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RISK FACTORS
An investment in
our securities involves a high degree of risk. Before investing in our securities, you should carefully consider the following
information about these risks, together with the other information contained in this prospectus and in the documents incorporated
by reference into this prospectus, including the specific risk factors discussed under the caption “Risk Factors” in
the applicable prospectus supplement, other information contained in the prospectus supplement or appearing in, or incorporated
by reference in this prospectus. If any of the events anticipated by the risks described below occur, our business, cash flow,
results of operations and financial condition could be adversely affected which could result in a decline in the market price of
our securities, causing you to lose all or part of your investment.
RISKS RELATED TO OUR OPERATIONS
Our business depends in large part
on the growth in demand for portable electronic devices.
Many of our battery products are used to
power various portable electronic devices. Therefore, the demand for our batteries is substantially tied to the market demand for
portable electronic devices. A growth in the demand for portable electronic devices will be essential to the expansion of our business.
Our results of operations may be adversely affected by decreases in the general level of economic activity. Decreases in consumer
spending that may result from the current global economic downturn may weaken demand for items that use our battery products. A
decrease in the demand for portable electronic devices would likely have a material adverse effect on our results of operations. We
are unable to predict the duration and severity of the current disruption in financial markets and the global adverse economic
conditions and the effect such events might have on our business.
Our success depends on the success
of manufacturers of the end applications that use our battery products.
Because our products are designed to be
used in other products, our success depends on whether end application manufacturers will incorporate our batteries in their products.
Although we strive to produce high quality battery products, there is no guarantee that end application manufacturers will accept
our products. Our failure to gain acceptance of our products from these manufacturers could result in a material adverse effect
on our results of operations.
Additionally, even if a manufacturer decides
to use our batteries, the manufacturer may not be able to market and sell its products successfully. The manufacturer’s inability
to market and sell its products successfully could materially and adversely affect our business and prospects because this manufacturer
may not order new products from us. Therefore, our business, financial condition, results of operations and future success would
be materially and adversely affected.
We are and will continue to be subject
to declining average selling prices of consumer electronic devices, which may harm our results of operations.
Portable consumer electronic devices, such
as cellular phones, laptop computers and tablets are subject to rapid declines in average selling prices due to rapidly evolving
technologies, industry standards and consumer preferences. Therefore, electronic device manufacturers expect suppliers, such as
our company, to cut their costs and lower the price of their products to lessen the negative impact on the electronic device manufacturer’s
own profit margins. As a result, we have previously reduced the price of some of our battery products and expect to continue to
face market-driven downward pricing pressures in the future. Our results of operations will suffer if we are unable to offset any
declines in the average selling prices of our products by developing new or enhanced products with higher selling prices or gross
profit margins, increasing our sales volumes or reducing our production costs.
Our success is highly dependent on
continually developing new and advanced products, technologies, and processes and failure to do so may cause us to lose our competitiveness
in the battery industry and may cause our profits to decline.
To remain competitive in the battery industry,
it is important to continually develop new and advanced products, technologies, and processes. There is no assurance that competitors’
new products, technologies, and processes will not render our existing products obsolete or non-competitive. Alternately, changes
in legislative, regulatory or industry requirements or in competitive technologies may render certain of our products obsolete
or less attractive. Our competitiveness in the battery market therefore relies upon our ability to enhance our current products,
introduce new products, and develop and implement new technologies and processes. We predominately manufacture and market
Ni-MH batteries, Li-ion and Li-polymer batteries. Our ability to adapt to evolving industry standards and anticipate future
standards will be a significant factor in maintaining and improving our competitive position and our prospects for growth. To achieve
this goal, we have invested and plan to continue investing significant financial resources in research and development. Research
and development, however, is inherently uncertain, and we might encounter practical difficulties in commercializing our research
results. The research and development of new products and technologies is costly and time consuming, and there are no assurances
that our research and development of new products will either be successful or completed within anticipated timeframes, if at all.
Accordingly, our significant investment in research and development may not bear fruit. On the other hand, our competitors may
improve their technologies or even achieve technological breakthroughs that would render our products obsolete or less marketable.
Our failure to technologically evolve and/or develop new or enhanced products may cause us to lose competitiveness in the battery
market and may cause our profits to decline.
In addition, in order to compete effectively
in the battery industry, we must be able to launch new products to meet our customers’ demands in a timely manner. However,
we cannot provide assurance that we will be able to install and certify any equipment needed to produce new products in a timely
manner, or that the transitioning of our manufacturing facility and resources to full production under any new product programs
will not impact production rates or other operational efficiency measures at our manufacturing facility. In addition, new product
introductions and applications are risky, and may suffer from a lack of market acceptance, delay in related product development
and failure of new products to operate properly. Any failure by us successfully to launch new products, or a failure by our customers
to accept such products, could adversely affect our operating results.
Our current business strategy depends
on the growth in demand for EV and acceptance by customers of our products related to the EV market.
In anticipation of an expected increase
in the demand for high-power EV we have invested in research and development of new products and also acquired an equity ownership
in Huizhou Yipeng Energy Technology Co. Ltd. (“Yipeng”), an EV power battery system solutions provider specializing
in the plug-in hybrid electric vehicle (“PHEV”) and E-bus market in China. However, the markets we have targeted may
not achieve the level of growth we expect. If this market fails to achieve our expected level of growth or our products for the
EV market are not widely accepted, our operating results may be adversely affected.
We have historically depended on a
limited number of customers for a significant portion of our revenues and this dependence is likely to continue.
We have historically depended on a limited
number of customers for a significant portion of our net sales. We anticipate that a limited number of customers will continue
to contribute to a significant portion of our net sales in the future. Maintaining the relationships with these significant customers
is vital to the expansion and success of our business, as the loss of a major customer could expose us to risk of substantial losses.
Our sales and revenue could decline and our results of operations could be materially adversely affected if one or more of these
significant customers stops or reduces its purchasing of our products, or if we fail to expand our customer base for our products.
Significant order cancellations, reductions
or delays by our customers could materially adversely affect our business.
Our sales are typically made pursuant to
individual purchase orders, and we generally do not have long-term supply arrangements with our customers, but instead work with
our customers to develop nonbinding forecasts of future requirements. Based on these forecasts, we make commitments regarding the
level of business that we will seek and accept, the timing of production schedules and the levels and utilization of personnel
and other resources. A variety of conditions, both specific to each customer and generally affecting each customer’s industry,
may cause customers to cancel, reduce or delay orders that were either previously made or anticipated. Generally, customers may
cancel, reduce or delay purchase orders and commitments without penalty, except for payment for services rendered or products competed
and, in certain circumstances, payment for materials purchased and charges associated with such cancellation, reduction or delay.
Significant or numerous order cancellations, reductions or delays by our customers could have a material adverse effect on our
business, financial condition or results of operations.
Substantial defaults by our customers
on accounts receivable or the loss of significant customers could have a material adverse effect on our business.
A substantial portion of our working capital
consists of accounts receivable from customers. If customers responsible for a significant amount of accounts receivable were to
become insolvent or otherwise unable to pay for products and services, or to make payments in a timely manner, our business, results
of operations or financial condition could be materially adversely affected. An economic or industry downturn could materially
adversely affect the servicing of these accounts receivable, which could result in longer payment cycles, increased collection
costs and defaults in excess of management’s expectations. A significant deterioration in our ability to collect on accounts
receivable could also impact the cost or availability of financing available to us.
A change in our product mix may cause
our results of operations to differ substantially from the anticipated results in any particular period.
Our overall profitability may not meet
expectations if our products, customers or geographic mix are substantially different than anticipated. Our profit margins vary
among our battery and new materials products, our customers and the geographic markets in which we sell our products. Consequently,
if our mix of any of these is substantially different from what is anticipated in any particular period, our profitability could
be lower than anticipated.
Certain disruptions in supply of and
changes in the competitive environment for raw materials integral to our products may adversely affect our profitability.
We use a broad range of materials and supplies,
including metals, chemicals and other electronic components in our products. A significant disruption in the supply of these materials
could decrease production and shipping levels, materially increase our operating costs and materially adversely affect our profit
margins. Shortages of materials or interruptions in transportation systems, labor strikes, work stoppages, war, acts of terrorism
or other interruptions to or difficulties in the employment of labor or transportation in the markets in which we purchase materials,
components and supplies for the production of our products, in each case may adversely affect our ability to maintain production
of our products and sustain profitability. If we were to experience a significant or prolonged shortage of critical components
from any of our suppliers and could not procure the components from other sources, we would be unable to meet our production schedules
for some of our key products and to ship such products to our customers in timely fashion, which would adversely affect our sales,
margins and customer relations.
Our industry is subject to supply
shortages and any delay or inability to obtain product components may have a material adverse effect on our business.
Our industry is subject to supply shortages,
which could limit the amount of supply available of certain required battery components. Any delay or inability to obtain supplies
may have a material adverse effect on our business. During prior periods, there have been shortages of components in the battery
industry and the availability of raw materials has been limited by some of our suppliers. We cannot assure investors that any future
shortages or allocations would not have such an effect on our business. A future shortage can be caused by and result from many
situations and circumstances that are out of our control, and such shortage could limit the amount of supply available of certain
required materials and increase prices adversely affecting our profitability.
Our future operating results may be
affected by fluctuations in costs of raw materials, such as nickel.
Our principal raw material is nickel, which
is available from a limited number of suppliers in China. The prices our raw materials used to make our batteries increase and
decrease due to factors beyond our control, including general economic conditions, domestic and worldwide demand, labor costs or
problems, competition, import duties, tariffs, energy costs, currency exchange rates and those other factors described under “Certain
disruptions in supply of and changes in the competitive environment for raw materials integral to our products may adversely affect
our profitability.” In an environment of increasing prices for our raw materials, competitive conditions may impact how much
of the price increases we can pass on to our customers and to the extent we are unable to pass on future price increases in our
raw materials to our customers, our financial results could be adversely affected.
Our operations would be materially
adversely affected if third-party carriers were unable to transport our products on a timely basis.
All of our products are shipped through
third party carriers. If a strike or other event prevented or disrupted these carriers from transporting our products, other carriers
may be unavailable or may not have the capacity to deliver our products to our customers. If adequate third party sources to ship
our products are unavailable at any time, our business would be materially adversely affected.
We may not be able to increase our
manufacturing output in order to maintain our competitiveness in the battery industry.
We believe that our ability to provide
cost-effective products represents a significant competitive advantage over our competitors. In order to continue providing such
cost-effective products, we must maximize the efficiency of our production processes and increase our manufacturing output to a
level that will enable us to reduce the unit production cost of our products. Our ability to increase our manufacturing output
is subject to certain significant limitations, including:
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Our ability raise capital to acquire additional raw materials and expand our manufacturing facilities;
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Delays and cost overruns, due to increases in raw material prices and problems with equipment vendors;
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Delays or denial of required approvals and certifications by relevant government authorities;
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Diversion of significant management attention and other resources; and
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Failure to execute our expansion plan effectively
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If we are not able to increase our manufacturing
output and reduce our unit production costs, we may be unable to maintain our competitive position in the battery industry. Moreover,
even if expand our manufacturing output, we may not be able to generate sufficient customer demand for our products to support
our increased production output.
The market for our products and services
is very competitive and, if we cannot effectively compete, our business will be adversely affected.
The market for our products and services
is very competitive and subject to rapid technological change. Many of our competitors are larger and have significantly greater
assets, name recognition and financial, personnel and other resources than we have. As a result, our competitors may be in a stronger
position to respond quickly to potential acquisitions and other market opportunities, new or emerging technologies and changes
in customer requirements. We cannot assure that we will be able to maintain or increase our market share against the emergence
of these or other sources of competition. Failure to maintain and enhance our competitive position could materially adversely affect
our business and prospects.
Our business may be adversely affected
by a global economic downturn, in addition to the continuing uncertainties in the financial markets.
The global economy experienced a pronounced
economic downturn in previous years. Global financial markets have and may in the future experience disruptions, including severely
diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment
rates, and uncertainty about economic stability. There is no assurance that there will not be deterioration in the global economy
in the future, the global financial markets and consumer confidence. If economic conditions deteriorate, our business and results
of operations could be materially and adversely affected.
Additionally, sales of consumer items such
as portable electronic devices, have slowed in previous years and there have been adverse changes in employment levels, job growth,
consumer confidence and interest rates. During 2016, China, which represented 58.4% of our net sales for the year ended December
31, 2016, experienced a pronounced deceleration in its economic growth. Our future results of operations may experience substantial
fluctuations from period to period as a consequence of these factors, and such conditions and other factors affecting consumer
spending may affect the timing of orders. Thus, any economic downturns generally would have a material adverse effect on our business,
cash flows, financial condition and results of operations.
Moreover, the inability of our customers
and suppliers to access capital efficiently, or at all, may have other adverse effects on our financial condition. For example,
financial difficulties experienced by our customers or suppliers could result in product delays; increase accounts receivable defaults;
and increase our inventory exposure. The inability of our customers to borrow money to fund purchases of our products reduces the
demand for our products and services and may adversely affect our results from operations and cash flow. These risks may increase
if our customers and suppliers do not adequately manage their business or do not properly disclose their financial condition to
us.
Although we believe we have adequate liquidity
and capital resources to fund our operations internally, in light of current market conditions, our inability to access the capital
markets on favorable terms, or at all, may adversely affect our financial performance. The inability to obtain adequate financing
from debt or capital sources could force us to self-fund strategic initiatives or even forego certain opportunities, which in turn
could potentially harm our performance.
Maintaining and expanding our manufacturing
operations requires significant capital expenditures, and our inability or failure to maintain and expand our operations would
have a material adverse impact on our market share and ability to generate revenue.
We had capital expenditures of approximately
$8.5 million and $11.3 million in the years ended December 31, 2016 and 2015, respectively. We may incur significant additional
capital expenditures as a result of our expansion of our operations into our new production factory, as well as unanticipated events,
regulatory changes and other events that impact our business. If we are unable or fail to adequately maintain our manufacturing
capacity or quality control processes or adequately expand our production capabilities, we could lose customers and there could
be a material adverse impact on our market share and our ability to generate revenue.
Warranty claims, product liability
claims and product recalls could harm our business, results of operations and financial condition.
Our business inherently exposes us to potential
warranty and product liability claims, in the event that our products fail to perform as expected or such failure of our products
results, or is alleged to result, in bodily injury or property damage (or both). Such claims may arise despite our quality controls,
proper testing and instruction for use of our products, either due to a defect during manufacturing or due to the individual’s
improper use of the product. In addition, if any of our designed products are or are alleged to be defective, then we may be required
to participate in a recall of them.
Existing PRC laws and regulations do not
require us to maintain third party liability insurance to cover product liability claims. Although we have obtained products liability
insurance, if a warranty or product liability claim is brought against us, regardless of merit or eventual outcome, or a recall
of one of our products is required, such claim or recall may result in damage to our reputation, breach of contracts with our customers,
decreased demand for our products, costly litigation, additional product recalls, loss of revenue, and the inability to commercialize
some products. Additionally, our insurance policy imposes a ceiling for maximum coverage and high deductibles and we may be
unable to obtain sufficient amounts from our policy to cover a product liability claim. We may not be able to obtain any insurance
coverage for certain types of product liability claims, as our policy excludes coverage of certain types of claims. In such
cases, we may still incur substantial costs related to a product liability claim, which could adversely affect our results of operations.
Manufacturing or use of our battery
products may cause accidents, which could result in significant production interruption, delay or claims for substantial damages.
Our batteries, especially lithium batteries,
can pose certain safety risks, including the risk of fire. While we implement stringent safety procedures at all stages of battery
production that minimize such risks, accidents may still occur. Any accident, regardless of where it occurs, may result in significant
production interruption, delays or claims for substantial damages caused by personal injuries or property damages.
Our labor costs have increased and
are likely to continue to increase as a result of changes in Chinese labor laws.
We expect to experience an increase in
our cost of labor due to recent changes in Chinese labor laws which are likely to increase costs further and impose restrictions
on our relationship with our employees. In June 2007, the National People’s Congress of the PRC enacted new labor law legislation
called the Labor Contract Law and more strictly enforced existing labor laws. The law, which became effective on January 1, 2008,
amended and formalized workers’ rights concerning overtime hours, pensions, layoffs, employment contracts and the role of
trade unions. As a result of the law, we have had to increase the salaries of our employees, provide additional benefits to our
employees, and revise certain other of our labor practices. The increase in labor costs has increased our operating costs, which
we have not always been able to pass on to our customers. In addition, under the law, employees who either have worked for us for
10 years or more or who have had two consecutive fixed-term contracts must be given an “open-ended employment contract”
that, in effect, constitutes a lifetime, permanent contract, which is terminable only in the event the employee materially breaches
our rules and regulations or is in serious dereliction of his or her duties. Such non-cancelable employment contracts have substantially
increased our employment-related risks and limit our ability to downsize our workforce in the event of an economic downturn. No
assurance can be given that we will not in the future be subject to labor strikes or that we will not have to make other payments
to resolve future labor issues caused by the new laws. Furthermore, there can be no assurance that labor laws in the PRC will not
change further or that their interpretation and implementation will vary, which may have a negative effect upon our business and
results of operations.
We cannot guarantee the protection
of our intellectual property rights and if infringement of our intellectual property rights occurs, including counterfeiting of
our products, our reputation and business may be adversely affected.
To protect the reputation of our products,
we have sought to file or register intellectual property, as appropriate, in the PRC where we have our primary business presence.
As of December 31, 2016, we have registered two trademarks as used on our battery products, one in English and the other in its
Chinese equivalent. Our products are currently sold under these trademarks in the PRC, and we plan to expand our products to other
international markets. There is no assurance that there will not be any infringement of our brand name or other registered trademarks
or counterfeiting of our products in the future, in China or elsewhere. Should any such infringement and/or counterfeiting occur,
our reputation and business may be adversely affected. We may also incur significant expenses and substantial amounts of time and
effort to enforce our trademark rights in the future. Such diversion of our resources may adversely affect our existing business
and future expansion plans.
We believe that obtaining patents and enforcing
other proprietary protections for our technologies and products have been and will continue to be very important in enabling us
to compete effectively. However, there can be no assurance that our pending patent applications will issue, or that we will be
able to obtain any new patents, in China or elsewhere, or that our or our licensors’ patents and proprietary rights will
not be challenged or circumvented, or that these patents will provide us with any meaningful competitive advantages. Furthermore,
there can be no assurance that others will not independently develop similar products or will not design around any patents that
have been or may be issued to us or our licensors. Failure to obtain patents in certain foreign countries may materially adversely
affect our ability to compete effectively in those international markets. If a sufficiently broad patent were to be issued from
a competing application in China or elsewhere, it could have a material adverse effect upon our intellectual property position
in that particular market.
In addition, our rights to use the licensed
proprietary technologies of our licensors depends on the timely and complete payment for such rights pursuant to license agreements
between the parties; failure to adhere to the terms of these agreements could result in the loss of such rights and could materially
and adversely affect our business.
If our products are alleged to or
found to conflict with patents that have been or may be granted to competitors or others, our reputation and business may be adversely
affected.
Rapid technological developments in the
battery industry and the competitive nature of the battery products market make the patent position of battery manufacturers subject
to numerous uncertainties related to complex legal and factual issues. Consequently, although we either own or hold licenses to
certain patents in the PRC, and are currently processing several additional patent applications in the PRC, it is possible that
no patents will issue from any pending applications or that claims allowed in any existing or future patents issued or licensed
to us will be challenged, invalidated, or circumvented, or that any rights granted there under will not provide us adequate protection.
As a result, we may be required to participate in interference or infringement proceedings to determine the priority of certain
inventions or may be required to commence litigation to protect our rights, which could result in substantial costs. Further, other
parties could bring legal actions against us claiming damages and seeking to enjoin manufacturing and marketing of our products
for allegedly conflicting with patents held by them. Any such litigation could result in substantial cost to us and diversion of
effort by our management and technical personnel. If any such actions are successful, in addition to any potential liability for
damages, we could be required to obtain a license in order to continue to manufacture or market the affected products. There can
be no assurance that we would prevail in any such action or that any license required under any such patent would be made available
on acceptable terms, if at all. Failure to obtain needed patents, licenses or proprietary information held by others may have a
material adverse effect on our business. In addition, if we were to become involved in such litigation, it could consume a substantial
portion of our time and resources. Also, with respect to licensed technology, there can be no assurance that the licensor of the
technology will have the resources, financial or otherwise, or desire to defend against any challenges to the rights of such licensor
to its patents.
We rely on trade secret protections
through confidentiality agreements with our employees, customers and other parties; the breach of such agreements could adversely
affect our business and results of operations.
We rely on trade secrets, which we seek
to protect, in part, through confidentiality and non-disclosure agreements with our employees, customers and other parties. There
can be no assurance that these agreements will not be breached, that we would have adequate remedies for any such breach or that
our trade secrets will not otherwise become known to or independently developed by competitors. To the extent that consultants,
key employees or other third parties apply technological information independently developed by them or by others to our proposed
projects, disputes may arise as to the proprietary rights to such information that may not be resolved in our favor. We may be
involved from time to time in litigation to determine the enforceability, scope and validity of our proprietary rights. Any such
litigation could result in substantial cost and diversion of effort by our management and technical personnel.
The failure to manage growth effectively
could have an adverse effect on our employee efficiency, product quality, working capital levels, and results of operations.
Any significant growth in the market for
our products or our entry into new markets may require expansion of our employee base for managerial, operational, financial, and
other purposes. During any growth, we may face problems related to our operational and financial systems and controls, including
quality control and delivery and service capacities. We would also need to continue to expand, train and manage our employee base.
Continued future growth will impose significant added responsibilities upon the members of management to identify, recruit, maintain,
integrate, and motivate new employees.
Aside from increased difficulties in the
management of human resources, we may also encounter working capital issues, as we will need increased liquidity to finance the
purchase of raw materials and supplies, development of new products, and the hiring of additional employees. For effective growth
management, we will be required to continue improving our operations, management, and financial systems and control. Our failure
to manage growth effectively may lead to operational and financial inefficiencies that will have a negative effect on our profitability.
We cannot assure investors that we will be able to timely and effectively meet that demand and maintain the quality standards required
by our existing and potential customers.
We are dependent on certain key personnel
and loss of these key personnel could have a material adverse effect on our business, financial condition and results of operations.
Our success is, to a certain extent, attributable
to the management, sales and marketing, and operational and technical expertise of certain key personnel. Each of the named executive
officers performs key functions in the operation of our business. The loss of a significant number of these employees could have
a material adverse effect upon our business, financial condition, and results of operations.
We are dependent on a technically
trained workforce and an inability to retain or effectively recruit such employees could have a material adverse effect on our
business, financial condition and results of operations.
We must attract, recruit and retain a sizeable
workforce of technically competent employees to develop and manufacture our products and provide service support. Our ability to
implement effectively our business strategy will depend upon, among other factors, the successful recruitment and retention of
additional highly skilled and experienced engineering and other technical and marketing personnel. There is significant competition
for technologically qualified personnel in our business and we may not be successful in recruiting or retaining sufficient qualified
personnel consistent with our operational needs.
Adverse capital and credit market
conditions may significantly affect our ability to meet liquidity needs, access to capital and cost of capital.
The capital and credit markets have previously
experienced extreme volatility and disruption, including, among other things, extreme volatility in securities prices, severely
diminished liquidity and credit availability, ratings downgrades of certain investments and declining valuations of others. Governments
have taken unprecedented actions intended to address extreme market conditions that have included severely restricted credit and
declines in real estate values. In some cases, the markets have exerted downward pressure on availability of liquidity and credit
capacity for certain issuers. While historically these conditions have not impaired our ability to utilize our current credit facilities
and finance our operations, there can be no assurance that there will not be deterioration in financial markets and confidence
in major economies such that our ability to access credit markets and finance our operations, might be impaired. Without sufficient
liquidity, we may be forced to curtail our operations. Adverse market conditions may limit our ability to replace, in a timely
manner, maturing liabilities and access the capital necessary to operate and grow our business. As such, we may be forced to delay
raising capital or bear an unattractive cost of capital which could decrease our profitability and significantly reduce our financial
flexibility. The tightening of credit in financial markets could adversely affect the ability of our customers to obtain financing
for purchases of our products and could result in a decrease in or cancellation of orders for our products. Our results of operations,
financial condition, cash flows and capital position could be materially adversely affected by disruptions in the financial markets.
We have been relying on bank facilities
to finance our expansion of new plants, which increased our debt asset ratio. We may not have sufficient cash to meet our payment
obligations.
The Company leverages from various Chinese
banks to fund its business operations and our expansion to meet the demand from the fast growing lithium battery market in mobile
and portable consumer devices, vehicles of various sizes, and energy storage systems. As of December 31, 2016, the Company’s
debt asset ratio was 72.3%. The management of the Company has taken and will take a number of actions and will continue to address
our high debt level situation in order to restore the Company to a sound financial position with an appropriate business strategy
going forward. These actions can include market more higher-margined lithium battery products and systems; control cost in operating
expenses, and improve management efficiency; and introduce strategic investment. If we are not successful in implementing these
actions, we may not have sufficient cash to meet our payment obligations.
Our quarterly results may fluctuate
because of many factors and, as a result, investors should not rely on quarterly operating results as indicative of future results.
Fluctuations in operating results or the
failure of operating results to meet the expectations of public market analysts and investors may negatively impact the value of
our securities. Quarterly operating results may fluctuate in the future due to a variety of factors that could affect revenues
or expenses in any particular quarter. Fluctuations in quarterly operating results could cause the value of our securities to decline.
Investors should not rely on quarter-to-quarter comparisons of results of operations as an indication of future performance. As
a result of the factors listed below, it is possible that in the future periods results of operations may be below the expectations
of public market analysts and investors. This could cause the market price of our securities to decline. Factors that may affect
our quarterly results include:
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Vulnerability of our business to a general economic downturn in China;
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Fluctuation and unpredictability of costs related to the raw materials used to manufacture our products;
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Seasonality of our business;
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Changes in the laws of the PRC that affect our operations;
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Competition from our competitors; and
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Our ability to obtain necessary government certifications and/or licenses to conduct our business.
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Our stock price may be negatively
affected if we become subject to the recent scrutiny, criticism and negative publicity involving U.S. listed Chinese companies.
U.S. public companies that have substantially
all of their operations in China, particularly companies like us which have completed share exchanges or reverse merger transactions,
have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory
agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting
irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance policies
or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity,
the publicly traded stock of many U.S.-listed Chinese companies has sharply decreased in value and, in some cases, has become virtually
worthless. Many of these companies subject to shareholder lawsuits and SEC enforcement actions, conducted internal and external
investigations into the allegations. If we become the subject of any unfavorable allegations, whether such allegations are proven
to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend our company. This
situation will be costly and time consuming and distract our management from growing our company. If such allegations are not proven
to be groundless, our company and business operations will be severely negatively affected and your investment in our stock could
be rendered worthless.
We have outstanding warrants and options,
and future sales of the shares obtained upon exercise of these options or warrants could adversely affect the market price of our
common stock.
As of December 31, 2016, we had outstanding
options exercisable for an aggregate of 381,392 shares of common stock at a weighted average exercise price of $2.76 per share
and warrants exercisable for an aggregate of 740,001 shares of common stock at a weighted average exercise price of $5.43 per share.
We have registered the issuance of all the shares issuable upon exercise of the options and 540,001 of the shares underlying warrant,
and they will be freely tradable by the exercising party upon issuance. The holders may sell these shares in the public markets
from time to time, without limitations on the timing, amount or method of sale. As our stock price rises, the holders may exercise
their warrants and options and sell a large number of shares. This could cause the market price of our
common stock to decline.
RISKS RELATED TO DOING BUSINESS IN
CHINA
The PRC government exerts substantial
influence over the manner in which we must conduct our business activities.
The PRC government has exercised and continues
to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our
ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import
and export tariffs, environmental regulations, land use rights, property, and other matters. We believe that our operations in
China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments
of the jurisdictions in which we operate may impose new, stricter regulations or interpretations of existing regulations that would
require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.
Substantially all of our assets are
located in the PRC and substantially all of our revenues are derived from our operations in China, and changes in the political
and economic policies of the PRC government could have a significant impact upon the business we may be able to conduct in the
PRC and accordingly on the results of our operations and financial condition.
Our business operations may be adversely
affected by the current and future political environment in the PRC. The Chinese government exerts substantial influence and control
over the manner in which we must conduct our business activities. Our ability to operate in China may be adversely affected by
changes in Chinese laws and regulations, including those relating to taxation, import and export tariffs, raw materials, environmental
regulations, land use rights, property and other matters. Under the current government leadership, the government of the PRC has
been pursuing economic reform policies that encourage private economic activities and greater economic decentralization. There
is no assurance, however, that the government of the PRC will continue to pursue these policies, or that it will not significantly
alter these policies from time to time without advance notice.
Our operations are subject to PRC
laws and regulations that are sometimes vague and uncertain. Any changes in such PRC laws and regulations, or the interpretations
thereof, may have a material and adverse effect on our business.
The PRC’s legal system is a civil
law system based on written statutes. Unlike the common law system prevalent in the United States, decided legal cases have little
value as precedent in China. There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations,
including but not limited to, governmental approvals required for conducting business and investments, laws and regulations governing
the battery industry, national security-related laws and regulations and export/import laws and regulations, as well as commercial,
antitrust, patent, product liability, environmental laws and regulations, consumer protection, and financial and business taxation
laws and regulations.
The Chinese government has been developing
a comprehensive system of commercial laws, and considerable progress has been made in introducing laws and regulations dealing
with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade. However,
because these laws and regulations are relatively new, and because of the limited volume of published cases and judicial interpretation
and their lack of force as precedents, interpretation and enforcement of these laws and regulations involve significant uncertainties.
New laws and regulations that affect existing and proposed future businesses may also be applied retroactively.
Our principal operating subsidiaries, SZ
Highpower, SZ Springpower and ICON are considered foreign invested enterprises under PRC laws, and as a result are required to
comply with PRC laws and regulations, including laws and regulations specifically governing the activities and conduct of foreign
invested enterprises. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our
businesses. If the relevant authorities find us in violation of PRC laws or regulations, they would have broad discretion in dealing
with such a violation, including, without limitation:
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Revoking our business license, other licenses or authorities;
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Requiring that we restructure our ownership or operations; and
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Requiring that we discontinue any portion or all of our business.
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The disclosures in our reports and
other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in the
PRC. Accordingly, our public disclosure should be reviewed in light of the fact that no governmental agency that is located in
China where substantially all of our operations and business are located have conducted any due diligence on our operations or
reviewed or cleared any of our disclosures.
We are regulated by the SEC and our reports
and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Unlike
public reporting companies whose operations are located primarily in the United States, however, substantially all of our operations
are located in China. Since substantially all of our operations and business take place in China, it may be more difficult for
the Staff of the SEC to overcome the geographic and cultural obstacles that are present when reviewing our disclosures. These same
obstacles are not present for similar companies whose operations or business take place entirely or primarily in the United States.
Furthermore, our SEC reports and other disclosures and public pronouncements are not subject to the review or scrutiny of any PRC
regulatory authority. For example, the disclosure in our SEC reports and other filings are not subject to the review of China Securities
Regulatory Commission, a PRC regulator that is tasked with oversight of the capital markets in China. Accordingly, you should review
our SEC reports, filings and our other public pronouncements with the understanding that no local regulator has done any due diligence
on our company and with the understanding that none of our SEC reports, other filings or any of our other public pronouncements
has been reviewed or otherwise been scrutinized by any local regulator.
Our auditors, like other independent
registered public accounting firms operating in China and to the extent their audit clients have operations in China, is not permitted
to be subject to full inspection by the Public Company Accounting Oversight Board and, as such, you may be deprived of the benefits
of such inspection.
Our independent registered public accounting
firm that issued the audit reports included in our annual reports filed with the SEC, as auditors of companies that are traded
publicly in the United States and registered with the US Public Company Accounting Oversight Board (United States), or PCAOB, are
required by the laws of the United States to undergo regular inspections by the PCAOB to assess their compliance with the laws
of the United States and professional standards.
However, our operations are solely located
in the PRC, a jurisdiction where PCAOB is currently unable to conduct inspections without the approval of the PRC authorities.
Our independent registered public accounting firm, like others operating in China (and Hong Kong, to the extent their audit clients
have operations in China), is currently not subject to inspection conducted by the PCAOB. Inspections of other firms that the PCAOB
has conducted outside China have identified deficiencies in those firms’ audit procedures and quality control procedures,
which may be addressed as part of the inspection process to improve future audit quality. The inability of the PCAOB to conduct
full inspections of auditors operating in China makes it more difficult to evaluate our auditors’ audit procedures or quality
control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.
The scope of our business license
in China is limited, and we may not expand or continue our business without government approval and renewal, respectively.
Our principal operating subsidiaries, SZ
Highpower and ICON, are wholly foreign-owned enterprises, commonly known as WFOEs. A WFOE can only conduct business within its
approved business scope, which appears on the business license since its inception. Our license permits us to design, manufacture,
sell and market battery products throughout the PRC. Any amendment to the scope of our business requires further application and
government approval. Prior to expanding our business and engaging in activities that are not covered by our current business licenses,
we are required to apply and receive approval from the relevant PRC government authorities. In order for us to expand business
beyond the scope of our license, we will be required to enter into a negotiation with the authorities for the approval to expand
the scope of our business. PRC authorities, which have discretion over business licenses, may reject our request to expand the
scope of our business licenses to include our planned areas of expansion. We will be prohibited from engaging in any activities
that the PRC authorities do not approve in our expanded business licenses. Companies that operate outside the scope of their
licenses can be subjected to fines, disgorgement of income and ordered to cease operations. Our business and results of operations
may be materially and adversely affected if we are unable to obtain the necessary government approval for expanded business licenses
that cover any areas in which we wish to expand.
We are subject to a variety of environmental
laws and regulations related to our manufacturing operations. Our failure to comply with environmental laws and regulations may
have a material adverse effect on our business and results of operations.
We are subject to various environmental
laws and regulations in China that require us to obtain environmental permits for our battery manufacturing operations. Although
we do not currently exceed the approved annual output limits under the new permit, we cannot guarantee that this will continue
to be the case. Additionally, our current permit does not cover one of our existing premises at our manufacturing facility. If
we fail to comply with the provisions of our permit, we could be subject to fines, criminal charges or other sanctions by regulators,
including the suspension or termination of our manufacturing operations.
To the extent we ship our products outside
of the PRC, or to the extent our products are used in products sold outside of the PRC, they may be affected by the following:
The transportation of non-rechargeable and rechargeable lithium batteries is regulated by the International Civil Aviation Organization
(ICAO), and corresponding International Air Transport Association (IATA), Pipeline & Hazardous Materials Safety Administration
(PHMSA), Dangerous Goods Regulations and the International Maritime Dangerous Goods Code (IMDG), and in the PRC by General Administration
of Civil Aviation of China and Maritime Safety Administration of People’s Republic of China. These regulations are based
on the United Nations (UN) Recommendations on the Transport of Dangerous Goods Model Regulations and the UN Manual of Tests and
Criteria. We currently ship our products pursuant to ICAO, IATA and PHMSA hazardous goods regulations. New regulations that pertain
to all lithium battery manufacturers went into effect in 2003 and 2004, and additional regulations went into effect on October
1, 2009. The regulations require companies to meet certain testing, packaging, labeling and shipping specifications for safety
reasons. We comply with all current PRC and international regulations for the shipment of our products, and will comply with any
new regulations that are imposed. We have established our own testing facilities to ensure that we comply with these regulations.
If we were unable to comply with the new regulations, however, or if regulations are introduced that limit our ability to transport
products to customers in a cost-effective manner, this could have a material adverse effect on our business, financial condition
and results of operations.
We cannot assure that at all times we will
be in compliance with environmental laws and regulations or our environmental permits or that we will not be required to expend
significant funds to comply with, or discharge liabilities arising under, environmental laws, regulations and permits. Additionally,
these regulations may change in a manner that could have a material adverse effect on our business, results of operations and financial
condition. We have made and will continue to make capital and other expenditures to comply with environmental requirements.
Furthermore, our failure to comply with
applicable environmental laws and regulations worldwide could harm our business and results of operations. The manufacturing, assembling
and testing of our products require the use of hazardous materials that are subject to a broad array of environmental, health and
safety laws and regulations. Our failure to comply with any of these applicable laws or regulations could result in:
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Regulatory penalties, fines and legal liabilities;
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Suspension of production;
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Alteration of our fabrication, assembly and test processes; and
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Curtailment of our operations or sales.
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In addition, our failure to manage the
use, transportation, emission, discharge, storage, recycling or disposal of hazardous materials could subject us to increased costs
or future liabilities. Existing and future environmental laws and regulations could also require us to acquire pollution abatement
or remediation equipment, modify our product designs or incur other expenses associated with such laws and regulations. Many new
materials that we are evaluating for use in our operations may be subject to regulation under existing or future environmental
laws and regulations that may restrict our use of one or more of such materials in our manufacturing, assembly and test processes
or products. Any of these restrictions could harm our business and results of operations by increasing our expenses or requiring
us to alter our manufacturing processes.
If our land use rights or the land
use rights of our landlord are revoked or not renewed, we would be forced to relocate operations.
Under Chinese law land is owned by the
state or rural collective economic organizations. The state issues to the land users the land use right certificates. Land use
rights can be revoked or not renewed and the land users forced to vacate at any time when redevelopment of the land is in the public
interest. The public interest rationale is interpreted quite broadly and the process of land appropriation may be less than transparent.
We acquired approximately 126,605 square meters of land equity in Huizhou from the Huizhou State-Owned Land Resource in 2007 upon
which we constructed a manufacturing facility. We also acquired 58,669 square meters of land equity in Ganzhou, Guangdong, China
in February 2012 from the Ganzhou Land and Resource Bureau upon which we have a facility to house our new materials business. Besides
the land use rights in Huizhou and Ganzhou, we rely on the land use rights of our landlords for other facilities, and the loss
of our own land use rights or our landlords’ land use rights would require us to identify and relocate our operations, which
could have a material adverse effect on our financial condition and results of operations. Any loss of this land use right would
require us to identify and relocate our manufacturing and other facilities, which could have a material adverse effect on our financial
condition and results of operations.
We will not be able to complete an
acquisition of prospective acquisition targets in the PRC unless their financial statements can be reconciled to U.S. generally
accepted accounting principles in a timely manner.
Companies based in the PRC may not have
properly kept financial books and records that may be reconciled with U.S. generally accepted accounting principles (“U.S.
GAAP”). If we attempt to acquire a significant PRC target company and/or its assets, we would be required to obtain or prepare
financial statements of the target that are prepared in accordance with and reconciled to U.S. GAAP. Federal securities laws require
that a business combination meeting certain financial significance tests require the public acquirer to prepare and file historical
and/or pro forma financial statement disclosure with the SEC. These financial statements must be prepared in accordance with, or
be reconciled to U.S. GAAP and the historical financial statements must be audited in accordance with the standards of the PCAOB.
If a proposed acquisition target does not have financial statements that have been prepared in accordance with, or that can be
reconciled to, U.S. GAAP and audited in accordance with the standards of the PCAOB, we will not be able to acquire that proposed
acquisition target. These financial statement requirements may limit the pool of potential acquisition targets with which we may
acquire and hinder our ability to expand our retail operations. Furthermore, if we consummate an acquisition and are unable to
timely file audited financial statements and/or pro forma financial information required by the Exchange Act, such as Item 9.01
of Form 8-K, we will be ineligible to use the SEC’s short-form registration statement on Form S-3 to raise capital, if we
are otherwise eligible to use a Form S-3. If we are ineligible to use a Form S-3, the process of raising capital may be more expensive
and time consuming and the terms of any offering transaction may not be as favorable as they would have been if we were eligible
to use Form S-3.
We face risks related to natural disasters,
terrorist attacks or other events in China that may affect usage of public transportation, which could have a material adverse
effect on our business and results of operations.
Our business could be materially and adversely
affected by natural disasters, terrorist attacks or other events in China. For example, in early 2008, parts of China suffered
a wave of strong snow storms that severely impacted public transportation systems. In May 2008, Sichuan Province in China suffered
a strong earthquake measuring approximately 8.0 on the Richter scale that caused widespread damage and casualties. Any future
natural disasters, terrorist attacks or other events in China could cause a reduction in usage of or other severe disruptions to,
public transportation systems and could have a material adverse effect on our business and results of operations.
The foreign currency exchange rate
between United States Dollar (“US$”) Dollars and Renminbi (“RMB”) could adversely affect our financial
condition.
To the extent that we need to convert US$
into RMB for our operational needs, our financial position and the price of our common stock may be adversely affected should the
RMB appreciate against the US$ at that time. Conversely, if we decide to convert RMB into US$ for the operational needs or paying
dividends on our common stock, the US$ equivalent of our earnings from our subsidiaries in China would be reduced should the US$
appreciate against the RMB.
Because most of our oversea sales
are made in US$ and most of our expenses are paid in RMB, devaluation of the US$ could negatively impact our results of operations.
The value of RMB is subject to changes
in China’s governmental policies and to international economic and political developments. In January 1994, the PRC government
implemented a unitary managed floating rate system. Under this system, the People’s Bank of China, or PBOC, began publishing
a daily Base Exchange Rate with reference primarily to the supply and demand of RMB against the US$ and other foreign currencies
in the market during the previous day. Authorized banks and financial institutions are allowed to quote buy and sell rates for
RMB within a specified band around the central bank’s daily exchange rate. On July 21, 2005, PBOC announced an adjustment
of the exchange rate of the US$ to RMB and modified the system by which the exchange rates are determined, which has resulted in
an appreciation of the RMB against the US$. During the year ended December 31, 2016, the exchange rate of the RMB to the US$ increased
approximately 6.9% from the level at the end of December 31, 2015. While the international reaction to the RMB revaluation has
generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible
currency policy, which could result in further fluctuations of the exchange rate of the US$ against the RMB, including future devaluations.
Because most of our net sales are made in US$ and most of our expenses are paid in RMB, any future devaluation of the US$ against
the RMB could negatively impact our results of operations. Moreover, any affirmative actions by the U.S. Government against the
PRC in relation to the exchange rate could negatively impact our results of operations.
Inflation in the PRC could negatively
affect our profitability and growth.
While the PRC economy has experienced rapid
growth, such growth has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid
economic growth can lead to growth in the money supply and rising inflation. According to the National Bureau of Statistics of
China, China’s Average Consumer Price Index was approximately 2.0% in 2016. If prices for our products and services rise
at a rate that is insufficient to compensate for the rise in the costs of supplies such as raw materials, it may have an adverse
effect on our profitability.
Because our funds are held in banks
which do not provide insurance, the failure of any bank in which we deposit our funds could affect our ability to continue in business.
Banks and other financial institutions
in the PRC do not provide insurance for funds held on deposit. A significant portion of our assets are in the form of cash deposited
with banks in the PRC, and in the event of a bank failure, we may not have access to our funds on deposit. Depending upon the amount
of money we maintain in a bank that fails, our inability to have access to our cash could impair our operations, and, if we are
not able to access funds to pay suppliers, employees and other creditors, we may be unable to continue in business.
Failure to comply with the United
States Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.
As our ultimate holding company is a Delaware
corporation, we are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies
from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business.
Foreign companies, including some that may compete with us, are not subject to these prohibitions. Corruption, extortion, bribery,
pay-offs, theft and other fraudulent practices may occur from time-to-time in the PRC. We can make no assurance, however, that
our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other
agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material
adverse effect on our business, financial condition and results of operations.
We have received certain preferential
tax concessions and the loss of these preferential tax concessions may cause our tax liabilities to increase and our profitability
to decline.
In China, the companies granted with National
High-tech Enterprise status (“NHTE”) enjoy 15% income tax rate. This status needs to be renewed every three years.
As of December 31, 2016, all the subsidiaries located in China were received NHTE status. The expiration of the preferential tax
treatment will increase our tax liabilities and reduce our profitability.
Under the EIT Law, Highpower International
and HKHTC may be classified as “resident enterprises” of China for tax purpose, which may subject Highpower International
and HKHTC to PRC income tax on taxable global income.
Under the EIT law and its implementing
rules, both of which became effective on January 1, 2008, enterprises are classified as resident enterprises and non-resident enterprises.
An enterprise established outside of China with its “de facto management bodies” located within China is considered
a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese domestic enterprise for enterprise
income tax purposes. The implementing rules of the EIT Law define de facto management body as a managing body that in practice
exercises “substantial and overall management and control over the production and operations, personnel, accounting, and
properties” of the enterprise. Due to the short history of the EIT Law and lack of applicable legal precedents, it remains
unclear how the PRC tax authorities will determine the PRC tax resident treatment of a foreign company such as Highpower International
and HKHTC. Both Highpower International and HKHTC’s members of management are located in China. If the PRC tax authorities
determine that Highpower International or HKHTC is a “resident enterprise” for PRC enterprise income tax purposes,
a number of PRC tax consequences could follow. First, they may be subject to the enterprise income tax at a rate of 25% on their
worldwide taxable income, including interest income on the proceeds from this offering, as well as PRC enterprise income tax reporting
obligations. Second, the EIT Law provides that dividend paid between “qualified resident enterprises” is exempted from
enterprise income tax. A recent circular issued by the State Administration of Taxation regarding the standards used to classify
certain Chinese-invested enterprises controlled by Chinese enterprises or Chinese group enterprises and established outside of
China as “resident enterprises” clarified that dividends and other income paid by such “resident enterprises”
will be considered to be PRC source income, subject to PRC withholding tax, currently at a rate of 10%, when recognized by non-PRC
shareholders. It is unclear whether the dividends that Highpower International or HKHTC receive from SZ Highpower and SZ Springpower
will constitute dividends between “qualified resident enterprises” and would therefore qualify for tax exemption, because
the definition of qualified resident enterprises is unclear and the relevant PRC government authorities have not yet issued guidance
with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise
income tax purposes. We are actively monitoring the possibility of “resident enterprise” treatment for the applicable
tax years and are evaluating appropriate organizational changes to avoid this treatment, to the extent possible. As a result of
the EIT Law, our historical operating results will not be indicative of our operating results for future periods and the value
of our common stock may be adversely affected.
Dividends payable by us to our foreign
investors and any gain on the sale of our shares may be subject to taxes under PRC tax laws.
If dividends payable to our shareholders
are treated as income derived from sources within China, then the dividends that shareholders receive from us, and any gain on
the sale or transfer of our shares, may be subject to taxes under PRC tax laws.
Under the EIT Law and its implementing
rules, PRC enterprise income tax at the rate of 10% is applicable to dividends payable by us to our investors that are non-resident
enterprises so long as such non-resident enterprise investors do not have an establishment or place of business in China or, despite
the existence of such establishment of place of business in China, the relevant income is not effectively connected with such establishment
or place of business in China, to the extent that such dividends have their sources within the PRC. Similarly, any gain realized
on the transfer of our shares by such investors is also subject to a 10% PRC income tax if such gain is regarded as income derived
from sources within China and Highpower International is considered as a resident enterprise which is domiciled in China for tax
purpose. Additionally, there is a possibility that the relevant PRC tax authorities may take the view that the Highpower International
and HKHTC are holding SZ Highpower, SZ Springpower and ICON, and the capital gain derived by our overseas shareholders or investors
from the share transfer is deemed China-sourced income, in which case such capital gain may be subject to a PRC withholding tax
at the rate of up to 10%. If we are required under the EIT Law to withhold PRC income tax on our dividends payable to our foreign
shareholders or investors who are non-resident enterprises, or if investors are required to pay PRC income tax on the transfer
or our shares under the circumstances mentioned above, the value of investors’ investment in our shares may be materially
and adversely affected.
A downturn in the economy of the PRC
may slow our growth and profitability.
The growth of the Chinese economy has been
uneven across geographic regions and economic sectors. There can be no assurance that growth of the Chinese economy will be steady
or that any downturn will not have a negative effect on our business, especially if it results in either a decreased use of our
products or in pressure on us to lower our prices.
Because our business is located in
the PRC, we may have difficulty establishing adequate management, legal and financial controls, which are required in order to
comply with U.S. securities laws.
PRC companies have historically not adopted
a western style of management and financial reporting concepts and practices, which includes strong corporate governance, internal
controls and, computer, financial and other control systems. Most of our middle and top management staff are not educated and trained
in the Western system, and we may have difficulty in hiring new employees in the PRC with such training. In addition, we may have
difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC. As a result of these factors,
we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing
financial statements, books of account and corporate records and instituting business practices that meet Western standards. Therefore,
we may, in turn, experience difficulties in implementing and maintaining adequate internal controls as required under Section 404
of the Sarbanes-Oxley Act of 2002. This may result in significant deficiencies or material weaknesses in our internal controls
which could impact the reliability of our financial statements and prevent us from complying with SEC rules and regulations and
the requirements of the Sarbanes-Oxley Act of 2002. Any such deficiencies, weaknesses or lack of compliance could have a materially
adverse effect on our business.
Investors may experience difficulties
in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based upon U.S. laws,
including the federal securities laws or other foreign laws against us or our management.
Most of our current operations, including
the manufacture and distribution of our products, are conducted in China. Moreover, most of our directors and officers are nationals
and residents of China Mainland or Hong Kong. All or substantially all of the assets of these persons are located outside the United
States and in the PRC. As a result, it may not be possible to effect service of process within the United States or elsewhere outside
China upon these persons. In addition, uncertainties exist as to whether the courts of China would recognize or enforce judgments
of U.S. courts obtained against us or such officers and/or directors predicated upon the civil liability provisions of the securities
laws of the United States or any state thereof, or be competent to hear original actions brought in China against us or such persons
predicated upon the securities laws of the United States or any state thereof.
Contract drafting, interpretation
and enforcement in China involve significant uncertainties.
We have entered into numerous contracts
governed by PRC law, many of which are material to our business. As compared with contracts in the United States, contracts governed
by PRC law tend to contain less detail and are not as comprehensive in defining contracting parties’ rights and obligations.
As a result, contracts in China are more vulnerable to disputes and legal challenges. In addition, contract interpretation and
enforcement in China is not as developed as in the United States, and the result of any contract dispute is subject to significant
uncertainties. Therefore, we cannot assure that we will not be subject to disputes under our material contracts, and if such disputes
arise, we cannot assure that we will prevail.
We could be liable for damages for
defects in our products pursuant to the Tort Liability Law of the PRC
The Tort Liability Law of the People’s
Republic of China, which was passed during the 12th Session of the Standing Committee of the 11th National People’s Congress
on December 26, 2009, states that manufacturers are liable for damages caused by defects in their products and sellers are liable
for damages attributable to their fault. If the defects are caused by the fault of third parties such as the transporter or storekeeper,
manufacturers and sellers are entitled to claim for compensation from these third parties after paying the compensation amount.
RISKS RELATED TO OUR CAPITAL STRUCTURE
The price of our common stock is volatile
and investors might not be able to resell their securities at or above the price they have paid.
Since our initial public offering and listing
of our common stock in October 2007, the price at which our common stock had traded has been highly volatile, with the lowest and
highest sales price of $0.92 and $9.82, respectively. Investors might not be able to resell the shares of our common stock at or
above the price they have paid. The stock market has experienced extreme volatility that often has been unrelated to the performance
of its listed companies. Moreover, only a limited number of our shares are traded each day, which could increase the volatility
of the price of our stock. These market fluctuations might cause our stock price to fall regardless of our performance. The market
price of our common stock might fluctuate significantly in response to many factors, some of which are beyond our control, including
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Actual or anticipated fluctuations in our annual and quarterly results of operations;
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Changes in securities analysts’ expectations;
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Variations in our operating results, which could cause us to fail to meet analysts’ or investors’ expectations;
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Announcements by our competitors or us of significant new products, contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments;
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Conditions and trends in our industry;
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General market, economic, industry and political conditions;
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Changes in market values of comparable companies;
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Additions or departures of key personnel;
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Stock market price and volume fluctuations attributable to inconsistent trading volume levels; and
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Future sales of equity or debt securities, including sales which dilute existing investors.
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A few principal stockholders have
significant influence over us.
Three of our stockholders beneficially
own or control approximately 40.4% of our outstanding shares. If these stockholders were to act as a group, they would have a controlling
influence in determining the outcome of any corporate transaction or other matters submitted to our stockholders for approval,
including mergers, consolidations and the sale of all or substantially all of our assets, election of directors, and other significant
corporate actions. Such stockholders may also have the power to prevent or cause a change in control. In addition, without the
consent of these three stockholders, we could be prevented from entering into transactions that could be beneficial to us. The
interests of these three stockholders may differ from the interests of our other stockholders.
Compliance with changing regulation
of corporate governance and public disclosure will result in additional expenses.
Changing laws, regulations and standards
relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC regulations, have
created uncertainty for public companies and significantly increased the costs and risks associated with accessing the public markets
and public reporting. Our management team has to invest significant management time and financial resources to comply with
both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and
a diversion of management time and attention from revenue generating activities to compliance activities.
If we fail to maintain effective internal
controls over financial reporting, the price of our common stock may be adversely affected.
We are required to establish and maintain
appropriate internal controls over financial reporting. Failure to establish those controls, or any failure of those controls once
established, could adversely impact our public disclosures regarding our business, financial condition or results of operations.
Any failure of these controls could also prevent us from maintaining accurate accounting records and discovering accounting errors
and financial frauds. Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require annual assessment
of our internal control over financial reporting. The standards that must be met for management to assess the internal control
over financial reporting as effective are complex, and require significant documentation, testing and possible remediation to meet
the detailed standards. We may encounter problems or delays in completing activities necessary to make an assessment of our internal
control over financial reporting. In addition, the attestation process by our independent registered public accountants is new
and we may encounter problems or delays in completing the implementation of any requested improvements and receiving an attestation
of our assessment by our independent registered public accountants. If we cannot assess our internal control over financial reporting
as effective, or our independent registered public accountants are unable to provide an unqualified attestation report on such
assessment, investor confidence and share value may be negatively impacted.
In addition, management’s assessment
of internal controls over financial reporting may identify weaknesses and conditions that need to be addressed in our internal
controls over financial reporting or other matters that may raise concerns for investors. Any actual or perceived weaknesses and
conditions that need to be addressed in our internal control over financial reporting, disclosure of management’s assessment
of our internal controls over financial reporting, or disclosure of our public accounting firm’s attestation to or report
on management’s assessment of our internal controls over financial reporting may have an adverse impact on the price of our
common stock.
We have adopted The 2010 Equity Incentive
Plan under which we may grant securities to compensate employees and other services providers, which could result in increased
share-based compensation expenses and, therefore, reduce net income.
Under current accounting rules, we would
be required to recognize share-based compensation as compensation expense in our statement of operations, based on the fair value
of equity awards on the date of the grant, and recognize the compensation expense over the period in which the recipient is required
to provide service in exchange for the equity award. We made grants of equity awards in 2015 and 2016, and accordingly our results
of operations for the years ended December 31, 2015 and 2016 contain share-based compensation charges. If we grant equity compensation
to attract and retain key personnel, the expenses associated with share-based compensation may adversely affect our net income.
However, if we do not grant equity compensation, we may not be able to attract and retain key personnel or be forced to expend
cash or other compensation instead. Furthermore, the issuance of equity awards would dilute the stockholders’ ownership interests
in our company.
Our certificate of incorporation and
bylaws and Delaware law may have anti-takeover effects that could discourage, delay or prevent a change in control, which may cause
our stock price to decline.
Our certificate of incorporation and bylaws
and Delaware law could make it more difficult for a third party to acquire us, even if closing such a transaction would be beneficial
to our stockholders. We are authorized to issue up to 10,000,000 shares of preferred stock. This preferred stock may be issued
in one or more series, the terms of which may be determined at the time of issuance by our board of directors without further action
by stockholders. The terms of any series of preferred stock may include voting rights (including the right to vote as a series
on particular matters), preferences as to dividend, liquidation, conversion and redemption rights and sinking fund provisions.
No preferred stock is currently outstanding. The issuance of any preferred stock could materially adversely affect the rights of
the holders of our common stock, and therefore, reduce the value of our common stock. In particular, specific rights granted to
future holders of preferred stock could be used to restrict our ability to merge with, or sell our assets to, a third party and
thereby preserve control by the present management.
Provisions of our certificate of incorporation
and bylaws and Delaware law also could have the effect of discouraging potential acquisition proposals or making a tender offer
or delaying or preventing a change in control, including changes a stockholder might consider favorable. Such provisions may also
prevent or frustrate attempts by our stockholders to replace or remove our management. In particular, the certificate of incorporation
and bylaws and Delaware law, as applicable, among other things:
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provide the board of directors with the ability to alter the bylaws without stockholder approval;
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place limitations on the removal of directors; and
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provide that vacancies on the board of directors may be filled by a majority of directors in office, although less than a quorum.
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We are also subject to Section 203 of the
Delaware General Corporation Law which, subject to certain exceptions, prohibits “business combinations” between a
publicly-held Delaware corporation and an “interested stockholder,” which is generally defined as a stockholder who
becomes a beneficial owner of 15% or more of a Delaware corporation’s voting stock for a three-year period following the
date that such stockholder became an interested stockholder.
We do not foresee paying cash dividends
in the foreseeable future and, as a result, our investors’ sole source of gain, if any, will depend on capital appreciation,
if any.
We do not plan to declare or pay any cash
dividends on our shares of common stock in the foreseeable future and currently intend to retain any future earnings for funding
growth. As a result, Investors should not rely on an investment in our securities if they require the investment to produce dividend
income. Capital appreciation, if any, of our shares may be investors’ sole source of gain for the foreseeable future. Moreover,
investors may not be able to resell their shares in our company at or above the price they paid for them.
DESCRIPTION OF DEBT SECURITIES
The following description,
together with the additional information we include in any applicable prospectus supplement, summarizes the material terms and
provisions of the debt securities that may be offered from time to time under this prospectus. While the terms we have summarized
below will generally apply to any future debt securities that may be offered under this prospectus, we will describe the particular
terms of any debt securities that may be offered in more detail in the applicable prospectus supplement. The terms of any debt
securities offered under a prospectus supplement may differ from the terms we describe below.
We may issue secured
or unsecured debt securities offered under this prospectus, which may be senior, subordinated or junior subordinated, and which
may be convertible and which may be issued in one or more series. We will issue any new senior debt securities under a senior indenture
that we will enter into with a trustee named in such senior indenture. We will issue any subordinated debt securities under a subordinated
indenture that we will enter into with a trustee named in such subordinated indenture. We have filed forms of these documents as
exhibits to the registration statement, of which this prospectus is a part. The terms of the debt securities will include those
set forth in the applicable indenture, any related supplemental indenture and any related securities documents that are made a
part of the indenture by the Trust Indenture Act of 1939, as amended (the “Trust Indenture Act”). You should read the
summary below, the applicable prospectus supplement and the provisions of the applicable indenture, any supplemental indenture
and any related security documents, if any, in their entirety before investing in our debt securities. We use the term “indentures”
to refer to both the senior indentures and the subordinated indentures.
The indentures will
be qualified under the Trust Indenture Act We use the term “trustee” to refer to either a trustee under the senior
indenture or a trustee under the subordinated indenture, as applicable.
The following summaries
of material provisions of any senior debt securities, any subordinated debt securities and the related indentures are subject to,
and qualified in their entirety by reference to, all the provisions of the indentures and any supplemental indenture or related
document applicable to a particular series of debt securities. In addition, the material specific financial, legal and other terms
as well as any material U.S. federal income tax consequences particular to securities of each series will be described in the prospectus
supplement relating to the securities of that series. The prospectus supplement may or may not modify the general terms found in
this prospectus and will be filed with the SEC. For a complete description of the terms of a particular series of debt securities,
you should read both this prospectus and the prospectus supplement relating to that particular series, as well as the complete
indentures that contain the terms of the debt securities. See the information under the heading “Where You Can Find More
Information” for information on how to obtain a copy of the appropriate indenture. Except as we may otherwise indicate, the
terms of any senior indenture and any subordinated indenture will be identical.
General
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We will describe in the applicable prospectus supplement the terms relating to a series of debt securities, including:
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the principal amount being offered, and if a series, the total amount authorized and the total
amount outstanding;
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any limit on the amount that may be issued;
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whether or not we will issue the series of debt securities in global form, and, if so, the terms
and who the depositary will be;
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the principal amount due at maturity, and whether the debt securities will be issued with any original
issue discount;
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whether and under what circumstances, if any, we will pay additional amounts on any debt securities
held by a person who is not a United States person for tax purposes, and whether we can redeem the debt securities if we have to
pay such additional amounts;
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the annual interest rate, which may be fixed or variable, or the method for determining the rate
and the date interest will begin to accrue, the dates interest will be payable and the regular record dates for interest payment
dates or the method for determining such dates;
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whether or not the debt securities will be secured or unsecured, and the terms of any secured debt;
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the terms of the subordination of any series of subordinated debt;
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the place where payments will be payable;
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restrictions on transfer, sale or other assignment, if any;
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our right, if any, to defer payment of interest and the maximum length of any such deferral period;
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the date, if any, after which, the conditions upon which, and the price at which, we may, at our
option, redeem the series of debt securities pursuant to any optional or provisional redemption provisions and the terms of those
redemption provisions;
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provisions for a sinking fund, purchase or other analogous fund, if any;
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the date, if any, on which, and the price at which we are obligated, pursuant to any mandatory
sinking fund or analogous fund provisions or otherwise, to redeem, or at the holder’s option, to purchase, the series of
debt securities;
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whether the indenture will restrict our ability and/or the ability of our subsidiaries to:
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incur additional indebtedness;
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issue additional securities;
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pay dividends or make distributions in respect of our capital stock or the capital stock of our
subsidiaries;
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place restrictions on our subsidiaries’ ability to pay dividends, make distributions or transfer
assets;
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make investments or other restricted payments;
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sell or otherwise dispose of assets;
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enter into sale-leaseback transactions;
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engage in transactions with stockholders or affiliates;
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issue or sell stock of our subsidiaries; or
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effect a consolidation or merger;
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whether the indenture will require us to maintain any interest coverage, fixed charge, cash flow-based,
asset-based or other financial ratios;
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a discussion of any material or special U.S. federal income tax considerations applicable to the
debt securities;
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information describing any book-entry features;
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the procedures for any auction and remarketing, if any;
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the denominations in which we will issue the series of debt securities, if other than denominations
of $1,000 and any integral multiple thereof;
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if other than U.S. dollars, the currency in which the series of debt securities will be denominated
and the currency in which principal, premium, if any, and interest will be paid; and
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any other specific terms, preferences, rights or limitations of, or restrictions on, the debt securities,
including any events of default that are in addition to or different than those described in this prospectus or any covenants provided
with respect to the debt securities that are in addition to those described above, and any terms which may be required by us or
advisable under applicable laws or regulations or advisable in connection with the marketing of the debt securities.
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In addition to the
debt securities that may be offered pursuant to this prospectus, we may issue other debt securities in public or private offerings
from time to time. These other debt securities may be issued under other indentures or documentation that are not described in
this prospectus, and those debt securities may contain provisions materially different from the provisions applicable to one or
more issues of debt securities offered pursuant to this prospectus.
Original Issue Discount
One or more series
of debt securities offered under this prospectus may be sold at a substantial discount below their stated principal amount, bearing
no interest or interest at a rate that at the time of issuance is below market rates. The federal income tax consequences and special
considerations applicable to any series of debt securities generally will be described in the applicable prospectus supplement.
Senior Debt Securities
Payment of the principal
or, premium, if any, and interest on senior debt securities will rank on a parity with all of our other indebtedness that is not
subordinated.
Subordination of Subordinated Debt
Securities
The subordinated debt
securities will be subordinate and junior in priority of payment to certain of our other indebtedness to the extent described in
a prospectus supplement. The indentures in the forms initially filed as exhibits to the registration statement of which this prospectus
is a part do not limit the amount of indebtedness which we may incur, including senior indebtedness or subordinated indebtedness,
and do not limit us from issuing any other debt, including secured debt or unsecured debt.
Conversion or Exchange Rights
We will set forth in
the applicable prospectus supplement the terms on which a series of debt securities may be convertible into or exchangeable for
our common stock, our preferred stock or other securities, including the conversion or exchange rate, as applicable, or how it
will be calculated, and the applicable conversion or exchange period. We will include provisions as to whether conversion or exchange
is mandatory, at the option of the holder or at our option. We may include provisions pursuant to which the number of securities
that the holders of the series of debt securities receive upon conversion or exchange would, under the circumstance described in
those provisions, be subject to adjustment, or pursuant to which those holders would, under those circumstances, receive other
property upon conversion or exchange, for example in the event of our merger or consolidation with another entity.
Consolidation, Merger or Sale
The indentures in the
forms initially filed as exhibits to the registration statement of which this prospectus is a part do not contain any covenant
that restricts our ability to merge or consolidate, or sell, convey, transfer or otherwise dispose of all or substantially all
of our assets. However, any successor of ours or acquirer of such assets must assume all of our obligations under the indentures
and the debt securities.
If the debt securities
are convertible for our other securities, the person with whom we consolidate or merge or to whom we sell all of our property must
make provisions for the conversion of the debt securities into securities which the holders of the debt securities would have received
if they had converted the debt securities before the consolidation, merger or sale.
Events of Default under the Indentures
Except as otherwise
set forth in an applicable prospectus supplement, the following are events of default under the indentures with respect to any
series of debt securities that we may issue:
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if we fail to pay interest when due and payable and our failure continues for 30 days and the time for payment has not been
extended or deferred;
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if we fail to pay the principal, or premium, if any, when due and payable and the time for payment has not been extended or
delayed;
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if we fail to observe or perform any other covenant contained in the debt securities or the indentures, other than a covenant
solely for the benefit of another series of debt securities, and our failure continues for 90 days after we receive notice from
the trustee or holders of at least 25% in aggregate principal amount of the outstanding debt securities of the applicable series;
and
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if specified events of bankruptcy, insolvency or reorganization occur.
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If an event of default
with respect to debt securities of any series occurs and is continuing, other than an event of default specified in the last bullet
point above under “— Events of Default Under the Indentures,” the trustee or the holders of at least 25% in aggregate
principal amount of the outstanding debt securities of that series, by notice to us in writing, and to the trustee if notice is
given by such holders, may declare the unpaid principal of, premium, if any, and accrued interest, if any, due and payable immediately.
If an event of default specified in the last bullet point above “— Events of Default Under the Indentures” occurs
with respect to us, the principal amount of and accrued interest, if any, of each series of debt securities then outstanding shall
be due and payable without any notice or other action on the part of the trustee or any holder.
The holders of a majority
in aggregate principal amount of the outstanding debt securities of an affected series may waive any default or event of default
with respect to the series and its consequences (other than bankruptcy defaults), except there may be no waiver of defaults or
events of default regarding payment of principal, premium, if any, or interest, unless we have cured the default or event of default
in accordance with the applicable indenture.
Subject to the terms
of the indentures, if an event of default under an indenture shall occur and be continuing, the trustee will be under no obligation
to exercise any of its rights or powers under such indenture at the request or direction of any of the holders of the applicable
series of debt securities, unless such holders have offered the trustee indemnity satisfactory to it. The holders of a majority
in principal amount of the outstanding debt securities of any series will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the trustee, or exercising any trust or power conferred on the trustee, with
respect to the debt securities of that series, provided that:
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the direction so given by the holder is not in conflict with any law or the applicable indenture; and
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subject to its duties under the Trust Indenture Act, the trustee need not take any action that might involve it in personal
liability or might be unduly prejudicial to the holders not involved in the proceeding.
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A holder of the debt
securities of any series will only have the right to institute a proceeding under the indentures or to appoint a receiver or trustee,
or to seek other remedies if:
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the holder has given written notice to the trustee of a continuing event of default with respect to that series;
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the holders of at least 25% in aggregate principal amount of the outstanding debt securities of that series have made written
request to the trustee, and such holders have offered indemnity satisfactory to the trustee, to institute the proceeding as trustee;
and
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the trustee does not institute the proceeding, and does not receive from the holders of a majority in aggregate principal amount
of the outstanding debt securities of that series other conflicting directions, within 90 days after the notice, request and offer.
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These limitations do
not apply to a suit instituted by a holder of debt securities if we default in the payment of the principal, premium, if any, or
interest on, the debt securities.
We will periodically
file statements with the trustee regarding our compliance with the covenants in the indentures.
Modification of Indenture; Waiver
We and the trustee
may modify an indenture or enter into or modify any supplemental indenture without the consent of any holders of the debt securities
with respect to specific matters, including:
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to fix any ambiguity, defect or inconsistency in the indenture;
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to comply with the provisions described above under “—Consolidation, Merger or Sale;”
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to comply with any requirements of the Securities and Exchange Commission in connection with the qualification of any indenture
under the Trust Indenture Act;
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to evidence and provide for the acceptance of appointment hereunder by a successor trustee;
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to provide for uncertificated debt securities and to make any appropriate changes for such purpose;
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to add to, delete from, or revise the conditions, limitations and restrictions on the authorized amount, terms or purposes
of issuance, authorization and delivery of debt securities of any unissued series;
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to add to our covenants such new covenants, restrictions, conditions or provisions for the protection of the holders, to make
the occurrence, or the occurrence and the continuance, of a default in any such additional covenants, restrictions, conditions
or provisions an event of default, or to surrender any of our rights or powers under the indenture; or
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to change anything that does not materially adversely affect the legal rights of any holder of debt securities of any series.
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In addition, under
the indentures, the rights of holders of a series of debt securities may be changed by us and the trustee with the written consent
of the holders of at least a majority in aggregate principal amount of the outstanding debt securities of each series that is affected.
However, we and the trustee may only make the following changes with the consent of each holder of any outstanding debt securities
affected:
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extending the fixed maturity of the series of debt securities;
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reducing the principal amount, reducing the rate of or extending the time of payment of interest, or reducing any premium payable
upon the redemption of any debt securities; or
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reducing the percentage of debt securities, the holders of which are required to consent to any supplemental indenture.
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Discharge
Each indenture provides
that, subject to the terms of the indenture and any limitation otherwise provided in the prospectus supplement applicable to a
particular series of debt securities, we can elect to be discharged from our obligations with respect to one or more series of
debt securities, except for specified obligations, including obligations to:
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register the transfer or exchange of debt securities of the series;
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replace stolen, lost or mutilated debt securities of the series;
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maintain paying agents and agencies for payment, registration of transfer and exchange and service of notices and demands;
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recover excess money held by the trustee;
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compensate and indemnify the trustee; and
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appoint any successor trustee.
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In order to exercise
our rights to be discharged, we must deposit with the trustee money or government obligations sufficient to pay all the principal
of, any premium and interest on, the debt securities of the series on the dates payments are due.
“Street Name” and Other
Indirect Holders
Investors who hold
securities in accounts at banks or brokers generally will not be recognized by us as legal holders of debt securities. This manner
of holding securities is called holding in “street name.” Instead, we would recognize only the bank or broker, or the
financial institution that the bank or broker uses to hold its securities. These intermediary banks, brokers and other financial
institutions pass along principal, interest and other payments on the debt securities, either because they agree to do so in their
customer agreements or because they are legally required to do so. If you hold debt securities in “street name,” you
should check with your own institution to find out, among other things:
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how it handles payments and notices;
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whether it imposes fees or charges;
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how it would handle voting if applicable;
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whether and how you can instruct it to send you debt securities registered in your own name so you can be a direct holder as
described below; and
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if applicable, how it would pursue rights under your debt securities if there were a default or other event triggering the
need for holders to act to protect their interests.
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Our obligations, as
well as the obligations of the trustee under the indentures and those of any third parties employed by us or the trustee under
either of the indentures, run only to persons who are registered as holders of debt securities issued under the applicable indenture.
As noted above, we do not have obligations to you if you hold in “street name” or other indirect means, either because
you choose to hold debt securities in that manner or because the debt securities are issued in the form of global securities as
described below. For example, once we make payment to the registered holder, we have no further responsibility for the payment
even if that holder is legally required to pass the payment along to you as a “street name” customer but does not do
so.
Form, Exchange and Transfer
We may issue debt securities
of each series only in fully registered form without coupons and, unless we otherwise specify in the applicable prospectus supplement,
in denominations of $1,000 and any integral multiple thereof. The indentures will provide that we may issue debt securities of
a series in temporary or permanent global form and as book-entry securities that will be deposited with, or on behalf of, The Depository
Trust Company or another depositary named by us and identified in a prospectus supplement with respect to that series (the “Depository”).
See “Book-Entry” below for a further description of the terms relating to any book-entry securities.
At the option of the
holder, subject to the terms of the indentures and the limitations applicable to global securities described below or in the applicable
prospectus supplement, the holder of the debt securities of any series can exchange the debt securities for other debt securities
of the same series, in any authorized denomination and of like tenor and aggregate principal amount.
Subject to the terms
of the indentures and the limitations applicable to global securities set forth below in the applicable prospectus supplement,
holders of the debt securities may present the debt securities for exchange or for registration of transfer, duly endorsed or with
the form of transfer endorsed thereon duly executed if so required by us or the security registrar, at the office of the security
registrar or at the office of any transfer agent designated by us for this purpose. Unless otherwise provided in the debt securities
that the holder presents for transfer or exchange, we will make no service charge for any registration of transfer or exchange,
but we may require payment of any taxes or other governmental charges.
We will name in the
applicable prospectus supplement the security registrar, and any transfer agent in addition to the security registrar, that we
initially designate for any debt securities. We may at any time designate additional transfer agents or rescind the designation
of any transfer agent or approve a change in the office through which any transfer agent acts, except that we will be required
to maintain a transfer agent in each place of payment for the debt securities of each series.
If we elect to redeem
the debt securities of any series, we will not be required to:
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issue, register the transfer of, or exchange any debt securities of any series being redeemed in part during a period beginning
at the opening of business 15 days before the day of mailing of a notice of redemption of any debt securities that may be selected
for redemption and ending at the close of business on the day of the mailing; or
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register the transfer of or exchange any debt securities so selected for redemption, in whole or in part, except the unredeemed
portion of any debt securities we are redeeming in part.
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Book-Entry Securities
The following description
of book-entry securities will apply to any series of debt securities issued in whole or in part in the form of one or more global
securities, except as otherwise described in a related prospectus supplement.
Book-entry securities
of like tenor and having the same date will be represented by one or more global securities deposited with and registered in the
name of a depositary that is a clearing agent registered under the Securities Exchange Act of 1934, as amended, or the Exchange
Act. Beneficial interests in book-entry securities will be limited to institutions that have accounts with the depositary, or “participants,”
or persons that may hold interests through participants.
Ownership of beneficial
interests by participants will only be evidenced by, and the transfer of that ownership interest will only be effected through,
records maintained by the depositary. Ownership of beneficial interests by persons that hold through participants will only be
evidenced by, and the transfer of that ownership interest within such participant will only be effected through, records maintained
by the participants. The laws of some jurisdictions require that certain purchasers of securities take physical delivery of such
securities in definitive form. Such laws may impair the ability to transfer beneficial interests in a global security.
Payment of principal
of and any premium and interest on book-entry securities represented by a global security registered in the name of or held by
a depositary will be made to the depositary, as the registered owner of the global security. Neither we, the trustee nor any agent
of ours or the trustee will have any responsibility or liability for any aspect of the depositary’s records or any participant’s
records relating to or payments made on account of beneficial ownership interests in a global security or for maintaining, supervising
or reviewing any of the depositary’s records or any participant’s records relating to the beneficial ownership interests.
Payments by participants to owners of beneficial interests in a global security held through such participants will be governed
by the depositary’s procedures, as is now the case with securities held for the accounts of customers registered in “street
name,” and will be the sole responsibility of such participants.
A global security representing
a book-entry security is exchangeable for definitive debt securities in registered form, of like tenor and of an equal aggregate
principal amount registered in the name of, or is transferable in whole or in part to, a person other than the depositary for that
global security, only if (i) the depositary notifies us that it is unwilling or unable to continue as depositary for that global
security or the depositary ceases to be a clearing agency registered under the Exchange Act, (ii) there shall have occurred and
be continuing an event of default with respect to the debt securities of that series or (iii) other circumstances exist that have
been specified in the terms of the debt securities of that series. Any global security that is exchangeable pursuant to the preceding
sentence shall be registered in the name or names of such person or persons as the depositary shall instruct the trustee. It is
expected that such instructions may be based upon directions received by the depositary from its participants with respect to ownership
of beneficial interests in such global security.
Except as provided
above, owners of beneficial interests in a global security will not be entitled to receive physical delivery of debt securities
in definitive form and will not be considered the holders thereof for any purpose under the indentures, and no global security
shall be exchangeable, except for a security registered in the name of the depositary. This means each person owning a beneficial
interest in such global security must rely on the procedures of the depositary and, if such person is not a participant, on the
procedures of the participant through which such person owns its interest, to exercise any rights of a holder under the indentures.
We understand that under existing industry practices, if we request any action of holders or an owner of a beneficial interest
in such global security desires to give or take any action that a holder is entitled to give or take under the indentures, the
depositary would authorize the participants holding the relevant beneficial interests to give or take such action, and such participants
would authorize beneficial owners owning through such participant to give or take such action or would otherwise act upon the instructions
of beneficial owners owning through them.
Information Concerning the Trustee
The trustee, other
than during the occurrence and continuance of an event of default under an indenture, undertakes to perform only those duties as
are specifically set forth in the applicable indenture and is under no obligation to exercise any of the powers given it by the
indentures at the request of any holder of debt securities unless it is offered reasonable security and indemnity against the costs,
expenses and liabilities that it might incur. However, upon an event of default under an indenture, the trustee must use the same
degree of care as a prudent person would exercise or use in the conduct of his or her own affairs.
Payment and Paying Agents
Unless we otherwise
indicate in the applicable prospectus supplement, we will make payment of the interest on any debt securities on any interest payment
date to the person in whose name the debt securities, or one or more predecessor securities, are registered at the close of business
on the regular record date for the interest.
We will pay principal
of and any premium and interest on the debt securities of a particular series at the office of the paying agents designated by
us, except that, unless we otherwise indicate in the applicable prospectus supplement, we may make interest payments by check which
we will mail to the holder or by wire transfer to certain holders. Unless we otherwise indicate in a prospectus supplement, we
will designate an office or agency of the trustee in the City of New York as our paying agent for payments with respect to debt
securities of each series. We will name in the applicable prospectus supplement any other paying agents that we initially designate
for the debt securities of a particular series. We will maintain a paying agent in each place of payment for the debt securities
of a particular series.
All money we pay to
a paying agent or the trustee for the payment of the principal of or any premium or interest on any debt securities which remains
unclaimed at the end of two years after such principal, premium or interest has become due and payable will be repaid to us, and
the holder of the debt security thereafter may look only to us for payment thereof.
Governing Law
Except as otherwise
specified in the applicable prospectus supplement, the indentures and the debt securities will be governed by and construed in
accordance with the laws of the State of New York, except to the extent that the Trust Indenture Act is applicable.