise
to its related parties at a price lower than the fair market value, the competent tax authority has the power to make a reasonable
adjustment to the taxable income of the transaction.
On October 17, 2017, the SAT issued the Announcement
of the State Administration of Taxation on Matters Concerning Withholding of Income Tax of Non-resident Enterprises as Source, or SAT
Bulletin 37, which repealed the entire SAT Circular 698 and the provision in relation to the time limit for the withholding agent to declare
to the competent tax authority for payment of such tax of SAT Bulletin 7. Pursuant to SAT Bulletin 37, the income from a property transfer,
as stipulated in the second item under Article 19 of the Law on Enterprise Income Tax, shall include the income derived from transferring
such equity investment assets as stock equity. The balance of deducting the equity’s net value from the total income from equity
transfer shall be taxable income from equity transfer. Where a withholding agent enters into a business contract, involving the income
specified in the third paragraph of Article 3 in the Law on Enterprise Income Tax, with a non-resident enterprise, the tax-excluding
income of the non-resident enterprise will be treated as the tax-including income, based on which the tax payment will be calculated and
remitted, if it is agreed in the contract that the withholding agent shall assume the tax payable.
There
has been very limited application of SAT Bulletin 7 and SAT Bulletin 37 because these regulations were newly issued and came
into force in February 2015 and in December 2017 respectively. During the effective period of SAT Circular 698, some
intermediary holding companies were actually looked through by the PRC tax authorities, and consequently the non-PRC resident
investors were deemed to have transferred the PRC subsidiary and PRC corporate taxes were assessed accordingly. It is possible
that we or our non-PRC resident investors may become at risk of being taxed under SAT Bulletin 7 and SAT Bulletin 37 and
may be required to expend valuable resources to comply with SAT Bulletin 7 and SAT Bulletin 37 or to establish that we or
our non-PRC resident investors should not be taxed under SAT Bulletin 7 and SAT Bulletin 37, which may have an adverse effect
on our financial condition and results of operations or such non-PRC resident investors’ investment in us.
Our PRC subsidiaries are subject to restrictions
on paying dividends or making other payments to us, which may restrict our ability to satisfy our liquidity requirements, and any limitation
on the ability of our PRC subsidiaries to make remittance to pay dividends to us could limit our ability to access cash generated by the
operations of those entities.
EZGO is a company incorporated in the BVI structured
as a holding company. EZGO may need dividends and other distributions on equity from our PRC subsidiaries to satisfy EZGO’s liquidity
requirements. Current PRC regulations permit our PRC subsidiaries to pay dividends to EZGO only out of their accumulated profits, if any,
determined in accordance with PRC accounting standards and regulations. In addition, EZGO’s PRC subsidiaries are required to set
aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds until the total amount set
aside reaches 50% of their respective registered capital. EZGO’s PRC subsidiaries may also allocate a portion of its after-tax profits
based on PRC accounting standards to employee welfare and bonus funds at their discretion. These reserves are not distributable as cash
dividends. Furthermore, if our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict
their ability to pay dividends or make other payments to us. Any limitation on the ability of EZGO’s subsidiaries to distribute
dividends or to make payments to it may restrict EZGO’s ability to satisfy its liquidity requirements.
In
addition, the EIT Law, and its implementation rules provide that a withholding tax rate of up to 10% will be applicable to
dividends payable by Chinese companies to non-PRC-resident enterprises unless otherwise exempted or reduced according to treaties
or arrangements between the PRC central government and governments of other countries or regions where the non-PRC-resident enterprises
are incorporated.
Fluctuations
in exchange rates could result in foreign currency exchange losses to us.
The value of the Renminbi against the U.S. dollar
and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions and the foreign
exchange policy adopted by the PRC government. In August 2015, the People’s Bank of China, or PBOC, changed the way it calculates
the mid-point price of Renminbi against the U.S. dollar, requiring the market-makers who submit for reference rates to consider the previous
day’s closing spot rate, foreign-exchange demand and supply as well as changes in major currency rates. In 2017, the value of the
Renminbi appreciated by approximately 6.3% against the U.S. dollar; and in 2018, the Renminbi depreciated by approximately 5.7% against
the U.S. dollar. From the end of 2018 through the end of September 2021, the value of the Renminbi appreciated by approximately 5.20%
against the U.S. dollar. It is difficult to predict how market forces or PRC or U.S. government policy, including any interest rate increases
by the Federal Reserve, may impact the exchange rate between the Renminbi and the U.S. dollar in the future. There remains significant
international pressure on the PRC government to adopt a more flexible currency policy, including from the U.S. government, which has threatened
to label China as a “currency manipulator,” which could result in greater fluctuation of the Renminbi against the U.S. dollar.
However, the PRC government may still at its discretion restrict access to foreign currencies for current account transactions in the
future. Therefore, it is difficult to predict how market forces or government policies may impact the exchange rate between the RMB and
the U.S. dollar or other currencies in the future. In addition, the PBOC regularly intervenes in the foreign exchange market to limit
fluctuations in RMB exchange rates and achieve policy goals. If the exchange rate between RMB and U.S. dollar fluctuates in unanticipated
manners, our results of operations and financial condition, and the value of, and dividends payable on, our shares in foreign currency
terms may be adversely affected. We may not be able to pay dividends in foreign currencies to our shareholders. Appreciation of RMB to
the U.S. dollar will result in exchange loss, while depreciation of RMB to the U.S. dollar will result in exchange gain.
It
may be difficult for overseas shareholders and/or regulators to conduct investigation or collect evidence within China.
Shareholder
claims or regulatory investigation that are common in the United States generally are difficult to pursue as a matter of
law or practicality in China. For example, in China, there are significant legal and other obstacles to providing information
needed for regulatory investigations or litigation initiated outside China. Although the authorities in China may establish a
regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border
supervision and administration, such cooperation with the securities regulatory authorities in the Unities States may not be efficient
in the absence of mutual and practical cooperation mechanism. Furthermore, according to Article 177 of the PRC Securities Law,
or Article 177, which became effective in March 2020, no overseas securities regulator is allowed to directly conduct investigation
or evidence collection activities within the territory of the PRC. While detailed interpretation of or implementation rules under
Article 177 have yet to be promulgated, the inability for an overseas securities regulator to directly conduct investigation or
evidence collection activities within China may further increase difficulties faced by you in protecting your interests.
The
M&A Rules and certain other PRC regulations establish complex procedures for some acquisitions of Chinese companies by
foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.
The
M&A Rules discussed in the preceding risk factor and related regulations and rules concerning mergers and acquisitions established
additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming
and complex. For example, the M&A Rules require that MOFCOM be notified in advance of any change-of-control transaction in
which a foreign investor takes control of a PRC domestic enterprise, if (i) any important industry is concerned, (ii) such transaction
involves factors that have or may have impact on the national economic security, or (iii) such transaction will lead to a change
in control of a domestic enterprise which holds a famous trademark or PRC time-honored brand, (iv) or in circumstances where overseas
companies established or controlled by PRC enterprises or residents acquire affiliated domestic companies. Mergers, acquisitions
or contractual arrangements that allow one market player to take control of or to exert decisive impact on another market player
must also be notified in advance to the MOFCOM when the threshold under the Provisions on Thresholds for Prior Notification of
Concentrations of Undertakings, or the Prior Notification Rules, issued by the State Council in August 2008 is triggered.
However, uncertainties still exist as to how the
M&A Rules will be interpreted and implemented, and we may subject to any new laws, rules, and regulations or detailed implementations
and interpretations in any form relating to the M&A Rules. If the CSRC or other PRC regulatory body subsequently determines that we
need to obtain the CSRC’s approval for any future offering or if the CSRC or any other PRC government authorities promulgates any
interpretation or implements rules before our listing that would require us to obtain CSRC or other governmental approvals for any future
offering, we may face adverse actions or sanctions by the CSRC or other PRC regulatory agencies. In any such event, these regulatory agencies
may impose fines and penalties on our operations in China, limit our operating privileges in China, delay or restrict the repatriation
of the proceeds from any future offering into the PRC or take other actions that could have a material adverse effect on our business,
financial condition, results of operations, reputation and prospects, as well as our ability to complete any future offering. The CSRC
or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to halt any future offering before
settlement and delivery. Consequently, if you engage in market trading or other activities in anticipation of and prior to settlement
and delivery, you do so at the risk that such settlement and delivery may not occur.
In addition, the security review rules issued
by the MOFCOM that became effective in September 2011 specify that mergers and acquisitions by foreign investors that raise “national
defense and security” concerns and mergers and acquisitions through which foreign investors may acquire de facto control over domestic
enterprises that raise “national security” concerns are subject to strict review by the MOFCOM, and the rules prohibit
any activities attempting to bypass a security review, including by structuring the transaction through a proxy or contractual control
arrangement. Furthermore, according to the security review, foreign investments that would result in acquiring the actual control of assets
in certain key sectors, such as critical agricultural products, energy and resources, equipment manufacturing, infrastructure, transport,
cultural products and services, information technology, Internet products and services, financial services, and technology sectors, are
required to obtain approval from designated governmental authorities in advance.
In the future, we may grow our business by acquiring
complementary businesses. Complying with the requirements of the above-mentioned regulations and other relevant rules to complete
such transactions could be time-consuming, and any required approval processes, including obtaining approval from the MOFCOM or its local
counterparts may delay or inhibit our ability to complete such transactions. It is unclear whether our business would be deemed to be
in an industry that raises “national defense and security” or “national security” concerns. However, the MOFCOM
or other government agencies may publish explanations in the future determining that our business is in an industry subject to the security
review, in which case our future acquisitions in the PRC, including those by way of entering into contractual control arrangements with
target entities, may be closely scrutinized or prohibited. Our ability to expand our business or maintain or expand our market share through
future acquisitions would as such be materially and adversely affected. Furthermore, according to the M&A Rules, if a PRC entity or
individual plans to merge or acquire its related PRC entity through an overseas company legitimately incorporated or controlled by such
entity or individual, such a merger and acquisition will be subject to examination and approval by the MOFCOM. There is a possibility
that the PRC regulators may promulgate new rules or explanations requiring that we obtain the approval of the MOFCOM or other PRC governmental
authorities for our completed or ongoing mergers and acquisitions. There is no assurance that, if we plan to make an acquisition, we can
obtain such approval from the MOFCOM or any other relevant PRC governmental authorities for our mergers and acquisitions, and if we fail
to obtain those approvals, we may be required to suspend our acquisition and be subject to penalties. Any uncertainties regarding such
approval requirements could have a material adverse effect on our business, results of operations and corporate structure.
In addition, on July 6, 2021, the relevant PRC
government authorities made public the Opinions on Strictly Cracking Down Illegal Securities Activities in Accordance with the Law. These
opinions emphasized the need to strengthen the administration over illegal securities activities and the supervision on overseas listings
by China-based companies and proposed to take effective measures, such as promoting the construction of relevant regulatory systems to
deal with the risks and incidents faced by China-based overseas-listed companies. As these opinions are recently issued, official guidance
and related implementation rules have not been issued yet and the interpretation of these opinions remains unclear at this stage. If the
CSRC or other regulatory agencies later promulgate new rules or explanations requiring that we obtain their approvals for any future follow-on
offering, we may be unable to obtain such approvals which could significantly limit or completely hinder our ability to offer or continue
to offer securities to our investors outside China.
U.S. regulatory bodies may be limited in
their ability to conduct investigations or inspections of our operations in China.
Any disclosure of documents or information located in China by foreign
agencies may be subject to jurisdiction constraints and must comply with China’s state secrecy laws, which broadly define the scope
of “state secrets” to include matters involving economic interests and technologies. There is no guarantee that requests from
U.S. federal or state regulators or agencies to investigate or inspect our operations will be honored by us, by entities who provide services
to us or with whom we associate, without violating PRC legal requirements, especially as those entities are located in China. Furthermore,
under the current PRC laws, an on-site inspection of our facilities by any of these regulators may be limited or prohibited.
You may experience difficulties in effecting
service of legal process, enforcing foreign judgments or bringing actions in China against us or our management named in this annual report
based on foreign laws.
EZGO is a company incorporated under the laws
of the BVI, and we conduct substantially all of our operations in China and substantially all of our assets are located in China. In addition,
all our senior executive officers reside within China for a significant portion of the time and all of them are PRC nationals. As a result,
it may be difficult for you to effect service of process upon us or those persons inside mainland China. It may also be difficult for
you to enforce in U.S. courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities
laws against us and our officers and directors as none of them currently resides in the United States or has substantial assets located
in the United States. In addition, there is uncertainty as to whether the courts of the PRC would recognize or enforce judgments
of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United States
or any state.
The
recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize
and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between
China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any
treaties or other forms of written arrangement with the United States that provide for the reciprocal recognition and enforcement
of foreign judgments. In addition, according to the PRC Civil Procedures Law, the PRC courts will not enforce a foreign judgment
against us or our directors and officers if they decide that the judgment violates the basic principles of PRC laws or national
sovereignty, security, or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment
rendered by a court in the United States.
Our ordinary shares may be delisted under
the Holding Foreign Companies Accountable Act if the PCAOB is unable to adequately inspect audit documentation located in China. The delisting
of our ordinary shares, or the threat of their being delisted, may materially and adversely affect the value of your investment. Additionally,
the inability of the PCAOB to conduct adequate inspections deprives our investors with the benefits of such inspections. Furthermore,
on June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act, which, if enacted, would amend the
HFCA Act and require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject
to PCAOB inspections for two consecutive years instead of three.
The Holding Foreign Companies Accountable Act,
or the HFCA Act, was enacted on December 18, 2020. The HFCA Act states if the SEC determines that a company has filed audit reports issued
by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in 2021,
the SEC shall prohibit such ordinary shares from being traded on a national securities exchange or in the over the counter trading market
in the U.S.
On March 24, 2021, the SEC adopted interim final
rules relating to the implementation of certain disclosure and documentation requirements of the HFCA Act. A company will be required
to comply with these rules if the SEC identifies it as having a “non-inspection” year under a process to be subsequently established
by the SEC. The SEC is assessing how to implement other requirements of the HFCA Act, including the listing and trading prohibition requirements
described above. Furthermore, on June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act, which,
if enacted, would amend the HFCA Act and require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges
if its auditor is not subject to PCAOB inspections for two consecutive years instead of three. On September 22, 2021, the PCAOB adopted
a final rule implementing the HFCA Act, which provides a framework for the PCAOB to use when determining, as contemplated under the HFCA
Act, whether the PCAOB is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction
because of a position taken by one or more authorities in that jurisdiction.
Furthermore, various equity-based research organizations
have recently published reports on China-based companies after examining their corporate governance practices, related party transactions,
sales practices and financial statements, and these reports have led to special investigations and listing suspensions on U.S. national
exchanges. Any similar scrutiny on us, regardless of its lack of merit, could cause the market price of our ordinary shares to fall, divert
management resources and energy, cause us to incur expenses in defending ourselves against rumors, and increase the premiums we pay for
director and officer insurance.
Our former auditor, Marcum Bernstein & Pinchuk LLP, an independent
registered public accounting firm, as an auditor of companies that are traded publicly in the United States and a firm registered with
the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with
the applicable professional standards. Our former auditor is headquartered in Manhattan, New York, and has been inspected by the PCAOB
on a regular basis with the last inspection in 2018 and an ongoing inspection that started in November 2020.
Our current auditor, Briggs & Veselka Co.,
the independent registered public accounting firm that issued the audit report included elsewhere in the annual report, an auditor of
companies that are traded publicly in the United States and an U.S.-based accounting firm registered with the PCAOB, is subject to laws
in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional
standards. Our current auditor is headquartered in Houston, Texas, and is subject to inspection by the PCAOB on a regular basis with the
last inspection in 2019.
However, recent developments with respect to audits
of China-based companies create uncertainty about the ability of our auditor to fully cooperate with the PCAOB’s request for audit
workpapers without the approval of the Chinese authorities. The PCAOB is currently able to conduct inspections of U.S. audit firms where
audit workpapers are located in China, however, PCAOB’s requests for workpapers are subject to approval by Chinese authorities.
The audit workpapers for our and the VIEs’ operations are located in China. As a result, our investors may be deprived of the benefits
of PCAOB’s oversight of our auditor through such inspections. The PCAOB has not requested our auditor to provide it with copies
of our and the VIEs’ audit workpapers and consequently our auditor has not sought permission from PRC authorities to provide copies
of these materials to the PCAOB. If our auditor is not permitted to provide requested audit work papers located in China to the PCAOB,
investors would be deprived of the benefits of PCAOB’s oversight of our auditor through such inspections. The recent developments
would add uncertainties to our offering and we cannot assure you whether Nasdaq or regulatory authorities would apply additional and more
stringent criteria to us after considering the effectiveness of such auditor’s audit procedures and quality control procedures,
adequacy of personnel and training, or sufficiency of resources, geographic reach or experience as it relates to the audit of our financial
statements.
The SEC may propose additional rules or guidance
that could impact us if such auditor is not subject to PCAOB inspection. For example, on August 6, 2020, the President’s Working
Group on Financial Markets, or the PWG, issued the Report on Protecting United States Investors from Significant Risks from Chinese Companies
to the then President of the United States. This report recommended the SEC implement five recommendations to address companies from jurisdictions
that do not provide the PCAOB with sufficient access to fulfil its statutory mandate. Some of the concepts of these recommendations were
implemented with the enactment of the HFCA Act. However, some of the recommendations were more stringent than the HFCA Act. For example,
if a company’s auditor was not subject to PCAOB inspection, the report recommended that the transition period before a company would
be delisted would end on January 1, 2022.
The SEC has announced that the SEC staff is preparing
a consolidated proposal for the rules regarding the implementation of the HFCA Act and to address the recommendations in the PWG report.
It is unclear when the SEC will complete its rulemaking and when such rules will become effective and what, if any, of the PWG recommendations
will be adopted. The implications of this possible regulation in addition to the requirements of the HFCA Act are uncertain. While we
understand that there has been dialogue among the CSRC, the SEC and the PCAOB regarding the inspection of PCAOB-registered accounting
firms in China, there can be no assurance that we will be able to comply with requirements imposed by U.S. regulators. Such uncertainty
could cause the market price of our ordinary shares to be materially and adversely affected, and our securities could be delisted and
prohibited from being traded on the national securities exchange earlier than would be required by the HFCA Act. If our securities are
unable to be listed on another securities exchange by then, such a delisting would substantially impair your ability to sell or purchase
our ordinary shares when you wish to do so, and the risk and uncertainty associated with a potential delisting would have a negative impact
on the price of our ordinary shares.
The PCAOB’s inability to conduct inspections
in China prevents it from fully evaluating the audits and quality control procedures of our independent registered public accounting firm.
As a result, we and investors in our ordinary shares are deprived of the benefits of such PCAOB inspections. The inability of the PCAOB
to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our independent registered public
accounting firm’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to the
PCAOB inspections, which could cause investors and potential investors in our shares to lose confidence in our audit procedures and reported
financial information and the quality of our financial statements.
In May 2013, the PCAOB announced that it had entered
into a Memorandum of Understanding on Enforcement Cooperation with the CSRC and the PRC Ministry of Finance (“MOF”), which
establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations
undertaken by the PCAOB in the PRC or by the CSRC or the MOF in the United States. The PCAOB continues to be in discussions with the CSRC
and the MOF to permit joint inspections in the PRC of audit firms that are registered with the PCAOB and audit Chinese companies that
trade on U.S. exchanges.
Should the PCAOB be unable to fully conduct inspections
of our former auditor’s workpapers in China, it will make it more difficult to evaluate the effectiveness of our former auditor’s
audit procedures or quality control procedures. Investors may consequently lose confidence in our reported financial information and the
quality of our financial statements, which would materially and adversely affect the value of and your investment in our ordinary shares.
Further, new laws and regulations or changes in laws and regulations in both the United States and China could affect our ability to list
our ordinary shares on Nasdaq, which could materially impair the market for and market price of our ordinary shares.
Risks
Related to Our Ordinary Shares
An active trading market for our ordinary
shares may not continue and the trading price for our ordinary shares may fluctuate significantly.
We cannot assure you that a liquid public market
for our ordinary shares will continue. If an active public market for our ordinary shares does not continue, the market price and liquidity
of our ordinary shares may be materially and adversely affected. We can provide no assurance that the trading price of our ordinary shares
will not decline. As a result, investors in our securities may experience a significant decrease in the value of their ordinary shares.
The trading price of our ordinary shares
may be volatile, which could result in substantial losses to investors.
The trading price of our ordinary shares may be
volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, like
the performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed
their securities in the United States. A number of Chinese companies have listed or are in the process of listing their securities on
U.S. stock markets. The securities of some of these companies have experienced significant volatility, including price declines in connection
with their initial public offerings. The trading performances of these Chinese companies’ securities after their offerings may affect
the attitudes of investors toward Chinese companies listed in the United States in general and consequently may impact the trading performance
of our ordinary shares, regardless of our actual operating performance.
In addition to market and industry factors, the
price and trading volume for our ordinary shares may be highly volatile for factors specific to our own operations, including the following:
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variations in our revenues, earnings, cash flow and data related to our user base or user engagement;
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announcements of new investments, acquisitions, strategic partnerships or joint ventures by us or our competitors;
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announcements of new product and service offerings, solutions and expansions by us or our competitors;
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changes in financial estimates by securities analysts;
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detrimental adverse publicity about us or our industry;
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additions or departures of key personnel;
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release of lock-up or other transfer restrictions on our outstanding equity securities or sales of additional equity securities; and
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potential litigation or regulatory investigations.
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Any of these factors may result in large and sudden
changes in the volume and price at which our ordinary shares will trade.
In the past, shareholders of public companies
often brought securities class action suits against those companies following periods of instability in the market price of their securities.
If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources
from our business and operations and require us to incur significant expenses to defend the suit, which could harm our results of operations.
Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future.
In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse
effect on our financial condition and results of operations.
We may not be able to maintain our listing
on Nasdaq which could limit investors’ ability to make transactions in our securities and subject us to additional trading restrictions.
Our ordinary shares are listed on Nasdaq. We cannot
assure you that our ordinary shares will continue to be listed on Nasdaq in the future. In order to continue listing our securities on
Nasdaq, we must maintain certain financial, distribution and share price levels. Generally, we must (i) maintain a minimum amount in shareholders’
equity (generally above $2,500,000), maintain a minimum market value of listed securities (generally above $35,000,000) or have a minimum
net income from operations for the prior year of for two of the preceding years (generally above $500,000); and (ii) a minimum number
of publicly held shares (generally greater than 500,000) and a minimum number of public shareholders (generally greater than 300 shareholders).
Our ordinary shares also cannot have a bid price of less than $1.00. Moreover, we must comply with certain listing standards regarding
the independence of our board of directors and members of our audit committee. We intend to fully comply with these requirements, but
we may not be able to meet these requirements in the future.
If Nasdaq delists our securities from trading
on its exchange and we are not able to list our securities on another national securities exchange, we expect our securities could be
quoted on an over-the-counter market. If this were to occur, we could face significant material adverse consequences, including:
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a limited availability of market quotations for our securities;
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reduced liquidity for our securities;
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a determination that our
ordinary shares are “penny stocks” which will require brokers trading in our ordinary shares to adhere to more stringent
rules and possibly result in a reduced level of trading activity in the secondary trading market for our securities;
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a limited amount of news and analyst coverage; and
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a decreased ability to issue additional securities or obtain additional financing in the future.
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The National Securities Markets Improvement Act
of 1996, which is a U.S. federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred
to as “covered securities.” Because our ordinary shares are listed on Nasdaq, such securities will be covered securities.
Although the states are preempted from regulating the sale of our securities, the federal statute does allow the states to investigate
companies if there is a suspicion of fraud, and, if there is a finding of fraudulent activity, then the states can regulate or bar the
sale of covered securities in a particular case. Further, if we were no longer listed on Nasdaq, our securities would not be covered securities
and we would be subject to regulations in each state in which we offer our securities.
Our ordinary shares are listed on the Nasdaq
Capital Market; if our financial condition deteriorates, we may not meet continued listing standards on the Nasdaq Capital Market, and
our ordinary shares may trade under $5.00 per share in the future and thus could be penny stocks. Trading in penny stocks has certain restrictions
and these restrictions could negatively affect the price and liquidity of our ordinary shares.
Our ordinary shares are listed on the Nasdaq Capital
Market. The Nasdaq Capital Market also requires companies to fulfill specific requirements in order for their shares to continue to be
listed. If our ordinary shares are delisted from the Nasdaq Capital Market at some later date, we may apply to have our ordinary shares
quoted on the OTC Bulletin Board or in the “pink sheets” maintained by the OTC Markets Group Inc. The OTC Bulletin Board and
the “pink sheets” are generally considered to be less efficient markets than the Nasdaq Capital Market. In addition, if our
ordinary shares are delisted from the Nasdaq Capital Market and are no longer traded on an exchange at some later date, our ordinary shares
may be subject to the “penny stock” regulations, and it is likely that the price of our ordinary shares would decline and
that and our shareholders could find it difficult to sell our ordinary shares.
The SEC has adopted regulations which generally
define a “penny stock” to be any equity security that has a market price of less than $5.00 per share, subject to certain
exceptions. Depending on market fluctuations, our ordinary shares could be considered to be a “penny stock,” A penny stock
is subject to rules that impose additional sales practice requirements on broker/dealers who sell these securities to persons other
than established members and accredited investors. For transactions covered by these rules, the broker/dealer must make a special suitability
determination for the purchase of these securities. In addition, a broker/dealer must receive the purchaser’s written consent to
the transaction prior to the purchase and must also provide certain written disclosures to the purchaser. Consequently, the “penny
stock” rules may restrict the ability of broker/dealers to sell our ordinary shares, and may negatively affect the ability
of holders of our ordinary shares to resell them. These disclosures require you to acknowledge that you understand the risks associated
with buying penny stocks and that you can absorb the loss of your entire investment. Penny stocks generally do not have a very high trading
volume. Consequently, the price of the stock is often volatile and you may not be able to buy or sell the stock when you want to.
If
securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations
regarding our ordinary shares, the market price for our ordinary shares and trading volume could decline.
The
trading market for our ordinary shares will be influenced by research or reports that industry or securities analysts publish
about our business. If one or more analysts who cover us downgrade our ordinary shares, the market price for our ordinary shares
would likely decline. If one or more of these analysts cease to cover us or fail to regularly publish reports on us, we could
lose visibility in the financial markets, which in turn could cause the market price or trading volume for our ordinary shares
to decline.
The
sale or availability for sale of substantial amounts of our ordinary shares could adversely affect their market price.
Sales of substantial amounts of our ordinary shares
in the public market in the future, or the perception that these sales could occur, could adversely affect the market price of our ordinary
shares and could materially impair our ability to raise capital through equity offerings in the future. Our ordinary shares are freely
tradable without restriction or further registration under the Securities Act, and shares held by our existing shareholders may also be
sold in the public market in the future subject to the restrictions in Rule 144 and Rule 701 under the Securities Act and the
applicable lock-up agreements. In connection with our initial public offering, we and each of our directors and officers, and certain
shareholders agreed not to sell any ordinary shares for 12 months from January 25, 2021 without the prior written consent of the underwriter,
subject to certain exceptions. However, the underwriters may release these securities from these restrictions at any time, subject to
applicable regulations of the Financial Industry Regulatory Authority, Inc. (“FINRA”). In connection with our previous
follow-on offering, our directors and officers agreed not to sell any ordinary shares for 90 days from June 1, 2021 without the prior
written consent of the placement agent named therein, subject to certain exceptions. We cannot predict what effect, if any, market sales
of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will
have on the market price of our ordinary shares.
We may need additional capital and may sell
additional ordinary shares or other equity securities or incur indebtedness, which could result in additional dilution to our shareholders
or increase our debt service obligations.
We may require additional cash resources due to changed business conditions
or other future developments, including any investments or acquisitions we may decide to pursue. If our cash resources are insufficient
to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional
equity securities or equity-linked debt securities could result in additional dilution to our shareholders. The incurrence of indebtedness
would result in debt service obligations and could result in operating and financing covenants that would restrict our operations. We
cannot assure you that financing will be available in amounts or terms acceptable to us, if at all.
Techniques employed by short sellers may
drive down the market price of the ordinary shares
Short selling is the practice of selling securities
that the seller does not own but rather has borrowed from a third party with the intention of buying identical securities back at a later
date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed
securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the
sale. As it is in the short seller’s interest for the price of the security to decline, many short sellers publish, or arrange for
the publication of, negative opinions and allegations regarding the relevant issuer and its business prospects in order to create negative
market momentum and generate profits for themselves after selling a security short. These short attacks have, in the past, led to selling
of shares in the market. If we were to become the subject of any unfavorable allegations, whether such allegations are proven to be true
or untrue, we could have to expend a significant amount of resources to investigate such allegations and/or defend ourselves. While we
would strongly defend against any such short seller attacks, we may be constrained in the manner in which we can proceed against the relevant
short seller by principles of freedom of speech, applicable state law or issues of commercial confidentiality.
Because
we do not expect to pay dividends in the foreseeable future, you must rely on price appreciation of our ordinary shares for return
on your investment.
We currently retain all of our available funds
and any future earnings to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends in
the foreseeable future. Therefore, you should not rely on an investment in our ordinary shares as a source for any future dividend income.
Our
board of directors has complete discretion as to whether to distribute dividends. Even if our board of directors decides to declare
and pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other things, our future results
of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our
subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly,
the return on your investment in our ordinary shares will likely depend entirely upon any future price appreciation of our ordinary
shares. There is no guarantee that our ordinary shares will appreciate in value in the future or even maintain the price at which
you purchased our ordinary shares. You may not realize a return on your investment in our ordinary shares and you may even lose
your entire investment.
Our
principal shareholders have substantial influence over our company. Their interests may not be aligned with the interests of our
other shareholders, and they could prevent or cause a change of control or other transactions.
As of the date of this report, our executive officers
and directors, together with each of our principal shareholders owning 5% or more of our issued and outstanding ordinary shares, beneficially
own approximately 6,381,960 ordinary shares, or approximately 46.83% of our outstanding ordinary shares.
Accordingly, our executive officers and directors,
together with principal shareholders owning 5% or more of our issued and outstanding ordinary shares, could have a significant influence
in determining the outcome of any corporate transaction or other matter submitted to the shareholders for approval, including mergers,
consolidations, the election of directors and other significant corporate actions. In cases where their interests are aligned and they
vote together, these principal shareholders will also have the power to prevent or cause a change in control. Without the consent of some
or all of these principal shareholders, we may be prevented from entering into transactions that could be beneficial to us or our minority
shareholders. In addition, our directors and officers could violate their fiduciary duties by diverting business opportunities from us
to themselves or others. The interests of our principal shareholders may differ from the interests of our other shareholders. The concentration
in the ownership of our ordinary shares may cause a material decline in the value of our ordinary shares.
As a company incorporated in the BVI, we
are relying on certain home country practices in relation to corporate governance matters that differ significantly from Nasdaq corporate
governance listing standards. These practices may afford less protection to shareholders than they would enjoy if we complied fully with
Nasdaq corporate governance listing standards.
As a business company incorporated in the
BVI that is listed on Nasdaq, EZGO is subject to Nasdaq corporate governance listing standards. However, Nasdaq rules permit a
foreign private issuer like EZGO to follow the corporate governance practices of its home country. Certain corporate governance
practices in the BVI, which is EZGO’s home country, may differ significantly from Nasdaq corporate governance listing
standards, including, but not limited to, board of directors independent requirements, director nomination procedures, compensation
committee matters. EZGO is following its home country law instead of the Nasdaq listing rules that require EZGO to obtain
shareholder approval for certain dilutive events, such as certain transactions other than a public offering involving issuances of a
20% or greater interest in the company, and acquisitions of the stock or assets of another company. As a result, EZGO’s
shareholders may be afforded less protection than they otherwise would enjoy under Nasdaq corporate governance listing standards
applicable to U.S. domestic issuers.
EZGO is a BVI company and, because judicial
precedent regarding the rights of shareholders is more limited under BVI law than under U.S. law, you may have less protection for your
shareholder rights than you would under U.S. law.
Our
corporate affairs are governed by our memorandum and articles of association as amended and restated from time to time, the BVI
Business Company Act, 2004 (as amended) (“BVI Act”) and the common law of the BVI. The rights of shareholders to take
action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under
BVI law are to a large extent governed by the common law of the BVI. The common law of the BVI is derived in part from comparatively
limited judicial precedent in the BVI as well as that from English common law, which has persuasive, but not binding, authority
on a court in the BVI. The rights of our shareholders and the fiduciary responsibilities of our directors under BVI law are not
as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States.
In particular, the BVI has a different body of securities laws than the United States. In addition, some U.S. states, such
as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the BVI. There is no statutory
recognition in the BVI of judgments obtained in the United States, although the courts of the BVI will in certain circumstances
recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. As a result
of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by
management, members of the board of directors or controlling shareholders than they would as shareholders of a U.S. public company.
We
are a foreign private issuer and, as a result, will not be subject to U.S. proxy rules and will be subject to more lenient and
less frequent Exchange Act reporting obligations than a U.S. issuer.
Because
we qualify as a foreign private issuer under the Exchange Act, we are exempted from certain provisions of the Exchange Act that
are applicable to U.S. public companies, including:
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the
sections of the Exchange Act that regulate the solicitation of proxies, consents or authorizations
in respect of a security registered under the Exchange Act;
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the
sections of the Exchange Act that require insiders to file public reports of their stock
ownership and trading activities and impose liability on insiders who profit from trades
made in a short period of time; and
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the
rules under the Exchange Act that require the filing of quarterly reports on Form 10-Q
containing unaudited financial and other specified information and current reports on
Form 8-K upon the occurrence of specified significant events.
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In
addition, foreign private issuers are not required to file their annual report on Form 20-F until 120 days after the end of each
fiscal year, while U.S. domestic issuers that are not large accelerated filers or accelerated filers are required to file their
annual report on Form 10-K within 90 days after the end of each fiscal year. Foreign private issuers are also exempt from Regulation
FD, aimed at preventing issuers from making selective disclosures of material information. As a result, you may not have the same
protections afforded to shareholders of companies that are not foreign private issuers.
We
have incurred increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging
growth company.”
We are a public company and, as a result, have
incurred significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002,
as well as rules subsequently implemented by the SEC and Nasdaq, impose various requirements on the corporate governance practices of
public companies. As a company with less than US$1.07 billion in revenues for our last fiscal year, we qualify as an “emerging growth
company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements
that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement
under Section 404 of the Sarbanes-Oxley Act of 2002 in the assessment of the emerging growth company’s internal control over financial
reporting and permission to delay adopting new or revised accounting standards until such time as those standards apply to private companies.
We
expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities
more time-consuming and costly. After we are no longer an “emerging growth company,” we expect to incur significant
expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley
Act of 2002 and the other rules and regulations of the SEC. For example, as a result of becoming a public company, we will need
to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures.
We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and
officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher
costs to obtain the same or similar coverage. In addition, we will incur additional costs associated with our public company reporting
requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive
officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict
or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.
In
the past, shareholders of a public company often brought securities class action suits against the company following periods of
instability in the market price of that company’s securities. If we were involved in a class action suit, it could divert
a significant amount of our management’s attention and other resources from our business and operations, which could harm
our results of operations and require us to incur significant expenses to defend the suit. Any such class action suit, whether
or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim
is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on
our financial condition and results of operations.
We
may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses.
As
discussed above, we are a foreign private issuer, and therefore, we are not required to comply with all of the periodic disclosure
and current reporting requirements of the Exchange Act. The determination of foreign private issuer status is made annually on
the last business day of an issuer’s most recently completed second fiscal quarter, and, accordingly, the next determination
will be made with respect to us on March 31, 2022. In the future, we would lose our foreign private issuer status if (1) more
than 50% of our outstanding voting securities are owned by U.S. residents and (2) a majority of our directors or executive officers
are U.S. citizens or residents, or we fail to meet additional requirements necessary to avoid loss of foreign private issuer status.
If we lose our foreign private issuer status, we will be required to file with the SEC periodic reports and registration statements
on U.S. domestic issuer forms, which are more detailed and extensive than the forms available to a foreign private issuer. We
will also have to mandatorily comply with U.S. federal proxy requirements, and our officers, directors and principal shareholders
will become subject to the short-swing profit disclosure and recovery provisions of Section 16 of the Exchange Act. In addition,
we will lose our ability to rely upon exemptions from certain corporate governance requirements under the listing rules of the
Nasdaq. As a U.S. listed public company that is not a foreign private issuer, we will incur significant additional legal, accounting
and other expenses that we will not incur as a foreign private issuer.
As an “emerging growth company”
under the Jumpstart Our Business Startups Act, or JOBS Act, we are permitted to, and relying on exemptions from certain disclosure requirements.
As an “emerging growth company” under
the JOBS Act, we are permitted to, and relying on exemptions from certain disclosure requirements. We are an emerging growth company until
the earliest of:
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the
last day of the fiscal year during which we have total annual gross revenues of $1.07
billion or more;
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the
last day of the fiscal year following the fifth anniversary of our initial public offering;
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the
date on which we have, during the previous three-year period, issued more than $1 billion
in non-convertible debt; or
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the
date on which we are deemed a “large accelerated issuer” as defined under
the federal securities laws.
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For
so long as we remain an emerging growth company, we may take advantage of certain exemptions from various reporting requirements
that are applicable to public companies that are not “emerging growth companies” including, but not limited to, not
being required to comply with the auditor attestation requirements of section 404 of the Sarbanes-Oxley Act for up to five fiscal
years after the date of our initial public offering. We cannot predict if investors will find our ordinary shares less attractive
because we may rely on these exemptions. If some investors find our ordinary shares less attractive as a result, there may be
a less active trading market for our ordinary shares and the trading price of our ordinary shares may be more volatile. In addition,
our costs of operating as a public company may increase when we cease to be an emerging growth company.
There
can be no assurance that we will not be a passive foreign investment company, or PFIC, for United States federal income tax
purposes for any taxable year, which could subject United States investors in our ordinary shares to significant adverse
United States income tax consequences.
A
non-United States corporation, such as our company, will be classified as a PFIC, for U.S. federal income tax purposes for
any taxable year, if either (i) 75% or more of its gross income for such year consists of certain types of “passive”
income or (ii) 50% or more of the value of its assets (determined on the basis of a quarterly average) during such year is attributable
to assets that produce or are held for the production of passive income.
Based on our current composition of assets, subsidiaries
and market capitalization (which will fluctuate from time to time), we do not expect to be or become a PFIC for U.S. federal income tax
purposes. However, the determination of whether we will be or become a PFIC will depend, in part, upon the value of our goodwill and other
unrecorded intangibles. Furthermore, the determination of whether we will be or become a PFIC will depend, in part, on the composition
of our income and assets. Fluctuations in the market price of our ordinary shares may cause us to become a PFIC for the current or subsequent
taxable years. The composition of our income and assets may also be affected by how, and how quickly, we use our liquid assets and the
cash raised in our offerings. In addition, because there are uncertainties in the application of the relevant rules, it is possible that
the Internal Revenue Service may challenge our classification of certain income and assets as non-passive or our valuation of our tangible
and intangible assets.
Because
determination of PFIC status is a fact-intensive inquiry made on an annual basis that depends upon the composition of our assets
and income, no assurance can be given that we are not or will not become classified as a PFIC. If we were to be or become classified
as a PFIC in any taxable year, a U.S. Holder (as defined in “ITEM 10. ADDITIONAL INFORMATION – 10.E.Taxation —
United States Federal Income Taxation”) may incur significantly increased U.S. federal income tax on gain recognized on
the sale or other disposition of our ordinary shares and on the receipt of distributions on the ordinary shares to the extent
such gain or distributions is treated as an “excess distribution” under the U.S. federal income tax rules. Further,
if we are classified as a PFIC for any year during which a U.S. Holder holds our ordinary shares, we generally will continue to
be treated as a PFIC for all succeeding years during which such U.S. Holder holds our ordinary shares. You are urged to consult
your tax advisor concerning the United States federal income tax consequences of acquiring, holding, and disposing of ordinary
shares if we are or become classified as a PFIC. For more information, see “ITEM 10. ADDITIONAL INFORMATION – 10.E.Taxation
— United States Federal Income Taxation.”
You
may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited,
because we are incorporated under BVI law.
EZGO is a company incorporated under the laws
of the BVI. As a result, it may be difficult for investors to enforce judgments obtained in the United States courts against our
directors or officers.
Our
corporate affairs are governed by our amended and restated memorandum and articles of association, the BVI Act and the common
law of the BVI. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary
responsibilities of our directors to us under BVI law are governed by the BVI Act and the common law of the BVI. The common law
of the BVI is derived from English common law, and while the decisions of the English courts are of persuasive authority, they
are not binding on a court in the BVI. The rights of our shareholders and the fiduciary responsibilities of our directors under
BVI law may not be as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States.
In particular, the BVI has a less developed body of securities laws as compared to the United States, and some states, such
as Delaware, have more fully developed and judicially interpreted bodies of corporate law. In addition, while statutory provisions
do exist in BVI law for derivative actions to be brought in certain circumstances, shareholders in BVI companies may not have
standing to initiate a shareholder derivative action in a federal court of the United States. The circumstances in which
any such action may be brought, and the procedures and defenses that may be available with respect to any such action, may result
in the rights of shareholders of a BVI company being more limited than those of shareholders of a company organized in the United States.
Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate wrongdoing has occurred.
The
BVI courts are also unlikely:
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to
recognize or enforce against us judgments of courts of the United States based on
certain civil liability provisions of U.S. securities laws where that liability is in
respect of penalties, taxes, fines or similar fiscal or revenue obligations of the company;
and
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to
impose liabilities against us, in original actions brought in the BVI, based on certain
civil liability provisions of U.S. securities laws that are penal in nature.
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There
is no statutory recognition in the BVI of judgments obtained in the United States, although the courts of the BVI will in
certain circumstances recognize such a foreign judgment and treat it as a cause of action in itself which may be sued upon as
a debt at common law so that no retrial of the issues would be necessary provided that:
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the
U.S. court issuing the judgment had jurisdiction in the matter and the company either
submitted to such jurisdiction or was resident or carrying on business within such jurisdiction
and was duly served with process;
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The
judgement is final and for a liquidated sum;
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the
judgment given by the U.S. court was not in respect of penalties, taxes, fines or similar
fiscal or revenue obligations of the company;
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in
obtaining judgment there was no fraud on the part of the person in whose favor judgment
was given or on the part of the U.S. court;
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recognition
or enforcement of the judgment would not be contrary to public policy in the BVI; and
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the
proceedings pursuant to which judgment was obtained were not contrary to natural justice.
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As
a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions
taken by our board of directors, management or controlling shareholders than they would as public shareholders of a U.S. company.
Judgments
obtained against us by our shareholders may not be enforceable.
We are a BVI company and substantially all of
our assets are located outside of the United States. Substantially all of our current operations are conducted in China. In addition,
certain of our directors and officers reside outside the United States. As a result, it may be difficult for you to effect service
of process within the United States or elsewhere outside China upon these persons. It may also be difficult for you to enforce in
China or BVI courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against
us and our officers and directors, most of whom are not residents in the United States and the substantial majority of whose assets
are located outside of the United States. It may be difficult or impossible for you to bring an action against us in the BVI if you
believe your rights under the U.S. securities laws have been infringed. In addition, there is uncertainty as to whether the courts of
the BVI or China would recognize or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions
of the securities laws of the United States or any state and it is uncertain whether such BVI or China courts would hear original
actions brought in the BVI or China against us or such persons predicated upon the securities laws of the United States or any state.
Provisions
in our amended and restated memorandum and articles of association may inhibit a takeover of us, which could limit the price investors
might be willing to pay in the future for our shares and could entrench management.
Our
amended and restated memorandum and articles of association contain provisions that may discourage unsolicited takeover proposals
that shareholders may consider to be in their best interests. These provisions include a staggered board of directors and the
ability of the board of directors to designate the terms of and issue new series of preferred shares, which may make the removal
of management more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing
market prices for our shares.
Restrictive covenants related to our previous
registered direct offering may restrict our ability to obtain future financing.
Under the securities purchase agreement with certain
accredited investors (the “previous registered direct offering investors”) in connection with the previous registered direct
offering, we are prohibited from entering into any Variable Rate Transaction (defined below) until such date that no warrants in connection
with the previous registered direct offering remain outstanding. “Variable Rate Transaction” means a transaction in which
the company (i) issues or sells any debt or equity securities that are convertible into, exchangeable or exercisable for, or include the
right to receive additional ordinary shares either (A) at a conversion price, exercise price or exchange rate or other price that is based
upon and/or varies with the trading prices of or quotations for the ordinary shares at any time after the initial issuance of such debt
or equity securities, or (B) with a conversion, exercise or exchange price that is subject to being reset at some future date after the
initial issuance of such debt or equity security or upon the occurrence of specified or contingent events directly or indirectly related
to the business of the company or the market for the ordinary shares or (ii) enters into, or effects a transaction under, any agreement,
including, but not limited to, an equity line of credit, whereby the company may issue securities at a future determined price.
In addition, we granted the previous registered
direct offering investors a 30% right of participation (on a pro-rata basis) with respect to any debt or equity linked financings undertaken
by us for one year following the closing of the previous registered direct offering. These participation rights could severely impact
our ability to engage investment bankers to structure a financing transaction and raise additional financing on favorable terms. Furthermore,
negotiating and obtaining a waiver to these participation rights may either not be possible or may be costly to us.
We
are subject to changing law and regulations regarding regulatory matters, corporate governance and public disclosure that have
increased both our costs and the risk of non-compliance.
We
are subject to rules and regulations by various governing bodies, including, for example, the Securities and Exchange Commission,
which are charged with the protection of investors and the oversight of companies whose securities are publicly traded, and to
new and evolving regulatory measures under applicable law. Our efforts to comply with new and changing laws and regulations have
resulted in and are likely to continue to result in, increased general and administrative expenses and a diversion of management
time and attention from revenue generating activities to compliance activities.
Moreover,
because these laws, regulations and standards are subject to varying interpretations, their application in practice may evolve
over time as new guidance becomes available. This evolution may result in continuing uncertainty regarding compliance matters
and additional costs necessitated by ongoing revisions to our disclosure and governance practices. If we fail to address and comply
with these regulations and any subsequent changes, we may be subject to penalty and our business may be harmed.
ITEM
4. INFORMATION ON THE COMPANY
4A. History and Development of the Company
EZGO was incorporated in the BVI on January 24,
2019. EZGO’s wholly owned subsidiary, EZGO HK, was incorporated in Hong Kong on February 13, 2019. EZGO HK, in turn, holds
all of the capital stock of Changzhou EZGO, which was incorporated in China on June 12, 2019 and Changzhou Langyi Electronic Technologies
Co., Ltd. (“Changzhou Langyi”), which was incorporated in China on August 6, 2021. Changzhou EZGO controls Jiangsu EZGO through
the VIE Agreements. See “— Contractual Arrangements with Jiangsu EZGO and Its Shareholders.” EZGO conducts its
business in the PRC primarily though Jiangsu EZGO and its subsidiaries, Changzhou Hengmao Power Battery Technology Co., Ltd. (“Hengmao
Power Battery”), a PRC company of which 80.87% of equity interest is owned by Jiangsu EZGO, Jiangsu Cenbird E-Motorcycle Technologies
Co., Ltd. (“Jiangsu Cenbird”), a PRC company of which 51% of equity interest is owned by Jiangsu EZGO, Changzhou Yizhiying
IoT Technologies Co., Ltd., (“Yizhiying IoT”) a PRC company and a wholly-owned subsidiary of Jiangsu EZGO, Tianjin Dilang
Technologies Co., Ltd. (“Tianjin Dilang”), a PRC company of which Yizhiying IoT owns 80% of equity interest, and Tianjin Jiahao
Bicycle Co, Co. Ltd. (“Tianjin Jiahao”), a PRC company and a wholly-owned subsidiary of Jiangsu EZGO, since EZGO obtained
control over Jiangsu EZGO in November 2019.
Our
principal executive offices are located at Building #A, Floor 2, Changzhou Institute of Dalian University of Technology, Science
and Education Town, Wujin District, Changzhou City, Jiangsu, China 213164, and our phone number is + 86 51983683805. We maintain
a corporate website at www.ezgotech.com.cn. The information contained in, or accessible from, our website or any other
website does not constitute a part of this annual report.
Recent Developments
On March 12, 2021, Jiangsu EZGO entered into an
Asset Purchase Arrangement Agreement (“Asset Purchase Arrangement Agreement”) with Benlin Huang, an individual, and Tianjin
Jiahao, a non-affiliated third party, pursuant to which Jiangsu EZGO agreed to purchase certain land and plants of Tianjin Jiahao (the
“Target Assets”) for the Company’s future production and business development, for an aggregate purchase price of US$10,164,204,
of which US$2,800,000 was paid as a deposit by EZGO in cash on March 15, 2021, with the remaining RMB50,000,000 (approximately US$7,364,204)
to be paid upon the satisfaction of the closing conditions in order to complete of the acquisition, including Benlin Huang’s exclusive
ownership of the Target Assets, our further due diligence of Tianjin Jiahao’s historical material indebtedness and the good and
marketable title of the Target Assets and the renewal of Tianjin Jiahao’s business scope on its business certificate. On April 2,
2021, Jiangsu EZGO received a written Notice of Assignment, pursuant to which Benlin Huang assigned and transferred all of his rights,
titles and obligations under the Asset Purchase Arrangement Agreement to Shanghai Mingli New Energy Technology Co., Ltd. (“Shanghai
Mingli”).
On April 19, 2021, Jiangsu EZGO entered into a
Shares Purchase Agreement with Shanghai Mingli and Tianjin Jiahao (“Shares Purchase Agreement”), pursuant to which Jiangsu
EZGO obtained the right to purchase 100% of the outstanding shares of Shanghai Mingli, the owner of the title of the Target Assets. RMB15,000,000
(approximately US$2,209,261.22) of the cash consideration was paid on April 20, 2021 pursuant to the Shares Purchase Agreement, with the
remaining RMB35,000,000 (approximately US$5,154,942.85) to be paid upon closing, which is subject to the closing conditions including
the completion of the transfer of the title of the Target Assets and the registration of the acquisition with PRC governmental authorities.
The Asset Purchase Arrangement Agreement and Shares
Purchase Agreement contain customary representations and warranties from the selling parties and Jiangsu EZGO. We are entitled to indemnification
for breaches by the selling parties of its representations and warranties.
On June 28, 2021, the acquisition of Tianjin Jiahao
and the Target Assets was completed and Tianjin Jiahao became Jiangsu EZGO’s wholly owned subsidiary. With the completion of this
acquisition, we have more than 35,000 square meters of factory land, including two factory buildings and an administration building, and
a construction area of approximately 11,000 square meters. We also have the flexibility to construct an additional 40,000 square meters
of production factory buildings on this land, located in the Beijing-Tianjin Science and Technology Valley in the Wuqing District of Tianjin,
which is a part of China’s Bicycle Kingdom Industrial Zone. The estimated production capacity of the existing factory buildings
purchased in this transaction is 100,000 units of two-wheeled e-bicycles. The estimated production capacity of the factory building that
may be built on the remaining land purchased is anticipated to be approximately 500,000 units of two-wheeled e-bicycles. As of the date
of this report, our current production capacity at our leased factory in Nancai Town of Tianjin is nearly 300,000 e-bicycles, with actual
capacity of 150,000 e-bicycles due to limited turnover space. This acquisition of the Target Assets enables us to significantly ramp production
of the e-bicycles following our completion of the national first-class electric motorcycle qualification application
On June 1, 2021, EZGO closed the previous registered
direct offering of 2,564,102 units of our securities, with each unit consisting of (i) one ordinary share, par value $0.001 per share,
and (ii) one warrant to purchase 0.7 ordinary shares. The units were sold at a price of $4.68 per unit. EZGO received gross proceeds from
the previous registered direct offering, before deducting estimated offering expenses payable by EZGO, of approximately $12,000,000.
On August 6, 2021, EZGO entered into an advisory agreement with ViewTrade
Securities, Inc. (the “Advisor”) pursuant to which the Advisor provided general business advice and other compliance advice
to EZGO. The advisory agreement expired on December 31, 2021.
4B.
Business Overview
EZGO is a holding company with operating subsidiaries,
a VIE and VIE’s subsidiaries, and with all of its operations and assets in China. Our vision is to be a leading short-distance transportation
solutions provider in China. Leveraging our Internet of Things (“IoT”) product and service platform, we have preliminarily
established a business model centered on the sale of e-bicycles and battery and cells, complemented by sale of battery packs and our charging
pile business. Currently, we (i) design, manufacture, rent and sell e-bicycles and e-tricycles; (ii) rent and sell lithium batteries;
and (iii) sell, franchise, and operate smart charging piles for e-bicycles and other electronic devices.
Our e-bicycles are models under the PRC Safety
Technical Specification for Electric Bicycles (GB 17761-2018) (also referred to generally as the “New National Standards for Electric
Bicycles” and referred to herein as the “New National Standards”) (“new standards e-bicycles”) and there
are no domestic law and regulations related to urban e-tricycles. Tianjin Dilang produces and sells the urban e-tricycles in suburban
areas in Beijing and Tianjin. In addition, the two-wheel electric vehicle models that do not comply with the new standards e-bicycles
that are manufactured under the New National Standards (“non-new standards e-bicycles”) are manufactured under the PRC National
Standard General Specification for Electric Motorcycle and Electric Mopeds (GB/T24158-2018) (“General Specification Standard”),
which came into effect on April 1, 2019. We do not produce any non-new standards e-bicycles. As of September 30, 2021, we did not have
non-new standards e-bicycles as our property, plants and equipment and no impairment was recognized for the fiscal years ended September
30, 2019, 2020 and 2021.
To date, we engaged in the business of battery
packs sales, which accounted for approximately 91%, 21% and 18% of our total revenues for the fiscal years ended September 30, 2019, 2020
and 2021, respectively. The revenue from e-bicycles sales accounted for approximately 8%, 73% and 78% of our total revenues for the fiscal
years ended September 30, 2019, 2020 and 2021, respectively. For the fiscal years ended September 30, 2019, 2020 and 2021, as our self-developed
smart charging piles for e-bicycles and other electronic devices have not yet entered into large-scale production and sales, the revenue
from this business accounted for a small proportion of our total revenues. For the fiscal year ended September 30, 2021, the revenue from
our smart charging piles business accounted for 1% of our total revenues.
We
are committed to providing cost-effective and convenient solutions for short distance travelers through the design, manufacture,
rental and sale of high-quality e-bicycles, with lightweight and high endurance lithium batteries, to meet different levels of
consumer demand, and through the operation of smart charging piles in communities. We also plan to launch our online 4S (which
stands for Sale, Spare-part supply, after-sale Service and Survey) services to enhance our sales capacity by combining our online
sales portals and offline service and support channels.
History
and Milestones
The
chart below illustrates the history and milestones of our company:
We
commenced lithium battery pouch cell manufacture in May 2014 through Hengmao Power Battery and were one of the earliest private
enterprises to manufacture lithium battery pouch cell in China. We established a mature lithium battery production process in a facility
of approximately 15,000 square meters (approximately 161,460 square feet), equipped with four high-capacity lithium battery cell production
lines and an annual production capacity of 100 million Ah lithium battery cells. However, due to changes in the Chinese government’s
energy subsidy policies, and the concentration of industrial production capacity in a few leading companies in China, competition in
the lithium battery industry intensified. As a result, we gradually shifted our focus from lithium battery cell manufacturing to battery
packing since October 2018. We launched our lithium battery rental business in January 2017, targeting delivery service professionals,
such as EMS, express service providers, and online meal deliverymen for platforms such as Meituan and Elema in Changzhou. In September 2017,
we launched our e-bicycle rental business, targeting deliverymen, students, business travelers, migrant workers and also entered into
agreements with our individual sublease agents to provide such service. However, we do not have any contractual arrangement with specific
delivery service provider. We had not provided any online service until May 2018 whereby we launched our first online mobile application,
Yidianxing, to run our IoT battery rental business. In October 2018, we decided to make a strategic shift from battery cell manufacturing
to focus on the packing and sale of lithium batteries and the rental of lithium batteries and e-bicycles. In August 2018, we established
Yizhiying IoT to develop and manage our IoT platform. Through Yizhiying IoT, we have continued to upgrade and enhance our IoT operating
platform. In December 2018, we renewed a new version of our Yidianxing mobile application for the e-bicycles and battery rental
business. For the ease of convenience for end-users’ experience and our system maintenance, we launched Wechat applet to replace
the old mobile application in December 2019. To date, Yizhiying IoT has expanded our IoT platform to cover cities including Changzhou,
Wenzhou and Wuhu.
In
December 2018, we sold all of Hengmao Power Battery’s battery cell production lines and fully concentrated our business
on the packing, rental and sale of lithium battery and e-bicycles.
On
April 15, 2019, the New National Standards became effective in China. The New National Standards set out requirements for e-bicycles
that include a pedal-riding function i.e. the speed of such e-bicycles cannot exceed 25 km/h and their weight should be no
more than 55 kg. The New National Standards also mandate that the voltage shall not exceed 48V and that motor power shall not
exceed 400W, among other limitations. The New National Standards also prohibits any sale of e-bicycles that do not comply with
the standards. As to the use of non-new standards e-bicycles, the State Administration of Market Supervision, the Ministry of
Industry and Information Technology and the Ministry of Public Security jointly issued an order “2019 No. 53 - Strengthening
the Supervision of the Implementation of National Standards for Electric Bicycles” (the “Order No. 53”).
According to Article 4 of Order No. 53, each provincial government should provide a grace period and issue a temporary permission
license to the owners of the non-new standards e-bicycles. The grace period for the use of non-new national standard e-bicycles
in most provinces, including Jiangsu, is five years from April 15, 2019. Within the grace period, people can legally use, purchase,
rent and ride non-new standard e-bicycles.
We
assessed the business opportunities for the new standards e-bicycle market and concluded that most of the external suppliers of
the e-bicycles’ components are located in three regions in China, namely, the Changzhou and Wuxi region, the Zhejiang and
Taizhou region and Tianjin region. All of these regions are in close proximity to our Changzhou headquarters and our Tianjin factories.
As a result, we can purchase the key components of new standards e-bicycles from external suppliers in Tianjin and Jiangsu. We
usually purchase our components on an order basis and we will consider entering into long-term agreements with the suppliers guaranteeing
a regular supply of those components in the future if necessary.
On July 30, 2019, we established Jiangsu EZGO
as a holding and management company, holding 80.87% of the equity of Hengmao Power Battery (the remaining equity being owned by two institutional
investors) and 100% of the equity of Yizhiying IoT. On September 6, 2019, for the purpose of expanding our sales channels and strengthening
the capabilities in research and development in developing e-bicycles, we decided to cooperate with Jiangsu Cenbird. Yuxing Liu, the general
manager and former shareholder of Jiangsu Cenbird, signed the equity transfer agreement with Jiangsu EZGO on September 6, 2019, which
stipulated that Yuxing Liu would transfer 51% of his equity interest of Jiangsu Cenbird to Jiangsu EZGO. Through Jiangsu EZGO, we invested
RMB5.1 million, accounting for 51% of the equity interest of Jiangsu Cenbird. Another shareholder of Jiangsu Cenbird, Yan Fang, also invested
RMB4.9 million, accounting for 49% of the equity interest of Jiangsu Cenbird. Yan Fang’s family owns Changzhou Cenbird Electric
Bicycle Manufacturing Co., Ltd. (“Changzhou Cenbird”), an entity with almost 20 years of experience manufacturing non-new
standards e-bicycles, which exports its products to many countries, including the United States. Changzhou Cenbird’s e-scooter,
a commuter vehicle in San Francisco since 2016, was jointly developed with Ojo Electric LLC (formerly known as eUrban LLC), a U.S. based
company. Through this transaction, we have the right to use the “Cenbird” trademark, a well-known brand of e-bicycles in Jiangsu
Province; e-bicycle design and sale capabilities; and sales channels through which we may export products to the potential customers and
existing customers from United States, Brazil, Israel and Southeast Asia in the future.
To further complete our e-bicycle product and
services ecosystem, we began developing our own smart charging piles under the brand named “Hengdian” in November 2018.
We finished designing the smart charging piles in August 2019 and sent the prototype to Wuxi Institute for Product Quality Inspection
for testing. In December 2019, we received a certificate of quality control issued by the Wuxi Institute for Product Quality Inspection
for our smart charging piles. Our smart charging pile business includes hardware provision to franchisees with whom we enter into co-investment
and income-sharing arrangements, and self-operation. Our smart charging piles satisfy the highest electric spark fire protection standards
that are obtainable in the PRC, IoT smart control capability, which allows us to remotely monitor the charging status of each port, and
a broad voltage range, and can be used to charge e-bicycles, mobile phones and laptops. The M version of our smart charging piles, which
is currently under research and development, will be portable and can be used both at fixed locations like park and on long-distance coaches
and tour buses. Our smart charging piles can also serve as advertising terminals, which increases their value-adding potential to our
company.
On March 12, 2021, Jiangsu EZGO entered into the
Asset Purchase Arrangement Agreement with Benlin Huang, an individual, and Tianjin Jiahao, pursuant to which Jiangsu EZGO agreed to purchase
the Target Assets for the Company’s future production and business development, for an aggregate purchase price of US$10,164,204,
of which US$2,800,000 was paid as a deposit by EZGO in cash on March 15, 2021, with the remaining RMB50,000,000 (approximately US$7,364,204)
to be paid upon the satisfaction of the closing conditions in order to complete of the acquisition, including Benlin Huang’s exclusive
ownership of the Target Assets, our further due diligence of Tianjin Jiahao’s historical material indebtedness and the good and
marketable title of the Target Assets and the renewal of Tianjin Jiahao’s business scope on its business certificate. On April 2,
2021, Jiangsu EZGO received a written Notice of Assignment, pursuant to which Benlin Huang assigned and transferred all of his rights,
titles and obligations under the Asset Purchase Arrangement Agreement to Shanghai Mingli.
On April 19, 2021, Jiangsu EZGO entered into the
Shares Purchase Agreement with Shanghai Mingli and Tianjin Jiahao, pursuant to which Jiangsu EZGO obtained the right to purchase 100%
of the outstanding shares of Shanghai Mingli, the owner of the title of the Target Assets. RMB15,000,000 (approximately US$2,209,261)
of the cash consideration was paid on April 20, 2021 pursuant to the Shares Purchase Agreement, with the remaining RMB35,000,000 (approximately
US$5,154,943) to be paid upon closing, which is subject to the closing conditions including the completion of the transfer of the title
of the Target Assets and the registration of the acquisition with PRC governmental authorities.
The Asset Purchase Arrangement Agreement and Shares
Purchase Agreement contain customary representations and warranties from the selling parties and Jiangsu EZGO. We are entitled to indemnification
for breaches by the selling parties of its representations and warranties.
On June 28, 2021, the acquisition of Tianjin Jiahao
and the Target Assets was completed and Tianjin Jiahao became Jiangsu EZGO’s wholly owned subsidiary. With the completion of this
acquisition, we have more than 35,000 square meters of factory land, including two factory buildings and an administration building, and
a construction area of approximately 11,000 square meters. We also have the flexibility to construct an additional 40,000 square meters
of production factory buildings on this land, located in the Beijing-Tianjin Science and Technology Valley in the Wuqing District of Tianjin,
which is a part of China’s Bicycle Kingdom Industrial Zone. The estimated production capacity of the existing factory buildings purchased
in this transaction is 100,000 units of two-wheeled e-bicycles. The estimated production capacity of the factory building that may be
built on the remaining land purchased is anticipated to be approximately 500,000 units of two-wheeled e-bicycles. As of the date of this
report, our current production capacity at our leased factory in Nancai Town of Tianjin is nearly 300,000 e-bicycles, with actual capacity
of 150,000 e-bicycles due to limited turnover space. This acquisition of the Target Assets enables us to significantly ramp production
of the e-bicycles following our completion of the national first-class electric motorcycle qualification application.
Competitive
Strengths
Accumulated
Industry Resources
Our management and key personnel have several
years of experience in the lithium battery industry, the e-bicycle industry and the e-commerce industry, which we believe will boost our
marketing. For example, Dr. Henglong Chen, one of the early founders of Hengmao Battery, has extensive experience in lithium battery
industry. Mr. Yuxing Liu, the General Manager of Jiangsu Cenbird, entered into the e-bicycle industry in 1999 and created the brand of
Cenbird e-bicycle in December 2000. Mr. Huiyan Xie, the General Manager of Tianjin Dilang, has over ten years’ industry experiences
in e-bicycle manufacturing and marketing. Mr. Xiaosong Qin, our executive vice president since August 2020, has extensive experience
both in business and investment management. He has a master’s of business administration from Leonard N. Stern School of Business,
New York University. He currently resides in the United States and is responsible for our business development in North America
and Latin America.
In
addition, we have developed a strategic alliance with the Jiangsu Institute of Research of Dalian University of Technology since
July 2019. Pursuant to our agreement, the research institute will provide us with personnel training, technologies sharing
and technical supports, helping to expedite our long-term development plans.
Advanced
Operations Model
One of our competitive advantages, we believe,
lies in our advanced operations model. We manage our costs and expenses through outsourcing. Through our smart charging piles, we expect
to be able to acquire information about customers and to promote our products and services. We also promote our products and services
through the advertisement on WeChat applet for our smart charging piles, sell products through social media and e-commerce platforms (including
TikTok and Taobao Live) and apply O2O (“online to offline”) and B2B2C (“business to business to consumer”) marketing
models. According to our internal estimates, these marketing models, compared with having offline stores only, has saved us more than
5% of sales expenses and have increased our margins. In addition, our experienced information technology team has built a basic IoT platform
that we believe puts us ahead of our competitors with no IoT platform for their products and/or services.
Quality
Products and Services
We
seek to innovate and enhance our existing mature e-bicycle models so that we can offer competitive pricings. In our manufacturing
processes of e-bicycles, we aim to control cost while maintaining quality, through the application of lean production methods
and Total Quality Management practices.
Consistent
with our efforts to provide high-quality products, we strive to provide high-quality services. We aim to help satisfying customers’
long term, rather merely serving their short-term needs. This approach has guided the development of our online 4S services for
quick-response maintenance, and our design of high-endurance batteries for takeaway food deliverymen.
We
use A-level battery cells to pack our batteries, and our battery management system has evolved as we accumulate technology improvements
and experience. As a result, our self-produced batteries have approximately an average of 10% longer usage duration than the national
standards for lithium batteries that took effect in July 2019 (GB T36972-2018).
Our
Strategies
We hope to transform ourselves in the next five
years (between 2021 to 2025) into a well-regarded e-bicycle manufacturing, sales and service company with a market share of at least 1%
in the e-bicycle industry in China, representing no less than an annual sales volume of 500,000 units by the end of 2025. Over that time
period, we plan to build our sales and service network in the Beijing-Tianjin-Hebei urban agglomeration area, the Yangtze River Delta
metropolitan area, the Zhujiang River Delta metropolitan area and several inland central cities, such as Chengdu, Xi’an and Zhengzhou,
and to deploy 50,000 smart charging piles. Our business strategies are “follow-on” strategy, moderate creative strategy, cost
leading strategy, 5G leverage strategy and ecological chain strategy. We also follow the leading e-bicycle manufactures on models and
promotion policies. Our moderate creative strategy emphasizes on cooperative development and sharing intelligence in order to mitigate
the research and development risk
We plan to focus on e-bicycles, e-motorcycles
and e-moped manufacturing and intend to build a short-distance IoT transportation network that integrates sales, rental, charging, battery
exchanges and other maintenance service to provide short-distance commuters with comprehensive e-bicycle products and services, an ecological
chain from manufacturing to sales to rentals to charging and maintenance. In the long term, we aim to becoming a leading domestic short-distance
transportation solutions provider in China.
Our Products and Services
Our product portfolio includes lithium batteries,
Dilang-brand and Cenbird-brand e-bicycles and e-tricycles, EZGO-brand e-bicycles, and Hengdian-brand smart charging piles. We (i) design,
manufacture, rent and sell e-bicycles and e-tricycles; (ii) rent and sell lithium batteries; and (iii) sell, franchise, and operate smart
charging piles for e-bicycles and other electronic devices. We also provide after-sales services for our e-bicycles, including technical
support, parts supply and sales of peripheral products and derivatives, including raincoats, helmets, and mobile phone brackets.
Batteries
In December 2018, we ceased battery cell
manufacture, although we still engage in battery cell trading. For the fiscal year ended September 30, 2021, we entered into a lithium
battery sales contract with downstream customers first, and then purchased from a suitable upstream supplier, and resold the batteries
to the downstream customers. In battery trading, we provide storage and bear the risk of inventory for several months. All the quality
assurance risks are borne by the suppliers. We are able to quickly match buyers and sellers leveraging our resources in the industry accumulated
over the years of our manufacturing and trading lithium batteries, including industry information, business relationship and industry
reputation.
At the same time, we pack, rent and sell batteries.
If a large number of battery packs are needed, we will either purchase the battery cells and assemble the batteries by ourselves or outsource
to third-party manufacturers.
Our battery cells trading and battery packs sales
for the fiscal years ended September 30, 2019, 2020 and 2021 were approximately $1.3 million, $3.1 million and $4.3 million, respectively,
mainly from our existing trade partnerships. In the future, we will continue to engage in trading business, especially those that could
use our battery packing capabilities and our special e-bicycle battery models such as our 60V and 48V batteries.
Below are some of our bicycle battery models such
as our 60V and 48V batteries:
48V24A Lithium Battery
60V20Ah Lithium Battery
72V60Ah Lithium Battery
Dilang E-Bicycles
Dilang-brand e-bicycles include fourteen models
of new standards e-bicycles with 3C certification, three of which are included in the current Beijing catalogue. We also produce urban-style
e-tricycles under the Dilang brand which are not required to hold any 3C certification. In 2021, we plan to apply for 3C certification
for 20 to 30 New National Standards e-bicycle models and qualification of manufacturing e-motorcycles. For the fiscal years ended September
30, 2019, 2020 and 2021, we had revenue from sales of Dilang brand e-bicycle of $18,594, $4,936,070 and $11,059,960, respectively. In
order to recover our sales post COVID-19, we have enhanced our supply chain and reinforced sales promotions, including sending direct
mail advertising brochure to our customers and advertising our products in local agent stores. For the fiscal year ended September 30,
2021, Tianjin Dilang had sold approximately 63,737 units of e-bicycle and reached the revenue of approximately RMB71,263,744 (approximately
$11.06 million). Tianjin Dilang was awarded “Competitive Brand in Electric Bicycle Industry in 2020” in China by cebike.com.
Below are some of Dilang brand’s e-bicycles
and urban-style e-tricycles:
TDT001Z:
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TDT002Z:
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TDT003Z:
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TDT004Z:
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TDT005Z:
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TDR66Z:
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TDT01Z
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TDT03Z
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Urban e-tricycle: A6
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Urban e-tricycle: X7
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Urban e-tricycle: Jelly Bean
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D1
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Below are part of Dilang brand’s new models:
The Dilang brand of products are primarily sold
through regional distributors. For the fiscal years ended September 30, 2020 and 2021, Dilang had sales revenue of $4,936,070 and $11,059,960,
respectively. We encourage customers to pick up their e-bicycles at nearby offline shops around Beijing, Tianjin and Changzhou, and also
provide delivery to customers in Beijing and Tianjin by ourselves, or to customers in other cities by express delivery. Through our regional
distributor in Beijing, Beijing 70 Generation Co., Ltd., we have developed a network of seven offline stores where customers can pick
up purchased products. These offline stores also offer after-sales services.
Cenbird E-Bicycles and Other Products
Cenbird is a well-known brand in the e-bicycle
industry. The Cenbird product portfolio includes high-speed non-new standards e-bicycles, light electric motor scooters (“e-mopeds”)
and new standards e-bicycles. Currently, all Jiangsu Cenbird products are manufactured through original design manufacturer outsourcing
by Changzhou Cenbird. To date, Jiangsu Cenbird has no inventory of non-new national standards e-bicycles. We will not pre-produce these
products unless an order has been placed.
The Cenbird brand of products are primarily sold
through offline stores. Following our investment at the end of August 2019, we have gradually taken over the design, sales and research
and development activities.
Below are part of the Cenbird e-bicycle models:
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DQ7-7A
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HONGYING
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HUALING
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HUANIU
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JIALI
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LINGYING
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XIAO YUZHOU
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XIAOQINGXIN
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T2
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T3
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Below are part of the Cenbird
e-bicycle new models:
EZGO E-Bicycles
In October 2021, we launched our new EZGO-brand
with the release of seven new independent innovation e-bicycles models, including four ultra-high-speed electric motorcycle models, the
“Devil,” “Little Angel,” “M9,” and “Zhuque,” (model names may be subject to change) and
three new national standard electric bicycles, at the 39th China Electric Vehicle and Parts Exhibition in Jiangsu, China. The new EZGO-brand
line of products features a sleek, high-quality exterior design and boast superior vehicle performance. We anticipate sales and marketing
promotions for the four ultra-high-speed electric motorcycles to be focused in American, European and other overseas markets. The trademark
of EZGO used on e-bicycles is still under application.
Battery
and E-Bicycle Rental Services
We began our lithium battery rental business under
the brand “Hengmao” in early 2017. Initially, we provided battery rental services to sublease agents, who then leased
them to individual and group customers such as EMS and other express service providers. Since May 2018, we purchased customized charging
cabinets and smart battery exchange cabinets from different third parties, and developed an IoT rental platform where our end customers
can rent lithium batteries directly from us. We have also cooperated with Jiangsu Institute of Research of Dalian University of Technology
to develop a WeChat applet for our end customers and intend to build a reliable IoT battery and e-bicycle rental management system.
Leveraging our IoT platform, we are able to recognize
each battery in the smart exchange cabinets through an embedded ID chip and distribute our batteries to the registered customers in real
time through our Wechat applet. Through the Wechat applet, customers can open the cabinets to take rented batteries and return used batteries.
Whenever a customer takes away a battery, the system automatically starts to a timer. Every 24 hours is a billing period. Each customer
needs his or her ID card and/or mobile phone number to register to an account with us. We also check every customer’s sesame credit
points which is developed by Alipay. If a customer’s credit point is lower than our required standard, he or she has to pay a deposit.
When the customer returns the battery to the cabinet, the system is able to read the embedded ID chip. Once the system recognizes the
battery, it will stop timing the customer.
The lithium batteries we rent to our customers
are 60V/20A models. They can be used in multiple e-bicycle models with compatible battery compartments. Our target customers usually run
average 90-100 kilometers a day, and require a combined battery usage of approximately 100-120 kilometers. In addition, we aim to cover
the cost of our batteries within 8 to 10 months with an expected battery life of 18 to 24 months. Long life-cycle also means more opportunities
for secondary use before the battery is scrapped (e.g. as a storage battery for emergency use).
We entered into agreements with different sublease
agents, pursuant to which we rent them lithium batteries for a fee of RMB6 per battery per 24 hours, and rented them non-new standards
e-bicycles for a fee of RMB20 per e-bicycle per 24 hours or a monthly subscription fee of RMB450 with an unlimited usage of batteries.
Since May 2018, we have started to rent to end customers ourselves via charging cabinets and smart battery exchange cabinets that
we operate through our IoT platform around the service stands of online meal delivery companies Meituan, Elema and Ali Zhongbao. Deliverymen
can purchase our rental services through our mobile application, Yidianxing, then scan codes and make payments at the exchange cabinets
to rent or return batteries. Our IoT platform software has been granted two software copyright.
Initially, we didn’t have our own brand
of e-bicycles and the e-bicycles we rented were provided by Shenzhen Star Asset Management Co., Ltd. (“Star Asset”), a related
party of the Company. For risk control purpose and in expectation of potential strategic cooperation, Star Asset provided 1,000 non-new
standards e-bicycles in August 2017 and an additional 7,000 non-new standards e-bicycles in January 2018 through operating lease.
Since July 2019, we also provide rental services of the Cenbird brand of non-new standards e-bicycles, all of which were purchased
from our related party, Changzhou Cenbird.
For the fiscal year ended September 30, 2021, the revenue from rental
services was approximately $342,636, which is 79% less than that of the previous year. Facing intense external competition, the company
proactively shrank the business in the current fiscal year and phased out the business in the first half of 2021. The Company terminated
all sublease agents during the fiscal year ended September 30, 2021.To date, we have no sublease agent.
The illustration below generally illustrates the
flow of our IoT rental services:
Because of the cost, none of the batteries were
embedded with GPS modules, so we cannot track each individual battery. However, all of the e-bicycles for rent have been embedded with
GPS modules and we can keep track of them.
Hengdian Smart Charging Piles
Our smart charging piles are manufactured by Wuxi
Hanbo New Energy Co., Ltd. A smart charging pile is composed of hardware and software systems. The hardware system is composed of a high-speed
single chip microcomputer, a 4G module connection to the Internet, a processing module, a power acquisition module, a relay control module
and a peripheral auxiliary system module. The software system has been granted 10 software copyrights.
Currently, there are no national-wide or industry
standards for e-bicycle smart charging piles, although Henan province has issued a local standard for charging piles. We have received
a certificate of quality control issued by the Wuxi Institute for Product Quality Inspection for our charging piles. China Pacific Insurance
(Group) Co., Ltd. provides the quality insurance.
Our
smart charging pile business includes hardware provision to franchisees with whom we enter into co-investment and income-sharing arrangements,
and self-operation. We enter into five-year franchising agreements with franchisees of our charging piles. For an investment of RMB800
(approximately $113.11), a franchisee will receive 30% of the revenues generated by one charging pile and for an investment of RMB1,000
(approximately $141.38), a franchise will receive 50% of the revenues generated. As of September 30, 2021, none of our charging piles
were operated by franchisees and 3,426 of charging piles operated
by us directly in Wuxi, Suzhou, Wenzhou, Wuhu and Changzhou.
The charging pile business is a strategical line
of business. We can collect the e-bicycles and users’ information which will assist us in our big data analysis. To date, we do
not have any significant revenue from charging piles. Charging piles installed in areas with high population density can generate revenue
of approximately RMB120 (approximately $16.97) per month per charging pile, compared with the revenue of approximately RMB20 to 30 (approximately
$2.83 to $4.24) per month per charging pile generated from areas with low population density.
Research and Development
From October 2016 to December 2020,
our continued expenditure in research and development has amounted to RMB4.57 million (approximately $650,000). In the early stage of
our company, we mainly focused on developing know-how for the production of lithium battery cells and packing technology. We obtained
a number of patents in this area. For the fiscal year ended September 30, 2021, we spent RMB365,000 (approximately $56,647) to develop
our IoT rental platform and jointly develop other technology relating to our rental business, including battery ID chips, smart exchange
cabinets and operating and marketing systems. In addition, we invested over RMB550,000 (approximately $85,359) to develop the smart charging
pile.
Our subsidiary Tianjin Dilang focuses on developing
New National Standards bicycle models. We invested almost RMB220,490 (approximately $34,220) to develop new e-bicycle models for the fiscal
year ended September 30, 2021, and we have 3C certifications for 25 models and 1 model in Tianjin Dilang and Jiangsu Cenbird, respectively
as of September 30, 2021.
In July 2019, we entered into a strategic
cooperation agreement with the Jiangsu Institute of Research of Dalian University of Technology, which provides us with opportunities
in personnel training, technologies sharing and technical supports.
Customers
Our customers can be classified as follows. We
have relied on our three major customers in sales of batteries, including Zhejiang Weichen Technology Co., Ltd., Changzhou Copidi Energy
Co., Ltd., and Guangxi Anneng Technology Co., Ltd., each accounted for approximately 52%, 28% and 8%, respectively, of our sales of lithium
batteries for the fiscal year ended September 30, 2021. For the fiscal year ended September 30, 2020, we generated revenue from sales
of batteries in the battery cells and packs segment and customers for our batteries sales business are mostly e-bicycles sales companies.
Our most important customers are Beijing 70 Generation Co., Ltd., Hehai Jinsong Bicycle Sales Shop, and Shangchi Motors Co., Ltd., each
accounted for approximately 20%, 19% and 10%, respectively, of our sales of lithium batteries for the fiscal year ended September 30,
2020. For the fiscal year ended September 30, 2019, we mainly generated revenue from battery cells trading in the battery cells and packs
segment, and customers for our battery cells trade business are mostly institutions. Our most important customers are Shanghai Yutu Industry
Co., Ltd, Shanghai Jialongtai Industry Co., Ltd, and Jiangyin Zhuoao International Trading Co., Ltd, which accounted for approximately
49%, 37% and 14%, respectively, of our trading of lithium battery cells for the fiscal year ended September 30, 2019.
We have relied on three major customers, including
Henan Young Man Industries Trade Co., Ltd., Beijing 70 Generation Co., Ltd., and Wenzhou Longwan Yongzhong Tengbu Bicycle Firm, each accounted
for approximately 17%, 11% and 9%, respectively, of our e-bicycles sales revenue for the fiscal year ended September 30, 2021. And we
have relied on one major customer in e-bicycles sales business, Beijing 70 Generation Co., Ltd., accounted for approximately 31% of our
e-bicycles sales revenue for the fiscal year ended September 30, 2020, and we had immaterial revenue in such business in the same period
of 2019.
Customers for our battery and e-bicycle rental
business are predominantly individuals, including end-users, end customers and sublease agents. We don’t have any agreement with
end-users and end customers except for the registration information and the e-receipt to the customers when they first use the WeChat
applet service. Our end-users can rent and pay for e-bicycles and batteries on the WeChat applet. In addition, the sublease agents play
a critical role in our rental business in allowing us to have a further geographical outreach. We had three main sublease agents in the
fiscal year ended September 30, 2020, Mr. Guoqing Zhu, Ms. Xiaoying Zheng and Mr. Zewu Zhao, who accounted for 34%, 19% and 13%, respectively,
of our rental business revenues for the fiscal year ended September 30, 2020. For the fiscal year ended September 30, 2019, the revenues
generated by Mr. Guoqing Zhu, Mr. Liwu Zhong and Mr. Zewu Zhao accounted for 30%, 23% and 12%, respectively, of our rental business revenues
for the fiscal year ended September 30, 2019. One of the three sublease agents, Mr. Guoqing Zhu is engaged in e-bicycle rental business
and the other two, Mr Xiaoying Zheng and Mr. Zewu Zhao, are engaged in battery rental business. The e-bicycle sublease agent accounted
for approximately 26% of the e-bicycle rental business and approximately 17% of our total rental business revenues for the fiscal year
ended September 30, 2020. The battery rental sublease agent accounted for approximately 67% of our battery rental business and approximately
22% of our total rental business revenues for the fiscal year ended September 30, 2020. We usually enter into a cooperation agreement
with each sublease agent. Pursuant to the e-bicycle rental cooperation agreement, we provide for the sublease agent e-bicycles for rental
and any necessary repair service. The sublease agent shall pay the monthly lease fee in the amount of RMB250 (approximately $36) per unit.
Such sublease agreement can be terminated by either party if the other party breaches the agreement. We usually enter into a one-year
sublease cooperation agreement with our battery rental sublease agents. Pursuant to the battery rental agreement, we provide for the sublease
agent the battery packs with charging services, and our sublease agent shall be responsible for the battery location selection and marketing.
The sublease agent shall pay a monthly sublease fee in the amount of RMB80 (approximately $12) per unit. The sublease cooperation agreement
can be terminated by each party upon a 30 days’ advance notice, Mr. Liwu Zhong, Mr. Guoqing Zhu, Mr. Zewu Zhao and Ms. Xiaoying
Zheng terminated their agreements in January 2019, January 2020, May 2020 and July 2020, respectively. The Company terminated
all sublease agents during the fiscal year ended September 30, 2021. To date, we have no sublease agent.
The customers for e-bicycle sales include individuals
and institutional distributors, as well as individual customers. We usually do not enter into sales agreement with individual customers.
The sales agreement with our distributors, such as Beijing 70 Generation Co., Ltd., usually provides that we authorize the distributor
to exclusively sell our products in a specific region and the distributor shall meet the monthly sales volumes stipulated in the agreement.
The agreement can be terminated by our company if the distributor fails to reach the sales volumes for 6 consecutive months or by each
party upon 30 days’ advance notice.
For smart charging piles, our customers are franchisees
and we usually enter into five-year franchising agreements with them. The franchise agreement includes the terms of cooperation, investment
terms, revenue sharing ratio, and payment term. We provide the charging piles with installation and maintenance services for a one-time
fee of RMB800 (“800 Pile”) or RMB1,000 (“1,000 Pile”) per charging pile paid by the franchisee. The franchisee
shall be responsible for the legal use of the charging pile stations and will receive 30% of the revenues generated by one 800 Pile or
50% of the revenues generated by one 1,000 Pile.
Sales and Marketing
Our general marketing strategy is integrated marketing
by building an ecological chain. We adopt different sales tactics for the different brands we operate. Hengmao is our lithium battery
brand, Dilang, Cenbird and EZGO are our e-bicycle brands, and Hengdian is our smart charging pile brand.
Our Hengmao-brand batteries are primarily being
rented, with a portion of them sold to customers who need to replace their old lead-acid batteries, including as a result of our promotional
activities.
For the Dilang and Cenbird brands of e-bicycles,
our marketing strategies include continuously developing new models of e-bicycle to improve product portfolio and making full use of new
media to promote our products, i.e. advertising on social media and engaging in targeted marketing such as displaying our own advertisements
on the WeChat applet homepage of our smart charging piles. Our sales are mostly conducted through WeChat mall and live network platform
(including TikTok and Taobao Live). Tianjin Dilang’s products are mainly sold in urban and suburban areas in Beijing, Tianjin, Hebei,
Shandong, Henan and Guangdong. Jiangsu Cenbird’s products are mainly sold in Jiangsu. For the fiscal year ended September 30, 2021,
our online sales amounted to $353,961, including Taobao, Pinduoduo platforms, and our self-developed application, Yidianxing, which accounted
for approximately 1.5% of our total sales. We plan to expand our market overseas by attending various international electronics
exhibitions to market our products in North America, Europe and Southeast Asia.
Marketing for our smart charging piles is mainly
carried out by relationship marketing and by telephone calls and visits made by our sales team. Franchisees and distributors are responsible
for relationship marketing, including seeking access to parking lots through relationships with property owners and property management
companies. Telephone and in office visits target small business owners for the installation of our smart charging pile on their premises.
Seasonality
Our products and services have no obvious seasonal
characteristics. In terms of the production and sales of e-bicycles and e-tricycles, we experience minor impacts in the northern regions
during winter season. However, even in the northern regions of China, weather is not the primary consideration for low- to middle-income
individuals and families seeking vehicle transportations.
Because our customers in the rental business are
mainly Meituan, Elema and Ali Zhongbao meal and express deliverymen, students and business travelers, we may experience minor impacts
during school holidays. Historically, we also experience declines during the first quarter of the calendar year, due to the Chinese New
Year and other holidays.
Intellectual Property
We regard our patents, copyrights, trademarks,
trade secrets and other intellectual property rights as critical to our success. We rely on a combination of patent, copyright, trademark
and trade secret laws and restrictions on disclosure to protect our intellectual property rights. Our intellectual property portfolio
as of the date of this annual report included the following:
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Patents: We had six registered patents in China, covering e-bicycle manufacturing. The term for invention patents in China is 20 years from the filing date and the term for utility model patents and design patents is 10 years, respectively, from the filing date. Details of the six patents are as follows:
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No.
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Patent Description
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Holder
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Patent Type
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Patent Number
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Duration
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1
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Two-stroke permanent magnet engine
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Yizhiying IoT
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Invention
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ZL201010552062.5
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November 19, 2010 to November 18, 2030
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2
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Electric vehicle headlamp device
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Yizhiying IoT
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Utility Model
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ZL201922413164.8
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December 27, 2019 to December 26, 2029
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3
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Leakage prevention device for electric vehicle
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Yizhiying IoT
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Utility Model
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ZL201922418505.0
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December 28, 2019 to December 27, 2029
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4
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Portable foldable bicycle
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Yizhiying IoT
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Utility Model
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201922390563.7
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December 27, 2019 to December 26, 2029
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5
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Labor-saving simple car ladder
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Yizhiying IoT
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Utility Model
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201922414574.4
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December 28, 2019 to December 27, 2029
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6
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Detachable and lifting basket
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Yizhiying IoT
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Utility Model
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201922419538.7
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December 28, 2019 to December 27, 2029
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Software copyrights: We
had a large portfolio of protected software copyrights, including 12 software copyrights registered in China;
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Trademarks: We owned 14
registered trademarks, and had right to use one registered trademark - “Cenbird.” Our trademarks include the combination
of graphs and names for Dilang, Yidianxing, Hengmao, Shijilanxiang, Cenbird and Baozhe:
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Domain names: We have six
registered domain names in China, including www.ez-go.com.cn, www.ezgotech.com.cn, www.ezgotech.cn, www.dilangmotocycle.com,
www.dilangtech.com and www.cenbird.com.cn.
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In addition to the foregoing protections, we generally
control access to and use of our proprietary and other confidential information through the use of internal and external controls. For
example, for external controls, we enter into confidentiality agreements or agree to confidentiality clauses with our customers and, for
internal controls, we adopt and maintain policies governing the operation and maintenance of our systems and the management of user-generated
data.
Competition
After decades of development, China’s e-bicycle
market is now facing increased competition and consolidation. Large manufacturers (such as Yadea, Niu and Segway-Ninebot) are pushing
to reduce prices and to improve processing technologies, product quality and service coverage, while small manufacturers are intensifying
regional competition by improving product quality and investing in market expansion. As a result of the release of the New National Standards,
all manufacturers have been brought to the same starting line in terms of model designs, quality control and cost control.
We believe the principal competitive factors in
our market are:
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ability to conform to the New National Standards;
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product features and functionality;
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quality of technologies and, as a result, research and development capabilities;
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ability to innovate and respond rapidly to customer needs;
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ability to control costs;
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relationships with key participants in the value chain;
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sufficient capital support; and
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brand awareness and reputation.
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We believe we can compete favorably based on the
above factors. However, we expect competition to intensify in the future. Our ability to remain competitive will largely depend on our
business model, the quality of our products and services, the effectiveness of our sales and marketing efforts and our ability to enhance
the features and functionality of our products.
Insurance
We maintain product liability insurance for our
smart charging piles. We consider our insurance coverage to be consistent with customary industry standards adopted by other companies
in the same industry and of similar size in China.
Legal Proceedings
From time to time, we may be subject to legal
proceedings, investigations and claims incidental to the conduct of our business. We currently have two contract disputes with our suppliers,
Jiangsu Anruida New Material Company Limited (“Anruida”) and Zhuhai Titans New Power Electric Co., Ltd. (“Titans”).
On October 21, 2019, Anruida commenced an action
against Hengmao Power Battery in Changzhou Wujin District Intermediate People’s Court alleging that Hengmao Power Battery defaulted
on the contract payment of RMB958,805.40 (approximately $148,804) and seeking for, among others, the payment of the contractual
payment and the interest on the contractual payment. The appellate court has rendered its judgment on January 28, 2021, pursuant to which
Hengmao Power Battery shall repay RMB958,805.40 and accrued interests.
On January 6, 2020, Titans commenced an action
against Hengmao Power Battery in Changzhou Wujin District Intermediate People’s Court alleging that Hengmao Power Battery defaulted
on the payment of RMB1,072,560 (approximately $166,459) and seeking for, among others, the payment of the contractual payment. However,
we plan to defend the case rigorously. The appellate court has rendered its judgment on January 27, 2021, pursuant to which Hengmao Power
Battery shall repay RMB1,072,560 (approximately $166,459), accrued interests and attorney’s fees.
Other than disclosed above, we are not a party
to, nor are we aware of, any legal proceedings, investigations or claims which, in the opinion of our management, are likely to have a
material adverse effect on our business, financial condition or results of operations.
Regulations
Our business operations are primarily in the PRC
and primarily subject to PRC laws and regulations. This section sets forth a summary of the most significant regulations or requirements
that affect our business activities in China or our shareholders’ rights to receive dividends and other distributions from us.
Recent Regulatory Developments in China
Recently, the PRC government initiated a series
of regulatory actions and made a number of public statements on the regulation of business operations in China with little advance notice,
including cracking down on illegal activities in the securities market, enhancing supervision over China-based companies listed overseas,
adopting new measures to extend the scope of cybersecurity reviews, and expanding efforts in anti-monopoly enforcement.
Among other things, the M&A Rules and Anti-Monopoly
Law of the People’s Republic of China promulgated by the SCNPC which became effective in 2008 (“Anti-Monopoly Law”),
established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming
and complex. Such regulation requires, among other things, that the SAMR be notified in advance of any change-of-control transaction in
which a foreign investor acquires control of a PRC domestic enterprise or a foreign company with substantial PRC operations, if certain
thresholds under the Provisions of the State Council on the Standard for Declaration of Concentration of Business Operators, issued by
the State Council in 2008, are triggered. Moreover, the Anti-Monopoly Law requires that transactions which involve the national security,
the examination on the national security shall also be conducted according to the relevant provisions of the State. In addition, the PRC
Measures for the Security Review of Foreign Investment which became effective in January 2021 require acquisitions by foreign investors
of PRC companies engaged in military-related or certain other industries that are crucial to national security be subject to security
review before consummation of any such acquisition.
On July 6, 2021, the relevant PRC government authorities
made public the Opinions on Strictly Cracking Down Illegal Securities Activities in Accordance with the Law. These opinions emphasized
the need to strengthen the administration over illegal securities activities and the supervision on overseas listings by China-based companies
and proposed to take effective measures, such as promoting the construction of relevant regulatory systems to deal with the risks and
incidents faced by China-based overseas-listed companies. As these opinions are recently issued, official guidance and related implementation
rules have not been issued yet and the interpretation of these opinions remains unclear at this stage. See “Item 3. Key Information
— D. Risk Factors – Risks Related to Doing Business in China –The M&A Rules and certain other PRC regulations
establish complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us
to pursue growth through acquisitions in China.”
In addition, on July 10, 2021, the Cyberspace
Administration of China issued the Measures for Cybersecurity Review (Revision Draft for Comments), or the Measures, for public comments,
which propose to authorize the relevant government authorities to conduct cybersecurity review on a range of activities that affect or
may affect national security, including listings in foreign countries by companies that possess the personal data of more than one million
users. On December 28, 2021, the Measures for Cybersecurity Review (2021 version) was promulgated and will become effective on February
15, 2022, which iterates that any “online platform operators” controlling personal information of more than one million users
which seeks to list in a foreign stock exchange should also be subject to cybersecurity review. The Measures for Cybersecurity Review
(2021 version), further elaborates the factors to be considered when assessing the national security risks of the relevant activities,
including, among others, (i) the risk of core data, important data or a large amount of personal information being stolen, leaked, destroyed,
and illegally used or exited the country; and (ii) the risk of critical information infrastructure, core data, important data or a large
amount of personal information being affected, controlled, or maliciously used by foreign governments after listing abroad. The Cyberspace
Administration of China has said that under the proposed rules companies holding data on more than 1,000,000 users must now apply for
cybersecurity approval when seeking listings in other nations because of the risk that such data and personal information could be “affected,
controlled, and maliciously exploited by foreign governments.” The cybersecurity review will also look into the potential national
security risks from overseas IPOs.
On December 24, 2021, the CSRC released the Administrative
Provisions of the State Council Regarding the Overseas Issuance and Listing of Securities by Domestic Enterprises (Draft for Comments)
(the “Draft Administrative Provisions”) and the Measures for the Overseas Issuance of Securities and Listing Record-Filings
by Domestic Enterprises (Draft for Comments) (the “Draft Filing Measures,” collectively with the Draft Administrative Provisions,
the “Draft Rules Regarding Overseas Listing”), both of which have a comment period that expires on January 23, 2022. The Draft
Rules Regarding Overseas Listing lay out the filing regulation arrangement for both direct and indirect overseas listing, and clarify
the determination criteria for indirect overseas listing in overseas markets. Among other things, if a domestic enterprise intends to
indirectly offer and list securities in an overseas market, the record-filing obligation is with a major operating entity incorporated
in the PRC and such filing obligation shall be completed within three working days after the overseas listing application is submitted.
The required filing materials for an initial public offering and listing shall include but not limited to: regulatory opinions, record-filing,
approval and other documents issued by competent regulatory authorities of relevant industries (if applicable); and security assessment
opinion issued by relevant regulatory authorities (if applicable).
The Draft Rules Regarding Overseas Listing, if
enacted, may subject us to additional compliance requirement in the future, and we cannot assure you that we will be able to get the clearance
of filing procedures under the Draft Rules Regarding Overseas List on a timely basis, or at all. Any failure of us to fully comply with
new regulatory requirements may significantly limit or completely hinder our ability to continue to offer our ordinary shares, cause significant
disruption to our business operations, and severely damage our reputation, which would materially and adversely affect our financial condition
and results of operations and cause our ordinary shares to significantly decline in value or become worthless.
As of the date of this report, no relevant laws
or regulations in the PRC explicitly require us to seek approval from the CSRC or any other PRC governmental authorities for our overseas
listing or securities offering plans, nor has our company, any of our subsidiaries or our VIE received any inquiry, notice, warning or
sanctions regarding our planned securities offering from the CSRC or any other PRC governmental authorities. However, since these statements
and regulatory actions by the PRC government are newly published and official guidance and related implementation rules have not been
issued, it is highly uncertain what the potential impact such modified or new laws and regulations will have on our daily business operations,
or the ability to accept foreign investments and list on a U.S. exchange. The SCNPC or other PRC regulatory authorities may in the future
promulgate laws, regulations or implementing rules that require our company, our VIE or its subsidiaries to obtain regulatory approval
from Chinese authorities before offering securities in the U.S. See “Item 3. Key Information — D. Risk Factors –
Risks Related to Doing Business in China – The PRC government exerts substantial influence over the manner in which we conduct
our business activities. The PRC government may also intervene or influence our operations at any time, which could result in a material
change in our operations and our ordinary shares could decline in value or become worthless.”
Regulation of Foreign Investment
The Company Law of PRC (the “Company Law”)
was promulgated on December 29, 1993, which became effective on July 1, 1994, and was subsequently revised on December 25,
1999, August 28, 2004, October 27, 2005, December 28, 2013 and on October 26, 2018. Limited liability companies and
companies limited by shares established in China shall be subject to the Company Law. Each company has the status of a legal person and
owns its own assets. Assets of a company may be used in full for the company’s liability. Foreign-invested companies are also subject
to the Company Law, except as otherwise provided in the foreign investment laws including the Law of the PRC on Wholly Foreign-owned Enterprise.
Pursuant to the Law of the PRC on Wholly Foreign-owned
Enterprise, which was adopted on April 12, 1986, amended on October 31, 2000 and September 2016, and abolished on January 1, 2020, the
establishment and subsequent changes of a WFOE is subject to the approval by the authority in charge of commerce or foreign trade and
investment and registration with the relevant administration for industry and commerce. The investor of the WFOE must make payment or
subscribe for the registered capital according to its articles of association.
On March 15, 2019, the National People’s
Congress approved the Foreign Investment Law, which came into effect on January 1, 2020 and replace the trio of existing laws regulating
foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture
Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The
organization form, organization and activities of foreign-invested enterprises shall be governed, among others, by the PRC Company Law
and the PRC Partnership Enterprise Law. Foreign-invested enterprises established before the implementation of the Foreign Investment Law
may retain the original business organization and so on within five years after the implementation of this Law. Foreign investors’
investment, earnings and other legitimate rights and interests within the territory of China shall be protected in accordance with the
law, and all national policies on supporting the development of enterprises shall equally apply to foreign-invested enterprises. Among
others, the state guarantees that foreign-invested enterprises participate in the formulation of standards in an equal manner and that
foreign-invested enterprises participate in government procurement activities through fair competition in accordance with the law. Further,
the state shall not expropriate any foreign investment except under special circumstances. In special circumstances, the state may levy
or expropriate the investment of foreign investors in accordance with the law for the needs of the public interest. The expropriation
and requisition shall be conducted in accordance with legal procedures and timely and reasonable compensation shall be given.
The Foreign Investment Law is formulated to further
expand opening-up, vigorously promote foreign investment and protect the legitimate rights and interests of foreign investors. According
to the Foreign Investment Law, foreign investments are entitled to pre-entry national treatment and are subject to negative list management
system. The pre-entry national treatment means that the treatment given to foreign investors and their investments at the stage of investment
access shall not be less favorable than that of domestic investors and their investments. The negative list management system means that
the state implements special administrative measures for access of foreign investment in specific fields. The Foreign Investment Law does
not mention the relevant concept and regulatory regime of contractual arrangement structures. However, since it is relatively new, uncertainties
still exist in relation to its interpretation and implementation.
On December 26, 2019, the State Council promulgated
the Implementing Regulations of the Foreign Investment Law of the People’s Republic of China, or the Implementing Regulations of
the Foreign Investment Law, which became effective on January 1, 2020. The Implementing Regulations of the Foreign Investment Law strictly
implement the legislative principles and purpose of the Foreign Investment Law, emphasize on promoting and protecting the foreign investment,
and refine the specific measures. At the same day, the Supreme People’s Court issued an Interpretation on the Application of the
Foreign Investment law of the PRC, which also came into effect on January 1, 2020. This interpretation shall apply to any contractual
dispute arising from the acquisition of the relevant rights and interests by a foreign investor by way of, among other things, gift, division
of property, merger of enterprises, division of enterprises.
Furthermore, foreign investments in China are
subject to investment information reporting obligations under the Foreign Investment Laws, which is further stipulated in the Measures
for Reporting of Foreign Investment Information, or the Foreign Investment Reporting Measures, that were jointly promulgated by the MOFCOM
and the State Administration for Market Regulation on December 30, 2019 and became effective on January 1, 2020. Pursuant to the Foreign
Investment Reporting Measures, foreign investors and foreign-invested enterprises are obligated to submit investment information reports
in regard with their direct or indirect investment activities in China through the Enterprise Registration System and the National Enterprise
Credit Information Publicity System, commencing from January 1, 2020. Such reports include preliminary report relating to establishment,
modification report, deregistration report, and annual report.
Negative List of Foreign Investment
The current regulation regime of foreign investment
in the PRC, setting aside special arrangements adopted in pilot free trade zones, preliminarily consists of three principal legal documents,
i.e. the Catalogue of Industries for Encouraged Foreign Investment (2020 Edition), or the 2020 Encouraged Catalogue, which was promulgated
jointly by the Ministry of Commerce and the National Development and Reform Commission, on December 27, 2020 and became effective on January
1, 2022, the Special Administrative Measures for Access of Foreign Investment (Negative List) (2021 Edition), or the 2021 Negative List,
which was promulgated jointly by the Ministry of Commerce and the National Development and Reform Commission, on December 27, 2021 and
became effective on January 1, 2022, and the Provisions Guiding Foreign Investment Direction, which was promulgated by the State Council
on February 11, 2002 and came into effect on April 1, 2002. These three legal documents collectively classify all foreign investment projects
into four categories: (1) encouraged projects, (2) permitted projects, (3) restricted projects, and (4) prohibited projects. If the industry
in which the investment is to occur falls into the encouraged category, foreign investment, in certain cases, may receive preferential
policies or benefits. If it falls into the restricted category, foreign investment may be conducted in accordance with applicable legal
and regulatory restrictions. If falls into the prohibited category, foreign investment of any kind will not be allowed.
The 2020 Encouraged Catalogue and the 2021 Negative
List govern investment activities in the PRC by foreign investors and classify industries into three categories with regard to foreign
investment: “encouraged,” “restricted” and “prohibited.” Industries not listed in the Catalogue are
generally deemed as falling into a fourth category, “permitted,” unless specifically restricted by other PRC laws. For some
restricted industries, foreign investors can only conduct investment activities through equity or contractual joint ventures, while in
other cases PRC partners are required to hold the majority interests in such joint ventures. In addition, some projects in the restricted
category are subject to higher-level governmental approvals. Foreign investors are not allowed to invest in industries in the prohibited
category.
Regulation of the Production of Electric Bicycles
On June 24, 2017, the State Council of the PRC
issued the Decision on Adjusting the Catalogue for the Administration of Production Permits for Industrial Products and on Trying out
the Simplification of Approval Procedures, or the Decision. Pursuant to the Decision, the production license for electric bicycle was
cancelled and was changed to implement mandatory product certification management. On July 2, 2018, the Announcement on the Arrangements
for the Transfer of Electric Bicycle Products from Licensing to CCC Certification Management was jointly promulgated by the State Administration
for the CNCA. According to the Announcement, electric bicycle products without CCC certification shall not be delivered, sold, imported
or used in other business activities commencing from April 15, 2019. On July 19, 2018, the CNCA issued the Implementation Rules for Compulsory
Product Certification of Electric Bicycles (CNCA-C11-16: 2018) which came into effect on August 1, 2018.
On May 15, 2018, the New National Standards were
promulgated by the State Administration for Market Regulation and the National Standardization Management Committee and became effective
on April 15, 2019. The New National Standards replace the General Technical Requirements for Electric Bicycles (GB 17761-1999) which were
issued on May 28, 1999.
Regulation of the Registration of Electric
Bicycles
Pursuant to the Road Traffic Safety Law of the
PRC (Revised in 2011), a non-motorized vehicle which ought to be lawfully registered shall be deemed street-illegal until it has been
registered with the local traffic administrative department. In addition, the categories of such non-motorized vehicles shall be determined
by provincial governments in light of their respective actual local situation and shall consist of technical standards in terms of overall
weight, braking performance, overall size and reflectors, which all non-motorized vehicles should abide by. Pursuant to the Circular on
Strengthening the Management of Electric Bicycles, promulgated on March 18, 2011, any non-compliant vehicle may not be registered as a
non-motorized vehicle, which in turn means it shall be deemed street-illegal.
Regulations Relating to Production Safety
Pursuant to the Production Safety Law of the PRC,
or the Production Safety Law, which promulgated on June 29, 2002, with the latest amended version effective from September 1, 2021, the
entities that are engaged in production and business operation activities must implement national industrial standards which guarantee
the production safety and comply with production safety requirements provided by the laws, administrative regulations and national or
industrial standards. An entity must take effective measures for safety production, maintain safety facilities, examine the safety production
procedures, educate and train employees and take any other measures to ensure the safety of its employees and the public. An entity or
its relevant persons-in-charge which has failed to perform such safety production liabilities will be required to make amends within a
time limit or face administrative penalties. If it fails to amend within the prescribed time limit, the production and business operation
entity may be ordered to suspend business for rectification, and serious violations may result in criminal liabilities.
Regulations Relating to Product Quality
The Product Quality Law of the PRC was promulgated
on February 22, 1993, amended on July 8, 2000, August 27, 2009 and December 29, 2018, respectively. The Product Quality Law applies to
anyone who manufactures or sells any product within the territory of the PRC. It is prohibited from producing or selling counterfeit products
in any form, including counterfeit brands, or providing false information about the product manufacturers. Violation of national or industrial
standards may result in civil liability and administrative penalties such as compensation, fines, suspension of business and confiscation
of illegal income, and serious violations may result in criminal liabilities.
Regulation of Mobile Applications
On June 28, 2016, the Cyberspace Administration
of China promulgated the Regulations for the Administration of Mobile Internet Application Information Services (the “Regulations
for Mobile Apps”), which came into effect on August 1, 2016, requiring ICPs who provide information services through mobile internet
applications, or “apps,” to:
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verify the real identities of registered users through mobile phone numbers or other similar channels;
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establish and improve procedures for protection of user information;
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establish and improve procedures for information content censorship;
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ensure that users are given adequate information concerning an app, and are able to choose whether an app is installed and whether or not to use an installed app and its functions;
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respect and protect intellectual property rights; and
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keep records of users’ logs for 60 days.
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If an ICP who provides information services through
apps violates these regulations, mobile app stores through which the ICP distributes its apps may issue warnings, suspend the release
of its apps, or terminate the sale of its apps, and/or report the violations to governmental authorities.
Regulations Relating to Intellectual Property
Rights
Patent. Patents
in the PRC are principally protected under the Patent Law of the PRC. The duration of a patent right is either 10 years or 20 years
from the date of application, depending on the type of patent right.
Copyright. Copyright
in the PRC, including copyrighted software, is principally protected under the Copyright Law of the PRC, the Regulation on Computer Software
Protection and related rules and regulations, the term of protection for copyrighted software is 50 years.
Trademark. Registered
trademarks are protected under the Trademark Law of the PRC and related rules and regulations. Trademarks are registered with the Trademark
Office of the SAIC. Where registration is sought for a trademark that is identical or similar to another trademark which has already been
registered or given preliminary examination and approval for use on the same or similar commodities or services, the application for registration
of such trademark may be rejected. Trademark registrations are effective for a renewable ten-year period, unless otherwise revoked.
Domain names. Domain
names are regulated by the Administrative Measures on the Internet Domain Names promulgated by the MIIT. The MIIT is the major regulatory
body responsible for the administration of domain names, under supervision of which the CNNIC is responsible for the daily administration
of .cn domain names and Chinese domain names. MIIT adopts the “first to file” principle with respect to the registration of
domain names. Domain name registrations are handled through domain name service agencies established under the relevant regulations, and
applicants become domain name holders upon successful registration.
Regulation of Employment and Social Welfare
Labor Laws
Companies in the PRC are subject to the PRC Labor
Law (the “PRC Labor Law”) which was promulgated on July 5, 1994, became effective on January 1, 1995 and was further amended
on August 27, 2009 and December 29, 2018, the PRC Labor Contract Law (the “PRC Labor Contract Law”) which was promulgated
on June 29, 2007, became effective on January 1, 2008 and was further amended on December 28, 2012, and the Implementation Regulations
of the PRC Labor Contract Law which was promulgated by the State Council on September 18, 2008 and became effective on the same date,
as well as other related regulations, rules and provisions promulgated by the relevant government authorities from time to time. Compared
to previous PRC Laws and regulations, the PRC Labor Contract Law imposes stricter requirements in such respects as signing of labor contracts
with employees, stipulation of probation period and violation penalties, termination of labor contracts, payment of remuneration and economic
compensation, use of labor dispatches as well as social security premiums.
According to the PRC Labor Law and the PRC Labor
Contract Law, a labor contract in writing shall be concluded when a labor relationship is to be established between an employer and an
employee. An employer shall pay an employee two times of his salary for each month in the circumstance where he fails to enter a written
labor contract with the employee for more than a month but less than a year; where such period exceeds one year, the parities are deemed
to have entered an unfixed-term labor contract. Employers shall pay wages that are not lower than the local minimum wage standards to
the employees. Employers are also required to establish labor safety and sanitation systems in compliance with PRC rules and standards,
and to provide relevant training to the employees.
Social Insurance and Housing Provident Funds
According to the Temporary Regulations on the
Collection and Payment of Social Insurance Premium, the Regulations on Work Injury Insurance, the Regulations on Unemployment Insurance
and the Trial Measures on Employee Maternity Insurance of Enterprises, enterprises in the PRC must provide beneficial plans for their
employees, that include basic pension insurance, unemployment insurance, maternity insurance, work injury insurance and medical insurance.
An enterprise must also provide social insurance by processing social insurance registration with local social insurance agencies, and
must pay or withhold relevant social insurance premiums for or on behalf of the employees. The Law on Social Insurance, which was promulgated
on October 28, 2010 and came into effect on July 1, 2011 and was amended on December 29, 2018, regulates basic pension insurance, unemployment
insurance, maternity insurance, work injury insurance and medical insurance, and has elaborated in detail the legal obligations and liabilities
of employers who do not comply with relevant laws and regulations on social insurance. The Regulations on the Administration of Housing
Provident Fund, which was promulgated and came into effect on April 3, 1999, and was amended on March 24, 2002 and March 24, 2019, provides
that housing provident fund contributions paid by an individual employee and housing provident fund contributions paid by his or her employer
all belong to the individual employee.
Regulation of Foreign Exchange
The Regulation of the PRC on Foreign Exchange
Control, most recently amended by the State Council on August 1 2008 and effective on August 5 2008, is the principal regulation
on foreign currency exchange in the PRC. According to the regulation, the Renminbi is freely convertible for current account items after
due process, including distribution of dividends, trade-related foreign exchange transactions and service-related foreign exchange transactions,
whereas foreign exchange for capital account items, such as direct investments or loans, requires prior approval of and registration with
the SAFE.
According to the Notice of State Administration
of Foreign Exchange on Reforming and Standardizing Capital Account Foreign Exchange Settlement Administration Policies issued by SAFE
on June 9, 2016, it has been specified clearly in the document that, for the capital account foreign exchange income subject to voluntary
foreign exchange settlement (including the repatriation of the proceeds from overseas listing), the domestic institutions may conduct
the foreign exchange settlement at the banks according to their operation needs. The proportion of the capital account foreign exchange
income subject to voluntary foreign exchange settlement was tentatively set as 100%, provided that SAFE may adjust the aforesaid proportion
according to the international payment balance status in good time.
In January 2017, SAFE promulgated the Circular
on Further Improving Reform of Foreign Exchange Administration and Optimizing Genuineness and Compliance Verification (the “SAFE
Circular 3”), which became effective on January 18 2017 and stipulates several capital control measures with respect to
the outbound remittance of profit from domestic entities to offshore entities, including (i) under the principle of genuine transaction,
banks shall check board resolutions regarding profit distribution, the original version of tax filing records and audited financial statements;
and (ii) domestic entities shall hold income to account for previous years’ losses before remitting the profits. Further, pursuant
to the SAFE Circular 3, domestic entities shall make detailed explanations of the sources of capital and utilization arrangements, and
provide board resolutions, contracts and other proof when completing the registration procedures in connection with an outbound investment.
Regulation of Dividend Distributions
The principal laws, rules and regulations governing
dividend distribution by foreign-invested enterprises in the PRC are the Company Law of the PRC, as amended. Under these laws, rules and
regulations, foreign-invested enterprises may pay dividends only out of their accumulated profit, if any, as determined in accordance
with PRC accounting standards and regulations. Both PRC domestic companies and wholly-foreign owned PRC enterprises are required to set
aside as general reserves at least 10% of their after-tax profit, until the cumulative amount of such reserves reaches 50% of their registered
capital. A PRC company is not permitted to distribute any profits until any losses from prior fiscal years have been offset. Profits retained
from prior fiscal years may be distributed together with distributable profits from the current fiscal year.
Regulation on Taxation
PRC Enterprise Income Tax
PRC enterprise income tax is calculated based
on taxable income, which is determined under (i) the PRC EIT Law, which was promulgated on March 16, 2007, and was most recently
amended and became effective on December 29, 2018, and (ii) the Implementing Regulations of the EIT Law (the “EIT Regulation”)
promulgated by the State Council on December 6, 2007 and implemented on January 1, 2008 and amended on April 23, 2019. The EIT Law imposes
a uniform enterprise income tax rate of 25% on all PRC resident enterprises, including foreign-invested enterprises, unless they are qualified
for certain exceptions. The enterprise income tax is calculated based on the PRC resident enterprise’s global income as determined
under PRC tax laws and accounting standards. According to the EIT Law and its implementation rules, the income tax rate of an enterprise
that has been granted the certificate of High and New Technology Enterprise may be reduced to 15% with the approval of relevant tax authorities.
The EIT Law also provides that enterprises established
under the laws of foreign jurisdictions with “de facto management body” located in PRC are treated as “resident enterprises”
for PRC tax purposes, and will be subjected to PRC income tax on their worldwide income. Under the EIT Regulation, a “de facto management
body” is defined as a body that has real and overall management control over the business, personnel, accounts and properties of
an enterprise.
The Notice on Issues Concerning the Determination
of Chinese-Controlled Enterprises Registered Overseas as Resident Enterprises on the Basis of Their Bodies of Actual Management, or the
SAT Circular 82, provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled
enterprise that is incorporated offshore is located in China. According to the SAT Circular 82, an offshore incorporated enterprise controlled
by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management
body” in China, and will be subject to PRC enterprise income tax on its global income only if all of the following conditions are
met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise’s
financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s
primary assets, accounting books and records, company seals, and board and shareholder resolutions are located or maintained in the PRC;
and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC. Further to SAT Circular 82, the
SAT issued a bulletin, known as SAT Bulletin 45, which took effect in September 2011, to provide more guidance on the implementation
of SAT Circular 82 and clarify the reporting and filing obligations of such “Chinese-controlled offshore incorporated resident enterprises.”
SAT Bulletin 45 provides procedures and administrative details for the determination of resident status and administration on post-determination
matters. Although both SAT Circular 82 and SAT Bulletin 45 only apply to offshore enterprises controlled by PRC enterprises or PRC enterprise
groups, not those controlled by PRC individuals or foreign individuals, the determining criteria set forth in SAT Circular 82 and SAT
Bulletin 45 may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining
the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises, PRC enterprise groups or
by PRC or foreign individuals.
We do not believe that EZGO, as a company incorporated
in the BVI, meets all of the conditions above thus we do not believe that EZGO is a PRC resident enterprise, though all members of our
management team as well as the management team of our offshore holding company are located in China. However, if the PRC tax authorities
determine that we are a PRC resident enterprise for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could
follow. First, we will be subject to the uniform 25% enterprise income tax on our world-wide income, which could materially reduce our
net income. In addition, we will also be subject to PRC enterprise income tax reporting obligations. However, the tax resident status
of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of
the term “de facto management body.”
Finally, dividends payable by us to our investors
and gains on the sale of our shares may become subject to PRC withholding tax, at a rate of 10% in the case of non-PRC enterprises or
20% in the case of non-PRC individuals (in each case, subject to the provisions of any applicable tax treaty), if such gains are deemed
to be from PRC sources. It is unclear whether non-PRC shareholders of our company would be able to claim the benefits of any tax treaties
between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce
the returns on your investment in the ordinary shares.
International Tax Treaties and Withholding
Tax
Under the PRC EIT Tax Law and its implementation
rules, we, as a non-resident enterprise, that is, an enterprise lawfully incorporated pursuant to the laws of a foreign country (region)
that has an office or premises established in China with no actual management functions performed in China, or an enterprise that has
income derived from or accruing in China although it does not have an office or premises in China, will be subject to a withholding tax
rate of 10%. Pursuant to the Treaty on the Avoidance of Double Taxation and Tax Evasion between Mainland and Hong Kong, such rate
may be reduced to 5% if a Hong Kong resident enterprise owns more than 25% of the equity interest in the PRC company. Under the Notice
of the State Administration of Taxation on Issues regarding the Administration of the Dividend Provision in Tax Treaties promulgated on
February 20, 2009, the taxpayer needs to satisfy certain conditions to enjoy the benefits under a tax treaty. These conditions include:
(1) the taxpayer must be the beneficial owner of the relevant dividends, and (2) the corporate shareholder to receive dividends
from the PRC subsidiaries must have continuously met the direct ownership thresholds during the 12 consecutive months preceding the receipt
of the dividends. Further, under Announcement of the State Administration of Taxation on Issues Relating to “Beneficial Owner”
in Tax Treaties, which took effect on April 1, 2018, a “Beneficial Owner” shall mean a person who has ownership and control
over the income and the rights and property from which the income is derived. To determine the “beneficial owner” status of
a resident of the treaty counterparty who needs to enjoy the tax treaty benefits, a comprehensive analysis shall be carried out, taking
into account actual conditions of the specific case.
Entitlement to a lower tax rate on dividends according
to tax treaties or arrangements between the PRC central government and governments of other countries or regions is subject to State Administration
of Taxation Circular 60 (“Circular 60”). Circular 60 provides that non-resident enterprises are not required to obtain pre-approval
from the relevant tax authority in order to enjoy the reduced withholding tax. Instead, non-resident enterprises and their withholding
agents may, by self-assessment and on confirmation that the prescribed criteria to enjoy the tax treaty benefits are met, directly apply
the reduced withholding tax rate, and file necessary forms and supporting documents when performing tax filings, which will be subject
to post-tax filing examinations by the relevant tax authorities.
PRC Value-Added Tax
Pursuant to the Interim Value-added Tax Regulations
of the PRC which was amended and became effective on November 19, 2017 and the Implementing Rules for the Interim Regulations of the PRC
on Value-added Tax which was amended on October 28, 2011 and became effective on November 1, 2011 (collectively the “VAT Law”),
all entities and individuals that are engaged in the sale of goods, the provision of repairs and replacement services and the importation
of goods in China are generally required to pay value-added tax (the “VAT”) at a rate of 17.0% of the gross sales proceeds
received, less any deductible VAT already paid or borne by the taxpayer, while small-scale taxpayer will be subject to a VAT rate of 3%.
Further, when exporting goods, the exporter is entitled to all the refund of VAT that it has already paid or borne unless otherwise stipulated.
On November 16, 2011, the MOF and SAT jointly
promulgated the Pilot Plan for Levying VAT in Lieu of Business. Starting from January 1, 2012, the PRC government has been gradually implementing
a pilot program in certain provinces and municipalities. According to the document, the tax rate of 17% shall be applicable to those like
lease of tangible personal property, the tax rate of 11% shall be applicable to the transportation industry and the construction industry,
and the tax rate of 6% shall be applicable to other modern service industries.
On March 23, 2016, the MOF and SAT jointly issued
the Circular of Full Implementation of Business Tax to VAT Reform (the “Circular 36”) which confirms that business tax will
be completely replaced by VAT from May 1, 2016.
On April 4, 2018, SAT and MOF jointly issued the
Circular on Adjusting Value-added Tax Rate to further adjust the VAT rate, including the change of tax rate from 17% and 11% to 16% and
10% respectively for the taxable sales or import of goods by the taxpayer.
According to the Announcement on Policies Concerning
Deepening the Reform of Value-added Tax, which was promulgated on March 20, 2019 and became effective on April 1, 2019, a VAT general
taxpayer who is previously subject to 16% on VAT-taxable sales activities shall have the applicable tax rates adjusted to 13%.
Regulations on Tax regarding Indirect Transfer
On February 3, 2015, the State Administration
of Taxation, or the SAT, issued the SAT Circular 7. Pursuant to the SAT Circular 7, an “indirect transfer” of assets, including
equity interests in a PRC resident enterprise, by non-PRC resident enterprises, may be re-characterized and treated as a direct transfer
of PRC taxable assets, if such arrangement does not have a reasonable commercial purpose and is established for the purpose of avoiding
payment of PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax.
When determining whether there is a “reasonable commercial purpose” of the transaction arrangement, considerations include,
inter alia, (i) whether the main value of the equity interest of the relevant offshore enterprise derives directly or indirectly
from PRC taxable assets; (ii) whether the assets of the relevant offshore enterprise mainly consists of direct or indirect investment
in China or if its income is mainly derived from China; and (iii) whether the offshore enterprise and its subsidiaries directly or
indirectly holding PRC taxable assets have real commercial nature evidenced by their actual function and risk exposure. According to the
SAT Circular 7, where the payer fails to withhold any or sufficient tax, the transferor shall declare and pay such tax to the tax authority
by itself within the statutory time limit. Late payment of applicable tax will subject the transferor to default interest. The SAT Circular
7 does not apply to transactions of sale of shares by investors through a public stock exchange where such shares were acquired on a public
stock exchange. On October 17, 2017, the SAT issued the Circular on Issues of Tax Withholding regarding Non-PRC Resident Enterprise Income
Tax, or the SAT Circular 37, which further elaborates the relevant implemental rules regarding the calculation, reporting and payment
obligations of the withholding tax by the non-resident enterprises. Nonetheless, there remain uncertainties as to the interpretation and
application of the SAT Circular 7. The SAT Circular 7 may be determined by the tax authorities to be applicable to our offshore transactions
or sales of our shares or those of our offshore subsidiaries where non-resident enterprises, being the transferors, were involved.
Regulation of M&A and Overseas Listings
The Regulations on Mergers and Acquisitions of
Domestic Companies by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in 2006 and amended in 2009, requires
an overseas special purpose vehicle formed for listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies
or individuals to obtain the approval of the China Securities Regulatory Commission, or the CSRC, prior to the listing and trading of
such special purpose vehicle’s securities on an overseas stock exchange. In September 2006, the CSRC published a notice on
its official website specifying documents and materials required to be submitted to it by a special purpose vehicle seeking CSRC approval
of its overseas listings.
Our PRC counsel, DeHeng Law Offices, has advised
us based on their understanding of the current PRC law, rules and regulations that the CSRC’s approval is not required for the listing
and trading of our ordinary shares on Nasdaq in the context of our initial public offering and follow-on offering, given that:
|
●
|
the CSRC currently has not issued any definitive rule or interpretation concerning whether offerings like ours under this annual report are subject to this regulation; and
|
|
●
|
Jiangsu EZGO was not established by a merger with or an acquisition of any PRC domestic companies as defined under the M&A Rules.
|
However, our PRC legal counsel has further advised
us that there remains some uncertainty as to how the M&A Rules will be interpreted or implemented in the context of an overseas offering
and its opinions summarized above are subject to any new laws, rules and regulations or detailed implementations and interpretations in
any form relating to the M&A Rules.
Regulation of Overseas Investment by PRC Residents
On July 4, 2014, the SAFE promulgated the Circular
on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles,
or SAFE Circular 37. On February 13, 2015, SAFE further promulgated the Circular on Further Simplifying and Improving the Administration
of the Foreign Exchange Concerning Direct Investment, or SAFE Circular 13, which took effect on June 1, 2015. This SAFE Circular 13 has
amended SAFE Circular 37 by requiring PRC residents or entities to register with qualified banks rather than SAFE or its local branch
in connection with their direct establishment or indirect control of an offshore entity established for the purpose of overseas investment
or financing, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests
in domestic enterprises or offshore assets or interests. Qualified local banks will directly examine and accept foreign exchange registration
for overseas direct investment, including the initial foreign exchange registration and amendment registration, under SAFE Circular 37
from June 1, 2015.
These circulars further require amendment to the
registration in the event of any significant changes with respect to the special purpose vehicle, such as an increase or decrease of capital
contributed by PRC residents, share transfer or exchange, merger, division or other material events. In the event that a PRC resident
holding interests in a special purpose vehicle fails to complete the required SAFE registration, the PRC subsidiary of that special purpose
vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign
exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiary.
Failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for evasion
of foreign exchange controls.
Regulation under the PRC Securities Law
The PRC Securities Law was promulgated in December 1998
and was subsequently revised in October 2005, June 2013, August 2019 and December 2019. According to Article 177 of
the PRC Securities Law, or Article 177, which became effective in March 2020, no overseas securities regulator is allowed to directly
conduct investigation or evidence collection activities within the territory of the PRC. While there is no detailed interpretation regarding
the rule implementation under Article 177, it will be difficult for an overseas securities regulator to conduct investigation or evidence
collection activities in China.
4C. Organizational Structure
The diagram below shows our corporate structure
as of the date of this annual report:
Contractual Arrangements with Jiangsu EZGO and Its Shareholders
Due to PRC legal restrictions on foreign ownership
in internet-based businesses, neither we nor our subsidiaries own any equity interest in Jiangsu EZGO. Instead, we control and receive
the economic benefits of Jiangsu EZGO’s business operations through the VIE Agreements. Changzhou EZGO, Jiangsu EZGO and its equity
holders entered into the VIE Agreements on November 8, 2019. The VIE Agreements are designed to provide Changzhou EZGO with the power,
rights, and obligations equivalent in all material respects to those it would possess as the equity holder of Jiangsu EZGO, including
absolute control rights and the rights in the assets, property and revenue of Jiangsu EZGO, to (i) exercise effective control over
Jiangsu EZGO, (ii) receive substantially all of the economic benefits of Jiangsu EZGO, and (iii) have an exclusive option to
purchase or designate any third party to purchase all or part of the equity interests in and assets of Jiangsu EZGO when and to the extent
permitted by PRC law.
As a result of our direct ownership in Changzhou
EZGO and the contractual arrangements with Jiangsu EZGO, we are regarded as the primary beneficiary of Jiangsu EZGO, and we treat Jiangsu
EZGO as our consolidated VIE under U.S. GAAP, which generally refers to an entity in which we do not have any equity interests but whose
financial results are consolidated into our consolidated financial statements in accordance with U.S. GAAP because we have a controlling
financial interest in, and thus are the primary beneficiary of, that entity. We have consolidated the financial results of Jiangsu EZGO
and its subsidiaries in our consolidated financial statements in accordance with U.S. GAAP.
Each of the VIE Agreements is described in detail below and each of
which is currently in full force and effect:
Exclusive Management Consulting and Technical
Service Agreement
Pursuant to the Exclusive Management Consulting
and Technical Service Agreement, dated November 8, 2019, between Changzhou EZGO and Jiangsu EZGO, Jiangsu EZGO agrees to engage Changzhou
EZGO as its exclusive provider of management consulting, technical support, intellectual property license and relevant services, including
all services within Jiangsu EZGO’s business scope and decided by Changzhou EZGO from time to time as necessary. Jiangsu EZGO shall
pay to Changzhou EZGO service fees within three months after each fiscal year end. The service fees should be 95% (or a percentage adjusted
by Changzhou EZGO in its sole discretion) of the after-tax profit after the deficit of the prior fiscal year is covered and the statutory
common reserve is extracted. Changzhou EZGO exclusively owns any intellectual property arising from the performance of the Exclusive Management
Consulting and Technical Service Agreement. The Exclusive Management Consulting and Technical Service Agreement is effective for twenty
years unless earlier terminated as set forth in the agreement or other written agreements entered into by the parties thereto. The Exclusive
Management Consulting and Technical Service Agreement shall be extended automatically by the expiry thereof, until Changzhou EZGO’s
business term or Jiangsu EZGO’s business term expires, unless otherwise notified by Changzhou EZGO in writing. During the term of
the Exclusive Management Consulting and Technical Service Agreement, Jiangsu EZGO may not terminate the agreements except in the case
of Changzhou EZGO’s gross negligence or fraud, or this agreement or laws provide otherwise. Changzhou EZGO may terminate this agreement
by 30-day written notice to Jiangsu EZGO at any time.
Equity Pledge Agreement
Pursuant to the Equity Pledge Agreement, dated
November 8, 2019, among Changzhou EZGO, Jiangsu EZGO and the equity holders of Jiangsu EZGO, the equity holders of Jiangsu EZGO have pledged
the 100% equity interests in Jiangsu EZGO to Changzhou EZGO to guarantee performance of all of his or her obligations under the Exclusive
Management Consulting and Technical Service Agreement, the Loan Agreement, the Exclusive Call Option Agreement and the Proxy Agreement.
If any event of default as provided for therein occurs, Changzhou EZGO, as the pledgee, will be entitled to dispose of the pledged equity
interests according to applicable PRC laws. On November 28, 2019, Changzhou EZGO, Jiangsu EZGO and all its equity holders have completed
the registration of the equity pledge with the relevant office of State Administration of Market Supervision (“SAMR”) in accordance
with the PRC Property Rights Law.
Exclusive Call Option Agreement
Pursuant to the Exclusive Call Option Agreement,
dated November 8, 2019, among Changzhou EZGO, Jiangsu EZGO and the equity holders of Jiangsu EZGO, each of the equity holders of Jiangsu
EZGO has irrevocably granted Changzhou EZGO an exclusive option to purchase, or to designate other persons to purchase, to the extent
permitted by applicable PRC laws, rules and regulations, all of the equity interest and assets in Jiangsu EZGO from its equity holders.
The equity holders of Jiangsu EZGO agree that, without the prior written consent of Changzhou EZGO, they will not dispose of their equity
interests in Jiangsu EZGO or create or allow any encumbrance on their equity interests. The purchase price for the equity interest is
to be the minimum price permitted by applicable PRC laws, rules and regulations, or the amount that the equity holders actually pay to
Jiangsu EZGO regarding the equity, whichever is lower. The purchase price for the assets is to be the minimum price permitted by applicable
PRC laws, rules and regulations, or the net book value of the assets, whichever is lower. The exclusive call option agreement expires
when all the equity interest or all the assets are transferred pursuant to the agreement.
Proxy Agreement
Pursuant to the Proxy Agreement, dated November
8, 2019, among Changzhou EZGO, Jiangsu EZGO and each of equity holders of Jiangsu EZGO, each of the equity holders irrevocably authorizes
Changzhou EZGO to exercise his or her rights as an equity holder of Jiangsu EZGO, including the right to attend equity holders meetings,
to exercise voting rights and to transfer all or a part of his or her equity interests therein pursuant to the Exclusive Call Option Agreement.
During the term of the Proxy Agreement, Jiangsu EZGO and all its equity holders may not terminate the agreements except when this agreement
or applicable PRC laws provide otherwise.
Loan Agreement
Pursuant to the Loan Agreement, dated November
8, 2019, Changzhou EZGO agrees to provide Jiangsu EZGO with loans of different amounts at an annual interest rate of 24% according to
Jiangsu EZGO’s needs from time to time. The term of each loan is 20 years, which can be extended with the written consent of
both parties. During the term of the loan or the extended term of the loan, Jiangsu EZGO shall not prepay without the written consent
of Changzhou EZGO while in case of certain circumstances, Jiangsu EZGO must repay the loan in advance upon Changzhou EZGO’s written
request.
Spousal Consent Letter
The spouses of individual equity holders of Jiangsu
EZGO have each signed a spousal consent letter. Under the spousal consent letter, the signing spouse unconditionally and irrevocably has
agreed to the execution by his or her spouse of the above-mentioned Equity Pledge Agreement, Exclusive Call Option Agreement and Proxy
Agreement, and that his or her spouse may perform, amend or terminate such agreements without his or her consent. In addition, in the
event that the spouse obtains any equity interest in Jiangsu EZGO held by his or her spouse for any reason, he or she agrees to be bound
by and sign any legal documents substantially similar to the contractual arrangements entered into by his or her spouse, as may be amended
from time to time.
Through the current contractual arrangements,
we established a contractual relationship with all equity holders of Jiangsu EZGO. Pursuant to these agreements, all equity holders of
Jiangsu EZGO irrevocably authorized Changzhou EZGO to exercise voting rights and all other rights as the equity holder and pledged all
of his or her equity interests in Jiangsu EZGO to Changzhou EZGO as collateral to secure performance of all of his or her obligations
under these agreements. However, the equity holders of Jiangsu EZGO may have potential conflicts of interest with us and may breach, or
cause Jiangsu EZGO to breach, or refuse to renew, the existing contractual arrangements we have with them and Jiangsu EZGO. Any failure
by Jiangsu EZGO or equity holders of Jiangsu EZGO to perform his or her obligations under our contractual arrangements with them would
have a material adverse effect on our business and financial condition. See “Item 3. Key Information — D. Risk Factors —
Risks Related to Doing Business in China — The shareholders of our consolidated VIE may have potential conflicts of interest with
us, which may materially and adversely affect our business and financial condition.”
In the opinion of DeHeng Law Offices, our PRC
counsel:
|
●
|
the
ownership structure of Jiangsu EZGO and Changzhou EZGO in China does not violate any applicable PRC laws or regulations currently in
effect; and
|
|
●
|
the
contractual arrangements among Changzhou EZGO, Jiangsu EZGO and Jiangsu EZGO’s shareholders governed by PRC law are valid, binding
and enforceable in accordance with their terms and applicable PRC laws or regulations currently in effect and do not and will not violate
any applicable PRC laws or regulations currently in effect.
|
However, there are substantial uncertainties regarding
the interpretation and application of current and future PRC laws, regulations and rules. Accordingly, the PRC regulatory authorities
may in the future take a view that is contrary to or otherwise different from the above opinion of our PRC legal counsel.
VIE Financial Information
Set
forth below is selected Consolidated Statements of Operations and cash flows for the fiscal years ended September 30, 2019, 2020 and 2021,
and selected balance sheet information as of September 30, 2019, 2020 and 2021 showing financial information for parent company EZGO Technologies
Ltd., non-VIE subsidiaries, the VIE and VIE’s subsidiaries, eliminating entries and consolidated information (dollars in thousands).
In the tables below, the column headings correspond to the following entities in the organizational diagram on page 68.
|
●
|
“parent”
refers to EZGO Technologies Ltd., a BVI business company;
|
|
●
|
“non-VIE
subsidiaries” refer to the sum of (i) China EZGO Group Ltd., our wholly owned Hong Kong subsidiary, (ii) Changzhou EZGO Enterprise
Management Co., Ltd., our wholly owned PRC subsidiary, and (iii) Changzhou Langyi Electronic Technology Co., Ltd., a wholly owned PRC
subsidiary;
|
|
●
|
“VIE
and its subsidiaries” refer to the sum of (i) Jiangsu EZGO Electronic Technologies, Co., Ltd., (ii) Changzhou Hengmao Power Battery
Technology Co., Ltd., (iii) Changzhou Yizhiying IoT Technologies Co., Ltd., and (iv) Jiangsu Cenbird E-Motorcycle Technologies Co., Ltd.,
(v) Tianjin Jiahao Bicycle Co, Co. Ltd., which became one of the subsidiaries of VIE in June 2021, (vi) Tianjin Dilang Technologies Co.,
Ltd., and (vii) Tianjin Dilang Import and Export Trading Co., Ltd., which was established in June 2021; and
|
|
●
|
“VIE”
refers to Jiangsu EZGO Electronic Technologies, Co., Ltd.
|
Consolidated Statements of Operations Information
|
|
|
|
|
Fiscal year ended September 30, 2021
|
|
|
|
Parent
|
|
|
Non-VIE
Subsidiaries
|
|
|
VIE and its
subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
3,793,146
|
|
|
$
|
19,628,860
|
|
|
$
|
-
|
|
|
$
|
23,422,006
|
|
Cost of revenue
|
|
|
-
|
|
|
|
(3,604,878
|
)
|
|
|
(19,434,650
|
)
|
|
|
-
|
|
|
|
(23,039,528
|
)
|
Gross profit
|
|
|
-
|
|
|
|
188,268
|
|
|
|
194,210
|
|
|
|
-
|
|
|
|
382,478
|
|
Operating expenses
|
|
|
(495,835
|
)
|
|
|
(72,242
|
)
|
|
|
(3,691,823
|
)
|
|
|
-
|
|
|
|
(4,259,900
|
)
|
(Loss) income from operations
|
|
|
(495,835
|
)
|
|
|
116,026
|
|
|
|
(3,497,613
|
)
|
|
|
-
|
|
|
|
(3,877,422
|
)
|
Share of loss from subsidiaries
|
|
|
(2,483,120
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
2,483,120
|
|
|
|
-
|
|
Share of loss from VIE and its subsidiaries
|
|
|
-
|
|
|
|
(2,279,373
|
)
|
|
|
-
|
|
|
|
2,279,373
|
|
|
|
-
|
|
Other income (expense), net
|
|
|
279
|
|
|
|
156,368
|
|
|
|
(75,873
|
)
|
|
|
-
|
|
|
|
80,774
|
|
Lossbefore income tax expenses (benefit)
|
|
|
(2,978,676
|
)
|
|
|
(2,006,978
|
)
|
|
|
(3,573,487
|
)
|
|
|
4,762,493
|
|
|
|
(3,796,648
|
)
|
Net loss
|
|
|
(2,978,676
|
)
|
|
|
(2,483,120
|
)
|
|
|
(2,714,344
|
)
|
|
|
4,762,493
|
|
|
|
(3,413,647
|
)
|
Less: net lossattributable to non-controlling interests
|
|
|
-
|
|
|
|
-
|
|
|
|
(434,971
|
)
|
|
|
-
|
|
|
|
(434,971
|
)
|
Net loss attributable to EZGO’s shareholders
|
|
|
(2,978,676
|
)
|
|
|
(2,483,120
|
)
|
|
|
(2,279,373
|
)
|
|
|
4,762,493
|
|
|
|
(2,978,676
|
)
|
|
|
|
|
|
Fiscal year ended September 30, 2020
|
|
|
|
Parent
|
|
|
Non-VIE
Subsidiaries
|
|
|
VIE and its
subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
15,243,282
|
|
|
$
|
-
|
|
|
$
|
15,243,282
|
|
Cost of revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
(13,704,248
|
)
|
|
|
-
|
|
|
|
(13,704,248
|
)
|
Gross profit
|
|
|
-
|
|
|
|
-
|
|
|
|
1,539,034
|
|
|
|
-
|
|
|
|
1,539,034
|
|
Operating expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,467,068
|
)
|
|
|
-
|
|
|
|
(1,467,068
|
)
|
Income from operations
|
|
|
-
|
|
|
|
-
|
|
|
|
71,966
|
|
|
|
-
|
|
|
|
71,966
|
|
Share of income from subsidiaries
|
|
|
147,174
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(147,174
|
)
|
|
|
-
|
|
Share of income from VIE and its subsidiaries
|
|
|
-
|
|
|
|
147,174
|
|
|
|
-
|
|
|
|
(147,174
|
)
|
|
|
-
|
|
Other income, net
|
|
|
-
|
|
|
|
-
|
|
|
|
378,395
|
|
|
|
-
|
|
|
|
378,395
|
|
Income before income tax expenses
|
|
|
147,174
|
|
|
|
147,174
|
|
|
|
450,361
|
|
|
|
(294,348
|
)
|
|
|
450,361
|
|
Net income
|
|
|
147,174
|
|
|
|
147,174
|
|
|
|
276,922
|
|
|
|
(294,348
|
)
|
|
|
276,922
|
|
Less: net income attributable to non-controlling interests
|
|
|
-
|
|
|
|
-
|
|
|
|
129,748
|
|
|
|
-
|
|
|
|
129,748
|
|
Net income attributable to EZGO’s shareholders
|
|
|
147,174
|
|
|
|
147,174
|
|
|
|
147,174
|
|
|
|
(294,348
|
)
|
|
|
147,174
|
|
|
|
|
|
|
Fiscal year ended September 30, 2019
|
|
|
|
Parent
|
|
|
Non-VIE
Subsidiaries
|
|
|
VIE and its
subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,371,201
|
|
|
$
|
-
|
|
|
$
|
1,371,201
|
|
Cost of revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
(246,736
|
)
|
|
|
-
|
|
|
|
(246,736
|
)
|
Gross profit
|
|
|
-
|
|
|
|
-
|
|
|
|
1,124,465
|
|
|
|
-
|
|
|
|
1,124,465
|
|
Operating expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
(348,602
|
)
|
|
|
-
|
|
|
|
(348,602
|
)
|
Income from operations
|
|
|
-
|
|
|
|
-
|
|
|
|
775,863
|
|
|
|
-
|
|
|
|
775,863
|
|
Share of income from subsidiaries
|
|
|
1,738,123
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,738,123
|
)
|
|
|
-
|
|
Share of income from VIE and its subsidiaries
|
|
|
-
|
|
|
|
1,738,123
|
|
|
|
-
|
|
|
|
(1,738,123
|
)
|
|
|
-
|
|
Other income, net
|
|
|
-
|
|
|
|
-
|
|
|
|
265,200
|
|
|
|
-
|
|
|
|
265,200
|
|
Income before income tax expenses
|
|
|
1,738,123
|
|
|
|
1,738,123
|
|
|
|
1,041,063
|
|
|
|
(3,476,246
|
)
|
|
|
1,041,063
|
|
Net income
|
|
|
1,738,123
|
|
|
|
1,738,123
|
|
|
|
2,191,437
|
|
|
|
(3,476,246
|
)
|
|
|
2,191,437
|
|
Less: net income attributable to non-controlling interests
|
|
|
-
|
|
|
|
-
|
|
|
|
453,314
|
|
|
|
-
|
|
|
|
453,314
|
|
Net income attributable to EZGO’s shareholders
|
|
|
1,738,123
|
|
|
|
1,738,123
|
|
|
|
1,738,123
|
|
|
|
(3,476,246
|
)
|
|
|
1,738,123
|
|
Consolidated Balance Sheets Information
|
|
As of September 30, 2021
|
|
|
|
Parent
|
|
|
Non-VIE
Subsidiaries
|
|
|
VIE and its
subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts due from subsidiary of EZGO
|
|
$
|
15,853,200
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(15,853,200
|
)
|
|
$
|
-
|
|
Prepaid on behalf of VIE
|
|
|
3,017,337
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,017,337
|
)
|
|
|
-
|
|
Amount due from VIE
|
|
|
-
|
|
|
|
13,323,711
|
|
|
|
|
|
|
|
(13,323,711
|
)
|
|
|
-
|
|
Amount due from Non-VIE
|
|
|
-
|
|
|
|
-
|
|
|
|
1,914,828
|
|
|
|
(1,914,828
|
)
|
|
|
-
|
|
Amount due from EZGO
|
|
|
-
|
|
|
|
-
|
|
|
|
316,524
|
|
|
|
(316,524
|
)
|
|
|
-
|
|
Current assets
|
|
|
20,145,974
|
|
|
|
18,079,192
|
|
|
|
23,880,044
|
|
|
|
(34,425,600
|
)
|
|
|
27,679,610
|
|
Amount due to VIE
|
|
|
(316,524
|
)
|
|
|
(1,914,828
|
)
|
|
|
-
|
|
|
|
2,231,352
|
|
|
|
-
|
|
Amount due to non-VIE
|
|
|
-
|
|
|
|
-
|
|
|
|
(13,323,711
|
)
|
|
|
13,323,711
|
|
|
|
-
|
|
Amount due to EZGO
|
|
|
-
|
|
|
|
(15,853,200
|
)
|
|
|
(3,017,337
|
)
|
|
|
18,870,537
|
|
|
|
-
|
|
Working capital
|
|
|
19,781,865
|
|
|
|
227,610
|
|
|
|
(1,805,035
|
)
|
|
|
-
|
|
|
|
18,204,440
|
|
Investment in non-VIE subsidiaries
|
|
|
8,736,137
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,736,137
|
)
|
|
|
-
|
|
Equity in the VIE and its subsidiaries through the VIE Agreements
|
|
|
-
|
|
|
|
6,590,089
|
|
|
|
-
|
|
|
|
(6,590,089
|
)
|
|
|
-
|
|
Assets
|
|
|
28,882,111
|
|
|
|
40,512,281
|
|
|
|
38,212,105
|
|
|
|
(65,594,827
|
)
|
|
|
42,011,670
|
|
|
|
As of September 30, 2020
|
|
|
|
Parent
|
|
|
Non-VIE
Subsidiaries
|
|
|
VIE and its
subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
-
|
|
|
|
-
|
|
|
|
16,316,861
|
|
|
|
-
|
|
|
|
16,316,861
|
|
Working capital
|
|
|
-
|
|
|
|
-
|
|
|
|
9,644,208
|
|
|
|
-
|
|
|
|
9,644,208
|
|
Investment in non-VIE subsidiaries
|
|
|
8,869,462
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,869,462
|
)
|
|
|
-
|
|
Equity in the VIE and its subsidiaries through the VIE Agreements
|
|
|
|
|
|
|
8,869,462
|
|
|
|
|
|
|
|
(8,869,462
|
)
|
|
|
-
|
|
Assets
|
|
|
8,869,462
|
|
|
|
8,869,462
|
|
|
|
19,817,798
|
|
|
|
(17,738,924
|
)
|
|
|
19,817,798
|
|
|
|
As of September 30, 2019
|
|
|
|
Parent
|
|
|
Non-VIE
Subsidiaries
|
|
|
VIE and its
subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
-
|
|
|
|
-
|
|
|
|
16,694,687
|
|
|
|
-
|
|
|
|
16,694,687
|
|
Working capital
|
|
|
-
|
|
|
|
-
|
|
|
|
9,860,560
|
|
|
|
-
|
|
|
|
9,860,560
|
|
Investment in non-VIE subsidiaries
|
|
|
8,226,779
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,226,779
|
)
|
|
|
-
|
|
Equity in the VIE and its subsidiaries through the VIE Agreements
|
|
|
-
|
|
|
|
8,226,779
|
|
|
|
-
|
|
|
|
(8,226,779
|
)
|
|
|
-
|
|
Assets
|
|
|
8,226,779
|
|
|
|
8,226,779
|
|
|
|
19,171,950
|
|
|
|
(16,453,558
|
)
|
|
|
19,171,950
|
|
Consolidated Cash Flows Information
|
|
|
|
|
Fiscal year ended September 30, 2021
|
|
|
|
Parent
|
|
|
Non-VIE
Subsidiaries
|
|
|
VIE and its
subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash used in operating
activities
|
|
$
|
(801,208
|
)
|
|
$
|
(4,353,568
|
)
|
|
$
|
(1,101,659
|
)
|
|
$
|
-
|
|
|
$
|
(6,256,435
|
)
|
Payment for acquisition of Tianjin Jiahao on behalf of VIE
|
|
|
(3,017,337
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
3,017,337
|
|
|
|
-
|
|
Loan to subsidiary of EZGO
|
|
|
(15,853,200
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
15,853,200
|
|
|
|
-
|
|
Loan to VIE
|
|
|
-
|
|
|
|
(13,323,711
|
)
|
|
|
-
|
|
|
|
13,323,711
|
|
|
|
-
|
|
Amount due from Changzhou EZGO
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,914,828
|
)
|
|
|
1,914,828
|
|
|
|
-
|
|
Others(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
(11,037,254
|
)
|
|
|
-
|
|
|
|
(11,037,254
|
)
|
Total cash used in investing activities
|
|
|
(18,870,537
|
)
|
|
|
(13,323,711
|
)
|
|
|
(12,952,082
|
)
|
|
|
34,109,076
|
|
|
|
(11,037,254
|
)
|
Loans from EZGO
|
|
|
-
|
|
|
|
15,853,200
|
|
|
|
3,017,337
|
|
|
|
(18,870,537
|
)
|
|
|
-
|
|
Loans from Changzhou EZGO
|
|
|
-
|
|
|
|
-
|
|
|
|
13,323,711
|
|
|
|
(13,323,711
|
)
|
|
|
-
|
|
Amount due to VIE
|
|
|
-
|
|
|
|
1,914,828
|
|
|
|
-
|
|
|
|
(1,914,828
|
)
|
|
|
-
|
|
Proceeds from issuance of ordinary shares in connection with IPO, net of issuance cost
|
|
|
20,947,182
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,947,182
|
|
Others(2)
|
|
|
-
|
|
|
|
-
|
|
|
|
1,816,894
|
|
|
|
-
|
|
|
|
1,816,894
|
|
Total cash provided by financing
activities
|
|
|
20,947,182
|
|
|
|
17,768,028
|
|
|
|
18,157,942
|
|
|
|
(34,109,076
|
)
|
|
|
22,764,076
|
|
Effect of exchange rate changes
|
|
|
-
|
|
|
|
-
|
|
|
|
78,968
|
|
|
|
-
|
|
|
|
78,968
|
|
Net increase in cash, cash equivalents
and restricted cash
|
|
|
1,275,437
|
|
|
|
90,749
|
|
|
|
4,183,169
|
|
|
|
-
|
|
|
|
5,549,355
|
|
(1)
|
Other
cash flows from investing activities mainly include the purchase of property, plants and equipment and land use right, and the purchase
of short-term investments.
|
(2)
|
Other
cash flows from financing activities mainly include the collection of loan to shareholder and proceeds from short-term borrowings.
|
|
|
Fiscal year ended September 30, 2020
|
|
|
|
Parent
|
|
|
Non-VIE
Subsidiaries
|
|
|
VIE and its
subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash provided by operating activities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,024,769
|
|
|
$
|
-
|
|
|
$
|
4,024,769
|
|
Total cash used in investing activities
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,349,847
|
)
|
|
|
-
|
|
|
|
(3,349,847
|
)
|
Total cash used in financing activities
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,004,361
|
)
|
|
|
-
|
|
|
|
(4,004,361
|
)
|
Effect of exchange rate changes
|
|
|
-
|
|
|
|
-
|
|
|
|
36,324
|
|
|
|
-
|
|
|
|
36,324
|
|
Net decrease in cash, cash equivalents and restricted cash
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,293,115
|
)
|
|
|
-
|
|
|
|
(3,293,115
|
)
|
|
|
Fiscal year ended September 30, 2019
|
|
|
|
Parent
|
|
|
Non-VIE
Subsidiaries
|
|
|
VIE and its
subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash used in operating activities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(2,702,167
|
)
|
|
$
|
-
|
|
|
$
|
(2,702,167
|
)
|
Total cash used in investing activities
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,922,326
|
)
|
|
|
-
|
|
|
|
(1,922,326
|
)
|
Total cash provided by financing activities
|
|
|
-
|
|
|
|
-
|
|
|
|
8,217,985
|
|
|
|
-
|
|
|
|
8,217,985
|
|
Effect of exchange rate changes
|
|
|
-
|
|
|
|
-
|
|
|
|
12,778
|
|
|
|
-
|
|
|
|
12,778
|
|
Net increase in cash, cash equivalents and restricted cash
|
|
|
-
|
|
|
|
-
|
|
|
|
3,606,270
|
|
|
|
-
|
|
|
|
3,606,270
|
|
Transfer of Cash Through our Organization
Prior to the
completion of our initial public offering in January 2021, the sources of funds of the VIE and its subsidiaries primarily consisted of
shareholders capital injection and cash generated from operations.
After the
completion of our initial public offering, our holding company EZGO transferred funds through a shareholder loan to EZGO HK. EZGO
HK transferred funds through an increase in the registered capital to Changzhou EZGO. EZGO and Changzhou EZGO provided loans to the VIE,
subject to statutory limits and restrictions.
For the fiscal year ended September 30,
2021, EZGO provided interest-free loan of $15,853,200 to EZGO HK; EZGO also paid $3,017,337 on behalf of VIE for the acquisition of
Tianjin Jiahao and insurance fees; and EZGO HK injected registered capital of $15,843,000 to Changzhou EZGO. Changzhou EZGO provided
loans of $13,323,711 to the VIE and have $1,914,828 payables to the VIE. The details of loans provided by Changzhou EZGO are shown
below:
Start Date
|
|
Maturity Date
|
|
Amount
|
|
|
Annual Interest Rate
|
|
April 6, 2021
|
|
April 5, 2026
|
|
$
|
3,878,735
|
|
|
|
5
|
%
|
June 9, 2021
|
|
June 8, 2026
|
|
$
|
2,327,241
|
|
|
|
5
|
%
|
June 22, 2021
|
|
June 21, 2026
|
|
$
|
3,878,735
|
|
|
|
5
|
%
|
September 17, 2021
|
|
September 16, 2024
|
|
$
|
620,598
|
|
|
|
4
|
%
|
September 29, 2021
|
|
September 28, 2024
|
|
$
|
2,618,402
|
|
|
|
4
|
%
|
Total
|
|
|
|
$
|
13,323,711
|
|
|
|
|
|
Foresaid transactions would be eliminated upon consolidation.
Dividends and Other Distributions
EZGO is a holding company incorporated in the
BVI with no material operations of its own and does not generate any revenue. It currently conducts its business in China through its
consolidated VIE, Jiangsu EZGO and its subsidiaries and with all of its operations and assets in China. We are permitted under PRC laws
and regulations to provide funding to our WFOE only through loans or capital contributions, and to our VIE only through loans, and only
if we satisfy the applicable government registration and approval requirements. See “Item 3. Key Information — D. Risk Factors —
Risks Related to Doing Business in China — PRC regulation on loans to, and direct investment in, PRC entities by offshore holding
companies and governmental control in currency conversion may delay or prevent us from using the proceeds of our initial public offering
or follow-on offering to make loans to or make additional capital contributions to our PRC subsidiaries, which could materially and adversely
affect our liquidity and our ability to fund and expand our business.”
Under our current corporate structure, we rely
on dividend payments from our PRC subsidiaries to fund any cash and financing requirements we may have, including the funds necessary
to pay dividends and other cash distributions to our shareholders or to service any debt we may incur. Our subsidiaries and VIE in the
PRC generate and retain cash generated from operating activities and re-invest it in their business, respectively. If any of our PRC subsidiaries
incurs debt on its own behalf in the future, the instruments governing such debt may restrict their ability to pay dividends to us.
Our PRC subsidiaries are permitted to pay dividends
only out of their retained earnings. However, each of our PRC subsidiaries is required to set aside at least 10% of its after-tax profits
each year, after making up for previous year’s accumulated losses, if any, to fund certain statutory reserves, until the aggregate
amount of such funds reaches 50% of its registered capital. This portion of our PRC subsidiaries’ respective net assets are prohibited
from being distributed to their shareholders as dividends. However, neither any of our subsidiary or our VIE has made any dividends or
distributions to our holding company or any U.S. investors as of the date of this report. See also “Item 3. Key Information —
D. Risk Factors — Risks Related to Doing Business in China - Our PRC subsidiaries are subject to restrictions on paying dividends
or making other payments to us, which may restrict our ability to satisfy our liquidity requirements, and any limitation on the ability
of our PRC subsidiaries to make remittance to pay dividends to us could limit our ability to access cash generated by the operations of
those entities.”
As of September 30, 2021, none of our subsidiaries
have ever issued any dividends or made other distributions to us or their respective holding companies nor have we or any of our subsidiaries
ever paid dividends or made other distributions to U.S. investors. We intend to retain all of our available funds and any future earnings
and cash proceeds from overseas financing activities to fund the development and growth of our business. As a result, we do not expect
to pay any cash dividends in the foreseeable future.
In addition, the PRC government imposes controls
on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. If the foreign
exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be
able to pay dividends in foreign currencies to our shareholders. See “Item 3. Key Information — D. Risk Factors —
Risks Related to Doing Business in China - Restrictions on currency exchange or outbound capital flows may limit our ability to utilize
our PRC revenue effectively.”
A 10% PRC withholding tax is applicable to dividends
payable to investors that are non-resident enterprises. Any gain realized on the transfer of ordinary shares by such investors is also
subject to PRC tax at a current rate of 10% which in the case of dividends will be withheld at source if such gain is regarded as income
derived from sources within the PRC. See also “Item 3. Key Information — D. Risk Factors — Risks Related to Doing
Business in China - There are significant uncertainties under the PRC EIT Law relating to the withholding tax liabilities of our PRC subsidiaries,
and dividends payable by our PRC subsidiaries to our offshore subsidiaries may not qualify to enjoy certain treaty benefits.”
4D. Property, Plants and Equipment
Under PRC law, land is owned by the state. “Land
use rights” are granted to an individual or entity after payment of a land use right fee is made to the applicable state or rural
collective economic organization. Land use rights allow the holder of the right to use the land for a specified long-term period.
Our
headquarters are located in Building #A, Floor 2, Changzhou Institute of Dalian University of Technology, Science and Education Town,
Wujin District, Changzhou, Jiangsu, China 213164, and we maintain offices, manufacturing and storage facilities and stores in Tianjin,
Changzhou, Wenzhou and Wuhu. As of September 30, 2021, we
own approximately 35,047.8 square meters (approximately 377,251.4 square feet) of real estate, and we leased an aggregate of approximately
13,080 square meters (approximately 140,791.9 square feet) of real property. We do not expect to experience difficulties in renewing any
of the leases when they expire. If we require additional space, we expect to be able to obtain additional facilities on commercially reasonable
terms.
Owned Properties
Address
|
|
Size
|
|
Ownership
|
|
|
Expiration
|
|
184 Xiangyuan Road, Chagugang Town, Wuqing District, Tianjin
|
|
35,047.8 square meters (approximately 377,251.4 square feet
|
|
Tianjin Jiahao Bicycles Co., Ltd.
|
|
|
December 4, 2057
|
|
Leased Properties
Address
|
|
Size
|
|
Rent
|
|
|
Expiration
|
|
A203, Science and Technology Town, Jiangsu Research Institute, Dalian University of Technology, Changzhou City, No. 18, Changwu Middle Road, Wujin District, Changzhou, Jiangsu Province
|
|
60 square meters (approximately 645.8 square feet
|
|
RMB2,394 per month (approximately $352.6)
|
|
|
April 24, 2023
|
|
|
|
|
|
|
|
|
|
|
A201-202, A208-209, Science and Technology Town, Jiangsu Research Institute, Dalian University of Technology, Changzhou City, No. 18, Changwu Middle Road, Wujin District, Changzhou, Jiangsu Province
|
|
235 square meters (approximately 2,529.5 square feet)
|
|
RMB9,165 per month (approximately $1,349.9)
|
|
|
April 24, 2023
|
|
|
|
|
|
|
|
|
|
|
3rd Floor, Office Building, No. 802, Huxi New District, Xiliu Village, Hengshanqiao Town, Changzhou Economic Development Zone, Changzhou, Jiangsu Province
|
|
300 square meters (approximately 3,229.2 square feet)
|
|
RMB6,000 per month (approximately $883.7)
|
|
|
January 9, 2024
|
|
|
|
|
|
|
|
|
|
|
West Side of Jingjin Road, Nancai Village, Wuqing District, Tianjin
|
|
10,000 square meters (approximately 107,639.1 square feet)
|
|
RMB35,000 per month (approximately $5,154.9)
|
|
|
July 31, 2025
|
|
|
|
|
|
|
|
|
|
|
No. 68, Miaoma Road East, Wujin District, Changzhou City
|
|
430 square meters (approximately 4,628.5 square feet)
|
|
RMB60,000 per year (approximately $8,837.0)
|
|
|
June 30, 2023
|
|
|
|
|
|
|
|
|
|
|
No. 70-72 Luofeng Manor Road, Rui’an City, Tangxiazhen, Wenzhou City, Zhejiang Province
|
|
55 square meters (approximately 592.0 square feet)
|
|
RMB40,000 per year (approximately $5,891.4)
|
|
|
June 1, 2022
|
|
|
|
|
|
|
|
|
|
|
3rd Floor, No. 3 Office Building, No. 802, Xiliucunhu Xixin West District, Hengshanqiao Town, Economic Development Zone, Changzhou, Jiangsu Province
|
|
2,000.0 square meters (approximately 21,527.8 square feet)
|
|
RMB360,000 per year (approximately $53,022.7)
|
|
|
January 9, 2024
|
|
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion and analysis should
be read in conjunction with our consolidated financial statements, the notes to those financial statements and other financial data that
appear elsewhere in this annual report. In addition to historical information, the following discussion contains forward-looking statements
based on current expectations that involve risks and uncertainties. Actual results and the timing of certain events may differ significantly
from those projected in such forward-looking statements due to a number of factors, including those set forth in “Item 3. Key Information
— D. Risk Factors” and elsewhere in this report. Our consolidated financial statements are prepared in conformity with U.S.
GAAP.
Overview
Our vision is to build a leading short-distance
transportation solution provider in China. Leveraging our IoT management platform, we have preliminarily established a business model
centered on the sale of e-bicycles and battery and cells, complemented by sale of battery packs, and our charging pile business.
Currently, we (i) design, manufacture, and sell
e-bicycles and e-tricycles; (ii) sell lithium batteries; and (iii) sell, franchise and operate smart charging piles for e-bicycles and
other electronic devices.
For the fiscal years ended September 30, 2019,
2020 and 2021, our revenues were $1,371,201, $15,243,282 and $23,422,006, respectively. We incurred a net income of $2,191,437 and $276,922
for the fiscal years ended September 30, 2019 and 2020, respectively and a net loss of $3,413,644 for the fiscal year ended September
30, 2021. We currently generate most of our revenues from e-bicycles sales and battery packs sales. We plan to focus on completing our
ecological chain of e-bicycles from manufacture to sales.
Key Factors that Affect Operating Results
We believe the following key factors may affect
our financial condition and results of operations:
|
●
|
our
ability to increase our e-bicycle sales volume;
|
|
●
|
our
ability to enhance our smart charging piles volume;
|
|
●
|
our
ability to enhance our operational efficiency; and
|
|
●
|
our
ability to expand into international markets.
|
COVID-19
The outbreak of novel coronavirus (COVID-19) began
in December 2019 and was quickly declared as a Public Health Emergency of International Concern on January 30, 2020 by the World Health
Organization. The pandemic has resulted in quarantines, travel restrictions, and the temporary closure of stores and facilities in China
and elsewhere.
Substantially all of our revenue is generated
from and workforce are concentrated in China. Consequently, the COVID-19 Outbreak has materially adversely affected our business operations
and financial condition, operating results and cash flow for the fiscal year 2020. However, as COVID-19
has been contained in the PRC since the second quarter of 2020, and the impact from COVID-19 has therefore been mitigated. Our production
of new e-bicycles resumed and we also accelerated research and development of new e-bicycles to meet the market demands. From the fiscal
year ended September 30, 2020, we developed more than 20 types of new e-bicycles, three of which comply with the New National Standard.
Further, due to increasing customer demands for the New National Standard e-bicycles and the steady
industry sentiment, and Tianjin Dilang’s acceptance of more orders from various exhibitions, revenues generated from sales of e-bicycles
has increased by $11,061,210 or 10,628% for the fiscal year ended September 30, 2020 as compared to the fiscal year ended September 30,
2019 and revenues generated from sales of e-bicycles has increased by $7,067,247 or 63% for the fiscal year ended September 30, 2021 as
compared to the fiscal year ended September 30, 2020.
Jiangsu Cenbird started to expand its wholesaler
channels in Changzhou and Wuxi with goals of “affordable e-bicycles with higher quality” and “100 stores in one city,
shared with value” since March 2020. Tianjin Dilang started “town and village full-coverage” activities to increase
the brand awareness since January 2020. We still continuously focus on expand business by attending various exhibitions.
Results of Operations
The following table sets forth a summary of our
consolidated statements of income for the fiscal years ended September 30, 2019, 2020 and 2021, respectively. This information should
be read together with our consolidated financial statements and related notes included elsewhere in this annual report. The results of
operations in any period are not necessarily indicative of our future trends.
Years Ended September 30, 2019, 2020 and 2021
|
|
For the fiscal years ended September 30,
|
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
1,371,201
|
|
|
$
|
15,243,282
|
|
|
$
|
23,422,006
|
|
Cost of revenues
|
|
|
(246,736
|
)
|
|
|
(13,704,248
|
)
|
|
|
(23,039,528
|
)
|
Gross profit
|
|
|
1,124,465
|
|
|
|
1,539,034
|
|
|
|
382,478
|
|
Selling and marketing expenses
|
|
|
(28,995
|
)
|
|
|
(385,722
|
)
|
|
|
(1,558,719
|
)
|
General and administrative expenses
|
|
|
(319,607
|
)
|
|
|
(1,081,346
|
)
|
|
|
(2,701,178
|
)
|
Total operating expenses
|
|
|
(348,602
|
)
|
|
|
(1,467,068
|
)
|
|
|
(4,259,897
|
)
|
Income (loss) from operations
|
|
|
775,863
|
|
|
|
71,966
|
|
|
|
(3,877,419
|
)
|
Total other income, net
|
|
|
265,200
|
|
|
|
378,395
|
|
|
|
80,774
|
|
Income (loss) from continuing operations before income tax expense
|
|
|
1,041,063
|
|
|
|
450,361
|
|
|
|
(3,796,645
|
)
|
Income tax (expense) benefit
|
|
|
(273,927
|
)
|
|
|
(116,063
|
)
|
|
|
419,405
|
|
Net income (loss) from continuing operations
|
|
|
767,136
|
|
|
|
334,298
|
|
|
|
(3,377,240
|
)
|
Income (loss) from discontinued operation, net of tax
|
|
|
1,424,301
|
|
|
|
(57,376
|
)
|
|
|
(36,404
|
)
|
Net income (loss)
|
|
|
2,191,437
|
|
|
|
276,922
|
|
|
|
(3,413,644
|
)
|
Net income (loss) from continuing operations
|
|
|
767,136
|
|
|
|
334,298
|
|
|
|
(3,377,240
|
)
|
Less: Net income (loss) attributable to non-controlling interests from continuing operations
|
|
|
403,334
|
|
|
|
129,748
|
|
|
|
(434,971
|
)
|
Net income (loss) attributable to our shareholders from continuing operations
|
|
|
363,802
|
|
|
|
204,550
|
|
|
|
(2,942,269
|
)
|
Income (loss) from discontinued operation, net of tax
|
|
|
1,424,301
|
|
|
|
(57,376
|
)
|
|
|
(36,404
|
)
|
Less: Net income attributable to non-controlling interests from discontinued operation
|
|
|
49,980
|
|
|
|
-
|
|
|
|
-
|
|
Net income (loss) attributable to our shareholders from discontinued operation
|
|
|
1,374,321
|
|
|
|
(57,376
|
)
|
|
|
(36,404
|
)
|
Net income (loss) attributable to our shareholders
|
|
$
|
1,738,123
|
|
|
$
|
147,174
|
|
|
$
|
(2,978,673
|
)
|
Segment Information
We
have determined that the Company operates in two operating segments for the fiscal years ended September 30, 2019, 2020 and 2021:
(i) battery cells and packs segment; and (ii) e-bicycle sales segment. The battery cells and packs segment engaged in selling battery
packs. The e-bicycle sales segment sells e-bicycles offline to regional exclusive distributors and wholesalers and on various online e-commerce
platforms to individual customers.
The following tables present the summary of each
reportable segment’s revenue and income, which are considered as segment operating performance measures, for the fiscal years ended
September 30, 2019, 2020 and 2021:
|
|
Fiscal year ended September 30, 2019
|
|
|
|
Battery cells
and packs
segment
|
|
|
E-bicycle
sales
segment
|
|
|
Total
segments
|
|
|
Others
|
|
|
Consolidated
|
|
Revenues from external customers*
|
|
|
1,253,569
|
|
|
|
104,080
|
|
|
|
1,357,649
|
|
|
|
13,552
|
|
|
|
1,371,201
|
|
Depreciation and amortization
|
|
|
-
|
|
|
|
(424
|
)
|
|
|
(424
|
)
|
|
|
(3,178
|
)
|
|
|
(3,602
|
)
|
Segment income (loss) before tax
|
|
|
1,119,568
|
|
|
|
32,994
|
|
|
|
1,152,562
|
|
|
|
(111,499
|
)
|
|
|
1,041,063
|
|
Segment gross profit margin
|
|
|
96
|
%
|
|
|
(2
|
%)
|
|
|
87
|
%
|
|
|
39
|
%
|
|
|
86
|
%
|
|
|
Fiscal year ended September 30,
2020
|
|
|
|
Battery cells
and packs
segment
|
|
|
E-bicycle
sales
segment
|
|
|
Total
segments
|
|
|
Others
|
|
|
Consolidated
|
|
Revenues from external customers*
|
|
|
3,148,156
|
|
|
|
11,165,290
|
|
|
|
14,313,446
|
|
|
|
929,836
|
|
|
|
15,243,282
|
|
Depreciation and amortization
|
|
|
(2,318
|
)
|
|
|
(82,896
|
)
|
|
|
(85,214
|
)
|
|
|
(466
|
)
|
|
|
(85,680
|
)
|
Segment income before tax
|
|
|
251,731
|
|
|
|
169,452
|
|
|
|
421,183
|
|
|
|
29,178
|
|
|
|
450,361
|
|
Segment gross profit margin
|
|
|
15
|
%
|
|
|
9
|
%
|
|
|
11
|
%
|
|
|
10
|
%
|
|
|
11
|
%
|
|
|
Fiscal year ended September 30, 2021
|
|
|
|
Battery cells
and packs
segment
|
|
|
E-bicycle
sales
segment
|
|
|
Total
segments
|
|
|
Others
|
|
|
Consolidated
|
|
Revenues from external customers*
|
|
|
4,288,366
|
|
|
|
18,232,537
|
|
|
|
22,520,903
|
|
|
|
901,103
|
|
|
|
23,422,006
|
|
Depreciation and amortization
|
|
|
(804
|
)
|
|
|
(139,501
|
)
|
|
|
(140,305
|
)
|
|
|
(329,543
|
)
|
|
|
(469,848
|
)
|
Segment income (loss) before tax
|
|
|
16,902
|
|
|
|
(2,034,515
|
)
|
|
|
(2,017,613
|
)
|
|
|
(1,779,032
|
)
|
|
|
(3,796,645
|
)
|
Segment gross profit margin
|
|
|
3.2
|
%
|
|
|
1.6
|
%
|
|
|
1.9
|
%
|
|
|
(4.4
|
%)
|
|
|
1.6
|
%
|
*
|
Please
refer to the analysis of net revenues in the paragraph headed “Components of Results of Operations” in this section.
|
Depreciation and amortization
The increase of depreciation and amortization
from the fiscal year ended September 30, 2019 to the fiscal year ended September 30, 2020 was primarily due to the increase from e-bicycle
sales segment. The depreciation and amortization increased by 2,279% to $85,680 for the fiscal year ended September 30, 2020 from $3,602
for the fiscal year ended September 30, 2019, representing a significant increase. The significant increase was consistent with the increase
of revenue from e-bicycle sales, and we purchased more equipment for e-bicycle manufacturing and quality testing.
The depreciation and amortization of e-bicycle
sales segment increased by 68% or $56,605 from the fiscal year ended September 30, 2020 to the fiscal year ended September 30, 2021, which
was consistent with the increase of revenue from e-bicycle sales. The depreciation and amortization of unallocated increased by $329,077
to $329,543 for the fiscal year ended September 30, 2021 from $466 for the same period in 2020, the increase was mainly due to the depreciation
of our charging piles equipment.
Segment income/loss before tax
The income before tax of battery cells and packs
segment decreased by $867,837 to $251,731 for the fiscal year ended September 30, 2020 from $1,119,568 for the fiscal year ended September
30, 2019, representing a significant decrease of approximately 78%. The significant decrease was primarily due to the revenue from battery
cell trading business decreased to $nil for the fiscal year ended September 30, 2020, which was recognized on a net basis.
The income before tax of battery cells and packs
segment decreased by $234,829 to $16,902 for the fiscal year ended September 30, 2021 from $251,731 for the fiscal year ended September
30, 2020, representing a significant decrease of approximately 93%. The loss was primarily due to a low profit margin of 3.2% for the
fiscal year ended September 30, 2021.
The income before tax of e-bicycle sales segment
increased by $136,458 to $169,452 for the fiscal year ended September 30, 2020 from $32,994 for the fiscal year ended September 2019,
representing a significant increase of approximately 414% due to a gradual increase of sale price of e-bicycles as the market demand increased
and a gradual decrease of unit cost of sales as the purchase volume increased during the fiscal year ended September 30, 2020.
We had a loss before tax of e-bicycle sales segment
of $2,034,515 for the fiscal year ended September 30, 2021, and an income before tax of $169,452 for the fiscal year ended September 30,
2020. The significant loss in 2021 fiscal year was primarily due to reduced unit price of e-bicycles and increased advertising in order
to increase our sales volume and market share.
We had a loss before tax of unallocated of $1,779,032
for the fiscal year ended September 30, 2021, and an income before tax of $29,718 for the fiscal year ended September 30, 2020. The loss
in 2021 fiscal year was primarily due to the expenditures of charging piles business, and the expensing of professional after the success
of our IPO.
Components of Results of Operations
Years Ended September 30, 2019, 2020 and 2021
Net revenues
The following table identifies the disaggregation
of our revenue from continuing operations and reportable segments for the fiscal years ended September 30, 2019, 2020 and 2021, respectively:
|
|
|
|
For the fiscal years ended
September 30,
|
|
|
|
Segment
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
Sales of batteries and battery packs
|
|
Battery cells and packs segment
|
|
|
1,253,569
|
|
|
|
3,148,156
|
|
|
|
4,288,366
|
|
Sales of e-bicycles
|
|
E-bicycle sales segment
|
|
|
104,080
|
|
|
|
11,165,290
|
|
|
|
18,232,537
|
|
Others
|
|
|
|
|
13,552
|
|
|
|
929,836
|
|
|
|
901,103
|
|
Net revenues
|
|
|
|
$
|
1,371,201
|
|
|
|
15,243,282
|
|
|
$
|
23,422,006
|
|
Our revenues from continuing operations for the
fiscal years ended September 30, 2019, 2020 and 2021 were $1,371,201, $15,243,282 and $23,422,006, respectively. The significant increase
in revenues from the fiscal year ended September 30, 2019 to the fiscal year ended September 30, 2020 were mainly driven by the increase
of sales of battery cells and package and sales of e-bicycles. The significant increase in revenues from the fiscal year ended September
30, 2020 to the fiscal year ended September 30, 2021 were mainly due to the increase of sales of e-bicycles by reducing our unit price
of e-bicycles and increasing advertising.
The sales of e-bicycles segment engaged in online
and offline sale. The sales of e-bicycles increased by 63.3% to $18,232,537 for the fiscal year ended September 30, 2021 from $11,165,290
for the fiscal year ended September 30, 2020. Since the business started in September 2019, for the long-term development of the business,
we have built up a production line for manufacturing Dilang e-bicycles. We also target for a rapid growth in the offline e-bicycles sales
market. As such, our main sales channels are through our regional exclusive distributor and wholesaler. We also sell on internet distribution
channels, such as Taobao, and Pinduoduo, and our self-developed Yidianxing application.
The battery cells and packs segment are engaged
in the selling of battery packs. The revenue from sales of battery packs for the fiscal year ended September 30, 2020 was $3,148,156,
as compared to $1,253,569 for the fiscal year ended September 30, 2019 as we take efforts to seize more market shares.
The revenue from sales of battery packs for the
fiscal year ended September 30, 2021 was $4,288,366, as compared to $3,148,156 for the fiscal year ended September 30, 2020. The increase
was mainly due to the increase of demand from our long-term customers.
Cost of revenues
Cost of revenues consists primarily of manufacturing
and purchase cost of e-bicycles, purchase cost of battery packs, depreciation, maintenance, and other overhead expenses.
Our cost of revenues increased by $13,457,512,
or 5,454%, to $13,704,248 for the fiscal year ended September 30, 2020 from $246,736 for the fiscal year ended September 30, 2019. The
increase of percentage of the cost kept synchronized with the increased trend of revenue.
Our cost of revenues significantly increased by
$9,335,280, or approximately 68%, to $23,039,528 for the fiscal year ended September 30, 2021 from $13,704,248 for the fiscal year ended
September 30, 2020, which was primarily due to the increase of manufacturing and purchase cost of e-bicycles for sales of e-bicycles,
and purchase cost of battery packs for sales of battery packs. We also provided sales rebate to distributor and wholesalers, which result
in the increase of our cost of revenues.
Gross profit
Gross profit for the fiscal years ended September
30, 2019, 2020 and 2021 was $1,124,465, $1,539,034 and $382,478, representing 82%, 10% and 2% of net revenues, respectively.
Gross profit margin for the fiscal year ended
September 30, 2020 significantly decreased by 88% primarily due to the fact that we had no revenue in battery cells trading business which
was recognized on a net basis and with a high gross profit ratio, while revenue in battery cell trading accounted for 87% of our total
net revenue for the year ended September 30, 2019.
Gross profit margin for the fiscal year ended
September 30, 2021 decreased from 10% to 2%, primarily due to the low margin of sales of e-bicycles, which is accounting for a large proportion
of our total revenue, thus, the total gross profit rate converged with that of sales of e-bicycles. In order to expand sales volume and
increase market share, we reduced unit price of e-bicycle and provided sales rebate to distributor and wholesalers, which resulted in
the low margin of sales of e-bicycles for the year ended September 30, 2021.
Selling and marketing expenses
Our selling and marketing expenses primarily consist
of salaries and welfare expenses, advertising expenses, and freight expenses. Our selling and marketing expenses increased by $356,727,
or approximately 1,230%, to $385,722 for the fiscal year ended September 30, 2020 from $28,995 for the fiscal year ended September 30,
2021, was primarily due to the more salespersons were hired with the business expansion on sales of e-bicycles, which is line with the
increase in our net revenue. Our selling and administrative expenses increased by $1,172,977, or approximately 304%, to $1,558,719 for
the fiscal year ended September 30, 2021 from $358,722 for the fiscal year ended September 30, 2020, was primarily due to more salespersons
were hired and more promotion were made for expanding sales volume and increasing market share of e-bicycles.
General and administrative expenses
Our general and administrative expenses significantly
increased by $761,739, or approximately 238%, to $1,081,346 for the fiscal year ended September 30, 2020 from $319,607 for the fiscal
year ended September 30, 2019. Such a significant increase was attributed to the significant increase of research and development expenses
for designing of Dilang and Cenbird e-bicycle models.
Our general and administrative expenses significantly
increased by $1,619,832, or approximately 150%, to $2,701,178 for the fiscal year ended September 30, 2021 from $1,081,346 for the fiscal
year ended September 30, 2020. The increase was attributed to the significant increase of the expenses of Liability Insurance of Directors,
consulting fee for the acquisition of Tianjin Jiahao and research and development fee and staff expenses.
Income tax expense/benefit
The PRC enterprise income tax (“EIT”)
is calculated based on the taxable income determined under the applicable EIT Law and its implementation rules, which became effective
on January 1, 2008. The EIT Law applies a uniform 25% income tax rate for all resident enterprises in China. Income tax expense amounted
to $273,927 and $116,063 for the fiscal years ended September 30, 2019 and 2020, respectively and we also incurred an income tax benefit
of $419,405 for the fiscal years ended September 30, 2021. The income tax benefit was generated from the deferred tax asset due to a net
loss recorded in 2021 and was partially offset by the deferred tax asset valuation allowance.
Net income/loss from continuing operations
Our income from continuing operations for the
fiscal years ended September 30, 2019 and 2020 was $767,136 and $334,298, respectively. In addition, we incurred a net loss of $3,377,240
from continuing operations for the fiscal year ended September 30, 2021.
Income/loss from discontinued operation, net
of tax
Our income from discontinued operation was $1,424,301
for the fiscal year ended September 30, 2019, and our loss from discontinued operation was $57,376 and $36,404 for the fiscal year ended
September 30, 2020 and 2021, respectively. We made a profit from discontinued operation for the fiscal year ended September 30, 2019
mainly due to the sale of remaining self-manufactured battery cells. We recorded losses for the fiscal years ended September 30, 2020
and 2021 primary due to the decrease of rental revenue. The decrease was due to the decline of customers’ demands and the termination
of the rental contract with our sublease under the impact of COVID-19.
Net income/loss
As a result of the foregoing, our net income for
the fiscal years ended September 30, 2019 and 2020, was $2,191,437 and $276,922 respectively. We recorded a net loss of $3,413,644 for
the fiscal years ended September 30, 2021.
Liquidity and Capital Resources
To date, we have financed our operations primarily
through capital contributions, initial public offering, registered direct offering and from operations. We received net proceeds of approximately
$10.85 million in our initial public offering in January, 2021 and received net proceeds of approximately $10.88 million in the previous
registered direct offering in June 2021. We plan to support our future operations primarily from cash generated from our operations. We
may, however, require additional cash due to business expansion or other future developments. If our future cash is insufficient to meet
our requirements, we may further to seek to issue debt or equity securities or obtain additional credit facilities.
As of September 30, 2021, we had cash and cash
equivalents of $4,774,531 and a total working capital of $18,204,440, $18,921,664 of which was from continuing operations and the current
liabilities exceeds the current assets by $717,224 for discontinued operation.
Although we consolidate the results of our VIE
and its subsidiaries, we only have access to cash balances or future earnings of our VIE and its subsidiaries through our VIE arrangements
with our VIE.
Current foreign exchange and other regulations
in the PRC may restrict our PRC entities in their ability to transfer their net assets to us and our subsidiary. However, we have no present
plans to declare a dividend and we plan to retain our retained earnings to continue to grow our business. In addition, these restrictions
had no impact on our ability to meet our cash obligations as all of our current cash obligations are due within the PRC.
To utilize the proceeds from the offering in January
2021 and June 2021, we may make additional capital contributions to our PRC subsidiary, establish new PRC subsidiaries and make capital
contributions to these new PRC subsidiaries, or make loans to the PRC subsidiaries. However, most of these uses are subject to PRC regulations.
Foreign direct investment and loans must be approved by and/or registered in accordance with the Foreign Exchange Administration Regulations
(1996), as amended in 2008. The total amount of loans we can make to our PRC subsidiary cannot exceed statutory limits and must be registered
with the local counterpart of SAFE. The statutory limit for the total amount of foreign debts of a foreign-invested company is the difference
between the amount of total investment as approved by the Ministry of Commerce or its local counterpart and the amount of registered capital
of such foreign-invested company.
We are permitted under PRC laws and regulations
to provide funding to our PRC subsidiary only through loans or capital contributions, and to our consolidated VIE only through loans,
and only if we satisfy the applicable government registration and approval requirements. The relevant filing and registration processes
for capital contributions to our PRC subsidiary typically take approximately eight weeks to complete. The filing and registration processes
for loans either to our PRC subsidiary or to our consolidated VIE typically take approximately four weeks or longer to complete. While
we currently see no material obstacles to completing the filing and registration procedures with respect to future capital contributions
to our PRC subsidiary and loans to our PRC subsidiary or our consolidated VIE, we cannot assure you that we will be able to complete these
filings and registrations on a timely basis, or at all. See “Item 3. Key Information — D. Risk Factors—Risks Related
to Doing Business in China—PRC regulation on loans to, and direct investment in, PRC entities by offshore holding companies and
governmental control in currency conversion may delay or prevent us from using the proceeds of this offering to make loans to or make
additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to
fund and expand our business.’’ Additionally, while there is no statutory limit on the amount of capital contribution that
we can make to our PRC subsidiaries, loans provided to our PRC subsidiary and consolidated VIE in the PRC are subject to certain statutory
limits. We are able to use all of the net proceeds from offering for investment in our PRC operations by funding our PRC subsidiary through
capital contributions which is not subject to any statutory limit on the amount under PRC laws and regulations. We have used $10.43 million
of the net proceeds for the acquisition of Tianjin Jiahao, and expect to continue using the net proceeds in the PRC in the form of Renminbi
and, therefore, our PRC subsidiary and consolidated VIE will need to convert any capital contributions or loans from U.S. dollars into
Renminbi in accordance with applicable PRC laws and regulations.
Cash Flows
The following table summarizes our cash flows
for the periods indicated:
|
|
For the fiscal years ended
September 30,
|
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
Net cash (used in) provided by operating activities, continuing operations
|
|
$
|
(8,038,610
|
)
|
|
$
|
3,895,871
|
|
|
$
|
(6,871,446
|
)
|
Net cash provided by used in operating activities, discontinued operation
|
|
|
5,336,443
|
|
|
|
128,898
|
|
|
|
615,011
|
|
Net cash used in investing activities, continuing operations
|
|
|
(1,048,998
|
)
|
|
|
(4,485,811
|
)
|
|
|
(11,436,429
|
)
|
Net cash (used in) provided by investing activities, discontinued operation
|
|
|
(873,328
|
)
|
|
|
1,135,964
|
|
|
|
399,175
|
|
Net cash provided (used in) by financing activities, continuing operations
|
|
|
8,217,985
|
|
|
|
(4,004,361
|
)
|
|
|
22,764,076
|
|
Effect of exchange rate changes
|
|
|
12,778
|
|
|
|
36,324
|
|
|
|
78,968
|
|
Net increase (decrease) in cash, cash equivalents, and restricted
cash
|
|
$
|
3,606,270
|
|
|
$
|
(3,293,115
|
)
|
|
$
|
5,549,355
|
|
Years ended September 30, 2019, 2020 and 2021
Operating Activities
Net cash used in continuing operating activities
was $6,871,446 for the fiscal year ended September 30, 2021, primarily derived from (a) a net loss from continuing operations of $3,377,240,
adjusted by depreciation and amortization of $469,848; (b) an increase of advance to suppliers of $4,514,366 was primarily due to prepayments
made for our e-bicycles sales business; c) an increase of amount due from related parties of $3,062,904 was primarily due to prepayments
made for our e-bicycles sales business to related parties, and offset by a) an increase of accrued expenses and other payables of $3,026,677,
and b) a decrease of note receivable of $1,736,538 due to the collection of receivable outstanding.
Net cash provided by discontinued operating activities
was $615,011 for the fiscal year ended September 30, 2021, primarily derived from (a) a net loss from discontinuing operations of $36,404,
adjusted by depreciation and amortization of $292,739; (b) a decrease of accounts receivable of $328,631; (c) a decrease of prepaid expense
and other current assets of $363,640 and was offset by a decrease of accrued expenses and other payable of $298,237.
Net cash provided by continuing operating activities
was $3,895,871 for the fiscal year ended September 30, 2020, mainly derived from (a) a net income from continuing operations of $334,298,
adjusted by depreciation and amortization of $85,680; (b) a decrease of advance to suppliers of $4,310,499; (c) an increase of accrued
expenses and other payables of $2,510,145; (d) a decrease of inventories of $1,568,669, and e) a decrease of amount due from related parties
of $1,839,439, and offset by a) an increase of accounts receivable of $6,093,585, and (b) an increase of note receivable of $1,612,995.
The decrease in advance to suppliers and amount due from related parties were primarily due to delivery of e-bicycles from the suppliers
and related parties during the fiscal year ended September 30, 2020 and we managed to obtain credit term from suppliers as we increased
purchase for the fiscal year ended September 30, 2020. The increase in accrued expenses and other payables were primarily due to the increase
of value-added tax payable, which was in line with the increase of our revenue. The increase in accounts receivable and note receivable
was primarily due to the increase of sales of e-bicycles.
Net cash provided by discontinued operating activities
was $128,898 for the fiscal year ended September 30, 2020, mainly derived from (a) a net loss from discontinued operation of $57,376,
adjusted by depreciation and amortization of $933,176 and the gain from the disposal of property, plants and equipment of $542,320; and
(b) an increase of accounts receivables of $232,896.
Net cash used in continuing operating activities
was $8,038,610 for the fiscal year ended September 30, 2019, mainly derived from (a) an increase of advance to suppliers of $7,105,732;
(b) an increase of amount due from related parties of $4,971,495; (c) an increase of inventories of $450,926; (d) a decrease of accounts
payable of $404,654; and (e) a decrease of accrued expenses and other payables of $2,538,098; offset by (a) a net income from continuing
operations of $767,136; (b) a decrease of accounts receivable of $4,092,954; (c) a decrease of prepaid expenses and other current assets
of $2,289,075; and (d) an increase of income tax payable of $138,888. The increase in advance to suppliers and amount due from related
parties were primarily due to the increase in purchases of e-bicycles for our e-bicycles sales business, which was launched in August
2019. The increase in inventories was primarily due to the increase in purchase of raw materials and finished goods for businesses expansion.
The decrease in accounts payable was because some suppliers has shortened their credit terms and the Company has made payments to them
accordingly. The decrease in accrued expenses and other payables were primarily due to the payment in fiscal year 2019 for the copper
foil transactions occurred in August 2018. The decrease in accounts receivable was primarily due to the shortened credit term given to
our sublease agents and we accelerated the collection of accounts receivable in order to satisfy our working capital requirement. The
decrease in prepaid expenses and other current assets was primarily due to the full collection of receivables from our copper foil trading
business for the fiscal year ended September 30, 2019, which was partially offset by the increase of other receivables from the sale of
our battery production line. The increase in the income tax payable was primarily due to the increase in the taxable income.
Net cash provided by discontinued operating activities
was $5,336,443 for the fiscal year ended September 30, 2019, mainly derived from (a) a net income from discontinued operation of $1,424,301,
adjusted by depreciation and amortization of $1,009,604, the loss from the disposal of property, plants and equipment of $151,298; and
(b) a decrease of inventories of $1,966,958; (c) a decrease of prepaid expenses and other current assets of $397,578. The decrease in
inventories was primarily due to the remaining inventories related to self-manufactured battery cells sold after the termination of the
business. The decrease in prepaid expenses and other current assets was primarily due to the deductible value-added tax declined for the
fiscal year ended September 30, 2019 as there was no purchase for our battery cells manufacturing business.
Investing Activities
For the fiscal year ended September 30, 2021,
net cash used in investing activities for the continuing operations was $11,436,429, which was primarily due to purchases of property,
plants and equipment of $6,723,468 and intangible asset of $4,497,426, which was primarily due to the purchase of the factory and land
use right from the acquisition of Tianjin Jiahao, which was partially offset by the proceeds from disposal of property, plants and equipment
of $453,652.
For the fiscal year ended September 30, 2021,
net cash provided by investing activities for the discontinued operations were $399,175 which was primarily due to a proceed from disposal
of equipment.
For the fiscal year ended September 30, 2020,
net cash used in investing activities for the continuing operations was $4,485,811, consisted of (a) the purchase of property, plants
and equipment in the amount of $2,344,667; and (b) purchase of short-term investments in the amount of $2,141,144.
For the fiscal year ended September 30, 2020,
net cash provided by investing activities for the discontinuing operations was $1,135,964, mainly consisted of a proceed from disposal
of equipment.
For the fiscal year ended September 30, 2019,
net cash used in investing activities for the continuing operations was 1,048,998 mainly consisted of the purchase of equipment in the
amount of $1,255,353.
For the fiscal year ended September 30, 2019,
net cash used in investing activities for the discontinued operation was $873,328, consisted of the purchase of equipment in the amount
of $1,890,916, which was offset by the proceeds from disposal of property, plants and equipment in the amount of $1,017,588
Financing Activities
For the fiscal year ended September 30, 2021,
net cash provided by financing activities for the continuing operations was $22,764,076, primarily consisted of (a) cash receipts from
equity issuance in the amount of $20,947,182; and (b) the collection of loan from a shareholder in the amount of $1,821,847.
For the fiscal year ended September 30, 2020,
net cash used in financing activities for the continuing operations was $4,004,361, mainly consisted of (a) repayment of the loan to related
parties in the amount of $4,289,426 and (b) a loan to a shareholder in the amount of $377,634, which was offset by a collection from a
shareholder in the amount of $391,116.
For the fiscal year ended September 30, 2019,
net cash provided by financing activities for the continuing operations was $8,217,985, mainly consisted of proceeds from interest-free
borrowings from shareholders in the amount of $4,374,249, and a capital contribution in the amount of $4,261,636.
For the fiscal years ended September 30,2019,
2020 and 2021, there were no cash flows from financing activities for the discontinued operations.
Trend Information
Other than as disclosed in “Item
3. Key Information — D. Risk Factors—Risks Related to Our Business and Industry—The outbreak of the recent COVID-19
in the PRC may materially and adversely affect our business, financial condition and results of operations” in this annual report,
we are not aware of any trends, uncertainties, demands, commitments or events that are reasonably likely to have a material effect on
our net revenues, income from continuing operations, profitability, liquidity or capital resources, or that would cause reported financial
information not necessarily to be indicative of future operating results or financial condition.
Off-Balance Sheet Arrangements
We did not have during the periods presented,
and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial
partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the
purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Tabular Disclosure of Contractual Obligations
Commitments and Contingencies
From time to time, we may be subject to certain
legal proceedings, claims and disputes that arise in the ordinary course of business. Although the outcomes of these legal proceedings
cannot be predicted, we do not believe these actions, in the aggregate, will have a material adverse impact on its financial position,
results of operations or liquidity.
Operating Lease
Our operating lease contractual obligations as
of September 30, 2021 were as follows:
|
|
Payments
due by
period
|
|
Year ending September 30,
|
|
|
|
|
2022
|
|
$
|
219,020
|
|
2023
|
|
|
141,527
|
|
2024
|
|
|
83,807
|
|
2025
|
|
|
54,319
|
|
2026 and thereafter
|
|
|
-
|
|
Total
|
|
$
|
498,673
|
|
Other than those shown above, we did not have
any significant capital and other commitments, long-term obligations, or guarantees as of September 30, 2021.
Critical Accounting Policies
(a) Basis of presentation. The accompanying consolidated
financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP”). The consolidated financial statements include the financial statements of EZGO, its subsidiaries, its VIE and its VIE’s
subsidiaries for which EZGO is the primary beneficiary. All inter-company transactions and balances have been eliminated upon consolidation.
(b) Use of estimates. The preparation of consolidated
financial statements in conformity with U.S. GAAP requires the Company’s management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the reporting period and accompanying notes, including allowance for
doubtful accounts, the useful lives of property, plants and equipment, impairment of short-term investments and long-lived assets, valuation
allowance for deferred tax assets and uncertain tax opinions. Actual results could differ from those estimates.
(c) Comparability due to discontinued operation.
Certain accounts in the Consolidated Statements of Operations and Comprehensive Income (Loss) for the fiscal years ended September 30,
2019, 2020 and 2021, and balances in the Consolidated Balance Sheet as of September 30, 2020 and 2021, and cash flows in the Consolidated
Statements of Cash Flows for the fiscal years ended September 30, 2019, 2020 and 2021, and related notes have been retrospectively adjusted
to reflect the effect of discontinued operations. See Note 13 for details of discontinued operations.
(d) Discontinued operation. A discontinued operation
may include a component of an entity or a group of components of an entity, or a business or nonprofit activity. A disposal of a component
of an entity or a group of components of an entity is required to be reported in discontinued operation if the disposal represents a strategic
shift that has (or will have) a major effect on an entity’s operations and financial results when any of the following occurs: (1)
the component of an entity or group of components of an entity meets the criteria to be classified as held for sale; (2) the component
of an entity or group of components of an entity is disposed of by sale; (3) the component of an entity or group of components of an entity
is disposed of other than by sale (for example, by abandonment or in a distribution to owners in a spinoff).
For any component classified as held for sale
or disposed of by sale or other than by sale that qualify for presentation as a discontinued operation in the period, the Company has
reported the assets and liabilities of the discontinued operation as current asset of discontinued operation, and current liabilities
of discontinued operation in the Consolidated Balance Sheets as of September 30, 2020 and 2021. The results of operations of discontinued
operation for the fiscal years ended September 30, 2019, 2020 and 2021 have been reflected separately in the Consolidated Statements of
Income as a single line item for all periods presented in accordance with U.S. GAAP. Cash flows from discontinued operation of the three
categories for the fiscal years ended September 30, 2019, 2020, and 2021 were separately presented in the Consolidated Statements of Cash
Flows for all periods presented in accordance with U.S. GAAP.
(e) Fair Value Measurement. The Company applies
Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures which defines fair value, establishes
a framework for measuring fair value and expands financial statement disclosure requirements for fair value measurements.
ASC Topic 820 defines fair value as the price
that would be received from the sale of an asset or paid to transfer a liability (an exit price) on the measurement date in an orderly
transaction between market participants in the principal or most advantageous market for the asset or liability.
ASC Topic 820 specifies a hierarchy of valuation
techniques, which is based on whether the inputs into the valuation technique are observable or unobservable. The hierarchy is as follows:
Level 1 inputs to the valuation methodology are
quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 inputs to the valuation methodology include
quoted prices for identical or similar assets and liabilities in active markets or in inactive markets, and inputs that are observable
for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
Level 3 inputs to the valuation methodology are
unobservable and significant to the fair value.
The carrying amount of our financial instruments
approximate their fair values because of their short-term nature. The Company’s financial instruments include cash, short-term investments,
accounts receivable, notes receivable, amount due from related parties, amount due to related parties, short-term borrowings, and accounts
payable and advances from customers.
(f) Cash and cash equivalents. Cash and cash equivalents
consist of cash on hand, bank deposits and short-term, highly liquid investments that are readily convertible to known amounts of cash,
and have insignificant risk of changes in value related to changes in interest rates and have original maturities of three months or less
when purchased.
(g) Restricted Cash. Restricted cash represents bank deposits with designated use, which cannot be withdrawn without certain approval
or notice.
As of September 30, 2020 and 2021, the Company
had restricted bank deposits of $17,932 and $1,115,354, respectively. The balance as of September 30, 2020 represented the restricted
bank deposits in the bank account, which cannot be withdrawn or used without the bank’s approval. The balances as of September 30,
2021 mainly represented the restricted deposits in two escrow account set up by the Company with two third-party escrow agents respectively
in the United States. The Company funded such account with the public offering on the Nasdaq Capital Market (“Nasdaq”) that
may be utilized to fund any bona fide indemnification claims. All funds cannot be withdrawn or used until the applicable period expires.
(h) Short-term investments. Short-term investments
include wealth management product and convertible debt instrument, which are classified as available-for-sale debt investments in accordance
with ASC topic 320 (“ASC 320”), Investments—Debt Securities. Short-term investments are measured at fair value and interest
income is recognized in earnings. The unrealized gains or losses from the changes in fair values are reported net of tax in accumulated
other comprehensive income until realized.
The Company reviews available-for-sale debt investments
for other-than-temporary impairment (“OTTI”) based on the specific identification method. The Company considers available
quantitative and qualitative evidence in evaluating potential impairment of its investments. If the cost of an investment exceeds the
investment’s fair value, the Company considers, among other factors, general market conditions, expected future performance of the
investees, the duration and the extent to which the fair value of the investment is less than the cost, and the Company’s intent
and ability to hold the investment. OTTI, if any, is recognized as loss in the Consolidated Statements of Income. For the fiscal years
ended September 30, 2019, 2020 and 2021, the Company did not record any OTTI.
(i) Accounts receivable, net are stated at the
original amount less an allowance for doubtful receivables, if any, based on a review of all outstanding amounts at period end. An allowance
is also made when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms
of the receivables. The Company analyzes the aging of the customer accounts, coverage of credit insurance, customer concentrations, customer
creditworthiness, historical and current economic trends and changes in its customer payment patterns when evaluating the adequacy of
the allowance for doubtful accounts. For the fiscal years ended September 30, 2019, 2020 and 2021, the Company recorded bad debt expense
of $nil, $20,790, and $1,321, respectively, against its accounts receivable.
(j) Inventories, primarily consisting of the raw
materials purchased by the Company for battery packs assembling and e-bicycles production, and finished goods including battery packs
and e-bicycles, are stated at the lower of cost or net realizable value. Cost of inventory is determined using weighted-average method.
Where there is evidence that the utility of inventories, in their disposal in the ordinary course of business, will be less than cost,
whether due to physical deterioration, obsolescence, changes in price levels, or other causes, the inventories are written down to net
realizable value. The write-downs recognized for the inventories for the fiscal years ended September 30, 2019, 2020 and 2021 is $nil,
$nil and $114,964.
(k) Advances to suppliers refer to advances for
purchase of materials or other service agreements, which are applied against accounts payable when the materials or services are received.
The Company reviews a supplier’s credit history and background information before advancing a payment. If the financial condition
of its suppliers were to deteriorate, resulting in an impairment of their ability to deliver goods or provide services, the Company would
provide allowance for such amount in the period when it is considered impaired. For the fiscal years ended September 30, 2019, 2020 and
2021, the Company provided bad debt expense of $83,370, $nil, and $nil, respectively, against advance to suppliers.
(l) Property, plants and equipment, net. Property,
plants and equipment are stated at cost less accumulated depreciation and depreciated on a straight-line basis over the estimated useful
lives of the assets. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its intended use.
The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired
or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in
income/loss in the year of disposition. Estimated useful lives are as follows:
|
|
Estimated
Useful Life
|
Building
|
|
20 years
|
Equipment for rental business
|
|
2.5-5 Years
|
Production line for e-bicycles
|
|
5-10 Years
|
Furniture, fixtures and office equipment
|
|
3-5 Years
|
Vehicles
|
|
4-10 Years
|
(m) Land use rights are recorded at cost less
accumulated amortization. Amortization is provided on straight-line basis over the useful life of land use right. The land use right has
a term of 36.5 years and will expire on December 4, 2057.
(n) Impairment of Long-lived Assets. In accordance
with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be fully recoverable. The Company recognizes an impairment loss when the sum of expected undiscounted
future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s
estimated fair value and its carrying amount. The Company did not record any impairment charge for the fiscal years ended September 30,
2019, 2020 and 2021.
(o) Equity investments without readily determinable
fair values are measured and recorded using a measurement alternative that measures the securities at cost minus impairment, if any, plus
or minus changes resulting from qualifying observable price changes in accordance with ASC topic 321, Investments – Equity Securities.
(p) Value Added Tax. EZGO’s China subsidiaries,
VIE and VIE’s subsidiaries are subject to value-added tax (“VAT”) for providing services and sales of products.
Revenue from providing services and sales of products
is generally subject to VAT at applicable tax rates, and subsequently paid to PRC tax authorities after netting input VAT on purchases.
The excess of output VAT over input VAT is reflected in accrued expenses and other payables. The Company reports revenue net of PRC’s
VAT for all the periods presented in the Consolidated Statements of Income.
(q) The Company adopted ASU 2014-09, Revenue
from Contracts with Customers (ASC Topic 606), starting October 1, 2017 using the modified retrospective method for the revenue from sales
of self-manufactured battery cell, battery pack and e-bicycles and battery cell trading. The Company applied ASC Topic 840, Leases,
for the revenue from rentals of lithium batteries and e-bicycles.
The core principle of ASC Topic 606 is that a
company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that
core principle:
Step 1: Identify the contract with the customer
Step 2: Identify the performance obligations in
the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the
performance obligations in the contract
Step 5: Recognize revenue when the company satisfies
a performance obligation
Revenue recognition policies are discussed as
follows:
Revenue from sales of self-manufactured battery
cell, battery pack and e-bicycles
The Company sells products to different customers,
primarily including sale of self-manufactured battery cells (see Note 13 Discontinued Operation), self-assembled battery packs and sale
of e-bicycles. The Company presents the revenue generated from its sales of products on a gross basis as the Company is a principal. The
revenue is recognized at a point in time when the Company satisfies the performance obligation by transferring promised product to a customer
upon acceptance by customers.
Revenue from battery cell trading
Revenue from battery cell trading is recognized
on a net basis as the Company arranges the provision of products through third parties and does not control the specified products provided
by the third parties before that products are transferred to the customers, and therefore, the Company acts as an agent. The revenue is
recognized at a point in time when the Company satisfies performance obligations by arranging the transfer of a promised product to a
customer and measured at fixed consideration which is determined as the difference between the sales price that the Company expects to
receive in exchange for arranging promised products to the customer and the settlement price with the third-party suppliers.
Contract liabilities primarily consist of advances
from customers, which comprises unamortized lithium batteries. As of September 30, 2020 and 2021, the Company recognized advances from
customers amounted to $154,554 and $94,899, respectively.
The revenue from sales of self-manufactured battery
cells and lithium batteries and e-bicycles services via sublease and its own application named Yidianxing are revenue from the Company’s
discontinued operation, and are represented separately in the Consolidated Statements of Income for the fiscal years ended September 30,
2019, 2020 and 2021 (see Note 13 Discontinued Operation). The following table identifies the disaggregation of the Company’s revenue
from continuing operations for the fiscal years ended September 30, 2019, 2020 and 2021, respectively:
|
|
For the fiscal years ended
September 30,
|
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
Revenues from continuing operations:
|
|
|
|
|
|
|
|
|
|
Sales of battery packs and e-bicycles
|
|
$
|
171,464
|
|
|
$
|
14,313,446
|
|
|
$
|
22,520,903
|
|
Battery cell trading
|
|
|
1,186,185
|
|
|
|
-
|
|
|
|
-
|
|
Others
|
|
|
13,552
|
|
|
|
929,836
|
|
|
|
901,103
|
|
Net revenues
|
|
$
|
1,371,201
|
|
|
$
|
15,243,282
|
|
|
$
|
23,422,006
|
|
Timing of revenue recognition may differ from
the timing of invoicing to customers. Accounts receivable represent revenue recognized for the amounts invoiced and/or prior to invoicing
when the Company has satisfied its performance obligation and has unconditional right to the payment. The Company has no contract assets
as of September 30, 2020 and 2021.
The Company applied a practical expedient to expense
costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. The Company
has no material incremental costs of obtaining contracts with customers that the Company expects the benefit of those costs to be longer
than one year.
(r) Cost of Revenue. Cost of revenue consists
primarily of cost of products, labor cost, depreciation, maintenance, and other overhead expenses.
(s) Income taxes. The Company accounts for income
taxes using the asset/liability method prescribed by ASC 740 Income Taxes. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that
will be in effect in the period in which the differences are expected to reverse. The Company records a valuation allowance to offset
deferred tax assets if, based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred
tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that
includes the enactment date.
The provisions of ASC 740-10-25, “Accounting
for Uncertainty in Income Taxes,” prescribe a more-likely-than-not threshold for consolidated financial statement recognition and
measurement of a tax position taken (or expected to be taken) in a tax return. This interpretation also provides guidance on the recognition
of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest
and penalties associated with tax positions, and related disclosures. The Company’s operating subsidiaries in PRC are subject to
examination by the relevant tax authorities. According to the PRC Tax Administration and Collection Law, the statute of limitations is
three years if the underpayment of taxes is due to computational errors made by the taxpayer or the withholding agent. The statute of
limitations is extended to five years under special circumstances, where the underpayment of taxes is more than RMB100,000 ($14,138).
In the case of transfer pricing issues, the statute of limitation is ten years. There is no statute of limitation in the case of tax evasion.
Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred.
(t) The reporting currency of the Company is the
U.S. dollar (“USD” or “$”). The functional currency of subsidiaries, VIE and VIE’s subsidiaries located
in China is the Chinese Renminbi (“RMB”), the functional currency of subsidiaries located in Hong Kong is the Hong Kong dollars
(“HK$”). For the entities whose functional currency is the RMB and HK$, result of operations and cash flows are translated
at average exchange rates during the period, assets, liabilities and receivables from a shareholder in equity are translated at the unified
exchange rate at the end of the period, and except for receivables from a shareholder, other equity items are translated at historical
exchange rates. As a result, amounts relating to assets and liabilities reported on the statements of cash flows may not necessarily agree
with the changes in the corresponding balances on the balance sheets. Translation adjustments are reported as foreign currency translation
adjustment and are shown as a separate component of other comprehensive loss in the consolidated statements of comprehensive income.
Transactions denominated in foreign currencies
are translated into the functional currency at the exchange rates prevailing on the transaction dates. Assets and liabilities denominated
in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date with any
transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional
currency are included in the results of operations as incurred.
The Consolidated Balance Sheets amounts, with
the exception of equity, on September 30, 2020 and 2021 were translated at RMB6.7896 to $1.00 and at RMB6.4434 to $1.00, respectively.
Equity accounts were stated at their historical rates. The average translation rates applied to Consolidated Statements of Income and
Cash Flows for the fiscal years ended September 30, 2019, 2020 and 2021 were RMB6.8698 to $1.00, RMB7.0056 to $1.00 and RMB6.5072 to $1.00,
respectively.
(u) Non-controlling Interest. A non-controlling
interest in a subsidiary of the Company represents the portion of the equity (net assets) in the subsidiary not directly or indirectly
attributable to the Company. Non-controlling interests are presented as a separate component of equity on the Consolidated Balance Sheets
and net income and other comprehensive income attributable to non-controlling shareholders are presented as a separate component on the
Consolidated Statements of Income.
(v) Segment Reporting. The Company has organized
its operations into two operating segments. The segments reflect the way the Company evaluates its business performance and manages its
operations by the Company’s chief operating decision maker (“CODM”) for making decisions, allocating resources and assessing
performance. The Company’s CODM has been identified as the chief executive officer, who reviews consolidated results when making
decisions about allocating resources and assessing performance of the Company.
The Company has determined that it operates in
two operating segments: (1) Battery cells and packs segment, and (2) e-bicycles sales segment. The Company’s reportable segments
are strategic business units that offer different products and services. They are managed separately because each business requires different
technology and marketing strategies.
As the Company’s long-lived assets are substantially
all located in the PRC and all of the Company’s revenue and expense are derived from within the PRC, no geographical segments are
presented.
(w) Net Income (loss) Per Share. Basic income
(loss) per share is computed by dividing net income (loss) attributable to ordinary shareholders by the weighted average number of ordinary
shares outstanding for the period. Diluted income (loss) per share is calculated by dividing net income (loss) attributable to ordinary
shareholders as adjusted for the effect of dilutive ordinary equivalent shares, if any, by the weighted average number of ordinary and
dilutive ordinary equivalent shares outstanding during the period. Potentially dilutive shares are excluded from the computation if their
effect is anti-dilutive.
(x) Comprehensive Income (loss). Comprehensive
income (loss) is comprised of the Company’s net income and other comprehensive income (loss). The components of other comprehensive
(income) loss consist of foreign currency translation adjustments and unrealized gain on available for sale short term investments.
(y) Commitments and Contingencies. Liabilities
for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable
that a liability has been incurred and the amount can be reasonably estimated. If a potential material loss contingency is not probable
but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate
of the range of possible loss if determinable and material, is disclosed. Legal costs incurred in connection with loss contingencies are
expensed as incurred.
(z) Recent Accounting Standards. The Company is
an “emerging growth company” (“EGC”) as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS
Act”). Under the JOBS Act, EGC can delay adopting new or revised accounting standards issued subsequent to the enactment of the
JOBS Act until such time as those standards apply to private companies.
In February 2016, FASB issued ASU No. 2016-02,
Leases (Topic 842). The guidance supersedes existing guidance on accounting for leases with the main difference being that operating leases
are to be recorded in the statement of financial position as right-of-use assets and lease liabilities, initially measured at the present
value of the lease payments. For operating leases with a term of 12 months or less, a lessee is permitted to make an accounting policy
election not to recognize lease assets and liabilities. In July 2018, ASU 2016-02 was updated with ASU 2018-11, Targeted Improvements
to ASC Topic 842, which provides entities with relief from the costs of implementing certain aspects of the new leasing standard. Specifically,
under the amendments in ASU 2018-11, (1) entities may elect not to recast the comparative periods presented when transitioning to ASC
842 and (2) lessors may elect not to separate lease and non-lease components when certain conditions are met. In November 2019, ASU 2019-10,
Codification Improvements to ASC 842 modified the effective dates of all other entities. In June 2020, ASU 2020-05 defer the effective
date for one year for entities in the “all other” category. For all other entities, the amendments in ASU 2020-05 are effective
for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early application
of the guidance continues to be permitted. The Company will adopt ASU 2016-02 from October 1, 2022 and will use the additional modified
retrospective transition method provided by ASU No. 2018-11 for the adoption. The Company is in the process of evaluating the effect of
the adoption of this ASU.
In June 2016, the FASB issued ASU No. 2016-13,
“Financial Instruments – Credit Losses”, which will require the measurement of all expected credit losses for financial
assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Subsequently,
the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, to clarify that receivables arising from operating leases are
within the scope of lease accounting standards. Further, the FASB issued ASU No. 2019-04, ASU 2019-05, ASU 2019-10, ASU 2019-11 and ASU
2020-02 to provide additional guidance on the credit losses standard. For all other entities, the amendments for ASU 2016-13 are effective
for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted.
Adoption of the ASUs is on a modified retrospective basis. The Company will adopt ASU 2016-13 from October 1, 2023. The Company is in
the process of evaluating the effect of the adoption of this ASU.
Other accounting standards that have been issued
by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements
upon adoption. The Company does not discuss recent standards that are not anticipated to have an impact on or are unrelated to its consolidated
financial condition, results of operations, cash flows or disclosures.
ITEM 10. ADDITIONAL INFORMATION
10.A. Share Capital
Not Applicable.
10.B. Memorandum and Articles of Association
EZGO is a BVI company limited by shares and its
affairs are governed by its memorandum and articles of association and the BVI Act (each as amended or modified from time to time).
As provided in EZGO’s amended and restated
memorandum and articles of association, subject to the BVI Act, EZGO has full capacity to carry on or undertake any business or activity,
do any act or enter into any transaction, and, for such purposes, full rights, powers and privileges. EZGO’s registered office is
c/o Maples Corporate Services (BVI) Limited, P.O. Box 173, Road Town, Tortola, British Virgin Islands.
EZGO has adopted amended and restated memorandum
and articles of association authorize the issuance of up to 100,000,000 ordinary shares of par value US$0.001 each and up to 10,000 preferred
shares of no par value (the “Preferred Shares”).
All options, regardless of grant dates, will entitle
holders to an equivalent number of ordinary shares once the vesting and exercising conditions are met.
EZGO’s ordinary shares have listed on Nasdaq
under the symbol “EZGO.”
Ordinary Shares
General. The
maximum number of shares we are authorized to issue is 100,000,000 ordinary shares, with a par value of $0.001 each and 10,000 Preferred
Shares of no par value. Holders of ordinary shares have the same rights. All of our outstanding ordinary shares are fully paid and non-assessable.
To the extent they are issued, certificates representing the ordinary shares are issued in registered form.
Our amended and restated memorandum and articles
of association do not provide for pre-emptive rights.
Dividends. The
holders of our ordinary shares are entitled to such dividends as may be declared by our board of directors. Our amended and restated articles
of association provide that dividends may be declared and paid at such time, and in such an amount, as the directors determine subject
to their being satisfied that the Company will meet the statutory solvency test immediately after the dividend. Holders of ordinary shares
will be entitled to the same amount of dividends, if declared.
Voting Rights. In
respect of all matters subject to a shareholders’ vote, each ordinary share is entitled to one vote for each ordinary share registered
in his or her name on our register of members. Holders of ordinary shares shall at all times vote together on all resolutions submitted
to a vote of the members. Voting at any meeting of shareholders is by show of hands unless a poll is demanded. A poll may be demanded
by the chairman of such meeting or any one shareholder.
A quorum required for a meeting of shareholders
consists of the holders of at least one-half of all voting power of our shares in issue at the date of the meeting present in person or
by proxy or, if a corporation or other non-natural person, by its duly authorized representative. Shareholders’ meetings may be
held annually. Each general meeting, other than an annual general meeting, shall be an extraordinary general meeting. Extraordinary general
meetings may be called by a majority of our board of directors or our chairman or upon a requisition of shareholders holding at the date
of deposit of the requisition not less than 30% of the aggregate voting power of our Company. Advance notice of at least 10 days
is required for the convening of our annual general meeting and other general meetings.
Transfer of Ordinary Shares. Under
the BVI Act the transfer of a registered share which is not listed on a recognized exchange is by a written instrument of transfer signed
by the transferor and containing the name of the transferee. However, the instrument must also be signed by the transferee if registration
would impose a liability on the transferee to the Company. The instrument of transfer must be sent to the Company for registration. The
transfer of a registered share is effective when the name of the transferee is entered in the register of members. The entry of the name
of a person in the Company’s register of members is prima facie evidence that legal title in the share vests in that person.
The procedure is different for the transfer of
shares that are listed on a recognized exchange. Such shares may be transferred without the need for a written instrument of transfer
if the transfer is carried out in accordance with the laws, rules, procedures and other requirements applicable to shares listed on the
recognized exchange and subject to the Company’s amended and restated memorandum and articles of association.
Liquidation. On
a liquidation, on winding up or other return of assets of the Company to shareholders (other than on conversion, redemption or purchase
of ordinary shares), assets available for distribution among the holders of ordinary shares shall be distributed among the holders of
the ordinary shares on a pro rata basis.
Calls on Ordinary Shares and Forfeiture
of Ordinary Shares. Our board of directors may from time to time make calls upon shareholders for any amounts
unpaid on their ordinary shares in a notice served to such shareholders at least 14 clear days prior to the specified time of payment.
The ordinary shares that have been called upon and remain unpaid are subject to forfeiture.
Redemption of Ordinary Shares. The
BVI Act and our amended and restated memorandum and articles of association permit us to purchase our own shares with the prior written
consent of the relevant shareholders, a resolution of directors and in accordance with applicable law.
Variation of Rights of Shares. Other
than with respect to the issuance of the Preferred Shares in accordance with our amended and restated memorandum and articles of association,
all or any of the rights attached to any class of shares may, subject to the provisions of the BVI Act, be varied without the consent
of the holders of the issued shares of that class where such variation is considered by the board of directors not to have a material
adverse effect upon such rights; otherwise, any such variation shall be made only with the consent in writing of the holders of a majority
of the issued shares of that class, or with the sanction of a resolution passed by a simple majority of the votes cast at a separate meeting
of the holders of the shares of that class. The rights conferred upon the holders of the shares of any class issued shall not, unless
otherwise expressly provided by the terms of issue of the shares of that class, be deemed to be varied by the creation or issue of further
shares ranking pari passu with such existing class of shares.
Inspection of Books and Records. A
member of the Company is entitled, on giving written notice to the Company, to inspect (a) the memorandum and articles of
association of the Company; (b) the register of members; (c) the register of directors; and (d) the minutes of
meetings and resolutions of members and of those classes of members of which he is a member; and to make copies of or take extracts
from the documents and records. Subject to the amended and restated memorandum and articles of association, the directors may, if
they are satisfied that it would be contrary to the Company’s interests to allow a member to inspect any document, or part of
a document, specified in (b), (c) and (d) above, refuse to permit the member to inspect the document or limit the
inspection of the document, including limiting the making of copies or the taking of extracts from the records.
Where a company fails or refuses to permit a member
to inspect a document or permits a member to inspect a document subject to limitations, that member may apply to the BVI High Court for
an order that he should be permitted to inspect the document or to inspect the document without limitation.
A company is required to keep at the office of
its registered agent: its memorandum and articles of association of the company; the register of members or a copy of the register of
members; the register of directors or a copy of the register of directors; and copies of all notices and other documents filed by the
company in the previous ten years.
Issuance of Additional Shares. Our
amended and restated memorandum and articles of association authorize our board of directors to issue additional ordinary shares from
time to time as our board of directors shall determine.
Register of Members
Under the BVI Act we must keep a register of members
and there should be entered therein:
|
●
|
the names and addresses of our members, a statement of the number and class of shares held by each member;
|
|
●
|
the date on which the name of any person was entered on the register as a member; and
|
|
●
|
the date on which any person ceased to be a member.
|
Under the BVI Act, the register of members of
our Company is prima facie evidence of the matters set out therein (that is, the register of members will raise a presumption of fact
on the matters referred to above unless rebutted) and a member registered in the register of members is deemed as a matter of the BVI
Act to have legal title to the shares as set against its name in the register of members.
If the name of any person is incorrectly entered
in or omitted from our register of members, or if there is any default or unnecessary delay in entering on the register the fact of any
person having ceased to be a member of our Company, the person or member aggrieved (or any member of our Company or our Company itself)
may apply to the High Court of the British Virgin Islands for an order that the register be rectified, and the Court may either refuse
such application or it may, if satisfied of the justice of the case, make an order for the rectification of the register.
Differences in Corporate Law The BVI
Act differs from laws applicable to United States corporations and their shareholders. Set forth below is a summary of the
significant differences between the provisions of the BVI Act applicable to us and the laws applicable to companies incorporated in
the State of Delaware.
Mergers and Similar Arrangements. Under
the BVI Act two or more companies, each a “constituent company,” may merge or consolidate. A merger involves the merging of
two or more companies into one of the constituent companies (to the merger) with one constituent company continuing in existence to become
the surviving company post-merger. A consolidation involves two or more companies consolidating into a new company.
A merger is effective on the date that the articles
of merger (as described below) are registered by the Registrar of Corporate Affairs in the BVI, or on such later date, not exceeding 30 days
from the date of registration as is stated in the articles of merger.
The BVI Act provides that any member of the Company
is entitled to payment of the fair value of his shares upon dissenting from a merger, unless the Company is the surviving company of the
merger and the member continues to hold the same or similar shares. The following is a summary of the position under the BVI Act.
A dissenter is in most circumstances required
to give to the Company written objection to the merger, which must include a statement that the dissenter proposes to demand payment for
his shares if the merger takes place. This written objection must be given before the meeting of members at which the merger is submitted
to a vote, or at the meeting but before the vote. However, no objection is required from a member to whom the Company did not give notice
of the meeting of members or where the proposed merger is authorized by written consent of the members without a meeting.
Within 20 days immediately following the
written consent, or the meeting at which the merger was approved, the Company shall give written notice of the consent or resolution to
each member who gave written objection or from whom written objection was not required, except those members who voted for, or consented
in writing to, the proposed merger.
A member to whom the Company was required to give
notice who elects to dissent shall, within 20 days immediately following the date on which the copy of the plan of merger or an outline
of the merger is given to him, give to the Company a written notice of his decision to elect to dissent, stating:
|
(a)
|
his name and address;
|
|
(b)
|
the number and classes of shares in respect of which he dissents (which must be all shares that he holds in the Company); and
|
|
(c)
|
a demand for payment of the fair value of his shares.
|
Upon the giving of a notice of election to dissent,
the dissenter ceases to have any of the rights of a member except the right to be paid the fair value of his shares, and the right to
institute proceedings to obtain relief on the ground that the action is illegal.
The Company shall make a written offer to each
dissenter to purchase his shares at a specified price that the Company determines to be their fair value. Such offer must be given within
7 days immediately following the date of the expiration of the period within which members may give their notices of election to
dissent, or within 7 days immediately following the date on which the merger is put into effect, whichever is later.
If the Company and the dissenter fail, within
30 days immediately following the date on which the offer is made, to agree on the price to be paid for the shares owned by the dissenter,
then within 20 days:
|
(a)
|
the Company and the dissenter shall each designate an appraiser;
|
|
(b)
|
the two designated appraisers together shall designate an appraiser;
|
|
(c)
|
the three appraisers shall fix the fair value of the shares owned by the dissenter as of the close of business on the day prior to the date of the meeting or the date on which the resolution was passed, excluding any appreciation or depreciation directly or indirectly induced by the action or its proposal, and that value is binding on the Company and the dissenter for all purposes; and
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|
(d)
|
the Company shall pay to the dissenter the amount in money upon the surrender by him of the certificates representing his shares, and such shares shall be cancelled.
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Squeeze-out Provisions. Members
of a company holding 90% of the votes of the outstanding shares entitled to vote and members of a company holding 90% of the votes
of the outstanding shares of each class of shares entitled to vote as a class, may give a written instruction to the company
directing it to redeem the shares held by the remaining members.
Shareholders’ Suits. Under
the provisions of the BVI Act, the memorandum and articles of association of a company are binding as between the company and its
members and between the members. In general, members are bound by the decision of the majority or special majorities as set out in
the memorandum and articles of association or in the BVI Act. As for voting, the usual rule is that with respect to normal
commercial matters members may act from self-interest when exercising the right to vote attached to their shares.
If the majority members have infringed a minority
member’s rights, the minority may seek to enforce its rights either by derivative action or by personal action. A derivative action
concerns the infringement of the company’s rights where the wrongdoers are in control of the company and are preventing it from
taking action, whereas a personal action concerns the infringement of a right that is personal to the particular member concerned.
The BVI Act provides for a series of remedies
available to members. Where a company incorporated under the BVI Act conducts some activity which breaches the BVI Act or the company’s
memorandum and articles of association, the BVI High Court can issue a restraining or compliance order. Members can now also bring derivative,
personal and Representative Actions under certain circumstances.
The traditional English basis for members’
remedies have also been incorporated into the BVI Act: where a member of a company considers that the affairs of the company have been,
are being or are likely to be conducted in a manner likely to be oppressive, unfairly discriminating or unfairly prejudicial to him, he
may apply to the BVI High Court for an order on such conduct.
Any member of a company may apply to the BVI High
Court for the appointment of a liquidator for the company and the Court may appoint a liquidator for the company if it is of the opinion
that it is just and equitable to do so.
The BVI Act provides that any member of a company
is entitled to payment of the fair value of his shares upon dissenting from any of the following:
|
(c)
|
any sale, transfer, lease, exchange or other disposition of more than 50 per cent in value of the assets or business of the company if not made in the usual or regular course of the business carried on by the company but not including (i) a disposition pursuant to an order of the court having jurisdiction in the matter; (ii) a disposition for money on terms requiring all or substantially all net proceeds to be distributed to the members in accordance with their respective interest within one year after the date of disposition; or (iii) a transfer pursuant to the power of the directors to transfer assets for the protection thereof;
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|
(d)
|
a redemption of 10 per cent, or fewer, of the issued shares of the company required by the holders of 90 percent, or more, of the shares of the company pursuant to the terms of the BVI Act; and
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|
(e)
|
an arrangement, if permitted by the BVI High Court.
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Generally any other claims against a company by
its members must be based on the general laws of contract or tort applicable in the BVI or their individual rights as members as established
by the company’s memorandum and articles of association.
The BVI Act provides that if a company or a director
of a company engages in, proposes to engage in or has engaged in, conduct that contravenes the BVI Act or the memorandum and articles
of association of the company, the BVI High Court may, on the application of a member or a director of the company, make an order
directing the company or director to comply with, or restraining the company or director from engaging in conduct that contravenes the
BVI Act or the memorandum and articles of association.
Indemnification of Directors and Executive
Officers and Limitation of Liability. BVI law does not limit the extent to which a company’s memorandum
and articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be
held by the BVI High Court to be contrary to public policy (e.g. for purporting to provide indemnification against the consequences of
committing a crime). An indemnity will be void and of no effect and will not apply to a person unless the person acted honestly and in
good faith and in what he believed to be in the best interests of the company and, in the case of criminal proceedings, the person had
no reasonable cause to believe that his conduct was unlawful. Our amended and restated memorandum and articles of association permit indemnification
of officers and directors for losses, damages, costs and expenses incurred in their capacities as such unless such losses or damages arise
from dishonesty or fraud of such directors or officers. This standard of conduct is generally the same as permitted under the Delaware
General Corporation Law for a Delaware corporation. In addition, we have entered into indemnification agreements with our directors and
executive officers that provide such persons with additional indemnification beyond that provided in our amended and restated memorandum
and articles of association.
Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to our directors, officers or persons controlling us under the foregoing provisions, we have
been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is
therefore unenforceable.
Directors’ Fiduciary Duties. Under
Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation and its shareholders. This duty
has two components: the duty of care and the duty of loyalty. The duty of care requires that a director act in good faith, with the care
that an ordinarily prudent person would exercise under similar circumstances. Under this duty, a director must inform himself of, and
disclose to shareholders, all material information reasonably available regarding a significant transaction. The duty of loyalty requires
that a director acts in a manner he reasonably believes to be in the best interests of the corporation. He must not use his corporate
position for personal gain or advantage. This duty prohibits self-dealing by a director and mandates that the best interest of the corporation
and its shareholders take precedence over any interest possessed by a director, officer or controlling shareholder and not shared by
the shareholders generally. In general, actions of a director are presumed to have been made on an informed basis, in good faith and
in the honest belief that the action taken was in the best interests of the corporation. However, this presumption may be rebutted by
evidence of a breach of one of the fiduciary duties. Should such evidence be presented concerning a transaction by a director, the director
must prove the procedural fairness of the transaction, and that the transaction was of fair value to the corporation.
Under BVI law, the directors owe fiduciary duties
at both common law and under statute, including a statutory duty to act honestly, in good faith and with a view to our best interests.
When exercising powers or performing duties as a director, the director is required to exercise the care, diligence and skill that a reasonable
director would exercise in the circumstances taking into account, without limitation, the nature of the company, the nature of the decision
and the position of the director and the nature of the responsibilities undertaken by him. In exercising the powers of a director, the
directors must exercise their powers for a proper purpose and shall not act or agree to the company acting in a manner that contravenes
our amended and restated memorandum and articles of association or the BVI Act.
In certain circumstances, a shareholder has the
right to seek various remedies against the company in the event the directors are in breach of their duties under the BVI Act. Pursuant
to Section 184B of the BVI Act, if a company or director of a company engages in, proposes to engage in or has engaged in, conduct
that contravenes the provisions of the BVI Act or the memorandum or articles of association of the company, the courts of the BVI may,
on application of a shareholder or director of the company, make an order directing the company or director to comply with, or restraining
the company or director from engaging in conduct that contravenes the BVI Act or the memorandum or articles. Furthermore, pursuant to
Section 184I(1) of the BVI Act, a shareholder of a company who considers that the affairs of the company have been, are being or
likely to be, conducted in a manner that is, or any acts of the company have been, or are likely to be oppressive, unfairly discriminatory,
or unfairly prejudicial to him in that capacity, may apply to the courts of the BVI for an order which, inter alia, can require the company
or any other person to pay compensation to the shareholders.
Shareholder Action by Written Consent. Under
the Delaware General Corporation Law, a corporation may eliminate the right of shareholders to act by written consent by amendment to
its certificate of incorporation. Although BVI law may permit shareholder actions by written consent, our amended and restated memorandum
and articles of association provide that shareholders may not approve corporate matters by way of a written resolution.
Shareholder Proposals. Under
the Delaware General Corporation Law, a shareholder has the right to put any proposal before the annual meeting of shareholders, provided
it complies with the notice provisions in the governing documents. A special meeting may be called by the board of directors or any other
person authorized to do so in the governing documents, but shareholders may be precluded from calling special meetings.
BVI law and our amended and restated memorandum
and articles of association provide that shareholders holding 30% or more of the voting rights entitled to vote on any matter for which
a meeting is to be converted may request that the directors shall requisition a shareholder’s meeting. As a BVI company, we are
not obliged by law to call shareholders’ annual general meetings.
Cumulative Voting. Under
the Delaware General Corporation Law, cumulative voting for elections of directors is not permitted unless the corporation’s certificate
of incorporation specifically provides for it. Cumulative voting potentially facilitates the representation of minority shareholders on
a board of directors since it permits the minority shareholder to cast all the votes to which the shareholder is entitled on a single
director, which increases the shareholder’s voting power with respect to electing such director. There are no prohibitions in relation
to cumulative voting under the laws of the BVI but our amended and restated memorandum and articles of association do not provide for
cumulative voting. As a result, our shareholders are not afforded any less protections or rights on this issue than shareholders of a
Delaware corporation.
Removal of Directors. Under
the Delaware General Corporation Law, a director of a corporation with a classified board may be removed only for cause with the approval
of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. Under our amended
and restated memorandum and articles of association, directors may be removed with or without cause, by a resolution of our shareholders,
or with cause by a resolution of the directors.
Transactions with Interested Shareholders. The
Delaware General Corporation Law contains a business combination statute applicable to Delaware corporations whereby, unless the corporation
has specifically elected not to be governed by such statute by amendment to its certificate of incorporation, it is prohibited from engaging
in certain business combinations with an “interested shareholder” for three years following the date that such person becomes
an interested shareholder. An interested shareholder generally is a person or a group who or which owns or owned 15% or more of the target’s
outstanding voting share within the past three years. This has the effect of limiting the ability of a potential acquirer to make a two-tiered
bid for the target in which all shareholders would not be treated equally. The statute does not apply if, among other things, prior to
the date on which such shareholder becomes an interested shareholder, the board of directors approves either the business combination
or the transaction which resulted in the person becoming an interested shareholder. This encourages any potential acquirer of a Delaware
corporation to negotiate the terms of any acquisition transaction with the target’s board of directors.
BVI law has no comparable statute. As a result,
we are not afforded the same statutory protections in the BVI as we would be offered by the Delaware business combination statute. However,
although BVI law does not regulate transactions between a company and its significant shareholders, it does provide that such transactions
must be entered into bona fide in the best interests of the company and not with the effect of constituting a fraud on the minority shareholders.
See also “-- Shareholders’ Suits” above. We have adopted a code of business conduct and ethics which requires employees
to fully disclose any situations that could reasonably be expected to give rise to a conflict of interest, and sets forth relevant restrictions
and procedures when a conflict of interest arises to ensure the best interest of the Company.
Dissolution; Winding up. Under
the Delaware General Corporation Law, unless the board of directors approves the proposal to dissolve, dissolution must be approved by
shareholders holding 100% of the total voting power of the corporation. Only if the dissolution is initiated by the board of directors
may it be approved by a simple majority of the corporation’s outstanding shares. Delaware law allows a Delaware corporation to include
in its certificate of incorporation a supermajority voting requirement in connection with dissolutions initiated by the board.
Under BVI law, the liquidation of a company may
be a voluntary solvent liquidation or an insolvent liquidation under the Insolvency Act. Where a company has been struck off the Register
of Companies under the BVI Act continuously for a period of 7 years it is dissolved with effect from the last day of that period.
Voluntary Liquidation
If the liquidation is a solvent liquidation, the
provisions of the BVI Act governs the liquidation. A company may only be liquidated under the BVI Act as a solvent liquidation if it has
no liabilities or it is able to pay its debts as they fall due and the value of its assets exceeds its liabilities. Subject to the amended
and restated memorandum and articles of association of a company, a liquidator may be appointed by a resolution of directors or resolution
of members but if the directors have commenced liquidation by a resolution of directors the members must approve the liquidation plan
by a resolution of members save in limited circumstances.
A liquidator is appointed for the purpose of collecting
in and realizing the assets of a company and distributing proceeds to creditors.
We expect that in the event of a voluntary liquidation
of the Company, after payment of the liquidation costs and any sums then due to creditors, the liquidator would distribute our remaining
assets on a pari passu basis.
Liquidation under the Insolvency Act
The Insolvency Act governs an insolvent liquidation.
Pursuant to the Insolvency Act, a company is insolvent if (a) it fails to comply with the requirements of a statutory demand that
has not be set aside pursuant to the Insolvency Act, execution or other process issued on a judgement, decree or order of court in favor
of a creditor of the company is returned wholly or partly unsatisfied or either the value of the company’s liabilities exceeds its
assets or the company is unable to pay its debts as they fall due. The liquidator must be either the Official Receiver in BVI or a BVI licensed
insolvency practitioner. An individual resident outside the BVI may be appointed to act as liquidator jointly with a BVI licensed
insolvency practitioner or the Official Receiver. The members of the company may appoint an insolvency practitioner as liquidator of the
company or the court may appoint an Official Receiver or an eligible insolvency practitioner. The application to the court can be made
by one or more of the following: (a) the company (b) a creditor (c) a member (d), the supervisor of a creditors’
arrangement in respect of the company, the Financial Services Commission and the Attorney General in the BVI.
The court may appoint a liquidator if:
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(a)
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the company is insolvent;
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(b)
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the court is of the opinion that it is just and equitable that a liquidator should be appointed; or
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(c)
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the court is of the opinion that it is in the public interest for a liquidator to be appointed.
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An application under (a) above by a member
may only be made with leave of the court, which shall not be granted unless the court is satisfied that there is prima facie case that
the company is insolvent. An application under (c) above may only be made by the Financial Services Commission or the Attorney General
and they may only make an application under (c) above if the company concerned is, or at any time has been, a regulated person (i.e.
a person that holds a prescribed financial services license) or the company is carrying on, or at any time has carried on, unlicensed
financial services business.
Order of Preferential Payments upon
Liquidation Upon the insolvent liquidation of a company, the assets of a company shall be applied in accordance with the
following priorities: (a) in paying, in priority to all other claims, the costs and expenses properly incurred in the
liquidation in accordance with the prescribed priority; (b) after payment of the costs and expenses of the liquidation, in
paying the preferential claims admitted by the liquidator (wages and salary, amounts to the BVI Social Security Board, pension
contributions, government taxes) — preferential claims rank equally between themselves and, if the assets of the company are
insufficient to meet the claims in full, they shall be paid ratably; (c) after the payment of preferential claims, in paying
all other claims admitted by the liquidator, including those of non-secured creditors — the claims of non-secured creditors of
the Company shall rank equally among themselves and if the assets of the company are insufficient to meet the claims in full, such
non-secured creditors shall be paid ratably; (d) after paying all admitted claims, paying any interest payable under the BVI
Insolvency Act; and finally (e) any surplus assets remaining after payment of the costs, expenses and claims above shall be
distributed to the members in accordance with their rights and interests in the Company. Part VIII of the Insolvency Act provides
for various applications which may be made by a liquidator to set aside transactions which have unfairly diminished the assets which
are available to creditors.
The appointment of a liquidator over the assets
of a company does not affect the right of a secured creditor to take possession of and realize or otherwise deal with assets of the company
over which that creditor has a security interest. Accordingly, a secured creditor may enforce its security directly without recourse to
the liquidator, in priority to the order of payments described above. However, so far as the assets of a company in liquidation available
for payment of the claims of unsecured creditors are insufficient to pay the costs and expenses of the liquidation and the preferential
creditors, those costs, expenses and claims have priority over the claims of charges in respect of assets that are subject to a floating
charge created by a company and shall be paid accordingly out of those assets.
Voidable Transactions
In the event of the insolvency of a company, there
are four types of voidable transaction provided for in the Insolvency Act:
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(a)
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Unfair Preferences: Under section 245 of the Insolvency Act a transaction entered into by a company, if it is entered into within the hardening period at a time when the company is insolvent, or it causes the company to become insolvent (an “insolvency transaction”), and which has the effect of putting the creditor into a position which, in the event of the company going into insolvent liquidation, will be better than the position it would have been in if the transaction had not been entered into, will be deemed an unfair preference. A transaction is not an unfair preference if the transaction took place in the ordinary course of business. It should be noted that this provision applies regardless of whether the payment or transfer is made for value or at an undervalue.
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(b)
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Undervalue Transactions: Under section 246 of the Insolvency Act the making of a gift or the entering into of a transaction on terms that the company is to receive no consideration, or where the value of the consideration for the transaction, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by the company will (if it is an insolvency transaction entered into within the hardening period) be deemed an undervalue transaction. A company does not enter into a transaction at an undervalue if it is entered into in good faith and for the purposes of its business and, at the time the transaction was entered into, there were reasonable grounds for believing the transaction would benefit the company.
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(c)
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Voidable Floating Charges: Under section 247 of the Insolvency Act a floating charge created by a company is voidable if it is an insolvency transaction created within the hardening period. A floating charge is not voidable to the extent that it secures: (i) money advanced or paid to the company, or at its direction, at the same time as, or after, the creation of the charge; (ii) the amount of any liability of the company discharged or reduced at the same time as, or after, the creation of the charge; (iii) the value of assets sold or supplied, or services supplied, to the company at the same time as, or after, the creation of the charge; and (iv) the interest, if any, payable on the amount referred to in (i) to (iii) pursuant to any agreement under which the money was advanced or paid, the liability was discharged or reduced, the assets were sold or supplied or the services were supplied.
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(d)
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Extortionate Credit Transactions: Under section 248 of the Insolvency Act an insolvency transaction entered into by a company for, or involving the provision of, credit to the company, may be regarded as an extortionate credit transaction if, having regard to the risk accepted by the person providing the credit, the terms of the transaction are or were such to require grossly exorbitant payments to be made in respect of the provision of the credit, or the transaction otherwise grossly contravenes ordinary principles of fair trading and such transaction takes place within the hardening period.
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The “hardening period” (known in the
Insolvency Act as the “vulnerability period”) in respect of each voidable transaction provision set out above is as follows:
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(a)
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for the purposes of sections 245, 246 and 247 of the Insolvency Act the period differs depending on whether the person(s) that the transaction is entered into with, or the preference is given to, are “connected persons” of the company within the meaning of the Insolvency Act:
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(i)
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in the case of “connected persons” the “hardening period” is the period beginning two years prior to the “onset of insolvency” and ending on the appointment of a liquidator of the company; and
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(ii)
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in the case of any other person, the “hardening period” is the period beginning six months prior to the “onset of insolvency” and ending on the appointment of a liquidator of the company; and
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(b)
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for the purposes of section 248 of the Insolvency Act the “hardening period” is the period beginning five years prior to the “onset of insolvency” and ending on the appointment of a liquidator of the company regardless of whether the person(s) that the transaction is entered into with is a connected person.
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The onset of insolvency for these purposes is
the date on which an application for the appointment of a liquidator was filed (if the liquidator was appointed by the court) or the date
of the appointment of the liquidator (where the liquidator was appointed by the members).
A conveyance made by a person with intent to defraud
creditors is voidable at the instance of the person thereby prejudiced. There is no requirement that the relevant transaction was entered
into at a time when one party was insolvent or became insolvent as a result of the transaction, and there is no requirement that the transferring
party subsequently went into liquidation. However, no conveyance entered into for valuable consideration and in good faith to a person
who did not have notice of the intention to defraud may be impugned.
The court has authority to order winding up in
a number of specified circumstances including where it is, in the opinion of the court, just and equitable to do so. Under the BVI Act
and our amended and restated memorandum and articles of association, our company may be dissolved, liquidated or wound up by a resolution
of our shareholders.
Variation of Rights of Shares. Under
the Delaware General Corporation Law, a corporation may vary the rights of a class of shares with the approval of a majority of the outstanding
shares of such class, unless the certificate of incorporation provides otherwise. Under BVI law and our amended and restated memorandum
and articles of association, all or any of the rights attached to any class of shares may, subject to the provisions of the BVI Act, be
varied without the consent of the holders of the issued shares of that class where such variation is considered by the board of directors
not to have a material adverse effect upon such rights; otherwise, any such variation shall be made only with the consent in writing of
the holders of a majority of the issued shares of that class, or with the sanction of a resolution passed by a majority of the votes cast
at a separate meeting of the holders of the shares of that class. The rights conferred upon the holders of the shares of any class issued
shall not, unless otherwise expressly provided by the terms of issue of the shares of that class, be deemed to be varied by the creation
or issue of further shares ranking pari passu with such existing class of shares.
Amendment of Governing Documents. Under
the Delaware General Corporation Law, a corporation’s governing documents may be amended with the approval of a majority of the
outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. As permitted by BVI law, our amended
and restated memorandum and articles of association may be amended with a resolution of our shareholders or, by resolutions of directors,
except that the directors of the company shall not have the power to amend our amended and restated memorandum (a) to restrict the
rights or powers of the members to amend the memorandum or articles; (b) to change the percentage of members required to pass a resolution
to amend the memorandum or articles; or (c) in circumstances where the memorandum or articles cannot be amended by the members.
Rights of Non-resident or Foreign Shareholders. There
are no limitations imposed by our amended and restated memorandum and articles of association on the rights of non-resident or foreign
shareholders to hold or exercise voting rights on our shares. In addition, there are no provisions in our amended and restated memorandum
and articles of association governing the ownership threshold above which shareholder ownership must be disclosed.
10.C. Material Contracts
We have not entered into any material contracts
other than in the ordinary course of business and other than those described in “Item 4. Information on the Company” or elsewhere
in this report.
10.D. Exchange Controls
British Virgin Islands
There are currently no exchange control regulations
in the BVI applicable to us or our shareholders.
The PRC
China regulates foreign currency exchanges primarily
through the following rules and regulations:
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Foreign Currency Administration Rules of 1996, as amended; and
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Administrative Rules of the Settlement, Sale and Payment of Foreign Exchange of 1996.
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As we disclosed in the risk factors above, Renminbi
is not a freely convertible currency at present. Under the current PRC regulations, conversion of Renminbi is permitted in China for routine
current-account foreign exchange transactions, including trade and service related foreign exchange transactions, payment of dividends
and service of foreign debts. Conversion of Renminbi for most capital-account items, such as direct investments, investments in PRC securities
markets and repatriation of investments, however, is still subject to the approval of SAFE.
Pursuant to the above-mentioned administrative
rules, foreign-invested enterprises may buy, sell and/or remit foreign currencies for current account transactions at banks in China with
authority to conduct foreign exchange business by complying with certain procedural requirements, such as presentment of valid commercial
documents. For capital-account transactions involving foreign direct investment, foreign debts and outbound investment in securities and
derivatives, approval from SAFE is a pre-condition. Capital investments by foreign-invested enterprises outside China are subject to limitations
and requirements in China, such as prior approvals from the PRC Ministry of Commerce or SAFE.
10.E. Taxation
The following discussion of material BVI, PRC
and United States federal income tax consequences of an investment in our ordinary shares is based upon laws and relevant interpretations
thereof in effect as of the date of this report, all of which are subject to change. This discussion does not deal with all possible tax
consequences relating to an investment in our ordinary shares, such as the tax consequences under state, local and other tax laws.
British Virgin Islands Taxation
The Company and all dividends, interest, rents,
royalties, compensation and other amounts paid by the Company to persons who are not resident in the BVI and any capital gains realized
with respect to any shares, debt obligations, or other securities of the Company by persons who are not resident in the BVI are exempt
from all provisions of the Income Tax Ordinance in the BVI.
No estate, inheritance, succession or gift tax,
rate, duty, levy or other charge is payable by persons who are not resident in the BVI with respect to any shares, debt obligation or
other securities of the Company.
All instruments relating to transfers of property
to or by the Company and all instruments relating to transactions in respect of the shares, debt obligations or other securities of the
Company and all instruments relating to other transactions relating to the business of the Company are exempt from payment of stamp duty
in the BVI. This assumes that the Company does not hold an interest in real estate in the BVI.
There are currently no withholding taxes or exchange
control regulations in the BVI applicable to the Company or its members.
People’s Republic of China Taxation
Under the PRC Enterprise Income Tax Law, an enterprise
established outside the PRC with “de facto management bodies” within the PRC is considered a “resident enterprise”
for PRC enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income. Under
the implementation rules to the EIT Law, a “de facto management body” is defined as a body that has material and overall management
and control over the manufacturing and business operations, personnel and human resources, finances and properties of an enterprise. If
our holding company in the BVI or any of our subsidiaries outside of China were deemed to be a “resident enterprise” under
the PRC EIT Law, it would be subject to enterprise income tax on its worldwide income at a rate of 25%. See “Item 3. Key Information
— D. Risk Factors-Risks Related do Doing Business in China — Under the PRC Enterprise Income Tax Law, we may be classified
as a PRC “resident enterprise” for PRC enterprise income tax purposes. Such classification would likely result in unfavorable
tax consequences to us and our non-PRC shareholders and has a material adverse effect on our results of operations and the value of your
investment.”
Our PRC subsidiary is a company incorporated under
PRC law and, as such, is subject to PRC enterprise income tax on its taxable income in accordance with the relevant PRC income tax laws.
Pursuant to the EIT Law, which became effective on January 1, 2008 and was amended on February 24, 2017, a uniform 25% enterprise
income tax rate is generally applicable to both foreign-invested enterprises and domestic enterprises, except where a special preferential
rate applies. The enterprise income tax is calculated based on PRC tax laws and PRC accounting standards. In accordance with the implementation
rules of PRC EIT Law, a qualified “High and New Technology Enterprise” is eligible for a preferential tax rate of 15%. The
“High and New Technology Enterprise” certificate is effective for a period of three years. An entity may re-apply for the
“High and New Technology Enterprise” certificate when the prior certificate expires. However, none of our PRC subsidiaries
have been recognized as High and New Technology enterprises. Therefore, none of our PRC subsidiaries are eligible to enjoy a preferential
tax rate of 15%.
In accordance with the relevant laws and regulations
promulgated by the SAT effective from 2008 onwards, enterprises engaging in research and development activities are entitled to claim
150% of their qualified research and development expenses so incurred as tax deductible expenses when determining their assessable profits
for the year. The additional deduction of 50% of qualified research and development expenses can only be claimed directly in the annual
tax filing and subject to the approval from the relevant tax authorities. Effective from 2018 onwards, enterprises engaging in research
and development activities are entitled to claim 175% of their qualified research and development expenses so incurred as tax deductible
expenses. The additional deduction of 75% of qualified research and development expenses can be directly claimed in the annual tax filing.
We are subject to VAT at a rate of 13% for products
sold except that Yizhiying IoT is subject to VAT at a rate of 3% on the services we provide, less any deductible VAT we have already paid
or borne. We are also subject to surcharges on VAT payments in accordance with PRC law.
As a BVI holding company, EZGO may receive dividends
from its PRC subsidiaries through its intermediary holding company in Hong Kong. The EIT Law and its implementing rules provide that
dividends paid by a PRC entity to a non-resident enterprise for income tax purposes is subject to PRC withholding tax at a rate of 10%,
subject to reduction by an applicable tax treaty with China. According to the Arrangement between China and the Hong Kong Special
Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income and Capital
and relevant implanting notice, if our Hong Kong subsidiary satisfies all the requirements under the tax arrangement and receives
approval from the relevant tax authority, the dividends paid to the Hong Kong subsidiary would be subject to withholding tax at the
standard rate of 5%. See “Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in China —
There are significant uncertainties under the PRC EIT Law relating to the withholding tax liabilities of our PRC subsidiaries, and dividends
payable by our PRC subsidiaries to our offshore subsidiaries may not qualify to enjoy certain treaty benefits.”
Certain United States Federal Income Tax
Considerations
The following discussion is a summary of U.S.
federal income tax considerations generally applicable to U.S. Holders (as defined below) of the ownership and disposition of our ordinary
shares. This summary applies only to U.S. Holders that hold our ordinary shares as capital assets (generally, property held for investment)
and that have the U.S. dollar as their functional currency. This summary is based on U.S. tax laws in effect as of the date of this annual
report, on U.S. Treasury regulations in effect or, in some cases, proposed as of the date of this annual report, and judicial and administrative
interpretations thereof available on or before such date. All of the foregoing authorities are subject to change, which could apply retroactively
and could affect the tax consequences described below. Moreover, this summary does not address the U.S. federal estate, gift, backup withholding,
and alternative minimum tax considerations, or any state, local, and non-U.S. tax considerations, relating to the ownership and disposition
of our ordinary shares. The following summary does not address all aspects of U.S. federal income taxation that may be important to particular
investors in light of their individual circumstances or to persons in special tax situations such as:
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financial institutions or financial services entities;
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regulated investment companies;
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real estate investment trusts;
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traders that elect to use a mark-to-market method of accounting;
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governments or agencies or instrumentalities thereof;
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certain former U.S. citizens or long-term residents;
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tax-exempt entities (including private foundations);
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persons liable for alternative minimum tax;
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persons holding stock as part of a straddle, hedging, conversion or other integrated transaction;
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persons whose functional currency is not the U.S. dollar;
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passive foreign investment companies;
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controlled foreign corporations;
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persons that actually or constructively own 5% or more of the total combined voting power of all classes of our voting stock; or
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partnerships or other entities taxable as partnerships for U.S. federal income tax purposes, or persons holding ordinary shares through such entities.
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PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
REGARDING THE APPLICATION OF U.S. FEDERAL TAXATION TO THEIR PARTICULAR CIRCUMSTANCES, AND THE STATE, LOCAL, NON-U.S., OR OTHER TAX CONSEQUENCES
OF THE OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES.
For purposes of this discussion, a “U.S.
Holder” is a beneficial owner of our ordinary shares that is, for U.S. federal income tax purposes:
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an individual who is a citizen or resident of the United States;
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a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in the United States or under the laws of the United States, any state thereof or the District of Columbia;
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an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or
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a trust that (1) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons for all substantial decisions, or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
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If a partnership (or other entity treated as a
partnership for U.S. federal income tax purposes) is a beneficial owner of our ordinary shares, the tax treatment of a partner in the
partnership will generally depend upon the status of the partner and the activities of the partnership. Partnerships holding our ordinary
shares and their partners are urged to consult their tax advisors regarding an investment in our ordinary shares.
Taxation of Dividends and Other Distributions
on Our Ordinary Shares
Subject to the discussion below under “Passive
Foreign Investment Company Rules,” any cash distributions (including the amount of any PRC tax withheld) paid on our ordinary shares
out of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles, will generally be includible
in the gross income of a U.S. Holder as dividend income on the day actually or constructively received by the U.S. Holder. Because we
do not intend to determine our earnings and profits on the basis of U.S. federal income tax principles, any distribution we pay will generally
be treated as a “dividend” for U.S. federal income tax purposes. A non-corporate U.S. Holder will be subject to tax on dividend
income from a “qualified foreign corporation” at a lower applicable capital gains rate rather than the marginal tax rates
generally applicable to ordinary income provided that certain holding period requirements are met. A non-U.S. corporation (other than
a corporation that is classified as a PFIC for the taxable year in which the dividend is paid or the preceding taxable year) will generally
be considered to be a qualified foreign corporation (i) if it is eligible for the benefits of a comprehensive tax treaty with the
United States that the U.S. Secretary of Treasury determines is satisfactory for purposes of this provision and includes an exchange
of information program, or (ii) with respect to any dividend it pays on stock that is readily tradable on an established securities
market in the United States, including Nasdaq. It is unclear whether dividends that we pay on our ordinary shares will meet the conditions
required for the reduced tax rate. However, in the event that we are deemed to be a PRC resident enterprise under the PRC Enterprise Income
Tax Law (see “ITEM 10. ADDITIONAL INFORMATION – 10.E.Taxation — People’s Republic of China Taxation”), we
may be eligible for the benefits of the United States-PRC income tax treaty. If we are eligible for such benefits, dividends we pay
on our ordinary shares, would be eligible for the reduced rates of taxation described in this paragraph. You are urged to consult your
tax advisor regarding the availability of the lower rate for dividends paid with respect to our ordinary shares. Dividends received on
our ordinary shares will not be eligible for the dividends-received deduction allowed to corporations.
Dividends will generally be treated as income
from foreign sources for U.S. foreign tax credit purposes and will generally constitute passive category income. Depending on the U.S.
Holder’s individual facts and circumstances, a U.S. Holder may be eligible, subject to a number of complex limitations, to claim
a foreign tax credit not in excess of any applicable treaty rate in respect of any foreign withholding taxes imposed on dividends received
on our ordinary shares. A U.S. Holder who does not elect to claim a foreign tax credit for foreign tax withheld may instead claim a deduction,
for U.S. federal income tax purposes, in respect of such withholding, but only for a year in which such U.S. Holder elects to do so for
all creditable foreign income taxes. The rules governing the foreign tax credit are complex and their outcome depends in large part on
the U.S. Holder’s individual facts and circumstances. Accordingly, U.S. Holders are urged to consult their tax advisors regarding
the availability of the foreign tax credit under their particular circumstances.
Taxation of Sale or Other Disposition of
Ordinary Shares
Subject to the discussion below under “Passive
Foreign Investment Company Rules,” a U.S. Holder will generally recognize capital gain or loss upon the sale or other disposition
of ordinary shares in an amount equal to the difference between the amount realized upon the disposition and the U.S. Holder’s adjusted
tax basis in such ordinary shares. Any capital gain or loss will be long term if the ordinary shares have been held for more than one
year and will generally be U.S.-source gain or loss for U.S. foreign tax credit purposes. Long-term capital gains of non-corporate taxpayers
are currently eligible for reduced rates of taxation. In the event that gain from the disposition of the ordinary shares is subject to
tax in the PRC, such gain may be treated as PRC-source gain under the United States-PRC income tax treaty. The deductibility of a
capital loss may be subject to limitations. U.S. Holders are urged to consult their tax advisors regarding the tax consequences if a foreign
tax is imposed on a disposition of our ordinary shares, including the availability of the foreign tax credit under their particular circumstances.
Passive Foreign Investment Company Rules
A non-U.S. corporation, such as our company, will
be classified as a PFIC, for U.S. federal income tax purposes for any taxable year, if either (i) 75% or more of its gross income
for such year consists of certain types of “passive” income or (ii) 50% or more of the value of its assets (determined
on the basis of a quarterly average) during such year is attributable to assets that produce or are held for the production of passive
income. For this purpose, cash and cash equivalents are categorized as passive assets and the company’s goodwill and other unrecorded
intangibles are taken into account as non-passive assets. Passive income generally includes, among other things, dividends, interest,
rents, royalties, and gains from the disposition of passive assets. We will be treated as owning a proportionate share of the assets and
earning a proportionate share of the income of any other corporation in which we own, directly or indirectly, more than 25% (by value)
of the stock.
Based on our current composition of assets, subsidiaries
and market capitalization (which will fluctuate from time to time), we do not expect to be or become a PFIC for U.S. federal income tax
purposes. However, no assurance can be given in this regard because the determination of whether we will be or become a PFIC is a factual
determination made annually that will depend, in part, upon the composition of our income and assets. Furthermore, the composition of
our income and assets may also be affected by how, and how quickly, we use our liquid assets and the cash raised in our initial public
offering and follow-on offering. Under circumstances where our revenue from activities that produce passive income significantly increase
relative to our revenue from activities that produce non-passive income, or where we determine not to deploy significant amounts of cash
for active purposes, our risk of becoming classified as a PFIC may substantially increase. In addition, because there are uncertainties
in the application of the relevant rules, it is possible that the Internal Revenue Service may challenge our classification of certain
income and assets as non-passive or our valuation of our tangible and intangible assets, each of which may result in our becoming a PFIC
for the current or subsequent taxable years. If we were classified as a PFIC for any year during which a U.S. Holder held our ordinary
shares, we generally would continue to be treated as a PFIC for all succeeding years during which such U.S. Holder held our ordinary shares
even if we cease to be a PFIC in subsequent years, unless certain elections are made.
If we are classified as a PFIC for any taxable
year during which a U.S. Holder holds our ordinary shares, and unless the U.S. Holder makes a mark-to-market election (as described below),
the U.S. Holder will generally be subject to special tax rules that have a penalizing effect, regardless of whether we remain a PFIC,
on (i) any excess distribution that we make to the U.S. Holder (which generally means any distribution paid during a taxable year
to a U.S. Holder that is greater than 125 percent of the average annual distributions paid in the three preceding taxable years or,
if shorter, the U.S. Holder’s holding period for the ordinary shares), and (ii) any gain realized on the sale or other disposition
of ordinary shares. Under these rules,
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the U.S. Holder’s gain or excess distribution will be allocated ratably over the U.S. Holder’s holding period for the ordinary shares;
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the amount allocated to the current taxable year and any taxable years in the U.S. Holder’s holding period prior to the first taxable year in which we are classified as a PFIC (each, a “pre-PFIC year”), will be taxable as ordinary income;
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the amount allocated to each prior taxable year, other than a pre-PFIC year, will be subject to tax at the highest tax rate in effect for individuals or corporations, as appropriate, for that year; and
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an additional tax equal to the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each prior taxable year, other than a pre-PFIC year, of the U.S. Holder.
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If we are treated as a PFIC for any taxable year
during which a U.S. Holder holds our ordinary shares, or if any of our subsidiaries is also a PFIC, such U.S. Holder would be treated
as owning a proportionate amount (by value) of the shares of any lower-tier PFICs for purposes of the application of these rules. U.S.
Holders are urged to consult their tax advisors regarding the application of the PFIC rules to any of our subsidiaries.
As an alternative to the foregoing rules, a U.S.
Holder of “marketable stock” in a PFIC may make a mark-to-market election with respect to such stock, provided that such stock
is “regularly traded” within the meaning of applicable U.S. Treasury regulations. If our ordinary shares qualify as being
regularly traded, and an election is made, the U.S. Holder will generally (i) include as ordinary income for each taxable year that
we are a PFIC the excess, if any, of the fair market value of ordinary shares held at the end of the taxable year over the adjusted tax
basis of such ordinary shares and (ii) deduct as an ordinary loss the excess, if any, of the adjusted tax basis of the ordinary shares
over the fair market value of such ordinary shares held at the end of the taxable year, but such deduction will only be allowed to the
extent of the amount previously included in income as a result of the mark-to-market election. The U.S. Holder’s adjusted tax basis
in the ordinary shares would be adjusted to reflect any income or loss resulting from the mark-to-market election. If a U.S. Holder makes
a mark-to-market election in respect of a corporation classified as a PFIC and such corporation ceases to be classified as a PFIC, the
U.S. Holder will not be required to take into account the gain or loss described above during any period that such corporation is not
classified as a PFIC. If a U.S. Holder makes a mark-to-market election, any gain such U.S. Holder recognizes upon the sale or other disposition
of our ordinary shares in a year when we are a PFIC will be treated as ordinary income and any loss will be treated as ordinary loss,
but such loss will only be treated as ordinary loss to the extent of the net amount previously included in income as a result of the mark-to-market
election.
Because a mark-to-market election cannot be made
for any lower-tier PFICs that we may own, a U.S. Holder may continue to be subject to the PFIC rules with respect to such U.S. Holder’s
indirect interest in any investments held by us that are treated as an equity interest in a PFIC for U.S. federal income tax purposes.
Furthermore, as an alternative to the foregoing
rules, a U.S. Holder that owns stock of a PFIC generally may make a “qualified electing fund” election regarding such corporation
to elect out of the PFIC rules described above regarding excess distributions and recognized gains. However, we do not intend to provide
information necessary for U.S. Holders to make qualified electing fund elections which, if available, would result in tax treatment different
from the general tax treatment for PFICs described above.
If a U.S. Holder owns our ordinary shares during
any taxable year that we are a PFIC, the U.S. Holder must generally file an annual Internal Revenue Service Form 8621 and provide
such other information as may be required by the U.S. Treasury Department, whether or not a mark-to-market election is or has been made.
If we are or become a PFIC, you should consult your tax advisor regarding any reporting requirements that may apply to you.
You should consult your tax advisors regarding
how the PFIC rules apply to your investment in our ordinary shares.
Non-U.S. Holders
Cash dividends paid or deemed paid to a Non-U.S.
Holder with respect to the ordinary shares generally will not be subject to U.S. federal income tax unless such dividends are effectively
connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable
income tax treaty, are attributable to a permanent establishment or fixed base that such holder maintains or maintained in the United States).
In addition, a Non-U.S. Holder generally will
not be subject to U.S. federal income tax on any gain attributable to a sale or other taxable disposition of the ordinary shares unless
such gain is effectively connected with its conduct of a trade or business in the United States (and, if required by an applicable
income tax treaty, is attributable to a permanent establishment or fixed base that such holder maintains or maintained in the United States)
or the Non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable year of such
sale or other disposition and certain other conditions are met (in which case, such gain from U.S. sources generally is subject to U.S.
federal income tax at a 30% rate or a lower applicable tax treaty rate).
Cash dividends and gains that are effectively
connected with the Non-U.S. Holder’s conduct of a trade or business in the United States (and, if required by an applicable
income tax treaty, are attributable to a permanent establishment or fixed base that such holder maintains or maintained in the United States)
generally will be subject to regular U.S. federal income tax at the same regular U.S. federal income tax rates as applicable to a comparable
U.S. Holder and, in the case of a Non-U.S. Holder that is a corporation for U.S. federal income tax purposes, may also be subject to an
additional branch profits tax at a 30% rate or a lower applicable tax treaty rate.
Information Reporting and Backup Withholding
Certain U.S. Holders are required to report information
to the Internal Revenue Service relating to an interest in “specified foreign financial assets,” including shares issued by
a non-United States corporation, for any year in which the aggregate value of all specified foreign financial assets exceeds $50,000
(or a higher dollar amount prescribed by the Internal Revenue Service), subject to certain exceptions (including an exception for shares
held in custodial accounts maintained with a U.S. financial institution). These rules also impose penalties if a U.S. Holder is required
to submit such information to the Internal Revenue Service and fails to do so.
In addition, dividend payments with respect to
our ordinary shares and proceeds from the sale, exchange or redemption of our ordinary shares may be subject to additional information
reporting to the IRS and possible U.S. backup withholding. Backup withholding will not apply, however, to a U.S. Holder who furnishes
a correct taxpayer identification number and makes any other required certification on IRS Form W-9 or who is otherwise exempt from
backup withholding. U.S. Holders who are required to establish their exempt status generally must provide such certification on IRS Form W-9.
U.S. Holders are urged to consult their tax advisors regarding the application of the U.S. information reporting and backup withholding
rules.
Backup withholding is not an additional tax. Amounts
withheld as backup withholding may be credited against your U.S. federal income tax liability, and you may obtain a refund of any excess
amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the IRS and furnishing any required
information. We do not intend to withhold taxes for individual shareholders. However, transactions effected through certain brokers or
other intermediaries may be subject to withholding taxes (including backup withholding), and such brokers or intermediaries may be required
by law to withhold such taxes.
THE PRECEDING DISCUSSION OF U.S. FEDERAL TAX CONSIDERATIONS
IS FOR GENERAL INFORMATION PURPOSES ONLY. IT IS NOT TAX ADVICE. EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN TAX ADVISOR REGARDING
THE PARTICULAR U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF OUR ORDINARY SHARES, INCLUDING
THE CONSEQUENCES OF ANY PROPOSED CHANGE IN APPLICABLE LAWS.
10.F. Dividends and Paying Agents
Not Applicable.
10.G. Statement by Experts
Not Applicable.
10.H. Documents on Display
The Company is subject to the informational requirements
of the Securities Exchange Act of 1934, as amended, and will file reports, registration statements and other information with the SEC.
The Company’s reports, registration statements and other information can be inspected on the SEC’s website at www.sec.gov.
You may also visit us on website at www.ezgotech.com.cn. However, information contained on our website does not constitute a part of this
annual report.
10.I. Subsidiary Information
Not Applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange Risk
Our functional currency is RMB, and our financial
statements are presented in U.S. dollars. RMB has gradually appreciated against U.S. dollars over the past few years. The average exchange
rate for U.S. dollars against RMB has changed from US$1.00 for RMB6.8698 in the fiscal year ended September 30, 2019, US$1.00 for RMB7.0056
in the fiscal year ended September 30, 2020 to US$1.00 for RMB6.4434 in the fiscal year ended September 30, 2021. The change in the value
of RMB relative to the U.S. dollar may affect our financial results reported in the U.S. dollar terms without giving effect to any underlying
change in our business or results of operation. If using the average exchange rate of fiscal 2020, our revenue, cost of revenue and total
expenses, including selling expenses and general and administrative expenses, for the fiscal year ended September 30, 2021 would decrease
by approximately $1.9 million, $1.8 million and $0.3 million, respectively.
Currently, our assets, liabilities, revenues,
and costs are denominated in RMB, our exposure to foreign exchange risk will primarily relate to those financial assets denominated in
U.S. dollars. Any significant revaluation of RMB against U.S. dollar may materially affect our earnings and financial position, and the
value of, and any dividends payable on, our ordinary shares in U.S. dollars in the future.
Credit Risk
As of September 30, 2019, 2020 and 2021, we had
cash of $3,633,645, $322,598, and $4,774,531, respectively. Our cash was on deposit at financial institutions in the PRC where there currently
is no rule or regulation requiring such financial institutions to maintain insurance to cover bank deposits in the event of bank
failure.
Accounts receivable are typically unsecured and
derived from revenue earned from customers, thereby exposed to credit risk. The risk is mitigated by the Company’s assessment of
its customers’ creditworthiness and its ongoing monitoring of outstanding balances.
Inflation Risk
Inflationary factors such as increases in the
cost of our product and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a
material effect on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse
effect on our ability to maintain current levels of gross profit and selling, general and administrative expenses as a percentage of net
sales if the selling prices of our services do not increase with these increased costs.