In this annual report on Form 20-F, unless
otherwise indicated, “EZGO” refers to EZGO Technologies Ltd., a British Virgin Islands business company; “we,”
“us,” “our,” “our company,” the “Company” or similar terms refer to EZGO Technologies
Ltd. and/or its consolidated subsidiaries, other than the variable interest entity, Jiangsu EZGO Electronic Technologies, Co., Ltd. (formerly
known as Jiangsu Baozhe Electric Technologies, Co., Ltd.), a PRC company, unless the context otherwise indicates; and “VIE”
refers to the variable interest entity, Jiangsu EZGO Electronic Technologies, Co., Ltd. EZGO conducts operations in China primarily through
the VIE and its subsidiaries in China, and EZGO does not conduct any business on its own. The financial results of the VIE and its subsidiaries
are consolidated into our financial statements for accounting purposes, but we do not hold any equity interest in the VIE or any of its
subsidiaries. Investors are purchasing an interest in EZGO, the British Virgin Islands holding company.
On December 2, 2021, the SEC adopted final amendments
to its rules implementing the HFCA Act. Such final rules establish procedures that the SEC will follow in (i) determining whether a registrant
is a “Commission-Identified Issuer” (a registrant identified by the SEC as having filed an annual report with an audit report
issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB is unable to inspect or investigate
completely because of a position taken by an authority in that jurisdiction) and (ii) prohibiting the trading of an issuer that is a
Commission-Identified Issuer for three consecutive years under the HFCA Act. The SEC began identifying Commission-Identified Issuers
for the fiscal years beginning after December 18, 2020. A Commission-Identified Issuer is required to comply with the submission and
disclosure requirements in the annual report for each year in which it was identified. If a registrant is identified as a Commission-Identified
Issuer based on its annual report for the fiscal year ended, for example, September 30, 2021, the registrant will be required to comply
with the submission or disclosure requirements in its annual report filing covering the fiscal year ended September 30, 2022. As of the
date of this Amendment, we have not been, and do not expect to be identified by the SEC under the HFCA Act.
ITEM
3. KEY INFORMATION
Contractual Arrangements and Corporate Structure
EZGO was incorporated in the BVI on January
24, 2019. EZGO’s wholly owned subsidiary, EZGO HK, formerly known as Hong Kong JKC Group Co., Limited, was incorporated in Hong
Kong on February 13, 2019. EZGO HK, in turn, holds all of the capital stock of Changzhou EZGO, formerly known as Changzhou Jiekai New
Energy Technology Company, 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 has obtained the contractual rights to determine the
most significant economic activities of the VIE and also receives the majority of the economic benefits of the VIE,
through a series of contractual arrangements (the “VIE Agreements”). See “– Contractual Arrangements
with the VIE and Its Shareholders.” EZGO conducts its business in the PRC primarily through the VIE and its subsidiaries, Changzhou
Hengmao Power Battery Technology Co., Ltd. (“Hengmao Power Battery”), Jiangsu Cenbird E-Motorcycle Technologies Co., Ltd.
(“Jiangsu Cenbird”), Changzhou Yizhiying IoT Technologies Co., Ltd., (“Yizhiying IoT”), Tianjin Dilang Technologies
Co., Ltd. (“Tianjin Dilang”) and Tianjin Jiahao Bicycle Co, Co. Ltd. (“Tianjin Jiahao”) since EZGO, through contractual
arrangements with the VIE, obtained the rights to determine the most significant economic activities and also receives the majority of
the economic benefits of the VIE beginning in November 2019.
As a result of such series of contractual
arrangements, EZGO and its subsidiaries become the primary beneficiary of the VIE for accounting purposes and the VIE as a PRC consolidated
entity under U.S. GAAP. We consolidate the financial results of the VIE and its subsidiaries in our consolidated financial statements
in accordance with U.S. GAAP. Neither we nor EZGO’s investors own any equity ownership in, direct foreign investment in, or control
through such ownership/investment of the VIE. These contractual arrangements have not been tested in a court of law in the PRC. As a
result, investors in EZGO’s Ordinary Shares are not purchasing an equity interest in the VIE or its subsidiaries but instead are
purchasing an equity interest in EZGO, the BVI holding company.
The diagram below shows our corporate structure
as of the date of this Amendment, including the VIE and its subsidiaries. However, investors are cautioned that the enforceability of
such VIE Agreements has not been tested in a court of law. EZGO conducts operations in China primarily through the VIE and its subsidiaries
in China, and EZGO does not conduct any business on its own. The VIE structure is used to provide investors with contractual exposure
to foreign investment in China-based companies where Chinese law prohibits or restricts direct foreign investment in the operating companies.
Due to PRC legal restrictions on foreign ownership in internet-based businesses, we do not have any equity ownership of the VIE, instead
we receive the economic benefits of the VIE’s business operations through certain contractual arrangements. As a result of such
series of contractual arrangements, EZGO and its subsidiaries become the primary beneficiary of the VIE for accounting purposes and the
VIE as a PRC consolidated entity under U.S. GAAP. We consolidate the financial results of the VIE and its subsidiaries in our consolidated
financial statements in accordance with U.S. GAAP. Neither we nor EZGO’s investors own any equity ownership in, direct foreign
investment in, or control through such ownership/investment of the VIE. Investors are purchasing an interest in EZGO, the BVI holding
company.
Contractual Arrangements with the VIE 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 the VIE. Instead, we receive the economic benefits
of the VIE’s business operations through the VIE Agreements. Changzhou EZGO, the VIE and its equity holders entered into the VIE
Agreements on November 8, 2019. The VIE Agreements are designed to provide Changzhou EZGO with contractual rights, and obligations, including
certain control rights and the rights in the assets, property and revenue of the VIE, to (i) determine the most significant economic
activities of the VIE, (ii) receive the majority of the economic benefits of the VIE, most importantly the ability to consolidate the
financial statements of the VIE with the financial statements of our holding company, EZGO under U.S. GAAP, for which we are the primary
beneficiary of the VIE for accounting purposes, 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 the VIE when and to the extent permitted by PRC law. However, The VIE Agreements
may not be as effective as direct ownership in providing us with control over the VIE and its subsidiaries, and the enforceability of
the VIE Agreements has not been tested in a court of law, and the PRC government may take actions to exert more oversight and control
over offerings by China based issuers conducted overseas and/or foreign investment in such companies, or could disallow the VIE Agreements,
which would likely result in a material change in EZGO’s operations and/or a material change in the value of the securities we
have registered for sale, including that it could cause the value of EZGO’s securities could to significantly decline or become
worthless. Specifically, the legal environment in the PRC is not as developed as in other jurisdictions, such as the United States. As
a result, uncertainties in the PRC legal system could limit our ability, as a BVI holding company, to enforce these contractual arrangements
and doing so may be quite costly. There are also substantial uncertainties regarding the interpretation and application of current and
future PRC laws, regulations and rules regarding the status of the rights of Changzhou EZGO with respect to its contractual arrangements
with the VIE and its shareholders. It is uncertain whether any new PRC laws or regulations relating to variable interest entity structure
will be adopted or if adopted, what they would provide. If we or the VIE are found to be in violation of any existing or future PRC laws
or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would
have broad discretion to take action in dealing with such violations or failures. In addition, the enforceability of the various contracts
described above by our company against the VIE is dependent upon the shareholders of the VIE. If the shareholders of the VIE fail to
perform their obligations under the contractual arrangements, we could be unable to enforce the contractual arrangements that enable
us to consolidate the VIE’s operations and financial results in our financial statements in accordance with U.S. GAAP as the primary
beneficiary. If this happens, we would need to deconsolidate the VIE. The majority of our assets, including the necessary licenses to
conduct business in China are held by the VIE and its subsidiaries and a significant part of our revenues are generated by the VIE and
its subsidiaries. An event that results in the deconsolidation of the VIE would have a material effect on EZGO’s operations and
result in the value of its securities diminishing substantially or even become worthless. For a detailed description of the risks associated
with our corporate structure, please refer to risks disclosed under “Item 3. Key Information—D. Risk Factors—Risks
Related to Our Corporate Structure” on page 19.
As a result of our direct ownership in Changzhou
EZGO and the contractual arrangements with the VIE, we are regarded as the primary beneficiary of Jiangsu EZGO, and we treat the VIE
as our consolidated variable interest entity 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 the VIE 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 the VIE (the “VIE Exclusive Management Agreement”),
the VIE agrees to engage Changzhou EZGO as its exclusive provider of management consulting, technical support, intellectual property
license and relevant services, including all services within the VIE’s business scope and decided by Changzhou EZGO from time to
time as necessary. The VIE pays to Changzhou EZGO service fees within three months after each fiscal year end. The service fees are set
at 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 VIE Exclusive Management Agreement. The VIE Exclusive Management 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 VIE Exclusive Management
Agreement shall be extended automatically at the end of its term, until Changzhou EZGO’s business term or the VIE’s business
term expires, unless otherwise notified by Changzhou EZGO in writing. During the term of the VIE Exclusive Management Agreement, the
VIE may not terminate the VIE Exclusive Management Agreement except in the case of Changzhou EZGO’s gross negligence or fraud,
or VIE Exclusive Management Agreement or applicable PRC laws provide otherwise. Changzhou EZGO may terminate the VIE Exclusive Management
Agreement by 30-day written notice to the VIE at any time.
Equity Pledge Agreement
Pursuant to the Equity Pledge Agreement, dated
November 8, 2019, among Changzhou EZGO, the VIE and the equity holders of the VIE (the “VIE Equity Pledge Agreement”), the
equity holders of the VIE have pledged 100% of their equity interests in the VIE to Changzhou EZGO to guarantee performance of all obligations
under the VIE Exclusive Management Agreement, the VIE Loan Agreement (defined hereafter), the VIE Exclusive Call Option Agreement (defined
hereafter) and the VIE Proxy Agreement (defined hereafter). 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, the VIE and all its equity holders completed the registration of the equity pledge with the relevant office of State Administration
of Market Regulation (“SAMR”, formerly known as State Administration for Industry and Commerce, or the SAIC) 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, the VIE and the equity holders of the VIE (the “VIE Exclusive Call Option Agreement”),
each of the equity holders of the VIE 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 interests and assets in the VIE
from its equity holders. The equity holders of the VIE agree that, without the prior written consent of Changzhou EZGO, they will not
dispose of their equity interests in the VIE 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 the VIE 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 VIE Exclusive Call Option Agreement expires when all the equity interests or all the assets
are transferred pursuant to the agreement.
Proxy Agreement
Pursuant to the Proxy Agreement, dated November
8, 2019, among Changzhou EZGO, the VIE and each of equity holders of the VIE (the “VIE Proxy Agreement”), each of the equity
holders irrevocably authorizes Changzhou EZGO to exercise his or her rights as an equity holder of the VIE, 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
VIE Exclusive Call Option Agreement. During the term of the VIE Proxy Agreement, the VIE and all its equity holders may not terminate
the VIE Proxy Agreement except when the VIE Proxy Agreement or applicable PRC laws provide otherwise.
Loan Agreement
Pursuant to the Loan Agreement, dated November
8, 2019 (the “VIE Loan Agreement”), Changzhou EZGO agrees to provide the VIE with loans of different amounts at an annual
interest rate of 24% according to the VIE’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, the VIE may not prepay any loan without
the written consent of Changzhou EZGO while in case of certain circumstances, the VIE must repay the loan in advance upon Changzhou EZGO’s
written request.
Spousal Consent Letter
The spouses of individual equity holders of the
VIE 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 VIE Equity Pledge Agreement, the VIE Exclusive Call Option Agreement and the VIE
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 the VIE 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 have established a contractual relationship with all equity holders of the VIE. Pursuant to these agreements, all equity holders of
the VIE have 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 the VIE to Changzhou EZGO as collateral to secure performance of all of his or her obligations under
these agreements. However, the equity holders of the VIE may have potential conflicts of interest with us and may breach, or cause the
VIE to breach, or refuse to renew, the existing contractual arrangements we have with them and the VIE. Any failure by the VIE or equity
holders of the VIE 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 Our Corporate
Structure” on page 19.
Based on the advice of our PRC counsel, DeHeng
Law Offices, that:
|
● |
the ownership
structure of the VIE and Changzhou EZGO in China does not violate any applicable PRC laws or regulations currently in effect; and |
|
● |
the contractual arrangements
among Changzhou EZGO, the VIE and the VIE’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, and the VIE Agreements have not been
tested in a court of law. Accordingly, we may incur substantial costs to enforce the terms of the VIE Agreements, and 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
WFOE (as defined below), 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 6. See also VIE and
consolidated financial information in Note 1 of our financial statements.
|
● |
“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 and (ii) Changzhou Langyi Electronic Technology
Co., Ltd., a wholly owned PRC subsidiary; |
|
● |
“WFOE” refers
to Changzhou EZGO Enterprise Management Co., Ltd., our 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 | | |
WFOE | | |
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 | ) | |
| (1,964 | ) | |
| (70,278 | ) | |
| (3,691,820 | ) | |
| - | | |
| (4,259,897 | ) |
(Loss) income from operations | |
| (495,835 | ) | |
| (1,964 | ) | |
| 117,990 | | |
| (3,497,610 | ) | |
| - | | |
| (3,877,419 | ) |
Share of loss from subsidiaries | |
| (203,744 | ) | |
| (205,707 | ) | |
| - | | |
| - | | |
| 409,451 | | |
| - | |
Other income (expense), net | |
| 279 | | |
| - | | |
| 156,368 | | |
| (75,873 | ) | |
| - | | |
| 80,774 | |
Loss before income tax expenses (benefit) | |
| (699,300 | ) | |
| (207,671 | ) | |
| 274,358 | | |
| (3,573,483 | ) | |
| 409,451 | | |
| (3,796,645 | ) |
Net loss | |
| (699,300 | ) | |
| (203,744 | ) | |
| (205,707 | ) | |
| (2,714,344 | | |
| 409,451 | | |
| (3,413,644 | ) |
Less: net loss attributable to non-controlling interests | |
| - | | |
| - | | |
| - | | |
| (434,971 | ) | |
| - | | |
| (434,971 | ) |
Net loss attributable to EZGO’s shareholders | |
| (699,300 | ) | |
| (203,744 | ) | |
| (205,707 | ) | |
| (2,279,373 | ) | |
| 409,451 | | |
| (2,978,673 | ) |
| |
Fiscal year ended September 30,
2020 | |
| |
Parent | | |
Non-VIE Subsidiaries | | |
WFOE | | |
VIE and its subsidiaries | | |
Eliminations | | |
Consolidated | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Third-party revenues | |
$ | - | | |
$ | - | | |
| - | | |
$ | 15,243,282 | | |
$ | - | | |
$ | 15,243,282 | |
Inter-company consulting and services revenues | |
| - | | |
| - | | |
| 116,190 | | |
| - | | |
| (116,190 | ) | |
| - | |
Third-party costs of Revenue | |
| - | | |
| - | | |
| - | | |
| (13,704,248 | ) | |
| - | | |
| (13,704,248 | ) |
Inter-company consulting and services costs | |
| - | | |
| - | | |
| - | | |
| (116,190 | ) | |
| 116,190 | | |
| - | |
Gross profit | |
| - | | |
| - | | |
| 116,190 | | |
| 1,422,844 | | |
| - | | |
| 1,539,034 | |
Operating expenses | |
| - | | |
| - | | |
| - | | |
| (1,467,068 | ) | |
| - | | |
| (1,467,068 | ) |
Income from operations | |
| - | | |
| - | | |
| 116,190 | | |
| (44,224 | ) | |
| - | | |
| 71,966 | |
Share of income from subsidiaries | |
| 116,190 | | |
| 116,190 | | |
| - | | |
| - | | |
| (232,380 | ) | |
| - | |
Other income, net | |
| - | | |
| - | | |
| - | | |
| 378,395 | | |
| - | | |
| 378,395 | |
Income before income tax expenses | |
| 116,190 | | |
| 116,190 | | |
| 116,190 | | |
| 334,171 | | |
| (232,380 | ) | |
| 450,361 | |
Net income | |
| 116,190 | | |
| 116,190 | | |
| 116,190 | | |
| 160,732 | | |
| (232,380 | ) | |
| 276,922 | |
Less: net income attributable to non-controlling interests | |
| - | | |
| - | | |
| - | | |
| 129,748 | | |
| - | | |
| 129,748 | |
Net income attributable to EZGO’s shareholders | |
| 116,190 | | |
| 116,190 | | |
| 116,190 | | |
| 30,984 | | |
| (232,380 | ) | |
| 147,174 | |
| |
Fiscal year ended September 30,
2019 | |
| |
Parent | | |
Non-VIE Subsidiaries | | |
WFOE | | |
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 | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Share of income from VIE and its subsidiaries | |
| - | | |
| | | |
| - | | |
| - | | |
| - | | |
| - | |
Other income, net | |
| - | | |
| - | | |
| - | | |
| 265,200 | | |
| - | | |
| 265,200 | |
Income before income tax expenses | |
| - | | |
| - | | |
| - | | |
| 1,041,063 | | |
| - | | |
| 1,041,063 | |
Net income | |
| - | | |
| - | | |
| - | | |
| 2,191,437 | | |
| - | | |
| 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 | |
Consolidated Balance Sheets Information
| |
As
of September 30, 2021 |
| |
Parent | | |
Non-VIE
Subsidiaries | | |
WFOE | | |
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 | ) | |
| - | |
Service fee receivable
from VIE | |
| - | | |
| - | | |
| 116,190 | | |
| - | | |
| (116,190 | ) | |
| - | |
Amount due from Non-VIE | |
| - | | |
| - | | |
| | | |
| 1,914,828 | | |
| (1,914,828 | ) | |
| - | |
Amount due from EZGO | |
| - | | |
| - | | |
| | | |
| 316,524 | | |
| (316,524 | ) | |
| - | |
Current assets | |
| 20,145,974 | | |
| 7,831 | | |
| 18,187,550 | | |
| 23,880,044 | | |
| (34,541,789 | ) | |
| 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 | | |
| - | |
Service fee payable to
WFOE | |
| - | | |
| - | | |
| - | | |
| (116,190 | ) | |
| 116,190 | | |
| - | |
Amount due to EZGO | |
| - | | |
| (15,853,200 | ) | |
| | | |
| (3,017,337 | ) | |
| 18,870,537 | | |
| - | |
Working capital | |
| 19,781,865 | | |
| (15,844,963 | ) | |
| 16,188,763 | | |
| (1,921,225 | ) | |
| - | | |
| 18,204,440 | |
Investment
in non-VIE subsidiaries | |
| - | | |
| 15,753,483 | | |
| | | |
| - | | |
| (15,753,483 | ) | |
| - | |
Assets | |
| 20,145,974 | | |
| 15,761,314 | | |
| 18,187,547 | | |
| 38,212,105 | | |
| (50,295,270 | ) | |
| 42,011,670 | |
| |
As of September 30, 2020 | |
| |
Parent | | |
Non-VIE Subsidiaries | | |
WFOE | | |
VIE and its subsidiaries | | |
Eliminations | | |
Consolidated | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Service fee receivable from VIE | |
| - | | |
| - | | |
| 116,190 | | |
| - | | |
| (116,190 | ) | |
| - | |
Current assets | |
| - | | |
| - | | |
| | | |
| 16,316,861 | | |
| - | | |
| 16,316,861 | |
Service fee payable to WFOE | |
| - | | |
| - | | |
| - | | |
| (116,190 | ) | |
| 116,190 | | |
| - | |
Working capital | |
| - | | |
| - | | |
| 116,190 | | |
| 9,528,018 | | |
| - | | |
| 9,644,208 | |
Investment in non-VIE subsidiaries | |
| 116,190- | | |
| 116,190 | | |
| | | |
| - | | |
| (232,380 | ) | |
| - | |
Assets | |
| 116,190- | | |
| 116,190 | | |
| 116,190 | | |
| 19,817,798 | | |
| (348,570 | ) | |
| 19,817,798 | |
| |
As of September 30, 2019 | |
| |
Parent | | |
Non-VIE Subsidiaries | | |
WFOE | | |
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 | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Assets | |
| - | | |
| - | | |
| - | | |
| 19,171,950 | | |
| | | |
| 19,171,950 | |
Consolidated Cash Flows Information
| |
Fiscal year ended September 30,
2021 | |
| |
Parent | | |
Non-VIE Subsidiaries | | |
WFOE | | |
VIE and its subsidiaries | | |
Eliminations | | |
Consolidated | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Total cash used in operating activities | |
$ | (801,208 | ) | |
$ | (1,963 | ) | |
| (4,351,605 | ) | |
$ | (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 | | |
| - | |
Invest in subsidiary | |
| | | |
| (15,843,000 | ) | |
| | | |
| | | |
| 15,843,000 | | |
| | |
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 | ) | |
| (15,843,000 | ) | |
| (13,323,711 | ) | |
| (12,952,082 | ) | |
| 49,952,076 | | |
| (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 | ) | |
| - | |
Contribution from shareholder | |
| | | |
| | | |
| 15,843,000 | | |
| | | |
| (15,843,000 | ) | |
| | |
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 | | |
| 15,853,200 | | |
| 17,757,828 | | |
| 18,157,942 | | |
| (49,952,076 | ) | |
| 22,764,076 | |
Effect of exchange rate changes | |
| - | | |
| - | | |
| | | |
| 78,968 | | |
| - | | |
| 78,968 | |
Net increase in cash, cash equivalents and
restricted cash | |
| 1,275,437 | | |
| 8,237 | | |
| 82,512 | | |
| 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 | | |
WFOE | | |
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 | | |
WFOE | | |
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
EZGO can transfer cash to its subsidiaries through
capital contributions and/or intercompany loans, and EZGO’s subsidiaries can transfer cash to EZGO through dividends or other distributions
and/or intercompany loans. Additionally, EZGO’s subsidiaries can transfer cash to the VIE through loans, and the VIE can transfer
cash to EZGO as service fees under the VIE Agreements and/or through loans. We intend to settle amounts owed under the VIE Agreements.
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 an interest-free loan of US$15,853,200 to EZGO HK; EZGO also paid US$3,017,337 on behalf of the VIE for the acquisition
of Tianjin Jiahao and insurance fees; and EZGO HK injected registered capital of US$15,843,000 into Changzhou EZGO. Changzhou EZGO provided
loans of US$13,323,711 to the VIE and had US$1,914,828 of payables due 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 including capital injection and loans, would
be eliminated upon consolidation.
We
maintain bank accounts in China, including cash in Renminbi in the amount of RMB29,583,341
and cash in USD in the amount of US$7,831 as of September 30, 2021. Funds are transferred
between EZGO, its subsidiaries, and the VIE for their daily operation purposes. The transfer
of funds between our PRC subsidiaries and the VIE are subject to the Provisions of the Supreme
People’s Court on Several Issues Concerning the Application of Law in the Trial of
Private Lending Cases (2020 Revision, the “Provisions on Private Lending Cases”),
which was implemented on August 20, 2020 to regulate the financing activities between natural
persons, legal persons and unincorporated organizations. The Provisions on Private Lending
Cases set forth that private lending contracts will be upheld as invalid under the circumstance
that (i) the lender swindles loans from financial institutions for relending; (ii) the lender
relends the funds obtained by means of a loan from another profit-making legal person, raising
funds from its employees, illegally taking deposits from the public; (iii) the lender who
has not obtained the lending qualification according to the law lends money to any unspecified
object of the society for the purpose of making profits; (iv) the lender lends funds to a
borrower when the lender knows or should have known that the borrower intended to use the
borrowed funds for illegal or criminal purposes; (v) the lending is in violation of public
orders or good morals; or (vi) the lending is in violation of mandatory provisions of laws
or administrative regulations. Due to the circumstances aforementioned do not exist in the
PRC subsidiaries’ operations, our PRC counsel, DeHeng Law Offices, is of the view that
the Provisions on Private Lending Cases does not prohibit using cash generated from one subsidiary
to fund another subsidiary’s operations. We have not been notified of any other restriction
which could limit our PRC subsidiaries’ ability to transfer cash between subsidiaries.
As of the date of this Amendment, we have not installed any cash management policies that
dictate how funds are transferred between us, our subsidiaries, and the VIE.
There is no assurance that the PRC government
will not intervene or impose restrictions on the ability of us, our subsidiaries and the VIE to transfer cash. Most of our cash is in
Renminbi, and the PRC government could prevent the cash maintained from leaving the PRC, could restrict deployment of the cash into the
business of the VIE and its subsidiaries and restrict the ability to pay dividends. For details regarding the restrictions on our ability
to transfer cash between us, our subsidiaries and the VIE, see “Item 3. Key Information – D. Risk Factors—Risks
Related to Doing Business in China—The PRC government could prevent the cash maintained from leaving the PRC, restrict deployment
of the cash into the business of the VIE and its subsidiaries and restrict the ability to pay dividends to U.S. investors, which could
materially adversely affect EZGO’s operations” on page 42. We currently do not have cash management policies that dictate
how funds are transferred between us, our subsidiaries, and the VIE.
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
the VIE and its subsidiaries, with substantially all of its operations and assets in China. We are permitted under PRC laws and regulations
to provide funding to our wholly foreign-owned enterprise, Changzhou EZGO (“WFOE”), only through loans or capital contributions,
and to the 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 from 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”
on page 41.
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 subsidiaries nor the VIE has paid any dividends
or made any other distributions to our holding company or any U.S. investors as of the date of this Amendment. 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” on page 44.
Under existing PRC foreign
exchange regulations, currently EZGO’s PRC subsidiaries may purchase foreign currency for settlement of “current account
transactions,” including payment of dividends to EZGO without the approval of the State Administration of Foreign Exchange, or
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 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 EZGO’s business activities outside of the PRC, make investments, service any debt
we may incur outside of China or pay dividends or make distributions in foreign currencies to EZGO’s shareholders, including holders
of EZGO’s Ordinary Shares. In addition, any transfer of funds by EZGO to its PRC subsidiaries, either as a shareholder loan or
as an increase in the registered capital, is subject to a series of procedural requirements imposed by SAFE, SAMR, MOFCOM, or their local
counterparts. This may hinder or delay EZGO’s deployment of cash into its subsidiaries’ and the VIE’s business, which
could result in a material and adverse effect on EZGO’s operations. See risks disclosed under “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.” on page 40, “Item 3. Key Information —
D. Risk Factors — Risks Related to Doing Business in China – 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 pages 40 and 41, and “Item 3. Key Information
— D. Risk Factors — Risks Related to Doing Business in China – The PRC government could prevent the cash maintained
from leaving the PRC, restrict deployment of the cash into the business of the VIE and its subsidiaries and restrict the ability to pay
dividends to U.S. investors, which could materially adversely affect EZGO’s operations.” on page 42.
As of September 30, 2021, none of our subsidiaries
have ever paid any dividends or made any other distributions to us or their respective holding companies nor have we or any of our subsidiaries
ever paid dividends or made any 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” on page 40.
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”
on page 43.
Recent
PCAOB Developments
The PCAOB is currently unable to conduct inspections
on accounting firms in the PRC or Hong Kong without the approval of the relevant government authorities. The auditor and its audit work
in the PRC or Hong Kong may not be inspected fully by the PCAOB. Inspections of other auditors conducted by the PCAOB outside China have
at times identified deficiencies in those auditors’ audit procedures and quality control procedures, which may be addressed as
part of the inspection process to improve future audit quality. The lack of PCAOB inspections of audit work undertaken in China or Hong
Kong prevents the PCAOB from regularly evaluating the PRC auditor’s audits and its quality control procedures. As a result, investor
may be deprived of the benefits of such inspection.
The documentation we may be required to submit
to the SEC proving certain beneficial ownership requirements and establishing that we are not owned or controlled by a foreign government
in the event that we use a foreign public accounting firm not subject to inspection by the PCAOB or where the PCAOB is unable to completely
inspect or investigate our accounting practices or financial statements because of a position taken by an authority in the foreign jurisdiction
could be onerous and time consuming to prepare. The HFCA Act mandates the SEC to identify issuers of SEC-registered securities whose
audited financial reports are prepared by an accounting firm that the PCAOB is unable to inspect due to restrictions imposed by an authority
in the foreign jurisdiction where the audits are performed. If such identified issuer’s auditor cannot be inspected by the PCAOB
for three consecutive years, the trading of such issuer’s securities on any U.S. national securities exchanges, as well as any
over-the-counter trading in the U.S., will be prohibited.
On March 24, 2021, the SEC adopted interim final
rules relating to the implementation of certain disclosure and documentation requirements of the HFCA Act. An identified issuer 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.
On November 5, 2021, the SEC approved the PCAOB’s
Rule 6100, Board Determinations Under the Holding Foreign Companies Accountable Act. Rule 6100 provides a framework for the PCAOB to
use when determining, as contemplated under the HFCA Act, whether it 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.
On December 2, 2021, the SEC issued amendments
to finalize rules implementing the submission and disclosure requirements in the HFCA Act. The rules apply to registrants that the SEC
identifies as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign
jurisdiction and that PCAOB is unable to inspect or investigate completely because of a position taken by an authority in foreign jurisdictions.
On December 16, 2021, the PCAOB issued a determination
report which found that the PCAOB is unable to inspect or investigate completely registered public accounting firms headquartered in:
(i) China, and (ii) Hong Kong, because of positions taken by PRC authorities in those jurisdictions, and the PCAOB included in the report
of its determination a list of the accounting firms that are headquartered in the PRC or Hong Kong.
This report does not include our former auditors,
MBP and Briggs & Veselka or our current auditor, WWC. Our auditor, 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. However, the PCAOB is currently unable to conduct inspections in
China without the approval of Chinese government authorities. If it is later determined that the PCAOB is unable to inspect or investigate
our auditor completely, investors may be deprived of the benefits of such inspection. Any audit reports not issued by auditors that are
completely inspected by the PCAOB, or a lack of PCAOB inspections of audit work undertaken in China that prevents the PCAOB from regularly
evaluating our auditors’ audits and their quality control procedures, could result in a lack of assurance that our financial statements
and disclosures are adequate and accurate, then such lack of inspection could cause EZGO’s securities to be delisted from the stock
exchange. See risks disclosed under “Item 3. Key Information — D. Risk Factors— Risks Related to Doing Business
in China — EZGO’s ordinary shares may be delisted under the HFCA Act if the PCAOB is unable to adequately inspect audit documentation
located in China. The delisting of EZGO’s 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 shareholders
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” on
page 47.
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 Regulations on Mergers
and Acquisitions of Domestic Enterprises by Foreign Investors (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”
or the “Opinions.” The 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 the Opinions are
recently issued, official guidance and related implementation rules have not been issued yet and the interpretation of the 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” on page 45.
In addition, on December 28, 2021, the Measures
for Cybersecurity Review (2021 version) was promulgated and became 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 on 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. Our PRC counsel, DeHeng Law Offices, is of the view as a
result of: (i) EZGO is listed on the Nasdaq and does not “seek to list on any other foreign stock exchange”; (ii) we do not
hold personal information on more than one million users in our business operations; and (iii) data processed in our business does not
have a bearing on national security and thus may not be classified as core or important data by the authorities, we are not required
to apply for a cybersecurity review under the Measures for Cybersecurity Review (2021 version).
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 expired 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 an overseas listed issuer intends
to implement any follow-on offering in an overseas market, it should, through its major operating entity incorporated in the PRC, submit
filing materials to the CSRC within three working days after the completion of the offering. The required filing materials shall include
but not be limited to: (1) filing report and relevant commitments; and (2) domestic legal opinions.
The Draft Rules Regarding Overseas Listing,
if enacted, may subject us to additional compliance requirements 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. For instance, if we complete
any offering after the enactment of the Draft Rules Regarding Overseas Listing, we may be required to submit additional filings. While
the final version of the Draft Rules Regarding Overseas Listings are expected to be adopted in 2022, we believe that none of the situations
that would clearly prohibit overseas offering and listing applies to us. In reaching this conclusion, we have relied on the advice of
our PRC counsel, DeHeng Law Offices, provided that there is uncertainty inherent in relying on an opinion of counsel in connection with
whether we are required to obtain permission from the Chinese government that is required to approve of EZGO’s operations and/or
any offerings. Any failure of EZGO to fully comply with new regulatory requirements may significantly limit or completely hinder its
ability to continue to offer its securities to investors, cause significant disruption to its business operations, and severely damage
its reputation, which could materially and adversely affect our financial condition and results of operations and cause its securities
to significantly decline in value or become worthless.
According to the Notice by the General Office
of the State Council of Comprehensively Implementing the List-based Management of Administrative Licensing Items (No. 2 [2022] of the
General Office of the State Council) and its attachment, the List
of Administrative Licensing Items Set by Laws, Administrative Regulations, and Decisions of the State Council (2022 Edition), as of the
date of this Amendment, we, our PRC subsidiaries, the VIE, and its subsidiaries have received from PRC authorities all requisite
licenses, permissions or approvals needed to engage in the businesses currently conducted in China, and no permission or approval has
been denied. Such licenses and permissions include, but not be limited to, business registration, pollutant discharge permit, construction
planning permit, fire protection design review of construction project, and fire protection acceptance of construction project. The following
table provides details on the licenses and permissions held by our PRC subsidiaries:
Company |
|
License/Permission |
|
Issuing
Authority |
|
Validity |
EZGO HK |
|
Business Registration Certificate |
|
Registrar of Companies Hong Kong Special Administrative
Region |
|
February 13, 2022 -
February 12, 2023 |
Changzhou
EZGO |
|
Business License |
|
Market Supervision Administrative Bureau of Changzhou
Wujin |
|
June 12, 2019 -
Long-term |
Jiansu
EZGO Energy Supply Chain Technologies Co., Ltd. |
|
Business License |
|
Administrative Examination and Approval Bureau of Changzhou
Wujin |
|
December 10, 2021 -
Long-term |
Jiangsu
EZGO Electronic Technologies, Co., Ltd. |
|
Business License |
|
Administrative Examination and Approval Bureau of Changzhou
Wujin |
|
July 30, 2019 -
Long-term |
Hengmao
Power Battery |
|
Business License |
|
Administrative Examination and Approval Bureau of Changzhou
Wujin |
|
May 5, 2014 -
May 4, 2034 |
Yizhiying
IoT |
|
Business License |
|
Administrative Examination and Approval Bureau of Changzhou
Wujin |
|
August 21, 2018 -
Long-term |
Tianjin
Dilang |
|
Business License |
|
Market Supervision Administrative Bureau of Tianjin
Wuqing |
|
July 2, 2019 -
July 1, 2049 |
Tianjin
Dilang Import and Export Trading Co., Ltd. |
|
Business License |
|
Market Supervision Administrative Bureau of Tianjin
Wuqing |
|
June 18, 2021 -
June 17, 2061 |
Jiangsu
Cenbird |
|
Business License |
|
Economic Development Zone Administrative Committee
of Jiangsu Changzhou |
|
May 7, 2018 -
Long-term |
Tianjin
Jiahao |
|
Business License |
|
Market Supervision Administrative Bureau of Tianjin
Wuqing |
|
September 25, 2007 -
Long-term |
Tianjin
Jiahao |
|
Construction Land Planning Permit |
|
Planning Bureau of Tianjin Wuqing |
|
January 24, 2008 -
Long-term |
Tianjin
Jiahao |
|
Environmental Protection Permit for Construction |
|
Environmental Protection Bureau of Tianjin Wuqing |
|
January 17, 2008-
Long-term |
Tianjin
Jiahao |
|
Construction Project Planning Acceptance Certificate |
|
Planning Bureau of Tianjin Wuqing |
|
November 5, 2013 -
Long-term |
Changzhou
Langyi |
|
Business License |
|
Administrative Examination and Approval Bureau of Changzhou
Wujin |
|
August 6, 2021 -
Long-term |
Jiangsu
Langyi Import and Export Trading Co., Ltd. |
|
Business License |
|
Administrative Examination and Approval Bureau of Changzhou
Wujin |
|
December 7, 2021 -
Long-term |
As of the date of this Amendment, as advised
by our PRC legal counsel, DeHeng Law Offices, none of our company, our subsidiaries, or the VIE are covered by permissions requirements
from the CSRC, the Cyberspace Administration of China (the “CAC”), or any other governmental agency that is required to approve
the VIE’s operations, and therefore no such permission or approval has been denied.
As of the date of this Amendment, no relevant
laws or regulations in the PRC explicitly require us, our subsidiaries, or the VIE 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 the VIE or any of
its subsidiaries, received any inquiry, notice, warning or sanctions regarding any 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. or other
foreign exchange. The SCNPC or other PRC regulatory authorities may in the future promulgate laws, regulations or implementing rules
that require our company, the 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 EZGO’s operations at any time, which could result in a material change in its operations and its Ordinary
Shares could decline in value or become worthless” on page 35 for a discussion of these legal and operational risks and other
information that should be considered before making a decision to purchase EZGO’s securities. In the event that we, our subsidiaries,
or the VIE (i) do not receive or maintain any requisite permissions or approvals, (ii) inadvertently conclude that such permissions or
approvals are not required, or (iii) applicable laws, regulations, or interpretations change and we are required to obtain such permissions
or approvals in the future, we, our subsidiaries, and the VIE may be subject to sanctions imposed by the relevant PRC regulatory authority,
including fines and penalties, revocation of the licenses of the VIE and its subsidiaries, and suspension of these entities’ business,
restrictions or limitations on our ability to pay dividends outside of China, regulatory orders, including injunctions requiring the
VIE and its subsidiaries to cease collecting or processing data, litigation or adverse publicity, the delisting of EZGO’s securities
on Nasdaq, and other forms of sanctions, which may materially and adversely affect its business, financial condition, and results of
operations.
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 EZGO’s 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 EZGO’s 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 EZGO’s 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 report. 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:
|
● |
We may incur losses in
the 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. |
|
|
|
|
● |
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. |
|
|
|
|
● |
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. |
|
|
|
|
● |
If we are unable to manage
our growth or execute our strategies effectively, our business and prospects may be materially and adversely affected. |
|
|
|
|
● |
Our marketing strategy
of appealing to and growing sales to a more diversified group of users may not be successful. |
|
|
|
|
● |
We face intense competition
in the charging pile market, and if we fail to compete effectively, we may lose market share and customers. |
|
|
|
|
● |
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. |
|
|
|
|
● |
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. |
|
|
|
|
● |
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. |
Risks Related to Our Corporate Structure
Risks and uncertainties relating to our corporate structure include,
but are not limited to, the following:
|
● |
Our current corporate structure
and business operations may be affected by the newly enacted Foreign Investment Law which does not explicitly classify whether a
variable interest entity that is controlled through contractual arrangements would be deemed as foreign-invested enterprises if it
is ultimately “controlled” by foreign investors. |
|
|
|
|
● |
We rely on contractual
arrangements with the 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. |
|
|
|
|
● |
Any failure by the VIE
or its shareholders to perform their obligations under our contractual arrangements with them would have a material adverse effect
on our business. |
|
|
|
|
● |
The shareholders of the
VIE may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition. |
|
● |
If
the PRC government deems that the contractual arrangements in relation to the VIE do not comply with PRC regulatory restrictions
on foreign investment in the relevant industries or other PRC regulations, or if these regulations change or are interpreted differently
in the future, the securities EZGO has registered may decline in value or become worthless if the determinations, changes, or interpretations
result in EZGO’s inability to assert contractual rights over the assets of its PRC subsidiaries or the VIE that conducts a
substantial part of EZGO’s operations. |
|
|
|
|
● |
Contractual arrangements
in relation to the VIE may be subject to scrutiny by the PRC tax authorities and they may determine that the VIE owes additional
taxes, which could negatively affect our financial condition and the value of your investment. |
|
|
|
|
● |
We may lose the ability
to use and enjoy assets held by the VIE that are material to the operation of our business if the entity goes bankrupt or becomes
subject to a dissolution or liquidation proceeding. |
|
|
|
|
● |
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. |
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:
|
● |
Uncertainties in the interpretation
and enforcement of PRC laws and regulations could limit the legal protections available to you and us. |
|
|
|
|
● |
We may be adversely affected
by the complexity, uncertainties, and changes in PRC regulation of internet retailers. |
|
|
|
|
● |
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. |
|
|
|
|
● |
Changes in China’s
economic, political, or social conditions or government policies could have a material adverse effect on EZGO’s business and
operations. The enforcement of laws and rules and regulations in China may change quickly with little advance notice, which could
result in a material adverse change in EZGO’s operations and the value of EZGO’s ordinary shares. |
|
|
|
|
● |
The Chinese government
may intervene or influence EZGO’s operations at any time, or may exert more control over offerings conducted overseas and/or
foreign investment in China-based issuers, which could result in a material change in EZGO’s operations and/or the value of
the securities EZGO has registered for sale. Any actions by the Chinese government to exert more oversight and control over offerings
that are conducted overseas and/or foreign investment in China-based issuers could significantly limit or completely hinder EZGO’s
ability to offer or continue to offer its securities to investors and cause the value of such securities to significantly decline
or become worthless. |
|
|
|
|
● |
Restrictions on currency
exchange or outbound capital flows may limit our ability to utilize our PRC revenue effectively. In addition, 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. |
|
|
|
|
● |
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. |
|
● |
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. |
|
● |
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. |
|
|
|
|
● |
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 requirements in the future. Any failure of us to fully comply with new regulatory requirements may significantly
limit or completely hinder EZGO’s ability to offer or continue to offer its ordinary shares, cause significant disruption to
its business operations, and severely damage its reputation, which would materially and adversely affect our financial condition
and results of operations and cause EZGO’s ordinary shares to significantly decline in value or become worthless. |
|
|
|
|
● |
Substantially all of
EZGO’s current operations are conducted in the PRC through the VIE and its subsidiaries, and substantially all of its assets
are located in the PRC. A majority of EZGO’s current directors and officers are nationals and residents of the PRC and a substantial
portion of their assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service
of process within the United States upon these persons, or to enforce against us or them judgments obtained in United States courts,
including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the
United States. |
|
|
|
|
● |
EZGO’s ordinary
shares may be delisted or prohibited from trading under the HFCA Act if the PCAOB is unable to inspect our auditors. The delisting
of EZGO’s ordinary shares, or the threat of their being delisted, may materially and adversely affect the value of EZGO’s
ordinary shares. Additionally, the inability of the PCAOB to conduct adequate inspection deprives our shareholders 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, and thus EZGO’s
ordinary shares could be prohibited from trading and delisted after two years instead of three. |
Risks Related to EZGO’s Ordinary Shares
In addition to the risks and uncertainties
described above, we are subject to risks relating to EZGO’s ordinary shares, including, but not limited to, the following:
|
● |
An
active trading market for EZGO’s ordinary shares may not continue and the trading price for EZGO’s ordinary shares may
fluctuate significantly. |
|
● |
The trading price of
EZGO’s ordinary shares may be volatile, which could result in substantial losses to investors. |
|
● |
We may not be able to
maintain our listing on Nasdaq which could limit investors’ ability to make transactions in EZGO’s securities and subject
us to additional trading restrictions. |
|
● |
Because we do not expect
to pay dividends in the foreseeable future, you must rely on price appreciation of EZGO’s ordinary shares for return on your
investment. |
|
● |
Restrictive covenants related to our previous registered direct offering may restrict our ability to obtain future financing. |
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
EZGO’s 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:
| ● | limited
brand recognition (compared with our home market in China); |
| ● | costs
associated with establishing new distribution networks; |
| ● | difficulty
to find qualified partners for overseas distribution; |
| ● | inability
to anticipate foreign consumers’ preferences and customs; |
| ● | difficulties
in staffing and managing foreign operations; |
| ● | burdens
of complying with a wide variety of local laws and regulations, including personal data protection,
battery, motor, packaging and labelling; |
| ● | political
and economic instability; |
| ● | lesser
degrees of intellectual property protection; |
| ● | tariffs
and customs duties and the classifications of our goods by applicable governmental bodies;
and |
| ● | a
legal system subject to undue influence or corruption. |
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 EZGO’s 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 variable interest entity structure. 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 EZGO’s 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 EZGO’s 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 EZGO’s 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 EZGO’s
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 a VIE that is controlled through contractual arrangements would be deemed as foreign-invested enterprises if it is 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 the 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 the VIE through contractual arrangements are deemed as foreign investment in the future, and any business of the
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 the 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 the 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 the
VIE and its shareholders to operate our business. For a description of these contractual arrangements, see “Item 3. Key Infomation
— Contractual Arrangements and Corporate Structure.” All of our revenue is attributed to the VIE. These contractual arrangements
may not be as effective as direct ownership in providing us with control over the VIE. If the VIE or its shareholders fail to perform
their respective obligations under these contractual arrangements, our recourse to the assets held by the 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 the 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
for us to enforce any of rights of determination over the most significant economic activities and receive the majority of the economic
benefits of the VIE including, most importantly, our ability to consolidate the financial statements of the VIE with the financial statements
of our holding company under U.S. GAAP, EZGO, 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 the 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 WFOE in the PRC, have entered
into a series of contractual arrangements with the VIE and its shareholders. For a description of these contractual arrangements, see
“Item 3. Key Infomation — Contractual Arrangements and Corporate Structure.” If the 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 the VIE were to refuse to transfer their equity interests in the 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 enforce our rights to determine the most significant
economic activities and receive the majority of the economic benefits of the VIE, most importantly, our ability to consolidate the financial
statements of the VIE with the financial statements of our holding company, EZGO under U.S. GAAP, and relevant rights and licenses held
by us 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 the 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 the 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
the 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 the 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 the 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 the 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 the VIE as provided under the power of attorney, directly appoint new directors of the VIE. We rely on the shareholders of the 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 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 the 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 the VIE do not comply with PRC regulatory restrictions on foreign
investment in the relevant industries or other PRC regulations, or if these regulations change or are interpreted differently in the
future, the securities EZGO has registered may decline in value or become worthless if the determinations, changes, or interpretations
result in its inability to assert contractual rights over the assets of its PRC subsidiaries or the VIE that conducts a substantial part
of EZGO’s 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”). Changzhou EZGO has entered into a series of contractual arrangements
with the VIE and its shareholders, which enable us to (i) have rights of determination over the most significant economic activities
of the VIE, (ii) receive the majority of the economic benefits of the VIE, most importantly, the ability to consolidate the financial
statements of the VIE with the financial statements of EZGO under U.S. GAAP, of which we are a primary beneficiary of the VIE for accounting
purposes, and (iii) have an exclusive option to purchase all or part of the equity interests and assets in the VIE when and to the extent
permitted by PRC law. As a result of these contractual arrangements, we have the contractual rights to determine the most significant
economic activities, receive the majority of the economic benefits and are the primary beneficiary of the VIE and hence consolidate its
financial results as the VIE under U.S. GAAP. For a description of these contractual arrangements, see “Item 3. Key Information—Contractual
Arrangements and Corporate Structure—Contractual Arrangements with the VIE and Its Shareholders.”
We believe that our corporate structure and contractual
arrangements comply with the current applicable PRC laws and regulations. Based on the advice of our PRC counsel, DeHeng Law Offices,
that based on its understanding of the relevant laws and regulations, each of the contracts among our wholly-owned PRC subsidiary, Changzhou
EZGO, the 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 M&A Rules and the relevant regulatory measures
concerning the telecommunications industry. There can be no assurance that the PRC government authorities, such as MOFCOM or 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 our rights to determine the most significant economic activities and the majority of the economic benefits of the VIE, most importantly,
the ability to consolidate the financial statements of the VIE with the financial statements of our holding company, EZGO under U.S.
GAPP, for which we are a primary beneficiary of the 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 EZGO’s 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 the VIE’s business and operations; and |
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taking other regulatory
or enforcement actions that could be harmful to our business. |
The PRC government has broad discretion in
determining rectifiable or punitive measures for non-compliance with or violations of PRC laws and regulations. The PRC government could
disallow the variable interest entity structure, which would likely result in a material change in EZGO’s operations and/or value
of its securities, including that it could cause the value of such securities to significantly decline or become worthless. The VIE agreements
have never been tested in a court of law in China. If the PRC government deems that our contractual arrangements in relation to the 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 or are interpreted differently in the future, we could be subject to severe penalties or be forced to
relinquish our interests in those operations. If the PRC government determines that we or the VIE do not comply with applicable law,
it could revoke the VIE’s business and operating licenses, require the VIE to discontinue or restrict the VIE’s operations,
restrict the VIE’s right to collect revenues, block the VIE’s websites, require the VIE to restructure its operations, impose
additional conditions or requirements with which the VIE may not be able to comply, impose restrictions on the VIE’s business operations,
or take other regulatory or enforcement actions against the VIE that could be harmful to its business. Any of these or similar occurrences
could significantly disrupt our or the VIE’s business operations or restrict the VIE from conducting a substantial portion of its
business operations, which could materially and adversely affect the VIE’s business, financial condition and results of operations.
If any of these occurrences results in our inability to determine the activities of the VIE that most significantly impact its economic
performance, and/or our failure to receive the economic benefits from the VIE, we may not be able to consolidate the VIE in our consolidated
financial statements in accordance with U.S. GAAP. In addition, EZGO’s securities may decline in value or become worthless if it
is unable to consolidate the VIE’s operations and financial results in our financial statements in accordance with U.S. GAAP as
the primary beneficiary since the VIE and its subsidiaries conduct a significant part of EZGO’s operations.
Contractual
arrangements in relation to the VIE may be subject to scrutiny by the PRC tax authorities and they may determine that the 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 Changzhou EZGO, the 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 Changzhou EZGO or the 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 Changzhou EZGO and the VIE for adjusted but unpaid taxes according to applicable regulations. Our financial position could
be materially and adversely affected if the tax liabilities of Changzhou EZGO and the 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 the VIE that are material to the operation of our business if the entity goes bankrupt
or becomes subject to a dissolution or liquidation proceeding.
The VIE holds substantially all of our assets.
Under the contractual arrangements, the 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 the VIE breach these contractual arrangements and voluntarily liquidate the VIE, or the 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 the 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 subsidiaries and the 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
subsidiaries and the 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 subsidiaries and the 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 subsidiaries and theVIE 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
EZGO’s business and impede its ability to continue its 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 CSRC or other regulatory agencies later promulgate new rules or explanations requiring that EZGO obtains
their approvals for any follow-on offering, EZGO may be unable to obtain such approvals which could significantly limit or completely
hinder its ability to offer or continue to offer its securities to its 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
requirements 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 EZGO’s ability to offer or continue to offer its securities to investors and could
cause the value of its 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 EZGO’s operations at any time, which are beyond
its control. Therefore, any such action may adversely affect EZGO’s operations and significantly limit or hinder its ability to
offer or continue to offer its securities to investors 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 EZGO’s 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 its operations, financial performance and/or the
value of EZGO’s ordinary shares or impair its 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 EZGO’s
operations at any time, which could result in a material change in its operations and its ordinary shares could decline in value or become
worthless.
Based on the advice of our PRC counsel, DeHeng
Law Offices, that we are currently not required to obtain approval from Chinese authorities for listing on U.S exchanges, nor the execution
of the VIE Agreements. However, if the 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. or other foreign exchanges, EZGO will not be able to continue listing on a U.S. or other
foreign exchange, continue to offer its securities to investors, or materially affect the interest of the investors and cause significantly
depreciation of the price of its 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 EZGO to divest
ourselves of any interest it then holds in its operations in China. Accordingly, the Chinese government may intervene or influence EZGO’s
operations at any time, which could result in a material change in its operations and/or the value of the securities EZGO has registered.
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. or other foreign exchanges, or enter into VIE Agreements
in the future, and even when such permission is obtained, whether it will be denied or rescinded. Although, in the opinion of our PRC
legal counsel, DeHeng Law Offices, 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. or other foreign exchange or enter into VIE Agreements, EZGO’s operations
could be adversely affected, directly or indirectly, by existing or future laws and regulations relating to its 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 EZGO’s ability to offer or continue to offer its securities to investors and cause the value of its 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 EZGO’s ability to continue to offer its
ordinary shares to investors and could cause the value of its securities 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. Among other things, if an overseas listed issuer intends
to implement any follow-on offering in an overseas market, it should, through its major operating entity incorporated in the PRC, submit
filing materials to the CSRC within three working days after the completion of the offering. The required filing materials shall include
but not be limited to: (1) filing report and relevant commitments; and (2) domestic legal opinions.
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 requirements 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. For instance, if we complete
any offering under a prospectus after the enactment of the Draft Rules Regarding Overseas Listing, we may be required to submit additional
filings. As of the date of this report, the Draft Rules Regarding Overseas Listings have not been promulgated, and we have not been required
to complete the record-filings procedure to the government of China for any offering pursuant to this report. While the final version
of the Draft Rules Regarding Overseas Listings are expected to be adopted in 2022, we believe that none of the situations that would
clearly prohibit overseas offering and listing applies to us. In reaching this conclusion, based on the advice of our PRC counsel, DeHeng
Law Offices, that there is uncertainty inherent in relying on an opinion of counsel in connection with whether we are required to obtain
permissions from the Chinese government that is required to approve of EZGO’s operations and/or offering. Any failure of EZGO to
fully comply with new regulatory requirements may significantly limit or completely hinder EZGO’s ability to continue to offer
its securities to investors, cause significant disruption to its business operations, and severely damage its reputation, which could
materially and adversely affect our financial condition and results of operations and cause its securities, including the securities
EZGO has registered for sale in a prospectus, 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:
| ● | 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. |
| ● | 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. |
|
● |
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 EZGO’s operations. If EZGO’s operations do not comply with these
new regulations at the time they become effective, or if EZGO fails to obtain any licenses required under these new laws and regulations,
it could be subject to penalties. |
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 EZGO’s 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.
Our business is
subject to complex and evolving Chinese laws and regulations regarding data privacy and security. Many of these laws and regulations
are subject to change and uncertain interpretation, and could result in claims, penalties, changes to our business practices, increased
cost of operations, damages to our reputation and brand, or otherwise harm our business.
In the PRC, governmental authorities have
enacted a series of laws and regulations to enhance the protection of data privacy and cybersecurity. The Cybersecurity Law of the PRC
and relevant regulations require network operators, which may include us, to ensure the security and stability of the services provided
via network and protect individual privacy and the security of personal data in general by requiring the consent of internet users prior
to the collection, use or disclosure of their personal data. Under the Cybersecurity Law, the owners and administrators of networks and
network service providers have various personal information security protection obligations, including restrictions on the collection
and use of personal information of users, and they are required to take steps to prevent personal data from being divulged, stolen, or
tampered with. Regulatory requirements regarding the protection of personal information are constantly evolving and can be subject to
differing interpretations or significant changes, making the extent of our responsibilities in that regard uncertain. An example of such
evolving regulatory requirements is the Measures for Cybersecurity Review (2021 version), which was promulgated on December 28, 2021
and took effect on February 15, 2022. The measures, among others, stipulate 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 by the CAC. The cybersecurity review, among others, evaluates the potential risks of critical information infrastructure, core
data, important data, or a large amount of personal information being influenced, controlled or maliciously used by foreign governments
after the overseas listing of an operator. The procurement of network products and services, data processing activities and overseas
listing should also be subject to the cybersecurity review if the CAC concerns or they potentially pose risks to national security. Our
PRC counsel, DeHeng Law Offices, is of the view that we are not subject to the cybersecurity review by the CAC, since (i) the cybersecurity
review is not applicable to further equity or debt offerings by companies that have completed their initial public offerings in the United
States; (ii) data processed in our business does not have a bearing on national security and may not be classified as core or important
data by the PRC governmental authorities. However, we cannot assure you that the PRC governmental authorities will not hold opposing
views or interpretations regarding the applicability of the cybersecurity review to us. As of the date of this report, we have not been
identified as an “operator of critical information infrastructure” by any PRC governmental authority, nor have we been informed
by any PRC governmental authority to undergo a cybersecurity review for this offering.
In addition, the Data
Security Law of the People’s Republic of China (the “Data Security Law”) was promulgated by the SCNPC on June 10, 2021
and took effect on September 1, 2021. Further, the CAC released the Measures for the Security Assessment of Cross-Border Data (Revised
Draft for Comments) on October 29, 2021, which specifies the government security review procedure for the transfer of a wide range of
data out of the territory of China. The draft measures for the first time clarify the threshold for being treated as a massive personal
information processor to be—(i) personal information processors holding over one million users which transfer personal information
out of the territory of China, or (ii) personal information processors which transfer accumulatively personal information of more than
100,000 users out of the territory of China or accumulatively sensitive personal information of more than 10,000 users out of the territory
of China. Massive personal information processors would be required to apply for the CAC’s security review of cross-border data
transfer with the provincial cyberspace administration. Before personal information processors can transfer data out of the territory
of China, they are required to conduct an internal risk assessment, regardless of whether they are subject to the CAC security review.
On November 14, 2021, the CAC released the Regulations on Cyber Data Security Management (Draft for Comments), or the draft regulations,
which shall apply to the processing of personal and organizational data out of the territory of China, under the following circumstances:
(i) for the purpose of providing products or services in the PRC; (ii) conducting analysis and evaluation of domestic individuals and
organizations; (iii) processing of important domestic data; or (iv) other circumstances provided by laws and administrative regulations.
The draft regulations classify data into three categories–general data, important data and core data. Data processors that transfer
data collected and generated in the PRC outside of the territory of China are required to prepare a data security assessment report to
the local cyberspace administration if (i) the data to be transmitted outside of the territory of China include important data, (ii)
critical information technology infrastructure operators and data processors holding over one million users that transfer data outside
the territory of China, or (iii) other circumstances that the CAC deems necessary. Meanwhile, a data processor that transfers personal
information and important data out of the territory of China shall report to the local cyberspace administration of the following in
the past calendar year: (i) the identities and contact information of all data receivers, (ii) the types, quantities and purposes of
the transmitted data, (iii) the locations and periods of storage as well as the scope and method of use of the transmitted data, (iv)
user complaints and the corresponding treatments related to the transmitted data, (v) violation of data security and the corresponding
treatments related to the transmitted data, (vi) the re-transmission of the transmitted data, and (vii) other circumstances that the
CAC deems necessary. A maximum of RMB10 million can be imposed on a data processor that is in violation of the draft regulations. It
is uncertain whether and when the abovementioned draft measures and regulations will be adopted, and if adopted, whether the final version
will contain the same provisions as the draft regulations.
The Data Security Law
and the Cybersecurity Law, together with other relevant regulations, are promulgated to jointly regulate China’s online spheres
in relation to personal information cybersecurity protection. There remain uncertainties regarding the further interpretation and implementation
of those laws and regulations. Despite our efforts to comply with applicable laws, regulations and other obligations relating to privacy,
data protection and information security, we cannot assure you that we will be compliant with such new laws, regulations and obligations
in all respects, and we may be ordered to rectify and terminate any actions that are deemed non-compliant by the regulatory authorities
and become subject to fines and other sanctions. As of the date of this report, we have not been involved in any investigations on cybersecurity
review made by the CAC on such basis, and we have not received any inquiry, notice, warning, or sanctions in such respect. We believe
that that we are compliant with the regulations and policies that have been issued by the CAC to date.
In order for us to maintain or achieve compliance
with applicable laws as they come into effect, it may require substantial expenditures of resources to continually evaluate our policies
and processes and adapt to new requirements that are or become applicable to us. Complying with any additional or new regulatory requirements
may impose significant burdens and costs on EZGO’s operations or require it to alter its business practices. While we strive to
protect our users’ privacy and data security and to comply with data protection laws and regulations applicable to us, however,
we cannot assure that our existing user information protection system and technical measures will be considered sufficient under all
applicable laws and regulations in all respects. Any failure or perceived failure by us to comply with applicable data privacy laws and
regulations, including in relation to the collection of necessary end-user consents and providing end-users with sufficient information
with respect to our use of their personal data, may result in fines and penalties imposed by regulators, governmental enforcement actions
(including enforcement orders requiring us to cease collecting or processing data in a certain way), litigation and/or adverse publicity.
Proceedings against us—regulatory, civil or otherwise—could force us to spend money and devote resources in the defense or
settlement of, and remediation related to, such proceedings. EZGO’s business operations could be adversely affected if the existing
or future laws and regulations are interpreted or implemented in a manner that is inconsistent with our current business practices or
requires changes to these practices.
The enforcement of the PRC Labor Contract
Law and other labor-related regulations in the PRC may adversely affect EZGO’s business and its 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,
EZGO’s 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, EZGO’s
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 EZGO’s business and operations.
Currently substantially all of EZGO’s
business operations are conducted in China through its VIE and the VIE’s subsidiaries, and substantially all of EZGO’s 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 EZGO’s
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:
| ● | investments
through enterprises established for only a few months without substantive operation; |
| ● | investments
with amounts far exceeding the registered capital of onshore parent and not supported by
its business performance shown on financial statements; |
| ● | investments
in targets that are not related to onshore parent’s main business; and |
| ● | investments
with abnormal sources of Renminbi funding suspected to be involved in illegal transfer of
assets or illegal operation of underground banking. |
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 EZGO’s 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 EZGO’s
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, EZGO’s business operations and
its ability to make distributions to the investors 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.
The PRC government could prevent the
cash maintained from leaving the PRC, restrict deployment of the cash into the business of the VIE and its subsidiaries and restrict
the ability to pay dividends to U.S. investors, which could materially adversely affect EZGO’s operations.
The PRC government controls the conversion of
Renminbi into foreign currencies and the remittance of currencies out of the PRC. We receive substantially all of our revenues in Renminbi,
and most of our cash is in Renminbi. Under our corporate structure, EZGO, a BVI holding company, primarily relies on dividend payments
from our PRC subsidiaries to fund any cash and financing requirements it may have. Under the existing PRC foreign exchange regulations,
payments of current account items, including profit distributions, interest payments and trade- and-service-related foreign exchange
transactions, can be made in foreign currencies without prior approval from the SAFE by complying with certain procedural requirements.
As such, under the existing exchange restrictions, cash generated from the operations of our PRC subsidiaries is able to be paid as dividends
in foreign currencies to EZGO without prior approval from the SAFE by complying with certain procedural requirements. However, approval
from or registration with appropriate government authorities is required where Renminbi is to be converted into foreign currency and
remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may
also at its discretion in the future restrict access to foreign currencies for current account transactions. There is no assurance that
the PRC government will not intervene or impose restrictions on the ability of us, our subsidiaries or the VIE to transfer cash. 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 from the PRC subsidiary to the offshore subsidiaries, across borders, and to our
shareholders, including the U.S. investors. These foreign exchange restrictions and limitations could prevent the cash maintained from
leaving the PRC, and restrict our ability to pay dividends to EZGO. and the U.S. investors.
There
are limitations on our PRC subsidiaries’ and the VIE’s ability to distribute earnings to their respective shareholders. On
the one hand, under the current PRC laws and regulations, our PRC subsidiaries may pay dividends only out of their accumulated profits.
In addition, our PRC subsidiaries are required to set aside at least 10% of their accumulated after-tax profits each year, if any, to
fund certain statutory reserve funds, until the aggregate amount of such fund reaches 50% of their registered capital. Our PRC subsidiaries
may at their discretion allocate a portion of their after-tax profits to staff welfare and bonus funds in accordance with relevant PRC
rules and regulations. These reserve funds and staff welfare and bonus funds cannot be distributed as cash dividends. Moreover, if the
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 distributions to us. On the other hand, through the VIE Agreements among Changzhou EZGO, the VIE and its shareholders,
we receive substantially all of the economic benefits of the VIE, most importantly, the ability to consolidate the financial statements
of the VIE with the financial statements of our holding company, EZGO under U.S. GAAP, for which we are the primary beneficiary of the
VIE for accounting purposes, in consideration for the services provided by Changzhou EZGO. For more information, see “Item 3.
Key Information—Contractual Arrangements and Corporate Structure” in this report. The VIE agreements are not equivalent
to equity ownership, and may limit our ability to settle amounts owed by the VIE under the VIE agreements. For example, the contractually
bound shareholders of the VIE could potentially breach their contractual agreements with us by failing to fulfill their contractual obligations,
failing to act in our interest, or acting to the detriment of our interest. Moreover, as these shareholders, rather than Changzhou EZGO,
are the actual shareholders of the VIE, we are unable to independently exercise any rights as a shareholder of the VIE and force the
VIE to distribute its earnings to us. In addition, the legality or enforceability of the VIE agreements have never been tested in a court
of law in China. If any relevant contractual provisions were to ultimately be held unenforceable by the PRC courts or other governmental
authorities, such uncertainty could result in us facing a reduced ability or complete inability to receive the economic benefits of the
business operations of the VIE. These restrictions and limitations could limit our ability to settle amounts owed under the VIE agreements
and our subsidiaries’ ability to pay dividends.
In addition, any transfer of funds by EZGO
to our PRC subsidiaries, either as a shareholder loan or as an increase in the registered capital, is subject to a series of procedural
requirements imposed by SAFE, SAMR, MOFCOM, or their local counterparts. This may hinder or delay EZGO’s deployment of cash into
its subsidiaries’ and the VIE’ business, which could result in a material and adverse effect on EZGO’s operations.
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 is wholly owned by 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 EZGO.
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, EZGO’s
shares in foreign currency terms may be adversely affected. EZGO may not be able to pay dividends in foreign currencies to its 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.
We have relied on the opinion of our PRC counsel,
DeHeng Law Offices, that we do not need to obtain prior approval from the CSRC pursuant to the M&A Rules. 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 EZGO’s operations in China, limit its 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 its business, financial condition, results of operations, reputation and prospects, as well as its 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 EZGO’s 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 EZGO obtains their approvals for any
future follow-on offering, EZGO may be unable to obtain such approvals which could significantly limit or completely hinder its ability
to offer or continue to offer its securities to its investors outside China.
U.S. regulatory bodies may be limited
in their ability to conduct investigations or inspections of EZGO’s 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 EZGO’s 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 EZGO conduct substantially all of its operations in China through the VIE and its subsidiaries and substantially all
of its assets are located in China. In addition, a majority of EZGO’s current directors and officers are nationals and residents
of the PRC and a substantial portion of their assets are located outside the United States. 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.
EZGO’s ordinary shares may be
delisted under the HFCA Act if the PCAOB is unable to adequately inspect audit documentation located in China. The delisting of EZGO’s
ordinary shares, or the threat of their being delisted, may materially and adversely affect EZGO’s ordinary shares. Additionally,
the inability of the PCAOB to conduct adequate inspections deprives our shareholders 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 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, and thus, would reduce
the time before EZGO’s securities may be prohibited from trading or delisted. 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.
On December 2, 2021, the SEC adopted final amendments
to its rules implementing the HFCA Act. Such final rules establish procedures that the SEC will follow in (i) determining whether a registrant
is a “Commission-Identified Issuer” (a registrant identified by the SEC as having filed an annual report with an audit report
issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB is unable to inspect or investigate
completely because of a position taken by an authority in that jurisdiction) and (ii) prohibiting the trading of an issuer that is a
Commission-Identified Issuer for three consecutive years under the HFCA Act. The SEC began identifying Commission-Identified Issuers
for the fiscal years beginning after December 18, 2020. A Commission-Identified Issuer is required to comply with the submission and
disclosure requirements in the annual report for each year in which it was identified. If a registrant is identified as a Commission-Identified
Issuer based on its annual report for the fiscal year ended, for example, September 30, 2021, the registrant will be required to comply
with the submission or disclosure requirements in its annual report filing covering the fiscal year ended September 30, 2022. As of the
date of this Amendment, we have not been, and do not expect to be identified by the SEC under the HFCA Act.
On December 16, 2021, the PCAOB issued its determination
report that the PCAOB is unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered in mainland
China and in Hong Kong, because of positions taken by PRC authorities in those jurisdictions, and the PCAOB included in the report of
its determination a list of the accounting firms that are headquartered in the PRC or Hong Kong. This report does not include our former
auditors, MBP and Briggs & Veselka, or our current auditor, WWC.
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 EZGO’s
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
former auditor, Briggs & Veselka, the independent registered public accounting firm that
issued one of the audit reports included 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, was subject to laws in the United States pursuant to which the PCAOB conducts
regular inspections to assess its compliance with the applicable professional standards.
Briggs & Veselka was headquartered in Houston, Texas, and was subject to inspection by
the PCAOB with the last inspection in 2019. Briggs & Veselka’s withdrawal of its
registration with the PCAOB became effective on May 24, 2022.
Our current auditor as of the date of this Amendment,
WWC, 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. WWC is headquartered in Flushing, New York, and is subject to inspection by the PCAOB on a regular basis with the last inspection
in February 2018.
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 company and the VIE’s 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 is currently unable to conduct inspections
in China without the approval of Chinese government authorities. If it is later determined that the PCAOB is unable to inspect or investigate
our auditor completely, investors may be deprived of the benefits of such inspection. Any audit reports not issued by auditors that are
completely inspected by the PCAOB, or a lack of PCAOB inspections of audit work undertaken in China that prevents the PCAOB from regularly
evaluating our auditors’ audits and their quality control procedures, could result in a lack of assurance that our financial statements
and disclosures are adequate and accurate, then such lack of inspection could cause EZGO’s securities to be delisted from the stock
exchange. The recent developments would add uncertainties to our offering pursuant to a prospectus 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, to the then President of the United States, the Report on Protecting United States Investors
from Significant Risks from Chinese Companies. This report recommended the SEC implement five recommendations to address companies from
jurisdictions that do not provide the PCAOB with sufficient access to fulfill 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 EZGO’s Ordinary Shares to be materially and adversely affected, and EZGO’s securities
could be delisted and prohibited from being traded on a national securities exchange earlier than would be required by the HFCA Act.
If EZGO’s securities are unable to be listed on another securities exchange by then, such a delisting would substantially impair
the ability to sell or purchase EZGO’s Ordinary Shares when desired, and the risk and uncertainty associated with a potential delisting
would have a negative impact on the price of EZGO’s 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 EZGO’s shareholders 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 auditor’s workpapers in China, it will make it more difficult to evaluate the effectiveness of our 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 could materially and adversely affect the value of EZGO’s 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 EZGO’s
Ordinary Shares on Nasdaq, which could materially impair the market for and market price of EZGO’s Ordinary Shares.
Risks Related to EZGO’s Ordinary
Shares
An active trading market for EZGO’s
ordinary shares may not continue and the trading price for EZGO’s ordinary shares may fluctuate significantly.
We cannot assure you that a liquid public
market for EZGO’s ordinary shares will continue. If an active public market for EZGO’s ordinary shares does not continue,
the market price and liquidity of EZGO’s ordinary shares may be materially and adversely affected. We can provide no assurance
that the trading price of EZGO’s ordinary shares will not decline. As a result, investors in EZGO’s securities may experience
a significant decrease in the value of their ordinary shares.
The trading price of EZGO’s ordinary
shares may be volatile, which could result in substantial losses to investors.
The trading price of EZGO’s 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 EZGO’s ordinary shares, regardless of our actual operating performance.
In addition to market and industry factors, the price and trading
volume for EZGO’s ordinary shares may be highly volatile for factors specific to our own operations, including the following:
|
● |
variations
in our revenues, earnings, cash flow and data related to our user base or user engagement; |
|
● |
announcements of new investments,
acquisitions, strategic partnerships or joint ventures by us or our competitors; |
|
● |
announcements of new product
and service offerings, solutions and expansions by us or our competitors; |
|
● |
changes in financial estimates
by securities analysts; |
|
● |
detrimental adverse publicity
about us or our industry; |
|
● |
additions or departures
of key personnel; |
|
● |
release of lock-up or other
transfer restrictions on our outstanding equity securities or sales of additional equity securities; and |
|
● |
potential litigation or
regulatory investigations. |
Any of these factors may result in large and
sudden changes in the volume and price at which EZGO’s 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 EZGO’s securities and subject us to additional trading
restrictions.
EZGO’s ordinary shares are listed on
Nasdaq. We cannot assure you that EZGO’s ordinary shares will continue to be listed on Nasdaq in the future. In order to continue
listing EZGO’s 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). EZGO’s 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 EZGO’s securities
from trading on its exchange and we are not able to list EZGO’s securities on another national securities exchange, we expect EZGO’s
securities could be quoted on an over-the-counter market. If this were to occur, we could face significant material adverse consequences,
including:
|
● |
a limited
availability of market quotations for EZGO’s securities; |
|
● |
reduced liquidity for
EZGO’s securities; |
|
● |
a determination that
EZGO’s ordinary shares are “penny stocks” which will require brokers trading in EZGO’s ordinary shares to
adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for EZGO’s
securities; |
|
● |
a limited amount of news
and analyst coverage; and |
|
● |
a decreased ability to
issue additional securities or obtain additional financing in the future. |
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 EZGO’s ordinary shares are listed on Nasdaq, such securities will be covered
securities. Although the states are preempted from regulating the sale of EZGO’s 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, EZGO’s
securities would not be covered securities and we would be subject to regulations in each state in which we offer EZGO’s securities.
EZGO’s 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 EZGO’s 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 EZGO’s ordinary shares.
EZGO’s 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 EZGO’s ordinary shares are delisted from the Nasdaq Capital Market at some later date, we may apply
to have EZGO’s 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 EZGO’s ordinary shares are delisted from the Nasdaq Capital Market and are no longer traded on
an exchange at some later date, EZGO’s ordinary shares may be subject to the “penny stock” regulations, and it is likely
that the price of EZGO’s ordinary shares would decline and that and our shareholders could find it difficult to sell EZGO’s
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, EZGO’s 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 EZGO’s ordinary shares, and may negatively
affect the ability of holders of EZGO’s 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 EZGO’s ordinary
shares, the market price for EZGO’s ordinary shares and trading volume could decline.
The trading market for EZGO’s 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 EZGO’s ordinary shares, the market price for EZGO’s 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 EZGO’s ordinary shares to decline.
The sale or availability for sale of
substantial amounts of EZGO’s ordinary shares could adversely affect their market price.
Sales of substantial amounts of EZGO’s
ordinary shares in the public market in the future, or the perception that these sales could occur, could adversely affect the market
price of EZGO’s ordinary shares and could materially impair our ability to raise capital through equity offerings in the future.
EZGO’s 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 EZGO’s 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 EZGO’s 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 EZGO’s 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 EZGO’s ordinary shares
will likely depend entirely upon any future price appreciation of EZGO’s ordinary shares. There is no guarantee that EZGO’s
ordinary shares will appreciate in value in the future or even maintain the price at which you purchased EZGO’s ordinary shares.
You may not realize a return on your investment in EZGO’s 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 EZGO’s ordinary shares may cause a material decline in the value of EZGO’s 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:
| ● | 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; |
| ● | 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 |
| ● | 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. |
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:
| ● | the
last day of the fiscal year during which we have total annual gross revenues of $1.07 billion
or more; |
| ● | the
last day of the fiscal year following the fifth anniversary of our initial public offering; |
| ● | the
date on which we have, during the previous three-year period, issued more than $1 billion
in non-convertible debt; or |
| ● | the
date on which we are deemed a “large accelerated issuer” as defined under the
federal securities laws. |
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 EZGO’s ordinary shares less attractive because we may rely on these exemptions. If some investors
find EZGO’s ordinary shares less attractive as a result, there may be a less active trading market for EZGO’s ordinary shares
and the trading price of EZGO’s 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 EZGO’s 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 EZGO’s 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 EZGO’s 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 EZGO’s ordinary shares, we generally will continue to be treated as a PFIC for all succeeding years during which such
U.S. Holder holds EZGO’s 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:
| ● | 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 |
| ● | 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. |
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:
| ● | 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; |
| ● | The
judgement is final and for a liquidated sum; |
| ● | 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; |
| ● | 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; |
| ● | recognition
or enforcement of the judgment would not be contrary to public policy in the BVI; and |
| ● | the
proceedings pursuant to which judgment was obtained were not contrary to natural justice. |
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, which was incorporated in China on August 6, 2021. Changzhou EZGO controls
the VIE through the VIE Agreements. See “— Contractual Arrangements with
the VIE and Its Shareholders.” EZGO conducts its business in the PRC primarily
though the VIE and its subsidiaries, Hengmao Power Battery, a PRC company of which 80.87%
of equity interest is owned by the VIE, Jiangsu Cenbird, a PRC company of which 51% of equity
interest is owned by the VIE, Yizhiying IoT, a PRC company and a wholly-owned subsidiary
of the VIE, Tianjin Dilang, a PRC company of which Yizhiying IoT owns 80% of equity interest,
and Tianjin Jiahao, a PRC company and a wholly-owned subsidiary of the VIE, since EZGO obtained
the rights to determine the most significant economic activities and receives the majority
of the economic benefits of the VIE through contractual arrangements in November 2019.
As a result of such series of contractual
arrangements, EZGO and its subsidiaries become the primary beneficiary of the VIE for accounting purposes and the VIE as a PRC consolidated
entity under U.S. GAAP. We consolidate the financial results of the VIE and its subsidiaries in our consolidated financial statements
in accordance with U.S. GAAP. Neither we nor our investors own any equity ownership in, direct foreign investment in, or control through
such ownership/investment of the VIE. These contractual arrangements have not been tested in a court of law in the PRC. As a result,
investors in EZGO’s ordinary shares are not purchasing an equity interest in the VIE or its subsidiaries but instead are purchasing
an equity interest in EZGO, the BVI holding company.
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, the VIE 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 the VIE 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, the VIE 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, the VIE entered into a Shares
Purchase Agreement with Shanghai Mingli and Tianjin Jiahao (“Shares Purchase Agreement”), pursuant to which the VIE 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 the VIE. 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 the VIE’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 its 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.
On July 21, 2022, EZGO entered into a securities
purchase agreement (the “SPA”) with certain “non-U.S. Persons” (the “Purchasers”) as defined in Regulation
S of the Securities Act, pursuant to which EZGO agreed to sell 10,000,000 ordinary shares (the “Shares”), at a per share
purchase price of $0.80 (the “Reg S Offering”). The gross proceeds to the Company from the Reg S Offering were US$8.0 million.
Upon closing of the Reg S Offering, there were 23,626,891 ordinary shares issued and outstanding. The Purchasers have each made customary
representations, warranties and covenants. The Shares were issued to Purchasers upon satisfaction of all closing conditions, including
Nasdaq’s completion of its review of the notification to Nasdaq regarding the listing of the Shares. The Shares issued in the Reg
S Offering are exempt from the registration requirements of the Securities Act, pursuant to Regulation S promulgated thereunder.
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 the VIE 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 the VIE on September 6, 2019, which
stipulated that Yuxing Liu would transfer 51% of his equity interest of Jiangsu Cenbird to the VIE. Through the VIE, 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, the VIE entered into the Asset
Purchase Arrangement Agreement with Benlin Huang, an individual, and Tianjin Jiahao, pursuant to which the VIE 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, the VIE 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, the VIE entered into the Shares
Purchase Agreement with Shanghai Mingli and Tianjin Jiahao, pursuant to which the VIE 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 the VIE. 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 the VIE’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:
|
|
|
DQ7-7A |
|
HONGYING |
|
|
|
|
|
|
HUALING |
|
HUANIU |
|
|
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JIALI |
|
LINGYING |
|
|
|
XIAO YUZHOU |
|
XIAOQINGXIN |
|
|
|
T2 |
|
T3 |
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 report included the following:
|
● |
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: |
No. |
|
Patent
Description |
|
Holder |
|
Patent
Type |
|
Patent
Number |
|
Duration |
1 |
|
Two-stroke
permanent magnet engine |
|
Yizhiying IoT |
|
Invention |
|
ZL201010552062.5 |
|
November 19, 2010 to November
18, 2030 |
2 |
|
Electric
vehicle headlamp device |
|
Yizhiying IoT |
|
Utility Model |
|
ZL201922413164.8 |
|
December 27, 2019 to December
26, 2029 |
3 |
|
Leakage
prevention device for electric vehicle |
|
Yizhiying IoT |
|
Utility Model |
|
ZL201922418505.0 |
|
December 28, 2019 to December
27, 2029 |
4 |
|
Portable
foldable bicycle |
|
Yizhiying IoT |
|
Utility Model |
|
201922390563.7 |
|
December 27, 2019 to December
26, 2029 |
5 |
|
Labor-saving
simple car ladder |
|
Yizhiying IoT |
|
Utility Model |
|
201922414574.4 |
|
December 28, 2019 to December
27, 2029 |
6 |
|
Detachable
and lifting basket |
|
Yizhiying IoT |
|
Utility Model |
|
201922419538.7 |
|
December 28, 2019 to December
27, 2029 |
|
● |
Software copyrights: We
had a large portfolio of protected software copyrights, including 12 software copyrights registered in China; |
|
● |
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: |
|
● |
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. |
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:
|
● |
ability to conform to the
New National Standards; |
|
● |
product features and functionality; |
|
● |
quality of technologies
and, as a result, research and development capabilities; |
|
● |
ability to innovate and
respond rapidly to customer needs; |
|
● |
ability to control costs; |
|
● |
relationships with key
participants in the value chain; |
|
● |
sufficient capital support;
and |
|
● |
brand awareness and reputation. |
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, 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 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 expired 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 an overseas listed issuer intends
to implement any follow-on offering in an overseas market, it should, through its major operating entity incorporated in the PRC, submit
filing materials to the CSRC within three working days after the completion of the offering. The required filing materials shall include
but not be limited to: (1) filing report and relevant commitments; and (2) domestic legal opinions.
The Draft Rules Regarding Overseas Listing,
if enacted, may subject us to additional compliance requirements 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. For instance, if we complete
any offering under a prospectus after the enactment of the Draft Rules Regarding Overseas Listing, we may be required to submit additional
filings. As of the date of this report, the Draft Rules Regarding Overseas Listings have not been promulgated, and we have not been required
to complete the record-filings procedure to the government of China for any offering pursuant to a prospectus. While the final version
of the Draft Rules Regarding Overseas Listings are expected to be adopted in 2022, we believe that none of the situations that would
clearly prohibit overseas offering and listing applies to us. In reaching this conclusion, we have relied on the advice of our PRC counsel,
DeHeng Law Offices, provided that there is uncertainty inherent in relying on an opinion of counsel in connection with whether we are
required to obtain permission from the Chinese government that is required to approve of our operations and/or any offerings made pursuant
to a prospectus. Any failure of us to fully comply with new regulatory requirements may significantly limit or completely hinder EZGO’s
ability to continue to offer its securities to investors, cause significant disruption to our business operations, and severely damage
our reputation, which could materially and adversely affect our financial condition and results of operations and cause EZGO’s
securities, including the securities we have registered for sale in a prospectus, to significantly decline in value or become worthless.
As of the date of this report, as advised by
our PRC legal counsel, DeHeng Law Offices, none of our company, our subsidiaries, or the VIE are covered by permissions requirements
from the CSRC, the CAC, or any other governmental agency that is required to approve the VIE’s operations, and therefore no such
permission or approval has been denied.
As of the date of this report, no relevant
laws or regulations in the PRC explicitly require us, our subsidiaries, or the VIE 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 the 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. or other foreign exchange. The SCNPC or other
PRC regulatory authorities may in the future promulgate laws, regulations or implementing rules that require our company, the 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 EZGO’s
operations at any time, which could result in a material change in its operations and its ordinary shares could decline in value or become
worthless” on page 35 for a discussion of these legal and operational risks and other information that should be considered
before making a decision to purchase EZGO’s securities. In the event that we, our subsidiaries, or the VIE (i) do not receive or
maintain any requisite permissions or approvals, (ii) inadvertently conclude that such permissions or approvals are not required, or
(iii) applicable laws, regulations, or interpretations change and we are required to obtain such permissions or approvals in the future,
we, our subsidiaries, and the VIE may be subject to sanctions imposed by the relevant PRC regulatory authority, including fines and penalties,
revocation of the licenses of the VIE and its subsidiaries, and suspension of these entities’ business, restrictions or limitations
on our ability to pay dividends outside of China, regulatory orders, including injunctions requiring the VIE and its subsidiaries to
cease collecting or processing data, litigation or adverse publicity, the delisting of EZGO’s securities on Nasdaq, and other forms
of sanctions, which may materially and adversely affect our business, financial condition, and results of operations.
The Cybersecurity Law of the PRC and relevant
regulations require network operators, which may include us, to ensure the security and stability of the services provided via network
and protect individual privacy and the security of personal data in general by requiring the consent of internet users prior to the collection,
use or disclosure of their personal data. Under the Cybersecurity Law, the owners and administrators of networks and network service
providers have various personal information security protection obligations, including restrictions on the collection and use of personal
information of users, and they are required to take steps to prevent personal data from being divulged, stolen, or tampered with. Regulatory
requirements regarding the protection of personal information are constantly evolving and can be subject to differing interpretations
or significant changes, making the extent of our responsibilities in that regard uncertain. An example of such evolving regulatory requirements
is the Measures for Cybersecurity Review (2021 version), which was promulgated on December 28, 2021 and took effect on February 15, 2022.
The measures, among others, stipulate 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 by the CAC. The cybersecurity
review, among others, evaluates the potential risks of critical information infrastructure, core data, important data, or a large amount
of personal information being influenced, controlled or maliciously used by foreign governments after the overseas listing of an operator.
The procurement of network products and services, data processing activities and overseas listing should also be subject to the cybersecurity
review if the CAC concerns or they potentially pose risks to national security. Based on the advice of our PRC counsel, DeHeng Law Offices,
who is of the view that we are not subject to the cybersecurity review by the CAC, since (i) the cybersecurity review is not applicable
to further equity or debt offerings by companies that have completed their initial public offerings in the United States; (ii) data processed
in our business does not have a bearing on national security and may not be classified as core or important data by the PRC governmental
authorities. However, we cannot assure you that the PRC governmental authorities will not hold opposing views or interpretations regarding
the applicability of the cybersecurity review to us. As of the date of this report, we have not been identified as an “operator
of critical information infrastructure” by any PRC governmental authority, nor have we been informed by any PRC governmental authority
to undergo a cybersecurity review for this offering.
In addition, the Data Security Law of the People’s
Republic of China (the “Data Security Law”) was promulgated by the SCNPC on June 10, 2021 and took effect on September 1,
2021. Further, the CAC released the Measures for the Security Assessment of Cross-Border Data (Revised Draft for Comments) on October
29, 2021, which specifies the government security review procedure for the transfer of a wide range of data out of the territory of China.
The draft measures for the first time clarify the threshold for being treated as a massive personal information processor to be—(i)
personal information processors holding over one million users which transfer personal information out of the territory of China, or
(ii) personal information processors which transfer accumulatively personal information of more than 100,000 users out of the territory
of China or accumulatively sensitive personal information of more than 10,000 users out of the territory of China. Massive personal information
processors would be required to apply for the CAC’s security review of cross-border data transfer with the provincial cyberspace
administration. Before personal information processors can transfer data out of the territory of China, they are required to conduct
an internal risk assessment, regardless of whether they are subject to the CAC security review. On November 14, 2021, the CAC released
the Regulations on Cyber Data Security Management (Draft for Comments), or the draft regulations, which shall apply to the processing
of personal and organizational data out of the territory of China, under the following circumstances: (i) for the purpose of providing
products or services in the PRC; (ii) conducting analysis and evaluation of domestic individuals and organizations; (iii) processing
of important domestic data; or (iv) other circumstances provided by laws and administrative regulations. The draft regulations classify
data into three categories–general data, important data and core data. Data processors that transfer data collected and generated
in the PRC outside of the territory of China are required to prepare a data security assessment report to the local cyberspace administration
if (i) the data to be transmitted outside of the territory of China include important data, (ii) critical information technology infrastructure
operators and data processors holding over one million users that transfer data outside the territory of China, or (iii) other circumstances
that the CAC deems necessary. Meanwhile, a data processor that transfers personal information and important data out of the territory
of China shall report to the local cyberspace administration of the following in the past calendar year: (i) the identities and contact
information of all data receivers, (ii) the types, quantities and purposes of the transmitted data, (iii) the locations and periods of
storage as well as the scope and method of use of the transmitted data, (iv) user complaints and the corresponding treatments related
to the transmitted data, (v) violation of data security and the corresponding treatments related to the transmitted data, (vi) the re-transmission
of the transmitted data, and (vii) other circumstances that the CAC deems necessary. A maximum of RMB10 million can be imposed on a data
processor that is in violation of the draft regulations. It is uncertain whether and when the abovementioned draft measures and regulations
will be adopted, and if adopted, whether the final version will contain the same provisions as the draft regulations.
The
Data Security Law and the Cybersecurity Law, together with other relevant regulations, are promulgated to jointly regulate China’s
online spheres in relation to personal information cybersecurity protection. There remain uncertainties regarding the further interpretation
and implementation of those laws and regulations. Despite our efforts to comply with applicable laws, regulations and other obligations
relating to privacy, data protection and information security, we cannot assure you that we will be compliant with such new laws, regulations
and obligations in all respects, and we may be ordered to rectify and terminate any actions that are deemed non-compliant by the regulatory
authorities and become subject to fines and other sanctions. As of the date of this report, we have not been involved in any investigations
on cybersecurity review made by the CAC on such basis, and we have not received any inquiry, notice, warning, or sanctions in such respect.
We believe that that we are compliant with the regulations and policies that have been issued by the CAC to date.
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:
|
● |
verify the real identities
of registered users through mobile phone numbers or other similar channels; |
|
● |
establish and improve procedures
for protection of user information; |
|
● |
establish and improve procedures
for information content censorship; |
|
● |
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; |
|
● |
respect and protect intellectual
property rights; and |
|
● |
keep records of users’
logs for 60 days. |
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 EZGO’s 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 |
|
● |
the VIE
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.
Enforceability
of Civil Liabilities
A majority of our officers and directors are
residents of China and a substantial portion of their assets are located outside the United States. As a result, it may be difficult
or impossible for a shareholder to effect service of process within the United States upon us or these persons, or to enforce against
us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities
laws of the United States or any state in the United States. It may also be difficult for a shareholder to enforce judgments obtained
in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our executive officers and
directors.
Our counsel as to PRC law has advised us that
there is uncertainty as to whether PRC courts would (i) recognize or enforce judgments of United States courts obtained against us or
our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in
the United States, or (ii) entertain original actions brought in each respective jurisdiction against us or our directors or officers
predicated upon the securities laws of the United States or any state in the United States.
Our counsel as to PRC law has further advised
us that the PRC Civil Procedures Law governs the recognition and enforcement of foreign judgments. PRC courts may recognize and enforce
foreign judgments in accordance with 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.
The PRC does not have any treaties or other agreements
with the United States that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the
PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they determine
that the judgment violates the basic principles of PRC law or national sovereignty, security or public interest. As a result, it is uncertain
whether a PRC court would enforce a judgment rendered by a court in the United States. Under the PRC Civil Procedures Law, foreign shareholders
may originate actions based on PRC law against us in the PRC, if they can establish sufficient nexus to the PRC for a PRC court to have
jurisdiction, and meet other procedural requirements, including, among others, the plaintiff must have a direct interest in the case,
and there must be a concrete claim, a factual basis and a cause for the suit.
4C. Organizational Structure
For descriptions of our organizational structure,
contractual arrangements, variable interest entity and subsidiaries as of the date of this report, please see “Item 3. Key Information
— Contractual Arrangements and Corporate Structure.”
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
WFOE (as defined below), 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 6. See also VIE and
consolidated financial information in Note 1 of our financial statements.
| ● | “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 and (ii) Changzhou Langyi Electronic Technology Co., Ltd., a wholly owned
PRC subsidiary; |
| ● | “WFOE”
refers to Changzhou EZGO Enterprise Management Co., Ltd., our 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 |
|
|
WFOE |
|
|
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 |
) |
|
|
(1,964 |
) |
|
|
(70,278 |
) |
|
|
(3,691,820 |
) |
|
|
- |
|
|
|
(4,259,897 |
) |
(Loss)
income from operations |
|
|
(495,835 |
) |
|
|
(1,964 |
) |
|
|
117,990 |
|
|
|
(3,497,610 |
) |
|
|
- |
|
|
|
(3,877,419 |
) |
Share
of loss from subsidiaries |
|
|
(203,744 |
) |
|
|
(205,707 |
) |
|
|
- |
|
|
|
- |
|
|
|
409,451 |
|
|
|
- |
|
Other
income (expense), net |
|
|
279 |
|
|
|
- |
|
|
|
156,368 |
|
|
|
(75,873 |
) |
|
|
- |
|
|
|
80,774 |
|
Loss
before income tax expenses (benefit) |
|
|
(699,300 |
) |
|
|
(207,671 |
) |
|
|
274,358 |
|
|
|
(3,573,483 |
) |
|
|
409,451 |
|
|
|
(3,796,645 |
) |
Net
loss |
|
|
(699,300 |
) |
|
|
(203,744 |
) |
|
|
(205,707 |
) |
|
|
(2,714,344 |
|
|
|
409,451 |
|
|
|
(3,413,644 |
) |
Less:
net loss attributable to non-controlling interests |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(434,971 |
) |
|
|
- |
|
|
|
(434,971 |
) |
Net
loss attributable to EZGO’s shareholders |
|
|
(699,300 |
) |
|
|
(203,744 |
) |
|
|
(205,707 |
) |
|
|
(2,279,373 |
) |
|
|
409,451 |
|
|
|
(2,978,673 |
) |
|
|
Fiscal
year ended September 30, 2020 |
|
|
|
Parent |
|
|
Non-VIE
Subsidiaries |
|
|
WFOE |
|
|
VIE
and its
subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party
revenues |
|
$ |
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
15,243,282 |
|
|
$ |
- |
|
|
$ |
15,243,282 |
|
Inter-company
consulting and services revenues |
|
|
- |
|
|
|
- |
|
|
|
116,190 |
|
|
|
- |
|
|
|
(116,190 |
) |
|
|
- |
|
Third-party
costs of Revenue |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(13,704,248 |
) |
|
|
- |
|
|
|
(13,704,248 |
) |
Inter-company
consulting and services costs |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(116,190 |
) |
|
|
116,190 |
|
|
|
- |
|
Gross
profit |
|
|
- |
|
|
|
- |
|
|
|
116,190 |
|
|
|
1,422,844 |
|
|
|
- |
|
|
|
1,539,034 |
|
Operating
expenses |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,467,068 |
) |
|
|
- |
|
|
|
(1,467,068 |
) |
Income
from operations |
|
|
- |
|
|
|
- |
|
|
|
116,190 |
|
|
|
(44,224 |
) |
|
|
- |
|
|
|
71,966 |
|
Share
of income from subsidiaries |
|
|
116,190 |
|
|
|
116,190 |
|
|
|
- |
|
|
|
- |
|
|
|
(232,380 |
) |
|
|
- |
|
Other
income, net |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
378,395 |
|
|
|
- |
|
|
|
378,395 |
|
Income
before income tax expenses |
|
|
116,190 |
|
|
|
116,190 |
|
|
|
116,190 |
|
|
|
334,171 |
|
|
|
(232,380 |
) |
|
|
450,361 |
|
Net
income |
|
|
116,190 |
|
|
|
116,190 |
|
|
|
116,190 |
|
|
|
160,732 |
|
|
|
(232,380 |
) |
|
|
276,922 |
|
Less:
net income attributable to non-controlling interests |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
129,748 |
|
|
|
- |
|
|
|
129,748 |
|
Net
income attributable to EZGO’s shareholders |
|
|
116,190 |
|
|
|
116,190 |
|
|
|
116,190 |
|
|
|
30,984 |
|
|
|
(232,380 |
) |
|
|
147,174 |
|
|
|
Fiscal
year ended September 30, 2019 |
|
|
|
Parent |
|
|
Non-VIE
Subsidiaries |
|
|
WFOE |
|
|
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 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Share
of income from VIE and its subsidiaries |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
income, net |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
265,200 |
|
|
|
- |
|
|
|
265,200 |
|
Income
before income tax expenses |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,041,063 |
|
|
|
- |
|
|
|
1,041,063 |
|
Net
income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,191,437 |
|
|
|
- |
|
|
|
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 |
|
Consolidated Balance Sheets Information
|
|
As
of September 30, 2021 |
|
|
|
Parent |
|
|
Non-VIE
Subsidiaries |
|
|
WFOE |
|
|
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 |
) |
|
|
- |
|
Service
fee receivable from VIE |
|
|
- |
|
|
|
- |
|
|
|
116,190 |
|
|
|
- |
|
|
|
(116,190 |
) |
|
|
- |
|
Amount
due from Non-VIE |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
1,914,828 |
|
|
|
(1,914,828 |
) |
|
|
- |
|
Amount
due from EZGO |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
316,524 |
|
|
|
(316,524 |
) |
|
|
- |
|
Current
assets |
|
|
20,145,974 |
|
|
|
7,831 |
|
|
|
18,187,550 |
|
|
|
23,880,044 |
|
|
|
(34,541,789 |
) |
|
|
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 |
|
|
|
- |
|
Service
fee payable to WFOE |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(116,190 |
) |
|
|
116,190 |
|
|
|
- |
|
Amount
due to EZGO |
|
|
- |
|
|
|
(15,853,200 |
) |
|
|
|
|
|
|
(3,017,337 |
) |
|
|
18,870,537 |
|
|
|
- |
|
Working
capital |
|
|
19,781,865 |
|
|
|
(15,844,963 |
) |
|
|
16,188,763 |
|
|
|
(1,921,225 |
) |
|
|
- |
|
|
|
18,204,440 |
|
Investment
in non-VIE subsidiaries |
|
|
- |
|
|
|
15,753,483 |
|
|
|
|
|
|
|
- |
|
|
|
(15,753,483 |
) |
|
|
- |
|
Assets |
|
|
20,145,974 |
|
|
|
15,761,314 |
|
|
|
18,187,547 |
|
|
|
38,212,105 |
|
|
|
(50,295,270 |
) |
|
|
42,011,670 |
|
|
|
As
of September 30, 2020 |
|
|
|
Parent |
|
|
Non-VIE
Subsidiaries |
|
|
WFOE |
|
|
VIE
and its
subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fee receivable from VIE |
|
|
- |
|
|
|
- |
|
|
|
116,190 |
|
|
|
- |
|
|
|
(116,190 |
) |
|
|
- |
|
Current assets |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
16,316,861 |
|
|
|
- |
|
|
|
16,316,861 |
|
Service fee payable to WFOE |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(116,190 |
) |
|
|
116,190 |
|
|
|
- |
|
Working capital |
|
|
- |
|
|
|
- |
|
|
|
116,190 |
|
|
|
9,528,018 |
|
|
|
- |
|
|
|
9,644,208 |
|
Investment in non-VIE subsidiaries |
|
|
116,190- |
|
|
|
116,190 |
|
|
|
|
|
|
|
- |
|
|
|
(232,380 |
) |
|
|
- |
|
Assets |
|
|
116,190- |
|
|
|
116,190 |
|
|
|
116,190 |
|
|
|
19,817,798 |
|
|
|
(348,570 |
) |
|
|
19,817,798 |
|
|
|
As
of September 30, 2019 |
|
|
|
Parent |
|
|
Non-VIE
Subsidiaries |
|
|
WFOE |
|
|
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 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Assets |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
19,171,950 |
|
|
|
|
|
|
|
19,171,950 |
|
Consolidated Cash Flows Information
| |
Fiscal year ended September 30,
2021 | |
| |
Parent | | |
Non-VIE Subsidiaries | | |
WFOE | | |
VIE and its subsidiaries | | |
Eliminations | | |
Consolidated | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Total cash used in operating
activities | |
$ | (801,208 | ) | |
$ | (1,963 | ) | |
| (4,351,605 | ) | |
$ | (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 | | |
| - | |
Invest in subsidiary | |
| | | |
| (15,843,000 | ) | |
| | | |
| | | |
| 15,843,000 | | |
| | |
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 | ) | |
| (15,843,000 | ) | |
| (13,323,711 | ) | |
| (12,952,082 | ) | |
| 49,952,076 | | |
| (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 | ) | |
| - | |
Contribution from shareholder | |
| | | |
| | | |
| 15,843,000 | | |
| | | |
| (15,843,000 | ) | |
| | |
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 | | |
| 15,853,200 | | |
| 17,757,828 | | |
| 18,157,942 | | |
| (49,952,076 | ) | |
| 22,764,076 | |
Effect of exchange rate changes | |
| - | | |
| - | | |
| | | |
| 78,968 | | |
| - | | |
| 78,968 | |
Net increase in cash, cash equivalents
and restricted cash | |
| 1,275,437 | | |
| 8,237 | | |
| 82,512 | | |
| 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 | | |
WFOE | | |
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 | | |
WFOE | | |
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
EZGO can transfer cash to its subsidiaries through
capital contributions and/or intercompany loans, and EZGO’s subsidiaries can transfer cash to EZGO through dividends or other distributions
and/or intercompany loans. Additionally, EZGO’s subsidiaries can transfer cash to the VIE through loans, and the VIE can transfer
cash to EZGO as service fees under the VIE Agreements and/or through loans. We intend to settle amounts owed under the VIE Agreements.
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 an interest-free loan of US$15,853,200 to EZGO HK; EZGO also paid US$3,017,337 on behalf of the VIE for the acquisition
of Tianjin Jiahao and insurance fees; and EZGO HK injected registered capital of US$15,843,000 into Changzhou EZGO. Changzhou EZGO provided
loans of US$13,323,711 to the VIE and had US$1,914,828 of payables due 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 including capital injection and loans, would
be eliminated upon consolidation.
We maintain bank accounts in China, including
cash in Renminbi in the amount of RMB 29,583,341 and cash in USD in the amount of US$7,831 as of September 30, 2021. Funds are transferred
between EZGO, its subsidiaries, and the VIE for their daily operation purposes. The transfer of funds between our PRC subsidiaries and
the VIE are subject to the Provisions of the Supreme People’s Court on Several Issues Concerning the Application of Law in the
Trial of Private Lending Cases (2020 Revision, the “Provisions on Private Lending Cases”), which was implemented on August
20, 2020 to regulate the financing activities between natural persons, legal persons and unincorporated organizations. The Provisions
on Private Lending Cases set forth that private lending contracts will be upheld as invalid under the circumstance that (i) the lender
swindles loans from financial institutions for relending; (ii) the lender relends the funds obtained by means of a loan from another
profit-making legal person, raising funds from its employees, illegally taking deposits from the public; (iii) the lender who has not
obtained the lending qualification according to the law lends money to any unspecified object of the society for the purpose of making
profits; (iv) the lender lends funds to a borrower when the lender knows or should have known that the borrower intended to use the borrowed
funds for illegal or criminal purposes; (v) the lending is in violation of public orders or good morals; or (vi) the lending is in violation
of mandatory provisions of laws or administrative regulations. Due to the circumstances aforementioned do not exist in the PRC subsidiaries’
operations, our PRC counsel, DeHeng Law Offices, is of the view that the Provisions on Private Lending Cases does not prohibit using
cash generated from one subsidiary to fund another subsidiary’s operations. We have not been notified of any other restriction
which could limit our PRC subsidiaries’ ability to transfer cash between subsidiaries. As of the date of this Amendment, we have
not installed any cash management policies that dictate how funds are transferred between us, our subsidiaries, and the VIE.
There is no assurance that the PRC government
will not intervene or impose restrictions on the ability of us, our subsidiaries and the VIE to transfer cash. Most of our cash is in
Renminbi, and the PRC government could prevent the cash maintained from leaving the PRC, could restrict deployment of the cash into the
business of the VIE and its subsidiaries and restrict the ability to pay dividends. For details regarding the restrictions on our ability
to transfer cash between us, our subsidiaries and the VIE, see “Item 3. Key Information – D. Risk Factors—Risks
Related to Doing Business in China—The PRC government could prevent the cash maintained from leaving the PRC, restrict deployment
of the cash into the business of the VIE and its subsidiaries and restrict the ability to pay dividends to U.S. investors, which could
materially adversely affect EZGO’s operations” on page 42. We currently do not have cash management policies that dictate
how funds are transferred between us, our subsidiaries, and the VIE.
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
the VIE and its subsidiaries, with substantially all of its operations and assets in China. We are permitted under PRC laws and regulations
to provide funding to our WFOE, Changzhou EZGO only through loans or capital contributions, and to the 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 from 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” on page 41.
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 subsidiaries nor the VIE has paid any dividends
or made any other distributions to our holding company or any U.S. investors as of the date of this Amendment. 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” on page 44.
As of September 30, 2021, none of our subsidiaries
have ever paid any dividends or made any other distributions to us or their respective holding companies nor have we or any of our subsidiaries
ever paid dividends or made any 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” on page 44.
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”
on page 43.
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 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 EZGO’s
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 |
|
(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. |
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; |
|
(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 |
|
(e) |
an arrangement, if permitted
by the BVI High Court. |
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:
|
(a) |
the company is insolvent; |
|
(b) |
the court is of the opinion
that it is just and equitable that a liquidator should be appointed; or |
|
(c) |
the court is of the opinion
that it is in the public interest for a liquidator to be appointed. |
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:
|
(a) |
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. |
|
(b) |
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. |
|
(c) |
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. |
|
(d) |
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. |
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:
|
(a) |
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: |
|
(i) |
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 |
|
(ii) |
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 |
|
(b) |
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. |
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:
|
● |
Foreign
Currency Administration Rules of 1996, as amended; and |
|
● |
Administrative
Rules of the Settlement, Sale and Payment of Foreign Exchange of 1996. |
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 EZGO’s 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 EZGO’s 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.”
Changzhou EZGO 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 EZGO’s
ordinary shares. This summary applies only to U.S. Holders that hold EZGO’s 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 report, on U.S. Treasury regulations in effect or, in some cases, proposed as of the date of this 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 EZGO’s 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:
|
● |
financial institutions
or financial services entities; |
|
● |
regulated investment companies; |
|
● |
real estate investment
trusts; |
|
● |
traders that elect to use
a mark-to-market method of accounting; |
|
● |
governments or agencies
or instrumentalities thereof; |
|
● |
certain former U.S. citizens
or long-term residents; |
|
● |
tax-exempt entities (including
private foundations); |
|
● |
persons liable for alternative
minimum tax; |
|
● |
persons holding stock as
part of a straddle, hedging, conversion or other integrated transaction; |
|
● |
persons whose functional
currency is not the U.S. dollar; |
|
● |
passive foreign investment
companies; |
|
● |
controlled foreign corporations; |
|
● |
persons that actually or
constructively own 5% or more of the total combined voting power of all classes of our voting stock; or |
|
● |
partnerships or other entities
taxable as partnerships for U.S. federal income tax purposes, or persons holding ordinary shares through such entities. |
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 EZGO’S ORDINARY SHARES.
For purposes of this discussion, a “U.S.
Holder” is a beneficial owner of EZGO’s ordinary shares that is, for U.S. federal income tax purposes:
|
● |
an individual who is a
citizen or resident of the United States; |
|
● |
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; |
|
● |
an estate, the income of
which is subject to U.S. federal income taxation regardless of its source; or |
|
● |
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. |
If a partnership (or other entity treated
as a partnership for U.S. federal income tax purposes) is a beneficial owner of EZGO’s 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
EZGO’s ordinary shares and their partners are urged to consult their tax advisors regarding an investment in EZGO’s ordinary
shares.
Taxation of Dividends and Other Distributions
on EZGO’s 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 EZGO’s 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 EZGO’s
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 EZGO’s 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 EZGO’s ordinary shares. Dividends received on EZGO’s 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 EZGO’s 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 EZGO’s 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 EZGO’s
ordinary shares, we generally would continue to be treated as a PFIC for all succeeding years during which such U.S. Holder held EZGO’s
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 EZGO’s 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,
|
● |
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; |
|
● |
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; |
|
● |
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 |
|
● |
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. |
If we are treated as a PFIC for any taxable
year during which a U.S. Holder holds EZGO’s 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 EZGO’s 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 EZGO’s 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 EZGO’s 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 EZGO’s 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 EZGO’s ordinary shares and proceeds from the sale, exchange or redemption of EZGO’s 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 EZGO’S
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, EZGO’s 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.