F-1 1 ea128863-f1_ezgotech.htm REGISTRATION STATEMENT

As filed with the U.S. Securities and Exchange Commission on October 27, 2020.

Registration No. 333-        

 

 

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 
FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

 

EZGO Technologies Ltd.

(Exact name of Registrant as specified in its charter)

 

Not Applicable
(Translation of Registrant’s name into English)

 

British Virgin Islands   3751   Not Applicable
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

 

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

Science and Education Town,

Wujin District, Changzhou City

Jiangsu, China 213164
Tel: + 86 51983683805

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

Puglisi & Associates
850 Library Avenue,
Suite 204 Newark, DE 19711
Tel: (302) 738-6680

(Name, address, including zip code, and telephone number, including area code, of agent for service)

  

Copies to:
     

Richard I. Anslow, Esq.

Richard Baumann, Esq.

Ellenoff Grossman & Schole LLP

1345 Avenue of the Americas

New York, New York 10105

Telephone: (212) 370-1300

 

Lawrence S. Venick, Esq.

Loeb & Loeb LLP

21st Floor, CCB Tower

3 Connaught Road Central

Hong Kong SAR

Telephone: +852-3923-1111

Facsimile: +852-3923-1100

 

Approximate date of commencement of proposed sale to the public: as soon as practicable after the effective date of this registration statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.   ☒

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.     ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.     ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.     ☐

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933. 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 7(a)(2)(B) of the Securities Act.     ☐

 

 

 

 

CALCULATION OF REGISTRATION FEE

  

Title of Class of Securities to be Registered  Amount to Be
Registered(1)
   Proposed
Maximum 
Offering 
Price per
Share(3)
   Proposed
Maximum
Aggregate
Offering
Price(1)
   Amount of
Registration
Fee
 
Ordinary shares, par value US$0.001 per share   3,220,000   $4.00   $12,880,000   $1,405.21 
Ordinary shares underlying Underwriter Warrants (2)(4)   322,000   $4.40   $1,416,800   $154.58 
Total   3,542,000        $14,296,800   $1,559.79 

  

(1) In accordance with Rule 416(a), the Registrant is also registering an indeterminate number of additional ordinary shares that shall be issuable pursuant to Rule 416 to prevent dilution resulting from share splits, share dividends or similar transactions. Includes up to 420,000 ordinary shares, subject to the underwriter’s over-allotment option.
   
(2) We have agreed to issue to the underwriter warrants to purchase the number of ordinary shares (the “Underwriter Warrants”) in the aggregate equal to ten percent (10%) of the number of offered shares sold to investors introduced by the underwriter in the offering, divided by the public offering price per share in the offering. The warrants will be exercisable at any time, and from time to time within five (5) years from effective date of the Registration Statement, in whole or in part, but may not be transferred nor may the shares underlying the warrants be sold until 180 days from the effective date of this registration statement. The exercise price of the Underwriter Warrants is equal to 110% of the public offering price per share in the offering. The Underwriter Warrants are exercisable, with a cashless provision, from the effective date of the offering for a period of five (5) years from the issuance.
   
(3) Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule 457(a) under the Securities Act of 1933, as amended.
   
(4) No separate registration fee required pursuant to Rule 457(g) under the Securities Act.

  

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.

 

 

 

 

 

 

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective.

 

PRELIMINARY PROSPECTUS (Subject to Completion) Dated October 27, 2020

 

2,800,000 Ordinary Shares

 

EZGO Technologies Ltd.

 

This is the initial public offering of our ordinary shares. We are offering 2,800,000 of our ordinary shares, par value $0.001 per share, on a firm commitment basis.  The estimated initial public offering price is $4.00 per share. Currently, no public market exists for our ordinary shares.  We intend to apply to have our ordinary shares listed on the Nasdaq Capital Market, or Nasdaq, under the symbol “EZGO”. We cannot guarantee that we will be successful in listing our ordinary shares on the Nasdaq; however, we will not complete this offering unless we are so listed.

 

We are an “emerging growth company”, as that term is used in the Jumpstart Our Business Startups Act of 2012, and will be subject to reduced public company reporting requirements. See “Prospectus Summary — Emerging Growth Company Status.”

 

Investing in our ordinary shares is highly speculative and involves a significant degree of risk.  See “Risk Factors” beginning on page 6 of this prospectus for a discussion of information that should be considered before making a decision to purchase our ordinary shares.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

   Per  Share   Total 
Public offering price  $4.00   $11,200,000 
Underwriter’s discount and commissions (1)  $0.28   $784,000 
Proceeds to us, before expenses  $3.72   $10,416,000 

  

(1) ViewTrade Securities, Inc (which we refer to herein as the Underwriter) will receive compensation in addition to the underwriting discount, as set forth in the section entitled “Underwriting” beginning on page 109 upon the closing of this offering. We have also agreed to reimburse Underwriter for certain expenses incurred by it. See “Underwriting” for additional information.

 

This offering is being conducted on a firm commitment basis. The Underwriter is obligated to take and pay for all of the shares if any such shares are taken. We have granted the Underwriter an option, exercisable in whole or in part, to purchase up to 420,000 additional ordinary shares from us at the public offering price, less the underwriting discounts and commissions, within 45 days from the date of this prospectus to cover over-allotments, if any. If the Underwriter exercises the option in full, the total underwriting discounts and commissions payable will be $901,600, and the total proceeds to us, before expenses, will be $11,978,400.

 

The Underwriter expects to deliver the ordinary shares to purchasers in the offering on or about [●], 2020.

 

 

 

VIEWTRADE SECURITIES, INC.

 

The date of this prospectus is [●].

 

 

 

 

TABLE OF CONTENTS

 

    Page
Prospectus Summary   1
Risk Factors   6
Special Note Regarding Forward-Looking Statements   31
Use of Proceeds   32
Capitalization   33
Dilution   34
Enforceability of Civil Liabilities   35
Corporate Structure   37
Selected Consolidated Financial Data   40
Management’s Discussion and Analysis of Financial Condition and Results of Operations   41
Business   57
Management   86
Principal Shareholders   89
Related Party Transactions   90
Description of Securities   93
Shares Eligible for Future Sale   103
Taxation   104
Underwriting   109
Expenses Relating to this Offering   115
Legal Matters   115
Experts   115
Where You Can Find Additional Information   115
Index to Consolidated Financial Statements   F-1

 

You should rely only on the information contained in this prospectus or in any related free-writing prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, the ordinary shares only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is current only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the ordinary shares.

 

Until               , 2020 (the 25th day after the date of this prospectus), all dealers that buy, sell or trade ordinary shares, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as an underwriter and with respect to their unsold allotments or subscriptions.

 

i

 

 

PROSPECTUS SUMMARY

 

The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our ordinary shares discussed under “Risk Factors,” before deciding whether to buy our ordinary shares.

 

All references to “we,” “us,” “our,” or similar terms used in this prospectus refer to EZGO Technologies Ltd., a British Virgin Islands business company, including its consolidated subsidiaries and variable interest entity (“VIE”), unless the context otherwise indicates.

 

PRC” or “China” refers to the People’s Republic of China, excluding, for the purpose of this prospectus, Taiwan, Hong Kong and Macau.

 

“RMB” or “Renminbi” refers to the legal currency of China.

 

“$,” “US$” or “U.S. Dollars” refers to the legal currency of the United States.

  

“BVI” means British Virgin Islands.
 
“BVI Act” means the BVI Business Company Act, 2004 (as amended) of the British Virgin Islands.
 
“share capital” or “shares in the capital of” or similar expressions include a reference to shares in a company that does not have a share capital under its governing law, but which is authorized to issue a maximum or unlimited number of shares.

 

Our Business

 

We are a holding company with operating subsidiaries and a VIE, and with all of our operations and assets in China. Our vision is to build 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 electronic bicycles (“e-bicycles”) and battery and e-bicycle rentals, complemented by sale of battery packs, battery cell trading and our charging pile business. Currently, we (i) trade lithium cells; (ii) rent and sell lithium batteries; (iii) design, manufacture, rent and sell e-bicycles and e-tricycles; and (iv) sell, franchise and operate smart charging piles for e-bicycles and other electronic devices. We trade lithium battery cells by securing sales contracts with downstream customers, purchasing from suppliers and reselling lithium cell products to such customers.

 

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. The models that do not comply with 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. However, Changzhou Cenbird Electric Bicycle Manufacturing Co., Ltd. (“Changzhou Cenbird”), our related company, has the capability and qualification to manufacture non-new standards e-bicycles. The non-new standards e-bicycles can be legally used for a period of three to five years (depending on the regulations in each province) from the effective date of the General Specification Standard and we may legally sell or rent non-new standard e-bicycles.

 

To date, our business consists of rental service of lithium battery cells and e-bicycles, which accounted for approximately 74% and 83% of our total revenues for the years ended September 30, 2019 and 2018, respectively, and accounted for approximately 19% and 68% of our total revenues for the six months ended March 31, 2020 and 2019, respectively. In addition, lithium battery cell trading also brought us considerable revenue for the year ended September 30, 2019, which accounted for approximately 23% and nil of our total revenues for the years ended September 30, 2019 and 2018, respectively, and approximately nil and 31% of our total revenues for the six months ended March 31, 2020 and 2019, respectively. We also engaged in the business of battery packs sales, which accounted for approximately 1% and 17% of our total revenues for the years ended September 30, 2019 and 2018, respectively, and approximately 20% and 1% of our total revenues for the six months ended March 31, 2020 and 2019, respectively. The revenue from e-bicycles sales accounted for approximately 61% and nil of our total revenues for the six months ended March 31, 2020 and 2019, respectively. For the year ended September 30, 2019 and six months ended March 31, 2020, 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.

 

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 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.

 

In the next five years (between 2021 and 2025), we hope to transform ourselves into a comprehensive e-bicycle provider with market share of at least 1% in the e-bicycle industry in China. Over that time period, we plan to build our sales and services network in the Beijing-Tianjin-Hebei urban agglomeration area, the Yangtze River Delta metropolitan area, the Zhujiang River Delta metropolitan area and other inland central cities, such as Chengdu, Xi’an and Zhengzhou, and to deploy 50,000 smart charging piles. We hope to achieve these goals by leveraging our manufacturing experience, our expanded product portfolio, our power battery resources and IoT technology. We also plan to expand our e-bicycle market overseas, including the United States, Brazil, Southeast Asian countries and Europe, through cooperation arrangements with local agents should the opportunities arise.

 

We amended our memorandum and articles of association in September 2020 in order to effect a reorganization of our ordinary shares by way of a sub-division and subsequent surrender of certain of our ordinary shares. As a result of the share reorganization, there are 7,800,000 ordinary shares outstanding as of the date hereof. Throughout this prospectus, each reference to a number of our ordinary shares gives effect to the share reorganization, unless otherwise indicated.

1

 

 

Summary of Risks Affecting Our Company

 

Our business is subject to numerous risks described in the section titled “Risk Factors” and elsewhere in this prospectus. The main risks set forth below and others you should consider are discussed more fully in the section entitled “Risk Factors”, which you should read in its entirety.

 

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.

 

  Our current corporate structure and business operations may be affected by the newly enacted PRC Foreign Investment Law which does not explicitly classify whether VIEs that are controlled through contractual arrangements would be deemed as foreign-invested enterprises if they are ultimately “controlled” by foreign investors.

 

We rely on contractual arrangements with our consolidated VIE and its shareholders to operate our business, which may not be as effective as direct ownership in providing operational control and otherwise have a material adverse effect as to our business.

 

Any failure by our consolidated VIE or its shareholders to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business.

 

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-related businesses and companies.

 

There has been no public market for our ordinary shares prior to this offering, and you may not be able to resell our ordinary shares at or above the price you paid, or at all.

 

Nasdaq may delist our securities from trading on its exchange, which could limit investors’ ability to make transactions in our securities and subject us to additional trading restrictions.

 

Contractual Arrangements and Corporate Structure

 

We were incorporated in the BVI on January 24, 2019. Our wholly owned subsidiary, Hong Kong JKC Group Co., Limited (“JKC HK”), was incorporated in Hong Kong on February 13, 2019. JKC HK, in turn, holds all the capital stock of Changzhou Jiekai New Energy Technology Company (“WFOE” or “Changzhou Jiekai”), which was incorporated in China on June 12, 2019. WFOE controls Jiangsu Baozhe Electric Technologies, Co., Ltd. (“Jiangsu Baozhe”) through a series of contractual arrangements (the “VIE Agreements”). See “– Contractual Arrangements with Jiangsu Baozhe and Its Shareholders.” We conduct our business in the PRC primarily through Jiangsu Baozhe 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”), and Tianjin Dilang Technologies Co., Ltd (“Tianjin Dilang”), since we obtained control over Jiangsu Baozhe in November 2019.

  

2

 

 

The diagram below shows our corporate structure as of the date of this prospectus:

 

 

Contractual Arrangements with Jiangsu Baozhe and Its Shareholders

 

Due to PRC legal restrictions on foreign ownership in internet-based businesses, neither we nor our subsidiaries own any equity interest in Jiangsu Baozhe. Instead, we control and receive the economic benefits of Jiangsu Baozhe’s business operations through the VIE Agreements. WFOE, Jiangsu Baozhe and its shareholders entered into the VIE Agreements on November 8, 2019. The VIE Agreements are designed to provide WFOE with the power, rights, and obligations equivalent in all material respects to those it would possess as the equity holder of Jiangsu Baozhe, including absolute control rights and the rights in the assets, property and revenue of Jiangsu Baozhe, to (i) exercise effective control over Jiangsu Baozhe, (ii) receive substantially all of the economic benefits of Jiangsu Baozhe, and (iii) have an exclusive option to purchase or designate any third party to purchase all or part of the equity interests in and assets of Jiangsu Baozhe when and to the extent permitted by PRC law.

 

As a result of our direct ownership in WFOE and the contractual arrangements with Jiangsu Baozhe, we are regarded as the primary beneficiary of Jiangsu Baozhe, and we treat Jiangsu Baozhe as our consolidated VIE under U.S. GAAP, which generally refers to an entity in which we do not have any equity interests but whose financial results are consolidated into our consolidated financial statements in accordance with U.S. GAAP because we have a controlling financial interest in, and thus are the primary beneficiary of, that entity. We have consolidated the financial results of Jiangsu Baozhe and its subsidiaries in our consolidated financial statements in accordance with U.S. GAAP. See “Corporate Structure.”

 

Foreign Private Issuer Status

 

We are a foreign private issuer within the meaning of the rules under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As such, we are exempt from certain provisions applicable to United States domestic public companies. For example:

 

  we are not required to provide as many Exchange Act reports, or as frequently, as a domestic public company;
     
  for interim reporting, we are permitted to comply solely with our home country requirements, which are less rigorous than the rules that apply to domestic public companies;
     
  we are not required to provide the same level of disclosure on certain issues, such as executive compensation;
     
  we are exempt from provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material information;
     
  we are not required to comply with the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; and
     
  we are not required to comply with Section 16 of the Exchange Act requiring insiders to file public reports of their share ownership and trading activities and establishing insider liability for profits realized from any “short-swing” trading transaction.

 

3

 

 

Implications of Being an Emerging Growth Company

 

As a company with less than US$1.07 billion in revenue for the last fiscal year, we qualify  as an “emerging growth company” pursuant to the Jumpstart Our Business Startups Act of 2012 (as amended by the Fixing America’s Surface Transportation Act of 2015) (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, or Section 404, in the assessment of the emerging growth company’s internal control over financial reporting. The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards.

 

We will remain an emerging growth company until the earliest of (i) the last day of our fiscal year during which we have total annual gross revenues of at least US$1.07 billion; (ii) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (iii) the date on which we have, during the previous three year period, issued more than US$1.0 billion in non-convertible debt; or (iv) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act, which would occur if the market value of our ordinary shares that are held by non-affiliates exceeds US$700 million as of the last business day of our most recently completed second fiscal quarter and we have been publicly reporting for at least 12 months. Once we cease to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above. 

 

Corporate Information

 

Our principal executive offices in China are located at Building #A, Floor 2, Changzhou Institute of Dalian University of Technology, Science and Education Town, Wujin District, Changzhou, Jiangsu Province. Our telephone number at this address is +86 51983683805. Our registered agent in the BVI is Maples Corporate Services (BVI) Limited, PO Box 173, Kingston Chambers, Road Town Tortola, British Virgin Islands. Investors should submit any inquiries to the address and telephone number of our principal executive offices.

 

Our principal website is www.ezgotech.com.cn. The information contained on this website is not a part of this prospectus.  

 

Conventions that Apply to this Prospectus

 

This prospectus contains information and statistics relating to China’s economy and the industries in which we operate derived from various publications issued by market research companies and PRC governmental entities, which have not been independently verified by us, the Underwriter or any of our affiliates or advisers. The information in such sources may not be consistent with other information compiled in or outside China.

 

We use U.S. dollars as the reporting currency in our consolidated financial statements and in this prospectus. Monetary assets and liabilities denominated in Renminbi are translated into U.S. dollars at the rates of exchange as of the applicable balance sheet date, equity accounts are translated at historical exchange rates, and revenues, expenses, gains and losses are translated using the average rates for the applicable period. In other parts of this prospectus, any Renminbi denominated amounts are accompanied by the related translations. With respect to amounts not recorded in our consolidated financial statements included elsewhere in this prospectus, all translations from Renminbi to U.S. dollars were made at RMB 7.0729 to $1.00, the exchange rate set forth in the central parity of RMB against the U.S. dollar by the People’s Bank of China on September 30, 2019. We make no representation that the Renminbi or U.S. dollar amounts referred to in this prospectus 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. 

 

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The Offering

 

Shares being offered: 2,800,000 ordinary shares (or 3,220,000 ordinary shares if the underwriter exercises its over-allotment option in full) on a firm commitment basis.
   
Initial offering price: $4.00 per share.
   
Number of ordinary shares outstanding before the offering: 7,800,000 of our ordinary shares are outstanding as of the date of this prospectus.
   
Number of ordinary shares outstanding after the offering: 10,600,000 of ordinary shares (or 11,020,000 ordinary shares if the underwriter exercises its over-allotment option in full).
   
Underwriter over-allotment option: We have granted the underwriter an option for a period of up to 45 days to purchase up to 420,000 additional ordinary shares.
   
Use of proceeds:

We plan to use the net proceeds of this offering as follows:

 

●     approximately 20% for marketing and promotion of our brand and products, including expanding our business globally, in the first two years after the completion of this offering;

●     approximately 15% for purchasing high-quality charging piles and e-bicycles for our rental business;

●     approximately 20% for research and development activities for our new products and technology, including building experimental workshops for the testing of new models, new technologies and new applications;

●     approximately 15% for acquiring new and advanced production facilities and equipment for the production of our e-bicycles, and for improving the environmental impacts of our facilities; and

●     approximately 30% for general administration and working capital.

 

See “Use of Proceeds.”

   
   
Lock-up: We, all of our directors and officers and certain shareholders have agreed with the underwriter not to sell, transfer or dispose of, directly or indirectly, any of our ordinary shares or securities convertible into or exercisable or exchangeable for our ordinary shares for a period of twelve (12) months after the date of this prospectus. See “Shares Eligible for Future Sale” and “Underwriting” for more information.
   
Listing: We intend to apply to have our ordinary shares listed on the Nasdaq Capital Market, or Nasdaq. We cannot guarantee that we will be successful in listing our ordinary shares on the Nasdaq; however, we will not complete this offering unless we are so listed.
   
Proposed Nasdaq symbol: EZGO
   
Risk factors: Investing in our ordinary shares is highly speculative and involves a significant degree of risk. As an investor, you should be able to bear a complete loss of your investment. You should carefully consider the information set forth in the “Risk Factors” section.

  

5

 

  

RISK FACTORS

 

An investment in our ordinary shares involves significant risks. You should carefully consider all of the information in this prospectus, including the risks and uncertainties described below, before making an investment in our ordinary shares. Any of the following risks could have a material adverse effect on our business, financial condition and results of operations. In any such case, the market price of our ordinary shares could decline, and you may lose all or part of your investment. 

 

Risks Related to Our Business and Industry

 

We may incur losses in the future.

 

We had a net income of approximately $2.19 million and $0.63 million for the fiscal year ended September 30, 2019 and 2018, respectively, and a net loss of approximately $0.59 million for the six months ended March 31, 2020. Despite generating net income in the last two fiscal years, we anticipate that our operating expenses, 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 a quarterly or annual basis for the foreseeable future.

 

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

 

We launched our business in 2014 and started focusing on the current business 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 shifting to 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 RMB 1,000 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.

 

6

 

 

If we are unable to manage our growth or execute our strategies effectively, our business and prospects may be materially and adversely affected.

 

To accommodate our growth, we anticipate that we will need to implement a variety of new and upgraded operational and financial systems, procedures and controls, including the improvement of our accounting and other internal management systems. We will also need to continue to expand, train, manage and motivate our workforce and manage our relationships with customers and third-party suppliers. All of these endeavors involve risks, and will require substantial management effort and significant additional expenditures. We may not be able to manage our growth or execute our strategies effectively, and any failure to do so may have a material adverse effect on our business and prospects.

 

Our marketing strategy of appealing to and growing sales to a more diversified group of users may not be successful.

 

Our marketing is aimed at reinforcing customer perceptions of our brand as a premium e-bicycles brand and leasing service provider. We aim to provide users with a good user experience, including by providing our users with access to a full suite of services conveniently through our online website and services stores. We cannot assure you that our services or our efforts to engage with our users using both our online and offline channels, will be successful, which could impact our revenues as well as our customer satisfaction and marketing.

 

To grow the business over the long term, we must be successful in selling products and services and promoting our brand experience to a broader and more users. We must also execute our diversification strategy without adversely impacting the strength of the brand with core users. Failure to successfully drive demand for our e-bicycles may have a material adverse effect on our business and results of operations.

 

We face intense competition in the battery and e-bicycle rental market and the charging pile market, and if we fail to compete effectively, we may lose market share and customers.

 

As a battery and e-bicycle rental provider, we face competition from companies nationwide, such as China Tieta Company and Shenzhen Immotor Technology Co., Ltd. Our current or future competitors may have longer operating histories, greater brand recognition, better supplier relationships, larger customer bases, more cost-effective fulfillment capabilities or greater financial, technical or marketing resources than we do. Competitors may leverage their brand recognition, experience and resources to compete with us in a variety of ways, including investing more heavily in research and development and making acquisitions for the expansion of their products and services.

 

In addition, 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.

 

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.  

 

7

 

 

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. In April 15, 2019, the State Administration for Market Regulatory and the National Standardization Administration of China jointly promulgated the Regulation on Safety Technical Specification for Electric Bicycles and announced the new standard GB11761-2018 was effective, or the National New Standard, replacing the old standard GB17761-1999. Although we follow the regulatory requirements and have obtained the 3C certificates issued by Certification Center of Light Industry Council, our new models e-bicycles may fail to meet the National New Standard.

 

In addition, our batteries must comply with the national standard GB/T 36972-2018 Lithium Batteries for Electric Bicycles, which was officially released on December 28, 2018 and implemented on July 1, 2019. Lithium batteries that do not meet standard may be returned by customers, harm our reputation and subject us to additional regulatory actions. While there is no national standard for charging pile, if the customers are not satisfied with our products, the products may be returned. This could harm our relationship with our business partners and reputation in the industry. Any of these occurrences could have a material adverse effect on our operations and financial results.

 

The wide variety of payment methods that we accept subjects us to third-party payment processing-related risks.

 

We accept payments using a variety of methods, including bank transfers, online payments with debit cards issued by banks in China, and payment through third-party online payment platforms such as Alipay and WeChat Pay. We may be subject to fraud and other illegal activities in connection with the various payment methods we accept, including online payment. 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 important 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 year ended September 30, 2019 and we had no trading business in the same period of 2018. For the six months ended March 31, 2020, we have no trading revenue. For the six months ended March 31, 2019, the sales revenue of Shanghai Yutu Industry Co., Ltd. and Shanghai Jialongtai Industry Co., Ltd. accounted for approximately 57% and 43%, respectively, of our total trading sales revenue of lithium battery cells. Any disputes with our business partners could have a material adverse effect on our business and results of operations.

 

We have relied on our two important customers in e-bicycles sales business, including Beijing 70 Generation Co., Ltd. and Jiangsu Piaggio Motorcycle Sales Co., Ltd., each accounted for approximately 39.3% and 14.4% of our e-bicycles sales revenue for the six months ended March 31, 2020, respectively, and we had no such business in the same period of 2019.

 

In addition, our lithium battery and e-bicycle rental business mainly serves couriers, meal deliverymen, students, business travelers and tourists. We had three significant individual sublease agents, Mr. Guoqing Zhu, Mr. Liwu Zhong, and Mr. Zewu Zhao, who accounted for 30.3%, 22.7% and 12%, respectively, of our rental business revenues for the year ended September 30, 2019 and 29.7%, 47.2% and 6.2%, respectively, of our rental business revenues for the year ended September 30, 2018. We had three important individual sublease agents, Mr. Guoqing Zhu, Mr. Zewu Zhao, and Ms. Xiaoying Zheng, who accounted for approximately 26.7%, 16.2%, and 9.6%, respectively, of our rental business revenues for the six months ended March 31, 2020, and accounted for approximately 28.0%, 9.6% and 23.1%, respectively, of our rental business revenues for the six months ended March 31, 2019. Although we plan to develop partnerships with other customers, we anticipate that our reliance on existing customers will continue in the near future.

 

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.

 

8

 

 

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 prospectus, we have obtained 10 registered patents from the PRC related to technologies used in our battery cell manufacturing, battery packing and 2-stroke permanent magnet engines and motors as well as e-bicycle manufacturing. We have also registered 6 trademarks with the China Trademark Office and have right to use on registered “Cenbird” trademark, and 11 copyright registrations with the PRC. See “Business – 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 prospectus, 2020, we owned 10 registered patents relating to various aspects of our operations. The rights granted under any issued patents, however, may not provide us with proprietary protection or competitive advantages. The claims under any patents that issue from our patent applications may not be broad enough to prevent others from developing technologies that are similar or that achieve results similar to ours. It is also possible that the intellectual property rights of others will bar us from licensing. Numerous patents owned by others exist in the fields in which we have developed and are developing our technology. These patents and patent applications might have priority over our patent applications and could subject our patent applications to invalidation. Finally, in addition to those who may claim priority, any of our existing patents may also be challenged by others on the basis that they are otherwise invalid or unenforceable. Any failure in extending our existing patents, or if our patent rights were to be contested, circumvented, invalidated or limited in scope could materially and adversely affect our business, financial condition and results of operations.

 

We may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt our business and operations.

 

We cannot be certain that our operations or any aspects of our business do not or will not infringe upon or otherwise violate patents, copyrights or other intellectual property rights held by third parties. We have been, and from time to time in the future may be, subject to legal proceedings and claims relating to the intellectual property rights of others. In addition, there may be other third-party intellectual property that is infringed by our products, services or other aspects of our business. There could also be existing patents of which we are not aware that our products may inadvertently infringe. Holders of patents purportedly relating to some aspect of our products or business, if any such holders exist, may seek to enforce such patents against us in China, the United States or any other jurisdictions. Further, the application and interpretation of China’s patent laws and the procedures and standards for granting patents in China are still evolving and are uncertain, and PRC courts or regulatory authorities may not agree with our analysis. If we are found to have violated the intellectual property rights of others, we may be subject to liability for our infringement activities or may be prohibited from using such intellectual property, and we may incur licensing fees or be forced to develop alternatives of our own. In addition, we may incur significant expenses, and may be forced to divert management’s time and other resources from our business and operations to defend against these third-party infringement claims, regardless of their merits. Infringement of our intellectual property rights or successful licensing claims made against us may result in significant monetary liabilities and may materially disrupt our business and operations by restricting or prohibiting our use of the intellectual property in question.

 

Our business, financial condition and results of operations may be adversely affected by a downturn in the global or Chinese economies.

 

Because our sales may depend on customers’ levels of disposable income, perceived job prospects and willingness to spend, our business and prospects may be affected by economic conditions in China or globally. The global financial markets experienced significant disruptions in 2008 and the United States, Europe and other economies went into recession. The recovery from the lows of 2008 and 2009 was uneven and is continuously facing new challenges, including the escalation of the European sovereign debt crisis since 2011 and the slowdown of the Chinese economy in 2012. 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 course 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. 

9

 

 

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.

 

Prior to this offering, we were a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. 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.

 

One material weakness that has been identified related to our lack of sufficient financial reporting and accounting personnel with appropriate knowledge of accounting principles generally accepted in the United States of America (“U.S. GAAP”) and SEC reporting requirements to properly address complex U.S. GAAP accounting issues and to prepare and review our consolidated financial statements and related disclosures to fulfill U.S. GAAP and SEC financial reporting requirements. The other material weakness that has been identified related to our lack of key monitoring mechanisms such as internal control department to oversee and monitor Company’s risk management, business strategies and financial reporting procedures. We plan to implement a number of measures to address the material weaknesses upon consummation of our initial public offering, including but not limited to, engaging experienced accounting staff to assist us in establishing appropriate policies and procedures in accordance with U.S. GAAP.

 

Neither we nor our independent registered public accounting firm undertook a comprehensive assessment of our internal control for purposes of identifying and reporting material weaknesses and other control deficiencies in our internal control over financial reporting as we and they will be required to do after we become a public company. Had we performed a formal assessment of our internal control over financial reporting or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, additional deficiencies may have been identified.

 

Upon completion of this offering, we will become subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act, or Section 404, will require that we include a report from management on the effectiveness of our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending September 30, 2021.

 

During the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may identify other weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. If we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of our securities. 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.

 

10

 

 

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 only in China. However, Changzhou Cenbird, our related party, distributes its products overseas. It is expected we will gradually expand into foreign markets with the cooperation with Changzhou Cenbird. International expansion represents a large opportunity to further grow our business and enhance our competitive position, and is one of our core strategies.

 

We may enter into new geographic markets where we have limited or no experience in marketing, selling, and localizing and deploying our e-bicycles. International expansion has required and will continue to require us to invest significant capital and other resources and our efforts may not be successful. International sales and operations may be subject to risks such as:

 

limited brand recognition (compared with our home market in China);

 

costs associated with establishing new distribution networks;

 

difficulty to find qualified partners for overseas distribution;

 

inability to anticipate foreign consumers’ preferences and customs;

 

difficulties in staffing and managing foreign operations;

 

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

 

political and economic instability;

 

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.

 

If relations between the United States and China worsen, our business and operating results may be adversely impacted.

 

The U.S. government has recently made statements and taken certain actions that may lead to significant changes to U.S. and international trade policies, including recently-imposed tariffs affecting certain products manufactured in 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.

 

We rely substantially on external suppliers and third-party delivery service providers for our e-bicycles, charging piles and batteries.

 

We purchase certain key components and raw material, including tires, motors, headlight, panel frame and controllers, from external suppliers for use in our production of e-bicycles on a purchase order basis. We also rely on external suppliers to manufacture the charging piles and supply batteries or components of our batteries. The continuous and stable supply of these components, raw materials and products that meet our standards is crucial to our operations and production. We cannot assure you that we will be able to maintain our existing relationships with these suppliers and continue to be able to source key components and raw materials we use in our e-bicycles on a stable basis and at a reasonable price or at all. For example, our suppliers may increase the prices for the components or materials we purchase and/or experience disruptions in their production of the components or materials. In addition, natural disasters or pandemics, such as the COVID-19 breakout, interrupted numerous supply chains in China, for companies operating in China as well as for international companies.

 

We also rely on third party delivery companies to delivery products sold on our online shops. Interacting with and coordinating the activities of a number of delivery companies are complicated and any major interruptions to or failures in these third-parties’ shipping services could prevent the timely or successful delivery of our products. These interruptions may be due to unforeseen events that are beyond our control or the control of these third-party delivery companies, such as inclement weather, natural disasters, transportation interruptions or labor unrest or shortage. If our products are not delivered on time or are delivered in a damaged state, customers may refuse to accept our products and have less confidence in our services. Thus, we may lose customers, and our financial condition and reputation could suffer. Delivery of our products could also be affected or interrupted by the merger, acquisition, insolvency or government shut-down 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. 

11

 

 

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 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 prospectus, certain cities in the PRC have been subject to travel restrictions by the relevant PRC authority to contain the Outbreak. If the implementation of travel restrictions prolonged or if certain cities where our factories and our major customers are located are being restricted to certain activities due to the Outbreak, there may be a decrease in or cancellation of purchase orders or delay in payments from our customers. In addition, if any of our employees is contracted with COVID-19, the relevant PRC authority would require our employees to be quarantined and/or our production facilities to be disinfected, which could disrupt our business operation and render us unable to deliver our products in a timely manner, or at all. As our existing inventories may not be sufficient to fulfill the accepted sales orders, this may lead to termination of orders from our customers. The Outbreak could, in extreme circumstances, lead to the forced suspension or closure of our factories and/or our major customers as an attempt to contain the Outbreak. The continuing spread and prolonged occurrence of COVID-19 could have an adverse effect on the overall economy in the PRC and worldwide. If the Outbreak is not alleviated in the foreseeable future, our business, financial condition and results of operations may be materially and adversely affected.

 

The occurrence of natural disasters may adversely affect our business, financial condition and results of operations.

 

The occurrence of natural disasters, including hurricanes, floods, earthquakes, tornadoes, fires and pandemic disease may adversely affect our business, financial condition or results of operations. The potential impact of a natural disaster on our results of operations and financial position is speculative and would depend on numerous factors. The extent and severity of these natural disasters determines their effect on a given economy. Although the long-term effect of diseases such as the COVID-19 “coronavirus”, H5N1 “avian flu,” or H1N1, the swine flu, cannot currently be predicted, previous occurrences of avian flu and swine flu had an adverse effect on the economies of those countries in which they were most prevalent. An outbreak of a communicable disease in our market could adversely affect our business, financial condition and results of operations, and timely reporting obligations under Regulation S-X and Regulation S-K following our business combination. We cannot assure you that natural disasters will not occur in the future or that our business, financial condition and results of operations will not be adversely affected.

 

Risks Related to Our Corporate Structure

 

Our current corporate structure and business operations may be affected by the newly enacted Foreign Investment Law which does not explicitly classify whether VIEs that are controlled through contractual arrangements would be deemed as foreign-invested enterprises if they are ultimately “controlled” by foreign investors.

 

On March 15, 2019, the National People’s Congress, China’s national legislative body (the “NPC”) approved the Foreign Investment Law, which took effect on January 1, 2020. Since it is relatively new, uncertainties exist in relation to its interpretation. The Foreign Investment Law does not explicitly classify whether variable interest entities that are controlled through contractual arrangements would be deemed as foreign-invested enterprises if they are ultimately “controlled” by foreign investors. However, it has a catch-all provision under definition of “foreign investment” that includes investments made by foreign investors in China through other means as provided by laws, administrative regulations or the State Council. Therefore, it still leaves leeway for future laws, administrative regulations or provisions of the State Council to provide for contractual arrangements being viewed as a form of foreign investment. Therefore, there can be no assurance that our control over our consolidated VIE through contractual arrangements will not be deemed as foreign investment in the future.

 

The Foreign Investment Law grants national treatment to foreign-invested entities, except for those foreign-invested entities that operate in industries specified as either “restricted” or “prohibited” from foreign investment in a “negative list” that is yet to be published. It is unclear whether the “negative list” to be published will differ from the current Special Administrative Measures for Market Access of Foreign Investment (Negative List). The Foreign Investment Law provides that foreign-invested entities operating in “restricted” or “prohibited” industries will require market entry clearance and other approvals from relevant PRC government authorities. If our control over our consolidated VIE through contractual arrangements are deemed as foreign investment in the future, and any business of our consolidated VIE is “restricted” or “prohibited” from foreign investment under the “negative list” effective at the time, we may be deemed to be in violation of the Foreign Investment Law, the contractual arrangements that allow us to have control over our consolidated VIE may be deemed as invalid and illegal, and we may be required to unwind such contractual arrangements and/or restructure our business operations, any of which may have a material adverse effect on our business operation.

 

Furthermore, if future laws, administrative regulations or provisions mandate further actions to be taken by companies with respect to existing contractual arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely affect our current corporate structure and business operations.

 

12

 

 

We rely on contractual arrangements with our consolidated VIE and its shareholders to operate our business, which may not be as effective as direct ownership in providing operational control and otherwise have a material adverse effect as to our business.

 

We rely on contractual arrangements with our consolidated VIE and its shareholders to operate our business. For a description of these contractual arrangements, see “Corporate Structure – Contractual Arrangements between Jiangsu Baozhe and Its Shareholders.” All of our revenue is attributed to our consolidated VIE. These contractual arrangements may not be as effective as direct ownership in providing us with control over our consolidated VIE. If our consolidated VIE or its shareholders fail to perform their respective obligations under these contractual arrangements, our recourse to the assets held by our consolidated VIE is indirect and we may have to incur substantial costs and expend significant resources to enforce such arrangements in reliance on legal remedies under PRC law. These remedies may not always be effective, particularly in light of uncertainties in the PRC legal system. Furthermore, in connection with litigation, arbitration or other judicial or dispute resolution proceedings, assets under the name of any of record holder of equity interest in our consolidated VIE, including such equity interest, may be put under court custody. As a consequence, we cannot be certain that the equity interest will be disposed pursuant to the contractual arrangement or ownership by the record holder of the equity interest.

 

All of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in other jurisdictions, such as the U.S. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. In the event that we are unable to enforce these contractual arrangements, or if we suffer significant time delays or other obstacles in the process of enforcing these contractual arrangements, it would be very difficult to exert effective control over our consolidated VIE, and our ability to conduct our business and our financial condition and results of operations may be materially and adversely affected. See “– Risks Related to Doing Business in China – Uncertainties in the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to you and us.”

 

Any failure by our consolidated VIE or its shareholders to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business.

 

We, through our wholly foreign-owned enterprise in the PRC, have entered into a series of contractual arrangements with our consolidated VIE and its shareholders. For a description of these contractual arrangements, see “Corporate Structure – Contractual Arrangements with Jiangsu Baozhe and Its Shareholders” If our consolidated VIE or its shareholders fail to perform their respective obligations under these contractual arrangements, we may incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC laws, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure you will be effective under PRC laws. For example, if the shareholders of our consolidated VIE were to refuse to transfer their equity interests in the consolidated VIE to us or our designee when we exercise the purchase option pursuant to these contractual arrangements, or if they were otherwise to act in bad faith toward us, then we may have to take legal actions to compel them to perform their contractual obligations.

 

All the agreements under our contractual arrangements are governed by PRC laws and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the U.S. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. Meanwhile, there are very few precedents and formal guidelines as to how contractual arrangements in the context of a VIE should be interpreted or enforced under PRC laws. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. In addition, under PRC laws, rulings by arbitrators are final and parties cannot appeal arbitration results in court unless such rulings are revoked or determined unenforceable by a competent court. If the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would require additional expenses and delay. In the event that we are unable to enforce these contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over our consolidated VIE and relevant rights and licenses held by it which we require in order to operate our business, and our ability to conduct our business may be negatively affected. See “– Risks Related to Doing Business in China – Uncertainties in the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to you and us.”

  

The arbitration provisions under these contractual arrangements have no effect on the rights of our shareholders to pursue claims against us under the United States federal securities laws.

 

The shareholders of our consolidated VIE may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.

 

The interests of the shareholders of our consolidated VIE in their capacities as such shareholders may differ from the interests of our company as a whole, as what is in the best interests of our consolidated VIE, including matters such as whether to distribute dividends or to make other distributions to fund our offshore requirement, may not be in the best interests of our company. There can be no assurance that when conflicts of interest arise, any or all of these shareholders will act in the best interests of our company or those conflicts of interest will be resolved in our favor. In addition, these shareholders may breach or cause our consolidated VIE and its subsidiaries to breach or refuse to renew the existing contractual arrangements with us.

 

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Currently, we do not have arrangements to address potential conflicts of interest that the shareholders of our consolidated VIE may encounter, on one hand, and as a beneficial owner of our company, on the other hand. We, however, could, at all times, exercise our option under the exclusive option agreement to cause them to transfer all of their equity ownership in our consolidated VIE to a PRC entity or individual designated by us as permitted by the then applicable PRC laws. In addition, if such conflicts of interest arise, we could also, in the capacity of attorney-in-fact of the then existing shareholders of our consolidated VIE as provided under the power of attorney, directly appoint new directors of our consolidated VIE. We rely on the shareholders of our consolidated VIE to comply with PRC laws and regulations, which protect contracts and provide that directors and executive officers owe a duty of loyalty to our company and require them to avoid conflicts of interest and not to take advantage of their positions for personal gains, and the laws of the BVI, which provide that directors have a duty of care and a duty to act honestly in good faith with a view to our best interests. However, the legal frameworks of both China and BVI do not provide guidelines on resolving conflicts with other corporate governance regimes. If we cannot resolve any conflicts of interest or disputes between us and the shareholders of our consolidated VIE, we would have to rely on legal proceedings, which could result in the disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.

 

If the PRC government deems that the contractual arrangements in relation to our consolidated VIE do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.

 

Because we are a business company incorporated in the BVI, we are classified as a foreign enterprise under PRC laws and regulations, and our wholly foreign-owned enterprise in the PRC is a foreign-invested enterprise (“FIE”). Our PRC subsidiary has entered into a series of contractual arrangements with our consolidated VIE and its shareholders, which enable us to (i) exercise effective control over the consolidated VIE, (ii) receive substantially all of the economic benefits of the consolidated VIE, and (iii) have an exclusive option to purchase all or part of the equity interests and assets in the consolidated VIE when and to the extent permitted by PRC law. As a result of these contractual arrangements, we have control over and are the primary beneficiary of the consolidated VIE and hence consolidate its financial results as our consolidated VIE under U.S. GAAP. For a description of these contractual arrangements, see “Corporate Structure – Contractual Arrangements with Jiangsu Baozhe and Its Shareholders.”

 

We believe that our corporate structure and contractual arrangements comply with the current applicable PRC laws and regulations. Our PRC legal counsel, DeHeng Law Offices, based on its understanding of the relevant laws and regulations, is of the opinion that each of the contracts among our wholly-owned PRC subsidiary, our consolidated VIE and its shareholders is valid, binding and enforceable in accordance with its terms. However, there are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “M&A Rules”), and the Telecommunications Regulations and the relevant regulatory measures concerning the telecommunications industry. There can be no assurance that the PRC government authorities, such as the Ministry of Commerce (“MOFCOM”) or the MIIT, or other authorities that regulate online services providers and other participants in the telecommunications industry, would agree that our corporate structure or any of the above contractual arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future. PRC laws and regulations governing the validity of these contractual arrangements are uncertain and the relevant government authorities have broad discretion in interpreting these laws and regulations.

 

If our corporate structure and contractual arrangements are deemed by the MIIT, the MOFCOM or other regulators that have competent authority, to be illegal, either in whole or in part, we may lose control of our consolidated VIE and have to modify such structure to comply with regulatory requirements. However, there can be no assurance that we can achieve this without material disruption to our business. Further, if our corporate structure and contractual arrangements are found to be in violation of any existing or future PRC laws or regulations, the relevant regulatory authorities would have broad discretion in dealing with such violations, including:

 

  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 our 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 our consolidated VIE’s business and operations; and

 

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

 

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Furthermore, new PRC laws, rules and regulations may be introduced to impose additional requirements that may be applicable to our corporate structure and contractual arrangements. Occurrence of any of these events could materially and adversely affect our business, financial condition and results of operations. In addition, if the imposition of any of these penalties or requirement to restructure our corporate structure causes us to lose the rights to direct the activities of our consolidated VIE or our right to receive their economic benefits, we would no longer be able to consolidate the financial results of such VIE in our consolidated financial statements. However, we do not believe that such actions would result in the liquidation or dissolution of our company, our wholly-owned subsidiary in China or our consolidated VIE or its subsidiaries. See “Corporate Structure – Contractual Arrangements with Jiangsu Baozhe and Its Shareholders.”

 

Contractual arrangements in relation to our consolidated VIE may be subject to scrutiny by the PRC tax authorities and they may determine that our consolidated VIE owes additional taxes, which could negatively affect our financial condition and the value of your investment.

 

Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. The PRC Enterprise Income Tax Law, or the EIT Law, requires every enterprise in China to submit its annual enterprise income tax return together with a report on transactions with its related parties to the relevant tax authorities. The tax authorities may impose reasonable adjustments on taxation if they have identified any related party transactions that are inconsistent with the arm’s length principles. We may face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements among our wholly-owned PRC subsidiary, our consolidated VIE and its shareholders were not entered into on an arm’s length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, regulations and rules, and adjust their income in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by our wholly-owned PRC subsidiary or consolidated VIE for PRC tax purposes, which could in turn increase their tax liabilities without reducing their tax expenses. Furthermore, the PRC tax authorities may impose late payment fees and other penalties on our PRC subsidiary and consolidated VIE for adjusted but unpaid taxes according to applicable regulations. Our financial position could be materially and adversely affected if the tax liabilities of our PRC subsidiary and consolidated VIE increase, or if they are required to pay late payment fees and other penalties.

 

We may lose the ability to use and enjoy assets held by our consolidated VIE that are material to the operation of our business if the entity goes bankrupt or becomes subject to a dissolution or liquidation proceeding.

 

Our consolidated VIE holds substantially all of our assets. Under the contractual arrangements, our consolidated VIE may not and its shareholders may not cause it to, in any manner, sell, transfer, mortgage or dispose of its assets or its legal or beneficial interests in the business without our prior consent. However, in the event that the shareholders of our consolidated VIE breach these contractual arrangements and voluntarily liquidate our consolidated VIE, or our consolidated VIE declares bankruptcy and all or part of its assets become subject to liens or rights of third-party creditors, or are otherwise disposed of without our consent, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. If our consolidated VIE undergoes a voluntary or involuntary liquidation proceeding, independent third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, financial condition and results of operations.

 

If the custodians or authorized users of our controlling non-tangible assets, including chops and seals, fail to fulfill their responsibilities, or misappropriate or misuse these assets, our business and operations may be materially and adversely affected.

 

Under PRC law, legal documents for corporate transactions, including agreements and contracts that our business relies on, are executed using the chop or seal of the signing entity or with the signature of a legal representative whose designation is registered and filed with the relevant local branch of the State Administration for Market Regulation, formerly known as the State Administration for Industry and Commerce (“SAIC”). We generally execute legal documents by affixing chops or seals, rather than having the designated legal representatives sign the documents.

 

We use two major types of chops: corporate chops and finance chops. Chops are seals or stamps used by a PRC company to legally authorize documents, often in place of a signature. We use corporate chops generally for documents to be submitted to government agencies, such as applications for changing business scope, directors or company name, and for legal letters. We use finance chops generally for making and collecting payments, including issuing invoices. Use of corporate chops must be approved by our legal department and administrative department, and use of finance chops must be approved by our finance department. The chops of our subsidiary and consolidated VIE are generally held by the relevant entities so that documents can be executed locally. Although we usually utilize chops to execute contracts, the registered legal representatives of our subsidiary and consolidated VIE have the apparent authority to enter into contracts on behalf of such entities without chops, unless such contracts set forth otherwise.

 

In order to maintain the physical security of our chops, we generally have them stored in secured locations accessible only to the designated key employees of our legal, administrative or finance departments. Our designated legal representatives generally do not have access to the chops. Although we have approval procedures in place and monitor our key employees, including the designated legal representatives of our subsidiary and consolidated VIE, the procedures may not be sufficient to prevent all instances of abuse or negligence. In addition, we also separate the authorized user of chops from the keeper of keys to the storage room and install security camera for the storage room. There is a risk that our key employees or designated legal representatives could abuse their authority, for example, by binding our subsidiary and consolidated VIE with contracts against our interests, as we would be obligated to honor these contracts if the other contracting party acts in good faith in reliance on the apparent authority of our chops or signatures of our legal representatives. If any designated legal representative obtains control of the chop in an effort to obtain control over the relevant entity, we would need to have a shareholder or board resolution to designate a new legal representative to take legal action to seek the return of the chop, apply for a new chop with the relevant authorities, or otherwise seek legal remedies for the legal representative’s misconduct. If any of the designated legal representatives obtains and misuses or misappropriates our chops and seals or other controlling intangible assets for whatever reason, we could experience disruption to our normal business operations. We may have to take corporate or legal action, which could involve significant time and resources to resolve the matter, while distracting management from our operations, and our business operations may be materially and adversely affected.

 

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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 subsidiary is subject to various PRC laws and regulations generally applicable to companies in China. The PRC legal system is based on written statutes. Unlike common law systems, it is a system in which legal cases have limited value as precedents. In the late 1970s, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past four decades has significantly increased the protections afforded to various forms of foreign or private-sector investment in China.

 

As relevant laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties.

 

From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. Furthermore, the PRC legal system is based in part on government policies and internal rules (some of which are not published in a timely manner or at all) that may have retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. Such uncertainties, including uncertainty over the scope and effect of our contractual, property (including intellectual property) and procedural rights, and any failure to respond to changes in the regulatory environment in China could materially and adversely affect our business and impede our ability to continue our operations.

 

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 subsidiary 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 our operations. If our operations do not comply with these new regulations at the time they become effective, or if we fail to obtain any licenses required under these new laws and regulations, we could be subject to penalties.

 

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.

 

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Regulation and censorship of information disseminated over the Internet in China may adversely affect our business, and we may be liable for content that is displayed on our website.

 

China has enacted laws and regulations governing Internet access and the distribution of products, services, news, information, audio-video programs and other content through the Internet. In the past, the PRC government has prohibited the distribution of information through the internet that it deems to be in violation of PRC laws and regulations. If any of our internet information was deemed by the PRC government to violate any content restrictions, we would not be able to continue to display such content and could become subject to penalties, including confiscation of income, fines, suspension of business and revocation of required licenses, which could materially and adversely affect our business, financial condition and results of operations. We may also be subject to potential liability for any unlawful actions of our customers or users of our website or for content we distribute that is deemed inappropriate. It may be difficult to determine the type of content that may result in liability to us, and if we are found to be liable, we may be prevented from operating our website in China.

 

The enforcement of the PRC Labor Contract Law and other labor-related regulations in the PRC may adversely affect our business and our results of operations.

 

The PRC Labor Law and the Labor Contract Law require that employers must execute written employment contracts with full-time employees. All employers must compensate their employees with wages equal to at least the local minimum wage standards. Violations of the PRC Labor Law and the Labor Contract Law may result in the imposition of fines, compensations and other administrative sanctions, and serious violations may constitute criminal offenses.

 

The PRC Labor Contract Law became effective and was implemented on January 1, 2008, which was amended on December 28, 2012. It has reinforced the protection of employees who, under the PRC Labor Contract Law, have the right, among others, to enter into written labor contracts, to enter into labor contracts with no fixed terms under certain circumstances, to receive overtime wages and to terminate or alter terms in labor contracts. According to the PRC Social Insurance Law, which became effective on July 1, 2011, and the Administrative Regulations on the Housing Funds, companies operating in China are required to participate in pension insurance, work-related injury insurance, medical insurance, unemployment insurance, maternity insurance and housing funds plans, and the employers must pay all or a portion of the social insurance premiums and housing funds for their employees.

 

As the interpretation and implementation of these laws and regulations are still evolving, our employment practice may not at all times be deemed in compliance with the new laws and regulations. If we are subject to severe penalties or incur significant liabilities in connection with labor disputes or investigations, our business and results of operations may be adversely affected.

 

Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and operations.

 

Currently all of our business operations are conducted in China and all of our sales are made in China. Accordingly, our business, financial condition, results of operations and prospects may be influenced to a significant degree by political, economic and social conditions in China generally and by continued economic growth in China as a whole.

 

China’s economy differs from the economies of most developed countries in many respects, including the level of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the PRC government has implemented measures since the late 1970’s emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance in business enterprises, which are generally viewed as a positive development for foreign business investment, a substantial portion of productive assets in China is still owned by the PRC government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over the PRC economic growth through allocating resources, controlling payments of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies.

 

While China’s economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy, and the rate of growth has been slowing down. Some of the governmental measures may benefit the overall Chinese economy, but may have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations. Any stimulus measures designed to boost the Chinese economy may contribute to higher inflation, which could adversely affect our results of operations and financial condition. For example, certain operating costs and expenses, such as employee compensation and office operating expenses, may increase as a result of higher inflation. In addition, the PRC government has implemented in the past certain measures to control the pace of economic growth. These measures may cause decreased economic activity, which in turn could lead to a reduction in demand for our products and services, and consequently have a material adverse effect on our businesses, financial condition and results of operations.

 

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Restrictions on currency exchange or outbound capital flows may limit our ability to utilize our PRC revenue effectively.

 

Substantially 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 our ordinary shares.

 

PRC regulations relating to foreign exchange registration of overseas investment by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into these subsidiaries, limit PRC subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.

 

On July 4, 2014, SAFE promulgated the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, which replaced the former Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents to Engage in Financing and Inbound Investment via Overseas Special Purpose Vehicles (generally known as SAFE Circular 75) promulgated by SAFE on October 21, 2005. On February 13, 2015, SAFE further promulgated the Circular on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment, or SAFE Circular 13, which took effect on June 1, 2015. This SAFE Circular 13 has amended SAFE Circular 37 by requiring PRC residents or entities to register with qualified banks rather than SAFE or its local branch in connection with their direct establishment or indirect control of an offshore entity established for the purpose of overseas investment or financing with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests. Qualified local banks will directly examine and accept foreign exchange registration for overseas direct investment, including the initial foreign exchange registration and amendment registration, under Circular 37 from June 1, 2015.

 

These circulars further require amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as an increase or decrease of capital contributed by PRC residents, share transfer or exchange, merger, division or other material events. In the event that a PRC resident holding interests in a special purpose vehicle fails to complete the required SAFE registration, the PRC subsidiary of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiary. Furthermore, it is unclear how this regulation, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant PRC government authorities, and we cannot predict how these regulations will affect our business operations or future strategy. Failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange controls. This may have a material adverse effect on our business, financial condition and results of operations.

 

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According to Circular 37 and Circular 13, our shareholders or beneficial owners who are PRC residents are subject to 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 Circular 37 and 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 subsidiary’s ability to distribute dividends to, or obtain foreign-exchange-dominated loans from, our company, or prevent us from making distributions or paying dividends. As a result, our business operations and our ability to make distributions to you could be materially and adversely affected.

 

Furthermore, as these foreign exchange regulations are still relatively new and their interpretation and implementation have been constantly evolving, it is unclear how these regulations, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. We cannot predict how these regulations will affect our business operations or future strategy. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the foreign exchange regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects.

   

PRC regulation on loans to, and direct investment in, PRC entities by offshore holding companies and governmental control in currency conversion may delay or prevent us from using the proceeds of this offering to make loans to or make additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.  

 

We are a company incorporated in the BVI structured as a holding company conducting our operations in China through our PRC subsidiaries. As permitted under PRC laws and regulations, in utilizing the proceeds of this offering, we may make loans to our PRC subsidiaries subject to the approval from governmental authorities and limitation of amount, or we may make additional capital contributions to our PRC subsidiary. Furthermore, loans by us to our PRC subsidiary to finance its 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 our PRC subsidiaries are subject to the requirement of making necessary filings in the Foreign Investment Comprehensive Management Information System and registration with other governmental authorities in China.

 

The SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming the Administration of Foreign Exchange Settlement of Capital of Foreign-invested Enterprises, or 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 this offering, to our PRC subsidiary, 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 subsidiary or with respect to future capital contributions by us to our PRC subsidiary. If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds from this 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.

 

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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 we, as a company incorporated in the BVI, meet all of the conditions above thus we do not believe that we are 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 subsidiary, and dividends payable by our PRC subsidiary 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 Jiekai is wholly owned by JKC HK. Accordingly, JKC HK may qualify for a 5% tax rate in respect of distributions from Changzhou Jiekai. 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 subsidiary 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 us.

 

Our PRC subsidiary is subject to restrictions on paying dividends or making other payments to us, which may restrict our ability to satisfy our liquidity requirements.

 

We are a company incorporated in the BVI structured as a holding company. We may need dividends and other distributions on equity from our PRC subsidiary to satisfy our liquidity requirements. Current PRC regulations permit our PRC subsidiary to pay dividends to us only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, our PRC subsidiary is 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. Our PRC subsidiary 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 subsidiary incurs 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 our subsidiary to distribute dividends or to make payments to us may restrict our ability to satisfy our liquidity requirements.

 

In addition, the EIT Law, and its implementation rules provide that a withholding tax rate of up to 10% will be applicable to dividends payable by Chinese companies to non-PRC-resident enterprises unless otherwise exempted or reduced according to treaties or arrangements between the PRC central government and governments of other countries or regions where the non-PRC-resident enterprises are incorporated.

 

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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 March 2020, the value of the Renminbi depreciated by approximately 3.23% 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.

 

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 approval of the China Securities Regulatory Commission may be required in connection with this offering under a regulation adopted in August 2006, and, if required, we cannot assure you that we will be able to obtain such approval.

 

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. However, substantial uncertainty remains regarding the scope and applicability of the M&A Rules to offshore special purpose vehicles. Currently, there is no consensus among leading PRC law firms regarding the scope and applicability of the CSRC approval requirement.

 

Our PRC counsel, DeHeng Law Offices, has advised us based on their understanding of the current PRC law, rules and regulations that the CSRC’s approval is not required for the listing and trading of our ordinary shares on Nasdaq in the context of this offering, given that:

 

  the CSRC currently has not issued any definitive rule or interpretation concerning whether offerings like ours under this prospectus are subject to this regulation; and

 

  Jiangsu Baozhe was not established by a merger with or an acquisition of any PRC domestic companies as defined under the M&A Rules.

 

However, our PRC legal counsel has further advised us that there remains some uncertainty as to how the M&A Rules will be interpreted or implemented in the context of an overseas offering and its opinions summarized above are subject to any new laws, rules and regulations or detailed implementations and interpretations in any form relating to the M&A Rules. We cannot assure you that relevant PRC governmental agencies, including the CSRC, would reach the same conclusion as we do. If it is determined that CSRC approval is required for this offering, we may face sanctions by the CSRC or other PRC regulatory agencies for failure to seek CSRC approval for this offering. These sanctions may include fines and penalties on our operations in the PRC, limitations on our operating privileges in the PRC, delays in or restrictions on the repatriation of the proceeds from this offering into the PRC, restrictions on or prohibition of the payments or remittance of dividends by our PRC subsidiaries, or other actions that could have a material and adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ordinary shares. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to halt this offering before the settlement and delivery of the ordinary shares that we are offering. Consequently, if you engage in market trading or other activities in anticipation of and prior to the settlement and delivery of the ordinary shares we are offering, you would be doing so at the risk that the settlement and delivery may not occur.

 

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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.

 

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.

 

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.

 

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 the prospectus based on foreign laws.

 

We are a company incorporated under the laws of the BVI, we conduct substantially all of our operations in China and substantially all of our assets are located in China. In addition, all our senior executive officers reside within China for a significant portion of the time and all of them are PRC nationals. As a result, it may be difficult for you to effect service of process upon us or those persons inside mainland China. It may also be difficult for you to enforce in U.S. courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors as none of them currently resides in the United States or has substantial assets located in the United States. In addition, there is uncertainty as to whether the courts of the PRC would recognize or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state.

 

The recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other forms of written arrangement with the United States that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, the PRC courts will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC laws or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States.

 

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Risks Related to this Offering and Ownership of Our Ordinary Shares

 

There has been no public market for our ordinary shares prior to this offering, and you may not be able to resell our ordinary shares at or above the price you paid, or at all.

 

Prior to this initial public offering, there has been no public market for our ordinary shares. We have applied to list our ordinary shares on Nasdaq under the symbol “EZGO.” If an active trading market for our ordinary shares does not develop after this offering, the market price and liquidity of our ordinary shares will be materially and adversely affected. Negotiations with the underwriter determine the initial public offering price for our ordinary shares which may bear no relationship to their market price after the initial public offering. We cannot assure you that an active trading market for our ordinary shares will develop or that the market price of our ordinary shares will not decline below the initial public offering price.

 

Nasdaq may delist our securities from trading on its exchange, which could limit investors’ ability to make transactions in our securities and subject us to additional trading restrictions.

 

We have applied to have our ordinary shares listed on Nasdaq on or promptly after the date of this prospectus. We cannot guarantee that our securities will be approved for listing on Nasdaq; however, we will not complete this offering unless we are so listed. Although after giving effect to this offering we expect to meet, on a pro forma basis, the minimum initial listing standards set forth in the Nasdaq listing standards, we cannot assure you that our securities will be, or will continue to be, listed on Nasdaq in the future. In order to continue listing our securities on Nasdaq, we must maintain certain financial, distribution and stock price levels. Generally, we must maintain a minimum amount in shareholders’ equity (generally $2,500,000) and a minimum number of holders of our securities (generally 300 public holders). Additionally, we will be required to demonstrate compliance with Nasdaq’s initial listing requirements after our initial public offering, which are more rigorous than Nasdaq’s continued listing requirements, in order to continue to maintain the listing of our securities on Nasdaq. For instance, our share price would generally be required to be at least $4.00 per share, our shareholders’ equity would generally be required to be at least $5.0 million and we would be required to have a minimum of 300 round lot holders of our securities (with at least 50% of such round lot holders holding securities with a market value of at least $2,500). We cannot assure you that we will be able to meet those initial listing requirements at that time.

 

If Nasdaq delists our securities from trading on its exchange and we are not able to list our securities on another national securities exchange, we expect our securities could be quoted on an over-the-counter market. If this were to occur, we could face significant material adverse consequences, including:

 

  a limited availability of market quotations for our securities;

 

  reduced liquidity for our securities;

 

  a determination that our ordinary shares is a “penny stock” which will require brokers trading in our ordinary shares to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our securities;

 

  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 federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as “covered securities.” Because we expect that our ordinary shares will be listed on Nasdaq, our ordinary shares will be covered securities. Although the states are preempted from regulating the sale of our securities, the federal statute does allow the states to investigate companies if there is a suspicion of fraud, and, if there is a finding of fraudulent activity, then the states can regulate or bar the sale of covered securities in a particular case. While we are not aware of a state having used these powers to prohibit or restrict the sale of securities issued by blank check companies, other than the State of Idaho, certain state securities regulators view blank check companies unfavorably and might use these powers, or threaten to use these powers, to hinder the sale of securities of blank check companies in their states. Further, if we were no longer listed on Nasdaq, our securities would not be covered securities and we would be subject to regulation in each state in which we offer our securities.

 

If a limited number of participants in this offering purchase a significant percentage of the offering, the effective public float may be smaller than anticipated and the price of our ordinary shares may be volatile.

 

As a company conducting a relatively modest public offering, we are subject to the risk that a small number of investors will purchase a high percentage of the offering. If this were to happen, investors could find our shares to be more volatile than they might otherwise anticipate. Companies that experience such volatility in their stock price may be more likely to be the subject of securities litigation. In addition, if a large portion of our public float were to be held by a few investors, smaller investors may find it more difficult to sell their shares.

 

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The market price for our ordinary shares may be volatile, which could result in substantial losses to investors.

 

The trading prices of our ordinary shares are likely to 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 in the market prices or the underperformance or deteriorating financial results of companies based in China that have listed their securities in the United States in recent years. The securities of some of these companies have experienced significant volatility since their initial public offerings, including, in some cases, substantial decline in their trading prices. The trading performances of other PRC companies’ securities after their offerings may affect the attitudes of investors toward PRC companies listed in the United States, which consequently may impact the trading performance of our ordinary shares, regardless of our actual operating performance. In addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or other matters of other PRC companies may also negatively affect the attitudes of investors towards PRC companies in general, including us, regardless of whether we have conducted any inappropriate activities. In addition, securities markets may from time to time experience significant price and volume fluctuations that are not related to our operating performance, which may have a material adverse effect on the market price of our shares. In addition to the above factors, the price and trading volume of our ordinary shares may be highly volatile due to multiple factors, including the following:

 

  regulatory developments affecting us, our customers, or our industry;

 

  regulatory uncertainties with regard to our VIE arrangements;

 

  announcements of studies and reports relating to our service offerings or those of our competitors;

 

  actual or anticipated fluctuations in our results of operations and changes or revisions of our expected results;

 

  changes in financial estimates by securities research analysts;

 

  announcements by us or our competitors of new product and service offerings, acquisitions, strategic relationships, joint ventures or capital commitments;

 

  additions to or departures of our senior management;

 

  detrimental negative publicity about us, our management or our industry;

 

  fluctuations of exchange rates between the Renminbi and the U.S. dollar;

 

  release or expiry of lock-up or other transfer restrictions on our outstanding ordinary shares; and

 

  sales or perceived potential sales of additional ordinary shares.

 

Shares eligible for future sale may adversely affect the market price of our ordinary shares, as the future sale of a substantial amount of outstanding ordinary shares in the public marketplace could reduce the price of our ordinary shares.

 

The market price of our shares could decline as a result of sales of substantial amounts of our shares in the public market, or the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise through future offerings of our ordinary shares. An aggregate of 7,800,000 shares were outstanding before the consummation of this offering and 10,600,000 shares will be outstanding immediately after this offering. All of the shares sold in the offering will be freely transferable without restriction or further registration under the Securities Act. The remaining shares will be “restricted securities” as defined in Rule 144. These shares may be sold in the future without registration under the Securities Act to the extent permitted by Rule 144 or other exemptions under the Securities Act.

 

You will experience immediate and substantial dilution.

 

The initial public offering price of our shares is expected to be substantially higher than the pro forma net tangible book value per share of our ordinary shares. Assuming the completion of the offering, if you purchase shares in this offering, you will incur immediate dilution of approximately $2.08 or approximately 51.90% in the pro forma net tangible book value per share from the price per share that you pay for the shares.  Accordingly, if you purchase shares in this offering, you will incur immediate and substantial dilution of your investment. See “Dilution.”

 

As a company incorporated in the BVI, we are permitted to adopt 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 expected to be listed on Nasdaq, we are subject to Nasdaq corporate governance listing standards. However, Nasdaq rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the BVI, which is our 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. In addition, we will be able to follow our home country law instead of the Nasdaq listing rules that require us 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. Currently, we do not plan to rely on the home country practice with respect to either, the examples cited in the “Prospectus Summary - Foreign Private Issuer Status”, this risk factor or any other matter of our corporate governance after we complete this offering. However, if we choose to follow home country practice in the future, our shareholders may be afforded less protection than they otherwise would enjoy under Nasdaq corporate governance listing standards applicable to U.S. domestic issuers.

 

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Our management has a certain level of discretion over use of proceeds of this offering.

 

While we have identified the priorities to which we expect to put the proceeds of this offering, our management will have considerable discretion in the application of the net proceeds received by us. Specifically, we intend to use the net proceeds from this offering to upgrade manufacturing facility and equipment and for working capital and general corporate purposes. We have reserved the right to re-allocate funds currently allocated to that purpose to our general working capital. If that were to happen, then our management would have significant discretion over even more of the net proceeds to be received by our company in this offering. You will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. The net proceeds may be used for corporate purposes that do not improve our efforts to achieve profitability or increase our stock price. The net proceeds from this offering may be placed in investments that do not produce profit or increase value. See “Use of Proceeds.”

 

We are 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 Act and the common law of the BVI. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under BVI law are to a large extent governed by the common law of the BVI. The common law of the BVI is derived in part from comparatively limited judicial precedent in the BVI as well as that from English common law, which has persuasive, but not binding, authority on a court in the BVI. The rights of our shareholders and the fiduciary responsibilities of our directors under BVI law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the BVI has a different body of securities laws than the United States. In addition, some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the BVI. There is no statutory recognition in the BVI of judgments obtained in the United States, although the courts of the BVI will in certain circumstances recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as shareholders of a U.S. public company.

 

We are a foreign private issuer and, as a result, will not be subject to U.S. proxy rules and will be subject to more lenient and less frequent Exchange Act reporting obligations than a U.S. issuer.

 

Upon consummation of this offering, we will report under the Securities Exchange Act as a foreign private issuer. Because we qualify as a foreign private issuer under the Exchange Act, we will be exempt 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.

 

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We will incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging growth company.”

 

Upon completion of this offering, we will become a public company and expect to incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and Nasdaq, impose various requirements on the corporate governance practices of public companies. As a company with less than US$1.07 billion in revenues for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002 in the assessment of the emerging growth company’s internal control over financial reporting and permission to delay adopting new or revised accounting standards until such time as those standards apply to private companies.

 

We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. After we are no longer an “emerging growth company”, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the other rules and regulations of the SEC. For example, as a result of becoming a public company, we will need to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.

 

In the past, shareholders of a public company often brought securities class action suits against the company following periods of instability in the market price of that company’s securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations, which could harm our results of operations and require us to incur significant expenses to defend the suit. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

 

We may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses.

 

As discussed above, we are a foreign private issuer, and therefore, we are not required to comply with all of the periodic disclosure and current reporting requirements of the Exchange Act. The determination of foreign private issuer status is made annually on the last business day of an issuer’s most recently completed second fiscal quarter, and, accordingly, the next determination will be made with respect to us on March 31, 2021. 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.

 

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As an “emerging growth company” under the Jumpstart Our Business Startups Act, or JOBS Act, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements.

 

As an “emerging growth company” under the JOBS Act, we are permitted to, and intend to, rely 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 this 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 this offering. We cannot predict if investors will find our ordinary shares less attractive because we may rely on these exemptions. If some investors find our ordinary shares less attractive as a result, there may be a less active trading market for our ordinary shares and the trading price of our ordinary shares may be more volatile. In addition, our costs of operating as a public company may increase when we cease to be an emerging growth company.

 

There can be no assurance that we will not be a passive foreign investment company, or PFIC, for United States federal income tax purposes for any taxable year, which could subject United States investors in our ordinary shares to significant adverse United States income tax consequences.

 

A non-United States corporation, such as our company, will be classified as a PFIC, for U.S. federal income tax purposes for any taxable year, if either (i) 75% or more of its gross income for such year consists of certain types of “passive” income or (ii) 50% or more of the value of its assets (determined on the basis of a quarterly average) during such year is attributable to assets that produce or are held for the production of passive income.

 

Based on our current composition of assets, subsidiaries and market capitalization (which will fluctuate from time to time), we do not expect to be or become a PFIC for U.S. federal income tax purposes. However, the determination of whether we will be or become a PFIC will depend, in part, upon the value of our goodwill and other unbooked intangibles. Furthermore, the determination of whether we will be or become a PFIC will depend, in part, on the composition of our income and assets. Fluctuations in the market price of our ordinary shares may cause us to become a PFIC for the current or subsequent taxable years. The composition of our income and assets may also be affected by how, and how quickly, we use our liquid assets and the cash raised in this offering. In addition, because there are uncertainties in the application of the relevant rules, it is possible that the Internal Revenue Service may challenge our classification of certain income and assets as non-passive or our valuation of our tangible and intangible assets.

 

Because determination of PFIC status is a fact-intensive inquiry made on an annual basis that depends upon the composition of our assets and income, no assurance can be given that we are not or will not become classified as a PFIC. If we were to be or become classified as a PFIC in any taxable year, a U.S. Holder (as defined in “Taxation—United States Federal Income Taxation”) may incur significantly increased U.S. federal income tax on gain recognized on the sale or other disposition of our ordinary shares and on the receipt of distributions on the ordinary shares to the extent such gain or distributions is treated as an “excess distribution” under the U.S. federal income tax rules. Further, if we are classified as a PFIC for any year during which a U.S. Holder holds our ordinary shares, we generally will continue to be treated as a PFIC for all succeeding years during which such U.S. Holder holds our ordinary shares. You are urged to consult your tax advisor concerning the United States federal income tax consequences of acquiring, holding, and disposing of ordinary shares if we are or become classified as a PFIC. For more information, see “Taxation—United States Federal Income Taxation.”

 

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If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the market price for our ordinary shares and trading volume could decline.

 

The trading market for our ordinary shares will depend in part on the research and reports that securities or industry analysts publish about us or our business. If research analysts do not establish and maintain adequate research coverage or if one or more of the analysts who cover us downgrade our ordinary shares or publish inaccurate or unfavorable research about our business, the market price for our ordinary shares would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which, in turn, could cause the market price or trading volume for our ordinary shares to decline.

 

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.

 

We are 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 will be governed by our post-offering 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;

 

29

 

 

  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. For a discussion of certain differences between the provisions of the BVI Act, remedies available to shareholders and the laws applicable to companies incorporated in the United States and their shareholders, see “Enforceability of Civil Liabilities” and “Description of Securities.”

 

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 British Virgin Islands 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 British Virgin Islands 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 British Virgin Islands 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 British Virgin Islands or China courts would hear original actions brought in the British Virgin Islands or China against us or such persons predicated upon the securities laws of the United States or any state. See “Enforceability of Civil Liabilities.”

 

Provisions in our post-offering 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 post-offering memorandum and articles of association will 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.

 

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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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

 

You can identify these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “likely to” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, but are not limited to, statements about:

 

  our goals and growth strategies;

 

  our expectations regarding demand for and market acceptance of our brand and platforms;

 

  our future business development, results of operations and financial condition;

 

  our ability to maintain and improve infrastructure necessary to operate our platforms;

 

  competition in the car accessory and online retail industry in China;

 

  the expected growth of, and trends in, the markets for our products and services in China;

 

  government policies and regulations relating to our corporate structure, business and industry;

 

  our expectation regarding the use of proceeds from this offering;

 

our ability to comply with the continued listing standards on the exchange or trading market on which our ordinary shares is listed for trading;

 

  general economic and business condition in China and elsewhere; and

 

  assumptions underlying or related to any of the foregoing.

 

You should read thoroughly this prospectus and the documents that we refer to in this prospectus with the understanding that our actual future results may be materially different from and worse than what we expect. Other sections of this prospectus include additional factors which could adversely impact our business and financial performance. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.

 

You should not rely upon forward-looking statements as predictions of future events. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this prospectus and the documents that we refer to in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

 

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USE OF PROCEEDS

  

After deducting the estimated underwriter’s discount and offering expenses payable by us, we expect to receive net proceeds of approximately $9,234,896 (or $10,780,496 in the aggregate if the underwriter exercise its over-allotment option in full) from this offering. The net proceeds from this offering must be remitted to China before we will be able to use the funds to grow our business.

 

We intend to use the net proceeds of this offering as follows, after we complete the remittance process:

 

approximately 20% for marketing and promotion of our brand and products, including expanding our business globally, in the first two years after the completion of this offering;

 

  approximately 15% for purchasing high-quality charging piles and e-bicycles for our rental business;

 

  approximately 20% for research and development expenses for our new products and technology, including building experimental workshops for the testing of new models, new technologies and new applications;

 

  approximately 15% for acquiring new and advanced production facilities and equipment for the production of our e-bicycles, and for improving the environmental impacts of our facilities; and

 

approximately 30% for general administration and working capital.

 

The precise amounts and percentage of proceeds we devote to particular categories of activity, and their priority of use, will depend on prevailing market and business conditions as well as on the nature of particular opportunities that may arise from time to time. Accordingly, we reserve the right to change the use of proceeds that we presently anticipate and describe herein. Pending remitting the offering proceeds to China, we intend to invest our net proceeds in short-term, interest bearing, and investment-grade obligations. 

 

The foregoing is set forth based on the order of priority of each purpose and represents our current intentions based upon our present plans and business conditions to use and allocate the net proceeds of this offering. Our management, however, will have significant flexibility and discretion to apply the net proceeds of this offering. If an unforeseen event occurs or business conditions change, we may use the proceeds of this offering differently than as described in this prospectus.

 

In using the proceeds of this offering, we are permitted under PRC laws and regulations as an offshore holding company to provide funding to our wholly foreign-owned subsidiary in China only through loans or capital contributions, subject to the satisfaction of applicable government registration and approval requirements. We may extend inter-company loans to our subsidiary in China or make additional capital contributions to our PRC subsidiary to fund their capital expenditures or working capital. For an increase of registered capital of our PRC subsidiaries, we need to file at the PRC Ministry of Commerce (“MOFCOM”) or its local counterparts. If we provide funding to our PRC subsidiary through loans, the total amount of such loans may not exceed the difference between the entity’s total investment as approved by the foreign investment authorities and its registered capital or twice of their net worth. Such loans must be registered with the PRC SAFE or its local branches, which usually takes up to 20 working days to complete. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all. See “Risk Factors—Risks Related to Doing Business in China—PRC regulation on loans to, and direct investment in, PRC entities by offshore holding companies and governmental control in currency conversion may delay or prevent us from using the proceeds of this offering to make loans to or make additional capital contributions to our PRC subsidiary, which could materially and adversely affect our liquidity and our ability to fund and expand our business.”

 

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CAPITALIZATION

 

The following tables set forth our capitalization as of March 31, 2020:

 

  on an actual basis; and

 

  on a pro forma as adjusted basis to reflect the issuance and sale of 2,800,000 shares at an assumed initial public offering price of $4.00 per share after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

You should read the tables together with our consolidated financial statements and the related notes included elsewhere in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

   As of March 31, 2020 
   Actual   As Adjusted 
   (in US$) 
Equity:        
Ordinary shares, $0.001 par value, 100,000,000 shares authorized, 7,800,000 ordinary shares outstanding on an actual basis; and 10,600,000 outstanding on an as adjusted basis   7,800    10,600 
Subscription receivable   (7,800)   (7,800)
Receivables from a shareholder   (4,542,689)   (4,542,689)
Additional paid-in capital (1)   12,078,058    21,310,154 
Statutory reserve   187,973    187,973 
Accumulated other comprehensive loss   (889,605)   (889,605)
Retained earnings   966,623    966,623 
Non-controlling interest   3,944,153    3,944,153 
Total equity   11,744,513    20,979,409 
           
Total capitalization   11,744,513    20,979,409 

 

(1) Pro forma additional paid in capital reflects the net proceeds we expect to receive, after deducting underwriting fee, underwriter expense allowance and other expenses. We expect to receive net proceeds of approximately $9,234,896  (offering proceeds of $11,200,000, less underwriting discounts of $784,000, non-accountable expense of $112,000 and offering expenses of $1,069,104). The additional paid in capital reflects the net proceeds we expect to receive, after deducting underwriting discounts, Underwriter expense allowance and other expenses.

 

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DILUTION

  

If you invest in our ordinary shares, you will incur immediate dilution since the public offering price per share you will pay in this offering is more than the net tangible book value per ordinary share immediately after this offering.

 

The net tangible book value of our ordinary shares as of March 31, 2020 was $11,160,253, or $1.43 per share based upon 7,800,000 ordinary shares outstanding. Net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities, divided by the total number of ordinary shares outstanding. Tangible assets equal our total assets less deferred tax assets and deferred offering cost.

 

The dilution in net tangible book value per share to new investors, represents the difference between the amount per share paid by purchasers of shares in this offering and the pro forma net tangible book value per share immediately after completion of this offering.  After giving effect to the sale of the 2,800,000 shares being sold pursuant to this offering price of $4.00 per share and after deducting underwriter’s discount and commission payable by us in the amount of $784,000, non-accountable expenses of $112,000 payable to the underwriter and estimated offering expenses in the amount of $1,069,104, our pro forma net tangible book value would be approximately $20,395,149, or $1.92 per share of ordinary shares. This represents an immediate increase in net tangible book value of $0.49 per share to existing shareholders and an immediate decrease in net tangible book value of $2.08 per share to new investors purchasing the shares in this offering.

 

The following table illustrates this per share dilution:

  

   As of
March 31,
2020
 
Public offering price per ordinary share  $4.00 
Net tangible book value per share as of March 31, 2020  $1.43 
Increase in net tangible book value per share attributable to existing shareholders  $0.49 
Pro forma net tangible book value per share after this offering  $1.92 
Dilution per share to new investors  $2.08 

 

Our adjusted pro forma net tangible book value after the offering, and the decrease to new investors in the offering, will change from the amounts shown above if the underwriter’s over-allotment option is exercised.

 

A $1.00 increase (decrease) in the assumed public offering price would increase (decrease) our pro forma net tangible book value per share after this offering by approximately $0.24, and increase the dilution per share to new investors by approximately $0.76, after deducting the underwriter’s discount and estimated offering expenses payable by us.

 

The following table sets forth, on a pro forma as adjusted basis as of March 31, 2020, the difference between the number of ordinary shares purchased from us, the total cash consideration paid, and the average price per share paid by our existing shareholders and by new public investors before deducting estimated underwriter’s discounts and commissions and estimated offering expenses payable by us, using an assumed public offering price of $4.00 per ordinary share:

 

   Shares Purchased   Total Cash Consideration   Average
Price Per
 
   Number   Percent   Amount   Percent   Share 
Existing shareholders   7,800,000    73.58%  $7,535,369    40.22%  $0.97 
New investors from public offering   2,800,000    26.42%  $11,200,000    59.78%  $4.00 
Total   10,600,000    100.00%  $18,735,369    100.00%  $1.77 

 

The pro forma as adjusted information discussed above is illustrative only. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual initial public offering price of our ordinary shares and other terms of this offering determined at pricing.

 

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ENFORCEABILITY OF CIVIL LIABILITIES

 

We are incorporated in the British Virgin Islands in order to enjoy the following benefits:

 

  political and economic stability;

 

  an effective judicial system;

 

  a favorable tax system; and

 

  the absence of exchange control or currency restrictions; and the availability of professional and support services.

 

However, certain disadvantages accompany incorporation in the British Virgin Islands. These disadvantages include, but are not limited to, the following:

 

  the British Virgin Islands has a less exhaustive body of securities laws as compared to the United States and these securities laws provide significantly less protection to investors; and

 

  British Virgin Islands companies may not have standing to sue before the federal courts of the United States.

 

The courts of the British Virgin Islands will not necessarily enter judgments in original actions brought in those courts predicated on U.S. federal or state securities laws. Additionally, there is no statutory enforcement in the British Virgin Islands of judgments obtained in the United States, however, the courts of the British Virgin Islands 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. judgment, provided that:

 

  the U.S. court issuing the judgment had jurisdiction in the matter and the company either submitted to such jurisdiction or was resident or carrying on business within such jurisdiction and was duly served with process;

 

  the judgement is final and for a liquidated sum;

 

  the judgment given by the U.S. court was not in respect of penalties, taxes, fines or similar fiscal or revenue obligations of the company;

 

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

 

  recognition or enforcement of the judgment in the British Virgin Islands would not be contrary to public policy; and

 

 

the proceedings pursuant to which judgment was obtained were not contrary to natural justice. 

 

The British Virgin Islands courts are unlikely:

 

to recognize or enforce against the Company, judgments of courts of the U.S. predicated upon the civil liability provisions of the securities laws of the U.S.; and

 

to impose liabilities against the Company, predicated upon the certain civil liability provisions of the securities laws of the U.S. so far as the liabilities imposed by those provisions are penal in nature.

 

35

 

 

Our constitutional documents do not contain provisions requiring that disputes, including those arising under the securities laws of the United States, between us, our officers, directors and shareholders, be arbitrated.

 

All of our current operations are conducted in the PRC, and all of our assets are located in the PRC. A majority of our 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. Deheng Law Office, our counsel as to PRC law, have advised us that there is uncertainty as to whether the courts of China would:

 

  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

 

  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.

 

We have been advised by DeHeng Law Offices that there is uncertainty as to whether the courts of the PRC would enforce judgments of United States courts or BVI courts obtained against us or these persons predicated upon the civil liability provisions of the United States federal and state securities laws. DeHeng Law Offices has further advised us that the recognition and enforcement of foreign judgments are provided for under PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. China does not have any treaties or other form of reciprocity with the United States or the British Virgin Islands 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 decide that the judgment violates the basic principles of PRC law 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 or in the British Virgin Islands.

 

Anti-money laundering

 

In order comply with legislation or regulations aimed at the prevention of money laundering the Company is required to adopt and maintain anti-money laundering procedures, and may require members to provide evidence to verify their identity. Where permitted, and subject to certain conditions, the Company also may delegate the maintenance of our anti-money laundering procedures (including the acquisition of due diligence information) to a suitable person.

 

If any person resident in the British Virgin Islands knows or suspects that another person is engaged in money laundering or terrorist financing and the information for that knowledge or suspicion came to their attention in the course of their business the person will be required to report his belief or suspicion to the Financial Investigation of the British Virgin Islands, pursuant to the Proceeds of Criminal Conduct Act 1997 (as amended). Such a report shall not be treated as a breach of confidence or of any restriction upon the disclosure of information imposed by any enactment or otherwise.

 

36

 

 

CORPORATE STRUCTURE

 

We were incorporated in the BVI on January 24, 2019. Our wholly owned subsidiary, JKC HK, was incorporated in Hong Kong on February 13, 2019. JKC HK, in turn, holds all the capital stock of Changzhou Jiekai, which was incorporated in China on June 12, 2019. WFOE controls Jiangsu Baozhe through the VIE Agreements. See “– Contractual Arrangements with Jiangsu Baozhe and Its Shareholders.” We conduct our business in the PRC primarily though Jiangsu Baozhe and its subsidiaries, Hengmao Power Battery, Jiangsu Cenbird, Yizhiying IoT, and Tianjin Dilang, since we obtained control over Jiangsu Baozhe in November 2019.

 

Our principal executive offices are located at Building #A, Floor 2, Changzhou Institute of Dalian University of Technology, Science and Education Town, Wujin District, Changzhou City, Jiangsu, China 213164, and our phone number is + 86 51983683805. We maintain a corporate website at www.ezgotech.com.cn. The information contained in, or accessible from, our website or any other website does not constitute a part of this prospectus.

  

The diagram below shows our corporate structure as of the date of this prospectus:

 

 

 

Contractual Arrangements with Jiangsu Baozhe and Its Shareholders

 

Due to PRC legal restrictions on foreign ownership in internet-based businesses, neither we nor our subsidiaries own any equity interest in Jiangsu Baozhe. Instead, we control and receive the economic benefits of Jiangsu Baozhe’s business operations through the VIE Agreements. WFOE, Jiangsu Baozhe and its equity holders entered into the VIE Agreements on November 8, 2019. The VIE Agreements are designed to provide WFOE with the power, rights, and obligations equivalent in all material respects to those it would possess as the equity holder of Jiangsu Baozhe, including absolute control rights and the rights in the assets, property and revenue of Jiangsu Baozhe, to (i) exercise effective control over Jiangsu Baozhe, (ii) receive substantially all of the economic benefits of Jiangsu Baozhe, and (iii) have an exclusive option to purchase or designate any third party to purchase all or part of the equity interests in and assets of Jiangsu Baozhe when and to the extent permitted by PRC law.

 

As a result of our direct ownership in WFOE and the contractual arrangements with Jiangsu Baozhe, we are regarded as the primary beneficiary of Jiangsu Baozhe, and we treat Jiangsu Baozhe as our consolidated VIE under U.S. GAAP, which generally refers to an entity in which we do not have any equity interests but whose financial results are consolidated into our consolidated financial statements in accordance with U.S. GAAP because we have a controlling financial interest in, and thus are the primary beneficiary of, that entity. We have consolidated the financial results of Jiangsu Baozhe and its subsidiaries in our consolidated financial statements in accordance with U.S. GAAP.

 

37

 

 

Each of the VIE Agreements is described in detail below:

 

Exclusive Management Consulting and Technical Service Agreement

 

Pursuant to the Exclusive Management Consulting and Technical Service Agreement, dated November 8, 2019, between WFOE and Jiangsu Baozhe, Jiangsu Baozhe agrees to engage WFOE as its exclusive provider of management consulting, technical support, intellectual property license and relevant services, including all services within Jiangsu Baozhe’s business scope and decided by WFOE from time to time as necessary. Jiangsu Baozhe shall pay to WFOE service fees within three months after each fiscal year end. The service fees should be 95% (or a percentage adjusted by WFOE 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. WFOE exclusively owns any intellectual property arising from the performance of the Exclusive Management Consulting and Technical Service Agreement. The Exclusive Management Consulting and Technical Service Agreement is effective for twenty years unless earlier terminated as set forth in the agreement or other written agreements entered into by the parties thereto. The Exclusive Management Consulting and Technical Service Agreement shall be extended automatically by the expiry thereof, until WFOE’s business term or Jiangsu Baozhe’s business term expires, unless otherwise notified by WFOE in writing. During the term of the Exclusive Management Consulting and Technical Service Agreement, Jiangsu Baozhe may not terminate the agreements except in the case of WFOE’s gross negligence or fraud, or this agreement or laws provide otherwise. WFOE may terminate this agreement by 30-day written notice to Jiangsu Baozhe at any time.

 

Equity Pledge Agreement

 

Pursuant to the Equity Pledge Agreement, dated November 8, 2019, among WFOE, Jiangsu Baozhe and the equity holders of Jiangsu Baozhe, the equity holders of Jiangsu Baozhe have pledged the 100% equity interests in Jiangsu Baozhe to WFOE to guarantee performance of all of his or her obligations under the Exclusive Management Consulting and Technical Service Agreement, the Loan Agreement, the Exclusive Call Option Agreement and the Proxy Agreement. If any event of default as provided for therein occurs, WFOE, as the pledgee, will be entitled to dispose of the pledged equity interests according to applicable PRC laws. On November 28, 2019, WFOE, Jiangsu Baozhe and all its equity holders have completed the registration of the equity pledge with the relevant office of State Administration of market supervision (“SAMR”) in accordance with the PRC Property Rights Law.

 

Exclusive Call Option Agreement

 

Pursuant to the Exclusive Call Option Agreement, dated November 8, 2019, among WFOE, Jiangsu Baozhe and the equity holders of Jiangsu Baozhe, each of the equity holders of Jiangsu Baozhe has irrevocably granted WFOE an exclusive option to purchase, or to designate other persons to purchase, to the extent permitted by applicable PRC laws, rules and regulations, all of the equity interest and assets in Jiangsu Baozhe from its equity holders. The equity holders of Jiangsu Baozhe agree that, without the prior written consent of WFOE, they will not dispose of their equity interests in Jiangsu Baozhe or create or allow any encumbrance on their equity interests. The purchase price for the equity interest is to be the minimum price permitted by applicable PRC laws, rules and regulations, or the amount that the equity holders actually pay to Jiangsu Baozhe regarding the equity, whichever is lower. The purchase price for the assets is to be the minimum price permitted by applicable PRC laws, rules and regulations, or the net book value of the assets, whichever is lower. The exclusive call option agreement expires when all the equity interest or all the assets are transferred pursuant to the agreement.

 

Proxy Agreement

 

Pursuant to the Proxy Agreement, dated November 8, 2019, among WFOE, Jiangsu Baozhe and each of equity holders of Jiangsu Baozhe, each of the equity holders irrevocably authorizes WFOE to exercise his or her rights as an equity holder of Jiangsu Baozhe, including the right to attend equity holders meetings, to exercise voting rights and to transfer all or a part of his or her equity interests therein pursuant to the Exclusive Call Option Agreement. During the term of the Proxy Agreement, Jiangsu Baozhe and all its equity holders may not terminate the agreements except when this agreement or applicable PRC laws provide otherwise.

 

Loan Agreement

 

Pursuant to the Loan Agreement, dated November 8, 2019, WFOE agrees to provide Jiangsu Baozhe with loans of different amounts at an annual interest rate of 24% according to Jiangsu Baozhe’s needs from time to time. The term of each loan is 20 years, which can be extended with the written consent of both parties. During the term of the loan or the extended term of the loan, Jiangsu Baozhe shall not prepay without the written consent of WFOE while in case of certain circumstances, Jiangsu Baozhe must repay the loan in advance upon WFOE’s written request.

   

38

 

 

Spousal Consent Letter

 

The spouses of individual equity holders of Jiangsu Baozhe have each signed a spousal consent letter. Under the spousal consent letter, the signing spouse unconditionally and irrevocably has agreed to the execution by his or her spouse of the above-mentioned Equity Pledge Agreement, Exclusive Call Option Agreement and Proxy Agreement, and that his or her spouse may perform, amend or terminate such agreements without his or her consent. In addition, in the event that the spouse obtains any equity interest in Jiangsu Baozhe held by his or her spouse for any reason, he or she agrees to be bound by and sign any legal documents substantially similar to the contractual arrangements entered into by his or her spouse, as may be amended from time to time.

 

Through the current contractual arrangements, we established a contractual relationship with all equity holders of Jiangsu Baozhe. Pursuant to these agreements, all equity holders of Jiangsu Baozhe irrevocably authorized WFOE to exercise voting rights and all other rights as the equity holder and pledged all of his or her equity interests in Jiangsu Baozhe to WFOE as collateral to secure performance of all of his or her obligations under these agreements. However, the equity holders of Jiangsu Baozhe may have potential conflicts of interest with us and may breach, or cause Jiangsu Baozhe to breach, or refuse to renew, the existing contractual arrangements we have with them and Jiangsu Baozhe. Any failure by Jiangsu Baozhe or equity holders of Jiangsu Baozhe 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 “Risk Factors — Risks Related to Doing Business in China —The shareholders of our consolidated VIE may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.”

 

In the opinion of DeHeng Law Offices, our PRC counsel:

 

  the ownership structure of Jiangsu Baozhe and WFOE in China, currently and immediately after this offering, does not violate any applicable PRC laws or regulations currently in effect; and

 

  the contractual arrangements among WFOE, Jiangsu Baozhe and Jiangsu Baozhe’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, both currently and immediately after this offering, do not and will not violate any applicable PRC laws or regulations currently in effect.

 

However, there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules. Accordingly, the PRC regulatory authorities may in the future take a view that is contrary to or otherwise different from the above opinion of our PRC legal counsel.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

 

The following selected consolidated statements of income data for the years ended September 30, 2019 and 2018, selected consolidated balance sheets data as of September 30, 2019 and 2018 and selected consolidated statements of cash flow data for the years ended September 30, 2019 and 2018 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The following selected consolidated statements of operation data for the six months ended March 31, 2020 and 2019, selected consolidated balance sheet data as of March 31, 2020, and selected consolidated statements of cash flow data for the six months ended March 31, 2020 and 2019 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus and have been prepared on the same basis as our audited consolidated financial statements and include all adjustments, consisting only of normal and recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for the periods presented. Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP. Our historical results are not necessarily indicative of results expected for future periods. You should read this Selected Consolidated Financial Data section together with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

(All amounts in U.S. dollars)

 

Selected Consolidated Statements of Operation:

 

    For the Years Ended
September 30,
    For the Six months Ended
March 31,
 
    2018     2019     2019     2020  
                (Unaudited)     (Unaudited)  
Net revenues   $ 3,191,560     $ 5,194,259     $ 3,310,547     $ 5,511,298  
Gross profit   $ 1,523,736     $ 3,179,951     $ 2,237,796     $ 526,547  
Operating expenses   $ (463,834 )   $ (932,073 )   $ (352,037 )   $ (1,220,026 )
Income (loss) from operations   $ 1,059,902     $ 2,247,878     $ 1,885,759     $ (693,479 )
Income taxes (expense) benefit   $ (286,905 )   $ (723,384 )   $ (490,059 )   $ 193,443  
Net income (loss) from continuing operations   $ 836,772     $ 1,930,113     $ 1,465,660     $ (591,829 )
Net income (loss)   $ 633,749     $ 2,191,437     $ 1,728,496     $ (591,829 )
Net income (loss) from continuing operations per ordinary share:                                
Basic and diluted   $ 0.09     $ 0.20     $ 0.15     $ (0.06 )
Net income (loss) per ordinary share:                                
Basic and diluted   $ 0.07     $ 0.23     $ 0.18     $ (0.06 )

 

Selected Consolidated Balance Sheets Data:

 

   As of
September 30,
   As of
March 31,
 
   2018   2019   2020 
           (Unaudited) 
Current assets  $9,672,891   $16,694,687   $12,347,533 
Total assets *  $13,700,498   $19,171,950   $15,511,158 
Current liabilities  $7,081,518   $6,834,127   $3,766,645 
Total liabilities  $7,081,518   $6,840,965   $3,766,645 
Total equity  $6,618,980   $12,330,985   $11,744,513 

 

*As of March 31, 2020, we had non-new standards e-bicycles of $382,585 recorded as our property and equipment. These non-new standards e-bicycles were used for the Company’s e-bicycles rental business in Jiangsu Province. According to the regulation of Jiangsu Province, non-new standards e-bicycles are allowed to be sold or leased during a five-year transition period which started from April 15, 2019. Since the life span of our non-new standards e-bicycles is less than the transition period, and we will not produce any non-new standards e-bicycles in the future. As such, we do not believe the regulation on non-new standards e-bicycles have significant impact in our business. The impairment of our non-new standards e-bicycles were nil for the six months ended March 31, 2020 and for the years ended September 30, 2019 and 2018.

 

Selected Consolidated Statements of Cash Flow Data:

  

   For the Years Ended
September 30,
   For the Six months Ended
March 31,
 
   2018   2019   2019   2020 
          

(Unaudited)

  

(Unaudited)

 
Net cash  provided by (used in) operating activities  $952,453   $(2,702,167)  $(188,933)  $2,614,843 
Net cash used in investing activities  $(52,834)  $(1,922,326)  $(236,761)  $(1,534,921)
Net cash (used in) provided by financing activities  $(892,112)  $8,217,985   $509,354  $(4,283,119)
Effect of exchange rate changes on cash  $(1,096)  $12,778   $1,401  $27,208 
Net increase (decrease) in cash, cash equivalents and restricted cash  $6,411   $3,606,270   $85,061  $(3,175,989)
Cash, cash equivalent and restricted cash at beginning of year  $20,964   $27,375   $27,375  $3,633,645 
Cash, cash equivalent and restricted cash at end of year  $27,375   $3,633,645   $112,436  $457,656 

   

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

 

The following management’s discussion and analysis of financial condition and results of operations contains forward-looking statements which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under “Risk Factors” and elsewhere in this prospectus. We assume no obligation to update forward-looking statements or the risk factors. You should read the following discussion in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus.

 

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 e-bicycle rentals, complemented by sale of battery packs, battery cell trading and our charging pile business. 

 

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

 

For the fiscal years ended September 30, 2019 and 2018, our revenues were $5,194,259 and $3,191,560, respectively, and our net income were $2,191,437 and $633,749, respectively. For the six months ended March 31, 2020 and 2019, our revenues were $5,511,298 and $3,310,547, respectively, and our net loss was $591,829 and net income was $1,728,496, respectively. We currently generate most of our revenues from e-bicycles sales, rental services of batteries and e-bicycles, and battery packs sales. We plan to focus completing our ecological chain of e-bicycles from manufacture to rentals and sales. 

 

Key Factors that Affect Operating Results

 

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

 

our ability to increase our e-bicycle sales volume;

 

our ability to enhance our smart charging piles volume;

 

our ability to enhance our operational efficiency; and 

 

our ability to expand into international markets.

 

COVID-19

 

The outbreak of novel coronavirus (COVID-19) began in December 2019 and was quickly declared as a Public Health Emergency of International Concern on January 30 2020 by the World Health Organization. Subsequent to the outbreak, COVID-19 has spread rapidly to many parts of China and other parts of the world. 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 and workforce are concentrated in China. Consequently, the COVID-19 Outbreak has materially adversely affected our business operations and financial condition, operating results and cash flow for fiscal year 2020, including but not limited to material and adverse impacts to our total revenues. The revenue of rental business decreased by approximately 70% for the six months ended June 30, 2020 as compared to the same period in 2019, which was mainly caused by the early termination of our rental contract with our sublease agent, Mr. Guoqing Zhu and Mr. Zewu Zhao, who terminated the rental contracts in January 2020 and May 2020, respectively. In addition, the productions of our new e-bicycles had been delayed, which caused a decrease of our forecasted revenues and cash flow. Although the pandemic led to increased customer demand for the new National Standard e-bicycles and the industry sentiment did not decline, the product supply of Tianjin Dilang was still affected. For instance, it is difficult for Tianjin Dilang to get necessary raw materials supply as the suppliers prefer to sell spare parts to large and established manufacturers during the pandemic. Due to the pandemic, the production and sales of our e-bicycles for March 2020 were approximately 20% lower than previously forecasted. It is expected that the sales of our e-bicycles for the fiscal year 2020 may drop by approximately 30% than previously forecasted.

 

In response to the COVID-19 pandemic, our primary focuses are on our cash flow management and timely collection of accounts receivables. Further, we also plan to apply for preferential low interest loans from the banks. In addition, Jiangsu Cenbird has started to expand its wholesaler channels in Changzhou and Wuxi with slogans of “affordable e-bicycles with higher quality” and “100 stores in one city, shared with value” since March 2020. Tianjin Dilang has started “town and village full-coverage” activities to increase the brand awareness since January 2020. Moreover, Tianjin Dilang has also attended various exhibitions in order to attract customers to further reduce the impact caused by the pandemic.

 

Results of Operations

 

The following table sets forth a summary of our consolidated statements of income for the six months ended March 31, 2020 and 2019, and for the fiscal years ended September 30, 2019 and 2018, respectively. This information should be read together with our consolidated financial statements and related notes included elsewhere in this prospectus. The results of operations in any period are not necessarily indicative of our future trends.

 

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Six Months Ended March 31, 2020 and 2019

 

   For the Six months Ended March 31,     
   2019   2020   Change 
   USD   %   USD   %   Amount   % 
Net revenues  $3,310,547    100   $5,511,298    100   $2,200,751    66 
Less: Cost of revenues   (1,072,751)   (32)   (4,984,751)   (90)   (3,912,000)   365 
Gross profit   2,237,796    68    526,547    10    (1,711,249)   (76)
Operating expenses:                              
Selling and marketing expenses   (17,073)   (1)   (246,833)   (4)   (229,760)   1,346 
General and administrative expenses   (334,964)   (10)   (973,193)   (18)   (638,229)   191 
Total operating expenses   (352,037)   (11)   (1,220,026)   (22)   (867,989)   247 
Income (loss) from operations   1,885,759    57    (693,479)   (13)   (2,579,238)   (137)
Total other income (expense), net   69,960    2    (91,793)   (2)   (161,753)   (231)
Income (loss) from continuing operations before income tax expense   1,955,719    59    (785,272)   (14)   (2,740,991)   (140)
Income tax (expense) benefit   (490,059)   (15)   193,443    4    683,502    (139)
Income (loss) from continuing operations   1,465,660    44    (591,829)   (11)   (2,057,489)   (140)
Income from discontinued operation, net of tax   262,836    8    -    -    (262,836)   (100)
Net income (loss)   1,728,496    52    (591,829)   (11)   (2,320,325)   (134)
Net income (loss) from continuing operations   1,465,660    44    (591,829)   (11)   (2,057,489)   (140)
Less: Net income (loss) attributable to non-controlling interests from continuing operations   298,133    9    (105,127)   (2)   (403,260)   (135)
Net income (loss) attributable to our shareholders from continuing operations   1,167,527    35    (486,702)   (9)   (1,654,229)   (142)
Income from discontinued operation, net of tax   262,836    8    -    -    (262,836)   (100)
Less: Net income attributable to non-controlling interests from discontinued operation   50,269    2    -    -    (50,269)   (100)
Net income attributable to our shareholders from discontinued operation   212,567    6    -    -    (212,567)   (100)
Net income (loss) attributable to our shareholders  $1,380,094    42   $(486,702)   (9)  $(1,866,796)   (135)

 

Segment Information

 

We have determined that the Company operates in three operating segments for six months ended March 31, 2020 and 2019: (i) battery cells and packs segment, (ii) rental segment, and (iii) e-bicycle sales segment. The battery cells and packs segment engaged in selling battery packs and trading battery cells. The rental segment provides lithium batteries and e-bicycles rental services. The e-bicycle sales segment sells e-bicycles through offline and online to customers.

 

The following tables present the summary of each reportable segment’s revenue and income, which are considered as segment operating performance measures, for the six months ended March 31, 2020 and 2019:

 

   Six months ended March 31, 2019 
   Battery
cells and
packs
segment
   Rental
segment
   E-bicycle
sales
segment
   Total
segments
   Unallocated   Consolidated 
Revenues from external customers *  $1,066,047   $2,244,500   $             -   $3,310,547   $-   $3,310,547 
Depreciation and amortization  $-   $(527,455)  $-   $(527,455)  $-   $(527,455)
Segment income before tax  $957,612   $928,146   $-   $1,885,758   $69,961   $1,955,719 
Segment gross profit margin   97%   54%   -    68%   -    68%

 

   Six months ended March 31, 2020 
   Battery
cells and
packs
segment
   Rental
segment
   E-bicycle
sales
segment
   Total
segments
   Unallocated   Consolidated 
Revenues from external customers *  $1,090,542   $1,048,765   $3,371,641   $5,510,948   $350   $5,511,298 
Depreciation and amortization  $-   $(501,632)  $(24,828)  $(526,460)  $(547)  $(527,007)
Segment income (loss) before tax  $59,178   $160,103   $(908,553)  $(689,272)  $(96,000)  $(785,272)
Segment gross profit margin   11%   28%   3%   10%   34%   10%

 

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

 

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Depreciation and amortization

 

The depreciation and amortization was stable for the six months ended March 31, 2020 as compared with the same period in 2019, which was mainly derived from the rental segment.

 

Segment income/loss before tax

 

The income before tax of battery cells and packs segment significantly decreased by $898,434 to $59,178 for the six months ended March 31, 2020 from $957,612 for the six months ended March 31, 2019, representing a significant decrease of approximately 94%. The significant decrease was primarily due to the revenue from battery cell trading business decreased to nil for the six months ended March 31, 2020, which was recognized on a net basis.

 

The income before tax of rental segment significantly decreased by $768,043 to $160,103 for the six months ended March 31, 2020 from $928,146 for the six months ended March 31, 2019, representing a significant decrease of approximately 83%. The significant decrease was primarily due to the revenue decrease in the rental segment as a result the impact of COVID-19 and the cost of the rental segment did not decrease proportionately as revenue because the cost mainly includes the fixed expenditures, such as depreciation expense.

 

The loss before tax of e-bicycle sales segment significantly increased by $908,553 for the six months ended March 31, 2020 from nil for the six months ended March 31, 2019. We suffered a loss for the six months ended March 31, 2020 as we adopted low price strategy for the sales of e-bicycles business in the promotion of new products due to fierce competition and we also incurred significant selling expenses and research and development expenses for exploring and developing the business opportunities. 

 

Years Ended September 30, 2019 and 2018

 

   For the Years Ended September 30,     
   2018   2019   Change 
   USD   %   USD   %   Amount   % 
Net revenues  $3,191,560    100   $5,194,259    100   $2,002,699    63 
Less: Cost of revenues   (1,667,824)   (52)   (2,014,308)   (39)   (346,484)   21 
Gross profit   1,523,736    48    3,179,951    61    1,656,215    109 
Operating expenses:                              
Selling and marketing expenses   (5,221)   (1)   (119,210)   (2)   (113,989)   2,183 
General and administrative expenses   (458,613)   (14)   (812,863)   (16)   (354,250)   77 
Total operating expenses   (463,834)   (15)   (932,073)   (18)   (468,239)   101 
Income from operations   1,059,902    33    2,247,878    43    1,187,976    112 
Total other income, net   63,775    2    405,619    8    341,844    536 
Income from continuing operations before income tax expense   1,123,677    35    2,653,497    51    1,529,820    136 
Income tax expense   286,905    9    723,384    14    436,479    152 
Income from continuing operations   836,772    26    1,930,113    37    1,093,341    131 
(Loss) income from discontinued operation, net of tax   (203,023)   (6)   261,324    5    464,347    (229)
Net income   633,749    20    2,191,437    42    1,557,688    246 
Net income from continuing operations   836,772    26    1,930,113    37    1,093,341    131 
Less: Net income attributable to non-controlling interests from continuing operations   160,037    5    403,334    8    243,297    152 
Net income attributable to our shareholders from continuing operations   676,735    21    1,526,779    29    850,044    126 
(Loss) income from discontinued operation, net of tax   (203,023)   (6)   261,324    5    464,347    (229)
Less: Net (loss) income attributable to non-controlling interests from discontinued operation   (38,829)   (1)   49,980    1    88,809    (229)
Net (loss) income attributable to our shareholders from discontinued operation   (164,194)   (5)   211,344    4    375,538    (229)
Net income attributable to our shareholders  $512,541    16   $1,738,123    33   $1,225,582    239 

 

Segment Information

 

We have determined that the Company operates in three operating segments for years ended September 30, 2019 and 2018: (i) battery cells and packs segment; (ii) rental segment; and (iii) e-bicycle sales segment. The battery cells and packs segment engaged in selling battery packs and trading battery cells. The rental segment provides lithium batteries and e-bicycles rental services. The e-bicycle sales segment sells e-bicycles on various e-commerce platforms to individual customers.

 

The following tables present the summary of each reportable segment’s revenue and income, which are considered as segment operating performance measures, for the years ended September 30, 2019 and 2018:

 

   Year ended September 30, 2018 
   Battery cells and packs segment   Rental segment   E-bicycle sales segment   Total segments   Unallocated   Consolidated 
Revenues from external customers *  $550,381   $2,641,179   $-   $3,191,560   $-   $3,191,560 
Depreciation and amortization  $-   $(598,498)  $-   $(598,498)  $(547)  $(599,045)
Segment income before tax  $105,045   $1,390,232   $-   $1,495,277   $(371,600)  $1,123,677 
Segment gross profit margin   16%   54%   -    48%   -    48%

 

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   Year ended September 30, 2019 
   Battery cells and packs segment   Rental segment   E-bicycle sales
segment
   Total
segments
   Unallocated   Consolidated 
Revenues from external customers *  $1,253,569   $3,823,058   $104,080   $5,180,707   $13,552   $5,194,259 
Depreciation and amortization  $-   $(940,434)  $(424)  $(940,858)  $(3,178)  $(944,036)
Segment income before tax  $1,119,568   $1,612,434   $32,994   $2,764,996   $(111,499)  $2,653,497 
Segment gross profit margin   96%   52%   (2)%   61%   39%   61%

 

*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 was primarily due to the increase from rental segment. The depreciation and amortization of rental segment increased by $341,936 to $940,434 for the year ended September 30, 2019 from $598,498 for the year ended September 30, 2018, representing a significant increase of approximately 57%. The significant increase was consistent with the increase of revenue from rental service of lithium batteries and e-bicycles, and we purchased more lithium batteries and e-bicycles for rental.

 

Segment income before tax

 

The income before tax of battery cells and packs segment increased by $1,014,523 to $1,119,568 for the fiscal year ended September 30, 2019 from $105,045 for the fiscal year ended September 30, 2018, representing a significant increase of approximately 966%.

 

The income before tax of rental segment increased by $222,202 to $1,612,434 for the fiscal year ended September 30, 2019 from $1,390,232 for the fiscal year ended September 30, 2018, representing an increase of approximately 16%

 

The income before tax of e-bicycle sales segment increased to $32,994 for the fiscal year ended September 30, 2019 from nil for the fiscal year ended September 30, 2018.

 

Components of Results of Operations

 

Six Months Ended March 31, 2020 and 2019

 

Net revenues

 

The following table identifies the disaggregation of our revenue from continuing operations and reportable segments for the six months ended March 31, 2020 and 2019, respectively:  

 

      For the Six months Ended March 31,   Change 
   Segment  2019   %   2020   %   Amount   % 
Rental of lithium batteries and e-bicycles  Rental segment  $2,244,500    68   $1,048,765    19   $(1,195,735)   (53)
Battery cell trading  Battery cells and packs segment   1,023,584    31    -    -    (1,023,584)   (100)
Sales of battery packs  Battery cells and packs segment   42,463    1    1,090,542    20    1,048,079    2,468 
Sales of e-bicycles  E-bicycle sales
segment
   -    -    3,371,641    61    3,371,641    N/A 
Others      -    -    350    -    350    N/A 
Net revenues     $3,310,547    100   $5,511,298    100   $2,200,751    66 

 

Our revenues from continuing operations for the six months ended March 31, 2020 and 2019 were $5,511,298 and $3,310,547, respectively, representing a significant increase of approximately 66.5%. The significant increase in revenues was mainly driven by the increase of sales of e-bicycles and battery packs, and partially offset by the decrease of rental of lithium batteries and e-bicycles and battery cell trading.

 

The sales of e-bicycles segment engaged in online and offline sales of e-bicycles. Since the business started in September, 2019, the revenue from sales of e-bicycles had a significant increase for the six months ended March 31, 2020. For the long-term development of the business, we have built up a production line for manufacturing Dilang e-bicycles. Currently, we 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 is engaged in the trading of battery cells and selling battery packs. The revenue from sales of battery packs and battery cells trading for the six months ended March 31, 2020 were $1,090,542 and nil, respectively, as compared to $42,463 and $1,023,584 for the six months ended March 31, 2019. The revenue from sales of battery packs increased significantly by $1,048,079, was mainly due to the demand changed from our long-term customer. The revenue from battery cell trading business was nil for the six months ended March 31, 2020 as compared to $1,023,584 for the six months ended March 31, 2019, the significant decrease was primarily due to the decline of the business due to intense competition in the industry. However, we will continue our trading business if we find any suitable potential customers and suppliers from daily operations.

 

The rental segment provides lithium batteries and e-bicycles rental services. The revenue from rental segment significantly decreased by $1,195,735, or approximately 53%, for the six months ended March 31, 2020 as compared to the six months ended March 31, 2019, primarily due to the decline of customers’ demands from the impact of COVID-19. In addition, the significant decrease of rental revenue was also caused by the termination of our rental contract with our sublease agent, Mr. Guoqing Zhu, in January 2020.

 

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Cost of revenues

 

Cost of revenues consists primarily of purchase cost of battery packs, manufacturing and purchase cost of e-bicycles, rentals of e-bicycles, depreciation, maintenance, and other overhead expenses. Our cost of revenues significantly increased by $3,912,000, or approximately 365%, to $4,984,751 for the six months ended March 31, 2020 from $1,072,751 for the six months ended March 31, 2019, which was primarily due to the increase of manufacturing and purchase cost of e-bicycles for e-bicycles business.

 

Gross profit 

 

Gross profit for the six months ended March 31, 2020 and 2019 was $526,547 and $2,237,796, representing 10% and 68% of net revenues, respectively. Gross profit for the six months ended March 31, 2020 significantly decreased by 58% primarily due to low sales price for sales of e-bicycles with intense market competitions, which accounted for a large proportion of our total revenue and has a significant impact on our gross profit. The significant decrease in the gross profit was also due to the decline of the trading business with a high gross profit ratio as the industry was highly competitive. In addition, the fixed cost including depreciation cost remained stable even with the decrease of revenue for lithium batteries and e-bicycles rental services, which also contributed to the significant decrease of our gross profit.

 

Selling and marketing expenses

 

Our selling and marketing expenses primarily consist of salaries and welfare expense, advertising expense, and freight expense. The salaries and benefits expense for the six months ended March 31, 2020 increased as more salespersons were hired with the business expansion on sales of e-bicycles. In addition, the increase of advertising expense of $34,054 was for the promotion of sales of e-bicycles.

 

General and administrative expenses

 

Our general and administrative expenses consist primarily of salaries and welfare expenses, research and development expenses, inspection fee, rental fee, and depreciation. Our general and administrative expenses significantly increased by $638,229, or approximately 191%, to $973,193 for the six months ended March 31, 2020 from $334,964 for the six months ended March 31, 2019. Such significant increase was attributed to (i) the significant increase of research and development expenses mainly for designing of Dilang e-bicycle models; and (ii) the significant increase of inspection fee for inspecting the quality of Dilang’s manufacturing facility.

 

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 benefit amounted to $193,443 for the six months ended March 31, 2020, which was shifted from income tax expense of $490,059 for the six months ended March 31, 2019. The income tax benefit was recognized as we suffered deductible loss for the six months ended March 31, 2020.

 

Net income (loss) from continuing operations

 

As a result of the foregoing, our net loss from continuing operations for the six months ended March 31, 2020 was $591,829, and the net income from continuing operations for the six months ended March 31, 2019 was $1,465,660.

 

Income from discontinued operation, net of tax

 

Our income from discontinued operation was nil and $262,836 for the six months ended March 31, 2020 and 2019, respectively. We made a profit from discontinued operation for the six months ended March 31, 2019 mainly due to the sale of remaining inventories of self-manufactured battery cells.

 

Net income (loss)

 

As a result of the foregoing, our net loss for the six months ended March 31, 2020 was $591,829, and our net income for the six months ended March 31, 2019 was $1,728,496.

 

Years Ended September 30, 2019 and 2018

 

Net revenues

 

The following table identifies the disaggregation of our revenue from continuing operations and reportable segments for the years ended September 30, 2019 and 2018, respectively:

  

     For the Years Ended September 30,   Change 
    Segment  2018   %   2019   %   Amount   % 
Rental of lithium batteries and e-bicycles  Rental segment  $2,641,179    83   $3,823,058    74   $1,181,879    45 
Battery cell trading  Battery cells and packs segment   -    -    1,186,185    23    1,186,185    N/A 
Sales of battery packs  Battery cells and packs segment   550,381    17    67,384    1    (482,997)   (88)
Sales of e-bicycles  E-bicycle sales
segment
   -    -    104,080    2    104,080    N/A 
Others      -    -    13,552    -    13,552    N/A 
Net revenues     $3,191,560    100   $5,194,259    100   $2,002,699    63 

 

Our revenues from continuing operations for the years ended September 30, 2019 and 2018 were $5,194,259 and $3,191,560, respectively. The significant increase in revenues were mainly driven by the increase of rental of lithium batteries and e-bicycles, battery cell trading, and partially offset by the decrease of sales of battery packs.

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The rental segment provides lithium batteries and e-bicycles rental services. The increase in revenue from rental segment was mainly due to we strengthened relationship with existing customers, and successful launch of a new application, Yidianxing, to rent lithium batteries and e-bicycles in April 2019, which helped us attract a significant number  of new customers, and we anticipate that the revenue from the Yidianxing application will grow faster than sales through traditional channels in the future.

 

The battery cells and packs segment engaged in the trading of battery cells and selling battery packs. The revenue from battery cells trading and sales of battery packs for the year ended September 30, 2019 were $1,186,185 and $67,384, respectively, as compared to nil and $550,381 for the year ended September 30, 2018. The battery cell trading business was launched in January 2019, which is recognized on a net basis as we arrange the provision of products through third parties and do not take control of the products provided by the suppliers at any point during the transactions. We purchase products and make payments to our suppliers when receiving orders and then collect the total sales amount when shipping to our customers. Therefore, we usually do not bear credit risk. Although, we have latitude over pricing of the products when selling to customers, we concluded that we acted as an agent in the trading business considering all the factors above. Trading revenue fee is determined on a net basis as the difference between the sales price and the settlement price with the suppliers.

 

The high gross margin of the battery cell was predominately due to the revenue of battery cell trading was recognized on a net basis and the cost was immaterial as we arranged three battery cell trading transactions in the fiscal year ended September 30, 2019. Sales of battery packs decreased for the year ended September 30, 2019 as compared to the year ended September 30, 2018, and such decrease was primarily due to the decrease of profit margin of the business as the industry was highly competitive, and we turned to focus on the rental service and sales of e-bicycle business.

 

The e-bicycle sales segment is engaged in selling e-bicycles on various e-commerce platforms to individual customers. We sell e-bicycles through internet distribution channels, such as Taobao and Pinduoduo. Since this business was launched in August 2019, the revenue from sales of e-bicycles was not significant for the year ended September 30, 2019.

Cost of revenues

 

Cost of revenues consists primarily of production cost of battery packs, and cost of e-bicycles purchased, labor cost, rentals of e-bicycles, depreciation, maintenance, and other overhead expenses. Our cost of revenues increased by $346,484, or 21%, to $2,014,308 for the year ended September 30, 2019 from $1,667,824 for the year ended September 30, 2018. The increase in percentage in cost of revenue was less than revenue, mainly because the revenue of battery cell trading was recognized on a net basis and the cost was nil.

 

Gross profit 

 

Gross profit for the years ended September 30, 2019 and 2018 was $3,179,951 and $1,523,736, respectively, representing 61% and 48% of net revenues. Gross profit margin for the year ended September 30, 2019 increased by 13% due to the increased net revenue of battery cell trading of $1,186,185, which was recognized on a net basis as we acted as an agent in arranging third parties to provide the products after we disposed the battery cell production lines. 

 

Selling and marketing expenses

 

Our selling and marketing expenses primarily consist of salaries and benefits of the sales department for the year ended September 30, 2019, and it increased by $113,989 from $5,221 for the year ended September 30, 2018. Such increase was primarily due to the increase of salaries expense to develop rental service and sales of e-bicycles.

 

General and administrative expenses

 

Our general and administrative expenses consist primarily of salaries and welfare expenses, rental fee, research and development expenses, depreciation, and bad debt provision. Our general and administrative expenses increased by $354,250, or 77%, to $812,863 for the year ended September 30, 2019 from $458,613 for the year ended September 30, 2018. Such increase mainly consists of a) salary expense which was mainly due to the newly established subsidiary in fiscal year 2019; b) rental fee generated from office lease for the new subsidiary; c) research and development expenses for developing a transportation supporting platform in fiscal year 2019; and d) allowance for advance to suppliers of $80,975 in the fiscal year ended September 30, 2019 which was provided based on the estimated unrecoverable amount. 

 

Income tax expense

 

The 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, including both foreign invested enterprises and domestic enterprises. Income tax expense amounted to $723,384 and $286,905 for the years ended September 30, 2019 and 2018, respectively. The increase resulted from the increased taxable income for the year ended September 30, 2019.

 

Net income from continuing operations

 

Our income from continuing operations for the years ended September 30, 2019 and 2018, was $1,930,113 and $836,772, respectively.

 

(Loss) income from discontinued operation, net of tax

 

Our income from discontinued operation was $261,324 for the year ended September 30, 2019, and our loss from discontinued operation was $203,023 for the year ended September 30, 2018. We made a profit from discontinued operation for the year ended September 30, 2019 mainly due to the sale of remaining inventories of self-manufactured battery cells.

 

Net income

 

As a result of the foregoing, our net income for the years ended September 30, 2019 and 2018, was $2,191,437 and $633,749, respectively.

 

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Liquidity and Capital Resources

 

To date, we have financed our operations primarily through capital contributions and loan from shareholders, and from operations. We received an aggregate capital injection by our shareholders of nil, $4,261,636 and nil for the six months ended March 31, 2020 and the years ended September 30, 2019 and 2018, respectively. In addition, we received an interests-free loan from a shareholder of $4,374,249 in fiscal year 2019, which was fully repaid during the six months ended March 31, 2020. We plan to support our future operations primarily from cash generated from our operations, and our initial public offering’s proceeds. 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 March 31, 2020, we had cash and cash equivalents of $444,582 and a total working capital of $8,580,888, $9,109,800 of which was from continuing operations and the current liabilities exceeds the current assets by $528,912 for discontinued operation. As of September 30, 2019, we had cash and cash equivalents of $3,633,645 and a total working capital of $9,860,560, $10,383,642 of which was from continuing operations and the current liabilities exceeds the current assets by $523,082 from discontinued operation. As of September 30, 2018, we had cash and cash equivalents of $5,570 and a total working capital of $2,591,373, $854,604 of which was from continuing operations and $1,736,769 from discontinued operation.

 

We believe that we will generate sufficient cash flows to fund our operations and to meet our obligations on a timely basis for the next 12 months assuming the successful implementation of our business plans.

 

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

 

Current foreign exchange and other regulations in the PRC may restrict our PRC entities in their ability to transfer their net assets to us and our subsidiary. However, we have no present plans to declare 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 expected proceeds from this offering, we may make additional capital contributions to our PRC subsidiary, establish new PRC subsidiaries and make capital contributions to these new PRC subsidiaries, or make loans to the PRC subsidiaries. However, most of these uses are subject to PRC regulations. Foreign direct investment and loans must be approved by and/or registered in accordance with the Foreign Exchange Administration Regulations (1996), as amended in 2008. The total amount of loans we can make to our PRC subsidiary cannot exceed statutory limits and must be registered with the local counterpart of SAFE. The statutory limit for the total amount of foreign debts of a foreign-invested company is the difference between the amount of total investment as approved by the Ministry of Commerce or its local counterpart and the amount of registered capital of such foreign-invested company.

 

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

 

47

 

 

Cash Flows

 

Six Months Ended March 31, 2020 and 2019

 

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

 

   For the six months ended March 31, 
   2019   2020 
Net cash (used in) provided by operating activities, continuing operations  $(2,641,984)  $2,608,366 
Net cash provided by operating activities, discontinued operation   2,453,051    6,477 
Net cash used in investing activities, continuing operations   (87,510)   (1,534,921)
Net cash used in investing activities, discontinued operation   (149,251)   - 
Net cash provided by (used in) financing activities, continuing operations   509,354    (4,283,119)
Effect of exchange rate changes   1,401    27,208 
Net increase (decrease) in cash, cash equivalents, and restricted cash  $85,061   $(3,175,989)

 

Operating Activities

 

Net cash provided by continuing operating activities was $2,608,366 for the six months ended March 31, 2020, primarily derived from (a) a net loss from continuing operations of $591,829, adjusted by depreciation and amortization of $527,007; (b) a decrease of advance to suppliers of $3,718,351; (c) a decrease of amount due from related parties of $1,639,270; and (d) an increase of accrued expenses and other payables of $930,498, and offset by an increase of accounts receivable of $3,705,300. 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 under the prepayments made for our e-bicycles sales business during the six months ended March 31, 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 was primarily due to the increase of sales of e-bicycles.

 

Net cash provided by discontinued operating activities was $6,477 for the six months ended March 31, 2020, primarily derived from a decrease of accounts receivable of $5,313.

 

Net cash used in continuing operating activities was $2,641,984 for the six months ended March 31, 2019, mainly derived from (a) an increase of accounts due from related parties of $4,587,549; (b) a decrease of accrued liabilities and other payables of $2,159,905; and (c) an increase of inventories of $1,678,208, and offset by (a) a net income from continuing operations of $1,465,660, adjusted by depreciation and amortization of $527,455 and deferred tax benefits of $129,335; (b) a decrease in prepaid expenses and other current assets of $2,713,797; and (c) a decrease in accounts receivables in the amount of $865,425. The increase in accounts due from related parties was primarily due to the prepayments made for purchasing battery cells for trading from a related party. The decrease in accrued liabilities and other payables was primarily due to the payments for trading copper foil business and sales of battery packs. The decrease in prepaid expenses and other current assets was primarily due to the collection of receivable for copper trading business during the six months ended March 31, 2019. 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.

 

Net cash provided by discontinued operating activities was $2,453,051 for the six months ended March 31, 2019, mainly derived from (a) a net income from discontinued operations of $262,836, adjusted by depreciation and amortization of $69,570; (b) a decrease of inventories of $1,978,336; (c) a decrease of prepaid expenses and other current assets of $409,436, and offset by a decrease of accounts payable of $324,452. The decrease in inventories was primarily due to the decline of our self-manufactured battery cells since we have gradually reduced our manufacturing battery cells and discontinued this business since October 2018. The decrease of prepaid expenses and other current assets was primarily due to the decline of deductible value-added tax for the six months ended March 31, 2019. The decrease in accounts payable was primarily caused by the decrease in the purchase of raw materials and payment of balances.

 

Investing Activities

 

For the six months ended March 31, 2020, net cash used in investing activities for the continuing operations was $1,534,921, which was primarily due to purchases of property and equipment. Purchase of property and equipment was primarily due to the purchase of the charging piles for e-bicycle manufacturing.

 

For the six months ended March 31, 2019, net cash used in investing activities for the continuing operations arose from the purchase of equipment in the amount of $87,510.

 

For the six months ended March 31, 2019, net cash used in investing activities for the discontinued operation was primarily due to the purchases of equipment in the amount of $149,251.

 

Financing Activities

 

For the six months ended March 31, 2020, net cash used in financing activities for the continuing operations was $4,283,119, primarily consisted of (a) repayment to a shareholder in the amount of $4,285,694; (b) the loan to a shareholder in the amount of $377,306, and offset by repayment from the same shareholder in the amount of $390,775.

 

For the six months ended March 31, 2019, net cash provided by financing activities for the continuing operations was $509,354, primarily consisted of (a) the contribution from shareholders in the amount of $527,068; and (b) the loan to a shareholder in the amount of $654,103 for his personal purpose, and offset by repayment from the same shareholder in the amount of $593,178.

 

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Years Ended September 30, 2019 and 2018

 

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

 

   For the years ended September 30, 
   2018   2019 
Net cash provided by (used in) operating activities, continuing operations  $615,551   $(5,526,208)
Net cash provided by operating activities, discontinued operation   336,902    2,824,041 
Net cash used in investing activities, continuing operations   (42,076)   (2,939,914)
Net cash (used in) provided by investing activities, discontinued operation   (10,758)   1,017,588 
Net cash (used in) provided by financing activities, continuing operations   (892,112)   8,217,985 
Effect of exchange rate changes   (1,096)   12,778 
Net increase in cash, cash equivalents, and restricted cash  $6,411   $3,606,270 

 

Operating Activities

 

Net cash used in continuing operating activities was $5,526,208 for the year ended September 30, 2019, mainly derived from (a) an increase of advance to suppliers of $7,106,766; (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 $389,258; and (e) a decrease of accrued expenses and other payables of $2,538,046; offset by (a) a net income from continuing operations of $1,930,113, adjusted by depreciation and amortization of $944,036; (b) a decrease of accounts receivable of $4,025,371; (c) a decrease of prepaid expenses and other current assets of $2,279,571; and (d)  an increase of income tax payable of $575,724. The increase in advance to suppliers and amount due from related parties were primarily due to the increase in purchases of e-bicycles from 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 account 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 $2,824,041 for the year ended September 30, 2019, mainly derived from (a) a net income from discontinued operation of $261,324, adjusted by depreciation and amortization of $69,170, the loss from the disposal of property 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 $407,082; and (d) an increase of accrued expenses and other payables of $235,093, and offset by a decrease of accounts payable of $258,617. 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. The increase in accrued expenses and other payables was primarily due to the increase of value-added tax to be paid for the fiscal year ended September 30, 2019 for the sales of remaining battery cells. The decrease in accounts payable was primarily due to no additional purchases were made since December 2018, and we continue to pay the payable balance during the fiscal year ended September 30, 2019.

 

Net cash provided by continuing operating activities was $615,551 for the year ended September 30, 2018, mainly derived from (a) a net income from continuing operations of $836,772, adjusted by depreciation and amortization of $599,045 and deferred tax benefits of $286,905; b) an increase of accrued liabilities and other payables of $3,755,909; and c) an increase of accounts payable of $442,799, offset by (a) an increase in accounts receivables in the amount of $2,791,065; and (b) an increase in prepaid expenses and other current assets in the amount of $2,478,963. The increase in accrued liabilities and other payables was primarily due to the payable for trading copper foil, which were purchased in August 2018. We engaged in a limited number of copper foil trading transactions in the past and do not plan to engage in such transactions going forward. The increase in accounts payable was primarily due to the payable to the one supplier for the lithium battery rental business, which occurred since the year ended September 31, 2018. The increase in accounts receivable was primarily due to the receivables from sublease agents for the lithium battery rental business, which were received within their credit periods. The increase in prepaid expenses and other current assets was primarily due to the receivables for copper foil trading business. 

 

Net cash provided by discontinued operating activities was $336,902 for the year ended September 30, 2018, mainly derived from (a) depreciation and amortization of $288,208 for the year end September 30, 2018; (b) a decrease of inventories of $455,632; (c) a decrease of prepaid expenses and other current assets of $215,550; and (d) a decrease of advance to suppliers of $151,949, and offset by (a) a net loss from discontinuing operations of $203,023; (b) a decrease of accounts payable of $386,294; and (c) a decrease of advance from  customers of $186,916. The decrease in inventories and advance to suppliers were primarily due to the decline of our self-manufactured battery cells since we have gradually reduced our manufacturing battery cells. The decrease in accounts payable was primarily caused by the decrease in the purchase of raw materials. The decrease in prepaid expenses and other current assets was primarily due to the decline of deductible value-added tax for the fiscal year ended September 30, 2018 compared with the same corresponding period of 2017. The decrease in advance from customers was mainly because we stopped taking orders for the business of manufacturing battery cells, and continued to complete the remaining orders.

  

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Investing Activities

 

For the year ended September 30, 2019, net cash used in investing activities for the continuing operations was $2,939,914, consisted of the purchase of property and equipment in the amount of $3,146,269, offset by the proceeds from the disposal of equipment in the amount of $206,355. The purchase of property and equipment was mainly due to the e-bicycle purchase for the rental business and the production line for e-bicycle manufacturing.

 

For the year ended September 30, 2019, net cash provided by investing activities for the discontinued operation consisted of the proceeding from the disposal of equipment in the amount of $1,017,588.

 

For the year ended September 30, 2018, net cash used in investing activities for the continuing operations consisted of the purchase of equipment in the amount of $42,076.

 

For the year ended September 30, 2018, net cash used in investing activities for the discontinued operation consisted of the purchase of equipment in the amount of $10,758.

 

Financing Activities

 

For the year ended September 30, 2019, net cash provided by financing activities for the continuing operations was $8,217,985, mainly consisted of (a) the proceeds from borrowing from a shareholder in the amount of $4,374,249; (b) the contribution from shareholders in the amount of $4,261,636; (c) the contribution from non-controlling shareholders in the amount of $728,741; and (d) repayment from a shareholder in the amount of $683,880, and offset by the loan to a shareholder of $1,857,441. The net cash provided by financing activities for the continuing operations represented cash injections from our shareholders to meet the paid-in capital requirement as required by PRC law and working capital requirement.

 

For the year ended September 30, 2018, net cash used in financing activities for the continuing operations was $892,112, consisted of the loan to a shareholder in the amount of $1,292,731 for his personal purpose, and offset by repayment from the same shareholder in the amount of $400,619.

 

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Trend Information

 

Other than as disclosed in “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 Form F-1, 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 March 31, 2020 were as follows:

 

   Payments
due by
period
 
For the six months ending September 30, 2020  $83,597 
Year ending September 30,     
2021  $118,802 
2022   67,441 
2023   59,382 
2024   59,382 
2025 and thereafter   49,485 
Total  $438,089 

 

Other than those shown above, we did not have any significant capital and other commitments, long-term obligations, or guarantees as of March 31, 2020.

 

Critical Accounting Policies

 

(a) Basis of presentation. The accompanying consolidated financial statements are prepared in accordance with U.S. GAAP. The consolidated financial statements include the financial statements of EZGO Technologies Ltd., its subsidiaries, its VIE and its VIE’s subsidiaries for which EZGO Technologies Ltd. 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 our 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 and equipment, impairment of long-lived assets, valuation allowance for deferred tax assets and uncertain tax opinions. Actual results could differ from those estimates.

 

(c) 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, we have reported the assets and liabilities of the discontinued operation as current asset of discontinued operation and noncurrent assets of discontinued operation, and current liabilities of discontinued operation in the consolidated balance sheets as of September 30, 2019, and 2018, and March 31, 2020. The results of operations of discontinued operation for the years ended September 30, 2019 and 2018, and for the six months ended March 31, 2020 and 2019 have been reflected separately in the consolidated statement 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 years ended September 30, 2019 and 2018, and for the six months ended March 31, 2020 and 2019 were separately presented in the consolidated statements of cash flows for all periods presented in accordance with U.S. GAAP.

 

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(d) Fair Value Measurement. We apply 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.

 

(e) 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.

 

(f) Restricted Cash. Restricted cash represent bank deposits with designated use, which cannot be withdrawn without certain approval or notice. Restricted cash, which matures in more than twelve months after the balance sheet date, is classified as noncurrent assets in the consolidated balance sheets. The Company had no noncurrent restricted cash as of September 30, 2019 and 2018.

 

As of September 30, 2019 and 2018, we had restricted bank deposits of nil and $21,805, respectively. The balance as of September 30, 2018 represented the restricted bank deposits in the bank account established for notes payable, which cannot be withdrawn or used without the bank’s approval. As of March 31, 2020, we had restricted bank deposits of $13,074, which cannot be withdrawn or used without the bank’s approval.

 

In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires entities to present the aggregate changes in cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, the statement of cash flows will be required to present restricted cash and restricted cash equivalents as a part of the beginning and ending balances of cash and cash equivalents. The Company early adopted ASU 2016-18 and presented restricted cash within the beginning and ending cash, cash equivalents and restricted cash balance on the Company’s consolidated statements of cash flows for the years ended September 30, 2019 and 2018 and for the six months ended March 31, 2020 and 2019.

 

(g) Accounts receivable. Accounts receivable 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. We analyze the aging of the customer accounts, coverage of credit insurance, customer concentrations, customer credit-worthiness, historical and current economic trends and changes in our customer payment patterns when evaluating the adequacy of the allowance for doubtful accounts. As of September 30, 2019 and 2018, and March 31, 2020, we did not record any allowances for doubtful accounts against its accounts receivable.

 

(h) Inventories. Inventories, primarily consisting of the raw materials purchased by us for the production of battery cells and finished goods including battery cells 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. There were no write-downs recognized for the inventories for the years ended September 30, 2019 and 2018 and for the six months ended March 31, 2020 and 2019.

 

(i) Advance to suppliers, net. 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. We review 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, we would provide allowance for such amount in the period when it is considered impaired. During years ended September 30, 2019 and 2018, we provided allowance for advance to suppliers of $80,975 and nil, respectively. The allowance for advance to suppliers were nil and $80,975 for the six months ended March 31, 2020 and 2019, respectively.

 

Advances to suppliers primarily consisted of prepayments for purchasing goods or services, including purchasing of battery, e-bicycles and obtaining the e-bicycles manufacturing related licenses.

 

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(j) Property and equipment, net. Property 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
Furniture, fixtures and office equipment   3-5 Years
Vehicle   4-10 Years
Production line   5-10 Years
Equipment for rental service   2.5-5Years

 

(k) Impairment of Long-lived Assets. In accordance with ASC Topic 360, we review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. We recognize 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. We did not record any impairment charge for the years ended September 30, 2019 and 2018 and for the six months ended March 31, 2020 and 2019.

 

(l) Value Added Tax. Our Chinese subsidiaries, our VIE and our 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. We report revenue net of PRC’s VAT for all the periods presented in the consolidated statements of operations.

 

(m) Revenue Recognition. We early adopted ASU 2014-09, Revenue from Contracts with Customers (ASC Topic 606), starting October 1, 2017 using the modified retrospective method for contracts that were not completed as of September 30, 2017. The adoption of ASC Topic 606 did not have a material impact on our consolidated financial statements. We applied ASC Topic 840, Leases, for the revenue from rental service.

 

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

 

We mainly generate revenue from sales of self-manufactured battery cell, battery pack and e-bicycles, battery cell trading, rentals of lithium batteries and e-bicycles, and others. Revenue recognition policies are discussed as follows:

 

Revenue from sales of self-manufactured battery cells, battery packs and e-bicycles

 

We sell products to different customers, primarily including sale of self-manufactured battery cells, battery packs  and sale of e-bicycles. We present the revenue generated from our sales of products on a gross basis as we are a principal. The revenue is recognized at a point in time when we satisfy 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 we arrange the provision of products through third parties and do not control the specified product provided by the third party before that product is transferred to the customer, and therefore, we act as an agent. The revenue is recognized at a point in time when we satisfy 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 we expect to receive in exchange for arranging promised products to the customer and the settlement price with the third-party suppliers.

 

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Revenue from rentals of lithium batteries and e-bicycles

 

We provide lithium battery and e-bicycles rental services via sublease agents and our own app named Yidianxing. We, as the lessor, recognize revenue under ASC Topic 840.

 

For providing lithium batteries and e-bicycles rental services via sublease agents, we satisfy performance obligations over the rental period, which is usually one month, and recognizes revenue monthly.

 

For providing lithium battery rental service via Yidianxing App, we derive rental service revenue from package fees paid by customers in exchange for a pre-determined maximum number of uses of the lithium batteries during rental period, usually less than a month. The rental service revenue is recognized for each use of lithium batteries when the battery is returned to us. The unused package fees paid are recognized as revenue at the expiry of the rental period.

 

For providing e-bicycles rental service via Yidianxing App, we derive rental service revenue from package fees paid by customers in exchange for unlimited number of uses of the e-bicycles during certain rental period, usually less than three months. The rental service revenue is recognized on a straight-line basis over the rental period.

 

Contract liabilities primarily consist of advances from customers which comprises unamortized lithium battery and e-bicycles rental service. As of September 30, 2019 and 2018, we recognized advances from customers of $111,606 and $26,575, respectively. As of March 31, 2020, we recognized advances from customers of $56,916.

 

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 we have satisfied our performance obligation and has unconditional right to the payment. The Company has no contract assets as of March 31, 2020, September 30, 2019 and 2018. 

 

We 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. We have no material incremental costs of obtaining contracts with customers that we expect the benefit of those costs to be longer than one year. 

 

(n) Cost of Revenue. Cost of revenue consists primarily of cost of products, labor cost, rental of e-bicycles, depreciation, maintenance, and other overhead expenses.

 

(o) Income taxes. We account 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. We record 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. Our 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 RMB 100,000 ($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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(p) Foreign Currency Translation. Our reporting currency is the U.S. dollar. The functional currency of our subsidiaries, our VIE and our VIE’s subsidiaries located in China is the 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 and liabilities are translated at the unified exchange rate at the end of the period, and equity is 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, 2018, and 2019 and March 31, 2020 were translated at RMB6.8792 to $1.00, at RMB7.0729 to $1.00, and at RMB7.0808 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 years ended September 30, 2018 and 2019 were RMB6.5516 to $1.00 and RMB6.8698 to $1.00, respectively, and for the six months ended March 31, 2019 and 2020 were RMB6.8302 to $1.00 and RMB7.0117 to $1.00, respectively.

 

(q) Non-controlling Interest. A non-controlling interest in our subsidiary represents the portion of the equity (net assets) in the subsidiary not directly or indirectly attributable to us. Non-controlling interests are presented as a separate component of equity on the Consolidated Balance Sheet and net income and other comprehensive income are attributed to controlling and non-controlling interests.

 

(r) Segment Reporting. We have organized our operations into three operating segments. The segments reflect the way we evaluate our business performance and manage the operations by our chief operating decision maker (“CODM”) for making decisions, allocating resources and assessing performance. Our CODM has been identified as the chief executive officer, who reviews consolidated results when making decisions about allocating resources and assessing our performance.

 

We have determined that it operates in three operating segments: (1) battery cells and packs segment, (2) rental segment and (3) e-bicycles sales segment. Our 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 our long-lived assets are substantially all located in the PRC and all of our revenue and expense are derived from within the PRC, no geographical segments are presented.

 

(s) 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.

 

(t) Comprehensive Income. Comprehensive income is comprised of our net income and other comprehensive loss. The components of other comprehensive income or loss consist solely of foreign currency translation adjustments.

 

(u) 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.

 

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(v) Recent Accounting Standards. In February 2016, the FASB issued Accounting Standards Update 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. For public companies, the standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the guidance is permitted. In July 2018, ASU 2016-02 was updated with ASU 2018-11, Targeted Improvements to ASC 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 Topic 842 modified the effective dates of all other entities. For all other entities, the amendments in ASU 2019-10 are effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Early application of the guidance is permitted. We are an “emerging growth company” (“EGC”) as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, EGCs 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. We will adopt ASU 2016-02 from October 1, 2021 and will use the additional modified retrospective transition method provided by ASU No. 2018-11 for the adoption. We are in the process of evaluating the effect of the adoption of this ASU and expect the adoption will result in an increase in the assets and liabilities on the consolidated balance sheets for the operating leases and will have an insignificant impact on the consolidated statements of income and cash flows.

 

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. We do 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 and 2018 were increases of 2.9% 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.

 

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.

 

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BUSINESS

 

Overview

 

We are a holding company with operating subsidiaries and a VIE, and with all of our operations and assets in China. Our vision is to be a leading short-distance transportation solutions provider in China. Leveraging our IoT product and service platform, we have preliminarily established a business model centered on the sale of e-bicycles and battery and e-bicycle rentals, complemented by sale of battery packs, battery cell trading and our charging pile business. Currently, we (i) trade lithium cells; (ii) rent and sell lithium batteries; (iii) design, manufacture, rent and sell e-bicycles and e-tricycles; and (iv) sell, franchise and operate smart charging piles for e-bicycles and other electronic devices. We trade lithium battery cells by securing sales contracts with downstream customers, purchasing from suppliers and reselling lithium cell products to such customers.

 

Our e-bicycles are models under the New National Standards 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 are manufactured under General Specification Standard which came into effect on April 1, 2019. We do not produce any non-new standards e-bicycles. However, Changzhou Cenbird, our related company, has the capability and qualification to manufacture non-new standards e-bicycles. The non-new standards e-bicycles can be legally used for a period of three to five years (depending on the regulations in each province) from the effective date of General Specification Standard and we may legally sell or rent non-new standard e-bicycles. As of March 31, 2020, we had non-new standards e-bicycles of $382,585 recorded as our property and equipment and no impairment was recognized for the six months ended March 31, 2020, and for the years ended September 30, 2019 and 2018.

 

To date, our business consists of rental service of lithium battery cells and e-bicycles, which accounted for approximately 74% and 83% of our total revenues for the years ended September 30, 2019 and 2018, respectively, and accounted for approximately 19% and 68% of our total revenues for the six months ended March 31, 2020 and 2019, respectively. In addition, lithium battery cell trading also brought us considerable revenue for the year ended September 30, 2019, which accounted for approximately 23% and nil of our total revenues for the years ended September 30, 2019 and 2018, respectively, and accounted for approximately nil and 31% of our total revenues for the six months ended March 31, 2020 and 2019, respectively. We also engaged in the business of battery packs sales, which accounted for approximately 1% and 17% of our total revenues for the years ended September 30, 2019 and 2018, respectively, and accounted for approximately 20% and 1% of our total revenues for the six months ended March 31, 2020 and 2019, respectively. The revenue from e-bicycles sales was accounted for approximately 61% and nil of our total revenues for the six months ended March 31, 2020 and 2019, respectively. For the year ended September 30, 2019 and six months ended March 31, 2020, 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.

 

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. We expect to extend our IoT platform to additional cities, including Wuxi, Xuzhou, Wuhan, Foshan and Chengdu.

 

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.

 

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On April 15, 2019, the New National Standards became effective in China. The New National Standards set out requirements for e-bicycles that include a pedal-riding function i.e. the speed of such e-bicycles cannot exceed 25 km/h and their weight should be no more than 55 kg. The New National Standards also mandate that the voltage shall not exceed 48V and that motor power shall not exceed 400W, among other limitations. The New National Standards also prohibits any sale of e-bicycles that do not comply with the standards. As to the use of non-new standards e-bicycles, the State Administration of Market Supervision, the Ministry of Industry and Information Technology and the Ministry of Public Security jointly issued an order “2019 No. 53 - Strengthening the Supervision of the Implementation of National Standards for Electric Bicycles” (the “Order No. 53”). According to Article 4 of Order No. 53, each provincial government should provide a grace period and issue a temporary permission license to the owners of the non-new standards e-bicycles. The grace period for the use of non-new national standard e-bicycles in most provinces, including Jiangsu, is five years from April 15, 2019. Within the grace period, people can legally use, purchase, rent and ride non-new standard e-bicycles.

 

We assessed the business opportunities for the new standards e-bicycle market and concluded that most of the external suppliers of the e-bicycles’ components are located in three regions in China, namely, the Changzhou and Wuxi region, the Zhejiang and Taizhou region and Tianjin region. All of these regions are in close proximity to our Changzhou headquarters and our Tianjin factories. As a result, we can purchase the key components of new standards e-bicycles from external suppliers in Tianjin and Jiangsu. We usually purchase our components on an order basis and we will consider entering into long-term agreements with the suppliers guaranteeing a regular supply of those components in the future if necessary.

 

On July 30, 2019, we established Jiangsu Baozhe 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 R&D in developing e-bicycles, we decided to cooperate with Jiangsu Cenbird. Yuxing Liu, the general manager and former shareholder of Jiangsu Cenbird, signed the equity transfer agreement with Jiangsu Baozhe on September 6, 2019, which stipulated that Yuxing Liu would transfer 51% of his equity interest of Jiangsu Cenbird to Jiangsu Baozhe. Through Jingsu Baozhe, we invested RMB 5.1 million, accounting for 51% of the equity interest of Jiangsu Cenbird. Another shareholder of Jiangsu Cenbird, Yan Fang, also invested RMB 4.9 million, accounting for 49% of the equity interest of Jiangsu Cenbird. Yan Fang’s family owns 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, currently expected to be launched in August 2020, are 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.

 

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Industry and Market Opportunities

 

With the implementation of the New National Standards for e-bicycles and the penetration rate of lithium batteries, the demand for both lithium batteries and e-bicycles are expected to grow significantly.

 

E-bicycles are the second most important means of short-distance travel in China, only after traditional bicycles. According to the statistics released by Ministry of Industry and Information Technology of PRC, E-bicycles accounted for about 22% of all vehicles manufactured in China in 2018.

 

 

 

Source: Ministry of Industry and Information Technology of PRC

 

On June 24, 2017, the State Council of the PRC issued the Decision on Adjusting the Catalog 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 e-bicycles was canceled 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 Market Regulation and the Certification and Accreditation Administration of the PRC, or the CNCA. According to the Announcement, e-bicycles 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 was 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. The New National Standards include such specifications for e-bicycles as maximum gross weight, speed, motor power and battery voltage. They also list technical requirements for overcharging fire protection and flame retardant. Unlike previous national standards, the New National Standards are mandatory, rather than advisory. Due to environmental protection and energy concerns, the New National Standards require that, eventually, most e-bicycles must use lithium batteries. At the same time, government authorities have also strengthened the management of the CCC certification system for e-bicycles, and enhanced the supervision of certification agencies and manufacturers to help ensure compliance and prevent uncertified vehicles from entering the market. The State Administration of Market Supervision, the Ministry of Industry and Information Technology and the Ministry of Public Security collectively manage 3C-certified e-bicycle products (including certificate numbers, vehicle codes, motor codes, controllers, batteries and related technical parameters). Sales of models that do not meet the New National Standards or that have not been issued 3C certificates are no longer permitted. Products that are 3C-certified under the New National Standards can be sold in all geographic areas in China, except for certain provinces and cities, including Beijing, Tianjin, Shanghai and Zhejiang, which still require models to be included in catalogues in order to be sold in each respective jurisdiction.

 

We believe that the market for new standards e-bicycles has great potential. According to data released by the Ministry of Emergency Management and the Director of the Comprehensive Coordination Department of Work Safety, China’s e-bicycles developed rapidly in recent year. As of May 2019, there were more than 250 million e-bicycles in China. According to the statistics released by the Mistry of Industry and Information Technology of PRC, from January 2019 to November 2019, the output of e-bicycles by mid-sized and large enterprises was approximately 24.58 million units, representing a year-on-year increase of approximately 14.8%. In November 2019, the monthly output of e-bicycles reached 2.12 million, representing a year over year increase of approximately 10.9%. Also, from January 2019 to November 2019, the aggregate gross sales of e-bicycle was RMB 66.33 billion (approximately $9.38 billion), representing a year over year increase of approximately 7.1%, with profit of RMB 2.57 billion (approximately $0.36 billion), representing a year-on-year increase of approximately 10.3%.

 

It is estimated that by the end of 2019, the total number of e-bicycles in China exceeded 300 million. With the implementation of the New National Standards, we expect that approximately 60% of these e-bicycles will be gradually replaced by new products that comply with the New National Standards. Taking into account both the replacements and increasing new demand, it is estimated that the aggregate demand for e-bicycles compliant with the New National Standards will be no less than 250 million units over the next two to three years, with a potential sales value of approximately RMB 500 billion (approximately $70 billion) if the New National Standards is strictly enforced nationwide.

 

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The e-bicycle manufacture industry in China is highly fragmented. As shown in the chart below, Yadea and Aima together accounted  for approximately 36% of the domestic e-bicycle sales in 2018. Most of these manufacturers focus on non-new standards e-bicycles which are considered more powerful and more popular in the market. However, with the implementation of the New National Standards, the market is expected to be redistributed among a greater number of competitors.

 

 

 

Source: ZDC, 2019 China Electric Bicycle Industry Development White Paper

 

Local sales markets for new standards e-bicycles is also fragmented. For example, as shown in the chart below, there was no brand taking more than 10% of the market in the first half of 2019 in Beijing. We believe that this fragmented market structure may create development opportunities for our company.

 

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Source: Beijing Bicycle and Battery Bike Association

 

With the implementation of the New National Standards, we believe that the lithium battery market will also expand accordingly. The restrictions on vehicle weight and speed imposed by the New National Standards should benefit the lithium battery industry and possibly make the lithium battery, rather than the lead-acid battery, the mainstream choice for e-bicycles in China. According to the Report on the Prospect of Lithium Battery for Electric Bicycles (the “Lithium Battery Report”) released by Shenzhen Gaogong Institute of Industry Research Company on the 37th Jiangsu International Electric Vehicle and Parts Trade Fair held in Nanjing on October 25, 2019, the first research report on lithium battery in China’s E-bicycle Industry since the implementation of the New National Standard. In 2018, the sales volume of lithium battery e-bicycles reached approximately 4.11 million units, a year-on-year increase of 62.5% as compared to 2017. The penetration rate of lithium battery in the e-bicycle market reached approximately 12.45%. The Lithium Battery Report predicts that the penetration rate will reach approximately 30% in 2019 and approximately 50% in 2021 and the volume of lithium battery e-bicycle will exceed 10 million in 2020. As a result, lithium batteries have surpassed lead-acid batteries and become the mainstream battery in the market. As such, we believe the market demands for e-bicycle lithium batteries will increase rapidly and will support the growth of our lithium battery packing and sales business.

 

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We are committed to create our own brand for new standards e-bicycles through our online-offline combined sales and service models. Since September 2019, we made progress in the production and sales of new national standards e-bicycles. We started our e-bicycle sales through selling agents and then launched our own e-bicycle models via original design manufacturer in Beijing. We also started training the sales team and built our sales channels for our e-bicycles. In December 2019, the new standards e-bicycle production line of Tianjin Dilang was put into production. The production capacity of the production line is approximately 300,000 units per year. Tianjin Dilang has produced more than 4,000 units of e-bicycles and 2,000 units of urban e-tricycles in January 2020. Although the COVID-19 pandemic slowed the production of Tianjin Dilang in February 2020 and March 2020, we have gradually resumed the production since April 2020. As of June 30, 2020, we have produced 10,388 units in total with an average monthly utilization rate of approximately 7%. It is expected that the total output of Tianjin Dilang will reach 21,600 units and reach an average monthly utilization rate of 14.4% for the period between July 1 to December 31 of the year 2020. We can also estimate that the total output of Tianjin Dilang will reach approximately 32,000 units with annual average utilization rate of approximately 10.67% in 2020 and 100,000 units with an annual average utilization rate of approximately 33.3% by the end of 2021. According to our forecast, it is estimated that the total sales volume of e-bicycles of the Dilang brand will reach 240,000 units or 80% of utilization rate annually by the end of 2024. The 80% utilization rate includes the expansion we intend to undertake with the proceeds of this offering.

 

Facing the challenge from the COVID-19, we have adopted positive marketing policies. We have been focusing on market penetration, local sales, and providing more preferential payment terms to our distributors and customers. Jiangsu Cenbird has started to expand its wholesaler channels in Changzhou and Wuxi with slogans “affordable e-bicycles with higher quality” and “100 stores in one city, shared with value” since March 2020. Further, Tianjin Dilang has started “town and village full-coverage” activities to increase the brand awareness since January 2020. Between October 1, 2019 and March 31, 2020, Tianjin Dilang and Jiangsu Cenbird had completed sales of RMB 23.1 million (approximately $3.3 million). By the end of June 2020, we had also built a 30-meter urban e-tricycles production line to expand the production of urban e-tricycle. In May 2020, we have developed a new technology application - “P” key driving – with an inductive key using radio frequency communication technology used for our new e-bicycle model to improve the safety and convenience of customers’ riding experiences. Moreover, we have completed our shared e-bicycle rental IoT platform at the end of May 2020 and launched a trial system in June 2020. We believe it can create a new source of revenue and diverse our revenue stream. We plan to continue our investments in the designs, production and technologies in e-bicycles and its related products. We believe that our investments in this field will provide us with unique advantages in the market.

  

Increasing demand for short-distance delivery services will promote the development of e-bicycle rental and battery exchange/charging businesses.

 

According to the State Post Bureau, the development index of the express delivery industry was 208.2 in December 2019 (with the development index in March 2016 equaling 100), representing a year-over-year increase of approximately 30.1%. In addition, each of the development scale index, service quality index, and development capability index of the express delivery industry were 252.6, 229, and 193.1, respectively, representing year-over-year increases of 16.3%, 62.8%, and 16.6%, respectively. Driven by promotional activities in the e-commerce industry, express delivery orders in November and December 2019 exceeded 2 billion.

 

In 2019, the volume of packages delivered by express delivery companies nationwide totaled 63.52 billion pieces, representing a year-over-year increase of 25.3%, and revenue totaled RMB 749.78 billion (approximately $106 billion), representing a year-on-year increase of 24.2%. In particular, courier and express delivery volume totaled 11.04 billion pieces, accounting for 17.4% of the total delivery volume and 10% of total revenue.

 

With the advantages of high mobility, low-carbon footprints and cost efficiency, e-bicycles and e-tricycles have become an important means of transportation for express delivery services in China. Therefore, we expect that the development of the express delivery industry, especially the same city delivery business, will contribute to demand for batteries, e-bicycles and e-tricycles.

 

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The rapidly developing takeaway food industry also stimulates demand for e-bicycles and batteries. According to a report issued by the Forward Industry Institute, the current growth rate of the takeaway food business averages more than 10% per year, exceeding that of the traditional restaurant industry. It is expected that the online food order and delivery market will continue to grow, with a potential to exceed RMB 300 billion in 2020.

 

The expansion of the takeaway food industry and couriers will drive the demand for deliverymen. In 2019, the top three food delivery platforms, Meituan, Elema and Zhongbao, had a combined average daily active delivery staff of nearly 6 million. Increase in demand for deliverymen will contribute to increase in demand for lithium batteries, e-motorcycle, e-bicycles and e-tricycles. For a deliveryman, the core competitiveness of his service depends on his lithium battery. We estimate that one deliveryman uses an average of two to two-and-a-half 60V/20A batteries per day, while traveling an average of approximately 70 kilometers (approximately 45 miles) per day. The traditional lead-acid battery requires approximately 8 hours of charging time, weighs approximately 35 kilograms (approximately 77 pounds) and has a duration of approximately 30 to 40 kilometers (approximately 18 to 25 miles). In contrast, a 60V/20A lithium battery requires approximately 3 hours of charging time with the usage of a special charger, weighs approximately 9 kilograms (approximately 20 pounds), and has a duration of approximately 45 to 50 kilometers (approximately 31 miles). The performance of the lithium battery has made e-bicycles the most popular means of transportation for deliverymen. Most deliverymen are in the low-income job market, and a one-time purchase of an e-bicycle and multiple lead-acid batteries could be a large financial burden for them. Therefore, lithium battery and e-bicycles rental services could be attractive to them.

 

Our smart charging piles could effectively address fire safety concerns for e-bicycle charging.

 

According to the Fire Protection and Rescue Bureau of the Ministry of Emergency Management, each year in China there are more than 2,000 fire accidents, more than 1,000 casualties and approximately RMB 300 million of economic losses caused by e-bicycle charging malfunctions. In recent years, governments at all levels and fire supervision departments have started to inspect charging piles, and fire hazard and property management companies have also introduced safety measures. For example, e-bicycles and their batteries are generally not allowed to be brought into residential buildings.

 

Many new brands of e-bicycle charging piles are entering the domestic market, but we believe that our charging pile technology is advanced and gives our products a competitive edge. Our self-developed “Hengdian” brand smart charging pile complies with the highest fire safety standards, and has smart data collection ability. It is able to detect and adapt to different e-bicycle batteries. It automatically turns off power once it detects that a battery has been fully charged. Our Hengdian smart charging pile has received a certificate of quality control issued by the Wuxi Institute for Product Quality Inspection. We also obtained a product liability insurance for the Hengdian smart charging piles from China Pacific Insurance Company.

 

Competitive Strengths

 

Accumulated Industry Resources

 

Our management and key personnel have strong industry experiences 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. Huajian Xu, the Vice President of Jiangsu Baozhe, has been working in the telecommunications and IT industry for more than 15 years and has a deep understanding of e-commerce and IT technology. 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.

 

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Advanced Operations Model

 

One of our competitive advantages 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 350,000 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. We expect to achieve these goals by leveraging our manufacturing experience, our expanded product portfolio, our power battery resources and IoT technology.

 

In the near term, we plan to maintain our lithium battery assembly and sales business and expand our lithium battery and e-bicycle rental business. Currently, our rental business is based in Changzhou, Wenzhou and Wuhu cities. We plan to expand the business to Wuxi, Foshan, Xuzhou, Chengdu and other cities. We also plan to implement installment purchase plans with the help of consumer finance solutions provided by financial institutions in 2021. In addition to our e-bicycles, we will also promote Cenbird’s e-bicycles. Once transitioned to us, we plan to continue to market and sell Cenbird e-bicycles (e-scooter) in the United States, Brazil, Israel, Southeast Asia countries and Europe. Furthermore, we plan to launch our online 4S maintenance services. In our smart charging pile business, we expect to provide hardware to franchisees with whom we enter into co-investment and income-sharing arrangements, and engage in self-operation. We will upgrade our smart charging piles partially with LCD screens, which could allow us to generate advertisement income in the future. By the end of 2020, we expect to deploy and install 5,000 smart charging piles, mainly in or adjacent to various stores, stands, parks and e-bicycle parking lots, many of which are located in basements of buildings.

 

Eventually, we plan 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. 

 

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Our Products and Services

  

Our product portfolio includes lithium batteries, Dilang-brand and Cenbird-brand e-bicycles and e-tricycles, and Hengdian-brand smart charging piles. We (i) trade lithium cells; (ii) rent and sell lithium batteries; (iii) design, manufacture, rent and sell e-bicycles and e-tricycles; and (iv) 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. Generally we will enter into a lithium battery cell sales contract with downstream customers first, and then purchase from a suitable upstream supplier, and resell the battery cells to the downstream customers. In batter cell trading, we do not provide storage or bear the risk of inventory. 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 battery cells, 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.

 

We realized revenue of $550,381 from our battery packing business for the year ended September 30, 2018. Our battery cells trading and battery packs sales for the six months ended March 31, 2020 and the year ended of 2019 were approximately $1.1 million and $1.3 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:

 

 

Pouch cell

 

  

48V18A Lithium Battery

 

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60V20Ah Lithium Battery

 

Dilang E-Bicycles

  

Dilang-brand e-bicycles include eight 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 2020, we plan to apply for 3C certification for 20 to 30 New National Standards e-bicycle models. In the fiscal year ended September 30, 2019, we had revenue from sales of Dilang brand e-bicycle of $18,594.  Due to the Outbreak of COVID-19, we have adjusted our forecasted sales volume and sales revenues. In order to recover our sales post COVID-19, we have enhanced our supply chain and reinforced sales promotions, including sending direct mail advertising paper to our customers and advertising our products in local agent stores. For the six months ended March 31, 2020, Tianjin Dilang had sold approximately 8,364 units of e-bicycle and reached the revenue of approximately RMB 10.8 million (approximately $1.5 million). It is expected that the total revenue of Tianjin Dilang will decrease approximately 30% for the year ending September 30, 2020 as compared to our initial forecast.

  

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

 

TDT001Z:   TDT002Z:
     
 
     
TDT003Z:   TDT004Z:
     
 

 

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TDT005Z:   TDR66Z:
     
 
     
TDT01Z   TDT03Z
     
 
     
Urban e-tricycle: A6   Urban e-tricycle: X7
     
 
     
Urban e-tricycle: Jelly Bean   D1 
     
   

 

The Dilang brand of products are primarily sold through regional distributors. For the year ended September 30, 2019, Dilang had sales revenue of $104,080. We encourage customers to pick up their e-bicycles at nearby offline shops around Beijing, Tianjin, Changzhou and Wuhu, 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. (“70 Generation”), we have developed a network of seven offline stores where customers can pick up purchased products. These offline stores also offer after-sales services. Pursuant to our regional distributor agreement with 70 Generation, it shall sell no less than 36,000 e-bicycles annually. Because of the Outbreak of COVID-19, the production and sales of Dilang brand of products have been materially impacted. 

 

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Cenbird E-Bicycles and Other Products

 

Cenbird is a well-known brand in the e-bicycle industry. The Cenbird product portfolio includes high-speed non-new standards e-bicycles, light electric motor scooters (“e-mopeds”) and new standards e-bicycles. Currently, all Jiangsu Cenbird products are manufactured through original design manufacturer outsourcing by Changzhou Cenbird. To date, Jiangsu Cenbird has no inventory of non-new national standards e-bicycles. We will not pre-produce these products unless an order has been placed.

 

The Cenbird brand of products are primarily sold through offline stores. Following our investment at the end of August 2019, we have gradually taken over the design, sales and research and development activities.

 

Below are part of the Cenbird e-bicycle models:

 

     
DQ7-7A    HONGYING 
     
     
HUALING    HUANIU 
     
   
JIALI   LINGYING

 

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HONGSHAN    LINGZHI 
     
     
KUPAO    
     
     
XIAO YUZHOU   XIAOQINGXIN

 

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T2   T3

  

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.

 

Our total rental resources include approximately 9,600 batteries and 3,140 e-bicycles without batteries as of March 31, 2020. For the six months ended March 31, 2020, the average rental revenue per battery per month was approximately RMB 46.04 (approximately $6.57), and the average revenue per e-bicycle per month was approximately RMB 253.74 (approximately $36.19). Our total revenue from our rental business for the six months ended March 31, 2020 was approximately RMB 7.4 million (approximately $1.0 million), of which approximately RMB 2.7 million (approximately $ 0.4 million) was from battery rental and approximately RMB 4.7 million (approximately $ 0.6 million) from e-bicycle rental. Our total revenue from our rental business for the six months ended March 31, 2019 was approximately RMB 15.3 million (approximately $ 2.2 million), of which approximately RMB 2.3 million (approximately $ 0.3 million) was from battery rental and approximately RMB 13.0 million (approximately $ 1.9 million) was from e-bicycle rental. During the six months ended March 31, 2020, the rental revenue of lithium battery accounted for approximately 35.7% of the total rental revenue, and the rental revenue of e-bicycles accounted for approximately 64.3% of the total rental revenue. Among them, the lithium battery rental revenue from sublease agents accounted for approximately 71.5% of the total battery rental revenue and the lithium battery rental revenue through Yidianxing application accounted for approximately 28.5% of the total battery rental revenue. The rental revenue of off-line e-bicycles accounted for approximately 41.1% of the total e-bicycle rental revenue and that of online e-bicycles accounted for approximately 58.9% of the total e-bicycle rental revenue for the six months ended March 31, 2020.

 

Our total rental resources include 12,000 batteries and 6,140 e-bicycles without batteries as of September 30, 2019. Each e-bicycle needs one battery. For the year ended September 30, 2019, the average rental revenue per battery per month was approximately RMB 38.59 (approximately $5.62), and the average revenue per e-bicycle per month was approximately RMB 281.44 (approximately $40.97). Our total revenue from our rental business for the year ended September 30, 2019 was approximately RMB 26.4 million (approximately $3.8 million), of which approximately RMB 5.56 million (approximately $0.81 million) was from battery rental and approximately RMB 20.74 million (approximately $3.02 million) from e-bicycle rental. Our total revenue from our rental business for the year ended September 30, 2018 was approximately RMB 17.3 million (approximately $2.6 million), of which approximately RMB 4.02 million (approximately $0.61 million) was from battery rental and approximately RMB 13.31 million (approximately $2.03 million) was from e-bicycle rental. Currently, all the e-bicycles we rent are non-new standards e-bicycles. During the fiscal year ended September 30, 2019, the rental revenue of lithium battery accounted for approximately 21.13% of the total rental revenue, and the rental revenue of e-bicycles accounted for approximately 78.87% of the total rental revenue. Among them, the lithium battery rental revenue from sublease agents accounted for approximately 87.05% of the total battery rental revenue and the lithium battery rental revenue through Yidianxing application accounted for approximately 12.95% of the total battery rental revenue. The rental revenue of e-bicycles from sublease agents accounted for approximately 80.33% of the total e-bicycle rental revenue and that of e-bicycles through Yidianxing application accounted for approximately 19.67% of the total e-bicycle rental revenue for the year ended September 30, 2019.

 

Leveraging our IoT platform, we are able to recognize each battery in the smart exchange cabinets through an embedded ID chip and distribute our batteries to the registered customers in real time through our Wechat applet. Through the Wechat applet, customers can open the cabinets to take rented batteries and return used batteries. Whenever a customer takes away a battery, the system automatically starts to a timer. Every 24 hours is a billing period. Each customer needs his or her ID card and/or mobile phone number to register to an account with us. We also check every customer’s sesame credit points which is developed by Alipay. If a customer’s credit point is lower than our required standard, he or she has to pay a deposit. When the customer returns the battery to the cabinet, the system is able to read the embedded ID chip. Once the system recognizes the battery, it will stop timing the customer.

 

The lithium batteries we rent to our customers are 60V/20A models. They can be used in multiple e-bicycle models with compatible battery compartments. Our target customers usually run average 90-100 kilometers a day, and require a combined battery usage of approximately 100-120 kilometers. In addition, we aim to cover the cost of our batteries within 8 to 10 months with an expected battery life of 18 to 24 months. Long life-cycle also means more opportunities for secondary use before the battery is scrapped (e.g. as a storage battery for emergency use).

 

We entered into agreements with different sublease agents, pursuant to which we rent them lithium batteries for a fee of RMB 6 per battery per 24 hours, and rented them non-new standards e-bicycles for a fee of RMB 20 per e-bicycle per 24 hours or a monthly subscription fee of RMB 450 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 one software copyright.

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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 purposes 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.

 

The illustration below generally illustrates the flow of our IoT rental services:

 

 

 

Because of the cost, none of the batteries were embedded with GPS modules, so we cannot track each individual battery. However, all of the e-bicycles for rent have been embedded with GPS modules and we can keep track of them.

 

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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 RMB 800 (approximately $113.11), a franchisee will receive 30% of the revenues generated by one charging pile and for an investment of RMB 1,000 (approximately $141.38), a franchises will receive 50% of the revenues generated. As of March 31, 2020, there are approximately 800 charging piles operated by franchisees and 1,200 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 RMB 120 (approximately $16.97) per month per charging pile, compared with the revenue of approximately RMB 20 to 30 (approximately $2.83 to $4.24) per month per charging pile generated from areas with low population density.

  

 

 

Research and Development (“R&D”)

 

From October 2016 to December 2019, our continued expenditure in research and development has amounted to RMB 3 million (approximately $430,000). 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. As of the end of 2019, we spent more than RMB 1 million (approximately $140,000) 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 RMB 500,000 (approximately $70,000) to develop the smart charging pile.

 

Our subsidiary Tianjin Dilang focuses on developing New National Standards bicycle models. We invested almost RMB 3 million (approximately $430,000) to develop new e-bicycle models in the calendar year 2019, and we have 3C certifications for eight models.

 

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. Customers for our battery cells trade business are mostly institutions. For battery cell trade, 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 year ended September 30, 2019. We had no revenues from battery trading in the year ended September 30, 2018. We do not have an ongoing contractual arrangement with the aforesaid top customers.

 

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, 2019, Mr. Guoqing Zhu, Mr. Liwu Zhong and Mr. Zewu Zhao, who accounted for 30%, 23% and 12%, respectively, of our rental business revenues for the year ended September 30, 2019. For the year ended September 30, 2018, the revenues generated by Mr. Guoqing Zhu, Mr. Liwu Zhong and Mr. Zewu Zhao accounted for 30%, 47% and 6%, respectively, of our rental business revenues for the fiscal year ended September 30, 2018. Two of the three sublease agents, Mr. Guoqing Zhu and Mr. Liwu Zhong, are engaged in e-bicycle rental business and Mr. Zewu Zhao is engaged in battery rental business. The two e-bicycle sublease agents accounted for approximately 67% of the e-bicycle rental business and approximately 53% of our total rental business revenues for the year ended September 30, 2019. The battery rental sublease agent accounted for approximately 57% of our battery rental business and approximately 12% of our total rental business revenues for the year ended September 30, 2019. 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 RMB 250 (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 RMB 80 (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 and Mr. Zewu Zhao terminated their agreements in January 2019, January 2020, and May 2020, respectively. To date, we only have one sublease agent, Ms. Xiaoying Zheng, who is operating battery rental business in Wuhu, Anhui Province.

 

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 70 Generation, usually provides that we authorize the distributor to exclusively sell our products in a specific region and the distributor shall meet the monthly sales volumes stipulated in the agreement. The agreement can be terminated by our company if the distributor fails to reach the sales volumes for 6 consecutive months or by each party upon 30 days’ advance notice. For smart charging piles, our customers are franchisees and we usually enter into five-year franchising agreements with them. The franchise agreement includes the terms of cooperation, investment terms, revenue sharing ratio, and payment term. We provide the charging piles with installation and maintenance services for a one-time fee of RMB 800 (“800 Pile”) or RMB 1,000 (“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 and Cenbird 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 year ended September 30, 2019, we had achieved a sale amount of $37,242 and $48,244 on Taobao and Pinduoduo platforms, respectively, and each accounted for 0.72% and 0.93% of our total sales, respectively. For the six months ended March 31, 2020, our online sales amounted to $636,228, including Taobao, Pinduoduo platforms, and our self-developed application, Yidianxing, which accounted for 11.54% of our total sales. We plan to expand our market overseas by attending various international electronics exhibitions to market our products in North America.

 

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.

 

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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 year, due to the Chinese New Year and other holidays. 

  

Intellectual Property

 

We regard our patents, copyrights, trademarks, trade secrets and other intellectual property rights as critical to our success. We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. Our intellectual property portfolio as of the date of this prospectus included the following: