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 September 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 13,562,597 shares of common stock, par value $0.0001 per share,
outstanding as of November 11, 2009.
HONG
KONG HIGHPOWER TECHNOLOGY, INC.
FORM 10-Q
For
the Quarterly Period Ended September 30, 2009
INDEX
|
|
|
Page
|
Part I
|
|
Financial
Information
|
|
|
|
|
|
|
|
|
|
Item
1.
|
|
Financial
Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Balance
Sheets as of September 30, 2009 (Unaudited) and December 31,
2008
|
2
|
|
|
|
|
|
|
|
|
|
|
|
(b)
|
Statements
of Comprehensive Income for the Three and Nine months Ended September 30,
2009 and 2008 (Unaudited)
|
4
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
Statements
of Cash Flows for the Nine months Ended September 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
|
34
|
|
|
|
|
|
|
|
|
Item
3.
|
|
Quantitative
and Qualitative Disclosures About Market Risk
|
41
|
|
|
|
|
|
|
|
|
Item
4.
|
|
Controls
and Procedures
|
42
|
|
|
|
|
|
|
Part II
|
|
Other
Information
|
|
|
|
|
|
|
|
|
|
Item
1.
|
|
Legal
Proceedings
|
43
|
|
|
|
|
|
|
|
|
Item
1A.
|
|
Risk
Factors
|
43
|
|
|
|
|
|
|
|
|
Item
2.
|
|
Unregistered
Sale of Equity Securities and Use of Proceeds
|
43
|
|
|
|
|
|
|
|
|
Item
3.
|
|
Default
Upon Senior Securities
|
43
|
|
|
|
|
|
|
|
|
Item
4.
|
|
Submission
of Matters to a Vote of Security Holders
|
43
|
|
|
|
|
|
|
|
|
Item
5.
|
|
Other
Information
|
43
|
|
|
|
|
|
|
|
|
Item
6.
|
|
Exhibits
|
44
|
|
|
|
|
|
|
Signatures
|
45
|
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
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets
:
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
|
7,203,175
|
|
|
|
4,175,780
|
|
Restricted cash
|
|
|
4,552,798
|
|
|
|
4,845,478
|
|
Accounts
receivable
|
|
|
11,260,286
|
|
|
|
8,765,593
|
|
Notes receivable
|
|
|
400,876
|
|
|
|
429,815
|
|
Prepaid expenses and other
receivables –
Note
8
|
|
|
4,191,720
|
|
|
|
1,732,709
|
|
Deferred
charges – Stock-based compensation –
Note 9
|
|
|
-
|
|
|
|
216,667
|
|
Inventories –
Note
10
|
|
|
10,437,454
|
|
|
|
11,208,697
|
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
38,046,309
|
|
|
|
31,374,739
|
|
Deferred
tax assets –
Note
6
|
|
|
137,400
|
|
|
|
104,556
|
|
Plant
and equipment, net –
Note
11
|
|
|
9,962,416
|
|
|
|
7,778,477
|
|
Leasehold
land, net –
Note
12
|
|
|
3,002,530
|
|
|
|
3,050,510
|
|
Intangible
asset, net –
Note
1
3
|
|
|
862,500
|
|
|
|
900,000
|
|
Currency
forward –
Note
7
|
|
|
-
|
|
|
|
116,157
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
|
52,011,155
|
|
|
|
43,324,439
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current Liabilities
:
|
|
|
|
|
|
|
|
|
Non-trading foreign currency
derivatives liabilities
|
|
|
5,335
|
|
|
|
293,830
|
|
Accounts payable
|
|
|
15,152,492
|
|
|
|
8,306,123
|
|
Other payables and accrued
liabilities –
Note
1
4
|
|
|
9,067,162
|
|
|
|
3,139,275
|
|
Income taxes
payable
|
|
|
812,688
|
|
|
|
476,330
|
|
Bank borrowings –
Note 1
5
|
|
|
6,495,909
|
|
|
|
14,829,228
|
|
|
|
|
|
|
|
|
|
|
Total Current
Liabilities
|
|
|
31,533,586
|
|
|
|
27,044,786
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES –
Note
1
7
|
|
|
|
|
|
|
|
|
(continued)
HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Continued)
(Stated
in US Dollars)
|
|
As
of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
|
|
|
|
|
|
Par
value: US$0.0001
|
|
|
|
|
|
|
|
|
Authorized:
10,000,000 shares
|
|
|
|
|
|
|
|
|
Issued
and outstanding: none
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
|
|
|
|
|
|
Par
value : US$0.0001
|
|
|
|
|
|
|
|
|
Authorized:
100,000,000 shares
|
|
|
|
|
|
|
|
|
Issued
and outstanding: 2009 – 13,562,597 shares
(2008
- 13,562,596 shares)
|
|
|
1,356
|
|
|
|
1,356
|
|
Additional paid-in
capital
|
|
|
5,048,194
|
|
|
|
5,048,194
|
|
Accumulated other comprehensive
income
|
|
|
1,987,709
|
|
|
|
1,595,091
|
|
Retained earnings
|
|
|
13,440,310
|
|
|
|
9,635,012
|
|
|
|
|
|
|
|
|
|
|
TOTAL
STOCKHOLDERS’ EQUITY
|
|
|
20,477,569
|
|
|
|
16,279,653
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
52,011,155
|
|
|
|
43,324,439
|
|
See notes
to condensed consolidated financial statements
HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Stated
in US Dollars)
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
21,056,149
|
|
|
|
20,473,472
|
|
|
|
47,811,438
|
|
|
|
57,326,510
|
|
Cost
of sales
|
|
|
(15,835,110
|
)
|
|
|
(16,961,664
|
)
|
|
|
(37,120,495
|
)
|
|
|
(47,731,537
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
5,221,039
|
|
|
|
3,511,808
|
|
|
|
10,690,943
|
|
|
|
9,594,973
|
|
Depreciation
|
|
|
(50,120
|
)
|
|
|
(49,792
|
)
|
|
|
(169,309
|
)
|
|
|
(130,448
|
)
|
Selling
and distribution costs
|
|
|
(767,194
|
)
|
|
|
(799,666
|
)
|
|
|
(1,879,001
|
)
|
|
|
(1,761,386
|
)
|
General
and administrative costs, including stock-based
compensation
|
|
|
(1,464,392
|
)
|
|
|
(1,915,367
|
)
|
|
|
(3,613,654
|
)
|
|
|
(4,256,468
|
)
|
Loss
on exchange rate difference
|
|
|
(6,813
|
)
|
|
|
(159,310
|
)
|
|
|
(62,402
|
)
|
|
|
(994,985
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
2,932,520
|
|
|
|
587,673
|
|
|
|
4,966,577
|
|
|
|
2,451,686
|
|
Change
in fair value of currency forwards – Note 3
|
|
|
(7,483
|
)
|
|
|
-
|
|
|
|
(117,106
|
)
|
|
|
29,102
|
|
Change
in fair value of warrants – Note 4
|
|
|
-
|
|
|
|
(204,750
|
)
|
|
|
-
|
|
|
|
(276,000
|
)
|
Other
income – Note 3
|
|
|
289,843
|
|
|
|
101,179
|
|
|
|
378,432
|
|
|
|
325,833
|
|
Interest
expenses – Note 4
|
|
|
(199,125
|
)
|
|
|
(159,063
|
)
|
|
|
(279,622
|
)
|
|
|
(559,830
|
)
|
Other
expenses – Note 5
|
|
|
(52,878
|
)
|
|
|
-
|
|
|
|
(223,963
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before taxes
|
|
|
2,962,877
|
|
|
|
325,039
|
|
|
|
4,724,318
|
|
|
|
1,970,791
|
|
Income
taxes – Note 6
|
|
|
(529,201
|
)
|
|
|
(35,683
|
)
|
|
|
(919,020
|
)
|
|
|
(266,861
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the period
|
|
|
2,433,676
|
|
|
|
289,356
|
|
|
|
3,805,298
|
|
|
|
1,703,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Foreign currency translation gain
|
|
|
(99,446
|
)
|
|
|
109,161
|
|
|
|
392,618
|
|
|
|
857,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
|
2,334,230
|
|
|
|
398,517
|
|
|
|
4,197,916
|
|
|
|
2,561,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Basic
|
|
|
0.18
|
|
|
|
0.02
|
|
|
|
0.28
|
|
|
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Diluted
|
|
|
0.18
|
|
|
|
0.02
|
|
|
|
0.28
|
|
|
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Basic
|
|
|
13,562,597
|
|
|
|
13,562,596
|
|
|
|
13,621,466
|
|
|
|
13,088,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Diluted
|
|
|
13,612,097
|
|
|
|
13,615,096
|
|
|
|
13,673,966
|
|
|
|
13,108,644
|
|
See notes
to condensed consolidated financial statements
HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated
in US Dollars)
|
|
Nine
months ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
$
|
|
|
$
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
3,805,298
|
|
|
|
1,703,930
|
|
Adjustments
to reconcile net income to net cash flows
|
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
|
Amortization
of intangible asset
|
|
|
37,500
|
|
|
|
37,500
|
|
Amortization
of leasehold land
|
|
|
47,073
|
|
|
|
-
|
|
Bad
debts written off
|
|
|
58,407
|
|
|
|
4,445
|
|
Depreciation
|
|
|
648,681
|
|
|
|
548,884
|
|
Change
in fair value of currency forwards
|
|
|
117,106
|
|
|
|
(29,102
|
)
|
Change
in fair value of warrants
|
|
|
-
|
|
|
|
276,000
|
|
Loss
on disposal of plant and equipment
|
|
|
24,713
|
|
|
|
43,704
|
|
Stock
based compensation
|
|
|
216,667
|
|
|
|
173,333
|
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase)
decrease in -
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(2,440,816
|
)
|
|
|
5,859,341
|
|
Notes
receivable
|
|
|
31,136
|
|
|
|
332,982
|
|
Deposit,
prepaid expenses and other receivables
|
|
|
(2,421,799
|
)
|
|
|
(1,381,578
|
)
|
Inventories
|
|
|
900,504
|
|
|
|
(954,510
|
)
|
Increase
(decrease) in -
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
6,723,770
|
|
|
|
(3,361,758
|
)
|
Other
payables and accrued liabilities
|
|
|
5,861,389
|
|
|
|
1,029,025
|
|
Income
tax payable
|
|
|
298,038
|
|
|
|
1,159,544
|
|
|
|
|
|
|
|
|
|
|
Net
cash flows provided by operating activities
|
|
|
13,907,667
|
|
|
|
5,441,740
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
Acquisition
of plant and equipment
|
|
|
(2,757,805
|
)
|
|
|
(2,523,600
|
)
|
Proceeds
from disposal of plant and equipment
|
|
|
-
|
|
|
|
393
|
|
|
|
|
|
|
|
|
|
|
Net
cash flows used in investing activities
|
|
|
(2,757,805
|
)
|
|
|
(2,523,207
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock
|
|
|
-
|
|
|
|
1,486,400
|
|
Proceeds
from / (repayment) new short-term bank loans
|
|
|
3,478,236
|
|
|
|
(1,437,492
|
)
|
Repayment
of short-term bank loans
|
|
|
(11,956,136
|
)
|
|
|
(5,298,812
|
)
|
Net
advancement of other bank borrowings
|
|
|
-
|
|
|
|
3,487,980
|
|
Decrease
in restricted cash
|
|
|
348,706
|
|
|
|
1,243,154
|
|
|
|
|
|
|
|
|
|
|
Net
cash flows used in financing activities
|
|
|
(8,129,194
|
)
|
|
|
(518,770
|
)
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
3,020,668
|
|
|
|
2,399,763
|
|
Effect
of foreign currency translation on cash and
cash
equivalents
|
|
|
6,727
|
|
|
|
145,593
|
|
Cash
and cash equivalents - beginning of period
|
|
|
4,175,780
|
|
|
|
1,489,262
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents - end of period
|
|
|
7,203,175
|
|
|
|
4,034,618
|
|
(continued)
HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
(Stated
in US Dollars)
|
|
Nine
months ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
$
|
|
|
$
|
|
Supplemental
disclosures of cash flow information :
|
|
|
|
|
|
|
|
|
Cash paid for :
|
|
|
|
|
|
|
|
|
Interest
|
|
|
279,622
|
|
|
|
559,830
|
|
Income
taxes
|
|
|
620,983
|
|
|
|
137,530
|
|
See notes
to condensed consolidated financial statements
HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
1.
|
Corporation information
and
reorganization
|
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.
|
Corporation information
and reorganization
(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
Placement 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 September 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.
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.
HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
|
Summary
of significant accounting policies
|
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
|
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)
|
On
June 29, 2009, the Financial Accounting Standards Board (FASB) established
the FASB Accounting Standards Codification (Codification) as the single source
of authoritative U.S. generally accepted accounting principles (GAAP) for all
nongovernmental entities. Rules and interpretive releases of the Securities and
Exchange Commission (SEC) are also sources of authoritative U.S. GAAP for SEC
registrants. The Codification does not change U.S. GAAP but takes previously
issued FASB standards and other U.S. GAAP authoritative pronouncements, changes
the way the standards are referred to, and includes them in specific topic
areas. The Codification is effective for financial statements issued for interim
and annual periods ending after September 15, 2009. The adoption of the
Codification did not have any impact on the Company’s financial
statements.
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.
Comparative
amounts
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).
HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
|
Summary of significant
accounting policies
(Continued)
|
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.
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 the nine months ended September 30, 2009 and 2008 are as
follows:
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Company
A
|
|
|
21
|
%
|
|
|
22
|
%
|
Company
B
|
|
|
10
|
%
|
|
|
*
|
|
* Less
than 10%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
%
|
|
|
22
|
%
|
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
(Continued)
Details
of the accounts receivable from the customers with the largest receivable
balances at September 30, 2009 and December 31, 2008 are as
follows:
|
|
Percentage of accounts receivable
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Company
A
|
|
|
24
|
%
|
|
|
17
|
%
|
Company
B
|
|
|
*
|
|
|
|
14
|
%
|
Company
C
|
|
|
10
|
%
|
|
|
13
|
%
|
Company
D
|
|
|
12
|
%
|
|
|
*
|
|
* Less
than 10%
|
|
|
|
|
|
|
|
|
Largest
receivable balances
|
|
|
46
|
%
|
|
|
44
|
%
|
Cash and cash
equivalents
Cash and
cash equivalents include all cash, deposits in banks and other liquid
investments with initial maturities of three 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.
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 experienced bad debts during the nine months ended September 30, 2009
and 2008 of $58,407 and $4,445, respectively.
HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
|
Summary
of significant accounting policies
(Continued)
|
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 nine months period ended September 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 $132,662 and $310,110 for the nine months ended
September 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
|
%
|
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.
HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
|
Summary
of significant accounting policies
(Continued)
|
Intangible Assets and
Long-Lived Assets
FASB
Accounting Standard Codification Topic 350 (ASC 850) “Intangibles – Goodwill and
Other” (Formerly known as 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 FASB
Accounting Standard Codification Topic 360 (ASC 360) “Property, Plant and
Equipment – Overall” (Formerly known as SFAS No. 144, “Accounting for
the Impairment of Long-Lived Assets (“SFAS 144”)”). ASC 360 establishes the
accounting for impairment of long-lived tangible and intangible assets other
than goodwill and for the disposal of a business. Pursuant to ASC 360, 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 nine months ended September 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.
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 nine months ended September 30, 2009 and
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)
|
Income
taxes
The
Company uses the asset and liability method of accounting for income taxes
pursuant to FASB Accounting Standard Codification Topic 740 (ASC
740) “Income taxes”, (Formerly known as 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 ASC 740, “Income taxes (Formerly known as FIN 48,
“Accounting for Uncertainty in Income Taxes – an interpretation of FASB
Statement No. 109”).
C
omprehensive
income
The
Company has adopted FASB Accounting Standard Codification Topic 220 (ASC
220) “Comprehensive income” (Formerly known as 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)
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Quarter
end RMB : US$ exchange rate
|
|
|
6.8178
|
|
|
|
6.8325
|
|
Average
quarterly RMB : US$ exchange rate
|
|
|
6.8425
|
|
|
|
6.9566
|
|
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
deriva
tive
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 FASB Accounting Standard
Codification Topic 260 (ASC 260) “Earnings Per Share” (Formerly known
as 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 FASB Accounting Standard Codification Topic
718 (ASC 718) “Compensation – Stock Compensation” (Formerly known as SFAS No.
123R, Share-Based Payment (“SFAS No. 123R”)) Under ASC 718, 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 $173,333 for the nine months ended
September 30, 2009 and 2008, respectively.
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
ASC 805,
Business Combinations (“ASC 805”) (formerly included under Statement of
Financial Accounting Standards No. 141 (revised 2007), Business
Combinations) contains guidance that was issued by the FASB in December 2007. It
requires the acquiring entity in a business combination to recognize all assets
acquired and liabilities assumed in a transaction at the acquisition-date fair
value, with certain exceptions. Additionally, the guidance requires changes to
the accounting treatment of acquisition related items, including, among other
items, transaction costs, contingent consideration, restructuring costs,
indemnification assets and tax benefits. ASC 805 also provides for a substantial
number of new disclosure requirements. ASC 805 also contains guidance that was
formerly issued as FSP FAS 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies
which was intended to provide additional guidance clarifying application issues
regarding initial recognition and measurement, subsequent measurement and
accounting, and disclosure of assets and liabilities arising from contingencies
in a business combination. ASC 805 was effective for business combinations
initiated on or after the first annual reporting period beginning after
December 15, 2008. The Company implemented this guidance effective
January 1, 2009. Implementing this guidance did not have an effect on the
Company’s financial position or results of operations; however it will likely
have an impact on the Company’s accounting for future business combinations, but
the effect is dependent upon acquisitions, if any, that are made in the
future.
In
March 2008, the FASB issued ASC 815 (formerly SFAS No. 161,
“Disclosures about Derivative Instruments and Hedging Activities, an amendment
of FASB Statement No. 133”) to amend and expand the disclosures about
derivatives and hedging activities. The standard requires enhanced qualitative
disclosures about an entity’s objectives and strategies for using derivatives,
and tabular quantitative disclosures about the fair value of derivative
instruments and gains and losses on derivatives during the reporting period.
This standard is effective for both fiscal years and interim periods that begin
after November 15, 2008. The adoption of this standard on December 29,
2008, the beginning of the Company’s fiscal year, did not have a material impact
on its consolidated financial statements.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
|
Summary of significant
accounting policies
(Continued)
|
Recently issued accounting
pronouncem
ents
(Continued)
ASC 855,
Subsequent Events (“ASC 855”) (formerly Statement of Financial Accounting
Standards No. 165, Subsequent Events) includes guidance that was issued by
the FASB in May 2009, and is consistent with current auditing standards in
defining a subsequent event. Additionally, the guidance provides for disclosure
regarding the existence and timing of a company’s evaluation of its subsequent
events. ASC 855 defines two types of subsequent events, “recognized” and
“non-recognized”. Recognized subsequent events provide additional evidence about
conditions that existed at the date of the balance sheet and are required to be
reflected in the financial statements. Non-recognized subsequent events provide
evidence about conditions that did not exist at the date of the balance sheet
but arose after that date and, therefore; are not required to be reflected in
the financial statements. However, certain non-recognized subsequent events may
require disclosure to prevent the financial statements from being misleading.
This guidance was effective prospectively for interim or annual financial
periods ending after June 15, 2009. The Company implemented the guidance
included in ASC 855 as of April 1, 2009. The effect of implementing this
guidance was not material to the Company’s financial position or results of
operations.
In June
2009, the FASB issued Statement of Financial Accounting Standards No. 166,
Accounting for Transfers of
Financial Assets an amendment of FASB Statement No. 140
(“Statement
No. 166”). Statement No. 166 revises FASB Statement of Financial
Accounting Standards No. 140,
Accounting for Transfers and
Extinguishment of Liabilities a replacement of FASB Statement 125
(“Statement No. 140”) and requires additional disclosures about transfers
of financial assets, including securitization transactions, and any continuing
exposure to the risks related to transferred financial assets. It also
eliminates the concept of a “qualifying special-purpose entity”, changes the
requirements for derecognizing financial assets, and enhances disclosure
requirements. Statement No. 166 is effective prospectively, for annual
periods beginning after November 15, 2009, and interim and annual periods
thereafter. Although Statement No. 166 has not been incorporated into the
Codification, in accordance with ASC 105, the standard shall remain
authoritative until it is integrated. The Company does not expect the adoption
of Statement No. 166 will have a material impact on its financial position
or results of operations.
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
ASC 105,
Generally Accepted Accounting Principles (“ASC 105”) (formerly Statement of
Financial Accounting Standards No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles a
replacement of FASB Statement No. 162) reorganized by topic existing
accounting and reporting guidance issued by the Financial Accounting Standards
Board (“FASB”) into a single source of authoritative generally accepted
accounting principles (“GAAP”) to be applied by nongovernmental entities. All
guidance contained in the Accounting Standards Codification (“ASC”) carries an
equal level of authority. Rules and interpretive releases of the Securities and
Exchange Commission (“SEC”) under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. Accordingly, all other
accounting literature will be deemed “non-authoritative”. ASC 105 is effective
on a prospective basis for financial statements issued for interim and annual
periods ending after September 15, 2009. The Company has implemented the
guidance included in ASC 105 as of July 1, 2009. The implementation of this
guidance changed the Company’s references to GAAP authoritative guidance but did
not impact the Company’s financial position or results of
operations.
HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
interest income
|
|
|
9,748
|
|
|
|
56,266
|
|
|
|
42,517
|
|
|
|
135,311
|
|
Gain
on forward contract
|
|
|
-
|
|
|
|
6,049
|
|
|
|
-
|
|
|
|
17,141
|
|
Government
sponsor
|
|
|
210,726
|
|
|
|
-
|
|
|
|
210,726
|
|
|
|
-
|
|
Other
interest income
|
|
|
-
|
|
|
|
3,379
|
|
|
|
-
|
|
|
|
20,597
|
|
Sundry
income
|
|
|
69,369
|
|
|
|
35,485
|
|
|
|
125,189
|
|
|
|
152,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
289,843
|
|
|
|
101,179
|
|
|
|
378,432
|
|
|
|
325,833
|
|
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on trade related bank loan
|
|
|
72,016
|
|
|
|
128,316
|
|
|
|
135,419
|
|
|
|
476,776
|
|
Interest
on short-term bank loans
|
|
|
127,109
|
|
|
|
30,747
|
|
|
|
144,203
|
|
|
|
83,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
199,125
|
|
|
|
159,063
|
|
|
|
279,622
|
|
|
|
559,830
|
|
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange contract expenses
|
|
|
52,878
|
|
|
|
-
|
|
|
|
223,963
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,878
|
|
|
|
-
|
|
|
|
223,963
|
|
|
|
-
|
|
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
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRC
income taxes
|
|
|
542,205
|
|
|
|
196,231
|
|
|
|
950,513
|
|
|
|
484,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax benefit
|
|
|
(13,004
|
)
|
|
|
(160,548
|
)
|
|
|
(31,493
|
)
|
|
|
(217,488
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
529,201
|
|
|
|
35,683
|
|
|
|
919,020
|
|
|
|
266,861
|
|
The major
components of deferred tax recognized in the consolidated balance sheets as of
September 30, 2009 and December 31, 2008 are as follows:-
|
|
As
of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Temporary
difference on :-
|
|
|
|
|
|
|
|
|
Recognized
of expenses
|
|
|
(120,371
|
)
|
|
|
(93,300
|
)
|
Accelerated
tax depreciation on intangible asset
|
|
|
(17,029
|
)
|
|
|
(11,256
|
)
|
|
|
|
|
|
|
|
|
|
Deferred
tax assets, net
|
|
|
(137,400
|
)
|
|
|
(104,556
|
)
|
|
|
|
|
|
|
|
|
|
Recognized
in the balance sheet:
|
|
|
|
|
|
|
|
|
Net deferred tax
assets
|
|
|
(137,400
|
)
|
|
|
(104,556
|
)
|
Effective
January 1, 2008, the Company adopted FASB Accounting Standard Codification Topic
740 (ASC 740) “Income Taxes” (Formerly known as FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109, Accounting for Income Taxes (FIN 48)). ASC 740 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 ASC 740, 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. ASC 740 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 ASC 740 did not have a material effect on the
Company’s financial statements. As of September 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 3 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 Statement of
comprehensive income, net.
|
|
As
of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Currency
forwards (notional amount $Nil million),
consisting
of a put and a call
|
|
|
-
|
|
|
|
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 September 30, 2009, the Company
did not have a series of currency forwards.
The
Company recognized the following gains and losses attributable to its derivative
financial instruments during the following periods:
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange contracts, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains
recognized in Other income, net
|
|
|
-
|
|
|
|
6,049
|
|
|
|
-
|
|
|
|
17,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains
recognized in Other expenses, net
|
|
|
52,878
|
|
|
|
-
|
|
|
|
223,963
|
|
|
|
-
|
|
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
|
|
|
As
of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Purchase
deposits paid
|
|
|
820,272
|
|
|
|
88,459
|
|
Advance
to staff
|
|
|
177,044
|
|
|
|
143,595
|
|
Other
deposits and prepayments
|
|
|
1,652,560
|
|
|
|
495,325
|
|
Value-added
tax prepayment
|
|
|
55,434
|
|
|
|
-
|
|
Other
receivables
|
|
|
1,486,410
|
|
|
|
1,005,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,191,720
|
|
|
|
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
|
|
|
As
of
|
|
|
|
September 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 nine months ended
September 30, 2009 and 2008 was $216,667 and $173,333,
respectively.
The
Company is amortizing the $520,000 cost of stock-based compensation over a
period of one year on the straight line basis.
|
|
As
of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
|
3,422,253
|
|
|
|
1,708,431
|
|
Work
in progress
|
|
|
2,217,019
|
|
|
|
1,434,517
|
|
Finished
goods
|
|
|
4,776,247
|
|
|
|
8,049,138
|
|
Consumables
|
|
|
-
|
|
|
|
16,611
|
|
Packing
materials
|
|
|
21,935
|
|
|
|
-
|
|
|
|
|
10,437,454
|
|
|
|
11,208,697
|
|
HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
|
|
As
of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
$
|
|
|
$
|
|
Cost
|
|
|
|
|
|
|
|
|
Furniture,
fixtures and office equipment
|
|
|
821,763
|
|
|
|
598,496
|
|
Leasehold
improvement
|
|
|
2,792,408
|
|
|
|
712,120
|
|
Machinery
and equipment
|
|
|
8,275,015
|
|
|
|
8,155,270
|
|
Motor
vehicles
|
|
|
692,632
|
|
|
|
476,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,581,818
|
|
|
|
9,942,796
|
|
|
|
|
|
|
|
|
|
|
Accumulated
depreciation
|
|
|
|
|
|
|
|
|
Furniture,
fixtures and office equipment
|
|
|
326,918
|
|
|
|
235,613
|
|
Leasehold
improvement
|
|
|
-
|
|
|
|
220,746
|
|
Machinery
and equipment
|
|
|
2,002,479
|
|
|
|
1,486,624
|
|
Motor
vehicles
|
|
|
290,005
|
|
|
|
221,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,619,402
|
|
|
|
2,164,319
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
Furniture,
fixtures and office equipment
|
|
|
494,845
|
|
|
|
362,883
|
|
Leasehold
improvement
|
|
|
2,792,408
|
|
|
|
491,374
|
|
Machinery
and equipment
|
|
|
6,272,536
|
|
|
|
6,668,646
|
|
Motor
vehicles
|
|
|
402,627
|
|
|
|
255,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,962,416
|
|
|
|
7,778,477
|
|
|
The
components of depreciation charged
are:
|
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in factory overheads
|
|
|
174,554
|
|
|
|
194,795
|
|
|
|
479,372
|
|
|
|
459,813
|
|
Included
in operating expenses
|
|
|
50,120
|
|
|
|
49,792
|
|
|
|
169,309
|
|
|
|
130,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
224,674
|
|
|
|
244,587
|
|
|
|
648,681
|
|
|
|
590,261
|
|
HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
|
|
At
of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
3,112,765
|
|
|
|
3,112,765
|
|
|
|
|
|
|
|
|
|
|
Accumulated
amortization
|
|
|
(110,235
|
)
|
|
|
(62,255
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
3,002,530
|
|
|
|
3,050,510
|
|
The
leasehold land is being amortized annually using the straight-line method over
the lease terms of 50 years.
|
|
As
of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
$
|
|
|
$
|
|
Cost
|
|
|
|
|
|
|
|
|
Consumer
battery license fee
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
Accumulated
amortization
|
|
|
(137,500
|
)
|
|
|
(100,000
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
862,500
|
|
|
|
900,000
|
|
Amortization
expenses included in selling and distributing costs for the nine months period
ended September 30, 2009 and 2008 were $37,500 and $37,500,
respectively.
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, 2008, 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, 2008, and the other within 45 days of August 8, 2008, as
royalties for its use of the licensed technology in 2004, 2005 and
2006. Both of these payments were made during 2008 and were recorded as
royalty expense in prior years, which was included in selling and distributing
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, 2008, 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 nine months ended September 30,
2009, the Company recorded a total of approximately $172,501 as royalty expense,
which was included in selling and distributing costs in the statement of
operations. At September 30, 2009, accrued royalty fees payable was $1,104,915
(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
|
|
|
As
of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Accrued
expenses
|
|
|
1,575,447
|
|
|
|
1,072,331
|
|
Royalty
payable
|
|
|
1,104,915
|
|
|
|
1,540,900
|
|
Sales
deposits received
|
|
|
6,354,664
|
|
|
|
388,261
|
|
Value-added
tax payables
|
|
|
-
|
|
|
|
105,833
|
|
Other
payables
|
|
|
32,136
|
|
|
|
31,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,067,162
|
|
|
|
3,139,275
|
|
HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
|
|
As of
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
$
|
|
|
|
$
|
|
Secured:
|
|
|
|
|
|
|
|
Repayable
within one year
|
|
|
|
|
|
|
|
Short
term bank loans
|
|
|
1,860,969
|
|
|
|
2,969,939
|
|
Other
trade related bank loans
|
|
|
4,634,940
|
|
|
|
11,859,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,495,909
|
|
|
|
14,829,228
|
|
As of
September 30, 2009, the above bank borrowings were secured by the
following:
|
(a)
|
charge
over bank deposits of $4,552,798 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 $3,002,530;
and
|
|
(d)
|
other
financial covenant:-
|
The bank
borrowings require one of the Company’s subsidiaries to maintain a minimum net
worth of $11,734,026. The Company was in compliance with this requirement at
September 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 September 30, 2009 ranged
from 5.508% to 6.804%.
The
interest rates of short term bank loans were at 6.804% per annum at September
30, 2009.
HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
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 $365,348 and $334,676 for the
nine months ended September 30, 2009 and 2008 respectively.
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 September 30, 2009 are as
follows:
Year
ending September 30
|
|
|
$
|
|
2009
|
|
|
172,510
|
|
2010
|
|
|
509,952
|
|
|
|
|
|
|
|
|
|
682,462
|
|
Rental
expenses for the nine months ended September 30, 2009 and 2008 were $715,663 and
$569,438, respectively.
Capital com
mitments
The
Company has the following capital commitments as of September 30,
2009:
|
|
|
$
|
|
|
|
|
|
|
Purchase
of plant and equipment
|
|
|
224,449
|
|
HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
17.
|
Commitments and contingencies
(Continued)
|
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.
|
As of
|
|
|
September
30,
|
|
|
December
31,
|
|
|
2009
|
|
|
2008
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
Bills
discounted
|
-
|
|
|
|
-
|
|
Other
than as disclosed above, the Company had no other material contractual
obligations and had no off-balance sheet guarantees or arrangement or
transactions as at September 30, 2009.
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 FASB Accounting Standard Codification Topic 280 (ASC 280) “Segment
Reporting” (Formerly known as 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:
|
|
Nine
months
ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Net
revenue
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Hong
Kong and China
|
|
|
22,082,229
|
|
|
|
23,619,551
|
|
Asia
|
|
|
2,598,107
|
|
|
|
3,859,153
|
|
Europe
|
|
|
15,666,163
|
|
|
|
20,979,729
|
|
North
America
|
|
|
7,195,782
|
|
|
|
8,482,758
|
|
South
America
|
|
|
41,979
|
|
|
|
155,278
|
|
Africa
|
|
|
61,444
|
|
|
|
-
|
|
Others
|
|
|
165,734
|
|
|
|
230,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,811,438
|
|
|
|
57,326,510
|
|
|
|
As of
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Accounts
receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hong
Kong and China
|
|
|
6,532,529
|
|
|
|
5,012,471
|
|
Asia
|
|
|
555,356
|
|
|
|
169,376
|
|
Europe
|
|
|
2,590,347
|
|
|
|
2,695,166
|
|
North
America
|
|
|
1,571,780
|
|
|
|
875,022
|
|
South
America
|
|
|
10,274
|
|
|
|
13,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,260,286
|
|
|
|
8,765,593
|
|
HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
We have
evaluated significant events and transactions that occurred from October 1, 2009
through the date of this report and have determined that there were no events or
transactions other than those disclosed in this report, if any, that would
require recognition or disclosure in our Condensed Consolidated Financial
Statements for the quarterly period ended September 30, 2009.
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 Spring Power
Technology (Shenzhen) Co., Ltd. (“Spring Power”). 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 Spring Power 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 FASB
Accounting Standard Codification Topic 740 (ASC 740) “Income Taxes” (Formerly
known as 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 FASB Accounting Standard Codification Topic 740 (ASC 740) “Income
Taxes” (Formerly known as 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
Three
Months Ended September 30, 2009 and 2008
Net sales
for the three months ended September 30, 2009 were $ 21.1 million compared to
$20.5 million for the three months ended September 30, 2008, an increase of
2.8%. This increase was largely due to a 44% increase in the number
of battery units sold and $113,831 for the sale of scrap batteries during three
months ended September 30, 2009, partially offset by a 29% decrease in the
average selling price of our battery units. The 44% increase in the
number of battery units sold was due to increased orders from our major
customers. The 29% 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 September 30, 2009 compared to the comparable period in
2008.
Cost of
sales consists of the cost of nickel and other materials. Costs of
sales were $15.8 million the three months ended September 30, 2009 as compared
to $17.0 million for the comparable period in 2008. As a
percentage of net sales, cost of sales decreased to 75.2 % for the three months
ended September 30, 2009 compared to 82.8% for the comparable period in
2008. This decrease was attributable to a 35 % decrease in the
average per unit cost of goods sold during three months ended September 30, 2009
as compared to the comparable period in 2008, which was offset by a 29% decrease
in the average selling price of our battery units during the three months ended
September 30, 2009 over three months ended September 30, 2008. The 35% decrease
in the average per unit cost of goods sold resulted from a 15% decrease in the
average cost of nickel during the three months ended September 30, 2009 compared
to the comparable period in 2008.
Gross
profit for the three months ended September 30, 2009 was $5.2 million, or 24.8%
of net sales, compared to $3.5 million, or 17.2% 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 September 30, 2009 is
primarily due to a 35% decrease in the average per unit cost of goods sold
during three months ended September 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 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. We engaged many new customers such as LG, Shenzhen
JiaYang Battery Co., Ltd for our Li-ion products. Our current monthly
Li-ion battery production increased by 600% during three months ended September
30, 2009 as compared to the comparable period in 2008.
Selling
and distribution costs were $767,000 for the three months ended September 30,
2009 compared to $800,000 for the comparable period in 2008. The decrease was
primarily due to a decrease of $50,000 in exhibiting expense during three months
ended September 30, 2009 as compared to the comparable period in
2008.
General
and administrative costs were $1.5 million, or 7.0% of net sales, for the three
months ended September 30, 2009, compared to $1.9 million, or 9.4% 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 $120,000 for the
three months ended September 30, 2009 over the comparable period in 2008 due to
the reduction of our indirect staff to cut indirect cost , and a
decrease in costs associated with the Company’s initial public
offering of common stock and listing on the NYSE Amex (formerly the American
Stock Exchange), and stock-based compensation expenses, which
decreased $500,000 for the three months ended September 30, 2009 over the
comparable period in 2008.
We
experienced losses on the exchange rate difference between the U.S. Dollar and
the RMB of $7,000, and $159,000, respectively, in the three months ended
September 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.
Interest
expense was $199,000 for the three months ended September 30, 2009, as compared
to $159,000 for the comparable period in 2008. The increase was primarily
due to higher interest rate. We decreased our borrowings by approximately $6.73
million in the three months ended September 30, 2009 as compared to the three
months ended September 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, government sponsor and sundry income, was $290,000 for the three
months ended September 30, 2009, as compared to $ 101,000 for the three months
ended September 30, 2008. The increase was due to a $211,000 gain from
government sponsor during the three months ended September 30, 2009 and an
increase of $34,000 in sundry income for the three months ended September 30,
2009 over the comparable period in 2008, partially offset by a decrease of
$47,000 in bank interest income and a $6,000 decrease in gains on forward
contracts.
We had
other expenses related to foreign exchange contracts of $53,000 in the three
months ended September 30, 2009 related to forward contracts. We had
no such expenses in the three months ended September 30, 2008.
During
the three months ended September 30, 2009, we recorded a provision for income
taxes of $530,000 as compared to $36,000 for the comparable period in
2008. The increase was a result of an increase in our net taxable
income.
Net
income for the three months ended September 30, 2009 was $ 2.4 million compared
to net income of $289,000 for the comparable period in 2008.
Nine
months Ended September 30, 2009 and 2008
Net sales
for the nine months ended September 30, 2009 were $ 47.8 million compared to
$57.3 million for the nine months ended September 30, 2008, a decrease of
16.6%. This decrease was largely due to a 23% decrease in the average
selling price of our battery units, offset by an 8% increase in the number of
battery units sold and $132,662 for the sale of scrap batteries during three
months ended September 30, 2009. The 8% increase in the number of
battery units sold was due to increased orders from our major
customers. The 23% decrease in the average selling price of our
battery units was due to a decrease in the average cost of nickel during the
nine months ended September 30, 2009 compared to the comparable period in
2008.
Cost of
sales consists of the cost of nickel and other materials. Costs of
sales were $ 37.1 million for the nine months ended September 30, 2009 as
compared to $47.7 million for the comparable period in 2008. As
a percentage of net sales, cost of sales decreased to 77.6% for the nine months
ended September 30, 2009 compared to 83.3% for the comparable period in
2008. This decrease was attributable to a 28% decrease in the average
per unit cost of goods sold during nine months ended September 30, 2009 as
compared to the comparable period in 2008, which was offset by a 23% decrease in
the average selling price of our battery units during the nine months ended
September 30, 2009 over nine months ended September 30, 2008. The 28% decrease
in the average per unit cost of goods sold resulted from a 30%decrease in the
average cost of nickel during the nine months ended September 30, 2009 compared
to the comparable period in 2008.
Gross
profit for the nine months ended September 30, 2009 was $10.7 million, or 22.4%
of net sales, compared to $9.6 million, or 16.7% 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 nine months ended September 30, 2009 is
primarily due to a 28% decrease in the average per unit cost of goods sold
during nine months ended September 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. We engaged many new customers such as LG,
Shenzhen JiaYang Battery Co., Ltd for our Li-ion products. Our current monthly
Li-ion battery production increased by 1000% during nine months ended September
30, 2009 as compared to the comparable period in 2008.
Selling
and distribution costs were $1.9 million for the nine months ended September 30,
2009 compared to $1.8 million for the comparable period in 2008. The increase
was primarily due to the expansion of our salesforce.
General
and administrative costs were $3.6million, or 7.6 % of net sales, for the nine
months ended September 30, 2009, compared to $4.3 million, or 7.4% 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 a 16.6% decrease in net sales during nine months ended September 30, 2009 as
compared to the comparable period in 2008.
We
experienced losses on the exchange rate difference between the U.S. Dollar and
the RMB of $62,000 and $995,000 respectively, in the nine months ended September
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 $117,106 loss on the fair value of our currency
forwards in the nine months ended September 30, 2009 compared to a gain of
$29,102 in the nine months ended September 30, 2008.
Interest
expense was $280,000 for the nine months ended September 30, 2009, as compared
to $600,000 for the comparable period in 2008. The decrease was primarily
due to lower borrowing levels. We decreased our borrowings by
approximately $6.73 million in the nine months ended September 30, 2009 as
compared to the nine months ended September 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 $378,000 for the nine months ended September
30, 2009, as compared to $326,000 for the nine months ended September 30, 2008.
The increase was due to a $93,000 increase in bank interest income, a $211,000
gain on government sponsor in the nine months ended September 30, 2009,
partially offset by a 28,000 decrease in sundry income and gains of $17,000 on
forward contracts and $21,000 in other interest income in the nine months ended
September 30, 2008.
We had
other expenses related to foreign exchange contracts of $224,000 in the nine
months ended September 30, 2009 related to forward contracts. We had
no such expenses in the nine months ended September 30, 2008.
During
the nine months ended September 30, 2009, we recorded a provision for income
taxes of $919,000 as compared to $267,000 for the comparable period in
2008. The increase was a result of an increase in our net taxable
income.
Net
income for the nine months ended September 30, 2009 was $3.8million, compared to
net income of $1.7 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
September 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 September 30, 2009, we
had utilized approximately $6.5 million under such general credit facilities and
had available unused credit facilities of $16.7 million.
For the
nine months ended September 30, 2009, net cash provided by operating activities
was approximately $13.9 million, as compared to $5.4 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 $2.8 million for the nine months ended
September 30, 2009 compared to $2.5 million for the comparable period in 2008.
The increase of cash used in investing activities was primarily attributable to
a slight increase in the amount of acquisition of plant and
equipment.
Net cash
used in financing activities was $8.1 million for the nine months ended
September 30, 2009 as compared to net cash used in financing activities of
$519,000 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 nine months ended September 30, 2009.
For the
nine months ended September 30, 2009, our inventory turnover was 4.8 times, as
compared to 4.3 times at September 30, 2008. The average days outstanding of our
accounts receivable at September 30, 2009 were 61 days, as compared to 64 days
at September 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 $1.0 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 $41,000 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
ASC 805,
Business Combinations (“ASC 805”) (formerly included under Statement of
Financial Accounting Standards No. 141 (revised 2007), Business
Combinations) contains guidance that was issued by the FASB in December 2007. It
requires the acquiring entity in a business combination to recognize all assets
acquired and liabilities assumed in a transaction at the acquisition-date fair
value, with certain exceptions. Additionally, the guidance requires changes to
the accounting treatment of acquisition related items, including, among other
items, transaction costs, contingent consideration, restructuring costs,
indemnification assets and tax benefits. ASC 805 also provides for a substantial
number of new disclosure requirements. ASC 805 also contains guidance that was
formerly issued as FSP FAS 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies
which was intended to provide additional guidance clarifying application issues
regarding initial recognition and measurement, subsequent measurement and
accounting, and disclosure of assets and liabilities arising from contingencies
in a business combination. ASC 805 was effective for business combinations
initiated on or after the first annual reporting period beginning after
December 15, 2008. The Company implemented this guidance effective
January 1, 2009. Implementing this guidance did not have an effect on the
Company’s financial position or results of operations; however it will likely
have an impact on the Company’s accounting for future business combinations, but
the effect is dependent upon acquisitions, if any, that are made in the
future.
In
March 2008, the FASB issued ASC 815 (formerly SFAS No. 161,
“Disclosures about Derivative Instruments and Hedging Activities, an amendment
of FASB Statement No. 133”) to amend and expand the disclosures about
derivatives and hedging activities. The standard requires enhanced qualitative
disclosures about an entity’s objectives and strategies for using derivatives,
and tabular quantitative disclosures about the fair value of derivative
instruments and gains and losses on derivatives during the reporting period.
This standard is effective for both fiscal years and interim periods that begin
after November 15, 2008. The adoption of this standard on December 29,
2008, the beginning of the Company’s fiscal year, did not have a material impact
on its consolidated financial statements.
ASC 855,
Subsequent Events (“ASC 855”) (formerly Statement of Financial Accounting
Standards No. 165, Subsequent Events) includes guidance that was issued by
the FASB in May 2009, and is consistent with current auditing standards in
defining a subsequent event. Additionally, the guidance provides for disclosure
regarding the existence and timing of a company’s evaluation of its subsequent
events. ASC 855 defines two types of subsequent events, “recognized” and
“non-recognized”. Recognized subsequent events provide additional evidence about
conditions that existed at the date of the balance sheet and are required to be
reflected in the financial statements. Non-recognized subsequent events provide
evidence about conditions that did not exist at the date of the balance sheet
but arose after that date and, therefore; are not required to be reflected in
the financial statements. However, certain non-recognized subsequent events may
require disclosure to prevent the financial statements from being misleading.
This guidance was effective prospectively for interim or annual financial
periods ending after June 15, 2009. The Company implemented the guidance
included in ASC 855 as of April 1, 2009. The effect of implementing this
guidance was not material to the Company’s financial position or results of
operations.
In June
2009, the FASB issued Statement of Financial Accounting Standards No. 166,
Accounting for Transfers of
Financial Assets an amendment of FASB Statement No. 140
(“Statement
No. 166”). Statement No. 166 revises FASB Statement of Financial
Accounting Standards No. 140,
Accounting for Transfers and
Extinguishment of Liabilities a replacement of FASB Statement 125
(“Statement No. 140”) and requires additional disclosures about transfers
of financial assets, including securitization transactions, and any continuing
exposure to the risks related to transferred financial assets. It also
eliminates the concept of a “qualifying special-purpose entity”, changes the
requirements for derecognizing financial assets, and enhances disclosure
requirements. Statement No. 166 is effective prospectively, for annual
periods beginning after November 15, 2009, and interim and annual periods
thereafter. Although Statement No. 166 has not been incorporated into the
Codification, in accordance with ASC 105, the standard shall remain
authoritative until it is integrated. The Company does not expect the adoption
of Statement No. 166 will have a material impact on its financial position
or results of operations.
ASC 105,
Generally Accepted Accounting Principles (“ASC 105”) (formerly Statement of
Financial Accounting Standards No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles a
replacement of FASB Statement No. 162) reorganized by topic existing
accounting and reporting guidance issued by the Financial Accounting Standards
Board (“FASB”) into a single source of authoritative generally accepted
accounting principles (“GAAP”) to be applied by nongovernmental entities. All
guidance contained in the Accounting Standards Codification (“ASC”) carries an
equal level of authority. Rules and interpretive releases of the Securities and
Exchange Commission (“SEC”) under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. Accordingly, all other
accounting literature will be deemed “non-authoritative”. ASC 105 is effective
on a prospective basis for financial statements issued for interim and annual
periods ending after September 15, 2009. The Company has implemented the
guidance included in ASC 105 as of July 1, 2009. The implementation of this
guidance changed the Company’s references to GAAP authoritative guidance but did
not impact the Company’s financial position or results of
operations.
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 70% of our sales
are made in U.S. Dollars. During the nine months ended September 30, 2009, the
exchange rate of the RMB to the U.S. Dollar decreased approximately 0.09% 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 September 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. We experienced a $7,000 and $117,000 loss in the
value of currency forwards in the three and nine months ended September 30,
2009, respectively, as compared to a gain of $nil and $29,000 during the three
and nine months ended September 30, 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 September 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 quarter 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
On August 20, 2009, we held our annual
meeting of stockholders. Of the 13,562,597 shares eligible to vote, 10,189,884
or 75.13%, votes were returned, formulating a quorum. At the annual stockholders
meeting, the following matters were submitted to stockholders for vote: Proposal
I—Election of directors; and Proposal II—Ratification of the appointment of
Dominic K.F. Chan & Co. as our independent auditors for the year ending
December 31, 2009.
Proposal
I—Election of Directors
The
results of voting on these proposals are as follows:
Director
|
|
For
|
|
|
Against
|
|
|
Withheld
|
|
|
Abstain
|
|
Elected
|
Dang
Yu Pan
|
|
|
10,173,476
|
|
|
|
0
|
|
|
|
16,408
|
|
|
|
0
|
|
Yes
|
Wen
Liang Li
|
|
|
10,173,476
|
|
|
|
0
|
|
|
|
16,408
|
|
|
|
0
|
|
Yes
|
Chao
Li
|
|
|
10,173,476
|
|
|
|
0
|
|
|
|
16,408
|
|
|
|
0
|
|
Yes
|
Xinhai
Li
|
|
|
10,173,476
|
|
|
|
0
|
|
|
|
16,408
|
|
|
|
0
|
|
Yes
|
Ping
Li
|
|
|
10,173,476
|
|
|
|
0
|
|
|
|
16,408
|
|
|
|
0
|
|
Yes
|
All
directors are elected at our annual meeting of stockholders.
Proposal
II—Ratification of the appointment of Dominic K.F. Chan & Co. as our
independent auditors for the year ending December 31, 2009.
Proposal
II was approved with 10,167,392 shares voted for, 10,175 voted against and
12,317 abstained from voting, thereby, ratifying the appointment of Dominic K.F.
Chan & Co. as our independent auditors for the year ending December 31,
2009.
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:
November 12, 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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