UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For The Quarterly Period Ended June 30, 2019

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For The Transition Period From             To          

 

COMMISSION FILE NO.001-34098

 

HIGHPOWER INTERNATIONAL, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware   20-4062622
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification Number)

 

Building A1, 68 Xinxia Street, Pinghu, Longgang,

Shenzhen, Guangdong, 518111, People’s Republic of China

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

 

(86) 755-89686238

(COMPANY’S TELEPHONE NUMBER, INCLUDING AREA CODE)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x      No  ¨

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  x      No  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and “emerging growth company” as defined in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ¨ Accelerated filer  ¨
Non-accelerated filer  x Smaller reporting company  x
Emerging growth company  ¨  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes  ¨      No  x

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, par value $0.0001   HPJ   Nasdaq Stock Market LLC (Nasdaq Global Market)
Preferred Stock Purchase Rights   HPJ   Nasdaq Stock Market LLC (Nasdaq Global Market)

 

The registrant had 15,690,533 shares of common stock, par value $0.0001 per share, outstanding as of August 13, 2019.

 

 

 

 

 

 

HIGHPOWER INTERNATIONAL, INC.

FORM10-Q

  FOR THE QUARTERLY PERIOD ENDED June 30, 2019

INDEX

 

        Page
Part I   Financial Information  
           
    Item 1.   Consolidated Financial Statements  
             
        (a) Condensed Consolidated Balance Sheets as of June 30, 2019 (Unaudited) and December 31, 2018 2
             
        (b) Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2019 and 2018 (Unaudited) 4
             
        (c) Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018 (Unaudited) 5
             
        (d) Condensed Consolidated Statements of Change in Equity for the Three and Six Months Ended June 30, 2019 and 2018 (Unaudited) 6
             
        (e) Notes to Condensed Consolidated Financial Statements (Unaudited) 7
             
    Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations 20
           
    Item 3.   Quantitative and Qualitative Disclosures About Market Risk 24
           
    Item 4.   Controls and Procedures 24
           
Part II   Other Information  
           
    Item 1.   Legal Proceedings 25
           
    Item 1A.   Risk Factors 25
           
    Item 2.   Unregistered Sale of Equity Securities and Use of Proceeds 25
           
    Item 3.   Default Upon Senior Securities 25
           
    Item 4.   Mine Safety Disclosures 25
           
    Item 5.   Other Information 25
           
    Item 6.   Exhibits 29
           
Signatures 31

 

  1  

 

 

Item 1. Consolidated Financial Statements

 

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Stated in US Dollars)

 

    June 30,     December 31,  
    2019     2018  
    (Unaudited)        
    $     $  
ASSETS                
Current Assets:                
Cash     18,092,242       24,916,484  
Restricted cash     29,154,304       44,495,633  
Accounts receivable, net     68,999,026       77,279,817  
Amount due from a related party     146,119       477,663  
Notes receivable     3,664,108       256,712  
Advances to suppliers     463,891       2,292,843  
Prepayments and other receivables     6,419,803       10,457,789  
Inventories     51,980,426       54,790,461  
Total Current Assets     178,919,919       214,967,402  
                 
Property, plant and equipment, net     65,089,990       56,523,177  
Long-term prepayments     2,373,543       2,617,419  
Land use right, net     2,406,173       2,445,751  
Other assets     770,717       643,128  
Deferred tax assets, net     935,443       865,370  
Long-term investments     8,387,618       9,993,852  
Right-of-use assets     10,213,704       -  
                 
TOTAL ASSETS     269,097,107       288,056,099  
                 
LIABILITIES AND EQUITY                
                 
LIABILITIES                
Current Liabilities:                
Accounts payable     64,413,566       66,486,690  
Deferred government grants     680,915       464,206  
Short-term loans     24,662,933       24,856,744  
Non-financial institution borrowing     -       8,761,426  
Notes payable     60,168,272       73,607,284  
Foreign exchange derivative liabilities     932,378       521,509  
Amount due to related parties     101,869       6,116,851  
Other payables and accrued liabilities     21,818,077       25,860,703  
Income taxes payable     3,394,112       4,124,719  
Lease liabilities, current     2,334,110       -  
Total Current Liabilities     178,506,232       210,800,132  
                 
Long-term payable     359,033       -  
Lease liabilities, non current     8,040,487       -  
                 
TOTAL LIABILITIES     186,905,752       210,800,132  
                 
COMMITMENTS AND CONTINGENCIES     -       -  

 

See notes to condensed consolidated financial statements

  

  2  

 

 

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Stated in US Dollars)

 

    June 30,     December 31,  
    2019     2018  
    (Unaudited)        
    $     $  
EQUITY                
Stockholders’ equity                
Preferred stock                
(Par value: $0.0001, Authorized: 10,000,000 shares, Issued and outstanding: none)     -       -  
Common stock                
(Par value: $0.0001, Authorized: 100,000,000 shares, 15,567,953 shares issued and outstanding at June 30, 2019 and 15,559,658 at December 31, 2018, respectively)     1,557       1,556  
Additional paid-in capital     14,257,469       13,863,282  
Statutory and other reserves     8,012,052       8,012,052  
Retained earnings     61,169,856       56,173,912  
Accumulated other comprehensive loss     (1,249,579 )     (794,835 )
                 
TOTAL EQUITY     82,191,355       77,255,967  
                 
TOTAL LIABILITIES AND EQUITY     269,097,107       288,056,099  

 

See notes to condensed consolidated financial statements

 

  3  

 

  

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Stated in US Dollars)

 

   

Three months ended

June 30,

   

Six months ended

June 30,

 
    2019     2018     2019     2018  
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
    $     $     $     $  
Net sales     75,807,093       64,923,960       133,920,573       114,707,413  
Cost of sales     (57,436,018 )     (53,614,034 )     (102,888,969 )     (95,831,160 )
Gross profit     18,371,075       11,309,926       31,031,604       18,876,253  
                                 
Research and development expenses     (4,380,399 )     (3,592,760 )     (7,367,108 )     (6,154,597 )
Selling and distribution expenses     (3,279,570 )     (2,121,650 )     (6,072,432 )     (4,096,746 )
General and administrative expenses     (5,027,418 )     (3,910,188 )     (9,850,907 )     (8,024,998 )
Foreign currency transaction gain (loss)     1,213,623       1,670,932       (37,272 )     656,239  
Total operating expenses     (11,473,764 )     (7,953,666 )     (23,327,719 )     (17,620,102 )
                                 
Income from operations     6,897,311       3,356,260       7,703,885       1,256,151  
                                 
Changes in fair value of foreign exchange derivatives     (996,012 )     (1,125,140 )     (608,912 )     (421,425 )
Government grants     729,204       988,679       950,639       1,318,499  
Other income     15,550       56,581       82,248       80,142  
Equity in (loss) earnings of investees     (1,177,639 )     160,070       (1,595,843 )     316,320  
Interest expenses, net     (38,675 )     (312,814 )     (509,098 )     (554,666 )
Income before taxes     5,429,739       3,123,636       6,022,919       1,995,021  
                                 
Income taxes expenses     (741,516 )     (409,321 )     (1,026,975 )     (399,642 )
Net income     4,688,223       2,714,315       4,995,944       1,595,379  
                                 
Comprehensive income                                
Net income     4,688,223       2,714,315       4,995,944       1,595,379  
Foreign currency translation loss     (2,160,506 )     (4,168,216 )     (454,744 )     (1,331,660 )
Comprehensive income (loss)     2,527,717       (1,453,901 )     4,541,200       263,719  
                                 
Earnings per share of common stock                                
- Basic     0.30       0.17       0.32       0.10  
- Diluted     0.30       0.17       0.32       0.10  
                                 
Weighted average number of common stock outstanding                                
- Basic     15,567,953       15,556,361       15,567,220       15,533,139  
- Diluted     15,626,265       15,629,413       15,615,590       15,619,771  

 

See notes to condensed consolidated financial statements

 

  4  

 

 

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Stated in US Dollars)

 

    Six Months Ended June 30,  
    2019     2018  
    (Unaudited)     (Unaudited)  
    $     $  
Cash flows from operating activities                
Net income     4,995,944       1,595,379  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:                
Depreciation and amortization     3,616,314       3,003,872  
Bad debt expense     93,576       (472,799 )
Loss on disposal of property, plant and equipment     94,147       159,458  
Impairment of plant and equipment     75,783       -  
Deferred taxes     (73,794 )     (498,878 )
Changes in fair value of foreign exchange derivatives     608,912       955,790  
Equity in loss (earnings) of investees     1,595,843       (316,320 )
Share based compensation     394,188       488,117  
Changes in operating assets and liabilities:                
Accounts receivable     8,198,062       (3,877,577 )
Notes receivable     (3,459,522 )     986,591  
Advances to suppliers     1,848,529       (2,154,883 )
Prepayments and other receivables     4,064,320       (4,921,059 )
Amount due from a related party     334,879       740,408  
Amount due to related parties     (138,767 )     -  
Inventories     2,668,278       (27,915,901 )
Accounts payable     (7,588,132 )     21,683,401  
Deferred government grants     221,572       469,895  
Other payables and accrued liabilities     (3,379,969 )     3,578,815  
Income taxes payable     (727,876 )     (1,140,753 )
Net cash flows provided by (used in) operating activities     13,442,287       (7,636,444 )
                 
Cash flows from investing activities                
Acquisitions of plant and equipment     (6,700,225 )     (5,681,723 )
Payment for long-term investment     (310,201 )     (328,927 )
Net cash flows used in investing activities     (7,010,426 )     (6,010,650 )
                 
Cash flows from financing activities                
Proceeds from short-term bank loans     14,771,485       15,664,587  
Repayments of short-term bank loans     (14,882,292 )     -  
Proceeds from a related party     2,954,297       -  
Repayment of loan from a related party     (8,589,619 )     -  
Repayments of non-financial institution borrowing     (8,862,891 )     (1,566,318 )
Proceeds from notes payable     58,314,662       53,584,205  
Repayments of notes payable     (71,701,335 )     (55,920,682 )
Payment of derivative instruments     (190,062 )     -  
Net cash flows (used in) provided by financing activities     (28,185,755 )     11,761,792  
Effect of foreign currency translation on cash     (411,677 )     (1,130,850 )
Net decrease in cash and restricted cash     (22,165,571 )     (3,016,152 )
Cash and restricted cash- beginning of year     69,412,117       40,456,117  
Cash and restricted cash- end of year     47,246,546       37,439,965  
                 
Supplemental disclosures for cash flow information:                
Cash paid for:                
Income taxes     1,960,545       2,039,273  
Interest expenses     1,394,561       1,002,653  
Non-cash investing and financing activities:                
Shares issued for legal case settlement     -       212,500  
Purchase of plant and equipment financed by accounts payable     5,715,931       -  
Reconciliation of cash and restricted cash:                
Cash     18,092,242       7,280,576  
Restricted cash     29,154,304       30,159,389  
Total cash and restricted cash shown in the condensed consolidated statements of cash flows     47,246,546       37,439,965  

 

See notes to condensed consolidated financial statements

 

  5  

 

 

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGE IN EQUITY

(Stated in US Dollars)

 

 

                                  Accumulated        
                Additional     Statutory           other        
    Common stock     paid-in     and other     Retained     comprehensive        
    Shares     Amount     capital     reserves     earnings     income (loss)     Total  
          $     $     $     $     $     $  
Balance, January 1, 2018     15,509,658       1,551       12,709,756       6,549,815       44,481,568       3,469,495       67,212,185  
Foreign currency translation adjustments     -       -       -       -       -       2,836,556       2,836,556  
Share-based compensation expenses     -       -       241,421       -       -       -       241,421  
Net loss     -       -       -       -       (1,118,936 )     -       (1,118,936 )
Balance, March 31, 2018     15,509,658       1,551       12,951,177       6,549,815       43,362,632       6,306,051       69,171,226  
                                                         
Shares issued for legal case settlement     50,000       5       212,495       -       -       -       212,500  
Foreign currency translation adjustments     -       -       -       -       -       (4,168,216 )     (4,168,216 )
Share-based compensation expenses     -       -       246,696       -       -       -       246,696  
Net income     -       -       -       -       2,714,315       -       2,714,315  
Balance, June 30, 2018     15,559,658       1,556       13,410,368       6,549,815       46,076,947       2,137,835       68,176,521  
                                                         
Balance, January 1, 2019     15,559,658       1,556       13,863,282       8,012,052       56,173,912       (794,835 )     77,255,967  
Exercise of the warrants     8,295       1       (1 )     -       -       -       -  
Foreign currency translation adjustments     -       -       -       -       -       1,705,762       1,705,762  
Share-based compensation expenses     -       -       204,602       -       -       -       204,602  
Net income     -       -       -       -       307,721       -       307,721  
Balance, March 31, 2019     15,567,953       1,557       14,067,883       8,012,052       56,481,633       910,927       79,474,052  
                                                         
Foreign currency translation adjustments     -       -       -       -       -       (2,160,506 )     (2,160,506 )
Share-based compensation expenses     -       -       189,586       -       -       -       189,586  
Net income     -       -       -       -       4,688,223       -       4,688,223  
Balance, June 30, 2019     15,567,953       1,557       14,257,469       8,012,052       61,169,856       (1,249,579 )     82,191,355  

 

See notes to condensed consolidated financial statements

 

  6  

 

 

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

 

1. Organization

 

The consolidated financial statements include the financial statements of Highpower International, Inc. ("Highpower") and its 100%-owned subsidiary Hong Kong Highpower Technology Company Limited (“HKHTC”), HKHTC’s wholly-owned subsidiary Shenzhen Highpower Technology Company Limited (“SZ Highpower”), SZ Highpower’s and HKHTC’s jointly owned subsidiaries, Springpower Technology (Shenzhen) Company Limited (“SZ Springpower”) and Icon Energy System Company Limited (“ICON”) and SZ Highpower’s and SZ Springpower’s jointly owned subsidiary Huizhou Highpower Technology Company Limited (“HZ HTC”). Highpower and its direct and indirect wholly owned subsidiaries are collectively referred to as the "Company".

 

2. Summary of significant accounting policies

 

Basis of presentation

 

The condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information, the instructions to Form 10-Q and Article 8 of Regulation S-X. They do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. The interim financial information should be read in conjunction with the Financial Statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on March 28, 2019.

 

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair presentation of the Company’s consolidated financial position as of June 30, 2019, its consolidated results of operations for the three and six months ended June 30, 2019, cash flows for the six months ended June 30, 2019 and change in equity for the three and six months ended June 30, 2019, as applicable, have been made. Operating results for the three and six months ended June 30, 2019 are not necessarily indicative of the operating results that may be expected for the year ending December 31, 2019 or any future periods.

 

Concentrations of credit risk

 

One major customer accounted for 12.7% and 12.2% of the total sales for the three and six months ended June 30, 2019, respectively. No customer accounted for over 10% or more of the total sales during the three and six months ended June 30, 2018.

 

One supplier accounted for 12.1% and 12.2% of the total purchase amount during the three and six months ended June 30, 2019, respectively. One supplier accounted for 12.0% and 13.3% of the total purchase amount during the three and six months ended June 30, 2018, respectively.

 

One customer accounted for 16.4% of the accounts receivable as of June 30, 2019. No customer accounted for 10% or more of the accounts receivable as of December 31, 2018.

 

Recently issued accounting standards

 

On February 25, 2017, the FASB issued ASU 2016-02, Leases (Topic 842). It requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset (“ROU asset ) representing its right to use the underlying asset for the lease term. We adopted this guidance in the first quarter of 2019 using the modified retrospective approach, electing the package of practical expedients, and the practical expedient to not separate lease and non-lease components for data center operating leases. We also elected the optional transition method that permits adoption of the new standard prospectively, as of the effective date, without adjusting comparative periods presented.

 

See Note 7 for disclosure required by ASC 842.

 

The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the consolidated financial position, statements of operations and cash flows.

 

  7  

 

 

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

 

3. Revenue Recognition

 

The Company follows the guidance under ASC 606 effective January 1, 2018. The following table disaggregates product sales by business segment and by geography, which provides information as to the major source of revenue. See Note 16 for additional description of the reportable business segments and the products being sold in each segment.

 

    Three months ended June 30, 2019     Six months ended June 30, 2019  
    Lithium
Business
    Ni-MH Batteries
and Accessories
    Consolidated     Lithium
Business
    Ni-MH Batteries
and Accessories
    Consolidated  
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
    $     $     $     $     $     $  
Primary Geographic Markets                                                
China Mainland     26,502,519       3,641,324       30,143,843       49,567,039       8,547,839       58,114,878  
Asia, others     33,804,072       1,911,993       35,716,065       50,815,302       7,971,477       58,786,779  
Europe     1,501,876       7,487,090       8,988,966       2,905,190       10,704,107       13,609,297  
North America     446,867       511,352       958,219       1,697,970       1,577,775       3,275,745  
Others     -       -       -       -       133,874       133,874  
Total sales     62,255,334       13,551,759       75,807,093       104,985,501       28,935,072       133,920,573  

 

The Company has elected to apply the practical expedient in paragraph ASC 606-10-50-14 and does not disclose information about remaining performance obligations (i) contracts that have an original expected length of one year or less; and (ii) contracts where revenue is recognized as invoiced.

 

The Company does not have amounts of contract assets since revenue is recognized as control of goods is transferred. The contract liabilities consist of advance payments from customers. The contract liabilities are reported in a net position on a customer-by-customer basis at the end of each reporting period. All contract liabilities are expected to be recognized as revenue within one year and are included in other payables and accrued liabilities in the condensed consolidated balance sheets.

 

4. Accounts receivable, net

 

    June 30,     December 31,  
    2019     2018  
    (Unaudited)        
    $     $  
Accounts receivable     69,152,027       77,340,837  
Less: allowance for doubtful accounts     153,001       61,020  
      68,999,026       77,279,817  

 

5. Inventories

 

    June 30,     December 31,  
    2019     2018  
    (Unaudited)        
    $     $  
Raw materials     20,577,090       25,952,099  
Work in progress     10,619,229       10,192,772  
Finished goods     20,560,649       18,348,119  
Packing materials     33,291       14,394  
Consumables     190,167       283,077  
      51,980,426       54,790,461  

 

  8  

 

 

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

 

6. Property, plant and equipment, net

 

    June 30,     December 31,  
    2019     2018  
    (Unaudited)        
    $     $  
Cost                
Construction in progress     8,615,548       6,991,889  
Furniture, fixtures and office equipment     8,011,061       7,221,527  
Leasehold improvement     7,707,640       7,090,162  
Machinery and equipment     49,048,270       40,316,428  
Motor vehicles     1,574,860       1,508,398  
Buildings     19,101,682       19,166,951  
      94,059,061       82,295,355  
Less: accumulated depreciation     28,969,071       25,772,178  
      65,089,990       56,523,177  

 

The construction in process represented buildings and machines under construction or testing as of June 30, 2019 and December 31, 2018.

 

The Company recorded depreciation expenses of $1,858,661 and $1,499,538 for the three months ended June 30, 2019 and 2018, respectively, and $3,559,595 and $2,945,238 for the six months ended June 30, 2019 and 2018, respectively.

 

During the six months ended June 30, 2019, the Company deducted deferred government grants of $nil on the carrying amount of property, plant and equipment. During the year ended December 31, 2018, the Company deducted deferred government grants of $75,584 in calculating the carrying amount of property, plant and equipment.

 

The buildings comprising the Huizhou facilities were pledged as collateral for bank loan. The net carrying amounts of the buildings were $8,392,542 and $8,536,246 as of June 30, 2019 and December 31, 2018, respectively.

 

The building located in Shenzhen, Guangdong was pledged as collateral for bank loans. The net carrying amount of the building was $340,901 and $353,752 as of June 30, 2019 and December 31, 2018, respectively.

 

  9  

 

 

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

 

7. Leases

 

The Company has various non-cancelable lease agreements for certain of the warehouses and accommodations with original lease periods expiring between 2019 and 2024. The lease terms may include options to extend or terminate the lease when it is reasonably certain the Company will exercise that option. Certain of the arrangements have free rent periods or escalating rent payment provisions. Leases with an initial term of twelve months or less are not recorded on the condensed consolidated balance sheets. The Company recognizes rental expense on a straight-line basis over the lease term.

 

The following table provides a summary of leases by balance sheet location as of June 30, 2019:

 

    Balance Sheet Location   June 30, 2019  
        (Unaudited)  
        $  
Assets            
Operating   Right-of-use assets     10,213,704  
Total leased assets         10,213,704  
             
Liabilities            
Operating - current   Lease Liabilities, current     2,334,110  
Operating - non current   Lease liabilities, non current     8,040,487  
Total lease liabilities         10,374,597  

 

The components of lease expense for the three and six months ended June 30, 2019 were as follows:

 

    Statement of Income Location   Three months ended
June 30, 2019
    Six months ended
June 30, 2019
 
        (Unaudited)     (Unaudited)  
        $     $  
Lease Costs                    
Operating lease expense   Cost of sales, Selling and distribution expenses, General and administrative expenses, Research and development expenses     764,149       1,521,856  
Total net lease costs         764,149       1,521,856  

 

Maturity of lease liabilities under the non-cancelable operating leases as of June 30, 2019 were as follows:

 

      Operating  
      (Unaudited)  
        $  
Remaining 2019       1,281,201  
2020       3,189,784  
2021       3,361,853  
2022       2,596,847  
2023       980,182  
2024       167,850  
Total lease payments       11,577,717  
Less: interest       1,203,120  
Present value of lease liabilities       10,374,597  

 

  10  

 

 

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

 

7. Leases (continued)

 

Future minimum rental payments under the non-cancelable operating leases as of December 31, 2018 were as follows:

 

      Leases (1)  
      $  
2019       2,288,437  
2020       1,790,861  
2021       1,621,298  
2022       668,792  
        6,369,388  

 

(1) Amounts are based on ASC 840, Leases that was superseded upon our adoption of ASC 842, Leases on January 1, 2019.

 

The following table provides a summary of the lease terms and discount rates as of June 30, 2019:

 

      June 30, 2019  
Weighted Average Remaining Lease Term          
Operating leases       3.52 years  
           
Weighted Average Discount Rate          
Operating leases       6.18 %

 

As most of the leases do not provide an implicit rate, the Company use the incremental borrowing rate based on the information available at the lease commencement date to determine the present value of lease payments.

 

Supplemental information related to the leases for the three and six months ended June 30, 2019 is as follows:

 

    Three months ended
June 30, 2019
    Six months ended
June 30, 2019
 
    (Unaudited)     (Unaudited)  
    $     $  
Cash paid for amounts included in the measurement of lease liabilities:                
Operating cash flows from operating leases     732,090       1,358,235  

 

  11  

 

 

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

 

8. Long-term investments

 

    June 30, 2019     December 31, 2018  
    (Unaudited)              
    $     Interest
%
    $     Interest
%
 
Equity method investments                                
-Ganzhou Highpower Technology Company Limited (“GZ Highpower”) (1)     6,188,223       31.294 %     7,683,900       31.294 %
-Shenzhen V-power Innovative Technology Co., Ltd (“V-power”) (2)     491,011       49.000 %     595,730       49.000 %
Cost method investment                                
-Huizhou Yipeng Energy Technology Co Ltd.     1,708,384       4.654 %     1,714,222       4.654 %
      8,387,618               9,993,852          

 

(1) Investment in GZ Highpower

 

On December 21, 2017, after the completion of the capital increase to GZ Highpower by other shareholders, the Company lost the controlling power over GZ Highpower and deconsolidated GZ Highpower. Thereafter, the investment was recorded under the equity method.

 

The equity in loss of investee was $1,150,032 and $1,491,608 for the three and six months ended June 30, 2019, respectively. The equity in earnings of investee was $179,964 and $336,214 for the three and six months ended June 30, 2018, respectively.

 

(2) Investment in V-power

 

On February 28, 2018, the Company signed an investment agreement with a related company and a group of individuals (the “Founder Team”) with an aggregate amount of RMB4.9 million (approximately $0.7 million) for 49% of the equity interest of V-power, which was recorded under the equity method. In addition, the Company agreed to transfer the 15% of original equity interest of V-power to the Founder Team as compensation under voluntary assignment as any of the following requirements met: 1. annual sales revenue higher or equal to RMB30 million before the first capital increase of V-power; and 2. valuation of V-power higher or equal to RMB30 million before equity issuance. As of June 30, 2019, the requirements have not been met and no such transfer was needed. As of June 30, 2019, the Company has injected RMB4.2 million (approximately $0.6 million) to V-power, and the unpaid amount was recorded as amount due to a related party (See Note 17).

 

The equity in loss of investee was $27,607 and $104,235 for the three and six months ended June 30, 2019, respectively. The equity in loss of investee was $19,894 and $19,894 for the three and six months ended June 30, 2018, respectively.

 

  12  

 

 

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

 

9. Taxation

 

Highpower and its direct and indirect wholly owned subsidiaries file tax returns separately.

 

1) VAT

 

Pursuant to the Provisional Regulation of the PRC on VAT and the related implementing rules, all entities and individuals ("taxpayers") that are engaged in the sale of products in the PRC are generally required to pay VAT, at a rate of which was changed from 17% to 16% on May 1, 2018, and changed from 16% to 13% on April 1, 2019 of the gross sales proceeds received, less any deductible VAT already paid or borne by the taxpayers. Further, when exporting goods, the exporter is entitled to a portion of or all the refund of VAT that it has already paid or incurred. The Company’s PRC subsidiaries are subject to VAT on their revenues.

 

2) Income tax

 

United States

 

Tax Reform

 

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into legislation. The 2017 Tax Act significantly revises the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 34% to 21%, imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax.

 

On December 22, 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740, Income Taxes. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete.

 

The one-time transition tax is based on the total post-1986 earnings and profits (“E&P”) for which the Company has previously deferred U.S. income taxes.

 

The Company evaluated the Global Intangible Low Taxed Income ("GILTI") inclusion on current earnings and profits of greater than 10% owned foreign controlled corporations. The Company has evaluated whether it has additional provision amount resulted by the GILTI inclusion on current earnings and profits of its foreign controlled corporations. The law also provides that corporate taxpayers may benefit from a 50% reduction in the GILTI inclusion, which effectively reduces the 21% U.S. corporate tax rate on the foreign income to an effective rate of 10.5%. The GILTI inclusion further provides for a foreign tax credit in connection with the foreign taxes paid. In 2019, the Company recorded a GILTI inclusion of $8,210,686. However, the total tax of $898,875 is fully offset by the deemed paid foreign tax credit.

 

The Company completed quantification of the Tax Act impact in 2018. The final adjustment is not material.

  

  13  

 

 

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

 

9. Taxation (continued)

 

Hong Kong

 

HKHTC, which was incorporated in Hong Kong, is subject to a corporate income tax rate of 16.5%.

 

In accordance with the relevant tax laws and regulations of Hong Kong, a company registered in Hong Kong is subject to income taxes within Hong Kong at the applicable tax rate on taxable income. In March 2018, the Hong Kong Government introduced a two-tiered profit tax rate regime by enacting the Inland Revenue (Amendment) (No.3) Ordinance 2018 (the “Ordinance”). Under the two-tiered profits tax rate regime, the first $2 million of assessable profits of qualifying corporations is taxed at 8.25% and the remaining assessable profits at 16.5%. The Ordinance is effective from the year of assessment 2018-2019. According to the policy, if no election has been made, the whole of the taxpaying entity’s assessable profits will be chargeable to Profits Tax at the rate of 16.5% or 15%, as applicable. Because the preferential tax treatment is not elected by the Company, HKHTC is subject to income tax at a rate of 16.5%.

 

PRC

 

In accordance with the relevant tax laws and regulations of the PRC, a company registered in the PRC is subject to income taxes within the PRC at the applicable tax rate on taxable income.

 

In China, the companies granted with National High-tech Enterprise (“NHTE”) status enjoy 15% income tax rate. This status needs to be renewed every three years. If these subsidiaries fail to renew NHTE status, they will be subject to income tax at a rate of 25% after the expiration of NHTE status. All the PRC subsidiaries received NHTE status and enjoy 15% income tax rate for calendar year 2019 and 2018.

 

The components of the income taxes expenses are:

 

    Three months ended
June 30,
    Six months ended
June 30,
 
    2019     2018     2019     2018  
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
    $     $     $     $  
Current     712,944       551,583       1,100,769       898,520  
Deferred     28,572       (142,262 )     (73,794 )     (498,878 )
Total income taxes expenses     741,516       409,321       1,026,975       399,642  

 

The reconciliation of income taxes expenses computed at the PRC statutory tax rate to income tax expense is as follows:

 

    Three months ended
June 30,
    Six months ended
June 30,
 
    2019     2018     2019     2018  
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
    $     $     $     $  
Income before tax     5,429,739       3,123,636       6,022,919       1,995,021  
                                 
Provision for income taxes at PRC statutory income tax rate (25%)     1,357,435       780,909       1,505,730       498,755  
Impact of different tax rates in other jurisdictions     88,722       37,886       207,343       96,546  
Effect of  PRC preferential tax rate     (494,344 )     (272,880 )     (684,651 )     (266,427 )
R&D expenses eligible for super deduction     (541,876 )     (334,892 )     (680,270 )     (334,892 )
Other non-deductible expenses     87,610       32,175       187,972       48,751  
Change in valuation allowance of deferred tax assets     243,969       166,123       490,851       356,909  
Effective enterprise income tax expenses     741,516       409,321       1,026,975       399,642  

 

  14  

 

 

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

 

9. Taxation (continued)

 

3) Deferred tax assets, net

 

Deferred tax assets and deferred tax liabilities reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purpose and the tax bases used for income tax purpose. The following represents the tax effect of each major type of temporary difference.

 

    June 30,     December 31,  
    2019     2018  
    (Unaudited)        
    $     $  
Deferred tax assets            
Tax loss carry-forward     1,604,854       1,096,956  
Allowance for doubtful receivables     22,950       9,153  
Impairment for inventory     409,863       382,375  
Difference for sales cut-off     33,519       15,526  
Deferred government grants     102,137       69,631  
Property, plant and equipment subsidized by government grant     233,274       250,563  
Impairment for property, plant and equipment     122,431       138,122  
Total gross deferred tax assets     2,529,028       1,962,326  
Valuation allowance     (1,403,764 )     (1,096,956 )
Total deferred tax assets, net of valuation allowance     1,125,264       865,370  
Deferred tax liability                
PPE, due to difference in depreciation     (189,821 )     -  
Total deferred tax liability     (189,821 )     -  
Total net deferred tax assets     935,443       865,370  

 

As of June 30, 2019, the Company had net operating loss carry-forwards in Hong Kong of $8,507,665 without expiration and in the PRC of $1,340,597, which will start to expire in 2023.

 

The Company has deferred tax assets which consisted of tax loss carry-forwards and other items that can be carried forward to offset future taxable income. Management determined it is more likely than not that part of the deferred tax assets could not be utilized, so a valuation allowance was provided for as of June 30, 2019 and December 31, 2018. The net valuation allowance increased by $0.3 million and $0.4 million during the six months ended June 30, 2019 and 2018, respectively.

 

10. Notes payable

 

Notes payable presented to certain suppliers as a payment against the outstanding trade payables.

 

Notes payable are mainly bank acceptance bills which are non-interest bearing and generally mature within one year. The outstanding bank acceptance bills are secured by restricted cash deposited in banks. Outstanding bank acceptance bills were $60,168,272 and $73,607,284 as of June 30, 2019 and December 31, 2018, respectively.

 

11. Short-term loans

 

As of June 30, 2019, the bank borrowings were for working capital and capital expenditure purposes with maturity of one year and were secured by personal guarantees executed by the Company’s Chief Executive Officer, Mr. Dang Yu Pan, the land use right with a net carrying amount of $2,406,173 and the buildings with a net carrying amount of $8,733,443, respectively.

 

The loans were primarily obtained from three banks with interest rates ranging from 5.2200% to 6.5253% per annum and 5.2300% to 6.5253% per annum as of June 30, 2019 and December 31, 2018, respectively. The interest expenses were $344,983 and $653,565 for the three and six months ended June 30, 2019, respectively. The interest expenses were $118,886 and $230,599 for the three and six months ended June 30, 2018, respectively.

 

  15  

 

 

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

 

12. Non-financial institution borrowing

 

For the six months ended June 30, 2019, the Company paid back $8,862,891 to the third party non-financial institution.

 

The interest expense of the above borrowing was $nil and $4,877 for the three and six months ended June 30, 2019. The interest expense of the above borrowing was $134,660 and $296,963 for the three and six months ended June 30, 2018.

 

13. Lines of credit

 

The Company entered into various credit contracts and revolving lines of credit, which were used for short-term loans and bank acceptance bills. As of June 30, 2019, the total and unused lines of credit were $107.2 million and $27.6 million, respectively, with maturity dates from August 2019 to October 2021. As of December 31, 2018, the total and unused lines of credit were $102.6 million and $23.8 million, respectively, with maturity dates from March 2019 to October 2021.

 

These lines of credit were guaranteed by the Company’s Chief Executive Officer, Mr. Dang Yu Pan and his wife. The Company’s buildings and the land use right were pledged as collateral for these lines of credit.

 

14. Earnings per share

 

The following table sets forth the computation of basic and diluted earnings per common share for the three and six months ended June 30, 2019 and 2018.

 

    Three months ended
June 30,
    Six months ended
June 30,
 
    2019     2018     2019     2018  
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
    $     $     $     $  
Numerator:                                
Net income     4,688,223       2,714,315       4,995,944       1,595,379  
                                 
Denominator:                                
Weighted-average shares outstanding                                
- Basic     15,567,953       15,556,361       15,567,220       15,533,139  
- Dilutive effects of equity incentive awards     58,312       73,052       48,370       86,632  
- Diluted    

15,626,265

      15,629,413       15,615,590       15,619,771  
                                 
Net income per share:                                
- Basic     0.30       0.17       0.32       0.10  
- Diluted     0.30       0.17       0.32       0.10  

 

Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock.

 

  16  

 

 

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

 

15. Defined contribution plan

 

Full-time employees of the Company in the PRC participate in a government mandated defined contribution plan, pursuant to which certain pension benefits, medical care, employee housing fund and other welfare benefits (“the Benefits”) are provided to employees. Chinese labor regulations require that the PRC operating subsidiaries of the Company make contributions to the government for these benefits based on certain percentages of the employees’ salaries. Except for contributions made related to the Benefits, the Company has no legal obligation.

 

The total contributions made, which were expensed as incurred, were $996,410 and $1,979,784 for the three and six months ended June 30, 2019. The total contributions made, which were expensed as incurred, were $729,595 and $1,383,552 for the three and six months ended June 30, 2018.

 

16. Segment information

 

The reportable segments are components of the Company that offer different products and are separately managed, with separate financial information available that is separately evaluated regularly by the Company’s chief operating decision maker (“CODM”), the Chief Executive Officer, in determining the performance of the business. The Company categorizes its business into two reportable segments, namely (i) Lithium Business and (ii) Ni-MH Batteries and Accessories.

 

The CODM evaluates performance based on each reporting segment’s net sales, cost of sales, gross profit and total assets. Net sales, cost of sales, gross profit and total assets by segments is set out as follows:

 

    Three months ended
June 30,
    Six months ended
June 30,
 
    2019     2018     2019     2018  
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
    $     $     $     $  
Net sales                                
Lithium Business     62,255,334       48,503,856       104,985,501       85,100,511  
Ni-MH Batteries and Accessories     13,551,759       16,420,104       28,935,072       29,606,902  
Total     75,807,093       64,923,960       133,920,573       114,707,413  
                                 
Cost of Sales                                
Lithium Business     47,382,082       39,755,643       81,010,550       70,546,982  
Ni-MH Batteries and Accessories     10,053,936       13,858,391       21,878,419       25,284,178  
Total     57,436,018       53,614,034       102,888,969       95,831,160  
                                 
Gross Profit                                
Lithium Business     14,873,252       8,748,213       23,974,951       14,553,529  
Ni-MH Batteries and Accessories     3,497,823       2,561,713       7,056,653       4,322,724  
Total     18,371,075       11,309,926       31,031,604       18,876,253  

 

    June 30,     December 31,  
    2019     2018  
    (Unaudited)        
    $     $  
Total Assets                
Lithium Business     215,321,303       231,795,621  
Ni-MH Batteries and Accessories     53,775,804       56,260,478  
Total     269,097,107       288,056,099  

 

  17  

 

 

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

 

16. Segment information (continued)

 

All long-lived assets of the Company are located in the PRC. Geographic information about the sales and accounts receivable based on the locations of the Company’s customers is set out as follows:

 

    Three months ended
June 30,
    Six months ended
June 30,
 
    2019     2018     2019     2018  
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
    $     $     $     $  
Net sales                                
China Mainland     30,143,843       32,880,005       58,114,878       61,185,768  
Asia, others     35,716,065       25,183,900       58,786,779       40,938,296  
Europe     8,988,966       4,849,360       13,609,297       9,387,263  
North America     958,219       1,998,243       3,275,745       3,163,074  
Others     -       12,452       133,874       33,012  
      75,807,093       64,923,960       133,920,573       114,707,413  

 

    June 30,     December 31,  
    2019     2018  
    (Unaudited)        
    $     $  
Accounts receivable                
China Mainland     33,494,645       38,048,651  
Asia, others     28,138,970       33,237,051  
Europe     6,596,124       5,413,343  
North America     769,287       566,769  
Others     -       14,003  
      68,999,026       77,279,817  

 

17. Related party balance and transaction

 

Related party balance

 

    June 30,     December 31,  
    2019     2018  
    (Unaudited)        
    $     $  
Accounts receivable     86,343       476,093  
Other receivable     59,776       1,570  
Amount due from a related party- GZ Highpower     146,119       477,663  
                 
Other payable-investment (1)     101,869       408,867  
Loan from Mr. Dang Yu Pan (2)     -       5,707,984  
Amount due to related parties     101,869       6,116,851  

 

(1) The Company signed an investment agreement with an aggregate amount of RMB4.9 million (approximately $0.7 million) in investing for 49% of the equity interest of V-power which was set up on March 1, 2018. On April 28, 2018, the Company injected RMB2.1 million (approximately $0.3 million) to V-power. On January 14, 2019, the Company injected RMB2.1 million (approximately $0.3 million) to V-power and the unpaid amount was recorded as amount due to a related party. (See Note 8)

 

(2) The Company entered into a loan agreement with a maximum amount of RMB60 million (approximately $8.7 million) with Mr. Dang Yu Pan on July 20, 2018. As of June 30, 2019, the Company repaid the loans. The interest rate is 5.65% per annum. The Company accrued interest expense $20,135 and $133,930 for the three and six months ended June 30, 2019, respectively.

 

  18  

 

 

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

 

17. Related party balance and transaction (continued)

 

Related party transaction

 

    Three months ended
June 30,
    Six months ended
June 30,
 
    2019     2018     2019     2018  
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
    $     $     $     $  
GZ Highpower                                
Sales     239,573       433,147       440,306       658,934  
                                 
V-Power                                
Payment of investment     -       -       310,201       -  
                                 
Dang Yu Pan                                
Loan from Dang Yu Pan     -       -       2,954,297       -  
Repayment of Loan from Dang Yu Pan     8,589,619       -       8,589,619       -  
Interest expense     20,135       -       133,930       -  

 

18. Subsequent event

 

The Company has evaluated subsequent events through the issuance of the unaudited condensed consolidated financial statements and no other subsequent event is identified that would have required adjustment or disclosure in the consolidated financial statements.

 

  19  

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and the related notes that are included in this Quarterly Report and the audited consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with SEC on March 28, 2019 (the “Annual Report”).

 

Special Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are not historical facts, and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. All statements, other than statements of historical fact included in this Form 10-Q including, without limitation, statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the Company’s financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. Words such as “expect,” “believe,” “anticipate,” “intend,” “estimate,” “seek” and variations and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performance, but reflect management’s current beliefs, based on information currently available. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to the Risk Factors section of the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”). The Company’s securities filings can be accessed on the EDGAR section of the SEC’s website at www.sec.gov. Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

 

Overview

 

Net sales increased by $10.9 million, or 16.8%, during the second quarter of 2019 compared to the same quarter in 2018. The main driver was our lithium business, including high-end consumer products, industrial applications and increased demand for artificial intelligence products. Lithium business net sales increased by $13.8 million, or 28.4%, during the second quarter of 2019 compared to the same quarter in 2018.

 

Gross profit during the second quarter of 2019 was $18.4 million, or 24.2% of net sales, compared to $11.3 million, or 17.4% of net sales, for the comparable period in 2018.

 

Critical Accounting Policies

 

See Note 2 to the accompanying unaudited condensed consolidated financial statements for our critical accounting policies.

 

  20  

 

 

 

Results of Operations

 

The following table sets forth the unaudited consolidated statements of operations of the Company for the three and six months ended June 30, 2019 and 2018, both in US$ and as a percentage of net sales.

 

Consolidated Statements of Operations

 

(Dollars in Thousands, Except Per   Three months ended June 30,     Six months ended June 30,  
Share Amounts)   2019     2018     2019     2018  
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
    $     %     $     %     $     %     $     %  
Net sales     75,807       100.0 %     64,924       100.0 %     133,921       100.0 %     114,707       100.0 %
Cost of sales     (57,436 )     (75.8 %)     (53,614 )     (82.6 %)     (102,889 )     (76.8 %)     (95,831 )     (83.5 %)
Gross profit     18,371       24.2 %     11,310       17.4 %     31,032       23.2 %     18,876       16.5 %
                                                                 
Research and development expenses     (4,380 )     (5.8 %)     (3,593 )     (5.5 %)     (7,367 )     (5.5 %)     (6,155 )     (5.4 %)
Selling and distribution expenses     (3,280 )     (4.3 %)     (2,122 )     (3.3 %)     (6,072 )     (4.5 %)     (4,097 )     (3.6 %)
General and administrative expenses     (5,027 )     (6.6 %)     (3,910 )     (6.0 %)     (9,851 )     (7.4 %)     (8,025 )     (7.0 %)
Foreign currency transaction gain (loss)     1,213       1.6 %     1,671       2.6 %     (38 )     (0.0 %)     657       0.6 %
Income from operations     6,897       9.1 %     3,356       5.2 %     7,704       5.8 %     1,256       1.1 %
                                                                 
Changes in fair value of foreign exchange derivatives     (995 )     (1.3 %)     (1,125 )     (1.7 %)     (609 )     (0.5 %)     (421 )     (0.4 %)
Government grants     729       1.0 %     989       1.5 %     951       0.7 %     1,318       1.1 %
Other income     16       0.0 %     57       0.1 %     82       0.1 %     81       0.1 %
Equity in (loss) earnings of investees     (1,178 )     (1.6 %)     160       0.2 %     (1,596 )     (1.2 %)     316       0.3 %
Interest expenses, net     (39 )     (0.1 %)     (313 )     (0.5 %)     (509 )     (0.4 %)     (555 )     (0.5 %)
Income before taxes     5,430       7.2 %     3,124       4.8 %     6,023       4.5 %     1,995       1.7 %
                                                                 
Income taxes expenses     (742 )     (1.0 %)     (410 )     (0.6 %)     (1,027 )     (0.8 %)     (400 )     (0.3 %)
Net income     4,688       6.2 %     2,714       4.2 %     4,996       3.7 %     1,595       1.4 %
                                                                 
Diluted earnings per common stock     0.30               0.17               0.32               0.10          

 

Net sales

 

Net sales for the three months ended June 30, 2019 were $75.8 million compared to $64.9 million for the comparable period in 2018, an increase of $10.9 million, or 16.8%.

 

Net sales for the six months ended June 30, 2019 were $133.9 million compared to $114.7 million for the comparable period in 2018, an increase of $19.2 million, or 16.7%. Net sales of Lithium business increased by $19.9 million, or 23.4%, during the six months ended June 30, 2019, compared to the comparable period in 2018. Ni-MH batteries and accessories net sales decreased by $0.7 million, or 2.3%, during the six months ended June 30, 2019, compared to the comparable period in 2018. The increase in net sales was mainly due to the optimization of our sales structure.

 

Gross profit

 

Gross profit for the three months ended June 30, 2019 was $18.4 million, or 24.2% of net sales, compared to $11.3 million, or 17.4% of net sales, for the comparable period in 2018. This increase was attributed to the product mix and improvement in our labor efficiency.

 

  21  

 

 

Gross profit for the six months ended June 30, 2019 was $31.0 million, or 23.2% of net sales, compared to $18.9 million, or 16.5% of net sales, for the comparable period in 2018. This increase was attributed to the product mix and improvement in our labor efficiency.

 

Research and development expenses

 

Research and development expenses were $4.4 million, or 5.8% of net sales, for the three months ended June 30, 2019, compared to $3.6 million, or 5.5% of net sales, for the comparable period in 2018.

 

Research and development expenses were $7.4 million, or 5.5% of net sales, for the six months ended June 30, 2019, compared to $6.2 million, or 5.4% of net sales, for the comparable period in 2018. The Company will continue to invest on R&D activities in the future.

 

Selling and distribution expenses

 

Selling and distribution expenses were $3.3 million, or 4.3% of net sales, for the three months ended June 30, 2019, compared to $2.1 million, or 3.3% of net sales, for the comparable period in 2018.

 

Selling and distribution expenses were $6.1 million, or 4.5% of net sales, for the six months ended June 30, 2019, compared to $4.1 million, or 3.6% of net sales, for the comparable period in 2018. The increase of expenses was mainly driven by marketing expenses for more branded customers.

 

General and administrative expenses

 

General and administrative expenses were $5.0 million, or 6.6% of net sales, for the three months ended June 30, 2019, compared to $3.9 million, or 6.0% of net sales, for the comparable period in 2018.

 

General and administrative expenses were $9.9 million, or 7.4% of net sales, for the six months ended June 30, 2019, compared to $8.0 million, or 7.0% of net sales, for the comparable period in 2018.

 

Foreign currency transaction gain (loss)

 

We experienced a gain of $1.2 million and $1.7 million for the three months ended June 30, 2019 and 2018, respectively, on the exchange rate difference between the US$ and the RMB.

 

We experienced a loss of $37,272 and a gain of $656,239 for the six months ended June 30, 2019 and 2018, respectively, on the exchange rate difference between the US$ and the RMB. The loss or gain in exchange rate difference was due to the influence of the RMB relative to the US$ over the respective periods.

 

Changes in fair value of foreign exchange derivatives

 

We experienced a loss on derivative instruments of $1.0 million and $1.1 million for the three months ended June 30, 2019 and 2018, respectively.

 

We experienced a loss on derivative instruments of $0.6 million and $0.4 million for the six months ended June 30, 2019 and 2018, respectively.

 

Government grants

 

Government grants were $0.7 million and $1.0 million for the three months ended June 30, 2019, and 2018, respectively.

 

Government grants were $1.0 million and $1.3 million for the six months ended June 30, 2019, and 2018, respectively.

 

  22  

 

 

Other income

 

Other income was $15,550 and $56,581 for the three months ended June 30, 2019 and 2018, respectively.

 

Other income was $82,248 and $80,142 for the six months ended June 30, 2019 and 2018, respectively.

 

Equity in (loss) earnings of investees 

 

Equity in loss of investees were $1.2 million for the three months ended June 30, 2019, compared to equity in earnings of investee $160,070 for the comparable period in 2018.

 

Equity in loss of investees were $1.6 million for the six months ended June 30, 2019, compared to equity in earnings of investee $316,320 for the comparable period in 2018.

 

Interest expenses, net

 

Interest expenses, net were $38,675 and $312,814 for the three months ended June 30, 2019 and 2018, respectively.

 

Interest expenses, net were $509,098 and $554,666 for the six months ended June 30, 2019 and 2018, respectively.

 

Income taxes expenses

 

Income taxes expenses were $0.7 million and $0.4 million for the three months ended June 30, 2019 and 2018, respectively.

 

Income taxes expenses were $1.0 million and $0.4 million for the six months ended June 30, 2019 and 2018, respectively.

 

Net income

 

Net income for the three months ended June 30, 2019 was $4.7 million compared to $2.7 million for the comparable period in 2018, increase of $2.0 million, or 72.7%.

 

Net income for the six months ended June 30, 2019 was $5.0 million compared to $1.6 million for the comparable period in 2018, increase of $3.4 million, or 213.2%.

 

Reconciliation of Net Income to EBITDA

 

A table reconciling earnings before interest, income tax, depreciation and amortization (“EBITDA”), a non-GAAP financial measure, to the appropriate GAAP measure is included with the Company's financial information below. EBITDA was derived by taking earnings before interest expense, net, taxes, depreciation and amortization. The presentation of this additional information is not meant to be considered in isolation or as a substitute for results prepared in accordance with U.S. GAAP. The Company believes this non-GAAP measure is useful to investors as it provides a basis for evaluating the Company's operating results in the ordinary course of its operations. This non-GAAP measure is not based on any comprehensive set of accounting rules or principles. The Company believes that non-GAAP measures have limitations in that they do not reflect all of the amounts associated with its results of operations as determined in accordance with U.S. GAAP and that these measures should only be used to evaluate the Company's results of operations in conjunction with, and not in lieu of, the corresponding GAAP measures.

 

    Three months ended
June 30,
    Six months ended
June 30,
 
    2019     2018     2019     2018  
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
    $     $     $     $  
Net income     4,688,223       2,714,315       4,995,944       1,595,379  
                                 

Interest expenses, net

    38,675       312,814       509,098       554,666  
Income taxes expenses     741,516       409,321       1,026,975       399,642  
Depreciation and Amortization     1,886,874       1,528,644       3,616,314       3,003,872  
                                 
EBITDA     7,355,288       4,965,094       10,148,331       5,553,559  

 

  23  

 

 

Liquidity and Capital Resources

 

We had cash of approximately $18.1 million as of June 30, 2019, compared to $24.9 million as of December 31, 2018.

 

To provide liquidity and flexibility in funding our operations, we borrow funds under bank facilities and other external sources of financing. As of June 30, 2019, we had lines of credit with eight financial institutions aggregating $107.2 million. The maturities of these facilities vary from August 2019 to October 2021. The facilities are subject to regular review and approval. Certain of these bank facilities are guaranteed by our Chief Executive Officer, Mr. Dang Yu Pan and his wife, pledged by land use right and buildings, and contain customary affirmative and negative covenants for secured credit facilities of this type. Interest rates are generally based on the banks’ reference lending rates. No significant commitment fees are required to be paid for the bank facilities. As of June 30, 2019, we had utilized approximately $79.6 million under such general credit facilities and had available unused credit facilities of $27.6 million.

 

Net cash provided by operating activities was approximately $13.4 million for the six months ended June 30, 2019, compared to net cash used in operating activities of $7.6 million for the comparable period in 2018. The net cash increase of $21.1 million provided by operating activities is primarily due to an increase of $30.6 million in cash inflow from inventories, an increase of $12.1 million in cash inflow from accounts receivable, an increase of $9.0 million in cash inflow from prepayments and other receivables and an increase of $29.3 million in cash outflow from accounts payable.

 

Net cash used in investing activities was $7.0 million for the six months ended June 30, 2019, compared to net cash used in investing activities of $6.0 million for the comparable period in 2018. The net cash increase of $1.0 million used in investing activities is primarily due to an increase of $1.0 million in cash outflow from acquisitions of plant and equipment.

 

Net cash used in financing activities was $28.2 million for the six months ended June 30, 2019, compared to net cash provided by financing activities of $11.8 million for the comparable period in 2018. The net cash increase of $40.0 million in net cash used in financing activities was primarily attributable to an increase of $15.8 million in cash outflow from repayments of notes payable, an increase of $14.9 million in cash outflow from repayments of short-term bank loans and an increase of $8.6 million in cash outflow from repayment of loan from a related party.

 

Recent Accounting Standards

 

Please refer to Note 2 (Recently issued accounting standards).

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not required for a smaller reporting company.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

(a) Evaluation of disclosure controls and procedures

 

Disclosure controls and procedures are controls and other procedures that are designed and adopted by management to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is properly recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that all necessary information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.

 

As of the end of the period covered by this Quarterly Report, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.

 

  24  

 

 

(b) Changes in Internal Control over Financial Reporting

 

There were no significant changes in our internal controls over financial reporting that occurred during the quarter ended June 30, 2019, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Part II. Other Information

 

Item 1. Legal Proceedings

 

From time to time, we are subject to certain legal proceedings, claims and disputes that arise in the ordinary course of our business. Although we cannot predict the outcomes of these legal proceedings, we do not believe these actions, in the aggregate, will have a material adverse impact on our financial position, results of operations or liquidity. We are currently not a party to any material legal proceedings

 

Item 1A. Risk Factors

 

Any investment in our common stock involves a high degree of risk. Investors should carefully consider the risks described herein and in our Annual Report on Form 10-K for the year ended December 31, 2018 as filed with the SEC on March 28, 2019 and all of the information contained in our public filings before deciding whether to purchase our common stock. Other than as set forth below, there have been no material revisions to the “Risk Factors” as set forth in our Annual Report on Form 10-K.

 

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Default Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information

 

Working Capital Loan Contract between SZ Highpower and Industrial and Commercial Bank of China Ltd. Shenzhen Henggang Branch

Working Capital Loan Contract between SZ Springpower and Industrial and Commercial Bank of China Ltd. Shenzhen Henggang Branch

 

On May 15, 2019, SZ Highpower entered into a working capital loan contract with Industrial and Commercial Bank of China Ltd., Shenzhen Henggang Branch providing for an aggregate loan of RMB10,000,000 ($1,455,265) to be used as current funds for production and operations. SZ Highpower must withdraw the facility before August 30, 2019, after which time the bank may cancel all or part of the facility. The term of the loan is 12 months from the first withdrawal date. The interest rate is 6.5250%, which equals to the one year benchmarked by interbank rates, float 51.4%. The loan is guaranteed by HK HTC, SZ Springpower and our Chief Executive Officer, Dang Yu Pan. The balance of loan was $1,455,265 as of June 30, 2019.

 

On June 25, 2019, SZ Highpower entered into a working capital loan contract with Industrial and Commercial Bank of China Ltd., Shenzhen Henggang Branch providing for an aggregate loan of RMB10,000,000 ($1,455,265) to be used as current funds for production and operations. SZ Highpower must withdraw the facility before September 24, 2019, after which time the bank may cancel all or part of the facility. The term of the loan is 12 months from the first withdrawal date. The interest rate is 6.5250%, which equals to the one year benchmarked by interbank rates, float 51.4%. The loan is guaranteed by HK HTC, SZ Springpower and our Chief Executive Officer, Dang Yu Pan. The balance of loan was $1,455,265 as of June 30, 2019.

 

On May 15, 2019, SZ Springpower entered into a working capital loan contract with Industrial and Commercial Bank of China Ltd., Shenzhen Henggang Branch providing for an aggregate loan of RMB10,000,000 ($1,455,265) to be used as current funds for production and operations. SZ Springpower must withdraw the facility before August 30, 2019, after which time the bank may cancel all or part of the facility. The term of the loan is 12 months from the first withdrawal date. The interest rate is 6.5250%, which equals to the one year benchmarked by interbank rates, float 51.4%. The loan is guaranteed by HK HTC, HZ HTC and our Chief Executive Officer, Dang Yu Pan. The Company’s real estate in Shenzhen also served as collateral for the loan. The balance of loan was $1,455,265 as of June 30, 2019.

 

  25  

 

 

The following constitute events of default under each loan agreement: failure to repay principal, interest, and other payables in accordance with the provisions specified in these contracts; or failure to fulfill any other obligations in these contracts, or contrary to the statements, guarantee and commitments in these contracts; the guarantees in these contracts have adversely changed to the lender’s loan, and the borrowers is not available to provide other guarantees approved by the lender failure to pay off any other debts due by the borrowers, or failure to fulfill or breach other obligations in these contracts, or likely to affect the performance of the obligations in these contracts; the financial performance of the profitability, debt payment ability, operating capacity and cash flow of the borrowers exceed the agreed standards, or deterioration has been or may affect the obligations in these contracts; the borrower’s ownership structure, operation, external investment has changed adversely, which have affected or may affect the fulfillment of the obligations in these contracts; the borrowers involves or may involve significant economic disputes, litigation, arbitration, or asset seizure, detention or enforcement, or judicial or administrative authorities for investigation or take disciplinary measures in accordance with the laws, or illegal with relevant state regulations or policies in accordance with the laws, or exposure by media, which have affected or may affect the fulfillment of the obligations in these contracts; the borrower’s principal individual investors, key management officer’s change, disappearances or restriction of personal liberty, likely to affect the performance of the obligations in these contracts; using false contracts with related parties, using no actual transaction to extract the lender’s funds or credit, or evasion of lender’s loan right through related party transactions; having been or may be out of business, dissolution, liquidation, business reorganizations, business license has been revoked or bankruptcy; breaches food safety, production safety, environmental protection and other environmental and social risk management related laws and regulations, regulatory requirements or industry standards, resulting in accidents, major environmental and social risk events, likely to affect the performance of the obligations in these contracts; in these contracts, the borrower's credit rating, level of profitability, asset-liability ratio, net cash flow of operating and other indicators do not meet the credit conditions of the lender; or without the lender’s written contract, pledges guarantee or provides assurance guarantees to other party, likely to affect the performance of the obligations in these contracts; other adverse situations may affect in the realization of loan right in these contracts.

 

Upon the occurrence of an event of default, the bank may: request the borrowers rectify the event of default within a specified time period; cancel or terminate the borrower’s the unused portion of the credit line and other financing arrangements in whole or in part; declare all amounts outstanding under the contract immediately due and payable; require the borrowers to compensate the bank for losses it incurs as a result of the event of default; or other measures permitted under applicable law or other necessary measures.

 

Working Capital Loan Contract between SZ Springpower and Bank of China, Buji Sub-branch

Working Capital Loan Contract between ICON and Bank of China, Buji Sub-branch

 

On April 25, 2019, SZ Springpower entered into a working capital loan contract with Bank of China, Buji Sub-branch providing for an aggregate loan of RMB10,000,000 ($1,455,265) to be used by SZ Springpower to purchase raw materials. The term of the loan is 12 months from the first withdrawal date. SZ Springpower must withdraw the facility within 30 days from April 29, 2019, after which time the bank may cancel all or part of the facility. The interest rate is 6.09%, which equals to the one year benchmarked by interbank rates, plus 112.75%. The loan is guaranteed by SZ Highpower, HZ HTC and our Chief Executive Officer, Dang Yu Pan. The balance of loan was $1,455,265 as of June 30, 2019.

 

On June 18, 2019, ICON entered into a working capital loan contract with Bank of China, Buji Sub-branch providing for an aggregate loan of RMB10,000,000 ($1,455,265) to be used by ICON to purchase raw materials. The term of the loan is 12 months from the first withdrawal date. ICON must withdraw the facility within 30 days from June 19, 2019, after which time the bank may cancel all or part of the facility. The interest rate is 5.22%, which equals to the one year benchmarked by interbank rates, plus 0.91%. The loan is guaranteed by SZ Highpower, SZ Springpower, HZ HTC and our Chief Executive Officer, Dang Yu Pan. The balance of loan was $1,455,265 as of June 30, 2019.

 

  26  

 

 

The following constitute events of default under each loan agreement: failure to comply with repayment obligations under the agreement or any affiliated credit lines contract; failure to use borrowed funds according to the specified purposes; any statement made by the borrower in the agreement is untrue or in violation of any commitments in the loan agreement or affiliated loan contracts; failure to provide an additional guarantor as required by the loan agreement; significant business difficulties or risks, deteriorated financial losses or losses of assets, or other financial crisis; breach of covenants in other credit agreements with the bank or affiliated institutions of the bank; any guarantor breaches a contract or defaults under any agreement with the bank or affiliated institutions of the bank; termination of its business or engagement due to any wind-up, cancellation or bankruptcy issues; involvement or potential involvement in significant economic disputes, litigation, arbitration or assets seizure or confiscation, or its involvement in other judicial proceedings or administrative punishment proceedings that have affected or may affect its capacity to perform its obligations under the affiliated specific credit line contract; an abnormal change in any major individual investor or key management member of the borrower or such a person or entity’s becoming subject to investigation or restriction by the judiciary, which have or may affect the borrower’s performance of obligation under affiliated specific credit line contract; Bank of China’s discovery of any situation that may affect the financial position or performance capacities of the borrower or a guarantor after the bank’s annual review of the borrower’s financial position and performance; failure to provide the relevant documentation acceptable to Bank of China about the inflows and outflows of large-sum and abnormal capital in capital recovery account; or being in violation of other rights and obligations under the affiliated specific credit line contract.

 

Upon the occurrence of an event of default, the bank may: request the borrower or any guarantor to rectify the event of default within a specified time period; reduce, temporarily suspend or permanently terminate the borrower’s credit limit in whole or in part; temporarily suspend or permanently terminate in part or in whole the borrower’s application for specific credit line under the agreement; announce the immediate expiration of all the credit lines granted under the affiliated specific credit line contract as well as other contracts; terminate or release the contract, terminate or release in part or in whole any of the affiliated specific credit line contract as well as the other contracts executed between the borrower and the bank; require compensation from the borrower on the losses thereafter caused; hold the borrower’s deposit account at the bank in custody for repayment of amounts due under the contract; exercise the real rights for security; request repayment from a guarantor; or take any other procedures deemed necessary by the bank.

 

Working Capital Loan Contract between ICON and Bank of Jiangsu, Shenzhen Branch

 

On April 30, 2019, ICON entered into a working capital loan contract with Bank of Jiangsu, Shenzhen Branch providing for an aggregate loan of RMB10,000,000 ($1,455,265) to be used by ICON to purchase raw materials. The term of the loan from May 24, 2019 to March 23, 2020. The interest rate is 6.09%, which equals to the one year benchmarked by interbank rates, float 40.0%. The loan is guaranteed by SZ Highpower, SZ Springpower, HZ HTC and our Chief Executive Officer, Dang Yu Pan. The balance of loan was $1,455,265 as of June 30, 2019.

 

The following constitute events of default under the loan agreement: failure to fully and promptly perform its any obligations specified in this Contract and other relevant documents. if the borrower's aforesaid behavior can be corrected but the borrower fails to correct it to the extent satisfied by the lender within 20 days after the lender sends a written notice of correction; the borrower voluntarily or compulsively goes out of business, winds up, reorganizes, dissolves or goes into bankruptcy; the borrower provides false materials or conceals important business financial facts; the borrower breaks through the financial indicators stipulated the contract; the borrower suffers from financial loss or deterioration of financial conditions, which may affect the loan safety, or the borrower intentionally evades or cancels the creditor's rights of the Bank; the borrower's loan project plan is canceled or cannot be implemented; the borrower fraudulently obtains funds or credit from the lender or other bank by use of a false contract with an affiliated party; the borrower engages in or suspected of carrying out illegal business activities; the borrower goes into division, combination, major merger, acquisition or reorganization; the borrower violates any other contract signed with the lender or a third party, or there is any dispute arising from such contract, thereby causing or likely to cause litigation or arbitration; the controlling shareholder of the borrower transfers its shares held in the borrower, or the controlling shareholder, actual controller, legal representative or other senior management person has major events, including but not limited to engaging in or suspected of conducting illegal activities, or subject to litigation, arbitration or administrative punishment, going worse of its financial conditions, declaration of bankruptcy or dissolution, and so on; the guarantor has breach of contract, including but not limited to provision of false materials by the guarantor, the guarantor's violation of other contract signed with the lender or a third party, litigation or arbitration caused due to any dispute arising from such contract, forced or active suspension of business, major business failure, engaging in or suspected of conducting illegal activities, evasion or cancellation of creditor's rights of the Bank, merger and/or acquisition or reorganization, or other situations which may reduce its guarantee capability; An event of default occurs under other loan contract or guarantee contract made and entered into by and between the borrower and the lender; Other circumstances which endanger or may endanger the lender's loan safety.

 

Upon the occurrence of an event of default, the bank may: change the loan payment mode, stop payment of the loan not withdrawn by the borrower and/or ask the borrower to repay the loan in advance and announce acceleration of maturity of all the loan hereunder according to the stipulations of this contract; ask the borrower to repay the loan principal and interest hereunder in advance and pay all other relevant expenses, or ask the borrower to transfer its all debts hereunder to a transferee accepted by the lender, or ask the borrower to provide other guarantee measures accepted by the lender.

 

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Financing Quota Agreement between HZ HTC and Shanghai Pudong Development Bank Co., Ltd., Huizhou Branch

 

On April 11, 2019, HZ HTC entered into a financing quota agreement with Shanghai Pudong Development Bank Co., Ltd., Huizhou Branch, which provides for a revolving line of credit of up to RMB20,000,000 ($2,190,530). HZ HTC may issue bank acceptance, from time to time as needed, on or before April 1, 2020. The loan is guaranteed by SZ Highpower, ICON, SZ Springpower and our Chief Executive Officer, Dang Yu Pan. The used facility was $nil as of June 30, 2019.

 

The following constitute events of default under the loan agreement: violates any representation, warranty hereof or such representation; or warranty is certified to be incorrect, untrue, or missed or misleading or have been violated; and/or the borrower violates or does not fulfill any promised matter herein; and/or the borrower violates any regulation of this agreement; or any affiliated financing document hereunder; and or the borrower has any circumstance that may affect the safety of the financing bank’s loan; and/ or the guarantor violates the regulation of any guarantee document, all constitute the borrower’s default events of this agreement and affiliated financing documents.

 

Upon the occurrence of an event of default, the bank may: adjust or cancel the financing quota hereunder; announce all or a part of the debts under any affiliated financing document hereof to expire in advance; and /or terminate this agreement and all or a part of the affiliated financing documents, and require the customer to immediately return all or a part of the financing principal or interest; require the borrower to add margin amount, or transfer the borrower’s deposit or the deposit in the settlement account to its margin account for external payment or the margin of the advance payment that may occur to the borrower in the future for the bills already accepted or L/C, L/G/ SLC opened by the financing bank within the quota use term; require the borrower to immediately repay the advance payment if the financing bank already had advance payment; interest shall be calculated according to the penalty interest rate agreed herein or the penalty interest rate agreed in the affiliated financing document; and compound interest shall be calculated and collected to the payable and unpaid interest; deduct the borrower’s deposit in any account in the financing bank in accordance with the regulation in the contract.

 

Comprehensive Credit Contract between SZ Highpower and China Everbright Bank Co., Ltd., Shenzhen Branch

Comprehensive Credit Contract between SZ Springpower and China Everbright Bank Co., Ltd., Shenzhen Branch

 

On April 4, 2019, each of SZ Highpower and SZ Springpower entered into a comprehensive credit line contract with China Everbright Bank Co., Ltd., Shenzhen Branch. SZ Highpower’s loan agreement provides for a revolving line of credit of up to RMB20,000,000 ($2,190,530) and SZ Springpower’s loan agreement provides for a revolving line of credit of up to RMB30,000,000 ($4,365,795). Each Company may issue bank acceptance, from time to time as needed, but must make a specific drawdown application on or before April 3, 2020, after which time the bank may cancel all or part of the facilities. SZ Highpower’s loan is guaranteed by SZ Springpower, HZ HTC, ICON and our Chief Executive Officer, Dang Yu Pan and his wife. SZ Springpower’s loan is guaranteed by SZ Highpower, HZ HTC and ICON and our Chief Executive Officer, Dang Yu Pan and his wife. The used facility of SZ Highpower and SZ Springpower was $2,190,530 and $4,365,795 as of June 30, 2019 which was used for bank acceptance.

 

The following constitute events of default under the loan contracts: a significant monetary policy change in the PRC; a severe financial risk occurs or is likely to occur in borrower’s location; a significant change in borrower’s business market; the borrower has experienced or will encounter major operational difficulties or risks; a significant change in borrower’s corporate structure, such as a merger, acquisition, reorganization, separation, amalgamation or termination, which the bank believes might affect its ability to collect on the loan; the borrower’s refusal to accept the bank’s supervision and inspection of the use of loan funds and borrower’s operational and financial activities; borrower’s change in the use of the loan proceeds without the prior consent of the bank, or misappropriation of loan funds, or engagement in illegal or irregular transactions; the borrower’s providing of false materials or withholding of important financial or operational facts; the borrower’s transfer of assets, retrieval of capital, denial of indebtedness; the borrower’s being considered a “group account” according to the “Commercial Bank Group Guidelines for Customer Credit Risk Management Business,” or other relevant laws and regulations through related party transactions; the borrower’s violation of the contractual commitments stipulated in the contract; a guarantor is in critical shortage of working capital or encounters a major operational difficulty, which negatively affects the guarantor’s ability to guaranty the loan; any pledged object is damaged or lost, which jeopardizes the security and rights of the bank; the emergence of any other circumstance that the bank determines may affect the bank’s ability to collect on the loan or harm the bank’s rights and benefits; the borrower’s failure to perform any obligations in a specific business contract.

 

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Upon the occurrence of an event of default, the bank may: adjust the maximum amount of the line of credit, any specific line of credit and the effective period for credit extension and/or cancel the comprehensive contract, terminate the unused portion of the credit line.

 

Item 6. Exhibits

 

Exhibit
Number
  Description of Document
     
10.1   Working Capital Loan Contract dated May 15, 2019, between Shenzhen Highpower Technology Co., Ltd. and Industrial and Commercial Bank of China Ltd. Shenzhen Henggang Branch (translated to English).
     
10.2   Working Capital Loan Contract dated June 25, 2019, between Shenzhen Highpower Technology Co., Ltd. and Industrial and Commercial Bank of China Ltd. Shenzhen Henggang Branch (translated to English).
     
10.3   Comprehensive Credit Contract dated April 4, 2019, between Shenzhen Highpower Technology Co., Ltd.  and China Everbright Bank Shenzhen Branch (translated to English).
     
10.3(a)   Maximum Amount Guaranty Contract dated March 13, 2019, between Icon Energy System (Shenzhen) Co., Ltd. and China Everbright Bank Shenzhen Branch (translated to English).
     
10.3(b)   Maximum Amount Guaranty Contract dated March 13, 2019, between Dang Yu Pan and China Everbright Bank Shenzhen Branch (translated to English).
     
10.3(c)   Maximum Amount Guaranty Contract dated March 13, 2019, between Zhou Tao Yin and China Everbright Bank Shenzhen Branch (translated to English).
     
10.3(d)   Maximum Amount Guaranty Contract dated March 13, 2019, between Huizhou Highpower Technology Co., Ltd. and China Everbright Bank Shenzhen Branch (translated to English).
     
10.3(e)   Maximum Amount Guaranty Contract dated March 13, 2019, between Springpower Technology (Shenzhen) Co., Ltd. and China Everbright Bank Shenzhen Branch (translated to English).
     
10.4   Working Capital Loan Contract dated April 25, 2019, between Springpower Technology (Shenzhen) Co., Ltd.. and Bank of China, Buji Sub-branch (translated to English).
     
10.5   Working Capital Loan Contract dated May 15, 2019, between Springpower Technology (Shenzhen) Co., Ltd.. and Industrial and Commercial Bank of China Ltd. Shenzhen Henggang Branch (translated to English).
     
10.6   Comprehensive Credit Contract dated April 4, 2019, between Springpower Technology (Shenzhen) Co., Ltd.. and China Everbright Bank Shenzhen Branch (translated to English).
     
10.6(a)   Maximum Amount Guaranty Contract dated March 13, 2019, between Icon Energy System (Shenzhen) Co., Ltd. and China Everbright Bank Shenzhen Branch (translated to English).
     
10.6(b)   Maximum Amount Guaranty Contract dated March 13, 2019, between Dang Yu Pan and China Everbright Bank Shenzhen Branch (translated to English).
     
10.6(c)   Maximum Amount Guaranty Contract dated March 13, 2019, between Zhou Tao Yin and China Everbright Bank Shenzhen Branch (translated to English).
     
10.6(d)   Maximum Amount Guaranty Contract dated March 13, 2019, between Huizhou Highpower Technology Co., Ltd. and China Everbright Bank Shenzhen Branch (translated to English).

     
10.6(e)   Maximum Amount Guaranty Contract dated March 13, 2019, between Shenzhen Highpower Technology Co., Ltd. and China Everbright Bank Shenzhen Branch (translated to English).

 

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10.7   Working Capital Loan Contract dated June 18, 2019, between Icon Energy System (Shenzhen) Co., Ltd. and Bank of China, Buji Sub-branch (translated to English).
     
10.8   Working Capital Loan Contract dated April 30, 2019, between Icon Energy System (Shenzhen) Co., Ltd. and Bank of Jiangsu Co., Ltd Shenzhen Branch (translated to English).
     
10.9   Financing Quota Agreement dated April 11, 2019, between Huizhou Highpower Technology Co., Ltd. and Shanghai Pudong Development Bank Co., Ltd.,, Huizhou Branch (translated to English).
     
10.9(a)   Maximum Warranty Contract dated May 13, 2019, between Icon Energy System (Shenzhen) Co., Ltd. and Shanghai Pudong Development Bank Co., Ltd., Huizhou Branch, (translated to English).
     
10.9(b)   Maximum Warranty Contract dated May 13, 2019, between Dang Yu Pan and Shanghai Pudong Development Bank Co., Ltd., Huizhou Branch (translated to English).
     
10.9(c)   Maximum Warranty Contract dated May 13, 2019, between Shenzhen Highpower Technology Co., Ltd. and Shanghai Pudong Development Bank Co., Ltd., Huizhou Branch (translated to English).
     
10.9(d)   Maximum Warranty Contract dated May 13, 2019, between Springpower Technology (Shenzhen) Co., Ltd. and Shanghai Pudong Development Bank Co., Ltd., Huizhou Branch (translated to English).
     
31.1   Certification of Chief Executive Officer Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2   Certification of Chief Financial Officer Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1*   Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

* This exhibit shall not be deemed “filed” for purposes of Section18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

 

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HIGHPOWER INTERNATIONAL, INC.

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  Highpower International, Inc.
     
     
Dated: August 13, 2019   /s/ Dang Yu Pan
  By: Dang Yu Pan
  Its: Chairman of the Board and Chief Executive Officer
(principal executive officer and duly authorized officer)
     
    /s/ Sunny Pan
  By: Sunny Pan
  Its: Chief Financial Officer
(principal financial and accounting officer)

 

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