ITEM 1. BUSINESS
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 subsidiaries Shenzhen Highpower Technology Company Limited (“SZ Highpower”), and Icon Energy System Company
Limited (“ICON”), SZ Highpower’s wholly owned subsidiary Huizhou Highpower Technology Company Limited (“HZ
HTC”) and its 70%-owned subsidiary Ganzhou Highpower Technology Company Limited (“GZ Highpower”) and SZ Highpower’s
and HKHTC’s jointly owned subsidiary, Springpower Technology (Shenzhen) Company Limited (“SZ Springpower”). Highpower
and its subsidiaries are collectively referred to as the “Company”, unless the context indicates otherwise.
Corporate Information
Highpower International, Inc. was incorporated
in the state of Delaware on January 3, 2006. HKHTC was incorporated in Hong Kong on July 4, 2003. All other operating subsidiaries
are incorporated in the People’s Republic of China (“PRC”) and are listed below:
Subsidiary
|
|
Principal Activities
|
Shenzhen Highpower Technology Co., Ltd
("SZ Highpower")
|
|
Manufacturing & marketing of NiMH batteries
|
|
|
|
Springpower Technology (Shenzhen) Co., Ltd
("SZ Springpower")
|
|
Manufacturing and marketing of lithium batteries
|
|
|
|
Ganzhou Highpower Technology Co., Ltd
("GZ Highpower")
|
|
Processing and marketing and research of battery materials
|
|
|
|
Icon Energy System Co., Ltd.
("ICON")
|
|
Design and production of advanced battery packs and systems
|
|
|
|
Huizhou Highpower Technology Co., Ltd
("HZ HTC")
|
|
Manufacturing & marketing of lithium batteries
|
Below is organizational flow chart of the Company:
SZ Highpower manufactures Nickel Metal Hydride
(“Ni-MH”) batteries for both consumer and industrial applications. We have developed significant expertise in Ni-MH
battery technology and large-scale manufacturing that enable us to improve the quality of our battery products, reduce costs, and
keep pace with evolving industry standards. In 2008, we commenced two production lines of Lithium-ion (“Li-ion”) and
Lithium polymer rechargeable batteries at SZ Springpower for consumer applications, such as consumer electronic products, mobile
devices and wireless communication products. In 2013, we completed the automated facility to produce higher volume orders of mobile
device batteries and larger format lithium polymer batteries for electric vehicles, and energy storage systems in Huizhou. Our
automated machinery enables us to enhance uniformity and precision during the manufacturing process.
We employ a broad network of salespersons in
China Mainland and Hong Kong, which targets key customers by arranging in-person sales presentations and providing after-sales
services both domestically and internationally. The sales staff works directly with our customers to better address their needs.
In 2010, we began establishing a new materials
business in which we intended to recycle and process certain used battery products and raw material scraps collected from the battery
manufacturing industry. This new materials business generates revenue and income and helps us understand our raw material supply
chain, and control our raw material costs and ensure that we have a steady supply of raw materials for battery manufacturing operations
to reduce our reliance on external suppliers. In 2012, we initiated the construction of our Ganzhou recycling plant, which was
completed in 2014.
Industry
General
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 up to 1,000 times. 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.
The initial technology for rechargeable batteries
was nickel cadmium (“Ni-Cad”). Ni-Cad batteries are offered in a variety of sizes and shapes but suffer from low energy
density and low cycle life. In addition, disposal of Ni-Cad batteries poses serious environmental and liability issues due to the
high toxicity level of cadmium. To meet the demand for higher performing rechargeable batteries, nickel-metal hydride (“Ni-MH”)
batteries were developed. Electrically, Ni-MH batteries are similar to the Ni-Cad counterparts but utilize a hydrogen-absorbing
alloy instead of cadmium. High capacity Ni-MH batteries can replace Ni-Cad batteries in many devices because they operate on the
same voltage and possess similar power and fast charge capabilities, while offering the advantage of greater energy density. In
devices such as power tools, electric toys, personal portable electronic devices and hybrid electric vehicles, Ni-MH batteries
optimize equipment performance. Ni-MH batteries have several advantages including:
|
·
|
High capacity
- Because of the use of hydrogen as a cathode material, Ni-MH batteries have up to a 40 percent longer service life than ordinary Ni-Cad batteries of equivalent size.
|
|
·
|
Long cycle life
- Up to 1,000 charge/discharge cycles.
|
|
·
|
No memory effect
- Ni-Cad batteries suffer from a memory effect - when charging, the user must ensure that they are totally flat first, otherwise they “remember” how much charge they used to have and die much quicker. Ni-MH batteries have a negligible memory effect, making charging quicker and more convenient.
|
|
·
|
Performs at extreme temperatures
- Capable of operation on discharge from -20°C to 50°C (-4°F to 122°F) and charge from 0°C to 45°C (32°F to 113ºF).
|
|
·
|
Environmentally friendly
- Zero percent cadmium or other toxic chemicals such as mercury.
|
|
·
|
Cost efficiency
- Rechargeable Ni-MH batteries are substantially less expensive than rechargeable lithium batteries.
|
The first rechargeable lithium batteries were
commercialized in 1991. Rechargeable lithium batteries are produced as cylindrical lithium-ion or prismatic lithium-polymer batteries.
The energy density of lithium is typically twice that of the standard nickel-cadmium. Lithium batteries are low maintenance, with
no memory effect and no scheduled cycling required to prolong battery life. In addition, the self-discharge is less than half compared
to nickel-cadmium, making lithium well suited for modern applications, such as power tools, electric bicycles, laptops, LED lights,
portable medical devices, digital cameras, MP3 players, and electric vehicles.
Despite its overall advantages, lithium battery
technology has limitations that include fragility, safety, aging, capacity deterioration and higher manufacturing cost. Manufacturers
are constantly working to improve lithium battery technology with new and enhanced chemical combinations. Lithium batteries have
several advantages including:
|
·
|
High capacity
- Up to 100% higher energy density compared to standard nickel-cadmium batteries.
|
|
·
|
Low self-discharge
- Self-discharge can be less than half that of nickel-based batteries.
|
|
·
|
Low maintenance
- No periodic discharge is needed and there is no memory effect. Specialty cells can provide very high current to applications such as power tools.
|
|
·
|
Flexible form factor
-
Prismatic lithium polymer batteries can be produced in a wide variety of form factors for different products and applications.
|
Lithium batteries also have several limitations:
|
·
|
Requires protection circuit to maintain voltage and current within safe limits.
|
|
·
|
Poses safety issues due to the more-active characteristics of its basic materials.
|
|
·
|
Subject to aging when not in use - storage in a cool place at 40% charge reduces the aging effect.
|
|
·
|
Transportation restrictions - shipment of larger quantities may be subject to regulatory control.
|
|
·
|
Manufacturing cost is approximately 40% greater than nickel-cadmium.
|
China
China’s market share of battery production
is expected to increase. China has a number of benefits in battery manufacturing, which are expected to drive this growth:
|
·
|
Low Costs
.
China continues to have a significant low cost of labor as well as easy access to raw materials and land.
|
|
·
|
Proximity to electronics supply chain
.
Electronics manufacturing in general continues to shift to China, giving China-based manufacturers a further cost and cycle time advantage.
|
|
·
|
Proximity to end-markets
.
China has focused in recent years on building its research, development and engineering skill base in all aspects of higher end manufacturing, including batteries.
|
Competitive Strengths
We believe the following competitive strengths contribute to our
success and differentiate us from our competitors:
Experienced management team
Our senior management team has extensive business
and industry experience. Our Chairman and Chief Executive Officer, Mr. Dang Yu Pan, has over 19 years of experience in China’s
battery industry. Our Chief Technology Officer, Mr. Wen Liang Li, has over 25 years of research experience in advanced battery
technologies and products. Additionally, other members of our senior management team have significant experience with respect to
other key aspects of our operations, including product design, manufacturing, and sales and marketing.
Market position
Since the Company’s inception, it has
primarily focused on the research, development and manufacture of Ni-MH battery cells. We have developed significant expertise
in Ni-MH battery technology and large-scale manufacturing that enables us to improve the quality of our products, reduce costs,
and keep pace with evolving industry standards. Our Ni-MH rechargeable batteries have been developed to respond to a number of
specific market requirements such as recyclability, high power, high energy density, long life, low cost and other important characteristics
for consumer and industrial applications. They are suitable for most applications where high currents, deep discharges and safety
are required. The consumer electronic industry and the high-end industrial energy storage industry have evolved significantly in
recent years. The demand for more compact and more powerful battery solutions has been driving the lithium battery sector grow
exponentially. In 2008 we established our subsidiary, SZ Springpower, to focus on specializing in the research, manufacturing and
marketing of lithium rechargeable batteries. In 2013 we completed the construction of our new lithium battery plant in Huizhou.
This new higher scale facility is dedicated to larger volume orders. Our lithium battery business has been growing rapidly and
we expect it will continue to grow as we gain more industry knowledge and acquire more customers. Our lithium battery segment has
increasingly become more important to our operations.
Well-established distribution channels
We sell our products to original equipment
manufacturers and a well-established network of distributors and resellers, which allows us to penetrate customer markets worldwide.
Our relationship with many distributors extends from our inception in 2001. We also continue to screen and identify our strongest
customers in each distribution channel and to focus our sales efforts towards the largest distributors and resellers in the fastest
growing industries, such as the mobile and wearable devices, electric vehicles and energy storage industries.
Proven product manufacturing capabilities
We selectively use automation in our manufacturing
process to ensure a high uniformity and precision in our products while maintaining our cost-competitiveness. We use automated
machinery in key stages of the manufacturing process while using manual labor for other stages to take advantage of the availability
of low-cost, skilled labor in China. We have received several accreditations, including the International Organization for Standardization
(ISO) 9001: 2000, ISO 14001, Conformite Europende (CE) and Underwriters Laboratories Inc. (UL) that attest to our quality management
requirements, manufacturing safety, controls, procedures and environmental performance.
Customer service expertise
We work closely with our major customers in
order to ensure high levels of customer satisfaction. To provide superior service and foster customer trust and loyalty, we offer
flexible delivery methods and product feedback opportunities to our customers. The Company provides the sales representatives and
marketing personnel with extensive training including necessary skills in answering questions relating to products and services,
proactively introducing potential customers about our products, and promptly responding to customer inquiries.
Our Strategy
Our goal is to become a global leader in the
development and manufacture of rechargeable battery products. We intend to achieve this goal by implementing the following strategies:
Continue to pursue cost-effective opportunities
Our operating model, coupled with our modern
manufacturing processes, has resulted in economies of scale, 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.
Aggressively pursue distribution channels
We intend to broaden the scope of our distribution
arrangements to increase sales penetration in targeted markets. We intend to select additional distributors based on their access
to markets and retail outlets that are candidates for our products. In addition, we intend to expand our international sales presence
and diversify our revenue sources by taking efforts to increase the percentage of our net sales attributable to sales to emerging
new markets.
Expand existing and new product offerings
Since the commencement of battery operations
in 2001, we have expanded our product offerings to multiple product lines, which include in each product line batteries of varying
sizes, capacities and voltages. We intend to expand our existing lines of both Ni-MH and lithium batteries for use in other applications,
such as energy storage systems, hybrid-electric cars, pure electric vehicles, and devote resources to the development of higher-end
and higher-performance applications requiring higher ampere hour batteries.
Enhance marketing efforts to increase brand awareness
We continue to devote our efforts towards brand
development and utilize marketing concepts in an attempt to enhance the marketability of our products.
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 over similarly sized standard
Ni-Cad rechargeable batteries. As a result, users can expect a longer time between charges and longer running time. Our Ni-MH rechargeable
batteries are available in both cylindrical and prismatic shapes.
In 2009, we completed the construction and
build-out of two production lines for the development and manufacturing of a range of lithium rechargeable batteries and products
in Shenzhen. In 2013, we completed the automated facility to produce higher volume orders of mobile device batteries and larger
format lithium batteries for electric vehicles, and energy storage systems in Huizhou. We produce Li-ion batteries and Li-polymer
batteries with hundreds of different models and specifications. Currently, we produce an average of 3.0-4.0 million lithium
battery units per month.
We produce an extensive line of batteries falling into two main
categories:
|
·
|
Consumer Batteries – Relative to ordinary Ni-Cad rechargeable batteries, as well as their non-rechargeable counterparts, our Ni-MH and lithium batteries offer higher power capacity allowing for longer working time and shortened charging time during equivalent working periods. We produce A, AA and AAA sized batteries in blister packing as well as chargers and battery packs.
|
|
·
|
Industrial Batteries – These batteries are designed for electric bikes, power tools and electric toys. They are specifically designed for high-drain discharge applications possessing low internal resistance, more power, and longer discharging time.
|
We also recycle scrap battery materials and
sell the recycled materials to customers. In recent years, China’s government has been stimulating the adoption of electric
vehicles to reduce carbon emission and air pollution. We have seen strong interest from electric vehicle manufactures who seek
help from us to recycle the batteries in the electric vehicles they produce.
Net sales for each of our product categories as a percentage of
net sales are set forth below:
|
|
Year Ended December 31,
|
|
|
2015
|
|
2014
|
Lithium Batteries
|
|
|
53.8
|
%
|
|
|
46.5
|
%
|
Ni-MH Batteries
|
|
|
44.2
|
%
|
|
|
51.0
|
%
|
New Materials
|
|
|
2.0
|
%
|
|
|
2.5
|
%
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
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.
Currently, 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 lithium are available from a limited number of suppliers. During the year ended December 31, 2015 and 2014, no supplier accounted
for or over 10% of our total purchase amount. 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. Our top suppliers include Xiamen Tungsten
Co., Ltd, Henan Kelong new energy Co., Ltd, Inner Mongolia Baotou Steel Rare-Earth (Group) Hi-Tech Co., Ltd.
At times, the pricing and availability of raw
materials can be volatile, attributable to numerous factors beyond the Company’s control, including general economic conditions,
currency exchange rates, industry cycles, production levels or a supplier’s tight supply. To the extent that we experience
cost increases we may seek to pass such cost increases on to our customers, but cannot provide any assurance that we will be able
to do so successfully or that our business, results of operations and financial condition would not be adversely affected by increased
volatility of the cost and availability of raw materials.
Quality Control
We consider quality control an important element
of our business practices. We have stringent quality control systems that are implemented by more than 200 company-trained staff
members to ensure quality control over each phase of the production process, from the purchase of raw materials through each step
in the manufacturing process. Supported by advanced equipment, we utilize a scientific management system and precision inspection
measurement, capable of supplying stable, high-quality rechargeable batteries. Our quality control department executes the following
functions:
|
¨
|
Setting internal controls and regulations for semi-finished and finished products;
|
|
¨
|
Testing samples of raw materials from suppliers;
|
|
¨
|
Implementing sampling systems and sample files;
|
|
¨
|
Maintaining quality of equipment and instruments; and
|
|
¨
|
Articulating the responsibilities of quality control staff.
|
We monitor quality and reliability in accordance
with the requirements of QSR, or Quality System Review, and ISO 9001 systems. We have received European Union’s CE attestation,
UL authentication, ISO 9001:2008 and ISO 14001 certification. We have passed stringent quality reviews and thus obtained OEM qualifications
from various domestic cellular phone brand names. With strong technological capabilities and use of automated equipment for core
aspects of the manufacturing process, we believe our product quality meets or even exceeds in certain key aspects international
industry standards.
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 of 55,680 square meters in Shenzhen and 126,605 square meters facility in Huizhou, a dedicated design, sales and marketing
team, and approximately 3,600 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.
The primary raw materials used in production
of rechargeable batteries include electrode materials, electrolytes, foils, cases and caps and separators. The electrodes are manufactured
using active materials, conductive agents and binder which are mixed with liquid. These mixtures are then uniformly coated onto
the thin metal foil, then after drying, the electrodes are cut down to the designated sizes. The positive electrode and negative
electrode are then wound together with a separator and inserted into a can, and electrolyte is filled. The sealing completes the
battery cell assembly. Some of these cells are then integrated into packages which are customized into a wide variety of configurations
to interface with different electronic devices.
In 2013, we completed construction of our manufacturing
factory in Huizhou, Guangdong Province, PRC. The factory houses a substantial part of the lithium battery production for the
Company and is equipped with more automated production lines. The factory’s production capacity is approximately two
to three times that of our current lithium battery production facility in Shenzhen.
In 2014, we completed construction of our materials
recycling factory in Ganzhou, Jiangxi Province, PRC and we began initial production in the factory in the first quarter of 2014.
Our Ni-MH facility currently produces approximately
11 million to 15 million battery units per month and our lithium facility produces approximately 5.0 million to 6.0 million units
per month. We are planning for moderate manufacturing capacity growth of approximately 30-40% for the lithium battery segment
in the next 12 months.
Major Customers
During the years ended December 31, 2015 and
2014, approximately 27.1% and 24.3% 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 year ended December 31, 2015 and 2014, no customer accounted for 10% or more of
net sales. As of December 31, 2015, there was one major customer accounted for 11.3% of the accounts receivable. None of the Company’s
customers accounted for 10% or more of the accounts receivable as of December 31, 2014.
Sales and Marketing
We have a broad sales network of approximately
90 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 to our customers are based primarily
on purchase orders we receive from time to time rather than firm, long-term purchase commitments from our customers. 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 target sales of our rechargeable batteries
and charging systems through original equipment manufacturers (“OEMs”), as well as distributors and resellers focused
on our target markets. We have contractual arrangements with distributors who market our products on a commission basis in particular
areas. Although OEM agreements typically contain volume-based pricing based on expected volumes, typically prices are rarely adjusted
retroactively if contract volumes are not achieved. We attempt to adjust future prices accordingly, but our ability to adjust prices
is generally based on market conditions which we cannot control.
Net sales based on the location of our customers as a percentage
of net sales is set forth below:
|
|
Year Ended December 31,
|
|
|
2015
|
|
2014
|
China mainland
|
|
|
46.7
|
%
|
|
|
47.1
|
%
|
Asia, others
|
|
|
29.8
|
%
|
|
|
25.6
|
%
|
Europe
|
|
|
17.9
|
%
|
|
|
20.3
|
%
|
North America
|
|
|
5.1
|
%
|
|
|
6.3
|
%
|
Rest of the World
|
|
|
0.5
|
%
|
|
|
0.7
|
%
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
While the largest portion of our sales are
made to customers in China Mainland and Hong Kong, our battery products are integrated in various devices and end-user products
and distributed worldwide, with approximately 46.7% of our products distributed to China Mainland, 29.8% to Asia, others, 17.9%
to Europe, 5.1% to North America, and 0.5% to other markets in 2015.
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.
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
and development center is currently staffed with over 380 research and development technicians who overlook our techniques department,
product development department, material analysis lab, and performance testing lab. These departments work together to research
new material and techniques, test battery performance, inspect products and to test performance of machines used in the manufacturing
process.
For the years ended December 31, 2015 and 2014,
we expended $7,631,181 and $7,709,618, respectively, in research and development.
Strategic Partnership with Freudenberg Nonwovens
In 2009, we entered into a strategic research
and development partnership with Freudenberg Nonwovens. Freudenberg utilizes our research and development center research facilities
in China to test their various separators. Freudenberg Nonwovens was the first to introduce nonwovens to the market over 70 years
ago and is now the largest and most diverse manufacturer of nonwovens in the world today. Separators are considered an integral
material for Ni-MH rechargeable batteries. We strongly believe the relationship with Freudenberg Nonwovens will continue to
improve our Ni-MH product quality, strengthen our research and development in nonwoven knowledge, which can create mutual benefits
in the Ni-MH battery development.
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 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; nickel-cadmium;
nickel metal hydride; liquid lithium-ion and lithium-ion polymer. Competition is typically based on design, quality, stability,
and performance. The technology behind Ni-MH rechargeable batteries has consistently improved over time and we continue to enhance
our products to meet the competitive threats from its competitors. Our primary competitors in the Ni-MH battery market or other
similar competing rechargeable battery products include SANYO Electric Co., Ltd. Global, Matsushita Industrial Co., Ltd. (Panasonic),
BYD Company Ltd., GPI International, Ltd., and GS Yuasa Corporation. Our primary competitors in the lithium battery market or other
similar competing rechargeable battery products include Desay Corp., Coslight Group, Tianjin Lishen Battery Co. Ltd., and Amperex
Technology Limited.
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 two
weeks during this time, resulting in lower sales during the first quarter.
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 currently hold 152 patents in China and have 49 patent applications
pending in China. We have two registered trademarks in China, which include “HFR” and its Chinese equivalent.
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.
PRC Government Regulations
Business License
Any company that conducts business in the PRC
must have a business license that covers the scope of the business in which such company is engaged. We conduct our business
through our operating subsidiaries, SZ Highpower, SZ Springpower, GZ Highpower, HZ HTC and ICON, and each of our operating subsidiaries
holds a business license that covers its present business. Prior to expanding our business beyond the scope covered by our
business licenses, we are required to apply and receive approvals from the relevant PRC authorities (if applicable, based on the
new business in which we intend to engage) and conduct modification registration formalities with the competent administration
of industry and commerce. Companies that operate outside the scope of their licenses can be subjected to a fine of not more than
RMB20,000, if such operations do not violate the PRC Criminal Law, or a fine of not less than RMB20,000 but no more than RMB200,000
if such operations violate the PRC Criminal Law, or a fine of not less than RMB50,000 but not more than RMB500,000 if the such
operations harm human health, have serious hidden hazards to safety, threaten public safety or destroy environmental resources. Other
penalties can include disgorgement of income and being ordered to cease operations.
Environmental Regulations
The major environmental regulations applicable
to us include the PRC Environmental Protection Law, the PRC Law on the Prevention and Control of Water Pollution and its Implementation
Rules, the PRC Law on the Prevention and Control of Air Pollution and its Implementation Rules, the PRC Law on the Prevention and
Control of Solid Waste Pollution, and the PRC Law on the Prevention and Control of Noise Pollution. We aim to comply with environmental
laws and regulations and have acquired an ISO14004:2004 Environment Systems Certification and QC080000 Hazardous Substance Process
Management System.
We constructed our manufacturing facilities
with the PRC’s environmental laws and requirements in mind. We currently outsource the disposal of solid waste to a third
party-contractor. In 2014, we renewed our environmental permit, which expires in December 2016, from the Shenzhen Environment Protection
Bureau Longgang Bureau covering our manufacturing operations and providing for an annual output limit of Ni-MH rechargeable batteries.
If we fail to comply with the provisions of the renewed permit, we could be subject to fines, criminal charges or other sanctions
by regulators, including the suspension or termination of our manufacturing operations.
Our operating subsidiaries have received certifications
from the relevant PRC government agencies in charge of environmental protection, which indicate that their business operations
are in material compliance with the relevant PRC environmental laws and regulations. We have committed significant attention and
efforts to quality and environmental protection during our production process. In November 2010, we received a Clean Production
Award from the Guangdong Economic and Information Commission and Environmental Bureau. We are not currently subject to any
pending actions alleging any violations of applicable PRC environmental laws. We do not believe the existence of these environmental
laws, as currently written and interpreted, will materially hinder or adversely affect our business operations; however, there
can be no assurances of future events or changes in laws, or the interpretation of laws, governing our industry. Failure to comply
with PRC environmental protection laws and regulations may subject us to fines up to RMB 1,000,000, the exact amount of which is
determined on a case by case basis, or disrupt our operations and the construction of our new facility, result in the shutdown
of our operations temporarily or permanently, which may materially and adversely affect our business, results of operations and
financial condition.
During the year ended December 31, 2015, we
expended approximately $23,638 related to our compliance with environmental regulations.
Patent Protection in China
The PRC’s intellectual property protection
regime is consistent with those of other modern industrialized countries. The PRC has domestic laws for the protection of rights
in copyrights, patents, trademarks and trade secrets. The PRC is also a signatory to most of the world’s major intellectual
property conventions, including:
|
·
|
Convention establishing the World Intellectual Property Organization (WIPO Convention) (June 4, 1980);
|
|
·
|
Paris Convention for the Protection of Industrial Property (March 19, 1985);
|
|
·
|
Patent Cooperation Treaty (January 1, 1994); and
|
|
·
|
The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) (November 11, 2001).
|
Patents in the PRC are governed by the China
Patent Law and its Implementing Regulations, each of which went into effect in 1985. Amended versions of the China Patent Law and
its Implementing Regulations came into effect in 2001 and 2003, respectively.
The PRC is signatory to the Paris Convention
for the Protection of Industrial Property, in accordance with which any person who has duly filed an application for a patent in
one signatory country shall enjoy, for the purposes of filing in the other countries, a right of priority during the period fixed
in the convention (12 months for inventions and utility models, and 6 months for industrial designs).
The Patent Law covers three kinds of patents,
i.e., patents for inventions, utility models and designs respectively. The Chinese patent system adopts the principle of first
to file. This means that, where more than one person files a patent application for the same invention, a patent can only be granted
to the person who first filed the application. Consistent with international practice, the PRC only allows the patenting of inventions
or utility models that possess the characteristics of novelty, inventiveness and practical applicability. For a design to be patentable,
it should not be identical with or similar to any design which, before the date of filing, has been publicly disclosed in publications
in the country or abroad or has been publicly used in the country, and should not be in conflict with any prior right of another.
PRC law provides that anyone wishing to exploit
the patent of another must conclude a written licensing contract with the patent holder and pay the patent holder a fee. One rather
broad exception to this, however, is that, where a party possesses the means to exploit a patent but cannot obtain a license from
the patent holder on reasonable terms and in reasonable period of time, the PRC State Intellectual Property Office, or SIPO, is
authorized to grant a compulsory license. A compulsory license can also be granted where a national emergency or any extraordinary
state of affairs occurs or where the public interest so requires. SIPO, however, has not granted any compulsory license up to now.
The patent holder may appeal such decision within three months from receiving notification by filing a suit in a people’s
court.
PRC law defines patent infringement as the
exploitation of a patent without the authorization of the patent holder. A patent holder who believes his patent is being infringed
may file a civil suit or file a complaint with a PRC local Intellectual Property Administrative Authority, which may order the
infringer to stop the infringing acts. Preliminary injunction may be issued by the People’s Court upon the patentee’s
or the interested parties’ request before instituting any legal proceedings or during the proceedings. Evidence preservation
and property preservation measures are also available both before and during the litigation. Damages in the case of patent infringement
is calculated as either the loss suffered by the patent holder arising from the infringement or the benefit gained by the infringer
from the infringement. If it is difficult to ascertain damages in this manner, damages may be reasonably determined in an amount
ranging from one to more times of the license fee under a contractual license. The infringing party may be also fined by Administration
of Patent Management in an amount of up to three times the unlawful income earned by such infringing party. If there is no unlawful
income so earned, the infringing party may be fined in an amount of up to RMB 500,000, or approximately $80,167.
Product Liability and Consumers Protection
Product liability claims may arise if the products
sold have any harmful effect on the consumers. The injured party may make a claim for damages or compensation. The General Principles
of the Civil Law of the PRC, which became effective in January 1987, state that manufacturers and sellers of defective products
causing property damage or injury shall incur civil liabilities for such damage or injuries.
The Product Quality Law of the PRC was enacted
in 1993 and amended in 2000 to strengthen the quality control of products and protect consumers’ rights and interests. Under
this law, manufacturers and distributors who produce or sell defective products may be subject to confiscation of earnings from
such sales, revocation of business licenses and imposition of fines, and in severe circumstances, may be subject to criminal liability.
The Law of the PRC on the Protection of the
Rights and Interests of Consumers was promulgated on October 31, 1993 and became effective on January 1, 1994 to protect consumers’
rights when they purchase or use goods or services. All business operators must comply with this law when they manufacture or sell
goods and/or provide services to customers.
The Tort Law of the PRC effective on July 1,
2010 requires that when the product defect endangers people’s life or property, the injured party may hold the producer or
the seller liable in tort and require that it remove obstacles, eliminate danger, or take other action. The Tort Law also requires
that when a product is found to be defective after it is put into circulation, the producer and the seller shall give timely warnings,
recall the defective product, or take other remedial measures.
Employment Laws
We are subject to laws and regulations governing
our relationship with our employees, including: wage and hour requirements, working and safety conditions, and social insurance,
housing funds and other welfare. These include local labor laws and regulations, which may require substantial resources for
compliance.
China’s National Labor Law, which became
effective on January 1, 1995, and China’s National Labor Contract Law, which became effective on January 1, 2008, permit
workers in both state and private enterprises in China to bargain collectively. The National Labor Law and the National Labor
Contract Law provide for collective contracts to be developed through collaboration between the labor union (or worker representatives
in the absence of a union) and management that specify such matters as working conditions, wage scales, and hours of work. The
laws also permit workers and employers in all types of enterprises to sign individual contracts, which are to be drawn up in accordance
with the collective contract. The National Labor Contract Law has enhanced rights for the nation’s workers, including
permitting open-ended labor contracts and severance payments. The legislation requires employers to provide written contracts
to their workers, restricts the use of temporary labor and makes it harder for employers to lay off employees. It also requires
that employees with fixed-term contracts be entitled to an indefinite-term contract after a fixed-term contract is renewed once
or the employee has worked for the employer for a consecutive ten-year period.
Tax
Pursuant to the Provisional Regulation of China
on Value Added Tax and their implementing rules, all entities and individuals that are engaged in the sale of goods, the provision
of repairs and replacement services and the importation of goods in China are generally required to pay VAT at a rate of 17.0%
of the gross sales proceeds received, less any deductible VAT already paid or borne by the taxpayer. Further, when exporting goods,
the exporter is entitled to a portion of or all the refund of VAT that it has already paid or borne.
Foreign Currency Exchange
The principal regulations governing foreign
currency exchange in China are the Foreign Exchange Administration Regulations promulgated by the State Council, as amended on
August 5, 2008, or the Foreign Exchange Regulations. Under the Foreign Exchange Regulations, the Renminbi is freely convertible
for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange
transactions. Conversion of Renminbi for capital account items, such as direct investments, loans, repatriation of investments
and investments in securities outside of China, however, is still subject to the approval of the PRC State Administration of Foreign
Exchange, or SAFE. Foreign-invested enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to
conduct foreign exchange business after providing valid commercial documents and, in the case of capital account item transactions,
obtaining approval from the SAFE. Capital investments by foreign-invested enterprises outside of China are also subject to limitations,
which include approvals by the Ministry of Commerce, the SAFE and the State Reform and Development Commission.
Dividend Distributions
Under applicable PRC regulations, enterprises
in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards
and regulations. In addition, an enterprise in China is required to set aside at least 10.0% of its after-tax profit based on PRC
accounting standards each year as its statutory general reserves until the accumulative amount of such reserves reach 50.0% of
its registered capital. These reserves are not distributable as cash dividends. The board of directors of an enterprise has the
discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity
owners except in the event of liquidation.
Foreign Ownership of PRC Operating Subsidiaries
The establishment, approval and registered
capital requirement matters of wholly foreign-owned enterprises, such as our PRC subsidiaries, SZ Highpower, SZ Springpower, HZ
HTC and ICON, are regulated by the Wholly Foreign-owned Enterprise Law of the PRC promulgated and effective on April 12, 1986,
as amended on October 31, 2000, and the Implementation Rules of the Wholly Foreign-owned Enterprise Law of the PRC effective on
December 12, 1990, as amended in 2001. The procedures of establishing SZ Highpower, SZ Springpower, HZ HTC and ICON as wholly
foreign-owned enterprises complied with such law and regulation.
Investment activities in the PRC by foreign
investors are principally governed by the Guidance Catalogue of Industries for Foreign Investment, or the Catalogue, which was
promulgated and is amended from time to time by the Ministry of Commerce and the National Development and Reform Commission. The
Catalogue divides industries into three categories: encouraged, restricted and prohibited. An industry not listed in the Catalogue
is generally open to foreign investment unless it is specifically restricted by other PRC regulations. In addition, the establishment
of wholly foreign-owned enterprises is generally permitted in most industries except for the restricted industries which are listed
in the Catalogue or restricted by other government regulations (which are subject to governmental approvals) and industries prohibited
from foreign investments. Pursuant to the currently effective Catalogue (2007 version) and other PRC regulations, the business
scope of SZ Highpower, SZ Springpower, GZ Highpower, HZ HTC and ICON as indicated on their business licenses does not fall within
the restricted or prohibited industries and is not restricted by other PRC regulations and, therefore, HKHTC is permitted to invest
in SZ Highpower, SZ Springpower, and ICON in the form of a wholly foreign-owned enterprise.
Employees
On December 31, 2015, 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, DVD players, 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. If our competitors develop alternative products with more enhanced features
than our products, our financial condition and results of operations would be materially and adversely affected.
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. 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. Our top five customers accounted for approximately 27.1% and 24.3%
of our net sales for the years ended December 31, 2015 and 2014, respectively. No customer accounted for 10% or more of net sales
for the years ended December 31, 2015 and 2014. 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. There was one major customer accounted for 11.3%
of the accounts receivable as of December 31
, 2015. 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 price of nickel was volatile during 2014 and 2015 and could be volatile
again. The price of nickel decreased 14% from January 2014 to December 2014 and 41% from January 2015 to December 2015. The prices
of nickel and other 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 nickel and other 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:
|
¨
|
Our ability raise capital to acquire additional raw materials and expand our manufacturing facilities;
|
|
¨
|
Delays and cost overruns, due to increases in raw material prices and problems with equipment vendors;
|
|
¨
|
Delays or denial of required approvals and certifications by relevant government authorities;
|
|
¨
|
Diversion of significant management attention and other resources; and
|
|
¨
|
Failure to execute our expansion plan effectively
.
|
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 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 2015, China, which represented 46.7% of our net sales for the year ended December
31, 2015, 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
$11.3 million and $8.9 million in the years ended December 31, 2015 and 2014, 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.
As of December 31, 2015, we have registered two trademarks as used on our battery products, one in English and the other in its
Chinese equivalent. 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.
As of December 31, 2015, we held 152 Chinese
patents and had 49 Chinese patent applications pending. Additionally, we have licensed patented technology from Ovonic Battery
Company, Inc. related to the manufacture of Ni-MH batteries. 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. As of December 31, 2015, we had approximately 3,600 full-time employees. 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.
Our planned expansion into new and existing
international markets poses additional risks and could fail, which could cost us valuable resources and affect our results of operations.
We are expanding sales of our products into
new and existing international markets including developing and developed countries, such as Japan, Russia, India, Turkey and Brazil. These
markets are untested for our products and we face risks in expanding the business overseas, which include differences in regulatory
product testing requirements, intellectual property protection (including patents and trademarks), taxation policy, legal systems
and rules, marketing costs, fluctuations in currency exchange rates and changes in political and economic conditions.
Our expansion into the Lithium battery business
is subject to substantial risks, which could result in a material adverse effect on our results of operations.
In September 2008, we completed the construction
and build-out of two production lines for the development and manufacturing of a range of lithium rechargeable batteries and products.
Prior to September 2008, we had very limited experience in the development and production of lithium batteries. While we are expanding
our production capabilities of lithium batteries, we may be unable to manufacture lithium battery products in the time frame and
amounts expected or may be unable to increase our sales of lithium products. The lithium ion battery market is competitive and
risky and we are unsure whether our lithium products will continue to gain market acceptance. We are competing against numerous
competitors with greater financial resources than us, and due to the difficulties of entry into these markets, we may be unsuccessful
and not be able to compete effectively in the lithium battery industry.
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, 2015, the Company’s
debt asset ratio was 68.1%. 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:
|
¨
|
Vulnerability of our business to a general economic downturn in China;
|
|
¨
|
Fluctuation and unpredictability of costs related to the raw materials used to manufacture our products;
|
|
¨
|
Seasonality of our business;
|
|
¨
|
Changes in the laws of the PRC that affect our operations;
|
|
¨
|
Competition from our competitors; and
|
|
¨
|
Our ability to obtain necessary government certifications and/or licenses to conduct our business.
|
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, 2015, we had outstanding
options exercisable for an aggregate of 399,078 shares of common stock at a weighted average exercise price of $3.17 per share
and warrants exercisable for an aggregate of 740,001 shares of common stock at a weighted average exercise price of $5.43 per share.
We have registered the issuance of all the shares issuable upon exercise of the options and 540,001 of the shares underlying warrant,
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 our stock price rises, the holders may exercise
their warrants and 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. Under the current government leadership, the government of the PRC has
been pursuing economic reform policies that encourage private economic activities and greater economic decentralization. There
is no assurance, however, 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
and SZ Springpower 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:
|
¨
|
Revoking our business license, other licenses or authorities;
|
|
¨
|
Requiring that we restructure our ownership or operations; and
|
|
¨
|
Requiring that we discontinue any portion or all of our business.
|
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 and 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.
Our auditors, like other independent registered
public accounting firms operating in China and to the extent their audit clients have operations in China, is not permitted to
be subject to full inspection by the Public Company Accounting Oversight Board and, as such, you may be deprived of the benefits
of such inspection.
Our independent registered public accounting
firm that issued the audit reports included in our annual reports filed with the SEC, as auditors of companies that are traded
publicly in the United States and registered with the US Public Company Accounting Oversight Board (United States), or PCAOB, are
required by the laws of the United States to undergo regular inspections by the PCAOB to assess their compliance with the laws
of the United States and professional standards.
However, our operations are solely located
in the PRC, a jurisdiction where PCAOB is currently unable to conduct inspections without the approval of the PRC authorities.
Our independent registered public accounting firm, like others operating in China (and Hong Kong, to the extent their audit clients
have operations in China), is currently not subject to inspection conducted by the PCAOB. Inspections of other firms that the PCAOB
has conducted outside China have identified deficiencies in those firms’ audit procedures and quality control procedures,
which may be addressed as part of the inspection process to improve future audit quality. The inability of the PCAOB to conduct
full inspections of auditors operating in China makes it more difficult to evaluate our auditors’ audit procedures or quality
control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.
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 subsidiaries, SZ Highpower
and ICON, are wholly foreign-owned enterprises, 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. Our current
environmental permit from the Shenzhen Environment Protection Bureau Longgang Sub-bureau (the “Bureau”) covering our
manufacturing operations expires on December 30, 2016. Historically, under a previous permit which expired in September 2007, we
substantially exceeded the approved annual output limit of Ni-MH rechargeable batteries set forth in the permit. 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:
|
¨
|
Regulatory penalties, fines and legal liabilities;
|
|
¨
|
Suspension of production;
|
|
¨
|
Alteration of our fabrication, assembly and test processes; and
|
|
¨
|
Curtailment of our operations or sales.
|
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.
PRC regulations relating to acquisitions
of PRC companies by foreign entities may create regulatory uncertainties that could restrict or limit our ability to operate, including
our ability to pay dividends. Our failure to obtain the prior approval of the China Securities Regulatory Commission, or the CSRC,
for any offering of our common stock could have a material adverse effect on our business, operating results, reputation and trading
price of our common stock.
The PRC State Administration of Foreign Exchange,
or “SAFE,” issued a public notice in November 2005, known as Circular 75, concerning the use of offshore holding companies
in mergers and acquisitions in China. The public notice provides that if an offshore company controlled by PRC residents intends
to acquire a PRC company, such acquisition will be subject to registration with the relevant foreign exchange authorities. The
public notice also suggests that registration with the relevant foreign exchange authorities is required for any sale or transfer
by the PRC residents of shares in an offshore holding company that owns an onshore company. The PRC residents must each submit
a registration form to the local SAFE branch with respect to their ownership interests in the offshore company, and must also file
an amendment to such registration if the offshore company experiences material events, such as changes in the share capital, share
transfer, mergers and acquisitions, spin-off transactions or use of assets in China to guarantee offshore obligations. If any PRC
resident stockholder of an offshore holding company fails to make the required SAFE registration and amended registration, the
onshore PRC subsidiaries of that offshore company may be prohibited from distributing their profits and the proceeds from any reduction
in capital, share transfer or liquidation to the offshore entity. In May 2011, the SAFE promulgated new operational rules, known
as Notice 19, for the implementation of Circular 75. Failure to comply with the SAFE registration and amendment requirements of
Circular 75, as applied by SAFE in accordance with Notice 19 could result in liability under PRC laws for evasion of applicable
foreign exchange restrictions. Most of our PRC resident stockholders, as defined in the SAFE notice, have not registered with the
relevant branch of SAFE, as currently required, in connection with their former ownership of equity interests in HKHTC. Because
of uncertainty of how the SAFE notice will be further interpreted and enforced, we cannot be sure how it will affect our business
operations or future plans. For example, our subsidiaries’ ability to conduct foreign exchange activities, such as the remittance
of dividends and foreign currency-denominated borrowings, may be subject to compliance with the SAFE notice by our PRC resident
beneficial holders. Failure by our PRC resident beneficial holders could subject these PRC resident beneficial holders to fines
or legal sanctions, restrict our overseas or cross-border investment activities, limit our subsidiaries’ ability to make
distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.
On August 8, 2006, the PRC Ministry of Commerce
(“MOFCOM”), joined by the State-owned Assets Supervision and Administration Commission of the State Council, the State
Administration of Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission and
SAFE, released a substantially amended version of the Provisions for Foreign Investors to Merge with or Acquire Domestic Enterprises
(the “Revised M&A Regulations”), which took effect on September 8, 2006. These rules significantly revised China’s
regulatory framework governing onshore-to-offshore restructurings and foreign acquisitions of domestic enterprises. These rules
implemented greater PRC government attention to cross-border merger, acquisition and other investment activities, by confirming
MOFCOM as a key regulator for issues related to mergers and acquisitions in China and requiring MOFCOM approval of a broad range
of merger, acquisition and investment transactions. Further, the rules established reporting requirements for acquisition of control
by foreigners of companies in key industries, and reinforce the ability of the Chinese government to monitor and prohibit foreign
control transactions in key industries.
Among other things, the Revised M&A Regulations
include provisions that require that an offshore special purpose vehicle, or SPV, formed for listing purposes and controlled directly
or indirectly by PRC companies or individuals must obtain the approval of the CSRC prior to the listing and trading of such SPV’s
securities on an overseas stock exchange. On September 21, 2006, the CSRC published on its official website procedures specifying
documents and materials required to be submitted to it by SPVs seeking CSRC approval of their overseas listings. Highpower’s
PRC counsel, Zhonglun Law Firm has advised us that because we completed our onshore-to-offshore restructuring before September
8, 2006, the effective date of the new regulation, it is not necessary for us to submit the application to the CSRC for its approval,
and the listing and trading of our common stock does not require CSRC approval.
If the CSRC or another PRC regulatory agency
subsequently determines that CSRC approval was required for any transaction prior to September 21, 2006 not receiving prior approval,
we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. These regulatory agencies may
impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation
of the proceeds from an offering of securities into the PRC, or take other actions that could have a material adverse effect on
our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our common
stock. The CSRC or other PRC regulatory agencies also may take actions requiring us, or making it advisable for us, to halt any
offering before settlement and delivery of the securities offered. Consequently, if investors engage in market trading or other
activities in anticipation of and prior to settlement and delivery, they do so at the risk that settlement and delivery may not
occur.
Also, if later the CSRC requires that we obtain
its approval for any transaction not receiving prior approval, we may be unable to obtain a waiver of the CSRC approval requirements,
if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding this CSRC
approval requirement could have a material adverse effect on the trading price of our common stock.
Furthermore, the Circular on establishing the
Security Review System for Merger and Acquisition of Domestic Enterprise by Foreign Investors was promulgated by the General Office
of the State Council on February 3, 2011 and the Ministry of Commerce issued the corresponding implementation rules on August 25,
2011. According to these rules, a foreign investor’s acquisitions of Chinese companies in the fields of military, energy
and resources, infrastructure, important agricultural products, infrastructure, transport service, key technology and major equipment
manufacturing, and other restricted fields requires security review by a ministerial panel established and governed under the direction
of the State Council and led by the National Development and Reform Commission and Ministry of Commerce.
Complying with the requirements of the above
rules to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval
from PRC Ministry of Commerce, may delay or inhibit our ability to complete such transactions, which could also affect our ability
to expand our business.
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. We also acquired 58,669 square meters of land equity in Ganzhou, Guangdong, China
in February 2012 from the Ganzhou Land and Resource Bureau upon which we have a facility to house our new materials business. Besides
the land use rights in Huizhou and Ganzhou, 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. 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. generally accepted accounting principles. 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. generally accepted accounting principles and the historical financial statements must be audited in accordance with the
standards of the Public Company Accounting Oversight Board (United States), or 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. generally accepted accounting
principles 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.
We face uncertainty from China’s Circular
on Strengthening the Administration of Enterprise Income Tax on Non-Resident Enterprises' Share Transfer (“Circular 698”)
that was released in December 2009 with retroactive effect from January 1, 2008.
The Chinese State Administration of Taxation
(SAT) released a circular (Guoshuihan No. 698 – Circular 698) on December 15, 2009 that addresses the transfer of shares
by nonresident companies. Circular 698, which is effective retroactively to January 1, 2008, may have a significant impact
on many companies that use offshore holding companies to invest in China. Circular 698, which provides parties with a short
period of time to comply its requirements, indirectly taxes foreign companies on gains derived from the indirect sale of a Chinese
company. Where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise by selling the shares
in an offshore holding company, and the latter is located in a country or jurisdiction where the effective tax burden is less than
12.5% or where the offshore income of his, her, or its residents is not taxable, the foreign investor is required to provide the
tax authority in charge of that Chinese resident enterprise with the relevant information within 30 days of the transfers. Moreover,
where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise through an abuse of form of organization
and there are no reasonable commercial purposes such that the corporate income tax liability is avoided, the PRC tax authority
will have the power to re-assess the nature of the equity transfer in accordance with PRC’s “substance-over-form”
principle and deny the existence of the offshore holding company that is used for tax planning purposes.
The SAT issued Bulletin of the State of Taxation
[2011] No. 24 (Bulletin) on March 28, 2011, in which various issues regarding the tax administration for non-PRC resident enterprises
and clarifications on Circular 698 were addressed. The Bulletin defined some parameters stipulated in Circular 698, which, if a
non-resident enterprise were to fall under, would be subject to the Circular requirements including that (a) “foreign investor
(party with effective control)” applies to all foreign investors who have indirectly transferred a Chinese resident enterprise
and (b) that “effective tax burden” refers to the effective tax imposed on the gains on the share transfer transaction
per se. However, the SAT is expected to issue further clarification and guidance with regard to how to decide “abuse of form
of organization” and “reasonable commercial purpose,” which can be utilized by us to determine if we comply with
Circular 698.
If we fail to comply with the requirements
under Circular 698 and the Bulletin, we may become at risk of being taxed and we may also be required to expend valuable resources
to comply with Circular 698 and the Bulletin or to establish that we should not be taxed, which could have a material adverse effect
on our financial condition and results of operations.
The foreign currency exchange rate between
U.S. Dollars and Renminbi could adversely affect our financial condition.
To the extent that we need to convert U.S.
Dollars into Renminbi for our operational needs, our financial position and the price of our common stock may be adversely affected
should the Renminbi appreciate against the U.S. Dollar at that time. Conversely, if we decide to convert Renminbi into U.S. Dollars
for the operational needs or paying dividends on our common stock, the dollar equivalent of our earnings from our subsidiaries
in China would be reduced should the dollar appreciate against the Renminbi.
Until 1994, the Renminbi experienced a gradual
but significant devaluation against most major currencies, including dollars, and there was a significant devaluation of the Renminbi
on January 1, 1994 in connection with the replacement of the dual exchange rate system with a unified managed floating rate foreign
exchange system. Since 1994, the value of the Renminbi relative to the U.S. Dollar has remained stable and has appreciated slightly
against the U.S. Dollar. Countries, including the United States, have argued that the Renminbi is artificially undervalued due
to China’s current monetary policies and have pressured China to allow the Renminbi to float freely in world markets. In
July 2005, the PRC government changed its policy of pegging the value of the Renminbi to the dollar. Under the new policy the Renminbi
is permitted to fluctuate within a narrow and managed band against a basket of designated foreign currencies. While the international
reaction to the Renminbi 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 and more significant appreciation of the Renminbi
against the dollar.
Because most of our oversea sales are made
in U.S. Dollars and most of our expenses are paid in RMB, devaluation of the U.S. Dollar 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 U.S. Dollar 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 U.S. Dollar to RMB and modified the system by which the exchange rates are determined, which has resulted
in an appreciation of the RMB against the U.S. Dollar. During the year ended December 31, 2015, the exchange rate of the RMB to
the U.S. Dollar increased approximately 6.2% from the level at the end of December 31, 2014. 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 U.S. Dollar against
the RMB, including future devaluations. Because most of our net sales are made in U.S. Dollars and most of our expenses are paid
in RMB, any future devaluation of the U.S. Dollar 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 1.4% in 2015. 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.
Furthermore, In order to control inflation
in the past, the PRC government has imposed controls on bank credits, limits on loans for fixed assets and restrictions on state
bank lending. In January 2010, the Chinese government took steps to tighten the availability of credit including ordering banks
to increase the amount of reserves they hold and to reduce or limit their lending. The implementation of such policies may impede
economic growth. In October 2004, the People’s Bank of China, the PRC’s central bank, raised interest rates for the
first time in nearly a decade and indicated in a statement that the measure was prompted by inflationary concerns in the Chinese
economy. In April 2006, the People’s Bank of China raised the interest rate again. Repeated rises in interest rates by the
central bank would likely slow economic activity in China which could, in turn, materially increase our costs and also reduce demand
for our products and services.
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.
If we make equity compensation grants to
persons who are PRC citizens, they may be required to register with the State Administration of Foreign Exchange of the PRC, or
SAFE. We may also face regulatory uncertainties that could restrict our ability to adopt an equity compensation plan for our directors
and employees and other parties under PRC law.
On April 6, 2007, SAFE issued the “Operating
Procedures for Administration of Domestic Individuals Participating in the Employee Stock Ownership Plan or Stock Option Plan of
An Overseas Listed Company, also known as “Circular 78.” It is not clear whether Circular 78 covers all forms of equity
compensation plans or only those which provide for the granting of stock options. For any plans which are so covered and are adopted
by a non-PRC listed company after April 6, 2007, Circular 78 requires all participants who are PRC citizens to register with and
obtain approvals from SAFE prior to their participation in the plan. In addition, Circular 78 also requires PRC citizens to register
with SAFE and make the necessary applications and filings if they participated in an overseas listed company’s covered equity
compensation plan prior to April 6, 2007. In 2008, we adopted the Highpower International, Inc. 2008 Omnibus Incentive Plan (the
“Plan”) under which we make option grants and other equity awards to our officers, directors and other eligible participants
under the plan. Circular 78 may require our officers and directors who receive option grants and are PRC citizens to register
with SAFE. We believe that the registration and approval requirements contemplated in Circular 78 will be burdensome and time consuming.
If it is determined that the Plan is subject to Circular 78, failure to comply with such provisions may subject us and participants
of the Plan who are PRC citizens to fines and legal sanctions and prevent us from being able to grant equity compensation to our
PRC employees. In that case, our ability to compensate our employees and directors through equity compensation would be hindered
and our business operations may be adversely affected. We have granted options to various employees and officers located in the
PRC. We have complied with all of the relevant regulations imposed upon us related to such grants and assisted our grantees with
their compliance with their individual registration requirements.
We have received certain preferential tax
concessions and the loss of these preferential tax concessions may cause our tax liabilities to increase and our profitability
to decline.
In China, the companies granted with National
High-tech Enterprise status enjoy 15% income tax rate. This status needs to be renewed every three years. In 2008, our operating
subsidiary, SZ Highpower received National High-tech Enterprise status, which was renewed in 2011 and recently renewed in 2014.
In 2013, SZ Springpower received the National High-tech Enterprise status. In 2014, both GZ Highpower and ICON received National
High-tech Enterprise status. The expiration of the preferential tax treatment will increase our tax liabilities and reduce our
profitability. Additionally, the PRC Enterprise Income Tax Law (the “EIT Law”) was enacted on March 16, 2007. Under
the EIT Law, which became effective on January 1, 2008, China adopted a uniform tax rate of 25% for all enterprises (including
foreign-invested enterprises) and canceled several tax incentives enjoyed by foreign-invested enterprises. However, for foreign-invested
enterprises established before the promulgation of the EIT Law, a five-year transition period is provided during which the tax
rate gradually increased starting in 2008 and will be equal to the new 25% tax rate at the end of the transition period. We believe
that our profitability will be negatively affected in the near future as a result of the new EIT Law. Any future increase in the
enterprise income tax rate applicable to us or other adverse tax treatments could increase our tax liabilities and reduce net income.
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 PRC Enterprise Income Tax Law (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 and SZ Springpower, 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.
In January, 2009, the State Administration
of Taxation promulgated the Provisional Measures for the Administration of Withholding of Enterprise Income Tax for Non-resident
Enterprises (“Measures”), pursuant to which, the entities which have the direct obligation to make the following payment
to a non-resident enterprise shall be the relevant tax withholders for such non-resident enterprise, and such payment includes:
incomes from equity investment (including dividends and other return on investment), interests, rents, royalties, and incomes from
assignment of property as well as other incomes subject to enterprise income tax received by non-resident enterprises in China.
Further, the Measures provides that in case of equity transfer between two non-resident enterprises which occurs outside China,
the non-resident enterprise which receives the equity transfer payment shall, by itself or engage an agent to, file tax declaration
with the PRC tax authority located at place of the PRC company whose equity has been transferred, and the PRC company whose equity
has been transferred shall assist the tax authorities to collect taxes from the relevant non-resident enterprise. However, it is
unclear whether the Measures refer to the equity transfer by a non-resident enterprise which is a direct or an indirect shareholder
of the said PRC Company. Given these Measures, there is a possibility that we may have an obligation to withhold income tax in
respect of the dividends paid to non-resident enterprise investors.
Any recurrence of Severe Acute Respiratory
Syndrome (SARS), Avian Flu, or another widespread public health problem, such as the spread of H1N1 (“Swine”) Flu,
in the PRC could adversely affect our operations.
A renewed outbreak of SARS, Avian Flu or another
widespread public health problem, such as the spread of H1N1 (“Swine”) Flu, in China, where all of our operations are
located and where the substantial portion of our sales occur, could have a negative effect on our operations. Our business is dependent
upon our ability to continue to manufacture battery products. Such an outbreak could have an impact on the Company’s operations
as a result of:
|
¨
|
Quarantines or closures of some of our manufacturing facilities, which would severely disrupt our operations;
|
|
|
|
|
¨
|
The sickness or death of our key officers and employees; and
|
|
|
|
|
¨
|
A general slowdown in the Chinese economy.
|
Any of the foregoing events or other unforeseeable
consequences of public health problems could adversely affect our operations.
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:
|
¨
|
Actual or anticipated fluctuations in our annual and quarterly results of operations;
|
|
¨
|
Changes in securities analysts’ expectations;
|
|
¨
|
Variations in our operating results, which could cause us to fail to meet analysts’ or investors’ expectations;
|
|
¨
|
Announcements by our competitors or us of significant new products, contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
|
|
¨
|
Conditions and trends in our industry;
|
|
¨
|
General market, economic, industry and political conditions;
|
|
¨
|
Changes in market values of comparable companies;
|
|
¨
|
Additions or departures of key personnel;
|
|
¨
|
Stock market price and volume fluctuations attributable to inconsistent trading volume levels; and
|
|
¨
|
Future sales of equity or debt securities, including sales which dilute existing investors.
|
A few principal stockholders have significant influence over
us.
Three of our stockholders beneficially own
or control approximately 40.4% 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.
We have adopted the Highpower International,
Inc. 2008 Omnibus Incentive Plan (the “Plan”) under which 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 2014 and 2015, and accordingly our results
of operations for the years ended December 31, 2014 and 2015 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 and bylaws
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:
|
¨
|
provide the board of directors with the ability to alter the bylaws without stockholder approval;
|
|
¨
|
place limitations on the removal of directors; and
|
|
¨
|
provide that vacancies on the board of directors may be filled by a majority of directors in office, although less than a quorum.
|
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.
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.