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EZGO Technologies (EZGO)

Filed: 5 Aug 22, 5:31pm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

AMENDMENT NO. 2

TO

FORM 20-F

 

☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended September 30, 2021

 

OR

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _________ to _____________.

 

OR

 

☐  SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report:

 

Commission file number: 001-39833

 

EZGO Technologies Ltd.

(Exact name of Registrant as Specified in its Charter)

 

British Virgin Islands

(Jurisdiction of Incorporation or Organization)

 

Building #A, Floor 2, Changzhou Institute of Dalian University of Technology,

Science and Education Town,

Wujin District, Changzhou City

Jiangsu, China 213164

(Address of Principal Executive Offices)

 

Jianhui Ye

Tel: (86) 0519-83683805

Building #A, Floor 2, Changzhou Institute of Dalian University of Technology,

Science and Education Town,

Wujin District, Changzhou City

Jiangsu, China 213164

(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of Each Class Trading symbol Name of Each Exchange On
Which Registered
Ordinary shares, par value 
US$0.001 per share
 EZGO Nasdaq Capital Market

 

 

 

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:

 

None

(Title of Class)

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

 

None

(Title of Class)

 

The number of outstanding shares of each of the issuer’s classes of capital or common stock as of January 26, 2022 was: 13,626,891 ordinary shares, par value $0.001 per share.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

Yes  ☐  No  ☒

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

Yes  ☐  No  ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes ☒  No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Yes  ☒  No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ☐Accelerated filer ☐Non-accelerated filer ☒Emerging growth company ☒

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

☒ U.S. GAAP☐ International Financial Reporting Standards as issued☐ Other
 by the International Accounting Standards Board 

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow: Item 17  ☐  Item 18  ☐

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  ☐  No  ☒

 

 

 

 

 

  

EXPLANATORY NOTE

  

This Amendment No. 2 to the Annual Report on Form 20-F (this “Amendment”) amends the Annual Report on Form 20-F of EZGO Technologies Ltd. (the “Company,” “we,” and “our”) for the year ended September 30, 2021, which was originally filed with the U.S. Securities and Exchange Commission on January 27, 2022 (the “Original Filing”), and was amended by Amendment No. 1 to the Original Filing on June 24, 2022 (the “Amendment No. 1”).

 

The Company is filing this Amendment for the purpose of disclosing certain legal and operational risks and potential impact on the Company associated with having substantially all of its operations conducted by its operating entities in China, additional legal, regulatory and enforcement risks that may apply to investments in the Company and controls and procedures as required by Item 15(b)(3) of Form 20-F. In addition, pursuant to Rule 12b-15 under the Exchange Act, the Company is filing the certifications required under the Sarbanes-Oxley Act of 2002.

 

Except as described above or as otherwise expressly provided by the terms of this Amendment, no other changes have been made to the Original Filing and the Amendment No. 1. Except as otherwise indicated herein, this Amendment continues to speak as of the date of the Original Filing and the Amendment No. 1, as applicable, and the Company has not updated the disclosures contained therein to reflect any events that occurred subsequent to the date of the Original Filing.

 

 

 

  

EZGO TECHNOLOGIES LTD.

FORM 20-F ANNUAL REPORT

 

TABLE OF CONTENTS

 

  Page
   
 PART I1
   
Item 1.Identity of Directors, Senior Management and Advisers5
Item 2.Offer Statistics and Expected Timetable5
Item 3.Key Information5
Item 4.Information On The Company57
Item 4A.Unresolved Staff Comments94
Item 5.Operating And Financial Review And Prospects94
Item 6.Directors, Senior Management And Employees114
Item 7.Major Shareholders And Related Party Transactions121
Item 8.Financial Information123
Item 9.The Offer And Listing123
Item 10.Additional Information123
Item 11.Quantitative And Qualitative Disclosures About Market Risk140
Item 12.Description Of Securities Other Than Equity Securities140
   
 PART II141
   
Item 13.Defaults, Dividend Arrearages And Delinquencies141
Item 14.Material Modifications To The Rights Of Security Holders And Use Of Proceeds141
Item 15.Controls And Procedures142
Item 16.[Reserved]143
Item 16A.Audit Committee Financial Expert143
Item 16B.Code Of Ethics143
Item 16C.Principal Accountant Fees and Services143
Item 16D.Exemptions From The Listing Standards For Audit Committees144
Item 16E.Purchases Of Equity Securities By The Issuer And Affiliated Purchasers144
Item 16F.Change In Registrant’s Certifying Accountant144
Item 16G.Corporate Governance144
Item 16H.Mine Safety Disclosure144
Item 16IDisclosure Regarding Foreign Jurisdictions That Prevent Inspections144
   
 PART III145
   
Item 17.Financial Statements145
Item 18.Financial Statements145
Item 19.Exhibits145

 

i

 

 

PART I

 

CERTAIN INFORMATION

 

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. 

 

Unless the context indicates otherwise, all references to “China” and the “PRC” refer to the People’s Republic of China, excluding, for the purpose of this annual report on Form 20-F, Taiwan, Hong Kong and Macau, all references to “Renminbi” or “RMB” are to the legal currency of China and all references to “U.S. dollars,” “dollars,” “US$” and “$” are to the legal currency of the United States. This annual report contains translations of Renminbi amounts into U.S. dollars at specified rates solely for the convenience of the reader. We make no representation that the Renminbi or U.S. dollar amounts referred to in this report could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. On September 30, 2021, the middle price of RMB exchange rate announced by the People’s Bank of China was RMB6.4854 to $1.00.

 

Investing in EZGO’s securities is highly speculative and involves a significant degree of risk. EZGO is not an operating company established in the PRC, but a holding company incorporated in the British Virgin Islands, or the BVI. As a holding company with no material operations of its own, EZGO conducts the majority of its operations through contractual arrangements with its operating entities established in the PRC, primarily the VIE, in which EZGO does not hold any equity interest, and the VIE’s subsidiaries based in the PRC, with substantially all of their operations and assets in China. This variable interest entity structure involves unique risks to investors. The contractual arrangements with the VIE have not been tested in court. This variable interest entity 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 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.

 

Investors may never hold equity interests in the Chinese operating company. The Chinese regulatory authorities could disallow this variable interest entity structure, 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 to significantly decline or become worthless. For a description of our corporate structure and contractual arrangements with the VIE, see “Item 4C. Organizational Structure” in this report. See also “Item 3. Key Information— D. Risk Factors— Risks Related to Our Corporate Structure” beginning on page 19 for certain risks related to the contractual arrangements with the VIE.

 

In addition, as EZGO conducts substantially all of its operations in China through the VIE and its subsidiaries in China, it is subject to legal and operational risks associated with having substantially all of its operations in China, which risks could result in a material change in EZGO’s operations and/or the value of the securities EZGO has registered for sale or could significantly limit or completely hinder EZGO’s ability to offer or continue to offer EZGO’s securities to investors and cause the value of EZGO’s securities to significantly decline or be worthless. 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. Our PRC counsel, DeHeng Law Offices, is of the view that as of the date of this Amendment, we are not directly subject to these regulatory actions or statements, as we have not implemented any monopolistic behavior and our business does not involve the collection of user data, implicate cybersecurity, or involve any other type of restricted industry. As further advised by our PRC counsel, as of the date of this Amendment, no effective laws or regulations in the PRC explicitly require us to seek approval from the China Securities Regulatory Commission (the “CSRC”) or any other PRC governmental authorities for our overseas listing, nor has our company, any of our subsidiaries, or the VIE or any of its subsidiaries, received any inquiry, notice, warning or sanctions regarding our planned overseas listing 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 the VIE’s daily business operation, the ability to accept foreign investments and list on a U.S. or other foreign exchange. The Standing Committee of the National People’s Congress (the “SCNPC”) or other PRC regulatory authorities may in the future promulgate laws, regulations or implementing rules that requires our company, the VIE or any of its subsidiaries to obtain regulatory approval from Chinese authorities before offering securities in the U.S. Any future Chinese, U.S., BVI or other rules and regulations that place restrictions on capital raising or other activities by companies with extensive operations in China could adversely affect EZGO’s business and results of operations. See “Item 3. Key Information — D. Risk Factors— Risks Related to Doing Business in China” beginning on page 19 for a detailed description of various risks related to doing business in China and other information that should be considered before making a decision to purchase any of EZGO’s securities.

 

1

 

 

As a holding company, EZGO relies on dividends and other distributions on equity paid by its operating subsidiaries for cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to its shareholders or to service any expenses it may incur. Our PRC subsidiaries’ ability to distribute dividends is based upon their respective distributable earnings. Current PRC regulations permit our PRC subsidiaries to pay dividends to their respective shareholders only out of their accumulated profits, if any, as determined in accordance with PRC accounting standards and regulations. In addition, under PRC law, each of our PRC subsidiaries is required to set aside at least 10% of its after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of its registered capital. These reserves are not distributable as cash dividends. If any of our PRC subsidiaries incurs debt on its own behalf in the future, the instruments governing such debt may restrict its ability to pay dividends to EZGO. To date, there have not been any such dividends or other distributions from our PRC subsidiaries to our subsidiaries located outside of China. In addition, as of the date of the Original Filing, none of our PRC subsidiaries had ever issued any dividends or distributions to EZGO or its shareholders outside of China. Furthermore, as of the date of the Original Filing, neither EZGO nor any of its subsidiaries had ever paid dividends or made distributions to U.S. investors. EZGO is permitted under PRC laws and regulations as an offshore holding company to provide funding to its PRC subsidiaries in China through shareholder loans or capital contributions, subject to satisfaction of applicable government registration, approval and filing requirements. According to the relevant PRC regulations on foreign-invested enterprises in China, there are no quantity limits on EZGO’s ability to make capital contributions to its PRC subsidiaries. However, our PRC subsidiaries may not procure loans which exceed the difference between their total investment amount as recorded in the Foreign Investment Comprehensive Management Information System and their respective registered capital or 2.5 times of their net worth. In the future, cash proceeds raised from overseas financing activities may continue to be transferred by EZGO to the PRC subsidiaries via capital contribution or shareholder loans, as the case may be. We intend to retain most, if not all, of our available funds and any future earnings for the development and growth of our business in China. We do not expect to pay dividends or distribute earnings in the foreseeable future. We intend to settle amounts owed under the contractual arrangements with the VIE.

 

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.

 

To date, transfers have occurred between EZGO, its subsidiaries, and the VIE. Prior to the completion of EZGO’s 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.

  

2

 

 

After the completion of our initial public offering, our holding company EZGO transferred funds through a shareholder loan to EZGO’s wholly-owned subsidiary, China EZGO Group Ltd. (“EZGO HK”). EZGO HK transferred funds through an increase in the registered capital to EZGO HK’s wholly-owned subsidiary, Changzhou EZGO Enterprise Management Co., Ltd. (“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     

 

For details of the transfers between EZGO, its subsidiaries, and the VIE, see “Item 3. Key Information — Transfer of Cash through our Organization.” For details of VIE’s financial information, see “Item 3. Key Information —VIE Financial Information” for the condensed consolidating schedule and pages F-9 to F-12 of this Amendment. 

 

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, 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 the Original Filing, we had not installed any cash management policies that dictate how funds are transferred between EZGO, our subsidiaries, and the VIE.

 

Most of our cash is in Renminbi, and the PRC government could prevent the cash maintained in the PRC or Hong Kong from leaving, 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 EZGO, our subsidiaries and the VIE, 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,” “Item 3. Key Information – D. Risk Factors—Risks Related to Doing Business in China— PRC regulation on loans to, and direct investment in, PRC entities by offshore holding companies and governmental control in currency conversion may delay or prevent us from using the proceeds of our initial public offering or follow-on offering to make loans to or make additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business,” 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.” 

 

3

 

 

Effect of Holding Foreign Companies Accountable Act 

 

The Holding Foreign Companies Accountable Act (the “HFCA Act”), which was signed into law on December 18, 2020, requires a foreign company to submit that it is not owned or manipulated by a foreign government or disclose the ownership of governmental entities and certain additional information, if the Public Company Accounting Oversight Board, or PCAOB, is unable to inspect completely a foreign auditor that signs the company’s financial statements. If the PCAOB is unable to inspect the Company’s auditors for three consecutive years, the Company’s securities will be prohibited from trading on a national exchange. The U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act on June 22, 2021, which, if enacted, would decrease the number of non-inspection years from three years to two, thus reducing the time period before EZGO’s ordinary shares may be prohibited from trading or delisted. Due to a position taken by the China Securities Regulatory Commission, or CSRC, the PCAOB is prevented from fully inspecting auditing records and evaluating quality control procedures of the auditors based in China. As a result, the investors may be 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 these accounting firms’ audit procedures or quality control procedures as compared to auditors outside of China that are subject to the PCAOB inspections, which could cause existing and potential investors in EZGO’s ordinary shares to lose confidence in our reported financial information and the quality of our financial statements. These developments could add uncertainties to EZGO’s offering, including the possibility that the SEC may prohibit trading in EZGO’s securities if the PCAOB cannot fully inspect or investigate our auditor and we fail to appoint a new auditor that is accessible to the PCAOB and that Nasdaq can delist EZGO’s ordinary shares.

 

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, Marcum Bernstein & Pinchuk LLP (“MBP”) and Briggs & Veselka Co., LLP (“Briggs & Veselka”), or our current auditor, Wei, Wei & Co., LLP (“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.

 

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.

 

For details on the effects of HFCA Act on us, see “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 investors with the benefits of such inspections. Furthermore, on June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act, which, if enacted, would amend the HFCA Act and require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years instead of three.” on page 47.

 

4

 

 

FORWARD-LOOKING STATEMENTS

 

This report contains “forward-looking statements” for purposes of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 that represent our beliefs, projections and predictions about future events. All statements other than statements of historical fact are “forward-looking statements,” including any projections of earnings, revenue or other financial items, any statements of the plans, strategies and objectives of management for future operations, any statements concerning proposed new projects or other developments, any statements regarding future economic conditions or performance, any statements of management’s beliefs, goals, strategies, intentions and objectives, and any statements of assumptions underlying any of the foregoing. Words such as “may,” “will,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates” and similar expressions, as well as statements in the future tense, identify forward-looking statements.

 

These statements are necessarily subjective and involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from any future results, performance or achievements described in or implied by such statements. Actual results may differ materially from expected results described in our forward-looking statements, including with respect to correct measurement and identification of factors affecting our business or the extent of their likely impact, and the accuracy and completeness of the publicly available information with respect to the factors upon which our business strategy is based or the success of our business.

 

Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of whether, or the times by which, our performance or results may be achieved. Forward-looking statements are based on information available at the time those statements are made and management’s belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to, those factors discussed under the headings “Risk Factors,” “Operating and Financial Review and Prospects,” and elsewhere in this report.

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not Applicable.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not Applicable.

  

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.

 

5

 

 

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.

 

 

  

6

 

 

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. 

 

7

 

 

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.

 

8

 

 

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)

 

9

 

 

  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 

 

10

 

 

  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.

 

11

 

  

  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     

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

  

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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.

 

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Risks Related to Our Corporate Structure

 

Risks and uncertainties relating to our corporate structure include, but are not limited to, the following:

 

 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.

 

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 PRC regulation on loans to, and direct investment in, PRC entities by offshore holding companies and governmental control in currency conversion may delay or prevent us from using the proceeds of 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.

 

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We are an early stage company of e-bicycle products and charging piles with a limited operating history. Our limited operating history in the industry may not provide an adequate basis to judge our future prospects and results of operations for this segment, and may increase the risk of your investment.

 

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.

 

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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.

 

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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.

 

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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.

 

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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.

  

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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;

 

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burdens of complying with a wide variety of local laws and regulations, including personal data protection, battery, motor, packaging and labelling;

 

political and economic instability;

 

trade restrictions;

 

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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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:

 

 revoking our business and operating licenses;

 

 levying fines on us;

 

 confiscating any of our income that they deem to be obtained through illegal operations;

 

 shutting down our services;

 

 discontinuing or restricting EZGO’s operations in China;

 

 imposing conditions or requirements with which we may not be able to comply;

 

 requiring us to change our corporate structure and contractual arrangements;

 

 restricting or prohibiting our use of the proceeds from overseas offering to finance the VIE’s business and operations; and

 

 taking other regulatory or enforcement actions that could be harmful to our business.

 

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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.

 

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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.

 

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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. 

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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;

 

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in obtaining judgment there was no fraud on the part of the person in whose favor judgment was given or on the part of the U.S. court;

 

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.

 

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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. 

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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.

 

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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.

 

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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

 

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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

 

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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.

 

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Below are some of Dilang brand’s e-bicycles and urban-style e-tricycles:

 

TDT001Z: TDT002Z:
   
 
   
TDT003Z: TDT004Z:
   
 
TDT005Z: TDR66Z:
 

 

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TDT01Z TDT03Z
   
 
   
Urban e-tricycle: A6 Urban e-tricycle: X7
   
 
Urban e-tricycle: Jelly Bean D1
   
 

 

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Below are part of Dilang brand’s new models:

 

 

 

 

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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.

 

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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

 

 
JIALI LINGYING

 

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HONGSHAN LINGZHI
   
 
KUPAO  

 

 
XIAO YUZHOU XIAOQINGXIN

 

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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.

 

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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:

 

 

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.”

 

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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.

 

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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.

 

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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.”

 

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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 

 

 

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  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 

 

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  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.

 

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  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.

 

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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.

 

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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  

 

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ITEM 4A. UNRESOLVED STAFF COMMENTS

 

Not Applicable

 

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

The following discussion and analysis should be read in conjunction with our consolidated financial statements, the notes to those financial statements and other financial data that appear elsewhere in this annual report. In addition to historical information, the following discussion contains forward-looking statements based on current expectations that involve risks and uncertainties. Actual results and the timing of certain events may differ significantly from those projected in such forward-looking statements due to a number of factors, including those set forth in “Item 3. Key Information — D. Risk Factors” and elsewhere in this report. Our consolidated financial statements are prepared in conformity with U.S. GAAP.

 

Overview

 

Our vision is to build a leading short-distance transportation solution provider in China. Leveraging our IoT management platform, we have preliminarily established a business model centered on the sale of e-bicycles and battery and cells, complemented by sale of battery packs, and our charging pile business. 

 

Currently, we (i) design, manufacture, and sell e-bicycles and e-tricycles; (ii) sell lithium batteries; and (iii) sell, franchise and operate smart charging piles for e-bicycles and other electronic devices.

 

For the fiscal years ended September 30, 2019, 2020 and 2021, our revenues were $1,371,201, $15,243,282 and $23,422,006, respectively. We incurred a net income of $2,191,437 and $276,922 for the fiscal years ended September 30, 2019 and 2020, respectively and a net loss of $3,413,644 for the fiscal year ended September 30, 2021. We currently generate most of our revenues from e-bicycles sales and battery packs sales. We plan to focus on completing our ecological chain of e-bicycles from manufacture to sales. 

 

Key Factors that Affect Operating Results

 

We believe the following key factors may affect our financial condition and results of operations:

 

our ability to increase our e-bicycle sales volume;

 

our ability to enhance our smart charging piles volume;

 

our ability to enhance our operational efficiency; and

 

our ability to expand into international markets.

 

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COVID-19

 

The outbreak of novel coronavirus (COVID-19) began in December 2019 and was quickly declared as a Public Health Emergency of International Concern on January 30, 2020 by the World Health Organization. The pandemic has resulted in quarantines, travel restrictions, and the temporary closure of stores and facilities in China and elsewhere.

 

Substantially all of our revenue is generated from and workforce are concentrated in China. Consequently, the COVID-19 Outbreak has materially adversely affected EZGO’s business operations and financial condition, operating results and cash flow for the fiscal year 2020. However, as COVID-19 has been contained in the PRC since the second quarter of 2020, and the impact from COVID-19 has therefore been mitigated. Our production of new e-bicycles resumed and we also accelerated research and development of new e-bicycles to meet the market demands. From the fiscal year ended September 30, 2020, we developed more than 20 types of new e-bicycles, three of which comply with the New National Standard. Further, due to increasing customer demands for the New National Standard e-bicycles and the steady industry sentiment, and Tianjin Dilang’s acceptance of more orders from various exhibitions, revenues generated from sales of e-bicycles has increased by $11,061,210 or 10,628% for the fiscal year ended September 30, 2020 as compared to the fiscal year ended September 30, 2019 and revenues generated from sales of e-bicycles has increased by $7,067,247 or 63% for the fiscal year ended September 30, 2021 as compared to the fiscal year ended September 30, 2020.

 

Jiangsu Cenbird started to expand its wholesaler channels in Changzhou and Wuxi with goals of “affordable e-bicycles with higher quality” and “100 stores in one city, shared with value” since March 2020. Tianjin Dilang started “town and village full-coverage” activities to increase the brand awareness since January 2020. We still continuously focus on expand business by attending various exhibitions.

 

Results of Operations

 

The following table sets forth a summary of our consolidated statements of income for the fiscal years ended September 30, 2019, 2020 and 2021, respectively. This information should be read together with our consolidated financial statements and related notes included elsewhere in this annual report. The results of operations in any period are not necessarily indicative of our future trends.

 

Years Ended September 30, 2019, 2020 and 2021

  For the fiscal years ended September 30, 
  2019  2020  2021 
          
Net revenues $1,371,201  $15,243,282  $23,422,006 
Cost of revenues  (246,736)  (13,704,248)  (23,039,528)
Gross profit  1,124,465   1,539,034   382,478 
Selling and marketing expenses  (28,995)  (385,722)  (1,558,719)
General and administrative expenses  (319,607)  (1,081,346)  (2,701,178)
Total operating expenses  (348,602)  (1,467,068)  (4,259,897)
Income (loss) from operations  775,863   71,966   (3,877,419)
Total other income, net  265,200   378,395   80,774 
Income (loss) from continuing operations before income tax expense  1,041,063   450,361   (3,796,645)
Income tax (expense) benefit  (273,927)  (116,063)  419,405 
Net income (loss) from continuing operations  767,136   334,298   (3,377,240)
Income (loss) from discontinued operation, net of tax  1,424,301   (57,376)  (36,404)
Net income (loss)  2,191,437   276,922   (3,413,644)
Net income (loss) from continuing operations  767,136   334,298   (3,377,240)
Less: Net income (loss) attributable to non-controlling interests from continuing operations  403,334   129,748   (434,971)
Net income (loss) attributable to our shareholders from continuing operations  363,802   204,550   (2,942,269)
Income (loss) from discontinued operation, net of tax  1,424,301   (57,376)  (36,404)
Less: Net income attributable to non-controlling interests from discontinued operation  49,980   -   - 
Net income (loss) attributable to our shareholders from discontinued operation  1,374,321   (57,376)  (36,404)
Net income (loss) attributable to our shareholders $1,738,123  $147,174  $(2,978,673)

 

Segment Information

 

We have determined that the Company operates in two operating segments for the fiscal years ended September 30, 2019, 2020 and 2021: (i) battery cells and packs segment; and (ii) e-bicycle sales segment. The battery cells and packs segment engaged in selling battery packs. The e-bicycle sales segment sells e-bicycles offline to regional exclusive distributors and wholesalers and on various online e-commerce platforms to individual customers.

 

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The following tables present the summary of each reportable segment’s revenue and income, which are considered as segment operating performance measures, for the fiscal years ended September 30, 2019, 2020 and 2021:

 

  Fiscal year ended September 30, 2019 
  Battery cells
and packs
segment
  E-bicycle
sales
segment
  Total
segments
  Others  Consolidated 
Revenues from external customers*  1,253,569   104,080   1,357,649   13,552   1,371,201 
Depreciation and amortization  -   (424)  (424)  (3,178)  (3,602)
Segment income (loss) before tax  1,119,568   32,994   1,152,562   (111,499)  1,041,063 
Segment gross profit margin  96%  (2)%  87%  39%  86%

 

  Fiscal year ended September 30, 2020 
  Battery cells
and packs
segment
  E-bicycle
sales
segment
  Total
segments
  Others  Consolidated 
Revenues from external customers*  3,148,156   11,165,290   14,313,446   929,836   15,243,282 
Depreciation and amortization  (2,318)  (82,896)  (85,214)  (466)  (85,680)
Segment income before tax  251,731   169,452   421,183   29,178   450,361 
Segment gross profit margin  15%  9%  11%  10%   11%

 

  Fiscal year ended September 30, 2021 
  Battery cells
and packs
segment
  E-bicycle
sales
segment
  Total
segments
  Others  Consolidated 
Revenues from external customers*  4,288,366   18,232,537   22,520,903   901,103   23,422,006 
Depreciation and amortization  (804)  (139,501)  (140,305)  (329,543)  (469,848)
Segment income (loss) before tax  16,902   (2,034,515)  (2,017,613)  (1,779,032)  (3,796,645)
Segment gross profit margin  3.2%  1.6%  1.9%  (4.4)%  1.6%

 

*Please refer to the analysis of net revenues in the paragraph headed “Components of Results of Operations” in this section.

 

Depreciation and amortization

 

The increase of depreciation and amortization from the fiscal year ended September 30, 2019 to the fiscal year ended September 30, 2020 was primarily due to the increase from e-bicycle sales segment. The depreciation and amortization increased by 2,279% to $85,680 for the fiscal year ended September 30, 2020 from $3,602 for the fiscal year ended September 30, 2019, representing a significant increase. The significant increase was consistent with the increase of revenue from e-bicycle sales, and we purchased more equipment for e-bicycle manufacturing and quality testing.

 

The depreciation and amortization of e-bicycle sales segment increased by 68% or $56,605 from the fiscal year ended September 30, 2020 to the fiscal year ended September 30, 2021, which was consistent with the increase of revenue from e-bicycle sales. The depreciation and amortization of unallocated increased by $329,077 to $329,543 for the fiscal year ended September 30, 2021 from $466 for the same period in 2020, the increase was mainly due to the depreciation of our charging piles equipment.

 

Segment income/loss before tax

 

The income before tax of battery cells and packs segment decreased by $867,837 to $251,731 for the fiscal year ended September 30, 2020 from $1,119,568 for the fiscal year ended September 30, 2019, representing a significant decrease of approximately 78%. The significant decrease was primarily due to the revenue from battery cell trading business decreased to $nil for the fiscal year ended September 30, 2020, which was recognized on a net basis.

 

The income before tax of battery cells and packs segment decreased by $234,829 to $16,902 for the fiscal year ended September 30, 2021 from $251,731 for the fiscal year ended September 30, 2020, representing a significant decrease of approximately 93%. The loss was primarily due to a low profit margin of 3.2% for the fiscal year ended September 30, 2021.

 

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The income before tax of e-bicycle sales segment increased by $136,458 to $169,452 for the fiscal year ended September 30, 2020 from $32,994 for the fiscal year ended September 2019, representing a significant increase of approximately 414% due to a gradual increase of sale price of e-bicycles as the market demand increased and a gradual decrease of unit cost of sales as the purchase volume increased during the fiscal year ended September 30, 2020.

 

We had a loss before tax of e-bicycle sales segment of $2,034,515 for the fiscal year ended September 30, 2021, and an income before tax of $169,452 for the fiscal year ended September 30, 2020. The significant loss in 2021 fiscal year was primarily due to reduced unit price of e-bicycles and increased advertising in order to increase our sales volume and market share.

 

We had a loss before tax of unallocated of $1,779,032 for the fiscal year ended September 30, 2021, and an income before tax of $29,718 for the fiscal year ended September 30, 2020. The loss in 2021 fiscal year was primarily due to the expenditures of charging piles business, and the expensing of professional after the success of our IPO.

  

Components of Results of Operations

 

Years Ended September 30, 2019, 2020 and 2021

 

Net revenues

 

The following table identifies the disaggregation of our revenue from continuing operations and reportable segments for the fiscal years ended September 30, 2019, 2020 and 2021, respectively:

   

    For the fiscal years ended September 30, 
  Segment 2019  2020  2021 
Sales of batteries and battery packs Battery cells and packs segment  1,253,569   3,148,156   4,288,366 
Sales of e-bicycles  E-bicycle sales segment  104,080   11,165,290   18,232,537 
Others    13,552   929,836   901,103 
Net revenues   $1,371,201   15,243,282  $23,422,006 

 

Our revenues from continuing operations for the fiscal years ended September 30, 2019, 2020 and 2021 were $1,371,201, $15,243,282 and $23,422,006, respectively. The significant increase in revenues from the fiscal year ended September 30, 2019 to the fiscal year ended September 30, 2020 were mainly driven by the increase of sales of battery cells and package and sales of e-bicycles. The significant increase in revenues from the fiscal year ended September 30, 2020 to the fiscal year ended September 30, 2021 were mainly due to the increase of sales of e-bicycles by reducing our unit price of e-bicycles and increasing advertising.

 

The sales of e-bicycles segment engaged in online and offline sale. The sales of e-bicycles increased by 63.3% to $18,232,537 for the fiscal year ended September 30, 2021 from $11,165,290 for the fiscal year ended September 30, 2020. Since the business started in September 2019, for the long-term development of the business, we have built up a production line for manufacturing Dilang e-bicycles. We also target for a rapid growth in the offline e-bicycles sales market. As such, our main sales channels are through our regional exclusive distributor and wholesaler. We also sell on internet distribution channels, such as Taobao, and Pinduoduo, and our self-developed Yidianxing application.

 

The battery cells and packs segment are engaged in the selling of battery packs. The revenue from sales of battery packs for the fiscal year ended September 30, 2020 was $3,148,156, as compared to $1,253,569 for the fiscal year ended September 30, 2019 as we take efforts to seize more market shares.

 

The revenue from sales of battery packs for the fiscal year ended September 30, 2021 was $4,288,366, as compared to $3,148,156 for the fiscal year ended September 30, 2020. The increase was mainly due to the increase of demand from our long-term customers.

 

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Cost of revenues

 

Cost of revenues consists primarily of manufacturing and purchase cost of e-bicycles, purchase cost of battery packs, depreciation, maintenance, and other overhead expenses.

 

Our cost of revenues increased by $13,457,512, or 5,454%, to $13,704,248 for the fiscal year ended September 30, 2020 from $246,736 for the fiscal year ended September 30, 2019. The increase of percentage of the cost kept synchronized with the increased trend of revenue.

 

Our cost of revenues significantly increased by $9,335,280, or approximately 68%, to $23,039,528 for the fiscal year ended September 30, 2021 from $13,704,248 for the fiscal year ended September 30, 2020, which was primarily due to the increase of manufacturing and purchase cost of e-bicycles for sales of e-bicycles, and purchase cost of battery packs for sales of battery packs. We also provided sales rebate to distributor and wholesalers, which result in the increase of our cost of revenues.

 

Gross profit 

 

Gross profit for the fiscal years ended September 30, 2019, 2020 and 2021 was $1,124,465, $1,539,034 and $382,478, representing 82%, 10% and 2% of net revenues, respectively.

 

Gross profit margin for the fiscal year ended September 30, 2020 significantly decreased by 88% primarily due to the fact that we had no revenue in battery cells trading business which was recognized on a net basis and with a high gross profit ratio, while revenue in battery cell trading accounted for 87% of our total net revenue for the year ended September 30, 2019.

 

Gross profit margin for the fiscal year ended September 30, 2021 decreased from 10% to 2%, primarily due to the low margin of sales of e-bicycles, which is accounting for a large proportion of our total revenue, thus, the total gross profit rate converged with that of sales of e-bicycles. In order to expand sales volume and increase market share, we reduced unit price of e-bicycle and provided sales rebate to distributor and wholesalers, which resulted in the low margin of sales of e-bicycles for the year ended September 30, 2021.

 

Selling and marketing expenses

 

Our selling and marketing expenses primarily consist of salaries and welfare expenses, advertising expenses, and freight expenses. Our selling and marketing expenses increased by $356,727, or approximately 1,230%, to $385,722 for the fiscal year ended September 30, 2020 from $28,995 for the fiscal year ended September 30, 2021, was primarily due to the more salespersons were hired with the business expansion on sales of e-bicycles, which is line with the increase in our net revenue. Our selling and administrative expenses increased by $1,172,977, or approximately 304%, to $1,558,719 for the fiscal year ended September 30, 2021 from $358,722 for the fiscal year ended September 30, 2020, was primarily due to more salespersons were hired and more promotion were made for expanding sales volume and increasing market share of e-bicycles.

 

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General and administrative expenses

 

Our general and administrative expenses significantly increased by $761,739, or approximately 238%, to $1,081,346 for the fiscal year ended September 30, 2020 from $319,607 for the fiscal year ended September 30, 2019. Such a significant increase was attributed to the significant increase of research and development expenses for designing of Dilang and Cenbird e-bicycle models.

 

Our general and administrative expenses significantly increased by $1,619,832, or approximately 150%, to $2,701,178 for the fiscal year ended September 30, 2021 from $1,081,346 for the fiscal year ended September 30, 2020. The increase was attributed to the significant increase of the expenses of Liability Insurance of Directors, consulting fee for the acquisition of Tianjin Jiahao and research and development fee and staff expenses.

 

Income tax expense/benefit

 

The PRC enterprise income tax (“EIT”) is calculated based on the taxable income determined under the applicable EIT Law and its implementation rules, which became effective on January 1, 2008. The EIT Law applies a uniform 25% income tax rate for all resident enterprises in China. Income tax expense amounted to $273,927 and $116,063 for the fiscal years ended September 30, 2019 and 2020, respectively and we also incurred an income tax benefit of $419,405 for the fiscal years ended September 30, 2021. The income tax benefit was generated from the deferred tax asset due to a net loss recorded in 2021 and was partially offset by the deferred tax asset valuation allowance.

 

Net income/loss from continuing operations

 

Our income from continuing operations for the fiscal years ended September 30, 2019 and 2020 was $767,136 and $334,298, respectively. In addition, we incurred a net loss of $3,377,240 from continuing operations for the fiscal year ended September 30, 2021.

 

Income/loss from discontinued operation, net of tax

 

Our income from discontinued operation was $1,424,301 for the fiscal year ended September 30, 2019, and our loss from discontinued operation was $57,376 and $36,404 for the fiscal year ended September 30, 2020 and 2021, respectively. We made a profit from discontinued operation for the fiscal year ended September 30, 2019 mainly due to the sale of remaining self-manufactured battery cells. We recorded losses for the fiscal years ended September 30, 2020 and 2021 primary due to the decrease of rental revenue. The decrease was due to the decline of customers’ demands and the termination of the rental contract with our sublease under the impact of COVID-19.

 

Net income/loss

 

As a result of the foregoing, our net income for the fiscal years ended September 30, 2019 and 2020, was $2,191,437 and $276,922 respectively. We recorded a net loss of $3,413,644 for the fiscal years ended September 30, 2021.

 

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Liquidity and Capital Resources

 

To date, we have financed our operations primarily through capital contributions, initial public offering, registered direct offering and from operations. We received net proceeds of approximately $10.85 million in our initial public offering in January, 2021 and received net proceeds of approximately $10.88 million in the previous registered direct offering in June 2021. We plan to support our future operations primarily from cash generated from our operations. We may, however, require additional cash due to business expansion or other future developments. If our future cash is insufficient to meet our requirements, we may further to seek to issue debt or equity securities or obtain additional credit facilities.

 

As of September 30, 2021, we had cash and cash equivalents of $4,774,531 and a total working capital of $18,204,440, $18,921,664 of which was from continuing operations and the current liabilities exceeds the current assets by $717,224 for discontinued operation.

 

Although we consolidate the results of the VIE and its subsidiaries, we only have access to cash balances or future earnings of the VIE and its subsidiaries through the VIE Agreements with the VIE.

 

Current foreign exchange and other regulations in the PRC may restrict our PRC entities in their ability to transfer their net assets to us and our subsidiaries. However, we have no present plans to declare a dividend and we plan to retain our retained earnings to continue to grow our business. In addition, these restrictions had no impact on our ability to meet our cash obligations as all of our current cash obligations are due within the PRC.

 

To utilize the proceeds from the offering in January 2021 and June 2021, we may make additional capital contributions to our PRC subsidiaries, establish new PRC subsidiaries and make capital contributions to these new PRC subsidiaries, or make loans to the PRC subsidiaries. However, most of these uses are subject to PRC regulations. Foreign direct investment and loans must be approved by and/or registered in accordance with the Foreign Exchange Administration Regulations (1996), as amended in 2008. The total amount of loans we can make to our PRC subsidiaries cannot exceed statutory limits and must be registered with the local counterpart of SAFE. The statutory limit for the total amount of foreign debts of a foreign-invested company is the difference between the amount of total investment as approved by the Ministry of Commerce or its local counterpart and the amount of registered capital of such foreign-invested company.

 

We are permitted under PRC laws and regulations to provide funding to our PRC subsidiaries 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. The relevant filing and registration processes for capital contributions to our PRC subsidiaries typically take approximately eight weeks to complete. The filing and registration processes for loans either to our PRC subsidiaries or to the VIE typically take approximately four weeks or longer to complete. While we currently see no material obstacles to completing the filing and registration procedures with respect to future capital contributions to our PRC subsidiaries and loans to our PRC subsidiaries or the VIE, we cannot assure you that we will be able to complete these filings and registrations on a timely basis, or at all. See “Item 3. Key Information — D. Risk Factors—Risks Related to Doing Business in China—PRC regulation on loans to, and direct investment in, PRC entities by offshore holding companies and governmental control in currency conversion may delay or prevent us from using the proceeds of 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.’’ Additionally, while there is no statutory limit on the amount of capital contribution that we can make to our PRC subsidiaries, loans provided to our PRC subsidiaries and the VIE in the PRC are subject to certain statutory limits. We are able to use all of the net proceeds from offering for investment in our PRC operations by funding our PRC subsidiaries through capital contributions which is not subject to any statutory limit on the amount under PRC laws and regulations. We have used $10.43 million of the net proceeds for the acquisition of Tianjin Jiahao, and expect to continue using the net proceeds in the PRC in the form of Renminbi and, therefore, our PRC subsidiaries and the VIE will need to convert any capital contributions or loans from U.S. dollars into Renminbi in accordance with applicable PRC laws and regulations.

 

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Cash Flows

  

The following table summarizes our cash flows for the periods indicated:

 

  For the fiscal years ended September 30, 
  2019  2020  2021 
Net cash (used in) provided by operating activities, continuing operations $(8,038,610) $3,895,871  $(6,871,446)
Net cash provided by used in operating activities, discontinued operation  5,336,443   128,898   615,011 
Net cash used in investing activities, continuing operations  (1,048,998)  (4,485,811)  (11,436,429)
Net cash (used in) provided by investing activities, discontinued operation  (873,328)  1,135,964   399,175 
Net cash provided (used in) by financing activities, continuing operations  8,217,985   (4,004,361)  22,764,076 
Effect of exchange rate changes  12,778   36,324   78,968 
Net increase (decrease) in cash, cash equivalents, and restricted cash $3,606,270  $(3,293,115) $5,549,355 

  

Years ended September 30, 2019, 2020 and 2021

 

Operating Activities

 

Net cash used in continuing operating activities was $6,871,446 for the fiscal year ended September 30, 2021, primarily derived from (a) a net loss from continuing operations of $3,377,240, adjusted by depreciation and amortization of $469,848; (b) an increase of advance to suppliers of $4,514,366 was primarily due to prepayments made for our e-bicycles sales business; c) an increase of amount due from related parties of $3,062,904 was primarily due to prepayments made for our e-bicycles sales business to related parties, and offset by a) an increase of accrued expenses and other payables of $3,026,677, and b) a decrease of note receivable of $1,736,538 due to the collection of receivable outstanding.

 

Net cash provided by discontinued operating activities was $615,011 for the fiscal year ended September 30, 2021, primarily derived from (a) a net loss from discontinuing operations of $36,404, adjusted by depreciation and amortization of $292,739; (b) a decrease of accounts receivable of $328,631; (c) a decrease of prepaid expense and other current assets of $363,640 and was offset by a decrease of accrued expenses and other payable of $298,237.

 

Net cash provided by continuing operating activities was $3,895,871 for the fiscal year ended September 30, 2020, mainly derived from (a) a net income from continuing operations of $334,298, adjusted by depreciation and amortization of $85,680; (b) a decrease of advance to suppliers of $4,310,499; (c) an increase of accrued expenses and other payables of $2,510,145; (d) a decrease of inventories of $1,568,669, and e) a decrease of amount due from related parties of $1,839,439, and offset by a) an increase of accounts receivable of $6,093,585, and (b) an increase of note receivable of $1,612,995. The decrease in advance to suppliers and amount due from related parties were primarily due to delivery of e-bicycles from the suppliers and related parties during the fiscal year ended September 30, 2020 and we managed to obtain credit term from suppliers as we increased purchase for the fiscal year ended September 30, 2020. The increase in accrued expenses and other payables were primarily due to the increase of value-added tax payable, which was in line with the increase of our revenue. The increase in accounts receivable and note receivable was primarily due to the increase of sales of e-bicycles.

 

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Net cash provided by discontinued operating activities was $128,898 for the fiscal year ended September 30, 2020, mainly derived from (a) a net loss from discontinued operation of $57,376, adjusted by depreciation and amortization of $933,176 and the gain from the disposal of property, plants and equipment of $542,320; and (b) an increase of accounts receivables of $232,896.

 

Net cash used in continuing operating activities was $8,038,610 for the fiscal year ended September 30, 2019, mainly derived from (a) an increase of advance to suppliers of $7,105,732; (b) an increase of amount due from related parties of $4,971,495; (c) an increase of inventories of $450,926; (d) a decrease of accounts payable of $404,654; and (e) a decrease of accrued expenses and other payables of $2,538,098; offset by (a) a net income from continuing operations of $767,136; (b) a decrease of accounts receivable of $4,092,954; (c) a decrease of prepaid expenses and other current assets of $2,289,075; and (d) an increase of income tax payable of $138,888. The increase in advance to suppliers and amount due from related parties were primarily due to the increase in purchases of e-bicycles for our e-bicycles sales business, which was launched in August 2019. The increase in inventories was primarily due to the increase in purchase of raw materials and finished goods for businesses expansion. The decrease in accounts payable was because some suppliers has shortened their credit terms and the Company has made payments to them accordingly. The decrease in accrued expenses and other payables were primarily due to the payment in fiscal year 2019 for the copper foil transactions occurred in August 2018. The decrease in accounts receivable was primarily due to the shortened credit term given to our sublease agents and we accelerated the collection of accounts receivable in order to satisfy our working capital requirement. The decrease in prepaid expenses and other current assets was primarily due to the full collection of receivables from our copper foil trading business for the fiscal year ended September 30, 2019, which was partially offset by the increase of other receivables from the sale of our battery production line. The increase in the income tax payable was primarily due to the increase in the taxable income.

 

Net cash provided by discontinued operating activities was $5,336,443 for the fiscal year ended September 30, 2019, mainly derived from (a) a net income from discontinued operation of $1,424,301, adjusted by depreciation and amortization of $1,009,604, the loss from the disposal of property, plants and equipment of $151,298; and (b) a decrease of inventories of $1,966,958; (c) a decrease of prepaid expenses and other current assets of $397,578. The decrease in inventories was primarily due to the remaining inventories related to self-manufactured battery cells sold after the termination of the business. The decrease in prepaid expenses and other current assets was primarily due to the deductible value-added tax declined for the fiscal year ended September 30, 2019 as there was no purchase for our battery cells manufacturing business.

 

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Investing Activities

 

For the fiscal year ended September 30, 2021, net cash used in investing activities for the continuing operations was $11,436,429, which was primarily due to purchases of property, plants and equipment of $6,723,468 and intangible asset of $4,497,426, which was primarily due to the purchase of the factory and land use right from the acquisition of Tianjin Jiahao, which was partially offset by the proceeds from disposal of property, plants and equipment of $453,652.

 

For the fiscal year ended September 30, 2021, net cash provided by investing activities for the discontinued operations were $399,175 which was primarily due to a proceed from disposal of equipment.

 

For the fiscal year ended September 30, 2020, net cash used in investing activities for the continuing operations was $4,485,811, consisted of (a) the purchase of property, plants and equipment in the amount of $2,344,667; and (b) purchase of short-term investments in the amount of $2,141,144.

 

For the fiscal year ended September 30, 2020, net cash provided by investing activities for the discontinuing operations was $1,135,964, mainly consisted of a proceed from disposal of equipment.

 

For the fiscal year ended September 30, 2019, net cash used in investing activities for the continuing operations was 1,048,998 mainly consisted of the purchase of equipment in the amount of $1,255,353.

 

For the fiscal year ended September 30, 2019, net cash used in investing activities for the discontinued operation was $873,328, consisted of the purchase of equipment in the amount of $1,890,916, which was offset by the proceeds from disposal of property, plants and equipment in the amount of $1,017,588

 

Financing Activities

 

For the fiscal year ended September 30, 2021, net cash provided by financing activities for the continuing operations was $22,764,076, primarily consisted of (a) cash receipts from equity issuance in the amount of $20,947,182; and (b) the collection of loan from a shareholder in the amount of $1,821,847.

 

For the fiscal year ended September 30, 2020, net cash used in financing activities for the continuing operations was $4,004,361, mainly consisted of (a) repayment of the loan to related parties in the amount of $4,289,426 and (b) a loan to a shareholder in the amount of $377,634, which was offset by a collection from a shareholder in the amount of $391,116.

 

For the fiscal year ended September 30, 2019, net cash provided by financing activities for the continuing operations was $8,217,985, mainly consisted of proceeds from interest-free borrowings from shareholders in the amount of $4,374,249, and a capital contribution in the amount of $4,261,636.

 

For the fiscal years ended September 30,2019, 2020 and 2021, there were no cash flows from financing activities for the discontinued operations.

 

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Trend Information

 

Other than as disclosed in “Item 3. Key Information — D. Risk Factors—Risks Related to Our Business and Industry—The outbreak of the recent COVID-19 in the PRC may materially and adversely affect our business, financial condition and results of operations” in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events that are reasonably likely to have a material effect on our net revenues, income from continuing operations, profitability, liquidity or capital resources, or that would cause reported financial information not necessarily to be indicative of future operating results or financial condition.

 

Off-Balance Sheet Arrangements

 

We did not have during the periods presented, and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

 

Tabular Disclosure of Contractual Obligations

 

Commitments and Contingencies

 

From time to time, we may be subject to certain legal proceedings, claims and disputes that arise in the ordinary course of business. Although the outcomes of these legal proceedings cannot be predicted, we do not believe these actions, in the aggregate, will have a material adverse impact on its financial position, results of operations or liquidity.

 

Operating Lease

 

Our operating lease contractual obligations as of September 30, 2021 were as follows:

 

 

  Payments
due by
period
 
Year ending September 30,    
2022 $219,020 
2023  141,527 
2024  83,807 
2025  54,319 
2026 and thereafter  - 
Total $498,673 

 

Other than those shown above, we did not have any significant capital and other commitments, long-term obligations, or guarantees as of September 30, 2021.

 

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Critical Accounting Policies

 

(a) Basis of presentation. The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The consolidated financial statements include the financial statements of EZGO, its subsidiaries, its VIE and its VIE’s subsidiaries for which EZGO is the primary beneficiary. All inter-company transactions and balances have been eliminated upon consolidation.

 

(b) Use of estimates. The preparation of consolidated financial statements in conformity with U.S. GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period and accompanying notes, including allowance for doubtful accounts, the useful lives of property, plants and equipment, impairment of short-term investments and long-lived assets, valuation allowance for deferred tax assets and uncertain tax opinions. Actual results could differ from those estimates.

 

(c) Comparability due to discontinued operation. Certain accounts in the Consolidated Statements of Operations and Comprehensive Income (Loss) for the fiscal years ended September 30, 2019, 2020 and 2021, and balances in the Consolidated Balance Sheet as of September 30, 2020 and 2021, and cash flows in the Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2019, 2020 and 2021, and related notes have been retrospectively adjusted to reflect the effect of discontinued operations. See Note 13 for details of discontinued operations.

 

(d) Discontinued operation. A discontinued operation may include a component of an entity or a group of components of an entity, or a business or nonprofit activity. A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operation if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when any of the following occurs: (1) the component of an entity or group of components of an entity meets the criteria to be classified as held for sale; (2) the component of an entity or group of components of an entity is disposed of by sale; (3) the component of an entity or group of components of an entity is disposed of other than by sale (for example, by abandonment or in a distribution to owners in a spinoff).

 

For any component classified as held for sale or disposed of by sale or other than by sale that qualify for presentation as a discontinued operation in the period, the Company has reported the assets and liabilities of the discontinued operation as current asset of discontinued operation, and current liabilities of discontinued operation in the Consolidated Balance Sheets as of September 30, 2020 and 2021. The results of operations of discontinued operation for the fiscal years ended September 30, 2019, 2020 and 2021 have been reflected separately in the Consolidated Statements of Income as a single line item for all periods presented in accordance with U.S. GAAP. Cash flows from discontinued operation of the three categories for the fiscal years ended September 30, 2019, 2020, and 2021 were separately presented in the Consolidated Statements of Cash Flows for all periods presented in accordance with U.S. GAAP.

 

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(e) Fair Value Measurement. The Company applies Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures which defines fair value, establishes a framework for measuring fair value and expands financial statement disclosure requirements for fair value measurements.

 

ASC Topic 820 defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability (an exit price) on the measurement date in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability.

 

ASC Topic 820 specifies a hierarchy of valuation techniques, which is based on whether the inputs into the valuation technique are observable or unobservable. The hierarchy is as follows:

 

Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

Level 2 inputs to the valuation methodology include quoted prices for identical or similar assets and liabilities in active markets or in inactive markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.

 

Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.

 

The carrying amount of our financial instruments approximate their fair values because of their short-term nature. The Company’s financial instruments include cash, short-term investments, accounts receivable, notes receivable, amount due from related parties, amount due to related parties, short-term borrowings, and accounts payable and advances from customers.

 

(f) Cash and cash equivalents. Cash and cash equivalents consist of cash on hand, bank deposits and short-term, highly liquid investments that are readily convertible to known amounts of cash, and have insignificant risk of changes in value related to changes in interest rates and have original maturities of three months or less when purchased.

 

(g) Restricted Cash. Restricted cash represents bank deposits with designated use, which cannot be withdrawn without certain approval or notice.

 

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As of September 30, 2020 and 2021, the Company had restricted bank deposits of $17,932 and $1,115,354, respectively. The balance as of September 30, 2020 represented the restricted bank deposits in the bank account, which cannot be withdrawn or used without the bank’s approval. The balances as of September 30, 2021 mainly represented the restricted deposits in two escrow account set up by the Company with two third-party escrow agents respectively in the United States. The Company funded such account with the public offering on the Nasdaq Capital Market (“Nasdaq”) that may be utilized to fund any bona fide indemnification claims. All funds cannot be withdrawn or used until the applicable period expires.

 

(h) Short-term investments. Short-term investments include wealth management product and convertible debt instrument, which are classified as available-for-sale debt investments in accordance with ASC topic 320 (“ASC 320”), Investments—Debt Securities. Short-term investments are measured at fair value and interest income is recognized in earnings. The unrealized gains or losses from the changes in fair values are reported net of tax in accumulated other comprehensive income until realized.

 

The Company reviews available-for-sale debt investments for other-than-temporary impairment (“OTTI”) based on the specific identification method. The Company considers available quantitative and qualitative evidence in evaluating potential impairment of its investments. If the cost of an investment exceeds the investment’s fair value, the Company considers, among other factors, general market conditions, expected future performance of the investees, the duration and the extent to which the fair value of the investment is less than the cost, and the Company’s intent and ability to hold the investment. OTTI, if any, is recognized as loss in the Consolidated Statements of Income. For the fiscal years ended September 30, 2019, 2020 and 2021, the Company did not record any OTTI.

 

(i) Accounts receivable, net are stated at the original amount less an allowance for doubtful receivables, if any, based on a review of all outstanding amounts at period end. An allowance is also made when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of the receivables. The Company analyzes the aging of the customer accounts, coverage of credit insurance, customer concentrations, customer creditworthiness, historical and current economic trends and changes in its customer payment patterns when evaluating the adequacy of the allowance for doubtful accounts. For the fiscal years ended September 30, 2019, 2020 and 2021, the Company recorded bad debt expense of $nil, $20,790, and $1,321, respectively, against its accounts receivable. 

 

(j) Inventories, primarily consisting of the raw materials purchased by the Company for battery packs assembling and e-bicycles production, and finished goods including battery packs and e-bicycles, are stated at the lower of cost or net realizable value. Cost of inventory is determined using weighted-average method. Where there is evidence that the utility of inventories, in their disposal in the ordinary course of business, will be less than cost, whether due to physical deterioration, obsolescence, changes in price levels, or other causes, the inventories are written down to net realizable value. The write-downs recognized for the inventories for the fiscal years ended September 30, 2019, 2020 and 2021 is $nil, $nil and $114,964. 

 

(k) Advances to suppliers refer to advances for purchase of materials or other service agreements, which are applied against accounts payable when the materials or services are received. The Company reviews a supplier’s credit history and background information before advancing a payment. If the financial condition of its suppliers were to deteriorate, resulting in an impairment of their ability to deliver goods or provide services, the Company would provide allowance for such amount in the period when it is considered impaired. For the fiscal years ended September 30, 2019, 2020 and 2021, the Company provided bad debt expense of $83,370, $nil, and $nil, respectively, against advance to suppliers.

 

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(l) Property, plants and equipment, net. Property, plants and equipment are stated at cost less accumulated depreciation and depreciated on a straight-line basis over the estimated useful lives of the assets. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its intended use. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income/loss in the year of disposition. Estimated useful lives are as follows:

 

  Estimated
Useful Life
Building 20 years
Equipment for rental business 2.5-5 Years
Production line for e-bicycles 5-10 Years
Furniture, fixtures and office equipment 3-5 Years
Vehicles 4-10 Years

 

(m) Land use rights are recorded at cost less accumulated amortization. Amortization is provided on straight-line basis over the useful life of land use right. The land use right has a term of 36.5 years and will expire on December 4, 2057.

 

(n) Impairment of Long-lived Assets. In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its carrying amount. The Company did not record any impairment charge for the fiscal years ended September 30, 2019, 2020 and 2021.

 

(o) Equity investments without readily determinable fair values are measured and recorded using a measurement alternative that measures the securities at cost minus impairment, if any, plus or minus changes resulting from qualifying observable price changes in accordance with ASC topic 321, Investments – Equity Securities.

 

(p) Value Added Tax. EZGO’s China subsidiaries, VIE and VIE’s subsidiaries are subject to value-added tax (“VAT”) for providing services and sales of products.

 

Revenue from providing services and sales of products is generally subject to VAT at applicable tax rates, and subsequently paid to PRC tax authorities after netting input VAT on purchases. The excess of output VAT over input VAT is reflected in accrued expenses and other payables. The Company reports revenue net of PRC’s VAT for all the periods presented in the Consolidated Statements of Income.

 

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(q) The Company adopted ASU 2014-09, Revenue from Contracts with Customers (ASC Topic 606), starting October 1, 2017 using the modified retrospective method for the revenue from sales of self-manufactured battery cell, battery pack and e-bicycles and battery cell trading. The Company applied ASC Topic 840, Leases, for the revenue from rentals of lithium batteries and e-bicycles.

 

The core principle of ASC Topic 606 is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:

 

Step 1: Identify the contract with the customer

 

Step 2: Identify the performance obligations in the contract

 

Step 3: Determine the transaction price

 

Step 4: Allocate the transaction price to the performance obligations in the contract

 

Step 5: Recognize revenue when the company satisfies a performance obligation

 

Revenue recognition policies are discussed as follows:

 

Revenue from sales of self-manufactured battery cell, battery pack and e-bicycles

 

The Company sells products to different customers, primarily including sale of self-manufactured battery cells (see Note 13 Discontinued Operation), self-assembled battery packs and sale of e-bicycles. The Company presents the revenue generated from its sales of products on a gross basis as the Company is a principal. The revenue is recognized at a point in time when the Company satisfies the performance obligation by transferring promised product to a customer upon acceptance by customers.

 

Revenue from battery cell trading

 

Revenue from battery cell trading is recognized on a net basis as the Company arranges the provision of products through third parties and does not control the specified products provided by the third parties before that products are transferred to the customers, and therefore, the Company acts as an agent. The revenue is recognized at a point in time when the Company satisfies performance obligations by arranging the transfer of a promised product to a customer and measured at fixed consideration which is determined as the difference between the sales price that the Company expects to receive in exchange for arranging promised products to the customer and the settlement price with the third-party suppliers.

 

Contract liabilities primarily consist of advances from customers, which comprises unamortized lithium batteries. As of September 30, 2020 and 2021, the Company recognized advances from customers amounted to $154,554 and $94,899, respectively.

 

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The revenue from sales of self-manufactured battery cells and lithium batteries and e-bicycles services via sublease and its own application named Yidianxing are revenue from the Company’s discontinued operation, and are represented separately in the Consolidated Statements of Income for the fiscal years ended September 30, 2019, 2020 and 2021 (see Note 13 Discontinued Operation). The following table identifies the disaggregation of the Company’s revenue from continuing operations for the fiscal years ended September 30, 2019, 2020 and 2021, respectively:

 

  For the fiscal years ended
September 30,
 
  2019  2020  2021 
Revenues from continuing operations:         
Sales of battery packs and e-bicycles $171,464  $14,313,446  $22,520,903 
Battery cell trading  1,186,185   -   - 
Others  13,552   929,836   901,103 
Net revenues $1,371,201  $15,243,282  $23,422,006 

 

Timing of revenue recognition may differ from the timing of invoicing to customers. Accounts receivable represent revenue recognized for the amounts invoiced and/or prior to invoicing when the Company has satisfied its performance obligation and has unconditional right to the payment. The Company has no contract assets as of September 30, 2020 and 2021. 

 

The Company applied a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. The Company has no material incremental costs of obtaining contracts with customers that the Company expects the benefit of those costs to be longer than one year.

 

(r) Cost of Revenue. Cost of revenue consists primarily of cost of products, labor cost, depreciation, maintenance, and other overhead expenses.

 

(s) Income taxes. The Company accounts for income taxes using the asset/liability method prescribed by ASC 740 Income Taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if, based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.

 

The provisions of ASC 740-10-25, “Accounting for Uncertainty in Income Taxes,” prescribe a more-likely-than-not threshold for consolidated financial statement recognition and measurement of a tax position taken (or expected to be taken) in a tax return. This interpretation also provides guidance on the recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and related disclosures. The Company’s operating subsidiaries in PRC are subject to examination by the relevant tax authorities. According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due to computational errors made by the taxpayer or the withholding agent. The statute of limitations is extended to five years under special circumstances, where the underpayment of taxes is more than RMB100,000 ($14,138). In the case of transfer pricing issues, the statute of limitation is ten years. There is no statute of limitation in the case of tax evasion. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred.

 

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(t) The reporting currency of the Company is the U.S. dollar (“USD” or “$”). The functional currency of subsidiaries, VIE and VIE’s subsidiaries located in China is the Chinese Renminbi (“RMB”), the functional currency of subsidiaries located in Hong Kong is the Hong Kong dollars (“HK$”). For the entities whose functional currency is the RMB and HK$, result of operations and cash flows are translated at average exchange rates during the period, assets, liabilities and receivables from a shareholder in equity are translated at the unified exchange rate at the end of the period, and except for receivables from a shareholder, other equity items are translated at historical exchange rates. As a result, amounts relating to assets and liabilities reported on the statements of cash flows may not necessarily agree with the changes in the corresponding balances on the balance sheets. Translation adjustments are reported as foreign currency translation adjustment and are shown as a separate component of other comprehensive loss in the consolidated statements of comprehensive income.

 

Transactions denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction dates. Assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date with any transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

 

The Consolidated Balance Sheets amounts, with the exception of equity, on September 30, 2020 and 2021 were translated at RMB6.7896 to $1.00 and at RMB6.4434 to $1.00, respectively. Equity accounts were stated at their historical rates. The average translation rates applied to Consolidated Statements of Income and Cash Flows for the fiscal years ended September 30, 2019, 2020 and 2021 were RMB6.8698 to $1.00, RMB7.0056 to $1.00 and RMB6.5072 to $1.00, respectively.

 

(u) Non-controlling Interest. A non-controlling interest in a subsidiary of the Company represents the portion of the equity (net assets) in the subsidiary not directly or indirectly attributable to the Company. Non-controlling interests are presented as a separate component of equity on the Consolidated Balance Sheets and net income and other comprehensive income attributable to non-controlling shareholders are presented as a separate component on the Consolidated Statements of Income.

 

(v) Segment Reporting. The Company has organized its operations into two operating segments. The segments reflect the way the Company evaluates its business performance and manages its operations by the Company’s chief operating decision maker (“CODM”) for making decisions, allocating resources and assessing performance. The Company’s CODM has been identified as the chief executive officer, who reviews consolidated results when making decisions about allocating resources and assessing performance of the Company.

 

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The Company has determined that it operates in two operating segments: (1) Battery cells and packs segment, and (2) e-bicycles sales segment. The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies.

 

As the Company’s long-lived assets are substantially all located in the PRC and all of the Company’s revenue and expense are derived from within the PRC, no geographical segments are presented.

 

(w) Net Income (loss) Per Share. Basic income (loss) per share is computed by dividing net income (loss) attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding for the period. Diluted income (loss) per share is calculated by dividing net income (loss) attributable to ordinary shareholders as adjusted for the effect of dilutive ordinary equivalent shares, if any, by the weighted average number of ordinary and dilutive ordinary equivalent shares outstanding during the period. Potentially dilutive shares are excluded from the computation if their effect is anti-dilutive.

 

(x) Comprehensive Income (loss). Comprehensive income (loss) is comprised of the Company’s net income and other comprehensive income (loss). The components of other comprehensive (income) loss consist of foreign currency translation adjustments and unrealized gain on available for sale short term investments.

 

(y) Commitments and Contingencies. Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. If a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, is disclosed. Legal costs incurred in connection with loss contingencies are expensed as incurred.

 

(z) Recent Accounting Standards. The Company is an “emerging growth company” (“EGC”) as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, EGC can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies.

 

In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842). The guidance supersedes existing guidance on accounting for leases with the main difference being that operating leases are to be recorded in the statement of financial position as right-of-use assets and lease liabilities, initially measured at the present value of the lease payments. For operating leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and liabilities. In July 2018, ASU 2016-02 was updated with ASU 2018-11, Targeted Improvements to ASC Topic 842, which provides entities with relief from the costs of implementing certain aspects of the new leasing standard. Specifically, under the amendments in ASU 2018-11, (1) entities may elect not to recast the comparative periods presented when transitioning to ASC 842 and (2) lessors may elect not to separate lease and non-lease components when certain conditions are met. In November 2019, ASU 2019-10, Codification Improvements to ASC 842 modified the effective dates of all other entities. In June 2020, ASU 2020-05 defer the effective date for one year for entities in the “all other” category. For all other entities, the amendments in ASU 2020-05 are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early application of the guidance continues to be permitted. The Company will adopt ASU 2016-02 from October 1, 2022 and will use the additional modified retrospective transition method provided by ASU No. 2018-11 for the adoption. The Company is in the process of evaluating the effect of the adoption of this ASU.

 

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In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses”, which will require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Subsequently, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, to clarify that receivables arising from operating leases are within the scope of lease accounting standards. Further, the FASB issued ASU No. 2019-04, ASU 2019-05, ASU 2019-10, ASU 2019-11 and ASU 2020-02 to provide additional guidance on the credit losses standard. For all other entities, the amendments for ASU 2016-13 are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. Adoption of the ASUs is on a modified retrospective basis. The Company will adopt ASU 2016-13 from October 1, 2023. The Company is in the process of evaluating the effect of the adoption of this ASU.

 

Other accounting standards that have been issued by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent standards that are not anticipated to have an impact on or are unrelated to its consolidated financial condition, results of operations, cash flows or disclosures.

 

Quantitative and Qualitative Disclosures about Market Risks

 

We are also exposed to liquidity risk which is risk that we are unable to provide sufficient capital resources and liquidity to meet its commitments and business needs. Liquidity risk is controlled by the application of financial position analysis and monitoring procedures. When necessary, we will turn to other financial institutions and the shareholders to obtain short-term funding to meet the liquidity shortage.

 

Inflation risk

 

To date, inflation in China has not materially impacted our results of operations. According to the National Bureau of Statistics of China, the year-over-year percent changes in the consumer price index for 2019, 2020 and November 2021 were increases of 2.9%, 2.5% and 2.1%, respectively. Although we have not been materially affected by inflation in the past, we can provide no assurance that we will not be affected in the future by higher rates of inflation in the PRC. For example, certain operating costs and expenses, such as employee compensation and office operating expenses may increase as a result of higher inflation. Additionally, because a substantial portion of our assets consists of cash and cash equivalents, high inflation could significantly reduce the value and purchasing power of these assets. We are not able to hedge our exposure to higher inflation in China.

 

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Interest rate risk

 

Our exposure to interest rate risk primarily relates to the interest rate that our deposited cash can earn. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed to material risks due to changes in interest rates. An increase, however, may raise the cost of any debt we incur in the future.

 

Foreign currency translation and transaction

 

Substantially all of our operating activities and our assets and liabilities are denominated in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through the Peoples’ Bank of China (“PBOC”) or other authorized financial institutions at exchange rates quoted by PBOC. Approval of foreign currency payments by the PBOC or other regulatory institutions requires submitting a payment application form together with suppliers’ invoices and signed contracts. The value of RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market.

 

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

6.A. Directors, Executive Officers and Key Employees

 

The following table sets forth the name, age, positions and a brief description of the business experience of each of our directors, executive officers and key employees as of the date hereof.

 

Directors and Executive Officers Age  Position/Title
Jianhui Ye 34  Chief Executive Officer and Director
Jingyan Wu 51  Chief Financial Officer
Shuang Wu 39  Chief Operating Officer
Di Wu 53  Director
Guanghui Yang 59  Independent Director
Robert Johnson 53  Independent Director
Guanneng Lai 35  Independent Director

 

There are no arrangements or understandings with major shareholders, customers, suppliers or others, pursuant to which any person referred to above was selected as a director or member of senior management. The address of each of our directors and executive officers is c/o EZGO Technologies Ltd., Building #A, Floor 2, Changzhou Institute of Dalian University of Technology, Science and Education Town, Wujin District, Changzhou City, Jiangsu, China 213164.

 

Executive Officers and Directors

 

Jianhui Ye has been serving as our Chief Executive Officer and Director since August 2019, the General Manager of Hengmao Power Battery since October 2017 and the Chief Executive Officer and Director of the VIE, Jiangsu EZGO Electronic Technologies, Co., Ltd., since August 2019. Mr. Ye is responsible for our daily operations and formulation of our business strategies. Since September 2017, Mr. Ye has also been serving as the general manager of Zhuhai Dinghua Equity Investment Management Co. Ltd., an investment company in China, to provide a platform for us to find potential partners and investors. Mr. Ye spends most of his time on our management as he is not involved in day-to-day operations of Zhuhai Dinghua Equity Investment Management Co. Ltd. From September 2016 to September 2017, Mr. Ye served as a senior investment manager of Guoyuan Securities Inc., a securities brokerage firm in Hong Kong. From July 2014 to September 2016, Mr. Ye served as a compliance risk control manager of Guangdong Juniu Investment Management Company Limited, an investment management company in China. From September 2010 to July 2014, Mr. Ye served as an investment manager of Guangzhou Huifu Enterprise Consulting Co., Ltd, a consulting company in China. Mr. Ye obtained his fund qualification certificate from the China Securities Investment Fund Industry Association in August 2018. Mr. Ye received a bachelor’s degree from Shenzhen University in July 2010.

 

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Jingyan Wu has been serving as our Chief Financial Officer and the Chief Financial Officer of the VIE, Jiangsu EZGO Electronic Technologies, Co., Ltd., since September 1, 2020. Ms. Wu has over 20 years of professional experience in accounting and auditing, including over 10 years serving at U.S. public companies and public accounting firms. From June 2018 to August 2020, Ms. Wu served as a Senior Internal Auditor of MSIG Holdings (U.S.A.) Inc., a member of MS&AD Insurance Group Holdings Inc., one of the world’s top property and casualty insurance providers located in Japan. From November 2009 to June 2018, Ms. Wu served as a Senior Internal Auditor of Children’s Place Inc. (Nasdaq: PLCE), an American specialty retailer of children’s apparel and accessories. From February 2007 to November 2009, she served as a Senior Auditor of Deloitte Touche Tohmatsu Limited. Ms. Wu has been a Certified Public Accountant since 2005, and is currently a licensed Certified Public Accountant in the States of New Jersey and Illinois. Ms. Wu received her bachelor’s degree from Shanghai University of Finance and Economics in June 1993 and master’s degree in Accountancy from University of Illinois, Urbana-Champaign in May 2004.

 

Shuang Wu has been serving as our Chief Operating Officer and the Chief Operating Officer of the VIE, Jiangsu EZGO Electronic Technologies, Co., Ltd., since August 2019. Mr. Wu has extensive experience in operation and marketing. Mr. Wu has been serving as the Senior Manager of Changzhou Yizhiying IoT since August 2018. From June 2015 to December 2017, Mr. Wu served as a Senior Manager of Shanghai Dafeng Investment Group, an investment company in China. From November 2011 to December 2014, Mr. Wu served as the Assistant to General Manager of Travelex, a well-known currency exchange company in the world. From June 2009 to November 2011, Mr. Wu served as a Financial Advisor of Westpac Bank Mr. Wu received his bachelor’s degree from Massey University of New Zealand in April 2007 and master’s degree from Massey University of New Zealand in August 2016.

 

Di Wu has been serving as our director since March 2019. She has also been serving as a Deputy General Manager of Changzhou Hengmao Power Battery Technology Co., Ltd. since May 2014. Ms. Wu co-founded Hengmao Power Battery in May 2014 with Dr. Henglong Chen. She received an associate degree from Shanghai Second Medical College in July 1990.

 

Robert Johnson has been serving as our independent Director and the chairman of the audit committee since December 2020. He has been serving as the financial controller of BAS Holdings Investments, LLC since February 2020. From January 2017 to January 2020, he served as the financial controller for Lionstone Development, LLC and from July 2015 to December 2016, Mr. Johnson served as an independent consultant. From June 2010 to June 2015, he served as the financial controller of BSL Capital, Inc. From September 2005 to June 2010, Mr. Johnson served as a senior tax accountant of CBIZ MHM, LLC, an accounting services provider and business consulting company in Miami, Florida. From January 2004 to September 2005, Mr. John served as a tax accountant of Mallah Furman and Company in Miami, Florida. Mr. Johnson received a dual bachelor’s degrees from The University of Central Florida in August 2000 and a master’s of business administration degree with a specialization in professional accounting from The University of Miami in December 2003. Mr. Johnson has been a Certified Public Accountant licensed by the State of Florida since October 2005 and a Certified Management Accountant licensed by the Institute of Management Accountants since August 2013. Mr. Johnson also holds a certification in Hotel Industry Analytics from The American Hotel and Lodging Association since November 2017 and is a Certified Hospitality Accountant Executive licensed by the Hospitality Financial and Technology Professionals since July 2018. Mr. Johnson is also a member of the Hospitality Financial and Technology Professionals since July 2018 and has also been a member of the Institute of Management Accountants since August 2013 and a member of the American Institute of Certified Public Accountants since October 2005.

 

Guanghui Yang has been serving as our independent Director and the chairman of the compensation committee since July 2021. Mr. Yang has been serving as an associate professor in the School of Economics of Shenzhen University since May 1997, where previously from June 1987 to May 1997 he was a lecturer in the Department of Economics of Shenzhen University. Mr. Yang has served as a member of Shenzhen Statistical Investigation Expert Group since November 2012. From April 2008 to April 2009, he served as an expert in the Science and Technology Bureau of Shenzhen Nanshan District. From November 2004 to November 2007, he served as a member of Shenzhen Population and Family Planning Expert Committee. Mr. Yang received a bachelor’s degree in Mathematics from Lanzhou University in 1982, a master’s degree in Applied Mathematics from Huazhong University of Science and Technology in 1987 and a doctoral degree in Statistics from Xiamen University in 2006.

 

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Guanneng Lai has been serving as our independent Director and the chairman of the nominating and corporate governance committee since December 2020. Mr. Lai has been serving a partner since December 2015 of Beijing Longan Law Firm (Shenzhen branch). In addition, Mr. Lai has been studying at Cheung Kong Graduate School of Business and pursuing a MBA degree since October 2019. From July 2011 to December 2015, Mr. Lai served as a paralegal and an associate of Beijing Longan Law Firm (Shenzhen branch). From March 2011 to June 2011, Mr. Lai served as a paralegal at Beijing Dongyuan Law Firm. From July 2010 to February 2011, Mr. Lai served as a paralegal at Beijing Yingke Law Firm. Mr. Lai received his bachelor’s degrees from China University of Political Science and Law in July 2010. He received the qualification certificate of Independent Director of Listed Company issued by Shenzhen Stock Exchange in January 2018. He also received the Arbitrator’s certificate issued by International Arbitration Court of Ganjiang New Area in May 2019. He is also a member of the Securities, Fund and Futures Legal Affairs Professional Committee of Shenzhen Lawyers Association since June 2017 and a member of the Law Committee of Shenzhen Corporate Governance Research Association since June 2017.

 

Each of our directors will serve as a director until our next annual general meeting and until their successors are duly elected and qualified.

 

Board Diversity

 

The table below provides certain information regarding the diversity of our board of directors as of the date of this report.

 

Board Diversity Matrix
Country of Principal Executive Offices:China
Foreign Private IssuerYes
Disclosure Prohibited under Home Country LawNo
Total Number of Directors5
 FemaleMale

Non-

Binary

Did Not
Disclose
Gender
Part I: Gender Identity 
Directors1400
Part II: Demographic Background 
Underrepresented Individual in Home Country Jurisdiction0
LGBTQ+0
Did Not Disclose Demographic Background0

 

Family Relationships

 

None of our directors or executive officers has a family relationship as defined in Item 401 of Regulation S-K.

 

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6.B. Compensation

 

For the fiscal years ended September 30, 2020 and 2021, we paid an aggregate of RMB170,500 (approximately $24,338) and RMB885,547 (approximately $136,087), respectively, in cash and benefits in-kind granted to or accrued on behalf of all of our directors and members of senior management for their services, in all capacities, and we did not pay any additional compensation to our directors and members of senior management. We have not set aside or accrued any amount to provide pension, retirement or other similar benefits to our executive officers and directors. Our PRC subsidiaries and the VIE are required by law to make contributions equal to certain percentages of each employee’s salary for his or her pension insurance, medical insurance, unemployment insurance and other statutory benefits and a housing provident fund.

 

Employment Agreements

 

We have entered into employment agreements with each of our executive officers. Under these agreements, each of our executive officers is employed for an initial term of three year. The executive officers are entitled to a fixed salary and other company benefits, each as determined by the Board from time to time. We may terminate an executive officer’s employment under PRC Labor Law and under other applicable laws and regulations.

 

Each executive officer has agreed to hold, at all times during and after the termination or expiry of his or her employment agreement, in strict confidence and not to use, except as required in the performance of his or her duties in connection with the employment or pursuant to applicable law, any of our confidential information, or the confidential or proprietary information disclosed to the executive officer by or obtained by the executive officer from us either directly or indirectly in writing, orally or otherwise, if specifically indicated to be confidential or reasonably expected to be confidential.

 

6.C. Board Practices

 

Our board of directors consists of 5 directors as of the date of this report. A director is not required to hold any shares in our Company to qualify to serve as a director. Subject to making appropriate disclosures to the board of directors in accordance with our amended and restated memorandum and articles of association, a director may vote with respect to any contract, proposed contract, or arrangement in which he or she is interested, in voting in respect of any such matter, such director should take into account his or her director’s duties. A director may exercise all the powers of the company to borrow money, mortgage its business, property and uncalled capital, and issue debentures or other securities whenever money is borrowed or as security for any obligation of the company or of any third party.

 

Committees of the Board of Directors

 

We have established an audit committee, a compensation committee and a nominating and corporate governance committee under the board of directors as of the date of this report. We have adopted a charter for each of the three committees. Each committee’s members and functions are described below.

 

Audit Committee. Our audit committee consists of Mr. Robert Johnson, Mr. Guanneng Lai and Mr. Guanghui Yang and is chaired by Mr. Robert Johnson. We have determined that each of these three directors satisfies the “independence” requirements of the Nasdaq Listing Rules and meet the independence standards under Rule 10A-3 under the Securities Exchange Act of 1934, as amended. We have determined that Robert Johnson qualifies as an “audit committee financial expert.” The audit committee oversees our accounting and financial reporting processes and the audits of our financial statements. The audit committee is responsible for, among other things:

 

 selecting the independent registered public accounting firm and pre-approving all auditing and non-auditing services permitted to be performed by the independent registered public accounting firm;

 

 reviewing with the independent registered public accounting firm any audit problems or difficulties and management’s response;

 

 reviewing and approving all proposed related party transactions, as defined in Item 404 of Regulation S-K under the Securities Act;

 

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 discussing the annual audited financial statements with management and the independent registered public accounting firm;

 

 reviewing the adequacy and effectiveness of our accounting and internal control policies and procedures and any special steps taken to monitor and control major financial risk exposures;

 

 annually reviewing and reassessing the adequacy of our audit committee charter;

 

 meeting separately and periodically with management and the independent registered public accounting firm;

 

 monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance; and

 

 reporting regularly to the board.

 

Compensation Committee. Our compensation committee consists of Mr. Robert Johnson, Mr. Guanneng Lai and Mr. Guanghui Yang, and is chaired by Mr. Guanghui Yang. We have determined that each of these directors satisfies the “independence” requirements of the Nasdaq Listing Rules. The compensation committee assists the board in reviewing and approving the compensation structure, including all forms of compensation, relating to our directors and executive officers. Our executive officers may not be present at any committee meeting during which their compensation is deliberated upon. The compensation committee is responsible for, among other things:

 

 reviewing and approving, or recommending to the board for its approval, the compensation for our chief executive officer and other executive officers;

 

 reviewing and recommending to the board for determination with respect to the compensation of our non-employee directors;

 

 reviewing periodically and approving any incentive compensation or equity plans, programs or other similar arrangements; and

 

 selecting compensation consultant, legal counsel or other adviser only after taking into consideration all factors relevant to that person’s independence from management.

 

Nominating and Corporate Governance Committee. Our nominating and corporate governance committee consists of Mr. Robert Johnson, Mr. Guanneng Lai and Mr. Guanghui Yang, and is chaired by Mr. Guanneng Lai. We have determined that each of these directors satisfies the “independence” requirements of the Nasdaq Listing Rules. The nominating and corporate governance committee assists the board in selecting individuals qualified to become our directors and in determining the composition of the board and its committees. The nominating and corporate governance committee is responsible for, among other things:

 

 recommending nominees to the board for election or re-election to the board, or for appointment to fill any vacancy on the board;

 

 reviewing annually with the board the current composition of the board with regards to characteristics such as independence, knowledge, skills, experience, expertise, diversity and availability of service to us;

 

 selecting and recommending to the board the names of directors to serve as members of the audit committee and the compensation committee, as well as of the nominating and corporate governance committee itself;

 

 developing and reviewing the corporate governance principles adopted by the board and advising the board with respect to significant developments in the law and practice of corporate governance and our compliance with such laws and practices; and

 

 evaluating the performance and effectiveness of the board as a whole.

 

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Duties of Directors

 

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.

 

Terms of Directors and Officers

 

Our board of directors is divided into three classes with only one class of directors being elected in each year and each class (except for those directors appointed prior to our first annual meeting of shareholders) serving a three-year term. The term of office of the first class of directors, consisting of Guanneng Lai, will expire at our first annual meeting of shareholders. The term of office of the second class of directors, consisting of Guanghui Yang and Robert Johnson, will expire at the second annual meeting of shareholders. The term of office of the third class of directors, consisting of Jianhui Ye and Di Wu, will expire at the third annual meeting of shareholders.

 

Our officers are elected by the board of directors and serve at the discretion of the board of directors, rather than for specific terms of office. Our board of directors is authorized to appoint persons to the offices set forth in our amended and restated memorandum and articles of association as it deems appropriate.

 

6.D. Employees

 

As of the date of this report, we had 115 full-time employees, and all our employees are based in China.

 

The following table provides the number of our employees by function as of the date of this report :

 

Function Number of
Full-Time
Employees
 
Research and Development 20 
Manufacture 31 
Business and Marketing  35 
Administrative, Human Resources and Finance  29 
Total  115 

 

As required by the laws of the PRC, we participate in various employee social security plans that are organized by municipal and provincial governments for our PRC-based full-time employees, including pension, unemployment insurance, childbirth insurance, work-related injury insurance and medical insurance. We are required under PRC law to make contributions monthly at specified percentages of the salaries, bonuses and certain allowances of our PRC-based full-time employees, up to maximum amounts specified by applicable local governments.

 

We enter into labor contracts and standard confidentiality and intellectual property agreements with our key employees. We believe that maintaining good working relationships with our employees is essential, and we have not experienced any labor disputes. None of our employees are represented by labor unions.

 

Assembly, production and delivery of our batteries, smart charging piles and a portion of our rented e-bicycle and battery products are conducted by independent contractors. The fluctuation in the number of contractors is related to changing business and production needs.

 

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6.E. Share Ownership

 

As of January 26, 2022, 13,626,891 of EZGO’s ordinary shares were outstanding. Holders of EZGO’s ordinary shares are entitled to vote together as a single class on all matters submitted to shareholders for approval. No holder of ordinary shares has different voting rights from any other holders of ordinary shares. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.

 

Beneficial ownership is determined in accordance with the rules and regulations of the SEC. The percentages of shares beneficially owned in the table below are based on 13,626,891 ordinary shares outstanding as of January 26, 2022.

 

The following table sets forth information with respect to the beneficial ownership of our common shares as of January 26, 2022 by:

 

 

each of our directors and executive officers; and

   
 each person known to us to beneficially own more than 5% of our outstanding ordinary shares.

 

Unless otherwise noted below, the address for each listed shareholder, director or executive officer is Building #A, Floor 2, Changzhou Institute of Dalian University of Technology, Science and Education Town, Wujin District, Changzhou City, Jiangsu, China 213164.

 

  Ordinary Shares
Beneficially Owned
 
Name of Beneficial Owners(1) Number  % 
Directors and Executive Officers:      
Jianhui Ye(2)  3,034,200   22.3 
Jingyan Wu      
Shuang Wu(3)  1,462,032   10.7 
Di Wu(4)  963,452   7.1 
Robert Johnson      
Guanghui Yang      
Guanneng Lai      
All directors and executive officers as a group (7 persons)  5,459,684   40.1 
         
5% shareholders:        
WXYZ Group Ltd.  3,034,200   22.3 
JKC Investment Holding Co., Ltd.  963,452   7.1 

 

(1)Unless otherwise noted, the business address of each of the following entities or individuals is Building #A, Floor 2, Changzhou Institute of Dalian University of Technology, Science and Education Town, Wujin District, Changzhou City, Jiangsu, China 213164.

 

(2)Includes 3,034,200 ordinary shares owned directly by WXYZ Group Ltd., of which Jianhui Ye, our Chief Executive Officer, is the sole shareholder and holds the voting and dispositive power over the ordinary shares held by such entity.

 

(3)Includes (i) 663,936 ordinary shares owned directly by Xingcaitong Growth 2 Investment Management Co., Ltd. and (ii) 459,732 ordinary shares owned directly by Xingcaitong Growth 1 Investment Management Co., Ltd., both of which Shuang Wu, our Chief Operating Officer, is the sole director and holds the voting and dispositive power over the ordinary shares held by each of such entities. Also includes 338,364 shares directly held by Peiyao Ji, Mr. Wu’s spouse.

 

(4)Includes 963,452 ordinary shares owned directly by JKC Investment Holding Co., Ltd., of which Di Wu, a director of the Company, is the sole shareholder and holds the voting and dispositive power over the ordinary shares held by such entity.

 

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None of our major shareholders have differing voting rights, and as of the date of this report, none of our outstanding ordinary shares are held by record holders in the United States. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.

 

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

7.A. Major Shareholders

 

See Item 6.E., “Share Ownership,” for a description of our major shareholders.

 

7.B. Related Party Transactions

 

Set forth below are the related party transactions of our company that occurred since the beginning of the last fiscal year up to the date of this report. The transactions are identified in accordance with the rules prescribed under Form 20-F and may not be considered as related party transactions under PRC law.

 

Transactions with Certain Related Parties

 

We have adopted an audit committee charter, which requires the committee to review all related party transactions on an ongoing basis and all such transactions be approved by the audit committee. In determining whether to approve a related party transaction, the audit committee shall consider, among other factors, the following factors to the extent relevant to the related party transaction:

 

 whether the terms of the related party transaction are fair to the Company and on the same basis as would apply if the transaction did not involve a related party;

 

 whether there are business reasons for the Company to enter into the related party transaction;

 

 whether the related party transaction would impair the independence of an outside director;

 

 whether the related party transaction would present an improper conflict of interest for any director or executive officer of the Company, taking into account the size of the transaction, the overall financial position of the director, executive officer or the related party, the direct or indirect nature of the director’s, executive officer’s or the related party’s interest in the transaction and the ongoing nature of any proposed relationship, and any other factors the audit committee deems relevant; and

 

 any pre-existing contractual obligations.

 

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During the fiscal years ended September 30, 2019, 2020 and 2021, and to the date of this annual report, we had the following material related party transactions: 

 

    For the fiscal years ended September 30, 
Related Parties Nature 2019  2020  2021 
Changzhou Cenbird Electric Bicycle Manufacturing Co., Ltd Purchase of e-bicycles from a related party  -   (4,538,100)  (6,048,053)
Changzhou Cenbird Electric Bicycle Manufacturing Co., Ltd Interest-free loan to a related party  -   856,458   - 
Changzhou Cenbird Electric Bicycle Manufacturing Co., Ltd Collection of loan to a related party  -   (856,458)  - 
Jiangsu Xinzhongtian Suye Co., Ltd Purchase of e-bicycles, gears and parts from a related party  -   (851,606)  (915,213)
Jiangsu Xinzhongtian Suye Co., Ltd Rental fee and utility fee  -   (63,378)  (146,607)
Jiangsu Xinzhongtian Suye Co., Ltd Interest-free loan to a related party  -   185,566   - 
Jiangsu Xinzhongtian Suye Co., Ltd Collection of loan to a related party  -   (186,993)  - 
Shenzhen Star Cycling Network Technology Co., Ltd Loan to a related party  -   -   310,395 
Nanjing Mingfeng Technology Co.,Ltd Loan to a related party  -   -   228,774 
Jiangsu Yimao Pure Electric Bus Co., Ltd Purchase of battery cells for battery cell trading business  (5,334,619)  -   - 
Jiangsu Yimao Pure Electric Bus Co., Ltd Purchase of raw materials and finished goods  (2,428,036)  -   - 
Henglong Chen Interest-free loan to a shareholder*  1,857,441   377,634   - 
Henglong Chen Collection of loan from a shareholder *  (683,880)  (391,116)  (1,821,847)
Henglong Chen Transfer of third-party loans to a related party*  59,682   -   - 
Huiyan Xie Interest-free loan to a related party  101,896   -   - 
Huiyan Xie Collection of loan from a related party  (101,896)  -   - 
Shenzhen Star Asset Management Co., Ltd Rental expenses of e-bicycles  (176,862)  -   - 
Shenzhen Star Asset Management Co., Ltd Disposal of e-bicycles on behalf of a related party  (291,131)  -   - 
Shenzhen Star Asset Management Co., Ltd Purchase of e-bicycles from a related party  (873,394)  -   - 
Jianhui Ye Interest-free loan from a related party  (4,374,249)  -   - 
Jianhui Ye Repayment of interest-free loan to a related party  -   4,289,426   - 
Beijing Weiqi Technology Co., Ltd Sales of e-bicycles to a related party  -   107,314   12,341 

 

 *As of the date of this report, the loans to Henglong Chen, the former chairman, have not been fully collected. The loans made to Henglong Chen which were for his personal purpose violated Sarbanes-Oxley Act section 402 due to the lack of internal control in term of related party borrowings, and were supposed to be repaid by July 28, 2021 (half year after the IPO). Mr. Chen failed to repay the loans in full by such date. The Company has asked Mr. Chen to execute a confirmation representing to the Company that the loans will be repaid, in full, by December 31, 2022, and expects to receive such executed confirmation on or before February 10, 2022, although there can be no assurance that such executed confirmation will be received by that date.

 

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Contractual Arrangements with Our Variable Interest Entity and Its Shareholders

 

PRC laws and regulations currently restrict foreign ownership and investment in value-added telecommunications services in China. As a result, we conduct our business in the PRC primarily though the VIE and its subsidiaries, Hengmao Power Battery, Jiangsu Cenbird, Yizhiying IoT, Tianjin Dilang and Tianjin Jiahao, since we entered into contractual arrangements with the the VIE in November 2019. For a description of these contractual arrangements, see Item 4.A - “History and Development of the Company.”

 

7.C. Interests of Experts and Counsel

 

Not applicable.

 

ITEM 8. FINANCIAL INFORMATION

 

Consolidated Statements and Other Financial Information

 

The financial statements required by this item may be found at the end of this report on 20-F, beginning on page F-1.

 

Legal Proceedings

 

See “Item 4.B. Business Overview – Legal Proceedings” for a description of our currently involved legal proceedings.

 

Dividends

 

We have never declared or paid any dividend on EZGO’s ordinary shares and we do not anticipate paying any dividends on EZGO’s ordinary shares in the future. We currently retain all future earnings to finance our operations and to expand our business.

 

No Significant Changes

 

No significant changes to our financial condition have occurred since the date of the annual financial statements contained herein.

 

ITEM 9. THE OFFER AND LISTING

 

9.A. Offer and Listing Details

 

EZGO’s ordinary shares are listed for trading on the Nasdaq Capital Market under the symbol “EZGO.” The shares began trading on January 26, 2021 on the Nasdaq Capital Market. The closing price for the ordinary shares was $1.11 on January 26, 2022. 

 

9.B. Plan of Distribution

 

Not Applicable.

 

9.C. Markets

 

EZGO’s ordinary shares are currently traded on the Nasdaq Capital Market under the symbol “EZGO.”

 

9.D. Selling Shareholders

 

Not Applicable.

 

9.E. Dilution

 

Not Applicable.

 

9.F. Expenses of the Issuer

 

Not Applicable.

 

ITEM 10. ADDITIONAL INFORMATION

 

10.A. Share Capital

 

Not Applicable.

 

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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