EZGO Tech(EZGO) - 2021 Q4 - Annual Report

PART I Key Information This section outlines the principal risks associated with investing in EZGO Technologies, categorized by business, corporate structure, China operations, and ordinary shares Risks Related to Our Business and Industry The company faces significant business and industry risks, including a history of net losses, limited operating history, intense competition, customer concentration, and material weaknesses in internal financial controls Net Income (Loss) Trend | Fiscal Year Ended | Net Income (Loss) | | :--- | :--- | | September 30, 2019 | $2.19 million | | September 30, 2020 | $0.28 million | | September 30, 2021 | ($3.41 million) | - The company is an early-stage entity in the e-bicycle and charging pile business, having started this focus in August 2019, which provides a limited basis for evaluating its future performance[33][34] - The company has a significant customer concentration risk, with three major customers accounting for approximately 52%, 28%, and 8% of lithium battery sales, and 17%, 11%, and 9% of e-bicycle sales revenue in fiscal year 2021[51][52] - Material weaknesses in internal control over financial reporting have been identified, relating to a lack of sufficient personnel with U.S. GAAP and SEC reporting knowledge and a lack of key monitoring mechanisms like an internal control department[63][64] Risks Related to Our Corporate Structure The company's reliance on a Variable Interest Entity (VIE) structure due to PRC regulations poses significant risks, including enforcement challenges and potential government non-compliance rulings - The company relies on contractual arrangements with its consolidated VIE and its shareholders to operate its business, as all revenue is attributed to the VIE, posing enforcement risks under the PRC legal system[97][98][100] - There is a significant risk that PRC authorities could deem the VIE structure non-compliant with foreign investment regulations, potentially leading to severe penalties or forced restructuring[106][107][108] - The shareholders of the consolidated VIE may have conflicts of interest with the company, potentially leading to actions not in the best interest of EZGO's public shareholders[103][105] Risks Related to Doing Business in China Operating in China exposes the company to substantial regulatory, political, and economic risks, including potential delisting under the HFCAA and new CSRC filing requirements - The company's shares may be delisted under the Holding Foreign Companies Accountable Act (HFCAA) if the PCAOB cannot inspect its auditors for two consecutive years, materially affecting investment value[28][194][195] - The China Securities Regulatory Commission (CSRC) has released draft rules that, if enacted, would require China-based companies to fulfill filing procedures for overseas listings, potentially hindering securities offerings[131][132][134] - The PRC government exerts substantial influence over business activities and may intervene at any time, with recent regulatory crackdowns highlighting the risk of changes impacting operations and share value[126][128][130] - PRC regulations on currency exchange and capital outflows may limit the company's ability to transfer funds from its PRC operations to fund business activities outside of China or to pay dividends to shareholders[149][151] Risks Related to Our Ordinary Shares Investment in the company's ordinary shares involves risks such as significant price volatility, potential delisting, no anticipated dividends, and substantial influence from principal shareholders - The trading price of the company's ordinary shares may be volatile due to market factors and company-specific performance, and an active trading market may not be sustained[208][209] - The company does not expect to pay dividends in the foreseeable future, so investors must rely on share price appreciation for any return on investment[225][226] - As of the report date, executive officers, directors, and principal shareholders beneficially own approximately 46.83% of outstanding ordinary shares, giving them substantial influence over corporate actions[227][228] - As a foreign private issuer, the company is exempt from certain U.S. proxy rules and reporting obligations, following BVI corporate governance practices that may offer less protection to shareholders than U.S. standards[229][230][234] Information On The Company EZGO Technologies is a BVI holding company operating in China through a VIE structure, focusing on short-distance transportation solutions including e-bicycles, lithium batteries, and smart charging piles History and Development of the Company This section outlines the company's corporate structure, including its BVI parent, Hong Kong subsidiary, WFOE, and VIE, and highlights the acquisition of Tianjin Jiahao and a registered direct offering in 2021 - The company operates in the PRC through its VIE, Jiangsu EZGO, and its subsidiaries, with control established via contractual arrangements by its WFOE, Changzhou EZGO[258] - On June 28, 2021, the company acquired Tianjin Jiahao, adding over 35,000 square meters of factory land and an estimated production capacity of 100,000 e-bicycles, with potential for expansion[262][275] - On June 1, 2021, EZGO closed a registered direct offering, selling 2,564,102 units at $4.68 per unit and raising gross proceeds of approximately $12 million[262] Business Overview EZGO's business focuses on short-distance transportation solutions in China, with e-bicycle and battery pack sales as primary revenue streams, aiming for a 1% market share by 2025 Revenue Breakdown by Source (FY 2019-2021) | Revenue Source | FY 2019 | FY 2020 | FY 2021 | | :--- | :--- | :--- | :--- | | Battery packs sales | 91% | 21% | 18% | | E-bicycles sales | 8% | 73% | 78% | - The company's strategic goal is to become a well-regarded e-bicycle company with at least 1% market share in China by 2025, targeting an annual sales volume of 500,000 units[281] - The product portfolio includes Dilang-brand e-bicycles, Cenbird-brand e-bicycles, the new EZGO-brand e-bicycles, and Hengdian-brand smart charging piles[284] - The company's rental services revenue decreased by 79% in FY2021 to approximately $342,636, and the business was phased out in the first half of 2021 due to intense competition[311] Organizational Structure This section details the company's reliance on a Variable Interest Entity (VIE) structure, where the WFOE controls the VIE through contractual agreements to consolidate financial results - The company controls its primary operating entity, Jiangsu EZGO, through a series of VIE agreements, including an Exclusive Management Consulting and Technical Service Agreement, Equity Pledge Agreement, Exclusive Call Option Agreement, and Proxy Agreement[401][402] - The VIE agreements are designed to provide the WFOE with power, rights, and obligations equivalent to direct equity ownership, allowing for consolidation of the VIE's financial results under U.S. GAAP[401] VIE Net Income (Loss) Attributable to EZGO Shareholders | Fiscal Year Ended | Net Income (Loss) | | :--- | :--- | | September 30, 2019 | $1,738,123 | | September 30, 2020 | $147,174 | | September 30, 2021 | ($2,279,373) | - In FY 2021, the parent company EZGO transferred funds to its PRC operations via loans to its Hong Kong subsidiary ($15.85 million) and WFOE, and the WFOE provided loans of $13.32 million to the VIE[426][427] Property, Plants and Equipment As of September 30, 2021, the company owns approximately 35,047.8 square meters of production real estate in Tianjin and leases about 13,080 square meters for other facilities Owned and Leased Properties | Type | Location | Size (sq. meters) | | :--- | :--- | :--- | | Owned | Tianjin | 35,047.8 | | Leased | Various (Changzhou, Tianjin, etc.) | ~13,080 | Operating And Financial Review And Prospects In fiscal year 2021, EZGO's revenues increased by 53.7% to $23.4 million, but profitability declined significantly to a net loss of $3.4 million due to lower gross margins and higher operating expenses Consolidated Financial Highlights (FY 2020 vs. FY 2021) | Metric | FY 2020 | FY 2021 | Change | | :--- | :--- | :--- | :--- | | Net Revenues | $15,243,282 | $23,422,006 | +53.7% | | Gross Profit | $1,539,034 | $382,478 | -75.1% | | Gross Margin | 10.1% | 1.6% | -8.5 p.p. | | Operating Expenses | ($1,467,068) | ($4,259,897) | +190.4% | | Net Income (Loss) | $276,922 | ($3,413,644) | N/A | - The increase in revenue was mainly driven by a 63.3% growth in e-bicycle sales, from $11.2 million in FY2020 to $18.2 million in FY2021[455][456] - The gross profit margin declined from 10% in FY2020 to 2% in FY2021, primarily due to reduced unit prices and sales rebates for e-bicycles to expand market share[460][461] - The company's liquidity position was strengthened by net proceeds of approximately $10.85 million from its January 2021 IPO and $10.88 million from its June 2021 registered direct offering[469] - Net cash used in operating activities was $6.9 million in FY2021, a significant reversal from the $3.9 million provided by operations in FY2020, reflecting the net loss and increased working capital needs[475][476][478] Directors, Senior Management And Employees This section details the company's leadership, including its five-member board with three independent directors, key executives, and its 115 full-time employees based in China - The company's board of directors consists of 5 members: Jianhui Ye (CEO), Di Wu, and three independent directors: Guanghui Yang, Robert Johnson, and Guanneng Lai[543][561] - Total cash compensation for all directors and senior management was RMB 885,547 (approximately $136,087) for the fiscal year ended September 30, 2021[558] - As of the date of the report, the company had 115 full-time employees in China, with the largest functions being Business and Marketing (35) and Manufacturing (31)[571][572] - Directors and executive officers as a group beneficially own approximately 40.1% of the company's outstanding ordinary shares[577] Major Shareholders And Related Party Transactions This section details major shareholders, with CEO Jianhui Ye holding 22.3% ownership, and highlights significant related party transactions including e-bicycle purchases and un-repaid loans to a former chairman Major Shareholder Ownership (as of Jan 26, 2022) | Name of Beneficial Owner | Ordinary Shares Beneficially Owned | Percentage | | :--- | :--- | :--- | | Jianhui Ye (CEO) | 3,034,200 | 22.3% | | Shuang Wu (COO) | 1,462,032 | 10.7% | | Di Wu (Director) | 963,452 | 7.1% | - In FY2021, the company purchased e-bicycles worth $6,048,053 from Changzhou Cenbird Electric Bicycle Manufacturing Co., Ltd., a related party[585] - Loans made to former chairman Henglong Chen for personal use violated the Sarbanes-Oxley Act section 402, were not fully repaid by the July 28, 2021 deadline, and are expected to be repaid by December 31, 2022[585] Financial Information This section refers to the full consolidated financial statements and notes the company's policy of retaining all earnings for business growth, with no anticipated dividends - The company's full consolidated financial statements can be found starting on page F-1 of the report[587] - The company has never paid a dividend and does not anticipate paying any in the foreseeable future, intending to retain all earnings for business financing and expansion[588] Additional Information This section covers the company's BVI corporate governance, PRC exchange controls, and tax implications, including the risk of being classified as a PRC 'resident enterprise' or a Passive Foreign Investment Company (PFIC) - The company is governed by the laws of the British Virgin Islands (BVI), which differ from U.S. corporate laws regarding shareholder suits, mergers, and director's fiduciary duties[604][618][620] - Operations are subject to PRC exchange controls, where the Renminbi is not freely convertible, requiring approval from SAFE for capital-account items like direct investments[649][650] - There is a risk the company could be classified as a PRC 'resident enterprise,' which would subject it to a 25% enterprise income tax on its worldwide income[655] - The company does not expect to be classified as a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes, but notes that this is a factual determination made annually and no assurance can be given[668][669] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks include foreign exchange risk due to RMB/USD fluctuations, credit risk from unsecured receivables and uninsured PRC bank deposits, and inflation risk impacting operating costs - The company faces foreign exchange risk as its functional currency is the RMB, while its reporting currency is the USD, meaning a significant revaluation of the RMB against the USD could materially affect reported financial results[686][687] - Credit risk exists with cash deposits in PRC financial institutions, as there is no regulation requiring insurance to cover bank deposits in the event of failure, and accounts receivable are also typically unsecured[687][688] PART II Material Modifications To The Rights Of Security Holders And Use Of Proceeds This section details the use of proceeds from the company's two public offerings in 2021, which collectively raised approximately $21.73 million in net proceeds Use of Proceeds from 2021 Offerings | Offering | Closing Date | Net Proceeds | | :--- | :--- | :--- | | Initial Public Offering | Jan 28, 2021 | ~$10.85 million | | Follow-on Offering | June 1, 2021 | ~$10.88 million | Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of September 30, 2021, due to material weaknesses in financial reporting personnel and monitoring mechanisms, with remediation efforts underway - Management concluded that disclosure controls and procedures were not effective as of the end of the fiscal year 2021[696] - Two material weaknesses were identified: 1) lack of sufficient personnel with appropriate U.S. GAAP/SEC reporting knowledge, and 2) lack of key monitoring mechanisms like an internal control department[697] - Remediation efforts include hiring a new CFO with U.S. GAAP experience and working to establish an internal audit department[698] Other Information This section covers various governance and compliance matters, including the change of independent auditors, the adoption of a code of ethics, and the company's use of BVI home country corporate governance practices - The company changed its independent registered public accounting firm on August 16, 2021, terminating Marcum Bernstein & Pinchuk LLP and appointing Briggs & Veselka Co[707] - As a foreign private issuer, the company follows its home country (BVI) practices in lieu of Nasdaq rules requiring annual shareholder meetings and shareholder approval for certain securities issuances[709] Principal Accountant Fees | Fiscal Year Ended | Audit Fees | | :--- | :--- | | September 30, 2020 | $350,000 | | September 30, 2021 | $250,000 | PART III Financial Statements This section contains the company's consolidated financial statements for fiscal years 2019-2021, prepared under U.S. GAAP, including auditor reports and notes on accounting policies, segments, and discontinued operations - The financial statements include reports from two independent registered public accounting firms, Briggs & Veselka Co. (for FY2021) and Marcum Bernstein & Pinchuk LLP (for FY2019 and FY2020), due to a change in auditors during 2021[721][728] - The company has retrospectively adjusted its financial statements for all periods presented to reflect the disposal of its battery cell production line and rental business as discontinued operations[858] Consolidated Balance Sheet Summary (As of Sep 30) | Metric | 2020 | 2021 | | :--- | :--- | :--- | | Total Current Assets | $16,316,861 | $27,679,610 | | Total Assets | $19,817,798 | $42,011,670 | | Total Current Liabilities | $6,672,653 | $9,475,170 | | Total Equity | $13,145,145 | $32,536,500 | - The company operates in two reportable segments: (1) Battery cells and packs, and (2) E-bicycle sales, with e-bicycle sales becoming the dominant segment, generating $18.2 million in revenue in FY2021[898][902]