Filed
Pursuant to Rule 424(b)(3)
File
Number 333-147355
PROSPECTUS
SUPPLEMENT NO. 2
to
Prospectus dated April 28, 2009
(Registration
No. 333-147355)
HONG
KONG HIGHPOWER TECHNOLOGY, INC.
This
Prospectus Supplement No. 2 supplements our Prospectus dated April 28, 2009 and
our Prospectus Supplement No. 1 dated May 26, 2009 (the “Prospectus
Supplement”). The shares that are the subject of the Prospectus have
been registered to permit their resale to the public by the selling stockholders
named in the Prospectus. We are not selling any shares of common stock in this
offering and therefore will not receive any proceeds from this offering. You
should read this Prospectus Supplement No. 2 together with the
Prospectus and the Prospectus Supplement.
This
Prospectus Supplement No. 2 includes the attached report, as set forth below, as
filed by us with the Securities and Exchange Commission (the “SEC”): Quarterly
Report on Form 10-Q filed with the SEC on August 13, 2009.
Our
common stock is traded on the NYSE Amex under the symbol “HPJ.”
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date
of this Prospectus Supplement No. 2 is September 29, 2009.
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form 10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
|
For
the Quarterly Period Ended June 30, 2009
|
|
OR
|
|
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For
the transition period
from to
Commission
File No.: 001-34098
HONG
KONG HIGHPOWER TECHNOLOGY, INC.
(Exact
name of Registrant as specified in its charter)
Delaware
|
|
20-4062622
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer
Identification
Number)
|
Building
A1, Luoshan Industrial Zone, Shanxia, Pinghu, Longgang, Shenzhen, Guangdong,
518111,
People’s
Republic of China
(ADDRESS
OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)
(86)
755-89686238
(COMPANY’S
TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes
x
No
o
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files). Yes
o
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” as defined in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer
o
Accelerated
filer
¨
Non-accelerated
filer
o
Smaller
reporting company
x
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes
o
No
x
The
registrant had 13,562,596 shares of common stock, par value $0.0001 per share,
outstanding as of August 11, 2009.
HONG
KONG HIGHPOWER TECHNOLOGY, INC.
FORM 10-Q
For
the Quarterly Period Ended June 30, 2009
INDEX
|
Page
|
Part I
|
|
Financial
Information
|
|
|
|
|
|
|
|
|
|
Item
1.
|
|
Financial
Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Balance
Sheets as of June 30, 2009 (Unaudited) and December 31,
2008
|
2
|
|
|
|
|
|
|
|
|
|
|
|
(b)
|
Statements
of Comprehensive Income for the Three and Six Months Ended June 30, 2009
and 2008 (Unaudited)
|
4
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
Statements
of Cash Flows for the Six Months Ended June 30, 2009 and 2008
(Unaudited)
|
5
|
|
|
|
|
|
|
|
|
|
|
|
(d)
|
Notes
to Financial Statements (Unaudited)
|
7
|
|
|
|
|
|
|
|
|
|
Item
2.
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
29
|
|
|
|
|
|
|
|
|
Item
3.
|
|
Quantitative
and Qualitative Disclosures About Market Risk
|
36
|
|
|
|
|
|
|
|
|
Item
4.
|
|
Controls
and Procedures
|
37
|
|
|
|
|
|
|
Part II
|
|
Other
Information
|
|
|
|
|
|
|
|
|
|
Item
1.
|
|
Legal
Proceedings
|
37
|
|
|
|
|
|
|
|
|
Item
1A.
|
|
Risk
Factors
|
37
|
|
|
|
|
|
|
|
|
Item
2.
|
|
Unregistered
Sale of Equity Securities and Use of Proceeds
|
37
|
|
|
|
|
|
|
|
|
Item
3.
|
|
Default
Upon Senior Securities
|
38
|
|
|
|
|
|
|
|
|
Item
4.
|
|
Submission
of Matters to a Vote of Security Holders
|
38
|
|
|
|
|
|
|
|
|
Item
5.
|
|
Other
Information
|
38
|
|
|
|
|
|
|
|
|
Item
6.
|
|
Exhibits
|
38
|
|
|
|
|
|
|
Signatures
|
39
|
Part I.
Financial Information
Item
1. Financial Statements
HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Stated
in US Dollars)
|
|
As of
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
$
|
|
|
$
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets
:
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
|
1,321,072
|
|
|
|
4,175,780
|
|
Restricted cash
|
|
|
4,119,107
|
|
|
|
4,845,478
|
|
Accounts
receivable
|
|
|
9,723,528
|
|
|
|
8,765,593
|
|
Notes receivable
|
|
|
577,699
|
|
|
|
429,815
|
|
Prepaid expenses and other
receivables –
Note
8
|
|
|
3,513,894
|
|
|
|
1,732,709
|
|
Deferred
charges – Stock-based compensation –
Note 9
|
|
|
-
|
|
|
|
216,667
|
|
Inventories –
Note
10
|
|
|
7,870,800
|
|
|
|
11,208,697
|
|
|
|
|
|
|
|
|
|
|
Total Current
Assets
|
|
|
27,126,100
|
|
|
|
31,374,739
|
|
Deferred tax assets –
Note 6
|
|
|
124,365
|
|
|
|
104,556
|
|
Plant and equipment, net –
Note
11
|
|
|
9,014,536
|
|
|
|
7,778,477
|
|
Leasehold
land, net –
Note
12
|
|
|
3,018,289
|
|
|
|
3,050,510
|
|
Intangible
asset, net –
Note
13
|
|
|
875,000
|
|
|
|
900,000
|
|
Currency
forward –
Note
7
|
|
|
7,333
|
|
|
|
116,157
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
|
40,165,623
|
|
|
|
43,324,439
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current Liabilities
:
|
|
|
|
|
|
|
|
|
Non-trading
foreign currency derivatives liabilities
|
|
|
65,487
|
|
|
|
293,830
|
|
Accounts payable
|
|
|
9,243,613
|
|
|
|
8,306,123
|
|
Other payables and accrued
liabilities –
Note
14
|
|
|
6,735,102
|
|
|
|
3,139,275
|
|
Income taxes
payable
|
|
|
333,799
|
|
|
|
476,330
|
|
Bank borrowings –
Note
15
|
|
|
5,644,282
|
|
|
|
14,829,228
|
|
|
|
|
|
|
|
|
|
|
Total Current
Liabilities
|
|
|
22,022,283
|
|
|
|
27,044,786
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES –
Note
17
|
|
|
|
|
|
|
|
|
(continued)
HONG KONG
HIGHPOWER TECHNOLOGY, INC AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Stated
in US Dollars)
|
|
As of
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
$
|
|
|
$
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
Preferred
Stock
|
|
|
|
|
|
|
Par
value: $0.0001
|
|
|
|
|
|
|
Authorized:
10,000,000 shares
|
|
|
|
|
|
|
Issued
and outstanding: none
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
|
|
|
|
|
|
Par
value : $0.0001
|
|
|
|
|
|
|
|
|
Authorized: 100,000,000
shares
|
|
|
|
|
|
|
|
|
Issued
and outstanding: 2009 –13,562,596 shares
(2008
–13,562,596 shares)
|
|
|
1,356
|
|
|
|
1,356
|
|
Additional paid-in
capital
|
|
|
5,048,194
|
|
|
|
5,048,194
|
|
Accumulated other comprehensive
income
|
|
|
2,087,155
|
|
|
|
1,595,091
|
|
Retained
earnings
|
|
|
11,006,635
|
|
|
|
9,635,012
|
|
|
|
|
|
|
|
|
|
|
TOTAL
STOCKHOLDERS’ EQUITY
|
|
|
18,143,340
|
|
|
|
16,279,653
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
40,165,623
|
|
|
|
43,324,439
|
|
See
accompanying notes to condensed consolidated financial
statements.
HONG KONG
HIGHPOWER TECHNOLOGY, INC AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF COMPENHENSIVE INCOME
(Stated
in US Dollars)
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
15,445,484
|
|
|
|
19,021,476
|
|
|
|
26,755,289
|
|
|
|
36,853,038
|
|
Cost
of sales
|
|
|
(12,371,676
|
)
|
|
|
(15,646,609
|
)
|
|
|
(21,285,385
|
)
|
|
|
(30,769,873
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
3,073,808
|
|
|
|
3,374,867
|
|
|
|
5,469,904
|
|
|
|
6,083,165
|
|
Depreciation
–
Notes 2 and
11
|
|
|
(68,075
|
)
|
|
|
(31,285
|
)
|
|
|
(119,189
|
)
|
|
|
(80,656
|
)
|
Selling
and distribution costs
|
|
|
(580,458
|
)
|
|
|
(547,697
|
)
|
|
|
(1,111,807
|
)
|
|
|
(961,720
|
)
|
General
and administrative costs, including stock-based
compensation
|
|
|
(1,046,340
|
)
|
|
|
(1,571,405
|
)
|
|
|
(2,149,262
|
)
|
|
|
(2,341,101
|
)
|
Loss
on exchange rate difference
|
|
|
(22,865
|
)
|
|
|
(330,788
|
)
|
|
|
(55,589
|
)
|
|
|
(835,675
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
1,356,070
|
|
|
|
893,692
|
|
|
|
2,034,057
|
|
|
|
1,864,013
|
|
Change
in fair value of currency forwards –
Note7
|
|
|
(21,510
|
)
|
|
|
-
|
|
|
|
(109,623
|
)
|
|
|
29,102
|
|
Change
in fair value of warrants –
Note 5
|
|
|
-
|
|
|
|
(71,250
|
)
|
|
|
-
|
|
|
|
(71,250
|
)
|
Other
income –
Note
3
|
|
|
21,774
|
|
|
|
120,120
|
|
|
|
88,589
|
|
|
|
224,654
|
|
Interest
expenses –
Note
4
|
|
|
(39,377
|
)
|
|
|
(194,017
|
)
|
|
|
(80,497
|
)
|
|
|
(400,767
|
)
|
Other
expenses -
Note
5
|
|
|
(119,549
|
)
|
|
|
-
|
|
|
|
(171,085
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before taxes
|
|
|
1,197,408
|
|
|
|
748,545
|
|
|
|
1,761,441
|
|
|
|
1,645,752
|
|
Income
taxes –
Note
6
|
|
|
(228,752
|
)
|
|
|
(64,298
|
)
|
|
|
(389,819
|
)
|
|
|
(231,178
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the period
|
|
|
968,656
|
|
|
|
684,247
|
|
|
|
1,371,622
|
|
|
|
1,414,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Foreign currency translation gain
|
|
|
456,215
|
|
|
|
516,654
|
|
|
|
492,064
|
|
|
|
748,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
|
1,424,871
|
|
|
|
1,200,901
|
|
|
|
1,863,686
|
|
|
|
2,163,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Basic and diluted
|
|
|
0.07
|
|
|
|
0.05
|
|
|
|
0.10
|
|
|
|
0.11
|
|
-
Diluted
|
|
|
0.07
|
|
|
|
0.05
|
|
|
|
0.10
|
|
|
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares of common stock outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Basic
|
|
|
13,762,217
|
|
|
|
12,899,560
|
|
|
|
13,651,389
|
|
|
|
12,849,203
|
|
-
Diluted
|
|
|
13,812,547
|
|
|
|
12,906,483
|
|
|
|
13,703,889
|
|
|
|
12,852,665
|
|
See
accompanying notes to condensed consolidated financial
statements.
HONG KONG
HIGHPOWER TECHNOLOGY, INC AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated
in US Dollars)
|
|
Six months ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
$
|
|
|
$
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
Net
income
|
|
|
1,371,622
|
|
|
|
1,414,574
|
|
Adjustments
to reconcile net income to net cash provided by operating activities
:
|
|
|
|
|
|
|
|
|
Amortization
of intangible asset
|
|
|
25,000
|
|
|
|
25,000
|
|
Amortization
of leasehold land
|
|
|
31,331
|
|
|
|
-
|
|
Bad
debts written off
|
|
|
-
|
|
|
|
1,258
|
|
Depreciation
|
|
|
424,007
|
|
|
|
345,674
|
|
Change
in fair value of currency forwards
|
|
|
109,623
|
|
|
|
(29,102
|
)
|
Loss
on disposal of plant and equipment
|
|
|
6,834
|
|
|
|
17,551
|
|
Share
based payment
|
|
|
216,667
|
|
|
|
114,584
|
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities :
|
|
|
|
|
|
|
|
|
(Increase)
decrease in -
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(850,943
|
)
|
|
|
4,209,356
|
|
Notes
receivable
|
|
|
(146,046
|
)
|
|
|
90,315
|
|
Deposit,
prepaid expenses and other receivables
|
|
|
(1,743,845
|
)
|
|
|
(2,761,398
|
)
|
Inventories
|
|
|
3,451,450
|
|
|
|
(4,701,466
|
)
|
Increase
(decrease) in -
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
835,955
|
|
|
|
1,973,774
|
|
Other
payables and accrued liabilities
|
|
|
3,532,852
|
|
|
|
1,127,082
|
|
Income
taxes payable
|
|
|
(165,841
|
)
|
|
|
226,163
|
|
|
|
|
|
|
|
|
|
|
Net
cash flows provided by operating activities
|
|
|
7,098,666
|
|
|
|
2,053,365
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
Acquisition
of plant and equipment
|
|
|
(1,569,989
|
)
|
|
|
(1,935,077
|
)
|
Deposit
paid for acquisition of machinery
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
cash flows used in investing activities
|
|
|
(1,569,989
|
)
|
|
|
(1,935,077
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock
|
|
|
-
|
|
|
|
1,963,067
|
|
Proceeds
from new short-term bank loans
|
|
|
2,626,113
|
|
|
|
-
|
|
Repayment
of short-term bank loans
|
|
|
-
|
|
|
|
(1,423,993
|
)
|
Repayment
from other loans
|
|
|
(11,936,980
|
)
|
|
|
2,475,343
|
|
Net
(repayment) advancement of other bank borrowings
|
|
|
-
|
|
|
|
(670,659
|
)
|
Increase
(Decrease) in restricted cash
|
|
|
779,112
|
|
|
|
(1,026,983
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash flows (used in) provided by financing activities
|
|
|
(8,531,755
|
)
|
|
|
1,316,775
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(3,003,078
|
)
|
|
|
1,435,063
|
|
Effect
of foreign currency translation on cash and cash
equivalents
|
|
|
148,370
|
|
|
|
75,279
|
|
Cash
and cash equivalents - beginning of period
|
|
|
4,175,780
|
|
|
|
1,489,262
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents - end of period
|
|
|
1,321,072
|
|
|
|
2,999,604
|
|
(continued)
HONG KONG
HIGHPOWER TECHNOLOGY, INC AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Stated
in US Dollars)
|
|
Six months ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
$
|
|
|
$
|
|
Supplemental
disclosures for cash flow information :
|
|
|
|
|
|
|
Cash
paid for :
|
|
|
|
|
|
|
Interest
|
|
|
80,497
|
|
|
|
400,767
|
|
Income
taxes
|
|
|
-
|
|
|
|
5,015
|
|
See
accompanying notes to condensed consolidated financial
statements.
HONG KONG
HIGHPOWER TECHNOLOGY, INC AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
1.
|
Organization
and Basis of Presentation
|
Hong Kong
Highpower Technology, Inc. (“Highpower” or the “Company,” formerly known as SRKP
11, Inc.) was incorporated in the State of Delaware on January 3, 2006 to locate
a suitable acquisition candidate to acquire.
On
October 20, 2007, Highpower entered into a share exchange agreement (the
“Exchange Agreement”) with Hong Kong Highpower Technology Company Limited
(“HKHTC”), which was incorporated in Hong Kong on July 4, 2003 under the Hong
Kong Companies Ordinance. HKHTC was organized principally to engage in the
manufacturing and trading of nickel metal hydride rechargeable
batteries.
As used
herein, the “Company” refers to Highpower and its wholly-owned subsidiaries,
unless the context indicates otherwise.
Pursuant
to the Exchange Agreement, Highpower agreed to issue shares of its common stock
in exchange for all of the issued and outstanding securities of HKHTC. On
November 2, 2007, upon the closing of the Exchange Agreement, HKHTC had a total
of 500,000 shares of common stock issued and outstanding, and Highpower issued
an aggregate of 9,248,973 shares of its common stock to the shareholders of
HKHTC in exchange for all of the issued and outstanding securities of HKHTC on
the basis of 18.497946 shares of Highpower for each share of HKHTC. The
9,248,973 shares of common stock issued to the shareholders of HKHTC in
conjunction with this transaction have been presented as outstanding for all
periods presented. In addition, immediately prior to the closing of the Exchange
Agreement, Highpower and certain of its stockholders agreed to cancel an
aggregate of 1,597,872 shares of outstanding common stock, as a result of which
there were 1,777,128 shares of common stock outstanding immediately prior to the
share exchange transaction.
On
November 2, 2007, concurrently with the close of the Exchange Agreement, the
Company received gross proceeds of $3,120,000 in a private placement transaction
(the “Private Placement”). Pursuant to subscription agreements entered into with
the investors, the Company sold an aggregate of 1,772,745 shares of common stock
at $1.76 per share. The investors in the Private Placement also entered into
lock-up agreements pursuant to which they agreed not to sell their shares until
90 days after the Company’s common stock is listed or quoted on either the New
York Stock Exchange, NYSE Amex (formerly known as the American Stock Exchange),
NASDAQ Global Market, NASDAQ Capital Market or the OTC Bulletin Board, when
one-tenth of their shares are released from the lock-up agreement, after which
their shares will automatically be released from the lock-up agreement on a
monthly basis pro rata over a nine-month period. After commissions and expenses,
the Company received net proceeds of approximately $2,738,000 from the Private
Placement.
HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
1.
|
Organization and Basis of
Presentation
(continued)
|
Immediately
after the closing of the Exchange Agreement and Private Placement, the Company
had 12,798,846 shares of common stock issued and outstanding. Upon the closing
of the Exchange Agreement, the shareholders of HKHTC and their designees owned
approximately 72.3% of the Company’s issued and outstanding common stock, the
pre-existing shareholders of the Company owned approximately 13.9% of the
Company’s issued and outstanding common stock, and the investors in the Private
Placemen owned 13.8% of the Company’s issued and outstanding common stock.
Therefore, although HKHTC became the Company’s wholly-owned subsidiary, the
transaction was accounted for as a recapitalization in the form of a reverse
merger of HKHTC, whereby HKHTC was deemed to be the accounting acquirer and was
deemed to have retroactively adopted the capital structure of SRKP 11. Since the
transaction was accounted for as a reverse merger, the accompanying consolidated
financial statements reflect the historical consolidated financial statements of
HKHTC for all periods presented, and do not include the historical financial
statements of SRKP 11. All costs associated with the reverse merger transaction,
consisting primarily of consideration paid to the previous control parties of
SRKP 11 and legal and investment banking fees and costs, were expensed as
incurred as a cost of the recapitalization, and have been presented as an
operating cost line item entitled fees and costs related to reorganization in
the statement of operations.
In
January 2008, HKHTC invested $749,971 in HZ Highpower Technology Co., Ltd. (“HZ
Highpower”). HZ Highpower is a wholly-owned subsidiary of HKHTC. HZ Highpower
has not commenced business as of June 30, 2009.
In June
20, 2008, HKHTC invested $250,000 in Spring Power Technology (Shenzhen) Co.,
Ltd. (“SZ Spring Power”, formerly known as Sure Power Technology (Shenzhen) Co.,
Ltd.) which became a wholly-owned subsidiary of HKHTC. On July 9, 2008, HKHTC
invested an additional $750,000 in SZ Spring Power. SZ Spring Power commenced
business in June 2008 and specializes in researching and manufacturing
Lithium-ion rechargeable batteries.
On June
19, 2008, the Company effected a 5-for-8 reverse stock split of the
Company’s issued and outstanding shares of common stock (the Reverse Stock
Split”). The par value and number of authorized shares of the common stock
remained unchanged. All references to number of shares and per share
amounts included in these consolidated financial statements and the accompanying
notes have been adjusted to reflect the Reverse Stock Split
retroactively.
On June
19, 2008, the company’s common stock commenced trading on the NYSE
Amex.
On June
19, 2008, the Company issued 603,750 shares of common stock upon the closing of
a public offering. The Company’s sale of common stock, which was sold indirectly
by the Company to the public at a price of $3.25 per share, resulted in net
proceeds of $1,486,400. These proceeds were net of underwriting discounts and
commissions, fees for legal and auditing services, and other offering
costs.
HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
1.
|
Organization and Basis of
Presentation
(continued)
|
On June
19, 2008, the Company issued 160,000 shares of common stock upon the closing of
the public offering. The shares are treated as compensation for investor
relations services. The services provided are for the period of one year from
the date of June 19, 2008.
Description of
business
The
subsidiaries of the Company include the following:
Name of company
|
|
Place and date of
incorporation
|
|
Attributable equity
interest held
|
|
Principal activities
|
Hong
Kong Highpower Technology Co., Ltd. (“HKHTC”)
|
|
Hong
Kong
July
4, 2003
|
|
100%
|
|
Investment
holding
|
|
|
|
|
|
|
|
Shenzhen
Highpower Technology Co., Ltd. (“SZ Highpower”)
|
|
PRC
October
8, 2002
|
|
100%
|
|
Manufacturing
of batteries
|
|
|
|
|
|
|
|
HZ
Highpower Technology Co., Ltd.
(“HZ
Highpower”)
|
|
PRC
January
29, 2008
|
|
100%
|
|
Inactive
|
|
|
|
|
|
|
|
Spring
Power Technology (Shenzhen) Co., Ltd. (“SZ Spring Power”)
|
|
PRC
June
4, 2008
|
|
100%
|
|
Manufacturing
of batteries
|
2.
|
Summary
of significant accounting policies
|
Basis of
presentation
The
accompanying consolidated financial statements of the Company have been prepared
in accordance with generally accepted accounting principles in the United States
of America. The consolidated financial statements for the interim periods are
unaudited. In the opinion of management, these consolidated financial
statements, include all adjustments, including normal recurring adjustments,
necessary for their fair presentation. Interim results are not necessarily
indicative of results of operations to be expected for a full year, The
accompanying consolidated financial statements have been prepared in accordance
with the rules and regulations of the Securities and Exchange Commission and do
not include all information and footnotes necessary for a complete presentation
of financial statements in conformity with accounting principles generally
accepted in the United States. These financial statements should be read in
conjunction with the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2008.
HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
|
Summary of significant
accounting policies
(continued)
|
Consolidation
The
consolidated financial statements include the accounts of the Company and its
subsidiaries. Intercompany accounts and transactions have been eliminated in
consolidation
Use of
estimates
In
preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting periods. These accounts and estimates include, but are not limited to,
the valuation of accounts receivable, inventories, deferred income taxes and the
estimation on useful lives of plant and equipment. Actual results could differ
from those estimates.
Certain
comparative amounts in prior periods have been reclassified to conform to the
current period’s presentation. The principal reclassification related to the
separate presentation of loss on exchange rate difference as an operating cost
line item in the statement of operations, which was previously included in
general and administrative costs. These reclassifications had no effect on
reported total assets, liabilities, stockholders’ equity, or net income
(loss).
Economic and political
risks
The
Company’s operations are conducted in the People’s Republic of China (the
“PRC”). Accordingly, the Company’s business, financial condition and
results of operations may be influenced by the political, economic and legal
environment in the PRC and by the general state of the PRC economy.
The
Company’s operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, the
political, economic and legal environment and foreign currency exchange. The
Company’s results may be adversely affected by changes in the political and
social conditions in the PRC and by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency
conversion, remittances abroad and rates and methods of taxation, among other
things.
HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
|
Summary of significant
accounting policies
(continued)
|
Concentrations of credit
risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of accounts receivable. The Company extends
credit based on an evaluation of the customer’s financial condition, generally
without requiring collateral or other security. In order to minimize the credit
risk, the management of the Company has delegated a team responsible for
determining credit limits, credit approvals and other monitoring procedures to
ensure that follow-up action is taken to recover overdue debts. Further, the
Company reviews the recoverable amount of each individual trade debt at each
balance sheet date to ensure that adequate impairment losses are made for
irrecoverable amounts. In this regard, the directors of the Company consider
that the Company’s credit risk is significantly reduced. Other than set forth
below, no customers represented 10% or more of the Company’s net sales and
accounts receivable.
A
substantial percentage of the Company's sales are made to the following
customers. Details of the customers accounting for 10% or more of
total net revenue in any of the six months ended June 30, 2009 and 2008 are as
follows:
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Company
A
|
|
|
22
|
%
|
|
|
22
|
%
|
Company
B
|
|
|
13
|
%
|
|
|
*
|
|
* Less
than 10%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
%
|
|
|
22
|
%
|
Details
of the accounts receivable from the customers with the largest receivable
balances at June 30, 2009 and 2008 are as follows:
|
|
Percentage of accounts
receivable
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Company
A
|
|
|
24
|
%
|
|
|
40
|
%
|
Company
B
|
|
|
11
|
%
|
|
|
32
|
%
|
Largest
receivable balances
|
|
|
35
|
%
|
|
|
72
|
%
|
Cash and cash
equivalents
Cash and
cash equivalents include all cash, deposits in banks and other liquid
investments with initial maturities of six months or less.
Restricted
cash
Certain
cash balances are held as security for short-term bank borrowings and are
classified as restricted cash in the Company’s balance sheets.
HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2
|
Summary of significant
accounting policies
(continued)
|
Accounts
receivable
Accounts
receivable are stated at the original amount less an allowance made for doubtful
receivables, if any, based on a review of all outstanding amounts at period
end. An allowance is also made when there is objective evidence that
the Company will not be able to collect all amounts due according to the
original terms of receivables. Bad debts are written off when identified. The
Company extends unsecured credit to customers in the normal course of business
and believes all accounts receivable in excess of the allowances for doubtful
receivables to be fully collectible. The Company does not accrue interest on
trade accounts receivable.
The
Company did not experience any bad debts during the six months ended June 30,
2009 and 2008.
Inventories
Inventories
are stated at the lower of cost or market value. Cost is determined on a
weighted average basis and includes purchase costs, direct labor and factory
overheads. There are no significant freight charges, inspection costs and
warehousing costs incurred for any of the periods presented. In assessing the
ultimate realization of inventories, management makes judgments as to future
demand requirements compared to current or committed inventory levels. The
Company’s reserve requirements generally increase based on management’s
projected demand requirements, and decrease due to market conditions and product
life cycle changes. During the six months ended June 30, 2009 and
2008, the Company did not make any allowance for slow-moving or defective
inventories. The Company’s production process results in a minor amount of waste
materials. The Company does not record a value for the waste in its cost
accounting. The Company records proceeds on an as realized basis, when the waste
is sold. The Company has offset the proceeds from the sales of waste materials
as a reduction of production costs. Proceeds from the sales of waste materials
were approximately $18,831 and $208,052 for the six months ended June 30, 2009
and 2008 respectively. Generally, waste materials on hand at the end of a year
are nominal.
Plant and
equipment
Plant and
equipment are stated at cost less accumulated depreciation. Cost represents the
purchase price of the asset and other costs incurred to bring the asset into its
existing use. Maintenance, repairs and betterments, including replacement of
minor items, are charged to expense; major additions to physical properties are
capitalized.
Depreciation
of plant and equipment is provided using the straight-line method over their
estimated useful lives at the following annual rates:
Furniture,
fixtures and office equipment
|
|
|
20
|
%
|
Leasehold
improvement
|
|
|
50
|
%
|
Machinery
and equipment
|
|
|
10
|
%
|
Motor
vehicles
|
|
|
20
|
%
|
HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
Summary of significant accounting
policies
(continued)
Plant and equipment
(continued)
Upon sale
or disposition, the applicable amounts of asset cost and accumulated
depreciation are removed from the accounts and the net amount less proceeds from
disposal is charged or credited to income.
Intangible Assets and
Long-Lived Assets
SFAS
No. 142, goodwill and Other Intangible Assets (“SFAS 142”), requires
purchased intangible assets other than goodwill to be amortized over their
useful lives unless these lives are determined to be
indefinite. Accordingly, the consumer battery license is being amortized
over its useful life of 20 years. The Company does not have any
goodwill.
The
Company accounts for the impairment of long-lived assets, such as plant and
equipment, leasehold land and intangible assets, under the provisions of SFAS
No. 144, “Accounting for the Impairment of Long-Lived Assets (“SFAS 144”)”.
SFAS 144 establishes the accounting for impairment of long-lived tangible and
intangible assets other than goodwill and for the disposal of a
business. Pursuant to SFAS No. 144, the Company periodically
evaluates, at least annually, whether facts or circumstances indicate that the
carrying value of its depreciable assets to be held and used may not be
recoverable. If such circumstances are determined to exist, an estimate of
undiscounted future cash flows produced by the long-lived asset, or the
appropriate grouping of assets, is compared to the carrying value to determine
whether impairment exists. In the event that the carrying amount of
long-lived assets exceeds the undiscounted future cash flows, then the carrying
amount of such assets is adjusted to their fair value. The Company reports
an impairment cost as a charge to operations at the time it is
recognized.
There was
no impairment of long-lived assets for the six months ended June 30, 2009 and
2008.
Revenue
recognition
The
Company recognizes revenue when the goods are delivered and the customer takes
ownership and assumes risk of loss, collection of the relevant receivable is
probable, persuasive evidence of an arrangement exists and the sales price is
fixed or determinable. Sales of goods represent the invoiced value of goods, net
of sales returns, trade discount and allowances.
The
Company does not have arrangements for returns from customers and does not have
any future obligations directly or indirectly related to product resales by
customers. The Company has no incentive programs.
HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
|
Summary of significant
accounting policies
(continued)
|
Advertising and promotion
expenses
Advertising
and promotion expenses are charged to expense as incurred.
Advertising
and promotion expenses, which are included in selling and distribution costs,
were not material for the six months ended June 30, 2009 and 2008.
Income
taxes
The
Company uses the asset and liability method of accounting for income taxes
pursuant to SFAS No. 109, “Accounting for Income Taxes”. Under the asset and
liability method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and liabilities and loss
carry forwards and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.
The Company has also
adopted FIN 48, “Accounting for Uncertainty in Income Taxes – an interpretation
of FASB Statement No. 109”.
Comprehensive
income
The
Company has adopted SFAS No. 130, “Reporting Comprehensive Income”, which
establishes standards for reporting and display of comprehensive income, its
components and accumulated balances. Accumulated other comprehensive income
represents the accumulated balance of foreign currency translation adjustments
of the Company.
Foreign currency
translation
The
functional currency of the Company is the Renminbi (“RMB”). The Company
maintains its financial statements in the functional
currency. Monetary assets and liabilities denominated in currencies
other than the functional currency are translated into the functional currency
at rates of exchange prevailing at the balance sheet
dates. Transactions denominated in currencies other than the
functional currency are translated into the functional currency at the exchange
rates prevailing at the dates of the transaction. Exchange gains or losses
arising from foreign currency transactions are included in the determination of
net income for the respective year.
For
financial reporting purposes, the financial statements of the Company, which are
prepared using the functional currency, are then translated into United States
dollars. Assets and liabilities are translated at the exchange rates
at the balance sheet dates and revenue and expenses are translated at the
average exchange rates and stockholders’ equity is translated at historical
exchange rates. Any translation adjustments resulting are not included in
determining net income but are included in foreign exchange adjustment in other
comprehensive income, a component of stockholders’ equity.
HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
|
Summary of significant
accounting policies
(continued)
|
Foreign currency translation
(continued)
|
|
June 30, 2009
|
|
|
June 30,2008
|
|
|
|
|
|
|
|
|
Quarter
end RMB : US$ exchange rate
|
|
|
6.8186
|
|
|
|
6.8670
|
|
Average
quarterly RMB : US$ exchange rate
|
|
|
6.8535
|
|
|
|
7.0225
|
|
The RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No
representation is made that RMB amounts could have been, or could be, converted
into US$ at rates used in translation.
Transactions and
balances
Transactions
in foreign currencies are translated into the functional currency at the
approximate rates of exchange ruling on the transaction date. Exchange gains and
losses resulting from this translation policy are recognized in the statements
of operations.
Fair value of financial
instruments
The
carrying values of the Company’s financial instruments, including cash and cash
equivalents, restricted cash, trade and other receivables, deposits, trade and
other payables, approximate their fair values due to the short-term maturity of
such instruments. The carrying amounts of borrowings approximate their fair
values because the applicable interest rates approximate current market
rates.
The
Company is exposed to certain foreign currency risk from export sales
transactions and the related accounts receivable as they will affect the future
operating results of the Company.
Foreign currency
derivative
From time
to time the Company may utilize forward foreign currency exchange contracts to
reduce the impact of foreign currency exchange rate risks. Forward contracts are
cash flow hedges of the Company’s foreign currency exposures and are recorded at
the contract’s fair value. The effective portion of the forward contract is
initially reported in “Accumulated other comprehensive income,” a component of
shareholders’ equity, with a corresponding asset or liability recorded based on
the fair value of the forward contract. When the hedged transaction is recorded
(generally when revenue on the associated sales contract is recognized), any
unrecognized gains or losses are reclassified into results of operations in the
same period. Any hedge ineffectiveness is recorded to operations in the current
period. The Company measures hedge effectiveness by comparing changes in fair
values of the forward contract and expected cash flows based on changes in the
spot prices of the underlying currencies. Cash flows from forward contracts
accounted for as cash flow hedges are classified in the same category as the
cash flows from the items being hedged.
HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
Summary of significant accounting
policies
(continued)
Earnings per
share
The
Company reports earnings per share in accordance with SFAS No. 128, “Earnings
Per Share”. Basic earnings per share is computed using the weighted average
number of common shares outstanding during the periods presented. The weighted
average number of shares represents the common stock outstanding during the
years, as adjusted retroactively to reflect the November 2007 recapitalization
as described at Note 1. As the Company did not have any common stock equivalents
during such periods, basic and diluted earnings per share were the same for all
periods presented.
Stock-Based
Compensation
Effective
January 1, 2006, the Company adopted Statements of Financial Accounting
Standards (“SFAS”) No. 123R,
Share-Based Payment
(“SFAS
No. 123R”). Under SFAS No. 123R, the Company measures the cost of employee
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award and recognizes the costs over the period the
employee is required to provide service in exchange for the award, which
generally is the vesting period.
Stock-based
compensation expense was $216,667 and Nil and for the six months ended June 30,
2009 and 2008, respectively.
Recently issued accounting
pronouncements
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” and
SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements – an amendment to ARB No. 51”. SFAS No. 141(R) and SFAS
No. 160 require most identifiable assets, liabilities, noncontrolling
interests and goodwill acquired in a business combination to be recorded at
“full fair value” and require noncontrolling interests (previously referred to
as minority interests) to be reported as a component of equity, which changes
the accounting for transactions with noncontrolling interest holders. Both
statements are effective for periods beginning on or after December 15,
2008, and earlier adoption is prohibited. SFAS No. 141(R) will be applied
to business combinations occurring after the effective date. SFAS No. 160
will be applied prospectively to all noncontrolling interests, including any
that arose before the effective date. We are currently evaluating the impact of
adopting SFAS No. 160 on our unaudited condensed consolidated financial
statements.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities,” which requires enhanced disclosures about an entity’s
derivative and hedging activities. This Statement is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008. The Company does not expect the adoption of SFAS
No.
161 will have a material impact on the
unaudited condensed consolidated financial statements.
HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
Summary of significant accounting
policies
(continued)
Recently issued accounting
pronouncements (continued)
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events”, SFAS No. 165 sets
forth; (1) the period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in financial statements, (2) the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements and (3) the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. Management has evaluated the
period beginning July 1, 2009 through August 13, 2009, and concluded there were
no events or transactions occurring during this period that required recognition
or disclosure in the unaudited condensed consolidated financial
statements.
In April
2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
Position (“FSP”) FAS No. 107-1 and APB 28-1, “Interim Disclosures about Fair
Value of Financial Instruments.” This FSP amends Statement of
Financial Accounting Standard (“SFAS”) No. 107, “Disclosures about Fair Value of
Financial Instruments,” and requires disclosures about fair value of financial
instruments for interim reporting periods as well as in annual financial
statements. Additionally, this FSP amends Accounting Principles Board
(“APB”) Opinion No. 28, “Interim Financial Reporting,” to require those
disclosures in summarized financial information at interim reporting
periods. These disclosures are required for interim reporting periods
ending after June 15, 2009. The adoption of FSP No. FAS 107-1 and APB
No. 28-1 did not have a material impact to the unaudited condensed consolidated
financial statements.
In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets, an amendment of SFAS No. 140”. SFAS No. 166 amends
SFAS No. 140 to improve the relevance, representational faithfulness, and
comparability of the information that a reporting entity provides in its
financial reports about a transfer of financial assets; the effects of a
transfer on its financial position, financial performance, and cash flows; and a
transferor’s continuing involvement in transferred financial
assets. This Statement is effective as of the beginning of each
reporting entity’s first annual reporting period that begins after November 15,
2009, for interim periods within that first annual reporting period, and for
interim and annual reporting periods thereafter. Earlier application
is prohibited. The recognition and measurement provisions of this
Statement shall be applied to transfers that occur on or after the effective
date. Management does not expect the adoption of SFAS No. 166 will
have a material impact to the unaudited condensed consolidated financial
statements,
In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standard Codification™
(“Codification”) and the Hierarchy of Generally Accepted Accounting Principles”,
effective for interim and annual reporting periods ending after September 15,
2009. This statement replaces SFAS No. 162, “The Hierarchy of
Generally Accepted Accounting Principles”, and establishes the Codification as
the source of authoritative accounting principles used in the preparation of
financial statements in conformity with generally accepted accounting
principles. The Codification does not replace or affect guidance
issued by the SEC or its staff. After the effective date of this
statement, all non-grandfathered non-SEC accounting literature not included in
the Codification will be superseded and deemed
non-authoritative. Management is currently evaluating the impact of
adopting SFAS No. 168 on the Company’s unaudited condensed consolidated
financial statements.
HONG
KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
3. Other
income
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
interest income
|
|
|
7,627
|
|
|
|
41,032
|
|
|
|
32,769
|
|
|
|
79,045
|
|
Gain
on forward contract
|
|
|
-
|
|
|
|
11,092
|
|
|
|
-
|
|
|
|
11,092
|
|
Other
interest income
|
|
|
-
|
|
|
|
6,501
|
|
|
|
-
|
|
|
|
17,218
|
|
Sundry
income
|
|
|
14,147
|
|
|
|
61,495
|
|
|
|
55,820
|
|
|
|
117,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,774
|
|
|
|
120,120
|
|
|
|
88,589
|
|
|
|
224,654
|
|
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on trade related
bank
loan
|
|
|
35,203
|
|
|
|
164,479
|
|
|
|
63,403
|
|
|
|
348,460
|
|
Interest
on short-term bank loans
|
|
|
4,174
|
|
|
|
29,538
|
|
|
|
17,094
|
|
|
|
52,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,377
|
|
|
|
194,017
|
|
|
|
80,497
|
|
|
|
400,767
|
|
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange contract expenses
|
|
|
119,549
|
|
|
|
-
|
|
|
|
171,085
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119,549
|
|
|
|
-
|
|
|
|
171,085
|
|
|
|
-
|
|
HONG KONG
HIGHPOWER TECHNOLOGY, INC AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
The components of the provision for
income taxes are:
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRC
income taxes
|
|
|
238,382
|
|
|
|
17,937
|
|
|
|
408,380
|
|
|
|
288,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax benefit
|
|
|
(9,630
|
)
|
|
|
46,361
|
|
|
|
(18,489
|
)
|
|
|
(56,940
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
228,752
|
|
|
|
64,298
|
|
|
|
389,819
|
|
|
|
231,178
|
|
The major
components of deferred tax recognized in the consolidated balance sheets as of
June 30, 2009 and December 31, 2008 are as follows:
|
|
At of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
$
|
|
|
$
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
|
|
|
|
Temporary
difference on:
|
|
|
|
|
|
|
Reorganization
of expenses
|
|
|
(109,134
|
)
|
|
|
(93,300
|
)
|
Accelerated
tax depreciation on intangible asset
|
|
|
(15,231
|
)
|
|
|
(11,256
|
)
|
|
|
|
|
|
|
|
|
|
Deferred
tax assets, net
|
|
|
(124,365
|
)
|
|
|
(104,556
|
)
|
|
|
|
|
|
|
|
|
|
Presented
in the balance sheet:
|
|
|
|
|
|
|
|
|
Net
deferred tax assets
|
|
|
(124,365
|
)
|
|
|
(104,556
|
)
|
Effective
January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,
Accounting for Income Taxes (FIN 48). FIN 48 addresses the determination of
whether tax benefits claimed or expected to be claimed on a tax return should be
recorded in the financial statements. Under FIN 48, the Company may recognize
the tax benefit from an uncertain tax position only if it is more likely than
not that the tax position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. The tax benefits
recognized in the financial statements from such a position should be measured
based on the largest benefit that has a greater than fifty percent likelihood of
being realized upon ultimate settlement. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties on income taxes,
accounting in interim periods and requires increased disclosures. The adoption
of the provisions of FIN 48 did not have a material effect on the Company’s
financial statements. As of June 30, 2009, no liability for unrecognized tax
benefits was required to be recorded.
HONG KONG
HIGHPOWER TECHNOLOGY, INC AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
7.
|
Risk
Management Activities, Including
Derivative
|
The
Company selectively uses foreign currency forward contracts to offset the
effects of foreign currency exchange rate changes on reported earnings, cash
flow and net asset positions. The terms of these derivative contracts are
generally for 12 months or less. Changes in the fair value of these derivative
contracts are recorded in earnings to offset the impact of foreign currency
transaction gains and losses attributable to certain third party and
intercompany financial assets and liabilities with similar terms. The net gains
and losses attributable to these activities are included in the statements of
comprehensive income.
|
|
At of
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
$
|
|
|
$
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
|
|
|
|
Currency
forwards (notional amount $4 million), consisting of a put and a
call
|
|
|
7,333
|
|
|
|
116,157
|
|
Due to
the volatility of the US Dollar to the Company’s functional currency, the
Company has put into place a hedging program to attempt to protect it from
significant changes to the US Dollar, which would affect the value of the
Company’s US dollar receivables and sales. At June 30, 2009, the Company had a
series of currency forwards totaling a notional amount US$1,000,000 expiring
from April 2009 to July 2009.
The
Company recognized the following gains and losses attributable to its derivative
financial instruments during the following periods:
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange contracts, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
recognized in Other expenses, net
|
|
|
119,549
|
|
|
|
-
|
|
|
|
171,085
|
|
|
|
-
|
|
Hedging
Activities
SZ
Highpower uses foreign currencies derivative instruments to manage foreign
exchange resulting from fluctuations in US Dollar to the Company’s functional
currency (RMB). The notional amounts of these financial instruments are based on
expected cash flow from operations.
HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
7.
Risk Management Activities, Including
Derivative
(continued)
At the
inception of a derivative contract, SZ Highpower historically designated the
derivative as a cash flow hedge. For all derivatives designated as cash flow
hedges, SZ Highpower formally documented the relationship between the derivative
contract and the hedged items, as well as the risk management objective for
entering into the derivative contract. To be designated as a cash flow hedge
transaction, the relationship between the derivative and the hedged items must
be highly effective in achieving the offset of changes in cash flows
attributable to the risk both at the inception of the derivative and on an
ongoing basis. SZ Highpower historically measured hedge effectiveness on a
quarterly basis and hedge accounting would be discontinued prospectively if it
was determined that the derivative was no longer effective in offsetting changes
in the cash flows of the hedged item. Gains and losses deferred in accumulated
other comprehensive income related to cash flow hedge derivatives that became
ineffective remained unchanged until the related cashflow was received. If SZ
Highpower determined that it was probable that a hedged forecasted transaction
would not occur, deferred gains or losses on the derivative were recognized in
earnings immediately.
Derivatives,
historically, were recorded on the balance sheet at fair value and changes in
the fair value of derivatives were recorded each period in net income or other
comprehensive income, depending on whether a derivative was designated as part
of a hedge transaction and, if it was, depending on the type of hedge
transaction. SZ Highpower’s derivatives historically consisted primarily of cash
flow hedge transactions in which SZ Highpower was hedging the variability of
cash flows related to a forecasted transaction. Period to period changes in the
fair value of derivative instruments designated as cash flow hedges were
reported in other comprehensive income and reclassified to net income in the
periods in which the contracts are settled. The ineffective portions of the cash
flow hedges were reflected in net income as an increase or decrease to other
income (expense). Gains and losses on derivative instruments that did not
qualify for hedge accounting were also recorded as an increase or decrease to
other income (expense), in the period in which they occurred. The resulting cash
flows from derivatives were reported as cash flows from operating
activities.
8.
|
Prepaid
expenses and other
receivables
|
|
|
At of
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Purchase
deposits paid
|
|
|
1,534,596
|
|
|
|
88,459
|
|
Advance
to staff
|
|
|
213,278
|
|
|
|
143,595
|
|
Other
deposits and prepayments
|
|
|
39,094
|
|
|
|
495,325
|
|
Other
receivables
|
|
|
1,726,926
|
|
|
|
1,005,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,513,894
|
|
|
|
1,732,709
|
|
HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
9.
|
Deferred
charges – Stock-based
compensation
|
|
|
At of
|
|
|
|
June 30
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
|
|
|
|
|
|
Stock-based
compensation – consulting fee
|
|
|
520,000
|
|
|
|
520,000
|
|
|
|
|
|
|
|
|
|
|
Accumulated
amortization
|
|
|
520,000
|
|
|
|
303,333
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
-
|
|
|
|
216,667
|
|
Amortization
expenses included in general and administrative costs for the six months ended
June 30, 2009 and 2008 were $216,667 and $43,334 respectively.
The
Company is amortizing the $520,000 cost of stock-based compensation over a
period of one year on the straight line basis.
|
|
At of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
|
2,104,424
|
|
|
|
1,708,431
|
|
Work
in progress
|
|
|
1,734,580
|
|
|
|
1,434,517
|
|
Finished
goods
|
|
|
4,015,399
|
|
|
|
8,049,138
|
|
Packing
materials
|
|
|
16,397
|
|
|
|
16,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,870,800
|
|
|
|
11,208,697
|
|
HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
|
|
At of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
$
|
|
|
|
$
|
|
Cost
|
|
|
|
|
|
|
|
|
Furniture,
fixtures and office equipment
|
|
|
729,518
|
|
|
|
598,496
|
|
Leasehold
improvement
|
|
|
1,299,012
|
|
|
|
712,120
|
|
Machinery
and equipment
|
|
|
8,872,944
|
|
|
|
8,155,270
|
|
Motor
vehicles
|
|
|
504,024
|
|
|
|
476,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,405,498
|
|
|
|
9,942,796
|
|
|
|
|
|
|
|
|
|
|
Accumulated
depreciation
|
|
|
|
|
|
|
|
|
Furniture,
fixtures and office equipment
|
|
|
294,102
|
|
|
|
235,613
|
|
Leasehold
improvement
|
|
|
-
|
|
|
|
220,746
|
|
Machinery
and equipment
|
|
|
1,830,415
|
|
|
|
1,486,624
|
|
Motor
vehicles
|
|
|
266,445
|
|
|
|
221,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,390,962
|
|
|
|
2,164,319
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
Furniture,
fixtures and office equipment
|
|
|
435,416
|
|
|
|
362,883
|
|
Leasehold
improvement
|
|
|
1,299,012
|
|
|
|
491,374
|
|
Machinery
and equipment
|
|
|
7,042,529
|
|
|
|
6,668,646
|
|
Motor
vehicles
|
|
|
237,579
|
|
|
|
255,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,014,536
|
|
|
|
7,778,477
|
|
|
The
components of depreciation charged
are:
|
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in factory overheads
|
|
|
118,715
|
|
|
|
159,594
|
|
|
|
304,818
|
|
|
|
265,018
|
|
Included
in operating expenses
|
|
|
68,075
|
|
|
|
37,285
|
|
|
|
119,189
|
|
|
|
80,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
186,790
|
|
|
|
196,879
|
|
|
|
424,007
|
|
|
|
345,674
|
|
HONG KONG
HIGHPOWER TECHNOLOGY, INC AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
|
|
At of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
3,112,765
|
|
|
|
3,112,765
|
|
|
|
|
|
|
|
|
|
|
Accumulated
amortization
|
|
|
(94,476
|
)
|
|
|
(62,255
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
3,018,289
|
|
|
|
3,050,510
|
|
The
leasehold land is being amortized annually using the straight-line method over
the lease terms of 50 years.
|
|
At of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
$
|
|
|
|
$
|
|
Cost
|
|
|
|
|
|
|
|
|
Consumer
battery license fee
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
Accumulated
amortization
|
|
|
(125,000
|
)
|
|
|
(100,000
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
875,000
|
|
|
|
900,000
|
|
Amortization
expenses included in selling and distribution costs for the six months ended
June 30, 2009 and 2008 was $25,000.
Shenzhen
Highpower Technology Co., Ltd. (SZ Highpower), a wholly-owned subsidiary of the
Company, entered into a Consumer Battery License Agreement with Ovonic Battery
Company, Inc. (Ovonic), an unrelated party, dated May 14, 2004, pursuant to
which SZ Highpower acquired a royalty-bearing, non-exclusive license to use
certain patents owned by Ovonic to manufacture rechargeable nickel metal hydride
batteries for portable consumer applications (Consumer Batteries) in the PRC,
and a royalty-bearing, non-exclusive worldwide license to use certain patents
owned by Ovonic to use, sell and distribute Consumer Batteries. SZ
Highpower made an up-front royalty payment to Ovonic of $50,000 in
2004.
HONG KONG
HIGHPOWER TECHNOLOGY, INC AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
13.
|
Intangible asset
(continued)
|
On August
8, 2007, SZ Highpwer and Ovonic amended the Consumer Battery License Agreement
pursuant to which SZ Highpower agreed to pay a total of $112,580, which was to
be made in two equal payments of $56,290, one of which was to be made within 15
days of August 8, 2007, and the other within 45 days of August 8, 2007, as
royalties for its use of the licensed technology in 2004, 2005 and 2006.
Both of these payments were made during 2007 and were recorded as royalty
expense in prior years, which was included in selling and distribution costs in
the statement of operations.
The
Consumer Battery License Agreement also requires the Company to pay an
additional up-front royalty payment of $1,000,000 by four annual installments
and an annual royalty fee based on the gross sales of consumer batteries over
the term of the Consumer Battery License Agreement. Accordingly, during the year
ended December 31, 2007, the Company recorded a total up-front royalty payment
obligation of $1,000,000, which was included in other payables and accrued
liabilities, with the related debit recorded as an intangible asset entitled
consumer battery license agreement. During the six months ended June 30, 2009,
the Company recorded a total of approximately $98,946 as royalty expense, which
was included in selling and distribution costs in the statement of operations.
At June 30, 2009, accrued royalty fees payable was $922,238 (see Note
14).
The
Company is amortizing the $1,000,000 cost of the Consumer Battery License
Agreement over a period of 20 years on the straight line basis. The
accounting for the Consumer Battery License Agreement is based on the Company’s
estimate of the useful life of the underlying technology, which is based on the
Company’s assessment of existing battery technology, current trends in the
battery business, potential developments and improvements, and the Company’s
current business plan.
14.
|
Other
payables and accrued liabilities
|
|
|
At of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Accrued
expenses
|
|
|
1,252,783
|
|
|
|
1,072,331
|
|
Royalty
payable
|
|
|
922,238
|
|
|
|
1,540,900
|
|
Sales
deposits received
|
|
|
4,533,234
|
|
|
|
388,261
|
|
Value-added
tax payables
|
|
|
-
|
|
|
|
105,833
|
|
Other
payables
|
|
|
26,847
|
|
|
|
31,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,735,102
|
|
|
|
3,139,275
|
|
HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
|
|
At of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
$
|
|
|
|
$
|
|
Secured:
|
|
|
|
|
|
|
|
|
Repayable within one
year
|
|
|
|
|
|
|
|
|
Short term bank
loans
|
|
|
1,851,367
|
|
|
|
2,969,939
|
|
Other trade related bank
loans
|
|
|
3,792,915
|
|
|
|
11,859,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,644,282
|
|
|
|
14,829,228
|
|
As of
June 30, 2009, the above bank borrowings were secured by the
following:
|
(a)
|
charge
over bank deposits of $4,119,107 which is included in restricted cash on
the Balance sheet;
|
|
(b)
|
personal
guarantee executed by the directors of the
Company;
|
|
(c)
|
the
legal charge over leasehold land with carrying amount $3,018,289 (see Note
12); and
|
|
(d)
|
other
financial covenant
|
The bank
borrowings require one of the Company’s subsidiaries to maintain a minimum net
worth of $11,732,692. The Company was in compliance with this requirement at
June 30, 2009.
The
interest rates of trade related bank loans were at bank’s prime lending rate per
annum with various maturity dates. The rates at June 30, 2009 ranged from 6.5%
to 8%.
The
interest rates of short term bank loans were at 4.86% per annum at June 30,
2009.
For
employees in PRC, the Company contributes on a monthly basis to various defined
contribution plans organized by the relevant municipal and provincial government
in the PRC based on certain percentage of the relevant employees’ monthly
salaries. The municipal and provincial governments undertake to assume the
retirement benefit obligations payable to all existing and future retired
employees under these plans and the Company has no further constructive
obligation for post-retirement benefits beyond the contributions made.
Contributions to these plans are expenses as incurred.
The
assets of the schemes are controlled by trustees and held separately from those
of the Company. Total pension cost was $258,228 and $48,840 for the six months
ended June 30, 2009 and 2008, respectively.
HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
17.
|
Commitments
and contingencies
|
Operating leases
commitments
The
Company leases factory and office premises under various non-cancelable
operating lease agreements that expire at various dates through years 2009 to
2010, with an option to renew the lease. All leases are on a fixed repayment
basis. None of the leases includes contingent rentals. Minimum future
commitments under these agreements payable as of June 30, 2009 are as
follows:
Period
ending June 30,
|
|
|
$
|
|
|
|
|
|
|
2009
|
|
|
276,097
|
|
2010
|
|
|
235,653
|
|
|
|
|
|
|
|
|
|
511,750
|
|
Rent
expenses for the six months ended June 30, 2009 and 2008 were $475,375 and
$292,506 respectively.
Capital
commitments
The
Company has the following capital commitments as of June 30, 2009:
|
|
|
$
|
|
|
|
|
|
|
Purchase
of plant and equipment
|
|
|
187,526
|
|
Contingencies
From time
to time, the Company factors bills receivable to banks. At the time of the
factoring, all rights and privileges of holding the receivables are transferred
to the banks. The Company removes the asset from its books and records a
corresponding expense for the amount of the discount. The Company remains
contingently liable on the amount outstanding in the event the bill issuer
defaults.
|
|
At of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Bills
discounted
|
|
|
-
|
|
|
|
-
|
|
HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
The
Company uses the “management approach” in determining reportable operating
segments. The management approach considers the internal organization and
reporting used by the Company’s chief operating decision maker for making
operating decisions and assessing performance as the source for determining the
Company’s reportable segments. Management, including the chief operating
decision maker, reviews operating results solely by monthly revenue (but not by
sub-product type or geographic area) and operating results of the Company and,
as such, the Company has determined that the Company has one operating segment
as defined by SFAS 131, “ Disclosures about Segments of an Enterprise and
Related Information ”.
Long-lived
assets of the Company are located in PRC. Geographic information
about the revenues and accounts receivable which are classified based on the
location of the customers is set out as follows:
|
|
Six
months ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
$
|
|
|
|
$
|
|
Net
revenue
|
|
|
|
|
|
|
|
|
Hong
Kong and China
|
|
|
12,157,121
|
|
|
|
13,346,458
|
|
Asia
|
|
|
1,573,266
|
|
|
|
2,719,708
|
|
Europe
|
|
|
9,002,647
|
|
|
|
15,306,697
|
|
North
America
|
|
|
3,818,465
|
|
|
|
5,187,455
|
|
South
America
|
|
|
41,911
|
|
|
|
159,329
|
|
Others
|
|
|
161,879
|
|
|
|
133,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,755,289
|
|
|
|
36,853,038
|
|
|
|
At of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
$
|
|
|
|
$
|
|
Accounts
receivable
|
|
|
|
|
|
|
|
|
Hong
Kong and China
|
|
|
5,009,263
|
|
|
|
5,012,471
|
|
Asia
|
|
|
626,535
|
|
|
|
169,376
|
|
Europe
|
|
|
2,472,255
|
|
|
|
2,695,166
|
|
North
America
|
|
|
85,628
|
|
|
|
875,022
|
|
South
America
|
|
|
1,519,566
|
|
|
|
13,558
|
|
Others
|
|
|
10,281
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,723,528
|
|
|
|
8,765,593
|
|
Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
The
following discussion relates to a discussion of the financial condition and
results of operations of Hong Kong Highpower Technology, Inc. (the “Company”)
and its wholly-owned subsidiary Hong Kong Highpower Technology Co., Ltd.
(referred to herein as “HKHT”), and HKHT’s wholly-owned subsidiaries Shenzhen
Highpower Technology Co., Ltd. (“Shenzhen Highpower”) and Springpower Technology
(Shenzhen) Co., Ltd. (“Springpower”). HKHT’s other subsidiary, HZ Highpower
Technology Co. (“HZ Highpower”) has not yet commenced operations.
Forward-Looking
Statements
This
management’s discussion and analysis of financial condition and results of
operations should be read in conjunction with our unaudited consolidated
financial statements and the related notes that are included in this Quarterly
Report and the audited consolidated financial statements and related notes and
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” contained in our Annual Report on Form 10-K for the year ended
December 31, 2008.
This
Quarterly Report contains forward-looking statements that involve substantial
risks and uncertainties. All statements other than historical facts contained in
this report, including statements regarding our future financial position,
capital expenditures, cash flows, business strategy and plans and objectives of
management for future operations, are forward-looking statements. The words
“anticipated,” “believe,” “expect, “plan,” “intend,” “seek,” “estimate,”
“project,” “could,” “may,” and similar expressions are intended to identify
forward-looking statements. Such statements reflect our management’s current
views with respect to future events and financial performance and involve risks
and uncertainties, including, without limitation, the current economic downturn
adversely affecting demand for the our products; fluctuations in the cost of raw
materials; our dependence on, or inability to attract additional, major
customers for a significant portion of our net sales; our ability to increase
manufacturing capabilities to satisfy orders from new customers; changes in the
laws of the PRC that affect our operations; our ability to complete construction
at our new manufacturing facility on time; our ability to control operating
expenses and costs related to the construction of our new manufacturing
facility; the devaluation of the U.S. Dollar relative to the Renminbi; our
dependence on the growth in demand for portable electronic devices and the
success of manufacturers of the end applications that use our battery products;
our responsiveness to competitive market conditions; our ability to successfully
manufacture Li-ion batteries in the time frame and amounts expected; the market
acceptance of our Li-ion products; changes in foreign, political, social,
business and economic conditions that affect our production capabilities or
demand for our products; and various other matters, many of which are beyond our
control. Actual results may vary materially and adversely from those
anticipated, believed, estimated or otherwise indicated should one or more of
these risks or uncertainties occur or if any of the risks or uncertainties
described in elsewhere in this report or in the “Risk Factors” section of our
2008 Annual Report occur. Consequently, all of the forward-looking statements
made in this filing are qualified by these cautionary statements and there can
be no assurance of the actual results or developments.
Overview
We were
incorporated in the state of Delaware on January 3, 2006. We were originally
organized as a “blank check” shell company to investigate and acquire a target
company or business seeking the perceived advantages of being a publicly held
corporation. On November 2, 2007, we closed a share exchange transaction,
pursuant to which we (i) became the 100% parent of HKHT and its wholly-owned
subsidiary, Shenzhen Highpower, (ii) assumed the operations of HKHT and its
subsidiary and (iii) changed our name from SRKP 11, Inc. to Hong Kong Highpower
Technology, Inc. HKHT was incorporated in Hong Kong in 2003, under the Companies
Ordinance of Hong Kong. Shenzhen Highpower was founded in founded in
2001. HKHT formed HZ Highpower and Springpower in 2008. HZ
Highpower has not yet commenced business operations.
In
addition, on November 2, 2007, concurrently with the close of the Share
Exchange, we conducted a private placement transaction (the “Private
Placement”). Pursuant to Subscription Agreements entered into with the
investors, we sold an aggregate of 1,772,745 shares of Common stock at $1.76 per
share. As a result, we received gross proceeds in the amount of $3.12
million.
Through
Shenzhen Highpower, we manufacture Nickel Metal Hydride (“Ni-MH”) batteries for
both consumer and industrial applications. We have developed significant
expertise in Ni-MH battery technology and large-scale manufacturing that enables
us to improve the quality of our battery products, reduce costs, and keep pace
with evolving industry standards. In 2008, we commenced manufacturing two lines
of Lithium-Ion (“Li-ion”) and Lithium polymer rechargeable batteries through
Spring Power for higher-end, high-performance applications, such as laptops,
digital cameras and wireless communication products. Our automated
machinery allows us to process key aspects of the manufacturing process to
ensure high uniformity and precision, while leaving the non-key aspects of the
manufacturing process to manual labor.
We employ
a broad network of salespersons in China and Hong Kong, which target key
customers by arranging in-person sales presentations and providing post-sale
services. The sales staff works with our customers to better address customers’
needs.
Critical
Accounting Policies and Estimates
The SEC
defines critical accounting policies as those that are, in management's view,
most important to the portrayal of our financial condition and results of
operations and those that require significant judgments and
estimates.
The
preparation of these condensed consolidated financial statements requires our
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, as well as the disclosure of
contingent assets and liabilities at the date of our financial statements. We
base our estimates on historical experience, actuarial valuations and various
other factors that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. Some of
those judgments can be subjective and complex and, consequently, actual results
may differ from these estimates under different assumptions or conditions. While
for any given estimate or assumption made by our management there may be other
estimates or assumptions that are reasonable, we believe that, given the current
facts and circumstances, it is unlikely that applying any such other reasonable
estimate or assumption would materially impact the financial statements. The
accounting principles we utilized in preparing our consolidated financial
statements conform in all material respects to generally accepted accounting
principles in the United States of America.
Use of
Estimates
. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the dates of the financial statements, as well as the reported amounts of
revenues and expenses during the reporting periods. These accounts and estimates
include, but are not limited to, the valuation of accounts receivable,
inventories, deferred income taxes and the estimation on useful lives of plant
and equipment. Actual results could differ from those estimates.
Accounts
Receivable
. Accounts receivable are stated at original amount less
allowance made for doubtful receivables, if any, based on a review of all
outstanding amounts at the period end. An allowance is also made when there is
objective evidence that we will not be able to collect all amounts due according
to original terms of receivables. Bad debts are written off when identified. We
extend unsecured credit to customers in the normal course of business and
believe all accounts receivable in excess of the allowances for doubtful
receivables to be fully collectible. We do not accrue interest on trade accounts
receivable.
Revenue
Recognition
.
We
recognize revenue when the goods are delivered and the customer takes ownership
and assumes risk of loss, collection of the relevant receivable is probable,
persuasive evidence of an arrangement exists and the sales price is fixed or
determinable. Sales of goods represent the invoiced value of goods, net of sales
returns, trade discount and allowances.
We do not
have arrangements for returns from customers and do not have any future
obligations directly or indirectly related to product resales by the customer.
We have no incentive programs.
Inventories
.
Inventories are stated at
the lower of cost or market value. Cost is determined on a weighted average
basis and includes purchase costs, direct labor and factory overheads. In
assessing the ultimate realization of inventories, management makes judgments as
to future demand requirements compared to current or committed inventory levels.
Our reserve requirements generally increase based on management’s projected
demand requirements, and decrease due to market conditions and product life
cycle changes. Our production process results in a minor amount of waste
materials. We do not record a value for the waste in our cost accounting. We
record proceeds on an as realized basis, when the waste is sold. We offset the
proceeds from the sales of waste materials as a reduction of production
costs.
Income
Taxes
.
We use the
asset and liability method of accounting for income taxes pursuant to SFAS No.
109, “Accounting for Income Taxes.” Under the asset and liability method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and loss carry
forwards and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized. We have also adopted FIN 48,
“Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 109.”
Foreign Currency
Translation
. Our functional currency is the Renminbi (“RMB”). We maintain
our financial statements in the functional currency. Monetary assets and
liabilities denominated in currencies other than the functional currency are
translated into the functional currency at rates of exchange prevailing at the
balance sheet dates. Transactions denominated in currencies other than the
functional currency are translated into the functional currency at the exchange
rates prevailing at the dates of the transaction. Exchange gains or losses
arising from foreign currency transactions are included in the determination of
net income for the respective periods.
For
financial reporting purposes, our financial statements, which are prepared using
the functional currency, are then translated into United States dollars. Assets
and liabilities are translated at the exchange rates at the balance sheet dates
and revenue and expenses are translated at the average exchange rates and
stockholders’ equity is translated at historical exchange rates. Any translation
adjustments resulting are not included in determining net income but are
included in foreign exchange adjustment in other comprehensive income, a
component of stockholders’ equity.
The RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No
representation is made that RMB amounts could have been, or could be, converted
into U.S. Dollars at rates used in translation.
Results
of Operations
Non-GAAP
Financial Results
In
evaluating our business, we consider and use EBITDA, a financial measure not in
accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), as
a supplemental measure of our operating performance. We define EBITDA as net
income (loss) before net interest expense, provision (benefit) for income taxes,
and depreciation and amortization. We use EBITDA as a supplemental measure to
review and assess our operating performance and to enhance comparability between
periods. We also believe the use of EBITDA facilitates the use by investors of
operating performance comparisons from period to period and company to company
by backing out potential differences caused by variations in such items as the
book amortization of intangible assets (affecting relative amortization
expense), the age and book value of facilities and equipment (affecting relative
depreciation expense), and capital structure (affecting relative interest
expense). We also present EBITDA because we believe it is frequently used by
securities analysts, investors and other interested parties as an alternate
measure of financial performance. We reconcile EBITDA to net income (loss), the
most comparable financial measure under U.S. GAAP.
We
believe that EBITDA permits a comparative assessment of our operating
performance, relative to our performance based on our U.S. GAAP results, while
isolating the effects of interest, taxes, depreciation and amortization, which
may vary from period to period without any correlation to underlying operating
performance. We provide information relating to our EBITDA so that securities
analysts, investors and other interested parties have the same data that we
employ in assessing our overall operations. We believe that trends in our EBITDA
are a valuable indicator of our operating performance and of our ability to
produce operating cash flows to fund working capital needs, to service debt
obligations and to fund capital expenditures.
The term
EBITDA is not defined under U.S. GAAP, and is not a measure of operating income,
operating performance or liquidity presented in accordance with U.S. GAAP. Our
EBITDA has limitations as an analytical tool, and when assessing our operating
performance, EBITDA should not be considered in isolation, or as a substitute
for net income (loss) or other consolidated statement of operations data
prepared in accordance with U.S. GAAP. Some of these limitations include, but
are not limited to, the following:
|
·
|
EBITDA
(1) does not reflect our cash expenditures or future requirements for
capital expenditures or contractual commitments; (2) does not reflect
changes in, or cash requirements for, our working capital needs;
(3) does not reflect the interest expense, or the cash requirements
necessary to service interest or principal payments, on our debt;
(4) does not reflect income taxes or the cash requirements for any
tax payments; and (5) does not reflect all of the costs associated
with operating our business;
|
|
·
|
although
depreciation and amortization are non-cash charges, the assets being
depreciated and amortized often will have to be replaced in the future,
and EBITDA does not reflect any cash requirements for such replacements;
and
|
|
·
|
other
companies may calculate EBITDA differently than we do, limiting its
usefulness as a comparative
measure.
|
We
compensate for these limitations by relying primarily on our U.S. GAAP results
and using EBITDA only supplementally. EBITDA is calculated as follows for the
periods presented:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
$
|
|
$
|
|
$
|
|
$
|
Net
income (loss)
|
|
|
968,656
|
|
684,247
|
|
1,371,622
|
|
1,414,574
|
Interest
expense
|
|
|
39,377
|
|
194,047
|
|
80,497
|
|
400,767
|
Income
taxes
|
|
|
228,752
|
|
64,298
|
|
389,819
|
|
231,178
|
Depreciation
|
|
|
186,790
|
|
190,879
|
|
424,007
|
|
345,674
|
Amortization
|
|
|
114,731
|
|
71,398
|
|
273,888
|
|
99,462-
|
EBITDA
|
|
|
1,538,306
|
|
1,204,869
|
|
2,539,833
|
|
2,491,655
|
EBITDA
for the three months ended June 30, 2009 totaled $1,538,306, compared with
$1,204,869 for the comparable period in 2008. The increase was due to
increase in the number of battery units sold and increased stock-based
compensation expense in 2009.
EBITDA
for the six months ended June 30, 2009 totaled $2,539,833, compared with
$2,491,655 for the comparable period in 2008. The increase was due to
increase in the number of battery units sold and increase stock-based
compensation expense in 2009.
Three
Months Ended June 30, 2009 and 2008
Net sales
for the three months ended June 30, 2009 were $15.4 million compared to
$19.0 million for the three months ended June 30, 2008, a decrease of
18.8%. This decrease was largely due to a 0.7% increase in the number
of battery units sold and a 19.5% decrease in the average selling price of our
battery units. The 0.7% increase in the number of battery units sold
was due to increased orders from our major customers. The 19.5%
decrease in the average selling price of our battery units was due to a decrease
in the average cost of nickel during the three months ended June 30, 2009
compared to the comparable period in 2008. Net sales during the three
months ended June 30, 2008 also included $148,052 from the sale of battery
seconds. No such sales of battery seconds occurred during the three
months ended June 30, 2009.
Cost of
sales consists of the cost of nickel and other materials. Costs of
sales were $12.4 million the three months ended June 30, 2009 as compared
to $15.6 million for the comparable period in 2008. As a
percentage of net sales, cost of sales decreased to 80.1% for the three months
ended June 30, 2009 compared to 82.3% for the comparable period in
2008. This decrease was attributable to a 22% decrease in the average
per unit cost of goods sold during three months ended June 30, 2009 as compared
to the comparable period in 2008, which was offset by a 19.5% decrease in the
average selling price of our battery units during the three months ended June
30, 2009 over three months ended June 30, 2008. The 22% decrease in the average
per unit cost of goods sold resulted from a 50% decrease in the average cost of
nickel during the three months ended June 30, 2009 compared to the comparable
period in 2008.
Gross
profit for the three months ended June 30, 2009 was $3.1 million, or 19.9% of
net sales, compared to $3.4 million, or 17.7% of net sales, for the
comparable period in 2008. Management considers gross profit to be a key
performance indicator in managing our business. Gross profit margins are usually
a factor of cost of sales, product mix and demand for product. The increase in
our gross profit margin for the three months ended June 30, 2009 is primarily
due to a 22% decrease in the average per unit cost of goods sold during three
months ended June 30, 2009 as compared to the comparable period in
2008.
To cope
with pressure on our gross margins we intend to control production costs by
preparing budgets for each department and comparing actual costs with our
budgeted figures monthly and quarterly. Additionally, we have reorganized the
Company’s production structure and have focused more attention on employee
training to enhance efficiency. We also intend to expand our market share by
investing in greater promotion of our products in regions such as the U.S.,
Russia, Europe and India, and by expanding our sales team with more experienced
sales personnel. We have also begun production of a line of Li-ion batteries as
to complement our current Ni-MH battery products so that we are less vulnerable
to price increases in nickel. We intend to expand production of our Li-ion
battery products in the future.
Selling
and distribution costs were $580,000 for the three months ended June 30, 2009
compared to $548,000 for the comparable period in 2008. The increase was
primarily due to the expansion of our salesforce. Our market share
remained relatively flat attributable to the decreased demand for our products
due to the global economic downturn and challenging economic
conditions.
General
and administrative costs were $1.0 million, or 6.8% of net sales, for the three
months ended June 30, 2009, compared to $1.6 million, or 8.3% of net sales, for
the comparable period in 2008. Management considers these expenses as a
percentage of net sales to be a key performance indicator in managing our
business. The decrease as a percentage of net sales was primarily due
to a decrease in personnel and labor costs, which decreased $124,500 for the
three months ended June 30, 2009 over the comparable period in 2008 due to the
reduction of our indirect staff to cut indirect cost , which was offset by an
increase in stock based compensation charges in the three months ended June 30,
2009.
We
experienced losses on the exchange rate difference between the U.S. Dollar and
the RMB of $23,000 and $331,000, respectively, in the three months ended June
30, 2009 and 2008, a significant decrease in losses, due to the slower
devaluation of the U.S. Dollar relative to the RMB over the respective
periods. Although our sales contracts do not automatically adjust to
reflect changes in exchange rates, to cope with devaluation of the U.S. Dollar
relative to the RMB, each time that we enter into new sales contracts with new
or existing customers we adjust the selling price of batteries in anticipation
of an increase, and to make up for any potential change, in the exchange rate
between the two currencies. We currently engage in currency hedging,
due to which we experienced a $21,000 loss on the fair value of our currency
forwards in the three months ended June 30, 2009 compared to $nil in the three
months ended June 30, 2008.
Interest
expense was $39,000 for the three months ended June 30, 2009, as compared to
$194,000 for the comparable period in 2008. The decrease was primarily due
to lower borrowing levels. We decreased our borrowings by approximately $11.2
million in the three months ended June 30, 2009 as compared to the three months
ended June 30, 2008. Further increases in borrowing rates would
further increase our interest expense, which would have a negative effect on our
results of operations.
Other
income from operations, which consists of bank interest income, exchange gains
and losses and sundry income, was $22,000, for the three months ended June 30,
2009, as compared to $120,000 for the three months ended June 30, 2008. The
decrease was due to a $33,000 decrease in bank interest income, an $11,000
decrease in other interest income, a $7,000 decrease in other interest income
and a $47,000 increase in sundry income.
During
the three months ended June 30, 2009, we recorded a provision for income taxes
of $229,000, as compared to $64,000 for the comparable period in
2008. The increase was a result of an increase in our net taxable
income, partially offset by an increase in our tax rate.
Net
income for the three months ended June 30, 2009 was $696,000, compared to net
income of $684,000 for the comparable period in 2008.
Six
Months Ended June 30, 2009 and 2008
Net sales
for the six months ended June 30, 2009 were $26.8 million compared to
$36.9 million for the six months ended June 30, 2008, a decrease of
27%. This decrease was largely due to a 10% decrease in the number of
battery units sold and a 19% decrease in the average selling price of our
battery units. The 10% decrease in the number of battery units sold
was due to decreased orders from our major customers. The 19%
decrease in the average selling price of our battery units was due to a decrease
in the average cost of nickel during the six months ended June 30, 2009 compared
to the comparable period in 2008. Net sales during the six months
ended June 30, 2008 also included $208,052 from the sale of battery
seconds. No such sales of battery seconds occurred during the six
months ended June 30, 2009.
Cost of
sales consists of the cost of nickel and other materials. Costs of
sales were $21.3 million the six months ended June 30, 2009 as compared to
$30.8 million for the comparable period in 2008. As a percentage
of net sales, cost of sales decreased to 79.6% for the six months ended June 30,
2009 compared to 83.5% for the comparable period in 2008. This
decrease was attributable to a 22% decrease in the average per unit cost of
goods sold during six months ended June 30, 2009 as compared to the comparable
period in 2008, which was offset by a 19% decrease in the average selling price
of our battery units during the six months ended June 30, 2009 over six months
ended June 30, 2008. The 22% decrease in the average per unit cost of goods sold
resulted from a 50% decrease in the average cost of nickel during the six months
ended June 30, 2009 compared to the comparable period in 2008.
Gross
profit for the six months ended June 30, 2009 was $5.5 million, or 20.4% of net
sales, compared to $6.1 million, or 16.5% of net sales, for the comparable
period in 2008. Management considers gross profit to be a key performance
indicator in managing our business. Gross profit margins are usually a factor of
cost of sales, product mix and demand for product. The increase in our gross
profit margin for the six months ended June 30, 2009 is primarily due to a 22%
decrease in the average per unit cost of goods sold during six months ended June
30, 2009 as compared to the comparable period in 2008.
To cope
with pressure on our gross margins we intend to control production costs by
preparing budgets for each department and comparing actual costs with our
budgeted figures monthly and quarterly. Additionally, we have reorganized the
Company’s production structure and have focused more attention on employee
training to enhance efficiency. We also intend to expand our market share by
investing in greater promotion of our products in regions such as the U.S.,
Russia, Europe and India, and by expanding our sales team with more experienced
sales personnel. We have also begun production of a line of Li-ion batteries as
to complement our current Ni-MH battery products so that we are less vulnerable
to price increases in nickel. We intend to expand production of our Li-ion
battery products in the future.
Selling
and distribution costs were $1.1 million for the six months ended June 30, 2009
compared to $962,000 for the comparable period in 2008. The increase was
primarily due to the expansion of our salesforce. Our market share
remained relatively flat attributable to the decreased demand for our products
due to the global economic downturn and challenging economic
conditions.
General
and administrative costs were $2.1 million, or 7.8% of net sales, for the six
months ended June 30, 2009, compared to $2.3 million, or 6.3% of net sales, for
the comparable period in 2008. Management considers these expenses as a
percentage of net sales to be a key performance indicator in managing our
business. The increase as a percentage of net sales was primarily due
to an increase in personnel and labor costs, which increased $62,000 for the six
months ended June 30, 2009 over the comparable period in 2008 due to the
expansion of our technician and marketing team to expand our market share and a
increase of $173,333 in stock based compensation charges in the six months
ended June 30, 2009.
We
experienced losses on the exchange rate difference between the U.S. Dollar and
the RMB of $56,000 and $836,000, respectively, in the six months ended June 30,
2009 and 2008, a significant decrease in losses, due to the slower devaluation
of the U.S. Dollar relative to the RMB over the respective
periods. Although our sales contracts do not automatically adjust to
reflect changes in exchange rates, to cope with devaluation of the U.S. Dollar
relative to the RMB, each time that we enter into new sales contracts with new
or existing customers we adjust the selling price of batteries in anticipation
of an increase, and to make up for any potential change, in the exchange rate
between the two currencies. We currently engage in currency hedging,
due to which we experienced an $110,000 loss on the fair value of our currency
forwards in the six months ended June 30, 2009 compared to a gain of $29,000 in
the six months ended June 30, 2008.
Interest
expense was $80,000 for the six months ended June 30, 2009, as compared to
$401,000 for the comparable period in 2008. The decrease was primarily due
to lower borrowing levels. We decreased our borrowings by approximately $11.2
million in the six months ended June 30, 2009 as compared to the six months
ended June 30, 2008. Further increases in borrowing rates would
further increase our interest expense, which would have a negative effect on our
results of operations.
Other
income from operations, which consists of bank interest income, exchange gains
and losses and sundry income, was $89,000, for the six months ended June 30,
2009, as compared to $225,000 for the six months ended June 30, 2008. The
decrease was due to a $46,000 decrease in bank interest income, an $11,000
decrease in other interest income, a $17,000 decrease in other interest income
and a $61,000 increase in sundry income.
During
the six months ended June 30, 2009, we recorded a provision for income taxes of
$390,000, as compared to $231,000 for the comparable period in
2008. The increase was a result of an increase in our net taxable
income, partially offset by an increase in our tax rate.
Net
income for the six months ended June 30, 2009 was $1.4 million, compared to net
income of $1.4 million for the comparable period in 2008.
Liquidity
and Capital Resources
To
provide liquidity and flexibility in funding our operations, we borrow amounts
under bank facilities and other external sources of financing. As of
June 30, 2009, we had in place general banking facilities with four financial
institutions aggregating $23.2 million. The maturity of these
facilities is generally up to one year. The facilities are subject to
annual review and approval. These banking facilities are guaranteed
by us and some of our shareholders, including Dang Yu Pan, Wen Liang Li and Wen
Wei Ma, and contain customary affirmative and negative covenants for secured
credit facilities of this type. However, these covenants do not have
any impact on our ability to undertake additional debt or equity
financing. Interest rates are generally based on the banks’ reference
lending rates. No significant commitment fees are required to be paid
for the banking facilities. As of June 30, 2009, we had utilized
approximately $5.6 million under such general credit facilities and had
available unused credit facilities of $17.6 million.
On
November 2, 2007, upon the closing of a private placement, we received gross
proceeds of $3.12 million in a private placement transaction (the “Private
Placement”). Pursuant to Subscription Agreements entered into with
the investors, we sold an aggregate of 2,836,364 shares of Common Stock at $1.10
per share. We filed a registration statement covering the common
stock sold in the Private Placement. For its services in connection with the
Share Exchange and as placement agent, the placement agent received an aggregate
commission equal to 10% of the gross proceeds from the Private Placement, in
addition to $30,000 in connection with the execution of the Exchange Agreement
and a $40,000 success fee for the Share Exchange, for an aggregate amount fee of
$382,000.
For the
six months ended June 30, 2009, net cash provided by operating activities was
approximately $7.1 million, as compared to $2.1 million for the comparable
period in 2008. The increase in net cash provided by operating activities is
primarily attributable to a decrease in inventory levels and an increase in
payables.
Net cash
used in investing activities was $1.6 million for the six months ended June 30,
2009 compared to $1.9 million for the comparable period in 2008. The decrease of
cash used in investing activities was primarily attributable to a slight
decrease in the amount of acquisition of plant and equipment.
Net cash
used in financing activities was $8.5 million for the six months ended June 30,
2009 as compared to net cash provided by financing activities of $1.6 million
for the comparable period in 2008. The different in net cash used in
financing activities was attributable to the repayment of bank borrowings in the
six months ended June 30, 2009.
For the
six months ended June 30, 2009, our inventory turnover was 8.2 times, as
compared to 3.9 times at June 30, 2008. The average days outstanding of our
accounts receivable at June 30, 2009 were 54 days, as compared to 58 days at
June 30, 2008. Inventory turnover and average days outstanding are key operating
measures that management relies on to monitor our business. In the
next 12 months, we expect to expand our research, development and manufacturing
of lithium-based batteries and anticipate additional capital expenditures of
approximately $0.5 million.
We are
required to contribute a portion of our employees’ total salaries to the Chinese
government’s social insurance funds, including medical insurance, unemployment
insurance and job injuries insurance, and a housing assistance fund, in
accordance with relevant regulations. We expect these contributions will
contribute to administrative and other operating expenses in an amount of
approximately $30,000 per month based on the size of our current workforce. We
expect the amount of our contribution to the government’s social insurance funds
to increase in the future as we expand our workforce and
operations.
Based
upon our present plans, we believe that cash on hand, cash flow from operations
and funds available under our bank facilities will be sufficient to fund our
capital needs for the next 12 months. However, our ability to
maintain sufficient liquidity depends partially on our ability to achieve
anticipated levels of revenue, while continuing to control costs. If we did not
have sufficient available cash, we would have to seek additional debt or equity
financing through other external sources, which may not be available on
acceptable terms, or at all. Failure to maintain financing arrangements on
acceptable terms would have a material adverse effect on our business, results
of operations and financial condition.
The use
of working capital is primarily for the maintenance of our accounts receivable
and inventory. We provide our major customers with payment terms ranging from 30
to 75 days. Additionally, our production lead time is approximately 30 to 40
days, from the inspection of incoming materials, to production, testing and
packaging. We need to keep a large supply of raw materials and work in process
and finished goods inventory on hand to ensure timely delivery of our products
to our customers. We use two methods to support our working capital needs: (1)
paying our suppliers under payment terms ranging from 30 to 60 days; and (2)
using short-term bank loans. We use our accounts receivable as collateral for
our loans. Upon receiving payment for our accounts receivable, we pay our
short-term loans. Our working capital management practices are designed to
ensure that we maintain sufficient working capital.
Recent Accounting
Pronouncements
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” and SFAS
No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an
amendment to ARB No. 51”. SFAS No. 141(R) and SFAS No. 160 require most
identifiable assets, liabilities, noncontrolling interests and goodwill acquired
in a business combination to be recorded at “full fair value” and require
noncontrolling interests (previously referred to as minority interest) to be
reported as a component of equity, which changes the accounting for transactions
with noncontrolling interest holders. Both statements are effective for periods
beginning on or after December 15, 2008, and earlier adoption is prohibited.
SFAS No. 141(R) will be applied to business combinations occurring after the
effective date. SFAS No. 160 will be applied prospectively to all noncontrolling
interests, including any that arose before the effective date. SFAS No. 160 is
effective for the Company on January 1, 2009. The Company does not expect the
initial adoption of SFAS No. 160 will have a material effect on the Company’s
consolidated financial statements.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities”, which requires enhanced disclosures about an entity’s
derivatives and hedging activities. This Statement is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008. Since SFAS No. 161 only provides for additional disclosure
requirements, management assessed that there will be no impact on the results of
operations and financial position.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS No. 162”). This statement identifies the sources
of accounting principles and the framework for selecting the principles used in
the preparation of financial statements of nongovernmental entities that are
presented in accordance with generally accepted accounting principles (“GAAP”).
With the issuance of this statement, the FASB concluded that the GAAP hierarchy
should be directed toward the entity and not its auditor, and reside in the
accounting literature established by the FASB as opposed to the American
Institute of Certified Public Accountants “AICPA”) Statement on Auditing
Standards No. 69, “The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles.” This statement is effective 60 days following
the Securities and Exchange Commission’s approval of the Public Company
Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting Principles.” The Company
does not expect the adoption of SFAS No. 162 will have a material impact on the
results of operations and financial position.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
Credit
Risk
We are
exposed to credit risk from our cash at bank, fixed deposits and contract
receivables. The credit risk on cash at bank and fixed deposits is limited
because the counterparts are recognized financial institutions. Contract
receivables are subject to credit evaluations. We periodically record a
provision for doubtful collections based on an evaluation of the collectibility
of contract receivables by assessing, among other factors, the customer’s
willingness or ability to pay, repayment history, general economic conditions
and our ongoing relationship with the customers.
Foreign
Currency and Exchange Risk
The
Company maintains its financial statements in the functional currency of
Renminbi (“RMB”). Substantially all of our operations are conducted in the PRC
and we pay the majority of our expenses in RMB. Approximately 75% of our sales
are made in U.S. Dollars. During the six months ended June 30, 2009, the
exchange rate of the RMB to the U.S. Dollar decreased approximately 0.05% from
the level at the end of December 31, 2008. This fluctuation resulted in a slight
increase in our material costs during the three months ended June 30,, 2009. A
future appreciation of the RMB against the U.S. Dollar would increase our costs
when translated into U.S. Dollars and could adversely affect our margins unless
we make sufficient offsetting sales. Conversion of RMB into foreign currencies
is regulated by the People’s Bank of China through a unified floating exchange
rate system. Although the PRC government has stated its intention to support the
value of the RMB, there can be no assurance that such exchange rate will not
continue to appreciate significantly against the U.S. Dollar. Exchange rate
fluctuations may also affect the value, in U.S. Dollar terms, of our net assets.
In addition, the RMB is not freely convertible into foreign currency and all
foreign exchange transactions must take place through authorized institutions.
Due to the volatility of the US Dollar to our functional currency the Company
put into place in 2008 a hedging program to attempt to protect it from
significant changes to the US Dollar which affects the value of its US dollar
receivables and sales. At June 30, 2009, the Company had a series of currency
forwards totaling a notional amount US$1,000,000 expiring from April 2009 to
July 2009. The terms of these derivative contracts are generally for 12 months
or less. Changes in the fair value of these derivative contracts are recorded in
earnings to offset the impact of foreign currency transaction gains and losses.
We experienced a $21,000 and $110,000 loss in the value of currency forwards in
the three and six months ended June 30, 2009, respectively, as compared to a
$nil during the comparable periods in 2008.
Country
Risk
The
substantial portion of our business, assets and operations are located and
conducted in Hong Kong and China. While these economies have experienced
significant growth in the past twenty years, growth has been uneven, both
geographically and among various sectors of the economy. The Chinese government
has implemented various measures to encourage economic growth and guide the
allocation of resources. Some of these measures benefit the overall economy of
Hong Kong and China, but may also have a negative effect on us. For example, our
operating results and financial condition may be adversely affected by
government control over capital investments or changes in tax regulations
applicable to us. If there are any changes in any policies by the Chinese
government and our business is negatively affected as a result, then our
financial results, including our ability to generate revenues and profits, will
also be negatively affected.
Item
4. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures, which are designed to ensure that
information required to be disclosed in the reports we file or submit under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer, or CEO,
and Chief Financial Officer, or CFO, as appropriate to allow timely decisions
regarding required disclosure.
Based on
an evaluation carried out as of the end of the period covered by this quarterly
report, under the supervision and with the participation of our management,
including our CEO and CFO, our CEO and CFO have concluded that, as of the end of
such period, our disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934) were
effective as of June 30, 2009.
Changes
in Internal Control Over Financial Reporting
Based on
the evaluation of our management as required by paragraph (d) of Rule 13a-15 of
the Exchange Act, there were no changes in our internal control over financial
reporting that occurred during our last fiscal year that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Part II.
Other Information
Item
1. Legal Proceedings
None.
Item
1A. Risk Factors
Not applicable to smaller reporting
companies.
Item
2. Unregistered Sale of Equity Securities and Use of Proceeds
None.
Item
3. Default Upon Senior Securities
None.
Item
4. Submission of Matters to a Vote of Security Holders
None.
Item
5. Other Information
None.
Item
6. Exhibits
(a) Exhibits
Exhibit
Number
|
|
Description of Document
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer Pursuant to Item 601(b)(31) of Regulation S-K,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
31.2
|
|
Certification
of Chief Financial Officer Pursuant to Item 601(b)(31) of Regulation S-K,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
32.1
|
|
Certification
of the Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
|
*
|
This
exhibit shall not be deemed “filed” for purposes of Section 18 of the
Securities Exchange Act of 1934 or otherwise subject to the liabilities of
that section, nor shall it be deemed incorporated by reference in any
filing under the Securities Act of 1933 or the Securities Exchange Act of
1934, whether made before or after the date hereof and irrespective of any
general incorporation language in any
filings.
|
HONG
KONG HIGHPOWER TECHNOLOGY, INC.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
Hong
Kong Highpower Technology, Inc.
|
|
|
|
Dated:
August 13, 2009
|
/s/
|
Dang
Yu Pan
|
|
By:
|
Dang Yu Pan
|
|
Its:
|
Chairman
of the Board and Chief Executive
Officer
|
|
|
|
|
/s/
|
Henry Ngan
|
|
By:
|
Henry
Ngan
|
|
Its:
|
Chief
Financial
Officer
|
Hong Kong Highpower Technology, Inc. (AMEX:HPJ)
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