Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
¨
No
x
Indicate by check
mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
¨
No
x
Indicate by check
mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes
x
No
¨
Indicate by checkmark
whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
x
No
¨
Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
¨
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company
or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”,
“small reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth
company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨
Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
The aggregate market
value of the registrant's issued and outstanding shares of common stock held by non-affiliates of the registrant as of June 30,
2017 (based on $3.65 per share, the price at which the registrant’s common stock was last sold on June 30, 2017) was approximately
$37.1 million.
There were 15,509,658 shares outstanding
of the registrant’s common stock, par value $0.0001 per share, as of April 4, 2018. The registrant’s common stock is
listed on the Nasdaq Global Market under the stock symbol “HPJ”.
The information contained in this Form
10-K, includes some statements that are not purely historical and that are “forward-looking statements.” Such forward-looking
statements include, but are not limited to, statements regarding our company’s and our management’s expectations, hopes,
beliefs, intentions or strategies regarding the future, including our financial condition and results of operations. In addition,
any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any
underlying assumptions, are forward-looking statements. The words “anticipates,” “believes,” “continue,”
“could,” “estimates,” “expects,” “intends,” “may,” “might,”
“plans,” “possible,” “potential,” “predicts,” “projects,” “seeks,”
“should,” “will,” “would” and similar expressions, or the negatives of such terms, may identify
forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking.
The forward-looking statements contained
in this Form 10-K are based on current expectations and beliefs concerning future developments and the potential effects on our
company. There can be no assurance that future developments actually affecting us will be those anticipated. These forward-looking
statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause
actual results or performance to be materially different from those expressed or implied by these forward-looking statements, including
the following:
These risks and uncertainties, along with
others, are also described above under the heading “Risk Factors.” Should one or more of these risks or uncertainties
materialize, or should our assumptions prove incorrect, actual results may vary in material respects from those projected in these
forward-looking statements. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge
from time to time and we cannot predict all such risk factors, nor can we assess the impact of all such risk factors on our business
or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained
in any forward-looking statements. The Company undertakes no obligation to update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
PART I
With respect to this discussion, the terms,
the “Company” “Highpower” “we,” “us,” and “our” refer to Highpower
International, Inc., and its 100%-owned subsidiary Hong Kong Highpower Technology Company Limited (“HKHTC”), HKHTC’s
wholly-owned subsidiary Shenzhen Highpower Technology Company Limited (“SZ Highpower”) and SZ Highpower’s wholly
owned subsidiary Huizhou Highpower Technology Company Limited (“HZ HTC”) and SZ Highpower’s and HKHTC’s
jointly owned subsidiaries Springpower Technology (Shenzhen) Company Limited (“SZ Springpower”) and Icon Energy System
Company Limited (“ICON”). SZ Highpower no longer holds the controlling equity interest over its previously 70%-owned
subsidiary Ganzhou Highpower Technology Company Limited (“GZ Highpower”) and deconsolidated GZ Highpower on December
21, 2017. Highpower and its subsidiaries are collectively referred to as the “Company”, unless the context indicates
otherwise.
Corporate Information
Rapid advancements in electronic technology
have expanded the number of battery-powered devices in recent years. As these devices have come to feature more sophisticated functions,
more compact sizes and lighter weights, the sources of power that operate these products have been required to deliver increasingly
higher levels of energy. This has stimulated consumer demand for higher-energy batteries capable of delivering longer service between
recharges or battery replacement. In contrast to non-rechargeable batteries, after a rechargeable battery is discharged, it can
be recharged and reused. Rechargeable batteries generally can be used in many non-rechargeable battery applications, as well as
high energy drain applications such as electric toys, power tools, portable computers and other electronics, medical devices, and
many other consumer products. High energy density and long achievable cycle life are important characteristics of rechargeable
battery technologies. Energy density refers to the total electrical energy per unit volume stored in a battery. High energy density
batteries generally are longer lasting power sources providing longer operating time and necessitating fewer battery recharges.
Greater energy density will permit the use of batteries of a given weight or volume for a longer time period. Long cycle life is
a preferred feature of a rechargeable battery because it allows the user to charge and recharge many times before noticing a difference
in performance. Long achievable cycle life, particularly in combination with high energy density, is desirable for applications
requiring frequent battery recharges.
To adapt to this demand, SZ Highpower was
founded to manufacture, market and research Ni-MH batteries. SZ Highpower’s predecessor was founded in Guangzhou in 2001,
and moved to Shenzhen in 2002.
Highpower was incorporated in the state
of Delaware on January 3, 2006 and was originally organized as a “blank check” shell company to investigate and acquire
a target company or business seeking the perceived advantages of being a publicly held corporation. On November 2, 2007, we closed
a share exchange transaction, pursuant to which we (i) became the 100% parent of HKHTC and its wholly-owned subsidiary, SZ Highpower,
(ii) assumed the operations of HKHTC and its subsidiary and (iii) changed our name to Hong Kong Highpower Technology, Inc. We subsequently
changed our name to Highpower International, Inc. in October 2010.
HKHTC was incorporated in Hong Kong in
2003 under the Companies Ordinance of Hong Kong.
HKHTC formed HZ Highpower and SZ Springpower
in 2008. HZ Highpower was dissolved in 2015. On October 8, 2013, SZ Springpower further increased its registered capital to $15,000,000.
SZ Highpower holds 69.97% of the equity interest of SZ Springpower, and HKHTC holds the remaining 30.03%.
In 2011, HKHTC formed another wholly-owned
subsidiary, ICON, a company organized under the laws of the PRC. On July 28, 2017, ICON further increased its registered capital
to $15,000,000. SZ Highpower holds 93.33% of the equity interest of ICON, and HKHTC holds the remaining 6.67%.
In 2012, SZ Highpower formed a wholly-owned
subsidiary HZ HTC. In March 2015, HZ HTC increased its paid-in capital to RMB60,000,000 ($9,496,526).
In 2010, SZ Highpower formed a subsidiary
GZ Highpower. On May 15, 2013, GZ Highpower increased its paid-in capital from RMB15,000,000 ($2,381,293) to RMB30,000,000 ($4,807,847).
On November 13, 2014, GZ Highpower increased its paid-in capital from RMB30,000,000 ($4,898,119) to RMB40,000,000 ($6,530,825)
and the additional capital of RMB10,000,000 was contributed by SZ Highpower. On December 11, 2017, GZ Highpower signed an Agreement
on Capital Increase and Share Enlargement (the “Agreement”) with Xiamen Tungsten Co., Ltd. ("Xiamen Tungsten")
and Mr. Ou, the General Manager of GZ Highpower. Pursuant to the terms of the Agreement, GZ Highpower received a total of RMB92.8
million (approximately $14.3 million), including RMB78.9 million (approximately $12.1 million) from Xiamen Tungsten in exchange
for 55.294% ownership of GZ Highpower (the “Transaction”). The Transaction was completed on December 21, 2017. After
the Transaction, SZ Highpower holds 31.294% of the equity interest of GZ Highpower. As a result, the Company no longer holds the
controlling equity interest of GZ Highpower and deconsolidated GZ Highpower on December 21, 2017.
All other operating subsidiaries are incorporated
in the People’s Republic of China (“PRC”) and are listed below:
Subsidiary
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Principal Activities
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SZ Highpower
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Manufacturing, marketing and research of Ni-MH batteries
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SZ Springpower
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Manufacturing, marketing and research of lithium batteries
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ICON
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Design and production of advanced battery packs and systems
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HZ HTC
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Manufacturing, marketing and research of lithium batteries
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Below is organizational flow chart of the Company:
Our Strategy
Our goal is to become a global leader in
the development and manufacture of rechargeable battery products. We believe the following strategies are the critical to achieve
this goal:
Continue to pursue cost-effective opportunities
Our operating model, coupled with our modern
manufacturing processes, has resulted in a low cost structure, and an ability to respond rapidly to customer demands. We intend
to achieve greater cost-effectiveness by expanding production capacity, increasing productivity and efficiency and seeking to lower
the unit cost of products through the use of advanced technologies.
Continue to invest in Research and Development (“R&D”)
In order to maintain our difference, we
will continue to strengthen the investment in R&D. We have also established a good cooperative relationship with universities,
such as Central South University and Tsinghua University.
Continue to focus on brand customers
We are committed to bringing quality products
and services to brand customers in the world and the top of segment markets to ensure the customer brand value continuously grows.
Products
Our Ni-MH rechargeable batteries are versatile
solutions for many diverse applications due to their long life, environmentally friendly materials, high power and energy, low
cost and safe applications. Developed to meet the requirement for increasingly higher levels of energy demanded by today’s
electronic products, our Ni-MH rechargeable batteries offer increased capacity and higher energy density to expect a longer running
time between charges as well as the performance of cycle life exceeds 2000 cycles for high end products. We produce AA, AAA, 9V,
C, D, SC (Normal & RTU version) sized batteries in blister packing as well as chargers and battery packs.
Similar to Ni-MH batteries, we established
lithium-ion batteries production lines to meet market needs. We produce Lithium-ion cylindrical, Lithium-ion polymer rechargeable
batteries and power source solutions.
Sales and Marketing
We have a broad sales network of approximately
70 sales and marketing staff in China and have one branch office in Hong Kong. Our sales staff in each of our offices targets key
customers by arranging in-person sales presentations and providing after-sales services. Our sales staff works closely with our
customers so that we can better address their needs and improve the quality and features of our products. We offer different price
incentives to encourage large-volume and long-term customers.
Sales from our customers are based primarily
on purchase orders we receive from time to time rather than firm, long-term purchase commitments. Uncertain economic conditions
and our general lack of long-term purchase commitments with our customers make it difficult for us to predict revenue accurately
over the longer term. Even in those cases where customers are contractually obligated to purchase products from us, we may elect
not to enforce our contractual rights immediately because of the long-term nature of our customer relationships and for other business
reasons, and instead may negotiate accommodations with customers regarding particular situations.
We mainly engage in marketing activities
such as attending industry-specific conferences and exhibitions to promote our products and brand name. We believe these activities
help in promoting our products and brand name among key industry participants.
During the years ended December 31, 2017
and 2016, approximately 21.2% and 22.9% of our net sales were from our five largest customers, respectively. The percentages of
net sales disclosed for each of our major customers includes sales to groups of customers under common control or that could be
deemed affiliates of such major customers. During the years ended December 31, 2017 and 2016, no customer accounted for 10% or
more of net sales.
Competition
We face competition from many other battery
manufacturers, some of which have significantly greater name recognition and financial, technical, manufacturing, personnel and
other resources than we have. We compete against other Ni-MH and lithium-ion battery producers, as well as manufacturers of other
rechargeable and non-rechargeable batteries. The main types of rechargeable batteries currently on the market include: lead-acid;
Ni-Cad; Ni-MH; liquid lithium-ion and lithium-ion polymer. Competition is typically based on design, quality, stability, and performance.
The technology behind Ni-MH and lithium rechargeable batteries has consistently improved over time and we continue to enhance our
products to meet the competitive threats from its competitors.
Supply of Raw Materials
The cost of the raw materials used in our
rechargeable batteries is a key factor in the pricing of our products. We purchase materials in volume, which allows us to negotiate
better pricing with our suppliers. Our purchasing department locates eligible suppliers of raw materials, striving to use only
those suppliers who have previously demonstrated quality control and reliability.
For Ni-MH, we purchase raw materials, consisted
primarily of metal materials including nickel oxide, nickel foam, metal hydride alloy and other battery components, such as membranes,
from suppliers located in China and Japan. For lithium batteries, we purchase raw materials consisting primarily of LiCoO2,
graphite and electrolyte. We believe that the raw materials and components used in manufacturing rechargeable batteries are
available from enough sources to be able to satisfy our manufacturing needs; however, some of our materials relating to nickel
and cobalt are available from a limited number of suppliers. No supplier accounted for over 10% of our total purchase amount during
the years ended December 31, 2017 and 2016. Presently, our relationships with suppliers are generally good and we expect that our
suppliers will be able to meet the anticipated demand for our products in the future.
Manufacturing
The manufacturing of rechargeable batteries
requires coordinated use of machinery and raw materials at various stages of production. We have a large-scale active production
base in Shenzhen and in Huizhou, a dedicated design, sales and marketing team and company-trained employees. We use automated machinery
which enables us to enhance uniformity and precision during the manufacturing process. We intend to further improve our automated
production lines and strive to continue investing in manufacturing infrastructures to further increase our manufacturing capacity,
which help us control the unit cost of products.
Research and Development
To enhance our product quality, reduce
cost, and keep pace with technological advances and evolving market trends, we have established an advanced research and development
center. Our research and development center is not only focused on enhancing our Ni-MH and Lithium-based technologies by developing
new products and improving the performance of our current products, but also seeks to develop alternative technologies. Our research
institute is currently staffed with over 350 research and development technicians who overlook our basic research center, product
development center, process engineering center, material analysis and performance testing labs. These teams work together to research
new material and techniques, develop new products and push to mass production.
For the years ended December 31, 2017 and
2016, we expended $9,512,074 and $9,243,750, respectively, in research and development.
Intellectual Property
We rely on a combination of patent and
trade secret protection and other unpatented proprietary information to protect our intellectual property rights and to maintain
and enhance our competitiveness in the battery industry. We regularly file patent applications to protect our research, development
and design, and are currently pursuing numerous patent applications in China. Over time, we have accumulated a lot of patents in
China. We also have a U.S. patent for safety technology on rechargeable batteries.
We also rely on unpatented technologies
to protect the proprietary nature of our product and manufacturing processes. We require that our management team and key employees
enter into confidentiality agreements that require the employees to assign the rights to any inventions developed by them during
the course of their employment with us. The confidentiality agreements include noncompetition and non-solicitation provisions that
remain effective during the course of employment and for periods following termination of employment, which vary depending on position
and location of the employees.
Seasonality
The first quarter of each fiscal year tends
to be our slow season due to the Chinese New Year holidays. Our factories and operations usually shut down for 2 weeks during this
time, resulting in lower sales during the first quarter.
Employees
As of December 31, 2017, we had approximately
3,600 employees, all of whom were employed full-time. There are no collective bargaining contracts covering any of our employees.
We have not experienced any work stoppages and consider our relations with employees to be good.
Any investment in our common stock involves
a high degree of risk. Potential investors should carefully consider the material risks described below and all of the information
contained in this Form 10-K before deciding whether to purchase any of our securities. Our business, financial condition or results
of operations could be materially adversely affected by these risks if any of them actually occur. The trading price of our shares
of common stock listed on the NASDAQ Global Market could decline due to any of these risks, and an investor may lose all or part
of his investment. Some of these factors have affected our financial condition and operating results in the past or are currently
affecting us. This report also contains forward-looking statements that involve risks and uncertainties. Our actual results could
differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks
faced described below and elsewhere in this Form 10-K.
RISKS RELATED TO OUR OPERATIONS
Our business depends in large part on the growth in demand
for portable electronic devices.
Many of our battery products are used to
power various portable electronic devices. Therefore, the demand for our batteries is substantially tied to the market demand for
portable electronic devices. A growth in the demand for portable electronic devices will be essential to the expansion of our business.
Our results of operations may be adversely affected by decreases in the general level of economic activity. Decreases in consumer
spending that may result from the current global economic downturn may weaken demand for items that use our battery products. A
decrease in the demand for portable electronic devices would likely have a material adverse effect on our results of operations. We
are unable to predict the duration and severity of the current disruption in financial markets and the global adverse economic
conditions and the effect such events might have on our business.
Our success depends on the success of manufacturers of the
end applications that use our battery products.
Because our products are designed to be
used in other products, our success depends on whether end application manufacturers will incorporate our batteries in their products.
Although we strive to produce high quality battery products, there is no guarantee that end application manufacturers will accept
our products. Our failure to gain acceptance of our products from these manufacturers could result in a material adverse effect
on our results of operations.
Additionally, even if a manufacturer decides
to use our batteries, the manufacturer may not be able to market and sell its products successfully. The manufacturer’s inability
to market and sell its products successfully could materially and adversely affect our business and prospects because this manufacturer
may not order new products from us. Therefore, our business, financial condition, results of operations and future success would
be materially and adversely affected.
We are and will continue to be subject
to declining average selling prices of consumer electronic devices, which may harm our results of operations.
Portable consumer electronic devices, such
as cellular phones, laptop computers and tablets are subject to rapid declines in average selling prices due to rapidly evolving
technologies, industry standards and consumer preferences. Therefore, electronic device manufacturers expect suppliers, such as
our company, to cut their costs and lower the price of their products to lessen the negative impact on the electronic device manufacturer’s
own profit margins. As a result, we have previously reduced the price of some of our battery products and expect to continue to
face market-driven downward pricing pressures in the future. Our results of operations will suffer if we are unable to offset any
declines in the average selling prices of our products by developing new or enhanced products with higher selling prices or gross
profit margins, increasing our sales volumes or reducing our production costs.
Our success is highly dependent on continually
developing new and advanced products, technologies, and processes and failure to do so may cause us to lose our competitiveness
in the battery industry and may cause our profits to decline.
To remain competitive in the battery industry,
it is important to continually develop new and advanced products, technologies, and processes. There is no assurance that competitors’
new products, technologies, and processes will not render our existing products obsolete or non-competitive. Alternately, changes
in legislative, regulatory or industry requirements or in competitive technologies may render certain of our products obsolete
or less attractive. Our competitiveness in the battery market therefore relies upon our ability to enhance our current products,
introduce new products, and develop and implement new technologies and processes. We predominately manufacture and market
Ni-MH batteries, Li-ion and Li-polymer batteries. Our ability to adapt to evolving industry standards and anticipate future
standards will be a significant factor in maintaining and improving our competitive position and our prospects for growth. To achieve
this goal, we have invested and plan to continue investing significant financial resources in research and development. Research
and development, however, is inherently uncertain, and we might encounter practical difficulties in commercializing our research
results. The research and development of new products and technologies is costly and time consuming, and there are no assurances
that our research and development of new products will either be successful or completed within anticipated timeframes, if at all.
Accordingly, our significant investment in research and development may not bear fruit. On the other hand, our competitors may
improve their technologies or even achieve technological breakthroughs that would render our products obsolete or less marketable.
Our failure to technologically evolve and/or develop new or enhanced products may cause us to lose competitiveness in the battery
market and may cause our profits to decline.
In addition, in order to compete effectively
in the battery industry, we must be able to launch new products to meet our customers’ demands in a timely manner. However,
we cannot provide assurance that we will be able to install and certify any equipment needed to produce new products in a timely
manner, or that the transitioning of our manufacturing facility and resources to full production under any new product programs
will not impact production rates or other operational efficiency measures at our manufacturing facility. In addition, new product
introductions and applications are risky, and may suffer from a lack of market acceptance, delay in related product development
and failure of new products to operate properly. Any failure by us successfully to launch new products, or a failure by our customers
to accept such products, could adversely affect our operating results.
We have historically depended on a limited
number of customers for a significant portion of our revenues and this dependence is likely to continue.
We have historically depended on a limited
number of customers for a significant portion of our net sales. We anticipate that a limited number of customers will continue
to contribute to a significant portion of our net sales in the future. Maintaining the relationships with these significant customers
is vital to the expansion and success of our business, as the loss of a major customer could expose us to risk of substantial losses.
Our sales and revenue could decline and our results of operations could be materially adversely affected if one or more of these
significant customers stops or reduces its purchasing of our products, or if we fail to expand our customer base for our products.
Significant order cancellations, reductions or delays by
our customers could materially adversely affect our business.
Our sales are typically made pursuant to
individual purchase orders, and we generally do not have long-term supply arrangements with our customers, but instead work with
our customers to develop nonbinding forecasts of future requirements. Based on these forecasts, we make commitments regarding the
level of business that we will seek and accept, the timing of production schedules and the levels and utilization of personnel
and other resources. A variety of conditions, both specific to each customer and generally affecting each customer’s industry,
may cause customers to cancel, reduce or delay orders that were either previously made or anticipated. Generally, customers may
cancel, reduce or delay purchase orders and commitments without penalty, except for payment for services rendered or products competed
and, in certain circumstances, payment for materials purchased and charges associated with such cancellation, reduction or delay.
Significant or numerous order cancellations, reductions or delays by our customers could have a material adverse effect on our
business, financial condition or results of operations.
Substantial defaults by our customers
on accounts receivable or the loss of significant customers could have a material adverse effect on our business.
A substantial
portion of our working capital consists of accounts receivable from customers.
If customers responsible for a significant
amount of accounts receivable were to become insolvent or otherwise unable to pay for products and services, or to make payments
in a timely manner, our business, results of operations or financial condition could be materially adversely affected. An economic
or industry downturn could materially adversely affect the servicing of these accounts receivable, which could result in longer
payment cycles, increased collection costs and defaults in excess of management’s expectations. A significant deterioration
in our ability to collect on accounts receivable could also impact the cost or availability of financing available to us.
A change in our product mix may cause
our results of operations to differ substantially from the anticipated results in any particular period.
Our overall profitability may not meet
expectations if our products, customers or geographic mix are substantially different than anticipated. Our profit margins vary
among our battery and new materials products, our customers and the geographic markets in which we sell our products. Consequently,
if our mix of any of these is substantially different from what is anticipated in any particular period, our profitability could
be lower than anticipated.
Certain disruptions in supply of and
changes in the competitive environment for raw materials integral to our products may adversely affect our profitability.
We use a broad range of materials and supplies,
including metals, chemicals and other electronic components in our products. A significant disruption in the supply of these materials
could decrease production and shipping levels, materially increase our operating costs and materially adversely affect our profit
margins. Shortages of materials or interruptions in transportation systems, labor strikes, work stoppages, war, acts of terrorism
or other interruptions to or difficulties in the employment of labor or transportation in the markets in which we purchase materials,
components and supplies for the production of our products, in each case may adversely affect our ability to maintain production
of our products and sustain profitability. If we were to experience a significant or prolonged shortage of critical components
from any of our suppliers and could not procure the components from other sources, we would be unable to meet our production schedules
for some of our key products and to ship such products to our customers in timely fashion, which would adversely affect our sales,
margins and customer relations.
Our industry is subject to supply shortages
and any delay or inability to obtain product components may have a material adverse effect on our business.
Our industry is subject to supply shortages,
which could limit the amount of supply available of certain required battery components. Any delay or inability to obtain supplies
may have a material adverse effect on our business. During prior periods, there have been shortages of components in the battery
industry and the availability of raw materials has been limited by some of our suppliers. We cannot assure investors that any future
shortages or allocations would not have such an effect on our business. A future shortage can be caused by and result from many
situations and circumstances that are out of our control, and such shortage could limit the amount of supply available of certain
required materials and increase prices adversely affecting our profitability.
Our future operating results may be affected by fluctuations
in costs of raw materials, such as nickel.
Our principal raw material is nickel, which
is available from a limited number of suppliers in China. The prices our raw materials used to make our batteries increase and
decrease due to factors beyond our control, including general economic conditions, domestic and worldwide demand, labor costs or
problems, competition, import duties, tariffs, energy costs, currency exchange rates and those other factors described under “Certain
disruptions in supply of and changes in the competitive environment for raw materials integral to our products may adversely affect
our profitability.” In an environment of increasing prices for our raw materials, competitive conditions may impact how much
of the price increases we can pass on to our customers and to the extent we are unable to pass on future price increases in our
raw materials to our customers, our financial results could be adversely affected.
Our operations would be materially adversely
affected if third-party carriers were unable to transport our products on a timely basis.
All of our products are shipped through
third party carriers. If a strike or other event prevented or disrupted these carriers from transporting our products, other carriers
may be unavailable or may not have the capacity to deliver our products to our customers. If adequate third party sources to ship
our products are unavailable at any time, our business would be materially adversely affected.
We may not be able to increase our manufacturing
output in order to maintain our competitiveness in the battery industry.
We believe that our ability to provide
cost-effective products represents a significant competitive advantage over our competitors. In order to continue providing such
cost-effective products, we must maximize the efficiency of our production processes and increase our manufacturing output to a
level that will enable us to reduce the unit production cost of our products. Our ability to increase our manufacturing output
is subject to certain significant limitations, including:
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Our ability raise capital to acquire additional raw materials and expand our manufacturing facilities;
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Delays and cost overruns, due to increases in raw material prices and problems with equipment vendors;
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Delays or denial of required approvals and certifications by relevant government authorities;
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Diversion of significant management attention and other resources; and
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Failure to execute our expansion plan effectively.
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If we are not able to increase our manufacturing
output and reduce our unit production costs, we may be unable to maintain our competitive position in the battery industry. Moreover,
even if expand our manufacturing output, we may not be able to generate sufficient customer demand for our products to support
our increased production output.
The activities of our non-U.S. subsidiaries
may be subject to U.S. taxation and the new U.S. tax reform legislations may adversely affect our results of operations.
Most of our subsidiaries are based in China
and are subject to income taxes in the PRC. These China-based subsidiaries conduct substantially all of our operations, and generate
most of our income in China. Highpower International, Inc. is a Delaware corporation and is subject to income taxes in the United
States. New U.S. federal tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”), was signed
into law on December 22, 2017. The Tax Act significantly modified the U.S. Internal Revenue Code by, among other things, reducing
the maximum U.S. federal corporate income tax rate from 35% to a flat rate of 21% for taxable years beginning after December 31,
2017; limiting and/or eliminating many business deductions; imposing a one-time transition tax on a mandatory deemed repatriation
of previously deferred foreign earnings of certain foreign subsidiaries; generally eliminating U.S. corporate income tax on dividends
from foreign subsidiaries subject to certain limitations; and providing for new taxes on certain foreign earnings. Taxpayers may
elect to pay the one-time transition tax over eight years, or in a single lump-sum payment. See Note 14 to our audited consolidated
financial statements beginning on page F-1 of this report.
Certain activities conducted in the PRC
or other jurisdictions outside of the U.S. may give rise to U.S. corporate income tax. These taxes would be imposed on the Company
when its subsidiaries that are controlled foreign corporations (“CFCs”) generate income that is subject to Subpart
F of the U.S. Internal Revenue Code, or Subpart F. Passive income, such as rents, royalties, interest, dividends, and gain from
disposal of our investments are among the types of income subject to taxation under Subpart F. Any income taxable under Subpart
F is taxable in the U.S. at federal corporate income tax rates of up to 21% for taxable years beginning after December 31, 2017.
Subpart F income that is taxable to Highpower International, Inc., even if it is not distributed to Hong Kong Highpower Technology
Company Limited, may also include income from transactions where the Company’s non-U.S. subsidiaries make an “investment
in U.S. property,” within the meaning of Subpart F, such as holding the stock in, or making a loan to, a U.S. corporation.
The Tax Act also includes provisions for
a new tax on global intangible low-taxed income (“GILTI”) effective for tax years beginning after December 31, 2017.
The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of CFCs, subject to the possible
use of foreign tax credits and a deduction equal to 50% to offset the income tax liability, subject to some limitations. The computation
of GILTI is still subject to interpretation and additional clarifying guidance is expected.
We have made reasonable estimates of the
effects of the tax law changes, including the remeasurement of our existing deferred tax balances and recording a tax liability
for the mandatory repatriation of deferred foreign earnings. The final impact of the Tax Act may differ from these provisional
estimates due to forthcoming guidance in interpretation of the law and accounting, or further refinement of our analysis. Any adjustment
could adversely affect our earnings.
The market for our products and services
is very competitive and, if we cannot effectively compete, our business will be adversely affected.
The market for our products and services
is very competitive and subject to rapid technological change. Many of our competitors are larger and have significantly greater
assets, name recognition and financial, personnel and other resources than we have. As a result, our competitors may be in a stronger
position to respond quickly to potential acquisitions and other market opportunities, new or emerging technologies and changes
in customer requirements. We cannot assure that we will be able to maintain or increase our market share against the emergence
of these or other sources of competition. Failure to maintain and enhance our competitive position could materially adversely affect
our business and prospects.
Our business may be adversely affected
by a global economic downturn, in addition to the continuing uncertainties in the financial markets.
The global economy experienced a pronounced
economic downturn in previous years. Global financial markets have and may in the future experience disruptions, including severely
diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment
rates, and uncertainty about economic stability. There is no assurance that there will not be deterioration in the global economy
in the future, the global financial markets and consumer confidence. If economic conditions deteriorate, our business and results
of operations could be materially and adversely affected.
Additionally, sales of consumer items such
as portable electronic devices, have slowed in previous years and there have been adverse changes in employment levels, job growth,
consumer confidence and interest rates. During 2017, Mainland China, which represented 57.0% of our net sales for the year
ended December 31, 2017, experienced a pronounced deceleration in its economic growth. Our future results of operations may experience
substantial fluctuations from period to period as a consequence of these factors, and such conditions and other factors affecting
consumer spending may affect the timing of orders. Thus, any economic downturns generally would have a material adverse effect
on our business, cash flows, financial condition and results of operations.
Moreover, the inability of our customers
and suppliers to access capital efficiently, or at all, may have other adverse effects on our financial condition. For example,
financial difficulties experienced by our customers or suppliers could result in product delays; increase accounts receivable defaults;
and increase our inventory exposure. The inability of our customers to borrow money to fund purchases of our products reduces the
demand for our products and services and may adversely affect our results from operations and cash flow. These risks may increase
if our customers and suppliers do not adequately manage their business or do not properly disclose their financial condition to
us.
Although we believe we have adequate liquidity
and capital resources to fund our operations internally, in light of current market conditions, our inability to access the capital
markets on favorable terms, or at all, may adversely affect our financial performance. The inability to obtain adequate financing
from debt or capital sources could force us to self-fund strategic initiatives or even forego certain opportunities, which in turn
could potentially harm our performance.
Maintaining and expanding our manufacturing
operations requires significant capital expenditures, and our inability or failure to maintain and expand our operations would
have a material adverse impact on our market share and ability to generate revenue.
We had capital expenditures of approximately
$13.7 million and $8.5 million in the years ended December 31, 2017 and 2016, respectively. We may incur significant additional
capital expenditures as a result of our expansion of our operations into our new production factory, as well as unanticipated events,
regulatory changes and other events that impact our business. If we are unable or fail to adequately maintain our manufacturing
capacity or quality control processes or adequately expand our production capabilities, we could lose customers and there could
be a material adverse impact on our market share and our ability to generate revenue.
Warranty claims, product liability claims
and product recalls could harm our business, results of operations and financial condition.
Our business inherently exposes us to potential
warranty and product liability claims, in the event that our products fail to perform as expected or such failure of our products
results, or is alleged to result, in bodily injury or property damage (or both). Such claims may arise despite our quality controls,
proper testing and instruction for use of our products, either due to a defect during manufacturing or due to the individual’s
improper use of the product. In addition, if any of our designed products are or are alleged to be defective, then we may be required
to participate in a recall of them.
Existing PRC laws and regulations do not
require us to maintain third party liability insurance to cover product liability claims. Although we have obtained products liability
insurance, if a warranty or product liability claim is brought against us, regardless of merit or eventual outcome, or a recall
of one of our products is required, such claim or recall may result in damage to our reputation, breach of contracts with our customers,
decreased demand for our products, costly litigation, additional product recalls, loss of revenue, and the inability to commercialize
some products. Additionally, our insurance policy imposes a ceiling for maximum coverage and high deductibles and we may be
unable to obtain sufficient amounts from our policy to cover a product liability claim. We may not be able to obtain any insurance
coverage for certain types of product liability claims, as our policy excludes coverage of certain types of claims. In such
cases, we may still incur substantial costs related to a product liability claim, which could adversely affect our results of operations.
Manufacturing or use of our battery
products may cause accidents, which could result in significant production interruption, delay or claims for substantial damages.
Our batteries, especially lithium batteries,
can pose certain safety risks, including the risk of fire. While we implement stringent safety procedures at all stages of battery
production that minimize such risks, accidents may still occur. Any accident, regardless of where it occurs, may result in significant
production interruption, delays or claims for substantial damages caused by personal injuries or property damages.
Our labor costs have increased and are likely to continue
to increase as a result of changes in Chinese labor laws.
We expect to experience an increase in
our cost of labor due to recent changes in Chinese labor laws which are likely to increase costs further and impose restrictions
on our relationship with our employees. In June 2007, the National People’s Congress of the PRC enacted new labor law legislation
called the Labor Contract Law and more strictly enforced existing labor laws. The law, which became effective on January 1, 2008,
amended and formalized workers’ rights concerning overtime hours, pensions, layoffs, employment contracts and the role of
trade unions. As a result of the law, we have had to increase the salaries of our employees, provide additional benefits to our
employees, and revise certain other of our labor practices. The increase in labor costs has increased our operating costs, which
we have not always been able to pass on to our customers. In addition, under the law, employees who either have worked for us for
10 years or more or who have had two consecutive fixed-term contracts must be given an “open-ended employment contract”
that, in effect, constitutes a lifetime, permanent contract, which is terminable only in the event the employee materially breaches
our rules and regulations or is in serious dereliction of his or her duties. Such non-cancelable employment contracts have substantially
increased our employment-related risks and limit our ability to downsize our workforce in the event of an economic downturn. No
assurance can be given that we will not in the future be subject to labor strikes or that we will not have to make other payments
to resolve future labor issues caused by the new laws. Furthermore, there can be no assurance that labor laws in the PRC will not
change further or that their interpretation and implementation will vary, which may have a negative effect upon our business and
results of operations.
We cannot guarantee the protection of
our intellectual property rights and if infringement of our intellectual property rights occurs, including counterfeiting of our
products, our reputation and business may be adversely affected.
To protect the reputation of our products,
we have sought to file or register intellectual property, as appropriate, in the PRC where we have our primary business presence.
Our products are currently sold under these trademarks in the PRC, and we plan to expand our products to other international markets.
There is no assurance that there will not be any infringement of our brand name or other registered trademarks or counterfeiting
of our products in the future, in China or elsewhere. Should any such infringement and/or counterfeiting occur, our reputation
and business may be adversely affected. We may also incur significant expenses and substantial amounts of time and effort to enforce
our trademark rights in the future. Such diversion of our resources may adversely affect our existing business and future expansion
plans.
We believe that obtaining patents and enforcing
other proprietary protections for our technologies and products have been and will continue to be very important in enabling us
to compete effectively. However, there can be no assurance that our pending patent applications will issue, or that we will be
able to obtain any new patents, in China or elsewhere, or that our or our licensors’ patents and proprietary rights will
not be challenged or circumvented, or that these patents will provide us with any meaningful competitive advantages. Furthermore,
there can be no assurance that others will not independently develop similar products or will not design around any patents that
have been or may be issued to us or our licensors. Failure to obtain patents in certain foreign countries may materially adversely
affect our ability to compete effectively in those international markets. If a sufficiently broad patent were to be issued from
a competing application in China or elsewhere, it could have a material adverse effect upon our intellectual property position
in that particular market.
In addition, our rights to use the licensed
proprietary technologies of our licensors depends on the timely and complete payment for such rights pursuant to license agreements
between the parties; failure to adhere to the terms of these agreements could result in the loss of such rights and could materially
and adversely affect our business.
If our products are alleged to or found
to conflict with patents that have been or may be granted to competitors or others, our reputation and business may be adversely
affected.
Rapid technological developments in the
battery industry and the competitive nature of the battery products market make the patent position of battery manufacturers subject
to numerous uncertainties related to complex legal and factual issues. Consequently, although we either own or hold licenses to
certain patents in the PRC, and are currently processing several additional patent applications in the PRC, it is possible that
no patents will issue from any pending applications or that claims allowed in any existing or future patents issued or licensed
to us will be challenged, invalidated, or circumvented, or that any rights granted there under will not provide us adequate protection.
As a result, we may be required to participate in interference or infringement proceedings to determine the priority of certain
inventions or may be required to commence litigation to protect our rights, which could result in substantial costs. Further, other
parties could bring legal actions against us claiming damages and seeking to enjoin manufacturing and marketing of our products
for allegedly conflicting with patents held by them. Any such litigation could result in substantial cost to us and diversion of
effort by our management and technical personnel. If any such actions are successful, in addition to any potential liability for
damages, we could be required to obtain a license in order to continue to manufacture or market the affected products. There can
be no assurance that we would prevail in any such action or that any license required under any such patent would be made available
on acceptable terms, if at all. Failure to obtain needed patents, licenses or proprietary information held by others may have a
material adverse effect on our business. In addition, if we were to become involved in such litigation, it could consume a substantial
portion of our time and resources. Also, with respect to licensed technology, there can be no assurance that the licensor of the
technology will have the resources, financial or otherwise, or desire to defend against any challenges to the rights of such licensor
to its patents.
We rely on trade secret protections
through confidentiality agreements with our employees, customers and other parties; the breach of such agreements could adversely
affect our business and results of operations.
We rely on trade secrets, which we seek
to protect, in part, through confidentiality and non-disclosure agreements with our employees, customers and other parties. There
can be no assurance that these agreements will not be breached, that we would have adequate remedies for any such breach or that
our trade secrets will not otherwise become known to or independently developed by competitors. To the extent that consultants,
key employees or other third parties apply technological information independently developed by them or by others to our proposed
projects, disputes may arise as to the proprietary rights to such information that may not be resolved in our favor. We may be
involved from time to time in litigation to determine the enforceability, scope and validity of our proprietary rights. Any such
litigation could result in substantial cost and diversion of effort by our management and technical personnel.
The failure to manage growth effectively
could have an adverse effect on our employee efficiency, product quality, working capital levels, and results of operations.
Any significant growth in the market for
our products or our entry into new markets may require expansion of our employee base for managerial, operational, financial, and
other purposes. During any growth, we may face problems related to our operational and financial systems and controls, including
quality control and delivery and service capacities. We would also need to continue to expand, train and manage our employee base.
Continued future growth will impose significant added responsibilities upon the members of management to identify, recruit, maintain,
integrate, and motivate new employees.
Aside from increased difficulties in the
management of human resources, we may also encounter working capital issues, as we will need increased liquidity to finance the
purchase of raw materials and supplies, development of new products, and the hiring of additional employees. For effective growth
management, we will be required to continue improving our operations, management, and financial systems and control. Our failure
to manage growth effectively may lead to operational and financial inefficiencies that will have a negative effect on our profitability.
We cannot assure investors that we will be able to timely and effectively meet that demand and maintain the quality standards required
by our existing and potential customers.
We are dependent on certain key personnel
and loss of these key personnel could have a material adverse effect on our business, financial condition and results of operations.
Our success is, to a certain extent, attributable
to the management, sales and marketing, and operational and technical expertise of certain key personnel. Each of the named executive
officers performs key functions in the operation of our business. The loss of a significant number of these employees could have
a material adverse effect upon our business, financial condition, and results of operations.
We are dependent on a technically trained
workforce and an inability to retain or effectively recruit such employees could have a material adverse effect on our business,
financial condition and results of operations.
We must attract, recruit and retain a sizeable
workforce of technically competent employees to develop and manufacture our products and provide service support. Our ability to
implement effectively our business strategy will depend upon, among other factors, the successful recruitment and retention of
additional highly skilled and experienced engineering and other technical and marketing personnel. There is significant competition
for technologically qualified personnel in our business and we may not be successful in recruiting or retaining sufficient qualified
personnel consistent with our operational needs.
Adverse capital and credit market conditions
may significantly affect our ability to meet liquidity needs, access to capital and cost of capital.
The capital and credit markets have previously
experienced extreme volatility and disruption, including, among other things, extreme volatility in securities prices, severely
diminished liquidity and credit availability, ratings downgrades of certain investments and declining valuations of others. Governments
have taken unprecedented actions intended to address extreme market conditions that have included severely restricted credit and
declines in real estate values. In some cases, the markets have exerted downward pressure on availability of liquidity and credit
capacity for certain issuers. While historically these conditions have not impaired our ability to utilize our current credit facilities
and finance our operations, there can be no assurance that there will not be deterioration in financial markets and confidence
in major economies such that our ability to access credit markets and finance our operations, might be impaired. Without sufficient
liquidity, we may be forced to curtail our operations. Adverse market conditions may limit our ability to replace, in a timely
manner, maturing liabilities and access the capital necessary to operate and grow our business. As such, we may be forced to delay
raising capital or bear an unattractive cost of capital which could decrease our profitability and significantly reduce our financial
flexibility. The tightening of credit in financial markets could adversely affect the ability of our customers to obtain financing
for purchases of our products and could result in a decrease in or cancellation of orders for our products. Our results of operations,
financial condition, cash flows and capital position could be materially adversely affected by disruptions in the financial markets.
We have been relying on bank facilities to finance our expansion
of new plants, which increased our debt asset ratio. We may not have sufficient cash to meet our payment obligations.
The Company leverages from various Chinese
banks to fund its business operations and our expansion to meet the demand from the fast growing lithium battery market in mobile
and portable consumer devices, vehicles of various sizes, and energy storage systems. As of December 31, 2017, the Company’s
debt asset ratio was 69.1%. The management of the Company has taken and will take a number of actions and will continue to address
our high debt level situation in order to restore the Company to a sound financial position with an appropriate business strategy
going forward. These actions can include market more higher-margined lithium battery products and systems; control cost in operating
expenses, and improve management efficiency; and introduce strategic investment. If we are not successful in implementing these
actions, we may not have sufficient cash to meet our payment obligations.
Our quarterly results may fluctuate
because of many factors and, as a result, investors should not rely on quarterly operating results as indicative of future results.
Fluctuations in operating results or the
failure of operating results to meet the expectations of public market analysts and investors may negatively impact the value of
our securities. Quarterly operating results may fluctuate in the future due to a variety of factors that could affect revenues
or expenses in any particular quarter. Fluctuations in quarterly operating results could cause the value of our securities to decline.
Investors should not rely on quarter-to-quarter comparisons of results of operations as an indication of future performance. As
a result of the factors listed below, it is possible that in the future periods results of operations may be below the expectations
of public market analysts and investors. This could cause the market price of our securities to decline. Factors that may affect
our quarterly results include:
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Vulnerability of our business to a general economic downturn in China;
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Fluctuation and unpredictability of costs related to the raw materials used to manufacture our products;
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Seasonality of our business;
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Changes in the laws of the PRC that affect our operations;
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Competition from our competitors; and
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Our ability to obtain necessary government certifications and/or licenses to conduct our business.
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Our stock price may be negatively affected
if we become subject to the recent scrutiny, criticism and negative publicity involving U.S. listed Chinese companies.
U.S. public companies that have substantially
all of their operations in China, particularly companies like us which have completed share exchanges or reverse merger transactions,
have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory
agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting
irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance policies
or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity,
the publicly traded stock of many U.S.-listed Chinese companies has sharply decreased in value and, in some cases, has become virtually
worthless. Many of these companies subject to shareholder lawsuits and SEC enforcement actions, conducted internal and external
investigations into the allegations. If we become the subject of any unfavorable allegations, whether such allegations are proven
to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend our company. This
situation will be costly and time consuming and distract our management from growing our company. If such allegations are not proven
to be groundless, our company and business operations will be severely negatively affected and your investment in our stock could
be rendered worthless.
We have outstanding warrants and options,
and future sales of the shares obtained upon exercise of these options or warrants could adversely affect the market price of our
common stock.
As of December 31, 2017, we had outstanding
options exercisable for an aggregate of 130,042 shares of common stock at a weighted average exercise price of $2.80 per share.
We have registered the issuance of all the shares issuable upon exercise of the options, and they will be freely tradable by the
exercising party upon issuance. The holders may sell these shares in the public markets from time to time, without limitations
on the timing, amount or method of sale. As of December 31, 2017, we also had outstanding warrants exercisable for an aggregate
of 200,000 shares of common stock at a weighted average exercise price of $3.00 per share. As our stock price rises, the holders
may exercise their options and sell a large number of shares. This could cause the market price of our common stock to decline.
RISKS RELATED TO DOING BUSINESS IN CHINA
The PRC government exerts substantial
influence over the manner in which we must conduct our business activities.
The PRC government has exercised and continues
to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our
ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import
and export tariffs, environmental regulations, land use rights, property, and other matters. We believe that our operations in
China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments
of the jurisdictions in which we operate may impose new, stricter regulations or interpretations of existing regulations that would
require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.
Substantially all of our assets are
located in the PRC and substantially all of our revenues are derived from our operations in China, and changes in the political
and economic policies of the PRC government could have a significant impact upon the business we may be able to conduct in the
PRC and accordingly on the results of our operations and financial condition.
Our business operations may be adversely
affected by the current and future political environment in the PRC. The Chinese government exerts substantial influence and control
over the manner in which we must conduct our business activities. Our ability to operate in China may be adversely affected by
changes in Chinese laws and regulations, including those relating to taxation, import and export tariffs, raw materials, environmental
regulations, land use rights, property and other matters. Although the current government of the PRC has been pursuing economic
reform policies that encourage private economic activities and greater economic decentralization, the PRC government continues
to exercise significant control over economic growth in China through the allocation of resources, controlling payment of foreign
currency-denominated obligations, setting monetary policy and imposing policies that impact particular industries or companies
in different ways. There is no assurance, that the government of the PRC will continue to pursue these policies, or that it will
not significantly alter these policies from time to time without advance notice.
Our operations are subject to PRC laws
and regulations that are sometimes vague and uncertain. Any changes in such PRC laws and regulations, or the interpretations thereof,
may have a material and adverse effect on our business.
The PRC’s legal system is a civil
law system based on written statutes. Unlike the common law system prevalent in the United States, decided legal cases have little
value as precedent in China. There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations,
including but not limited to, governmental approvals required for conducting business and investments, laws and regulations governing
the battery industry, national security-related laws and regulations and export/import laws and regulations, as well as commercial,
antitrust, patent, product liability, environmental laws and regulations, consumer protection, and financial and business taxation
laws and regulations.
The Chinese government has been developing
a comprehensive system of commercial laws, and considerable progress has been made in introducing laws and regulations dealing
with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade. However,
because these laws and regulations are relatively new, and because of the limited volume of published cases and judicial interpretation
and their lack of force as precedents, interpretation and enforcement of these laws and regulations involve significant uncertainties.
New laws and regulations that affect existing and proposed future businesses may also be applied retroactively.
Our principal operating subsidiaries, SZ
Highpower, SZ Springpower and ICON are considered foreign invested enterprises under PRC laws, and as a result are required to
comply with PRC laws and regulations, including laws and regulations specifically governing the activities and conduct of foreign
invested enterprises. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our
businesses. If the relevant authorities find us in violation of PRC laws or regulations, they would have broad discretion in dealing
with such a violation, including, without limitation:
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Revoking our business license, other licenses or authorities;
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Requiring that we restructure our ownership or operations; and
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Requiring that we discontinue any portion or all of our business.
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The disclosures in our reports and other
filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in the PRC. Accordingly,
our public disclosure should be reviewed in light of the fact that no governmental agency that is located in China where substantially
all of our operations and business are located have conducted any due diligence on our operations or reviewed or cleared any of
our disclosures.
We are regulated by the SEC and our reports
and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Unlike
public reporting companies whose operations are located primarily in the United States, however, substantially all of our operations
are located in China. Since substantially all of our operations and business take place in China, it may be more difficult for
the Staff of the SEC to overcome the geographic and cultural obstacles that are present when reviewing our disclosures. These same
obstacles are not present for similar companies whose operations or business take place entirely or primarily in the United States.
Furthermore, our SEC reports and other disclosures and public pronouncements are not subject to the review or scrutiny of any PRC
regulatory authority. For example, the disclosure in our SEC reports and other filings are not subject to the review of China Securities
Regulatory Commission, a PRC regulator that is tasked with oversight of the capital markets in China. Accordingly, you should review
our SEC reports, filings and our other public pronouncements with the understanding that no local regulator has done any due diligence
on our company and with the understanding that none of our SEC reports, other filings or any of our other public pronouncements
has been reviewed or otherwise been scrutinized by any local regulator.
The scope of our business license in
China is limited, and we may not expand or continue our business without government approval and renewal, respectively.
Our principal operating subsidiary, SZ
Highpower is a wholly foreign-owned enterprise, commonly known as WFOEs. A WFOE can only conduct business within its approved business
scope, which appears on the business license since its inception. Our license permits us to design, manufacture, sell and market
battery products throughout the PRC. Any amendment to the scope of our business requires further application and government approval.
Prior to expanding our business and engaging in activities that are not covered by our current business licenses, we are required
to apply and receive approval from the relevant PRC government authorities. In order for us to expand business beyond the
scope of our license, we will be required to enter into a negotiation with the authorities for the approval to expand the scope
of our business. PRC authorities, which have discretion over business licenses, may reject our request to expand the scope of our
business licenses to include our planned areas of expansion. We will be prohibited from engaging in any activities that the
PRC authorities do not approve in our expanded business licenses. Companies that operate outside the scope of their licenses
can be subjected to fines, disgorgement of income and ordered to cease operations. Our business and results of operations
may be materially and adversely affected if we are unable to obtain the necessary government approval for expanded business licenses
that cover any areas in which we wish to expand.
We are subject to a variety of environmental
laws and regulations related to our manufacturing operations. Our failure to comply with environmental laws and regulations may
have a material adverse effect on our business and results of operations.
We are subject to various environmental
laws and regulations in China that require us to obtain environmental permits for our battery manufacturing operations. Although
we do not currently exceed the approved annual output limits under the new permit, we cannot guarantee that this will continue
to be the case. Additionally, our current permit does not cover one of our existing premises at our manufacturing facility. If
we fail to comply with the provisions of our permit, we could be subject to fines, criminal charges or other sanctions by regulators,
including the suspension or termination of our manufacturing operations.
To the extent we ship our products outside
of the PRC, or to the extent our products are used in products sold outside of the PRC, they may be affected by the following:
The transportation of non-rechargeable and rechargeable lithium batteries is regulated by the International Civil Aviation Organization
(ICAO), and corresponding International Air Transport Association (IATA), Pipeline & Hazardous Materials Safety Administration
(PHMSA), Dangerous Goods Regulations and the International Maritime Dangerous Goods Code (IMDG), and in the PRC by General Administration
of Civil Aviation of China and Maritime Safety Administration of People’s Republic of China. These regulations are based
on the United Nations (UN) Recommendations on the Transport of Dangerous Goods Model Regulations and the UN Manual of Tests and
Criteria. We currently ship our products pursuant to ICAO, IATA and PHMSA hazardous goods regulations. New regulations that pertain
to all lithium battery manufacturers went into effect in 2003 and 2004, and additional regulations went into effect on October
1, 2009. The regulations require companies to meet certain testing, packaging, labeling and shipping specifications for safety
reasons. We comply with all current PRC and international regulations for the shipment of our products, and will comply with any
new regulations that are imposed. We have established our own testing facilities to ensure that we comply with these regulations.
If we were unable to comply with the new regulations, however, or if regulations are introduced that limit our ability to transport
products to customers in a cost-effective manner, this could have a material adverse effect on our business, financial condition
and results of operations.
We cannot assure that at all times we will
be in compliance with environmental laws and regulations or our environmental permits or that we will not be required to expend
significant funds to comply with, or discharge liabilities arising under, environmental laws, regulations and permits. Additionally,
these regulations may change in a manner that could have a material adverse effect on our business, results of operations and financial
condition. We have made and will continue to make capital and other expenditures to comply with environmental requirements.
Furthermore, our failure to comply with
applicable environmental laws and regulations worldwide could harm our business and results of operations. The manufacturing, assembling
and testing of our products require the use of hazardous materials that are subject to a broad array of environmental, health and
safety laws and regulations. Our failure to comply with any of these applicable laws or regulations could result in:
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Regulatory penalties, fines and legal liabilities;
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Suspension of production;
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Alteration of our fabrication, assembly and test processes; and
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Curtailment of our operations or sales.
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In addition, our failure to manage the
use, transportation, emission, discharge, storage, recycling or disposal of hazardous materials could subject us to increased costs
or future liabilities. Existing and future environmental laws and regulations could also require us to acquire pollution abatement
or remediation equipment, modify our product designs or incur other expenses associated with such laws and regulations. Many new
materials that we are evaluating for use in our operations may be subject to regulation under existing or future environmental
laws and regulations that may restrict our use of one or more of such materials in our manufacturing, assembly and test processes
or products. Any of these restrictions could harm our business and results of operations by increasing our expenses or requiring
us to alter our manufacturing processes.
If our land use rights or the land use
rights of our landlord are revoked or not renewed, we would be forced to relocate operations.
Under Chinese law land is owned by the
state or rural collective economic organizations. The state issues to the land users the land use right certificates. Land use
rights can be revoked or not renewed and the land users forced to vacate at any time when redevelopment of the land is in the public
interest. The public interest rationale is interpreted quite broadly and the process of land appropriation may be less than transparent.
We acquired approximately 126,605 square meters of land equity in Huizhou from the Huizhou State-Owned Land Resource in 2007 upon
which we constructed a manufacturing facility. Besides the land use rights in Huizhou, we rely on the land use rights of our landlords
for other facilities, and the loss of our own land use rights or our landlords’ land use rights would require us to identify
and relocate our operations, which could have a material adverse effect on our financial condition and results of operations. Any
loss of this land use right would require us to identify and relocate our manufacturing and other facilities, which could have
a material adverse effect on our financial condition and results of operations.
We will not be able to complete an acquisition
of prospective acquisition targets in the PRC unless their financial statements can be reconciled to U.S. generally accepted accounting
principles in a timely manner.
Companies based in the PRC may not have
properly kept financial books and records that may be reconciled with U.S. generally accepted accounting principles (“U.S.
GAAP”). If we attempt to acquire a significant PRC target company and/or its assets, we would be required to obtain or prepare
financial statements of the target that are prepared in accordance with and reconciled to U.S. GAAP. Federal securities laws require
that a business combination meeting certain financial significance tests require the public acquirer to prepare and file historical
and/or pro forma financial statement disclosure with the SEC. These financial statements must be prepared in accordance with, or
be reconciled to U.S. GAAP and the historical financial statements must be audited in accordance with the standards of the PCAOB.
If a proposed acquisition target does not have financial statements that have been prepared in accordance with, or that can be
reconciled to, U.S. GAAP and audited in accordance with the standards of the PCAOB, we will not be able to acquire that proposed
acquisition target. These financial statement requirements may limit the pool of potential acquisition targets with which we may
acquire and hinder our ability to expand our retail operations. Furthermore, if we consummate an acquisition and are unable to
timely file audited financial statements and/or pro forma financial information required by the Exchange Act, such as Item 9.01
of Form 8-K, we will be ineligible to use the SEC’s short-form registration statement on Form S-3 to raise capital, if we
are otherwise eligible to use a Form S-3. If we are ineligible to use a Form S-3, the process of raising capital may be more expensive
and time consuming and the terms of any offering transaction may not be as favorable as they would have been if we were eligible
to use Form S-3.
We face risks related to natural disasters,
terrorist attacks or other events in China that may affect usage of public transportation, which could have a material adverse
effect on our business and results of operations.
Our business could be materially and adversely
affected by natural disasters, terrorist attacks or other events in China. For example, in early 2008, parts of China suffered
a wave of strong snow storms that severely impacted public transportation systems. In May 2008, Sichuan Province in China suffered
a strong earthquake measuring approximately 8.0 on the Richter scale that caused widespread damage and casualties. Any future
natural disasters, terrorist attacks or other events in China could cause a reduction in usage of or other severe disruptions to,
public transportation systems and could have a material adverse effect on our business and results of operations.
The foreign currency exchange rate between
United States Dollar (“US$”) Dollars and Renminbi (“RMB”) could adversely affect our financial condition.
To the extent that we need to convert US$
into RMB for our operational needs, our financial position and the price of our common stock may be adversely affected should the
RMB appreciate against the US$ at that time. Conversely, if we decide to convert RMB into US$ for the operational needs or paying
dividends on our common stock, the US$ equivalent of our earnings from our subsidiaries in China would be reduced should the US$
appreciate against the RMB.
Because most of our oversea sales are
made in US$ and most of our expenses are paid in RMB, devaluation of the US$ could negatively impact our results of operations.
The value of RMB is subject to changes
in China’s governmental policies and to international economic and political developments. In January 1994, the PRC government
implemented a unitary managed floating rate system. Under this system, the People’s Bank of China, or PBOC, began publishing
a daily Base Exchange Rate with reference primarily to the supply and demand of RMB against the US$ and other foreign currencies
in the market during the previous day. Authorized banks and financial institutions are allowed to quote buy and sell rates for
RMB within a specified band around the central bank’s daily exchange rate. On July 21, 2005, PBOC announced an adjustment
of the exchange rate of the US$ to RMB and modified the system by which the exchange rates are determined, which has resulted in
an appreciation of the RMB against the US$. During the year ended December 31, 2017, the exchange rate of the RMB to the US$ decreased
approximately 6.4% from the level at the end of December 31, 2016. While the international reaction to the RMB revaluation has
generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible
currency policy, which could result in further fluctuations of the exchange rate of the US$ against the RMB, including future devaluations.
Because most of our net sales are made in US$ and most of our expenses are paid in RMB, any future devaluation of the US$ against
the RMB could negatively impact our results of operations. Moreover, any affirmative actions by the U.S. Government against the
PRC in relation to the exchange rate could negatively impact our results of operations.
Inflation in the PRC could negatively
affect our profitability and growth.
While the PRC economy has experienced rapid
growth, such growth has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid
economic growth can lead to growth in the money supply and rising inflation. According to the National Bureau of Statistics of
China, China’s Average Consumer Price Index was approximately 1.6% in 2017. If prices for our products and services rise
at a rate that is insufficient to compensate for the rise in the costs of supplies such as raw materials, it may have an adverse
effect on our profitability.
Because our funds are held in banks
which do not provide insurance, the failure of any bank in which we deposit our funds could affect our ability to continue in business.
Banks and other financial institutions
in the PRC do not provide insurance for funds held on deposit. A significant portion of our assets are in the form of cash deposited
with banks in the PRC, and in the event of a bank failure, we may not have access to our funds on deposit. Depending upon the amount
of money we maintain in a bank that fails, our inability to have access to our cash could impair our operations, and, if we are
not able to access funds to pay suppliers, employees and other creditors, we may be unable to continue in business.
Failure to comply with the United States
Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.
As our ultimate holding company is a Delaware
corporation, we are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies
from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business.
Foreign companies, including some that may compete with us, are not subject to these prohibitions. Corruption, extortion, bribery,
pay-offs, theft and other fraudulent practices may occur from time-to-time in the PRC. We can make no assurance, however, that
our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other
agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material
adverse effect on our business, financial condition and results of operations.
We have received certain preferential
tax concessions and the loss of these preferential tax concessions will cause our tax liabilities to increase and our profitability
to decline.
In China, the companies granted with National
High-tech Enterprise status (“NHTE”) enjoy a 15% income tax rate. This status needs to be renewed every three years.
As of December 31, 2017, all of our subsidiaries located in China received NHTE status. The loss of the preferential tax treatment
will increase our tax liabilities and reduce our profitability.
Under the EIT Law, Highpower International
and HKHTC may be classified as “resident enterprises” of China for tax purpose, which may subject Highpower International
and HKHTC to PRC income tax on taxable global income.
Under the EIT law and its implementing
rules, both of which became effective on January 1, 2008, enterprises are classified as resident enterprises and non-resident enterprises.
An enterprise established outside of China with its “de facto management bodies” located within China is considered
a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese domestic enterprise for enterprise
income tax purposes. The implementing rules of the EIT Law define de facto management body as a managing body that in practice
exercises “substantial and overall management and control over the production and operations, personnel, accounting, and
properties” of the enterprise. Due to the short history of the EIT Law and lack of applicable legal precedents, it remains
unclear how the PRC tax authorities will determine the PRC tax resident treatment of a foreign company such as Highpower International
and HKHTC. Both Highpower International and HKHTC’s members of management are located in China. If the PRC tax authorities
determine that Highpower International or HKHTC is a “resident enterprise” for PRC enterprise income tax purposes,
a number of PRC tax consequences could follow. First, they may be subject to the enterprise income tax at a rate of 25% on their
worldwide taxable income, including interest income on the proceeds from this offering, as well as PRC enterprise income tax reporting
obligations. Second, the EIT Law provides that dividend paid between “qualified resident enterprises” is exempted from
enterprise income tax. A recent circular issued by the State Administration of Taxation regarding the standards used to classify
certain Chinese-invested enterprises controlled by Chinese enterprises or Chinese group enterprises and established outside of
China as “resident enterprises” clarified that dividends and other income paid by such “resident enterprises”
will be considered to be PRC source income, subject to PRC withholding tax, currently at a rate of 10%, when recognized by non-PRC
shareholders. It is unclear whether the dividends that Highpower International or HKHTC receive from SZ Highpower and SZ Springpower
will constitute dividends between “qualified resident enterprises” and would therefore qualify for tax exemption, because
the definition of qualified resident enterprises is unclear and the relevant PRC government authorities have not yet issued guidance
with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise
income tax purposes. We are actively monitoring the possibility of “resident enterprise” treatment for the applicable
tax years and are evaluating appropriate organizational changes to avoid this treatment, to the extent possible. As a result of
the EIT Law, our historical operating results will not be indicative of our operating results for future periods and the value
of our common stock may be adversely affected.
Dividends payable by us to our foreign
investors and any gain on the sale of our shares may be subject to taxes under PRC tax laws.
If dividends payable to our shareholders
are treated as income derived from sources within China, then the dividends that shareholders receive from us, and any gain on
the sale or transfer of our shares, may be subject to taxes under PRC tax laws.
Under the EIT Law and its implementing
rules, PRC enterprise income tax at the rate of 10% is applicable to dividends payable by us to our investors that are non-resident
enterprises so long as such non-resident enterprise investors do not have an establishment or place of business in China or, despite
the existence of such establishment of place of business in China, the relevant income is not effectively connected with such establishment
or place of business in China, to the extent that such dividends have their sources within the PRC. Similarly, any gain realized
on the transfer of our shares by such investors is also subject to a 10% PRC income tax if such gain is regarded as income derived
from sources within China and Highpower International is considered as a resident enterprise which is domiciled in China for tax
purpose. Additionally, there is a possibility that the relevant PRC tax authorities may take the view that the Highpower International
and HKHTC are holding SZ Highpower, SZ Springpower and ICON, and the capital gain derived by our overseas shareholders or investors
from the share transfer is deemed China-sourced income, in which case such capital gain may be subject to a PRC withholding tax
at the rate of up to 10%. If we are required under the EIT Law to withhold PRC income tax on our dividends payable to our foreign
shareholders or investors who are non-resident enterprises, or if investors are required to pay PRC income tax on the transfer
or our shares under the circumstances mentioned above, the value of investors’ investment in our shares may be materially
and adversely affected.
A downturn in the economy of the PRC may slow our growth
and profitability.
The growth of the Chinese economy has been
uneven across geographic regions and economic sectors. There can be no assurance that growth of the Chinese economy will be steady
or that any downturn will not have a negative effect on our business, especially if it results in either a decreased use of our
products or in pressure on us to lower our prices.
Because our business is located in the
PRC, we may have difficulty establishing adequate management, legal and financial controls, which are required in order to comply
with U.S. securities laws.
PRC companies have historically not adopted
a western style of management and financial reporting concepts and practices, which includes strong corporate governance, internal
controls and, computer, financial and other control systems. Most of our middle and top management staff are not educated and trained
in the Western system, and we may have difficulty in hiring new employees in the PRC with such training. In addition, we may have
difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC. As a result of these factors,
we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing
financial statements, books of account and corporate records and instituting business practices that meet Western standards. Therefore,
we may, in turn, experience difficulties in implementing and maintaining adequate internal controls as required under Section 404
of the Sarbanes-Oxley Act of 2002. This may result in significant deficiencies or material weaknesses in our internal controls
which could impact the reliability of our financial statements and prevent us from complying with SEC rules and regulations and
the requirements of the Sarbanes-Oxley Act of 2002. Any such deficiencies, weaknesses or lack of compliance could have a materially
adverse effect on our business.
Investors may experience difficulties
in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based upon U.S. laws,
including the federal securities laws or other foreign laws against us or our management.
Most of our current operations, including
the manufacture and distribution of our products, are conducted in China. Moreover, most of our directors and officers are nationals
and residents of China Mainland or Hong Kong. All or substantially all of the assets of these persons are located outside the United
States and in the PRC. As a result, it may not be possible to effect service of process within the United States or elsewhere outside
China upon these persons. In addition, uncertainties exist as to whether the courts of China would recognize or enforce judgments
of U.S. courts obtained against us or such officers and/or directors predicated upon the civil liability provisions of the securities
laws of the United States or any state thereof, or be competent to hear original actions brought in China against us or such persons
predicated upon the securities laws of the United States or any state thereof.
Contract drafting, interpretation and
enforcement in China involve significant uncertainties.
We have entered into numerous contracts
governed by PRC law, many of which are material to our business. As compared with contracts in the United States, contracts governed
by PRC law tend to contain less detail and are not as comprehensive in defining contracting parties’ rights and obligations.
As a result, contracts in China are more vulnerable to disputes and legal challenges. In addition, contract interpretation and
enforcement in China is not as developed as in the United States, and the result of any contract dispute is subject to significant
uncertainties. Therefore, we cannot assure that we will not be subject to disputes under our material contracts, and if such disputes
arise, we cannot assure that we will prevail.
We could be liable for damages for defects in our products
pursuant to the Tort Liability Law of the PRC
The Tort Liability Law of the People’s
Republic of China, which was passed during the 12th Session of the Standing Committee of the 11th National People’s Congress
on December 26, 2009, states that manufacturers are liable for damages caused by defects in their products and sellers are liable
for damages attributable to their fault. If the defects are caused by the fault of third parties such as the transporter or storekeeper,
manufacturers and sellers are entitled to claim for compensation from these third parties after paying the compensation amount.
RISKS RELATED TO OUR CAPITAL STRUCTURE
The price of our common stock is volatile
and investors might not be able to resell their securities at or above the price they have paid.
Since our initial public offering and listing
of our common stock in October 2007, the price at which our common stock had traded has been highly volatile, with the lowest and
highest sales price of $0.92 and $9.82, respectively. Investors might not be able to resell the shares of our common stock at or
above the price they have paid. The stock market has experienced extreme volatility that often has been unrelated to the performance
of its listed companies. Moreover, only a limited number of our shares are traded each day, which could increase the volatility
of the price of our stock. These market fluctuations might cause our stock price to fall regardless of our performance. The market
price of our common stock might fluctuate significantly in response to many factors, some of which are beyond our control, including
the following:
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Actual or anticipated fluctuations in our annual and quarterly results of operations;
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Changes in securities analysts’ expectations;
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Variations in our operating results, which could cause us to fail to meet analysts’ or investors’ expectations;
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Announcements by our competitors or us of significant new products, contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
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Conditions and trends in our industry;
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General market, economic, industry and political conditions;
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Changes in market values of comparable companies;
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Additions or departures of key personnel;
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Stock market price and volume fluctuations attributable to inconsistent trading volume levels; and
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Future sales of equity or debt securities, including sales which dilute existing investors.
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A few principal stockholders have significant influence over
us.
Three of our stockholders beneficially
own or control approximately 32.5% of our outstanding shares. If these stockholders were to act as a group, they would have a controlling
influence in determining the outcome of any corporate transaction or other matters submitted to our stockholders for approval,
including mergers, consolidations and the sale of all or substantially all of our assets, election of directors, and other significant
corporate actions. Such stockholders may also have the power to prevent or cause a change in control. In addition, without the
consent of these three stockholders, we could be prevented from entering into transactions that could be beneficial to us. The
interests of these three stockholders may differ from the interests of our other stockholders.
Compliance with changing regulation
of corporate governance and public disclosure will result in additional expenses.
Changing laws, regulations and standards
relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC regulations, have
created uncertainty for public companies and significantly increased the costs and risks associated with accessing the public markets
and public reporting. Our management team has to invest significant management time and financial resources to comply with
both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and
a diversion of management time and attention from revenue generating activities to compliance activities.
If we fail to maintain effective internal
controls over financial reporting, the price of our common stock may be adversely affected.
We are required to establish and maintain
appropriate internal controls over financial reporting. Failure to establish those controls, or any failure of those controls once
established, could adversely impact our public disclosures regarding our business, financial condition or results of operations.
Any failure of these controls could also prevent us from maintaining accurate accounting records and discovering accounting errors
and financial frauds. Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require annual assessment
of our internal control over financial reporting. The standards that must be met for management to assess the internal control
over financial reporting as effective are complex, and require significant documentation, testing and possible remediation to meet
the detailed standards. We may encounter problems or delays in completing activities necessary to make an assessment of our internal
control over financial reporting. In addition, the attestation process by our independent registered public accountants is new
and we may encounter problems or delays in completing the implementation of any requested improvements and receiving an attestation
of our assessment by our independent registered public accountants. If we cannot assess our internal control over financial reporting
as effective, or our independent registered public accountants are unable to provide an unqualified attestation report on such
assessment, investor confidence and share value may be negatively impacted.
In addition, management’s assessment
of internal controls over financial reporting may identify weaknesses and conditions that need to be addressed in our internal
controls over financial reporting or other matters that may raise concerns for investors. Any actual or perceived weaknesses and
conditions that need to be addressed in our internal control over financial reporting, disclosure of management’s assessment
of our internal controls over financial reporting, or disclosure of our public accounting firm’s attestation to or report
on management’s assessment of our internal controls over financial reporting may have an adverse impact on the price of our
common stock.
Under our 2010 Equity Incentive Plan
we may grant securities to compensate employees and other services providers, which could result in increased share-based compensation
expenses and, therefore, reduce net income.
Under current accounting rules, we would
be required to recognize share-based compensation as compensation expense in our statement of operations, based on the fair value
of equity awards on the date of the grant, and recognize the compensation expense over the period in which the recipient is required
to provide service in exchange for the equity award. We made grants of equity awards in 2016 and 2017, and accordingly our results
of operations for the years ended December 31, 2016 and 2017 contain share-based compensation charges. If we grant equity compensation
to attract and retain key personnel, the expenses associated with share-based compensation may adversely affect our net income.
However, if we do not grant equity compensation, we may not be able to attract and retain key personnel or be forced to expend
cash or other compensation instead. Furthermore, the issuance of equity awards would dilute the stockholders’ ownership interests
in our company.
Our certificate of incorporation, bylaws,
Stockholder Rights Agreement and Delaware law may have anti-takeover effects that could discourage, delay or prevent a change in
control, which may cause our stock price to decline.
Our certificate of incorporation and bylaws
and Delaware law could make it more difficult for a third party to acquire us, even if closing such a transaction would be beneficial
to our stockholders. We are authorized to issue up to 10,000,000 shares of preferred stock. This preferred stock may be issued
in one or more series, the terms of which may be determined at the time of issuance by our board of directors without further action
by stockholders. The terms of any series of preferred stock may include voting rights (including the right to vote as a series
on particular matters), preferences as to dividend, liquidation, conversion and redemption rights and sinking fund provisions.
No preferred stock is currently outstanding. The issuance of any preferred stock could materially adversely affect the rights of
the holders of our common stock, and therefore, reduce the value of our common stock. In particular, specific rights granted to
future holders of preferred stock could be used to restrict our ability to merge with, or sell our assets to, a third party and
thereby preserve control by the present management.
Provisions of our certificate of incorporation
and bylaws and Delaware law also could have the effect of discouraging potential acquisition proposals or making a tender offer
or delaying or preventing a change in control, including changes a stockholder might consider favorable. Such provisions may also
prevent or frustrate attempts by our stockholders to replace or remove our management. In particular, the certificate of incorporation
and bylaws and Delaware law, as applicable, among other things:
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provide the board of directors with the ability to alter the bylaws without stockholder approval;
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place limitations on the removal of directors; and
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provide that vacancies on the board of directors may be filled by a majority of directors in office, although less than a quorum.
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On September 12, 2017, we entered into
a Rights Agreement (the “Rights Agreement”) with Corporate Stock Transfer, Inc., as rights agent, and our Board of
Directors declared a dividend distribution of one right for each outstanding share of the common stock to holders of record at
the close of business on September 21, 2017. Each right is attached to and trades with the associated share of common stock. The
rights will become exercisable only if a person acquires beneficial ownership of 15% or more of our common stock (or, in the case
of a person who beneficially owned 15% or more of our common stock on the date the rights plan was adopted, such person acquires
beneficial ownership of any additional shares of our common stock) or after the date of the Rights Agreement, commences a tender
offer that, if consummated, would result in beneficial ownership by a person of 15% or more of our common stock. The rights will
expire on September 12, 2020, unless the rights are earlier redeemed or exchanged.
The intent of the Rights Plan is to protect
our stockholders’ interests by encouraging anyone seeking control of our company to negotiate with our Board of Directors.
However, our Rights Agreement could make it more difficult for a third party to acquire us without the consent of our Board of
Directors, even if doing so may be beneficial to our stockholders. This agreement may discourage, delay or prevent a tender offer
or takeover attempt, including offers or attempts that could result in a premium over the market price of our common stock. This
agreement could reduce the price that stockholders might be willing to pay for shares of our common stock in the future. Furthermore,
the anti-takeover provisions of our Rights Agreement may entrench management and make it more difficult to replace management even
if the stockholders consider it beneficial to do so.
We are also subject to Section 203 of the
Delaware General Corporation Law which, subject to certain exceptions, prohibits “business combinations” between a
publicly-held Delaware corporation and an “interested stockholder,” which is generally defined as a stockholder who
becomes a beneficial owner of 15% or more of a Delaware corporation’s voting stock for a three-year period following the
date that such stockholder became an interested stockholder.
Any delay or prevention of a change of
control transaction or changes in our Board of Directors or management could deter potential acquirers or prevent the completion
of a transaction in which our stockholders could receive a substantial premium over the then current market price for their shares.
We do not foresee paying cash dividends
in the foreseeable future and, as a result, our investors’ sole source of gain, if any, will depend on capital appreciation,
if any.
We do not plan to declare or pay any cash
dividends on our shares of common stock in the foreseeable future and currently intend to retain any future earnings for funding
growth. As a result, Investors should not rely on an investment in our securities if they require the investment to produce dividend
income. Capital appreciation, if any, of our shares may be investors’ sole source of gain for the foreseeable future. Moreover,
investors may not be able to resell their shares in our company at or above the price they paid for them.
ITEM 1B. UNRESOLVED STAFF
COMMENTS
Not applicable to smaller reporting companies.
ITEM 2. PROPERTIES
The Company currently has four active manufacturing
operations located in mainland China in the cities of Shenzhen and Huizhou located in the Guangdong province. HKHTC’s registered
office is located in Hong Kong. Our active facilities consist of manufacturing plants, dormitories and research and development
facilities. We lease manufacturing facilities with varying terms ranging, which are renewed upon expiration. All leases have been
fully prepaid until the expiration date, and we will renew all the leases before the expiration date.
In China, only the PRC government and peasant
collectives may own land. In February 2007, the Company acquired approximately 126,605 square meters (1,362,765 square feet) of
land equity in Huizhou, Guangdong province, China for a total of RMB21.5 million ($3.3 million) under a land use right grant from
the Huizhou State-Owned Land Resource Bureau that gave us the right to use the land for 50 years and an agreement with the government
of Maan Town. In the event we wish to continue to use the land after the 50-year period, we must apply for an extension at least
one year prior to the land grant’s expiration.
Our rights with respect to the land use
right grant permit us to develop the land and construct buildings for industrial applications. We have the right to transfer or
rent the land and use it as collateral for our loans.
ITEM 3. LEGAL PROCEEDINGS
On January 14, 2016, FirsTrust China, Ltd
(“FirsTrust”) filed an amended complaint in the Delaware Chancery Court (amending its initial complaint filed February
25, 2015) naming Highpower as the defendant asserting a cause of action for breach of contract and conversion of stock, and seeking
damages in the form of issuance of 150,000 shares or the value of such shares, plus interest thereon, attorneys’ fees and
costs and expenses. On February 4, 2016, Highpower filed an answer, affirmative defenses and counterclaim against FirsTrust asserting
claims for equitable rescission, declaratory relief and breach of contract, and seeking rescission of the contract, return of the
200,000 warrants and 150,000 shares of Highpower stock previously issued to FirsTrust, plus interest, attorneys’ fees and
costs and expenses. On January 24, 2017, the court denied FirsTrust’s motion for judgment on the pleadings. On January 19,
2018, the parties engaged in a court-sponsored mediation, which resulted in a settlement of all claims between the parties, the
basic terms of which are evidenced by a “term sheet”. As part of the settlement, Highpower agreed to pay to FirsTrust
the equivalent of $450,000 in Highpower’s common stock, with a portion payable in cash, at Highpower’s option. The
settlement amount will be paid in two installments, with $212,500 payable in the form of 50,000 shares of common stock based on
$4.25 per share to be paid as the first installment and a second installment of $237,500, or shares equal to that amount, to be
paid within six months. The parties are currently working on a long form settlement agreement.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON STOCK,
R
ELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock trades on the NASDAQ Global
Market under the stock symbol “HPJ”.
The following table summarizes the highest
and lowest sales prices of our common stock during the quarters listed below as reported by the NASDAQ:
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Highest
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Lowest
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Year ended December 31, 2017
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First Quarter
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$
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4.90
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$
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2.10
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Second Quarter
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$
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5.70
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$
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3.60
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Third Quarter
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$
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5.20
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$
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3.25
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Fourth Quarter
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$
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5.75
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$
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3.65
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Year ended December 31, 2016
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First Quarter
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$
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3.12
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$
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1.65
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Second Quarter
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$
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3.07
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$
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1.65
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Third Quarter
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$
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3.64
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$
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1.78
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Fourth Quarter
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$
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3.14
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$
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2.25
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The stock market in general has experienced
extreme stock price fluctuations in the past few years. In some cases, these fluctuations have been unrelated to the operating
performance of the affected companies. Many companies have experienced dramatic volatility in the market prices of their common
stock. We believe that a number of factors, both within and outside our control, could cause the price of our common stock to fluctuate,
perhaps substantially. Factors such as the following could have a significant adverse impact on the market price of our common
stock:
|
·
|
Our financial position and results of operations;
|
|
·
|
Our ability to obtain additional financing and, if available, the terms and conditions of the financing;
|
|
·
|
Concern as to, or other evidence of, the reliability and efficiency of our proposed products or our competitors’ products;
|
|
·
|
Announcements of innovations or new products by us or our competitors;
|
|
·
|
Federal and state governmental regulatory actions and the impact of such requirements on our business;
|
|
·
|
The development of litigation against us;
|
|
·
|
Period-to-period fluctuations in our operating results;
|
|
·
|
Changes in estimates of our performance by any securities analysts;
|
|
·
|
The issuance of new equity securities pursuant to a future offering or acquisition;
|
|
|
|
|
·
|
Changes in interest rates;
|
|
·
|
Competitive developments, including announcements by competitors of new products or significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
|
|
·
|
Investor perceptions of our company; and
|
|
·
|
General economic and other national conditions.
|
Stockholders
As of April 4, 2018, we had 20 stockholders
of record. This number does not include an indeterminate number of stockholders whose shares are held by brokers in street name.
Dividends
We do not expect to declare or pay any
cash dividends on our common stock in the foreseeable future, and we currently intend to retain future earnings, if any, to finance
the expansion of our business. The decision whether to pay cash dividends on our common stock will be made by our board of directors,
at its discretion, and will depend on our financial condition, operating results, capital requirements and other factors that the
board of directors considers significant.
We did not pay cash dividends in the years ended December 31,
2017 or 2016.
Transfer Agent
The transfer agent and registrar for our
common stock is Computershare Trust Company, N.A.
Equity Compensation Plan Information
Our equity compensation plan information is provided as set
forth in Part III, Item 11 herein.
Additional Information
Copies of our annual reports, quarterly
reports, current reports, and any amendments to those reports, are available free of charge on the Internet at www.sec.gov. All
statements made in any of our filings, including all forward-looking statements, are made as of the date of the document, in which
the statement is included, and we do not assume or undertake any obligation to update any of those statements or documents unless
we are required to do so by law.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Not applicable for a smaller reporting
company.
ITEM 7. MANAGEMENT’S DISCUSSION
AND ANALYSIS AND RESULTS OF OPERATIONS
The following discussion and analysis of
the Company’s historical results of operations and liquidity and capital resources should be read in conjunction with the
consolidated financial statements of the Company and notes thereto appearing elsewhere herein. The following discussion and analysis
also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of various factors. See “Forward Looking Statements”
that precedes Item 1 above on page ii.
Overview
In 2017, Highpower’s overall revenue
increased by $70.3 million or 40.4% compared to 2016. The main driver was our lithium business and new materials business. Lithium
business net sales increased by $49.5 million, or 44.2% during 2017 compared to 2016. New materials business net sales increased
by $24.5 million, or 543.2% during 2017 compared to 2016, which experienced an increase in larger volume orders with support from
the new largest shareholder of GZ Highpower.
Ni-MH batteries and accessories net sales
decreased by $3.7 million or 6.5%, during 2017 compared to 2016, which was in line with the whole industry trend.
The descriptions of the reportable segments
have been changed from Lithium Batteries and Ni-MH Batteries to Lithium Business and Ni-MH Batteries and Accessories, respectively.
Lithium Business mainly consists of lithium batteries, power storage system and power source solutions. Ni-MH Batteries and Accessories
mainly consists of Ni-MH rechargeable batteries, sized batteries in blister packing as well as chargers and battery packs.
Gross profit during 2017 was $47.4 million,
or 19.4% of net sales, compared to $38.1 million, or 21.9% of net sales in 2016. This decrease of gross profit margin was mainly
due to the product mix and the high raw material price. The actions which we had taken to offset material price fluctuation expired
gradually in the third quarter of 2017. Our gross profit margin was 14.9% in the fourth quarter of 2017 was due to the raw material
price remains on high level and a substantial increase in new materials business which had a low gross profit margin. As we expected
in the 10-Q of the third quarter of 2017, our gross profit margin was 17.0% after excluding new materials business in the fourth
quarter of 2017.
For 2018, we will continue to drive business
growth. As the raw material price may be still at a high level, we will strive to balance our selling price and customer expectation
carefully. At same time, we will seek to continuously improve our labor efficiency and improve material usage for better gross
margin.
Deconsolidation of GZ Highpower
On December 11, 2017, GZ Highpower signed
the Agreement with Xiamen Tungsten and Mr. Ou, the General Manager of GZ Highpower. Pursuant to the terms of the Agreement, GZ
Highpower received a total of RMB92.8 million (approximately $14.3 million), including RMB78.9 million (approximately $12.1 million)
from Xiamen Tungsten in exchange for 55.294% ownership of GZ Highpower. The Transaction was completed on December 21, 2017. After
the Transaction, the Company no longer holds the controlling equity interest of GZ Highpower and deconsolidated GZ Highpower. As
of December 31, 2017, the Company held 31.294% of the equity interest of GZ Highpower which was recorded under the equity method.
In connection with the Transaction, RMB
40 million (approximately $6.1 million) of the proceeds was received by the Company in the form of repayments of loans and related
interests that were previously extended by the Company to GZ Highpower.
During the year ended December 31, 2017,
the Company recognized a gain amounting to $6,004,008 arising from deconsolidation of GZ Highpower.
Critical Accounting Policies, Estimates and Assumptions
The SEC defines critical accounting policies
as those that are, in management's view, most important to the portrayal of our financial condition and results of operations and
those that require significant judgments and estimates.
The accounting principles we utilized in
preparing our consolidated financial statements conform in all material respects to U.S GAAP.
Use of Estimates
. The preparation
of financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant items subject
to such estimates and assumptions include, but are not limited to, the allowance for doubtful receivables; recoverability of the
carrying amount of inventory; fair value of financial instruments; provisional amounts based on reasonable estimates for certain
income tax effects of the Tax Cuts and Jobs Act (the “Act”) and the assessment of deferred tax assets or liabilities.
These estimates are often based on complex judgments and assumptions that management believes to be reasonable but are inherently
uncertain and unpredictable. Actual results could differ from these estimates.
Accounts Receivable
. Accounts
receivable are stated at original amount less an allowance made for doubtful receivables, if any, based on a review of all outstanding
amounts at the period end. An allowance is also made when there is objective evidence that the Company will not be able to collect
all amounts due according to the original terms of receivables. The Company analyzes the aging of the customer accounts, coverage
of credit insurance, customer concentrations, customer credit-worthiness, historical and current economic trends and changes in
its customer payment patterns when evaluating the adequacy of the allowance for doubtful accounts.
Revenue Recognition.
The
Company recognizes revenue when persuasive evidence of an arrangement exists, the sales price is fixed or determinable, delivery
of the product has occurred, title and risk of loss have transferred to the customers and collectability of the receivable is reasonably
assured. The majority of domestic sales contracts transfer title and risk of loss to customers upon receipt of product by customer.
The majority of oversea sales contracts transfer title and risk of loss to customers when goods were delivered to the carriers.
Revenue is presented net of sales tax and value added tax.
The Company does not have arrangements
for returns from customers and does not have any future obligations directly or indirectly related to product resale by customers.
The Company has no sales incentive programs.
Inventories.
Inventories
are stated at the lower of cost or net realizable value. Cost is determined using the weighted average method. Inventories include
raw materials, packing materials, consumables, work in progress, and finished goods. The variable production overhead is allocated
to each unit of production on the basis of the actual use of the production facilities. The allocation of fixed production overhead
to the costs of conversion is based on the normal capacity of the production facilities.
Where there is evidence that the utility
of inventories, in their disposal in the ordinary course of business, will be less than cost, whether due to physical deterioration,
obsolescence, changes in price levels, or other causes, the inventories are written down to net realizable value.
Income Taxes
.
The Company
recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based
on enacted tax laws and statutory tax rates, applicable to the periods in which the differences are expected to affect taxable
income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
Foreign Currency Translation and
Transactions.
Highpower’s functional currency is the US$. HKHTC's functional currency is the Hong Kong dollar ("HK$").
The functional currency of the Highpower’s other direct and indirect wholly owned subsidiaries in the PRC is the RMB.
Most of the Company’s oversea sales
are priced and settled with US$. At the date a foreign currency transaction is recognized, each asset, liability, revenue, expense,
gain, or loss arising from the transaction is measured initially in the functional currency of the recording entity by use of the
exchange rate in effect at that date. The increase or decrease in expected functional currency cash flows upon settlement of a
transaction resulting from a change in exchange rates between the functional currency and the currency in which the transaction
is denominated is recognized as foreign currency transaction gain or loss that is included in earnings for the period in which
the exchange rate changes. At each balance sheet date, recorded balances that are denominated in a foreign currency are adjusted
to reflect the current exchange rate.
The Company’s reporting currency
is US$. Assets and liabilities of HKHTC and the PRC subsidiaries are translated at the current exchange rate at the balance sheet
dates, revenues and expenses are translated at the average exchange rates during the reporting periods, and equity accounts are
translated at historical rates. Translation adjustments are reported in other comprehensive income.
Recently Issued Accounting Standards
See Note 2 to the Consolidated Financial
Statements included herewith.
Results of Operations
The following table sets forth the consolidated
statements of operations of the Company for the years ended December 31, 2017 and 2016, both in US$ and as a percentage of net
sales.
Consolidated Statements of Operations
(Dollars in Thousands, Except Diluted Earnings per Common Stock attributable to the Company)
|
|
For the years Ended December 31,
|
|
|
|
2017
|
|
|
|
|
|
2016
|
|
|
|
|
|
Increased
(decreased) %
|
|
Net Sales
|
|
|
244,166
|
|
|
|
100.0
|
%
|
|
|
173,851
|
|
|
|
100
|
%
|
|
|
40.4
|
%
|
Cost of Sales
|
|
|
(196,792
|
)
|
|
|
(80.6
|
%)
|
|
|
(135,769
|
)
|
|
|
(78.1
|
%)
|
|
|
44.9
|
%
|
Gross profit
|
|
|
47,374
|
|
|
|
19.4
|
%
|
|
|
38,082
|
|
|
|
21.9
|
%
|
|
|
24.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
|
(9,512
|
)
|
|
|
(3.9
|
%)
|
|
|
(9,244
|
)
|
|
|
(5.3
|
%)
|
|
|
2.9
|
%
|
Selling and distribution expenses
|
|
|
(7,501
|
)
|
|
|
(3.1
|
%)
|
|
|
(6,888
|
)
|
|
|
(4.0
|
%)
|
|
|
8.9
|
%
|
General and administrative expenses
|
|
|
(15,394
|
)
|
|
|
(6.3
|
%)
|
|
|
(18,186
|
)
|
|
|
(10.4
|
%)
|
|
|
(15.4
|
%)
|
Foreign currency transaction (loss) gain
|
|
|
(2,390
|
)
|
|
|
(1.0
|
%)
|
|
|
1,959
|
|
|
|
1.1
|
%
|
|
|
(222.0
|
%)
|
Income from operations
|
|
|
12,577
|
|
|
|
5.2
|
%
|
|
|
5,723
|
|
|
|
3.3
|
%
|
|
|
119.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in fair value of warrant liability
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
140
|
|
|
|
0.1
|
%
|
|
|
(100.0
|
%)
|
Changes in fair value of foreign currency derivatives
|
|
|
273
|
|
|
|
0.1
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
N/A
|
|
Government grants
|
|
|
1,358
|
|
|
|
0.6
|
%
|
|
|
1,763
|
|
|
|
1.0
|
%
|
|
|
(22.9
|
%)
|
Other income
|
|
|
459
|
|
|
|
0.2
|
%
|
|
|
509
|
|
|
|
0.3
|
%
|
|
|
(10.0
|
%)
|
Equity in earnings of investee
|
|
|
107
|
|
|
|
0.0
|
%
|
|
|
352
|
|
|
|
0.2
|
%
|
|
|
(69.5
|
%)
|
Gain on dilution in equity method investee
|
|
|
500
|
|
|
|
0.2
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
N/A
|
|
Gain on sales of long-term investment
|
|
|
1,677
|
|
|
|
0.7
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
N/A
|
|
Gain on deconsolidation of a subsidiary
|
|
|
6,004
|
|
|
|
2.5
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
N/A
|
|
Interest expenses
|
|
|
(1,426
|
)
|
|
|
(0.6
|
%)
|
|
|
(1,420
|
)
|
|
|
(0.8
|
%)
|
|
|
0.5
|
%
|
Income before taxes
|
|
|
21,529
|
|
|
|
8.8
|
%
|
|
|
7,067
|
|
|
|
4.1
|
%
|
|
|
204.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expenses
|
|
|
(4,315
|
)
|
|
|
(1.8
|
%)
|
|
|
(1,439
|
)
|
|
|
(0.9
|
%)
|
|
|
199.8
|
%
|
Net income
|
|
|
17,214
|
|
|
|
7.1
|
%
|
|
|
5,628
|
|
|
|
3.2
|
%
|
|
|
205.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: net income (loss) attributable to non-controlling interest
|
|
|
441
|
|
|
|
0.2
|
%
|
|
|
(490
|
)
|
|
|
(0.3
|
%)
|
|
|
190.0
|
%
|
Net income attributable to the Company
|
|
|
16,773
|
|
|
|
6.9
|
%
|
|
|
6,118
|
|
|
|
3.5
|
%
|
|
|
174.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common stock attributable to the Company
|
|
|
1.09
|
|
|
|
|
|
|
|
0.40
|
|
|
|
|
|
|
|
|
|
Net sales
Net sales for the year ended December 31,
2017 were $244.2 million compared to $173.9 million for the comparable period in 2016, an increase of $70.3 million, or 40.4%.
The increase was driven by our lithium business and new materials business, which was partially offset decrease in net sales by
Ni-MH batteries and accessories. Lithium business net sales increased by $49.5 million, or 44.2%, during the year ended December
31, 2017, compared to 2016, which was due to the increase in the number of lithium batteries units sold. New materials business
net sales increased by $24.5 million, or 543.2%, during the year ended December 31, 2017, compared to 2016, which was primarily
driven by increasing demand and increasing sales price of precious metal materials. Ni-MH batteries and accessories net sales decreased
by $3.7 million, or 6.5%, during the year ended December 31, 2017, compared to 2016, which was in line with the whole industry
trend.
Gross profit
Gross profit for the year ended December
31, 2017 was $47.4 million, or 19.4% of net sales, compared to $38.1 million, or 21.9% of net sales, respectively, for the comparable
period in 2016. This decrease of gross profit margin was mainly due to the product mix and the high raw material price.
Research and development expenses
Research and development expenses were
$9.5 million, or 3.9% of net sales, for the year ended December 31, 2017, as compared to $9.2 million, or 5.3% of net sales, for
the comparable period in 2016. The Company will continue to invest on R&D activities in the future.
Selling and distribution expenses
Selling and distribution expenses were
$7.5 million, or 3.1% of net sales, for the year ended December 31, 2017 compared to $6.9 million, or 4.0% of net sales, for
the comparable period in 2016. The decrease of percent of net sales was attributable to our optimization of our customer base.
General and administrative expenses
General and administrative expenses were
$15.4 million, or 6.3% of net sales, for the year ended December 31, 2017, compared to $18.2 million, or 10.4% of net sales, for
the comparable period in 2016. This decrease was primarily due to the one-time expenses in 2016, including impairment loss of machinery
and equipment and allowance for doubtful accounts that amounted to $0.5 million and $1.6 million, respectively. The Company expects
that general and administrative expenses will remain stable even though the business continues to grow.
Foreign currency transaction (loss)
gain
We experienced a loss of $2.4 million and
a gain of $2.0 million on the foreign currency transaction between the US$ and the RMB for the years ended December 31, 2017 and
2016, respectively. The (loss) gain on the foreign currency transaction was due to the influence of the RMB relative to the US$
over the respective periods.
Changes in fair value in foreign
currency derivatives
Changes in fair value in foreign currency
derivatives were $0.3 million for the year ended December 31, 2017.
Government grants
Government grants were $1.4 million and
$1.8 million for the years ended December 31, 2017 and 2016, respectively.
Other income
Other income, which consists of interest
income and sundry income, was $0.5 million for the year ended December 31, 2017 and 2016.
Equity in earnings of investee
Equity in earnings of investee, the former
equity method investee (Yipeng), was $0.1 million for the year ended December 31, 2017, as compared to $0.4 million for the comparable
period in 2016.
Gain on dilution in equity method
investee
Gain on dilution in equity method investee,
which was due to the equity issuance of Yipeng to a third party, was $0.5 million for the year ended December 31, 2017.
Gain on sales of long-term investment
Gain on sales of long-term investment,
which was due to sale the equity of Yipeng to a third party, was $1.7 million for the year ended December 31, 2017.
Gain on deconsolidation of a subsidiary
Gain on deconsolidation of a subsidiary,
GZ Highpower, was $6.0 million for the year ended December 31, 2017.
Interest expenses
Interest expenses were $1.4 million for
the years ended December 31, 2017 and 2016.
Income tax expenses
During the year ended December 31, 2017,
we recorded a provision for income tax expense of $4.3 million as compared to $1.4 million for the comparable period in 2016.
Net income
Net income attributable to the Company
(excluding net loss attributable to non-controlling interest) for the year ended December 31, 2017 was $16.8 million compared to
net income attributable to the Company (excluding net loss attributable to non-controlling interest) of $6.1 million for the comparable
period in 2016.
Reconciliation of Net Income to EBITDA
A table reconciling earnings before interest,
income tax, depreciation and amortization (“EBITDA”), a non-GAAP financial measure, to the appropriate GAAP measure
is included with the Company's financial information below. EBITDA was derived by taking earnings before interest expense (net),
taxes, depreciation and amortization. The presentation of this additional information is not meant to be considered in isolation
or as a substitute for results prepared in accordance with U.S. GAAP. The Company believes this non-GAAP measure is useful to investors
as it provides a basis for evaluating the Company's operating results in the ordinary course of its operations. This non-GAAP measure
is not based on any comprehensive set of accounting rules or principles. The Company believes that non-GAAP measures have limitations
in that they do not reflect all of the amounts associated with its results of operations as determined in accordance with U.S.
GAAP and that these measures should only be used to evaluate the Company's results of operations in conjunction with, and not in
lieu of, the corresponding GAAP measures.
|
|
For the years ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
Net income attributable to the Company
|
|
|
1
6,772,852
|
|
|
|
6,117,927
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
1,426,547
|
|
|
|
1,419,962
|
|
Income taxes expenses
|
|
|
4,315,325
|
|
|
|
1,439,177
|
|
Depreciation and Amortization
|
|
|
5,290,980
|
|
|
|
4,937,688
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
27,805,704
|
|
|
|
13,914,754
|
|
Key financial items excluding GZ
Highpower
The Company deconsolidated GZ Highpower
on December 21, 2017. Considered that the Company will no longer present GZ Highpower’s total assets and liabilities and
operations and comprehensive incomes upon deconsolidation, the table below shows the comparative figures of key financial items
excluding the effect of GZ Highpower:
|
|
For the years ended December
31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
$
|
|
|
$
|
|
Sales:
|
|
|
|
|
|
|
|
|
Lithium Business
|
|
|
161,660,771
|
|
|
|
112,128,757
|
|
Ni-MH Batteries and Accessories
|
|
|
53,492,309
|
|
|
|
57,211,657
|
|
Sales to GZ Highpower
|
|
|
746,776
|
|
|
|
367,982
|
|
Net sales (excluding GZ Highpwer)
|
|
|
215,899,856
|
|
|
|
169,708,396
|
|
Gross profit (excluding GZ Highpwer)
|
|
|
44,023,549
|
|
|
|
38,455,939
|
|
Gross profit margin (excluding GZ Highpwer)
|
|
|
20.4
|
%
|
|
|
22.7
|
%
|
|
|
|
|
|
|
|
|
|
Net income:
|
|
|
|
|
|
|
|
|
Net income
|
|
|
17,213,896
|
|
|
|
5,627,777
|
|
Less: Net income (loss) of GZ Highpower (including transaction with GZ Highpwer)
|
|
|
1,470,145
|
|
|
|
(1,633,834
|
)
|
Net income (excluding GZ Highpwer)
|
|
|
15,743,751
|
|
|
|
7,261,611
|
|
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
$
|
|
|
$
|
|
Total Assets:
|
|
|
|
|
|
|
|
|
Lithium Business
|
|
|
171,881,450
|
|
|
|
115,116,508
|
|
Ni-MH Batteries and Accessories (including $8,102,520 investment in GZ Highpower under equity method)
|
|
|
48,383,088
|
|
|
|
37,994,369
|
|
Amount due from GZ Highpower
|
|
|
-
|
|
|
|
6,601,065
|
|
Investment to GZ Highpower
|
|
|
-
|
|
|
|
4,028,893
|
|
Total Assets (excluding GZ Highpwer)
|
|
|
220,264,538
|
|
|
|
163,740,835
|
|
Liquidity and Capital Resources
We had cash of approximately $14.5 million
as of December 31, 2017, as compared to $9.3 million as of December 31, 2016.
To provide liquidity and flexibility in
funding our operations, we borrow funds under bank facilities and other external sources of financing. As of December 31, 2017,
we had lines of credit with eight financial institutions aggregating $79.8 million. The maturities of these facilities vary from
March 2018 to July 2019. The facilities are subject to regular review and approval. Certain of these bank facilities are guaranteed
by our Chief Executive Officer, Mr. Dang Yu Pan and his wife, pledged by land use right and buildings, and contain customary affirmative
and negative covenants for secured credit facilities of this type. Interest rates are generally based on the banks’ reference
lending rates. No significant commitment fees are required to be paid for the bank facilities. As of December 31, 2017, we had
utilized approximately $48.5 million under such general credit facilities and had available unused credit facilities of $31.3 million.
The Company’s debt asset ratio dropped to 69.5% as of December 31, 2017, which decreased by 2.8% as compared to a debt asset
ratio of 72.3% as of December 31, 2016.
For the year ended December 31, 2017, net
cash used in operating activities was approximately $4.1 million, as compared to net cash provided by operating activities of $4.8
million for the comparable period in 2016. The net cash increase of $8.9 million used in operating activities is primarily due
to an increase of $20.3 million in cash outflow from inventories, an increase of $14.6 million in cash inflow from amount due from
related parties, and an increase of $3.2 million in cash outflow from amount due to a related party.
Net cash used in investing activities was
$4.3 million for the year ended December 31, 2017 compared to $11.5 million for the comparable period in 2016. The net cash decrease
of $7.2 million used in investing activities is primarily attributable to an increase of $10.5 million in cash inflow from proceeds
from sale of long-term investments.
Net cash provided by financing activities
was $11.6 million for the year ended December 31, 2017 as compared to $10.1 million for the comparable period in 2016. The
net increase of $1.5 million cash provided by financing activities was primarily attributable to an increase of $5.9 million in
cash inflow proceeds from non-financial institution borrowings.
For fiscal year 2017 and 2016, our inventory
turnover was 6.0 and 6.6 times, respectively. The average days outstanding of our accounts receivable at December 31, 2017 was
77 days, as compared to 85 days at December 31, 2016. Inventory turnover and average days outstanding of accounts receivables are
key operating measures that management relies on to monitor our business.
The accounts receivable and inventory turnover
ratios have critical influence on the working capital. We provide our major customers with payment terms ranging from 30 to 90
days. Additionally, our production lead time is approximately 30 to 40 days, from the inspection of incoming materials, to production,
testing and packaging. We need to keep a large supply of raw materials, work in process and finished goods inventory on hand to
ensure timely delivery of our products to customers. We use two methods to support our working capital needs: (i) paying our suppliers
under payment terms ranging from 60 to 120 days; and (ii) using short-term bank loans. Upon receiving payment for our accounts
receivable, we pay our short-term loans. Our working capital management practices are designed to ensure that we maintain sufficient
working capital.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet debt,
nor do we have any transactions, arrangements or relationships with any special purpose entities.
ITEM 7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Credit Risk
We are exposed to credit risk from our
cash at bank, fixed deposits and accounts receivable. The credit risk on cash at bank and fixed deposits is limited because the
counterparts are recognized financial institutions. Accounts receivable are subject to credit evaluations. We periodically record
a provision for doubtful collections based on an evaluation of the collectability of accounts receivable by assessing, among other
factors, the customer’s willingness or ability to pay, repayment history, general economic conditions and our ongoing relationship
with the customers. We also work with Chinese Export & Credit Insurance Corporation to control credit risk from accounts receivable.
Foreign Currency and Exchange Risk
Though the reporting currency is the US$,
the Company maintains its financial records in the functional currency of RMB. Substantially all of our operations are conducted
in the PRC and we pay the majority of our expenses in RMB. Approximately 40% of our sales are made in US$. During the year ended
December 31, 2017, the exchange rate of the RMB to the US$ appreciated approximately 6.4% from the level at the end of December
31, 2016. Appreciation of the RMB against the US$ would increase our costs when translated into US$ and could adversely affect
our margins unless we make sufficient offsetting sales. Exchange rate fluctuations may also affect the value, in US$ terms, of
our net assets. In addition, the RMB is not freely convertible into foreign currency and all foreign exchange transactions must
take place through authorized institutions. Due to the volatility of the US$ to our functional currency, the Company placed a purchasing
forward exchange contracts to attempt to protect it from significant changes to the US$ which affects the value of its US$ receivables
and sales.
Country Risk
The substantial portion of our business,
assets and operations are located and conducted in China Mainland. While the economy has experienced significant growth in the
past twenty years, growth has been uneven, both geographically and among various sectors of the economy. The Chinese government
has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit
the overall economy of China Mainland, but may also have a negative effect on Highpower International. For example, Highpower International’s
operating results and financial condition may be adversely affected by government control over capital investments or changes in
tax regulations applicable to Highpower International. If there are any changes in any policies by the Chinese government and Highpower
International’s business is negatively affected as a result, then Highpower International’s financial results, including
our ability to generate revenues and profits, will also be negatively affected.
ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
The information required by this Item 8
is incorporated in this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls
and procedures
Disclosure controls and procedures are
controls and other procedures that are designed and adopted by management to ensure that information required to be disclosed by
us in the reports that we file or submit under the Exchange Act is properly recorded, processed, summarized and reported, within
the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that all necessary information required to be disclosed by the Company
in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal
executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.
As of the end of the period covered by
this Annual Report, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer
and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange
Act). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure
controls and procedures are effective.
(b) Management’s Report on Internal Control over
Financial Reporting
Our management is responsible for establishing
and maintaining adequate internal control over financial reporting. Internal control over financial reporting, as defined in Exchange
Act Rule 13a-15(f) and 15d-15(f), is a process designed by, or under the supervision of, our principal executive and principal
financial officers and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles and includes those policies and procedures that:
|
·
|
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
|
|
·
|
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
|
|
·
|
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use of disposition of our assets that could have a material effect on the financial statements.
|
Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement
preparation and presentation. Our management assessed the effectiveness of our internal control over financial reporting as of
December 31, 2017. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations
of the Tread way Commission (COSO) in the 2013 Internal Control-Integrated Framework. Based on this assessment, management believes
that as of December 31, 2017, our internal control over financial reporting is effective based on those criteria.
(c) Changes in Internal Control over Financial Reporting
There were no significant changes (including corrective actions
with regard to significant deficiencies) in our internal controls over financial reporting that occurred during the fourth quarter
of 2017, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Comprehensive Credit Granting Contract
between SZ Highpower and China Minsheng Banking Corp., Ltd. Shenzhen Branch
On November 14, 2017, SZ Highpower entered
into a comprehensive credit line contract with China Minsheng Banking Corp., Ltd., Shenzhen Branch, which provides for a revolving
line of credit of up to RMB20,000,000 ($3,073,188). The amount may be used for bank acceptance, although the maximum amount that
the company may have outstanding under the facility at any given time is RMB20 million. SZ Highpower and its subsidiary HZ HTC
or SZ Springpower may withdraw from each loan, from time to time as needed, but must make a specific drawdown application on or
before November 14, 2018, after which time the bank may cancel all or part of the facilities. The loan is guaranteed by HZ HTC,
SZ Springpower and our Chief Executive Officer, Dang Yu Pan. The line of credit required 40% of deposit, which is not included
in the contract amount of line of credit, and actual total line of credit amount up to RMB 33,333,333 ($5,121,980). The used facility
was $3,841,485 as of December 31, 2017 which was used for bank acceptance.
The following constitute events of default
by SZ Highpower under the loan agreement: the occurrence of significant business difficulties or adverse changes on the financial
conditions of SZ Highpower; an adverse change in the SZ Highpower’s business market; any major adjustment of relevant national
policies; SZ Highpower violates any other contract or agreement concluded with others, or any commitment or warranty unilaterally
made by SZ Highpower, which constitutes breach of other debts or other debts have been or may be announced acceleration by other
creditor; the guarantor’s guarantee capacity becomes obviously insufficient, or the guarantor violates the guarantee contract
or any obligation specified in the commitments made by the guarantor; any pledged or mortgaged property is damaged or value is
obviously decreased, and SZ Highpower fails to provide a new guarantee as required by the bank; SZ Highpower indicates directly
or by its conduct that it will not perform its obligations under the contract or other specified contracts with the bank; SZ Highpower’s
providing false information or withholding of important financial facts (including balance sheet, profit and loss statement and
other important materials), or refusal to accept the bank’s supervision of the use of the loan and the company’s operational
and financial activities; SZ Highpower transfers its assets, withdraws funds, evades debts or has any other behavior which damages
the bank’s rights and interest; SZ Highpower’s suffering major change in financial conditions, or involving in litigation,
arbitration, administrative punishment or other judicial administrative proceedings, which may have adverse impact the execution
of the contract; or any adversely affect SZ Highpower’s ability to perform its obligations under the loan facility.
Upon the occurrence of an event of default
under the CCL Agreement, the bank may adjust or cancel a credit line, and demand SZ Highpower to prepay all the borrowings having
been withdrawn under the contract.
Maximum Financing Contract between SZ
Springpower and Hua Xia Bank Co., Ltd. Shenzhen Branch
On October 23, 2017, SZ Springpower entered
into a comprehensive credit line contract with Hua Xia Bank Co., Ltd. Shenzhen Branch, which provides for a revolving line of credit
of up to RMB50,000,000 ($7,682,970). SZ Springpower may withdraw from each loan, from time to time as needed, but must make a specific
drawdown application on or before October 23, 2018, after which time the bank may cancel all or part of the facilities. The loan
is guaranteed by HZ HTC, SZ Springpower, ICON, our Chief Executive Officer, Dang Yu Pan and his wife. The used facility was $2,937,968
as of December 31, 2017 which was used for bank acceptance.
The following constitute events of default
by SZ Springpower under the loan agreement: SZ Springpower provides false information or holds back important operational accounting
facts; SZ Springpower changes the purpose of the financed capital or uses the financed capital for conducting any illegal or rule-breaking
transaction without The bank’s consent; SZ Springpower violates any other contract or agreement concluded with others, or
SZ Springpower makes any commitment or warranty unilaterally, which constitutes serious breach of other debts; the guarantee capacity
of the guarantor hereunder becomes obviously insufficient, or the pledged or mortgaged property hereunder is expropriated or damaged
or its value obviously declines, and SZ Springpower is unable to provide a new guarantee according to The bank’s requirements;
during the valid period of this Contract, SZ Springpower expressly indicates or indicates by its acts that SZ Springpower is unable
to or fails to perform its obligations specified in this Contract or the specific business contract; SZ Springpower transfers its
assets, withdraws funds, evades debts or has any other behavior which damages The bank’s rights and interest; SZ Springpower
does not perform its commitments made in this contract or does not perform the obligations agreed in this Contract or a specific
business contract; SZ Springpower refuses The bank’s supervision and examination on SZ Springpower’s use of the credit
funds and relevant operation and financial activities; SZ Springpower uses a false contract with an affiliated party to discount
or pledge on the basis of bill receivable and accounts receivable without real trade background to illegally withdraw The bank's
financing; SZ Springpower evades The bank’s obligatory right intentionally through affiliated transaction; SZ Springpower’s
operating mode, self system or legal status is changed, including but not limited to contracting, lease, custody, asset reorganization,
debt reconstruction, reform of shareholding system, joint operation, consolidation (merger), division, paid transfer of property,
joint venture (cooperation), reduce of registered capital, or applying for winding-up, applying for dissolution (or cancellation),
applying for reforming, reconciliation and bankruptcy; SZ Springpower has not obtained SZ Springpower’s written consent,
hasn’t implemented the liability of repayment of the debts under a specific business contract of this Contract or hasn’t
provided a new guarantee accepted by The bank; There is any serious crisis of the overall credit status, operating conditions and
financial status of the group customer of SZ Springpower, which causes significant threat to the safety of The bank’s loan;
SZ Springpower is unable to or is likely unable to repay the due debt because SZ Springpower sells, transfers or disposes by other
means any material assets or SZ Springpower’s operation and financial status becomes worse; or SZ Springpower is involved
in any significant economic lawsuit or arbitration and other legal dispute, or is involved in any significant administrative punishment,
which serious affects and threatens the realization of the creditor’s rights of The bank; SZ Springpower goes out of business,
is dissolved, stops business or is ordered to close, or its business license is revoked or cancelled; SZ Springpower violates any
other obligation agreed in this Contract, or the Guarantor hereunder violates any obligation agreed in the guarantee contract,
that The bank thinks sufficient to affect realization of its creditor’s rights; SZ Springpower causes a liability accident
or a significant environment and social risk incident due to violation of relevant laws, regulations, regulatory provisions or
industrial standards for food safety, work safety, environmental protection and management of environment and social risks, which
has affected or may affect the performance of obligations under this Contract or a specific business contract.
Upon the occurrence of an event of default
under the Maximum Financing Contract, the bank may adjust or cancel a credit line, and demand SZ Highpower to prepay all the borrowings
and interests having been withdrawn under the contract.
Comprehensive Credit Contract between
HZ HTC and Guangdong Huaxing Bank Co., Ltd. Huizhou Branch
On October 26, 2017, HZ HTC entered into
a comprehensive credit line contract with Guangdong Huaxing Bank Co., Ltd. Huizhou Branch, which provides for a revolving line
of credit of up to RMB60,000,000 ($9,219,564). HZ HTC may withdraw from each loan, from time to time as needed, but must make a
specific drawdown application on or before September 27, 2018, after which time the bank may cancel all or part of the facilities.
The comprehensive credit line shall be automatically terminated if the bank does not issue any credit line to HZ HTC prior to March
27, 2018. The loan is guaranteed by SZ Highpower, our Chief Executive Officer, Dang Yu Pan and HZ HTC’s accounts receivable.
The used facility was $5,676,178 as of December 31, 2017 which was used for bank acceptance.
The following constitute events of default
by HZ HTC under the loan agreement: HZ HTC violates agreed obligations under this Contract or any specific business contract during
the validity of this Contract, or HZ HTC expressly indicates or indicates through its acts that it does not perform the agreed
obligations under this Contract or any specific business contract during the validity of this Contract; the relevant certificates
and documents submitted by HZ HTC to The bank or the representations, warranties and commitments made by HZ HTC are not true, not
accurate or not complete, or have false record, misleading statement or major omission; HZ HTC conceals some important true information,
or fails to coordinate The bank’s investigation, examination and inspection; HZ HTC changes the purpose of the loan funds
without authorization, or conducts illegal transactions by use of the loan or bank loans; HZ HTC violates any other similar contract
(including but not limited to credit contract, loan contract and guarantee contract) concluded and signed with The bank or with
any third party, or debt securities issued by HZ HTC, or any dispute arising from such contract or securities is under litigation
or arbitration; HZ HTC’s guarantor violates the guarantee contract (including but not limited to guarantee contract, mortgage
contract and pledge contract) or has any breach of the guarantee contract, or the guarantee contract has not taken effect, is invalid
or is canceled; HZ HTC has any one of the following behaviors, being negligent in managing and claiming the creditor’s right
due, or disposing and transferring its main properties free of charge, or at unreasonable low price or by other improper means,
or escaping debts; HZ HTC illegally get funds or credit from The bank or other banks by using a false contract and arrangement
with a third party (including but not limited to HZ HTC's affiliated parties), including but not limited to pledge or discount
of the notes receivable and other claims without actual trading background; HZ HTC evades bank claims through affiliated transactions
or by other means; HZ HTC's operation conditions go into major problems, such as deterioration of financial conditions, serious
financial losses, loss of assets (including but not limited to loss of assets caused due to external guarantee) or other financial
crisis; HZ HTC has any illegal management behavior, and is subject to administrative punishment or criminal sanction, or is being
investigated by relevant authorities, or is likely to be subject to administrative punishment or criminal sanction; HZ HTC has
the following changes, such as division, consolidation, major merger, acquisition and reconstruction, disposal of major assets,
reduction of capital, liquidation, reorganization, being announced bankruptcy or being dissolved; HZ HTC's controlling shareholder
or actual controller is changed that The bank thinks having affected or likely to affect realization of creditor's rights hereunder;
or there is any significant event of HZ HTC's controlling shareholder, actual controller, legal representative or senior management
personnel, including but not limited to due to illegal management behavior, subject to administrative punishment or criminal sanction,
or being investigated by relevant authorities, or likely to be subject to administrative punishment or criminal sanction, or is
involved in a lawsuit or arbitration case, or serious deterioration of financial conditions, being announced bankruptcy or dissolved;
There is adverse change to the industry where HZ HTC is located, which The bank thinks having affected or likely to affect realization
of creditor's rights hereunder; HZ HTC fails to handle settlement or deposit or relevant business with The bank according to provisions;
other circumstances related to HZ HTC which endanger or likely to endanger realization of creditor’s right.
Upon the occurrence of an event of default
under the Comprehensive Credit Contract, the bank may: to adjust, cancel or terminate the comprehensive credit line hereunder,
or to adjust the valid period of the line; to announce immediate maturity of all or part of HZ HTC's debts; to demand HZ HTC to
immediately repay all or part of the credit line used; to demand HZ HTC to add security or take other measures to ensure The bank’s
lawful rights and interests not infringed; to make deduction directly from the account of HZ HTC and the guarantor to repay all
the debts under this Contract and the specific business contract (including the debts The bank requests for prepayment), without
obtaining HZ HTC’s consent in advance; to exercise the suretyship, ask the surety to perform suretyship liability, or realize
claim through disposal of the mortgaged property and/or pledged property.
Working Capital Loan Contract between
SZ Highpower and Bank of China, Buji Sub-branch
On October 20, 2017, SZ Highpower entered
into a working capital loan contract with Bank of China, Buji Sub-branch providing for an aggregate loan of RMB10,000,000 ($1,536,594)
to be used by SZ Highpower to purchase raw materials. The term of the loan is 12 months from the first withdrawal date. SZ Highpower
must withdraw the facility before October 25, 2017 one-time, after which time the bank may cancel all or part of the facility.
The interest rate will equal the one year benchmarked by interbank rates, plus 1.355% on all outstanding loan amounts. The loan
is guaranteed by SZ Springpower and our Chief Executive Officer, Dang Yu Pan. The Company’s real estate properties and land
use rights in Huizhou also serve as collateral for the loan. The balance of loan was $1,536,594 as of December 31, 2017.
The following constitute events of default
under the loan contracts: failure to comply with repayment obligations under the agreement or any affiliated credit lines contract;
failure to use borrowed funds according to the specified purposes; any statement made by SZ Highpower in the agreement is untrue
or in violation of any commitments in the loan agreement or affiliated loan contracts; failure to provide an additional guarantor
as required by the loan agreement; significant business difficulties or risks, deteriorated financial losses or losses of assets,
or other financial crisis; breach of covenants in other credit agreements with the bank or affiliated institutions of the bank;
any guarantor breaches a contract or defaults under any agreement with the bank or affiliated institutions of the bank; termination
of its business or engagement due to any wind-up, cancellation or bankruptcy issues; involvement or potential involvement in significant
economic disputes, litigation, arbitration or assets seizure or confiscation, or its involvement in other judicial proceedings
or administrative punishment proceedings that have affected or may affect its capacity to perform its obligations under the affiliated
specific credit line contract; an abnormal change in any major individual investor or key management member of SZ Highpower or
such a person or entity’s becoming subject to investigation or restriction by the judiciary, which have or may affect SZ
Highpower’s performance of obligation under affiliated specific credit line contract; Bank of China’s discovery of
any situation that may affect the financial position or performance capacities of SZ Highpower or a guarantor after the bank’s
annual review of SZ Highpower’s financial position and performance; failure to provide the relevant documentation acceptable
to Bank of China about the inflows and outflows of large-sum and abnormal capital in capital recovery account; or being in violation
of other rights and obligations under the affiliated specific credit line contract.
Upon the occurrence of an event of default,
the bank may: request SZ Highpower or any guarantor to rectify the event of default within a specified time period; reduce, temporarily
suspend or permanently terminate SZ Highpower’s credit limit in whole or in part; temporarily suspend or permanently terminate
in part or in whole SZ Highpower’s application for specific credit line under the agreement; announce the immediate expiration
of all the credit lines granted under the affiliated specific credit line contract as well as other contracts; terminate or release
the contract, terminate or release in part or in whole any of the affiliated specific credit line contract as well as the other
contracts executed between SZ Highpower and the bank; require compensation from SZ Highpower on the losses thereafter caused; hold
SZ Highpower’s deposit account at the bank in custody for repayment of amounts due under the contract; exercise the real
rights for security; request repayment from a guarantor; or take any other procedures deemed necessary by the bank.
Working Capital Loan Contract between
SZ Springpower and Bank of China, Buji Sub-branch
On October 20, 2017, SZ Springpower entered
into a working capital loan contract with Bank of China, Buji Sub-branch providing for an aggregate loan of RMB10,000,000 ($1,536,594)
to be used by SZ Springpower to purchase raw materials. The term of the loan is 12 months from the first withdrawal date. SZ Springpower
must withdraw in 30 days from October 24, 2017, after which time the bank may cancel all or part of the facility. The interest
rate will equal the one year benchmarked by interbank rates, plus 1.355% on all outstanding loan amounts. The loan is guaranteed
by SZ Highpower, HZ HTC and our Chief Executive Officer, Dang Yu Pan. The balance of loan was $1,536,594 as of December 31, 2017.
The following constitute events of default
under the loan contracts: failure to comply with repayment obligations under the agreement or any affiliated credit lines contract;
failure to use borrowed funds according to the specified purposes; any statement made by SZ Springpower in the agreement is untrue
or in violation of any commitments in the loan agreement or affiliated loan contracts; failure to provide an additional guarantor
as required by the loan agreement; significant business difficulties or risks, deteriorated financial losses or losses of assets,
or other financial crisis; breach of covenants in other credit agreements with the bank or affiliated institutions of the bank;
any guarantor breaches a contract or defaults under any agreement with the bank or affiliated institutions of the bank; termination
of its business or engagement due to any wind-up, cancellation or bankruptcy issues; involvement or potential involvement in significant
economic disputes, litigation, arbitration or assets seizure or confiscation, or its involvement in other judicial proceedings
or administrative punishment proceedings that have affected or may affect its capacity to perform its obligations under the affiliated
specific credit line contract; an abnormal change in any major individual investor or key management member of SZ Springpower or
such a person or entity’s becoming subject to investigation or restriction by the judiciary, which have or may affect SZ
Springpower’s performance of obligation under affiliated specific credit line contract; Bank of China’s discovery of
any situation that may affect the financial position or performance capacities of SZ Springpower or a guarantor after the bank’s
annual review of SZ Springpower’s financial position and performance; failure to provide the relevant documentation acceptable
to Bank of China about the inflows and outflows of large-sum and abnormal capital in capital recovery account; or being in violation
of other rights and obligations under the affiliated specific credit line contract.
Upon the occurrence of an event of default,
the bank may: request SZ Springpower or any guarantor to rectify the event of default within a specified time period; reduce, temporarily
suspend or permanently terminate SZ Springpower’s credit limit in whole or in part; temporarily suspend or permanently terminate
in part or in whole SZ Springpower’s application for specific credit line under the agreement; announce the immediate expiration
of all the credit lines granted under the affiliated specific credit line contract as well as other contracts; terminate or release
the contract, terminate or release in part or in whole any of the affiliated specific credit line contract as well as the other
contracts executed between SZ Springpower and the bank; require compensation from SZ Springpower on the losses thereafter caused;
hold SZ Springpower’s deposit account at the bank in custody for repayment of amounts due under the contract; exercise the
real rights for security; request repayment from a guarantor; or take any other procedures deemed necessary by the bank.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Stated in US Dollars)
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
|
14,502,171
|
|
|
|
9,324,393
|
|
Restricted cash
|
|
|
25,953,946
|
|
|
|
11,213,640
|
|
Accounts receivable, net
|
|
|
58,252,999
|
|
|
|
46,280,769
|
|
Amount due from related parties
|
|
|
1,165,838
|
|
|
|
7,517,250
|
|
Notes receivable
|
|
|
2,606,517
|
|
|
|
1,093,730
|
|
Advances to suppliers
|
|
|
6,050,531
|
|
|
|
2,007,184
|
|
Prepayments and other receivables
|
|
|
4,268,527
|
|
|
|
3,694,020
|
|
Foreign exchange derivatives
|
|
|
236,436
|
|
|
|
-
|
|
Inventories
|
|
|
42,946,644
|
|
|
|
22,207,333
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
155,983,609
|
|
|
|
103,338,319
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
46,520,776
|
|
|
|
43,504,991
|
|
Long-term prepayments
|
|
|
3,715,445
|
|
|
|
1,198,668
|
|
Land use rights, net
|
|
|
2,639,631
|
|
|
|
3,622,435
|
|
Other assets
|
|
|
748,431
|
|
|
|
500,000
|
|
Deferred tax assets, net
|
|
|
750,267
|
|
|
|
1,477,761
|
|
Long-term investments
|
|
|
9,906,379
|
|
|
|
9,689,576
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
|
220,264,538
|
|
|
|
163,331,750
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
60,368,012
|
|
|
|
49,463,901
|
|
Deferred income
|
|
|
309,638
|
|
|
|
761,491
|
|
Short-term loans
|
|
|
10,128,646
|
|
|
|
18,776,080
|
|
Non-financial institution borrowings
|
|
|
10,756,158
|
|
|
|
3,741,115
|
|
Notes payable
|
|
|
54,859,478
|
|
|
|
30,658,000
|
|
Amount due to a related party
|
|
|
-
|
|
|
|
1,522,313
|
|
Other payables and accrued liabilities
|
|
|
12,243,345
|
|
|
|
11,148,556
|
|
Income taxes payable
|
|
|
3,609,391
|
|
|
|
1,963,298
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
152,274,668
|
|
|
|
118,034,754
|
|
|
|
|
|
|
|
|
|
|
Income taxes payable, noncurrent
|
|
|
777,685
|
|
|
|
-
|
|
Warrant Liability
|
|
|
-
|
|
|
|
259
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
15
3,052,353
|
|
|
|
118,035,013
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
-
|
|
|
|
-
|
|
HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Stated in US Dollars)
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
EQUITY
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
(Par value: $0.0001, Authorized: 10,000,000 shares, Issued and outstanding: none)
|
|
|
-
|
|
|
|
-
|
|
Common stock
|
|
|
|
|
|
|
|
|
(Par value: $0.0001, Authorized: 100,000,000 shares, 15,509,658 shares issued and outstanding at December 31, 2017 and 15,114,991 shares issued and outstanding at December 31, 2016)
|
|
|
1,551
|
|
|
|
1,511
|
|
Additional paid-in capital
|
|
|
12,709,756
|
|
|
|
11,580,934
|
|
Statutory and other reserves
|
|
|
6,549,815
|
|
|
|
4,992,463
|
|
Retained earnings
|
|
|
4
4,481,568
|
|
|
|
29,266,068
|
|
Accumulated other comprehensive income (loss)
|
|
|
3,469,495
|
|
|
|
(873,582
|
)
|
|
|
|
|
|
|
|
|
|
Total equity attributable to the stockholders of Highpower International Inc.
|
|
|
6
7,212,185
|
|
|
|
44,967,394
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest
|
|
|
-
|
|
|
|
329,343
|
|
|
|
|
|
|
|
|
|
|
TOTAL EQUITY
|
|
|
6
7,212,185
|
|
|
|
45,296,737
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND EQUITY
|
|
|
220,264,538
|
|
|
|
163,331,750
|
|
See notes to consolidated financial statements
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
(Stated in US Dollars)
|
|
For the years ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
Net sales
|
|
|
244,166,312
|
|
|
|
173,851,113
|
|
Cost of sales
|
|
|
(196,792,444
|
)
|
|
|
(135,768,642
|
)
|
Gross profit
|
|
|
47,373,868
|
|
|
|
38,082,471
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
|
(9,512,074
|
)
|
|
|
(9,243,750
|
)
|
Selling and distribution expenses
|
|
|
(7,500,560
|
)
|
|
|
(6,888,052
|
)
|
General and administrative expenses
|
|
|
(15,393,791
|
)
|
|
|
(18,186,362
|
)
|
Foreign currency transaction (loss) gain
|
|
|
(2,390,417
|
)
|
|
|
1,959,036
|
|
Total operating expenses
|
|
|
(34,796,842
|
)
|
|
|
(32,359,128
|
)
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
12,577,026
|
|
|
|
5,723,343
|
|
|
|
|
|
|
|
|
|
|
Changes in fair value of warrant liability
|
|
|
259
|
|
|
|
140,290
|
|
Changes in fair value of foreign exchange derivatives
|
|
|
273,496
|
|
|
|
-
|
|
Government grants
|
|
|
1,357,852
|
|
|
|
1,762,266
|
|
Other income
|
|
|
458,247
|
|
|
|
509,262
|
|
Equity in earnings of investee
|
|
|
107,243
|
|
|
|
351,755
|
|
Gain on dilution in equity method investee
|
|
|
500,270
|
|
|
|
-
|
|
Gain on sale of long-term investment
|
|
|
1,677,367
|
|
|
|
-
|
|
Gain on deconsolidation of a subsidiary
|
|
|
6,004,008
|
|
|
|
-
|
|
Interest expenses
|
|
|
(1,426,547
|
)
|
|
|
(1,419,962
|
)
|
Income before income taxes
|
|
|
21,529,221
|
|
|
|
7,066,954
|
|
|
|
|
|
|
|
|
|
|
Income taxes expenses
|
|
|
(
4,315,325
|
)
|
|
|
(1,439,177
|
)
|
Net income
|
|
|
1
7,213,896
|
|
|
|
5,627,777
|
|
|
|
|
|
|
|
|
|
|
Less: net income (loss) attributable to non-controlling interest
|
|
|
441,044
|
|
|
|
(490,150
|
)
|
Net income attributable to the Company
|
|
|
1
6,772,852
|
|
|
|
6,117,927
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
Net income
|
|
|
1
7,213,896
|
|
|
|
5,627,777
|
|
Foreign currency translation gain (loss)
|
|
|
4,234,078
|
|
|
|
(3,540,334
|
)
|
Comprehensive income
|
|
|
21,447,974
|
|
|
|
2,087,443
|
|
|
|
|
|
|
|
|
|
|
Less: comprehensive income (loss) attributable to non-controlling interest
|
|
|
479,098
|
|
|
|
(524,140
|
)
|
Comprehensive income attributable to the Company
|
|
|
20,968,876
|
|
|
|
2,611,583
|
|
|
|
|
|
|
|
|
|
|
Earnings per share of common stock attributable to the Company
|
|
|
|
|
|
|
|
|
- Basic
|
|
|
1.
09
|
|
|
|
0.41
|
|
- Diluted
|
|
|
1.
09
|
|
|
|
0.40
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common stock outstanding
|
|
|
|
|
|
|
|
|
- Basic
|
|
|
15,326,797
|
|
|
|
15,105,235
|
|
- Diluted
|
|
|
15,435,371
|
|
|
|
15,113,914
|
|
See notes to consolidated financial statements
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGE IN EQUITY
(Stated in US Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
other
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
paid-in
|
|
|
Statutory
and
|
|
|
Retained
|
|
|
comprehensive
|
|
|
Non-controlling
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
other
reserves
|
|
|
earnings
|
|
|
income
|
|
|
interest
|
|
|
Total
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2015
|
|
|
15,101,679
|
|
|
|
1,510
|
|
|
|
11,227,979
|
|
|
|
4,042,429
|
|
|
|
24,098,175
|
|
|
|
2,632,762
|
|
|
|
853,483
|
|
|
|
42,856,338
|
|
Proceeds from exercise of stock options
|
|
|
13,312
|
|
|
|
1
|
|
|
|
35,009
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35,010
|
|
Foreign currency translation adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,506,344
|
)
|
|
|
(33,990
|
)
|
|
|
(3,540,334
|
)
|
Share-based compensation expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
317,946
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
317,946
|
|
Transfer to statutory and other reserves
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
950,034
|
|
|
|
(950,034
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,117,927
|
|
|
|
-
|
|
|
|
(490,150
|
)
|
|
|
5,627,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016
|
|
|
15,114,991
|
|
|
|
1,511
|
|
|
|
11,580,934
|
|
|
|
4,992,463
|
|
|
|
29,266,068
|
|
|
|
(873,582
|
)
|
|
|
329,343
|
|
|
|
45,296,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
294,667
|
|
|
|
30
|
|
|
|
802,661
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
802,691
|
|
Foreign currency translation adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,196,024
|
|
|
|
38,054
|
|
|
|
4,234,078
|
|
Share-based compensation expenses
|
|
|
100,000
|
|
|
|
10
|
|
|
|
326,161
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
326,171
|
|
Transfer to statutory and other reserves
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,705,747
|
|
|
|
(1,705,747
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,772,852
|
|
|
|
-
|
|
|
|
441,044
|
|
|
|
17,213,896
|
|
Deconsolidation of a subsidiary
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(148,395
|
)
|
|
|
148,395
|
|
|
|
147,053
|
|
|
|
(808,441
|
)
|
|
|
(661,388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2017
|
|
|
15,509,658
|
|
|
|
1,551
|
|
|
|
12,709,756
|
|
|
|
6,549,815
|
|
|
|
44,481,568
|
|
|
|
3,469,495
|
|
|
|
-
|
|
|
|
67,212,185
|
|
See notes to consolidated financial statements
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated in US Dollars)
|
|
For the years ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
|
1
7,213,896
|
|
|
|
5,627,777
|
|
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
5,290,980
|
|
|
|
4,937,688
|
|
Allowance for doubtful accounts
|
|
|
58,728
|
|
|
|
1,651,546
|
|
Impairment of machinery and equipment
|
|
|
-
|
|
|
|
530,914
|
|
Loss on disposal of property, plant and equipment
|
|
|
48,976
|
|
|
|
609,842
|
|
Deferred taxes
|
|
|
374,626
|
|
|
|
(32,756
|
)
|
Changes in fair value of foreign exchange derivatives
|
|
|
(228,314
|
)
|
|
|
-
|
|
Gain on deconsolidation of a subsidiary
|
|
|
(6,004,008
|
)
|
|
|
-
|
|
Equity in earnings of investee
|
|
|
(107,243
|
)
|
|
|
(351,755
|
)
|
Gain on dilution in equity method investee
|
|
|
(500,270
|
)
|
|
|
-
|
|
Gain on sale of long-term investment
|
|
|
(1,677,367
|
)
|
|
|
-
|
|
Share based compensation
|
|
|
326,171
|
|
|
|
317,946
|
|
Changes in fair value of warrant liability
|
|
|
(259
|
)
|
|
|
(140,290
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(11,926,311
|
)
|
|
|
(13,809,278
|
)
|
Other assets
|
|
|
(288,180
|
)
|
|
|
-
|
|
Notes receivable
|
|
|
(1,389,107
|
)
|
|
|
575,514
|
|
Advances to suppliers
|
|
|
(5,070,174
|
)
|
|
|
(72,470
|
)
|
Prepayments and other receivables
|
|
|
(673,006
|
)
|
|
|
(1,683,119
|
)
|
Amount due from related parties
|
|
|
7,140,963
|
|
|
|
(7,457,338
|
)
|
Amount due to related parties
|
|
|
(1,569,839
|
)
|
|
|
1,589,963
|
|
Inventories
|
|
|
(24,705,574
|
)
|
|
|
(4,410,429
|
)
|
Accounts payable
|
|
|
15,183,933
|
|
|
|
11,196,709
|
|
Deferred income
|
|
|
154,151
|
|
|
|
(64,658
|
)
|
Other payables and accrued liabilities
|
|
|
2,023,991
|
|
|
|
5,471,022
|
|
Income taxes payable
|
|
|
2,240,550
|
|
|
|
307,984
|
|
Net cash flows (used in) provided by operating activities
|
|
|
(4,082,687
|
)
|
|
|
4,794,812
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Acquisitions of plant and equipment
|
|
|
(13,730,328
|
)
|
|
|
(8,487,473
|
)
|
Acquisition of long-term investment
|
|
|
-
|
|
|
|
(3,005,666
|
)
|
Loan to a related party
|
|
|
(514,821
|
)
|
|
|
-
|
|
Proceeds from sale of long-term investment
|
|
|
10,535,062
|
|
|
|
-
|
|
Impact to cash resulting from deconsolidation of a subsidiary
|
|
|
(632,754
|
)
|
|
|
-
|
|
Net cash flows used in investing activities
|
|
|
(4,342,841
|
)
|
|
|
(11,493,139
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from short-term bank loans
|
|
|
12,725,676
|
|
|
|
19,611,969
|
|
Repayments of short-term bank loans
|
|
|
(22,331,365
|
)
|
|
|
(13,526,998
|
)
|
Proceeds from non-financial institution borrowings
|
|
|
10,386,681
|
|
|
|
4,508,499
|
|
Repayments of non-financial institution borrowings
|
|
|
(3,857,910
|
)
|
|
|
(601,133
|
)
|
Repayment of long-term bank loans
|
|
|
-
|
|
|
|
(1,803,399
|
)
|
Proceeds from notes payable
|
|
|
90,871,294
|
|
|
|
59,952,794
|
|
Repayments of notes payable
|
|
|
(69,511,376
|
)
|
|
|
(57,731,108
|
)
|
Proceeds from exercise of employee options
|
|
|
802,691
|
|
|
|
35,010
|
|
Repayment from GZ Highpower
|
|
|
6,035,600
|
|
|
|
-
|
|
Change in restricted cash
|
|
|
(13,498,698
|
)
|
|
|
(320,093
|
)
|
Net cash flows provided by financing activities
|
|
|
11,622,593
|
|
|
|
10,125,541
|
|
Effect of foreign currency translation on cash
|
|
|
1,980,713
|
|
|
|
47,212
|
|
Net increase in cash
|
|
|
5,177,778
|
|
|
|
3,474,426
|
|
Cash - beginning of year
|
|
|
9,324,393
|
|
|
|
5,849,967
|
|
Cash - end of year
|
|
|
14,502,171
|
|
|
|
9,324,393
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures for cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
1,700,149
|
|
|
|
1,163,950
|
|
Interest expenses
|
|
|
1,550,878
|
|
|
|
1,229,173
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Offset of deferred income related to government grant and property, plant and equipment
|
|
|
263,948
|
|
|
|
229,951
|
|
Transfer of equipment to Yipeng
|
|
|
-
|
|
|
|
7,156,717
|
|
See notes to consolidated financial statements
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Stated in US Dollars)
|
1.
|
Principal activities and organization
|
The consolidated financial statements
include the financial statements of Highpower International, Inc. ("Highpower") and its 100%-owned subsidiary Hong Kong
Highpower Technology Company Limited (“HKHTC”), HKHTC’s wholly-owned subsidiary Shenzhen Highpower Technology
Company Limited (“SZ Highpower”), SZ Highpower’s wholly owned subsidiary Huizhou Highpower Technology Company
Limited (“HZ HTC”) and SZ Highpower’s and HKHTC’s jointly owned subsidiaries, Springpower Technology (Shenzhen)
Company Limited (“SZ Springpower”) and Icon Energy System Company Limited (“ICON”). Highpower and its direct
and indirect wholly owned subsidiaries are collectively referred to as the "Company".
Highpower was incorporated in the
State of Delaware on January 3, 2006. HKHTC was incorporated in Hong Kong on July 4, 2003. All other subsidiaries are incorporated
in the People’s Republic of China ("PRC").
On December 11, 2017, GZ Highpower
signed an Agreement on Capital Increase and Share Enlargement (the “Agreement”) with Xiamen Tungsten Co., Ltd. ("Xiamen
Tungsten") and Mr. Ou, the General Manager of GZ Highpower. Pursuant to the terms of the Agreement, GZ Highpower will receive
a total of RMB92.8 million (approximately $14.3 million), including RMB78.9 million (approximately $12.1 million) from Xiamen Tungsten
in exchange for 55.294% ownership of GZ Highpower (the “Transaction”). The Transaction was completed on December 21,
2017 upon the receipt of the payments by GZ Highpower. After the Transaction, SZ Highpower holds 31.294% of the equity interest
of GZ Highpower. The Company no longer holds the controlling equity interest of GZ Highpower and deconsolidated GZ Highpower on
December 21, 2017.
The Company’s principal activities
are described as follows:
Name of company
|
|
Place and date
incorporation
|
|
Principal activities
|
HKHTC
|
|
Hong Kong
July 4, 2003
|
|
Investment holding and marketing of batteries
|
|
|
|
|
|
SZ Highpower
|
|
PRC
October 8, 2002
|
|
Manufacturing, marketing and research of Ni-MH batteries
|
|
|
|
|
|
SZ Springpower
|
|
PRC
June 4, 2008
|
|
Manufacturing, marketing and research of lithium batteries
|
|
|
|
|
|
ICON
|
|
PRC
February 23, 2011
|
|
Design and production of advanced battery packs and systems
|
|
|
|
|
|
|
|
|
|
|
HZ HTC
|
|
PRC
March 8, 2012
|
|
Manufacturing, marketing and research of lithium batteries
|
HIGHPOWER INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Stated in US Dollars)
|
2.
|
Summary of significant accounting policies
|
Basis of presentation
The consolidated financial statements
have been prepared in accordance with the United States generally accepted accounting principles ("U.S. GAAP").
Consolidation
The consolidated financial statements
include the accounts of Highpower and its direct and indirect wholly subsidiaries. All significant inter-company balances and transactions
have been eliminated in consolidation. The Company deconsolidates a subsidiary as of the date the Company ceases to have a controlling
financial interest in that subsidiary. In 2017, the Company deconsolidated GZ Highpower (See Note 12).
Reclassification
The Company has reclassified certain
comparative balances in the consolidated balance sheet for December 31, 2016 and comparative balance in the consolidated statements
of operations and comprehensive income to conform to the current period’s presentation. The reclassification includes the
segregation of: 1) the balance of long-term prepayments related to the advances paid to equipment suppliers from the balance of
prepayments and other receivables; 2) the balance of advances to suppliers related to raw materials from the balance of prepayments
and other receivables; and 3) the amount of government grants from other income. The reclassification did not have an impact on
the reported total assets, liabilities, stockholders’ equity and operations and comprehensive income.
Use of estimates
The preparation of financial
statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates
and assumptions include the allowance for doubtful receivables; recoverability of the carrying amount of inventory; fair value
of financial instruments; provisional amounts based on reasonable estimates for certain income tax effects of the Tax Cuts and
Jobs Act (the “Tax Act”) and the assessment of deferred tax assets or liabilities. These estimates are often based
on complex judgments and assumptions that management believes to be reasonable but are inherently uncertain and unpredictable.
Actual results could differ from these estimates.
Concentrations of credit risk
Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist principally of accounts receivable. The Company extends
credit based on an evaluation of the customer’s financial condition, generally without requiring collateral or other security.
In order to minimize the credit risk, the management of the Company has delegated a team responsible for determining credit limits,
credit approvals and other monitoring procedures to ensure that follow-up action is taken to recover overdue debts. Further, the
Company reviews the recoverable amount of each individual trade debt at each balance sheet date with the consideration of credit
insurance to ensure that adequate impairment losses are made for irrecoverable amounts. In this regard, the management of the Company
considers that the Company’s credit risk is significantly reduced.
No customer accounted for 10% or
more of net sales during the years ended December 31, 2017 and 2016.
No supplier accounted for or over
10% of our total purchase amount during the years ended December 31, 2017 and 2016.
There was one major customer accounted
for 10.1% of the accounts receivable as of December 31, 2017. There was no customer accounted for 10% or more of the accounts receivable
as of December 31, 2016.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Stated in US Dollars)
|
2.
|
Summary of significant accounting policies (continued)
|
Cash
Cash include all cash on hand and
cash in bank with no restrictions.
Restricted cash
Restricted cash include time deposit
pledged for bank loan facilities within one-year maturities, cash deposit for bank acceptance bills within six-month maturities
and special bank accounts required by government grant.
Accounts receivable
Accounts receivable are stated at
the original amount less an allowance for doubtful receivables, if any, based on a review of all outstanding amounts at period
end. An allowance is also made when there is objective evidence that the Company will not be able to collect all amounts due according
to the original terms of the receivables. The Company analyzes the aging of the customer accounts, coverage of credit insurance,
customer concentrations, customer credit-worthiness, historical and current economic trends and changes in its customer payment
patterns when evaluating the adequacy of the allowance for doubtful accounts.
Notes receivable
Notes receivable represent banks’
acceptances that have been arranged with third-party financial institutions by certain customers to settle their purchases from
us. These banks’ acceptances are non-interest bearing and are collectible within six months.
Inventories
Inventories are stated at lower of
cost or net realizable value. Cost is determined using the weighted average method. Inventories include raw materials, packing
materials, consumables, work in progress and finished goods. The variable production overhead is allocated to each unit of production
on the basis of the actual use of the production facilities. The allocation of fixed production overhead to the costs of conversion
is based on the normal capacity of the production facilities.
Where there is evidence that the
utility of inventories, in their disposal in the ordinary course of business, will be less than cost, whether due to physical deterioration,
obsolescence, changes in price levels, or other causes, the inventories are written down to net realizable value. The Company wrote
down inventories of $1,109,702 and $87,236 for the years ended December 31, 2017 and 2016, respectively.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Stated in US Dollars)
|
2.
|
Summary of significant accounting policies (continued)
|
Property, plant and equipment
Property, plant and equipment are
stated at cost less accumulated depreciation. Cost represents the purchase price of the asset and other costs incurred to bring
the asset into its existing use. Maintenance, repairs and betterments, including replacement of minor items, are charged to expense;
major additions to physical properties are capitalized.
Depreciation of property, plant and
equipment is provided using the straight-line method over their estimated useful lives:
Buildings
|
20-40 years
|
Furniture, fixtures and office equipment
|
5 years
|
Leasehold improvement
|
Shorter of the remaining lease terms or estimated useful lives
|
Machinery and equipment
|
10 years
|
Motor vehicles
|
5 years
|
Upon sale or disposal, the applicable
amounts of asset cost and accumulated depreciation are removed from the accounts and the net amount less proceeds from disposal
is charged or credited to income.
Construction in progress represents
capital expenditures for direct costs of construction or acquisition and design fees incurred, and the interest expenses directly
related to the construction. Capitalization of these costs ceases and the construction in progress is transferred to the appropriate
category of property, plant and equipment when substantially all the activities necessary to prepare the assets for their intended
use are completed. Construction in progress is not depreciated.
Long-term investments
For an investee over which the Company
holds less than 20% voting interest and has no ability to exercise significant influence, the investments are accounted for under
the cost method.
For an investee over which the Company
has the ability to exercise significant influence, but does not have a controlling interest, the Company accounted for those using
the equity method. Significant influence is generally considered to exist when the Company has an ownership interest in the voting
stock of the investee between 20% and 50%. Other factors, such as representation on the investee’s board of directors, voting
rights and the impact of commercial arrangements, are also considered in determining whether the equity method of accounting is
appropriate.
An impairment charge is recorded
if the carrying amount of the investment exceeds its fair value and this condition is determined to be other-than temporary. As
of December 31, 2017 and 2016, management believes no impairment charge is necessary.
Land use rights
Land use rights represent payments
for the rights to use certain parcels of land for a certain period of time in the PRC. Land use rights are carried at cost and
charged to expense on a straight-line basis over 50 years the rights are granted.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Stated in US Dollars)
|
2.
|
Summary of significant accounting policies (continued)
|
Other assets
Other assets represent the long-term
rental deposits and a royalty-bearing, non-exclusive license to use certain patents owned by an unrelated party ("License
Provider"), to manufacture rechargeable nickel metal hydride batteries for portable consumer applications (“Consumer
Batteries”) in the PRC, and a royalty-bearing, non-exclusive worldwide license to use certain patents owned by License Provider
to manufacture, sell and distribute Consumer Batteries.
Government grants
Conditional government grants are
recognized as deferred income when received. Specifically, government grants whose primary condition is that the Company should
purchase, construct or otherwise acquire non-current assets is recognized on the consolidated balance sheet as deferred income
and deducted in calculating the carrying amount of the related asset. The revenue from such grants is recognized in profit or loss
over the life of the related depreciable asset as a reduction of depreciation expense. As of December 31, 2017 and 2016, the Company
recorded deferred income of $309,638 and $761,491, respectively, for the government grants to purchase non-current assets.
Government grants as compensation
for expenses or losses already incurred or for the purpose of giving immediate financial support to the Company with no future
related benefit are recognized in the period in which they become receivable. Approximately $1,357,852 and $1,762,266 government
grant were recognized for the years ended December 31, 2017 and 2016, respectively.
Impairment of long-lived assets
The Company reviews its long-lived
assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be
recoverable. When these events occur, the Company measures impairment by comparing the carrying value of the long-lived assets
to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If
the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, the Company would recognize an impairment
loss, which is the excess of carrying amount over the fair value of the assets, using the expected future discounted cash flows.
Revenue recognition
The Company recognizes revenue when
persuasive evidence of an arrangement exists, the sales price is fixed or determinable, delivery of the product has occurred, title
and risk of loss have transferred to the customers and collectability of the receivable is reasonably assured. The majority of
domestic sales contracts transfer title and risk of loss to customers upon receipt of product by customer. The majority of oversea
sales contracts transfer title and risk of loss to customers when goods were delivered to the carriers. Revenue is presented net
of sales tax and value added tax.
The Company does not have arrangements
for returns from customers and does not have any future obligations directly or indirectly related to product resale by customers.
The Company has no sales incentive programs.
Cost of Sales
Cost of sales consists primarily
of material costs, labor costs, depreciation and related expenses, which are directly attributable to the production of products.
Write-down of inventories to lower of cost or net realizable value is also recorded in cost of sales.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Stated in US Dollars)
|
2.
|
Summary of significant accounting policies (continued)
|
Research and development
Research and development expenses
include expenses directly attributable to the conduct of research and development programs, including the expenses of salaries,
employee benefits, materials, supplies, and maintenance of research equipment. All expenses associated with research and development
are expensed as incurred.
Share-Based Compensation
The Company recognizes compensation
expense associated with the issuance of equity instruments to employees for their services. The fair value of the equity instruments
is estimated on the date of grant and is expensed in the financial statements over the vesting period. The input assumptions used
in determining fair value are the expected life, expected volatility, risk-free rate and the dividend yield.
Share-based compensation associated
with the issuance of equity instruments to non-employees is recorded at the fair value on the measurement date. The measurement
of stock-based compensation at fair value is subject to periodic adjustment at each reporting period.
Income taxes
The Company recognizes deferred
tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences
between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws
and statutory tax rates, applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
Uncertain tax positions
The Company accounts for uncertainty
in income taxes using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the
tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that
the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step
is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. Interest and
penalties related to uncertain tax positions are recognized and recorded as necessary in the provision for income taxes. According
to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due
to computational errors made by the taxpayer or the withholding agent. The statute of limitations is extended to five years under
special circumstances, where the underpayment of taxes is more than RMB 100,000. In the case of transfer pricing issues, the statute
of limitation is ten years. There is no statute of limitation in the case of tax evasion. There were no uncertain tax positions
as of December 31, 2017 and 2016 and the Company does not believe that its unrecognized tax benefits will change over the next
twelve months.
Comprehensive income
Comprehensive income is comprised
of the Company’s net income and other comprehensive income. The component of other comprehensive income or loss is consisted
solely of foreign currency translation adjustments, net of the income tax effect.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Stated in US Dollars)
|
2.
|
Summary of significant accounting policies (continued)
|
Foreign currency translation and transactions
Highpower’s functional currency
is the United States dollar ("US$"). HKHTC's functional currency is the Hong Kong dollar ("HK$"). The functional
currency of Highpower's other direct and indirect wholly owned subsidiaries in the PRC is the Renminbi ("RMB").
Most of the Company’s oversea
sales are priced and settled with US$. At the date a foreign currency transaction is recognized, each asset, liability, revenue,
expense, gain, or loss arising from the transaction is measured initially in the functional currency of the recording entity by
use of the exchange rate in effect at that date. The increase or decrease in expected functional currency cash flows upon settlement
of a transaction resulting from a change in exchange rates between the functional currency and the currency in which the transaction
is denominated is recognized as foreign currency transaction gain or loss that is included in earnings for the period in which
the exchange rate changes. At each balance sheet date, recorded balances that are denominated in a foreign currency are adjusted
to reflect the current exchange rate.
The Company’s reporting currency
is US$. Assets and liabilities of HKHTC and the PRC subsidiaries are translated at the current exchange rate at the balance sheet
dates, revenues and expenses are translated at the average exchange rates during the reporting periods, and equity accounts are
translated at historical rates. Translation adjustments are reported in other comprehensive income.
Segment Reporting
The Company uses the “management
approach” in determining reportable segments. The management approach considers the internal organization and reporting used
by the Company's chief operating decision maker for making operating decisions and assessing performance as the source for determining
the Company's reportable segments. The Company’s reportable segments are based on products, geography, legal structure, management
structure, or any other manner in which management disaggregates a company. Therefore the Company categorizes its business into
three reportable segments, namely (i) Lithium Business; (ii) Ni-MH Batteries and Accessories; and (iii) New Material.
Fair value of financial instruments
The carrying values of the Company’s
financial instruments, including cash, restricted cash, trade and other receivables, deposits, trade and other payables and short-term
borrowings, approximate their fair value due to the short-term maturity of such instruments.
ASC Topic 820 defines fair value as
the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted
to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it
considers assumptions that market participants would use when pricing the asset or liability.
ASC Topic 820 establishes a fair value
hierarchy that requires maximizing the use of observable inputs and minimizing the use of unobservable inputs when measuring fair
value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that
is significant to the fair value measurement.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Stated in US Dollars)
|
2.
|
Summary of significant accounting policies (continued)
|
Fair value of financial instruments
(continued)
The Company measures fair value using
three levels of inputs that may be used to measure fair value:
-Level 1 applies to assets or liabilities
for which there are quoted prices in active markets for identical assets or liabilities.
-Level 2 applies to assets or liabilities
for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such
as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets
with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs
are observable or can be derived principally from, or corroborated by, observable market data.
-Level 3 applies to assets or liabilities
for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value
of the assets or liabilities.
Foreign Exchange Derivatives
From time to time the Company may
utilize foreign currency forward contracts to reduce the impact of foreign currency exchange rate risk. Management considered that
the foreign currency forwards did not meet the criteria for designated hedging instruments and hedged transactions to qualify for
cash flow hedge or fair value hedge accounting. The currency forwards therefore are accounted for as derivatives, with fair value
changes reported as gain (loss) of derivative instruments in the statements of operations. The derivatives asset is recognized
in the balance sheet at the fair value (level 2).
Warrant Liability
For warrants that are not indexed
to the Company’s stock, the Company records the fair value of the issued warrants as a liability at each balance sheet date
and records changes in the estimated fair value as a non-cash gain or loss in the consolidated statement of operations and comprehensive
income. The warrant liability is recognized in the balance sheet at the fair value (level 3). The fair value of these warrants
have been determined using the Black-Scholes pricing mode. The Black-Scholes pricing model provides for assumptions regarding volatility,
call and put features and risk-free interest rates within the total period to maturity. The Company revalued the warrants utilizing
a binomial model as of December 31, 2016 with no material difference in the value. The warrants expired on April 17, 2017.
Earnings per share
Basic earnings per share (“EPS”)
is computed by dividing income attributable to holders of common shares by the weighted average number of common shares outstanding
during the year. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common
shares were exercised or converted into common shares.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Stated in US Dollars)
|
2.
|
Summary of significant accounting policies (continued)
|
Recently issued accounting pronouncements
In May 2014, the Financial Accounting
Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU
2014-09”), which was subsequently modified in August 2015 by ASU 2015-14, Revenue from Contracts with Customers: Deferral
of the Effective Date. This guidance will be effective for fiscal years (and interim reporting periods within those years) beginning
after December 15, 2017. The core principle of ASU 2014-09 is that companies should recognize revenue when the transfer of promised
goods or services to customers occurs in an amount that reflects what the company expects to receive. It requires additional disclosures
to describe the nature, amount, timing and uncertainty of revenue and cash flows from contracts with customers. In 2016, the FASB
issued additional ASUs that clarify the implementation guidance on principal versus agent considerations (ASU 2016-08), on identifying
performance obligations and licensing (ASU 2016-10), and on narrow-scope improvements and practical expedients (ASU 2016-12) as
well as on the revenue recognition criteria and other technical corrections (ASU 2016-20). In 2017, the FASB issued Accounting
Standards Update (ASU) 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20),
which was originally issued in ASU 2014-09. The amendments in this Update require that an entity to initially measure a retained
non-controlling interest in a nonfinancial asset at fair value consistent with a how a retained non-controlling interest in a business
is measured.
During 2017, the Company made
significant progress toward its evaluation of the potential changes from adopting the new standard on its future financial reporting
and disclosures. The Company has established a cross-functional implementation team on assessment on the five-step model of the
new standard to its revenue contracts.
Under Topic 606, an entity recognizes
revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the
entity expects to receive in exchange for those goods or services. It also impacts certain other areas, such as the accounting
for costs to obtain or fulfill a contract. The standard also requires disclosure of the nature, amount, timing, and uncertainty
of revenue and cash flows arising from contracts with customers.
Management has adopted this standard
effective January 1, 2018 using the modified-retrospective approach, in which case the cumulative effect of applying the standard
would be recognized at the date of initial application. The Company also estimates there will not be a material impact to the beginning
balance of retained earnings.
In November 2015, the FASB issued
ASU 2015-17, Income Taxes (Topic 740). Balance Sheet Classification of Deferred Taxes which requires entities to present deferred
tax assets and deferred tax liabilities as noncurrent on the consolidated balance sheet. The Company adopted this guidance effective
January 1, 2017 and it was applied retrospectively for all prior periods.
On February 25, 2016, the FASB
issued ASU 2016-02, Leases (Topic 842). It requires that a lessee recognize the assets and liabilities that arise from operating
leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability)
and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months
or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets
and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the
earliest period presented using a modified retrospective approach. Public business entities should apply the amendments in ASU
2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application
is permitted for all public business entities and all nonpublic business entities upon issuance. The Company is currently evaluating
the impact of adopting ASU 2016-02 on its consolidated financial statements.
In August 2016, the FASB issued
ASU 2016-15, Statement of Cash Flows (Topic 230). The amendments in this update provide guidance on eight specific cash flow issue.
It applies to all entities. For public business entities, the amendments in this Update are effective for annual periods beginning
after December 15, 2017, and interim periods within those annual periods. The adoption of this guidance is not expected to have
a material impact on the Company's consolidated financial condition, results of operations or cash flows.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Stated in US Dollars)
|
2.
|
Summary of significant accounting policies (continued)
|
Recently issued accounting pronouncements
(continued)
In October 2016, the FASB issued
ASU 2016-16, Income Taxes (Topic 740). The amendments in this Update is to improve the accounting for the income tax consequences
of intra-entity transfers of assets other than inventory and align the recognition of income tax consequences for intra-entity
transfers of assets other than inventory with International Financial Reporting Standards (IFRS). Public business entities should
apply the amendments in ASU 2016-16 for fiscal years beginning after December 15, 2017, including interim periods within those
fiscal years. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial condition,
results of operations or cash flows.
In November 2016, the FASB issued
ASU 2016-18, Statement of Cash Flows (Topic 230). The amendments in this Update require that a statement of cash flows explain
the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted
cash equivalents. The amendments in this Update are effective for public business entities for fiscal years beginning after December
15, 2017, and interim periods within those fiscal years, including adoption in an interim period. If an entity early adopts the
amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that
interim period. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial
condition, results of operations or cash flows.
In February 2018, the FASB issued
ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220). The amendments in this Update allow a reclassification
from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs
Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve
the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification
of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax
laws or rates be included in income from continuing operations is not affected. The amendments in this Update also require certain
disclosures about stranded tax effects. Public business entities should apply the amendments in ASU 2018-02 for fiscal years beginning
after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted,
including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements
have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been
made available for issuance. The Company is currently evaluating the impact of adopting ASU 2018-02 on its consolidated financial
statements.
The Company does not believe other
recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the consolidated
financial position, statements of operations and cash flows.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Stated in US Dollars)
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
Securities for bank acceptance bill
|
|
|
21,837,690
|
|
|
|
10,541,105
|
|
Time deposit
|
|
|
3,982,226
|
|
|
|
151,083
|
|
Government subsidy deposit
|
|
|
134,030
|
|
|
|
521,452
|
|
|
|
|
25,953,946
|
|
|
|
11,213,640
|
|
As of December 31, 2017, cash of
$21.8 million was restricted by eight banks for bank acceptance bill, cash of $4.0 million was restricted for short-term bank loan
and cash of $0.1 million was restricted under supervision by the Government due to government subsidy granted.
As of December 31, 2016, cash of
$10.5 million was restricted by five banks for bank acceptance bill, cash of $0.2 million was restricted for short-term bank loan
and cash of $0.5 million was restricted under supervision by the Government due to government subsidy granted.
|
4.
|
Accounts receivable, net
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
Accounts receivable
|
|
|
61,431,785
|
|
|
|
49,460,347
|
|
Allowance for doubtful accounts
|
|
|
(3,178,786
|
)
|
|
|
(3,179,578
|
)
|
|
|
|
58,252,999
|
|
|
|
46,280,769
|
|
The Company recorded bad debt expense
of $58,728 and $1,176,208 for the years ended December 31, 2017 and 2016, respectively. The Company write-off accounts receivable
against the allowance for doubtful accounts of $100,213 and $42,897 for the years ended December 31, 2017 and 2016, respectively.
Balances of advances to suppliers
were $6,050,531 and $2,007,184 as of December 31, 2017 and 2016, respectively, which represented prepayments to suppliers for raw
material.
|
6.
|
Prepayments and other receivables
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
Value-added tax (“VAT”) prepayment
|
|
|
3,132,236
|
|
|
|
1,100,319
|
|
Rental deposit
|
|
|
12,523
|
|
|
|
266,883
|
|
Prepaid insurance fee
|
|
|
6,098
|
|
|
|
259,113
|
|
Advances to staff for daily operations
|
|
|
180,850
|
|
|
|
81,502
|
|
Compensation receivable for land occupation
|
|
|
486,019
|
|
|
|
455,115
|
|
Other receivables from third parties (1)
|
|
|
444,263
|
|
|
|
1,508,278
|
|
Prepaid expense
|
|
|
492,557
|
|
|
|
477,925
|
|
|
|
|
4,754,546
|
|
|
|
4,149,135
|
|
Less: allowance for doubtful accounts
|
|
|
486,019
|
|
|
|
455,115
|
|
|
|
|
4,268,527
|
|
|
|
3,694,020
|
|
(1) Other receivables from third
parties represented the receivable of equipment deposit from an equipment supplier as of December 31, 2017. Other receivables from
third parties represented payment of $532,389 due on demand and the receivable of equipment deposit from an equipment supplier
of $975,889 as of December 31, 2016.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Stated in US Dollars)
Balances of long-term prepayments
were $3,715,445 and $1,198,668 as of December 31, 2017 and 2016, respectively, which represented prepayments for equipment purchases.
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
Raw materials
|
|
|
21,428,315
|
|
|
|
6,492,755
|
|
Work in progress
|
|
|
6,931,486
|
|
|
|
4,878,856
|
|
Finished goods
|
|
|
14,284,563
|
|
|
|
10,608,180
|
|
Packing materials
|
|
|
36,797
|
|
|
|
21,083
|
|
Consumables
|
|
|
265,483
|
|
|
|
206,459
|
|
|
|
|
42,946,644
|
|
|
|
22,207,333
|
|
9. Property, plant and equipment, net
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
Cost
|
|
|
|
|
|
|
|
|
Construction in progress
|
|
|
1,330,643
|
|
|
|
715,188
|
|
Furniture, fixtures and office equipment
|
|
|
5,794,983
|
|
|
|
4,025,635
|
|
Leasehold improvement
|
|
|
7,080,409
|
|
|
|
5,865,909
|
|
Machinery and equipment
|
|
|
33,176,416
|
|
|
|
27,526,572
|
|
Motor vehicles
|
|
|
1,498,605
|
|
|
|
1,496,628
|
|
Building
|
|
|
20,169,197
|
|
|
|
21,797,158
|
|
|
|
|
69,050,253
|
|
|
|
61,427,090
|
|
Less: accumulated depreciation
|
|
|
22,529,477
|
|
|
|
17,922,099
|
|
|
|
|
46,520,776
|
|
|
|
43,504,991
|
|
The Company recorded depreciation
expenses of $5,152,396 and $4,797,968 for the years ended December 31, 2017 and 2016, respectively.
During the years ended December
31, 2017 and 2016, deferred income related to government grants of $263,948 and $229,951, respectively, was reduced from the carrying
amount of property, plant and equipment.
During the years ended December
31, 2017 and 2016, the Company recorded nil and $530,914 of impairment loss of machinery and equipment, respectively.
The buildings comprising the Huizhou
facilities were pledged as collateral for bank loans as of December 31, 2017 and 2016. The net carrying amounts of the buildings
were $9,224,694 and $8,864,837 as of December 31, 2017 and 2016, respectively.
The building located in Longgang,
Shenzhen, Guangdong was pledged as collateral for bank loans as of December 31, 2017 and 2016. The net carrying amount of the buildings
was $396,843 and $394,640 as of December 31, 2017 and 2016, respectively.
The buildings comprising the Ganzhou
facilities were pledged as collateral for short-term loans and bank acceptance bills drawn under certain lines of credit as of
December 31, 2016. The carrying amount of the building was $2,594,975 as of December 31, 2016 (See Note 12).
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Stated in US Dollars)
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
Cost
|
|
|
|
|
|
|
|
|
Land located in Huizhou
|
|
|
3,299,539
|
|
|
|
3,089,739
|
|
Land located in Ganzhou
|
|
|
-
|
|
|
|
1,205,368
|
|
|
|
|
3,299,539
|
|
|
|
4,295,107
|
|
Accumulated amortization
|
|
|
(659,908
|
)
|
|
|
(672,672
|
)
|
Net
|
|
|
2,639,631
|
|
|
|
3,622,435
|
|
As of December 31, 2017, land use
right included certain parcel of land located in Huizhou City, Guangdong Province, PRC. Land use rights for land in Huizhou City
with an area of approximately 126,605 square meters will expire on May 23, 2057. As of December 31, 2016, land use right also included
certain parcel of land located in Ganzhou City, Jiangxi Province, PRC. Land use rights for land in Ganzhou City with an area of
approximately 58,669 square meters will expire on January 4, 2062 (See Note 12).
Land use rights are being amortized
annually using the straight-line method over a contract term of 50 years. Estimated amortization for the coming years is as follows:
For the years ending December 31,
|
|
$
|
|
2018
|
|
|
63,724
|
|
2019
|
|
|
63,724
|
|
2020
|
|
|
63,724
|
|
2021
|
|
|
63,724
|
|
2022
|
|
|
63,724
|
|
Thereafter
|
|
|
2,321,011
|
|
|
|
|
2,639,631
|
|
The Company recorded amortization
expenses of $88,584 and $89,720 for the years ended December 31, 2017 and 2016, respectively.
The land use right for land located
in Huizhou was pledged as collateral for bank loans as of December 31, 2017 and 2016, respectively.
The land use right for land located
in Ganzhou City was pledged as collateral for bank loans as of December 31, 2016.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Stated in US Dollars)
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
Consumer battery license fee (1)
|
|
|
450,000
|
|
|
|
500,000
|
|
Long-term rental deposit
|
|
|
298,431
|
|
|
|
-
|
|
|
|
|
748,431
|
|
|
|
500,000
|
|
(1) The Company
is amortizing the $1,000,000 cost of the Consumer Battery License Agreement with a License Provider over a period of 20 years on
the straight line basis in accordance with the terms of license (See Note 13).
Amortization
expenses included in research and development expense were $50,000 for both the years ended December 31, 2017 and 2016.
|
12.
|
Long-term investments
|
Investment
to Yipeng
In 2016, the
Company invested an aggregate amount of RMB65.0 million (approximately $10.0 million) in exchange for 35.4% of the equity interest
of Yipeng, which was recorded under the equity method as of December 31, 2016.
On May 5, 2017,
the Company entered into an Agreement for Equity Transfer and Capital Increase (the “Equity Transfer Agreement”) with
a third party, Xiamen Jiupai Yuanjiang New Power Equity Investment Partnership ("New Power"). New Power invested RMB60.0
million (approximately $9.2 million) for a 20% equity interest in Yipeng, which the business registration was completed on June
8, 2017, and the Company received RMB71.0 million (approximately $10.9 million) in cash from New Power for the sales of 25,145,834
shares in Yipeng on July 27, 2017 (collectively, the “Equity Transfer Transaction”). After the Equity Transfer Transaction,
the Company’s equity ownership in Yipeng decreased from 35.4% to 4.654%, and the Company lost the ability to exercise significant
influence over Yipeng, discontinued the use of equity method accounting and applied the cost method.
The Company
recognized gain on dilution in equity method investee of $500,270 for the year ended December 31, 2017 in connection with the additional
equity issuance of Yipeng to New Power. The Company recognized gain on sales for $1,677,367 in connection with the sales of its
shares in Yipeng to New Power.
The equity in
earnings of investee was $107,243 and $351,755 from January 1, 2017 to July 27, 2017 and from May 12, 2016 to December 31, 2016,
respectively.
Deconsolidation
of GZ Highpower
On December
11, 2017, GZ Highpower signed the Agreement with Xiamen Tungsten and Mr. Ou, the General Manager of GZ Highpower. Pursuant to the
terms of the Agreement, GZ Highpower will receive a total of RMB92.8 million (approximately $14.3 million), including RMB78.9 million
(approximately $12.1 million) from Xiamen Tungsten in exchange for 55.294% ownership of GZ Highpower. The Transaction was completed
on December 21, 2017 upon the receipt of the payments by GZ Highpower. After the Transaction, the Company lost the controlling
power over GZ Highpower and deconsolidated GZ Highpower. As of December 31, 2017, the Company held 31.294% of the equity interest
of GZ Highpower which was recorded under the equity method.
In connection
with the Transaction, RMB 40 million (approximately $6.1 million) of the proceeds was received by the Company in the form of repayments
of loans and related interests that were previously extended by the Company to GZ Highpower.
During the year
ended December 31, 2017, the Company recognized gain amounting to $6,004,008 arising from deconsolidation of GZ Highpower which
was completed on December 21, 2017.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Stated in US Dollars)
|
13.
|
Other payables and accrued liabilities
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
Accrued expenses
|
|
|
1,140,443
|
|
|
|
1,011,866
|
|
Accrued payroll
|
|
|
7,442,056
|
|
|
|
6,094,843
|
|
Royalty payable
|
|
|
427,986
|
|
|
|
400,773
|
|
VAT payable
|
|
|
94,612
|
|
|
|
554,064
|
|
Sales deposits received
|
|
|
1,759,021
|
|
|
|
1,582,141
|
|
Other payables
|
|
|
1,379,227
|
|
|
|
1,504,869
|
|
|
|
|
12,243,345
|
|
|
|
11,148,556
|
|
Highpower and its direct
and indirect wholly owned subsidiaries file tax returns separately.
1) VAT
Pursuant to the Provisional Regulation
of the PRC on VAT and the related implementing rules, all entities and individuals ("taxpayers") that are engaged in
the sale of products in the PRC are generally required to pay VAT at a rate of 17% of the gross sales proceeds received, less any
deductible VAT already paid or borne by the taxpayers. Further, when exporting goods, the exporter is entitled to a portion of
or all the refund of VAT that it has already paid or incurred. The Company’s PRC subsidiaries are subject to VAT at 17% of
their revenues.
2) Income tax
United States
Tax Reform
On December 22, 2017, the Tax
Act was signed into legislation. The 2017 Tax Act significantly revises the U.S. corporate income tax by, among other things, lowering
the statutory corporate tax rate from 34% to 21%, imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries,
introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax.
On December 22, 2017, the Securities
and Exchange Commission staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting
for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act
enactment date for companies to complete the accounting under ASC 740, Income Taxes. In accordance with SAB 118, a company must
reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent
that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable
estimate, it must record a provisional estimate in the financial statements.
As of December 31, 2017, the
Company has not completed its accounting for certain tax effects of enactment of the Tax Act; however, as described below, the
Company has made reasonable estimates of the effects on our existing deferred tax balances and the one-time transition tax. The
Company expects to finalize these provisional estimates before the end of 2018 after completing our reviews and analysis, including
reviews and analysis of any interpretations issued during this re-measurement period.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Stated in US Dollars)
United States (continued)
The Company measures deferred
tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected
to be recovered or paid.
The one-time transition tax
is based on the total post-1986 earnings and profits (“E&P”) for which the Company has previously deferred U.S.
income taxes. The Company recognized a one-time transition tax of $0.8 million on previously deferred foreign earnings of $17.0
million. The Company expects to make adjustments to this provisional estimate based on additional clarifying and interpretative
technical guidance to be issued related to the calculation of the one-time transition tax.
Hong Kong
HKHTC, which was incorporated
in Hong Kong, is subject to a corporate income tax rate of 16.5%.
PRC
In accordance with the relevant
tax laws and regulations of the PRC, a company registered in the PRC is subject to income taxes within the PRC at the applicable
tax rate on taxable income.
In China, the companies granted
with National High-tech Enterprise (“NHTE”) status enjoy 15% income tax rate. This status needs to be renewed every
three years. If these subsidiaries fail to renew NHTE status, they will be subject to income tax at a rate of 25% after the expiration
of NHTE status. All the PRC subsidiaries received NHTE status and enjoy 15% income tax rate for calendar year 2017 and 2016.
The components of the provision
for income taxes expenses are:
|
|
For the years ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
Current
|
|
|
3,940,699
|
|
|
|
1,471,933
|
|
Deferred
|
|
|
374,626
|
|
|
|
(32,756
|
)
|
Total income taxes expenses
|
|
|
4,315,325
|
|
|
|
1,439,177
|
|
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Stated in US Dollars)
The reconciliation of income
taxes expenses computed at the PRC statutory tax rate applicable to income tax expense is as follows:
|
|
For the years ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
Income before tax
|
|
|
21,529,221
|
|
|
|
7,066,954
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes at PRC statutory income tax rate (25%)
|
|
|
5,382,305
|
|
|
|
1,766,739
|
|
Impact of different tax rates in other jurisdictions
|
|
|
(75,504
|
)
|
|
|
100,139
|
|
Effect of PRC preferential tax rate
|
|
|
(2,313,343
|
)
|
|
|
(959,453
|
)
|
R&D expenses eligible for super deduction
|
|
|
(451,003
|
)
|
|
|
(546,088
|
)
|
Other non-deductible expenses
|
|
|
754,820
|
|
|
|
146,493
|
|
Toll-charge from the Tax Act
|
|
|
5,773,436
|
|
|
|
-
|
|
Foreign tax credits
|
|
|
(2,063,810
|
)
|
|
|
-
|
|
Change in valuation allowance of deferred tax assets
|
|
|
(2,691,576
|
)
|
|
|
931,347
|
|
Effective enterprise income tax
|
|
|
4,315,325
|
|
|
|
1,439,177
|
|
3) Deferred tax assets,
net
Deferred tax assets and deferred tax
liabilities reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purpose and the tax bases used for income tax purpose. The following represents the tax effect of each major type of
temporary difference.
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
Tax loss carry-forward
|
|
|
991,766
|
|
|
|
4,274,881
|
|
Allowance for doubtful receivables
|
|
|
136,562
|
|
|
|
121,932
|
|
Impairment for inventory
|
|
|
222,289
|
|
|
|
98,276
|
|
Difference for sales cut-off
|
|
|
17,322
|
|
|
|
14,245
|
|
Deferred income
|
|
|
46,446
|
|
|
|
114,224
|
|
Property, plant and equipment subsidized by government grant
|
|
|
269,344
|
|
|
|
468,313
|
|
Impairment for property, plant and equipment
|
|
|
58,304
|
|
|
|
76,248
|
|
Total gross deferred tax assets
|
|
|
1,742,033
|
|
|
|
5,168,119
|
|
Valuation allowance
|
|
|
(991,766
|
)
|
|
|
(3,690,358
|
)
|
Total net deferred tax assets
|
|
|
750,267
|
|
|
|
1,477,761
|
|
As of December 31, 2017, the Company
had net operating loss carry-forwards in Hong Kong of $6,010,701 and all of these losses do not expire.
Valuation allowance was provided
against deferred tax assets in entities where it was determined, it was more likely than not that the benefits of the deferred
tax assets will not be realized. The Company had deferred tax assets which consisted of tax loss carry-forwards and others, which
can be carried forward to offset future taxable income. The management determines it is more likely than not that part of deferred
tax assets could not be utilized, so allowance was provided as of December 31, 2017 and 2016. The net valuation allowance decreased
by approximately $2.7 million and increased by approximately $0.9 million during the years ended December 31, 2017 and 2016, respectively.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Stated in US Dollars)
Notes payable are presented to certain
suppliers as a payment against the outstanding trade payables.
Notes payable are mainly bank acceptable
bills which are non-interest bearing and generally mature within six months. The outstanding bank acceptance bills are secured
by restricted cash deposited in banks. Outstanding bank acceptance bills were $54,859,478 and $30,658,000 as of December 31, 2017
and 2016, respectively.
As of December 31, 2017, the bank
borrowings were for working capital and capital expenditure purposes and were secured by personal guarantees executed by the Company’s
Chief Executive Officer, Mr. Dang Yu Pan and his wife of the Company, the time deposit with a carrying amount of $ 3,982,226, the
land use right with a net carrying amount of $2,639,631 and the buildings with a net carrying amount of $9,621,537, respectively.
The loans as of December 31, 2017
were primarily obtained from two banks with interest rates ranging from 5.000% to 5.8725% per annum. The interest expenses were
$909,878 and $925,115 for the years ended December 31, 2017 and 2016, respectively.
The weighted average interest rates
of short-term loans outstanding were 4.34% and 5.18% per annum as of December 31, 2017 and 2016, respectively.
|
17.
|
Non-financial institution borrowings
|
In 2016, the Company obtained
$3,005,666 borrowings from a third party non-financial institution and $1,502,833 from an individual, which were used for
working capital and capital expenditure purposes. The interest rates for the borrowings were 5.66%. The borrowings are
personally guaranteed by the Company’s Chief Executive Officer, Mr. Dang Yu Pan. For the year ended December 31, 2016,
the Company paid $601,133 back to the third party non-financial institution.
In 2017, the Company obtained borrowings
from a third party non-financial institution in amount of $1,483,812 and an individual in an amount of $8,902,870, which were used
for working capital and capital expenditure purposes. The interest rates for the borrowings were 5.655% and 5.66% per annum, respectively.
The borrowings are personally guaranteed by the Company's Chief Executive Officer, Mr. Dang Yu Pan. For the year ended December
31, 2017, the Company paid back $2,374,099 to the third party non-financial institution and $1,483,811 to the individual, respectively.
The interest expenses of the above
borrowings were $622,694 and $157,740 for the years ended December 31, 2017 and 2016, respectively.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Stated in US Dollars)
The Company entered into various credit
contracts and revolving lines of credit, which were used for short-term loans and bank acceptance bills. The following tables summarize
the unused lines of credit as of December 31, 2017 and 2016:
|
|
December 31, 2017
|
Lender
|
|
Starting date
|
|
Maturity date
|
|
Maximum
Amount
Available of
Line of Credit
|
|
|
Unused line of
credit
|
|
|
|
|
|
|
|
$
|
|
|
$
|
|
Ping An Bank Co., Ltd. (1)
|
|
3/17/2017
|
|
3/16/2018
|
|
|
10,756,158
|
|
|
|
3,130,042
|
|
Industrial and Commercial Bank of China (1)
|
|
8/24/2017
|
|
8/31/2018
|
|
|
7,682,970
|
|
|
|
6,146,376
|
|
Jiang Su Bank Co., Ltd. (1)
|
|
4/20/2017
|
|
4/19/2018
|
|
|
3,841,485
|
|
|
|
113,708
|
|
Jiang Su Bank Co., Ltd. (2)
|
|
7/3/2017
|
|
7/2/2018
|
|
|
2,560,990
|
|
|
|
7,171
|
|
Industrial Bank Co., Ltd. (1)
|
|
9/20/2017
|
|
9/20/2018
|
|
|
3,073,188
|
|
|
|
517,832
|
|
Guangdong Huaxing Bank (1)
|
|
10/26/2017
|
|
9/27/2018
|
|
|
9,219,564
|
|
|
|
3,543,386
|
|
Hua Xia Bank Co., Ltd. (2)
|
|
10/23/2017
|
|
10/23/2018
|
|
|
7,682,970
|
|
|
|
4,745,002
|
|
China Minsheng Banking Corp., Ltd. (1)
|
|
11/14/2017
|
|
11/14/2018
|
|
|
5,121,980
|
|
|
|
1,280,495
|
|
Bank of China (1)
|
|
7/11/2016
|
|
7/11/2019
|
|
|
13,445,197
|
|
|
|
8,279,168
|
|
Bank of China (1)
|
|
7/12/2016
|
|
7/12/2019
|
|
|
12,292,752
|
|
|
|
3,366,677
|
|
Bank of China (1)
|
|
7/25/2016
|
|
7/25/2019
|
|
|
4,097,584
|
|
|
|
143,928
|
|
Total
|
|
|
|
|
|
|
79,774,838
|
|
|
|
31,273,785
|
|
|
|
December 31, 2016
|
Lender
|
|
Starting date
|
|
Maturity date
|
|
Maximum
Amount
Available of
Line of Credit
|
|
|
Unused line of
credit
|
|
|
|
|
|
|
|
$
|
|
|
$
|
|
Bank of China (1)
|
|
7/11/2016
|
|
7/11/2019
|
|
|
12,590,290
|
|
|
|
1,444,934
|
|
China Everbright Bank Co., Ltd. (1)
|
|
12/28/2016
|
|
12/27/2017
|
|
|
7,194,452
|
|
|
|
7,194,452
|
|
Industrial and Commercial Bank of China (1)
|
|
7/1/2016
|
|
6/30/2017
|
|
|
7,194,452
|
|
|
|
4,316,671
|
|
China Minsheng Banking Corp., Ltd. (1)
|
|
11/1/2016
|
|
11/1/2017
|
|
|
3,597,226
|
|
|
|
287,778
|
|
Bank of China (1)
|
|
7/12/2016
|
|
7/12/2019
|
|
|
10,483,344
|
|
|
|
111
|
|
Industrial Bank Co., Ltd. (1)
|
|
10/28/2016
|
|
10/28/2017
|
|
|
7,194,452
|
|
|
|
2,409,882
|
|
Hua Xia Bank Co., Ltd. (2)
|
|
6/1/2016
|
|
6/1/2017
|
|
|
4,316,671
|
|
|
|
2,298,681
|
|
Bank of China (1)
|
|
7/25/2016
|
|
7/25/2019
|
|
|
3,837,041
|
|
|
|
124,892
|
|
Hongkong and Shanghai Banking Corporation Limited (1)
|
|
8/26/2016
|
|
7/15/2017
|
|
|
4,000,000
|
|
|
|
4,000,000
|
|
Total
|
|
|
|
|
|
|
60,407,928
|
|
|
|
22,077,401
|
|
|
(1)
|
The lines of credits are guaranteed by the Company’s
Chief Executive Officer, Mr. Dang Yu Pan.
|
|
(2)
|
The lines of credit are guaranteed by the Company’s
Chief Executive Officer, Mr. Dang Yu Pan, and his wife.
|
Certain of the agreements governing
the Company’s loans include standard affirmative and negative as well as financial covenants, including restrictions on granting
additional pledges on the Company’s property and incurring additional debt and obligations to provide advance notice of major
corporate actions, and other covenants including: that the borrower may not serve as a guarantor for more than double its net assets;
that the borrower is restricted in certain circumstances from using the loans in connection with related party transactions or
other transactions with affiliates; that the borrower must provide monthly reports to certain lenders describing the actual use
of loans; that the borrower may need to obtain approval to engage in major corporate transactions; that the borrower’s asset-liability
ratio need be lower than 75%; and that the borrower may need to obtain approval to increase overseas investments, guarantee additional
debt or incur additional debt by an amount which exceeds 20% of its total net assets should the lender determine that such action
would have a material impact on the ability of the borrower to repay the loan. The covenants in these loan agreements could prohibit
the Company from incurring any additional debt without consent from its lenders. The Company believes it would be able to obtain
consents from the lenders in the event it needed to do so. The agreements governing the Company’s loans may also include
covenants that, in certain circumstances, may require the Company’s PRC operating subsidiaries to give notice to, or obtain
consent from, certain of their lenders prior to making a distribution of net profit, as well as covenants restricting the ability
of the Company’s PRC operating subsidiaries from extending loans.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Stated in US Dollars)
|
19.
|
Share-based compensation
|
Under the Company’s 2008 Omnibus
Incentive Plan (the "2008 Plan") a total of two million shares were reserved for issuance. In October 2017, the Company
ceased granting awards under the 2008 Plan and there were 47,046 remaining shares available for grant under the 2008 Plan. Under
the terms of the 2008 Plan, options were granted with a contractual term of ten years and generally vest over three to five years
with an exercise price equal to the fair market value on the date of grant. Incentive stock options (ISOs) granted must have an
exercise price equal to or greater than the fair market value of the Company’s common stock on the date of grant. Repricing
of stock options and stock appreciation rights (SARs) is permitted without stockholder approval. If a particular award agreement
so provides, certain change in control transactions may cause such awards granted under the 2008 Plan to vest at an accelerated
rate, unless the awards are continued or substituted for in connection with the transaction.
A total of 2,250,000 shares were reserved
for issuance under the 2017 Omnibus Incentive Plan (the “2017 Plan”), which was adopted on October 3, 2017. As of December
31, 2017, 2,250,000 shares were available for future grant under the 2017 Plan. The 2017 Plan authorizes the issuance of awards
including stock options, restricted stock units (RSUs), restricted stock, unrestricted stock, SARs and other equity and/or cash
performance incentive awards to employees, directors, and consultants of the Company. Subject to certain restrictions, the Compensation
Committee of the Board of Directors has broad discretion to establish the terms and conditions for awards under the 2017 Plan,
including the number of shares, vesting conditions and the required service or performance criteria. Under the terms of the 2017
Plan, in general, options and SAR’s will vest over a three to five-year period with an exercise price not less than the fair
market value on the date of grant. However, options may vest based on time or achievement of performance conditions. Options may
contain early exercise provisions, to which the Company will have the right to repurchase any unvested shares in the event that
the awardee is terminated. ISOs granted must have an exercise price equal to or greater than the fair market value of the Company’s
common stock on the date of grant. The maximum term of options granted under the 2017 Plan is ten years, except that the maximum
permitted term of incentive stock options granted to 10% stockholders is five years.
A summary of the option activity as
of December 31, 2017 and 2016 and changes during the fiscal years then ended is presented below:
Options Granted to Employees
|
|
Number of
Shares
|
|
|
Weighted
Average Exercise
Price
|
|
|
Remaining
Contractual
Term in Years
|
|
|
|
|
|
|
$
|
|
|
|
|
Outstanding, January 1, 2016
|
|
|
786,926
|
|
|
|
3.08
|
|
|
|
6.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
190,000
|
|
|
|
2.66
|
|
|
|
-
|
|
Exercised
|
|
|
(13,312
|
)
|
|
|
2.63
|
|
|
|
-
|
|
Forfeited
|
|
|
(41,678
|
)
|
|
|
2.15
|
|
|
|
-
|
|
Canceled
|
|
|
(366,544
|
)
|
|
|
3.47
|
|
|
|
-
|
|
Outstanding, December 31, 2016
|
|
|
555,392
|
|
|
|
2.70
|
|
|
|
7.39
|
|
Exercisable, December 31, 2016
|
|
|
381,392
|
|
|
|
2.76
|
|
|
|
6.67
|
|
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Stated in US
Dollars)
|
19.
|
Share-based compensation (continued)
|
Options Granted to Employees (continued)
|
|
Number of
Shares
|
|
|
Weighted
Average Exercise
Price
|
|
|
Remaining
Contractual
Term in Years
|
|
|
|
|
|
|
$
|
|
|
|
|
Outstanding, January 1, 2017
|
|
|
555,392
|
|
|
|
2.70
|
|
|
|
7.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
665,000
|
|
|
|
4.59
|
|
|
|
-
|
|
Exercised
|
|
|
(294,667
|
)
|
|
|
3.26
|
|
|
|
-
|
|
Forfeited
|
|
|
(3,619
|
)
|
|
|
2.63
|
|
|
|
-
|
|
Canceled
|
|
|
(7,064
|
)
|
|
|
2.63
|
|
|
|
-
|
|
Outstanding, December 31, 2017
|
|
|
915,042
|
|
|
|
4.07
|
|
|
|
8.34
|
|
Exercisable, December 31, 2017
|
|
|
130,042
|
|
|
|
2.80
|
|
|
|
5.74
|
|
Intrinsic value is calculated as the
amount by which the current market value of a share of common stock exceeds the exercise price multiplied by the number of option.
The aggregate intrinsic value of options exercisable, and vested and expected to vest as of December 31, 2017, was approximately
$133,000 and $298,000, respectively. The aggregate intrinsic value of options exercisable, and vested and expected to vest as of
December 31, 2016 was approximately $8,000 and $8,000, respectively.
During the years ended December 31,
2017, the Company granted options to purchase 665,000 shares to twenty-three employees at a weighted average grant date fair value
of $3.10 per share. Thirty-six employees exercised their options to purchase 294,667 shares of the Company’s common stock.
Three employees resigned and their options to purchase a total of 3,619 shares of the Company’s common stock were forfeited.
These employees had resigned with 17,100 shares vested, which if not exercised with 90 days after termination, will be cancelled.
Of these vested shares 10,036 shares were exercised and 7,064 shares were cancelled during the year ended December 31, 2017, and
no outstanding and exercisable share as of December 31, 2017.
During the year ended December 31,
2016, the Company granted options to purchase 190,000 shares to two employees at a weighted average grant date fair value of $2.66
per share. Four employees exercised their option to purchase 13,312 shares of the Company’s common stock. Thirteen employees
resigned and their options to purchase a total of 41,678 shares of the Company’s common stock were forfeited. These employees
had resigned with 386,920 shares vested, which if not exercised with 90 days after termination, will be cancelled. Of these vested
shares 13,312 shares were exercised and 366,544 shares were cancelled during the year ended December 31, 2016, and 7,064 were outstanding
and exercisable as of December 31, 2016.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Stated in US
Dollars)
|
19.
|
Share-based compensation (continued)
|
Restricted stock awards
During the year ended December 31,
2017, the Company granted 115,000 shares of restricted stock to one employee and five members of the Board of Directors. The Restricted
Stock Awards (“RSAs”) granted in 2017 vest over a three year period on the anniversary date of the grant at 30%, 30%
and 40%, respectively, with the entire 30% vesting on the first anniversary of the grant, and thereafter on each subsequent anniversary
date of the grant, the awards vest in equal installments on a 1/12th basis each month per year for the applicable percentage. RSAs
granted under the incentive plans are governed by agreements between the Company and recipients of the awards. In December 2017,
one member of the Board of Directors resigned, and 15,000 shares of unvested restricted stock were cancelled.
A summary of the RSA activity as of
December 31, 2017 and changes during the fiscal year then ended is presented below:
|
|
Number of
Shares
|
|
|
Weighted
Average Exercise
Price
|
|
|
|
|
|
|
$
|
|
Outstanding, January 1, 2017
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
115,000
|
|
|
|
4.65
|
|
Cancelled
|
|
|
(15,000
|
)
|
|
|
4.65
|
|
Outstanding, December 31, 2017
|
|
|
100,000
|
|
|
|
4.65
|
|
Total Share-based Compensation
Expense
The estimated fair value of share-based
compensation for employees is recognized as a charge against income on a ratable basis over the requisite service period, which
is generally the vesting period of the award. The fair value of each stock option grant was estimated on the date of grant using
the Black-Scholes option pricing model under the following assumptions:
|
|
For the years ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Dividend yield
|
|
|
-
|
|
|
|
-
|
|
Risk-free interest rate
|
|
|
2%-2.06%
|
|
|
|
1.21%-1.4%
|
|
Expected term (in years)
|
|
|
6-6.05
|
|
|
|
5-6.05
|
|
Volatility
|
|
|
76.16%-76.74%
|
|
|
|
76.98%-79.55%
|
|
Forfeiture rates
|
|
|
4
|
%
|
|
|
9
|
%
|
As of December 31, 2017, total unrecognized
compensation cost related to unvested share-based compensation awards was $2,416,032. This amount is expected to be recognized
as stock-based compensation expense in the Company’s consolidated statements of operations and comprehensive income over
the remaining weighted average vesting period of 2.66 years.
In connection with the grant of stock
options and RSAs to employees, the Company recorded stock-based compensation charges of $326,171 and $317,946, for the years ended
December 31, 2017 and 2016, respectively. No options were granted to non-employees during the years ended December 31, 2017 and
2016.
The Company has adopted ASU 2016-09
"Improvement to employee Share-Based Payment Accounting" in Q1-2017 and has elected to account forfeitures as they occur.
The cumulative effect on the retained earnings is $3,689.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Stated in US Dollars)
The following table sets forth the
computation of basic and diluted earnings per common share for the years ended December 31, 2017 and 2016.
|
|
For the years ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income attributable to the Company
|
|
|
16,772,852
|
|
|
|
6,117,927
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
|
|
|
|
|
|
|
|
- Basic
|
|
|
15,326,797
|
|
|
|
15,105,235
|
|
- Dilutive effects of equity incentive awards
|
|
|
108,574
|
|
|
|
8,679
|
|
- Diluted
|
|
|
15,435,371
|
|
|
|
15,113,914
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
- Basic
|
|
|
1.09
|
|
|
|
0.41
|
|
- Diluted
|
|
|
1.09
|
|
|
|
0.40
|
|
Diluted earnings per share takes into
account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted
into common stock.
915,042 shares of outstanding stock
options with a total dilutive effect of 54,325 shares were included in the computation of diluted EPS for the year ended December
31, 2017. There were 200,000 warrants with a total dilutive effect of 53,846 shares were included in the computation of diluted
EPS for the year ended December 31, 2017. There were 7,064 forfeited options with a total dilutive effect of 403 shares were included
in the computation of diluted EPS for the year ended December 31, 2017.
555,392 shares of outstanding stock
options with a total dilutive effect of 3,435 shares were included in the computation of diluted EPS for the year ended December
31, 2016. There were 740,001 warrants with a total dilutive effect of 5,244 shares were included in the computation of diluted
EPS for the year ended December 31, 2016.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Stated in US Dollars)
In April 2014, the Company and certain
institutional investors entered into a securities purchase agreement, pursuant to which the Company sold 1,000,000 shares of common
stock and warrants to purchase 500,000 shares of common stock in a registered direct offering at a price of $5.05 per fixed combination
for aggregate proceeds of $5.05 million.
The warrants had an initial exercise
price of $6.33 per share and were exercisable until April 17, 2017.
The warrants were classified as a
liability. The fair value of the warrants liability is re-measured at each reporting period. As of December 31, 2017 and 2016 the
fair value of warrant liability was $nil and $259, respectively. For the years ended December 31, 2017 and 2016, the Company recognized
a gain of $259 and $140,290, respectively, on the changes in the fair value of the warrant liability.
In January 2014, the Company issued
to a consultant warrants to purchase 100,000 shares of common stock with an exercise price of $2.20 per share and warrants to purchase
100,000 shares of common stock with an exercise price of $3.80 per share. The warrants expire in January 2019.
The fair value of the warrants as
of December 31, 2016 were calculated using the Black-Scholes pricing model with the following assumptions:
Expected volatility
|
|
|
56.79
|
%
|
Risk-free interest rate
|
|
|
0.53
|
%
|
Expected term (in years)
|
|
|
0.30
|
|
Dividend rate
|
|
|
-
|
|
The Company revalued the warrants
utilizing a binomial model as of December 31, 2016 with no material difference in the value. The warrants expired on April 17,
2017.
The movement of the warrant for the years ended December
31, 2017 and 2016 is as following:
|
|
Warrants
|
|
|
Weighted
Average Exercise
Price
|
|
|
Remaining
Contractual Term
in Years
|
|
|
|
|
|
|
$
|
|
|
|
|
Outstanding, January 1, 2016
|
|
|
500,001
|
|
|
|
6.33
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, December 31, 2016
|
|
|
500,001
|
|
|
|
6.33
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, January 1, 2017
|
|
|
500,001
|
|
|
|
6.33
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(500,001
|
)
|
|
|
6.33
|
|
|
|
-
|
|
Outstanding, December 31, 2017
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Stated in US Dollars)
|
22.
|
Non-controlling interest
|
As of December 31, 2016, non-controlling
interest related to the 30% minority interest in GZ Highpower in the consolidated balance sheet was $329,343. GZ Highpower was
deconsolidated on December 21, 2017, Details see Note 12
For the years ended December 31, 2017
and 2016, non-controlling interest related to GZ Highpower in the consolidated statements of operations was gain of $441,044 and
loss of $490,150, respectively.
|
23.
|
Defined contribution plan
|
Full-time employees of the Company
in the PRC participate in a government mandated defined contribution plan, pursuant to which certain pension benefits, medical
care, employee housing fund and other welfare benefits (“the Benefits”) are provided to employees. Chinese labor regulations
require that the PRC operating subsidiaries of the Company make contributions to the government for these benefits based on certain
percentages of the employees’ salaries. Except for contributions made related to the Benefits, the Company has no legal obligation.
The total contributions made, which
were expensed as incurred, were $2,752,901 and $1,614,299 for the years ended December 31, 2017 and 2016, respectively.
|
24.
|
Commitments and contingencies
|
Operating leases commitments
The Company leases factory and office
premises under various non-cancelable operating lease agreements that expire at various dates through years 2018 to 2022, with
an option to renew the lease. All leases are on a fixed payment basis. None of the leases include contingent rentals. Minimum future
commitments under these agreements as of December 31, 2017 are as follows:
For the years ending December 31,
|
|
$
|
|
2018
|
|
|
3,033,333
|
|
2019
|
|
|
2,545,351
|
|
2020
|
|
|
1,726,499
|
|
2021
|
|
|
1,686,532
|
|
2022
|
|
|
703,763
|
|
|
|
|
9,695,478
|
|
Rent expenses for the years ended
December 31, 2017 and 2016 were $2,540,031 and $1,858,577, respectively.
HIGHPOWER INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Stated in US Dollars)
The reportable segments are components
of the Company that offer different products and are separately managed, with separate financial information available that is
separately evaluated regularly by the Company’s chief operating decision maker (“CODM”), the Chief Executive
Officer, in determining the performance of the business. The Company categorizes its business into three reportable segments, namely
(i) Lithium Business; (ii) Ni-MH Batteries and Accessories; and (iii) New Materials.
The descriptions of the reportable
segments have been changed from Lithium Batteries and Ni-MH Batteries to Lithium Business and Ni-MH Batteries and Accessories,
respectively. Lithium Business mainly consists of lithium batteries, power storage system and power source solutions. Ni-MH Batteries
and Accessories mainly consists of Ni-MH rechargeable batteries, sized batteries in blister packing as well as chargers and battery
packs.
The CODM evaluates performance based
on each reporting segment’s net sales, cost of sales, gross profit and total assets. Net sales, cost of sales, gross profit
and total assets by segments is set out as follows:
|
|
For the years ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
Net sales
|
|
|
|
|
|
|
|
|
Lithium Business
|
|
|
161,660,771
|
|
|
|
112,128,757
|
|
Ni-MH Batteries and Accessories
|
|
|
53,492,309
|
|
|
|
57,211,657
|
|
New Materials
|
|
|
29,013,232
|
|
|
|
4,510,699
|
|
Total
|
|
|
244,166,312
|
|
|
|
173,851,113
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
|
|
|
|
|
|
|
Lithium Business
|
|
|
129,295,264
|
|
|
|
87,721,456
|
|
Ni-MH Batteries and Accessories
|
|
|
41,834,267
|
|
|
|
43,163,019
|
|
New Materials
|
|
|
25,662,913
|
|
|
|
4,884,167
|
|
Total
|
|
|
196,792,444
|
|
|
|
135,768,642
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
Lithium Business
|
|
|
32,365,507
|
|
|
|
24,407,301
|
|
Ni-MH Batteries and Accessories
|
|
|
11,658,042
|
|
|
|
14,048,638
|
|
New Materials
|
|
|
3,350,319
|
|
|
|
(373,468
|
)
|
Total
|
|
|
47,373,868
|
|
|
|
38,082,471
|
|
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
|
$
|
|
|
$
|
|
Total Assets
|
|
|
|
|
|
|
|
|
Lithium Business
|
|
|
171,881,450
|
|
|
|
115,116,508
|
|
Ni-MH Batteries and Accessories
|
|
|
48,383,088
|
|
|
|
37,994,369
|
|
New Materials
|
|
|
-
|
|
|
|
10,220,873
|
|
Total
|
|
|
220,264,538
|
|
|
|
163,331,750
|
|
HIGHPOWERINTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Stated in US Dollars)
|
25.
|
Segment information (continued)
|
All long-lived assets of the Company
are located in the PRC. Geographic information about the sales and accounts receivable based on the locations of the Company’s
customers is set out as follows:
|
|
For the years ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
Net sales
|
|
|
|
|
|
|
|
|
China mainland
|
|
|
139,096,630
|
|
|
|
101,459,371
|
|
Asia, others
|
|
|
81,060,414
|
|
|
|
43,764,963
|
|
Europe
|
|
|
18,684,852
|
|
|
|
17,958,060
|
|
North America
|
|
|
4,769,797
|
|
|
|
9,371,838
|
|
South America
|
|
|
269,596
|
|
|
|
759,472
|
|
Africa
|
|
|
143,475
|
|
|
|
284,692
|
|
Others
|
|
|
141,548
|
|
|
|
252,717
|
|
|
|
|
244,166,312
|
|
|
|
173,851,113
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
Accounts receivable
|
|
|
|
|
|
|
|
|
China mainland
|
|
|
37,636,478
|
|
|
|
29,663,633
|
|
Asia, others
|
|
|
15,294,527
|
|
|
|
10,441,358
|
|
Europe
|
|
|
5,189,859
|
|
|
|
3,875,979
|
|
North America
|
|
|
94,585
|
|
|
|
2,260,840
|
|
South America
|
|
|
12,816
|
|
|
|
26,610
|
|
Africa
|
|
|
-
|
|
|
|
378
|
|
Others
|
|
|
24,734
|
|
|
|
11,971
|
|
|
|
|
58,252,999
|
|
|
|
46,280,769
|
|
HIGHPOWERINTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Stated in US Dollars)
|
26.
|
Related party balance and transaction
|
Related party balances
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
Accounts receivable
|
|
|
632,704
|
|
|
|
7,125,140
|
|
Other receivable
|
|
|
533,134
|
|
|
|
392,110
|
|
Account due from related parties
|
|
|
1,165,838
|
|
|
|
7,517,250
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
-
|
|
|
|
1,516,557
|
|
Other payables
|
|
|
-
|
|
|
|
5,756
|
|
Amount due to a related party
|
|
|
-
|
|
|
|
1,522,313
|
|
Prior to July 27, 2017, Yipeng was
considered as a related party of the Company. From December 21, 2017, GZ Highpower was considered as a related party of the Company
(See Note 12).
Related party transactions
Yipeng
The details of the transactions with
Yipeng were as follows:
|
|
From January 1, 2017 to July
27, 2017
|
|
|
From May 2, 2016 to
December 31, 2016
|
|
|
|
$
|
|
|
$
|
|
Income:
|
|
|
|
|
|
|
|
|
Sales
|
|
|
2,188,957
|
|
|
|
9,345,285
|
|
Rental income (1)
|
|
|
26,895
|
|
|
|
38,188
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Technical support fee
|
|
|
-
|
|
|
|
992,359
|
|
Equipment rental fee (2)
|
|
|
386,341
|
|
|
|
246,143
|
|
Sales quantity deposit paid
|
|
|
-
|
|
|
|
751,416
|
|
Purchase
|
|
|
-
|
|
|
|
254
|
|
(1) The Company signed an agreement
with Yipeng for its office leasing and received rental income from Yipeng.
(2) The Company rent machines from
Yipeng since September 1, 2016 and the Company accrued rental expense for it.
GZ Highpower
The Company received the repayment,
RMB 40 million (approximately $6.1 million) of loans and related interests from GZ Highpower (See Note 12).
The Company has evaluated subsequent
events through the issuance of the consolidated financial statements and no subsequent event is identified that would have required
adjustment or disclosure in the consolidated financial statements.
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