UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form 10-Q
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x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the Quarterly Period Ended September 30, 2010
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OR
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For
the transition period
from to
Commission
File No.: 001-34098
HIGHPOWER
INTERNATIONAL, INC.
(Exact
name of Registrant as specified in its charter)
Delaware
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|
20-4062622
|
(State
or other jurisdiction of
incorporation
or organization)
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|
(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)
Hong Kong Highpower Technology,
Inc.
Former
Name
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes
x
No
¨
Indicate by check mark whether the
registrant has submitted electronically 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
¨
No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” as defined in Rule 12b-2 of the Exchange
Act.
Large accelerated filer
¨
|
Accelerated filer
¨
|
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|
Non-accelerated filer
¨
|
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
¨
No
x
The
registrant had
13,582,106
shares of common stock, par value $0.0001 per share, outstanding as of November
11, 2010.
HIGHPOWER INTERNATIONAL, INC.
FORM
10-Q
For the Quarterly Period Ended
September 30, 2010
INDEX
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Page
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Part I
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Financial
Information
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Item
1.
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Financial
Statements
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1
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(a)
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Balance
Sheets as of September 30, 2010 (Unaudited) and December 31,
2009
|
1
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(b)
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Statements
of Comprehensive Income for the Three and Nine Months Ended September 30,
2010 and 2009 (Unaudited)
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3
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(c)
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Statements
of Cash Flows for the Nine Months Ended September 30, 2010 and 2009
(Unaudited)
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4
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(d)
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Notes
to Financial Statements (Unaudited)
|
5
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
34
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
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41
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Item
4.
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Controls
and Procedures
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42
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Part II
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Other
Information
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Item
1.
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Legal
Proceedings
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42
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Item
1A.
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Risk
Factors
|
42
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Item
2.
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Unregistered
Sale of Equity Securities and Use of Proceeds
|
42
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Item
3.
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Default
Upon Senior Securities
|
42
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Item
4.
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Removed
and Reserved
|
42
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Item
5.
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Other
Information
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42
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Item
6.
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Exhibits
|
43
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Signatures
|
44
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Item 1. Financial Statements
HIGHPOWER
INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Stated
in US Dollars)
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As of
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September
30,
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|
December
31,
|
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2010
|
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|
2009
|
|
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|
(Unaudited)
|
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|
(Audited)
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$
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|
$
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ASSETS
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|
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Current
Assets:
|
|
|
|
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Cash
and cash equivalents
|
|
|
5,385,507
|
|
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|
2,967,586
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Restricted
cash
|
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|
7,579,676
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|
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|
5,478,418
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Accounts
receivable
|
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|
19,459,847
|
|
|
|
14,896,503
|
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Notes
receivable
|
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|
1,979,551
|
|
|
|
596,795
|
|
Prepaid
expenses and other receivables –
Note 7
|
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|
4,958,306
|
|
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|
2,366,734
|
|
Inventories
–
Note
11
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|
14,773,060
|
|
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|
10,633,566
|
|
|
|
|
|
|
|
|
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Total
Current Assets
|
|
|
54,135,947
|
|
|
|
36,939,602
|
|
Plant
and equipment, net –
Note 12
|
|
|
13,242,801
|
|
|
|
10,284,873
|
|
Leasehold
land, net –
Note
13
|
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|
2,978,606
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|
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|
3,019,509
|
|
Intangible
asset, net –
Note
14
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812,500
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|
|
|
850,000
|
|
Investment
securities –
Note
15
|
|
|
52,843
|
|
|
|
52,732
|
|
Investment
in an associate
|
|
|
135,735
|
|
|
|
-
|
|
|
|
|
|
|
|
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TOTAL
ASSETS
|
|
|
71,358,432
|
|
|
|
51,146,716
|
|
|
|
|
|
|
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
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|
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LIABILITIES
|
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Current
Liabilities:
|
|
|
|
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Non-trading
foreign currency derivatives liabilities
|
|
|
11,065
|
|
|
|
11,041
|
|
Accounts
payable
|
|
|
17,798,596
|
|
|
|
10,738,714
|
|
Other
payables and accrued liabilities –
Note 19
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|
5,051,365
|
|
|
|
3,563,308
|
|
Income
taxes payable
|
|
|
855,227
|
|
|
|
876,739
|
|
Bank
borrowings –
Note
20
|
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|
21,704,893
|
|
|
|
14,787,714
|
|
|
|
|
|
|
|
|
|
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Total
Current Liabilities
|
|
|
45,421,146
|
|
|
|
29,977,516
|
|
|
|
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COMMITMENTS
AND CONTINGENCIES –
Note
22
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(continued)
HIGHPOWER
INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Stated
in US Dollars)
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|
As of
|
|
|
|
September30,
|
|
|
December
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
$
|
|
|
$
|
|
STOCKHOLDERS’
EQUITY
|
|
|
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Preferred
Stock
|
|
|
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|
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Par
value: $0.0001
|
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|
Authorized:
10,000,000 shares
|
|
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|
|
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Issued
and outstanding: none
|
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|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
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Common
stock
|
|
|
|
|
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Par
value : $0.0001
|
|
|
|
|
|
|
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Authorized:
100,000,000 shares
|
|
|
|
|
|
|
|
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Issued
and outstanding: 2010 –13,582,106 shares (2009 –13,582,106
shares)
|
|
|
1,358
|
|
|
|
1,358
|
|
Additional
paid-in capital
|
|
|
5,173,097
|
|
|
|
5,065,426
|
|
Accumulated
other comprehensive income
|
|
|
2,082,617
|
|
|
|
2,023,858
|
|
Retained
earnings
|
|
|
18,680,214
|
|
|
|
14,078,558
|
|
|
|
|
|
|
|
|
|
|
TOTAL
STOCKHOLDERS’ EQUITY
|
|
|
25,937,286
|
|
|
|
21,169,200
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
71,358,432
|
|
|
|
51,146,716
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
HIGHPOWER
INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Stated
in US Dollars)
|
|
Three months ended
September 30,
|
|
|
Nine
months
ended
September
30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
27,774,213
|
|
|
|
21,056,149
|
|
|
|
76,975,699
|
|
|
|
47,811,438
|
|
Cost
of sales
|
|
|
(21,900,312
|
)
|
|
|
(15,835,110
|
)
|
|
|
(61,456,057
|
)
|
|
|
(37,120,495
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
5,873,901
|
|
|
|
5,221,039
|
|
|
|
15,519,642
|
|
|
|
10,690,943
|
|
Depreciation
–
Notes
12
|
|
|
(57,638
|
)
|
|
|
(50,120
|
)
|
|
|
(196,599
|
)
|
|
|
(169,309
|
)
|
Selling
and distributing costs
|
|
|
(1,132,812
|
)
|
|
|
(767,194
|
)
|
|
|
(2,995,314
|
)
|
|
|
(1,879,001
|
)
|
General
and administrative costs, including stock-based
compensation
|
|
|
(2,625,900
|
)
|
|
|
(1,464,392
|
)
|
|
|
(6,247,610
|
)
|
|
|
(3,613,654
|
)
|
Loss
on exchange rate difference
|
|
|
(328,921
|
)
|
|
|
(6,813
|
)
|
|
|
(481,405
|
)
|
|
|
(62,402
|
)
|
Loss
from associate
|
|
|
(6,780
|
)
|
|
|
-
|
|
|
|
(6,780
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
1,721,850
|
|
|
|
2,932,520
|
|
|
|
5,591,934
|
|
|
|
4,966,577
|
|
Change
in fair value of currency forwards
|
|
|
-
|
|
|
|
(7,483
|
)
|
|
|
-
|
|
|
|
(117,106
|
)
|
Other
income –
Note
3
|
|
|
83,490
|
|
|
|
289,843
|
|
|
|
286,890
|
|
|
|
378,432
|
|
Interest
expenses –
Note
4
|
|
|
(89,669
|
)
|
|
|
(199,125
|
)
|
|
|
(257,113
|
)
|
|
|
(279,622
|
)
|
Other
expenses -
Note
5
|
|
|
-
|
|
|
|
(52,878
|
)
|
|
|
-
|
|
|
|
(223,963
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before taxes
|
|
|
1,715,671
|
|
|
|
2,962,877
|
|
|
|
5,621,711
|
|
|
|
4,724,318
|
|
Income
taxes –
Note
6
|
|
|
(280,062
|
)
|
|
|
(529,201
|
)
|
|
|
(1,020,055
|
)
|
|
|
(919,020
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the period
|
|
|
1,435,609
|
|
|
|
2,433,676
|
|
|
|
4,601,656
|
|
|
|
3,805,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Foreign currency translation gain
|
|
|
(31,010
|
)
|
|
|
(99,446
|
)
|
|
|
(54,505
|
)
|
|
|
392,618
|
|
-
Cash flow hedge
|
|
|
(4,892
|
)
|
|
|
-
|
|
|
|
4,894
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
|
1,399,707
|
|
|
|
2,334,230
|
|
|
|
4,552,045
|
|
|
|
4,197,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Basic
|
|
|
0.11
|
|
|
|
0.18
|
|
|
|
0.34
|
|
|
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Diluted
|
|
|
0.11
|
|
|
|
0.18
|
|
|
|
0.34
|
|
|
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Basic
|
|
|
13,582,106
|
|
|
|
13,562,597
|
|
|
|
13,582,106
|
|
|
|
13,621,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Diluted
|
|
|
13,732,096
|
|
|
|
13,615,096
|
|
|
|
13,732,096
|
|
|
|
13,673,966
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
HIGHPOWER
INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated
in US Dollars)
|
|
Nine months ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
$
|
|
|
$
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
Net
income
|
|
|
4,601,656
|
|
|
|
3,805,298
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Amortization
of intangible asset
|
|
|
37,500
|
|
|
|
37,500
|
|
Amortization
of leasehold land
|
|
|
40,903
|
|
|
|
47,073
|
|
Depreciation
|
|
|
1,025,489
|
|
|
|
648,681
|
|
Change
in fair value of currency forwards
|
|
|
-
|
|
|
|
117,106
|
|
Loss
on disposal of plant and equipment
|
|
|
66,184
|
|
|
|
24,713
|
|
Share
based payment
|
|
|
97,525
|
|
|
|
216,667
|
|
Bad
debt written off
|
|
|
9,408
|
|
|
|
58,407
|
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase)
decrease in -
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(4,563,344
|
)
|
|
|
(2,440,816
|
)
|
Notes
receivable
|
|
|
(1,382,756
|
)
|
|
|
31,136
|
|
Prepaid
expenses and other receivables
|
|
|
(2,591,572
|
)
|
|
|
(2,421,799
|
)
|
Inventories
|
|
|
(4,139,494
|
)
|
|
|
900,504
|
|
Increase
(decrease) in -
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
7,059,882
|
|
|
|
6,723,770
|
|
Other
payables and accrued liabilities
|
|
|
1,488,057
|
|
|
|
5,861,389
|
|
Income
taxes payable
|
|
|
(21,512
|
)
|
|
|
298,038
|
|
|
|
|
|
|
|
|
|
|
Net
cash flows provided by operating activities
|
|
|
1,727,926
|
|
|
|
13,907,667
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
Acquisition
of plant and equipment
|
|
|
(4,269,128
|
)
|
|
|
(2,757,805
|
)
|
Investment
in an associate
|
|
|
(135,735
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
cash flows used in investing activities
|
|
|
(4,404,863
|
)
|
|
|
(2,757,805
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds
from new short-term bank loans
|
|
|
2,284,420
|
|
|
|
3,478,236
|
|
Repayment
of short-term bank loans
|
|
|
(1,569,151
|
)
|
|
|
(11,956,136
|
)
|
Proceed
from other secured loans
|
|
|
25,036,124
|
|
|
|
-
|
|
Repayment
of other secured loans
|
|
|
(18,865,440
|
)
|
|
|
-
|
|
(Decrease)
Increase in restricted cash
|
|
|
(2,101,258
|
)
|
|
|
348,706
|
|
|
|
|
|
|
|
|
|
|
Net
cash flows (used in) provided by financing activities
|
|
|
4,784,695
|
|
|
|
(8,129,194
|
)
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
2,107,758
|
|
|
|
3,020,668
|
|
Effect
of foreign currency translation on cash and cash
equivalents
|
|
|
310,163
|
|
|
|
6,727
|
|
Cash
and cash equivalents - beginning of period
|
|
|
2,967,586
|
|
|
|
4,175,780
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents - end of period
|
|
|
5,385,507
|
|
|
|
7,203,175
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures for cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid for:
|
|
|
|
|
|
|
|
|
Interest
|
|
|
257,113
|
|
|
|
279,622
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
HIGHPOWER
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
1.
|
Organization
and Basis of Presentation
|
Highpower
International, Inc. (“Highpower” or the “Company,” formerly known as Hong Kong
Highpower Technology, Inc.) was incorporated in the State of Delaware on January
3, 2006 to locate a suitable acquisition candidate to acquire.
The
Company’s wholly owned subsidiary, Hong Kong Highpower Technology Company
Limited, a company incorporated in Hong Kong (“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.
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 at September 30, 2010.
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..
The
Company’s common stock commenced trading on the Nasdaq Global Market on December
21, 2009. Prior to December 21, 2009, shares of the Company’s common
stock were listed for 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 were for the period of one year from
the date of June 19, 2008 pursuant to a one-year contract with this investor
relations firm, which has expired.
On
November 18, 2009, HKHTC invested an additional $1,227,487 in SZ
Highpower.
HIGHPOWER
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
1.
|
Organization and Basis of
Presentation
(continued)
|
On May 25
2010, the Company invested $142,515 in Springpower International, Inc.
(“Springpower International”) which became an associate of HKHTC. Springpower
International, which is incorporated in Canada, mainly researches and develops
advanced, high performance battery materials and clean energy
materials.
On
September 21, 2010, the Company invested $293,574 in Ganzhou Highpower
Technology Co., Ltd. (“GZ Highpower”). GZ Highpower is a wholly owned subsidiary
of SZ Highpower. GZ Highpower is expected to engage in trading and research of
batteries, and it has not commenced business as at September 30,
2010.
In
October 20, 2010, with stockholders’ approval, the Company officially changes
its name from Hong Kong Highpower Technology, Inc. to Highpower International,
Inc.
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
|
|
|
|
|
|
|
|
|
Ganzhou
Highpower Technology Co., Ltd
(“GZ
Highpower”)
|
|
PRC
September
21, 2010
|
|
|
100
|
%
|
Trading
and research of
batteries
|
HIGHPOWER
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
1.
|
Organization and Basis of
Presentation
(continued)
|
The
associate of the Company includes the following:
Name of company
|
|
Place and date of
incorporation
|
|
Attributable equity
interest held
|
|
Principal activities
|
Springpower
International, Inc.
(“Springpower
International”)
|
|
Canada
March
22, 2010
|
|
|
40
|
%
|
Research
and development of
batteries
|
2.
|
Summary
of significant accounting policies
|
Basis of
presentation
The
accompanying consolidated financial statements of the Company have been prepared
in accordance with generally accepted accounting principles in the United States
of America. The consolidated financial statements for the interim periods are
unaudited. In the opinion of management, these consolidated financial
statements, include all adjustments, including normal recurring adjustments,
necessary for their fair presentation. Interim results are not necessarily
indicative of results of operations to be expected for a full
year. The accompanying consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission and do not include all information and footnotes necessary
for a complete presentation of financial statements in conformity with
accounting principles generally accepted in the United States. These financial
statements should be read in conjunction with the Company’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2009.
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.
HIGHPOWER
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
|
Summary
of significant accounting policies
(continued)
|
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).
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 any of the nine months ended September 30, 2010 and 2009
are as follows:
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Company
A
|
|
|
24
|
%
|
|
|
21
|
%
|
Company
B
|
|
|
*
|
|
|
|
10
|
%
|
* Less
than 10%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
%
|
|
|
31
|
%
|
HIGHPOWER
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED 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 of September 30, 2010 and 2009 are as follows:
|
|
Percentage of accounts receivable
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Company
A
|
|
|
40
|
%
|
|
|
24
|
%
|
Company
B
|
|
|
10
|
%
|
|
|
10
|
%
|
Company
C
|
|
|
*
|
|
|
|
12
|
%
|
Company
D
|
|
|
21
|
%
|
|
|
*
|
|
* Less
than 10%
|
|
|
|
|
|
|
|
|
Largest
receivable balances
|
|
|
71
|
%
|
|
|
46
|
%
|
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 of $9,408 and $58,407 during the nine months ended
September 30, 2010 and 2009, respectively.
HIGHPOWER
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED 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 ended September 30, 2010
and 2009, 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 $53,877 and $132,662 for the nine months ended September 30,
2010 and 2009, 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:
Buildings
|
|
|
5%
- 10
|
%
|
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.
Construction
in progress represents the properties and plant and machinery in the course of
development for production or buildings under development and are stated at
cost, less any identified impairment losses. When the construction is completed
and the asset is ready for its intended use, the related cost is transferred to
an appropriate category of property, plant and equipment and depreciated in
accordance with the above policy.
HIGHPOWER
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
|
Summary
of significant accounting policies
(continued)
|
Investment
Securities
Investments
in less than twenty percent owned entities are accounted for under the cost
basis and are reviewed for impairment periodically.
Management
have strategic investments in certain debt and equity securities that are
included in noncurrent “Investment securities” on our Consolidated Balance
Sheets accounted for using the cost methods of accounting.
The
Company ability to realize value from our strategic investments in companies
that are not publicly traded depends on the success of those companies’
businesses and their ability to obtain sufficient capital to execute their
business plans. Because private markets are not as liquid as public
markets, there is also increased risk that we will not be able to sell these
investments, or that when we desire to sell them we will not be able to obtain
fair value for them.
Intangible Assets and
Long-Lived Assets
FASB ASC
350 “Intangibles – Goodwill and Other,” 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
ASC 360 “Property, Plant and Equipment – Overall”. 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, 2010
and 2009.
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 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.
HIGHPOWER
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
Summary of significant accounting
policies
(continued)
Advertising and promotion
expenses
Advertising
and promotion expenses are charged to expense as incurred.
Advertising
and promotion expenses, which are included in selling and distribution costs,
were not material for the nine months ended September 30, 2010 and
2009.
Income
taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. 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. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in consolidated statements of income in the period that
includes the enactment date or date of change in tax rate. A valuation allowance
is provided to reduce the amount of deferred tax assets if it is considered more
likely than not that some portion or all of the deferred tax assets will not be
realized.
The
Company adopted FASB ASC 740, “Accounting for Uncertainty in Income Taxes”
clarifies the accounting for uncertain tax positions. This interpretation
requires that an entity recognizes in the consolidated financial statements the
impact of a tax position, if that position is more likely than not of being
sustained upon examination, based on the technical merits of the position.
Recognized income tax positions are measured at the largest amount that is
greater than 50% likely of being realized. Changes in recognition or measurement
are reflected in the period in which the change in judgement occurs. The Company
has elected to classify interest and penalties related to unrecognized tax
benefits, if and when required, as a component of income tax expense in the
consolidated statements of income. According to the PRC Tax Administration and
Collection Law, the statute of limitations is three years if the underpayment of
taxes is due to computational errors made by the taxpayer or the withholding
agent. The statute of limitations is extended to five years under special
circumstances, which are not clearly defined. In the case of a related party
transaction, the statute of limitation is ten years. There is no statute of
limitation in the case of tax evasion. The adoption of ASC 740 did not have a
significant effect on the consolidated financial statements.
Comprehensive
income
The
Company has adopted FASB ASC 220 “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.
HIGHPOWER
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
|
Summary
of significant accounting policies
(continued)
|
Foreign currency translation
(continued)
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.
|
|
September 30,
2010
|
|
|
September 30,
2009
|
|
|
|
|
|
|
|
|
Quarter
end RMB : US$ exchange rate
|
|
|
6.8126
|
|
|
|
6.8178
|
|
Average
quarterly RMB : US$ exchange rate
|
|
|
6.8150
|
|
|
|
6.8425
|
|
The RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No
representation is made that RMB amounts could have been, or could be, converted
into US$ at rates used in translation.
Transactions and
balances
Transactions
in foreign currencies are translated into the functional currency at the
approximate rates of exchange ruling on the transaction date. Exchange gains and
losses resulting from this translation policy are recognized in the statements
of operations.
Fair value of financial
instruments
The
carrying values of the Company’s financial instruments, including cash and cash
equivalents, restricted cash, trade and other receivables, deposits, trade and
other payables, approximate their fair values due to the short-term maturity of
such instruments. The carrying amounts of borrowings approximate their fair
values because the applicable interest rates approximate current market
rates.
The
Company is exposed to certain foreign currency risk from export sales
transactions and the related accounts receivable as they will affect the future
operating results of the Company.
Foreign currency
derivative
From time
to time the Company may utilize forward foreign currency exchange contracts to
reduce the impact of foreign currency exchange rate risks. Forward contracts are
cash flow hedges of the Company’s foreign currency exposures and are recorded at
the contract’s fair value. The effective portion of the forward contract is
initially reported in “Accumulated other comprehensive income,” a component of
shareholders’ equity, with a corresponding asset or liability recorded based on
the fair value of the forward contract. When the hedged transaction is recorded
(generally when revenue on the associated sales contract is recognized), any
unrecognized gains or losses are reclassified into results of operations in the
same period. Any hedge ineffectiveness is recorded to operations in the current
period. The Company measures hedge effectiveness by comparing changes in fair
values of the forward contract and expected cash flows based on changes in the
spot prices of the underlying currencies. Cash flows from forward contracts
accounted for as cash flow hedges are classified in the same category as the
cash flows from the items being hedged.
HIGHPOWER
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED 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.” 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. Diluted
earnings per common share computations are based on the weighted average number
of common shares outstanding during the period, plus the dilutive effect of
stock options, warrants and restricted stock awards.
The
Company accounts for stock-based payment transactions in which the Company
receives employee services in exchange for (a) equity instruments of the
enterprise or (b) liabilities that are based on the fair value of the
enterprise’s equity instruments or that may be settled by the issuance of such
equity instruments. Stock-based compensation cost for restricted stock units
(“RSUs”) is measured based on the closing fair market value of the Company’s
common stock on the date of grant. Stock-based compensation cost for stock
options is estimated at the grant date based on each option’s fair-value as
calculated by the Black-Scholes-Merton (“BSM”) option-pricing model. The Company
recognizes stock-based compensation cost as expense ratably on a straight-line
basis over the requisite service period. The Company will recognize a benefit
from stock-based compensation in equity if an incremental tax benefit is
realized by following the ordering provisions of the tax law. In addition, the
Company accounts for the indirect effects of stock-based compensation on the
research tax credit, the foreign tax credit and the domestic manufacturing
deduction through the income statement. Further information regarding
stock-based compensation can be found in Note 9, “Shareholders’ Equity and
Stock-Based Compensation.”
Share-based
compensation expense was $97,525 and $216,667 and for the nine months ended
September 30, 2010 and 2009, respectively.
HIGHPOWER
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED 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.
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.
HIGHPOWER
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
|
Summary
of significant accounting policies
(continued)
|
Recently issued accounting
pronouncements (continued)
In August
2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, which amends
ASC Topic 820, Measuring Liabilities at Fair Value, which provides additional
guidance on the measurement of liabilities at fair value. These amended
standards clarify that in circumstances in which a quoted price in an active
market for the identical liability is not available, we are required to use the
quoted price of the identical liability when traded as an asset, quoted prices
for similar liabilities, or quoted prices for similar liabilities when traded as
assets. If these quoted prices are not available, we are required to use another
valuation technique, such as an income approach or a market approach. These
amended standards are effective for us beginning in the fourth quarter of fiscal
year 2009. There was no material impact upon the adoption of this standard on
the Company’s consolidated financial statements.
In
September 2009, the FASB issued ASU 2009-06, Income Taxes (Topic 740),
”Implementation Guidance on Accounting for Uncertainty in Income Taxes and
Disclosure Amendments for Nonpublic Entities”, which provides implementation
guidance on accounting for uncertainty in income taxes, as well as eliminates
certain disclosure requirements for nonpublic entities. For entities
that are currently applying the standards for accounting for uncertainty in
income taxes, this update shall be effective for interim and annual periods
ending after September 15, 2009. For those entities that have deferred the
application of accounting for uncertainty in income taxes in accordance with
paragraph
740-10-65-1(e), this update shall be
effective upon adoption of those standards. The adoption of this standard is not
expected to have an impact on the Company’s consolidated financial position and
results of operations since this accounting standard update provides only
implementation and disclosure amendments.
In
September 2009, the FASB has published ASU 2009-12, “Fair Value Measurements and
Disclosures (Topic 820) - Investments in Certain Entities That Calculate Net
Asset Value per Share (or Its Equivalent)”. This ASU amends Subtopic 820-10,
“Fair Value Measurements and Disclosures – Overall”, to permit a reporting
entity to measure the fair value of certain investments on the basis of the net
asset value per share of the investment (or its equivalent). This ASU also
requires new disclosures, by major category of investments including the
attributes of investments within the scope of this amendment to the
Codification. The guidance in this update is effective for interim and annual
periods ending after December 15, 2009. Early application is
permitted. The Company is in the process of evaluating the
impact of this standard on its consolidated financial position and results of
operations.
In
October 2009, the FASB has published ASU 2009-13, “Revenue Recognition (Topic
605)-Multiple Deliverable Revenue Arrangements”, which addresses the accounting
for multiple-deliverable arrangements to enable vendors to account for products
or services (deliverables) separately rather than as a combined unit.
Specifically, this guidance amends the criteria in Subtopic 605-25, “Revenue
Recognition-Multiple-Element Arrangements”, for separating consideration in
multiple-deliverable arrangements. This guidance establishes a selling price
hierarchy for determining the selling price of a deliverable, which is based on:
(a) vendor-specific objective evidence; (b) third-party evidence; or (c)
estimates. This guidance also eliminates the residual method of allocation and
requires that arrangement consideration be allocated at the inception of the
arrangement to all deliverables using the relative selling price method and also
requires expanded disclosures. The guidance in this update is effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. Early adoption is permitted.
The adoption of this standard is not expected to have a material impact on the
Company’s consolidated financial position and results of
operations.
HIGHPOWER
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
|
Summary
of significant accounting policies
(continued)
|
Recently issued accounting
pronouncements (continued)
ASC 105,
Generally Accepted Accounting Principles (“ASC 105”) (formerly SFAS
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.
In
January 2010, the FASB issued Accounting Standards Update No. 2010-06 (ASU
2010-06), Fair Value Measurements and Disclosures which amends ASC Topic 820,
adding new requirements for disclosures for Levels 1 and 2, separate disclosures
of purchases, sales, issuances, and settlements relating to Level 3 measurements
and clarification of existing fair value disclosures. ASU 2010-06 is
effective for interim and annual periods beginning after December 15, 2009,
except for the requirement to provide Level 3 activity of purchases, sales,
issuances, and settlements on a gross basis, which will be effective for fiscal
years beginning after December 15, 2010 (the Company’s fiscal year 2012); early
adoption is permitted. The Company is currently evaluating the impact of
adopting ASU 2009-14 on its financial statements.
In
January 2010 the FASB issued guidance that eliminates the concept of a
“qualifying special-purpose entity” (QSPE), revises conditions for reporting a
transfer of a portion of a financial asset as a sale (e.g., loan
participations), clarifies the derecognition criteria, eliminates special
guidance for guaranteed mortgage securitizations, and changes the initial
measurement of a transferor’s interest in transferred financial assets. This
guidance is effective for financial statements issued for fiscal years, and
interim periods within those fiscal years, beginning after November 15,
2009. We adopted the provisions of this guidance effective January 1, 2010,
which did not have a material impact on our financial
statements.
In
January 2010 the FASB issued guidance that revises analysis for identifying the
primary beneficiary of a variable interest entity, or VIE, by replacing the
previous quantitative-based analysis with a framework that is based more on
qualitative judgments. The new guidance requires the primary beneficiary of a
VIE to be identified as the party that both (i) has the power to direct the
activities of a VIE that most significantly impact its economic performance and
(ii) has an obligation to absorb losses or a right to receive benefits that
could potentially be significant to the VIE. This guidance is effective for
financial statements issued for fiscal years, and interim periods within those
fiscal years, beginning after November 15, 2009. We adopted the provisions
of this guidance effective January 1, 2010, which did not have a material
impact on our financial statements.
HIGHPOWER
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
|
Summary
of significant accounting policies
(continued)
|
Recently issued accounting
pronouncements (continued)
In
January 2010, the FASB issued guidance that expands the interim and annual
disclosure requirements of fair value measurements, including the information
about movement of assets between Level 1 and 2 of the three-tier fair value
hierarchy established under its fair value measurement guidance. This guidance
also requires separate disclosure for purchases, sales, issuances and
settlements in the reconciliation for fair value measurements using significant
unobservable inputs using Level 3 methodologies. Except for the detailed
disclosure in the Level 3 reconciliation, which is effective for the fiscal
years beginning after December 15, 2010, all the other disclosures under
this guidance became effective during the six months ended June 30, 2010.
We adopted the relevant provisions of this guidance effective January 1,
2010, which did not have a material impact on our financial
statements.
|
|
Three
months
ended
September
30,
|
|
|
Nine
months
ended
September
30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
interest income
|
|
|
26,555
|
|
|
|
9,748
|
|
|
|
76,408
|
|
|
|
42,517
|
|
Foreign
exchange contract income
|
|
|
(1,167
|
)
|
|
|
-
|
|
|
|
4,189
|
|
|
|
-
|
|
Government
sponsor
|
|
|
9,952
|
|
|
|
210,726
|
|
|
|
59,865
|
|
|
|
210,726
|
|
Sundry
income
|
|
|
48,150
|
|
|
|
69,369
|
|
|
|
146,428
|
|
|
|
125,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,490
|
|
|
|
289,843
|
|
|
|
286,890
|
|
|
|
378,432
|
|
|
|
Three
months
ended
September
30,
|
|
|
Nine
months
ended
September
30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on trade related bank loan
|
|
|
84,512
|
|
|
|
72,016
|
|
|
|
236,513
|
|
|
|
135,419
|
|
Interest
on short-term bank loans
|
|
|
5,157
|
|
|
|
127,109
|
|
|
|
20,600
|
|
|
|
144,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89,669
|
|
|
|
199,125
|
|
|
|
257,113
|
|
|
|
279,622
|
|
HIGHPOWER
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
|
|
Three
months
ended
September
30,
|
|
|
Nine
months
ended
September
30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange contract expenses
|
|
|
-
|
|
|
|
52,878
|
|
|
|
-
|
|
|
|
223,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
52,878
|
|
|
|
-
|
|
|
|
223,963
|
|
The components of the provision for
income taxes are:
|
|
Three
months
ended
September
30,
|
|
|
Nine
months
ended
September
30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRC
income taxes
|
|
|
280,062
|
|
|
|
529,201
|
|
|
|
1,020,055
|
|
|
|
919,020
|
|
Accounting
for Uncertainty in Income Taxes
The
Company adopted the provisions of FASB Accounting Standard Codification Topic
740 (ASC 740) “Income Taxes.” ASC 740 clarifies the accounting for uncertainty
in income taxes recognized in an enterprise’s financial statements in accordance
with ASC 740, and prescribes a recognition threshold and measurement process for
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. ASC 740 provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. The adoption of the provisions of ASC 740
did not have a material effect on the Company’s financial
statements.
Based on
the Company’s evaluation, the Company has concluded that there are no
significant uncertain tax positions requiring recognition in its financial
statements.
HIGHPOWER
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
7.
|
Prepaid
expenses and other
receivables
|
|
|
At of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Purchase
deposits paid
|
|
|
1,809,234
|
|
|
|
800,437
|
|
Advance
to staff
|
|
|
95,285
|
|
|
|
150,139
|
|
Valued-added
tax prepayment
|
|
|
1,688,910
|
|
|
|
339,868
|
|
Other
deposits and prepayments
|
|
|
340,104
|
|
|
|
423,058
|
|
Other
receivables
|
|
|
1,024,773
|
|
|
|
653,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,958,306
|
|
|
|
2,366,734
|
|
8.
|
Deferred
charges – Stock-based
compensation
|
|
|
At of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Cost
|
|
|
|
|
|
|
Stock-based
compensation – consulting fee
|
|
|
-
|
|
|
|
520,000
|
|
|
|
|
|
|
|
|
|
|
Accumulated
amortization
|
|
|
-
|
|
|
|
(520,000
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
-
|
|
|
|
-
|
|
Amortization
expenses included in general and administrative costs for the nine months ended
September 30, 2010 and 2009 were $Nil and $216,667
respectively.
The
Company is amortizing the $520,000 cost of stock-based compensation over a
period of one year on the straight line basis.
HIGHPOWER
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
9.
|
Share
– based compensation
expenses
|
The
Company has outstanding equity awards issued under its legacy equity plans and
equity plans assumed as a result of previous acquisitions. While the Company
maintains a number of legacy and acquired equity incentive plans that have
awards outstanding, equity awards are currently made only from the 2008 Omnibus
Incentive Plan as described below.
2008 Omnibus Incentive
Plan
The 2008
Omnibus Incentive Plan (the “2008 Plan”) was approved by the Company’s Board of
Directors on October 30, 2008 and became effective upon the approval of the
Company’s stockholders on December 11, 2008. The 2008 Plan has a ten year term.
The 2008 Plan reserves two million shares of common stock for issuance, subject
to increase from time to time by the number of shares: (i) subject to
outstanding awards granted under the Company’s prior equity compensation plans
that terminate without delivery of any stock (to the extent such shares would
have been available for issuance under such prior plan), and (ii) subject
to awards assumed or substituted in connection with the acquisition of another
company.
The 2008
Plan authorizes the issuance of awards including stock options, restricted stock
units (RSUs), restricted stock, unrestricted stock, stock appreciation rights
(SARs) and other equity and/or cash performance incentive awards to employees,
directors, and consultants of the Company. Subject to certain restrictions, the
Compensation Committee of the Board of Directors has broad discretion to
establish the terms and conditions for awards under the 2008 Plan, including the
number of shares, vesting conditions and the required service or performance
criteria. Options and SARs have a maximum term of five years, and their exercise
price may not be less than 110% of fair market value on the date of grant.
Repricing of stock options and SARs is prohibited without stockholder approval.
Each share subject to an award other than stock options or SARs will reduce the
number of shares available for issuance under the 2008 Plan by 17,000 shares.
Certain change in control transactions may cause awards granted under the 2008
Plan to vest, unless the awards are continued or substituted for in connection
with the transaction. As of September 30, 2010, there were 1,983,000 shares
authorized and available for issuance under the 2008 Plan.
The
restricted stock activity in 2010 related to the Company’s 2008 Plan was as
follows:
|
|
|
|
|
Weighted
Average
Grant Date
Price
|
|
|
|
Shares
|
|
|
$
|
|
Non-vested
at December 31, 2009
|
|
|
|
|
|
|
Granted
|
|
|
17,000
|
|
|
|
8.11
|
|
Vested
|
|
|
(8,500
|
)
|
|
|
5.74
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Non-vested
at September 30, 2010
|
|
|
8,500
|
|
|
|
10.48
|
|
HIGHPOWER
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
9.
|
Share
– based compensation expenses
(continued)
|
The share
option activity in 2010 related to the Company’s 2008 Plan was as
follows:
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
average
exercise
|
|
|
average
remaining
|
|
|
|
options
|
|
|
price
|
|
|
life
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of January 1, 2010
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
during the period
|
|
|
100,000
|
|
|
|
3.85
|
|
|
|
10.00
|
|
Forfeited
during the period
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Balance
as of September 30, 2010
|
|
|
100,000
|
|
|
|
3.85
|
|
|
|
9.92
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
average
exercise
|
|
|
average
remaining
|
|
|
|
options
|
|
|
price
|
|
|
life
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
as of January 1, 2010
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
during the period
|
|
|
33,333
|
|
|
|
3.85
|
|
|
|
10.00
|
|
Forfeited
during the period
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Exercisable
as of September 30, 2010
|
|
|
33,333
|
|
|
|
3.85
|
|
|
|
9.92
|
|
Basic
earning per common share is computed by dividing income available to common
shareholders by the weighted-averages number of shares of common stock
outstanding during the period. Diluted earning per common share is computed by
dividing income available to common shareholders by the weighted-average number
of shares of common stock outstanding during the period increased to include the
number of additional shares of common stock outstanding that would have been
outstanding if the potentially dilutive securities had been issued. Potentially
dilutive securities include outstanding stock options, restricted shares. The
dilutive effect of potential dilutive securities is reflected in diluted earning
per common share by application of the treasury stock method. Under the treasury
stock method, an increase in the fair market value of the Company’s common stock
can result in a greater dilutive effect from potentially dilutive
securities.
HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
10.
|
Earning
per share (continued)
|
|
The
following tables set forth the computation of basic and diluted earnings
per common share for the nine months ended September 30, 2010 and
2009.
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
$
|
|
|
$
|
|
Numerator:
|
|
|
|
|
|
|
Net
income
|
|
|
4,601,656
|
|
|
|
3,805,298
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average
shares outstanding
|
|
|
13,582,106
|
|
|
|
13,621,466
|
|
Effect
of dilutive securities
|
|
|
149,990
|
|
|
|
52,500
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares diluted
|
|
|
13,732,096
|
|
|
|
13,673,966
|
|
|
|
|
|
|
|
|
|
|
Basic
earning per common share
|
|
|
0.34
|
|
|
|
0.28
|
|
|
|
|
|
|
|
|
|
|
Diluted
earning per common share
|
|
|
0.34
|
|
|
|
0.28
|
|
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
|
5,741,470
|
|
|
|
4,090,897
|
|
Work
in progress
|
|
|
1,946,189
|
|
|
|
1,086,523
|
|
Finished
goods
|
|
|
7,074,162
|
|
|
|
5,441,554
|
|
Packing
materials
|
|
|
11,239
|
|
|
|
14,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,773,060
|
|
|
|
10,633,566
|
|
HIGHPOWER
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
|
|
At of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
$
|
|
|
$
|
|
Cost
|
|
|
|
|
|
|
Construction
in progress
|
|
|
3,056,425
|
|
|
|
1,207,274
|
|
Furniture,
fixtures and office equipment
|
|
|
2,263,326
|
|
|
|
1,748,650
|
|
Leasehold
improvement
|
|
|
681,289
|
|
|
|
750,050
|
|
Machinery
and equipment
|
|
|
10,365,661
|
|
|
|
9,040,243
|
|
Motor
vehicles
|
|
|
899,089
|
|
|
|
710,245
|
|
Building
|
|
|
248,719
|
|
|
|
61,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,514,509
|
|
|
|
13,518,363
|
|
|
|
|
|
|
|
|
|
|
Accumulated
depreciation
|
|
|
|
|
|
|
|
|
Construction
in progress
|
|
|
-
|
|
|
|
-
|
|
Furniture,
fixtures and office equipment
|
|
|
875,851
|
|
|
|
619,020
|
|
Leasehold
improvement
|
|
|
421,085
|
|
|
|
362,042
|
|
Machinery
and equipment
|
|
|
2,592,709
|
|
|
|
1,962,512
|
|
Motor
vehicles
|
|
|
372,876
|
|
|
|
288,931
|
|
Building
|
|
|
9,187
|
|
|
|
985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,271,708
|
|
|
|
3,233,490
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
Construction
in progress
|
|
|
3,056,425
|
|
|
|
1,207,274
|
|
Furniture,
fixtures and office equipment
|
|
|
1,387,475
|
|
|
|
1,129,630
|
|
Leasehold
improvement
|
|
|
260,204
|
|
|
|
388,008
|
|
Machinery
and equipment
|
|
|
7,772,952
|
|
|
|
7,077,731
|
|
Motor
vehicles
|
|
|
526,213
|
|
|
|
421,314
|
|
Building
|
|
|
239,532
|
|
|
|
60,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,242,801
|
|
|
|
10,284,873
|
|
The
components of depreciation charged are:
|
|
Three
months
ended
September
30,
|
|
|
Nine
months
ended
September
30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in factory overheads
|
|
|
293,555
|
|
|
|
174,554
|
|
|
|
828,890
|
|
|
|
479,372
|
|
Included
in operating expenses
|
|
|
57,638
|
|
|
|
50,120
|
|
|
|
196,599
|
|
|
|
169,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
351,193
|
|
|
|
224,674
|
|
|
|
1,025,489
|
|
|
|
648,681
|
|
HIGHPOWER
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
|
|
At of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Cost
|
|
|
3,151,964
|
|
|
|
3,145,322
|
|
|
|
|
|
|
|
|
|
|
Accumulated
amortization
|
|
|
(173,358
|
)
|
|
|
(125,813
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
2,978,606
|
|
|
|
3,019,509
|
|
The
leasehold land is being amortized annually using the straight-line method over
the lease terms of 50 years.
14.
|
Intangible
asset – Consumer battery license
|
|
|
At of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
$
|
|
|
$
|
|
Cost
|
|
|
|
|
|
|
Consumer
battery license fee
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
Accumulated
amortization
|
|
|
(187,500
|
)
|
|
|
(150,000
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
812,500
|
|
|
|
850,000
|
|
Amortization
expenses included in selling and distribution costs for the nine months ended
September 30, 2010 and 2009 was $37,500.
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.
On August
8, 2007, SZ Highpwer and Ovonic amended the Consumer Battery License Agreement
pursuant to which SZ Highpower agreed to pay a total of $112,580, which was to
be made in two equal payments of $56,290, one of which was to be made within 15
days of August 8, 2007, and the other within 45 days of August 8, 2007, as
royalties for its use of the licensed technology in 2004, 2005 and 2006.
Both of these payments were made during 2007 and were recorded as royalty
expense in prior years, which was included in selling and distribution costs in
the statement of operations.
HIGHPOWER
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
14.
|
Intangible
asset – Consumer battery license
(continued)
|
The
Consumer Battery License Agreement also requires the Company to pay an
additional up-front royalty payment of $1,000,000 by four annual installments
and an annual royalty fee based on the gross sales of consumer batteries over
the term of the Consumer Battery License Agreement. Accordingly, during the year
ended December 31, 2007, the Company recorded a total up-front royalty payment
obligation of $1,000,000, which was included in other payables and accrued
liabilities, with the related debit recorded as an intangible asset entitled
consumer battery license agreement. During the nine months ended September 30,
2010, the Company recorded a total of approximately $269,832 as royalty expense,
which was included in selling and distribution costs in the statement of
operations. At September 30, 2010, accrued royalty fees payable was $1,233,752
(see Note 19).
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.
15.
|
Investment
Securities
|
|
|
As of
|
|
|
|
September 30,
2010
(Unaudited)
|
|
|
December 31,
2009
(Audited)
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Investment
securities - cost method
|
|
|
52,843
|
|
|
|
52,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,843
|
|
|
|
52,732
|
|
The
investments in less than twenty percent owned entities are accounted for under
the cost basis.
16.
|
Fair
Value Measurements
|
The
Company adopted FASB ASC 820, Fair Value Measurements and Disclosures (“ASC
820”), related to the Company’s financial assets and liabilities. ASC 820
defines fair value, establishes a framework for measuring fair value in
accordance with generally accepted accounting principles and expands disclosures
about fair value measurements. ASC 820 defines fair value as the price that
would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement date. ASC 820
also describes three levels of inputs that may be used to measure fair
value:
Level 1 —
quoted prices in active markets for identical assets and
liabilities.
Level 2 —
observable inputs other than quoted prices in active markets for identical
assets and liabilities.
Level 3 —
unobservable inputs in which there is little or no market data available, which
require the reporting entity to develop its own
assumptions.
HIGHPOWER
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
16.
|
Fair
Value Measurements (continued)
|
ASC 820
also provides guidance for determining the fair value of a financial asset when
the market for that asset is not active, and for determining fair value when the
volume and level of activity for an asset or liability have significantly
decreased and includes guidance on identifying circumstances that indicate when
a transaction is not orderly. The adoption of ASC 820 did not have a material
impact on the Company’s financial condition or results of
operations.
The
effective date for certain aspects of ASC 820 was deferred and are currently
being evaluated by the Company. Areas impacted by the deferral relate to
nonfinancial assets and liabilities that are measured at fair value, but are
recognized or disclosed at fair value on a nonrecurring basis. The effects of
these remaining aspects of ASC 820 are to be applied by the Company to fair
value measurements prospectively beginning November 1, 2009. The adoption
of the remaining aspects of ASC 820 is not expected to have a material impact on
its financial condition or results of operations. See Note 6 to the
consolidated financial statements in this Report on Form 10-K for
additional investment information.
The
following table details the fair value measurements of assets and liabilities
within the three levels of the fair value hierarchy at September 30, 2010 and
December 31, 2009:
|
|
|
|
|
Fair Value Measurements at reporting date using
|
|
|
|
September 30,
2010
|
|
|
Quoted Price
in active
Markets for
identical assets
(level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Other
Unobservable
Inputs
(Level 3)
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
19,459,847
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,459,847
|
|
Prepaid
expenses and other receivables
|
|
|
4,958,306
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,958,306
|
|
Notes
receivable
|
|
|
1,979,551
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,979,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-trading
foreign currency derivatives liabilities
|
|
|
11,065
|
|
|
|
-
|
|
|
|
11,065
|
|
|
|
-
|
|
Accounts
payable
|
|
|
17,798,596
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,798,596
|
|
Other
payables and accrued liabilities
|
|
|
5,051,365
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,051,365
|
|
HIGHPOWER
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
16.
|
Fair
Value Measurements (continued)
|
|
|
|
|
|
Fair Value Measurements at reporting date using
|
|
|
|
December
31, 2009
|
|
|
Quoted Price
in active
Markets for
identical assets
(level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Other
Unobservable
Inputs
(Level 3)
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
14,896,503
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,896,503
|
|
Prepaid
expenses and other receivables
|
|
|
2,366,734
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,366,734
|
|
Notes
receivable
|
|
|
596,795
|
|
|
|
-
|
|
|
|
-
|
|
|
|
596,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Non-trading
foreign currency derivatives liabilities
|
|
|
11,041
|
|
|
|
-
|
|
|
|
11,041
|
|
|
|
-
|
|
Accounts
payable
|
|
|
10,738,714
|
|
|
|
-
|
|
|
|
|
|
|
|
10,738,714
|
|
Other
payables and accrued liabilities
|
|
|
3,563,308
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,563,308
|
|
Level 2
financial assets represent the fair value of our foreign currency exchange
contracts that were valued using pricing models that take into account the
contract terms as well as multiple inputs are applicable, such as currency rate.
Level 3 financial assets represent the fair value of our accounts
receivables.
17.
|
Risk
Management Activities, Including
Derivative
|
The
Company recognized the following gains and losses attributable to its derivative
financial instruments during the following periods:
|
|
Nine months ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
$
|
|
|
$
|
|
Foreign
exchange contracts, net
|
|
|
|
|
|
|
Gain
recognized in Other income, net
|
|
|
4,189
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Gain
recognized in Other expenses, net
|
|
|
-
|
|
|
|
223,604
|
|
HIGHPOWER
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
17.
|
Risk
Management Activities, Including Derivative
(continued)
|
Hedging
Activities
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, 2010, the Company
had a series of currency forwards totaling a notional amount US$6,000,000
expiring from November 2010 to May 2011.
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.
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.
The cost
of the effective portion of the cash flow hedges was $15,931 and $Nil for the
nine months ended September 30, 2010 and 2009.
HIGHPOWER
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
18.
|
Change
in fair value of share warrants
|
On June
19, 2008, the Company issued to WestPark Capital, Inc. warrants to purchase
52,500 shares of common stock at an exercise price of $3.90 per share in
connection with the initial public offering. The warrants have a term of five
years and are exercisable no sooner than one year and no later than five years
from the date of issuance.
The fair
value of the warrants at June 19, 2008, the date of issue is $276,000. The fair
value of the warrants is appraised by an independent qualified
valuer.
On
December 16, 2009, a warrant holder exercised 5,000 shares of the warrants via a
cashless exercise. The Company issued 2,510 shares of common stock upon the
exercise of the warrants at no consideration. At September 30, 2010, warrants to
purchase 47,500 shares of common stock were still outstanding.
19.
|
Other
payables and accrued liabilities
|
|
|
At of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Accrued
expenses
|
|
|
2,134,789
|
|
|
|
2,056,261
|
|
Royalty
payable
|
|
|
1,233,752
|
|
|
|
1,071,787
|
|
Sales
deposits received
|
|
|
961,362
|
|
|
|
259,550
|
|
Other
payables
|
|
|
721,462
|
|
|
|
175,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,051,365
|
|
|
|
3,563,308
|
|
HIGHPOWER
INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
|
|
At of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
$
|
|
|
$
|
|
Secured:
|
|
|
|
|
|
|
Repayable
within one year
|
|
|
|
|
|
|
Short
term bank loans
|
|
|
1,983,507
|
|
|
|
2,929,551
|
|
Other
trade related bank loans
|
|
|
19,721,386
|
|
|
|
11,858,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,704,893
|
|
|
|
14,787,714
|
|
As of
September 30, 2010, the above bank borrowings were secured by the
following:
|
(a)
|
charge
over bank deposits of $ 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 $2,978,606 (see Note
13); and
|
|
(d)
|
other
financial covenant
|
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, 2010 ranged from
4.9% to 5.1%.
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 $501,955 and $365,348 for the nine months
ended September 30, 2010 and 2009, respectively.
HIGHPOWER
INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
22.
|
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 2010 to
2011, 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, 2010 are as
follows:
Period ending September 30,
|
|
$
|
|
|
|
|
|
2010
|
|
|
440,106
|
|
2011
|
|
|
258,983
|
|
|
|
|
|
|
|
|
|
699,089
|
|
Rent
expenses for the nine months ended September 30, 2010 and 2009 were $462,232 and
$715,663, respectively.
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”.
All
long-lived assets of the Company are located in the PRC. Geographic information
about the revenues and accounts based on the location of the Company’s customers
is set out as follows:
|
|
Nine months ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
$
|
|
|
$
|
|
Net
revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hong
Kong and China
|
|
|
42,690,547
|
|
|
|
22,082,229
|
|
Asia
|
|
|
4,246,253
|
|
|
|
2,598,107
|
|
Europe
|
|
|
20,837,062
|
|
|
|
15,666,163
|
|
North
America
|
|
|
8,551,986
|
|
|
|
7,195,782
|
|
South
America
|
|
|
344,507
|
|
|
|
41,979
|
|
Africa
|
|
|
125,687
|
|
|
|
61,444
|
|
Others
|
|
|
179,657
|
|
|
|
165,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,975,699
|
|
|
|
47,811,438
|
|
HIGHPOWER
INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
23.
|
Segment
Information
(continued)
|
|
|
At of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
$
|
|
|
$
|
|
Accounts
receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hong
Kong and China
|
|
|
12,132,868
|
|
|
|
8,511,192
|
|
Asia
|
|
|
483,844
|
|
|
|
476,659
|
|
Europe
|
|
|
5,097,028
|
|
|
|
4,050,519
|
|
North
America
|
|
|
1,728,460
|
|
|
|
1,846,832
|
|
South
America
|
|
|
8,517
|
|
|
|
900
|
|
Africa
|
|
|
9,130
|
|
|
|
10,300
|
|
Other
|
|
|
-
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,459,847
|
|
|
|
14,896,503
|
|
The
Company has evaluated significant events and transactions that occurred from
October 1, 2010 through the date of this report and has determined that there
were no events or transactions other than those disclosed in this report, if
any, that would require recognition or disclosure in its Unaudited Condensed
Consolidated Financial Statements for the quarterly period ended September 30,
2010.
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 Highpower International, 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 Sure Power Technology (Shenzhen)
Co., Ltd. (“Sure Power”). HKHT’s other subsidiary, HZ Highpower Technology Co.
(“HZ Highpower”) and Shenzhen Highpower’s wholly-owned subsidiary, Ganzhou
Highpower Technology Co., Ltd. (“GZ Highpower”), have 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, 2009.
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
2009 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 to Hong Kong Highpower Technology,
Inc. On October 20, 2010 we changed our name to Highpower
International, Inc.
HKHT was
incorporated in Hong Kong in 2003, under the Companies Ordinance of Hong Kong.
Shenzhen Highpower was founded in founded in 2001. HKHT formed HZ
Highpower and Springpower in 2008. Shenzhen Highpower formed GZ
Highpower in September 2010. Neither HZ Highpower nor GZ Highpower
has not yet commenced business operations.
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.
We
recently began a new materials business in which we buy and resell certain raw
materials related to our battery manufacturing operations. This new
materials business generates revenue and income and helps us understand our raw
material supply chain, control our raw material costs and ensure that we have a
steady supply of raw materials for our battery manufacturing
operations.
Critical
Accounting Policies and Estimates
The SEC
defines critical accounting policies as those that are, in management's view,
most important to the portrayal of our financial condition and results of
operations and those that require significant judgments and
estimates.
The
preparation of these condensed consolidated financial statements requires our
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, as well as the disclosure of
contingent assets and liabilities at the date of our financial statements. We
base our estimates on historical experience, actuarial valuations and various
other factors that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. Some of
those judgments can be subjective and complex and, consequently, actual results
may differ from these estimates under different assumptions or conditions. While
for any given estimate or assumption made by our management there may be other
estimates or assumptions that are reasonable, we believe that, given the current
facts and circumstances, it is unlikely that applying any such other reasonable
estimate or assumption would materially impact the financial statements. The
accounting principles we utilized in preparing our consolidated financial
statements conform in all material respects to generally accepted accounting
principles in the United States of America.
Use of
Estimates
. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the dates of the financial statements, as well as the reported amounts of
revenues and expenses during the reporting periods. These accounts and estimates
include, but are not limited to, the valuation of accounts receivable,
inventories, deferred income taxes and the estimation on useful lives of plant
and equipment. Actual results could differ from those estimates.
Accounts
Receivable
. Accounts receivable are stated at original amount less
allowance made for doubtful receivables, if any, based on a review of all
outstanding amounts at the period end. An allowance is also made when there is
objective evidence that we will not be able to collect all amounts due according
to original terms of receivables. Bad debts are written off when identified. We
extend unsecured credit to customers in the normal course of business and
believe all accounts receivable in excess of the allowances for doubtful
receivables to be fully collectible. We do not accrue interest on trade accounts
receivable.
Revenue
Recognition
.
We
recognize revenue when the goods are delivered and the customer takes ownership
and assumes risk of loss, collection of the relevant receivable is probable,
persuasive evidence of an arrangement exists and the sales price is fixed or
determinable. Sales of goods represent the invoiced value of goods, net of sales
returns, trade discount and allowances.
We do not
have arrangements for returns from customers and do not have any future
obligations directly or indirectly related to product resales by the customer.
We have no incentive programs.
Inventories
.
Inventories are stated at
the lower of cost or market value. Cost is determined on a weighted average
basis and includes purchase costs, direct labor and factory overheads. In
assessing the ultimate realization of inventories, management makes judgments as
to future demand requirements compared to current or committed inventory levels.
Our reserve requirements generally increase based on management’s projected
demand requirements, and decrease due to market conditions and product life
cycle changes. Our production process results in a minor amount of waste
materials. We do not record a value for the waste in our cost accounting. We
record proceeds on an as realized basis, when the waste is sold. We offset the
proceeds from the sales of waste materials as a reduction of production
costs.
Income
Taxes
.
We use the
asset and liability method of accounting for income taxes pursuant to SFAS No.
109, “Accounting for Income Taxes.” Under the asset and liability method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and loss carry
forwards and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. We have also
adopted FIN 48, “Accounting for Uncertainty in Income Taxes - an interpretation
of FASB Statement No. 109.”
Foreign Currency
Translation
. Our functional currency is the Renminbi (“RMB”). We maintain
our financial statements in the functional currency. Monetary assets and
liabilities denominated in currencies other than the functional currency are
translated into the functional currency at rates of exchange prevailing at the
balance sheet dates. Transactions denominated in currencies other than the
functional currency are translated into the functional currency at the exchange
rates prevailing at the dates of the transaction. Exchange gains or losses
arising from foreign currency transactions are included in the determination of
net income for the respective periods.
For
financial reporting purposes, our financial statements, which are prepared using
the functional currency, are then translated into United States dollars. Assets
and liabilities are translated at the exchange rates at the balance sheet dates
and revenue and expenses are translated at the average exchange rates and
stockholders’ equity is translated at historical exchange rates. Any translation
adjustments resulting are not included in determining net income but are
included in foreign exchange adjustment in other comprehensive income, a
component of stockholders’ equity.
The RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No
representation is made that RMB amounts could have been, or could be, converted
into U.S. Dollars at rates used in translation.
Results
of Operations
Three
Months Ended September 30, 2010 and 2009
Net sales
for the three months ended September 30, 2010 were $27.8 million compared to
$21.1 million for the three months ended September 30, 2009, an increase of
31.9%. This increase was largely due to a 20% increase in the average
selling price of our battery units, partially offset by a 0.5% decrease in the
number of battery units sold. The 20% increase in the average selling
price of our battery units was due to an increase in the average cost of nickel
during the three months ended September 30, 2010 compared to the comparable
period in 2009. The 0.5% decrease in the number of battery units sold
was due to decreased orders from our customers. Net sales during the
three months ended September 30, 2010 also included $2,705,905 in sales from our
New Material business and $15,147 from the sale of battery seconds (waster
materials).
Cost of
sales consists of the cost of nickel and other materials. Costs of
sales were $21.9 million for the three months ended September 30, 2010 as
compared to $15.8 million for the comparable period in 2009. As
a percentage of net sales, cost of sales increased to 78.9% for the three months
ended September 30, 2010 compared to 75.2% for the comparable period in
2009. This increase was attributable to a 22% increase in the average
per unit cost of goods sold during three months ended September 30, 2010 as
compared to the comparable period in 2009, which was offset by a 20% increase in
the average selling price of our battery units during the three months ended
September 30, 2010 over three months ended September 30, 2009. The 22% increase
in the average per unit cost of goods sold resulted from a 19% increase in the
average cost of nickel during the three months ended September 30, 2010 compared
to the comparable period in 2009.
Gross
profit for the three months ended September 30, 2010 was $5.9 million, or 21.1%
of net sales, compared to $5.2 million, or 24.8% of net sales, for the
comparable period in 2009. 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
decrease in our gross profit margin for the three months ended September 30,
2010 is primarily due to a 22% increase in the average per unit cost of goods
sold during three months ended September 30, 2010 as compared to the comparable
period in 2009.
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. Our current monthly Li-ion battery production increased
by 20% during three months ended September 30, 2010 as compared to the
comparable period in 2009.
Selling
and distribution costs were $1.1 million for the three months ended September
30, 2010 compared to $767,000 million for the comparable period in 2009. The
increase was primarily due to the expansion of our salesforce.
General
and administrative costs were $2.6 million, or 9.5% of net sales, for the three
months ended September 30, 2010, compared to $1.5 million, or 7.0% of net sales,
for the comparable period in 2009. 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 increased labor costs and research and development expenses. Labor
and personnel costs increased $1,089,479 for the three months ended September
30, 2010 as compared to the comparable period in 2009 due to the expansion of
our workforce to expand production. Research and development expenses increased
$156,869 for the three months ended September 30, 2010 as compared to the
comparable period in 2009 due to our increased commitment to advance our
research and development activities.
We
experienced losses on the exchange rate difference between the U.S. Dollar and
the RMB of $329,000 and $7,000, respectively, in the three months ended
September 30, 2010 and 2009. The increase in the losses on exchange
rate was due to the 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 $90,000 for the three months ended September 30, 2010, as compared
to $199,000 for the comparable period in 2009. The decrease was primarily
due to lower interest rates. We increased our borrowings by approximately $4.0
million in the three months ended September 30, 2010 as compared to the three
months ended September 30, 2009. 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 $83,000, for the three months ended September
30, 2010, as compared to $290,000 for the three months ended September 30, 2009,
a decrease of 247%. The decrease was due to a decrease in funds from a
government sponsor of $201,000 and a $21,000 decrease in sundry income,
partially offset by a $17,000 increase in bank interest income and a $1,000
gain on a foreign exchange contract.
We had
other expenses related to foreign exchange contracts of $53,000 in the three
months ended September 30, 2009. We had no such expenses in the three
months ended September 30, 2010.
During
the three months ended September 30, 2010, we recorded a provision for income
taxes of $280,000, as compared to $530,000 for the comparable period in
2009. The decrease was a result of a decrease in our net taxable
income.
Net
income for the three months ended September 30, 2010 was $1.4 million,
compared to net income of $2.4 million for the comparable period in
2009.
Nine
months Ended September 30, 2010 and 2009
Net sales
for the nine months ended September 30, 2010 were $77.0 million compared to
$47.8 million for the nine months ended September 30, 2009, an increase of
61.0%. This increase was largely due to a 30% increase in the number
of battery units sold and a 7.5% increase in the average selling price of our
battery units. The 30% increase in the number of battery units sold
was due to increased orders from our customers. The 7.5% increase in
the average selling price of our battery units was due to an increase in the
average cost of nickel during the nine months ended September 30, 2010 compared
to the comparable period in 2009. Net sales during the nine months
ended September 30, 2010 also included $10,338,039 in sales from our New
Material Business and $53,877 from the sale of battery seconds (waster
materials). Sales of battery seconds (waste materials) decreased from
$132,662 during the nine months ended September 30, 2009 to $53,877 during the
nine months ended September 30, 2010.
Cost of
sales consists of the cost of nickel and other materials. Costs of
sales were $61.5 million million the nine months ended September 30, 2010
as compared to $37.1 million for the comparable period in
2009. As a percentage of net sales, cost of sales increased to 79.8%
for the nine months ended September 30, 2010 compared to 77.6% for the
comparable period in 2009. This increase was attributable to a
9.5 % increase in the average per unit cost of goods sold during nine
months ended September 30, 2010 as compared to the comparable period in 2009,
which was offset by a 7.5% increase in the average selling price of our battery
units during the nine months ended September 30, 2010 over nine months ended
September 30, 2009. The 9.5% increase in the average per unit cost of goods sold
resulted from a 40% increase in the average cost of nickel during the nine
months ended September 30, 2010 compared to the comparable period in
2009.
Gross
profit for the nine months ended September 30, 2010 was $15.5 million, or 20.2%
of net sales, compared to $10.7 million, or 22.4% of net sales, for the
comparable period in 2009. 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
decrease in our gross profit margin for the nine months ended September 30,
2010 is primarily due to a 9.5% increase in the average per unit cost of goods
sold during nine months ended September 30, 2010 as compared to the comparable
period in 2009.
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. Our current monthly Li-ion battery production
increased by 120% during nine months ended September 30, 2010 as compared to the
comparable period in 2009.
Selling
and distribution costs were $3.0 million for the nine months ended September 30,
2010 compared to $1.9 million for the comparable period in 2009. The increase
was primarily due to the expansion of our salesforce.
General
and administrative costs were $6.2 million, or 8.1% of net sales, for the nine
months ended September 30, 2010, compared to $3.6 million, or 7.6% of net sales,
for the comparable period in 2009. 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 increased labor costs and research and development expenses. Labor
and personnel costs increased $1,623,545 for the nine months ended September 30,
2010 as compared to the comparable period in 2009 due to the expansion of our
workforce to expand production. Research and development expenses increased
$476,822 for the nine months ended September 30, 2010 as compared to the
comparable period in 2009 due to our increased commitment to advance our
research and development activities.
We
experienced losses on the exchange rate difference between the U.S. Dollar and
the RMB of $481,000 and $62,000, respectively, in the nine months ended
September 30, 2010 and 2009. The increase in the losses on exchange
rate was due to the 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 $257,000 for the nine months ended September 30, 2010, as compared
to $280,000 for the comparable period in 2009. The decrease was primarily
due to lower interest rates. We increased our borrowings by approximately $5 .0
million in the nine months ended September 30, 2010 as compared to the nine
months ended September 30, 2009. 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 $287,000, for the nine months ended September
30, 2010, as compared to $378,000 for the nine months ended September 30, 2009,
a decrease of $91,000. The decrease was due to a decrease in funds received from
a government sponsor of $151,000, partially offset by a $24,000 increase in bank
interest income, a $4,000 gain from a foreign exchange contract and a
$21,000 increase in sundry income during the nine months ended September 30,
2010 as compared to the comparable period in 2009.
We had
other expenses related to foreign exchange contracts of $224,000 in the nine
months ended September 30, 2009. We had no such expenses in the nine
months ended September 30, 2010.
During
the nine months ended September 30, 2010, we recorded a provision for income
taxes of $1.0 million, as compared to $919,000 for the comparable period in
2009. The increase was a result of an increase in our net taxable
income.
Net
income for the nine months ended September 30, 2010 was $4.6 million, compared
to net income of $3.8 million for the comparable period in 2009.
Liquidity
and Capital Resources
We had cash and cash equivalents of
approximately $5.4 million as of September 30, 2010, as compared to $3.0 million
as of December 31, 20
09.
Our funds are kept in financial institutions located in the PRC, which do not
provide insurance for amounts on deposit. Moreover, we are subject to
the regulations of the PRC which restrict the transfer of cash from the PRC,
except under certain spec
i
fic circumstances. Accordingly, such
funds may not be readily available to us to satisfy obligations which have been
incurred outside the PRC.
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, 2010, we had in place general banking facilities with five
financial institutions aggregating $35.0 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, 2010, we had utilized
approximately $21.7 million under such general credit facilities and had
available unused credit facilities of $13.3 million.
For the
nine months ended September 30, 2010, net cash provided by operating activities
was approximately $1.7 million, as compared to $13.9 million for the comparable
period in 2009. The decrease in net cash provided by operating activities is
primarily attributable to an increase in
accounts receivable
and an
increase in inventories.
Net cash
used in investing activities was $4.4 million for the nine months ended
September 30, 2010 compared to $2.8 million for the comparable period in 2009.
The increase of cash used in investing activities was primarily attributable to
an increase in the acquisition of plant and equipment over the respective
periods.
Net cash
provided by financing activities was $4.8 million during the nine months ended
September 30, 2010, as compared to net cash used in financing activities of $8.1
million for the nine months ended September 30, 2009. The increase in
net cash provided by financing activities was attributable to a decrease in the
repayment of other secured loans.
For the
nine months ended September 30, 2010, our inventory turnover was 5.14 times, as
compared to 6.7 times at September 30, 2009. The average days outstanding of our
accounts receivable at September 30, 2010 were 70 days, as compared to 62 days
at September 30, 2009. 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.
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. Total contributions to the
funds were approximately $233,759 and $107,120 in the three months ended
September 30, 2010 and 2009, respectively and $501,955 and $365,348 in the nine
months ended September 30, 2010 and 2009, respectively. We expect the
amount of our contribution to the government’s social insurance funds to
increase in the future as we expand our workforce and operations.
Based
upon our present plans, we believe that cash on hand, cash flow from operations
and funds available under our bank facilities will be sufficient to fund our
capital needs for the next 12 months. However, our ability to
maintain sufficient liquidity depends partially on our ability to achieve
anticipated levels of revenue, while continuing to control costs. If we did not
have sufficient available cash, we would have to seek additional debt or equity
financing through other external sources, which may not be available on
acceptable terms, or at all. Failure to maintain financing arrangements on
acceptable terms would have a material adverse effect on our business, results
of operations and financial condition.
The use
of working capital is primarily for the maintenance of our accounts receivable
and inventory. We provide our major customers with payment terms ranging from 30
to 75 days. Additionally, our production lead time is approximately 30 to 40
days, from the inspection of incoming materials, to production, testing and
packaging. We need to keep a large supply of raw materials and work in process
and finished goods inventory on hand to ensure timely delivery of our products
to our customers. We use two methods to support our working capital needs: (1)
paying our suppliers under payment terms ranging from 30 to 60 days; and (2)
using short-term bank loans. We use our accounts receivable as collateral for
our loans. Upon receiving payment for our accounts receivable, we pay our
short-term loans. Our working capital management practices are designed to
ensure that we maintain sufficient working capital.
Recent
Accounting Pronouncements
In
January 2010, the FASB issued Accounting Standards Update No. 2010-06 (ASU
2010-06), Fair Value Measurements and Disclosures which amends ASC Topic 820,
adding new requirements for disclosures for Levels 1 and 2, separate disclosures
of purchases, sales, issuances, and settlements relating to Level 3 measurements
and clarification of existing fair value disclosures. ASU 2010-06 is
effective for interim and annual periods beginning after December 15, 2009,
except for the requirement to provide Level 3 activity of purchases, sales,
issuances, and settlements on a gross basis, which will be effective for fiscal
years beginning after December 15, 2010 (the Company’s fiscal year 2012); early
adoption is permitted. The Company is currently evaluating the impact
of adopting ASU 2009-14 on its financial statements.
In
January 2010 the FASB issued guidance that eliminates the concept of a
“qualifying special-purpose entity” (QSPE), revises conditions for reporting a
transfer of a portion of a financial asset as a sale (e.g., loan
participations), clarifies the derecognition criteria, eliminates special
guidance for guaranteed mortgage securitizations, and changes the initial
measurement of a transferor’s interest in transferred financial assets.
This guidance is effective for financial statements issued for fiscal years, and
interim periods within those fiscal years, beginning after November 15, 2009. We
adopted the provisions of this guidance effective January 1, 2010, which did not
have a material impact on our financial statements.
In
January 2010 the FASB issued guidance that revises analysis for identifying the
primary beneficiary of a variable interest entity, or VIE, by replacing the
previous quantitative-based analysis with a framework that is based more on
qualitative judgments. The new guidance requires the primary beneficiary of a
VIE to be identified as the party that both (i) has the power to direct the
activities of a VIE that most significantly impact its economic performance and
(ii) has an obligation to absorb losses or a right to receive benefits that
could potentially be significant to the VIE. This guidance is effective for
financial statements issued for fiscal years, and interim periods within those
fiscal years, beginning after November 15, 2009. We adopted the provisions of
this guidance effective January 1, 2010, which did not have a material impact on
our financial statements.
In
January 2010, the FASB issued guidance that expands the interim and annual
disclosure requirements of fair value measurements, including the information
about movement of assets between Level 1 and 2 of the three-tier fair value
hierarchy established under its fair value measurement guidance. This guidance
also requires separate disclosure for purchases, sales, issuances and
settlements in the reconciliation for fair value measurements using significant
unobservable inputs using Level 3 methodologies. Except for the detailed
disclosure in the Level 3 reconciliation, which is effective for the fiscal
years beginning after December 15, 2010, all the other disclosures under this
guidance became effective during the six months ended June 30, 2010. We adopted
the relevant provisions of this guidance effective January 1, 2010, which did
not have a material impact on our financial statements.
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.
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 August
2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, which amends
ASC Topic 820, Measuring Liabilities at Fair Value, which provides additional
guidance on the measurement of liabilities at fair value. These amended
standards clarify that in circumstances in which a quoted price in an active
market for the identical liability is not available, we are required to use the
quoted price of the identical liability when traded as an asset, quoted prices
for similar liabilities, or quoted prices for similar liabilities when traded as
assets. If these quoted prices are not available, we are required to use another
valuation technique, such as an income approach or a market approach. These
amended standards are effective for us beginning in the fourth quarter of fiscal
year 2009. There was no material impact upon the adoption of this standard on
the Company’s consolidated financial statements.
In
September 2009, the FASB issued ASU 2009-06, Income Taxes (Topic 740),
”Implementation Guidance on Accounting for Uncertainty in Income Taxes and
Disclosure Amendments for Nonpublic Entities”, which provides implementation
guidance on accounting for uncertainty in income taxes, as well as eliminates
certain disclosure requirements for nonpublic
entities. For entities that are currently applying the standards
for accounting for uncertainty in income taxes, this update shall be effective
for interim and annual periods ending after September 15, 2009. For those
entities that have deferred the application of accounting for uncertainty in
income taxes in accordance with paragraph 740-10-65-1(e), this update shall be
effective upon adoption of those standards. The adoption of this standard is not
expected to have an impact on the Company’s consolidated financial position and
results of operations since this accounting standard update provides only
implementation and disclosure amendments.
In
September 2009, the FASB has published ASU 2009-12, “Fair Value Measurements and
Disclosures (Topic 820) - Investments in Certain Entities That Calculate Net
Asset Value per Share (or Its Equivalent)”. This ASU amends Subtopic 820-10,
“Fair Value Measurements and Disclosures – Overall”, to permit a reporting
entity to measure the fair value of certain investments on the basis of the net
asset value per share of the investment (or its equivalent). This ASU also
requires new disclosures, by major category of investments including the
attributes of investments within the scope of this amendment to the
Codification. The guidance in this update is effective for interim and annual
periods ending after December 15, 2009. Early application is
permitted. The Company is in the process of evaluating the
impact of this standard on its consolidated financial position and results of
operations.
In
October 2009, the FASB has published ASU 2009-13, “Revenue Recognition (Topic
605)-Multiple Deliverable Revenue Arrangements”, which addresses the accounting
for multiple-deliverable arrangements to enable vendors to account for products
or services (deliverables) separately rather than as a combined unit.
Specifically, this guidance amends the criteria in Subtopic 605-25, “Revenue
Recognition-Multiple-Element Arrangements”, for separating consideration in
multiple-deliverable arrangements. This guidance establishes a selling price
hierarchy for determining the selling price of a deliverable, which is based on:
(a) vendor-specific objective evidence; (b) third-party evidence; or (c)
estimates. This guidance also eliminates the residual method of allocation and
requires that arrangement consideration be allocated at the inception of the
arrangement to all deliverables using the relative selling price method and also
requires expanded disclosures. The guidance in this update is effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. Early adoption is permitted.
The adoption of this standard is not expected to have a material impact on the
Company’s consolidated financial position and results of
operations.
ASC 105,
Generally Accepted Accounting Principles (“ASC 105”) (formerly SFAS 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 Ris
k
Credit
Risk
We are
exposed to credit risk from our cash at bank, fixed deposits and contract
receivables. The credit risk on cash at bank and fixed deposits is limited
because the counterparts are recognized financial institutions. Contract
receivables are subject to credit evaluations. We periodically record a
provision for doubtful collections based on an evaluation of the collectibility
of contract receivables by assessing, among other factors, the customer’s
willingness or ability to pay, repayment history, general economic conditions
and our ongoing relationship with the customers.
Foreign
Currency and Exchange Risk
The
Company maintains its financial statements in the functional currency of
Renminbi (“RMB”). Substantially all of our operations are conducted in the PRC
and we pay the majority of our expenses in RMB. Approximately 75% of our sales
are made in U.S. Dollars. During the nine months ended September 30, 2010, the
exchange rate of the RMB to the U.S. Dollar increased approximately 1.9% from
the level at the end of December 31, 2009. This fluctuation resulted in a slight
increase in our material costs during the nine months ended September 30,
2010. 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 affect the
value of its US dollar receivables and sales. At September 30, 2010, the Company
had a series of currency forwards totaling a notional amount US$6,000,000
expiring from November 2010 to May 2011. The terms of these derivative contracts
are generally for 12 months or less. Changes in the fair value of these
derivative contracts are recorded in earnings to offset the impact of foreign
currency transaction gains and losses. We experienced a $4,189 gain in the value
of currency forwards in the nine months ended September 30, 2010 as compared to
a $223,604 loss on currency forwards during the comparable period in
2009.
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.