熵基科技：熵基科技股份有限公司2023年半年度报告（英文版）

ZKTeco 2023 Half Year Report 1 ZKTECOCO., LTD. 2023 Half Year Report Announcement No.: 2023-062 August 2023 ZKTeco 2023 Half Year Report 2 Section IImportant Notes, Contents and Definitions The Board of Directors, the Board of Supervisors, directors, supervisors and senior management guarantee that the information presented in this report is true, accurate and complete without any false records, misleading statements or material omissions, and will undertake individual and joint legal liabilities. The Company's legal representative, Jin Hairong, the person in charge of the accounting work, Wang Youwu, and the person in charge of accounting institution (accounting supervisor), Fang Li, hereby declare that the financial information in this report is true, accurate, and complete. All directors have attended the board meeting to review this report. The Company has elaborated in detail on the potential risk factors that may occur in the future in this report. Investors are advised to refer to the full text of this report and pay special attention to the content of "Section IIIManagement Discussion and Analysis"-"X. Risks Faced by the Company and Countermeasures". The Company will not distribute cash dividend, distribute bonus shares, or distribute shares from capital reserve during the current reporting period. ZKTeco 2023 Half Year Report 3 Table of Contents Section IImportant Notes, Contents and Definitions ...........................................................................................2 Section IICompany Profile and Key Financial Indicators ..................................................................................8 Section IIIManagement Discussion and Analysis ..............................................................................................12 Section IVCorporate Governance .......................................................................................................................67 Section VEnvironmental and Social Responsibility ...........................................................................................71 Section VISignificant Events................................................................................................................................75 Section VIIChanges in Shares and Information about Shareholders ..............................................................82 Section VIIIInformation of Preferred Shares ....................................................................................................91 Section IXBonds ....................................................................................................................................................92 Section XFinancial Report ...................................................................................................................................93 ZKTeco 2023 Half Year Report 4 Documents Available for Inspection I. The original text of the 2023 Half Year Report signed by the Company's legal representative and stamped by the Company; II. Financial statements affixed with official stamps and the signatures of the Company's legal representative, the person in charge of the accounting work and the person in charge of accounting institution (accounting supervisor) of the Company. III. All original copies of the Company's documents and the original drafts of the Company's announcements as disclosed on websites designated by the CSRC during the reporting period. Place for document inspection: Office of the Company's Board of Directors ZKTeco 2023 Half Year Report 5 Definitions Terms Refers to Definitions Company, our Company, joint-stock company, ZKTECO Refers to ZKTECOCO., LTD. ZKTeco Times Refers to Shenzhen ZKTeco Times Investment Co., Ltd., a controlling shareholder of the Company LXInvestment Refers to Dongguan LXInvestment Partnership (Limited Partnership), a shareholder of the Company JYLXRefers to Shenzhen JYLXConsulting Enterprise (Limited Partnership), a shareholder of the Company Yiwu Walden Refers to Yiwu Walden Yuanjing Venture Capital Center (Limited Partnership), a shareholder of the Company Qingdao Walden Refers to Qingdao Walden Zhongxiang Equity Investment Center (Limited Partnership), a shareholder of the Company Guangdong Zkteco Refers to ZKTECO (GUANGDONG) CO., LTD, a wholly-owned subsidiary of the Company Shenzhen ZKTeco Refers to Shenzhen ZKTeco Biometric Identification Technology Co., Ltd., a wholly-owned subsidiary of the Company ZKCserv Refers to ZKCserv Technology Limited Co., Ltd., a company holding 51% equity of the Company Shenzhen Zhongjiang Refers to Shenzhen Zhongjiang Intelligent Technology Co., Ltd., a company holding 51% equity of the Company XIAMENZKTECORefers to XIAMENZKTECOCO., LTD., a wholly-owned subsidiary of the Company Xingniu Fund Refers to Hefei Xingniu Private Equity Fund Management Co., Ltd. Zhongan Intelligent Control Refers to Shenzhen Zhongan Intelligent Control Technology Co., Ltd., previously a controlling subsidiary of the Company, with its equity in the Company transferred in 2019 Zokon Industry Refers to Shenzhen Zokon Industry Development Co., Ltd. Ministry of Public Security Refers to Ministry of Public Security of the PRC MIITRefers to Ministry of Industry and Information Technology of the People's Republic of China Company Law Refers to Company Law of the People's Republic of China Securities Law Refers to Securities Law of the People's Republic of China Articles of Association Refers to Articles of Association of ZKTECOCO., LTD. A shares Refers to RMB denominated ordinary shares RMB, RMB '0,000 Refers to RMB, RMB '0,000 Reporting Period Refers to January-June 2023 End of Reporting Period Refers to June 30,2023 CVRefers to Computer Vision BioCVRefers to Biometrics & Computer Vision Biometrics Refers to A computer technology that utilizes the analysis of human biological characteristics to distinguish biological organisms. It is used for personal identification by a close combination of computer technology with high-tech methods such as optics, acoustics, biosensors, and biostatistics, and utilizing the inherent physiological characteristics of the human body (fingerprints, facial features, palm veins, iris, etc.) or behavioral characteristics (sound, gait, etc.) Computer Vision Refers to Used to simulate biological vision using cameras, computers, and related equipment; simulate human visual abilities, capture and process three-dimensional information of the scene by using optical systems and image ZKTeco 2023 Half Year Report 6 processing tools, understand and command specific devices to execute decisions RF, RFIDRefers to Radio Frequency Identification (RFID), a wireless communication technology that can identify specific targets and read and write relevant data through radio signals without establishing mechanical or optical contact between the identification system and specific targets Internet of Things/IoTRefers to Used to connect any object to the network by using information sensing devices and following agreed protocols. The object exchanges and communicates information through information dissemination media to achieve intelligent recognition, positioning, tracking, supervision, and other functions GA/T 1012-2019 Technical Specifications for Fingerprint Acquisition and Comparison of Resident Identity Card Refers to The national standard for resident identity cards issued by the Ministry of Public Security in 2019, stipulating the requirements for fingerprint collection and comparison of resident identity cards, as well as the technical indicators and testing methods of fingerprint algorithms GA450-2013 General Technical Requirements for Desktop Readers of the Resident IDCard Refers to The national standard for general technical requirements of ID card readers issued by the Ministry of Public Security in 2013, stipulating the technical requirements, test methods, inspection rules, marking, packaging, transportation and storage of desktop ID card readers GA/T1011-2012 General Technical Requirements for Fingerprint Capture Device of the Resident IDCard Refers to The national standard for General Technical Requirements for Fingerprint Capture Device of the Resident IDCard issued by the Ministry of Public Security in 2012, stipulating the technical requirements, test methods, inspection rules, marking, packaging, transportation and storage of ID card fingerprint capture devices 2nd-Generation IDCard, Resident ID Card Refers to 2nd-Generation Resident IDCard SMEDRefers to Single Minute Exchange of Die, a process improvement method that minimizes the product die exchange time, production startup time, or adjustment time of the die. It can significantly shorten the time required for machine installation and die exchange setting Middleware Refers to A type of software that lies between application systems and system software. It uses the basic services and functions provided by system software to connect various parts or different applications of application systems on the network, achieving the goal of resource and function sharing SaaSRefers to Software as a Service, a software application model that provides software services through the Internet CTIDRefers to Cyber Trusted Identity, an authoritative network identity certificate issued to individuals by the "Internet+" trusted identity authentication platform (CTIDPlatform) ZigBee Refers to A wireless network protocol for low speed short distance transmission IP65 Refers to A protection level for electrical equipment casings against foreign object intrusion, which can completely prevent dust from entering and wash with water without any harm PUSHRefers to The active push technology on the server side, enabling the timely transmission of data updates, which is characterized by high efficiency and low terminal energy consumption MRPRefers to Material Requirement Planning, the process in which a production enterprise gradually derives the production and procurement plans for the components, raw materials, and other materials required for the production of the main product based on the production plan, the structure of the main product, and the inventory situation SAMRefers to Secure Access Module, a module used for encrypting and decrypting identity card information ISO14001 Refers to International standards for environmental management systems developed by the International Organization for Standardization (ISO) SMTRefers to Surface Mount Technology, a circuit assembly technology used to install ZKTeco 2023 Half Year Report 7 surface mounted components without pins or with short leads on the surface of printed circuit boards (PCBs) or other substrates, and then solder and assemble them through methods such as reflow soldering or immersion soldering PCBARefers to Printed Circuit Board Assembly, the process of soldering components onto a PCB substrate to form a printed circuit board (PCB) asmag Refers to A professional industry media company under the Messe Frankfurt Exhibition GmbH, aiming to provide market analysis, technical information, solution evaluation, industry forecasting, etc. for practitioners in smart security, smart life, smart transportation, smart buildings, IT communication, and networking CNCRefers to Computer Numerical Control Machine Tools, an automated machine tool equipped with a program control system AIRefers to Artificial Intelligence AIoTRefers to The Artificial Intelligence of Things IoTRefers to Internet of Things NB-IOTRefers to Narrow Band Internet of Things, NB-IoT Rebate Refers to The rebate the Company provides to dealers based on the rebate policy and the completion of dealer performance SDKRefers to Software Development Kit OCRRefers to Optical character recognition, the process of electronic devices (such as scanners or digital cameras) using image processing and pattern recognition techniques to examine characters on images, bills, or certificates and translate them into computer text AIGCRefers to AIGC (Artificial Intelligence Generated Content) refers to a technology that generates text, images, audio, video, and other contents through learning existing data based on deep learning and other methods Note: If there is a discrepancy between the total count and the sum of the sub item values in any table of this report, it is due to rounding reasons. ZKTeco 2023 Half Year Report 8 Section IICompany Profile and Key Financial Indicators I. Company Information Stock Abbreviation ZKTECOStock code 301330 Stock listing exchange Shenzhen Stock Exchange Chinese name of the Company熵基科技股份有限公司Chinese abbreviation of the Company (if any) 熵基科技English name of the Company (if any) ZKTECOCO., LTD. English abbreviation of the Company (if any) ZKTECO Legal representative of the Company Jin Hairong II. Contacts and Contact Information Board Secretary Representative of Securities Affairs Name Guo Yanbo Wang Jia Contact address No.32, Pingshan Industrial Road, Tangxia Town, Dongguan, Guangdong, China No.32, Pingshan Industrial Road, Tangxia Town, Dongguan, Guangdong, China Tel.0769-826188680769-82618868 Fax 0769-826188480769-82618848 E-mail ir@zkteco.com ir@zkteco.com III. Other Information 1. Company's Contact Information Whether the registered address, office address, postal code, website, email address, etc. of the Company changed during the reporting period □ Applicable Not applicable The registered address, office address, postal code, website, email address, etc. of the Company have not changed during the reporting period, as detailed in the 2022 Annual Report. 2. Information Disclosure and Place of the Report Whether the information disclosure and place of the report changed during the reporting period □ Applicable Not applicable The website and media name and website of the stock exchange where the Company disclosed its Half Year Report. The filing location of the Company's Half Year Report remains unchanged during the reporting period, as detailed in the 2022 Annual Report. ZKTeco 2023 Half Year Report 9 3. Registration Change Whether the registration changed during the reporting period □ Applicable Not applicable The Company's registration remained unchanged during the reporting period, as detailed in the 2022 Annual Report. 4. Other Relevant Information Whether other relevant information changed during the reporting period Applicable □ Not applicable During the reporting period, due to the implementation of the 2022 annual equity distribution, the registered capital of the Company was changed from RMB 148,492,051 to RMB 193,039,666, as detailed in the "Announcement on Completing Industrial and Commercial Change Registration" (Announcement No.2023-060) disclosed by the Company on June 30,2023. IV. Main Accounting Data and Financial Indicators Whether the Company performed a retroactive adjustment or restatement of the previous accounting data Yes □ No Reasons for retroactive adjustment or restatement of the previous accounting data Accounting policy change Current reporting period The same period last year YoY change during the reporting period Before adjustment After adjustment After adjustment Operating revenue (RMB) 937,182,670.00925,114,950.16925,114,950.161.30% Net profit attributable to shareholders of listed companies (RMB) 88,754,335.6270,265,221.9670,231,661.4326.37% Net profit attributable to shareholders of listed companies after deducting non-recurring profits and losses (RMB) 94,476,476.5074,002,831.1673,969,270.6327.72% Net cash flows from operating activities (RMB) 130,730,027.12 -21,915,202.10 -21,915,202.10696.53% Basic earnings per share (RMB/share) 0.45980.48530.4851 -5.22% Diluted earnings per share (RMB/share) 0.45790.48530.4851 -5.61% Weighted average return on net assets 2.85% 4.97% 4.96% -2.11% At the end of this reporting period At the end of 2022 Increase or decrease at the end of this year compared to the end of ZKTeco 2023 Half Year Report 10 the previous year Before adjustment After adjustment After adjustment Total assets (RMB) 3,761,253,561.103,655,960,456.303,662,519,973.002.70% Net assets attributable to shareholders of listed companies (RMB) 3,134,825,464.693,057,467,189.683,057,720,783.952.52% Reasons for changes in accounting policies and situations of correction of accounting errors On November 30,2022, the Ministry of Finance issued and implemented the "Interpretation No.16 of the Accounting Standards for Business Enterprises", which stipulates that "deferred income tax related to assets and liabilities arising from individual transactions shall not be subject to the accounting treatment of initial recognition exemption". The Company shall implement it from January 1, 2023. For the lease liabilities and right-of-use assets recognized due to the application of this regulation in the earliest period of financial statement presentation for the first time, as well as the estimated liabilities and corresponding assets related to the disposal obligation recognized, which generate taxable temporary differences and deductible temporary differences, the Company shall adjust the cumulative impact to present the initial retained earnings and other related financial statement items for the earliest period in the financial statements in accordance with this regulation and the provisions of "Accounting Standards for Enterprises No.18 - Income Tax". V. Differences in accounting data between domestic and overseas accounting standards 1. Differences in net profit and net assets in financial reports disclosed in accordance with international accounting standards and Chinese accounting standards □ Applicable Not applicable During the reporting period, there were no differences in net profit and net assets between the financial reports disclosed in accordance with international accounting standards and Chinese accounting standards. 2. Differences in net profit and net assets in financial reports disclosed in accordance with foreign accounting standards and Chinese accounting standards □ Applicable Not applicable During the reporting period, there were no differences in net profit and net assets between the financial reports disclosed in accordance with foreign accounting standards and Chinese accounting standards. VI. Items and Amounts of Non-recurring Gains and Losses Applicable □ Not applicable Unit: RMB Item Amount Remarks Losses and gains from disposal of non-current assets (including the offsetting portion of the provision for asset impairment) -433,635.76 Government subsidies included in current profits and losses (except those closely related to the normal business of the Company, which are in line with national policies and regulations and continue to be enjoyed in accordance with certain standards or quotas) 3,012,356.92 Capital occupancy fees charged to non-financial enterprises included in current profits and losses 26,607.00 ZKTeco 2023 Half Year Report 11 In addition to the effective hedging business related to the normal business of the Company, the profits and losses from fair value changes arising from the holding of trading financial assets and trading financial liabilities as well as investment income from the disposal of trading financial assets, trading financial liabilities and available-for-sale financial assets -7,809,909.35 Mainly due to investment gains and losses and changes in fair value generated by partial forward exchange settlement to hedge against exchange rate fluctuations risk Other non-operating income and expenses other than the above items -130,111.10 Less: income tax impact 457,610.55 Minority interest impact (after tax) -70,161.96 Total -5,722,140.88 Details of other profit and loss items that meet the definition of non-recurring profits and losses: □ Applicable Not applicable The Company has no specific situation of other profit and loss items that meet the definition of non-recurring profits and losses. Description on defining the non-recurring profit and loss items listed in the "Explanatory Announcement for Information Disclosure by Companies that Issue Securities to the Public No.1 - Non-recurring Profits and Losses" as recurring profit and loss items □ Applicable Not applicable The Company has no situation where the non-recurring profit and loss items listed in the "Explanatory Announcement for Information Disclosure by Companies that Issue Securities to the Public No.1 - Non-recurring Profits and Losses" are defined as recurring profit and loss items. ZKTeco 2023 Half Year Report 12 Section IIIManagement Discussion and Analysis I. Main Businesses Engaged by the Company During the Reporting Period (I) Basic situation of the Company's main businesses and products The Company is an international enterprise in the field of multimodal "Computer Vision and Biometrics" (BioCV), and is a national high-tech enterprise specializing in providing smart entrance and exit management, smart identity verification, smart office products, smart retail products and solutions. The Company is mainly committed to integrating core biometric technologies such as fingerprints, facial features, palmprints, veins (including finger veins and palm veins), and iris and other multimodal biometrics with computer vision, IoT, cloud computing and other technologies. It provides smart terminals, industry application software, and platforms with identity recognition and verification functions to multiple fields such as commerce, transportation, finance, education, healthcare, government affairs and retail. Relying on the global ecosystem of R&D, manufacturing, and sales services, the Company actively deploys the field of smart retail cloud services while deeply cultivating the three major business sectors of smart entrance and exit, smart identity verification, and smart office, providing digital products and services for users in the public service field, enterprises, and personal users. From the perspective of the main application scenarios of the product, the Company's main business during the reporting period mainly covered three major areas: smart entrance and exit management, smart identity verification, and smart office. The main business income obtained from the three major scenarios is as follows: Unit: RMB '0,000 Item January-June 2023 January-June 2022 Amount Proportion Amount Proportion I. Smart entrance and exit management products 68,498.6873.34% 67,859.0673.55% II. Smart identity verification products 7,693.098.24% 9,903.5310.74% III. Smart office products 17,199.2618.42% 14,488.3615.71% Total 93,391.03100.00% 92,250.95100.00% 1. Smart entrance and exit management (1) Smart terminal products and functions During the reporting period, the Company's smart terminal products for smart entrance and exit management mainly include access control management, pedestrian channels, vehicle channels, security inspection products, intelligent videos, smart locks, elevator control, charging piles, and self-service visitor services. Product Category Product Name Product Description Product Image ZKTeco 2023 Half Year Report 13 Access control products Access control The access control is a smart terminal that achieves single door access control permission verification and logical judgment through biometric information verification or radio frequency verification. According to different biometric verification methods, it can be divided into fingerprint, facial, finger vein, and palmprint recognition access control integrated machines, equipped with RFID cards, passwords, and other verification methods. The device has professional access control function and supports unified management on the software platform. The access control is equipped with high-definition binocular cameras, configured with facial recognition and liveness detection algorithms, which can quickly collect facial information. It has strong anti-counterfeiting capabilities for printing photos, videos, and 3D simulation masks. It can also form a visual intercom system with the indoor unit, calling the indoor unit with one click through the doorbell button, achieving indoor control of door opening and voice bidirectional intercom function. During the reporting period, the Company launched a new generation of multimodal palmprint recognition technology and accelerated the implementation of technology products. Access controller The access controller is a smart terminal used to receive data from biometrics readers, radio frequency readers, and access control, and perform access permission verification and logical judgment. It is mainly used in large and medium-sized project locations with a large number of access points and high security requirements. Accessible collection methods include fingerprints, RFID cards, and passwords. The device has professional access control function and supports unified management on the software platform. The Company actively deploys advanced access controllers for large and medium-sized enterprises and public sector applications. RF card reader The RF card reader is mainly used for the collection and transmission of RFID cards and passwords, and can send the collected data to the access controller for comparison and verification. The data information whose collection is supported includes RFID cards, passwords, etc. ZKTeco 2023 Half Year Report 14 Elevator control Elevator controller The elevator controller supports two modes of online and offline operation, controlling a maximum of 128 floors. It has multiple verification methods such as face, fingerprint, RFID card, QR code, etc. and can accurately identify elevator user instructions without the need for buttons, directly reaching the target floor. In addition, it also supports seamless integration with the visitor system, achieving one code interconnection for visitors. Multimodal Collection reader The multimodal Collection reader is an inductive reader used to collect information such as the cardholder's face, fingerprint, palmprint or QR code, RFID card, password, etc., and transmit it to the access controller and elevator controller. It is used in conjunction with software to achieve single or multiple door access control permission verification. The multimodal acquisition reader is equipped with a high-definition binocular camera, configured with a facial liveness algorithm, which can quickly capture faces and has strong anti-counterfeiting ability. The dustproof and waterproof level can reach IP65. Pedestrian channel Pedestrian gate The channel gate is a channel management device that can be used in conjunction with other systems for different special occasions to play a greater role. With the rapid development of digital technology, the application of intelligent pedestrian gates is becoming increasingly widespread. At present, schools, high-end residential areas, scenic spots, stations, customs, airports, code gates, office buildings, sports venues, and other places that require pedestrian flow management, identity recognition, and self-service fee management are all provided with automated channel gates instead of traditional manual ticket or admission verification. The Company's pedestrian gate products support the integrated integration of multimodal biometrics and radio frequency identification, and support various infrared passage detection functions for human and object, enabling intelligent control and management of the channel. With the extension of the Company's core technologies in video detection, image recognition, behavior analysis, and feature matching, and combined with the characteristics of various scenarios in pedestrian channels, the Company has developed self-service settlement and passage products and solutions that can meet the usage needs of multiple scenarios such as libraries, unmanned supermarkets, communities, schools, airports, subways, and stations, promoting convenient travel in the above passage scenarios. The video passage detection algorithm and device independently developed by the Company use AI technology to detect, alarm, and dissuade abnormal behaviors such as tailgating, intrusion, shoulder to shoulder, and hugging. This not only reduces the work pressure of staff, but ZKTeco 2023 Half Year Report 15 also greatly improves the safety of control and the accuracy of passage data. During the reporting period, the Company promoted the integration and application of technologies such as pedestrian gates, multimodal recognition, and holographic projection according to the needs of high-end commercial scenarios. Vehicle channel License plate recognition all-in-one machine The license plate recognition all-in-one machine is mainly used to obtain and recognize license plate information such as license plate number, license plate color, and license plate logo type. The Company's license plate recognition all-in-one machine adopts an integrated structure of license plate recognition camera, control panel, display screen, fill light, automatic barrier, etc. It can realize voice broadcasting in local language and display information such as license plate numbers. The license plate recognition parking lot management system can help car owners to park automatically, support various mobile payment functions, and can set flexible and diverse charging rules to meet the needs of different scenarios. Automatic barrier The automatic barrier can be independently controlled to lift and lower the pole, or it can be accessed through the parking lot management system to lift and lower the pole. The Company's gate is composed of a reducer, motor, balancing device, chassis, gate pole support, gate rod and other parts. According to the application location of the gate, its gate poles can be divided into straight poles,90° curved arm poles, fence poles, anti-collision round poles, and other pole types. The gate with license plate recognition all-in-one machine is suitable for entrance and exit management of parking lots in different scenarios. ZKTeco 2023 Half Year Report 16 Charging pile New energy vehicle charging piles can be fixed on the ground or walls, installed in public buildings (buildings, shopping malls, public parking lots, etc.), residential parking lots, and dedicated charging stations to provide charging and energy replenishment services for electric vehicles and hybrid vehicles. According to the output power of the charging pile, it is generally divided into various different power charging methods such as AC slow charging, DC fast charging, and overcharging to meet the charging needs of new energy vehicles in different scenarios. On the basis of iteratively upgrading the performance of the 7KWAC charging pile series, the Company has developed a DC fast charging pile for new energy vehicles. It mainly focuses on charging scenarios at the departure or destination of car owners in households, communities, office buildings, industrial parks, government agencies and other areas with greater demand in the future. It supports functions such as card swiping charging, QR code scanning charging, mobile payment, self-service, online monitoring, cloud management, OTA remote upgrade, etc. (integrated management and service of charging and parking can be achieved with the Company's smart parking business). Security inspection products Walk through metal detector Metal detectors are mainly used in public places with high pedestrian flow, such as stations, factories, public service departments, and large conference venues, to inspect metal objects on people, such as guns and controlled knives. The metal detector device has functions such as adjusting metal detection sensitivity, detecting location, and automatic counting. According to usage requirements, the device can integrate functions such as facial recognition and channel management. X-Ray Scanner The X-Ray Scanner is a detection device used to detect whether packages and other items contain specific prohibited items. The Company's X-Ray Scanner products have X-ray image acquisition and processing functions, which can intelligently identify, mark the items in the package, and alert for prohibited items such as knives, lighters, batteries, etc. The device can integrate functions such as people and bag association, intelligent video and security inspection management platform. ZKTeco 2023 Half Year Report 17 Video surveillance Entrance and exit video device The entrance and exit video side devices extract target features from the video stream and analyze and process them in smart cameras or smart edge boxes, suitable for various entrance and exit scenarios such as residential areas, campuses and enterprises. Smart lock Biometrics smart lock Smart locks are mainly used for opening and closing control of doors in homes, hotels, offices, and other areas. The Company's biometrics smart lock products have the function of extracting and comparing various information such as fingerprints, faces, RFID cards, etc. They can be managed through software, smart speakers, or apps, and are compatible with lock bodies in line with national standards, American standards, European standards, and Korean standards. They support WiFi, NBIoT, ZigBee, and Bluetooth communication methods. Visitor Terminal Visitor Identity Verification Terminal Cooperating with the Human Certificate One Card Solution Cube Visitor Management System, it can achieve "real name" + "real person" visitor authentication; support CTID trusted identity authentication; support mobile visitor appointment, dual screen display, QR code and OCR document scanning, barcode printer, and other functions. SDKs can be provided for customers to conduct secondary development to meet the visitor management needs of users in different industries. (2) ZKBio Access IVSIntegrated Entrance and Exit Management Platform V6000 The ZKBio Access IVSV6000, based on multimodal BioCV technology, provides an integrated entrance and exit management platform that integrates pedestrian, vehicle, and object inspection. It includes multiple business subsystems such as personnel, attendance, access control, visitors, consumption, patrol, parking lot, elevator control, channel, intelligent video, information screen, system management, etc. The platform adopts a micro-service development framework, which has the characteristics of high system performance, high service availability, module scalability, high communication security, and strong third-party integration scalability. At the same time, the platform provides a unified and open smart cloud platform for data unified management and mobile internet applications, creating a virtuous ecological loop of effective pre warning, quick response to incidents, and precise verification after the incident, providing effective security guarantees for people's production and life. (3) ZKBio Intelligent Integrated Management Platform V6600 ZKBio V6600, based on multimodal BioCV technology, focuses on intelligent integrated entrance and exit management, and provides an intelligent integrated management platform that integrates "pedestrian, vehicle, and object inspection". With the help of machine vision intelligent analysis technology, the platform realizes intelligent analysis and safety supervision to meet the needs of users for diversified and fragmentation application scenarios based on target recognition, intelligent scene algorithm and IoT perception technology, combined with business subsystems such as attendance, access control, visitors, consumption, patrol, parking lot, elevator ZKTeco 2023 Half Year Report 18 control, channel, information screen, intelligent video, and smart scenarios. (4) ZKBio Smart Park Integrated Management Platform V8800 The ZKBio V8800, based on multimodal BioCV technology, provides an integrated park management platform that integrates pedestrian, vehicle, and object inspection. The platform adopts a micro-service development framework, which has the characteristics of high system performance, high service availability, module scalability, high communication security, and strong third-party integration scalability. With the Company's long-term experience and user needs in the field of smart parks, we will comprehensively integrate intelligent video applications to empower entrance and exit businesses, providing comprehensive and security guarantees and office convenience for the production and life of the park. 2. Smart identity verification (1) Smart terminal products and functions During the reporting period, the Company's smart terminal products of smart identity verification mainly included multimodal biometrics products, card recognition and reading products, and industry smart terminals. Product Category Product Name Product Description Product Image Multimodal biometrics products Fingerprint scanner Fingerprint capture device has the characteristics of large capture area, high fingerprint image pixels, and good imaging effects for dry and wet fingerprints. It supports the development and use of systems such as Windows, Android, and Linux. Fingerprint scanner of the resident ID card The specialized fingerprint scanner of the resident ID cards complies with the "Technical Specifications for Fingerprint Acquisition and Comparison of Resident Identity Card" (GA/T 1012-2019) and the "General Technical Requirements for Fingerprint Scanner of the Resident ID Card" (GA/T 1011-2012). The device is small and exquisite in appearance. Combined with high-performance processors and international semiconductor fingerprint sensors, it has the characteristics of fast capture speed and excellent image quality. Finger vein capture device It can simultaneously collect fingerprint and finger vein information. Fingerprint and finger vein two-factor authentication can improve the anti-counterfeiting ability, and is mostly used in scenarios with high security requirements. It supports the development and use of systems such as Windows, Android, and Linux. ZKTeco 2023 Half Year Report 19 Iris capture device A non-contact binocular iris capture device that can quickly capture iris images of standard compatible citizen identity quality within a comfortable capture distance of 35-50cm. Moreover, it can be adjusted with the knob to adapt to different heights, and image data can be powered and transmitted through dual USB interfaces, suitable for large-scale iris data collection and database building. Biometrics reader The biometrics reader is a smart terminal used to collect human biological characteristics, mainly used in access control systems. It can send the collected biometrics information to the access controller for comparison and verification. The data information whose collection is supported includes fingerprints, faces, RFID cards, etc. Palm information capture device The palm vein information capture device adopts a high-definition near-infrared dedicated lens, which supports near-infrared light compensation, and can obtain clear vein images. It supports palm recognition at large angles. Card recognition and reading products QR code module of CTID terminal A hardware level module designed for various application scenarios of CTID authentication certificates, fully supporting the recognition and reading of CTID authentication certificate QR codes, mainstream QR codes, and one-dimensional barcodes, with strong decoding and code verification capabilities for CTID authentication certificate. Trusted Digital Identity Authentication Terminal The built-in ID card reader complies with the "General Technical Requirements for Desktop Readers of the Resident IDCard" (GA 450-2013), and can support the recognition and reading of the 2nd-generation IDCard, Foreign Permanent Resident IDCard, and Residence Card for Hong Kong, Macao and Taiwan Residents. In addition, it supports recognition and reading of CTID authentication certificate QR codes, mainstream QR codes, and one-dimensional barcodes through docking, with strong CTID authentication certificate decoding, code verification, and other capabilities. ZKTeco 2023 Half Year Report 20 ID card reader It complies with "General Technical Requirements for Desktop Readers of the Resident IDCard" (GA 450-2013), "Technical Specifications for Fingerprint Acquisition and Comparison of Resident Identity Card" (GA/T 1012-2019), and "General Technical Requirements for Fingerprint Capture Device of the Resident IDCard" (GA/T 1011-2012). It is an ID card reader with fingerprint verification function, and can support the recognition and reading of the 2nd-generation IDCard, Foreign Permanent Resident IDCard and Residence Card for Hong Kong, Macao and Taiwan Residents. According to different application scenarios, the ID card reader can be divided into three types: desktop, built-in, and handheld. Desktop ID card reader can be directly connected to a computer for use, built-in ID card reader can be integrated into various terminal devices to achieve ID card machine reading function, and handheld ID card reader can be directly used offline. Smart Government Terminal A dual screen smart government terminal that integrates basic functions such as ID card recognition and reading, fingerprint collection and verification, and facial recognition. It is designed with dual screens and supports handwritten electronic signatures. Equipped with a built-in high-definition camera, it supports shooting up to A4 format and can capture and retain documents, certificates, invoices, etc., achieving paperless office. Industry Smart Terminal Human Certificate Verification Terminal ASmart Human Certificate Verification Terminal that integrates functions such as portrait collection, fingerprint collection, and 2nd-generation ID card reading. It can also support the recognition and reading of various documents such as 2nd-generation Resident IDCard, Foreign Permanent Resident IDCard, and Residence Card for Hong Kong, Macao and Taiwan Residents. According to different application scenarios, it can be divided into four types: wall mounted, handheld, desktop, and floor mounted. The Company's Human Certificate Verification Terminal is pre-installed with One Card Solution Cube Identity Authentication Software, which can be used in conjunction with the certificate One Card Solution Cube Backend Management System for unified use. Medical Insurance Identity Verification Terminal A desktop device that integrates various functions such as social security card, ID card reading, contact/non-contact smart card recognition and reading, one-dimensional/QR code electronic voucher recognition, fingerprint comparison recognition, etc. The built-in ID card reader meets the requirements of " General Technical Requirements for Desktop Readers of the Resident IDCard" (GA450-2013) and supports reading smart cards such as social security cards and bank cards. The ZKTeco 2023 Half Year Report 21 device supports 4 sets of PSAM cards, has a multi-platform SDK, and supports USB (drive free). This product is suitable for scenarios in fields such as social security, health, medical insurance, pharmacies, industry and commerce, taxation, electricity, telecommunications, hotels, transportation, banking, insurance, and fast payment. (2) One Card Solution Cube Identity Authentication Management System The One Card Solution Cube Identity Authentication Management System is a "real person system" identity verification system independently developed by the Company based on multimodal biometric technology for "the integration of people and certificates". It consists of two parts: the Human Certificate One Card Solution Cube Terminal Software (APP) and the Identity Authentication Management Platform, integrating the Company's ZKLiveFace facial recognition algorithm and ZKFinger V15.0 ID card fingerprint comparison algorithm. The software can read 2nd-generation ID cards, Hong Kong and Macao resident residence permit, foreign permanent residence permit and other certificate information, compare the fingerprint or face of the holder on the spot for the "integration of people and certificates", and accurately and quickly verify user identity information. One Card Solution Cube Identity Authentication Management Platform has functions such as intelligent device management, personnel management, and black/white list monitoring, which can achieve real-time and comprehensive multi-dimensional monitoring and analysis of devices, personnel, and data. Moreover, the One Card Solution Cube Identity Authentication Management System supports access to large capacity facial recognition servers, CTIDPlatform (Trusted Identity Authentication Platform), and million-level large capacity facial backend verification and trusted identity authentication capabilities, providing authoritative, reliable, stable and secure identity authentication services for customers in different vertical fields, covering various fields such as government affairs, finance, justice, medical care, public security, education and exams, and providing a one-stop industry solution of "algorithm+smart terminal+authentication platform+application" for the identity authentication industry chain. (3) Biowhois CTIDPlatform Biowhois CTIDPlatform is an identity authentication SaaS service platform launched by the Company based on multimodal biometric technology and an "Internet+" CTIDPlatform. It can provide developers and industry users with multimodal biometrics, online identity authentication, real name offline identity authentication and other open, scalable, cross-platform multi-dimensional identity authentication services. The data interconnection between Biowhois CTIDPlatform and "Internet+" CTIDPlatform can provide users with authoritative, reliable, stable and secure online identity authentication services such as two real names, two real people, four real names, four real people, and CTID authentication certificate, which can not only intelligently upgrade the existing offline identity authentication scenarios in finance, medical care, government affairs, transportation, education, etc., but also is suitable for internet identity authentication scenarios such as e-commerce, online games, social networking sites, online education, online healthcare, and online live streaming in the digital economy. 3. Smart office (1) Smart terminal products and functions During the reporting period, the Company's smart terminal products of smart office mainly included attendance products and consumer products. Product Category Product Name Product Description Product Image Attendance product Attendance Smart Terminal A self service attendance terminal, mainly registering and comparing biometrics information, recording personnel attendance time data, and cooperating with backend software to scientifically and effectively manage enterprise personnel. The Company's biometrics attendance ZKTeco 2023 Half Year Report 22 terminal can support multiple verification methods such as fingerprint, face, palmprint, RFID card, and password, and has personnel management functions such as self-service scheduling and report generation. Consumer product Consumer Smart Terminal Support face, RFID card, QR code and other verification methods; mainly used in consumption scenarios such as internal canteens, gyms, and schools within enterprises, supporting various consumption modes such as free amount deduction, count deduction, and fixed value deduction. The system can be equipped with mini programs to achieve convenient and intelligent consumption management. (2) E-ZKEco Pro Time & Security Refined Service Platform The E-ZKeco Pro Time & Security Refined Management Platform focuses on enterprise time and security management, combining the three core elements of internet applications: time, computing, and storage. It integrates multimodal BioCV, IoT perception technology, and connectivity into software and hardware to achieve standardization, modularization, and platformization of functions such as personnel, attendance, consumption, access control, visitors, meetings, assets, and salaries, and assists in the digital upgrading of enterprise management. Through the intelligent application of the E-ZKeco Pro Platform, enterprises can standardize their management processes, significantly improving their level of time and security refined management, while reducing the burden of tedious work such as human resources, administration, and finance, and helping enterprises reduce operating costs and improve operational efficiency. （3）BioTime 8.0 BioTime 8.0 is an independently developed attendance management software platform that supports remote, multi-branch, and multi-site attendance management based on the needs and characteristics of overseas markets. BioTime 8.0 can be stably connected to standard attendance PUSH devices of the Company. At the same time, employees perform various self-service office operations such as check-in, check-out, out of office check-in, leave approval, and self query reports through mobile apps and browsers. The platform can ultimately record employee attendance status and output attendance reports based on attendance rules. In addition, the software has gradually been localized in more than ten countries around the world, including attendance rules, attendance reports, localized languages, and localized Payroll rules. The interface between localization and third-party social security, tax, banking, and other institutions is seamlessly connected, greatly improving the efficiency of enterprise office operations and receiving high praise. (II) The Company business model 1. Procurement model (1) Procurement execution In order to fully leverage the advantages of centralized procurement, reduce procurement costs, improve operational efficiency, and optimize procurement resources, the Company has a Procurement Center that manages the procurement of electronic materials, structural components, and other materials required in the production process. The Procurement Center consists of three departments: Resource Development Department, Executive Procurement Department, and Comprehensive Procurement Department. Among them, the Resource Development Department is mainly responsible for developing and managing supplier resources, following up on samples, and conducting business negotiations during the sampling period. The Executive Procurement Department is mainly responsible for executing purchase orders and following up on material delivery. The Comprehensive Procurement Department is mainly responsible for administrative, office, and fixed asset procurement, ZKTeco 2023 Half Year Report 23 except for production materials. The Company mainly adopts the MRP procurement model. The material control specialist of the Company's Manufacturing Center mainly analyzes the raw material usage based on the production plan and the material structure of the product, formulates priority levels, allocates materials based on inventory, and gradually deduces the raw material procurement plan required for the production of the product. For some general materials, the Company has set up a minimum safe stocking point for inventory warning and replenishment. (2) Supplier selection and management The Company has established strict supplier selection and management measures. For newly introduced suppliers who need to develop new products, expand supply resources, and reduce costs, after the supplier submits basic information, the Resource Development Department of the Company's Procurement Center will organize the Material Certification Department, the Executive Procurement Department, the Manufacturing Center, and the R&DCenter to conduct on-site reviews of the supplier. For suppliers who pass the assessment, formal certification will be carried out for storage. In the daily procurement process, in order to ensure the quality of the Company's raw material supply, except for the SAM (security module) involved in the card business, which can only be purchased from Xingtang Communication Technology Co., Ltd., the only supplier selected by the Ministry of Public Security, the Company usually selects two or more suppliers that meet the Company's certification standards for the main raw materials for supply. The Company will also strengthen the management of suppliers by signing relevant "Supply Quality Agreement" and conducting monthly and annual reviews. Suppliers with scores below 60 for three consecutive months will be disqualified from being suppliers. 2. Production model From the perspective of process characteristics, the Company's smart terminal products are mainly produced by the production methods of processing and assembly. According to the different production planning methods, the production method can be divided into two production models: Make to Stock (MTS) and Make to Order (MTO). The MTS of the Company mainly combines historical sales data and the Company's sales strategy to predict and produce standardized products, and meets market demand in a timely manner by maintaining a certain amount of finished product inventory. The MTO is a production method according to personalized needs such as variety, model specifications, and performance based on customer orders. Once the product is produced, it can be directly sent to customers without the need to maintain finished product inventory. After successful development and testing, the Company's application software and platform products are delivered to users through CD or website distribution and download. The basic version of the software can be used without customer activation; the advanced version of the software and platforms require activation. In basic parameter configurations, customers are not required to pay for activation and use. In case of upgrading parameter configurations, users are required to pay a software license fee before activation and use. For large-scale engineering projects, the Company will assign engineering personnel to the user's site for installation, debugging, and training services. The application software and platforms released by the Company are locally deployed, used, and managed by users. The Company does not provide operation services, but only provides necessary after-sales services according to the sales contract. 3. Marketing and management models The Company adopts a sales model that combines distribution and direct sales. During the reporting period, the main business income of the Company's various sales models was as follows: Unit: RMB '0,000 Sales model January-June 2023 January-June 2022 Amount Proportion Amount Proportion Distribution 63,695.1168.20% 59,863.3464.89% Direct sales 29,695.9231.80% 32,387.6135.11% ZKTeco 2023 Half Year Report 24 Total 93,391.03100.00% 92,250.95100.00% (1) Distribution model In the distribution model, the Company's customers are mainly dealers, and the relationship between the Company and dealers belongs to a purchase and sales relationship, adopting a buyout sales method. (2) Direct sales model The Company's direct sales customers mainly include system integrators, engineering contractors, end users, etc. On the one hand, the Company can provide smart terminal devices and application software platforms to system integrators and engineering contractors, which can integrate or include the aforementioned products in products, systems, or engineering services sold to downstream end users. On the other hand, the Company can also directly sell to end users through offline direct sales or online self operated platforms. Normally, the Company's direct sales business can be divided into two categories based on whether installation and debugging are required: product sales and project implementation. For project implementation related businesses, the Company will customize or transform its own smart terminals and application software platforms based on different engineering project requirements. (III) Market position of the Company's products during the reporting period From 2020 to 2022, the Company has been listed as one of the "Top 50 Global Security Companies" by asmag for three consecutive years, ranking 14th,13th, and 12th respectively; and won the "2022 Honor Security Technology Innovation Award" and "2022 Smart IoT and Security Ecology Most Growing Enterprise" from CPS; "Smart City" Construction Excellent Solution and Innovative Technology Award (Smart Government), "Smart City" Construction Excellent Solution and Innovative Technology Award (Smart Campus) from Beijing Security Industry Network; Huicong IoT "Top 10 IoTSolution Awards for 2022" and "Top 10 Entrance and Exit Control Brands for 2022"; the "11th Top 30 Enterprises in China's Intelligent Transportation Network in 2022"; the Company was also awarded the "Technical Activity Unit of the Chinese Information Technology Application Innovation Working Committee", and was shortlisted in the list of trusted digital identity QR code module suppliers, smart education products and service suppliers (the first batch). In addition, since 2016, the Company has been awarded the title of "Top 500 Manufacturing Enterprises in Guangdong Province" by Guangdong Manufacturers Association and other units for 7 consecutive years. In 2022, the Company was selected as a "Sample Enterprise of China's Foreign Trade Export Leading Index" by the General Administration of Customs of the People's Republic of China. In May 2023, the Company's trusted digital identity QR code module ZKB10M was successfully shortlisted for the "Trusted Digital Identity Ecological Product Recommendation List" of Beijing Zhongdun Security Technology Development Co., Ltd. In June 2023, the Company's ZKTeco perception data gate was awarded the "Excellent Innovative Product Award" at the 16th China International Public Safety Products Expo. Internationally, the Company has won 6 industrial design industry awards, including 2 German Red Dot Awards and 4 iFDesign Awards. (IV) Key performance drivers 1. Accelerated development of multimodal biometric technology In recent years, biometrics products have mainly focused on single biometrics recognition. In many application scenarios, a single biometric technology (such as fingerprint recognition) can meet the needs of most customers, and many single biometric technology products have price advantages and can be easily installed. Although the accuracy and anti-counterfeiting performance of a single biometric technology have gradually improved, with the continuous development and evolution of deep learning algorithms and big data technologies, the importance of information security has become increasingly prominent, and higher requirements have been placed on the security and accuracy of identity recognition information. The development of multimodal biometric technology utilizing multiple biometric technologies has become a new trend in the field of biometrics. Multimodal recognition technology has better recognition performance than single biometric technology, greatly improving product security. Multimodal biometric technology is not a simple superposition of biometric technologies, but rather the R&D of new algorithms based on the characteristics of different biometrics to improve computational efficiency and accuracy. This requires enterprises to have a deep understanding of different biometric technologies and be able to innovate products through algorithm ZKTeco 2023 Half Year Report 25 optimization. At present, multimodal biometrics, which integrates multiple biometric technologies, will become more flexible. Suitable fusion methods and weight decisions can be selected based on different application needs and scenario changes, which becomes a development trend in the biometric market. 2. The rise of non-contact biometric technology applications With the development of biometric technology, non-contact biometric technology has gradually matured. Due to its non-contact characteristics, which can avoid physical contact between users and machines, and have efficient and hygienic characteristics, its application in the global market has gradually emerged. In recent years, it has been further accepted by the market with market-oriented applications. Non-contact biometric technology mainly includes facial recognition, palm vein recognition, and iris recognition. With the development of big data and AI technologies, facial recognition has become increasingly mature in terms of recognition accuracy, and is applied in many scenarios such as real name verification. Its characteristic is that it does not require active cooperation from the recognition object, and the difficulty of information collection is low. The recognition accuracy can reach the same level as fingerprint recognition in specific situations. The recognition technology of palm vein and finger vein currently mainly focuses on applications in medium and small scenes, such as ATM systems. With the development of wide dynamic image acquisition technology, the recognition technology of palm vein has also entered a growth period, and its non-contact and concealment characteristics can avoid the risk of information leakage. Iris technology has the characteristics of high accuracy and high difficulty in information collection, and is generally applied in situations with high security requirements. Due to its high accuracy, it is also suitable for unified and standardized identity authentication and recognition at the national level. The Company promotes the application of non-contact palm recognition technology in financial and other fields by participating in the development of group standards related to non-contact palm recognition technology, and promotes the patent and technical layout of non-contact fingerprint capture devices. Non-contact fingerprint recognition has become an important development direction of traditional fingerprint recognition, and its non-contact characteristics will bring more security and better user experience. 3. The rise of mobile terminal biometric technology applications In recent years, the application of biometric technology on mobile terminal devices has gradually emerged. For example, fingerprint recognition, facial recognition, palm recognition, and iris recognition technologies are gradually used on mobile terminal devices to generate BioCode from these biometric methods and are integrated into entrance and exit access control, smartphones, tablets and other mobile devices in the form of QR codes, to provide convenient identity authentication, and improve the high security application functions such as users' independent storage of biometric templates. 4. National industrial policies provide a favorable development environment for industry development The "Outline of the 14th Five-Year Plan (2021-2025) for National Economic and Social Development and Vision 2035 of the People's Republic of China" (hereinafter referred to as the "Outline of the 14th Five-Year Plan") released in March 2021 clearly states that new types of infrastructure will be an important component of China's modern infrastructure system, and the construction of traditional and new types of infrastructure will be promoted in a coordinated manner to create a complete, efficient, practical, intelligent, green, safe and reliable modern infrastructure system. In the "Outline of the 14th Five-Year Plan", the entire section of "Construction of new types of infrastructure" proposes requirements for the construction and development of new types of infrastructure: With the aim of strengthening the support for digital transformation, intelligent upgrade, and integrated innovation, we will build new types of infrastructure in such areas as information technology, integration, and innovation, and provide guidance on the development of industries such as intelligent home appliances, intelligent lighting, intelligent security, and intelligent video surveillance systems. In the context of new types of infrastructure, the Company will adhere to innovation driven and long-term principles, continue to strengthen multimodal BioCV core technology and precise investment in R&D, and enhance the core competitiveness of products and solutions. In addition, the Company will work with partners to promote global leadership and commercial scale applications and enhance customer value based on multimodal BioCV technology according to customer needs. 5. The development of new types of infrastructure in China brings market increment With the acceleration of digital transformation and intelligent upgrading of the economy and society, the IoT has become an ZKTeco 2023 Half Year Report 26 important part of new types of infrastructure. In September 2021, the MIIT and seven other departments jointly issued the "Three-year Action Plan (2021-2023) for the Construction of New Types of Infrastructure for the Internet of Things" (hereinafter referred to as the "Action Plan"), which specifies that by the end of 2023, new types of infrastructure of IoT will be preliminarily built in major cities in China, with the number of IoT connections exceeding 2 billion. Facing the application field of the IoT, the Company actively embraces digital transformation, deeply focuses on industry and customer needs, and creates a series of scenario based products and solutions that are suitable for scenarios; promotes the ability of back-end software platform, improves the ability of data service, continues to meet the fragmentation and personalized needs of the Artificial Internet of Things (AIoT), and promotes the innovative application of urban and industrial smart scenes. 6. Digital China construction provides new development opportunities for the Company On February 27,2023, the CPCCentral Committee and the State Council issued the "Overall Layout Plan for the Construction of Digital China" (hereinafter referred to as the "Plan"), pointing out that building a digital China is an important engine to promote Chinese path to modernization in the digital era and a strong support to build a new competitive advantage of the country. The "Plan" will propose to ensure capital investment, innovate funding support methods, strengthen the overall guidance of various funds, play the role of the national industry finance cooperation platform, guide financial resources to support digital development, encourage and guide capital in the construction of digital China in a standardized manner, and build an investment and financing system with effective participation of social capital. According to the "Report on the Development of China's Digital Economy (2023)" released by the China Academy of Information and Communications Technology (CAICT), the scale of China's digital economy reached RMB 50.2 trillion in 2022, accounting for 41.5% of GDP. The digital economy policies, including the "Plan", will catalyze the further development of new smart city projects. In the wave of digital economy, the Company, as the driver and practitioner of digitalization and intelligence, actively explores, builds and improves the computer vision field, multi-dimensional perception smart terminals, scene interactive robots, scene cloud service software, AR digital twins, digital identity cards and other track industry chains, forms a digital ecosystem integrating upstream, downstream and cross industries, and works with Xingniu Fund to jointly establish an ecological innovation fund to accelerate product incubation, and assist in the ecological construction of the digital industry. 7. The driving force of AI technology on company business development With rapidly changing technologies today, AI technology, with its unique charm and unparalleled potential, is causing profound changes worldwide. The large language model represented by ChatGPT of OpenAI reveals that algorithm models with Transformer as the core architecture are steadily moving towards the direction of Artificial General Intelligence (AGI). This transformation not only promotes the depth and breadth of AI research in theory, but also demonstrates enormous potential and value in practical applications. Multimodal large models have become an important means for AI to perceive and understand the real world by integrating natural language, images, speech and various other signals. This integration approach not only improves the understanding ability of AI, but also endows it with stronger adaptability and wider application scope. It can be used in multiple fields such as image recognition, speech recognition, natural language processing, etc., greatly improving the practicality and efficiency of AI. Moreover, AIhas demonstrated its important application value in fields such as smart security and smart office. It implements automatic monitoring through image recognition technology to improve security efficiency. By using natural language processing technology, it achieves automated office work and improves work efficiency. In addition, AI is also highly valuable for the Company's smart business scenario based applications. By using AI technology, deep mining and analysis of business data can be achieved, thus providing more accurate basis for company decision-making. Through speech recognition, speech synthesis and Large Language Model (LLM), Q&A robots that interact with natural language can be developed to achieve intelligent frontend, intelligent customer service and other services. The Company has been committed to conducting in-depth research in the field of AI and has made significant breakthroughs in multiple directions. This includes continuous iteration and frontier tracking of the BioCVLLM and the BioCVVLM multimodal large model. Moreover, the Company actively leverages the power of the open source technology community to maintain synchronous development with the latest global technologies. These technological breakthroughs have provided strong impetus for the Company's new business development. Through continuous technological innovation and business expansion, the Company will be able to achieve greater breakthroughs in the field of AI, thus injecting stronger vitality into its development. ZKTeco 2023 Half Year Report 27 II. Analysis of Core Competitiveness 1. Technological and R&D advantages (1) Mastering the core algorithms of biometrics, leading the industry in multimodal biometric technology After years of technological accumulation, the Company has built a core technology system focusing on single biometric technology and multimodal biometric technology. In the field of single biometric recognition, the Company has successfully developed biometric technologies such as fingerprints, facial features, palmprints, veins (including finger veins and palm veins) and irises. Among them, the Company's resident ID card fingerprint recognition algorithm has been recognized by regulatory agencies and is listed in the "Qualified List of Quality Consistency Evaluation and Inspection of Resident IDCard Fingerprint Application Algorithms". The Company has become one of the seven recognized manufacturers. In the field of multimodal biometrics, the Company continues to innovate and has launched various multimodal biometric technologies such as "fingerprint+facial recognition", "facial+palm vein recognition", "fingerprint+finger vein recognition", "facial+iris recognition", and "fingerprint+palmprint+facial recognition". It has obtained 14 invention and utility model patents in the field of multimodal biometrics. The Company possesses core algorithms in the field of biometrics and has a strong competitive advantage. In addition, the Company also has a comprehensive industry incubation ability to combine various application technologies with biometric technology, providing support for the development of various industries. The Company combines basic R&D of biometrics with application R&D. As of June 30,2023, the Company has obtained a total of 799 patents, including 126 invention patents and obtained a total of 659 computer software copyrights and 65 work copyrights. The Company was awarded the titles of "Guangdong Intellectual Property Advantage Enterprise" and "Guangdong Intellectual Property Demonstration Enterprise" by the Guangdong IPProtection Association (GDIPPA) in 2018 and 2019, respectively. In 2022, XIAMEN ZKTECO was awarded the title of National Intellectual Property Advantage Enterprise. (2) The Company's unique ultra short delay supercomputing technology provides innovative solutions for the deployment of edge and end devices in biometric technology, with three prominent advantages: Firstly, this technology is deployed on edge and end devices without being constrained by network quality and stability. This provides a more stable environment for applications and ensures efficient operation. Secondly, it can run on mid to low frequency chips (such as the ARM9 with 1GHz main frequency), which can effectively reduce power consumption and costs, and avoid high requirements for chip manufacturing processes. In the current fierce "chip war" environment, it has achieved the freedom of independent R&D. Most importantly, this technology minimizes the transmission and centralized storage of sensitive information, effectively avoiding the risk of leakage and malicious attacks and ensuring data security. In summary, the Company's ultra short latency supercomputing technology provides revolutionary advantages for the practical application of biometric technology, maximizing the performance of edge and end devices while ensuring data privacy and security. (3) Deep research on multimodal BioCVAI technology The Company has evolved from a single biometric technology to a pioneer in computer vision and biometric multimodal BioCV AI technology. It is no longer just about identifying "I'll tell you who you are", but about combining computer vision and biometrics to realize the multimodal AI attribute: "Who are you What kind of service should I provide for you" as well as the empathetic experience ecology of scene interaction. Minerva, an AIoT platform based on smart retail scenarios and independent intellectual property rights, has launched a ZKDIGIMAXLevel 3 digital marketing solution for traditional small and medium-sized retailers. This solution provides five core services, including Minerva IoT platform, machine vision analysis platform, big data analysis platform, AIGC platform, advertising production and distribution platform, as well as corresponding smart terminals. Relying on the IoT, big data and cloud computing technologies, the Company has delved into the field of smart retail and utilized machine vision analysis technology to integrate the interactive value of people and scenarios and the empowering value of scenarios into innovative value. The ZKTeco 2023 Half Year Report 28 Company is committed to building a multi-dimensional intelligent business analysis platform based on the data lake, and creating a new service provider of boundless all-round, full scene and full chain retail platform. (4) Technological accumulation of computer vision AI technology and smart retail scenarios Computer vision, as an important branch of AI, has been widely applied in various industries. In the retail industry, computer vision technology has multiple functions such as supervising shelves, identifying and recommending products, analyzing passenger flow density, and supporting unmanned retail stores. The Company has focused on laying out the basic technology of universal large models and launched the BioCVLLM3.0 self-developed large model project. Large model technology has emerged in recent years as a promising field that can be applied to smart shopping guidance, product advertising content generation, and online and offline interaction experiences. With the widespread application of large models in smart retail scenarios, they have gradually become an indispensable component in the field of AI. The Company closely tracks the latest development of large model technology and has achieved key technological reserves in lightweight and edge local deployment, which have been applied in multiple pilot projects. The Company has successfully implemented programming and validation of algorithms such as GPT and BERT, and trained them on medium-sized open corpus data, achieving the best level of advanced open source projects currently available. In the era of AI, the Company continuously innovates product service interaction experiences and enhances competitiveness. (5) Advantages of R&D team and extension cooperation The biometric industry belongs to a technology intensive industry, and the R&D strength and industrialization ability largely determine whether the Company can occupy a commanding position in future market competition. Therefore, the Company attaches great importance to R&D investment. As of June 30,2023, the Company has 1,181 global R&D and engineering technicians, with R&DCenters in Dongguan, Shenzhen, Xiamen, Dalian, and India. The Company has been approved by the People's Government of Guangdong Province to establish the Guangdong Biometrics and Security Technology Engineering Technology Research Center, strengthen the introduction and training of biometrics engineering technicians, and improves the efficiency of technology transformation. The Guangdong Biometrics and Security Technology Engineering Technology Research Center is the only provincial-level engineering center in the biometric industry in Guangdong Province. Relying on the talent team and research equipment of ZKTECO, the center accelerates the transformation of scientific research achievements into real productivity with the goal of building a provincial-level first-class research platform for deep integration of biometrics by researching and developing key common technologies in the industry, thereby promoting industrial technological progress. (6) Actively participate in the formulation of industry standards and norms, occupying the industry's commanding heights Participating in the formulation of industry standards and norms can enable the Company to grasp the forefront of industry development direction and carry out technology development and product layout in advance. Since its establishment, the Company has been focused on the R&D of biometric technology, and is one of the main participants in drafting and revising multiple technical standards and specifications in the industry. The relevant R&D achievements made by the Company during the reporting period are as follows: (1) Wide access IoT perception application platform V1.0 Based on computer vision and multimodal BioCV technology, the Company has introduced multi-dimensional perception technology and launched a new wide access IoT perception application platform V1.0. This platform comprehensively monitors devices, entrances and exits, application software, and perception data focusing on intelligent and scenario oriented requirements, thus achieving intelligent analysis and precise control, and meeting diverse application scenario requirements. The Company focuses on building a comprehensive management platform across different fields, aiming to enhance the intelligent perception and precise control level of users in different fields (enterprises, parks, shopping malls, hospitals, factories, construction sites, etc.). Through the integration of intelligent perception technology, the Company aims to enhance precise control capabilities, promote digital transformation, and increase market share. In addition, the platform takes full advantage of edge computing and can quickly adapt to market changes. (2) Smart retail content publishing management system CMS ZKTeco 2023 Half Year Report 29 The Company's smart retail content publishing management system CMS is an intelligent operational partner for digital signage, specifically tailored for smart retail scenarios. It aims to promote in-store advertising, marketing and training contents. The system is easy to operate and friendly, supports private deployment and managed operation and maintenance, and is suitable for digital signage devices of various operating systems. The perfect combination of optimized players and stable network protocols provides an excellent playback experience. In addition, the CMS has powerful store and device management functions. It supports multi-role and multi-account permission management, enabling efficient collaboration among different related parties in the same system. (3) AI digital signage AI intelligent edge digital signage integrates advanced edge computing capabilities, presenting a new kind of smart experience. Its powerful processing performance supports the edge BioCVLLM model, achieving natural voice interaction, intelligent Q&A, and even specified target perception functions on the edge side. This not only highlights the unique advantages of signage in edge computing, but also shows its comprehensive support in intelligent interactions on voice, text and video. （4）ZKDIGIMAXL3 ZKDIGIMAXL3 is an SaaS cloud based digital marketing solution for traditional small and medium-sized retailers. With a comprehensive hosting and O&M model, it provides integrated digital tools, including content delivery, interaction experience, intelligent storefront analysis, electronic tags, POS, data analysis, device O&M, and business data analysis, to provide retailers with comprehensive solutions. Focusing on creating outstanding scenario based experiences, intelligent tools are used for commercial analysis, a deeper understanding is made to customer behaviors and trends, and customized services and promotion strategies are provided for retailers to improve operational efficiency and unleash value potential. (5) Research on retail scenario detection and recognition applications and edge AI computing terminals The retail scenario detection and recognition platform developed by the Company focuses on supermarket retail. Targets in the scenario are accurately identified through multi-dimensional perception technology, including products and shelves, weighing and checkout counter products, clothing logos, and even fine-grained features of specific products (such as cigarettes and beverage bottles). The platform integrates high-precision edge AI computing power, integrates product identification, statistics, passenger flow and customer group analysis, assists in shelf management and shortage monitoring, reduces errors, and improves business efficiency. The device is easy to use and convenient, supporting fast field deployment and networking. In addition, it has local data analysis to ensure data privacy and security. (6) Smart terminal based on LLM and large model technology of multimodal computer vision The new smart terminal developed by the Company cleverly integrates ChatGPT technology, machine vision and speech recognition technology, achieving the integration of multiple interaction methods such as dialogue, vision and speech, thus creating new possibilities for intelligent applications in diverse scenarios. This terminal has a wide screen of 21 inches or more, combined with an audio and video interaction perception system, to achieve human-machine dialogue and bring efficient user experience, with a wide range of applications. It integrates LLM and machine vision technology to further improve interaction performance. 2. Product array advantages The Company's products include hardware and software products, connecting different product combinations through intelligence, and creating diversified smart solutions to meet the needs of numerous industries. With the increasing demand for downstream fragmentation, the Company continues to expand a rich product array, which can provide a full range of product services in various segmentation scenarios such as smart entrance and exit management, smart identity verification and smart office. In terms of smart terminals, the Company can provide various products in the field of smart entrance and exit management, such as access control management, pedestrian channels, vehicle channels, security inspection products, intelligent videos, smart locks, elevator controls, charging piles, and self-service visitors; products in the field of smart identity verification, such as Human Certificate Verification Terminal, biometrics capture devices, biometrics modules, and card readers; products such as employee attendance, smart consumption, and smart conferences in the field of smart office; products such as employee attendance, smart consumption, and smart conferences in the field of smart office; digital signage, self-service machines, and POS machines in the field of smart retail. ZKTeco 2023 Half Year Report 30 In terms of software systems and platforms, the Company has always attached great importance to the development and design of software and hardware linkage, focusing on building an AIoT ecosystem that integrates software and hardware. The Company can provide diversified, personalized and customized system software and platforms for different users, application scenarios, and vertical fields. On the one hand, the Company has laid out the ZKTECO cloud IoT platform Minerva IoT based on Amazon cloud technology as the technical foundation, providing deployment-free SaaS application products for smart office scenarios, smart entrance and exit scenarios, and smart home scenarios. Moreover, for system integration customers, the Company can provide ZKTeco Biowhois CTID Platform. For large park type enterprise customers, the Company can provide ZKBio Smart Park Integrated Management Platform V8800, ZKTeco ZKBio Intelligent Integrated Management Platform V6600, and ZKBio Access IVSIntegrated Entrance and Exit Management Platform V6000. For medium to large enterprise customers, the Company can provide E-ZKEco Pro Time & Security Refined Service Platform. For overseas customers, the Company can provide ZKTeco Cloud Attendance and Access Control Management System such as BioTime 8.0; on the other hand, the Company combines the mature technical modules and software middleware of the aforementioned platforms for application, providing users with flexible platform function customization and development services, thereby meeting their personalized needs and forming a good brand awareness. The Company's main products rely on multimodal BioCV technology. In the future, as the boundaries of user application scenarios continue to expand and extend, the Company will continue to enrich and improve its diversified product array to meet the needs of users in the field of multimodal BioCV applications and provide customers with comprehensive, professional and high-quality solutions. 3. Global marketing service network and localized service advantages After years of development, the Company has accumulated rich experience in operating channel products, has a large number of customer resources, and has established a relatively complete global marketing service network system. Sales channels and service networks cover major cities in China and in multiple countries and regions around the world. Moreover, the Company actively expands its online sales channels and has established a comprehensive online marketing network on major e-commerce platforms and self built shopping malls. The integration and complementarity of international, domestic, online, and offline channels have formed a strong marketing service network advantage. As of June 30,2023, the Company has established 28 branches,15 subsidiaries, and 194 service outlets in 31 provinces, cities, and autonomous regions across China, with a sales and service system covering the whole country. During the reporting period, the Company continued to implement regional expansion and market lead strategies, worked together with core partners and distributor customers to continuously promote terminal image construction mainly focused on lightboxes, doors, car stickers, outdoor advertising, etc., actively participated in regional industry exhibitions and forums, and expanded precise brand coverage in multiple dimensions; accelerated the establishment of marketing service centers of ZKTeco and the establishment of digital marketing service platforms, and accelerated the sinking of marketing and service networks to county-level cities around the third, fourth and fifth tier cities in the region and core cities. In the future, the Company will continue to develop the market in the third and fourth tier cities to build marketing and service outlets, and continue to enhance brand awareness. The Company has established a total of 45 subsidiaries overseas, located in 29 countries and regions worldwide, with product sales covering over 100 countries and regions. The Company always adheres to the concept of localized services in the process of developing global markets. The Company has resident business and technical service personnel in the global market, which can provide customers with comprehensive pre-sales, in-sales, and after-sales support and services. The localized service system helps the Company quickly understand the personalized needs of local users based on factors such as local economic development level, social stability, religion, and culture, providing flexible software and hardware personalized customization services, thereby improving customer satisfaction and brand awareness, and enhancing customer viscosity. Based on a localized service team, the Company actively guides some overseas subsidiaries to transform from traditional channel sales to value-added development, expanding vertical and deep projects, and thereby improving the Company's sales revenue and profit level. 4. Production and manufacturing advantages (1) Integrated production process chain configuration The Company's rich product array benefits from its integrated production process chain and high-quality production supporting facilities. The Company has a complete process chain for injection molding, laser cutting, optical processing, sheet metal processing, ZKTeco 2023 Half Year Report 31 SMT, plug-in welding, algorithm burning program, PCBA production, final assembly, testing, and packaging programs required for various products. The complete process depth provides favorable conditions for the Company to achieve pull production based on market demand. The Company's various process flows are closely connected, with smooth coordination between production capacity and production pace, and the Company has a strong competitive advantage in the industry. (2) Customized and flexible production capacity The Company can provide comprehensive product services in segmented scenarios such as smart entrance and exit management, smart identity verification, and smart office, and has the ability to quickly respond to customized needs in mass production. The Company's customized and flexible production capacity benefits from a professional R&D and engineering technical team, diverse product component production capabilities, and flexible product component coupling characteristics. The Company has achieved SMED in the production process, from SMT to injection molding, which can achieve rapid exchange of production equipment. In addition, the refined material supply system and lean line design in the assembly workshop can meet the flexible production needs of customers from different countries for small batches, multiple varieties, and customization. (3) Advantages of lean production The Company has achieved industry-leading lean production model in multiple production lines through overall planning of various processes in the product production process, and optimization of process flow. The lean production model can effectively reduce waste throughout the entire production and manufacturing process, reduce workers, improve labor productivity, improve output and product quality, shorten delivery cycles, and quickly meet customer needs while reducing manufacturing costs. 5. Brand advantages The Company is committed to creating a high-quality brand image and always regards brand strategy as a systematic project. After years of deep cultivation, the Company's brand has been highly recognized by customers both domestically and internationally, and has received numerous honors both domestically and internationally. From 2020 to 2022, the Company has been listed as one of the "Top 50 Global Security Companies" by asmag for three consecutive years, ranking 14th,13th, and 12th respectively; and won the "2022 Honor Security Technology Innovation Award" and "2022 Smart IoT and Security Ecology Most Growing Enterprise" from CPS; "Smart City" Construction Excellent Solution and Innovative Technology Award (Smart Government), "Smart City" Construction Excellent Solution and Innovative Technology Award (Smart Campus) from Beijing Security Industry Network; Huicong IoT "Top 10 IoTSolution Awards for 2022" and "Top 10 Entrance and Exit Control Brands for 2022"; the "11th Top 30 Enterprises in China's Intelligent Transportation Network in 2022"; the Company was also awarded the "Technical Activity Unit of the Chinese Information Technology Application Innovation Working Committee", and was shortlisted in the list of trusted digital identity QR code module suppliers, smart education products and service suppliers (the first batch). Internationally, in 2023, the Company won 6 industrial design awards, including 2 German Red Dot Awards and 4 iF Design Awards. In addition, since 2016, the Company has been awarded the title of "Top 500 Manufacturing Enterprises in Guangdong Province" by Guangdong Manufacturers Association and other units for 7 consecutive years. In 2022, the Company was selected as a "Sample Enterprise of China's Foreign Trade Export Leading Index" by the General Administration of Customs of the People's Republic of China. In May 2023, the Company's trusted digital identity QR code module ZKB10M was successfully shortlisted for the "Trusted Digital Identity Ecological Product Recommendation List" of Beijing Zhongdun Security Technology Development Co., Ltd. In June 2023, the Company's ZKTeco perception data gate was awarded the "Excellent Innovative Product Award" at the 16th China International Public Safety Products Expo. 6. Advantages of management team and mechanism The core team of the Company has over two decades of industry experience, and has a deep understanding of the development trends of biometrics related technologies and products. They have a clear understanding of the Company's development strategy, product direction, technology roadmap, and marketing strategy. From user needs to solutions, from product architecture to software and hardware development, from product trial production to standardized mass production, from large-scale production organization to improved quality assurance system, from model market creation to global sales service network construction, the Company has accumulated rich operational management experience, laying a solid foundation for the Company's subsequent sound and rapid ZKTeco 2023 Half Year Report 32 development. The core management team of the Company is stable, and currently, core team members and key employees also directly or indirectly hold shares in the Company. The Company focuses on the design of future equity structure, which is conducive to sustainable and sound' development in the future. 7. Quality control advantages Leading quality management level is an important factor for the Company to gain customer recognition. Since its establishment, the Company has always attached great importance to product quality control, adhered to the close integration of quality management and production management, established a complete and strict product quality control system, and formed the advantage of product quality control. The Company has passed multiple management system certifications. The Company strictly adheres to the requirements of the quality system and the close integration of quality management and production management, implements the guiding ideology of management informatization, standardized process systems, professional personnel, and stable personnel in key positions, and comprehensively promotes quality management. The Company has established quality management systems including the "Design and Development Management Control Procedure", "Production Process Control Procedure", "Nonconforming Product Management Control Procedure", "Nonconformance Correction and Prevention Control Procedure", "Continuous Improvement Control Procedure", and "Change Management Control Procedure". The Quality Management Department strictly controls product quality throughout the entire process, including project approval review, development process, trial production review, design verification, material selection, production process, and after-sales service, to ensure product quality and meet customer needs. III. Main Business Analysis Overview See relevant contents of "I. Main Businesses Engaged by the Company During the Reporting Period". YoYChanges in Major Financial Data Unit: RMB Current reporting period The same period last year YoY change Reasons for changes Operating revenue 937,182,670.00925,114,950.161.30% Operating cost 488,923,174.83529,108,492.93 -7.59% Selling expense 196,138,701.98168,605,074.7416.33% Administrative expense 60,476,345.4754,789,860.0710.38% Financial expenses -34,623,511.50 -14,713,473.71 -135.32% Mainly due to the increase in interest income for the current period Income tax expense 9,350,242.665,933,954.6557.57% Mainly due to the increase in taxable income for the current period R&D investment 100,984,101.7292,094,542.709.65% Net cash flows from operating activities 130,730,027.12 -21,915,202.10696.53% Mainly due to an increase in cash received from selling goods and providing services in the current period and a decrease in cash paid for purchasing goods and receiving services ZKTeco 2023 Half Year Report 33 Net cash flows from operating activities -99,684,331.4813,248,113.10 -852.44% Mainly due to an increase in cash paid for purchasing financial products in the current period Net cash flows from financing activities -76,269,456.65 -15,816,720.71 -382.21% Mainly due to the distribution of cash dividends in the current period Net increase in cash and cash equivalents -37,683,116.58 -11,624,640.23 -224.17% Mainly due to a decrease in net cash flow from investing activities and financing activities in the current period Cash received from disinvestment 509,707,506.6482,990,700.78514.17% Mainly due to an increase in the maturity or redemption amount of time deposits and financial products compared to the same period last year Cash received from investment income 1,864,089.861,333,253.6639.82% Mainly due to the increase in overseas investment and wealth management income in the current period Cash paid to acquire and construct fixed assets, intangible assets and other long-term assets 54,738,953.7437,895,915.2744.45% Mainly due to an increase in fixed asset expenses for the construction of factories and dormitories in Guangdong Zkteco Cash paid for investments 554,750,509.9130,223,471.891,735.50% Mainly due to an increase in cash paid for purchasing financial products in the current period Refund of taxes and surcharges 33,538,290.5222,977,739.9345.96% Mainly due to the increase in export tax refunds in the current period Cash paid for other investing activities 2,046,795.003,315,980.00 -38.27% Mainly due to a YoY decrease in the amount of forward foreign exchange settlement and sales delivered in the current period Cash paid for distribution of dividends and profits or payment of interest 64,829,721.10345,152.5018,682.92% Mainly due to the increase in cash paid for cash dividends distributed in the current period Major changes in the composition or source of profits of the Company during the reporting period □ Applicable Not applicable ZKTeco 2023 Half Year Report 34 There have been no major changes in the composition or source of profits of the Company during the reporting period. Products or services accounting for more than 10% Applicable □ Not applicable Unit: RMB Operating revenue Operating cost Gross profit margin YoY change of operating revenue YoY change of operating costs YoY change of gross profit margin By products or services Smart office products 171,992,572.4073,838,973.0757.07% 18.71% -22.24% 22.61% Including: attendance products 113,070,613.1555,614,136.8050.81% 28.83% -7.39% 19.23% Other products 58,921,959.2518,224,836.2769.07% 3.16% -47.80% 30.19% Smart entrance and exit management products 684,986,802.49366,460,088.8246.50% 0.94% -2.90% 2.12% Including: access control products 426,031,487.76211,340,607.4950.39% 2.41% -4.82% 3.76% Other products 258,955,314.73155,119,481.3340.10% -1.38% -0.17% -0.73% Smart identity verification products 76,930,864.3548,624,112.9436.80% -22.32% -14.28% -5.92% Including: biometrics sensor products 27,679,631.3912,308,635.9055.53% -16.43% -5.27% -5.24% Card products 35,473,635.5832,088,967.909.54% -23.46% -12.06% -11.72% Other products 13,777,597.384,226,509.1469.32% -29.60% -41.63% 6.32% Other products 3,272,430.76 100.00% 25.60% By region Domestic sales 306,584,149.97213,159,868.6330.47% -18.78% -18.04% -0.64% Overseas sales 630,598,520.03275,763,306.2056.27% 15.15% 2.50% 5.40% By sales model Distribution 636,951,088.35362,358,407.3243.11% 6.40% -0.40% 3.88% Direct sales 296,959,150.89126,564,767.5157.38% -8.31% -23.44% 8.42% Others 3,272,430.76 100.00% 25.60% Note: The presentation standard for the data in the current period by products or services and sales models will be adjusted. The original other business income (mainly waste income) will be separately listed in other products and other categories, and the data for the same period last year will be adjusted according to this standard. The impact of the above standard adjustment is as follows: Before adjustment for the same period last year Adjustments for the same period last year After adjustment for the same period last year Revenue Cost Revenue Cost Revenue Cost By products or services Smart office products 144,913,706.8894,961,185.66 -30,105.06 144,883,601.8294,961,185.66 ZKTeco 2023 Half Year Report 35 Smart entrance and exit management products 681,165,981.09377,423,039.59 -2,575,315.19 678,590,665.90377,423,039.59 Smart identity verification products 99,035,262.1956,724,267.68 99,035,262.1956,724,267.68 Other products 2,605,420.25 2,605,420.25 By sales model Distribution 598,633,417.88363,799,897.27 598,633,417.88363,799,897.27 Direct sales 326,481,532.28165,308,595.66 -2,605,420.25 323,876,112.03165,308,595.66 Others 2,605,420.25 2,605,420.25 R&D investment 1. R&D investment table Amount in the Current Period (RMB) Amount in the Same Period of Previous Year (RMB) Change R&D investment amount (RMB) 100,984,101.7292,094,542.709.65% Ratio of R&D investment to operating revenue 10.78% 9.95% 0.83% Amount of R&D expenditure capitalization (RMB) - - - Ratio of capitalized R&D expenditure to R&D investment 0.00% 0.00% - Proportion of capitalized R&D expenditure to current net profit 0.00% 0.00% - 2. Main R&D project S/N Main R&D Project Name Project Objective Project Progress Proposed Objective Expected Impact on the Company's Future Development 1 BioCV LLM 3.0 (Large Language Model) The LLM has become one of the most promising and potential fields in recent years. With its widespread application in fields such as natural language processing, intelligent customer service, and intelligent translation, the LLM has gradually become an indispensable part of the field of AI. The Project aims to track the latest development of LLM technology and prepare relevant technical reserves. In the research stage The Project achieves efficient fine-tuning training of large models based on application scenario data and the research on related technologies in engineering implementation of LLM applications. In the era of AI, continuous innovation in product service interaction experience lays the foundation for core technology capabilities and enhances the Company's competitiveness. ZKTeco 2023 Half Year Report 36 S/N Main R&D Project Name Project Objective Project Progress Proposed Objective Expected Impact on the Company's Future Development 2 BioCV VLM 2.0 Multimodal Computer Vision Large Model With the rapid development of computer vision and natural language processing, multimodal vision large model has gradually become a popular research direction. The multimodal vision large model combines computer vision and natural language processing, and can process images, videos and text information to achieve more efficient and intelligent image and video recognition and understanding. The Project aims to develop a large model training technology with advanced multimodal visual representation capabilities, and train a universal base large model. Based on this base large model, it aims to improve the accuracy of current computer vision algorithms and biometric technology. In the research stage 1. Track the latest development of multimodal vision large model technology, and continuously optimize and improve BioCVVLM 2.0, ensuring that the Company maintains a leading position in this field; 2. Based on this large model, improve the accuracy of palm recognition algorithms and promote their commercialization; 3. Based on this large model, improve other biometrics algorithms and computer vision algorithms; 4. Explore the application of multimodal vision large models in various fields, such as security monitoring, smart home, office automation, etc., to provide technical support for the Company to expand into new business areas. 1. Improving the core technical capabilities of the Company's products in the field of computer vision and natural language processing, and providing customers with more intelligent and efficient solutions; 2. Promoting the Company's innovation and development in the field of AI, and providing technical support for the Company's long-term strategic goals; 3. Greatly accelerating the Company's algorithm development and iteration speed in the field of computer vision; 4. Having improved the Company's ability to apply computer vision algorithms in various scenarios, laying a solid foundation for expanding its business in the global market. 3 Research on the Application of Retail Scenario Detection and Recognition In the retail application of supermarkets, multi-dimensional perception of targets in the scenario is the foundation of intelligent application through computer vision technology. In the research stage 1. Algorithm for detecting and identifying goods and shelves; 2. Product identification algorithm for weighing and checkout counter platform; 3. Clothing Logo detection; 4. A fine-grained product feature extraction algorithm for specific products (cigarettes and beverage bottles). Satisfy the Company's computer vision technology needs in supermarket application scenarios, and better support the Company's smart retail related business 4 Wide Access IoT Perception Application Platform V1.0 (formerly known as ZKBioCV Security V1) Relying on computer vision technology+multimodal BIOCV core technology as the core, implement security supervision linkage and joint defense and intelligent video analysis management, and build a reliable and stable security integration and visualization platform and solution by utilizing intelligent video technology, based on access control, vehicle recognition, emergency alarm, perimeter defense, etc., combined with multiple business subsystems such as personnel, attendance, access control, visitor, consumption, patrol, elevator control, passage, storage cabinet, intrusion alarm, monitoring center, wide access, and system management. Completed Focusing on the actual needs of intelligence and scenario, the Project implements uniform monitoring of front-end and back-end devices, entrances and exits, application software, and perception data, implements the platform's intelligent analysis and security management and control to meet the needs of diversified and fragmentation application scenarios of users. Build an intelligent security comprehensive management platform with intelligent security, collaborative efficiency, and scenario application, and enhance customers' intelligent perception and 1. Relying on the accumulation and sedimentation of existing technology, the Project can quickly respond to market demand; 2. The Project can increase the share of products in enterprises, parks, shopping malls, hospitals, factories, construction sites and other scenes, integrate intelligent perception to improve precision management and control capabilities, and help the industry digital transformation; 3. The Project helps the Company further expand and consolidate its market position, bringing greater profits. ZKTeco 2023 Half Year Report 37 S/N Main R&D Project Name Project Objective Project Progress Proposed Objective Expected Impact on the Company's Future Development precise control capabilities in enterprises, parks, shopping malls, hospitals, factories, construction sites, and other venues. 5 Recognition SDK Based on Non-contact and Contact Fingerprint Matching (1.0) For traditional contact fingerprint recognition products, non-contact fingerprint recognition products have many advantages such as high imaging quality, hygiene and health, and high recognition rate. Through non-contact and contact fingerprint matching and recognition technology, two modes of compatible recognition can be achieved, providing customers with more efficient and secure fingerprint recognition solutions, and improving the customer experience. Completed Make non-contact fingerprints interconnect and integrate with contact fingerprints in the same recognition system mainly through research and implementation of the integration of non-contact and contact fingerprint recognition technologies, and develop a fingerprint recognition SDK that is easy to integrate to ensure its support for various mainstream operating systems and platforms, and reduce customer integration costs. Meanwhile, optimize algorithm performance to ensure stability and robustness in various scenarios, meeting the needs of different customers. 1. Enhancing the Company's technical strength and market competitiveness in the field of multimodal BioCV, and providing customers with more efficient and secure fingerprint recognition solutions; 2. Assisting the Company in expanding its wider application scenarios, such as security monitoring, intelligent access control, mobile payment, etc., and promoting the diversified development of the Company's business; 3. Accumulating technical experience in the field of multimodal BioCV, laying a solid foundation for the Company's future development in this field. 6 ZKTeco Interconnection Cloud Scenario Service Platform V2.0.0 Based on the Company's core business of "smart office, smart entrance and exit, and smart multimodal BioCV", focusing on the SMB small and medium-sized enterprise customer group, serve the long tail market, leverage the comprehensive three-dimensional advantages of ZKTECO frontend intelligent hardware+backend offline smart account service system+Goddess Cloud Platform PaaS+SaaS application, provide a "business premises management scenario+business management scenario+service scenario" solution for the small and medium-sized enterprise customer group, accompany small and medium-sized enterprises in the growth, and provide multiple digital and intelligent "assistants" for enterprises from "rough" to "refined" management. In the research stage 1. Based on the base capacity of IoTPaaS Platform, and focusing on the terminal needs of IoT scenario solutions and SME digital and reality integration, serve as the SME cloud scenario linker; 2. Through ZKTeco Interconnection (for small and medium-sized enterprise users) and ZKTeco Cloud Commerce (for intermediate service provider users), jointly establish a comprehensive operation system for IoT product research, sales, operation, and service through end-edge-management-cloud-use-service-operation; 3. Based on the precipitation of user scenario data, provide a market soil for commercial verification of customer 1. Assisting the Company in leveraging its customer base in the long tail market, and creating a new performance growth model focusing on the needs of small and medium-sized enterprise customer base based on cloud service scenarios and the digital and reality integration; 2. By utilizing a digital and intelligent scenario solution of software+hardware+cloud services, laying out a new track in advance to meet the needs of the post-90s and post-00s for enterprise management and business management; 3. Driving the sales of hardware or scenario solutions through cloud services, and bringing about changes in business models such as operational model validation through cloud service subscription models; 4. Through the precipitation of ZKTeco 2023 Half Year Report 38 S/N Main R&D Project Name Project Objective Project Progress Proposed Objective Expected Impact on the Company's Future Development foundation and operational transformation for SaaS subscription services. user data and scenario data, providing rich product R&D support for commercial transformation models. 7 Smart Supermarket Voice Assistant V1.0 Based on LLM Develop text information feature extraction algorithms, speech recognition algorithms, speech synthesis algorithms, and feature clustering and retrieval algorithms for the LLM, as well as a complete core operation process of the Q&A system and a backend maintenance module for storing supermarket information. In the research stage 1. Provide text information feature extraction algorithms using LLM/Baidu ERNIEBot to provide technical support for the Company's long-term strategic goals; 2. Provide speech recognition algorithms and improve functional modules; 3. Provide speech synthesis algorithms and improve functional modules; 4. Provide feature clustering and retrieval algorithms to achieve high-precision and efficient information processing and recognition; 5. Provide a complete core operation process of the Q&A system to provide customers with more efficient and convenient solutions; 6. Provide a backend maintenance module for storing supermarket information and promote its productization. 1. Having improved the Company's technical capabilities in the field of personalized recommendation, with the use of data mining and machine learning technology in voice assistants, which can better provide more accurate personalized product recommendations and services based on user preferences and purchase history; 2. Having improved the Company's technical capabilities in big data analysis and data mining. The large amount of data generated by voice assistants in interactions can be used to analyze user behavior and trend prediction, and have better insight into market trends, customer needs and behaviors, thereby optimizing the Company's strategic planning; 3. Having improved the Company's technical capabilities in speech recognition/synthesis, enabling high accuracy speech recognition and natural and smooth speech synthesis. It can respond intelligently based on previous conversations and user behaviors, and also enhance the Company's technical capabilities in context awareness, conversation management and multi-round conversation processing; 4. By showcasing the Company's leading position in AI and LLM, the Company can set industry benchmarks in technological innovation, and attract more attention and cooperation opportunities. ZKTeco 2023 Half Year Report 39 S/N Main R&D Project Name Project Objective Project Progress Proposed Objective Expected Impact on the Company's Future Development 8 ZKDigimax-Level3 V1.0 (Cloud Digital Advertising Retail Management Platform) The Project aims to develop enterprise level cloud digital advertising, content templates, and retail management solutions based on cloud architecture. In the research stage Connect end/edge/cloud to enhance digital advertising retail product capabilities of global cloud. Implement a solution for cloud digital advertising retail management to enhance the Company's cloud product capabilities. 9 ZLink (International Version) V2.0 (ZKTeco Interconnection Cloud Scenario Service Platform) Provide intelligent solutions for office scenarios, supporting multi-user, multi-company, and multi-role SaaS software, thus providing users with better scenario adaptability, better user experience and lower costs. In the research stage Connect end/edge/cloud to enhance customer experience. Implement a solution for smart office scenarios to enhance the Company's cloud service capabilities. 10 Cloud Attendance Scenario Service Platform V3.0 The Project aims to develop an enterprise level time management solution based on cloud architecture for Europe and America. In the research stage The Project integrates workday, synerion, prime point,3M and other software to provide enterprise level time management solutions for SaaS. Implement a solution for cloud time management to enhance the Company's cloud product capabilities. 11 R&D of Technology and Device for Authentication Application Based on CTID Digital Identity Card The Project plans to develop an identity authentication terminal device based on the CTID authentication certificate recognition technology, which can identify the information encrypted by the CTID digital identity card and complete the corresponding scenario applications. The identification device supports both the physical ID card and the electronic identity card, which can effectively guarantee the network data transmission security of the identity card information. In the research stage The Project aims to implement terminal device equipment based on authentication and verification methods such as CTID authentication certificate and physical identity card; this recognition device supports both physical and electronic identity cards, which not only ensures the convenience of physical identity cards, but also solves the problems of network data transmission security and personal privacy of identity card information. 1. Meeting the general trend of the construction of a digital China; 2. Improving the technical gap of digital identity card identification and information security transmission; 3. Improving the basic ability of digital identity card application technology, and lay a foundation for the subsequent development of digital identity card products; 4. Giving the Company a leading edge in the field of digital identity cards. 12 R&D of Structured Light Module for Face and Palm Hybrid Recognition Based on High Security and High Accuracy The Project aims to develop a recognition module based on face, palm, and 3D structural anti-counterfeiting technology, achieving simultaneous recognition of face and palm. The 3D live projection system has over 30,000 speckle points, and can decode 1 million 3D coordinate point clouds and complete comprehensive and secure recognition of face and palm databases, widely used in the In the research stage The Project aims to solve the problem of high security for palms and faces. Face anti-counterfeiting can prevent electronic image attacks, live video attacks, synthetic video attacks,2D laser photo and ordinary photo attacks, hole digging photo attacks, 3D mask attacks, injection attacks, etc. Palm anti-counterfeiting can prevent electronic image attacks, The face anti-counterfeiting covers and meets the requirements of face attack risk and UnionPay face live detection of GB/T 38427.1-2019 issued by the Ministry of Public Security in July 2020, and improves palm anti-counterfeiting ability, effectively enhances the competitiveness of the Company's products, enhances economic benefits, and drives ZKTeco 2023 Half Year Report 40 S/N Main R&D Project Name Project Objective Project Progress Proposed Objective Expected Impact on the Company's Future Development equipment of manufacturers of face and palm applications. palm video attacks, synthetic video attacks,2D laser photo and ordinary photo attacks,3D palm attacks, injection attacks, etc. the sound development of the industry's intelligent access control and attendance industries towards high-end technology industries. 13 R&D of Core Technology Platform and Device for Access Controller Based on IoTVideo Technology The Project plans to develop a visual access control core technology platform and device based on IoT video technology, break through industrial level IoT communication access technology mainly based on the cloud platform, with BIOCV as the core technology, and audio and video as the core technology, especially based on hardware equipment. Based on intelligent video+access controller, a multifunctional intelligent video access control box with a combination of access control and video linkage and with facial recognition capture supported in videos, solving the problem of independent two-part products in the current market, which greatly troubles customers in product selection and configuration operations, and greatly compresses the product cost of video+access control; it is widely used in residential communities, commercial buildings, logistics parks and other scenarios. In the research stage Taking user demands as the starting point, based on IoT video technology, access controller, and NVR technology, the Project develops an access control+video+gateway multi-functional control device relying on ZKBioCV Security offline software and cloud platform, achieving multiple door control, multiple video channels, access control events, alarms, and other functions, solving the problem of users' independent configuration of access control and video, and providing customers with a new choice. 1. Breaking through BioCV video access control terminal of audio and video, access control, and IoT communication access technologies, and breaking the current situation of on-site access control and video business separation in the industry; 2. Enriching the array of access control video products by highly integrating video and access control; 3. Providing new technological directions for access control video products and accumulating core technologies for the Company in building video access control capabilities. 14 R&D of Smart Terminal Based on LLM and Large Model Technology of Multimodal Computer Vision The Project plans to develop an intelligent AI robot based on AI scenarios, utilizing ChatGPT technology and the fusion of machine vision and speech recognition technology to achieve multiple interactive methods such as dialogue, vision and speech, thus achieving comprehensive intelligent applications in various scenarios. The content of the Project covers multiple aspects such as semantic understanding, emotional analysis, natural language generation, image recognition, speech recognition, intelligent recommendation, etc. It can achieve natural dialogue between humans and computers, provide a fast and efficient user experience, and has a wide range of application scenarios. In the research stage Integrate LLM technology and machine vision technology, develop an intelligent terminal that enables multiple interactive modes such as visual and voice between humans and computers, and provide a fast and efficient user experience. Integrate LLM technology and machine vision technology to enhance product interaction experience and enhance the Company's competitiveness. ZKTeco 2023 Half Year Report 41 S/N Main R&D Project Name Project Objective Project Progress Proposed Objective Expected Impact on the Company's Future Development 15 R&D of Digital IoT Integration Based on Smart Retail Scenarios The Project aims to develop a new digital display solution in the smart retail scenario, including digital tags, bar screen displays and gateway base stations, aiming to enable more efficient and intelligent interaction between merchants and customers in the smart retail field. Through digital tags, merchants can quickly update goods information and prices, achieve real-time display, and improve sales efficiency. The display of the bar screen serves as a prominent advertising area for merchants, which can display more promotional information and product characteristics. The gateway base station connects digital tags in series for overall control and data collection, which can better manage the smart retail system. The innovative project aims to make smart retail more convenient, fast and user-friendly, improve the sales ability of stores, improve the user experience, deeply integrate the IoT+AI technology, and achieve the strategic upgrade of "Internet+retail". In the research stage The project aims to make smart retail more convenient, fast and user-friendly, deeply integrate the IoT+AI technology, and achieve the strategic upgrade of "Internet+retail". Satisfy the Company's IoT technology needs in smart retail application scenarios, and better support the Company's smart retail related business IV. Non-main Business Applicable □ Not applicable Unit: RMB Amount Proportion to Total Profit Description of Reason Sustainable or Not Investment income 1,237,665.061.13% Mainly due to the gains and losses generated from the purchase of financial products and the mature delivery of forward foreign exchange settlement and sales contracts No Profits and losses from fair value changes -7,045,482.43 -6.45% Mainly due to the gains and losses generated from the purchase of financial products and the mature delivery of forward foreign exchange settlement and sales contracts No Asset impairment -3,693,840.00 -3.38% Mainly due to the provision for impairment of current inventory and provision for impairment of contract assets No Non-operating income 281,042.360.26% No ZKTeco 2023 Half Year Report 42 Non-operating expenditure 597,424.530.55% Mainly due to expenses such as non current asset retirement losses and external donations during the reporting period No Other income 5,763,414.145.28% Mainly due to other income generated by government subsidies during the reporting period No Losses from credit impairment -2,759,705.20 -2.53% Mainly due to the provision of bad debt reserves for accounts receivable during the reporting period No Income from asset disposal -245,859.71 -0.23% Mainly due to income from disposal of non-current assets during the reporting period No V. Analysis of Assets and Liabilities 1. Major changes of asset items Unit: RMB '0,000 At the end of this reporting period At the end of 2022 Proportion increase or decrease Description of major changes Amount Proportion to total assets Amount Proportion to total assets Monetary funds 204,846.4354.46% 191,294.5052.23% 2.23% No major change Accounts receivable 44,645.0011.87% 40,349.7911.02% 0.85% No major change Contract assets 30.120.01% 30.680.01% 0.00% No major change Inventories 32,983.858.77% 34,828.069.51% -0.74% No major change Investment real estate Long-term equity investment 723.530.19% 715.130.20% -0.01% No major change Fixed assets 46,024.0812.24% 44,685.7512.20% 0.04% No major change Construction in progress 7,691.212.04% 5,704.131.56% 0.48% No major change Right-of-use asset 4,609.591.23% 5,064.071.38% -0.15% No major change Short-term loan 985.500.26% 985.500.27% -0.01% No major change Contract liabilities 6,826.081.81% 5,883.881.61% 0.20% No major change Long-term loan 380.740.10% 14.180.00% 0.10% No major change Lease liabilities 2,205.210.59% 2,825.670.77% -0.18% No major change ZKTeco 2023 Half Year Report 43 2. Information on main overseas assets Applicable □ Not applicable Unit: RMB '0,000 Specific content of assets Cause of formation Asset size Location Operation mode Control measures to ensure asset security Income Proportion of overseas assets to the Company's net assets Is there a significant impairment risk ZK TECHNOLOGY LLC Controlling subsidiary 8,093.52 America Overseas sales Control by subsidiary 4,408.962.54% No ZKTECOCO., LIMITED Wholly-owned subsidiary 41,253.64 Hong Kong Overseas sales Control by subsidiary 1,167.9912.97% No ZKTECO SECURITYL.L.C Wholly-owned subsidiary 9,591.94 Dubai Overseas sales Control by subsidiary 891.283.02% No Armatura Tech Co., Ltd. Wholly-owned subsidiary 9,326.75 Thailand Overseas sales Control by subsidiary 603.392.93% No ZKTECO PANAMA, S.A. Controlling subsidiary 5,041.76 Panama Overseas sales Control by subsidiary 221.271.59% No ZKTECO BIOMETRICS INDIAPRIVATE LIMITED Controlling subsidiary 5,140.58 India Overseas sales Control by subsidiary 235.311.62% No ZKTECO EUROPESL Controlling subsidiary 9,266.41 Europe Overseas sales Control by subsidiary 172.672.91% No Other explanations The overseas assets are RMB 914,095,279.61 (currency: RMB), accounting for 24.30% of the total assets. The "Income Status" in the above table is a net profit indicator. 3. Assets and liabilities measured at fair value Applicable □ Not applicable Unit: RMB Item Beginning balance Profits and losses from fair value changes in the current period Cumulative changes in fair value recognized in equity Impairment accrued in the current period Purchase amount in the current period Sales amount in current period Other changes Ending balance Financial assets 1. Trading financial assets (excluding derivative financial assets) 204,318,406.053,616.44 51,141,968.12156,006,015.69 99,457,974.92 Subtotal of financial assets 204,318,406.053,616.44 51,141,968.12156,006,015.69 99,457,974.92 ZKTeco 2023 Half Year Report 44 Total 204,318,406.053,616.44 51,141,968.12156,006,015.69 99,457,974.92 Financial liabilities 0.007,049,098.87 7,049,098.87 Other changes None Has there been any major change in the measurement attributes of the Company's main assets during the reporting period □ Yes No 4. Assets right restrictions as of the end of the reporting period Please refer to "Section XFinancial Report VII. Notes to Consolidated Financial Statements 59. Assets with Restricted Ownership or Use Rights" in this report for details VI. Investment Analysis 1. Overall Applicable □ Not applicable Investment in the reporting period (RMB) Investment in the same period of the previous year (RMB) YoY 333,844,991.15212,108,040.0057.39% 2. Significant equity investments obtained during the reporting period □ Applicable Not applicable ZKTeco 2023 Half Year Report 45 3. Significant non-equity investments during the reporting period Applicable □ Not applicable Unit: RMB Project Name Investment Mode Fixed Asset Assessment or Not Investment Project Industry Investment Amount During the Reporting Period Accumulated Actual Investment Amount As of the End of the Reporting Period Source of Funds Project Progress Expected Income Accumulated Realized Income As of the End of the Reporting Period Reasons for Not Achieving Planned Progress and Expected Benefits Disclosure Date (if any) Disclosure Index (if any) Hybrid Biometrics IoT Intelligent Industrial Base Project Self-built Yes Plant and supporting facilities 10,077,460.79 218,344,125.09 Own funds, bank loans, and raised funds Under construction Not applicable Not applicable Not applicable Multimodal Biometrics Digitalization Industrial Base Construction Project Self-built Yes Plant and supporting facilities 15,288,387.24 18,271,3 29.19 Own funds and raised funds Under construction Not applicable Not applicable Not applicable Total -- -- -- 25,365,848.03 236,615,454.28 -- -- -- -- -- 4. Financial assets measured at fair value Applicable □ Not applicable Unit: RMB Asset Category Initial investment outlay Profits and losses from fair value Cumulative changes Purchase amount during the reporting Sales amount during the reporting period Accumulated investmenOther chanClosing amount Source of Funds ZKTeco 2023 Half Year Report 46 changes in the current period in fair value recognized in equity period t income ges Financial derivatives 0.00 -7,049,098.87 257,337,175.0064,867,925.00 -7,049,098.87 Own funds Others 206,170,753.293,616.44 51,141,968.12156,006,015.6959,678.01 99,457,974.92 Own funds Total 206,170,753.29 -7,045,482.430.00308,479,143.12220,873,940.6959,678.010.0092,408,876.05 -- 5. Use of raised funds Applicable □ Not applicable (1) Overall use of raised funds Applicable □ Not applicable Unit: RMB '0,000 Total amount of raised funds 145,729.84 Total amount of raised funds used in this period 5,230.06 Accumulated total amount of raised funds used 43,028.36 Total amount of raised funds with changed purposes during the reporting period 25,189.32 Accumulated total amount of raised funds with changed purposes 28,537.02 Proportion of accumulated total amount of raised funds with change purposes 19.58% Description of the overall use of raised funds 1. According to the approval of the "Reply of CSRC to Approval for the Registration of Initial Public Offering of Stocks of ZKTECO CO., LTD." (ZJXK [2022] No.926), the Company has publicly issued 37,123,013 RMB denominated ordinary shares (A shares) with a face value of RMB 1.00 per share, an issuance price of RMB 43.32 per share, and a total amount of raised funds of RMB 1,608,168,923.16. After deducting the issuance expenses (excluding value-added tax) of RMB 150,870,545.46, the actual net amount of raised funds is RMB 1,457,298,377.70. The receipt date of the raised funds is August 12,2022. The availability of the raised funds has been verified by Baker Tilly China Certified Public Accountants (Special General Partnership) and a "Capital Verification Report" (TZYZ [2022] No.38658) has been issued. 2. All the raised funds mentioned above have been deposited in a special account for raised funds for management, and a regulatory agreement for raised funds has been signed with the sponsor and the commercial bank that deposited the raised funds. 3. As of June 30,2023, the Company has invested a total of RMB 430.2836 million in raised funds, with a total of RMB 1.0481666 billion in unused raised funds (including related interest income after deducting handling fees). (2) Committed projects with raised funds Applicable □ Not applicable Unit: RMB '0,000 Committed investment projects and Has the projecCommitted total investmAdjusted total investment Investment Amount Accumulated investmenInvestment progresDate when the Benefits achieveAccumulated benefits Have the expecteHas there been a ZKTeco 2023 Half Year Report 47 the investment direction of over-raised funds t been changed (including partial changes) ent amount of raised funds (1) During the Reporting Period t amount as of the end of the period (2) s as of the end of the period (3)=(2)/(1) project reaches its expected conditions for use d during this reporting period achieved as of the end of the reporting period d benefits been achieved major change in the feasibility of the project Committed investment projects 1. Tangxia Production Base Construction Project Yes 24,841.1 8 - - - - Not applicable Not applicable Not applicable Not applicable Yes 2. Hybrid Biometrics IoT Intelligent Industrial Base Project No 43,689.9 4 43,689.942,073.7525,495.0258.35% August 31, 2024 Not applicable Not applicable Not applicable No 3. American Manufacturing Factory Construction Project Yes 17,392.2 1 14,392.65 97.540.68% August 31, 2026 Not applicable Not applicable Not applicable No 4. R&D Center Construction Project No 18,240.5 8 18,240.58863.939,884.9954.19% August 31, 2024 Not applicable Not applicable Not applicable No 5. Global Marketing Service Network Construction Project No 26,802.0 1 26,802.01697.455,955.8822.22% August 31, 2025 Not applicable Not applicable Not applicable No 6. Remaining funds after the previous change in the American Manufacturing Factory Construction Project Yes - 2,999.56 Not applicable Not applicable Not applicable No 7. Multimodal Biometrics Digitalization Industrial Base Construction Project Yes - 39,605.11,594.931,594.934.03% June 30, 2026 Not applicable Not applicable Not applicable No Subtotal of committed investment -- 130,965.92 145,729.845,230.0643,028.36 -- -- -- -- ZKTeco 2023 Half Year Report 48 projects Direction of over-raised fund investment direction Undetermined funds Yes 14,763.9 2 - Not applicable No Subtotal of over-raised fund investment direction -- 14,763.9 2 -- -- Not applicable Not applicable -- -- Total -- 145,729.84 145,729.845,230.0643,028.36 -- -- -- -- Describe the situation and reasons why the planned progress and expected benefits have not been achieved by projects (including the reason for selecting "not applicable" for "whether the expected benefits have been achieved") The planned investment for the "Tangxia Production Base Construction Project" (hereinafter referred to as "Tangxia Production Project") is RMB 248.4118 million, with a construction period of 2 years. The Project plans to build a production base in Tangxia Town, Dongguan City to meet the Company's future business development needs, including the expansion of production capacity for access control products, biometrics module products, and card products, as well as the need for supporting production, office, and living facilities. As of December 31,2022, the Project has not yet started investment, and the difference between the actual use of the raised funds in the year of the investment project and the estimated use amount of the raised funds disclosed last time exceeds 30%. On January 18,2023, the Company held the 23rd Session of the Second Board Meeting and the 17th Session of the Second Supervisory Board Meeting. On February 6,2023, the Company held the Second Extraordinary General Meeting of 2023, and deliberated and approved the "Proposal on Changing the Investment Projects of Raised Funds, Changing the Special Account for Raised Funds, Increasing Capital and Providing Loans to Subsidiaries to Implement Investment Projects". This matter does not constitute a related party transaction. In order to further promote the development of the Company's business, accelerate production capacity planning and industrial layout, and improve the efficiency of the use of raised funds, the original Tangxia Production Project has been changed to ZKTECOMultimodal Biometrics Digitalization Industrial Base Construction Project (hereinafter referred to as the "Digitalization Base Project"), and the Tangxia Production Project will no longer be constructed. The Tangxia Production Project was constructed by the Company as the main entity, while the Digitalization Base Project was constructed by Guangdong Zkteco, a wholly-owned subsidiary of the Company, as the implementation entity. The total investment amount of the Digitalization Base Project is RMB 431.8689 million. The Digitalization Base Project uses the unused raised funds and over-raised funds of the Tangxia Production Project, as well as the corresponding fund returns. Among them, the raised funds of the Tangxia Production Project are RMB 248.4118 million, and the over-raised funds are RMB 147.6392 million. The actual income of the funds corresponding to these two parts shall be based on the net income of the funds corresponding to the transfer of relevant funds to the special account for the Digitalization Base Project after approval by the shareholders' meeting. The insufficient part will be invested by Guangdong Zkteco with its own funds. Description of major changes in project feasibility The original investment project (Tangxia Production Base Construction Project) was formulated in 2020, which was a comprehensive layout of the Company based on factors such as the market environment, industry development trends and the actual situation of the Company at that time. With the development of the Company and market changes, the planning of the original Tangxia Production Base Construction Project can no longer meet the current production and operation needs of the Company, and cannot reflect the development trend of new technologies and new formats. In order to further promote the development of the Company's business, accelerate production capacity planning and industrial layout, and improve the efficiency of the use of raised funds, the Company reviewed and approved relevant proposals during the reporting period to change the original investment project: Tangxia Production Base Construction Project to the Digitalization Base Project. The original Tangxia Production Base Construction Project will no longer be constructed, and the implementation entity of the Digitalization Base Project will be changed to the Company's wholly-owned subsidiary Guangdong Zkteco. The specific reasons for the change are as follows: ① At present, the Company's production sites are scattered. According to the overall plan of the Company at this stage, Guangdong Zkteco will mainly undertake the Company's manufacturing functions, and will transfer the investment projects of production nature to Guangdong Zkteco for implementation, facilitating the Company's centralized production management, saving management costs, and improving production efficiency. ② As the current production model and capacity of Guangdong Zkteco are not conducive to controlling the Company's costs, quality, and delivery time, and cannot meet the Company's future sustainable development needs after Guangdong Zkteco mainly undertakes the Company's manufacturing function. The change of investment projects helps to enhance the Company's production capacity and technological process level, thereby improving product quality, production efficiency, and market competitiveness. ③ With the change of the market, multimodal biometrics and non-contact biometric technology have developed rapidly. Computer vision products such as edge computing and intelligent perception self-help of the IoT, intelligent robots and so on ZKTeco 2023 Half Year Report 49 have entered the field of smart wide entrance and exit, and the business model has also been upgraded rapidly, from the original products and solutions to the subscription and cloud service model. The Company closely tracks cutting-edge technologies and standards in the market, continuously promotes production technology innovation, and conducts technological application engineering transformation based on biometrics core technology, continuously develops and designs products to meet market demand. The changes in investment projects are also necessary for the Company's business development and technological achievement transformation. In summary, firstly, it can meet the Company's production capacity and technical process requirements, improve the production capacity of core components, ensure product quality stability, reduce product production costs, and enhance product market competitiveness through the implementation of the Digitalization Base Project; secondly, it can fundamentally solve the problem of mismatch between the Company's development and production sites, unify the layout and scientific centralized management of production bases, improve production efficiency, and reduce costs; thirdly, it is beneficial for the Company to combine its acquired knowledge achievements with the latest industry technical standards, and achieve the industrialization of the Company's technological achievements. The amount, purpose, and progress of the over-raised funds Applicable The amount of over-raised funds from the Company's initial public offering of stocks was RMB 147.6392 million. On September 29,2022, the Company held the 19th Session of the Second Board Meeting and the 13th Session of the Second Supervisory Board Meeting. On October 17,2022, the Company held the Second Extraordinary General Meeting of 2022 and deliberated and approved the "Proposal on Using Part of the Temporarily Idle Raised Funds for Cash Management". The Company and its subsidiaries plan to use a portion of the temporarily idle raised funds that does not exceed RMB 1 billion (including) for cash management for the appropriate purchase of products with high safety and good liquidity with an investment period of not more than 12 months. The above idle fund limit shall be valid for a period of 12 months from the date of approval by the shareholders' meeting, and the fund shall be used in a rolling manner within the above limit. As of June 30,2023, the Company has used temporarily idle raised funds for cash management, with an outstanding amount of RMB 642.19 million. On January 18,2023, the Company held the 23rd Session of the Second Board Meeting and the 17th Session of the Second Supervisory Board Meeting. On February 6,2023, the Company held the Second Extraordinary General Meeting of 2023, and deliberated and approved the "Proposal on Changing the Investment Projects of Raised Funds, Changing the Special Account for Raised Funds, Increasing Capital and Providing Loans to Subsidiaries to Implement Investment Projects". The Company agrees to use the over-raised funds of 147.6392 million to invest in the construction of the Digitalization Industrial Base Project. Changes in the implementation location of projects invested with raised funds Applicable Occurred during the reporting period On April 26,2023, the Company held the Second Session of the Third Board Meeting and the Second Session of the Third Supervisory Board Meeting. On May 19,2023, the Company held Annual General Meeting of 2022, and deliberated and approved the "Proposal on Changing the Implementation Location and Total Investment Amount of Some Raised Fund Investment Projects, and Adjusting Some Construction Contents", and adjusted the implementation location of the investment project "American Manufacturing Factory Construction Project" from "6775 Meadow Ln, Alpharetta, GA 30005" to "1600 Union Hill Rd, Alpharetta, GA 30005". Adjustment of implementation methods for projects invested with raised funds Applicable Occurred during the reporting period On April 26,2023, the Company held the Second Session of the Third Board Meeting and the Second Session of the Third Supervisory Board Meeting. On May 19,2023, the Company held Annual General Meeting of 2022, and deliberated and approved the "Proposal on Changing the Implementation Location and Total Investment Amount of Some Raised Fund Investment Projects, and Adjusting Some Construction Contents", and changed the construction method of the investment project "American Manufacturing Factory Construction Project" from purchase to self-construction. Advance investment and replacement of raised funds for investment projects Applicable The Company held the 19th Session of the Second Board Meeting and the 13th Session of the Second Supervisory Board Meeting on September 29,2022, and deliberated and approved the "Proposal on Using Raised Funds to Replace Self Raised Funds for Pre-invested Raised Investment Projects and Paid Issuance Expenses". It is agreed that the Company will use the raised funds to replace the self raised funds of RMB 358.6078 million invested in the raised investment project and paid issuance expenses as of August 21,2022, as well as the pre-paid issuance fees of RMB 13.8425 million (excluding value-added tax) with the self raised funds. On September 16,2022, the Company held the 18th Session of the Second Board Meeting and the 12th Session of the Second Supervisory Board Meeting, and deliberated and approved the "Proposal on Using Its Own Funds and Foreign Exchange to Pay for Part of the Funds Raised for Investment Projects and Exchanging Them with the Raised Funds in Equal Amounts". On January 18,2023, the Company held the 23rd Session of the Second Board Meeting and the 17th Session of the Second Supervisory Board Meeting. On February 6,2023, the Company held the Second Extraordinary General Meeting, and ZKTeco 2023 Half Year Report 50 deliberated and approved the "Proposal on Changing the Investment Projects of Raised Funds, Changing the Special Account for Raised Funds, Increasing Capital and Providing Loans to Subsidiaries to Implement Investment Projects". The salaries, social insurance premiums, housing provident fund, utilities, etc. of domestic personnel of the Company in implementing the investment projects "Hybrid Biometrics IoTIntelligent Industrial Base Project", "R&DCenter Construction Project", "Global Marketing Service Network Construction Project" and the "Multimodal Biometrics Digitalization Industrial Base Construction Project of ZKTECO" are planned to be paid by the Company or its subsidiary implementing the investment projects in advance with their own funds. The Company collected and calculated the aforementioned advance expenses incurred by each investment project on a monthly basis, and then transferred an equal amount of funds from the special account for investment to the Company's or its subsidiary's own fund account for implementing the investment projects. The implementation location of the Company's investment project "American Manufacturing Factory Construction Project" is in the United States, and the investment project construction funds need to be paid in USD. The Company's investment projects "Global Marketing Service Network Construction Project" and "R&DCenter Construction Project" include overseas construction content, and the operability of paying funds required for overseas construction directly from the special account for raised funds is poor. Therefore, the Company plans to use its own foreign exchange to pay the required funds for the overseas parts of the "Global Marketing Service Network Construction Project", "American Manufacturing Factory Construction Project", and "R&DCenter Construction Project". Subsequently, the amount of advance payments will be calculated monthly, and equal amounts will be transferred from the special account for raised funds to the Company's own fund account. As of June 30,2023, the Company has used its own funds and foreign exchange replaced with the raised funds to pay a portion of the funds raised for the investment project, totaling RMB 17.4119 million. Temporary replenishment of working capital with idle raised funds Not applicable The amount and reasons for the surplus of raised funds during project implementation Not applicable The purpose and destination of the raised funds that have not been used yet As of June 30,2023, the balance of the Company's unused IPO raised funds is RMB 1.0481666 billion (including interest income and deducting handling fees), including RMB 405.9766 million of demand deposit in the special account for raised funds and RMB 642.19 million of time deposit. The above financial products have high safety, meet the requirements of capital preservation, and have good liquidity, which does not affect the normal operation of the investment plan for raised funds. Problems or other situations in the use and disclosure of raised funds None (3) Change in the use of raised funds Applicable □ Not applicable Unit: RMB '0,000 ZKTeco 2023 Half Year Report 51 Changed project Corresponding original committed projects The total amount of raised funds to be invested in the project after the change (1) Actual investment amount during this reporting period Actual accumulated investment amount as of the end of the period (2) Investment progress as of the end of the period (3)=(2)/(1) Date when the project reaches its expected conditions for use Benefits achieved during this reporting period Have the expected benefits been achieved Has there been a major change in the feasibility of the project after the change Digitalization Base Project Tangxia Production Project 39,605.11,594.931,594.934.03% June 30, 2026 Not applicable Not applicable No American Manufacturing Factory Construction Project American Manufacturing Factory Construction Project 14,392.65097.540.68% August 31,2026 Not applicable Not applicable No Total -- 53,997.751,594.931,692.47 -- -- -- -- Description of reasons for changes, decision-making procedures, and information disclosure (by specific project) ① The Tangxia Production Project has been changed to the Digitalization Base Project. For details, please refer to "The situation and reasons for not achieving the planned progress or expected benefits" and "Description of major changes in project feasibility" columns in the "Comparison Table for the Use of Raised Funds". ② On April 26,2023, the Company held the Second Session of the Third Board Meeting and the Second Session of the Third Supervisory Board Meeting for the American Manufacturing Factory Construction Project, and deliberated and approved the "Proposal on Changing the Implementation Location and Total Investment Amount of Some Raised Fund Investment Projects, and Adjusting Some Construction Contents". On May 19,2023, the Company held the 2022 Annual General Meeting, and deliberated and approved the "Proposal on Changing the Implementation Location and Total Investment Amount of Some Raised Funds Investment Projects and Adjusting the Construction Content of Some Projects". The Company adjusted the implementation location of the investment project "American Manufacturing Factory Construction Project" from "6775 Meadow Ln, Alpharetta, GA 30005" to "1600 Union Hill Rd, Alpharetta, GA 30005", and the construction method of the Project was changed from purchase to self-construction. After adjustment, the total investment of the Project increased by RMB 3.4814 million, and the total investment of the Project increased from RMB 140.4451 million to RMB 143.9265 million. After this change, the additional investment amount of RMB 3.4814 million for the Project was paid out of the previously reduced RMB 33.477 million for the Project. After this adjustment, the Project planned to use the raised funds of RMB 143.9265 million for investment and construction. The remaining funds after this change was changed to RMB 29.9956 million. Reason for change: 1. The reason for the change in implementation location and total investment of the American Manufacturing Factory Construction Project is the increase in construction and labor costs in the United States. After careful evaluation and investigation by the Company, implementing the investment plan at the new location can reduce cost investment while shortening the construction cycle and accelerating the construction of the investment project without affecting the original planned production capacity of the Project. 2. Based on industry technology development trends and market changes, combined with the actual business development needs of the Company, the Company plans to adjust part of the construction content of the investment project after sufficient market research in order to effectively use the raised funds, which is conducive to further strengthening the Company's main business and core technology competitiveness, and is conducive to the ZKTeco 2023 Half Year Report 52 Company's sustainable development, thereby further improving the efficiency of using the raised funds and maximizing shareholder interests. The specific content mentioned above can be found in the Company's "Announcement on Changing the Investment Projects of Raised Funds, Changing the Special Account for Raised Funds, Increasing Capital and Providing Loans to Subsidiaries to Implement Investment Projects" (Announcement No.2023-004) and "Announcement on Changing the Implementation Location and Total Investment Amount of Some Raised Fund Investment Projects, and Adjusting Some Construction Contents" (Announcement No.2023-044) published on CNINFO. The situation and reasons for not achieving the planned progress or expected benefits (by specific project) None Description of major changes in project feasibility after the change None 6. Entrusted financial management, derivative investment and entrusted loans (1) Entrustment of financial management Applicable □ Not applicable Overview of entrusted financial management during the reporting period Unit: RMB '0,000 Specific types Source of funds for entrusted financial management Amount of entrusted financial management Outstanding balance Overdue uncollected amount Provision for impairment amount of overdue uncollected financial assets Bank financial products Fundraising 14,760000 Bank financial products Own funds 3,0003,000.3600 Bank financial products Own funds 5,571.685,180.6300 Bank financial products Own funds 1,589.681,602.7500 Bank financial products Own funds 144.52146.2200 Bank financial products Own funds 42.38000 Other categories Own funds 34.0515.8400 Total 25,142.319,945.800 Specific situation of high-risk entrusted financial management with significant individual amounts, low safety, and poor liquidity □ Applicable Not applicable Expected inability to recover principal or other situations that may lead to impairment in entrusted financial management □ Applicable Not applicable (2) Derivative investment Applicable □ Not applicable ZKTeco 2023 Half Year Report 53 1) Derivative investments for hedging purposes during the reporting period Applicable □ Not applicable Unit: RMB '0,000 Types of derivative investments Initial investment amount Profits and losses from fair value changes in the current period Cumulative changes in fair value recognized in equity Purchase amount during the reporting period Sales amount during the reporting period Closing amount Ratio of ending investment amount to the Company's net assets at the end of the reporting period Forward foreign exchange settlement and sales 0 -704.91025,733.726,486.7919,246.936.14% Total 0 -704.91025,733.726,486.7919,246.936.14% Accounting policies and specific accounting principles for hedging business during the reporting period, as well as description on whether there have been major changes compared to the previous reporting period No major change Description of actual profit and loss during the reporting period During the reporting period, the Company obtained investment income of RMB -2.0468 million through forward foreign exchange settlement and sales, and generated fair value change profit and loss of RMB -7.0491 million Description of hedging effect Reducing the impact of exchange rate fluctuations on the Company's exchange rate Source of funding for derivative investment Own funds Risk analysis and control measures of derivatives positions during the reporting period (including but not limited to market risk, liquidity risk, credit risk, operational risk, legal risk, etc.) I. Risk analysis of the Company's hedging business Forward foreign exchange settlement and sales business can reduce the impact of exchange rate fluctuations on the Company's production and operation in the event of significant fluctuations in exchange rates, but there are still certain risks in conducting forward foreign exchange settlement and sales transactions: 1. Exchange rate fluctuation risk: In cases of significant fluctuations in exchange rate courses, exchange losses may occur when the exchange rate of the forward foreign exchange settlement and sales agreed in the confirmation letter for the forward foreign exchange settlement and sales is lower than the real-time exchange rate. 2. Risk of payment collection prediction: Business departments make payment prediction based on customer orders and expected orders. During the actual execution process, customers may adjust their own orders and predictions, resulting in inaccurate company payment prediction and the risk of delayed delivery of forward exchange settlement. 3. Internal control risk: Forward foreign exchange settlement and sales transactions are highly specialized and complex, which may result in risks due to imperfect internal control systems. ZKTeco 2023 Half Year Report 54 4. Customer default risk: If the customer's accounts receivable are overdue and the payment cannot be collected within the predicted payment period, it will cause a delay in forward exchange settlement and result in losses to the Company. 5. Transaction performance risk: Conducting financial derivative trading business carries the risk of default caused by the inability of counterparties to perform when the contract expires. II. Preparation work and risk control measures for hedging by the Company The Company follows the principle of hedging when conducting forward foreign exchange settlement and sales transactions, and does not engage in speculative arbitrage transactions. The main risk control measures are as follows: 1. When signing forward foreign exchange settlement and sales contracts, transactions are carried out in strict accordance with the Company's predicted collection amount, and all forward foreign exchange settlement and sales businesses have a true trade background. 2. The Company has formulated the "Management System for Forward Foreign Exchange Settlement and Sales of ZKTECOCO., LTD.", which clearly stipulates the amount, variety, approval authority, internal audit process, information disclosure, and other aspects of forward foreign exchange settlement and sales. Moreover, the Company has strengthened the business training and professional ethics of relevant personnel, improved the quality of relevant personnel, and established a timely reporting system for abnormal conditions to avoid the occurrence of operational risk to the maximum extent. 3. To prevent the delayed delivery of forward foreign exchange settlement and sales, the Company will attach great importance to the management of foreign currency accounts receivable, avoid the phenomenon of overdue accounts receivable, and strive to improve the accuracy of payment collection prediction and reduce prediction risks. Meanwhile, the Company has purchased credit insurance for some export products, thus reducing the customer default risk. 4. To control transaction performance risks, the Company carefully selects counterparties engaged in financial derivatives business. The Company only conducts financial derivative trading business with legally qualified large commercial banks and other financial institutions, and carefully reviews the contract terms signed with the counterparties to prevent credit and legal risks. Changes in market price or fair value of products during the reporting period of the invested derivatives. The analysis of the fair value of derivatives shall disclose the specific methods used and the setting of relevant assumptions and parameters The fair value changes are determined at the end of each month based on market quotations from external financial institutions. Litigation situation (if applicable) Not applicable Disclosure date of announcement by the Board of Directors for approval of derivative investment (if any) April 28,2023 Special opinions of independent directors on the Company's derivative investment and risk The Company's business of forward foreign exchange settlement and sales meets the Company's business development needs, and the Company has established corresponding internal control systems and risk management mechanisms. The feasibility analysis report issued by the Company for conducting forward foreign exchange settlement and sales complies with the provisions of laws and regulations and the Company's business development needs, and is feasible. ZKTeco 2023 Half Year Report 55 control 2) Derivative investments for speculative purposes during the reporting period □ Applicable Not applicable There were no derivative investments for speculative purposes during the Company's reporting period. (3) Entrusted loan □ Applicable Not applicable There were no entrusted loans during the reporting period of the Company. VII. Disposal of Significant Assets and Equity 1. Disposal of significant assets □ Applicable Not applicable There is no disposal of significant asset for the Company during the reporting period. 2. Disposal of significant equity □ Applicable Not applicable VIII. Analysis of Major Holding and Joint-stock Companies Applicable □ Not applicable Major subsidiaries and joint-stock companies with an impact on the Company's net profit of over 10% Unit: RMB Company Name Company type Principal activities Registered Capital Total assets Net assets Operating revenue Operating profit Net profit ZK INVESTMENTSINC. Subsidiaries Established 2,049,570.0 0 98,856,824.75 97,257,835.20 0.00 31,400,455.04 24,605,618.05 ZK TECHNOLOGYLLC Subsidiaries Sales of goods 2,716,194.0 0 80,935,242.25 47,202,533.01 74,892,637.61 44,089,564.44 44,089,564.44 ZKTECO CO., LIMITED Subsidiaries Sales of goods 104,469,00 0.00 412,536,36 1.94 227,317,63 1.64 211,563,90 6.33 13,753,599.12 11,679,856.07 ZKTECO (GUANGDONG) CO., LTD Subsidiaries R&D, production, and sales of products and software 800,000,00 0.00 1,117,763,9 52.74 854,419,60 9.59 178,809,90 2.50 12,236,673.29 10,947,381.80 Acquisition and disposal of subsidiaries during the reporting period Applicable □ Not applicable Company Name Method of acquiring and disposing of Impact on overall production, operation, ZKTeco 2023 Half Year Report 56 subsidiaries during the reporting period and performance ZKDIGIMAXPTE. LTD. New establishment New establishment, with no significant impact on the overall production, operation, and performance of the Company ZKDIGIMAXPANAMA, S.A. New establishment New establishment, with no significant impact on the overall production, operation, and performance of the Company ZKDIGIMAXCOLOMBIASASNew establishment New establishment, with no significant impact on the overall production, operation, and performance of the Company ZKDIGIMAX (PTY) LTDNew establishment New establishment, with no significant impact on the overall production, operation, and performance of the Company PT. ZKDIGIMAXEXCELNOBLENew establishment New establishment, with no significant impact on the overall production, operation, and performance of the Company ZKTeco Yunlian (Xiamen) Technology Co., Ltd. New establishment New establishment, with no significant impact on the overall production, operation, and performance of the Company Description of the main controlling and participating companies: Please refer to the relevant content of "Section XFinancial Report - IX. Equity in Other Entities" for details IX. Structured Entities Controlled by the Company □ Applicable Not applicable X. Risks Faced by the Company and Countermeasures 1. Operational risk (1) Market competition risk After years of deep cultivation in the biometric industry, the Company has formed competitive advantages in the fields of smart entrance and exit management, smart identity verification, and smart office applications, including technological and R&D strength, production capacity, brand influence, and marketing service network. However, in recent years, China's entrance and exit control and management, identity authentication, and office industries have formed a diversified and market-oriented competition pattern, with a large number of enterprises. The Company's main business products are facing competition pressure from various aspects such as quality, price, and brand. In response to market competition, the Company has continuously increased its R&D investment in recent years, insisting on developing and optimizing single and multimodal hybrid biometric technologies, continuously expanding and enriching the types of biometric products and services, and paying more attention to the overall linkage design of product software and hardware, thus consolidating the Company's leading position in the industry. However, with the increasing market competition, if the Company cannot continuously optimize product design, improve production quality, enhance brand competitiveness, expand and consolidate sales network, the Company's existing industry and market position will be affected, and the Company will face the risk of declining market share and profitability. (2) Overseas business operational risks ZKTeco 2023 Half Year Report 57 In the first half of 2023, the Company's overseas sales revenue from countries and regions was RMB 630.3064 million, accounting for 67.49% of the Company's main business income. The Company's overseas business income accounted for a relatively large proportion. In recent years, the global economy has been facing changes in trade policies of major economies, the rise of international trade protectionism, the deterioration of local economic environments, the depreciation of currencies in many countries around the world caused by the continuous interest rate hikes of the US dollar and geopolitical tensions, resulting in strong uncertainty in global trade policies. The Company's international sales business may face international trade friction, especially the risk of Trade disputes between China and the United States. Although China and the United States are still constantly trying to find solutions, if trade disputes between China and the United States worsen in the future, it may have a certain adverse impact on the Company's product sales, which in turn will affect the Company's future business performance. In addition, the Company's international business accounts for a relatively large proportion of exports to developing countries such as India, Mexico, and Indonesia. Although the overall political, financial, and economic systems of relevant countries are currently relatively stable, their infrastructure is relatively weak, and government efficiency is relatively inefficient, compared to developed countries, which poses potential social instability factors. If major changes occur in its political environment, economic environment, trade policies with China, tariff and non-tariff barriers, and industry standards in the future, it will have a negative impact on the Company's export business. In addition to the risks of global economic and political environment changes and trade frictions that the Company may face, the multinational enterprise business model of the Company will increase the difficulty of operating, financial management, and personnel management, and the operation will be influenced by the legal and regulatory environments and business environments of different countries and systems. Although the Company has accumulated rich experience in international business development, if the Company's management personnel and various systems cannot meet the requirements of global operation, cross regional management, and standardized operation, it will also affect its operational efficiency and profitability. (3) Tax compliance risks caused by transfer pricing arrangements between various tax entities within the Company both domestically and internationally As of June 30,2023, the Company has a total of 45 overseas subsidiaries located in countries and regions such as Hong Kong, the United States, Mexico, the United Arab Emirates, and India. During the reporting period, there were cases where the Company sold products to overseas subsidiaries and sold them locally through these subsidiaries due to business needs between the Company and some overseas subsidiaries. There was a situation of transfer pricing in the above-mentioned transaction links. According to the Company's self inspection, there were no cases of the Company or its overseas subsidiaries being punished by the tax department due to transfer pricing issues during the reporting period. From the perspective of its own compliance, the Company regularly hires professional consulting agencies to analyze and demonstrate the transfer pricing strategies involved in the operation of the Company and some overseas subsidiaries, and issues special reports. If there are major changes in the tax policies of the Company in different tax jurisdictions in the future, or if the Company fails to be correctly or timely informed of the changes in tax policies, or if there are cases of tax recovery and fines due to the re-approval of transaction prices by the competent tax authorities, it may lead to adverse effects on the Company's operations. (4) Legal risks of the impact of industry regulatory policies related to personal information protection and data protection on company operations Laws, regulations, and industry norms such as the "Civil Code of the People's Republic of China", the "Cybersecurity Law of the People's Republic of China", the "Data Security Law of the People's Republic of China", the "Personal Information Protection Law of the People's Republic of China", and the "General Data Protection Regulation" all stipulate the collection and use of personal information by citizens, as well as the compliance obligations of personal information controllers, and emphasizes the legal liability for violating personal information protection and data security has been strengthened. The "Provisions of the Supreme People's Court on Several Issues concerning the Application of Law in the Trial of Civil Cases Relating to Processing of Personal Information by Using the Facial Recognition Technology" (FS [2021] No.15) provides detailed provisions on the behavior and civil liability of ZKTeco 2023 Half Year Report 58 information processors who violate the personal rights and interests of natural persons by processing facial information in violation of regulations. In recent years, personal information protection and data security have become regulatory priorities in various countries around the world, and regulatory policies related to them have been increasingly strengthened. If the Company fails to make timely and effective adjustments and responses to relevant policies and regulations in its future business operations, there may be potential legal risks in data compliance caused by changes in legislation or regulatory policies. Meanwhile, if the Company is unable to strictly comply with the relevant laws, regulations, and industry norms mentioned above in the future, and if employees violate the Company's internal regulations, or data collaborators, customers, etc. violate agreements or cause improper use or leakage of data due to other personal reasons, it/they may be subject to administrative penalties from relevant departments or complaints from users, and even lead to disputes such as litigation or arbitration, which may have adverse effects on the Company's reputation and business. 2. Technology and product innovation risks Driven by market demand and technological development, biometric technology has achieved rapid development globally. Biometric technology is gradually iterating towards non-contact and multimodal hybrid biometrics. In addition, with the development of cutting-edge technologies such as cloud computing, the IoT, and AI, users' personalized needs for smart terminal products and even ecological platforms are constantly increasing in the fields of biometric technology applications such as smart entrance and exit management, smart identity verification, and smart office where the Company is located. Industry technology is updated and iterated quickly, requiring industry enterprises to have strong technological innovation capabilities to adapt to the rapid development of the industry. The continuous innovation ability of products and technologies is increasingly becoming an important component of the core competitiveness of related product and solution suppliers. The Company always attaches great importance to technological innovation and new product R&D. In the first half of 2023, the Company's R&D expenses were RMB 100.9841 million, accounting for 10.78% of operating revenue. As of June 30,2023, the Company has 799 patents, including 126 invention patents; 659 computer software copyrights and 65 work copyrights, as well as strong sustained innovation capabilities. However, if the Company cannot keep up with the development trends of domestic and foreign biometric technology and related application products, and fully pay attention to the diverse individual needs of customers, and the subsequent R&D investment is insufficient, resulting in the Company's technology development and product upgrading not being able to adapt to industry technology iterations and market demand changes in a timely manner, it will face the risk of declining market competitiveness due to the inability to maintain sustained innovation capabilities. 3. Internal control risk (1) Management risks caused by future expansion of the Company's scale With the construction and production of investment projects, the Company's scale has rapidly expanded, and the number of sales, R&D, and management personnel has increased significantly, posing higher requirements for the Company's management level and system. Although the Company has established a series of relatively complete enterprise management systems, such as clear institutional processes in procurement, production, sales, R&D, and service, to ensure the competitiveness and reliability of the Company's products and services, if the Company's management ability cannot be further effectively improved, it may trigger corresponding management risks, hinder the Company's future development, and have a negative impact on the overall profitability of the Company. (2) Dealer management risk During the reporting period, the Company mainly adopted a sales model that combines distribution and direct sales, and the proportion of distribution was relatively high. In the first half of 2023, the Company achieved a revenue of RMB 636.9511 million through the distribution model, accounting for 68.20% of the Company's main business income in the first half of 2023. Except for business cooperation, each dealer is independent of the Company, and its business plan is determined independently based on its own business goals and risk preferences. Although the Company has established strict dealer management systems and effective and reasonable rebate policies, and maintains good cooperative relationships with major dealers, the coverage area of marketing and service networks will continue to expand in the future with the rapid development of the Company, and the difficulty of training, organizing, and risk management for dealers will also continue to increase. If the Company is unable to improve its ZKTeco 2023 Half Year Report 59 management capabilities for dealers in a timely manner, and if dealers engage in disorderly management, poor management, illegal or irregular behavior, or if the Company cannot maintain good relationships with dealers in the future, resulting in dealers ceasing to cooperate with the Company, and the Company is unable to quickly obtain orders from other channels in the short term, or the incentive effect of the rebate policy decreases, it may lead to a regional decline in the sales of the Company's products, and have a negative impact on the Company's market promotion. 4. Financial risk (1) Risk of bad debt losses on accounts receivable At the end of the reporting period, the book balance of the Company's accounts receivable was RMB 476.9039 million, accounting for 50.89% of the current operating revenue. With the further expansion of the Company's business scale, the amount of accounts receivable may continue to increase. If there are changes in the macroeconomic environment, customer operating conditions, etc., and accounts receivable cannot be recovered in a timely manner, resulting in bad debt losses, the Company's operating results may be adversely affected. (2) Inventory depreciation risk With the growth of the Company's business scale, the inventory scale has been increasing year by year. At the end of the reporting period, the book value of the Company's inventory was RMB 329.8385 million, accounting for 10.93% of the total current assets at the end of the period. During the reporting period, the Company comprehensively considered factors such as expected selling price and inventory age, and made sufficient provision for inventory impairment. At the end of the reporting period, the provision ratio for inventory impairment was 5.01%. The Company's inventory mainly consists of raw materials, inventory goods, etc. The Company has always maintained a good cooperative relationship with raw material suppliers and customers, and reasonably arranged the inventory of raw materials and inventory goods. However, with the further growth of the Company's sales revenue and asset size, the Company's inventory also increases accordingly, which may lead to a decline in price, backlog, and unsold inventory due to market changes, resulting in the risk of deteriorating financial position and declining profitability. (3) Risk of RMB exchange rate fluctuations The Company's current business layout is highly internationalized, and there are many local controlling subsidiaries and participating companies in the overseas export market. The majority of export sales are settled in USD or EUR, resulting in significant exchange rate fluctuations in production and operation. On the one hand, the fluctuations of the RMB exchange rate will directly affect the sales prices of the Company's exported products, thereby affecting the price competitiveness of the Company's products; on the other hand, fluctuations of the RMB exchange rate may also cause corresponding exchange gains and losses to the Company. If the RMB appreciates in the future, it will have a significant adverse impact on the Company's operating performance. (4) Risk of exchange rate fluctuations Due to the high degree of internationalization of the Company, with the increase in interest rates in the United States, currencies in many countries have depreciated, and countries with weak industrial capabilities may even implement foreign exchange controls, which will lead to longer payment collection times for downstream customers and increased risks. Although the Company has effectively reduced this risk through measures such as Sinosure in the past year, further interest rate hikes in the United States this year may further exacerbate the situation and pose risks to the Company's accounts receivable. 5. Risks related to raising funds to invest in projects (1) The risk of raising funds to invest in projects that do not yield expected returns The investment projects with raised funds are a prudent decision and planning made by the Company based on a thorough analysis of the current market situation, development speed, industrial environment, and future development trends of the industry, as well as the Company's existing technological level, management ability, and expected future customer needs combined with development prospects of the biometric industry and related application fields, as well as the expected changes in the international trade environment. However, if there are major changes in the future market demand, industry structure, industrial policies or the global economic and political situation, it may prevent the smooth implementation of investment projects with raised funds as planned or prevent them from achieving expected returns. ZKTeco 2023 Half Year Report 60 (2) The risks of cross-border implementation of investment projects The American Manufacturing Factory Construction Project, R&DCenter Construction Project, and Global Marketing Service Network Construction Project among these investment projects with raised funds all involve overseas investment. Although the Company has accumulated rich experience in cross-border operations and management in overseas markets, including the United States, through various overseas subsidiaries, the construction progress of the Company's American Manufacturing Factory Construction Project, R&DCenter Construction Project, and Global Marketing Service Network Construction Project may be affected by multiple factors considering the global economic situation and the complex diversity of policies and cultures in various countries. Operations in various countries also face certain uncertainties. In addition, during the implementation process of the overseas investment projects, there may be a risk of delaying the implementation of the investment projects due to the need to increase or re-fulfill the filing or approval procedures due to subsequent needs, policy changes, and other reasons. The Company reminds investors to pay attention to the risks of cross-border investment projects. XI. Reception of Activities including Research, Communication and Interviews During the Reporting Period Applicable □ Not applicableZKTeco 2023 Half Year Report 61 Reception time Reception location Reception methods Reception object type Reception object The main content of the discussion and the materials provided Index of basic information of research February 9, 2023 Company Meeting Room Field research Institution CITICSecurities: Yan Li, Liang Nan, Liang Shilin, and Ni Yancheng Harmony Capital: Cui Danwei Beijing Xiaoying Investment Management Co., Ltd.: Deng Haocheng Yinhua Fund Management Co., Ltd.: Shao Zihao V-FUNDManagement Co., Ltd.: Zeng Jie ICBC-AXAAsset Management Co., Ltd.: Liu Shang Lion Fund Management Co, Ltd.: Lu Weicheng Shenzhen Self-knowledge Investment Management Co., Ltd .: Zhou Jie See CNINFO (o.com.cn) CNINFO .cn, Announcement date: February 11,2023, Investor Relations Activity Record Form of ZKTECOCO., LTD. (No.2023-001) February 14, 2023 Company Meeting Room Field research Institution Pacific Securities Co., Ltd.: Cao Pei Shanghai Qisheng Asset Management Co., Ltd.: He Zheng Guangdong Hengli Asset Management Co., Ltd.: Li Jinbo See CNINFO (o.com.cn) CNINFO .cn, Announcement date: February 15,2023, Investor Relations Activity Record Form of ZKTECOCO., LTD. (No.2023-002) March 12,2023 Online Meeting Others Institution Host: Joint Chief Analyst of Computer at CSC: Jin Ge Chief Analyst of AI at CSC: Yu Fangbo Other participating organizations: Hotland Innovation Asset Management Co., Ltd., HZBANK WEALTHMANAGEMENTCO., LTD., China Merchants Fund Management Co., Ltd., Shanghai Boomleading Investment Management Co., Ltd., Shanghai Mingyu Asset Management Co., Ltd., AXASPDBInvestment Managers Co., Ltd., RBCGlobal Asset Management (Asia) Limited, Sage Investment Management Co,. Ltd., Prudence Investment Management (Hong Kong) Ltd., Comein Finance, Truvalue Asset Management Co., Ltd., Western Leadbank Fund Management Co., Ltd., Beijing Longrising Asset Management Co., Ltd., HFTInvestment Management Co., Ltd., See CNINFO (o.com.cn) CNINFO .cn, Announcement date: March 13,2023, Investor Relations Activity Record Form of ZKTECOCO., LTD. (No.2023-003) ZKTeco 2023 Half Year Report 62 Harvest Fund Management Co., Ltd., China Post Life Insurance Company Limited, Guotai Junan Securities Co., Ltd., Shanghai Jiupeng Asset Management Center (Limited Partnership), CITIC Group Corporation, Shenzhen Mingda Capital Management Co., Ltd., Shanghai Xitai Investment Management Co., Ltd., Penghua Fund Management Co., Ltd., King Tower Asset Management Company Ltd., Pacific Asset Management Co., Ltd., China Capital Management Co., Ltd., Caitong Fund Management Co., Ltd., Fujian Haixia Bank Co., Ltd., China Universal Asset Management Co., Ltd., China International Fund Management Co., Ltd., PICC Asset Management Company Limited, Shanghai Harmony Huiyi Asset Management Co., Ltd., Changjiang Securities Company Limited, SWSMUFund Management Co., Ltd., AIACompany Limited Shanghai Branch, Huatai-PineBridge Fund Management Co., Ltd., Xi'an Curiosity Investment Management Co., Ltd., Dajia Asset Management Co., Ltd., Shanghai Chaser Asset Management Company Limited, Qian He Capital Management Co., Ltd., Shanghai Hexi Investment Management Co., Ltd., Kingsun (Shanghai) Investment Co., Ltd., Zhejiang Jingan Investment Management Co., Ltd., China Coal Energy Company Limited, Shanghai Chengshi Asset Management Co., Ltd., Jiangsu Ruihua Investment Holding Group Co., Limited, Soochow Asset Management Co., Ltd., Baoying Fund Management Co., Ltd., Beijing Zechang Asset Management Co., Ltd., Shenzhen Sandstone Fund Management Co., Ltd., Zhong Ou Asset Management Co., Ltd., Shanghai Panwen Investment Management Co., Ltd., Chang'an Fund Management Co., Ltd., Beijing Ren Bridge Asset Management Co., Ltd, Shanghai Quanxi Investment Management Co., Ltd., Customer of Wealth Management Department of CSC Economic and Management Commission, Orient Fund Management Co., Ltd., Zhejiang BUTTONWOOD&RIGHTAsset Management Co., Ltd., Guotai Asset Management Co., Ltd., Huashang Fund Management Co., Ltd., China Southern Fund Management Co., Ltd., Hangzhou Yudi Investment Management Co., Ltd., Harfor Fund Management Co., Ltd., Beijing Derivative Sailing Investment Co., Ltd., Hua An Fund Management Co., Ltd., Xiamen JINHENGYUInvestment Managerment Co., Ltd., Gfund Management Co., Ltd., Three Gorges Capital Holding Co., Ltd., ABC-CAFund Management Co., Ltd., Huaxi Fund Management ZKTeco 2023 Half Year Report 63 Co., Ltd., Shanghai Chengyi Private Equity Fund Management Center (Limited Partnership), Everbright Wealth Management Co., Ltd., The Green Le Investment management (Shanghai) Co., Ltd., Xiamen Zhonglue Investment Management Co., Ltd., ABCWealth Management Co., Ltd., Shanghai Feng Run Capital Company Ltd., Oriental Alpha Fund Management Co., Ltd., Zhongrong Fund Management Co., Ltd., China Life Asset Management Company Limited, ICBCCredit Suisse Asset Management Co., Ltd., Haijin (Dalian) Investment Management Co., Ltd., Yaokang Private Equity Fund (Hangzhou) Co., Ltd., Minsheng Royal Fund, Shanghai Eureka Investment Partner Co., Ltd., Beijing Eastern Smart Rock Asset Management Co., Ltd., Beijing Heju Investment Management Co., Ltd., GFFund Management Co., Ltd., Shanghai XCFund Management Co., Ltd., Qianhai Life Insurance Co., Ltd., Orient Securities Asset Management Company Limited, Chang Xin Asset Management Co., Ltd., Taikang Asset Management Co., Ltd., Fullerton Investment Management (Shanghai) Co., Ltd., Tongtai Fund Management Co., Ltd., China Securities (International) Finance Holding Company Limited, Zhejiang Longhang Asset Management Co., Ltd., Industrial Fund Management Co., Ltd., Invesco Great Wall Fund Management Co., Ltd., Securities Asset Management Branch of Sealand Securities Co., Ltd., Harvest Forever Capital Management (Beijing) Co., Ltd., Shanghai Jingxi Asset Management Co., Ltd., Yuance (Shanghai) Investment Management LLP, National Council for Social Security Fund, CCT Fund Management Co., Ltd., Purekind Fund Management Co., Ltd., Yingda Insurance Asset Management Co., Ltd., Huatai Asset Management Co., Ltd., Shanghai Panjing Investment Center (Limited Partnership), Xinhua Asset Management Co., Ltd., and CCBLife Insurance Asset Management Company Limited. March 15,2023 XIAMEN ZKTECO Meeting Room Field research Institution China Securities Co., Ltd.: Jin Ge Shenzhen Minsen Investment Co., Ltd.: Li Yajun Shenzhen Upright Asset Management Co., Ltd.: Ma Li Shanghai Guotai Junan Securities Asset Management Co., Ltd.: Fan Ming Sunon Investment Management Co., Ltd.: Tang Heng See CNINFO (o.com.cn) CNINFO .cn, Announcement date: March 17,2023, Investor Relations Activity Record Form of ZKTECOCO., LTD. (No.2023-004) March 22 and Company Telephone Institution Shenzhen Branch of Haiyin Wealth Management Co., Ltd., Haitong See CNINFOCNINFO ZKTeco 2023 Half Year Report 64 23,2023 Meeting Rooms and Online Meetings Communication Securities Co., Ltd., Shenzhen Qianhai Decheng Asset Management Co., Ltd., Everbright Securities Co., Ltd., Shenzhen Qianhai Wanli Private Equity Fund Management Co., Ltd., Beijing Ding Investment Co., Ltd., China Merchants Securities Co., Ltd., Shenzhen Qianhai Deyun Investment Co., Ltd., Elitimes Capital Management Co., Ltd., :China Great Wall Securities Co., Ltd., Zheshang Securities Co., Ltd., Shenzhen Kingstone Investment Management Limited, Guangdong Branch of Shenwan Hongyuan Securities Co., Ltd., Shenzhen Hongliwan Investment Management Co., Ltd., Shenzhen Gaoyi Private Equity Fund Management Co., Ltd., Upright Asset, Mingfu Fund, Minmetals Securities Co., Ltd., Shenzhen Xinzheng Asset Management Co., Ltd., Tebon Securities Co., Ltd., Sinolink Securities Co., Ltd., CHINAMATE INTERNATIONALINVESTMENTHOLDINGSLIMITED, China Securities Co., Ltd., Huachuang Asset Management, China Capital Management, Shanghai Tourmaline Asset Management, Broad Fund, CICCFund, Sunrise Asset, QINCHENASSET, Soochow Self-management, Yuexi Investment, Guangzhou Xuan Yuan Investment, Fuyun Private Equity Fund, Tiancheng Investment, Valoran Investment, Songxi Private Fund, Hongsheng Asset, and CITIC-Prudential Fund (o.com.cn) .cn, Announcement date: March 24,2023, Investor Relations Activity Record Form of ZKTECOCO., LTD. (No.2023-005) May 8,2023 Quanjing "Investor Relations Interactive Platform" (et) Remote text communication on network Others Investors participating in the 2022 annual performance briefing See CNINFO (o.com.cn) CNINFO .cn, Announcement date: May 12,2023, Investor Relations Activity Record Form of ZKTECOCO., LTD. (No.2023-006) May 29,2023 Online Meeting Others Institution Host: Chief Analyst of AI at CSC: Yu Fangbo Researcher of AI at CSC: Chen Siyue Other participating organizations and personnel: Baoying Fund Management Co., Ltd., China Post Life Insurance Company Limited, Dajia Asset Management Co., Ltd., Mingshi Partners Private Equity Fund Management (Zhuhai) Co., Ltd., Shanghai Mingyu Asset Management Co., Ltd., CSOPAsset Management Limited, Huiquan Fund Management Co., Ltd., See CNINFO (o.com.cn) CNINFO .cn, Announcement date: May 30,2023, Investor Relations Activity Record Form of ZKTECOCO., LTD. (No.2023-007) ZKTeco 2023 Half Year Report 65 Chasing Securities Co., Ltd., Shanghai Xunbao Investment Management Co., Ltd., Springs Capital (Beijing) Limited, Xinghe Fund Management Co., Ltd., Fengyan Investment Management (Shanghai) Co., Ltd., Shanghai Chaos Investment (Group) Co., Ltd., Harvest Fund Management Co., Ltd., Shanghai Chaser Asset Management Company Limited, Shanghai Alluvium Asset Management (Limited Partnership), Changjiang Securities Company Limited, China Universal Asset Management Co., Ltd., Shanghai Qiyao Capital Management Partnership Limited, CITIC Group Corporation, Beijing Longrising Asset Management Co., Ltd., Shaanxi Baopu Rongyi Asset Management Co., Ltd., Tianjin Yixinan Asset Management Co., Ltd., CCBLife Insurance Asset Management Company Limited, Evergrande Life Insurance Co., Ltd., Bank of Beijing Scotiabank Asset Management Co., Ltd., Hangzhou Linnuo Private Equity Fund Management Co., Ltd., Shanghai Simike Materials Technology Co., Ltd., Zheshang Securities Co., Ltd., Guorong Securities Co., Ltd., First State Cinda Fund Management Co., Ltd., Kingsun (Shanghai) Investment Co., Ltd., Hainan Tuopu Private Equity Fund Management Co., Ltd., BOSERAFUNDSMANAGEMENTCO., LIMITED, Dacheng Fund Management Co., Ltd., Xiamen JINHENGYUInvestment Managerment Co., Ltd., Harfor Fund Management Co., Ltd., Donghai Securities Co., Ltd., ABC-CAFund Management Co., Ltd., Green Court Capital Management Ltd, Tebon Fund Management Co., Ltd., Wealth Management Department of CSC Economic and Management Commission, Broad VISION Investment Co., Ltd., Nanhua Fund Management Co., Ltd., Securities Asset Management Branch of Sealand Securities Co., Ltd., Tianhong Asset Management Co., Ltd., Guangzhou Loongzi Investment Management Co., Ltd., China Securities (International) Finance Holding Company Limited, Beihai Dizeng Investment Consulting Co., Ltd., Caitong Securities Co., Ltd.,Western Leadbank Fund Management Co., Ltd., Shenzhen Sandstone Fund Management Co., Ltd., Amundi BOCWealth Management Co., Ltd., Beijing Ziwei Private Fund Management Co., Ltd., AXA SPDBInvestment Managers Co., Ltd., Hangzhou Yudi Investment Management Co., Ltd., China Resources Yuanda Fund Management Co., Ltd., China Life Pension Company Limited, Shanghai Zhonglan Fund Management Co., Ltd., Shanghai Liling Private ZKTeco 2023 Half Year Report 66 Fund Management Co., Ltd., Gelin Fund Management Co., Ltd., Zhejiang BUTTONWOOD&RIGHTAsset Management Co., Ltd., Soochow Asset Management Co., Ltd., GFFund Management Co., Ltd., Shanghai Eureka Investment Partner Co., Ltd., ZHONG CHUANFINANCECOMPANYLIMITED, Shanghai Kemai Asset Management Co., Ltd., China Capital Management Co., Ltd., Fuanda Fund Management Co., Ltd., Zhongke Richland Asset Management Co., Ltd., Jiangdong Holdings Group Co., Ltd.,Founder Securities Co., Ltd., China Guangfa Bank Co., Ltd., Hainan Fudao Private Equity Fund Management Co., Ltd., Cathay Lujiazui Life Insurance Company Limited, New China Fund Management Co., Ltd., Jinxin Fund Management Co., Ltd., Shanghai Xiangyi Asset Management Co., Ltd., and Fuzhou Development Zone Sanxin Asset Management Co., Ltd., etc. June 12 and 14, 2023 XIAMEN ZKTECO and ZKTECO Meeting Room Field research Institution COFCOFutures Co., Ltd., Nomura Orient International Securities Co., Ltd., Sunon Investment Management Co., Ltd., Beijing Suncapital Co., Ltd., Zheshang Securities Co., Ltd., Wisdomshire Asset Management Co., Ltd., Minsheng Royal Fund Management Co., Ltd., Khazanah Nasional Berhad, Matthews Asia, Modular Asset Management, Sunshine Life, Yiheng Capital, and UBS See CNINFO (o.com.cn) CNINFO .cn, Announcement date: June 15,2023, Investor Relations Activity Record Form of ZKTECOCO., LTD. (No.2023-008) ZKTeco 2023 Half Year Report 67 Section IVCorporate Governance I. Annual General Meetings and Extraordinary General Meetings Convened During the Reporting Period 1. General Meetings convened during this reporting period Meeting Meeting Type Proportion of participatinginvestors Convening Date Disclosure Date Resolution of the Meeting The 1st Extraordinary General Meeting of Shareholders in 2023 Extraordinary General Meeting 70.96% January 16, 2023 January 16, 2023 "Proposal on Renewing the Appointment of Accounting Firms" The 2nd Extraordinary General Meeting of Shareholders in 2023 Extraordinary General Meeting 70.97% February 6, 2023 February 6, 2023 "Proposal on Changing the Investment Projects of Raised Funds, Changing the Special Account for Raised Funds, Increasing Capital and Providing Loans to Subsidiaries to Implement Investment Projects" The 3rd Extraordinary General Meeting of Shareholders in 2023 Extraordinary General Meeting 73.65% April 7,2023 April 7,2023 (I) "Proposal on the Election and Nomination of Non-Independent Director Candidates for the Third Board of Directors" (1) "Election of Mr. Che Quanhong as a Non-Independent Director Candidate for the Third Board of Directors of the Company"; (2) "Election of Mr. Jin Hairong as a Non-Independent Director Candidate for the Third Board of Directors of the Company"; (3) "Election of Mr. Ma Wentao as a Non-Independent Director Candidate for the Third Board of Directors of the Company"; (4) "Election of Mr. Fu Zhiqian as a Non-Independent Director Candidate for the Third Board of Directors of the Company". (II) "Proposal on the Election and Nomination of Independent Director Candidates for the Third Board of Directors" (1) "Election of Mr. Pang Chunlin as an Independent Director Candidate for the Third Board of Directors of the Company"; (2) "Election of Ms. Zhuo Shuyan as an Independent Director Candidate for the ZKTeco 2023 Half Year Report 68 Third Board of Directors of the Company"; (3) "Election of Ms. Dong Xiuqin as an Independent Director Candidate for the Third Board of Directors of the Company". (III) "Proposal on the Election and Nomination of Candidates for Non-employee Representative Supervisors of the 3rd Board of Supervisors" (1) "Election of Wang Huineng as a Candidate for Non-Employee Representative Supervisors of the 3rd Board of Supervisors"; (2) "Election of Yang Xianfeng as a Candidate for Non-Employee Representative Supervisors of the 3rd Board of Supervisors". Annual General Meeting of 2022 Annual General Meeting 73.66% May 19,2023 May 19,2023 (I) Proposal on the "2022 Annual Report" and Its Summary; (II) Proposal on the "2022 Work Report of the Board of Directors"; (III) Proposal on the "2022 Work Report of the Board of Supervisors"; (IV) Proposal on the "2022 Annual Financial Settlement Report"; (V) "Proposal on the 2022 Profit Distribution Plan"; (VI) Proposal on Changing the Registered Capital, Amending the Articles of Association, and Handling the Procedures for Changing Industrial and Commercial Registration; (VII) "Proposal on Applying for Comprehensive Credit Line from Banks and Handling Bank Loans"; (VIII) "Proposal on Using Idle Self-owned Funds to Purchase Financial Products"; (IX) "Proposal on 2023 Compensation Plan for Directors"; (X) "Proposal on 2023 Compensation Plan for Supervisors"; (XI) "Proposal on Changing the Implementation Location and Total Investment Amount of Some Raised Funds Investment Projects and Adjusting the Construction Content of Some Projects". 2. Extraordinary General Meetings Convened at the Request of Preferred Shareholders with Resumed Voting Rights □ Applicable Not applicable II. Changes of Directors, Supervisors and Senior Management of the Company Applicable □ Not applicable ZKTeco 2023 Half Year Report 69 Name Positions Type Date Reasons Wang Huineng Supervisor Elected April 7,2023 Election of the Board of Supervisors Yang Xianfeng Supervisor Elected April 7,2023 Election of the Board of Supervisors Liu Jiajia Supervisor Resignation upon expiration of term April 7,2023 Resignation upon expiration of term and no longer serve as a supervisor of the Company Wu Xinke Supervisor Resignation upon expiration of term April 7,2023 Resignation upon expiration of term and no longer serve as a supervisor of the Company III. Profit Distribution and Conversion of Capital Reserve to Share Capital during the Reporting Period □ Applicable Not applicable The Company plans not to distribute cash dividends, issue bonus shares, or distribute shares from capital reserve during the first half of 2023. IV. Implementation of the Company's Equity Incentive Plans, Employee Stock Ownership Plans, or Other Employee Incentive Plans Applicable □ Not applicable 1. Equity incentives On September 29,2022, the Company held the 19th Session of the Second Board Meeting and the 13th Session of the Second Supervisory Board Meeting. On October 17,2022, the Company held the second extraordinary general meeting of 2022, deliberated and approved the "Proposal on the Company's Restricted Stock Incentive Plan 2022 (Draft) and its Abstract", the "Proposal on the Company's Restricted Stock Incentive Plan Implementation Assessment Management Measures 2022", and the "Proposal on Submitting to the Shareholders' Meeting to Authorize the Board of Directors to Handle Matters Related to Equity Incentive" and other relevant proposals. During the period from September 29,2022 to October 9,2022, the Company publicly announced the names and positions of the incentive objects granted for the first time under this incentive plan. During the announcement period, the Company's board of supervisor did not receive any objections related to the proposed incentive objects of this incentive plan for the first time. On October 11,2022, the Company announced the "Statement and Verification Opinions of the Board of Supervisors on the Publicity of the List of Incentive Objects First Granted with the Incentive Plan of Restricted Stock in 2022". According to the "Proposal on the Company's Restricted Stock Incentive Plan 2022 (Draft) and its Abstract" and the authorization of the shareholders' meeting to the Board of Directors, the Company held the 21st Session of the Second Board Meeting and the 15th Session of the Second Supervisory Board Meeting on November 16,2022, and deliberated and approved the "Proposal on Adjusting the List of Incentive Objects of Restricted Stock Incentive Plan in 2022 and the Number of Granted Objects" and the "Proposal on Granting Restricted Stock to Incentive Objects of 2022 Restricted Stock Incentive Plan for the First Time". The independent directors gave their independent opinions on the above equity incentive plan, adjustment and grant, and the Board of Supervisors verified the list of incentive objects granted with restricted stock. The progress of the 2022 restricted stock incentive plan during the reporting period is as follows: ZKTeco 2023 Half Year Report 70 On June 21,2023, the Company held the Third Session of the Third Board Meeting and the Third Session of the Third Supervisory Board Meeting, and deliberated and approved the "Proposal on Adjusting the Granting Price and Quantity of 2022 Restricted Stock Incentive Plan", "Proposal on Cancelling Some Granted but Not Affiliated Restricted Stocks", and "Proposal on Granting Reserved Restricted Stocks to the Incentive Objects of 2022 Restricted Stock Incentive Plan". The Board of Directors of the Company believes that the reserved grant conditions stipulated in this incentive plan have been met, and agrees to determine June 21,2023 as the reserved grant date to grant reserved restricted stocks to the incentive objects of the 2022 restricted stock incentive plan. The independent directors gave their independent opinions on the above equity incentive adjustment, cancellation and reserved grant, and the Board of Supervisors verified the list of incentive objects granted with reserved restricted stock. Please refer to the "Announcement on Adjusting the Granting Price and Quantity of 2022 Restricted Stock Incentive Plan" (Announcement No.2023-053), "Announcement on Cancelling Some Granted but Not Affiliated Restricted Stocks" (Announcement No.2023-054), and "Announcement on Granting Reserved Restricted Stocks to the Incentive Objects of 2022 Restricted Stock Incentive Plan" (Announcement No.2023-055) disclosed by the Company on the website of CNINFO ( on June 21,2023. 2. Implementation of employee stock ownership plan □ Applicable Not applicable 3. Other employee incentive plans □ Applicable Not applicable ZKTeco 2023 Half Year Report 71 Section VEnvironmental and Social Responsibility I. Significant Environmental Issues Whether the Company or any of its subsidiaries should be categorized as a critical pollutant entities published by the environmental protection department □ Yes No Administrative penalties for environmental problems during the reporting period Name of company or subsidiary Reason for penalty Violations Penalty results The impact on the production and operation of listed companies Rectification measures of the Company Company and subsidiaries Not applicable Not applicable Not applicable Not applicable Not applicable Refer to other environmental information disclosed by key pollutant discharge units The Company and its subsidiaries are not listed as key pollutant discharge units by the environmental protection department. The Company and its subsidiaries conscientiously implement environmental protection laws and regulations such as the "Environmental Protection Law of the People's Republic of China", the "Law of the People's Republic of China on Prevention and Control of Water Pollution", the "Law of the People's Republic of China on the Prevention and Control of Atmospheric Pollution", the "Law of the People's Republic of China on Prevention and Control of Environmental Noise Pollution", and the "Law of the People's Republic of China on Prevention and Control of Environmental Pollution by Solid Waste" in their daily production and operation. The production and operating activities of the Company and its subsidiaries comply with the relevant national environmental protection requirements, and there are no cases of being punished for violations of laws and regulations. The Company has passed the ISO14001:2015 environmental management system certification, and has developed and implemented systems such as the "Environmental Factor Identification and Evaluation Procedure", the "Environmental Monitoring and Control Procedure", and the "Waste Management Specification". Measures taken to reduce carbon emissions during the reporting period and their effects □ Applicable Not applicable Reasons for not disclosing other environmental information Not applicable II. Social Responsibilities (I) Shareholders' equity protection The Company has formed a modern corporate governance structure that separates, supports, and balances the board of shareholders, Board of Directors, Board of Supervisors, and management in strict accordance with the requirements of laws and regulations such as the "Company Law", the "Securities Law", the "Code of Corporate Governance for Listed Companies", the "Rules Governing the Listing of Shares on the ChiNext Market of Shenzhen Stock Exchange", and the "Shenzhen Stock Exchange Guideline No.2 on Self Regulation of Listed Companies - Normative Operation of Listed Companies on the Growth Enterprise Board", and established an internal control system based on the Company's "Articles of Association", with core structures such as the "Rules of ZKTeco 2023 Half Year Report 72 Procedure for Shareholders' Meeting", the "Rules of Procedure of the Board of Directors", and the "Rules of Procedure for the Board of Supervisors". The Company attaches great importance to the protection of investors' rights and interests, strictly fulfills its information disclosure obligations in accordance with regulatory requirements, and communicates with investors through various means such as on-site research, investor phone calls, and investor relationship interaction platforms to improve the Company's transparency and effectively protect the legitimate rights and interests of investors, especially small and medium-sized investors. During the reporting period, the Company held one annual general meeting and three extraordinary general meetings. The convening and voting procedures of the shareholders' meeting strictly follow the provisions of laws, regulations, and the Company's Articles of Association. A combination of on-site voting and online voting is adopted at the shareholders' meeting, providing convenient conditions for investors to fully participate in the shareholders' meeting and ensuring shareholders' right to know, participate, and vote on significant events of the Company. When the major matters that affect the interests of small and medium-sized investors are deliberated at the shareholders' meeting, separate counting of votes for small and medium-sized investors shall be carried out and timely public disclosure shall be made in the resolutions of the shareholders' meeting to fully protect the rights and interests of small and medium-sized investors. (II) Protection of employee rights and interests The Company always adheres to the "people-oriented" talent concept, strictly implements various laws and regulations such as the "Labor Law", plays the role of trade unions, respects and protects the legitimate rights and interests of employees, and effectively guarantees their occupational health and safety. For new employees, the Company actively cultivates and promotes the corporate culture spirit of responsibility, integrity, practicality, and excellence. Through the 1,700 ㎡ corporate development and cultural exhibition hall visit and learning, the Company strengthens employees' sense of organizational responsibility, and enhances employees' sense of honor and pride. The Company attaches great importance to employee skill training to improve their skill quality. The Company makes efforts to promote employee education and training, improve the treatment of skilled workers, and focuses on recognition and rewards towards the frontline. The Company establishes a talent training mechanism, including on-the-job training, job rotation communication, mentorship, internal trainers, and professional technical training, to accelerate employee career growth and broaden employee development channels. The Company adheres to the concept of "safety first, precaution crucial", pays attention to the occupational health of employees, and formulates systems such as the "Occupational Disease Management System" and "Occupational Disease Physical Examination Management Process" in accordance with relevant laws and regulations. By focusing on controlling the operation and activities related to important occupational health and safety risk factors, pasting occupational health notification cards on site, distributing labor protection equipment regularly, developing work safety operation manuals, and strengthening their work skills, quality awareness and occupational health and safety awareness through on-the-job training, the Company continuously improves employees' ideological awareness of work safety. The office area is equipped with emergency medicine, fire prevention equipment, gas masks and other items for emergency use. The Company regularly holds fire drills and training, showcasing the usage methods of commonly used fire extinguishers to employees, and guiding them to learn initial fire fighting and other knowledge. At the same time, ZKTECO and Guangdong Zkteco have passed the ISO45001 occupational health and safety management system certification. They conduct annual occupational disease hazard factor testing in the workplace, and conduct professional occupational health examinations for personnel in positions exposed to hazardous factors through testing, pay attention to employee health and reduce the risk of occupational diseases. An inspection team is established within the enterprise, the safety inspection system is strictly implemented, and a combination of safety self-inspection and special inspection, routine inspection and surprise inspection, and inspection and rectification is adopted, to continuously eliminate unsafe factors in production such as human, machine and environmental factors. The Company listens to the voices of its employees and effectively solves their difficulties. The Company innovatively carries out the "ZKTeco Tree Hole" activity to collect employee opinions, continues to provide traditional holiday condolences, improves employee accommodation environment, and provides multiple services such as child-care centers, libraries, medical and health ZKTeco 2023 Half Year Report 73 promotion, and annual physical examinations for employees. The Company regularly holds employee birthday parties, sports events, outdoor activities, employee interest clubs, cultural salons, and other forms of activities. Moreover, the Company establishes employee assistance funds. In addition, the Company provides interest free housing loans to eligible key personnel to effectively safeguard and ensure the interests of employees and enhance employees' sense of belonging, which has won the trust and support of the majority of employees. (III) Protection of the rights and interests of suppliers, customers, and consumers The cooperation between the Company and suppliers is based on the principles of fairness, justice, mutual benefit, and win-win cooperation. The mutual trust, conventions, and contracts established by both parties in the cooperation are the foundation of business cooperation, and improving efficiency and common development are the common goals of both parties. The supply chain has always adhered to the principles of "sunshine purchase, honesty and trustworthiness, integrity and self-discipline", requiring suppliers to also bear relevant responsibilities for social responsibility and environmental impact. By formulating complete procurement management agreements, including the "Integrity Agreement", "Procurement Framework Agreement", and "CSRAgreement", and continuously improving the procurement process, the Company ensures that the source of materials is legal and compliant. The Company attaches great importance to the quality and safety of its products, and has established quality management systems such as the "Supply Quality Agreement" with suppliers to further standardize supplier management, improve efficiency and service quality, and work together with supply chain partners to create better products for customers. Starting from customer needs and experiences, the Company continuously improves organizational construction, institutional management, financial supervision, process control and comprehensive audit of budget and final accounts. While providing high-quality products and services for customers, as well as creating greater value for society, partners and customers, the Company continuously enhances its own value. The Company adheres to the value concept of "working together to achieve win-win cooperation". The Company goes forward hand in hand with partners and customers. With integrity and reputation as the foundation of business, the Company constantly listens to the opinions of partners and customers, and strives to improve product quality and jointly create a healthy, long-term, stable and win-win cooperation ecosystem to assist in the sustainable development of the industry. The Company attaches great importance to product quality and safety, protects the interests of partners and customers, and effectively fulfills the Company's social responsibility to suppliers, partners, and customers. The Company adheres to business rules and operates with integrity as the foundation. It promises to strictly abide by applicable laws and regulations, respect the rights and interests of suppliers, partners, and customers, and keep trade secrets confidential. (IV) Environmental protection and sustainable development The Company has been committed to protecting and improving the natural environment, and adhering to people orientation, energy conservation, and work safety, adheres to the code of ethics and conscientiously implements relevant national laws and regulations in ecological environment protection, energy consumption, and work safety. The Company strives to achieve energy conservation, emission reduction, and sustainable development in the production and operation process, committed to reducing resource and energy consumption and environmental costs during production and operation, and improving resource utilization efficiency. Various energy-saving systems have been formulated, such as the "Energy Conservation Target Management System", the "Energy Conservation Publicity System", and the "Energy Conservation and Emission Reduction Reward and Punishment System". The Company actively responded to various environmental protection measures issued by the Environmental Protection Department, actively cooperated with the work instructed by the Municipal Environmental Protection Bureau, enhancing employees' environmental awareness; carried out promotional activities, strengthened supervision and inspection, and promoted the progress of environmental protection matters, playing a good leading role in environmental protection, and fulfilling social responsibilities. During the reporting period, the Company was awarded the titles of "Dongguan Environmental Management Demonstration Enterprise" and "Dongguan Safe Enterprise". (V) Public relations and social welfare undertakings The Company continued to deepen the role of the labor union, organized employees to participate in various large-scale activities organized by the city/town federation of labor unions, such as "Civilized City Co-creation", "Anti-fraud Propaganda", and "Employee ZKTeco 2023 Half Year Report 74 Library Construction". The Company allowed them to widely participate in corporate social responsibility and public welfare undertakings, continuously enriching their leisure lives. Give movie tickets and consumption vouchers to employees. In addition, the Company provided pedestrian, vehicle and access control solutions for international event venues and service areas such as the Hangzhou Asian Games Esports Hall, creating a safe, convenient and efficient travel experience to support the development of the sports industry. The Company actively participated in the 2023 "6·30" Assistance to Rural Revitalization and Dongguan Charity Day activities in Tangxia Town and Zhangmutou Town, making positive contributions to consolidating and expanding poverty alleviation achievements and rural revitalization, and promoting common prosperity. ZKTeco 2023 Half Year Report 75 Section VISignificant Events I. Commitments completed by actual controllers, shareholders, related parties, purchasers, or the Company within the reporting period and commitments not fulfilled by the end of the reporting period □ Applicable Not applicable There are no commitments completed by actual controllers, shareholders, related parties, purchasers, or the Company within the reporting period and commitments not fulfilled by the end of the reporting period. II. Non Operating Occupation of Funds by Controlling Shareholders and Other Related Parties of Listed Company □ Applicable Not applicable During the reporting period, there was no non-operating occupation of funds by controlling shareholders or other related parties of the listed company. III. Illegal Provision of Guarantees for External Parties □ Applicable Not applicable There were no illegal external guarantees during the reporting period of the Company. IV. Appointment and Dismissal of Accounting Firms Whether the half year financial report has been audited □ Yes No The Company's Half Year Report has not been audited. V. Explanation Given by the Board of Directors and Board of Supervisors Regarding the "Non-standard Audit Report" Issued by the CPAFirm for the Current Reporting Period □ Applicable Not applicable VI. Explanation Given by the Board of Directors regarding the "Non-standard Audit Report" in the Previous Year □ Applicable Not applicable VII. Matters Related to Bankruptcy Reorganization □ Applicable Not applicable There were no bankruptcy or restructuring related matters during the reporting period of the Company. ZKTeco 2023 Half Year Report 76 VIII. Litigation Matters Major litigation and arbitration matters Applicable □ Not applicable Basic information of litigation (arbitration) Amount involved (RMB '0,000) Is there an estimated liability formed Progress of litigation (arbitration) Litigation (arbitration) trial results and effects Execution of litigation (arbitration) judgments Disclosure Date Disclosure Index Patent dispute filed by Hanwang Technology Co., Ltd. against the Company and its subsidiary XIAMEN ZKTECO 11,048.6 No The Beijing Intellectual Property Court has ruled to reject all lawsuits filed by the other party The court ruled to dismiss the other party's lawsuit, which has no impact on the Company Not involved June 30, 2023 "Announcement on the Progress of Litigation Matters" on CNINFO (Announcement No.: 2023-059) Unfair competition dispute filed by the Company against Zokon Industry 200 No After the second instance judgment, Zokon Industry filed a retrial application, and the Guangdong Higher People's Court issued a notice of appearance for civil application retrial case (2022) YMS No.17262 to the Company on February 15,2023 The second instance court ruled that Zokon Industry compensate the Company and Shenzhen ZKTeco for a loss of RMB 2 million, and the retrial application does not affect the execution of the second instance judgment The Company and Shenzhen ZKTeco submitted an "Application for Execution" to the Shenzhen Intermediate People's Court and was accepted by the Shenzhen Intermediate People's Court. Currently, the Company and Shenzhen ZKTeco have not received compensation from the other party April 28, 2023 CNINFO (.cninfo.com.cn) "2022 Annual Report of ZKTECO CO., LTD." Disputes filed by Zokon Industry over infringement of trademark rights and unfair competition 500 Yes (of which RMB 600,000 forms estimated liabilities) The Guangdong Higher People's Court has accepted the appeal application between the The first instance judgment has not taken effect, and the second instance trial is ongoing The second instance trial is ongoing April 28, 2023 CNINFO (.cninfo.com.cn) "2022 Annual Report of ZKTECO CO., LTD." ZKTeco 2023 Half Year Report 77 against the Company and Shenzhen Xinjiacheng Intelligent Technology Co., Ltd. Company and Shenzhen Xinjiacheng Intelligent Technology Co., Ltd., and the second instance is ongoing Other lawsuits/arbitrations where the Company (including subsidiary companies in the consolidated financial statements) as the plaintiff fails to meet the disclosure standards for major lawsuits 1,193.83 No The Company strictly follows the progress of each case No significant impact The Company strictly follows the progress of each case Not applicable Not applicable Other lawsuits/arbitrations where the Company (including subsidiary companies in the consolidated financial statements) as the defendant fails to meet the disclosure standards for major lawsuits 14.78 No The Company strictly follows the progress of each case No significant impact The Company strictly follows the progress of each case Not applicable Not applicable Other litigation matters □ Applicable Not applicable IX. Punishment and Rectification □ Applicable Not applicable ZKTeco 2023 Half Year Report 78 X. The Integrity of the Company, Its Controlling Shareholders, and Actual Controllers Applicable □ Not applicable During the reporting period, the Company, its controlling shareholders, and actual controllers were in good faith, and there were no instances of failure to fulfill effective court judgments or outstanding debts of significant amounts. XI. Significant Related-Party Transactions 1. Related-party transactions related to daily operations □ Applicable Not applicable There were no related party transactions related to daily operations during the reporting period of the Company. 2. Related-party transactions arising from the acquisition and sale of assets or equity □ Applicable Not applicable There were no related party transactions related to asset or equity acquisitions or sales during the reporting period of the Company. 3. Related-party Transactions Arising from Joint Investments on External Parties □ Applicable Not applicable During the reporting period, the Company did not engage in any related party transactions related to joint foreign investment. 4. Related Credit and Debt Transactions □ Applicable Not applicable There were no current associated rights of credit and liabilities during the reporting period of the Company. 5. Transactions with Related Financial Companies □ Applicable Not applicable There is no deposit, loan, credit or other financial businesses between the Company and its affiliated financial companies, the financial companies held by the Company and related parties. 6. Transactions between financial companies controlled by the Company and related parties □ Applicable Not applicable There is no deposit, loan, credit or other financial businesses between the financial company controlled by the Company and its affiliated parties. 7. Other significant related party transactions Applicable □ Not applicable On June 21,2023, the Company held the Third Session of the Third Board Meeting and the Third Session of the Third Supervisory Board Meeting, and deliberated and approved the "Proposal on Establishing Ecological Innovation Fund and Related Party Transactions through Cooperation with Professional Investment Institutions". It was agreed that the Company and related parties would invest in the establishment of an ecological innovation fund. The Company planned to contribute RMB 48 million, the related party Mr. Che ZKTeco 2023 Half Year Report 79 Quanhong planned to contribute RMB 12 million, and other investors planned to contribute a total of RMB 60 million, with a total investment of RMB 120 million, to establish an ecological innovation fund. Please refer to the "Announcement on Establishing Ecological Innovation Fund and Related Party Transactions through Cooperation with Professional Investment Institutions" (Announcement No.2023-056) disclosed by the Company on CNINFO on June 21,2023. Related Queries on the Disclosure Website of Temporary Reports on Major Related Party Transactions Temporary Announcement Name Temporary Announcement Disclosure Date Temporary Announcement Disclosure Website Name "Announcement on Establishing Ecological Innovation Fund and Related Party Transactions through Cooperation with Professional Investment Institutions" June 21,2023 CNINFO XII. Significant Contracts and Their Performance 1. Custody, contracting, and leasing matters (1) Custody □ Applicable Not applicable There was no custody during the reporting period of the Company. (2) Contracting □ Applicable Not applicable There was no contracting during the reporting period of the Company. (3) Leasing Applicable □ Not applicable Description of leasing During the reporting period, the Company and its subsidiaries rented offices at relevant locations for business use due to operational needs, and both parties have signed housing rental contracts. Projects that bring profits and losses to the Company that exceed 10% of the total profit during the reporting period □ Applicable Not applicable There are no leasing projects that bring profits or losses to the Company during the reporting period that exceed 10% of the total profits of the Company during the reporting period. 2. Significant guarantee Applicable □ Not applicable Unit: RMB '0,000 External guarantees provided by the Company and its subsidiaries (excluding guarantees provided to subsidiaries) Name of Disclosu Guarante Actual Actual Type of Collatera Counter Guarante Whether Whether ZKTeco 2023 Half Year Report 80 guarantee object re date of guarantee limit related announcements e amount occurrence date guarantee amount guarantee l (if any) guarantee (if any) e period it has been fulfilled to guarantee for related parties Guarantee of the Company to its subsidiaries Name of guarantee object Disclosure date of guarantee limit related announcements Guarantee amount Actual occurrence date Actual guarantee amount Type of guarantee Collateral (if any) Counter guarantee (if any) Guarantee period Whether it has been fulfilled Whether to guarantee for related parties ZKTECO (GUANGDONG) CO., LTD 25,000 December 16, 2019 0 15 years No No Total approved guarantee amount for subsidiaries during the reporting period (B1) 100,000 Total actual amount of guarantee for subsidiaries during the reporting period (B2) 0 Total approved guarantee amount for subsidiaries at the end of the reporting period (B3) 100,000 Total actual guarantee balance for subsidiaries at the end of the reporting period (B4) 0 Guarantee provided by subsidiaries to subsidiaries Name of guarantee object Disclosure date of guarantee limit related announcements Guarantee amount Actual occurrence date Actual guarantee amount Type of guarantee Collateral (if any) Counter guarantee (if any) Guarantee period Whether it has been fulfilled Whether to guarantee for related parties Total amount of company guarantee (i.e. the total of the first three major items) Total approved guarantee amount during the reporting period (A1+B1+C1) 100,000 Total actual amount of guarantees incurred during the reporting period (A2+B2+C2) 0 Total approved guarantee amount at the end of the reporting period (A3+B3+C3) 100,000 Total actual guarantee balance at the end of the reporting period (A4+B4+C4) 0 Proportion of actual total guarantee amount 0.00% ZKTeco 2023 Half Year Report 81 (i.e. A4+B4+C4) to the Company's net assets Including: Balance of guarantees provided to shareholders, actual controllers, and their related parties (D) 0 Balance of debt guarantee provided directly or indirectly for guaranteed objects with an asset liability ratio exceeding 70% (E) 0 Amount of the total guarantee exceeding 50% of net assets (F) 0 Total amount of the above three guarantees (D+E+F) 0 Explanation of situations where there is a guarantee liability or evidence indicating the possibility of assuming joint and several liability for the unexpired guarantee contract during the reporting period (if any) Not applicable Explanation of providing external guarantees in violation of prescribed procedures (if any) Not applicable Explanation of the specific situation of using composite guarantee 3. Significant contracts for daily operations There were no significant contracts for daily operations during the reporting period of the Company. 4. Other significant contracts □ Applicable Not applicable There were no other significant contracts during the reporting period of the Company. XIII. Explanation of Other Significant Events □ Applicable Not applicable There are no other significant matters that need to be explained during the reporting period of the Company. XIV. Significant Events of the Company's Subsidiaries □ Applicable Not applicable ZKTeco 2023 Half Year Report 82 Section VIIChanges in Shares and Information about Shareholders I. Changes in Shares 1. Changes in shares Unit: share Before the change Increase or decrease in this change (+, -) After the change Quantity Proportion Issue new shares Bonus Share transferred from capital reserve Others Subtotal Quantity Proportion I. Restricted shares 115,239,37677.61% 34,012,262 -1,865,16832,147,094147,386,47076.35% 1. Shares held by State 2. Shares held by state-owned legal persons 6,9960.00% -6,996 -6,9960 3. Shares held by other domestic enterprises 115,227,13877.60% 34,012,262 -1,852,93032,159,332147,386,47076.35% Including: shares held by domestic legal persons 89,051,89359.97% 26,160,962 -1,848,68524,312,277113,364,17058.73% Shares held by domestic natural persons 26,175,24517.63% 7,851,300 -4,2457,847,05534,022,30017.62% 4. Foreign shareholding 5,2420.00% -5,242 -5,2420 Including: shares held by overseas legal persons 5,1580.00% -5,158 -5,1580 Shares held by overseas natural person 840.00% -84 -840 II. Shares without trading restrictions 33,252,67522.39% 10,535,3531,865,16812,400,52145,653,19623.65% 1. RMB denominated ordinary shares 33,252,67522.39% 10,535,3531,865,16812,400,52145,653,19623.65% 2. Domestic listed foreign shares 3. Overseas ZKTeco 2023 Half Year Report 83 listed foreign shares 4. Others III. Total shares 148,492,051100.00% 44,547,615 44,547,615193,039,666 100.00 % Reasons for changes in shares Applicable □ Not applicable 1. Reasons for changes in restricted shares On February 17,2023, the lockup period of the Company's initial public offering of offline restricted shares expired and the shares went public. The number of shareholders with the restrictions lifted was 5,361, with 1,865,168 shares, accounting for 1.26% of the Company's total share capital at the time of lifting the restrictions. 2. Reasons for changes in total shares Conversion of public reserve funds to share capital: The Company's equity distribution plan for 2022 is as follows: to distribute a cash dividend of RMB 3.5 (including tax) per 10 shares to all shareholders based on the Company's total capital of 148,492,051 shares as of December 31,2022, with the total cash dividend distribution of RMB 51,972,217.85 (including tax); at the same time, to convert capital reserves to share capital, and convert 3 shares per 10 shares to all shareholders with a total of 148,492,051 shares, with the total conversion of 44,547,615 shares. After the conversion, the total share capital of the Company will increase to 193,039,666 shares; no bonus shares will be given. Approval of changes in shares Applicable □ Not applicable The 2022 annual equity distribution plan of the Company has been deliberated and approved by the 2022 annual general meeting held on May 19,2023, and the Company disclosed the "2022 Annual Equity Distribution Implementation Announcement" (Announcement No.: 2023-049) on CNINFO ( on May 25,2023. Transfer of changes in shares Applicable □ Not applicable The registration date for the Company's annual equity distribution in 2022 is May 30,2023, and the ex-dividend date is May 31,2023. The increased shares were registered in the shareholder's securities account on May 31,2023. Implementation progress of share repurchase □ Applicable Not applicable Progress in implementing centralized bidding trading to reduce holdings and repurchase shares □ Applicable Not applicable The impact of share changes on financial indicators such as basic earnings per share and diluted earnings per share for the most recent year and period, and net assets per share attributable to ordinary shareholders of the Company Applicable □ Not applicable During the reporting period, due to the Company's implementation of converting capital reserve to share capital, the total share capital increased from 148,492,051 shares to 193,039,666 shares, resulting in corresponding dilution of earnings per share and net assets per ZKTeco 2023 Half Year Report 84 share. The relevant data can be found in "IV. Main Accounting Data and Financial Indicators" of "Section IICompany Profile and Key Financial Indicators" of the report. Other contents deemed necessary by the Company or required to be disclosed by the securities regulatory authority □ Applicable Not applicable 2. Changes in restricted shares Applicable □ Not applicable Unit: share Name of shareholder Number of restricted shares at the beginning of the period Number of shares released from trading restrictions in this period Increase in restricted shares during the period Number of restricted shares at the end of the period Reason for restrictions Date of releasing from trading restrictions Shenzhen ZKTeco Times Investment Co., Ltd. 45,000,000 13,500,00058,500,000 Restricted shares before IPO February 17, 2026 Che Quanhong 26,171,000 7,851,30034,022,300 Restricted shares before IPO February 17, 2026 Shenzhen JYSJ Investment Enterprise (Limited Partnership) 10,852,000 3,255,60014,107,600 Restricted shares before IPO One quarter of the shares will be unlocked from August 17,2023, until all shares are unlocked on August 17, 2026 Shenzhen JYHY Investment Enterprise (Limited Partnership) 10,708,500 3,212,55013,921,050 Restricted shares before IPO One quarter of the shares will be unlocked from August 17,2023, until all shares are unlocked on August 17, 2026 Dongguan LX Investment Partnership (Limited Partnership) 7,600,000 2,280,0009,880,000 Restricted shares before IPO August 17, 2025 Shenzhen JYLX Consulting Enterprise (Limited Partnership) 3,652,600 1,095,7804,748,380 Restricted shares before IPO One quarter of the shares will be unlocked from August 17,2023, until all shares are unlocked on August 17, 2026 ZKTeco 2023 Half Year Report 85 Shenzhen Fuhai Juanyong I Venture Investment Fund (Limited Partnership) 2,009,646 602,8942,612,540 Restricted shares before IPO August 17, 2023 Huaxin Yuanchuang (Qingdao) Capital Management Co., Ltd. - Yiwu Walden Yuanjing Venture Capital Centre (Limited Partnership) 1,406,752 422,0251,828,777 Restricted shares before IPO August 17, 2023 Huaxin Yuanchuang (Qingdao) Capital Management Co., Ltd. - Qingdao Walden Zhongxiang Investment Centre (Limited Partnership) 2,612,540 783,7623,396,302 Restricted shares before IPO August 17, 2023 Shenzhen JYQL Investment and Consulting Enterprise (Limited Partnership) 1,356,000 406,8001,762,800 Restricted shares before IPO One quarter of the shares will be unlocked from August 17,2023, until all shares are unlocked on August 17, 2026 Changjiang Wealth Asset Management - Bank of Nanjing - Changjiang Wealth - ZKTeco Employee Strategic Placement No.1 Collective Asset Management Plan 1,733,148 519,9442,253,092 Restricted shares after IPO August 17, 2023 Changjiang Wealth Asset Management - Bank of Nanjing - 272,022 81,607353,629 Restricted shares after IPO August 17, 2023 ZKTeco 2023 Half Year Report 86 Changjiang Wealth - ZKTeco Employee Strategic Placement No.2 Collective Asset Management Plan Offline issuance restricted shares 1,865,1681,865,168 0 Restricted shares after IPO February 17, 2023 Total 115,239,3761,865,16834,012,262147,386,470 -- -- II. Issuance and Listing of Securities □ Applicable Not applicable III. Number of Shareholders of the Company and Shareholding Unit: share Total number of ordinary shareholders at the end of the reporting period 18,664 Total number of preferred shareholders with restored voting rights at the end of the reporting period (if any) (see Note 8) 0 Total number of shareholders holding special voting shares (if any) 0 Shareholding of ordinary shareholders holding more than 5% or the top 10 shareholders Name of shareholder Nature of shareholder Percentage of shares Number of shares held at the end of the reporting period Changes in increase and decrease during the reporting period Number of shares with selling restrictions Number of shares without trading restrictions Pledge, marking or freezing Share status Quantity Shenzhen ZKTeco Times Investment Co., Ltd. Domestic non state-owned legal persons 30.30% 58,500,00013,500,00058,500,000 Che Quanhong Domestic natural persons 17.62% 34,022,3007,851,30034,022,300 Shenzhen JYSJ Investment Enterprise (Limited Partnership) Domestic non state-owned legal persons 7.31% 14,107,6003,255,60014,107,600 Shenzhen JYHY Investment Domestic non state-7.21% 13,921,0503,212,55013,921,050 ZKTeco 2023 Half Year Report 87 Enterprise (Limited Partnership) owned legal persons Dongguan LX Investment Partnership (Limited Partnership) Domestic non state-owned legal persons 5.12% 9,880,0002,280,0009,880,000 Shenzhen JYLX Consulting Enterprise (Limited Partnership) Domestic non state-owned legal persons 2.46% 4,748,3801,095,7804,748,380 Huaxin Yuanchuang (Qingdao) Capital Management Co., Ltd. - Qingdao Walden Zhongxiang Investment Centre (Limited Partnership) Others 1.76% 3,396,302783,7623,396,302 Shenzhen Fuhai Juanyong I Venture Investment Fund (Limited Partnership) Domestic non state-owned legal persons 1.35% 2,612,540602,8942,612,540 Changjiang Wealth Asset Management - Bank of Nanjing - Changjiang Wealth - ZKTeco Employee Strategic Placement No.1 Collective Asset Management Plan Others 1.17% 2,253,092519,9442,253,092 Huaxin Yuanchuang (Qingdao) Capital Management Co., Ltd. - Yiwu Walden Yuanjing Venture Capital Centre (Limited Partnership) Others 0.95% 1,828,777422,0251,828,777 ZKTeco 2023 Half Year Report 88 Strategic investors or general legal persons become the top 10 shareholders due to the placement of new shares (if any) (see Note 3) Changjiang Wealth Asset Management - Bank of Nanjing - Changjiang Wealth - ZKTeco Employee Strategic Placement No.1 Collective Asset Management Plan is a strategic placement plan established by the executives and core employees of ZKTECOCO., LTD. The restricted share trade period of this part of the shares is 12 months after the Company goes public. In addition, the start and end dates of the shareholding period have not been agreed with the shareholders. Description of the above shareholder's association or concerted action Shareholder Che Quanhong is elder brother of shareholder Che Quanzhong from ZKTeco Times are brothers, and son of Che Jun, partner of LXInvestment. The shareholder Che Quanhong holds 76.02% of the equity of ZKTeco Times, being the controlling shareholder of ZKTeco Times. Meanwhile, Che Quanhong holds 1.18% of the property share of shareholder LXInvestment. Che Quanzhong, the younger brother of shareholder Che Quanhong, holds a 23.98% stake in ZKTeco Times. Che Jun, the father of shareholder Che Quanhong, holds 98.68% of the property share of LXInvestment. The fund managers of shareholders Qingdao Walden and Yiwu Walden are both Huaxin Yuanchuang (Qingdao) Capital Management Co., Ltd. In addition, there is no affiliated relationship between the other shareholders of the Company. Description of the above shareholders' involvement in entrusting/entrusted voting rights and waiver of voting rights Not involved Special description of the existence of special repurchase accounts among the top 10 shareholders (see Note 11) Non-existent Shareholding of the top 10 shareholders without trading restrictions Name of shareholder Number of shares without trading restrictions held at the end of the reporting period Types of shares Types of shares Quantity Shenzhen Gohedge Fund Management Co., Ltd. - Gohedge Pearl No.1 Private Equity Fund 799,630 RMB denominated ordinary shares 799,630 Zhu Yongjian 726,213 RMB denominated ordinary shares 726,213 Hong Kong Securities Clearing Company Limited 487,917 RMB denominated ordinary shares 487,917 Xu Jie 333,730 RMB denominated ordinary shares 333,730 Ping An Securities Ltd.294,888 RMB denominated ordinary shares 294,888 China International Capital Corporation Hong Kong Asset Management Limited - CICCFT4 (QFII) 281,317 RMB denominated ordinary shares 281,317 CITICSecurities Co., Ltd.253,672 RMB denominated ordinary shares 253,672 Liu Lianxiang 248,465 RMB denominated ordinary shares 248,465 Shenzhen Gohedge Fund Management Co., Ltd. - Gohedge Pearl No.3 Private Equity Securities Investment Fund 247,000 RMB denominated ordinary shares 247,000 ZKTeco 2023 Half Year Report 89 Liu Xiaojun 212,940 RMB denominated ordinary shares 212,940 Description of the association or concerted action between the top 10 shareholders of outstanding shares without trading restrictions, as well as between the top 10 shareholders of outstanding shares without trading restrictions and the top 10 shareholders The Company does not know whether there is a related relationship between the top 10 shareholders of shares without trading restrictions, as well as between the top 10 shareholders outstanding shares without trading restrictions and the top 10 shareholders, or whether they belong to persons acting in concert. Description of top 10 ordinary shareholders participating in margin trading (if any) (see Note 4) None Does the Company have voting right difference arrangements □ Yes No Did the top 10 ordinary shareholders and the top 10 shareholders of ordinary shares without trading restrictions engage in agreed repurchase transactions during the reporting period □ Yes No The top 10 ordinary shareholders and the top 10 shareholders of ordinary shares without trading restrictions did not engage in any agreed repurchase transactions during the reporting period. IV. The Cumulative Pledged Shares of the Company's Controlling Shareholder or the Largest Shareholder and Its Concerted Action Person Account for 80% of the Company's Shares Held by Them □ Applicable Not applicable V. Changes in Shareholding of Directors, Supervisors and Senior Management Applicable □ Not applicable Name Position Tenure status Shares held at the beginning of the period (shares) Shares increased during the period (shares) Shares decreased during the period (shares) Shares held at the end of the period (shares) Number of restricted stocks granted at the beginning of the period (shares) Number of restricted stocks granted in this period (shares) Number of restricted stocks granted at the end of the period (shares) Che Quanhong Chairman Incumbent 26,171,0007,851,300034,022,300000 Total -- -- 26,171,0007,851,300034,022,300000 Note: The increase in shareholding during the reporting period mentioned above was due to the implementation of the 2022 equity distribution and conversion of provident fund to share capital. ZKTeco 2023 Half Year Report 90 VI. Changes in Controlling Shareholders and Actual Controllers Changes in controlling shareholders during the reporting period □ Applicable Not applicable There was no change in the controlling shareholder of the Company during the reporting period. Changes in actual controller during the reporting period □ Applicable Not applicable There has been no change in the actual controller of the Company during the reporting period. ZKTeco 2023 Half Year Report 91 Section VIIIInformation of Preferred Shares □ Applicable Not applicable There is no preferred share in the Company during the reporting period. ZKTeco 2023 Half Year Report 92 Section IXBonds □ Applicable Not applicable ZKTeco 2023 Half Year Report 93 Section XFinancial Report I. Audit Report Whether the Half Year Report has been audited □ Yes No The Company's half year financial report has not been audited. II. Financial Statements The unit of the financial statements in the financial notes is: RMB 1. Consolidated Balance Sheet Prepared by: ZKTECOCO., LTD. June 30,2023 Unit: RMB Item June 30,2023 January 1,2023 Current assets: Monetary funds 2,048,464,279.071,912,945,031.97 Deposit reservation for balance Lendings to banks and other financial institutions Trading financial asset 99,457,974.92204,318,406.05 Derivative financial assets Notes receivable Accounts receivable 446,450,001.33403,497,924.27 Receivable financing Prepayment 32,082,331.7630,954,685.58 Premiums receivable Reinsurance accounts receivable Reserves for reinsurance contract receivable Other receivables 35,432,462.7234,207,287.53 Including: interest receivable Dividends receivable Buying back the sale of financial assets Inventories 329,838,529.45348,280,641.59 Contract assets 301,199.94306,799.94 Held-for-sale assets Non-current assets due within one year 10,025,638.8910,025,638.89 Other current assets 16,856,210.5217,861,354.81 Total current assets 3,018,908,628.602,962,397,770.63 ZKTeco 2023 Half Year Report 94 Non-current assets: Loans and advances to customers Debt investment 18,251,667.3012,331,160.29 Other debt investment Long-term receivables Long-term equity investment 7,235,342.837,151,332.70 Other equity instrument investments Other non-current financial assets Investment real estate Fixed assets 460,240,750.81446,857,509.06 Construction in progress 76,912,095.6357,041,298.90 Productive biological assets Oil and gas assets Right-of-use asset 46,095,938.5350,640,675.59 Intangible assets 67,243,840.1368,110,512.79 Development expenditures Goodwill 515,002.85496,386.40 Long-term deferred expenses 2,965,962.303,056,310.34 Deferred income tax assets 61,230,141.4653,309,238.98 Other non-current assets 1,654,190.661,127,777.32 Total non-current assets 742,344,932.50700,122,202.37 Total assets 3,761,253,561.103,662,519,973.00 Current liabilities: Short-term loan 9,855,000.009,855,000.00 Borrowings from the Central Bank Borrowings from banks and other financial institutions Trading financial liabilities 7,049,098.87 Derivative financial liabilities Notes payable 119,716,487.5468,293,818.22 Accounts payable 177,829,570.61226,000,476.96 Advances from customer Contract liabilities 68,260,778.4358,838,840.39 Financial assets sold for repurchase Deposit from customers and interbank Acting trading securities Acting underwriting securities Payroll payable 44,534,329.6158,940,852.80 Taxes and dues payable 32,115,867.2122,621,805.04 Other payables 39,934,593.0431,429,478.43 Including: interest payable Dividends payable Handling charges and commissions ZKTeco 2023 Half Year Report 95 payable Reinsurance accounts receivable Liabilities held for sale Non-current liabilities due within one year 24,719,773.2823,718,225.39 Other current liabilities 18,378,205.6321,173,620.79 Total current liabilities 542,393,704.22520,872,118.02 Non-current liabilities: Reserves for insurance contracts Long-term loan 3,807,390.06141,757.54 Bonds payable Including: preferred stock Perpetual bonds Lease liabilities 22,052,086.0228,256,717.44 Long-term payables Long-term payroll payable Estimated liabilities 600,000.00600,000.00 Deferred income 1,946,626.062,039,702.49 Deferred tax liability 9,517,145.989,833,050.63 Other non-current liabilities 115,660.38 Total non-current liabilities 38,038,908.5040,871,228.10 Total liabilities 580,432,612.72561,743,346.12 Owner's equity: Share capital 193,039,666.00148,492,051.00 Other equity instruments Including: preferred stock Perpetual bonds Capital reserve 2,035,632,270.112,061,172,912.28 Less: treasury stock Other comprehensive income 26,569,765.955,254,175.81 Special reserve Surplus reserves 53,975,085.7753,975,085.77 General risk reserves Undistributed profits 825,608,676.86788,826,559.09 Total owner's equity attributable to the parent company 3,134,825,464.693,057,720,783.95 Minority interests 45,995,483.6943,055,842.93 Total owner's equity 3,180,820,948.383,100,776,626.88 Total liabilities and owner's equity 3,761,253,561.103,662,519,973.00 Legal Representative: Jin Hairong Person in charge of accounting work: Wang Youwu Person in charge of accounting institution: Fang Li 2. Balance Sheet of Parent Company Unit: RMB Item June 30,2023 January 1,2023 Current assets: ZKTeco 2023 Half Year Report 96 Monetary funds 1,112,655,172.331,356,208,501.46 Trading financial asset 158,367.81147,962,384.55 Derivative financial assets Notes receivable Accounts receivable 575,335,724.07584,894,333.69 Receivable financing Prepayment 23,623,252.5027,798,174.17 Other receivables 80,992,427.1633,980,555.26 Including: interest receivable 156,947.22122,433.25 Dividends receivable 14,000,000.00 Inventories 195,949,623.46201,604,881.25 Contract assets 291,421.59297,021.59 Held-for-sale assets Non-current assets due within one year 10,025,638.8910,025,638.89 Other current assets 4,282,639.214,880,995.15 Total current assets 2,003,314,267.022,367,652,486.01 Non-current assets: Debt investment 10,857,694.1010,670,541.33 Other debt investment Long-term receivables Long-term equity investment 1,151,771,457.95781,906,396.17 Other equity instrument investments Other non-current financial assets Investment real estate Fixed assets 63,824,484.7366,876,094.68 Construction in progress Productive biological assets Oil and gas assets Right-of-use asset 13,380,471.7414,733,170.98 Intangible assets 8,738,989.818,082,316.47 Development expenditures Goodwill Long-term deferred expenses 1,038,079.011,312,121.13 Deferred income tax assets 32,418,097.7029,799,536.02 Other non-current assets Total non-current assets 1,282,029,275.04913,380,176.78 Total assets 3,285,343,542.063,281,032,662.79 Current liabilities: Short-term loan Trading financial liabilities 7,049,098.87 Derivative financial liabilities Notes payable 123,247,078.2171,337,129.13 ZKTeco 2023 Half Year Report 97 Accounts payable 225,679,808.28268,538,611.36 Advances from customer Contract liabilities 36,104,797.9429,070,869.80 Payroll payable 21,946,599.5931,351,658.90 Taxes and dues payable 1,915,140.111,986,839.30 Other payables 57,374,082.6686,241,351.29 Including: interest payable Dividends payable Liabilities held for sale Non-current liabilities due within one year 6,957,649.477,376,143.83 Other current liabilities 14,718,950.5417,999,117.66 Total current liabilities 494,993,205.67513,901,721.27 Non-current liabilities: Long-term loan Bonds payable Including: preferred stock Perpetual bonds Lease liabilities 5,506,549.497,095,945.72 Long-term payables Long-term payroll payable Estimated liabilities 600,000.00600,000.00 Deferred income 472,089.66543,212.69 Deferred tax liability 4,905,741.005,231,980.02 Other non-current liabilities 115,660.38 Total non-current liabilities 11,600,040.5313,471,138.43 Total liabilities 506,593,246.20527,372,859.70 Owner's equity: Share capital 193,039,666.00148,492,051.00 Other equity instruments Including: preferred stock Perpetual bonds Capital reserve 2,047,491,577.032,073,269,021.41 Less: treasury stock Other comprehensive income Special reserve Surplus reserves 53,883,789.2853,883,789.28 Undistributed profits 484,335,263.55478,014,941.40 Total owner's equity 2,778,750,295.862,753,659,803.09 Total liabilities and owner's equity 3,285,343,542.063,281,032,662.79 3. Consolidated Profit Statement Unit: RMB Item Half Year of 2023 Half Year of 2022 Total operating revenue 937,182,670.00925,114,950.16 ZKTeco 2023 Half Year Report 98 Including: operating revenue 937,182,670.00925,114,950.16 Interest income Premium earned Revenue from handling charges and commissions II. Total operating cost 820,963,431.57838,342,425.13 Including: operating cost 488,923,174.83529,108,492.93 Interest expense Expenses from handling charges and commissions Surrender value Net payments for insurance claims Net provisions for reserves in insurance liability contracts Policy dividend expenses Reinsurance expenses Taxes and surcharges 9,064,619.078,457,928.40 Selling expense 196,138,701.98168,605,074.74 Administrative expense 60,476,345.4754,789,860.07 R&D expenses 100,984,101.7292,094,542.70 Financial expenses -34,623,511.50 -14,713,473.71 Including: interest expenses 1,807,293.551,516,520.94 Interest income 31,152,457.274,360,354.56 Plus: other income 5,763,414.146,357,304.91 Investment income ( loss expressed with "-") 1,237,665.06 -1,145,360.70 Including: income from investment in associates and joint ventures 1,092,924.55703,737.77 Gains from derecognition of financial assets measured at amortized cost Gains from foreign exchange (loss expressed with "-") Gains from net exposure hedging (loss expressed with "-") Gains from changes in fair value (loss expressed with "-") -7,045,482.43 -3,258,877.56 Losses from credit impairment (loss expressed with "-") -2,759,705.20 -2,685,995.01 Losses from impairment of assets (loss expressed with "-") -3,693,840.00 -3,232,502.13 Gains from disposal of assets (loss expressed with "-") -245,859.71 -41,828.07 III. Operating profit (loss expressed with "-") 109,475,430.2982,765,266.47 ZKTeco 2023 Half Year Report 99 Plus: non-operating revenue 281,042.36692,545.13 Less: non-operating expenditure 597,424.531,383,097.91 IV. Total profit (loss expressed with "-") 109,159,048.1282,074,713.69 Less: income tax expenses 9,350,242.665,933,954.65 V. Net profit (loss expressed with "-") 99,808,805.4676,140,759.04 (I) Classification by business continuity 1. Net profit from continuing operations (net loss expressed with "-") 99,808,805.4676,140,759.04 2. Net profit from discontinued operations (net loss expressed with "-") (II) Classification by ownership 1. Net profit attributable to shareholders of the parent company (net loss expressed with "-") 88,754,335.6270,231,661.43 2. Minority shareholders' profit and loss (net loss expressed with "-") 11,054,469.845,909,097.61 VI. Other comprehensive income - after tax 24,565,469.1213,472,794.75 Net of tax of other comprehensive income attributable to the owner of the parent company 21,315,590.1414,003,638.80 Other comprehensive income that cannot be transferred to profit or loss 1. Changes in re-measurement of the defined benefit plan 2. Other comprehensive income that cannot be transferred to profit or loss under the equity method 3. Changes in fair value of other equity instrument investments 4. Changes in the fair value of the Company's own credit risk 5. Other (2) Other comprehensive income that will be reclassified into profit or loss 21,315,590.1414,003,638.80 1. Other comprehensive income that can be transferred to profit or loss under the equity method 2. Change in fair value of other debt investments 3. Amount of financial assets reclassified into other comprehensive income 4. Provision for credit impairment of other debt investments 5. Cash flow hedging reserve 6. Translation difference of foreign currency financial statements 21,315,590.1414,003,638.80 7. Others After-tax net amount of other comprehensive income attributable to the minority shareholders 3,249,878.98 -530,844.05 VII. Total comprehensive income 124,374,274.5889,613,553.79 Total comprehensive income attributable to owners of the parent 110,069,925.7684,235,300.23 ZKTeco 2023 Half Year Report 100 company Total comprehensive income attributable to minority shareholders 14,304,348.825,378,253.56 VIII. Earnings per share: (I) Basic earnings per share 0.45980.4851 (II) Diluted earnings per share 0.45790.4851 In the event of a merger of enterprise under the same control in the current period, the net profit realized by the combined party before the merger is RMB 0.00, and the net profit realized by the combined party in the previous period is RMB 0.00. Legal Representative: Jin Hairong Person in charge of accounting work: Wang Youwu Person in charge of accounting institution: Fang Li 4. Parent Company's Profit Statement Unit: RMB Item Half Year of 2023 Half Year of 2022 I. Operating revenue 668,101,346.15804,593,627.52 Less: operating cost 470,747,145.91611,165,964.32 Taxes and surcharges 2,642,445.403,904,677.66 Selling expense 86,562,114.2976,810,089.46 Administrative expense 32,097,381.5331,977,615.07 R&D expenses 68,222,616.4666,583,440.83 Financial expenses -31,969,286.63 -16,232,086.76 Including: interest expenses 326,423.56107,859.01 Interest income 20,391,414.574,093,598.85 Plus: other income 1,426,313.932,519,587.64 Investment income ( loss expressed with "-") 22,862,372.4338,087,950.57 Including: income from investment in associates and joint ventures Gains from derecognition of financial assets measured at amortized cost Gains from net exposure hedging (loss expressed with "-") Gains from changes in fair value (loss expressed with "-") -7,049,098.87 -3,296,677.52 Losses from credit impairment (loss expressed with "-") -1,004,071.90657,172.54 Losses from impairment of assets (loss expressed with "-") -449,231.75 -874,634.97 Gains from disposal of assets (loss expressed with "-") -177,330.4610,611.57 II. Operating profit (loss expressed with "-") 55,407,882.5767,487,936.77 Plus: non-operating revenue 132,788.43662,503.05 Less: non-operating expenditure 217,320.551,173,458.93 III. Total profits (total losses expressed 55,323,350.4566,976,980.89 ZKTeco 2023 Half Year Report 101 with "-") Less: income tax expenses -2,969,189.55 -4,495,314.60 IV. Net profit (net loss expressed with "-") 58,292,540.0071,472,295.49 (I) Net profit from continuing operations (net loss expressed with "-") 58,292,540.0071,472,295.49 (II) Net profit from discontinued operations (net loss expressed with "-") V. Net of tax of other comprehensive income Other comprehensive income that cannot be transferred to profit or loss 1. Changes in re-measurement of the defined benefit plan 2. Other comprehensive income that cannot be transferred to profit or loss under the equity method 3. Changes in fair value of other equity instrument investments 4. Changes in the fair value of the Company's own credit risk 5. Other (2) Other comprehensive income that will be reclassified into profit or loss 1. Other comprehensive income that can be transferred to profit or loss under the equity method 2. Change in fair value of other debt investments 3. Amount of financial assets reclassified into other comprehensive income 4. Provision for credit impairment of other debt investments 5. Cash flow hedging reserve 6. Translation difference of foreign currency financial statements 7. Others VI. Total comprehensive income 58,292,540.0071,472,295.49 VII. Earnings per share: (I) Basic earnings per share (II) Diluted earnings per share 5. Consolidated Cash Flow Statement Unit: RMB Item Half Year of 2023 Half Year of 2022 I. Cash flows from operating activities: Cash received from sale of goods and rendering of services 971,520,477.90948,394,064.73 Net increase in deposits from customers and deposits in banks and other financial institutions Net increase in borrowings from the Central Bank ZKTeco 2023 Half Year Report 102 Net increase in borrowings from banks and other financial institutions Cash received from receiving insurance premiums of original insurance contracts Net cash received from reinsurance business Net increase in deposits and investments from policyholders Cash received from interest, handling fees and commissions Net increase in borrowings from banks and other financial institutions Net capital increase in repurchase business Net cash received from vicariously traded securities Refund of taxes and surcharges 33,538,290.5222,977,739.93 Cash received from other operating activities 23,184,790.9120,152,097.90 Subtotal of cash inflows from operating activities 1,028,243,559.33991,523,902.56 Cash paid for purchase of goods and rendering of services 464,265,830.40593,827,640.57 Net increase in loans and advances to customers Net increase in deposits in Central Bank and other banks and financial institutions Cash paid for original insurance contract claims Net increase in lendings to banks and other financial institutions Cash paid for interest, handling fees and commissions Cash paid for policy dividends Cash paid to and for employees 275,369,361.95257,817,884.32 Payments of all types of taxes 35,397,636.9742,534,871.74 Other cash payments relating to operating activities 122,480,702.89119,258,708.03 Subtotal of cash outflows from operating activities 897,513,532.211,013,439,104.66 Net cash flows from operating activities 130,730,027.12 -21,915,202.10 II. Cash flows from investing activities: Cash received from disinvestment 509,707,506.6482,990,700.78 Cash received from investment income 1,864,089.861,333,253.66 Net cash received from disposal of fixed assets, intangible assets and other long-term assets 280,330.67359,525.82 Net cash received from disposal of subsidiaries and other business units 0.00 Cash received from other investing activities 0.00 ZKTeco 2023 Half Year Report 103 Subtotal of cash inflows from investing activities 511,851,927.1784,683,480.26 Cash paid to acquire and construct fixed assets, intangible assets and other long-term assets 54,738,953.7437,895,915.27 Cash paid for investments 554,750,509.9130,223,471.89 Net increase in pledge loans Net cash paid to acquire subsidiaries and other business units Cash paid for other investing activities 2,046,795.003,315,980.00 Subtotal of cash outflows from investing activities 611,536,258.6571,435,367.16 Net cash flows from operating activities -99,684,331.4813,248,113.10 III. Cash flows from financing activities: Cash received from investors 1,415,200.020.00 Including: cash received by subsidiaries from the absorption of minority shareholders' investments 1,415,200.020.00 Cash received from borrowings 3,700,000.00 Cash received from other financing activities 0.00 Subtotal of cash inflows from financing activities 5,115,200.020.00 Cash paid for debt repayments 26,952.47101,210.46 Cash paid for distribution of dividends and profits or payment of interest 64,829,721.10345,152.50 Including: dividends and profits paid to minority shareholders by subsidiaries 12,806,836.00329,794.92 Cash paid for other financing activities 16,527,983.1015,370,357.75 Subtotal of cash outflows from financing activities 81,384,656.6715,816,720.71 Net cash flows from financing activities -76,269,456.65 -15,816,720.71 IV. Effect of exchange rate changes on cash and cash equivalents 7,540,644.4312,859,169.48 V. Net increase in cash and cash equivalents -37,683,116.58 -11,624,640.23 Plus: beginning balance of cash and cash equivalents 1,077,608,258.10516,288,425.76 VI. Closing balance of cash and cash equivalents 1,039,925,141.52504,663,785.53 6. Cash Flow Statement of Parent Company Unit: RMB Item Half Year of 2023 Half Year of 2022 I. Cash flows from operating activities: Cash received from sale of goods and rendering of services 730,327,882.57856,762,939.77 Refund of taxes and surcharges 30,787,233.3020,216,813.85 Cash received from other operating activities 13,045,527.9123,199,549.23 Subtotal of cash inflows from operating activities 774,160,643.78900,179,302.85 Cash paid for purchase of goods and rendering of services 471,387,756.01716,444,477.99 ZKTeco 2023 Half Year Report 104 Cash paid to and for employees 126,389,611.09131,421,104.42 Payments of all types of taxes 2,854,237.658,901,305.92 Other cash payments relating to operating activities 169,870,087.9194,595,490.74 Subtotal of cash outflows from operating activities 770,501,692.66951,362,379.07 Net cash flows from operating activities 3,658,951.12 -51,183,076.22 II. Cash flows from investing activities: Cash received from disinvestment 406,011,800.0050,679,575.47 Cash received from investment income 10,743,851.379,933,000.00 Net cash received from disposal of fixed assets, intangible assets and other long-term assets 178,820.172,869,012.46 Net cash received from disposal of subsidiaries and other business units Cash received from other investing activities 0.00 Subtotal of cash inflows from investing activities 416,934,471.5463,481,587.93 Cash paid to acquire and construct fixed assets, intangible assets and other long-term assets 1,659,867.55999,742.00 Cash paid for investments 364,000,000.0065,291,797.43 Net cash paid to acquire subsidiaries and other business units Cash paid for other investing activities 2,046,795.003,315,980.00 Subtotal of cash outflows from investing activities 367,706,662.5569,607,519.43 Net cash flows from operating activities 49,227,808.99 -6,125,931.50 III. Cash flows from financing activities: Cash received from investors Cash received from borrowings Cash received from other financing activities Subtotal of cash inflows from financing activities Cash paid for debt repayments Cash paid for distribution of dividends and profits or payment of interest 51,972,217.85 Cash paid for other financing activities 5,671,917.654,080,741.56 Subtotal of cash outflows from financing activities 57,644,135.504,080,741.56 Net cash flows from financing activities -57,644,135.50 -4,080,741.56 IV. Effect of exchange rate changes on cash and cash equivalents 1,493,480.053,017,330.55 V. Net increase in cash and cash equivalents -3,263,895.34 -58,372,418.73 Plus: beginning balance of cash and cash equivalents 731,506,487.43290,328,864.13 VI. Closing balance of cash and cash equivalents 728,242,592.09231,956,445.40 ZKTeco 2023 Half Year Report 105 7. Consolidated Statement of Changes in Equity Amount in current period Unit: RMB Item Half Year of 2023 Equity attributable to owners of the parent company Minority interests Total owner's equity Share capital Other equity instruments Capital reserve Less: treasury stock Other comprehensive income Special reserve Surplus reserves General risk reserves Undistributed profits Others Subtotal Preferred stock Perpetual bonds Others Ending balance of previous year 148,492,051.00 2,061,172,912.28 5,255,222.65 53,975,085.77 788,571,917.98 3,057,467,189.6843,025,126.303,100,492,315.98 Plus: changes in accounting policies -1,046.84 254,641.11 253,594.2730,716.63284,310.90 Corrections of prior period errors Merger of enterprise under the same control Ot ZKTeco 2023 Half Year Report 106 hers II. Beginning balance of this year 148,492,051.00 2,061,172,912.28 5,254,175.81 53,975,085.77 788,826,559.09 3,057,720,783.9543,055,842.933,100,776,626.88 III. Amount increase/decrease of the current period (decrease expressed with "-") 44,547,615.00 -25,540,642.17 21,315,590.14 36,782,117.77 77,104,680.742,939,640.7680,044,321.50 (I) Total comprehensive income 21,315,590.14 88,754,335.62 110,069,925.7614,304,348.82124,374,274.58 (II) Capital invested and reduced by the owners 19,006,972.83 0.00 19,006,972.831,442,127.9420,449,100.77 1. Common stock contributed by owners 0.001,415,200.021,415,200.02 2. Capital invested by holders of other equity instruments 3. Amount of share-based payments recognized in equity 18,876,651.21 18,876,651.2126,927.9218,903,579.13 4. Others 130,321.62 130,321.62 130,321.62 ZKTeco 2023 Half Year Report 107 (III) Profit distribution -51,972,217.85 -51,972,217.85 - 12,806,836.00 -64,779,053.85 1. Surplus reserves withdrawal 2. Withdrawal of general risk preparation 3. Distribution to owners (or shareholders) -51,972,217.85 -51,972,217.85 - 12,806,836.00 -64,779,053.85 4. Others (IV) Internal carryover of owner's equity 44,547,615.00 -44,547,615.00 1. Capital surplus transfer to capital (or equity capital) 44,547,615.00 -44,547,615.00 2. Surplus reserve transfer to capital (or equity capital) 3. Surplus reserve offsetting ZKTeco 2023 Half Year Report 108 losses 4. Changes in defined benefit plans carried forward to retained earnings 5. Retained income carried forward from other comprehensive income 6. Others (V) Special reserve 1. Withdrawal in this period 2. Use in the current period (VI) Others IV. Ending balance of current period 193,039,666.00 2,035,632,270.11 26,569,765.95 53,975,085.77 825,608,676.86 3,134,825,464.6945,995,483.693,180,820,948.38 Amount of previous year Unit: RMB Item Half Year of 2022 ZKTeco 2023 Half Year Report 109 Equity attributable to owners of the parent company Minority interests Total owner's equity Share capital Other equity instruments Capital reserve Less: treasury stock Other comprehensive income Special reserve Surplus reserves General risk reserves Undistributed profits Others Subtotal Preferred stock Perpetual bonds Others Ending balance of previous year 111,369,038.00 636,363,658.40 -25,505,560.02 42,581,853.37 607,725,356.63 1,372,534,346.3836,170,791.651,408,705,138.03 Plus: changes in accounting policies -3,149.17 58,510.83 55,361.6610,573.2665,934.92 Corrections of prior period errors Merger of enterprise under the same control Others II. Beginning balance of this year 111,369,038.00 636,363,658.40 -25,508,709.19 42,581,853.37 607,783,867.46 1,372,589,708.0436,181,364.911,408,771,072.95 III. Amount 14,003,638.80 70,231,661.43 84,235,300.235,048,458.6489,283,758.87 ZKTeco 2023 Half Year Report 110 increase/decrease of the current period (decrease expressed with "-") (I) Total comprehensive income 14,003,638.80 70,231,661.43 84,235,300.235,378,253.5689,613,553.79 (II) Capital invested and reduced by the owners 1. Common stock contributed by owners 2. Capital invested by holders of other equity instruments 3. Amount of share-based payments recognized in equity 4. Others (III) Profit distribution -329,794.92 -329,794.92 1. Surplus reserves withdrawal 2. ZKTeco 2023 Half Year Report 111 Withdrawal of general risk preparation 3. Distribution to owners (or shareholders) -329,794.92 -329,794.92 4. Others (IV) Internal carryover of owner's equity 1. Capital surplus transfer to capital (or equity capital) 2. Surplus reserve transfer to capital (or equity capital) 3. Surplus reserve offsetting losses 4. Changes in defined benefit plans carried forward to ZKTeco 2023 Half Year Report 112 retained earnings 5. Retained income carried forward from other comprehensive income 6. Others (V) Special reserve 1. Withdrawal in this period 2. Use in the current period (VI) Others IV. Ending balance of current period 111,369,038.00 636,363,658.40 -11,505,070.39 42,581,853.37 678,015,528.89 1,456,825,008.2741,229,823.551,498,054,831.82 8. Statement of Changes in Equity of the Parent Company Amount in current period Unit: RMB Item Half Year of 2023 Share capital Other equity instruments Capital reserve Less: treasury stock Other comprehensive income Special reserve Surplus reserves Undistributed profits Others Total owner's equity Preferred stock Perpetual bonds Others ZKTeco 2023 Half Year Report 113 Ending balance of previous year 148,492,051.00 2,073,269,021.41 53,883,789.28478,054,103.62 2,753,698,965.31 Plus: changes in accounting policies -39,162.22 -39,162.22 Corrections of prior period errors Others II. Beginning balance of this year 148,492,051.00 2,073,269,021.41 53,883,789.28478,014,941.40 2,753,659,803.09 III. Amount increase/decrease of the current period (decrease expressed with "-") 44,547,615.00 -25,777,444.38 6,320,322.15 25,090,492.77 (I) Total comprehensive income 58,292,540.00 58,292,540.00 (II) Capital invested and reduced by the owners 18,770,170.62 18,770,170.62 1. Common stock contributed by owners 0.00 2. Capital invested by holders of other equity instruments 3. Amount of share-based payments recognized in equity 18,770,170.62 18,770,170.62 4. Others (III) Profit distribution -51,972,217.85 -51,972,217.85 1. Surplus reserves withdrawal 2. Distribution to owners (or shareholders) -51,972,217.85 -51,972,217.85 3. Others (IV) Internal carryover of 44,547,615.00 -44,547,615.00 ZKTeco 2023 Half Year Report 114 owner's equity 1. Capital surplus transfer to capital (or equity capital) 44,547,615.00 -44,547,615.00 2. Surplus reserve transfer to capital (or equity capital) 3. Surplus reserve offsetting losses 4. Changes in defined benefit plans carried forward to retained earnings 5. Retained income carried forward from other comprehensive income 6. Others (V) Special reserve 1. Withdrawal in this period 2. Use in the current period (VI) Others IV. Ending balance of current period 193,039,666.00 2,047,491,577.03 53,883,789.28484,335,263.55 2,778,750,295.86 Amount of previous period Unit: RMB Item Half Year of 2022 Share capital Other equity instruments Capital reserve Less: treasury stock Other comprehensive income Special reserve Surplus reserves Undistributed profits Others Total owner's equity Preferred stock Perpetual bonds Others Ending balance of previous year 111,369,038.00 648,463,311.34 42,490,556.88375,515,011.98 1,177,837,918.20 Plus: changes in accounting policies -68,353.91 -68,353.91 Corrections of ZKTeco 2023 Half Year Report 115 prior period errors Others II. Beginning balance of this year 111,369,038.00 648,463,311.34 42,490,556.88375,446,658.07 1,177,769,564.29 III. Amount increase/decrease of the current period (decrease expressed with "-") 71,472,295.49 71,472,295.49 (I) Total comprehensive income 71,472,295.49 71,472,295.49 (II) Capital invested and reduced by the owners 1. Common stock contributed by owners 2. Capital invested by holders of other equity instruments 3. Amount of share-based payments recognized in equity 4. Others (III) Profit distribution 1. Surplus reserves withdrawal 2. Distribution to owners (or shareholders) 3. Others (IV) Internal carryover of owner's equity 1. Capital surplus transfer to capital (or equity capital) 2. Surplus reserve transfer to capital (or equity capital) ZKTeco 2023 Half Year Report 116 3. Surplus reserve offsetting losses 4. Changes in defined benefit plans carried forward to retained earnings 5. Retained income carried forward from other comprehensive income 6. Others (V) Special reserve 1. Withdrawal in this period 2. Use in the current period (VI) Others IV. Ending balance of current period 111,369,038.00 648,463,311.34 42,490,556.88446,918,953.56 1,249,241,859.78 ZKTeco 2023 Half Year Report 117 III. Basic Information of the Company ZKTECOCO., LTD. was established on December 14,2007 by Che Jun and Che Quanhong, with registration number 441900000160222 and registered capital of RMB 5,000,000.00 at the time of establishment. The Company obtained the "Business License" with a unified social credit code of 914419006698651618 on July 14,2016. According to the "Reply of CSRC to Approval for the Registration of Initial Public Offering of Stocks of ZKTECOCO., LTD." (ZJXK [2022] No.926), the Company publicly issues 37,123,013 RMB denominated ordinary shares (A shares) to the public, with a changed capital of RMB 148,492,051.00. On April 26,2023, the Company held the Second Session of the Third Board Meeting and the Second Session of the Third Supervisory Board Meeting. On May 19,2023, the Company held Annual General Meeting of 2022, and deliberated and approved the "Proposal on the 2022 Profit Distribution Plan". The Company's profit distribution plan for 2022 is as follows: to distribute a cash dividend of RMB 3.5 (including tax) per 10 shares to all shareholders based on the Company's total capital of 148,492,051 shares as of December 31,2022, with the total cash dividend distribution of RMB 51,972,217.85 (including tax); at the same time, to convert capital reserves to share capital, and convert 3 shares per 10 shares to all shareholders with a total of 148,492,051 shares, with the total conversion of 44,547,615 shares. After the conversion, the total share capital of the Company will increase to 193,039,666 shares; no bonus shares will be given. The Company has completed the registration of industrial and commercial changes, and its share capital has increased from 148,492,051 shares to 193,039,666 shares. The registered capital has been changed from RMB 148,492,051 to RMB 193,039,666. Main business address of the Company: No.32, Pingshan Industrial Road, Tangxia Town, Dongguan, Guangdong, China Main operating activities of the Company: ZKTeco is mainly engaged in the R&D, design, production, sales, and service of biometric technology and related products. The ultimate controller of the Company is Che Quanhong, who directly holds 17.62% of the Company's shares and indirectly controls 30.30% of the Company's shares through the controlling shareholder ZKTeco Times, totaling 47.92% of the Company's shares. This financial statement was approved by the Board of Directors of the Company on August 28,2023. As of June 30,2023, the scope and changes included in the consolidated financial statements are detailed in "Section XFinancial Report VIII. Changes to the Consolidation Scope" and "Section XFinancial Report IX. Equity in Other Entities". IV. Preparation Basis for Financial Statements 1. Basis of preparation This financial statement is prepared based on the assumption of the Company's going concern and actual transaction events, in accordance with the relevant provisions of the Accounting Standards for Enterprises, and based on the important accounting policies and estimates described below. 2. Going concern The Company has the ability to continue as a going concern for at least 12 months from the end of the reporting period, and there are no major events affecting the ability to continue as a going concern. V. Important Accounting Policies and Estimates Tips of specific accounting policies and estimates: ZKTeco 2023 Half Year Report 118 The specific accounting policies and estimates formulated by the Company based on the actual production and operation characteristics include operating cycle, recognition and measurement of bad debt reserves for accounts receivable, inventory measurement, classification and depreciation methods of fixed assets, amortization of intangible assets, revenue recognition and measurement, etc. 1. Declaration of compliance with Accounting Standards for Business Enterprises The financial statements prepared by the Company based on the above preparation basis comply with the latest Accounting Standards for Enterprises and their application guidelines, interpretations, and other relevant regulations (collectively referred to as "Accounting Standards for Enterprises") issued by the Ministry of Finance, and truly and completely reflect the Company's financial position, operating results, cash flows, and other relevant information. In addition, this financial report has been prepared in accordance with the reporting and disclosure requirements of the "Preparation Rules for Information Disclosure by Companies Offering Securities to the Public No.15 - General Provisions on Financial Reports (revised in 2014) (hereinafter referred to as No.15 Document (revised in 2014))" of the CSRC and the "Notice on Matters Related to the Implementation of the New Accounting Standards for Enterprises by Listed Companies" (Accounting Department Letter [2018] No.453). 2. Accounting period The accounting year of the Company starts from January 1 to December 31 in the Gregorian calendar. 3. Operating cycle The Company's operating cycle is 12 months. 4. Recording currency Renminbi is adopted as the recording currency. 5. Accounting treatment methods of business merger under the common control and not under the common control 1. Accounting treatment methods for merger of enterprise under the same control The assets and liabilities acquired by the Company through the merger of enterprise under the same control in a single transaction or through multiple transactions step by step are measured at the book value of the combined party in the ultimate controller's consolidated financial statements on the merger date. The difference between the book value of the net assets obtained by the Company and the book value of the merger consideration paid (or the total face value of the issued shares) shall be adjusted to the capital reserve. If the capital reserve is insufficient to offset, the retained earnings shall be adjusted. 2. Accounting treatment methods for merger under different control The difference between the merger cost and the fair value of the identifiable net assets obtained from the acquiree on the date of acquisition is recognized as goodwill by the Company. If the merger cost is less than the fair value share of the identifiable net assets obtained from the acquiree in the merger, the fair values of the identifiable assets, liabilities, ZKTeco 2023 Half Year Report 119 and contingent liabilities obtained from the acquiree, as well as the measurement of the merger cost, are first reviewed. After review, if the merger cost is still less than the fair value share of the identifiable net assets obtained from the acquiree in the merger, the difference is included in current profits and losses. To achieve a merger under different control through multiple transactions step by step, the following order shall be followed: (1) Adjust the initial investment cost of long-term equity investments. If the equity held before the date of acquisition is accounted by the equity method, it shall be remeasured according to the fair value of the equity on the date of acquisition, and the difference between the fair value and its book value shall be included in the current investment income; if the equity of the acquiree held before the acquisition date involves changes in other comprehensive income and other owner's equity accounted by the equity method, it shall be transferred to the current income on the date of acquisition, except for other comprehensive income arising from the investee's remeasurement of the changes in net liabilities or net assets of the defined benefit plan. (2) Recognize goodwill (or the amount included in current profits and losses). Compare the initial investment cost of the long-term equity investment after the adjustment in the first step with the fair value share of the identifiable net assets of the subsidiary that shall be enjoyed on the date of acquisition. If the former is greater than the latter, the difference is recognized as goodwill; if the former is smaller than the latter, the difference is included in current profits and losses. The situation where the equity is disposed of step by step through multiple transactions until the loss of control over the subsidiary (1) The principle of determining whether all transactions in the process from step-by-step disposal of equity to loss of control over subsidiaries belong to a "package deal" The terms, conditions, and economic impact of various transactions related to the disposal of equity investments in subsidiaries in one or more of the following circumstances usually indicate that multiple transactions shall be accounted for as a package deal: 1) These transactions were entered into simultaneously or taking into account mutual influence; 2) These transactions as a whole can achieve a complete business result; 3) The occurrence of a transaction depends on the occurrence of at least one other transaction; 4) A transaction alone is not economical, but it is economic when considered with other transactions. (2) Accounting treatment methods for transactions in the process from step-by-step disposal of equity to loss of control over subsidiaries as a "package deal" If all transactions involving the disposal of equity investment in subsidiaries until the loss of control right are treated as a package deal, the Company shall treat each transaction as the one involving the disposal of subsidiaries and the loss of control right for accounting treatment. However, the difference between each disposal price and the share of the subsidiary's net assets corresponding to the investment disposal before the loss of control right shall be recognized as other comprehensive income in the consolidated financial statements, and shall be transferred into the current profits and losses when the control right is lost. In the consolidated financial statements, the remaining equity shall be remeasured at its fair value on the date of loss of control. The difference between the sum of the consideration obtained from the disposal of equity and the fair values of the remaining equity minus the shares of the net assets that shall be continuously calculated by the original subsidiary ZKTeco 2023 Half Year Report 120 from the date of acquisition calculated as per the original shareholding ratio shall be included in the current investment income when the control right is lost. Other comprehensive income related to equity investments in the original subsidiary shall be converted into current investment income when control is lost. (3) Accounting treatment methods for transactions in the process from step-by-step disposal of equity to loss of control over subsidiaries not as a "package deal" If the disposal of an investment in a subsidiary does not result in the loss of control, the difference between the disposal price in the consolidated financial statements and the corresponding share of the subsidiary's net assets enjoyed by the disposal investment is included in the capital reserve (capital premium or share capital premium). If the capital premium is insufficient to offset, the retained earnings shall be adjusted. If control is lost in the disposal of investments in subsidiaries, in the consolidated financial statements, the remaining equity shall be remeasured at its fair value on the date of loss of control. The difference between the sum of the consideration obtained from the disposal of equity and the fair values of the remaining equity minus the shares of the net assets that shall be continuously calculated by the original subsidiary from the acquisition date calculated as per the original shareholding ratio shall be included in the current investment income when the control right is lost. Other comprehensive income related to equity investments in the original subsidiary shall be converted into current investment income when control is lost. 6. Preparation method for consolidated financial statements The Company will include all subsidiaries under its control in the consolidation scope of the consolidated financial statements. The consolidated financial statements are prepared by the Company in accordance with the "Accounting Standards for Enterprises No.33 - Consolidated Financial Statements" based on the financial statements of the parent company and its subsidiaries according to other relevant information. 7. Classification of joint-operation arrangement and accountant treatment method of joint operation 1. Recognition and classification of joint venture arrangements A joint venture arrangement is an arrangement jointly controlled by two or more participants. The joint venture arrangement has the following characteristics: 1) All participating parties are bound by the arrangement; 2) Two or more participants exercise joint control over the arrangement. No participant can independently control the arrangement, and any participant with joint control over the arrangement can prevent other participants or a combination of participants from independently controlling the arrangement. Common control refers to the sharing of control over a certain arrangement under related agreements, while related activities of such arrangement must be recognized only with the unanimous consent of the parties involved in the sharing of control. Joint arrangement can be classified into joint operations and joint ventures. Joint operations refer to an arrangement that the joint party enjoys the assets related to such arrangement and bears the liabilities related to such arrangement. Joint venture refers to a joint venture arrangement in which the joint venture party only has rights to the net assets of the arrangement. 2. Accounting treatment of joint venture arrangements ZKTeco 2023 Half Year Report 121 The joint venture participants shall confirm the following items related to their share of interests in the joint venture and conduct accounting treatment in accordance with the relevant Accounting Standards for Enterprises: 1) Recognize the assets held individually, and the assets held jointly based on their share; 2) Recognize the liabilities undertaken individually and jointly based on their respective shares; 3) Recognize the revenue generated from the sale of its share of joint operating output; 4) Recognize the revenue generated from the sale of output in joint operations based on their share; 5) Recognize the expenses incurred individually and the expenses incurred in joint operations based on their share. The joint venture participants shall conduct accounting treatment on the investment of the joint venture in accordance with the provisions of the "Accounting Standards for Enterprises No.2 - Long-term Equity Investments". 8. Recognition criteria for cash and cash equivalents The cash in the cash flow statement refers to the cash on hand and deposits that can be used for payment at any time. Cash equivalent refers to the short term and highly liquid investments (generally expired within three months from the date of acquisition) of the Company that is easily converted to the cash of known amount and subject to an insignificant risk of change in value. 9. Foreign currency transactions and foreign currency statement translation 1. Translation of foreign currency transactions Foreign currency transactions are initially recognized and converted into RMB using the spot exchange rate on the transaction date. On the balance sheet date, foreign currency monetary items are converted using the spot exchange rate on the balance sheet date. The exchange differences arising from different exchange rates, except for the exchange differences related to the purchase and construction of assets eligible for capitalization, are included in current profits and losses. Foreign currency non-monetary items measured at historical cost are still converted using the spot exchange rate on the transaction date, without changing their RMB amount. Foreign currency non-monetary items measured at fair value are converted using the spot exchange rate on the date of fair value determination, and the difference is included in current profits and losses or other comprehensive income. 2. Conversion of foreign currency financial statements The asset and liability items in the balance sheet are converted using the spot exchange rate on the balance sheet date. The owner's equity items, except for the "undistributed profits" item, are converted using the spot exchange rate on the transaction date. The income and expense items in the income statement are converted using the approximate exchange rate of the spot exchange rate on the transaction date. The foreign currency financial statement conversion difference generated by the above conversion is presented in other comprehensive income under the owner's equity item in the balance sheet. 10. Financial instruments 1. Recognition and derecognition of financial instruments A financial asset or financial liability is recognized when the Company becomes a party to a financial instrument contract. Trading financial assets in conventional ways shall be recognized and derecognized according to the accounting on the trading day. The conventional method of buying and selling financial assets refers to the collection or delivery of financial assets within the ZKTeco 2023 Half Year Report 122 period specified by regulations or common practices, in accordance with the terms of the contract. Trading day refers to the date on which the Company promises to buy or sell financial assets. If the following conditions are met, the recognition of financial assets (or a portion of financial assets, or a group of similar financial assets) shall be terminated, and they shall be written off from their accounts and balance sheets: (1) The right to receive cash flows from financial assets expires; (2) Transferred the right to receive cash flows from financial assets, or assumed the obligation to promptly pay the full amount of the received cash flows to a third party under the "pass-thorough agreement"; and (a) substantially transferred almost all the risks and rewards of ownership of the financial assets, or (b) relinquished control over the financial asset even though substantially neither transferred nor retained almost all the risks and rewards of ownership of the financial assets. 2. Classification and measurement of financial assets According to the operation mode of financial assets management and the contract cash flow characteristics of financial assets of the Company, the financial assets of the Company, at the initial recognition, are classified into: the financial assets measured at the amortized cost; the financial assets measured at fair value and whose changes are included in other comprehensive income; and the financial assets measured at fair value and whose changes are included in the current profits and losses. The subsequent measurement of financial assets depends on their classification. The classification of financial assets by the Company is based on the business model of managing financial assets and the cash flow characteristics of financial assets. (1) Financial assets measured at amortized costs Financial assets that meet the following conditions are classified as financial assets measured at the amortized cost: the business model of the Company's management of the financial assets is aimed at collecting contractual cash flows. The contractual terms of the financial asset stipulate that the cash flow generated on a specific date is only the payment of principal and interest based on the outstanding principal amount. The financial assets are subsequently measured at amortised cost using the effective interest rate method. The gains or losses arising from amortisation or impairment are included in current profits and losses. (2) Debt instrument investments measured at fair value with changes recognized in other comprehensive income Financial assets that meet the following conditions are classified as financial assets measured at fair value and whose changes are included in other comprehensive income: the business model of the Company's management of the financial assets is aimed at collecting contractual cash flows and the sales of financial assets. The contractual terms of the financial asset stipulate that the cash flow generated on a specific date is only the payment of principal and interest based on the outstanding principal amount. For such financial assets, the Company adopts fair value for subsequent measurement. The discount or premium is amortized using the effective interest rate method and recognized as interest income or expense. Except for impairment losses and exchange differences of foreign currency monetary financial assets recognized as current profit and loss, changes in fair value of such financial assets are recognized as other comprehensive income until the financial asset is derecognized, and its cumulative gains or losses are transferred to current profit and loss. Interest income related to such financial assets is included in current profits and losses. (3) Equity instrument investments measured at fair value with changes recognized in other comprehensive income The Company irrevocably chooses to designate some non-trading equity instrument investments as financial assets measured at fair value and whose changes are included in other comprehensive income. Only relevant dividend income is included in current profits and losses, and changes in fair value are recognized as other comprehensive income until the financial asset is derecognized, and its cumulative gains or losses are transferred to retained earnings. (4) Financial assets measured at fair value and whose changes are included in the current profits and losses Financial assets other than above financial assets measured at the amortized cost and financial assets measured at fair value and whose changes are included in other comprehensive income are classified as financial assets measured at fair value and whose changes are included in the current profits and losses. At the time of initial recognition, the Company may designate certain financial assets as financial assets measured at fair value and whose changes are included in the current profits and losses in order to eliminate or ZKTeco 2023 Half Year Report 123 significantly reduce accounting mismatch. For such financial assets, the Company adopts fair value for subsequent measurement, and all changes in fair value are included in current profits and losses. All affected related financial assets are reclassified only when the Company changes its business model of managing financial assets. For financial assets measured at fair value and whose changes are included in the current profits and losses, the related transaction expense is directly included in current profits and losses. For other types of financial assets, related transaction costs are included in the initial recognition amount. 3. Classification and measurement of financial liabilities The financial liabilities of the Company are classified at initial recognition as financial liabilities measured at amortized costs and financial liabilities measured at fair value and whose changes are included in the current profits and losses. Financial liabilities that meet one of the following conditions can be designated as financial liabilities measured at fair value and whose changes are included in the current profits and losses at initial measurement: (1) This designation can eliminate or significantly reduce accounting mismatch; (2) Manage and evaluate financial liability portfolios or financial asset and financial liability portfolios based on fair value, in accordance with the group's risk management or investment strategy as stated in formal written documents, and report to key management personnel within the group on this basis; (3) This financial liability includes embedded derivative instruments that need to be splitted separately. The Company determines the classification of financial liabilities at initial recognition. For financial liabilities measured at fair value through current profits and losses, the related transaction expense is directly recognised in current profits and losses. The related transaction expense of other financial liabilities is included in the initial recognition amount. The subsequent measurement of financial liabilities depends on their classification: (1) Financial liabilities measured at amortized costs The financial liabilities are subsequently measured at amortised cost using the effective interest rate method. (2) Financial liabilities measured at fair value and whose changes are included in the current profits and losses Financial liabilities measured at fair value through current profits and losses, including financial liabilities (including derivatives that are financial liabilities) and financial liabilities that are designated at fair value through current profits and losses. 4. Offset of financial instruments If the following conditions are met simultaneously, financial assets and financial liabilities shall be presented in the balance sheet at the net amount after mutual offset: they have the legal right to offset the recognized amount, and such legal right is currently enforceable; it is planned to settle on a net basis, or simultaneously realize the financial asset and settle the financial liability. 5. Impairment of financial assets The Company recognizes loss provisions based on expected credit losses for financial assets measured at the amortized cost, debt instrument investments measured at fair value with changes recognized in other comprehensive income, and financial guarantee contracts. Credit loss refers to the difference between all contractual cash flows receivable from the contract and all cash flows expected to be received by the Company at the original effective interest rate, that is, the present value of all cash shortages. The Company considers all reasonable and evidence-based information, including forward-looking information, to estimate the expected credit losses of financial assets measured at the amortized cost and financial assets measured at fair value and whose changes are included in other comprehensive income (debt instruments), either individually or in combination. (1) General model of expected credit loss If the credit risk of the financial instrument has been increased significantly since the initial recognition, the Company will measure its loss provision based on the amount of expected credit loss over the whole duration of the financial instrument; if the credit risk of the financial instrument has not been significantly increased since the initial recognition, the Company will measure its loss provision based on the amount of expected credit losses for the financial instrument in the next 12 months. The resultant increased or reversed amount of the loss provision will be included in current profits and losses as impairment loss or gain. The specific assessment of credit risk by the Company is detailed in Note "X. Risks Related to Financial Instruments". ZKTeco 2023 Half Year Report 124 Normally, after 30 days overdue, unless there is conclusive evidence indicating that the credit risk of the financial instrument has not significantly increased since the initial recognition, the Company will deem that the credit risk of the financial instrument has significantly increased. Specifically, the Company divides the process of credit impairment of financial instruments that have not experienced credit impairment at the time of purchase or origin into three stages, and there are different accounting treatments for the impairment of financial instruments at different stages: Stage 1: Credit risk has not significantly increased since initial recognition For financial instruments in this stage, the enterprise shall measure the provision for losses based on the expected credit losses in the next 12 months, and calculate interest income based on their book balance (i.e. without deducting impairment provisions) and actual interest rate (if the instrument is a financial asset, the same below). Stage 2: Credit risk has significantly increased since initial recognition, but credit impairment has not yet occurred For financial instruments in this stage, the enterprise shall measure the provision for losses based on the expected credit losses of the instrument throughout its lifespan, and calculate interest income based on its book balance and actual interest rate. Stage 3: Credit impairment occurs after initial recognition For financial instruments in this stage, the enterprise shall measure the loss provision based on the expected credit loss of the instrument throughout its lifespan, but the calculation of interest income is different from that of financial assets in the first two stages. For financial assets that have undergone credit impairment, the enterprise shall calculate interest income based on their amortized cost (book balance minus impairment provision, i.e. book value) and actual interest rate. For financial assets that have experienced credit impairment at the time of purchase or origin, the enterprise shall only recognize the changes in expected credit losses during the entire lifespan after initial recognition as loss reserves, and calculate interest income based on their amortized cost and the actual interest rate adjusted by credit. (2) The Company chooses not to compare the credit risk of financial instruments with their initial recognition on the balance sheet date, but directly assumes that the credit risk of the instrument has not significantly increased since initial recognition. Where the enterprise determines that the default risk of financial instruments is low, the borrower has a strong ability to fulfill its contractual cash flow obligations in a short term, and the borrower's ability to fulfill its contractual cash flow obligations will not be necessarily reduced even if there are adverse changes in the economic situation and operating environment for a long period of time, the financial instrument can be regarded as having low credit risk. (3) Receivables and lease receivables The Company adopts a simplified model of expected credit losses for accounts receivable that do not contain significant financing components (including those that do not consider financing components in contracts that do not exceed one year) according to the "Accounting Standards for Enterprises No.14 - Revenues", and always measures its loss provision based on the amount of expected credit losses throughout the entire lifespan. The Company has made an accounting policy choice to adopt a simplified model of expected credit losses for accounts receivable that contain significant financing components and lease receivables regulated by the "Accounting Standards for Enterprises No.21 - Leases", that is, to measure loss reserves at an amount equivalent to expected credit losses throughout the entire lifespan. The Company evaluates the expected credit losses of financial instruments based on individual and combination assessments. The Company has considered the credit risk characteristics of different customers and evaluated the expected credit losses of commercial acceptance bills, accounts receivable, and other receivables based on aging portfolio. The comparison table between the Company's aging portfolio and the expected credit loss rate for the entire duration is as follows: Accounts receivable aging Expected credit loss rate (%) Within 1 year (including 1 year) 5 1-2 years (including 2 years) 10 ZKTeco 2023 Half Year Report 125 2-3 years (including 3 years) 30 Over 3 years 100 When evaluating expected credit losses, the Company considers reasonable and evidence-based information about past events, current conditions, and future economic forecasts. When the Company no longer reasonably expects to fully or partially recover the contractual cash flow of financial assets, the Company directly writes down the book balance of the financial assets. 6. Transfer of financial assets If the Company has transferred almost all the risks and rewards of ownership of the financial assets to the transferee, the recognition of the financial assets shall be terminated. If almost all risks and rewards related to the ownership of the financial assets are retained, the recognition of the financial assets will not be terminated. If the Company neither transfers nor retains almost all the risks and rewards related to the ownership of financial assets, they shall be treated as follows: if the Company gives up control over the financial assets, the recognition of the financial assets shall be terminated and the resulting assets and liabilities shall be recognized. If the control over the financial assets has not been relinquished, the relevant financial assets shall be recognized based on their continued involvement in the transferred financial assets, and the relevant liability shall be recognized accordingly. If the Company continues to be involved by providing financial guarantees for the transferred financial assets, the assets formed by the continued involvement shall be recognized based on the lower of the book value of the financial assets and the amount of financial guarantees. The financial guarantee amount refers to the highest amount of consideration received that will be required to be repaid. 11. Accounts receivable The Company adopts a simplified model of expected credit losses for notes receivable, accounts receivable, other receivables, and financing lease payments that do not include significant financing components (including those that do not consider financing components in contracts that do not exceed one year) in accordance with the "Accounting Standards for Enterprises No.14 - Revenues", that is, the loss provision is always measured based on the amount of expected credit losses throughout the entire lifespan, and the increase or reversal of the loss provision resulting therefrom is recognized as an impairment loss or gain is included in current profits and losses. For accounts receivable containing significant financing components, the Company chooses to adopt a simplified model of expected credit losses, which always measures its loss provision based on the amount of expected credit losses throughout the entire duration. 1. At the end of the period, a separate impairment test shall be conducted on accounts receivable that have objective evidence indicating impairment. Based on the difference between their expected future cash flow present value and their book value, impairment losses shall be recognized and bad debt reserves shall be withdrawn. 2. When the expected credit loss information cannot be assessed through a single financial asset at a reasonable cost, the Company divides accounts receivable portfolios based on credit risk characteristics and calculates expected credit losses on the portfolio basis. Portfolio Name Accrual method Accounting age combination This portfolio takes the aging of accounts receivable as the credit risk characteristics. Related party portfolio This portfolio includes accounts receivable from subsidiaries and other related parties within the consolidation scope. Portfolio of deposits, security deposits, employee loans, etc. This portfolio features deposits, security deposits and employee loans as credit risk characteristics. ZKTeco 2023 Half Year Report 126 (1) Aging portfolio Aging Expected credit loss rate of accounts receivable (%) Within 1 year (including 1 year) 5 1-2 years (including 2 years) 10 2-3 years (including 3 years) 30 Over 3 years 100 (2) Related party portfolio Related party portfolio: refer to historical credit loss experience, combined with the current situation and the forecast of future economic conditions, through default risk exposure and the expected credit loss rate of the entire duration. 12. Receivable financing Financial assets that meet the following conditions are classified as financial assets measured at fair value and whose changes are included in other comprehensive income: the business model of the Company's management of the financial assets is aimed at collecting contractual cash flows and the sales of financial assets. The contractual terms of the financial asset stipulate that the cash flow generated on a specific date is only the payment of principal and interest based on the outstanding principal amount. The Company transfers its accounts receivable in the form of discounts or endorsements, and if this type of business is frequent and involves a large amount, its management business model essentially involves both receiving contract cash flows and selling them. In accordance with the relevant provisions of the financial instrument standards, it is classified as financial assets measured at fair value with changes recognized in other comprehensive income. 13. Other receivables Determination methods and accounting treatment methods of expected credit losses of other receivables 1. At the end of the period, a separate impairment test shall be conducted on other receivables that have objective evidence indicating impairment. Based on the difference between their expected future cash flow present value and their book value, impairment losses shall be recognized and bad debt reserves shall be withdrawn. 2. When the expected credit loss information cannot be assessed through a single financial asset at a reasonable cost, the Company divides accounts receivable portfolios based on credit risk characteristics and calculates expected credit losses on the portfolio basis. (1) Aging portfolio Aging Expected credit loss rate of other receivables (%) Within 1 year (including 1 year) 5 1-2 years (including 2 years) 10 2-3 years (including 3 years) 30 ZKTeco 2023 Half Year Report 127 Over 3 years 100 (2) Related party portfolio Related party portfolio: refer to historical credit loss experience, combined with the current situation and the forecast of future economic conditions, through default risk exposure and the expected credit loss rate of the entire duration. (3) Portfolio of deposits, security deposits, employee loans, etc. Portfolio of deposits, security deposits, employee loans, etc.: refer to historical credit loss experience, combined with the current situation and the forecast of future economic conditions, through default risk exposure and the expected credit loss rate of the entire duration. 14. Inventory 1. Inventory classification Inventories include finished products or commodities held by the Company for sale in daily activities, products in process of production, and materials consumed in the process of production or provision of labor services. 2. Method of valuation for inventory acquisition and delivery All types of inventory of the Company are valued at actual cost upon receipt, and are valued using the weighted average method upon delivery. 3. Determination basis for net realizable value of inventory and provision method for inventory depreciation reserves On the balance sheet date, inventory is measured at the lower of cost and net realizable value, and a provision for inventory depreciation is made based on the difference between the cost of the inventory category and the net realizable value. The net realizable value of inventory directly used for sale is determined in the normal production and operation process based on the estimated selling price of the inventory minus the estimated selling expenses and related taxes and fees. The net realizable value of inventory that needs to be processed in the normal production and operation process is determined by subtracting the estimated cost to be incurred until completion, estimated sales expenses, and relevant taxes from the estimated selling price of the finished product produced. On the balance sheet date, if a portion of the same inventory has a contract price agreement and other parts do not have a contract price, their net realizable value shall be determined separately, and compared with their corresponding costs to determine the amount of provision or reversal for inventory depreciation reserves. 4. Inventory taking system The perpetual inventory system is adopted. 5. Amortization method for low value consumables and packaging materials Low value consumables and packaging materials are amortized using the one-off amortization method when received. 15. Contract assets 1. Methods and standards for the recognition of contract assets The Company lists contract assets or contract liabilities in the balance sheet according to the relationship between the performance of performance obligations and customer payment. The consideration (excluding accounts receivable) that the Company is entitled to receive for transferring goods or providing services to customers is listed as contract assets. 2. Determination methods and accounting treatment methods of the expected credit loss of contract assets For contract assets that do not contain significant financing components, the Company adopts a simplified model of expected credit losses, which always measures its loss provision at an amount equivalent to the expected credit losses for the entire duration. The increase or reversal of the loss provision resulting therefrom is recognized as a loss reduction or gain is included in current profits and losses. ZKTeco 2023 Half Year Report 128 (1) At the end of the period, a separate impairment test shall be conducted on accounts receivable that have objective evidence indicating impairment. Based on the difference between their expected future cash flow present value and their book value, impairment losses shall be recognized and bad debt reserves shall be withdrawn. (2) When the expected credit loss information cannot be assessed through a single financial asset at a reasonable cost, the Company establishes aging portfolios based on credit risk characteristics and calculates expected credit losses on the aging portfolio basis. Aging Expected credit loss rate of contract assets (%) Within 1 year (including 1 year) 5 1-2 years (including 2 years) 10 2-3 years (including 3 years) 30 Over 3 years 100 For contract assets that contain significant financing components, the Company chooses to adopt a simplified model of expected credit losses, which always measures its loss provision at an amount equivalent to the expected credit losses for the entire duration. The increase or reversal of the loss provision resulting therefrom is recognized as a loss reduction or gain is included in current profits and losses. 16. Contract cost The contract cost shall include the contract performance cost and the contract acquisition cost. If the cost incurred by the Company in fulfilling a contract simultaneously meets the following conditions, it shall be recognized as a contract performance cost as an asset: 1. The cost is directly related to a current or expected contract, including direct labor, direct materials, manufacturing expenses (or similar expenses), costs clearly borne by the customer, and other costs incurred solely due to the contract; 2. Such cost increases the enterprise's resources used for future performance of performance obligations; 3. This cost is expected to be recovered. If the incremental cost incurred by the Company for acquiring the contract is expected to be recovered, it shall be recognized as an asset as the contract acquisition cost. However, if the asset is amortized for no more than one year, it can be included in current profits and losses when incurred. Assets related to contract costs are amortized on the same basis as the recognition of revenue from goods or services related to the assets. If the book value of the assets related to the contract cost is higher than the difference between the following two items, the Company shall withdraw the impairment provision for the excess part and recognize it as assets impairment loss: 1. The remaining consideration which the Company is expected to obtain due to the transfer of the commodities or services related to such assets; 2. The cost estimated to be incurred for the transfer of the relevant commodities or services. If the above-mentioned asset impairment provision is subsequently reversed, the book value of the reversed asset shall not exceed the book value of the asset on the date of reversal assuming no impairment provision is made. 17. Held-for-sale assets The Company classifies group components (or non-current assets) that meet the following conditions simultaneously as held for sale: (1) According to the convention of selling such assets or disposal groups in similar transactions, they can be immediately sold ZKTeco 2023 Half Year Report 129 under current conditions; (2) The sale is highly likely to occur, and a decision has been made on a sale plan and a confirmed purchase commitment has been obtained. The confirmed purchase commitment refers to a legally binding purchase agreement signed between the enterprise and other parties, which includes important terms such as transaction price, time, and sufficiently severe breach penalties, making the possibility of significant adjustment or revocation of the agreement extremely low. The sale is expected to be completed within one year. Approval from relevant authorities or regulatory authorities has been obtained in accordance with relevant regulations. The Company adjusts the held-for-sale expected net residual value to reflect the net amount of its fair value minus selling expenses (but not exceeding the original book value of the held for sale assets). The difference between the original book value and the adjusted expected net residual value is recognized as an asset impairment loss and included in current profits and losses, and a provision for impairment of held-for-sale assets is also made. For the amount of asset impairment loss recognized by the disposal group held for sale, the book value of goodwill in the disposal group shall be offset first, and then the book value shall be offset proportionally according to the proportion of the book value of non-current assets measured and stipulated in the Accounting Standards in the disposal group. If the net amount of the fair value of non-current assets held for sale minus the selling expenses increases on the subsequent balance sheet date, the amount previously written down shall be restored and reversed within the amount of asset impairment loss recognized after being classified as held for sale, and the reversed amount shall be included in current profits and losses. The impairment loss of assets recognized before being classified as held for sale is not reversed. If the net amount of the fair value of the disposal group held for sale minus the selling expenses increases on the subsequent balance sheet date, the amount previously written down shall be restored and reversed within the amount of asset impairment loss recognized for non-current assets to which the measurement provisions of the Accounting Standards are applicable after being classified as held for sale, and the reversed amount shall be included in current profits and losses. The book value of goodwill that has been offset and the impairment loss of non-current assets that are subject to the measurement provisions of these standards before they are classified as held for sale shall not be reversed. For the subsequent reversed amount of asset impairment loss recognized by the disposal group held for sale, the book value shall be increased in proportion to the book value of non-current assets measured and stipulated in the Accounting Standards in the disposal group except for goodwill. If an enterprise loses control over a subsidiary due to the sale of its investment in the subsidiary or other reasons, regardless of whether the enterprise retains a portion of its equity investment after the sale, the overall investment in the subsidiary shall be classified as held for sale in the parent company's individual financial statements when the proposed investment in the subsidiary meets the criteria for classification as held for sale. In the consolidated financial statements, all assets and liabilities of the subsidiary are classified as held for sale. 18. Long-term equity investment 1. Determination of investment cost (1) In case of a business merger under the same control, if the combining party pays cash, transfers non-cash assets, assumes debts, or issues equity securities as the merger consideration, the initial investment cost shall be the share of the owner's equity of the combined party in the ultimate controller's consolidated financial statements on the merger date. The difference between the initial investment cost of long-term equity investment and the book value of the paid merger consideration or the total face value of the issued shares is adjusted to the capital reserve (capital premium or equity premium). If the capital reserve is insufficient to offset, the retained earnings shall be adjusted. ZKTeco 2023 Half Year Report 130 In case of a merger of enterprise under the same control step by step, the initial investment cost of the investment shall be the share of the owner's equity of the combined party on the merger date calculated based on the shareholding ratio. The difference between the initial investment cost and the book value of the original long-term equity investment plus the book value of the newly paid consideration for further shares obtained on the merger date shall be adjusted to the capital reserve (capital premium or equity premium). If the capital reserve is insufficient to offset, the retained earnings shall be offset. (2) For a merger under different control, the fair value of the paid merger consideration shall be used as the initial investment cost on the date of acquisition. (3) Except for those formed through business merger: for those acquired through cash payment, the initial investment cost shall be the actual purchase price paid; for those acquired through the issuance of equity securities, their initial investment cost shall be the fair value of the issued equity securities; if it is invested by an investor, the initial investment cost shall be the value agreed upon in the investment contract or agreement (except for those with unfair value agreed upon in the contract or agreement). 2. Subsequent measurement and profit and loss recognition methods The long-term equity investment that the Company can control over the investee is accounted for using the cost method in individual financial statements of the Company; the long-term equity investment with joint control or significant influence shall be accounted for by the equity method. When the cost method is adopted, long-term equity investments are valued at the initial investment cost. Except for the declared but not yet distributed cash dividends or profits included in the actual payment or consideration when obtaining the investment, the cash dividends or profits declared to be distributed by the investee are recognized as current investment income, and the impairment of long-term investments is considered based on relevant asset impairment policies. When equity method is adopted, if the cost of initial investment of long-term equity investment exceeds identifiable fair value of net assets of invested units sharable at investment, cost of initial investment of long-term equity investment is included; if the cost of initial investment of long-term equity investment is less than identifiable fair value of net assets of invested units sharable at investment, the difference is included in current profits and losses when it is incurred and meanwhile the cost of long-term equity investment shall be adjusted. When the equity method is adopted, after obtaining the long-term equity investment, the investment profits and losses shall be recognized and the book value of the long-term equity investment shall be adjusted according to the share of the net profits and losses realized by the investee that shall be enjoyed or shared. When recognizing the attributable share of the net profit and loss of the investee, it shall be recognized after adjustment of the net profit of the investee based on the fair value of the identifiable assets of the investee at the time of acquisition of the investment, and in accordance with the Company's accounting policies and accounting period, and after the portion of internal transaction losses incurred between associates and joint ventures is offset, and the portion attributable to the investing enterprise is calculated based on the shareholding ratio (but if internal transaction losses belong to asset impairment losses, they shall be fully recognized). The portion that shall be distributed shall be calculated based on the profits or cash dividends declared by the investee, and the book value of long-term equity investments shall be correspondingly reduced. The Company recognizes the net loss incurred by the investee to the extent that the book value of the long-term equity investment and other long-term equities that substantially constitute the net investment in the investee are reduced to zero, except for the situation where the Company is obligated to bear additional losses. For changes in owner's equity of the investee other than net profit or loss, the book value of long-term equity investments shall be adjusted and recorded in owner's equity. 3. Basis for determining control and significant impact on the investee Control refers to having the power over the invested party, enjoying variable returns through participation in related activities of the investee, and having the ability to use the power over the investee to influence the return amount. Significant influence refers to the investor having the power to participate in decision-making on the financial and operational policies of the investee, but not being able to control or jointly control the formulation of these policies with other parties. 4. Disposal of long-term equity investments (1) Partial disposal of long-term equity investments in subsidiaries without losing control ZKTeco 2023 Half Year Report 131 When disposing of a long-term equity investment in a subsidiary without losing control, the difference between the disposal price and the corresponding book value of the disposed investment shall be recognized as current investment income. (2) Partial disposal of equity investments or loss of control over subsidiaries due to other reasons If control over a subsidiary is lost due to partial disposal of equity investments or other reasons, the book value of the long-term equity investment corresponding to the sold equity shall be carried forward. The difference between the sale price and the book value of the long-term equity investment shall be recognized as investment income (loss); meanwhile, the remaining equity shall be recognized as long-term equity investment or other related financial assets based on its book value. If the remaining equity after disposal can exercise joint control or significant influence on the subsidiary, accounting treatment shall be carried out in accordance with the relevant provisions on the conversion of the cost method to the equity method. 5. Impairment test method and method of provision for assets impairment If there is objective evidence indicating impairment of investments in subsidiaries, associates, and joint ventures on the balance sheet date, corresponding impairment provisions shall be made based on the difference between the book value and the recoverable amount. 19. Fixed assets (1) Recognition conditions Fixed assets of the Company are physical assets held by the Company for use in the production of goods, labor service, leasing and for administrative purposes. Fixed assets shall be recognized when the following the conditions are met simultaneously: (1) Economic benefits associated with such fixed assets are likely to flow into the Company; (2) Cost of such fixed assets can be measured reliably. (2) Depreciation methods Category Depreciation method Depreciation period Residual value rate Annual depreciation rate Houses and buildings Straight-line method 20-50 years 5% 1.90%-4.75% Machinery equipment Straight-line method 5-10 years 5% 9.50%-19.00% Electronic equipment and others Straight-line method 3-5 years 5% 19.00%-31.67% Transportation vehicles Straight-line method 4 years 5% 23.75% (3) Recognition basis, valuation method and depreciation methods of fixed assets under financing lease Not applicable 20. Construction in progress 1. Construction in progress is transferred to fixed assets when it reaches the expected conditions for use according to the actual project cost. For those that have reached the expected conditions for use but have not yet been subjected to final accounts, they shall be transferred to fixed assets based on the estimated value. After the final accounts are processed, the original estimated value shall be adjusted based on the actual cost, but the depreciation already calculated shall not be adjusted. 2. On the balance sheet date, if there are signs indicating impairment of construction in progress, corresponding impairment provisions shall be made based on the difference between the book value and the recoverable amount. ZKTeco 2023 Half Year Report 132 21. Borrowing costs 1. Recognition principles for capitalization of borrowing costs Borrowing costs are loan interests, amortization of depreciation or appreciation arising from borrowings, auxiliary expenses, and exchange differences from foreign currency borrowings, etc. The borrowing costs for inventory and investment properties that can be directly attributed to the purchase and construction of fixed assets and require a construction or production process of more than one year (including one year) to reach the expected conditions for use and sales shall be capitalized; other borrowing costs are recognized as expenses based on their amount when incurred and included in current profits and losses. The borrowing costs that shall be capitalized begin capitalizing when the following three conditions are met simultaneously: (1) Asset expenditure has already incurred; (2) The borrowing costs have already been incurred; (3) Acquisition, construction or production activities necessary to bring the asset to be ready for its intended use or sale are in progress. 2. The period of capitalization of borrowing costs: For the borrowing costs that shall be capitalized, if they meet the above capitalization conditions, and incur before the relevant assets that meet the capitalization conditions have reached their expected conditions for use or sale, they shall be included in the cost of the relevant assets. If there is an abnormal interruption in the acquisition, construction or production activities of the relevant assets, and the interruption lasts for more than 3 consecutive months, the capitalization of borrowing costs shall be suspended. The borrowing costs incurred during the interruption period shall be recognized as expenses and included in current profits and losses until the acquisition, construction or production activities of the assets restart. When the relevant assets reach their expected conditions for use or sale, the capitalization of borrowing costs shall be stopped, and subsequent borrowing costs shall be directly recorded in the current financial expenses based on their amount when incurred. 3. Calculation methods for capitalized amount of borrowing costs (1) Capitalized amount of loan interest: For specialized loans borrowed for the purchase, construction, or production of assets that meet the capitalization conditions, the capitalized amount of interest for each accounting period shall not exceed the actual interest expenses incurred in the current period of the specialized loan, minus the interest income obtained from depositing unused loan funds in the bank or the investment income obtained from temporary investments. As for general borrowings for the acquisition, construction or production and development of assets eligible for capitalization, the amount of capitalization of the interest amount shall be determined by multiplying the weighted average of difference between accumulative assets expenditure and assets expenditure of specially borrowed loans by the capitalization rate of general borrowings. The capitalization rate is calculated and determined based on the weighted average interest rate of general borrowings. The capitalized amount of interest for each accounting period shall not exceed the actual interest amount incurred on the relevant borrowings in the current period. If there is a discount or premium on the loan, the amount of discount or premium to be amortized for each accounting period shall be determined using the effective interest rate method, and the interest amount for each period shall be adjusted. (2) Auxiliary expenses: Auxiliary expenses incurred for specialized loans that incur before the assets purchased, constructed or produced that meet the capitalization conditions reach their intended conditions for use and sale shall be capitalized based on their amount when incurred and included in the cost of assets that meet the capitalization conditions. If an asset that meets the capitalization conditions and is purchased, constructed or produced reaches its intended conditions for use and sale, it shall be recognized as an expense based on its amount when incurred and included in current profits and losses. The auxiliary expenses incurred in general borrowing are recognized as expenses based on their amount when incurred and included in current profits and losses. (3) During the capitalization period, the exchange difference between the principal and interest of foreign currency loans that fall within the scope of capitalization of borrowing costs shall be capitalized. ZKTeco 2023 Half Year Report 133 22. Right-of-use assets On the commencement date of the lease term, the Company recognizes the right-of-use assets and lease liabilities for the lease, except for short-term leases and low value asset leases that have been simplified using the standards. The right-of-use assets are initially measured at cost by the Company. The cost includes: 1. The initial measurement amount of lease liabilities; 2. For the lease payment paid on or before the commencement date of the lease term, if there is lease incentive, the relevant amount of lease incentive enjoyed shall be deducted; 3. Initial direct expenses incurred; 4. The costs that the Company expects to incur for dismantling and removing the leased assets, restoring the site where the leased assets are located, or restoring the leased assets to the state agreed in the lease terms. Where the aforementioned costs are incurred for the production of inventory, the "Accounting Standards for Enterprises No.1 - Inventories" shall apply. The Company recognizes and measures the costs mentioned in item 4 in accordance with the "Accounting Standards for Enterprises No.13 - Contingencies". The initial direct cost refers to the incremental cost incurred to achieve the lease. Incremental cost refers to the cost that would not incur if the enterprise did not acquire the lease. The Company makes depreciation for the right-of-use assets with reference to the relevant depreciation provisions of the "Accounting Standards for Enterprises No.4 - Fixed Assets". If the lessee can be reasonably determined that the ownership of the leased asset can be obtained when the lease term expires, depreciation shall be accrued during the remaining useful life of the leased asset. If it cannot be reasonably determined that the ownership of the leased asset can be obtained when the lease term expires, depreciation shall be accrued during the shorter period of the lease term and the remaining useful life of the leased asset. The Company determines whether the right-of-use assets have been impaired and accounts for any identified impairment losses according to the "Accounting Standards for Enterprises No.8 - Asset Impairment". 23. Intangible assets (1) Valuation method, service life and impairment test The intangible assets of the Company are valued at their actual cost at the time of acquisition. If the service life of intangible assets is limited, they shall be amortized evenly in installments over the expected service life from the month of acquisition. If it is impossible to foresee the period during which intangible assets will bring economic benefits to the enterprise, they shall be considered as intangible assets with uncertain service lives and shall not be amortized. The amortization period of the expected service life shall be determined based on the following principles: For intangible assets derived from contractual or other legal rights, their service life shall not exceed the term of the contractual or other legal rights. If the contractual or other legal rights are extended upon expiration due to renewal or other reasons, and there is evidence indicating that the enterprise does not need to pay a significant cost for renewal, the renewal period shall be included in the service life. If the contract or law does not specify a service life, the enterprise shall make a comprehensive judgment based on various factors to determine the period during which intangible assets can bring economic benefits to the enterprise. If the period during which intangible assets bring economic benefits to the enterprise cannot be reasonably determined according to the above methods, the intangible asset shall be treated as an intangible asset with an uncertain service life. Category Estimated service life (year) Depreciation method Land use rights From obtaining the land use right to the termination date of the land use right Straight-line method ZKTeco 2023 Half Year Report 134 Software 2-10 Straight-line method Recognition criteria and provision methods for impairment of intangible assets: For intangible assets with uncertain benefit periods such as trademarks, impairment tests are conducted at the end of each year to estimate their recoverable amount. An impairment provision for intangible assets is made based on the difference between their recoverable amount and their book value. For other intangible assets, an inspection is conducted at the end of the year. When there are signs of impairment, the recoverable amount is estimated, and an impairment provision for intangible assets is made based on the difference between the recoverable amount and the book value. (1) It has been replaced by other new technologies, causing significant adverse effects on its ability to create economic benefits for the Company; (2) The market price has significantly declined in the current period and is not expected to recover within the remaining amortization period; (3) It has exceeded the legal protection period, but still has partial use value; (4) Other circumstances that are sufficient to prove that impairment has actually incurred. (2) Internal R&D expenditure accounting policy Specific standards for expenditure during the R&D stages of internal R&D projects Expenditure on R&D projects inside the Company can be divided into expenditure in research stage and expenditure in development stage; (1) The expenditures during research shall be included in current profits and losses as incurred. (2) Expenditures during the development stage shall be recognized as intangible assets when proving the following: ① Complete such intangible asset to make it usable or salable with technical feasibility; ② Intention of completing such intangible asset for use or sale; ③ Method for intangible assets to produce future economic benefits, including the ability to prove that the products from such intangible assets exist in the market or that the intangible assets themselves exist in the market, and the ability to prove the serviceability of the intangible asset if used internally; ④ There is sufficient support from technical, financial resources and other resources, to complete development of such intangible assets, and the ability of using or selling such intangible assets; ⑤ The expenditures attributable to development stage of such intangible assets shall be measured reliably. The expenses incurred during the research stage of intangible assets developed through self research are included in current profits and losses when incurred; the expenses incurred during the development stage that meet the following conditions are recognized as intangible assets (patented technology and non patented technology): (1) Complete such intangible asset to make it usable or salable with technical feasibility; (2) Intention of completing such intangible asset for use or sale; (3) The products produced using the intangible asset have a market or the intangible asset itself has a market; (4) There is sufficient support from technical, financial resources and other resources, to complete development of such intangible assets, and the ability of using or selling such intangible assets; (5) The expenditures attributable to development stage of such intangible assets shall be measured reliably. ZKTeco 2023 Half Year Report 135 24. Long-term assets impairment The enterprise shall determine whether there are any signs of possible impairment of assets on the balance sheet date. Intangible assets with uncertain goodwill and service life formed by business mergers shall undergo impairment test annually, regardless of whether there are signs of impairment. The presence of the following signs indicates that assets may have been impaired: (1) The market price of assets has significantly decreased in the current period, and its decline is significantly higher than the expected decline due to the passage of time or normal use; (2) The economic, technological, or legal environment in which the enterprise operates, as well as the market of the assets, have undergone major changes in the current period or in the near future, resulting in adverse effects on the enterprise; (3) The market interest rate or other market investment return rates have increased in the current period, which affects the discount rate of the enterprise to calculate the present value of the expected future cash flow of the assets, resulting in a significant reduction in the recoverable amount of the assets; (4) There is evidence indicating that the assets have become outdated or its entity has been damaged; (5) Assets have been or will be idle, terminated or planned for early disposal; (6) The evidence in the internal report of the enterprise indicates that the economic performance of the assets has been or will be lower than expected, such as the net cash flow created by the assets or the operating profit (or loss) realized being much lower (or higher) than the expected amount; (7) Other signs indicating that assets may have been impaired. Where there are signs of impairment of assets, the recoverable amount shall be estimated. The recoverable amounts are the higher between the net amount of their fair values less the disposal expenses and the present values of estimated future cash flows of the assets. The disposal expenses shall include the relevant legal expenses, relevant taxes, truckage as well as the direct expenses for bringing the assets into a marketable state. The present value of the asset's estimated future cash flow shall be determined per the estimated future cash flow generated in the process of the asset's continuous use and the final disposal, based on the account upon selecting proper discount rate to discount the asset. The present value of the future cash flow of an asset shall be predicted in comprehensive consideration of the future cash flow, service life, discount rate and other factors of the asset. The measurement results of the recoverable amount indicate that if the recoverable amount of an asset is lower than its book value, the book value of the asset shall be written down to the recoverable amount. The written down amount is recognized as an asset impairment loss and included in current profits and losses. At the same time, a corresponding asset impairment provision shall be made. 25. Long-term deferred expenses Long-term deferred expenses are recorded based on the actual amount incurred and amortized evenly over the benefit period or specified period. If a long-term deferred expense item cannot benefit future accounting periods, the amortized value of the item that has not yet been amortized will be fully transferred to the current profit and loss. ZKTeco 2023 Half Year Report 136 26. Contract liabilities The Company lists contract assets or contract liabilities in the balance sheet according to the relationship between the performance of performance obligations and customer payment. The Company lists contract assets or contract liabilities in the balance sheet according to the relationship between the performance of performance obligations and customer payment. 27. Employee compensation (1) Accounting treatment methods for short-term compensation During the accounting period when the employees work for the Company, the actual short-term compensation is recognized as liabilities, and included in current profits and losses for the current period or relevant asset costs. Among them, non-monetary benefits are measured at the fair value. (2) Accounting treatment method for post employment benefits Post employment benefits mainly include basic pension insurance premiums, unemployment insurance premiums, etc., classified as defined contribution plans based on the risks and obligations borne by the Company. During the accounting period when employees provide services, the Company will recognize the payable amount calculated in accordance with the above social security regulations as a liability and include it in the current profits and losses or related asset costs. (3) Accounting treatment method for dismissal benefits The Company terminates the labor relationship with employees before the expiration of their labor contracts, or proposes compensation to encourage employees to voluntarily accept layoffs. When the Company cannot unilaterally withdraw the termination plan or layoff proposal, or when the Company recognizes the costs and expenses related to the restructuring involving the payment of dismissal benefits, whichever is earlier, the liabilities arising from the compensation for the termination of the labor relationship with employees are recognized and included in current profits and losses. 28. Lease liabilities On the commencement date of the lease term, the Company recognizes the right-of-use assets and lease liabilities for the lease, except for short-term leases and low value asset leases that have been simplified using the standards. Lease liabilities are initially measured according to the present value of the unpaid lease payments on the commencement date of the lease term. The lease payment amount refers to the amount paid by the Company to the lessor related to the right to use the leased asset during the lease term, including: 1. Fixed payment and substantial fixed payment. If there is lease incentive, the relevant amount of lease incentive shall be deducted; 2. The variable lease payment amount depends on the index or ratio, which is determined at the initial measurement based on the index or ratio on the commencement date of the lease term; 3. The exercise price of the purchase option, provided that the Company reasonably determines that the option will be exercised; ZKTeco 2023 Half Year Report 137 4. The amount to be paid for the exercise of the option to terminate the lease, provided that the lease term reflects that the Company will exercise the option to terminate the lease; 5. The amount expected to be paid according to the residual value of the guarantee provided by the Company. When calculating the present value of lease payments, the Company uses the interest rate implicit in the lease as the discount rate. If the interest rate implicit in the lease cannot be determined, the incremental borrowing interest rate shall be used as the discount rate. 29. Estimated liabilities 1. When the obligation formed by providing external guarantees, litigation matters, product quality assurance, loss contracts, and other contingencies becomes a current obligation undertaken by the Company, and the performance of this obligation is likely to result in economic benefits flowing out of the Company, and the amount of this obligation can be reliably measured, the Company recognizes this obligation as an estimated liability. 2. The Company initially measures the estimated liabilities based on the best estimate of the expenses required to fulfill the relevant current obligations, and reviews the book value of the estimated liabilities on the balance sheet date. 30. Share-based payment 1. Types of share-based payments This includes equity settled share-based payments and cash settled share-based payments. 2. Method for determining the fair value of equity instruments (1) If there is an active market, it shall be determined based on the quoted prices in the active market; (2) Valuation techniques are adopted if there is no active market, including reference to prices used in recent market transactions by various parties who are familiar with the situation and voluntary transactions, reference to the current fair value of other financial instruments that are substantially the same, discounted cash flow method and option pricing model. 3. Basis for confirming the best estimate of exercisable equity instruments Estimate based on the latest changes in the number of employees with feasible rights and other subsequent information. 4. Accounting treatment for the implementation, modification and termination of share-based payment plans (1) Equity settled share-based payments Equity settled share-based payments that are immediately exercisable after grant in exchange for employee services shall be recognized as relevant costs or expenses based on the fair value of the equity instrument on the grant date, and the capital reserve shall be adjusted accordingly. For equity settled share-based payments that require the completion of services during the waiting period or the achievement of specified performance conditions in exchange for employee services, on each balance sheet date during the waiting period, the services obtained in the current period shall be recognized as relevant costs or expenses at the fair value of the equity instrument grant date based on the best estimate of the number of vested equity instruments, and the capital reserve shall be adjusted accordingly. For equity settled share-based payments in exchange for services from other parties, if the fair value of the services from other parties can be reliably measured, they shall be measured at the fair value of the services from other parties on the date of acquisition. If the fair value of services provided by other parties cannot be reliably measured, but the fair ZKTeco 2023 Half Year Report 138 value of equity instruments can be reliably measured, the fair value of equity instruments on the date of service acquisition shall be measured and included in relevant costs or expenses, with corresponding increase in owner's equity. (2) Cash settled share-based payments Cash settled share-based payments that are immediately exercisable after the grant in exchange for employee services are recognized as relevant costs or expenses at the fair value of the Company's liabilities on the grant date, with corresponding increases in liabilities. For cash settled share-based payment that can be exercised only after completing the services in the waiting period or meeting the prescribed performance conditions in exchange for employee services, on each balance sheet date in the waiting period, based on the best estimate of the exercisable rights, the services obtained in the current period shall be included in the cost or expense and the corresponding liabilities according to the fair value amount of the Company's liabilities. (3) Modify or terminate the share-based payment plan If the modification increases the fair value of the granted equity instrument, the Company shall recognize the increase in services obtained accordingly based on the increase in fair value of the equity instrument; if the modification increases the number of equity instruments granted, the Company will recognize the fair value of the increased equity instruments as an increase in the acquisition of services accordingly; if the Company modifies the vesting conditions in a way that benefits employees, the Company will consider the modified vesting conditions when dealing with the vesting conditions. If the modification reduces the fair value of the granted equity instrument, the Company will continue to recognize the amount of services obtained based on the fair value of the equity instrument on the grant date, without considering the decrease in the fair value of the equity instrument; if the modification reduces the number of granted equity instruments, the Company will treat the reduced portion as cancellation of the granted equity instruments; if the vesting conditions are modified in a way that is not conducive to employees, the modified vesting conditions will not be considered when dealing with the vesting conditions. If the Company cancels or settles the granted equity instruments during the waiting period (except for those cancelled due to failure to meet the vesting conditions), the cancellation or settlement will be treated as accelerated vesting, and the amount originally confirmed during the remaining waiting period will be immediately confirmed. 31. Revenue Accounting policies adopted for revenue recognition and measurement 1. Revenue recognition The Company recognizes the revenue when performance obligations under the contract are performed, i.e., the consumer obtains the control power over relevant goods. Obtaining the control power over the relevant goods means being able to dominate the use of such goods and obtain almost all economic benefits from them. 2. According to the relevant provisions of the revenue standards, the Company determines that the nature of the relevant performance obligations belongs to "performance obligations performed within a certain period of time" or "performance obligations performed at a certain point of time", and recognizes revenue according to the following principles. (1) When any of the following conditions is satisfied, it will be deemed as that the Company fulfills its performance obligations during certain period: ① The customers obtain and consume the economic benefit arising from the performance of the Company at the time of the performance of the Company. ZKTeco 2023 Half Year Report 139 ② The customer is able to control the in-process assets during the Company's performance. ③ The assets produced during the performance of the Company are for an irreplaceable purpose, and during the contract period, the Company has the right to ask for the payment for the completed performance accumulated so far. For the performance obligations within a certain period of time, the Company recognizes the revenue in accordance with the performance progress during the period, except that the performance progress cannot be determined reasonably. The Company considers the nature of the goods and uses the output method or input method to determine the appropriate performance schedule. (2) For performance obligations that are not fulfilled within a certain period of time and are fulfilled at a certain time point, the Company recognizes revenue at the time when the customer obtains control of the relevant goods. In the judgment of whether the customer has obtained the control over the goods, the Company will consider the following indications: ① The Company has the current right to collect the goods, that is, the customer has a current payment obligation for the goods. ② The Company has transferred the legal ownership of the goods to the customer, that is, the customer has obtained the legal ownership of the goods. ③ The Company has transferred the physical goods to the customer, that is, the customer has possessed the physical goods. ④ The Company has transferred the main risks and rewards existing in the ownership of the goods to the customers, that is, the customer has obtained the main risks and rewards existing in the ownership of the goods. ⑤ The customer has accepted the item. ⑥ Other signs that customers have gained control of the goods. 3. Measurement of revenue Revenue shall be measured by the Company according to the transaction price apportioned to each individual performance obligation. In determining the transaction price, the Company considers the impact of variable consideration, major financing components in the contract, non-cash consideration, and consideration payable to customers. (1) Variable consideration The Company determines the best estimate of variable consideration based on expected value or the most likely amount to occur, but the transaction price including variable consideration shall not exceed the amount of the cumulative recognized revenue that is highly unlikely to result in a significant reversal when the relevant uncertainty is eliminated. When evaluating whether the cumulative recognized revenue is highly unlikely to undergo a significant reversal, the enterprise shall also consider the possibility and proportion of revenue reversal. (2) Significant financing components If there are significant financing components in the Contract, the Company will determine the transaction price based on the amount payable which is assumed to be paid by the customer in cash when obtaining the control right on goods. The difference between the transaction price and the contract consideration shall be amortized using the effective interest rate method during the contract period. (3) Non-cash consideration Where a customer pays non-cash consideration, the Company determines the transaction price based on the fair value of the non-cash consideration. Where the fair value of the non-cash consideration cannot be reasonably estimated, the Company indirectly determines the transaction price with reference to the separate selling price of the goods it undertakes to transfer to customers. (4) Consideration payable to customers For the consideration payable to customers, the payable consideration shall be offset against the transaction price, and the current income shall be offset at the later of the recognition of relevant income and the payment (or commitment to pay) of customer consideration, except for the consideration payable to customers to obtain other clearly distinguishable goods from customers. The consideration payable by the enterprise to customers is to obtain other clearly distinguishable goods from customers, and the purchased goods shall be confirmed in a manner consistent with other purchases of the enterprise. Where the consideration payable by the enterprise to the customer exceeds the fair value of the identifiable goods obtained from the customer, the excess amount shall be ZKTeco 2023 Half Year Report 140 offset against the transaction price. If the fair value of clearly distinguishable goods obtained from customers cannot be reasonably estimated, the Company shall offset the transaction price in full with the consideration payable to customers. Differences in accounting policies for revenue recognition due to different business models used in similar businesses The Company recognizes revenue at different time points under different business models, which can be divided into the following situations: (1) The principle for recognizing domestic offline sales revenue of products: If the Company sells its products to engineering contractors, dealers, and end customers, and the contract is signed without installation, the Company will send the goods to the customer or the customer will pick them up at their doorstep according to the delivery method agreed in the sales contract. The customer receives the goods and accepts them as qualified. The revenue is recognized when the Company obtains the customer's receipt certificate. (2) The principle for recognizing revenue from overseas offline sales of products: For domestic companies that directly export and sell products, FOB terms are adopted. For those that declare and export through sea and air freight, the export customs declaration procedures are completed, the customs declaration form is obtained, and the revenue is recognized when obtaining the bill of lading. For customs declaration and export through express delivery, revenue shall be recognized based on the date of the customs declaration. If the overseas subsidiary sells overseas, the goods shall be delivered to the customer or picked up at the customer's doorstep according to the agreed delivery method with the customer. Revenue shall be recognized when the customer receives the goods and the acceptance is qualified. (3) The principle for recognizing sales revenue through online self operation mode of products: In self operation mode, the Company mainly sells products directly to consumers through domestic e-commerce platforms (Tmall, Taobao, JD, PDD, Suning) and overseas e-commerce platforms (Amazon, Lazada, Shoppe). The Company confirms online self operated business revenue when sending out goods, either directly confirmed by consumers or automatically confirmed by the system's default delivery time and meeting the return period terms. (4) Principle for recognizing sales revenue of system integration: The sales of company system integration products include providing customers with supporting products, installation, debugging, and system trial operation, and other supporting services. After passing the acceptance inspection, sales revenue is recognized. (5) Software sales revenue recognition principle: The software is directly provided to the buyer and requires a dedicated software authorization code to be used. After the software authorization code is provided to the buyer, the realization of software sales revenue is recognized. If the company contract stipulates that the software needs to be installed, debugged, or inspected, the software sales revenue will be recognized after the installation, debugging, or inspection are completed and an acceptance report is obtained. 32. Government subsidies 1. Government subsidies include government subsidies related to assets and government subsidies related to income. 2. If a government subsidy is a monetary asset, it shall be measured at the amount received or receivable. If government subsidies are non-monetary assets, they shall be measured at fair value. If the fair value cannot be obtained reliably, it shall be measured at the nominal amount Government subsidies measured at their nominal amounts are directly included in the current profits and losses. 3. The gross price method is adopted for government subsidies: (1) Government subsidies related to assets are recognized as deferred income and included in the profits and losses in stages within the useful life of the relevant assets in a reasonable and systematic way. If the relevant assets are sold, transferred, scrapped or damaged before the end of their service lives, the balance of relevant deferred income that has not been allocated shall be transferred to the current profits and losses of asset disposal. (2) Government subsidies related to income that are used to compensate related costs or losses in subsequent periods shall be recognized as deferred income, and shall be included in current profits and losses during the period when the related costs are ZKTeco 2023 Half Year Report 141 recognized. Those used to compensate related costs or losses that have already occurred are directly included in current profits and losses. 4. For the government subsidies that include both asset-related and income-related portions, accounting treatments shall be subject to different portions; if difficult to distinguish them, they shall be classified as income-related government subsidies in whole. 5. The government subsidies related to the Company's daily activities shall be included in other income or offset against relevant costs according to the essence of economic business; and the governmental subsidies unrelated to daily activities of the Company shall be included in non-operating income and expenditure. 6. The policy preferential loans obtained by the Company will be treated in two ways: The government will allocate the discount funds to the lending bank and the government will directly allocate the discount funds to the Company: (1) Where the finance department allocates the discount fund to the lending bank and the lending bank provides a loan at the policy-based preferential interest rate for the Company, the Company chooses to conduct accounting treatment according to the following methods: 1) Use the actually received loan amount as the entry value of the loan and counts relevant borrowing costs based on loan principal and the policy-based preferential interest rate. 2) The fair value of the loan is used as the entry value of the loan and the borrowing costs are calculated using the effective interest rate method. The difference between the actual received amount and the fair value of the loan is recognized as deferred income. Deferred income is amortized using the effective interest rate method during the duration of the loan to offset related borrowing costs. (2) Where the finance directly allocates the discount fund to the Company, the Company uses the corresponding discount to offset relevant borrowing costs. 33. Deferred income tax assets/deferred income tax liabilities The Company adopts the balance sheet liabilities method to provide deferred income tax based on the temporary difference between the book value of assets/liabilities and tax basis at the balance sheet date. On the balance sheet date, the deferred income tax assets and deferred income tax liabilities shall be measured according to the tax rate applicable to the period during which the assets are expected to be recovered or the liabilities are expected to be paid off. 1. Recognition of deferred income tax assets (1) The Company recognizes the deferred income tax assets arising from the deductible temporary differences to the extent that it is likely to obtain the taxable income used to offset the deductible temporary differences. However, deferred income tax assets arising from the initial recognition of assets or liabilities in transactions with the following characteristics shall not be recognized: 1) This transaction is not a business merger; 2) When a transaction occurs, it does not affect accounting profits or taxable income (or deductible losses). (2) The Company recognizes deferred income tax assets for deductible temporary differences related to investments in subsidiaries, associates, and joint ventures that meet the following conditions: 1) The temporary difference is likely to reverse in the foreseeable future; 2) It is likely to obtain taxable income to offset temporary differences in the future. (3) As for any deductible loss and tax deduction which can be carried forward to the next year, the corresponding deferred income tax assets are recognized by the Company to the extent the taxable income which is likely to be obtained for offsetting the deductible loss and tax deduction. 2. Recognition of deferred income tax liabilities Except for deferred income tax liabilities arising from the following situations, the Company recognizes all deferred income tax liabilities arising from taxable temporary differences: (1) Initial recognition of goodwill; (2) The initial recognition of assets or liabilities arising from transactions that simultaneously meet the following characteristics: 1) This transaction is not a business merger; ZKTeco 2023 Half Year Report 142 2) When a transaction occurs, it does not affect accounting profits or taxable income (or deductible losses). (3) The Company has taxable temporary differences related to investments in subsidiaries, associates, and joint ventures that meet the following conditions: 1) The investment enterprise can control the timing of the reversal of temporary differences; 2) The temporary difference is likely not to reverse in the foreseeable future. 34. Leasing (1) Accounting treatment methods for operating leases (1) The Company as lessor As the lessor, the Company adopts the straight-line method to recognize the rental income from operating leases during each period of the lease term. The Company capitalizes the initial direct expenses related to operating leases, and allocates them on the same basis as the recognition of rental income during the lease term, and includes them in the current profits and losses. For fixed assets in assets under operating lease, the Company shall adopt a depreciation policy similar to that of assets to calculate depreciation; for other assets under operating lease, they shall be amortized using systematic and reasonable methods in accordance with the applicable Accounting Standards for Enterprises. The Company determines whether the assets under operating lease have been impaired and conducts the corresponding accounting treatment according to the "Accounting Standards for Enterprises No.8 - Asset Impairment". (2) The Company as lessee When the Company is the lessee, on the commencement date of the lease term, except for short-term leases and low value asset leases for which simplified treatment is adopted, the right-to-use assets and lease liabilities are recognized for the lease. After the commencement date of the lease term, the Company adopts a cost model for subsequent measurement of the right-of-use asset. The Company makes depreciation for the right-of-use assets with reference to the relevant depreciation provisions of the "Accounting Standards for Enterprises No.4 - Fixed Assets". If the lessee can be reasonably determined that the ownership of the leased asset can be obtained when the lease term expires, depreciation shall be accrued during the remaining useful life of the leased asset. If it cannot be reasonably determined that the ownership of the leased asset can be obtained when the lease term expires, depreciation shall be accrued during the shorter period of the lease term and the remaining useful life of the leased asset. The Company determines whether the right-of-use assets have been impaired and accounts for any identified impairment losses according to the "Accounting Standards for Enterprises No.8 - Asset Impairment". The Company calculates the interest expense of the lease liability in each period of the lease term according to the fixed periodic interest rate and records it into the current profits and losses. Where they shall be included in the cost of relevant assets according to other standards such as the "Accounting Standards for Enterprises No.17- Borrowing Costs", the provisions shall apply. For short-term leases and low value asset leases, the Company chooses not to recognize the right-of-use assets and lease liabilities. The lease payments for short-term leases and low value asset leases are recorded in the relevant asset costs or current profit and loss using the straight-line method during each period of the lease term. (2) Accounting treatment methods for financial leasing (1) The Company as lessor As the lessor, the Company recognizes the receivable financing lease payments for financing leases on the commencement date of the lease term, terminates the recognition of financing lease assets, and calculates and recognizes interest income for each period of the lease term at a fixed periodic interest rate. (2) The Company as lessee ZKTeco 2023 Half Year Report 143 When the Company is the lessee, on the commencement date of the lease term, except for short-term leases and low value asset leases for which simplified treatment is adopted, the right-to-use assets and lease liabilities are recognized for the lease. After the commencement date of the lease term, the Company adopts a cost model for subsequent measurement of the right-of-use asset. The Company makes depreciation for the right-of-use assets with reference to the relevant depreciation provisions of the "Accounting Standards for Enterprises No.4 - Fixed Assets". If the lessee can be reasonably determined that the ownership of the leased asset can be obtained when the lease term expires, depreciation shall be accrued during the remaining useful life of the leased asset. If it cannot be reasonably determined that the ownership of the leased asset can be obtained when the lease term expires, depreciation shall be accrued during the shorter period of the lease term and the remaining useful life of the leased asset. The Company determines whether the right-of-use assets have been impaired and accounts for any identified impairment losses according to the "Accounting Standards for Enterprises No.8 - Asset Impairment". The Company calculates the interest expense of the lease liability in each period of the lease term according to the fixed periodic interest rate and records it into the current profits and losses. Where they shall be included in the cost of relevant assets according to other standards such as the "Accounting Standards for Enterprises No.17- Borrowing Costs", the provisions shall apply. For short-term leases and low value asset leases, the Company chooses not to recognize the right-of-use assets and lease liabilities. The lease payments for short-term leases and low value asset leases are recorded in the relevant asset costs or current profit and loss using the straight-line method during each period of the lease term. 35. Other important accounting policies and estimates None 36. Changes of significant accounting policies and accounting estimates (1) Significant accounting policy changes Applicable □ Not applicable Contents and reasons for changes in accounting policies Approval procedure Remarks On November 30,2022, the Ministry of Finance issued and implemented the "Interpretation No.16 of the Accounting Standards for Business Enterprises", which stipulates that "deferred income tax related to assets and liabilities arising from individual transactions shall not be subject to the accounting treatment of initial recognition exemption". The Company shall implement it from January 1,2023. For the lease liabilities and right-of-use assets recognized due to the application of this regulation in the earliest period of financial statement presentation for the first time, as well as the estimated liabilities and corresponding assets related to the disposal obligation recognized, which generate taxable temporary differences and deductible temporary differences, the Company shall adjust the cumulative impact to present the initial retained Not applicable ZKTeco 2023 Half Year Report 144 earnings and other related financial statement items for the earliest period in the financial statements in accordance with this regulation and the provisions of "Accounting Standards for Enterprises No.18 - Income Tax". The specific impacts of changes in accounting policies are as follows: Report items that are significantly affected Affected amount Remarks Balance Sheet Items as of December 31,2022 Deferred income tax assets 6,559,516.70 Deferred tax liability 6,275,205.80 Other comprehensive income -1,046.84 Undistributed profits 254,641.11 Minority interests 30,716.63 2022 Income Statement Items Income tax expense -285,138.71 Deferred income tax expense Minority interest 30,497.60 (2) Changes in significant accounting estimates □ Applicable Not applicable (3) Implementation of new accounting standards adjustment for the first time starting from 2023. Relevant information on financial statements at the beginning of the year Applicable □ Not applicable According to the relevant provisions of the "Interpretation No.16 of the Accounting Standards for Business Enterprises", the Company has made the following adjustments to the beginning balance of 2023 for certain accounts in the consolidated balance sheet and parent company's balance sheet: Adjustment of some accounts involved in the consolidated balance sheet Item December 31,2022 January 1,2023 Adjustments Deferred income tax assets 46,749,722.28 53,309,238.986,559,516.70 Deferred tax liability 3,557,844.83 9,833,050.636,275,205.80 Other comprehensive income 5,255,222.65 5,254,175.81 -1,046.84 Undistributed profits 788,571,917.98 788,826,559.09254,641.11 Minority interests 43,025,126.30 43,055,842.9330,716.63 Adjustment of some accounts involved in the parent company's balance sheet Item December 31,2022 January 1,2023 Adjustments Deferred income tax assets 27,628,722.59 29,799,536.022,170,813.43 Deferred tax liability 3,022,004.37 5,231,980.022,209,975.65 ZKTeco 2023 Half Year Report 145 Undistributed profits 478,054,103.62478,014,941.40 -39,162.22 VI. Taxation 1. Main tax types and tax rates Tax Type Tax Basis Tax rates VAT Selling goods or providing taxable services 13%,9%,6%,5%,3%, and applicable value-added tax rate for overseas subsidiaries in their registered location Urban maintenance and construction tax Payable turnover tax amount 7%,5% Property tax For ad valorem taxes, the remaining value after deducting 30% from the original value of the property in one go 1.20% Education surcharges Payable turnover tax amount 3% Local education surcharges Payable turnover tax amount 2% Disclosure of information on taxpayers with different corporate income tax rates Name of Taxpayer Income tax rate ZKTECOCO., LTD.15% Xiamen Zkteco Biometric Identification Technology Co., Ltd.25% Shenzhen ZKTeco Biometric Identification Technology Co., Ltd. 20% Hangzhou ZKTeco Hanlian E-commerce Co., Ltd.20% Xi'an ZKTeco Co., Ltd.20% Dalian ZKTeo CO., Ltd.20% Hubei ZKTeco Co., Ltd.20% ZKCserv Technology Limited Co., Ltd.20%,15% XIAMENZKTECOCO., LTD.15% ZKTeco Huayun (Xiamen) Integrated Circuit Co., Ltd.25% ZKTECO (GUANGDONG) CO., LTD 15% Shenzhen Zhongjiang Intelligent Technology Co., Ltd.25% Xiamen ZKTeco Cloud Valley Design and Development Co., Ltd. 25% Wuhan ZKTeco Perception Technology Co., Ltd.20%,15% ZKTeco Sales Co., Ltd.25% ZKINVESTIMENTOSDOBRASILLTDA.25%,15% ZKTECODOBRASILS.A.25%,15% Limited Liability Company "ZKTeco biometrics and security" 20% ZKTECHNOLOGYLLCNot applicable ZKTECOUSALLCNot applicable ZKTECOARGENTINAS.A.25%,30%,35% ZKTeco Latam R&DS.A.25%,30%,35% ZKTECOBIOMETRICSINDIAPRIVATELIMITED 25%,15% ZKTECOCOLOMBIASAS 35% ZKTECOEUROPESL 25% ZKTECOIRELANDLIMITED 12.5% ZKTECOITALIAS.R.L.27.9% ZKTeco Deutschland GmbH 31.225% ZKTECOLATAM, S.A. DEC.V.30% ZKSOFTWAREDEMEXICO, S.A. DEC.V.30% ZKTECOPERUSOCIEDADANONIMACERRADA 29.5% ZKTECOSECURITYL.L.C 0% ZKTECOTHAICO., LTD.20%,15%,0% ZKTeco 2023 Half Year Report 146 Armatura Tech Co., Ltd.20%,15%,0% ZKTECOTURKEYELEKTRONIKSANAYIVETICARET LIMITEDSIRKETI. 25% ZKTECO (M) SDN. BHD.24% PT. ZKTECOBIOMETRICSINDONESIA 22%,11% Armatura Co., Ltd.25%,22%,20%,10% ZKTeco Chile SpA 27% SOLUCIONESINTEGRALESYSISTEMASSPA 27% ZKTECOCO., LIMITED 16.50%,8.25% NGTECOCO., LIMITED 16.50%,8.25% ZKTECOPANAMA, S.A.5% ZKTECOSGINVESTMENTPTE. LTD.17%,4.25%,8.5% ZKTECOSINGAPOREPTE. LTD.17%,4.25%,8.5% ZKINTELLIGENTSOLUTIONS (PTY) LTD 27% ZKTECOBIOMETRICLIMITED 30% ZKTECOBIOMETRICSKENYALIMITED 30% ZKTECOInvestment Inc.21% ZKINVESTMENTSINC.21% ARMATURALLC.21% ZKTeco Japan Co., Ltd.23.20%,15% ZKTECOUKLTD 19% ZKTECOVIETNAMTECHNOLOGYCOMPANYLIMITED 20% ZKTECOROMANIAS.R.L 16% ZKTeco Yunlian (Xiamen) Technology Co., Ltd.25% ZKDIGIMAXPTE.LTD.4.25%,8.5%,17% ZKDIGIMAXPANAMA, S.A.25% ZKDIGIMAXCOLOMBIASAS 35% ZKDIGIMAX (PTY) LTD 27% PT. ZKDIGIMAXEXCELNOBLE 0.5%,22% 2. Tax incentives According to the relevant provisions of the "Notice of the Ministry of Finance and the State Administration of Taxation on Value-added Tax Policies for Software Products" (CS [2011] No.100) and the "Notice on Questions of Policies on Encouraging the Development of the Software and Integrated Circuit Industries" (CS [2000] No.25), from January 1,2011, for general taxpayers of value-added tax who sell software products developed and produced by themselves, after value-added tax is levied at the applicable tax rate, a policy of taxation and drawback has been implemented for the portion of its actual value-added tax burden exceeding 3.00%. Dalian ZKTeo CO., Ltd. and Wuhan ZKTeco Perception Technology Co., Ltd. are taxpayers who provide postal services, telecommunications services, modern services and daily life services, with sales revenue accounting for over 50% of the total sales revenue. They are taxpayers in the productive service industry. According to the "Announcement of the Ministry of Finance and the State Administration of Taxation on Extending the Implementation Period of the VATReduction and Exemption Policy for Small-Scale Taxpayers" (Announcement of the Ministry of Finance and the State Administration of Taxation [2023] No.1), from January 1, 2023 to December 31,2023, taxpayers in the production service industry are allowed to deduct 5% of the current deductible input tax to offset the taxable amount. According to the Announcement on Further Implementing the "Announcement of the Ministry of Finance and the State Taxation Administration on Further Implementing the "Six Taxes and Two Fees" Reduction and Exemption Policies for Micro and Small Enterprises" (Announcement No.10 of the State Administration of Taxation of the Ministry of Finance,2022), from January 1,2022 to December 31,2024, small-scale value-added tax taxpayers, small and micro profit enterprises, and individual industrial and commercial households can reduce resource tax, urban maintenance and construction tax, property tax, urban land use tax, stamp duty (excluding securities transaction stamp duty), farmland occupation tax, education surcharge, and local education surcharge within a tax amount range of 50.00%. This policy is applicable to Shenzhen ZKTeco Biometric Identification Technology Co., Ltd., Hangzhou ZKTeco 2023 Half Year Report 147 ZKTeco Hanlian E-commerce Co., Ltd., Xi'an ZKTeco Co., Ltd., Dalian ZKTeo CO., Ltd., Hubei ZKTeco Co., Ltd., ZKCserv Technology Limited Co., Ltd. and Wuhan ZKTeco Perception Technology Co., Ltd. On December 20,2021, ZKTECOCO., LTD. passed the high-tech review and recognition (high-tech enterprise certificate number: GR202144002274, valid for 3 years, and the income tax preferential period is from January 1,2021 to December 31,2023). According to relevant regulations such as the "Law of the People's Republic of China on Enterprise Income Tax", the Company would enjoy a preferential corporate income tax rate of 15.00% for high-tech enterprises in 2023. According to the "Announcement of the Ministry of Finance and the State Taxation Administration on Implementing the Preferential Income Tax Policies for Micro and Small Enterprises and Individual Industrial and Commercial Households" (Announcement No.6 of the Ministry of Finance and the State Administration of Taxation,2023), from January 1,2023 to December 31,2024, the portion of Shenzhen ZKTeco Biometric Identification Technology Co., Ltd., Hangzhou ZKTeco Hanlian E-commerce Co., Ltd., Xi'an ZKTeco Co., Ltd., Dalian ZKTeo CO., Ltd. and Hubei ZKTeco Co., Ltd. that does not exceed RMB 1 million shall be subject to corporate income tax reduction by 25%, and the corporate income tax shall be paid at a tax rate of 20%. According to the "Announcement of the Ministry of Finance and the State Taxation Administration on Further Implementing the Preferential Income Tax Policies for Micro and Small Enterprises" (Announcement No.13 of the Ministry of Finance and the State Administration of Taxation,2022), from January 1,2022 to December 31,2024, the portion of Shenzhen ZKTeco Biometric Identification Technology Co., Ltd., Hangzhou ZKTeco Hanlian E-commerce Co., Ltd., Xi'an ZKTeco Co., Ltd., Dalian ZKTeo CO., Ltd. and Hubei ZKTeco Co., Ltd. that exceeds RMB 1 million but does not exceed RMB 3 million shall be subject to corporate income tax reduction by 25.00%, and the corporate income tax shall be paid at a tax rate of 20.00%. According to the "Announcement of the Ministry of Finance and the State Taxation Administration on Implementing the Preferential Income Tax Policies for Micro and Small Enterprises and Individual Industrial and Commercial Households" (Announcement No.6 of the Ministry of Finance and the State Administration of Taxation,2023), from January 1,2023 to December 31,2024, the portion of ZKCserv Technology Limited Co., Ltd. that does not exceed RMB 1 million shall be subject to corporate income tax reduction by 25%, and the corporate income tax shall be paid at a tax rate of 20%. According to the "Announcement of the Ministry of Finance and the State Taxation Administration on Further Implementing the Preferential Income Tax Policies for Micro and Small Enterprises" (Announcement No.13 of the Ministry of Finance and the State Administration of Taxation,2022), from January 1,2022 to December 31,2024, the portion of ZKCserv Technology Limited Co., Ltd. that exceeds RMB 1 million but does not exceed RMB 3 million shall be subject to corporate income tax reduction by 25.00%, and the corporate income tax shall be paid at a tax rate of 20.00%. On December 11,2020, ZKCserv Technology Limited Co., Ltd. passed the high-tech identification (high-tech enterprise certificate number: GR202044201143, valid for 3 years, and the income tax preferential period is from January 1,2020 to December 31,2022). According to the "Announcement of the State Administration of Taxation on Relevant Issues Concerning the Implementation of Preferential Tax Policies for High and New-Technology Enterprise" (Announcement No.7), in the year when an enterprise's high-tech enterprise qualification expires, its enterprise income tax is temporarily prepaid at a 15% tax rate before being re-recognized. If the enterprise has not yet obtained the high-tech enterprise qualification before the end of the year, the tax in the corresponding period shall be paid in accordance with regulations. According to regulations, ZKCserv Technology Limited Co., Ltd. will temporarily prepay at a tax rate of 15% for 2023. On November 17,2022, XIAMENZKTECOCO., LTD. passed the high-tech identification (high-tech enterprise certificate number: GR202235100737, valid for 3 years, and the income tax preferential period is from January 1,2022 to December 31,2024). According to relevant regulations such as the "Law of the People's Republic of China on Enterprise Income Tax", XIAMENZKTECO CO., LTD. would enjoy a preferential corporate income tax rate of 15.00% for high-tech enterprises in 2023. On December 19,2022, ZKTECO (GUANGDONG) CO., LTD passed the high-tech identification (high-tech enterprise certificate number: GR202244002616, valid for 3 years, and the income tax preferential period is from January 1,2022 to December 31,2024). According to relevant regulations such as the "Law of the People's Republic of China on Enterprise Income Tax", ZKTECO (GUANGDONG) CO., LTD would enjoy a preferential corporate income tax rate of 15.00% for high-tech enterprises in 2023. ZKTeco 2023 Half Year Report 148 According to the "Announcement of the Ministry of Finance and the State Taxation Administration on Implementing the Preferential Income Tax Policies for Micro and Small Enterprises and Individual Industrial and Commercial Households" (Announcement No.6 of the Ministry of Finance and the State Administration of Taxation,2023), from January 1,2023 to December 31,2024, the portion of Wuhan ZKTeco Perception Technology Co., Ltd. that does not exceed RMB 1 million shall be subject to corporate income tax reduction by 25%, and the corporate income tax shall be paid at a tax rate of 20%. According to the "Announcement of the Ministry of Finance and the State Taxation Administration on Further Implementing the Preferential Income Tax Policies for Micro and Small Enterprises" (Announcement No.13 of the Ministry of Finance and the State Administration of Taxation,2022), from January 1,2022 to December 31,2024, the portion of Wuhan ZKTeco Perception Technology Co., Ltd. that exceeds RMB 1 million but does not exceed RMB 3 million shall be subject to corporate income tax reduction by 25.00%, and the corporate income tax shall be paid at a tax rate of 20.00%. On December 1,2020, Wuhan ZKTeco Perception Technology Co., Ltd. passed the high-tech identification (high-tech enterprise certificate number: GR202042002298, valid for 3 years, and the income tax preferential period is from January 1,2020 to December 31,2022). According to the "Announcement of the State Administration of Taxation on Relevant Issues Concerning the Implementation of Preferential Tax Policies for High and New-Technology Enterprise" (Announcement No.7), in the year when an enterprise's high-tech enterprise qualification expires, its enterprise income tax is temporarily prepaid at a 15% tax rate before being re-recognized. If the enterprise has not yet obtained the high-tech enterprise qualification before the end of the year, the tax in the corresponding period shall be paid in accordance with regulations. According to regulations, Wuhan ZKTeco Perception Technology Co., Ltd. will temporarily prepay at a tax rate of 15% for 2023. 3. Others When the total taxable income of ZKINVESTIMENTOSDOBRASILLTDA. and ZKTECODOBRASILS.A. is below 240,000 Reals, the tax rate is 15.00%; an additional 10.00% will be levied on the portion exceeding 240,000 Reals. LLC type companies are not required to pay corporate income tax, and the profits of LLC companies are summarized to C-corp type company shareholders or individual shareholders, and then shareholders pay income tax. If the accumulated taxable net income of ZKTECOARGENTINAS.A. and ZKTeco Latam R&DS.A. exceeds 5 million pesos, they will be taxed at a tax rate of 25.00%; those between 5 million and 50 million pesos will be taxed at a tax rate of 30.00%; those exceeding 50 million pesos will be taxed at a tax rate of 35.00%. Coexistence of two types of corporate income tax of ZKTECOBIOMETRICSINDIAPRIVATELIMITED: (1) Normal Tax corporate income tax rate is 25.00%; (2) MATTax: In 2022, the MATTax rate was 15.00%. When the Company's tax payable is less than 15.00% of its book profit, the minimum alternative tax is paid, calculated as 15.00% of its book profit; Normal Tax and MAT Tax, whichever is higher. The corporate income tax rate for ZKTeco Deutschland GmbH in 2023 is 31.225%. ZKTECOTHAICO., LTD. and Armatura Tech Co., Ltd. are small and medium-sized enterprises (SMEs) that meet the following two conditions: (1) As of the last day of the accounting cycle, the paid in capital shall not exceed THB 5 million; (2) The total annual revenue from selling goods or providing services shall not exceed THB 30 million. Applicable to tax rates of 20.00%,15.00%, and 0.00%, specifically including: accounting profits below THB 300,000.00, with a tax rate of 0.00%; from THB 300,000.00 to THB 3,000,000.00, with a tax rate of 15.00%; above THB 3,000,000.00, with tax rate is 20.00%. If the above two conditions are not met, the tax rate is applicable at 20.00%. The corporate income tax rate of ZKTECOTURKEYELEKTRONIKSANAYIVETICARETLIMITEDSIRKETI for the year 2023 was 25%. PT. ZKTECOBIOMETRICSINDONESIA, an Indonesian subsidiary, applies the corporate income tax rate for the year 2023 as follows: 1) When the total sales revenue does not exceed IDR 4.8 billion, the applicable income tax rate is 11.00%; ZKTeco 2023 Half Year Report 149 2) When the total sales exceed IDR 4.8 billion and do not exceed IDR 50 billion, the taxable income of IDR 4.8 billion accounting for the proportion of total sales shall be calculated at a tax rate of 11.00%, and the taxable income of the part exceeding IDR 4.8 billion accounting for the proportion of total sales shall be calculated at a tax rate of 22.00%; 3) When the total sales exceed IDR 50 billion, the applicable income tax rate is 22.00%. Armatura Co., Ltd. has an income tax rate of 10.00% for sales between KRW 0.00 to KRW 200 million; 20.00% for KRW 200 million to 20 billion; 22.00% for KRW 20-300 billion, and 25.00% for over KRW 300 billion. The applicable income tax rates for ZKTECOCO., LIMITED and NGTECOCO., LIMITED are 8.25% and 16.50% respectively; the tax rate is 8.25% for accounting profits of HKD 2 million, and the tax rate is 16.50% for those exceeding HKD 2 million. ZKTECOPANAMA, S.A. obtained the letter of authorization for the Colon Free Zone, Panama on August 30,2021. In 2022, export income of enterprises within the zone was exempt from corporate income tax. From January to February 2022, the corporate income tax rate for sales revenue in Panama was 25.00%. On March 3,2022, they obtained the Colon Free Zone license, and from March 2022, the corporate income tax rate for sales revenue in Panama was 5.00%. The applicable income tax rates for ZKTECOSGINVESTMENTPTE. LTD. and ZKTECOSINGAPOREPTE. LTD. in 2023 were 4.25%,8.5% and 17.00% respectively; the taxable income rate was 4.25% for those within SGD 100,000,8.5% for those between SGD 100,000 and SGD 200,000, and 17% for the excess; If the registered capital of ZKTeco Japan Co., Ltd. is less than JPY 100 million and there is no capital fund, the corporate tax rate (income tax) is 15.00% for the income of less than JPY 8 million; for income exceeding JPY 8 million, the corporate tax rate (income tax) is 23.20%. The applicable income tax rates for ZKDIGIMAXPTE.LTD. in 2023 were 4.25%,8.5% and 17.00% respectively; the taxable income rate was 4.25% for those within SGD 100,000,8.5% for those between SGD 100,000 and SGD 200,000, and 17% for the excess. PT. ZKDIGIMAXEXCELNOBLE was established in May 2023, with tax incentives for the first year. The tax rate is 0.5% for income below IDR 4.8 billion, and 22% for excess tax. VII. Notes to Consolidated Financial Statements 1. Monetary fund Unit: RMB Item Ending Balance Beginning Balance Cash on hand 2,643,551.192,646,715.85 Cash in bank 2,000,091,555.961,876,652,122.37 Other monetary funds 45,729,171.9233,646,193.75 Total 2,048,464,279.071,912,945,031.97 Including: total amount deposited abroad 229,988,345.74200,783,792.34 The total amount of funds with restrictions on use due to mortgage, pledge, or freezing 41,202,050.7231,118,488.94 Other explanations: Note 1: Other monetary funds are mainly restricted funds such as bank acceptance bill margin, funds in transit, withdrawable funds on e-commerce platforms and other funds deposited on WeChat Alipay. Note 2: The funds deposited overseas mainly refer to the monetary funds of subsidiary companies ZKINVESTEMENTS INC., ZKTECOCO., LIMITED, ZKTECOEUROPESL, ZKTECOInvestment Inc., ZKTECHNOLOGYLLC, ZKTECO SECURITYL.L.C and Armatura Tech Co., Ltd., as shown in the table below: ZKTeco 2023 Half Year Report 150 Item Ending Balance Beginning Balance ZKINVESTMENTSINC.36,280,542.80 5,488,562.65 ZKTECOCO., LIMITED 13,432,856.63 15,460,746.98 ZKTECOEUROPESL 15,118,933.99 13,570,285.55 ZKTECOInvestment Inc.18,358,720.70 12,478,045.71 ZKTECHNOLOGYLLC 43,221,551.77 49,108,592.44 ZKTECOSECURITYL.L.C 19,214,535.10 17,077,386.32 Armatura Tech Co., Ltd.25,557,535.64 33,067,155.46 Total 171,184,676.63 146,250,775.11 Note 3: As of June 30,2023, the restricted funds include bank acceptance bill margin of RMB 40,776,865.92, funds in transit of RMB 425,166.07 and frozen litigation funds of RMB 18.73. Except for the restricted funds mentioned above, there are no other restrictions on the use of funds such as mortgages or pledges. Please refer to "VII.59. Assets with Restricted Ownership or Use Rights" for details. Note 4: As of June 30,2023, in the balance of bank deposits at the end of the period, the principal ending balance of time deposits and CDs was RMB 946,164,535.64, and the accrued interest amount was RMB 16,171,424.08, which does not belong to cash and cash equivalents. Please refer to "VII.57. Supplementary information of cash flow statement" for details. 2. Trading financial assets Unit: RMB Item Ending Balance Beginning Balance Financial assets measured at fair value and whose changes are included in the current profits and losses 99,457,974.92204,318,406.05 Including: Financial products 99,457,974.92204,318,406.05 Including: Total 99,457,974.92204,318,406.05 3. Accounts receivable (1) Disclosure of accounts receivable classification Unit: RMB Category Ending Balance Beginning Balance Book balance Bad debt reserve Book value Book balance Bad debt reserve Book value Amount Proportion Amount Accrual proportiAmount Proportion Amount Accrual proportiZKTeco 2023 Half Year Report 151 on on Accounts receivable with individual provision for bad debts 5,232,36 5.31 1.10% 5,232,36 5.31 100.00% 0.00 5,430,61 9.60 1.26% 5,430,61 9.60 100.00% 0.00 Including: Accounts receivable with insignificant single amount and bad debt reserve withdrawn separately 5,232,36 5.31 1.10% 5,232,36 5.31 100.00% 0.00 5,430,61 9.60 1.26% 5,430,61 9.60 100.00% 0.00 Receivable with combined provision for bad debt reserve 471,671,503.01 98.90% 25,221,5 01.68 5.35% 446,450,001.33 426,173,082.75 98.74% 22,675,1 58.48 5.32% 403,497,924.27 Including: Accounts receivable with consolidated provision for bad debt reserves according to the credit risk characteristics 471,671,503.01 98.90% 25,221,5 01.68 5.35% 446,450,001.33 426,173,082.75 98.74% 22,675,1 58.48 5.32% 403,497,924.27 Total 476,903,868.32 100.00% 30,453,8 66.99 6.39% 446,450,001.33 431,603,702.35 100.00% 28,105,7 78.08 6.51% 403,497,924.27 Bad debt reserve made individually: 5,232,365.31 ZKTeco 2023 Half Year Report 152 Unit: RMB Name Ending Balance Book balance Bad debt reserve Accrual proportion Reasons for provision Shanghai Leqi Automation Technology Co., Ltd. 490,186.63490,186.63100.00% Expected non-recoverable Noble ITSolutions Co., Ltd 423,880.24423,880.24100.00% Expected non-recoverable Zicom Electronic Securit 378,957.08378,957.08100.00% Expected non-recoverable Al Asma Technology 360,996.13360,996.13100.00% Expected non-recoverable Guizhou Zhongjiang Intelligent Technology Co., Ltd. 334,800.21334,800.21100.00% Expected non-recoverable Shenzhen Xuhui Information Technology Co., Ltd. 326,350.00326,350.00100.00% Expected non-recoverable TIMEWATCH INFOCOMPVT. LTD. 306,799.23306,799.23100.00% Expected non-recoverable Northwood Investors LLC 249,723.65249,723.65100.00% Expected non-recoverable Gansu Fourth Construction Group Co., Ltd. 224,676.00224,676.00100.00% Expected non-recoverable VENDEMMIA COMERCIO INTERNACIONAL LTDA 205,079.19205,079.19100.00% Expected non-recoverable Hainan Zhongkong IOTTechnology Co., Ltd. 199,579.00199,579.00100.00% Expected non-recoverable Tianjin Eagle Eye Biotechnology Co., Ltd. 193,330.00193,330.00100.00% Expected non-recoverable ASIA IDENTIFICATION ANDSECURITY TECHNOLOGY COMPANYLIMITED 171,256.52171,256.52100.00% Expected non-recoverable Wanqiao Information Technology Co.,Ltd. 165,900.00165,900.00100.00% Expected non-recoverable Baoneng Urban Development and Construction Group Co., Ltd. 155,292.00155,292.00100.00% Expected non-recoverable PONTORHJEIRELI - ME 102,083.28102,083.28100.00% Expected non-recoverable SECUZAA SECURITY SOLUTIONSLAB PRIVATELIMITED 100,209.42100,209.42100.00% Expected non-recoverable Green Electricity Renewable Energy Co., Ltd., of Nanhai, Foshan 98,024.6498,024.64100.00% Expected non-recoverable INTELLISMART 76,000.9676,000.96100.00% Expected non-ZKTeco 2023 Half Year Report 153 TECHNOLOGYINC. recoverable Qianxinan Mengku Business Service Co., Ltd. 74,672.0074,672.00100.00% Expected non-recoverable RBBTechnologies Private Limited 64,268.8164,268.81100.00% Expected non-recoverable Yichang Anlian Intelligent Technology Development Co., Ltd. 56,085.0056,085.00100.00% Expected non-recoverable Dongguan Yukong Security Technology Co., Ltd. 53,703.0053,703.00100.00% Expected non-recoverable KWKCELLPHONE ANDACCESSORIES 38,263.5738,263.57100.00% Expected non-recoverable Nanjing Xianji Technology Co., Ltd. 31,850.0031,850.00100.00% Expected non-recoverable Entropy Electronic Technology Yangzhou Co., Ltd. 31,122.6631,122.66100.00% Expected non-recoverable SARLMICHEL HENRYLEPAUTE 30,818.0530,818.05100.00% Expected non-recoverable Iss Facility Services (Shanghai) Ltd. 28,152.0028,152.00100.00% Expected non-recoverable Huawei Technologies (Netherlands) B.V. 27,653.1927,653.19100.00% Expected non-recoverable SMARTECHCO. LIMITED 26,038.6226,038.62100.00% Expected non-recoverable ELECTRONICA GHANALIMITED 23,374.3823,374.38100.00% Expected non-recoverable AVANTISYSTEM D.O.O 21,504.4821,504.48100.00% Expected non-recoverable Others 161,735.37161,735.37100.00% Expected non-recoverable Total 5,232,365.315,232,365.31 Bad debt reserve made by portfolio: 25,221,501.68 Unit: RMB Name Ending Balance Book balance Bad debt reserve Accrual proportion Within 1 year (including 1 year) 458,684,309.1322,934,215.375.00% 1-2 years (including 2 years) 10,558,996.891,055,899.8710.00% 2-3 years (including 3 years) 1,709,729.52512,918.9730.00% Over 3 years 718,467.47718,467.47100.00% Total 471,671,503.0125,221,501.68 Explanation of the basis for determining the portfolio: Accounts receivable with bad debt reserves based on expected credit loss combinations based on aging characteristics If the provision for bad debt reserve of accounts receivable is made based on the general model of expected credit losses, please disclose the relevant information of the bad debt reserve with reference to the disclosure methods of other accounts receivable: □ Applicable Not applicable Disclosure by aging ZKTeco 2023 Half Year Report 154 Unit: RMB Aging Ending Balance Within 1 year (including 1 year) 458,726,067.01 1-2 years 11,476,126.66 2-3 years 3,310,894.37 Over 3 years 3,390,780.28 3-4 years 1,869,027.53 4-5 years 591,452.28 Over 5 years 930,300.47 Total 476,903,868.32 (2) Bad debt reserves withdrawn, recovered or reversed in the current period Provision for bad debt reserves in current period: Unit: RMB Category Beginning Balance Current period change amount Ending Balance Provision Return or reversal Redeem/redemption Others Accounts receivable with insignificant single amount and bad debt reserve withdrawn separately 5,430,619.6058,547.57 256,801.86 5,232,365.31 Accounts receivable with significant individual amounts and separate provision for bad debt reserves Accounts receivable with consolidated provision for bad debt reserves according to the credit risk characteristics 22,675,158.482,546,343.20 25,221,501.68 Total 28,105,778.082,604,890.77 256,801.86 30,453,866.99 (3) Actual verification of accounts receivable in the current period Unit: RMB ZKTeco 2023 Half Year Report 155 Item Write-off amount SEDASSAULTSYSTEMES 256,801.86 Important accounts receivable verification status: Unit: RMB Company name Nature of accounts receivable Write-off amount Write-off reason Verification and cancellation programs that have been performed Whether the payment is incurred due to related transactions SEDASSAULT SYSTEMES Goods payment 256,801.86 Customer closure No Total 256,801.86 Explanation of accounts receivable verification: The current written off amount is RMB 256,801.86, which is due to the bankruptcy of SEDASSAULTSYSTEMS, a customer of our subsidiary ZKTECOEUROPESL, and it is expected that the accounts receivable will not be recovered, resulting in a change in the bad debt reserves for accounts receivable. (4) Accounts receivable from top five borrowers classified based on the ending balance Unit: RMB Company name Ending balance of accounts receivable Proportion in the total ending balance of accounts receivable Ending balance of bad debt reserve Customer 137,619,136.247.89% 1,880,956.81 Customer 217,229,905.443.61% 902,643.32 Customer 316,663,593.673.49% 833,179.68 Customer 414,636,305.973.07% 733,233.56 Customer 511,589,102.732.43% 579,455.14 Total 97,738,044.0520.49% (5) Accounts receivable derecognized due to transfer of financial assets No accounts receivable derecognized due to transfer of financial assets in current period. (6) The amount of assets and liabilities formed by transferring accounts receivable and continuing to be involved If there are no transferred accounts receivable at the end of the period and they continue to be involved, the amount of assets and liabilities formed by the continued involvement shall be listed. Other explanations: None ZKTeco 2023 Half Year Report 156 4. Prepayment (1) Prepayments listed by aging Unit: RMB Aging Ending Balance Beginning Balance Amount Proportion Amount Proportion Within 1 year 31,565,784.8798.38% 30,444,433.0898.35% 1-2 years 150,075.260.47% 343,416.741.11% 2-3 years 335,453.611.05% 135,428.000.44% Over 3 years 31,018.020.10% 31,407.760.10% Total 32,082,331.76 30,954,685.58 Explanation of the reasons why prepayments with an aging of over 1 year and significant amounts were not settled in a timely manner: None in this period (2) Prepayments of the top five ending balances collected by prepayment object Company name Closing amount Proportion in total prepayment (%) Supplier 17,071,927.0622.04 Supplier 25,101,238.7115.90 Supplier 32,299,508.187.17 Supplier 41,396,776.034.35 Supplier 51,136,753.803.54 Total 17,006,203.7853.00 Other explanations: None 5. Other receivables Unit: RMB Item Ending Balance Beginning Balance Other receivables 35,432,462.7234,207,287.53 Total 35,432,462.7234,207,287.53 (1) Other receivables 1) Classification of other receivables based on nature of payment Unit: RMB ZKTeco 2023 Half Year Report 157 Payment nature Closing book balance Opening book balance Current account 11,386,457.1811,109,121.37 Guarantee deposit 16,849,395.5314,623,016.19 Reserve funds and loans 11,808,149.258,156,672.47 Collection and payment on behalf of others 1,748,982.43826,216.46 Withholding and paying social security and provident fund on behalf of others 1,593,211.391,664,032.00 Export tax refund 3,928,644.229,631,295.37 Others 770,302.40694,798.92 Total 48,085,142.4046,705,152.78 2) Provision for bad debt reserves Unit: RMB Bad debt reserve Stage 1 Stage 2 Stage 3 Total Expected credit loss in the future 12 months Expected credit loss within whole duration (no credit impairment occur) Expected credit loss within whole duration (credit impairment has occurred) Balance as of January 1,2023 1,520,901.66 10,976,963.5912,497,865.25 Balance as of January 1,2023 in the current period Provision in current period 157,204.33 157,204.33 Reversals in the current period 2,389.902,389.90 Balance as of June 30, 2023 1,678,105.99 10,974,573.6912,652,679.68 Changes in book balance with major changes in loss reserves during the current period □ Applicable Not applicable Disclosure by aging Unit: RMB Aging Ending Balance Within 1 year (including 1 year) 20,924,440.55 1-2 years 3,040,749.85 2-3 years 3,013,773.09 Over 3 years 21,106,178.91 3-4 years 4,571,581.41 4-5 years 14,200,092.57 Over 5 years 2,334,504.93 Total 48,085,142.40 ZKTeco 2023 Half Year Report 158 3) Bad debt reserves withdrawn, recovered or reversed in the current period Provision for bad debt reserves in current period: Unit: RMB Category Beginning Balance Current period change amount Ending Balance Provision Return or reversal Redeem/redemption Others Other receivables with significant individual amounts and separate provision for bad debt reserves 6,012,062.77 6,012,062.77 Other receivables with provision for bad debt reserves based on a combination of credit risk characteristics 1,520,901.66157,204.33 1,678,105.99 Other receivables with insignificant individual amounts but separate provision for bad debt reserves 4,964,900.82 2,389.90 4,962,510.92 Total 12,497,865.25157,204.332,389.90 12,652,679.68 4) Other accounts receivable with the top five ending balances collected by the debtor Unit: RMB Company name Nature of payment Ending Balance Aging Proportion to the total ending balance of other accounts receivable Ending balance of bad debt reserve Shenzhen Zhongan Intelligent Control Technology Co., Ltd. Current account 7,772,552.26 Over 3 years 16.16% 6,012,062.77 Zhangmutou Branch of Dongguan Finance Bureau Guarantee deposit 4,800,000.00 Over 3 years 9.98% 0.00 ZKTeco 2023 Half Year Report 159 Export tax refund Export tax refund 3,928,644.22 Within 1 year 8.17% 0.00 Shenzhen Zhikongtaike Biometric Technology Co., Ltd. Current account 2,500,000.00 Over 3 years 5.20% 2,500,000.00 ADVANNOTECH (PTY) LTD Current account 1,639,989.39 Within 1 year,1-2 years,2-3 years, more than 3 years 3.41% 1,486,706.42 Total 20,641,185.87 42.92% 9,998,769.19 6. Inventory Whether the Company needs to comply with disclosure requirements in the real estate industry No (1) Inventory classification Unit: RMB Item Ending Balance Beginning Balance Book balance Inventory depreciation reserves or contract performance cost impairment reserves Book value Book balance Inventory depreciation reserves or contract performance cost impairment reserves Book value Raw materials 92,904,227.355,254,221.0587,650,006.3095,807,941.082,700,265.8993,107,675.19 Products in process 12,680,683.61 12,680,683.6122,655,606.68 22,655,606.68 Inventory goods 229,829,842.9711,983,085.01217,846,757.96233,342,447.3711,987,915.23221,354,532.14 Contract performance cost 22,022.56 22,022.56240,067.45 240,067.45 Sending goods 10,432,323.85148,556.1310,283,767.729,566,960.1280,028.519,486,931.61 Consigned processing materials 1,355,291.30 1,355,291.301,435,828.52 1,435,828.52 Total 347,224,391.6417,385,862.19329,838,529.45363,048,851.2214,768,209.63348,280,641.59 (2) Inventory depreciation reserves and contract performance cost impairment reserves Unit: RMB Item Beginning Balance Increase in current period Decrease in current period Ending Balance Provision Others Reversal or reselling Others Raw materials 2,700,265.892,702,293.22 148,338.06 5,254,221.05 Inventory 11,987,915.232,332,193.43 2,337,023.65 11,983,085.01 ZKTeco 2023 Half Year Report 160 goods Sending goods 80,028.51148,555.61 80,027.99 148,556.13 Total 14,768,209.635,183,042.26 2,565,389.70 17,385,862.19 (3) Explanation of the capitalized amount of borrowing costs included in the ending balance of inventory None (4) Explanation of the current amortization amount of contract performance cost None 7. Contract assets Unit: RMB Item Ending Balance Beginning Balance Book balance Impairment provision Book value Book balance Impairment provision Book value Quality guarantee deposit receivable 321,942.1220,742.18301,199.94329,942.1223,142.18306,799.94 Total 321,942.1220,742.18301,199.94329,942.1223,142.18306,799.94 The amount and reasons for major changes in the book value of contract assets during the current period: Unit: RMB Item Change amount Reasons for changes If the provision for impairment of contract assets is made based on the general model of expected credit losses, please disclose the relevant information of the provision for impairment with reference to the disclosure methods of other accounts receivable: Applicable □ Not applicable Category Ending Balance Beginning Balance Book balance Bad debt reserve Book value Book balance Bad debt reserve Book value Amount Proportion Amount Accrual proportion Amount Proportion Amount Accrual proportion Provision for impairment by portfolio 321,942.12100% 20,742.186.44% 301,199.94329,942.12100.00% 23,142.187.01% 306,799.94 Including: Provision for impairment based on a general model of expected credit losses 321,942.12100% 20,742.186.44% 301,199.94329,942.12100.00% 23,142.187.01% 306,799.94 Total 321,942.12100% 20,742.186.44% 301,199.94329,942.12100.00% 23,142.187.01% 306,799.94 Provision for impairment of contract assets in current period: Unit: RMB ZKTeco 2023 Half Year Report 161 Item Provision in current period Reversals in the current period Charged or written off in current period Reasons Quality guarantee deposit receivable -2,400.00 Provision of bad debts by aging portfolio Total -2,400.00 —— 8. Non-current assets due within one year Unit: RMB Item Ending Balance Beginning Balance Debt investment due within one year 10,025,638.8910,025,638.89 Total 10,025,638.8910,025,638.89 Important debt investments/other debt investments Unit: RMB Debt items Ending Balance Beginning Balance Face value Coupon rate Effective interest rate Due Date Face value Coupon rate Effective interest rate Due Date Certificates of Deposit (CD) of Industrial Bank 10,000,000.003.55% 3.55% September 30,2023 10,000,000.003.55% 3.55% September 30,2023 Total 10,000,000.00 10,000,000.00 Other explanations: On January 17,2022, the Company signed a transfer confirmation letter with Guangfa Qianhe Investment Co., Ltd. for the CD issued by Industrial Bank on September 30,2020 with the CD number 20200583395100100200097239. The principal of the CD is RMB 10,000,000.00, with a yield to maturity (YTM) of 3.55% and a maturity date of September 30,2023. The non-current assets of the Company that mature within one year are the face value of the CD of RMB 10,000,000.00 and the interest paid from December 21, 2021 to January 16,2022 of RMB 25,638.89 upon transfer. 9. Other current assets Unit: RMB Item Ending Balance Beginning Balance Input tax to be deducted for value-added tax 5,125,604.935,880,824.30 Prepaid income tax 10,040,378.3210,774,743.22 Other prepaid taxes 1,690,227.271,205,787.29 Total 16,856,210.5217,861,354.81 10. Debt investment Unit: RMB ZKTeco 2023 Half Year Report 162 Item Ending Balance Beginning Balance Book balance Impairment provision Book value Book balance Impairment provision Book value Bank CD - Principal 17,715,619.61 17,715,619.6111,997,192.94 11,997,192.94 Bank CD - Interest 536,047.69 536,047.69333,967.35 333,967.35 Total 18,251,667.30 18,251,667.3012,331,160.29 12,331,160.29 Important debt investment Unit: RMB Debt items Ending Balance Beginning Balance Face value Coupon rate Effective interest rate Due Date Face value Coupon rate Effective interest rate Due Date CD of Bank of China 10,000,000.003.85% 3.85% April 7, 2024 10,000,000.003.85% 3.85% April 7, 2024 Total 10,000,000.00 10,000,000.00 Provision for impairment Unit: RMB Bad debt reserve Stage 1 Stage 2 Stage 3 Total Expected credit loss in the future 12 months Expected credit loss within whole duration (no credit impairment occur) Expected credit loss within whole duration (credit impairment has occurred) Balance as of January 1,2023 0.000.000.00 Balance as of January 1,2023 in the current period -- Move to stage 20.000.000.00 --Move to stage 30.000.000.00 -- Return to stage 20.000.000.00 -- Return to stage 10.000.000.00 Provision in current period 0.000.000.00 Reversals in the current period 0.000.000.00 Write-off in current period 0.000.000.00 Canceled after verification in the current period 0.000.000.00 Other changes 0.000.000.00 Balance as of June 30, 2023 0.000.000.00 Changes in book balance with major changes in loss reserves during the current period □ Applicable Not applicable ZKTeco 2023 Half Year Report 163 Other explanations: On April 20,2022, the Company signed a transfer confirmation letter with Jiangmen Haoxin New Energy Co., Ltd. for a CD issued by the Bank of China on April 7,2021, with the CD number CD003210407143640620, the CD amount of RMB 10,000,000.00, the YTM of 3.85%, and the maturity date of April 7,2024, as a time deposit product from 2022 to 2024. The principal of the Company corresponds to the face value of the CD of RMB 10,000,000.00 and the interest paid from April 7,2021 to April 19,2022 of RMB 397,833.00. 11. Long-term equity investment Unit: RMB Investee Beginning balance (book value) Increase or decrease in the current period Ending balance (book value) Ending balance of impairment provision Additional investment Reduced investment Investment profit or loss recognized under equity method Other comprehensive income adjustments Changes in other equities Cash dividends or profits declared to pay Impairment provision Others I. Joint ventures II. Joint venture PT. ZKTECO SECURITY INDONESIA 91,727.34 -93,447.40 1,720.060.00 CVSquared, Inc. 3,689,002.9 9 -3,577.05 138,286.343,823,712.28 Silk IDSystems Inc. 1,557,356.7 1 -175,088.68 55,184.221,437,452.25 ZKTECO SMARTCITY (THAILAND) CO., LTD. 1,813,245.6 6 91,249.17 69,683.471,974,178.30 Subtotal 7,151,332.7 0 -180,863.96 264,874.097,235,342.83 Total 7,151,332.7 0 -180,863.96 264,874.097,235,342.83 Other explanations: The increase or decrease in long-term equity investment in the current period mainly refers to the amount of exchange rate changes in long-term equity investment of the Company. 12. Fixed assets Unit: RMB Item Ending Balance Beginning Balance Fixed assets 460,240,750.81446,391,810.26 Liquidation of fixed assets 465,698.80 Total 460,240,750.81446,857,509.06 ZKTeco 2023 Half Year Report 164 (1) Status of fixed assets Unit: RMB Item Houses and buildings Machinery equipment Transportation vehicles Electronic equipment and others Total I. Original book value: 1. Beginning Balance 419,672,406.0249,603,033.579,813,482.9592,362,437.18571,451,359.72 2. Increase in current period 11,357,561.085,315,868.851,680,963.2110,321,021.3028,675,414.44 (1) Purchase 8,573,640.87774,922.42969,201.789,847,236.0020,165,001.07 (2) Transferred from construction in progress 4,467,617.67633,628.32393,805.315,495,051.30 (3) Foreign currency translation difference 2,783,920.2173,328.7678,133.1179,979.993,015,362.07 3. Decrease in current period 169,270.39598.29404,999.79574,868.47 (1) Disposal or retirement 169,270.39598.29404,999.79574,868.47 4. Ending balance 431,029,967.1054,749,632.0311,493,847.87102,278,458.69599,551,905.69 II. Accumulated depreciation 1. Beginning Balance 37,089,625.8922,647,760.077,317,412.3258,004,751.18125,059,549.46 2. Increase in current period 6,349,371.202,645,706.01463,118.445,093,589.2414,551,784.89 (1) Provision 6,243,915.732,622,677.26383,638.195,446,778.5414,697,009.72 (2) Foreign currency translation difference 105,455.4723,028.7579,480.25 -353,189.30 -145,224.83 3. Decrease in current period 105,831.83568.38193,779.26300,179.47 (1) Disposal or retirement 105,831.83568.38193,779.26300,179.47 4. Ending balance 43,438,997.0925,187,634.257,779,962.3862,904,561.16139,311,154.88 III. Provision for impairment 1. Beginning Balance 2. Increase in current period ZKTeco 2023 Half Year Report 165 (1) Provision 3. Decrease in current period (1) Disposal or retirement 4. Ending balance IV. Book value 1. Ending book value 387,590,970.0129,561,997.783,713,885.4939,373,897.53460,240,750.81 2. Beginning book value 382,582,780.1326,955,273.502,496,070.6334,357,686.00446,391,810.26 (2) Disposal of fixed assets Unit: RMB Item Ending Balance Beginning Balance Machinery equipment 461,708.97 Electronic equipment 2,457.35 Other equipment 1,532.48 Total 465,698.80 13. Construction in progress Unit: RMB Item Ending Balance Beginning Balance Construction in progress 76,912,095.6357,041,298.90 Total 76,912,095.6357,041,298.90 (1) Construction in progress Unit: RMB Item Ending Balance Beginning Balance Book balance Impairment provision Book value Book balance Impairment provision Book value Hybrid Biometrics IoT Intelligent Industrial Base Project 58,525,722.17 58,525,722.1748,448,261.38 48,448,261.38 Multimodal Biometrics Digitalization Industrial Base Construction Project 18,271,329.19 18,271,329.192,982,941.95 2,982,941.95 Equipment 115,044.27 115,044.275,610,095.57 5,610,095.57 ZKTeco 2023 Half Year Report 166 Total 76,912,095.63 76,912,095.6357,041,298.90 57,041,298.90 (2) Current changes in important construction in progress Unit: RMB Project Name Budget amount Beginning Balance Increase in current period Amount transferred to fixed assets in the current period Other decreases in the current period Ending Balance Proportion of accumulated project investment to budget Engineering progress Accumulated amount of interest capitalization Including: current interest capitalized amount Current interest capitalization rate Source of Funds Hybrid Biometrics IoT Intelligent Industrial Base Project 214,042,00 0.00 48,448,261.3 8 10,077,460.7 9 58,525,722.1 7 102.01 % Under construction 2,359,113.42 Fundraising, self owned funds, bank loans Multimodal Biometrics Digitalization Industrial Base Construction Project 284,566,26 4.91 2,982,941.95 15,288,387.2 4 18,271,329.1 9 6.42% Under construction Fundraising and self owned funds Total 498,608,26 4.91 51,431,203.3 3 25,365,848.0 3 76,797,051.3 6 2,359,113.42 (3) Current provision for impairment of construction in progress Unit: RMB Item Current provision amount Reason for provision Other explanations: No signs of impairment were found in the current period, so no provision for impairment was made (4) Engineering materials Unit: RMB Item Ending Balance Beginning Balance Book balance Impairment provision Book value Book balance Impairment provision Book value Other explanations: ZKTeco 2023 Half Year Report 167 None 14. Right-of-use assets Unit: RMB Item Houses and buildings Machinery equipment Transportation vehicles Electronic equipment and others Total I. Original book value 1. Beginning Balance 95,533,396.63 1,487,226.0723,200.9397,043,823.63 2. Increase in current period 10,547,607.8090,606.431,088,201.83 11,726,416.06 (1) New lease 8,349,275.8287,975.931,098,200.71 9,535,452.46 (2) Foreign currency translation difference 2,198,331.982,630.50 -9,998.88 2,190,963.60 3. Decrease in current period 2,130,606.32 1,215,772.17 3,346,378.49 (1) Expiration of lease contract 1,986,624.50 1,215,772.17 3,202,396.67 (2) Lease change 65,989.40 65,989.40 (3) Termination of lease 77,992.42 77,992.42 4. Ending balance 103,950,398.1190,606.431,359,655.7323,200.93105,423,861.20 II. Accumulated depreciation 1. Beginning Balance 45,566,705.77 827,935.308,506.9746,403,148.04 2. Increase in current period 14,890,028.1131,064.05809,304.682,320.0815,732,716.92 (1) Provision 13,727,449.8430,162.20813,735.412,320.0814,573,667.53 (2) Foreign currency translation difference 1,162,578.27901.85 -4,430.73 1,159,049.39 3. Decrease in current period 1,592,170.12 1,215,772.17 2,807,942.29 (1) Disposal (2) Expiration of lease contract 1,227,162.25 1,215,772.17 2,442,934.42 (3) Lease change 281,842.71 281,842.71 (4) Termination of lease 83,165.16 83,165.16 4. Ending balance 58,864,563.7631,064.05421,467.8110,827.0559,327,922.67 III. Provision for ZKTeco 2023 Half Year Report 168 impairment 1. Beginning Balance 2. Increase in current period (1) Provision 3. Decrease in current period (1) Disposal 4. Ending balance IV. Book value 1. Ending book value 45,085,834.3559,542.38938,187.9212,373.8846,095,938.53 2. Beginning book value 49,966,690.86 659,290.7714,693.9650,640,675.59 15. Intangible assets (1) Intangible assets Unit: RMB Item Land use rights Patent rights Non-Patent Technology] Software Others Total I. Original book value 1. Beginning Balance 72,034,013.37 12,835,073.96104,614.5484,973,701.87 2. Increase in current period 456,927.03 164,859.5263,108.31684,894.86 (1) Purchase 144,936.8459,436.14204,372.98 (2) Internal R&D (3) Increase in business merger (4) Differences in foreign currency statement translation 456,927.03 19,922.683,672.17480,521.88 3. Decrease in current period ZKTeco 2023 Half Year Report 169 (1) Disposal 4. Ending balance 72,490,940.40 12,999,933.48167,722.8585,658,596.73 II. Accumulated amortisation 1. Beginning Balance 10,102,827.54 6,719,776.6540,584.8916,863,189.08 2. Increase in current period 621,076.98 918,225.5312,265.011,551,567.52 (1) Provision 621,076.98 830,354.8410,625.151,462,056.97 (2) Differences in foreign currency statement translation 87,870.691,639.8689,510.55 3. Decrease in current period (1) Disposal 4. Ending balance 10,723,904.52 7,638,002.1852,849.9018,414,756.60 III. Provision for impairment 1. Beginning Balance 2. Increase in current period (1) Provision 3. Decrease in current period (1) Disposal 4. Ending balance IV. Book value 1. Ending book value 61,767,035.88 5,361,931.30114,872.9567,243,840.13 2. Beginning book value 61,931,185.83 6,115,297.3164,029.6568,110,512.79 The proportion of intangible assets formed through internal research and development of the company to the balance of intangible assets at the end of this period is 0.00% ZKTeco 2023 Half Year Report 170 16. Goodwill (1) Original book value of goodwill Unit: RMB Name of invested entity or matters forming goodwill Beginning Balance Increase in the current period Decrease in the current period Ending Balance Formed by business merger Caused by exchange rate fluctuations Disposals Caused by exchange rate fluctuations ZKTECO (M) SDN. BHD. 170,261.90 6,385.49 176,647.39 ZK INVESTIMENTOSDO BRASIL LTDA. 326,124.50 12,230.96 338,355.46 Total 496,386.40 18,616.45 515,002.85 (2) Provision for impairment of goodwill Unit: RMB Name of invested entity or matters forming goodwill Beginning Balance Increase in the current period Decrease in the current period Ending Balance Provision Disposals Total Information related to the asset group or combination of asset groups where goodwill is located Book value of goodwill Asset group or portfolio of asset groups Main components Book value Determination method Has there been any change in the current period 176,647.39 ZKTECO (M) SDN. BHD.2,363,134.45 An asset group or portfolio of asset groups that can independently generate cash flow, taking into account the synergistic effects of business mergers and the management's management or monitoring of production and operating activities. Conversion rate changes, no other changes 338,355.46 ZKINVESTIMENTOSDO BRASILLTDA. -3,396,363.37 An asset group or portfolio of asset groups that can independently generate cash flow, taking into account the synergistic effects of business mergers and the management's management or monitoring of production and operating activities. Conversion rate changes, no other changes Describe the goodwill impairment test process, key parameters (such as the growth rate in the forecast period, the growth rate in the stable period, the profit rate, the Discount rate, the forecast period) and the recognition method of goodwill impairment loss: ZKTeco 2023 Half Year Report 171 Impact of goodwill impairment test 17. Long-term deferred expenses Unit: RMB Item Beginning Balance Increase in current period Amortization amount for the current period Other reduced amounts Ending Balance Decoration works 2,528,270.50406,191.30514,428.81 -34,499.792,454,532.78 Others 528,039.84120,000.00136,067.60542.72511,429.52 Total 3,056,310.34526,191.30650,496.41 -33,957.072,965,962.30 Other explanations: Other decreases are due to the foreign currency translation difference of RMB -28,328.28 for the subsidiary of the Company, ZKTECOCO., LIMITED, RMB -5,135.06 for the subsidiary of the Company, ZKTECOSGINVESTMENTPTE. LTD., and RMB -493.73 for the sub-subsidiary of the Company, ZKTECOVIETNAMTECHNOLOGYCOMPANYLIMITED. 18. Deferred income tax assets/deferred income tax liabilities (1) Deferred income tax assets not offset Unit: RMB Item Ending Balance Beginning Balance Deductible temporary difference Deferred income tax assets Deductible temporary difference Deferred income tax assets Provision for impairment of assets 46,977,217.527,659,625.6041,997,676.046,800,781.79 Unrealized profits from internal transactions 91,068,319.6119,078,979.3675,228,978.6114,665,616.31 Deductible losses 144,979,082.1321,670,871.79144,679,629.1921,701,944.38 Deferred income 1,946,626.06291,993.912,039,702.49305,955.37 Withholding rebates 15,725,144.282,270,014.5019,110,934.942,746,709.94 Estimated liabilities 600,000.0090,000.00600,000.0090,000.00 Changes in fair value of trading financial instruments 7,049,098.871,057,364.83 Share-based payments 18,599,461.972,790,446.072,925,355.23438,714.49 Lease liabilities 37,180,868.646,320,845.4037,561,906.506,559,516.70 Total 364,125,819.0861,230,141.46324,144,183.0053,309,238.98 (2) Non-offsetting deferred income tax liabilities Unit: RMB Item Ending Balance Beginning Balance Taxable temporary difference Deferred tax liability Taxable temporary difference Deferred tax liability Accelerated depreciation of fixed 22,812,708.113,422,358.1523,697,128.763,554,569.32 ZKTeco 2023 Half Year Report 172 assets Changes in fair value of trading financial instruments 3,616.44542.4721,836.713,275.51 Right-of-use asset 36,610,065.446,094,245.3636,562,097.396,275,205.80 Total 59,426,389.999,517,145.9860,281,062.869,833,050.63 (3) Details of unconfirmed deferred income tax assets Unit: RMB Item Ending Balance Beginning Balance Deductible temporary difference 32,075,571.8829,464,015.44 Deductible losses 95,784,295.5678,251,101.86 Total 127,859,867.44107,715,117.30 (4) The deductible losses of unrecognized deferred income tax assets will expire in the following years Unit: RMB Year Closing amount Opening amount Remarks 202320,528,323.3022,728,613.61 202418,904,009.0019,643,972.43 20258,824,780.478,690,163.50 20265,978,381.336,092,224.82 202716,700,454.4611,597,031.35 20287,814,943.87 2029 2030 2031385,904.10604,137.52 2032455,168.01427,900.39 2033491,689.86 2034 2035 2036 20372,540,908.542,388,691.10 Infinite carry forward 13,159,732.626,078,367.14 Total 95,784,295.5678,251,101.86 19. Other non-current assets Unit: RMB Item Ending Balance Beginning Balance Book balance Impairment provision Book value Book balance Impairment provision Book value Prepaid decoration fee 773,049.06 773,049.06563,981.71 563,981.71 Prepaid equipment payment 881,141.60 881,141.60563,795.61 563,795.61 Total 1,654,190.66 1,654,190.661,127,777.32 1,127,777.32 ZKTeco 2023 Half Year Report 173 20. Short-term loan (1) Classification of short-term loans Unit: RMB Item Ending Balance Beginning Balance Discounted domestic letters of credit that cannot be derecognized before expiration 9,855,000.009,855,000.00 Total 9,855,000.009,855,000.00 21. Trading financial liabilities Unit: RMB Item Ending Balance Beginning Balance Trading financial liabilities 7,049,098.87 Including: Unexpired contract for forward foreign exchange settlement and sales 7,049,098.87 Including: Total 7,049,098.87 22. Notes payable Unit: RMB Category Ending Balance Beginning Balance Bank acceptance bill 119,716,487.5468,293,818.22 Total 119,716,487.5468,293,818.22 The total amount of unpaid notes payable at the end of this period is RMB 0.00. 23. Accounts payable (1) Listing of accounts payable Unit: RMB Item Ending Balance Beginning Balance Material payment 167,890,795.79210,894,468.56 Equipment payment 969,521.993,130,476.79 Service fee 2,484,450.14742,705.27 Project payment 6,424,032.6910,886,449.82 Others 60,770.00346,376.52 Total 177,829,570.61226,000,476.96 ZKTeco 2023 Half Year Report 174 (2) Important accounts payable with account age over 1 year Unit: RMB Item Ending Balance Reasons for non-repayment or carry-forward Dongguan Saini Electromechanical Equipment Co., Ltd. 684,562.10 There are quality issues with the supplier's supply, and payment is on hold. As of the end of this period, the supplier has not initiated any litigation Total 684,562.10 Other explanations: None 24. Contract liabilities Unit: RMB Item Ending Balance Beginning Balance Within 1 year (including 1 year) 51,387,462.9545,906,147.23 1-2 years (including 2 years) 5,818,216.835,800,889.87 2-3 years (including 3 years) 3,950,490.684,347,121.85 Over 3 years 7,104,607.972,784,681.44 Total 68,260,778.4358,838,840.39 Amount and reasons for major changes in book value during the reporting period Unit: RMB Item Change amount Reasons for changes Shenzhen Zhongan Intelligent Control Technology Co., Ltd. 1,551,645.74 Bankruptcy liquidation CVSquared, Inc.1,275,140.00 The project has not yet been accepted Total 2,826,785.74 25. Payroll payable (1) List of Payroll payable Unit: RMB Item Beginning Balance Increase in the current period Decrease in the current period Ending Balance I. Short-term compensation 58,505,505.72250,655,130.28265,154,178.2444,006,457.76 II. Post-employment welfare - defined contribution plan 325,697.8814,498,740.2614,296,566.29527,871.85 III. Dismissal benefit 109,649.205,000.00114,649.20 Total 58,940,852.80265,158,870.54279,565,393.7344,534,329.61 ZKTeco 2023 Half Year Report 175 (2) List of short-term compensation Unit: RMB Item Beginning Balance Increase in the current period Decrease in the current period Ending Balance 1.Salary, bonus, allowance and subsidy 56,728,600.85234,314,422.47248,745,575.1142,297,448.21 2. Employee benefits 155,656.424,596,908.014,501,532.63251,031.80 3.Social insurance 344,455.538,559,925.928,697,134.24207,247.21 Including: medical insurance premium 308,232.547,840,824.567,943,849.26205,207.84 Work-related injury insurance premium 1,888.88304,927.08304,776.592,039.37 Birth insurance premium 34,334.11414,174.28448,508.39 4. Housing fund 80,431.852,781,830.602,809,909.5652,352.89 5. Labor union expenditure and personnel education fund 1,196,361.07349,947.41347,930.831,198,377.65 8. Other short-term compensation 52,095.8752,095.87 Total 58,505,505.72250,655,130.28265,154,178.2444,006,457.76 (3) List of defined contribution plan Unit: RMB Item Beginning Balance Increase in the current period Decrease in the current period Ending Balance 1. Basic endowment insurance expense 322,188.3614,036,039.6713,840,091.49518,136.54 2.Unemployment insurance 3,509.52462,700.59456,474.809,735.31 Total 325,697.8814,498,740.2614,296,566.29527,871.85 26. Taxes and dues payable Unit: RMB Item Ending Balance Beginning Balance VAT 7,191,677.166,423,184.92 Enterprise income tax 21,711,305.3412,861,731.77 Individual income tax 1,278,161.671,582,183.19 Urban maintenance and construction tax 245,286.62423,601.95 Land use tax 53,192.278,200.43 Property tax 791,924.68499,264.69 ZKTeco 2023 Half Year Report 176 Education surcharges 235,953.35449,094.47 Stamp duty 268,123.75195,980.34 Others 340,242.37178,563.28 Total 32,115,867.2122,621,805.04 27. Other payables Unit: RMB Item Ending Balance Beginning Balance Other payables 39,934,593.0431,429,478.43 Total 39,934,593.0431,429,478.43 (1) Other payables 1) List of other payables by nature of money Unit: RMB Item Ending Balance Beginning Balance Employee reimbursement 4,353,806.876,747,819.07 Payment to be settled 8,148,881.669,597,128.66 Withholding and paying social security and provident fund on behalf of others 232,646.4866,013.83 Current account 10,453,605.413,561,040.08 Collection and payment on behalf of others 764,869.62208,657.13 Guarantee deposit 4,110,342.213,321,927.78 Others 11,870,440.797,926,891.88 Total 39,934,593.0431,429,478.43 2) Other important accounts payable with aging over 1 year Unit: RMB Item Ending Balance Reasons for non-repayment or carry-forward Shenzhen Huijiang Industrial Group Co., Ltd. 1,800,000.00 Unexpired Total 1,800,000.00 28. Non-current liabilities due within one year Unit: RMB Item Ending Balance Beginning Balance Long-term loans due within one year 51,547.2754,873.94 Lease liabilities due within one year 24,668,226.0123,663,351.45 Total 24,719,773.2823,718,225.39 ZKTeco 2023 Half Year Report 177 29. Other current liabilities Unit: RMB Item Ending Balance Beginning Balance Sales rebates payable 15,725,144.2819,110,934.94 Tax to be transferred to output tax 2,653,061.352,062,685.85 Total 18,378,205.6321,173,620.79 Changes in short-term bonds payable: Unit: RMB Bond name Face value Issue Date Bond duration Issue amount Beginning Balance Current issue Accruing interest at face value Amortization of excess and discount Current repayment Ending Balance Total 30. Long-term loan (1) Classification of long-term loans Unit: RMB Item Ending Balance Beginning Balance Credit borrowings 3,807,390.06141,757.54 Total 3,807,390.06141,757.54 Explanation of long-term loan classification: Note: The sub-subsidiary of the Company, ZKINTELLIGENTSOLUTIONS (PTY), signed a loan agreement with NEDBANK on June 14,2022 (No.1951/000009/06). The agreement stipulates a loan amount of RMB 164,280.75 (equivalent to ZAR 425,175.00), with a loan term from June 14,2022 to July 1,2026. As of June 30,2023, the loan balance was RMB 134,442.83, and the interest balance was RMB 24,494.47, of which RMB 51,547.24 will be repaid within one year. On January 30,2023, XIAMENZKTECOCO., LTD. (hereinafter referred to as the "borrower") signed a "Technology Innovation Fund Syndicated Loan Contract" with Xiamen Branch of Industrial Bank Co., Ltd. (hereinafter referred to as the "lender" or "lead bank") and Xiamen International Trust Co., Ltd. (hereinafter referred to as the "lender", "participating bank"). The amount of the loan contract is RMB 8.5 million. The participating bank and the lead bank, as lenders, shall undertake loans in a ratio of 5:95. The commitment amount of the participating bank shall not exceed RMB 425,000.00, and the commitment amount of the lead bank shall not exceed RMB 8,075,000.00. The Contract stipulates that the borrower shall use each fund withdrawn for the R&D investment of XIAMENZKTECOCO., LTD. The fixed interest rate of the loan is 3.60%, with Xiamen International Trust Co., Ltd. bearing 1.60% of the interest expense. The loan term is 3 years and interest is paid quarterly. This R&D loan is granted in batches according to the needs of the enterprise. As of June 30,2023, XIAMENZKTECO has applied for and received a R&D loan of RMB 3,700,000.00 from Industrial Bank, of which RMB 2,000,000.00 was received on April 11 and RMB 1,700,000.00 was received on June 12. ZKTeco 2023 Half Year Report 178 31. Lease liabilities Unit: RMB Item Ending Balance Beginning Balance Lease payment amount 53,570,793.6359,266,343.29 Unrecognized financing charges -6,850,481.60 -7,346,274.40 Lease liabilities due within one year -24,668,226.01 -23,663,351.45 Total 22,052,086.0228,256,717.44 32. Estimated liabilities Unit: RMB Item Ending Balance Beginning Balance Cause of formation Pending litigation 600,000.00600,000.00 The main reason for the pending litigation on June 30,2023 is the estimated liabilities based on the judgment of the civil judgment (2021) Y 03 MCNo. 5383 on the trademark infringement dispute between the Company and Shenzhen Zokon Industry Development Co., Ltd. Total 600,000.00600,000.00 33. Deferred income Unit: RMB Item Beginning Balance Increase in the current period Decrease in the current period Ending Balance Cause of formation Government subsidies 2,039,702.49 93,076.431,946,626.06 Financial allocation Total 2,039,702.49 93,076.431,946,626.06 Items involving government subsidies: Unit: RMB Liability items Beginning Balance Newly added subsidy amount in current period Amount included in non-operating revenue for the current period Amount included in other income in the current period Current offset cost expense amount Other changes Ending Balance Related to assets/related to returns Dongguan Economic and Information Technology Bureau "Human Replacement by Machine" Project 196,931.43 29,499.56 167,431.87 Assets-related ZKTeco 2023 Half Year Report 179 Automation Project of Dongguan Bureau of Industry and Information Technology 312,648.20 30,298.37 282,349.83 Assets-related Integration of Informatization and Industrialization of Dongguan Bureau of Industry and Information Technology 33,633.06 11,325.10 22,307.96 Assets-related Subsidy for Exhibition Hall Decoration 547,323.60 8,029.20 539,294.40 Assets-related Subsidy for Residency and Decoration 949,166.20 13,924.20 935,242.00 Assets-related Total 2,039,702.49 93,076.43 1,946,626.06 Assets-related 34. Other non-current liabilities Unit: RMB Item Ending Balance Beginning Balance Special accounts payables 115,660.38 Total 115,660.38 35. Equity Unit: RMB Beginning Balance Increase/decrease in this change (+, -) Ending Balance Issue new shares Bonus Share transferred from capital reserve Others Subtotal Total Shares 148,492,051.00 44,547,615.0 0 44,547,615.0 0 193,039,666.00 Other explanations: ZKTeco 2023 Half Year Report 180 The 2022 Annual General Meeting of the Company held on May 19,2023 deliberated and approved the "Proposal on the 2022 Profit Distribution Plan", and disclosed the "2022 Annual Equity Distribution Implementation Announcement of ZKTECOCO., LTD." on May 25,2023. The Company increased 3 shares per 10 shares to all shareholders based on the total share capital of 148,492,051 shares as of December 31,2022, totaling 44,547,615 shares, After conversion, the total share capital of the Company increased to 193,039,666 shares. 36. Capital reserve Unit: RMB Item Beginning Balance Increase in the current period Decrease in the current period Ending Balance Capital premium (share capital premium) 1,988,225,327.93 44,547,615.001,943,677,712.93 Other capital reserves 72,947,584.3519,006,972.83 91,954,557.18 Total 2,061,172,912.2819,006,972.8344,547,615.002,035,632,270.11 Other descriptions, including changes in current period and reasons for changes: Note 1: The decrease in share premium for the current period is due to the conversion of capital reserves to share capital. Note 2: The increase in other capital reserves in this period is due to the confirmation of share-based payments for Class II restricted stocks, as well as the transfer of 10% of shares of Armatura Co., Ltd. (2,379 shares) to be held by the sub-subsidiary of the Company, ZKTECOInvestment Inc., to LEEKYUWHAN for KRW 3,819.00 per share. 37. Other comprehensive income Unit: RMB Item Beginning Balance Amount incurred in the current period Ending Balance Amount incurred before income tax in the current period Less: Profit and loss included in other comprehensive income at early stage and transferred in the current period Less: the net amount that is included in other comprehensive profits of prior period and retained earnings transferred into the current profits and loss Less: income tax expenses Attributable to parent company after tax Attributable to minority shareholder after tax II. Other comprehensive income that will be reclassified into profit or loss 5,254,175.8124,565,469.12 21,315,590.143,249,878.9826,569,765.95 ZKTeco 2023 Half Year Report 181 Translation difference of foreign currency financial statements 5,254,175.8124,565,469.12 21,315,590.143,249,878.9826,569,765.95 Total of other comprehensive income 5,254,175.8124,565,469.12 21,315,590.143,249,878.9826,569,765.95 38. Surplus reserve Unit: RMB Item Beginning Balance Increase in the current period Decrease in the current period Ending Balance Legal surplus reserve 53,975,085.77 53,975,085.77 Total 53,975,085.77 53,975,085.77 39. Undistributed profit Unit: RMB Item Current period Previous period Undistributed profits before adjustment at end of the previous period 788,571,917.98607,725,356.63 Total undistributed profits in the adjustment beginning period (increase in "+", decrease in "–") 254,641.1158,510.83 Undistributed profit at the end of the adjustment period 788,826,559.09607,783,867.46 Plus: Net profits attributable to parent company in this period 88,754,335.62192,435,924.03 Less: withdrawal of legal surplus reserves 11,393,232.40 Dividends payable on ordinary shares 51,972,217.85 Undistributed profit at the end of the period 825,608,676.86788,826,559.09 Details of undistributed profits at the beginning of the adjustment period: 1) Due to the retrospective adjustment of the "Accounting Standards for Enterprises" and related new regulations, the undistributed profit at the beginning of the period was affected by RMB 254,641.11. 2) Due to changes in accounting policies, the undistributed profit at the beginning of the period was RMB 254,641.11. 3) Due to significant accounting error correction, the undistributed profit at the beginning of the period was RMB 0.00. 4) Due to changes in the scope of consolidation caused by the same control, the undistributed profit at the beginning of the period was RMB 0.00. ZKTeco 2023 Half Year Report 182 5) The total impact of other adjustments on the undistributed profit at the beginning of the period was RMB 0.00. 40. Operating revenue and operating cost Unit: RMB Item Amount incurred in the current period Amount incurred in the previous period Revenue Cost Revenue Cost Main business 933,910,239.24488,923,174.83922,509,529.91529,108,492.93 Other businesses 3,272,430.76 2,605,420.25 Total 937,182,670.00488,923,174.83925,114,950.16529,108,492.93 Revenue related information: Unit: RMB Contract classification Division 1 Division 2 Operating revenue Total Goods type Including: Smart office products 171,992,572.40171,992,572.40 Smart entrance and exit management products 684,986,802.49684,986,802.49 Smart identity verification products 76,930,864.3576,930,864.35 Others 3,272,430.763,272,430.76 Classification by region of operation Including: Domestic sales 306,584,149.97306,584,149.97 Overseas sales 630,598,520.03630,598,520.03 Market or customer type Including: Distribution 636,951,088.35636,951,088.35 Direct sales 296,959,150.89296,959,150.89 Others 3,272,430.763,272,430.76 Type of contract Including: Classification by time of transfer of goods Including: Classification by contract term Including: Classification by sales channel Including: Total 937,182,670.00937,182,670.00 ZKTeco 2023 Half Year Report 183 Information related to performance obligations: None Information related to the transaction price allocated to the remaining performance obligations: The corresponding income amount for performance obligations that have been signed but have not yet been fulfilled or completed at the end of this reporting period is RMB 0.00. Other explanations: None 41. Tax and surcharges Unit: RMB Item Amount incurred in the current period Amount incurred in the previous period Urban maintenance and construction tax 1,240,447.261,728,203.39 Education surcharges 728,160.521,146,138.55 Property tax 804,766.17769,846.44 Land use tax 53,192.27499,789.56 Stamp duty 561,396.18439,869.23 Local education surcharges 488,667.58759,613.04 Other taxes and fees for overseas companies 5,173,139.873,099,896.85 Others 14,849.2214,571.34 Total 9,064,619.078,457,928.40 42. Selling expense Unit: RMB Item Amount incurred in the current period Amount incurred in the previous period Employee remuneration 119,777,810.57109,127,528.88 Depreciation and amortization expenses 1,698,736.193,175,349.88 Exhibition and conference fees 5,477,387.253,316,739.71 Transport cost 921,267.65762,265.15 Maintenance and testing fees 2,790,387.442,094,843.75 Sales and service expenses 4,861,913.438,120,073.57 Rental expenses 2,448,767.432,517,090.57 Business entertainment expenses 1,588,838.83809,959.34 Travel expense 11,115,530.617,611,024.84 Office allowance 3,097,812.403,205,518.09 Insurance premium 2,916,330.622,161,808.64 Agency fees 6,110,506.415,386,621.80 Advertising expenses 11,827,049.327,533,350.27 Amortization of right-of-use assets 7,485,296.727,022,417.01 Share-based payments 6,725,599.03 Others 7,295,468.085,760,483.24 Total 196,138,701.98168,605,074.74 ZKTeco 2023 Half Year Report 184 43. Administrative expenses Unit: RMB Item Amount incurred in the current period Amount incurred in the previous period Employee remuneration 27,180,420.2227,703,330.81 Taxes 201,783.21776,321.65 Office allowance 1,273,534.132,052,305.32 Depreciation and amortization 5,369,758.224,329,061.49 Business entertainment expenses 995,574.87755,024.61 Repair fee 284,365.87251,245.68 Travel expense 899,595.71373,901.60 Rent and utilities 1,855,286.911,876,476.00 Car expenses 571,076.11747,663.36 Low-value consumables 148,322.51115,509.66 Agency fees 3,274,197.971,984,037.87 Communications fee 758,248.80783,684.91 Amortization of right-of-use assets 4,496,496.023,663,326.93 Share-based payments 3,010,579.74 Others 10,157,105.189,377,970.18 Total 60,476,345.4754,789,860.07 44. R&D expense Unit: RMB Item Amount incurred in the current period Amount incurred in the previous period Employee remuneration 75,368,207.4874,081,236.06 Depreciation and amortization 1,899,982.132,100,727.06 Office allowance 409,182.70230,113.72 Travel expense 2,607,717.681,191,979.25 Business entertainment expenses 34,535.9315,807.11 Rental fees and utilities 451,336.40338,794.37 R&D material costs 2,697,441.965,312,201.37 Software and technical service fees 4,354,028.633,828,361.80 Testing and certification fees 1,106,017.65679,327.05 Amortization of right-of-use assets 1,197,842.901,319,931.03 Share-based payments 7,403,999.48 Others 3,453,808.782,996,063.88 Total 100,984,101.7292,094,542.70 45. Financial expense Unit: RMB Item Amount incurred in the current period Amount incurred in the previous period Interest expense 1,807,293.551,516,520.94 Less: interest income 31,152,457.274,360,354.56 Exchange loss (gain) -6,564,554.23 -12,600,353.33 Handling fee expenditure 1,014,262.29740,557.99 Others 271,944.16 -9,844.75 ZKTeco 2023 Half Year Report 185 Total -34,623,511.50 -14,713,473.71 46. Other income Unit: RMB Sources of other income generation Amount incurred in the current period Amount incurred in the previous period Government subsidies related to daily activities of the enterprise 5,545,156.286,212,001.58 Other items related to daily activities 218,257.86145,303.33 Including: refund of individual income tax handling fee 218,257.86145,303.33 Total 5,763,414.146,357,304.91 47. Investment income Unit: RMB Item Amount incurred in the current period Amount incurred in the previous period Long-term equity investment income accounted by equity method 1,092,924.55703,737.77 Investment income obtained from financial products 2,191,535.511,466,881.53 Forward foreign exchange settlement and sales contract -2,046,795.00 -3,315,980.00 Total 1,237,665.06 -1,145,360.70 48. Income from changes in fair value Unit: RMB Sources of income from changes in fair value Amount incurred in the current period Amount incurred in the previous period Trading financial asset 3,616.4457,076.80 Trading financial liabilities -7,049,098.87 -3,315,954.36 Total -7,045,482.43 -3,258,877.56 49. Credit impairment losses Unit: RMB Item Amount incurred in the current period Amount incurred in the previous period Bad debt losses on other receivables -154,814.43 -397,445.76 Bad debt losses on accounts receivable -2,604,890.77 -2,288,549.25 Total -2,759,705.20 -2,685,995.01 50. Asset impairment losses Unit: RMB Item Amount incurred in the current period Amount incurred in the previous period ZKTeco 2023 Half Year Report 186 I. Inventory depreciation loss and contract performance cost impairment loss -3,696,240.00 -3,208,323.93 II. Impairment losses on contract assets 2,400.00 -24,178.20 Total -3,693,840.00 -3,232,502.13 51. Income from asset disposal Unit: RMB Source of income from asset disposal Amount incurred in the current period Amount incurred in the previous period Income from disposal of non-current assets - fixed assets -266,037.65 -84,726.60 Income from disposal of non-current assets - right-of-use assets 20,177.9442,898.53 Total -245,859.71 -41,828.07 52. Non-operating revenue Unit: RMB Item Amount incurred in the current period Amount incurred in the previous period Amount included in current non-recurring profit and loss Gains from scrapping and damaging non-current assets 290.17 290.17 Gains from inventory profit 0.08 Penalty income 500.00 Others 280,752.19692,045.05280,752.19 Total 281,042.36692,545.13281,042.36 53. Non-operating expenditure Unit: RMB Item Amount incurred in the current period Amount incurred in the previous period Amount included in current non-recurring profit and loss 1. Total loss in scrap of non-current assets: 186,561.24225,031.28186,561.24 Including: loss in scrap of fixed assets 186,561.24225,031.28186,561.24 2. External donations 178,252.9244,979.01178,252.92 3. Extraordinary losses 997,148.84 4. Penalty expenses 45,606.3114,906.1945,606.31 5. Other 187,004.06101,032.59187,004.06 Total 597,424.531,383,097.91597,424.53 54. Income tax expenses (1) Income tax expense statement Unit: RMB Item Amount incurred in the current period Amount incurred in the previous period Current income tax expenses 17,332,087.139,954,639.10 Deferred income tax expense -7,981,844.47 -4,020,684.45 ZKTeco 2023 Half Year Report 187 Total 9,350,242.665,933,954.65 (2) Accounting profit and income tax expense adjustment process Unit: RMB Item Amount incurred in the current period Total profits 109,159,048.12 Income tax expenses calculated based on statutory/applicable tax rates 16,373,857.22 The impact of different tax rates applicable to subsidiaries -449,325.28 The impact of adjusting previous period income tax 1,735,366.04 The impact of non-taxable income -4,990,717.20 The impact of non-deductible costs, expenses, and losses 1,962,110.31 The impact of deductible losses on unrecognized deferred income tax assets in the prior period of use -842,270.56 The impact of deductible temporary differences or deductible losses on unrecognized deferred income tax assets in the current period 6,347,224.19 Deduction of technology development expenses -10,633,698.60 Salary paid for the placement of disabled individuals with additional deductions -13,444.92 The impact of tax rate changes on the beginning deferred income tax balance 39,964.39 Others -178,822.93 Income tax expense 9,350,242.66 55. Other comprehensive income Please refer to "VII. Note 37. Other Comprehensive Income" for details. 56. Cash flow statement items (1) Other cash received related to operating activities Unit: RMB Item Amount incurred in the current period Amount incurred in the previous period Interest income 7,396,363.003,806,032.20 Received government subsidies 3,269,551.833,478,433.31 Current account 10,479,582.749,773,830.91 Restricted funds such as restricted guarantee deposit and funds in transit 28,500.002,484,355.21 Others 2,010,793.34609,446.27 Total 23,184,790.9120,152,097.90 (2) Other cash paid relating to operating activities Unit: RMB Item Amount incurred in the current period Amount incurred in the previous period ZKTeco 2023 Half Year Report 188 Expense payment 97,959,328.9380,676,050.30 Current account 21,076,460.8622,618,286.81 Restricted funds such as restricted guarantee deposit and funds in transit 12,800.0013,524,027.65 Others 3,432,113.102,440,343.27 Total 122,480,702.89119,258,708.03 (3) Other cash received related to investing activities Unit: RMB Item Amount incurred in the current period Amount incurred in the previous period Total 0.000.00 (4) Other cash paid related to investing activities Unit: RMB Item Amount incurred in the current period Amount incurred in the previous period Investment losses on forward foreign exchange settlement and sales 2,046,795.003,315,980.00 Total 2,046,795.003,315,980.00 (5) Other cash received related to financing activities Unit: RMB Item Amount incurred in the current period Amount incurred in the previous period Total 0.000.00 (6) Other cash paid relating to financing activities Unit: RMB Item Amount incurred in the current period Amount incurred in the previous period Lease liability payment amount 16,527,983.1015,370,357.75 Total 16,527,983.1015,370,357.75 57. Supplementary information of cash flow statement (1) Supplementary information of cash flow statement Unit: RMB Supplementary information Amount in current period Amount of previous period 1. Reconciliation of net profit to cash flows from operating activities: ZKTeco 2023 Half Year Report 189 Net profit 99,808,805.4676,140,759.04 Plus: provision for asset impairment 6,453,545.205,918,497.14 Depreciation of fixed assets, consumption of oil and gas assets and productive biological assets 14,793,934.7712,046,101.52 Depreciation of right of use assets 14,326,297.0113,243,858.10 Amortization of intangible assets 967,519.991,077,895.72 Long-term unamortized expenses 650,496.411,651,099.41 Loss from disposal of fixed assets, intangible assets and other long-term assets (gains expressed with "-") 245,859.7141,828.07 Loss on retirement of fixed assets (gains expressed with "-") 186,271.07225,031.28 Loss from changes in fair value (gains expressed with "-") 7,045,482.433,258,877.56 Financial expenses (gains expressed with "-") -1,746,936.23 -3,297,031.83 Investment loss (gains expressed with "-") -1,237,665.061,145,360.70 Decrease of deferred income tax assets (increase expressed with "-") -7,121,514.67 -4,376,524.34 Increases of deferred income tax liabilities (decrease expressed with "-") -461,480.54355,839.89 Decrease of inventory (increase expressed with "-") 19,487,642.81 -634,712.92 Decreases of operational receivables (increase expressed with "-") -55,447,007.82 -49,379,560.57 Increases of operating payables (decrease expressed with "-") 13,875,197.45 -80,836,080.58 Others 18,903,579.131,503,559.71 Net cash flows from operating activities 130,730,027.12 -21,915,202.10 2. Major investment and financing activities not relating to cash deposit and withdrawal Conversion of debt into capital Convertible corporate bonds due within one year Fixed assets under financing lease 3. Net change of cash and cash equivalents: Ending balance of cash 1,039,925,141.52504,663,785.53 Less: beginning balance of cash 1,077,608,258.10516,288,425.76 Plus: ending balance of cash equivalents Less: beginning balance of cash equivalents Net increase in cash and cash -37,683,116.58 -11,624,640.23 ZKTeco 2023 Half Year Report 190 equivalents (2) Composition of cash and cash equivalents Unit: RMB Item Ending Balance Beginning Balance I. Cash 1,039,925,141.521,077,608,258.10 Including: Cash on hand 2,643,551.192,646,715.85 Bank deposit available for payment at any time 1,032,754,450.401,072,431,575.41 Other monetary funds available for payment at any time 4,527,139.932,529,966.84 III. Ending balance of cash and cash equivalents 1,039,925,141.521,077,608,258.10 58. Notes to items in the statement of changes in owner's equity Explain the names and adjusted amounts of "other" items that have been adjusted to the ending balance of the previous year: None 59. Assets with restricted ownership or use right Unit: RMB Item Ending book value Reasons for restriction Monetary funds 41,202,050.72 The bill deposit is RMB 40,776,865.92, funds in transit are RMB 425,166.07, and frozen litigation funds are RMB 18.73 Fixed assets 158,193,211.50 See other explanations Intangible assets 44,343,479.82 See other explanations Construction in progress 76,797,051.36 See other explanations Total 320,535,793.40 Other explanations: The restrictions on the use rights of buildings and land are as follows: On December 16,2019, the subsidiary of the Company, ZKTECO (GUANGDONG) CO., LTD, signed a "Fixed Asset Loan Contract" with the number of DY (3100) 2019 GDZi No.013346 and a maximum mortgage contract with the number of DY (3100) 2019 GDZi No.024957 with the Dongguan Branch of Bank of Dongguan Co., Ltd., agreeing to a loan amount of RMB 206 million and a loan term from December 16,2019 to December 15,2029, and agree that the land with the number Y (2018) DGBDCQNo. 0259880 is used as collateral, and the Company has signed a contract with Dongguan Branch of Bank of Dongguan Co., Ltd. with the number DY (3100) 2019 ZGBZi No.024956, with a maximum guarantee amount of RMB 250 million. Considering that the land area of the Company's collateral has changed and a new real estate certificate has been obtained for the collateral, on October 19,2020, the subsidiary of the Company, ZKTECO (GUANGDONG) CO., LTD, has signed a supplementary agreement with the number 20201013001 with Dongguan Branch of Bank of Dongguan Co., Ltd., which stipulates to change the collateral to Y (2020) DGBDCQ No.0248681 land. ZKTeco 2023 Half Year Report 191 60. Foreign currency monetary items (1) Foreign currency monetary items Unit: RMB Item Ending foreign currency balance Conversion rate Ending equivalent RMB Balance Monetary funds 282,107,256.03 Including: USD 26,636,428.147.2258192,469,502.45 EUR 3,338,000.847.877126,293,766.42 HKD 1,410,425.260.92201,300,383.88 GBP 121,968.069.14321,115,178.37 MYR 684,525.371.55121,061,822.90 INR 41,816,721.050.08803,680,896.39 COP 199,764,430.320.0017344,813.39 MXN 678,786.040.4235287,499.38 PEN 126,142.611.9885250,830.74 TRL 162,130.870.278545,149.48 ZAR 12,836,548.470.38644,959,834.81 THB 100,160,895.080.203420,376,128.06 DNS 9,218,578.161.974118,198,752.66 IDR 1,537,553,871.160.0005743,178.16 CLP 406,579,378.000.00903,656,557.68 ARS 12,983,534.420.0282366,148.59 RUB 10,193,045.570.0834849,739.12 UYU 249.000.192047.81 KRW 105,896,545.000.0055581,945.07 Brasilia 422,994.111.4878629,311.35 SGD 411,862.965.34422,201,078.03 KES 1,024,028.600.051452,664.95 PYG 436,700.000.0010434.30 NGN 79,405,501.300.0096760,522.07 VND 656,852,665.000.0003201,356.98 AUD 211.154.79921,013.35 JPY 18,907,495.000.0501947,152.05 DZD 11,400.000.0533607.62 CAD 133,575.775.4721730,939.97 Accounts receivable 421,113,305.00 Including: USD 42,982,245.497.2258310,581,109.47 EUR 2,250,076.777.877117,724,079.72 MYR 778,942.221.55121,208,280.55 INR 118,609,685.900.088010,440,559.50 COP 410,597,482.530.0017708,732.33 MXN 41,484,466.610.423517,570,718.60 PEN 741,841.631.98851,475,129.47 TRL 4,406,374.550.27851,227,067.42 ZAR 8,922,515.950.38643,447,515.92 THB 18,424,625.690.20343,748,194.66 DNS 19,326,808.591.974138,153,802.38 CLP 165,768,536.000.00901,490,833.64 ARS 1,010,997.130.028228,511.13 KRW 1,335,823,352.000.00557,340,898.79 Brasilia 1,178,267.011.48781,752,971.94 ZKTeco 2023 Half Year Report 192 SGD 89,895.745.3442480,420.81 NGN 386,092,998.590.00963,697,882.92 VND 1,245,490.000.0003381.80 JPY 722,920.000.050136,213.95 Long-term loan 107,390.06 Including: USD EUR ZAR 277,936.250.3864107,390.06 HKD Other receivables 18,057,492.58 Including: USD 1,054,422.387.22587,619,045.21 EUR 65,892.457.8771519,041.42 MYR 55,460.001.551286,028.51 INR 16,599,408.300.08801,461,154.78 COP 255,327,632.980.0017440,721.04 MXN 5,593,957.230.42352,369,316.91 PEN 159,355.091.9885316,872.74 TRL 61,923.390.278517,244.15 ZAR 111,693.730.386443,156.65 THB 5,304,242.850.20341,079,063.16 DNS 181,945.091.9741359,184.86 IDR 30,000,000.000.000514,500.53 CLP 156,359,428.000.00901,406,213.15 ARS 1,401,701.060.028239,529.36 RUB 938,400.000.083478,229.34 KRW 86,690,000.000.0055476,397.21 Brasilia 342,486.711.4878509,536.11 SGD 54,858.785.3442293,176.29 KES 464,999.000.051423,914.52 NGN 36,029,303.770.0096345,077.86 VND 200,877,220.000.000361,578.54 JPY 9,951,496.000.0501498,510.24 Accounts payable 10,658,243.04 Including: USD 118,225.357.2258854,272.73 EUR 1,603.517.877112,631.01 MYR 40,116.361.551262,227.74 INR 6,641,016.860.0880584,572.26 COP 948,629.000.00171,637.43 MXN 3,886,705.930.42351,646,211.75 PEN 20,460.491.988540,685.06 TRL 5,237.260.27851,458.45 THB 9,375,381.660.20341,907,271.07 DNS 707,573.561.97411,396,848.41 CLP 57,294,319.000.0090515,274.49 ARS 563,558.740.028215,892.92 RUB 39,389.130.08343,283.66 Brasilia 273,868.621.4878407,449.25 KES 26,755.510.05141,376.01 NGN 334,856,050.430.00963,207,150.80 Other payables 8,465,828.74 Including: USD 642,210.637.22584,640,485.56 EUR 200,641.167.87711,580,470.48 ZKTeco 2023 Half Year Report 193 MYR 16,198.851.551225,127.35 INR 1,495,278.070.0880131,621.12 MXN 302,438.930.4235128,097.81 PEN 159,382.831.9885316,927.90 TRL 251,016.790.278569,902.03 THB 1,082,932.030.2034220,305.16 DNS 8,124.561.974116,039.01 CLP 3,916,908.000.009035,226.58 ARS 1,491,159.730.028242,052.19 KRW 72,108,517.000.0055396,265.96 Brasilia 132,636.571.4878197,330.64 SGD 14,228.705.344276,041.02 KES 263,000.000.051413,525.87 NGN 40,850,167.020.0096391,250.65 VND 3,197,556.000.0003980.20 JPY 3,676,672.000.0501184,179.21 (2) Description of overseas operating entities, including for important overseas operating entities, disclosure of their main overseas operating location, recording currency, and selection basis. Reasons for changes in the recording currency should also be disclosed. Applicable □ Not applicable Subsidiaries Registered place of business Recording currency Basis for adopting recording currency ZKTECOCO.,LIMITEDHong Kong USD Sales and procurement are mainly priced in USD Armatura Tech Co.,Ltd. Thailand THB Currency used in the place of operation ZKTECOSECURITYL.L.CDubai DNS Currency used in the place of operation ZKTECOEUROPESLSpain EUR Currency used in the place of operation ZKTECHNOLOGYLLCAmerica USD Currency used in the place of operation ZKTECOUSALLCAmerica USD Currency used in the place of operation ZKTECOBIOMETRICSINDIAPRIVATELIMITEDIndia INR Currency used in the place of operation ZKTECOPANAMA ,S.A. Panama USD Sales and procurement are mainly priced in USD ZKTECOLATAM, S.ADEC.V. Mexico MXN Currency used in the place of operation ZKINTELLIGENTSOLUTIONS (PTY) LTDSouth Africa ZAR Currency used in the place of operation NGTECOCO.,LIMITEDHong Kong USD Sales and procurement are mainly priced in USD Note: Starting from 2023, ZKTECOSECURITYL.L.C. will replace its recording currency from US dollars to dirhams. The main reason is that dirham is a commonly used settlement currency in the local area, and the proportion of dirhams in sales settlement is higher. ZKTeco 2023 Half Year Report 194 61. Government subsidies (1) Basic information of government subsidies Unit: RMB Category Amount Listed items Amount included in current profits and losses Value added tax is collected and refunded immediately 2,751,057.22 Other income 2,751,057.22 Dongguan Economic and Information Technology Bureau "Human Replacement by Machine" Fund 563,900.00 Deferred income/other income 29,499.58 Subsidy for Residency and Decoration of Management Committee of Xiamen Torch High-Tech Industry Development Zone 958,449.00 Deferred income/other income 13,924.20 Subsidy for Exhibition Hall Decoration of Management Committee of Xiamen Torch High-Tech Industry Development Zone 550,000.00 Deferred income/other income 8,029.20 Stabilization allowance 90,930.44 Other income 90,930.44 Automation Project Subsidy of Dongguan Bureau of Industry and Information Technology 512,000.00 Deferred income/other income 30,298.36 Industrial Support and Transformation and Upgrading Special Fund (Integration of Informatization and Industrialization) of Dongguan Bureau of Industry and Information Technology 301,320.00 Deferred income/other income 11,325.09 Value added tax deduction of 5% 3,053.49 Other income 3,053.49 Rewards for National Intellectual Property Advantage Enterprises 200,000.00 Other income 200,000.00 Rewards for high-tech enterprise recognition 500,000.00 Other income 500,000.00 One-time job expansion subsidy 45,000.00 Other income 45,000.00 Subsidies for enterprise R&D expenses 400,000.00 Other income 400,000.00 Singapore Employment Support Scheme 94,745.70 Other income 94,745.70 One-time Training Subsidy for Retention of Workers of Social Security Bureau 145,880.57 Other income 145,880.57 2022 Provincial Special Fund for Promoting High Quality Economic Development of Bureau of Commerce of 1,101,719.86 Other income 1,101,719.86 ZKTeco 2023 Half Year Report 195 Dongguan City Graduates' Social Security Subsidies 29,797.67 Other income 29,797.67 Others 89,894.90 Other income 89,894.90 Total 8,337,748.85 5,545,156.28 (2) Return of government subsidies □ Applicable Not applicable Other explanations: None 62. Others None VIII. Change of Merger Range 1. Changes in the scope of consolidation due to other reasons Description of changes in the scope of consolidation caused by other reasons (for example, establishing new subsidiaries, liquidating subsidiaries, etc.) and their related situations: S/NCompany Name Establishment Date Registered Capital Percentage of shares Reason for Change 1 ZKDIGIMAXPTE. LTD. March 7,2023 USD 20,000,000.0080% New establishment 2 ZKDIGIMAXPANAMA, S.A. April 11,2023 USD 10,000.0080% New establishment 3 ZKDIGIMAXCOLOMBIA SAS April 26,2023 COP 10,000,000.0080% New establishment 4 ZKDIGIMAX (PTY) LTDMarch 14,2023 80% New establishment 5 PT. ZKDIGIMAXEXCEL NOBLE May 25,2023 10,010,000,000.00 IDR 56% New establishment 6 ZKTeco Yunlian (Xiamen) Technology Co., Ltd. May 18,2023 USD 300,000.0080% New establishment ZKTeco 2023 Half Year Report 196 IX. Interest in Other Entities 1. Equity in subsidiaries (1) Composition of the enterprise group Name of Subsidiaries Main business place Registration place Nature of business Percentage of shares Acquisition method Direct Indirect 1. Xiamen Zkteco Biometric Identification Technology Co., Ltd. Xiamen Xiamen Software development 100.00% Acquisition 2. Shenzhen ZKTeco Biometric Identification Technology Co., Ltd. Shenzhen Shenzhen Sales of goods 100.00% Acquisition 2.1.ZK INVESTMENTSINC. America America Established 100.00% by investment 2.1.1.ZK TECHNOLOGYLLC America America Sales of goods 76.92% by investment 3. ZKTeco Sales Co., Ltd. Dongguan Dongguan Sales of goods 100.00% by investment 4. Hangzhou ZKTeco Hanlian E-commerce Co., Ltd. Hangzhou Hangzhou E-commerce 100.00% by investment 5. ZKCserv Technology Limited Co., Ltd. Shenzhen Shenzhen Software development 51.00% by investment 6. Dalian ZKTeo CO., Ltd. Dalian Dalian Software development and sales 100.00% by investment 7. XIAMEN ZKTECOCO., LTD. Xiamen Xiamen Software development and sales 100.00% by investment 7.1 ZKTeco Huayun (Xiamen) Integrated Circuit Co., Ltd. Xiamen Xiamen Software development 51.00% by investment 7.2 Xiamen ZKTeco Cloud Valley Design and Development Co., Ltd. Xiamen Xiamen Software development 100.00% by investment ZKTeco 2023 Half Year Report 197 7.3.ZKTECO VIETNAM TECHNOLOGYCOMPANY LIMITED Vietnam Vietnam Sales of goods 100.00% by investment 8. ZKTECO (GUANGDONG) CO., LTD Dongguan Dongguan Production and sales of goods 100.00% by investment 9. Xi'an ZKTeco Co., Ltd. Xi'an Xi'an Sales of goods 100.00% Acquisition 10. Shenzhen Zhongjiang Intelligent Technology Co., Ltd. Shenzhen Shenzhen Project construction and sales 51.00% by investment 11. ZKTECO CO., LIMITED Hong Kong, China Hong Kong, China Sales of goods 100.00% by investment 11.1.ZKTECO TURKEY ELEKTRONIK SANAYIVE TICARET LIMITED SIRKETI. Turkey Turkey Sales of goods 75.99% by investment 11.2.ZKTECO LATAM, S.A. DEC.V. Mexico Mexico Sales services 100.00% by investment 11.3.ZK SOFTWARE DEMEXICO, S.A. DEC.V. Mexico Mexico R&D services 51.00% Capital increase and equity investment 11.4.ZKTECO COLOMBIA SAS Columbia Columbia Sales services 100.00% by investment 11.5.ZKTECO （M） SDN. BHD. Malaysia Malaysia Sales of goods 51.00% Acquisition 11.6.ZKTECO BIOMETRICS INDIA PRIVATE LIMITED India India Sales of goods 99.15% Capital increase and equity investment 11.7.ZKTECO EUROPESL Spain Spain Sales of goods 51.00% Acquisition 11.7.1.ZKTECOIRELAND LIMITED Ireland Ireland Sales services 51.00% by investment 11.7.2.ZKTeco Deutschland GmbH Germany Germany Sales of goods 51.00% by investment 11.7.3.ZKTECOITALIA S.R.L. Italy Italy Sales of goods 48.09% by investment 11.7.4.ZKTECOUKLTD UKUKSales of goods 51.00% by investment 11.8.ZKTECOPeru Peru Sales services 100.00% Acquisition ZKTeco 2023 Half Year Report 198 PERU SOCIEDAD ANONIMA CERRADA 11.9.ZKTECO THAICO., LTD. Thailand Thailand Sales of goods 99.80% Acquisition 11.10.ZKTeco Chile SpA Chile Chile Sales services 100.00% by investment 11.10.1.SOLUCIONES INTEGRALES YSISTEMAS SpA Chile Chile Sales services 100.00% by investment 11.11.ZKTECO SECURITY L.L.C Dubai Dubai Sales of goods 100.00% Acquisition 11.12.ZKTECO ARGENTINA S.A. Argentina Argentina Sales of goods 60.00% Acquisition 11.13.Limited Liability Company "ZKTeco biometrics and security" Russia Russia Sales of goods 100.00% by investment 11.14.ZKTECO Investment Inc. America America Established 100.00% by investment 11.14.1.ZKTECOUSALLC America America Sales of goods 80.00% by investment 11.14.2.Armatura Co., Ltd. Korea Korea Sales of goods 90.00% Acquisition 11.14.3.ZKTeco Japan Co., Ltd. Japan Japan Sales of goods 100.00% by investment 11.14.4.ARMATURALLC. America America Sales of goods 100.00% by investment 11.15.PT. ZKTECO BIOMETRICS INDONESIA Indonesia Indonesia Sales of goods 95.00% by investment 11.16.ZK INVESTIMENTOSDO BRASIL LTDA. Brazil Brazil Established 99.68% Acquisition 11.16.1.ZKTECODOBRASIL S.A. (formerly BIOMETRUS INDUSTRIA ELETRO-ELETRONICA S.A.) Brazil Brazil Sales of goods 74.76% Acquisition 11.17.ZKTeco Latam R&D S.A. Argentina Argentina Sales of goods 99.20% by investment ZKTeco 2023 Half Year Report 199 11.18.NGTECOCO., LIMITED Hong Kong, China Hong Kong, China Sales of goods 100.00% by investment 11.19.ZKTECO BIOMETRIC LIMITED Nigeria Nigeria Sales of goods 60.00% by investment 11.20.ZKTECO PANAMA, S.A. Panama Panama Sales of goods 99.86% by investment 11.21.ZK INTELLIGENTSOLUTIONS (PTY) LTD South Africa South Africa Sales of goods 100.00% by investment 11.22.ZKTECO BIOMETRICS KENYA LIMITED Kenya Kenya Sales of goods 100.00% by investment 11.23.ZKTECO ROMANIA S.R.L Romania Romania Sales of goods 100.00% by investment 12. Hubei ZKTeco Co., Ltd. Wuhan Wuhan Sales of goods 100.00% by investment 13. Wuhan ZKTeco Perception Technology Co., Ltd. Wuhan Wuhan Sales of goods 51.00% by investment 14.ZKTECO SG INVESTMENT PTE. LTD. Singapore Singapore Sales of goods 100.00% by investment 14.1.ZKTECO SINGAPORE PTE. LTD. Singapore Singapore Sales of goods 100.00% by investment 14.2.Armatura Tech Co., Ltd. Thailand Thailand Production and sales of goods 99.99% Acquisition 14.3.ZKDIGIMAXPTE. LTD. Singapore Singapore Sales of goods 80.00% by investment 14.3.1.ZKDIGIMAX PANAMA, S.A. Panama Panama Sales of goods 80.00% by investment 14.3.2.ZKDIGIMAX COLOMBIA SAS Columbia Columbia Sales of goods 80.00% by investment 14.3.3.ZKDIGIMAX (PTY) LTD South Africa South Africa Sales of goods 80.00% by investment 14.3.4.PT. ZKDIGIMAX EXCEL NOBLE Indonesia Indonesia Sales of goods 56.00% by investment 14.3.5 ZKTeco Yunlian (Xiamen) Xiamen Xiamen Sales of goods 80.00% by investment ZKTeco 2023 Half Year Report 200 Technology Co., Ltd. (2) Important partly-owned subsidiaries Unit: RMB Name of Subsidiaries Minority shareholding ratio Profit and loss attributable to minority shareholders in current period Dividends declared for distribution to minority shareholders in the current period Closing balance of minority interest ZKTECHNOLOGYLLC 23.08% 13,239,941.9112,771,360.0013,331,297.52 ZKTECOUSALLC 20.00% 19,334.1435,476.005,266,441.45 (3) Main financial information of important partly-owned subsidiaries Unit: RMB Name of Subsidiaries Ending Balance Beginning Balance Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities ZK TECHNOLOGY LLC 80,155,815.8 7 779,42 6.38 80,935,242.2 5 33,621,605.2 7 111,10 3.97 33,732,709.2 4 71,976,229.0 4 1,110,736.14 73,086,965.1 8 28,686,703.9 2 475,38 7.16 29,162,091.0 8 ZKTECO USA LLC 33,481,769.2 9 986,05 7.30 34,467,826.5 9 7,900,315.58 201,71 7.38 8,102,032.96 40,257,368.6 6 1,147,107.78 41,404,476.4 4 15,808,239.1 9 272,71 0.13 16,080,949.3 2 Unit: RMB Name of Subsidiaries Amount incurred in the current period Amount incurred in the previous period Operating revenue Net profit Total comprehensive income Cash flow from operating activities Operating revenue Net profit Total comprehensive income Cash flow from operating activities ZK TECHNOLOGYLLC 74,892,637.61 44,089,564.44 45,848,858.91 50,898,526.54 43,907,529.94 18,387,017.08 19,957,101.70 22,481,108.65 ZKTECO USALLC 25,730,594.94 54,320.24 1,077,742.5 1 - 1,237,106.9 3 42,681,731.43 2,641,232.4 5 3,798,388.2 8 - 596,667.58 ZKTeco 2023 Half Year Report 201 2. Transactions resulting in change of owners' equity in subsidiaries and the subsidiaries still being under control (1) Change of owners' equity in subsidiaries On February 15,2023, the Company's sub-subsidiary, ZKTECOInvestment Inc., transferred 10% of its shares (2,379 shares) in Armatura Co., Ltd. to LEEKYUWHAN for KRW 3,819.00 per share. After the transfer, LEEKYUWHAN held 10% of the shares in Armatura Co., Ltd. ZKTECOInvestment Inc. holds 90% shares in Armatura Co., Ltd. and still controls Armatura Co., Ltd. (2) Effect of transactions on minority equity and owners' equity attributable to the parent company Unit: RMB Acquisition cost/disposal consideration --Cash 47,632.71 -- Fair value of non-cash assets Total cost/disposal consideration 47,632.71 Less: Net assets of the subsidiaries calculated based on the proportion of assets acquired/disposed -82,688.91 Difference 130,321.62 Including: Adjustment to the capital reserves 130,321.62 Adjustment to surplus reserve Adjustment to undistributed profit Other explanations: None 3. Equity in joint arrangements or associates (1) Important joint ventures or associates Name of joint venture or associate Main business place Registration place Nature of business Percentage of shares Accounting treatment methods for investments in joint ventures or associates Direct Indirect Xi‘an Hi-Think Information Technology Co., Ltd. Xi'an Xi'an Software and information technology services industry 19.89% Long-term equity investment (2) Major financial information of important associates Unit: RMB ZKTeco 2023 Half Year Report 202 Ending balance/current amount incurred Beginning balance/amount incurred in the previous period Current assets 10,053,025.409,875,903.92 Non-current assets 1,521,214.212,116,980.59 Total assets 11,574,239.6111,992,884.51 Current liabilities 24,929,959.6219,966,606.53 Non-current liabilities 345,193.16337,468.89 Total liabilities 25,275,152.7820,304,075.42 Minority interests Shareholders' equity attributable to the parent company -13,700,913.17 -8,311,190.91 Net asset share calculated based on shareholding ratio -2,724,618.40 -1,652,796.67 Adjustment matters --Goodwill --Unrealized profits from internal transactions --Others Book value of equity investment in associates Fair value of equity investments in associates with public offers Operating revenue 2,854,572.432,042,181.80 Net profit -5,411,549.51 -6,410,736.39 Net profit from discontinued operations Other comprehensive income Total comprehensive income -5,411,549.51 -6,410,736.39 Dividends received from associates this year (3) Excess losses incurred by joint ventures or associates Unit: RMB Name of joint venture or associate Accumulated unrecognized losses accumulated in the previous period Unrecognized losses in the current period (or net profit shared in the current period) Accumulated unrecognized losses at the end of this period Xi‘an Hi-Think Information Technology Co., Ltd. -12,164,220.89 -1,076,357.20 -13,240,578.09 ZKTECOSOLUTIONSINC. -538,127.4845,619.61 -492,507.87 PT. ZKTECOSECURITY INDONESIA -14,844.38 -154,025.11 -168,869.49 ZKTeco 2023 Half Year Report 203 X. Risks Related to Financial Instruments The main financial instruments of the Company, in addition to derivative instruments, include bank loans, monetary funds, etc. The main purpose of these financial instruments is to finance the Company's operations. The Company has a variety of other financial assets and liabilities directly arising from its operations, such as accounts receivable and accounts payable. The main risks caused by the Company's financial instruments are credit risk, liquidity risk, and market risk. (I) Credit risk The credit risk of the Company mainly comes from monetary funds, trading financial assets, notes receivable, accounts receivable, and other receivables. The management has established appropriate credit policies and continuously monitors the exposure to these credit risks. The Company manages credit risks by portfolio classification. Credit risk mainly arises from bank deposits and accounts receivable. The Company's bank deposits are mainly deposited in banks with high credit ratings, and the Company expects that bank deposits do not pose significant credit risks. For accounts receivable, the Company sets relevant policies to control credit risk exposure. The Company evaluates the credit qualifications of the debtor based on their financial position, credit history, and other factors such as current market conditions, and sets credit terms. Credit risk is centrally managed by customers and geographical regions. Due to the widespread dispersion of the Company's accounts receivable customer base in different geographical regions, there is no significant concentration of credit risk within the Company. The Company's maximum credit risk exposure is the carrying amount of each financial asset in the balance sheet. The Company has not provided any guarantee that may expose the Company to credit risk. For the quantitative data of the Company's credit risk exposure arising from accounts receivable and other receivables, please refer to "Section XFinancial Report VII. Consolidated Financial Reimbursement Item Note 3. Accounts Receivable" and "Section X Financial Report VII. Consolidated Financial Reimbursement Item Note 5. Other Receivables" in this report. (II) Liquidity risk Liquidity risk refers to the risk of the Company encountering a shortage of funds when fulfilling its obligations related to financial liabilities. The Company's policy is to ensure sufficient funds are available to repay maturing debts. Liquidity risk is centrally controlled by the Company's Finance Department. The Finance Department ensures that the Company has sufficient funds to repay debts under all reasonable forecasts by monitoring cash balances and rolling forecasts of cash flows for the next 12 months. (III) Market risk Market risk refers to the risk that the fair value or future cash flow of financial instruments will fluctuate due to changes in market prices. Market risk mainly includes interest rate risk and foreign exchange risk. 1. Interest rate risk Interest rate risk refers to the risk of fluctuations in the fair value or future cash flows of financial instruments due to changes in market interest rates. The loan contract for the Company's loans clearly stipulates the loan interest rate, so there is no significant risk of market interest rate fluctuations in the Company's financial liabilities. 2. Exchange rate risk The foreign exchange risk faced by the Company is mainly related to its operating activities (when income and expenditure are settled in foreign currencies different from the Company's recording currency) and its net investment in overseas subsidiaries. The presentation of the Company's foreign currency financial assets and foreign currency financial liabilities at the end of the period can be found in "Section XFinancial Report VII. Consolidated Financial Reimbursement Item Note 60. Foreign Currency Monetary Items" of this report. ZKTeco 2023 Half Year Report 204 XI. Disclosure of Fair Value 1. Ending fair value of assets and liabilities measured at fair value Unit: RMB Item Fair value at the end of the period First level fair value measurement Second level fair value measurement Third level fair value measurement Total I. Continuous fair value measurement -- -- -- -- (I) Trading financial assets 99,457,974.90 99,457,974.90 1. Financial assets measured at fair value and whose changes are included in the current profits and losses 99,457,974.92 99,457,974.92 (1) Debt instrument investment 99,457,974.92 99,457,974.92 Total assets continuously measured at fair value 99,457,974.90 99,457,974.90 (VI) Trading financial liabilities 7,049,098.87 7,049,098.87 Derivative financial liabilities 7,049,098.87 7,049,098.87 Total liabilities continuously measured at fair value 7,049,098.87 7,049,098.87 II. Continuous fair value measurement -- -- -- -- 2. Basis for determining the market value of continuous and non-continuous first level fair value measurement items None 3. Qualitative and quantitative information on valuation techniques and important parameters used for continuous and non-continuous second level fair value measurement items The Company divides its bank financial products into financial assets measured at fair value and whose changes are included in the current profits and losses, and subsequently measures them at fair value. At the end of the period, the expected income is calculated based on the expected return rate of the bank financial products, and it is used as the fair value with the principal at the end of the period. ZKTeco 2023 Half Year Report 205 4. Qualitative and quantitative information on valuation techniques and important parameters used for continuous and non-continuous third level fair value measurement items None 5. Fair value of financial assets and financial liabilities not measured at fair value Financial assets and liabilities not measured at fair value mainly include accounts receivable, other receivables, short-term loans, payables, other payables, lease liabilities, non-current liabilities due within one year, and long-term loans. The difference between the carrying amounts of financial assets and liabilities not measured at fair value and fair value is very small. XII. Related Parties and Related Transactions 1. Information of the parent company of the enterprise Name of the parent company Registration place Nature of business Registered Capital Share proportion held by parent company in the enterprise Proportion of voting rights of the parent company to the Company Shenzhen ZKTeco Times Investment Co., Ltd. Shenzhen Established RMB 9 million 30.30% 30.30% Explanation of the parent company of the enterprise None The ultimate controller of this enterprise is Che Quanhong. Other explanations: None 2. Subsidiaries of the enterprise The enterprise's subsidiaries are detailed in IX. Equity in Other Entities 1. Equity in subsidiaries of the Notes. 3. Information of joint ventures and associates of the enterprise For important joint ventures or associates of the enterprise, please refer to Chapter IXEquity in Other Entities.3. Equity in joint ventures or associates of the Notes. Related party transactions with the Company occurred in the current period, the information of other joint ventures or associates that have formed balances through related party transactions with the Company in the early stage is as follows: Name of joint venture or associate Relationship with the enterprise ZKTECOSMARTCITY (THAILAND) CO., LTD. Joint venture PT. ZKTECOSECURITYINDONESIAJoint venture ZKTECOSOLUTIONSINC. Joint venture CVSquared, Inc. Joint venture Guizhou Zhongjiang Intelligent Technology Co., Ltd. Joint venture Xi‘an Hi-Think Information Technology Co., Ltd. Joint venture Silk IDSystems Inc. Joint venture ZKTeco 2023 Half Year Report 206 Other explanations: None 4. Conditions of other affiliated parties Names of other related parties Relationship between other related parties and the enterprise Shenzhen ZKTeco Times Investment Co., Ltd. A shareholder of the Company Shenzhen JYHYInvestment Enterprise (Limited Partnership) A shareholder of the Company Shenzhen JYSJInvestment Enterprise (Limited Partnership) A shareholder of the Company Dongguan LXInvestment Partnership (Limited Partnership) A shareholder of the Company ZKTIMESCO., LIMITED Controlling shareholder Shenzhen ZKTeco Times Investment Co., Ltd. holds 100.00% of the shares (dissolved on March 3, 2023) Fujian Zhongkong Mining Co., Ltd. The actual controller Che Quanhong serves as the supervisor of the Company and holds 50.00% equity, while Che Quanzhong, the younger brother of the actual controller Che Quanhong, serves as the Chairman and General Manager of the Company and holds 50.00% equity Beijing Zhongkong Villa Agricultural Tourism Co., Ltd Che Quanzhong, the younger brother of the actual controller Che Quanhong, serves as the Manager and Executive Director, holding 99.93% equity Guangzhou Aiji Food Co., Ltd. An enterprise in which independent director Zhuo Shuyan holds 20.00% equity, while her younger brother holds 80.00% equity and serves as Executive Director and General Manager Ma Wentao Director and Deputy General Manager Jin Hairong Director and General Manager Fu Zhiqian Director Zhuo Shuyan Independent director Dong Xiuqin Independent director Pang Chunlin Independent director Jiang Wenna Employee supervisor Wu Xinke Supervisor (no longer serve as a supervisor of the Company from April 7,2023) Liu Jiajia Supervisor (no longer serve as a supervisor of the Company from April 7,2023) Yang Xianfeng Supervisor (serve as a supervisor of the Company from April 7, 2023) Wang Huineng Supervisor (serve as a supervisor of the Company from April 7, 2023) Wang Youwu CFO Guo Yanbo Secretary of the Board of Directors and Deputy General Manager Li Zhinong Deputy General Manager Wang Haitao Executive Director and General Manager of the controlling shareholder ZKTeco Times Wu Xiongxiong Supervisor of the controlling shareholder ZKTeco Times Mu Wenting Deputy General Manager MANISHDINESHDALAL A shareholder holding 10.00% equity in subsidiary ZKTECO USALLC Lawrence John Reed A shareholder holding 10.00% equity of subsidiary ZKTECO USALLC and 0.01% equity of subsidiary Armatura Tech Co., Ltd; simultaneously holding 2.74% of the capital contribution share of JYLX, with JYLX holding 2.46% of the Company's shares Shenzhen Huijiang Industrial Group Co., Ltd. A shareholder holding 49.00% equity in subsidiary Shenzhen ZKTeco 2023 Half Year Report 207 Zhongjiang ITMOMENTUM.COMLIMITEDA shareholder holding 49.00% equity in subsidiary ZKCserv TVCENLINEA.COMSADECV An enterprise controlled by minority shareholders of subsidiary ZKSOFTWAREDEMEXICO, S.A. DEC.V. PSDSECURITY, S.L. (formerly PROFESSIONAL SOFTWAREDEVELOPMENT,S.L.) An enterprise controlled by the minority shareholder Fernando Ducay Real of subsidiary ZKTECOEUROPESL; Fernando Ducay Real also holds 27.38% of the capital contribution share of JYLX, which holds 2.46% of the Company's equity SECURITALYS.R.L An enterprise controlled by minority shareholders of subsidiary ZKTECOITALIAS.R.L BIOCARDTECNOLOGIAS.R.L An enterprise controlled by minority shareholders of subsidiary ZKTECOARGENTINAS.A SB-TELECOMSANDDEVICESLIMITED A minority shareholder of subsidiary ZKTECOBIOMETRIC LIMITED Zizi Zhongxing Health Culture (Shenzhen) Co., Ltd. An enterprise in which independent director Zhuo Shuyan holds 39.00% equity, her spouse serves as Executive Director and General Manager, and holds 61.00% equity Shanghai GFLaw Firm (Shenzhen Branch) An enterprise with independent director Zhuo Shuyan as partner Chelian Innovation (Beijing) Science and Technology Center An enterprise in which independent director Pang Chunlin holds 85.00% equity and serves as the Manager, Executive Director, and Legal Representative Open Unmanned Farm Engineering Technology (Jiangsu) Co., Ltd. An enterprise in which independent director Pang Chunlin holds 90.00% equity as the Executive Director and Legal Representative of the Company Whole Process Unmanned Operation Technology Promotion (Jiangsu) Co., Ltd. An enterprise in which independent director Pang Chunlin holds 100.00% equity as the Executive Director and Legal Representative of the Company Shanghai Pateo Electronic Equipment Manufacturing Co., Ltd. An enterprise with independent director Pang Chunlin serving as a director Ningbo Yuping Times Venture Capital Partnership (Limited Partnership) Actual controller Che Quanhong holds 97.50% share Che Quanzhong The actual controller Che Quanhong's younger brother Shenzhen Qingyi Photomask Limited Enterprises where independent director Pang Chunlin serves as a director (no longer serve as a director of the Company since April 2023) Onman Intelligent Machinery (Beijing) Co., Ltd. An enterprise in which independent director Pang Chunlin serves as the Executive Director, the Manager and Legal Representative of the Company Qiaosuan Information Technology (Beijing) Co., Ltd. An enterprise with independent director Pang Chunlin serving as the Executive Director 5. Related party transactions (1) Related party transactions for purchasing and selling goods, providing and receiving labor services Table of Purchasing Goods/Accepting Labor Services Unit: RMB Related parties Content of related party transaction Amount incurred in the current period Approved transaction limit Does it exceed the transaction limit Amount incurred in the previous period TVCENLINEA.COMSADECV Purchasing goods 1,523,554.191,400,000.00 Yes 1,729,350.95 PSDSECURITY, S.L. (formerly Purchasing goods 9,150.045,000.00 Yes 0.00 ZKTeco 2023 Half Year Report 208 PROFESSIONAL SOFTWARE DEVELOPMENT,S.L.) ZKTECOSMART CITY (THAILAND) CO., LTD. Purchasing goods 3,900.71 52,751.36 Silk IDSystems Inc. Technology license fee No 201,308.93 Xi‘an Hi-Think Information Technology Co., Ltd. Service fee 559,759.24 0.00 PT. ZKTECO SECURITY INDONESIA Marketing expenses 127,473.68 0.00 Note: The expected daily related party transaction limit of the Company is the maximum amount that both parties may sign a contract, and the actual amount incurred is determined based on the business development of both parties, resulting in a certain difference between the actual amount incurred and the expected amount. The difference in amount is relatively small and does not meet the criteria for review by the Board of Directors. The daily related party transactions of the Company in 2023 were based on the normal production and operation needs of the Company. The related party transactions comply with the principles of fairness, openness, and impartiality, and there is a certain difference between the actual amount incurred and the expected amount. This is mainly due to the Company's appropriate adjustments based on business conditions, and there is no situation that damages the Company and shareholders' rights and interests, which will not affect the independence of the Company. Selling goods/rendering labor service Unit: RMB Related parties Content of related party transaction Amount incurred in the current period Amount incurred in the previous period Xi‘an Hi-Think Information Technology Co., Ltd. Selling goods 18,380.270.00 PT. ZKTECOSECURITY INDONESIA Selling goods 852,201.76736,167.14 ZKTECOSMARTCITY (THAILAND) CO., LTD. Selling goods 1,108,553.37838,672.61 TVCENLINEA.COMSADE CV Selling goods 20,076,960.6113,411,296.18 SECURITALYS.R.LSelling goods 625,099.29632,449.77 PSDSECURITY, S.L. (formerly PROFESSIONAL SOFTWARE DEVELOPMENT,S.L.) Selling goods 1,920,743.513,771,629.03 BIOCARDTECNOLOGIA S.R.L Selling goods 3,310.41 -206,278.54 ZKTECOSOLUTIONSINC. Selling goods 2,298,463.424,743,693.63 Description of related party transactions for purchasing and selling goods, providing and receiving labor services According to the substance over form principle, as long as it is recognized as a related party during the reporting period, the above table discloses all transactions of the related party that occurred during the reporting period. (2) Related party lease The Company as lessor: ZKTeco 2023 Half Year Report 209 Unit: RMB Name of leasee Types of leased assets Confirmed rental income in the current period Rental income recognized in the previous period PT. ZKTECOSECURITY INDONESIA Houses and buildings 139,163.1044,932.92 Note: PT. ZKTECOSECURITYINDONESIA began leasing the house and building of the subsidiary PT. ZKTECO BIOMETRICSINDONESIA on March 1,2020, with a lease term from March 1,2020 to February 28,2022, and a contract renewal on February 21,2022, extending the lease term to February 29,2024. The Company as lessee: Unit: RMB Name of lessor Types of leased assets Simplified rental fees for short-term leases and low value asset leases (if applicable) Variable lease payments not included in the measurement of lease liabilities (if applicable) Rent paid Interest expense on lease liabilities assumed Increased right-of-use assets Amount incurred in the current period Amount incurred in the previous period Amount incurred in the current period Amount incurred in the previous period Amount incurred in the current period Amount incurred in the previous period Amount incurred in the current period Amount incurred in the previous period Amount incurred in the current period Amount incurred in the previous period Che Quanzhong Houses and buildings 0.00 15,000.00 1,282,5 66.12 1,039,9 94.86 41,308.72 7,890.9 6 0.00 194,248.44 Xi‘an Hi-Think Information Technology Co., Ltd. Houses and buildings 0.00 50,000.00 93,256.20 54,500.00 - 3,501.2 8 0.00 - 79,054.58 0.00 Information of related leasing situation (3) Related party fund borrowing and lending Unit: RMB Related parties Lending amount Start Date Due Date Remarks Borrowing Lending ZKTECO SOLUTIONS INC. 361,290.00 March 28,2021 December 31,2024 The subsidiary of the Company, ZKTECO CO., LIMITED, signed a loan agreement with ZKTECOSOLUTIONSINC. on March 29,2021, agreeing to provide a maximum loan of USD 240,000.00; on March 31,2021, the amount of the loan remitted was USD 50,000.00, with an exchange rate of 6.5713 for the loan on the ZKTeco 2023 Half Year Report 210 same day, which was converted into RMB 328,565.00. Both parties agreed to repay the loan within 12 months after its expiration, with an interest rate of 3.00%. The repayment deadline has expired, and ZKTECOSOLUTIONSINC. has not yet repaid it. After negotiation, the two parties have extended it for 21 months, until December 31,2024. The ending exchange rate on June 30,2023 is 7.2258, which is converted into RMB 361,290.00. (4) Compensation for key management personnel Unit: RMB Item Amount incurred in the current period Amount incurred in the previous period Compensation for key management personnel 4,541,331.252,903,753.05 (5) Other related party transactions None 6. Accounts receivable and payable to related parties (1) Accounts receivable Unit: RMB Project Name Related parties Ending Balance Beginning Balance Book balance Bad debt reserve Book balance Bad debt reserve Accounts receivable Guizhou Zhongjiang Intelligent Technology Co., Ltd. 334,800.21334,800.21334,800.21334,800.21 Accounts receivable PT. ZKTECO SECURITY INDONESIA 5,141,880.33382,496.634,038,062.35287,436.39 Accounts receivable ZKTECO SOLUTIONS INC. 11,589,102.73579,455.1414,290,503.53714,525.18 Accounts receivable TVCENLINEA.COMSADECV 16,663,593.67833,179.6818,800,631.46940,031.57 Accounts receivable SECURITALY S.R.L 266,372.0113,318.60159,062.067,953.10 Accounts receivable ZKTECOSMART CITY (THAILAND) CO., LTD. 1,068,812.8953,440.64453,023.7622,651.19 Accounts receivable PSDSECURITY, S.L. (formerly PROFESSIONAL SOFTWARE 1,560,485.3378,024.252,833,385.37141,669.27 ZKTeco 2023 Half Year Report 211 DEVELOPMENT,S.L.) Other receivables Guizhou Zhongjiang Intelligent Technology Co., Ltd. 522,994.11522,994.11397,428.70397,428.70 Other receivables ZKTECO SOLUTIONS INC. 385,714.22110,287.49366,547.8736,132.41 Other receivables Xi‘an Hi-Think Information Technology Co., Ltd. 31,395.00 Other receivables Wu Xinke 7,225.80 Other receivables Yang Xianfeng 28,208.34 Other receivables Che Quanhong 31,946.67 Other receivables Wu Xiongxiong 14,869.95 Other receivables Liu Jiajia 20,893.80 Prepayment SB-TELECOMS ANDDEVICES LIMITED 11,980.50 (2) Accounts payable Unit: RMB Project Name Related parties Closing book balance Opening book balance Contract liabilities CVSquared, Inc.1,275,140.001,275,140.00 Contract liabilities Silk IDSystems Inc.54,465.7052,496.86 Contract liabilities SB-TELECOMSAND DEVICESLIMITED 18,381.7117,717.25 Accounts payable SB-TELECOMSAND DEVICESLIMITED 16,077.2512,612.61 Accounts payable ZKTECOSMARTCITY (THAILAND) CO., LTD. 25,750.871,379.34 Accounts payable TVCENLINEA.COMSADE CV 504,050.10428,030.88 Accounts payable Xi‘an Hi-Think Information Technology Co., Ltd. 268,420.07 Other payables Shenzhen Huijiang Industrial Group Co., Ltd. 1,800,000.001,800,000.00 Other payables PT. ZKTECOSECURITY INDONESIA 295,856.20 Other payables Wu Xinke 22,592.6918,525.84 Other payables Wu Xiongxiong 34,202.10 XIII. Share-based Payment 1. Overall information of share-based payment Applicable □ Not applicable Unit: RMB The total amount of various equity instruments granted by the 273,036.00 ZKTeco 2023 Half Year Report 212 Company in this period The total amount of various equity instruments exercised by the Company in the current period 0.00 The total amount of various equity instruments that have expired in the current period of the Company 0.00 The range of exercise prices for stock options issued by the Company at the end of the period and the remaining term of the contract The grant price is RMB 18.70 per share, and the validity period is from the date of the first grant of restricted stocks to the date when all restricted stocks granted to the incentive object are attributed or invalidated, with a maximum of 48 months The range of exercise prices for other equity instruments issued by the Company at the end of the period and the remaining term of the contract None Other explanations: On September 29,2022, the Company held the 19th Session of the Second Board Meeting, deliberated and approved the "Proposal on the Company's Restricted Stock Incentive Plan 2022 (Draft) and its Abstract", the "Proposal on the Company's Restricted Stock Incentive Plan Implementation Assessment Management Measures 2022", and the "Proposal on Submitting to the Shareholders' Meeting to Authorize the Board of Directors to Handle Matters Related to Equity Incentive". On October 17,2022, the Company held the second extraordinary general meeting of 2022, deliberated and approved the "Proposal on the Company's Restricted Stock Incentive Plan 2022 (Draft) and its Abstract", the "Proposal on the Company's Restricted Stock Incentive Plan Implementation Assessment Management Measures 2022", and the "Proposal on Submitting to the Shareholders' Meeting to Authorize the Board of Directors to Handle Matters Related to Equity Incentive". The incentive plan will grant restricted stocks with a total of not more than 2.9 million shares to incentive objects, including 2,689,972 shares for the first time and 210,028 shares reserved. The incentive plan grants 525 incentive objects for the first time, including directors, senior management, middle managers and core technology (business) backbones (excluding independent directors and supervisors) of the Company (including branches and subsidiaries). The grant price of restricted stocks in the incentive plan is RMB 18.70/share, and the grant date of restricted stocks for the first time is November 16,2022. According to the authorization of the second extraordinary general meeting in 2022, the Company held the 21st Session of the Second Board Meeting on November 16,2022, and deliberated and approved the "Proposal on Granting Restricted Stock to Incentive Objects of 2022 Restricted Stock Incentive Plan for the First Time" and the "Proposal on Adjusting the List of Incentive Objects of Restricted Stock Incentive Plan in 2022 and the Number of Granted Objects". Considering that 17 of the incentive objects to be granted voluntarily gave up participating in the incentive plan due to personal reasons or resignation, adjustments have been made to the incentive objects and the number of grants in the incentive plan. After these adjustments, the number of incentive objects granted in the incentive plan has been adjusted from 525 to 508, and the number of restricted stocks granted for the first time has been adjusted from 2,689,972 to 2,655,900. According to the authorization of the second extraordinary general meeting of shareholders in 2022, the Company held the Third Session of the Third Board Meeting on June 21,2023, and deliberated and approved the "Proposal on Adjusting the Granting Price and Quantity of 2022 Restricted Stock Incentive Plan", "Proposal on Cancelling Some Granted but Not Affiliated Restricted Stocks", and "Proposal on Granting Reserved Restricted Stocks to the Incentive Objects of 2022 Restricted Stock Incentive Plan". Considering that the Company has announced the implementation of the 2022 annual equity distribution, corresponding adjustments have been made to the grant price and number of restricted stocks in the 2022 restricted stock incentive plan. The initial and reserved grant prices have been adjusted from RMB 18.70 per share to RMB 14.12 per share, and the number of restricted stocks granted for the first time has been adjusted from 2.6559 million shares to 3.45267 million shares. The number of reserved restricted stocks that are granted has been adjusted from 210,028 shares to 273,036 shares. At the same time, the reserved grant conditions stipulated in the 2022 restricted stock incentive plan of the Company have been met. The Board of Directors has agreed to determine June 21,2023 as the reserved grant date, and has agreed to grant 273,036 restricted stocks to 46 incentive objects who meet the grant conditions. ZKTeco 2023 Half Year Report 213 Considering that ① the incentive object Yang Xianfeng was elected as a supervisor of the Company on April 7,2023, and according to relevant regulations, the supervisor cannot be the incentive object, a total of 7,020 Class II restricted stocks that have been granted but have not yet been affiliated shall not be attributed and shall be invalidated by the Company; considering that ② among the incentive objects,16 objects do not meet the incentive qualifications due to their resignation, the corresponding 94,380 shares of Class II restricted stock that have been granted but have not yet been affiliated shall not be attributed and shall be invalidated by the Company. A total of 101,400 shares that have been invalidated and granted but have not yet been affiliated as mentioned above shall be invalidated by the Company and will not be affiliated. (Note: The number of invalidated shares as mentioned above is the number of shares adjusted according to the Company's 2022 equity distribution plan.) 2. Equity settled share-based payments Applicable □ Not applicable Unit: RMB Method for determining the fair value of equity instruments on the grant date Determination of Fair Value Based on the Black Scholes Model Basis for Determining the Number of Exercisable Equity Instruments On each balance sheet date during the waiting period, the Company predicts based on the latest number of exercisable rights, completion of performance indicators, personal assessment status, and other subsequent information Reasons for significant differences between the current estimate and the previous estimate None Accumulated amount of equity settled share-based payments recognized in capital reserve 23,537,468.31 The total amount of expenses recognized for equity settled share-based payments in this period 18,903,579.13 Other explanations: On November 16,2022, the Company held the 21st Session of the Second Board Meeting, and deliberated and approved the "Proposal on Granting Restricted Stock to Incentive Objects of 2022 Restricted Stock Incentive Plan for the First Time". The independent directors of the Company expressed independent opinions on this matter, and believed that the conditions for granting stipulated in the Company's incentive plan had been met, the determined grant date was in line with relevant regulations, the scope of incentive objects stipulated in the Company's restricted stock incentive plan, and its subject qualification as the incentive object of the Company's restricted stock incentive plan was legal and effective. The Board of Supervisors verified the list of incentive objects granted on the grant date and issued verification opinions. On June 21,2023, the Company held the Third Session of the Third Board Meeting, and deliberated and approved the "Proposal on Adjusting the Granting Price and Quantity of 2022 Restricted Stock Incentive Plan", "Proposal on Cancelling Some Granted but Not Affiliated Restricted Stocks", and "Proposal on Granting Reserved Restricted Stocks to the Incentive Objects of 2022 Restricted Stock Incentive Plan". The independent directors of the Company have expressed independent opinions on this matter, believing that the grant date complies with the relevant provisions of the "Management Measures" and the Company's restricted stock incentive plan regarding the grant date. The Company and the incentive objects of reserved grant have not experienced any circumstances where rights and interests cannot be granted, and the grant conditions stipulated in the Company's incentive plan have been met. The Board of Supervisors verified the list of incentive objects granted on the grant date and issued verification opinions. Therefore, the grant date of the first grant of restricted stocks is November 16,2022, and the fair value of the granted restricted stocks is determined according to the Black Scholes model: RMB 20.08/share for the first phase and RMB 20.61/share for the second phase. The grant date of the reserved restricted stocks is June 21,2023, and the fair value of the granted restricted stocks is determined according to the Black Scholes model: RMB 25.50/share for the first phase and RMB 25.87/share for the second phase. ZKTeco 2023 Half Year Report 214 Item Fair value per share Number of shares The amount of share-based payment generated this time Amortization total month Amortization Month as of June 30,2023 Recognized Amount of Capital Reserve as of June 30,2023 November 16,2022 20.081,726,335.00 25,117,309.37127.515,718,237.86 20.611,726,335.00 24,464,626.96247.57,680,766.12 June 21, 2023 25.50136,518.003,307,148.55120.3491,865.24 25.87136,518.003,355,134.63240.3446,599.09 Total 3,725,706.0056,244,219.51 - - 23,537,468.31 In summary, the total amount of share-based payments that the Company shall recognize is RMB 56,244,219.51. As of June 30, 2023, the cumulative amount included in share-based payments is RMB 23,537,468.31. 3. Cash settled share-based payments □ Applicable Not applicable 4. Modification and termination of share-based payment According to the authorization of the second extraordinary general meeting of shareholders in 2022, the Company held the Third Session of the Third Board Meeting on June 21,2023, and deliberated and approved the "Proposal on Adjusting the Granting Price and Quantity of 2022 Restricted Stock Incentive Plan", "Proposal on Cancelling Some Granted but Not Affiliated Restricted Stocks", and "Proposal on Granting Reserved Restricted Stocks to the Incentive Objects of 2022 Restricted Stock Incentive Plan". Considering that the Company has announced the implementation of the 2022 annual equity distribution, corresponding adjustments have been made to the grant price and number of restricted stocks in the 2022 restricted stock incentive plan. The initial and reserved grant prices have been adjusted from RMB 18.70 per share to RMB 14.12 per share, and the number of restricted stocks granted for the first time has been adjusted from 2.6559 million shares to 3.45267 million shares. The number of reserved restricted stocks that are granted has been adjusted from 210,028 shares to 273,036 shares. At the same time, the reserved grant conditions stipulated in the 2022 restricted stock incentive plan of the Company have been met. The Board of Directors has agreed to determine June 21,2023 as the reserved grant date, and has agreed to grant 273,036 restricted stocks to 46 incentive objects who meet the grant conditions. The reserved grant date for the incentive plan has been determined to be June 21,2023, with an adjusted fair value of RMB 25.50 per share for the first period and RMB 25.87 per share for the second period. Considering that ① the incentive object Yang Xianfeng was elected as a supervisor of the Company on April 7,2023, and according to relevant regulations, the supervisor cannot be the incentive object, a total of 7,020 Class II restricted stocks that have been granted but have not yet been affiliated shall not be attributed and shall be invalidated by the Company; considering that ② among the incentive objects,16 objects do not meet the incentive qualifications due to their resignation, the corresponding 94,380 shares of Class II restricted stock that have been granted but have not yet been affiliated shall not be attributed and shall be invalidated by the Company. A total of 101,400 shares that have been invalidated and granted but have not yet been affiliated as mentioned above shall be invalidated by the Company and will not be affiliated. (Note: The number of invalidated shares as mentioned above is the number of shares adjusted according to the Company's 2022 equity distribution plan.) ZKTeco 2023 Half Year Report 215 5. Others None XIV. Commitment and Contingency 1. Significant commitments Significant commitments on the balance sheet date As of June 30,2023, the Company has no significant commitments to be disclosed. 2. Contingencies (1) Significant contingencies on the balance sheet date 1. ZKTeco filed a lawsuit against Zhongan Intelligent Control, Liu Yuntian, Yan Pingjin, Zhang Peng, and Wang Gen regarding a loan contract dispute On July 31,2019, the Company filed a lawsuit against Shenzhen Zhongan Intelligent Control Technology Co., Ltd. (hereafter referred to as "Zhongan Intelligent Control"), Liu Yuntian, Yan Pingjin, Zhang Peng, and Wang Gen in the Third People's Court of Dongguan City, Guangdong Province regarding a loan contract dispute, requesting judgment that Zhongan Intelligent Control repay the loan of RMB 7,757,380.00 and pay interest of RMB 262,560.75 (calculated from April 1,2019 at an annual interest rate of 8.70% and temporarily recorded until July 31,2019); request judgment that Liu Yuntian, Yan Pingjin, Zhang Peng, and Wang Gen bear joint and several payment responsibilities for the loan and interest; request that Zhongan Intelligent Control, Liu Yuntian, Yan Pingjin, Zhang Peng, and Wang Gen pay an attorney fee of RMB 240,000.00, a guarantee fee of RMB 8,200.00, and all legal costs in this case in the judgment. The cause of action was in December 2017. Zhongan Intelligent Control borrowed RMB 7,000,000.00 from the Company for business development reasons, with a repayment deadline of May 9,2018. Afterwards, Zhongan Intelligent Control was unable to repay the aforementioned loan, and after negotiation, the repayment date was changed to January 10,2019. In October 2018, due to a shortage of working capital, Zhongan Intelligent Control proposed to advance the mold opening fee of RMB 757,380.00 to the Company, and the Company once again provided a loan of RMB 757,380.00 to Zhongan Intelligent Control. In April 2019, the Company signed a supplementary agreement with Zhongan Intelligent Control, stipulating that the loan and interest would be repaid on a monthly basis starting from April 2019. Liu Yuntian, Yan Pingjin, Zhang Peng, and Wang Gen would bear unlimited joint and several guarantee liability. After the contract was signed, Zhongan Intelligent Control did not repay on time. The case has been accepted by the Third People's Court of Dongguan City, Guangdong Province. The case number is (2019) Y 1973 MCNo.12578. On October 31,2020, Zhongan Intelligent Control was sentenced to repay the loan of RMB 7,757,380.00 and interest (with RMB 7,757,380.00 as the principal, calculated at an annual interest rate of 8.70% from April 1,2019 to the actual payment date). Liu Yuntian, Yan Pingjin, Zhang Peng, and Wang Gen bear joint and several liability for the repayment of the above-mentioned debt scope. At the same time, Zhongan Intelligent Control shall bear the actual attorney fee of RMB 240,000.00 and preservation and guarantee service fees of RMB 8,200.00 in this lawsuit. On October 29,2020, the People's Court of Longgang District, Shenzhen City, Guangdong Province accepted the bankruptcy liquidation case of Zhongan Intelligent Control, with case number (2020) Y 0307 PSNo.33, and designated the bankruptcy administrator for the case. According to the (2020) Y 0307 PNo.30-1 "Civil Ruling" issued by the People's Court of Longgang District, Shenzhen on May 14,2021, it was determined to confirm the creditor's rights recorded in the "Debt Statement of Shenzhen Zhongan Intelligent Control Technology Co., Ltd.", and the amount of the Company's ordinary creditor's rights was RMB 9,150,710.78. On July ZKTeco 2023 Half Year Report 216 2,2021, the People's Court of Longgang District, Shenzhen City issued the (2020) Y 0307 PNo.30-4 "Civil Ruling", declaring Zhongan Intelligent Control's bankrupcy; on July 14,2021, the People's Court of Longgang District, Shenzhen City issued the (2020) Y 0307 P No.30-5 "Civil Ruling", approving the bankruptcy property distribution plan of Zhongan Intelligent Control. After the completion of the bankruptcy property distribution plan, the assets under the name of Zhongan Intelligent Control were insufficient to repay all of its debts, and the Company did not receive repayment. On July 20,2021, the People's Court of Longgang District, Shenzhen City, Guangdong Province issued the (2020) Y 0307 PNo. 30-8 "Civil Ruling", ruling to terminate the bankruptcy proceedings of Zhongan Intelligent Control. As of the date of approval of the financial report, Zhongan Intelligent Control has not yet been deregistered. 2. ZKTeco filed a lawsuit against Zhikongtaike, Liu Yuntian, Yan Pingjin, Zhang Peng, and Wang Gen in the case regarding equity transfer dispute On July 31,2019, the Company filed a lawsuit against Shenzhen Zhikongtaike Biometric Technology Co., Ltd. (hereinafter referred to as "Zhikongtaike"), Liu Yuntian, Yan Pingjin, Zhang Peng, and Wang Gen in a dispute over equity transfer with the Third People's Court of Dongguan City, Guangdong Province, requesting that Zhikongtaike pay the remaining equity transfer fee of RMB 2,500,000.00 and interest of RMB 84,616.44 (calculated from April 1,2019 at an annual interest rate of 8.70% and temporarily recorded until July 31,2019), as well as liquidated damages of RMB 1,020,000.00 for non fulfillment of the agreement; request a judgment that Liu Yuntian, Yan Pingjin, Zhang Peng, and Wang Gen bear joint and several payment responsibilities for the loan, interest, and liquidated damages; request the judgment that Zhikongtaike, Liu Yuntian, Yan Pingjin, Zhang Peng, and Wang Gen pay the attorney fee of RMB 110,000.00, the guarantee fee of RMB 3,600.00, and all legal costs in this case in the judgment. The cause of action was in August 2016, when the Company and Zhikongtaike jointly invested to establish Shenzhen Zhongan Intelligent Control Technology Co., Ltd. with a registered capital of RMB 10,000,000.00, the Company contributed RMB 5,100,000.00, holding 51.00% of the shares, and Zhikongtaike contributed RMB 4,900,000.00, holding 49.00% of the shares. After the establishment of Shenzhen Zhongan Intelligent Control Technology Co., Ltd., due to conflicts between the Company's and Zhongan Intelligent Control's business philosophy, after mutual consultation, the Company withdrew from Shenzhen Zhongan Intelligent Control Technology Co., Ltd. and transferred its equity to Zhikongtaike. On April 22,2019, both parties signed an "Equity Transfer Agreement" and a "Guarantee Contract" regarding the transfer of equity. It was agreed that the Company would transfer its 51% equity to Zhikongtaike for RMB 5,100,000.00, and Zhikongtaike would pay RMB 2,600,000.00 in advance. The remaining RMB 2,500,000.00 would be paid and interest calculated over 21 months, and Liu Yuntian, Yan Pingjin, Zhang Peng, and Wang Gen would bear unlimited joint and several guarantee liability for the payable amount. After the contract was signed, both parties completed the equity transfer procedures as agreed, but Zhikongtaike did not make the remaining equity transfer payment as agreed. The case has been accepted by the Third People's Court of Dongguan City, Guangdong Province, with case number (2019) Y 1973 MCNo.12579. On October 13,2020, the court ruled that Zhikongtaike should pay the Company an equity transfer fee of RMB 2,500,000.00 and interest, as well as liquidated damages of RMB 1,020,000. Liu Yuntian, Yan Pingjin, Zhang Peng, and Wang Gen shall be jointly and severally liable for the above-mentioned debt scope. At the same time, Zhikongtaike, Liu Yuntian, Yan Pingjin, Zhang Peng, and Wang Gen shall bear the attorney fee of RMB 110,000.00 in this lawsuit. On January 8,2021, the Company submitted an application for compulsory execution to the Third People's Court of Dongguan City, requesting the enforcement of the (2019) Y 1973 MCNo.12579 judgment against Zhikongtaike, Liu Yuntian, Yan Pingjin, Zhang Peng, and Wang Gen. They shall repay the loan of RMB 2,500,000.00 and interest to the Company (with RMB 2,500,000.00 as the principal, calculated at an annual interest rate of 8.70% from April 1,2019 to the actual repayment date), and pay liquidated damages of RMB 1,020,000.00, the attorney fee of RMB 110,000.00, and the guarantee fee of RMB 3,600.00 to the Company, and double the debt interest during the delayed performance period. On June 24,2021, the Company reached an "Implementation Settlement Agreement" (hereinafter referred to as the "Original Agreement") with Liu Yuntian, Yan Pingjin, Zhang Peng, and Wang Gen, agreeing that Liu Yuntian, Yan Pingjin, Zhang Peng, and Wang Gen shall bear joint and several liability for the equity transfer payment of RMB 2,500,000.00 and interest (with RMB ZKTeco 2023 Half Year Report 217 2,500,000.00 as the principal, and calculated at an annual interest rate of 8.7% from April 1,2019) and liquidated damages of RMB 1,020,000 for Zhikongtaike to the Company within one year from the date of signing the settlement agreement. At the same time, they shall pay the attorney fee of RMB 110,000.00 and the guarantee fee of RMB 3,600.00. The Company submitted an Implementation Settlement Agreement for compulsory measures against Liu Yuntian, Yan Pingjin, Zhang Peng, and Wang Gen to the Third People's Court of Dongguan City, Guangdong Province. On July 21,2021, the Company applied to withdraw the enforcement application against Liu Yuntian, Yan Pingjin, Zhang Peng, and Wang Gen. On the same day, the Third People's Court of Dongguan City, Guangdong Province issued an enforcement notice (2021) Y 1973 ZNo.3006 to the Company, informing that the Company had not yet discovered any other property available for enforcement in Zhikongtaike, Liu Yuntian, Yan Pingjin, Zhang Peng, and Wang Gen. The court requested the Company to provide it with property clues available for enforcement within three days after receiving the enforcement notice, and if it failed to provide them within the time limit and did not provide other opinions in writing, the execution procedure would be terminated. On September 9,2021, the Company received the (2021) Y 1973 ZNo.3006-1 document of ruling issued by the Third People's Court of Dongguan City, Guangdong Province on July 22,2021, ruling to terminate this execution procedure. On June 24,2022, the Company signed a settlement extension agreement with Liu Yuntian, Yan Pingjin, Zhang Peng, and Wang Gen, agreeing to extend the payment term by 6 months on the basis of the Original Agreement. Before December 24,2022, Liu Yuntian, Yan Pingjin, Zhang Peng, and Wang Gen shall pay all the payable amounts to the Company. The debt interest during the delayed performance period shall be subject to the Original Agreement. If Liu Yuntian, Yan Pingjin, Zhang Peng, and Wang Gen fail to fulfill their payment obligations on time, the Company has the right to apply to the court to resume compulsory enforcement measures against them. On December 24,2022, the Company signed a settlement extension agreement with Liu Yuntian, Yan Pingjin, Zhang Peng, and Wang Gen, agreeing to extend the payment term by 1 year on the basis of the Original Agreement. Before December 24,2023, Liu Yuntian, Yan Pingjin, Zhang Peng, and Wang Gen shall pay all the payable amounts to the Company. The debt interest during the delayed performance period shall be subject to the Original Agreement. If Liu Yuntian, Yan Pingjin, Zhang Peng, and Wang Gen fail to fulfill their payment obligations on time, the Company has the right to apply to the court to resume compulsory enforcement measures against them. 3. Case of unfair competition of Zokon Industry On April 24,2019, the Company filed a lawsuit with the Shenzhen Intermediate People's Court against Shenzhen Zokon Industry Development Co., Ltd. (hereinafter referred to as "Zokon Industry Development") for unfair competition disputes, requesting that Zokon Industry Development immediately stop the false propaganda and commercial defamation that affect the Company, immediately delete the articles and promotional materials that contain false propaganda and commercial defamation, and immediately stop unfair competition such as infringing the Company's logo and trade name, plundering the Company's goodwill through malicious trademark infringement litigation, and seizing the Company's competitive advantage; requesting the court to order Zokon Industry Development to apologize to the Company and publish a statement on its official website, well-known websites, and the front page of newspapers for a consecutive month to eliminate the negative impact caused; requesting the order to compensate the Company for economic losses and reasonable expenses paid by the Company to stop infringement, totaling RMB 8,000,000.00; requesting to order Zokon Industry Development to bear all the legal costs of the case. The cause of action was that in order to plunder the goodwill and product reputation accumulated by the Company's years of operation in the "ZK" brand, Zokon Industry Development carried out false propaganda, commercial slander, intentional confusion, malicious trademark infringement litigation to plunder the Company's goodwill, occupied the Company's competitive advantage and conducted other unfair competition behaviors, which seriously violated the Company's legitimate rights and interests. The case was accepted by Shenzhen Intermediate People's Court, Guangdong Province on May 27,2019, with case number of (2019) Y 03 MCNo.1932. The judgment was made on December 29,2020, ruling Shenzhen Zokon Industry Development Co., Ltd. to immediately stop the unfair competition behavior of false propaganda from the effective date of the judgment, immediately stop ZKTeco 2023 Half Year Report 218 publishing such claims as "Currently, the ZK brand has been the preferred brand for customers in the field of office equipment attendance and access control for many years, with high influence and market appeal, and high visibility"; "The first brand of Chinese patrol machines"; "ZK has become the largest production base for patrol products and the largest OEM/ODM supplier in China"; "The leader of the Internet of Things (IoT)"; "The world's leading personnel security management and asset equipment management solution provider"; "The first to build a domestic leading mobile terminal production line"; "Is establishing a leading position in Chinese Mainland"; "The leading level in China"; "Attendance access professional manufacturer * 15 years' brand * trustworthy"; immediately stop unfair competition behaviors of commercial slander against ZKTECOCO., LTD. and Shenzhen ZKTeco Biometric Identification Technology Co., Ltd. as of the effective date of the judgment, that is, immediately delete the article "True or False "ZKteco""; immediately stop the unfair competition behaviors of using F7 plus and F18 commodity names on fingerprint attendance access controls that have certain influences on ZKTECOCO., LTD. and Shenzhen ZKTeco Biometric Identification Technology Co., Ltd. from the effective date of the judgment; compensate ZKTECOCO., LTD. and Shenzhen ZKTeco Biometric Identification Technology Co., Ltd. for the economic losses and reasonable rights protection expenses of RMB 2 million within ten days from the effective date of the judgment; publish a statement on the front page of its official website (. com) for one month within ten days from the effective date of the judgment to eliminate the adverse impact of its unfair competition on ZKTECOCO., LTD. and Shenzhen ZKTeco Biometric Identification Technology Co., Ltd. (the statement must be submitted to the Shenzhen Intermediate People's Court of Guangdong Province for review within five days after the effective date of the judgment). Where Shenzhen Zokon Industry Development Co., Ltd. fails to perform within the time limit, the Shenzhen Intermediate People's Court of Guangdong Province will publish the main content of this judgment in the Nanfang Daily, and the expenses incurred will be borne by Shenzhen Zokon Industry Development Co., Ltd.; other litigation requests from ZKTECOCO., LTD. and Shenzhen ZKTeco Biometric Identification Technology Co., Ltd. will be rejected. ZKTECOCO., LTD. and Shenzhen ZKTeco Biometric Identification Technology Co., Ltd. shall bear a case acceptance fee of RMB 30,000.00, while Shenzhen Zokon Industry Development Co., Ltd. shall bear a case acceptance fee of RMB 37,800.00. On January 28,2021, Shenzhen Zokon Industry Development Co., Ltd. filed an appeal to the Guangdong Higher People's Court, requesting the revocation of the judgments (I), (II), (III), (IV), and (V) of the civil judgment (2019) Y 03 MCNo.1932 issued by the Shenzhen Intermediate People's Court, Guangdong Province in accordance with the law, and the judgment (VI) of the civil judgment (2019) Y 03 MCNo.1932 shall be revised to reject all litigation requests from ZKTECOCO., LTD. and Shenzhen ZKTeco Biometric Identification Technology Co., Ltd., and ZKTECOCO., LTD. and Shenzhen ZKTeco Biometric Identification Technology Co., Ltd. shall jointly bear the first instance case acceptance fee and the second instance appeal acceptance fee. The Guangdong Higher People's Court has accepted this case, with case number (2021) YMZNo.1431. On June 30,2021, the Guangdong Higher People's Court issued a summons to the Company, notifying the Company that the case would be heard on July 14,2021. On September 5,2022, the Guangdong Higher People's Court issued a civil judgment (2021) YMZNo.1431, rejecting the appeal of Shenzhen Zokon Industry Development Co., Ltd. and upholding the original judgment. On November 3,2022, Shenzhen Zokon Industry Development Co., Ltd. filed a retrial with the Guangdong Higher People's Court, requesting the revocation of the civil judgment (2021) YMZNo.1431 made by the Guangdong Higher People's Court and the judgments (I), (III) and (V) of the civil judgment (2019) Y 03 MMCNo.1932 made by the Shenzhen Intermediate People's Court, Guangdong Province, while maintaining the judgments (II) and (VI); the judgment (IV) was legally revised as: Shenzhen Zokon Industry Development Co., Ltd. shall compensate Shenzhen ZKTeco Biometric Identification Technology Co., Ltd. and ZKTECOCO., LTD. for economic losses and reasonable rights protection expenses totaling RMB 200,000 within ten days from the effective date of this judgment. On November 10,2022, the Shenzhen Intermediate People's Court, Guangdong Province issued a case acceptance notice (2022) Y 03 ZNo.5902, which filed and enforced the Company's application for compulsory execution of the civil judgment (2019) Y 03 MCNo.1932 of Shenzhen Intermediate People's Court by Shenzhen Zokon Industry Development Co., Ltd. On February 15,2023, the Guangdong Higher People's Court issued a notice of appearance for civil application retrial case (2022) YMSNo.17262. ZKTeco 2023 Half Year Report 219 As of the date of approval of the financial report, this case is still under retrial and review by the Guangdong Higher People's Court, and the court has yet to make a decision on whether to proceed with a retrial. 4. Lease contract dispute with Guizhou Yiyun Big Data Service Co., Ltd. On April 23,2020, Guizhou Yiyun Big Data Service Co., Ltd., as the plaintiff, filed a lawsuit against Guizhou Zhongjiang Intelligent Technology Co., Ltd. in the People's Court of Guanshanhu District, Guiyang City, claiming to request the termination of the legal relationship between the two parties regarding the lease of the house, the return of the house, payment of rent of RMB 923,390.28 and overdue interest (interest request judgment until the full payment of the rent), and compensation for rent-free period losses of RMB 208,800.00. On May 26,2020, Guizhou Yiyun Big Data Service Co., Ltd. filed a lawsuit with the People's Court of Guanshanhu District, Guiyang City, adding He Siting and Shenzhen Zhongjiang Intelligent Technology Co., Ltd. as co-defendants, and claiming to request that the defendants bear joint and several liability for rent, overdue interest, and compensation for losses during the rent-free period. On July 31,2020, Guizhou Zhongjiang Intelligent Technology Co., Ltd. filed a counterclaim with the People's Court of Guanshanhu District, Guiyang City, requesting Guizhou Yiyun Big Data Service Co., Ltd. to compensate for operating losses of RMB 972,275.00 and bear legal costs. On December 23,2021, the People's Court of Guanshanhu District, Guiyang City, Guizhou Province issued a civil judgment (2020) Q 0115 MCNo.2786, ruling that: I. Guizhou Zhongjiang Intelligent Technology Co., Ltd. shall vacate the site (house) (including shared area) with a construction area of 689m2 located at No.1,8F, Building B, Morgan Center, Lincheng West Road, Guanshanhu District, Guiyang City within ten days after the judgment takes effect and return it to Guizhou Yiyun Big Data Service Co., Ltd.; II. Guizhou Zhongjiang Intelligent Technology Co., Ltd. shall pay a total rent of RMB 501,307.00 and a penalty for overdue payment to Guizhou Yiyun Big Data Service Co., Ltd. within ten days after the judgment takes effect (based on the unpaid rent and calculated at an annual interest rate of 3.85%, from April 23,2020 to the date when the rent is fully paid); III. Guizhou Zhongjiang Intelligent Technology Co., Ltd. shall pay a rent free period loss of RMB 100,000.00 to Guizhou Yiyun Big Data Service Co., Ltd. within ten days after the judgment takes effect; IV. He Siting, the shareholder of Guizhou Zhongjiang Intelligent Technology Co., Ltd., and Shenzhen Zhongjiang Intelligent Technology Co., Ltd. shall bear joint and several liability for the payment obligations determined in the judgments (II) and (III); V. Reject other litigation requests from Guizhou Yiyun Big Data Service Co., Ltd.; VI. Reject all counterclaim requests from Guizhou Zhongjiang Intelligent Technology Co., Ltd. On December 31,2021, the subsidiary of the Company, Shenzhen Zhongjiang Intelligent Technology Co., Ltd., filed an appeal to the Intermediate People's Court of Guiyang City, request to maintain the judgments (I), (II), (III), and (VI) of the civil judgment (2020) Q 0115 MCNo.2786 issued by the People's Court of Guanshanhu District, Guiyang City; revoke the judgments (IV) and (V) of the civil judgment (2020) Q 0115 MCNo.2786 made by the People's Court of Guanshanhu District, Guiyang City; reject other claims of the appellee. On January 5,2022, Guizhou Zhongjiang Intelligent Technology Co., Ltd. filed an appeal against the first instance judgment to the Intermediate People's Court of Guiyang City. On January 10,2022, Guizhou Yiyun Big Data Service Co., Ltd. filed an appeal against the first instance judgment. On March 29,2022, the Intermediate People's Court of Guiyang City, Guizhou Province issued a notice to Guizhou Zhongjiang Intelligent Technology Co., Ltd. for the trial to be held on April 18,2022. On August 9,2022, the Intermediate People's Court of Guiyang City issued a civil judgment (2022) Q 01 MZNo.2230, rejecting the appeal and upholding the original judgment. On December 2,2022, the People's Court of Guanshanhu District, Guiyang City issued an enforcement notice (2022) Q 0115 Z No.9258 and a report property order (2022) Q 0115 ZNo.9258, ordering the subsidiary of the Company, Shenzhen Zhongjiang Intelligent Technology Co., Ltd., He Siting, and Guizhou Zhongjiang Intelligent Technology Co., Ltd., to immediately fulfill the obligations determined in the civil judgment (2022) Q 01 MZNo.2230, and ordering them to report truthfully the current property situation and such situation one year prior to the date of receiving the enforcement notice within five days after receiving the report property order. Shenzhen Zhongjiang has not yet made the relevant payment. ZKTeco 2023 Half Year Report 220 5. Disputes filed by Zokon Industry Development over infringement of trademark rights and unfair competition against the Company and Shenzhen Xinjiacheng Intelligent Technology Co., Ltd. On April 22,2021, Shenzhen Zokon Industry Development Co., Ltd. (hereinafter referred to as "Zokon Industry Development") sued the Company and Shenzhen Xinjiacheng Intelligent Technology Co., Ltd. to the Shenzhen Intermediate People's Court. The main claims of the lawsuit are as follows: (1) Request to order the Company and Shenzhen Xinjiacheng Intelligent Technology Co., Ltd. to immediately stop trademark infringement and unfair competition behaviors, and the Company and/or Shenzhen Xinjiacheng Intelligent Technology Co., Ltd. to immediately stop using the words "ZKAttendance Machine" or the identification of or containing "ZK" on relevant Internet platforms; (2) Request to order the Company to immediately stop the unfair competition behaviors of malicious trademark application and objection, that is, immediately stop the registration of "attendance machine, office punch, fingerprint checker and facial recognition equipment" products with "ZK" or "ZOKOTECH" logo or similar logo, and withdraw the objection application against the trademark "No.40407655" and "ZOKOTECH" on the products of "fingerprint checkers, facial recognition devices, and computerized attendance clocks with fingerprint recognition" announced in the preliminary review notice; (3) Request a ruling for the Company to publish a statement on prominent positions of its official website homepage and the homepage of Tencent, Sina, and Nanfang Metropolis Daily for a consecutive week (including the ownership of the "ZK" trademark to the plaintiff and the defendant's commitment to stop infringement), in order to eliminate any adverse effects on the plaintiff; (4) Request to order the Company to compensate Zokon Industry for economic losses and reasonable expenses incurred by Zokon Industry to stop infringement, totaling RMB 5 million. Shenzhen Xinjiacheng Intelligent Technology Co., Ltd. shall bear joint and several liability for the Company's aforementioned debts within the range of RMB 300,000;(5) Request to order the Company to bear all the legal costs of this case. On May 20,2021, Shenzhen Intermediate People's Court issued the "Notice of Advance Mediation" (2021) Y 03 SQTNo.6668. On July 29,2021, the Shenzhen Intermediate People's Court filed a case for trial, with the case number (2021) Y 03 MC 5383. On September 3,2021, the Shenzhen Intermediate People's Court issued a "Notice of Appearance", "Evidence Proof Notice", and "Notice" to the Company. On November 22,2021, the Shenzhen Intermediate People's Court, Guangdong Province issued a hearing summons to the Company, notifying the Company that the case would be heard on December 21,2021. On September 15,2022, the Shenzhen Intermediate People's Court, Guangdong Province issued a civil judgment (2021) YMC No.5383, ruling that: (1) The Company shall immediately stop using the "ZKAttendance Machine" in search keywords, page titles and contents of Baidu,360, Sogou, WeChat official account, and stop using "ZK" in search keywords, brand areas, product names and details pages of Suning.com and JD platform; the Company and Shenzhen Xinjiacheng Intelligent Technology Co., Ltd. shall immediately stop using "ZK" in the search keywords, product names, and details pages of the 1688 platform, and immediately stop using "ZK" in the search keywords and product names on Taobao and Tmall platforms; Shenzhen Xinjiacheng Intelligent Technology Co., Ltd. shall immediately stop using "ZK" on WeChat official account; (2) The Company shall, within ten days from the date of legal effect of the judgment, compensate Shenzhen Zokon Industry Development Co., Ltd. for economic losses and pay reasonable rights protection expenses of RMB 500,000; (3) The Company and Shenzhen Xinjiacheng Intelligent Technology Co., Ltd. shall, within ten days from the date of legal effect of the judgment, compensate Shenzhen Zokon Industry Development Co., Ltd. for economic losses and pay reasonable rights protection expenses of RMB 100,000; (4) The defendant ZKTECOCO., LTD. shall publish a statement on the homepage of its website () for a consecutive week within ten days from the effective date of the judgment, in order to eliminate the adverse effects caused by its trademark infringement on Shenzhen Zokon Industry Development Co., Ltd. If it fails to perform within the time limit, the court will publish the main content of this judgment in the Nanfang Metropolis Daily, and the expenses incurred shall be borne by the defendant ZKTECOCO., LTD.; (5) Reject other litigation requests from Shenzhen Zokon Industry Development Co., Ltd. On September 15,2022, the Company filed an appeal to the Guangdong Higher People's Court, requesting the revocation of the (2021) Y 03 MCNo.5383 civil judgment issued by the Shenzhen Intermediate People's Court, and the modification of the judgment to reject all litigation claims of Shenzhen Zokon Industry Development Co., Ltd. in the first instance. On March 30,2023, the Guangdong Higher People's Court issued a notice of case acceptance (2022) YMZNo.4634. The Guangdong Provincial Higher People's Court held a trial on April 11,2023. ZKTeco 2023 Half Year Report 221 As of the date of approval of the financial report, the Guangdong Higher People's Court has not yet made a second instance judgment. 6. Patent dispute with Hanwang Technology Co., Ltd. On January 20,2022, the Company received the "Notice of Responding to Civil Cases" and "Civil Complaints" and other relevant litigation materials from the Beijing Intellectual Property Court concerning the litigation cases numbered (2021) J 73 MCNo.1673-1679 and No.1616, and Hanwang Technology Co., Ltd. (hereinafter referred to as Hanwang Technology) requested that: 1. The Company and Beijing Jingdong Century Information Technology Co., Ltd. immediately stop infringing the patent rights of Hanwang Technology, that is, immediately stop producing and selling infringing products (8 models including IFACE102/302/702/702-P); 2. The Company and Beijing Jingdong Century Information Technology Co., Ltd. jointly and severally compensate Hanwang Technology for economic losses of RMB 99,987,200.00 in total, reasonable expenses for notarization services of RMB 1,337,108.00, and purchase costs for infringing products of RMB 9,676.00; 3. The Company and Beijing Jingdong Century Information Technology Co., Ltd. shall bear the legal costs of this case. On January 20,2022, the subsidiary of the Company, XIAMENZKTECOCO., LTD. (hereinafter referred to as XIAMEN ZKTECO), received "Notice of Responding to Civil Cases" and "Civil Complaints" and other relevant litigation materials from the Beijing Intellectual Property Court concerning the litigation cases numbered (2021) J 73 MCNo.1617, and Hanwang Technology requests that: 1. XIAMENZKTECO and Beijing Jingdong Century Information Technology Co., Ltd. immediately stop infringing on patent rights of Hanwang Technology Co., Ltd. (hereinafter referred to as Hanwang Technology), that is, immediately stop producing and selling infringing products (UF100PLUS model); 2. XIAMENZKTECO and Beijing Jingdong Century Information Technology Co., Ltd. jointly and severally compensate Hanwang Technology for economic losses of RMB 9,120,000.00 in total, reasonable expenses for notarization services of RMB 31,555.00, and purchase costs for infringing products of RMB 456.00; 3. XIAMEN ZKTECO and Beijing Jingdong Century Information Technology Co., Ltd. shall bear the legal costs of this case. The Company conducted a detailed comparison and analysis of the patents and related products involved in the Hanwang Technology Announcement. Based on the legal opinions provided by the lawyer hired by the Company, the management believes that the possibility of the Company being convicted of infringement and being liable for infringement compensation is relatively low. According to relevant provisions of the Accounting Standards for Enterprises, there is no need to accrue estimated liabilities. On August 3,2022, the Beijing Intellectual Property Court issued a hearing summons to the Company, informing the Company that the case would be heard on August 16,2022. During the hearing, Hanwang Technology submitted a written application to the Beijing Intellectual Property Court on August 16,2022 to withdraw the lawsuit against the Company and Beijing Jingdong Century Information Technology Co., Ltd. with case number of (2021) J 73 MCNo.1674. On August 17,2022, the Beijing Intellectual Property Court issued a civil ruling (2021) J 73 MCNo.1674, allowing Hanwang Technology to withdraw its lawsuit against the Company and Beijing Jingdong Century Information Technology Co., Ltd., with the amount involved of RMB 3,751,741.00. On June 30,2023, the Company received 8 civil rulings issued by the Beijing Intellectual Property Court, which held that:, "The patents involved in the case have been declared invalid by the State National Intellectual Property Administration according to law, and the effectiveness of the patent rights involved in the case has been in an uncertain state, that is, whether Hanwang (referring to Hanwang Technology) enjoys the rights of the patents involved in the case is uncertain, and whether it has a direct interest in the case is also uncertain, which does not meet the prosecution conditions specified in Article 122 of the Civil Procedure Law of the People's Republic of China". Based on this, a ruling was made to dismiss the prosecutions of (2021) J 73 MCNo.1616, (2021) J 73 MCNo. 1617, (2021) J 73 MCNo.1673, (2021) J 73 MCNo.1675, (2021) J 73 MCNo.1676, (2021) J 73 MCNo.1677, (2021) J 73 MCNo. 1678, and (2021) J 73 MCNo.1679 cases of Hanwang Technology. As of the date of approval for the financial report, the Company has not received any notice of appeal from Hanwang Technology. 7. Dispute over the Invalidation of the Trademark "ZKTECH" No.36806148 ZKTeco 2023 Half Year Report 222 On January 17,2022, the State National Intellectual Property Administration issued the "Award of the Request for Invalidation of the "ZKTECH" Trademark No.36806148 "(SPZi [2022] No.0000015424), ruling that the trademark No.36806148 would be declared invalid on office punch machines and attendance machines, and would be maintained on other goods. On February 24,2022, the Company proposed to Beijing Municipal Intellectual Property Office to revoke the "Award of the Request for Invalidation of the "ZKTECH" Trademark No.36806148 "(SPZi [2022] No.0000015424) issued by the State National Intellectual Property Administration, with the State National Intellectual Property Administration as the plaintiff and the third party as Shenzhen Zokon Industry Development Co., Ltd. On April 15,2022, the Beijing Intellectual Property Court issued the Notice of Acceptance of Administrative Cases (2022) J 73 XCNo.6449 to accept the case. On June 26,2023, the Beijing Intellectual Property Court issued an administrative judgment rejecting the Company's litigation request. The Company is not satisfied with the verdict and filed an appeal on July 18,2023. Currently, it has not received the case acceptance notice. (2) The Company shall also provide a description if there are no important contingencies that need to be disclosed There are no significant contingencies that need to be disclosed by the Company. 3. Others None XV. Events after the Balance Sheet Date 1. Important non adjustment matters Unit: RMB Item Content Number of impacts on financial position and operating results The reason for the inability to estimate the number of impacts Important external investment (1) On June 28,2023, our subsidiary ZKTECOCO.,LIMITED increased the capital of the sub-subsidiary of the Company ZKTECOPERUSOCIEDAD ANONIMACERRADA by USD 220,000 through profit reinvestment. The increased capital was paid on July 3,2023. After the capital increase, ZKTECO CO., LIMITED changed its shareholding in ZKTECOPERUSOCIEDAD ANONIMACERRADA from 99.9% to 99.96%, and ZKTECOInvestment Inc. changed its shareholding in ZKTECOPERUSOCIEDADANONIMA CERRADA from 0.1% to 0.04%. The capital increase procedures are still in progress. (2) Our subsidiary ZKTECOCO., LIMITED will subscribe for 2,445 newly issued shares of the sub-subsidiary of the Company ZKTECOEUROPESL with a capital increase of EUR 2,149.71 per share, totaling EUR 5,256,040.95. After the subscription is completed, ZKTECOCO., LIMITED will hold 80% of the equity of ZKTECOEUROPESL, and foreign shareholder FERNANDO 0.00 ZKTeco 2023 Half Year Report 223 DUCAYREAL will hold 20% of the equity. The capital increase procedures are still in progress. Equity transfer (1) Our subsidiary ZKTECOCO., LIMITED will acquire 17.07% of the shares (700 shares) held by the foreign shareholder FERNANDODUCAYREAL in the sub-subsidiary of the Company ZKTECOEUROPESL at a price of EUR 2,149.71 per share. After the acquisition is completed, ZKTECOCO., LIMITED will hold 68.07% of the equity in ZKTECOEUROPESL, while the foreign shareholder FERNANDODUCAYREAL will hold 31.93% of the equity. On August 10,2023, ZKTECOCO., LIMITED paid the subscription amount, and both parties have signed an Equity Transfer Agreement. The equity transfer procedures are still in progress. (2) On June 30,2023, our subsidiary ZKTECOCO.,LIMITED and the sub-subsidiary of the Company ZKTECOLATAM, S.ADEC.V. signed an agreement with the foreign shareholder SARAHí ZúIGARUIZ to acquire 49% of the shares (1,836,858 shares) of the sub-subsidiary of the Company ZK SOFTWAREDEMEXICO, S.A. DEC.V. held by the foreign shareholder at a price of MXN 1 per share. After the acquisition is completed, ZKTECOCO., LIMITED will hold 99% equity in ZKSOFTWAREDEMEXICO, S.A. DE C.V., and ZKTECOLATAM, S.ADEC.V. will hold 1% of the equity in ZK SOFTWAREDEMEXICO, S.A. DEC.V. The equity transfer procedures have not yet been completed. 0.00 2. Profit distribution 3. Description of other events after the balance sheet date On August 7,2023, Xiamen ZKTeco Cloud Valley Design and Development Co., Ltd. (hereinafter referred to as "XIAMEN ZKTECOCloud Valley"), a subsidiary of the Company's subsidiary, XIAMENZKTECOCloud Valley, received a "Registration Notice" issued by the Xiamen Municipal Market Supervision Bureau. XIAMENZKTECOCloud Valley has completed the deregistration procedures in accordance with relevant procedures. After the completion of the cancellation, XIAMENZKTECO Cloud Valley will no longer be included in the Company's consolidated financial statements. XVI. Other Important Events 1. Others 1. In August 2023, Dongguan Tangxia Sub-branch of Industrial Bank Co., Ltd. issued the "Comprehensive Credit Extension Plan for ZKTeco" to the Company, agreeing to grant the Company Group a credit of RMB 400 million (exposure of RMB 180 million), with a credit period of one year and a validity period of six months. Among them, a single entity credit of RMB 400 million (with an exposure of not more than RMB 150 million) was granted to the Company, and a single entity credit of RMB 150 million (with an exposure of not more than RMB 100 million) was granted to the wholly-owned subsidiary ZKTECO (GUANGDONG) CO., LTD. The credit and exposure use of the above two entities is based on the overall control of the Group's credit and exposure implementation line. It is agreed to grant the Company Group a credit line of RMB 400 million (exposure of RMB 180 million). Based on the current credit needs of the Company, after mutual consultation, the Group's credit line is controlled to be used within the credit line of RMB 280 million (exposure of RMB 180 million). 2. On August 22,2022, Dongguan Tangxia Sub-branch of Agricultural Bank of China Ltd. issued a "Credit Statement", granting the Company a credit line of RMB 280 million, with a validity period from August 15,2022 to August 15,2023. Among them, RMB 50 million is other exclusive credit lines, occupied by bank acceptance and guarantee deposits; RMB 50 million is a low risk credit line, and 100% deposit is required for low risk businesses; RMB 180 million is a general credit line used for handling bank acceptance bills, working capital loans, trade financing loans, domestic letters of credit, foreign letters of credit, domestic letters of guarantee, and ZKTeco 2023 Half Year Report 224 foreign letters of guarantee. Among them, RMB 80 million is used for credit, and the guarantee way of the other RMB 100 million is pending. The specific guarantee method for new credit under this line must be approved by Agricultural Bank of China. The specific use of credit shall be implemented in accordance with the management measures for individual business, and the loan interest rate shall be implemented in accordance with the relevant regulations of Agricultural Bank of China. The proportion of deposit for handling bank acceptance bills and letter of guarantee business shall not be less than 30%, with the bank acceptance bill handling fee being 0.025% of the total invoicing amount. The original credit line has expired, and the new credit line is currently being applied for credit approval. The new credit extension plan is subject to the approval results. 3. On April 17,2023, the Company signed a "Credit Line Agreement" numbered GED476790120230048 with Dongguan Branch of Bank of China Limited, granting the Company a bank acceptance bill limit of RMB 200 million, which is valid from the effective date of the Agreement to March 26,2024. 4. On May 19,2023, the Company approved the resolution of 2022 annual general meeting, deliberated and approved the "Proposal on Applying for Comprehensive Credit Line from Banks and Handling Bank Loans" formulated by the Company. In order to meet the potential funding needs of the Company's production, operation and business development, the Company and its controlling subsidiaries (including newly established controlling subsidiaries) plan to apply for a credit line of not more than RMB 2 billion in 2023 (including equivalent foreign currency, the same below) from commercial banks and other financial institutions, and plan to provide a total credit guarantee limit of not more than RMB 1 billion for the holding subsidiaries. The above credit extensions include credit, mortgage, guarantee, and margin. The credit line applied by the Company and its controlling subsidiaries to the bank in 2023 will ultimately be based on the actual credit line approved by the bank. The term of this authorization is from the date of approval at the 2022 annual general meeting to the time of the 2023 annual general meeting. On January 30,2023, XIAMENZKTECOCO., LTD. (hereinafter referred to as "XIAMENZKTECO"), a subsidiary of the Company, signed a "Credit Line Contract" numbered XYXXZEZi No.2023003 with Xiamen Branch of Industrial Bank Co., Ltd. The maximum principal amount of the credit line under this Contract is converted into RMB 40 million, and the specific types of credit line business include but are not limited to short-term working capital loans, medium-term working capital loans, working capital loans (technology innovation fund R&D loans), bank acceptance bills, non-financing letter of guarantee business, and bill pool financing business, which revolve within the limit. On January 30,2023, XIAMENZKTECO signed a "Technology Innovation Fund Syndicated Loan Contract" numbered XYXXZYTZi No.2023003 with Xiamen Branch of Industrial Bank Co., Ltd. (hereinafter referred to as the "lender", "lead bank", "agent bank") and Xiamen International Trust Co., Ltd. (hereinafter referred to as the "lender", "participating bank"). All lenders agree to provide XIAMENZKTECO with a loan limit of not more than RMB 8,500,000.00 in total principal. The participating bank and the lead bank, as lenders, shall undertake loans in a ratio of 5:95. The commitment amount of the participating bank shall not exceed RMB 425,000.00, and the commitment amount of the lead bank shall not exceed RMB 8,075,000.00. The Contract stipulates that the borrower shall use each fund withdrawn for the R&D investment of XIAMENZKTECO. The fixed interest rate of the loan is 3.60%, with Xiamen International Trust Co., Ltd. bearing 1.60% of the interest expense. The loan term is 3 years, with quarterly interest payments. The repayment term: repay RMB 425,000.00 on July 21,2023, RMB 425,000.00 on January 21,2024, RMB 425,000.00 on July 21,2024, RMB 425,000.00 on January 21,2025, RMB 425,000.00 on July 21,2025, RMB 425,000.00 on January 21,2026, and RMB 5,950,000.00 on January 29,2026. From January to June 2023, XIAMENZKTECOCO., LTD. actually borrowed RMB 3,700,000.00 (borrowed RMB 2,000,000.00 on April 11 and RMB 1,700,000.00 on June 12), and repaid RMB 185,000.00 on July 21,2023. 5. On June 7,2023, the Company signed a "Bank Credit" (Facility Letter No. CN11002483543-230412) with HSBCBank (China) Limited Shenzhen Branch to extend the "Bank Credit" (Facility Letter No. CN11002483543-220601) signed by both parties on July 18,2022. It is agreed that HSBCBank (China) Limited Shenzhen Branch shall provide the Company with an acceptance credit of up to RMB 100,000,000.00 for bank acceptance bills, as a guarantee, and the Company needs to provide a margin guarantee. 6. Due to the needs of strategic planning and business development, the Company plans to use its own capital of RMB 48 million as a limited partner to cooperate with Xingniu Fund to establish an ecological innovation fund. The investment direction is "in the field of computer vision, multi-dimensional perception smart terminals, scene interactive robots, scene cloud service software, AR digital ZKTeco 2023 Half Year Report 225 twins, digital identity cards and upstream and downstream of the other track industry chains". The target raising scale of the ecological innovation fund is RMB 120 million. The Company plans to contribute RMB 48 million with its own capital as a limited partner, with a subscription ratio of 40%. Xingniu Fund, as a general partner and executive partner, contributed no less than RMB 1 million. Xingniu Fund shall be responsible for raising the remaining capital from other qualified specific investors. On June 21,2023, the Company held the Third Session of the Third Board Meeting and the Third Session of the Third Supervisory Board Meeting, and deliberated and approved the "Proposal on Establishing Ecological Innovation Fund and Related Party Transactions through Cooperation with Professional Investment Institutions". It was agreed that the Company and related parties would invest in the establishment of an ecological innovation fund. The related director, Mr. Che Hongquan, has avoided voting, the independent director has expressed corresponding pre-approval opinions and independent opinions, and the sponsor has issued a non objection verification opinion. This proposal does not need to be submitted to the Company's Board of Shareholders for review. The Company, professional investment institutions, and related parties registered and established Xiamen Xingniu Yunyu Venture Capital Partnership Enterprise (Limited Partnership) for Ecological Innovation Fund on August 11,2023. Xingniu Fund is the executive partner with a unified social credit code of 91350211MACRR4FEIP. The investment amount is RMB 120 million, and the partner information and subscription amount are as follows: S/NPartner Name Partner Nature Subscribed Capital Contribution (RMB '0,000) Contribution Ratio 1 Hefei Xingniu Private Equity Fund Management Co., Ltd. General partner 100.000.83% 2 ZKTECOCO., LTD. Limited partner 4,800.0040.00% 3 Che Quanhong Limited partner 1,200.0010.00% 4 Huang Jian Limited partner 800.006.67% 5 Lian Hongxia Limited partner 120.001.00% 6 Gao Zhongyou Limited partner 1,500.0012.50% 7 He Xunpeng Limited partner 1,800.0015.00% 8 Liu Qingsong Limited partner 1,680.0014.00% Total 12,000.00100.00% XVII. Notes to Main Items in the Financial Statements of the Parent Company 1. Accounts receivable (1) Disclosure of accounts receivable classification Unit: RMB Category Ending Balance Beginning Balance Book balance Bad debt reserve Book value Book balance Bad debt reserve Book value Amount Proportion Amount Accrual proportion Amount Proportion Amount Accrual proportion Accounts receivable with individual provision for bad debts 3,285,44 1.45 0.56% 3,285,44 1.45 100.00% 0.00 3,224,67 1.15 0.54% 3,224,67 1.15 100.00% 0.00 Includ ZKTeco 2023 Half Year Report 226 ing: Accounts receivable with insignificant single amount and bad debt reserve withdrawn separately 3,285,44 1.45 0.56% 3,285,44 1.45 100.00% 3,224,67 1.15 0.54% 3,224,67 1.15 100.00% 0.00 Receivable with combined provision for bad debt reserve 581,811,285.15 99.44% 6,475,56 1.08 1.11% 575,335,724.07 590,426,593.17 99.46% 5,532,25 9.48 0.94% 584,894,333.69 Including: Related party portfolio 471,488,095.61 80.58% 471,488,095.61 492,232,071.11 82.92% 492,232,071.11 Other receivables with provision for bad debt reserves based on a combination of credit risk characteristics 110,323,189.54 18.86% 6,475,56 1.08 5.87% 103,847,628.46 98,194,5 22.06 16.54% 5,532,25 9.48 5.63% 92,662,2 62.58 Total 585,096,726.60 100.00% 9,761,00 2.53 1.67% 575,335,724.07 593,651,264.32 100.00% 8,756,93 0.63 1.48% 584,894,333.69 Bad debt reserve made individually: 3,285,441.45 Unit: RMB Name Ending Balance Book balance Bad debt reserve Accrual proportion Reasons for provision Shanghai Leqi Automation Technology Co., Ltd. 490,186.63490,186.63100.00% Expected non-recoverable Noble ITSolutions 423,880.24423,880.24100.00% Expected non-ZKTeco 2023 Half Year Report 227 Co., Ltd recoverable Zicom Electronic Securit 378,957.08378,957.08100.00% Expected non-recoverable Shenzhen Xuhui Information Technology Co., Ltd. 326,350.00326,350.00100.00% Expected non-recoverable Gansu Fourth Construction Group Co., Ltd. 224,676.00224,676.00100.00% Expected non-recoverable VENDEMMIA COMERCIO INTERNACIONAL LTDA 205,079.19205,079.19100.00% Expected non-recoverable Tianjin Eagle Eye Biotechnology Co., Ltd. 193,330.00193,330.00100.00% Expected non-recoverable Hainan Zhongkong IOTTechnology Co., Ltd. 176,179.00176,179.00100.00% Expected non-recoverable Wanqiao Information Technology Co.,Ltd. 165,900.00165,900.00100.00% Expected non-recoverable Baoneng Urban Development and Construction Group Co., Ltd. 155,292.00155,292.00100.00% Expected non-recoverable PONTORHJEIRELI - ME 102,083.28102,083.28100.00% Expected non-recoverable Guizhou Zhongjiang Intelligent Technology Co., Ltd. 77,919.4677,919.46100.00% Expected non-recoverable INTELLISMART TECHNOLOGYINC. 76,000.9676,000.96100.00% Expected non-recoverable Qianxinan Mengku Business Service Co., Ltd. 74,672.0074,672.00100.00% Expected non-recoverable Dongguan Yukong Security Technology Co., Ltd. 53,703.0053,703.00100.00% Expected non-recoverable KWKCELLPHONE ANDACCESSORIES 38,263.5738,263.57100.00% Expected non-recoverable Nanjing Xianji Technology Co., Ltd. 31,850.0031,850.00100.00% Expected non-recoverable Entropy Electronic Technology Yangzhou Co., Ltd. 31,122.6631,122.66100.00% Expected non-recoverable Iss Facility Services (Shanghai) Ltd. 28,152.0028,152.00100.00% Expected non-recoverable ELECTRONICA GHANALIMITED 23,374.3823,374.38100.00% Expected non-recoverable Others 8,470.008,470.00100.00% Expected non-recoverable Total 3,285,441.453,285,441.45 Bad debt reserve made by portfolio: 6,475,561.08 Unit: RMB Name Ending Balance ZKTeco 2023 Half Year Report 228 Book balance Bad debt reserve Accrual proportion Within 1 year (including 1 year) 105,113,392.855,255,669.655.00% 1-2 years (including 2 years) 3,296,195.21329,619.5210.00% 2-3 years (including 3 years) 1,461,899.39438,569.8230.00% Over 3 years 451,702.09451,702.09100.00% Total 110,323,189.546,475,561.08 Explanation of the basis for determining the portfolio: If the provision for bad debt reserve of accounts receivable is made based on the general model of expected credit losses, please disclose the relevant information of the bad debt reserve with reference to the disclosure methods of other accounts receivable: Applicable □ Not applicable Disclosure by aging Unit: RMB Aging Ending Balance Within 1 year (including 1 year) 576,643,246.10 1-2 years 3,493,696.60 2-3 years 2,587,913.32 Over 3 years 2,371,870.58 3-4 years 1,146,739.59 4-5 years 298,442.53 Over 5 years 926,688.46 Total 585,096,726.60 (2) Bad debt reserves withdrawn, recovered or reversed in the current period Provision for bad debt reserves in current period: Unit: RMB Category Beginning Balance Current period change amount Ending Balance Provision Return or reversal Redeem/redemption Others Accounts receivable with insignificant single amount and bad debt reserve withdrawn separately 3,224,671.1560,770.30 3,285,441.45 Accounts receivable with significant individual amounts and separate provision for bad debt ZKTeco 2023 Half Year Report 229 reserves Accounts receivable with consolidated provision for bad debt reserves according to the credit risk characteristics 5,532,259.48943,301.60 6,475,561.08 Total 8,756,930.631,004,071.90 9,761,002.53 (3) Accounts receivable from top five borrowers classified based on the ending balance Unit: RMB Company name Ending balance of accounts receivable Proportion in the total ending balance of accounts receivable Ending balance of bad debt reserve Customer 1183,994,681.8931.45% Customer 2162,810,655.3227.83% Customer 325,245,347.934.31% Customer 419,419,764.683.32% Customer 514,252,264.802.44% Total 405,722,714.6269.35% (4) Accounts receivable derecognized due to transfer of financial assets No accounts receivable derecognized due to transfer of financial assets in current period (5) The amount of assets and liabilities formed by transferring accounts receivable and continuing to be involved If there are no transferred accounts receivable at the end of the period and they continue to be involved, the amount of assets and liabilities formed by the continued involvement shall be listed. 2. Other receivables Unit: RMB Item Ending Balance Beginning Balance Interest receivable 156,947.22122,433.25 Dividends receivable 14,000,000.00 Other receivables 66,835,479.9433,858,122.01 Total 80,992,427.1633,980,555.26 (1) Interest receivable 1) Classification of interest receivable Unit: RMB ZKTeco 2023 Half Year Report 230 Item Ending Balance Beginning Balance Interest on related party loans 156,947.22122,433.25 Total 156,947.22122,433.25 2) Provision for bad debt reserves □ Applicable Not applicable (2) Dividends receivable 1) Classification of dividends receivable Unit: RMB Item (or the investee) Ending Balance Beginning Balance XIAMENZKTECOCO., LTD.14,000,000.00 Total 14,000,000.00 (3) Other receivables 1) Classification of other receivables based on nature of payment Unit: RMB Payment nature Closing book balance Opening book balance Current account 62,718,385.4326,728,933.46 Reserve funds and loans 5,106,859.983,231,834.22 Export tax refund 3,928,644.229,631,295.37 Guarantee deposit 1,772,546.941,910,792.36 Collection and payment on behalf of others 1,229,056.59286,952.43 Withholding and paying social security and provident fund on behalf of others 972,241.65960,569.04 Others Total 75,727,734.8142,750,376.88 2) Provision for bad debt reserves Unit: RMB Bad debt reserve Stage 1 Stage 2 Stage 3 Total Expected credit loss in the future 12 months Expected credit loss within whole duration (no credit impairment occur) Expected credit loss within whole duration (credit impairment has occurred) Balance as of January 1,2023 53,000.00 8,839,254.878,892,254.87 Balance as of January 1,2023 in the current period Balance as of June 30, 2023 53,000.00 8,839,254.878,892,254.87 ZKTeco 2023 Half Year Report 231 Changes in book balance with major changes in loss reserves during the current period □ Applicable Not applicable Disclosure by aging Unit: RMB Aging Ending Balance Within 1 year (including 1 year) 48,356,787.64 1-2 years 14,929,518.48 2-3 years 755,578.62 Over 3 years 11,685,850.07 3-4 years 2,794,709.77 4-5 years 8,092,386.10 Over 5 years 798,754.20 Total 75,727,734.81 3) Bad debt reserves withdrawn, recovered or reversed in the current period Provision for bad debt reserves in current period: Unit: RMB Category Beginning Balance Current period change amount Ending Balance Provision Return or reversal Redeem/redemption Others Other receivables with significant individual amounts and separate provision for bad debt reserves 6,012,062.77 6,012,062.77 Other receivables with provision for bad debt reserves based on a combination of credit risk characteristics 53,000.00 53,000.00 Other receivables with insignificant individual amounts but separate provision for bad debt reserves 2,827,192.10 2,827,192.10 Total 8,892,254.87 8,892,254.87 ZKTeco 2023 Half Year Report 232 4) Other accounts receivable with the top five ending balances collected by the debtor Unit: RMB Company name Nature of payment Ending Balance Aging Proportion to the total ending balance of other accounts receivable Ending balance of bad debt reserve ZKTECO (GUANGDONG) CO., LTD Current account 36,145,723.70 Within 1 year 47.73% Shenzhen Zhongan Intelligent Control Technology Co., Ltd. Current account 7,772,552.26 Over 3 years 10.26% 6,012,062.77 Wuhan ZKTeco Perception Technology Co., Ltd. Current account 6,580,000.00 Within 1 year 8.69% Export tax refund Export tax refund 3,928,644.22 Within 1 year 5.19% Shenzhen Zhikongtaike Biometric Technology Co., Ltd. Current account 2,500,000.00 Over 3 years 3.30% 2,500,000.00 Total 56,926,920.18 75.17% 8,512,062.77 5) Other receivables derecognized due to transfer of financial assets There are no other accounts receivable that have been derecognized due to the transfer of financial assets at the end of the period. 6) The amount of assets and liabilities formed by transferring other receivables and continuing to be involved The amount of assets and liabilities formed by not transferring other receivables and continuing to be involved in this period. 3. Long-term equity investment Unit: RMB Item Ending Balance Beginning Balance Book balance Impairment provision Book value Book balance Impairment provision Book value Investment in subsidiaries 1,151,771,457.95 1,151,771,457.95781,906,396.17 781,906,396.17 Total 1,151,771,457.95 1,151,771,457.95781,906,396.17 781,906,396.17 (1) Investment in subsidiaries Unit: RMB Investee Beginning balance (book Increase or decrease in the current period Ending balance (book value) Ending balance Additional Reduced Impairme Others ZKTeco 2023 Half Year Report 233 value) investment investment nt provision of impairment provision Shenzhen ZKTeco Biometric Identification Technology Co., Ltd. 12,608,518.14 12,608,518.14 Hangzhou ZKTeco Hanlian E-commerce Co., Ltd. 2,011,694.5848,643.48 2,060,338.06 ZKTECOCO., LIMITED 133,541,486.20368,511.18 133,909,997.38 XIAMENZKTECO CO., LTD. 100,650,998.352,673,858.31 103,324,856.66 Xiamen Zkteco Biometric Identification Technology Co., Ltd. 38,986,734.804,422.13 38,991,156.93 ZKCserv Technology Limited Co., Ltd. 510,000.00 510,000.00 ZKTECO (GUANGDONG) CO., LTD 436,416,752.35365,681,885.02 802,098,637.37 Dalian ZKTeo CO., Ltd. 3,075,306.01333,030.76 3,408,336.77 Xi'an ZKTeco Co., Ltd. 78,563.62175,411.32 253,974.94 Shenzhen Zhongjiang Intelligent Technology Co., Ltd. 5,100,000.00 5,100,000.00 Hubei ZKTeco Co., Ltd. 3,510,708.762,948.09 3,513,656.85 ZKTECOSG INVESTMENT PTE. LTD. 45,281,854.44 45,281,854.44 ZKTeco Sales Co., Ltd. 133,778.92576,351.49 710,130.41 Total 781,906,396.17369,865,061.78 1,151,771,457.95 (2) Investment in affiliated and joint ventures Unit: RMB Investor Beginning balance (book value) Increase or decrease in the current period Ending balance (book value) Ending balance of impairment provision Additional investment Reduced investment Investment profit or loss recogniOther comprehensive income adjustmChanges in other equities Cash dividends or profits declareImpairment provision Others ZKTeco 2023 Half Year Report 234 zed under equity method ents d to pay I. Joint ventures II. Joint venture (3) Other descriptions The increase in this period is due to the grant of Class II restricted stock equity incentive amount of RMB 5,865,061.78 to the incentive objects of the subsidiary, and the increase of RMB 364,000,000.00 to the subsidiary ZKTECO (GUANGDONG) Co., LTD. 4. Operating revenue and operating cost Unit: RMB Item Amount incurred in the current period Amount incurred in the previous period Revenue Cost Revenue Cost Main business 667,441,845.59470,747,145.91803,423,874.84611,165,964.32 Other businesses 659,500.56 1,169,752.68 Total 668,101,346.15470,747,145.91804,593,627.52611,165,964.32 Revenue related information: Unit: RMB Contract classification Division 1 Division 2 Operating revenue Total Goods type Including: Smart office products 93,980,657.7793,980,657.77 Smart entrance and exit management products 512,206,718.27512,206,718.27 Smart identity verification products 61,254,469.5561,254,469.55 Others 659,500.56659,500.56 Classification by region of operation Including: Domestic sales 269,516,873.84269,516,873.84 Overseas sales 398,584,472.31398,584,472.31 Market or customer type Including: Distribution 606,951,317.71606,951,317.71 Direct sales 60,490,527.8860,490,527.88 Others 659,500.56659,500.56 Type of contract Including: Classification by time of transfer of goods Including: ZKTeco 2023 Half Year Report 235 Classification by contract term Including: Classification by sales channel Including: Total 668,101,346.15668,101,346.15 Information related to performance obligations: None Information related to the transaction price allocated to the remaining performance obligations: The corresponding income amount for performance obligations that have been signed but have not yet been fulfilled or completed at the end of this reporting period is RMB 0.00. Other explanations: 5. Investment income Unit: RMB Item Amount incurred in the current period Amount incurred in the previous period Income from long-term equity investment accounted with cost method 24,000,000.0040,000,000.00 Investment income from financial products 909,167.431,403,930.57 Forward foreign exchange settlement and sales contract -2,046,795.00 -3,315,980.00 Total 22,862,372.4338,087,950.57 XVIII. Supplementary Information 1. Detailed statement of non-recurring profits and losses in the current period Applicable □ Not applicable Unit: RMB Item Amount Remarks Losses and gains from disposal of non-current assets (including the offsetting portion of the provision for asset impairment) -433,635.76 Government subsidies included in current profits and losses (except those closely related to the normal business of the Company, which are in line with national policies and regulations and continue to be enjoyed in accordance with certain standards or quotas) 3,012,356.92 ZKTeco 2023 Half Year Report 236 Capital occupancy fees charged to non-financial enterprises included in current profits and losses 26,607.00 In addition to the effective hedging business related to the normal business of the Company, the profits and losses from fair value changes arising from the holding of trading financial assets and trading financial liabilities as well as investment income from the disposal of trading financial assets, trading financial liabilities and available-for-sale financial assets -7,809,909.35 Mainly due to investment gains and losses and changes in fair value generated by partial forward exchange settlement to hedge against exchange rate fluctuations risk Other non-operating income and expenses other than the above items -130,111.10 Less: income tax impact 457,610.55 Minority interest impact -70,161.96 Total -5,722,140.88 Details of other profit and loss items that meet the definition of non-recurring profits and losses: □ Applicable Not applicable The Company has no specific situation of other profit and loss items that meet the definition of non-recurring profits and losses. Description on defining the non-recurring profit and loss items listed in the "Explanatory Announcement for Information Disclosure by Companies that Issue Securities to the Public No.1 - Non-recurring Profits and Losses" as recurring profit and loss items □ Applicable Not applicable 2. Net return on assets and earnings per share Profit during the reporting period Weighted average return on net assets Earnings per share Basic earnings per share (RMB/share) Diluted earnings per share (RMB/share) Net profit attributable to ordinary shareholders of the Company 2.85% 0.45980.4579 Net profit attributable to ordinary shareholders of the Company after deducting non-recurring profits and losses 3.03% 0.48940.4875 3. Differences in accounting data between domestic and foreign accounting standards (1) Differences in net profit and net assets in financial reports disclosed in accordance with international accounting standards and Chinese accounting standards □ Applicable Not applicable (2) Differences in net profit and net assets in financial reports disclosed in accordance with foreign accounting standards and Chinese accounting standards □ Applicable Not applicable