NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
1.
|
Principal activities and organization
|
The consolidated financial statements
include the financial statements of Highpower International, Inc. ("Highpower") and its 100%-owned subsidiary Hong Kong
Highpower Technology Company Limited (“HKHTC”), HKHTC’s wholly-owned subsidiaries Shenzhen Highpower Technology
Company Limited (“SZ Highpower”), and Icon Energy System Company Limited (“ICON”), SZ Highpower’s
wholly owned subsidiary Huizhou Highpower Technology Company Limited (“HZ HTC”) and its 70%-owned subsidiary Ganzhou
Highpower Technology Company Limited (“GZ Highpower”) and SZ Highpower’s and HKHTC’s jointly owned subsidiary,
Springpower Technology (Shenzhen) Company Limited (“SZ Springpower”). Highpower and its direct and indirect wholly
and majority owned subsidiaries are collectively referred to as the "Company".
Highpower was incorporated in the
State of Delaware on January 3, 2006. HKHTC was incorporated in Hong Kong on July 4, 2003. All other subsidiaries are incorporated
in the People’s Republic of China ("PRC").
Highpower Energy Technology (Huizhou)
Company Limited ("HZ Highpower") which was formed by HKHTC in 2008, was dissolved in September 2015. The subsidiary did
not commence operation since establishment.
The Company’s principal activities
are described as follows:
Name of company
|
|
Place and date
incorporation
|
|
Principal activities
|
HKHTC
|
|
Hong Kong
July 4, 2003
|
|
Investment holding and marketing of batteries
|
|
|
|
|
|
SZ Highpower
|
|
PRC
October 8, 2002
|
|
Manufacturing, marketing and research of Ni-MH batteries
|
|
|
|
|
|
SZ Springpower
|
|
PRC
June 4, 2008
|
|
Manufacturing, marketing and research of lithium batteries
|
|
|
|
|
|
GZ Highpower
|
|
PRC
September 21, 2010
|
|
Processing, marketing and research of battery materials
|
|
|
|
|
|
ICON
|
|
PRC
February 23, 2011
|
|
Design and production of advanced battery packs and systems
|
|
|
|
|
|
HZ HTC
|
|
PRC
March 8, 2012
|
|
Manufacturing, marketing and research of lithium batteries
|
HIGHPOWER INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
2.
|
Summary of significant accounting policies
|
Basis of presentation
The consolidated financial statements
have been prepared in accordance with the United States generally accepted accounting principles ("U.S. GAAP").
Consolidation
The consolidated financial statements
include the accounts of Highpower and its direct and indirect wholly and majority owned subsidiaries. All significant inter-company
balances and transactions have been eliminated in consolidation. Non-controlling interests represent the equity interest in the
GZ Highpower that is not owned by the Company.
Reclassification
The Company has reclassified certain
comparative balances in the consolidated balance sheet for December 31, 2015 to conform to the current period’s presentation.
The reclassification is related to the aggregation of the balance of prepayments and the balance of other receivables into the
balance of prepayments and other receivables. The reclassification did not have an impact on the reported total assets, liabilities
and stockholders’ equity.
Use of estimates
The preparation of financial statements
in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates and
assumptions include the allowance for doubtful receivables; recoverability of the carrying amount of inventory; fair value of financial
instruments; and the assessment of deferred tax assets or liabilities. These estimates are often based on complex judgments and
assumptions that management believes to be reasonable but are inherently uncertain and unpredictable. Actual results could differ
from these estimates.
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 management of the Company considers that the Company’s credit
risk is significantly reduced.
No customer accounted for 10% or
more of net sales during the years ended December 31, 2016 and 2015.
No supplier accounted for or over
10% of our total purchase amount during the years ended December 31, 2016 and 2015.
As of December 31, 2016, there was
no customer accounted for 10% or more of the accounts receivable. There was one major customer accounted for 11.3% of the accounts
receivable as of December 31, 2015.
HIGHPOWER INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
2.
|
Summary of significant accounting policies (continued)
|
Cash
Cash include all cash on hand and
cash in bank with no restrictions.
Restricted cash
Restricted cash include time deposits,
cash security for bank acceptance bills, and government grant.
Accounts receivable
Accounts receivable are stated at
the original amount less an allowance 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 the receivables. The Company analyzes the aging of the customer accounts, customer concentrations, customer
credit-worthiness, current economic trends and changes in its customer payment patterns when evaluating the adequacy of the allowance
for doubtful accounts.
Notes receivable
Notes receivable represent banks’
and commercial acceptances that have been arranged with third-party financial institutions by certain customers to settle their
purchases from us. These banks’ acceptances are non-interest bearing and are collectible within six months.
Inventories
Inventories are stated at lower of
cost or market. Cost is determined using the weighted average method. Inventories include raw materials, packing materials, consumables,
work in progress and finished goods. The variable production overhead is allocated to each unit of production on the basis of the
actual use of the production facilities. The allocation of fixed production overhead to the costs of conversion is based on the
normal capacity of the production facilities.
Where there is evidence that the
utility of inventories, in their disposal in the ordinary course of business, will be less than cost, whether due to physical deterioration,
obsolescence, changes in price levels, or other causes, the inventories are written down to fair value.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
2.
|
Summary of significant accounting policies (continued)
|
Property, plant and equipment
Property, 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 property, plant and
equipment is provided using the straight-line method over their estimated useful lives:
Buildings
|
20-40 years
|
Furniture, fixtures and office equipment
|
5 years
|
Leasehold improvement
|
Shorter of the remaining lease terms or estimated useful lives
|
Machinery and equipment
|
10 years
|
Motor vehicles
|
5 years
|
Upon sale or disposal, 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
capital expenditures for direct costs of construction or acquisition and design fees incurred, and the interest expenses directly
related to the construction. Capitalization of these costs ceases and the construction in progress is transferred to the appropriate
category of property, plant and equipment when substantially all the activities necessary to prepare the assets for their intended
use are completed. Construction in progress is not depreciated.
Long-term investment
For an investee company over which
the Company holds less than 20% voting interest, the investments are accounted for under the cost method.
For an investee company over which
the Company has the ability to exercise significant influence, but does not have a controlling interest, the Company accounted
for those using the equity method. Significant influence is generally considered to exist when the Company has an ownership interest
in the voting stock of the investee between 20% and 50%. Other factors, such as representation on the investee’s board of
directors, voting rights and the impact of commercial arrangements, are also considered in determining whether the equity method
of accounting is appropriate.
An impairment charge is recorded
if the carrying amount of the investment exceeds its fair value and this condition is determined to be other-than temporary. As
of December 31, 2016, management believes no impairment charge is necessary.
Land use rights
Land use rights represent payments
for the rights to use certain parcels of land for a certain period of time in the PRC. Land use rights are carried at cost and
charged to expense on a straight-line basis over 50 years the rights are granted.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
2.
|
Summary of significant accounting policies (continued)
|
Other assets
Other assets represent a royalty-bearing,
non-exclusive license to use certain patents owned by an unrelated party ("License Provider"), 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 License Provider to manufacture, sell and distribute Consumer Batteries.
Government grants
Conditional government grants are
recognized as deferred income when received. Specifically, government grants whose primary condition is that the Company should
purchase, construct or otherwise acquire non-current assets is recognized on the consolidated balance sheet as deferred income
and deducted in calculating the carrying amount of the related asset. The revenue from such grants is recognized in profit or loss
over the life of the related depreciable asset as a reduction of depreciation expense. As of December 31, 2016 and 2015, the Company
recorded deferred income of $761,491 and $879,944, respectively, for the government grants to purchase non-current assets.
Government grants as compensation
for expenses or losses already incurred or for the purpose of giving immediate financial support to the Company with no future
related benefit are recognized as other income in the period in which they become receivable. Approximately $1,762,266 and $563,485
government grant were recognized as other income for the years ended December 31, 2016 and 2015, respectively.
Impairment of long-lived assets
The Company reviews its long-lived
assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be
recoverable. When these events occur, the Company measures impairment by comparing the carrying value of the long-lived assets
to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If
the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, the Company would recognize an impairment
loss, which is the excess of carrying amount over the fair value of the assets, using the expected future discounted cash flows.
Revenue recognition
The Company recognizes revenue when
persuasive evidence of an arrangement exists, the sales price is fixed or determinable, delivery of the product has occurred, title
and risk of loss have transferred to the customers and collectability of the receivable is reasonably assured. The majority of
domestic sales contracts transfer title and risk of loss to customers upon receipt of product by customer. The majority of oversea
sales contracts transfer title and risk of loss to customers when goods were delivered to the carriers. Revenue is presented net
of sales tax and value added tax.
The Company does not have arrangements
for returns from customers and does not have any future obligations directly or indirectly related to product resale by customers.
The Company has no sales incentive programs.
Cost of Sales
Cost of sales consists primarily
of material costs, labor costs, depreciation and related expenses, which are directly attributable to the production of products.
Write-down of inventories to lower of cost or market is also recorded in cost of sales.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
2.
|
Summary of significant accounting policies (continued)
|
Research and development
Research and development expenses
include expenses directly attributable to the conduct of research and development programs, including the expenses of salaries,
employee benefits, materials, supplies, and maintenance of research equipment. All expenses associated with research and development
are expensed as incurred.
Share-Based Compensation
The Company recognizes compensation
expense associated with the issuance of equity instruments to employees for their services. The fair value of the equity instruments
is estimated on the date of grant and is expensed in the financial statements over the vesting period. The input assumptions used
in determining fair value are the expected life, expected volatility, risk-free rate and the dividend yield.
Share-based compensation associated
with the issuance of equity instruments to non-employees is recorded at the fair value on the measurement date. The measurement
of stock-based compensation at fair value is subject to periodic adjustment at each reporting period.
Income taxes
The Company recognizes deferred
tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences
between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws
and statutory tax rates, applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
Uncertain tax positions
The Company accounts for uncertainty
in income taxes using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the
tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that
the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step
is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. Interest and
penalties related to uncertain tax positions are recognized and recorded as necessary in the provision for income taxes. According
to the PRC Tax Administration and Collection Law, the statute of limitations is three years, five years, ten years and twenty years,
if the underpayment of taxes is due to computational errors made by the taxpayer or the withholding agent, errors relating to transferring
pricing issues and tax evasion, respectively. There were no uncertain tax positions as of December 31, 2016 and 2015 and the Company
does not believe that its unrecognized tax benefits will change over the next twelve months.
Comprehensive income
Comprehensive income is comprised
of the Company’s net income and other comprehensive income. The component of other comprehensive income or loss is consisted
solely of foreign currency translation adjustments, net of the income tax effect.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
2.
|
Summary of significant accounting policies (continued)
|
Foreign currency translation and transactions
Highpower’s functional currency
is the United States dollar ("US$"). HKHTC's functional currency is the Hong Kong dollar ("HK$"). The functional
currency of Highpower's other direct and indirect wholly and majority owned subsidiaries in the PRC is the Renminbi ("RMB").
Most of the Company’s oversea
sales are priced and settled with US$. At the date a foreign currency transaction is recognized, each asset, liability, revenue,
expense, gain, or loss arising from the transaction is measured initially in the functional currency of the recording entity by
use of the exchange rate in effect at that date. The increase or decrease in expected functional currency cash flows upon settlement
of a transaction resulting from a change in exchange rates between the functional currency and the currency in which the transaction
is denominated is recognized as foreign currency transaction gain or loss that is included in earnings for the period in which
the exchange rate changes. At each balance sheet date, recorded balances that are denominated in a foreign currency are adjusted
to reflect the current exchange rate.
The Company’s reporting currency
is US$. Assets and liabilities of HKHTC and the PRC subsidiaries are translated at the current exchange rate at the balance sheet
dates, revenues and expenses are translated at the average exchange rates during the reporting periods, and equity accounts are
translated at historical rates. Translation adjustments are reported in other comprehensive income.
Segment Reporting
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. The Company’s reportable segments are based on products, geography, legal
structure, management structure, or any other manner in which management disaggregates a company. Therefore the Company categorizes
its business into three reportable segments, namely (i) Lithium Batteries; (ii) Ni-MH Batteries; and (iii) New Material.
Fair value of financial instruments
The carrying values of the Company’s
financial instruments, including cash, restricted cash, trade and other receivables, deposits, trade and other payables and bank
borrowings, approximate their fair value due to the short-term maturity of such instruments.
ASC Topic 820 defines fair value as
the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted
to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it
considers assumptions that market participants would use when pricing the asset or liability.
ASC Topic 820 establishes a fair value
hierarchy that requires maximizing the use of observable inputs and minimizing the use of unobservable inputs when measuring fair
value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that
is significant to the fair value measurement.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
2.
|
Summary of significant accounting policies (continued)
|
Fair value of financial instruments
(continued)
The Company measures fair value using
three levels of inputs that may be used to measure fair value:
-Level 1 applies to assets or liabilities
for which there are quoted prices in active markets for identical assets or liabilities.
-Level 2 applies to assets or liabilities
for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such
as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets
with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs
are observable or can be derived principally from, or corroborated by, observable market data.
-Level 3 applies to assets or liabilities
for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value
of the assets or liabilities.
Warrant Liability
For warrants that are not indexed
to the Company’s stock, the Company records the fair value of the issued warrants as a liability at each balance sheet date
and records changes in the estimated fair value as a non-cash gain or loss in the consolidated statement of operations and comprehensive
income. The warrant liability is recognized in the balance sheet at the fair value (level 3). The fair value of these warrants
have been determined using the Black-Scholes pricing mode. The Black-Scholes pricing model provides for assumptions regarding volatility,
call and put features and risk-free interest rates within the total period to maturity. The Company revalued the warrants utilizing
a binomial model as of December 31, 2016 and 2015, respectively, with no material difference in the value.
Earnings per share
Basic earnings per share (“EPS”)
is computed by dividing income attributable to holders of common shares by the weighted average number of common shares outstanding
during the year. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common
shares were exercised or converted into common shares.
Recently issued accounting pronouncements
In May 2014, the FASB issued Accounting
Standards Update 2014-09, Revenue from Contracts with Customers, or ASU 2014-09. This new standard will replace all current U.S.
GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition standard provides a unified
model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to correlate
with the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity
expects to be entitled in exchange for those goods or services. In July 2015, the FASB voted to defer the effective date of ASU
2014-09 by one year, while allowing a company to adopt the new revenue standard early but not before the original effective date.
This guidance will be effective as to the Company on January 1, 2018 and can be applied either retrospectively to each period presented
or as a cumulative-effect adjustment as of the date of adoption. In April and May 2016, the FASB issued Accounting Standards Update
2016-10, Revenue from Contracts with Customers, or ASU 2016-10, and Accounting Standards Update 2016-12, Revenue from Contracts
with Customers, or ASU 2016-12, respectively. These new standards will identify performance obligations and narrow aspects on achieving
core principle. The Company is currently evaluating the impact of adopting these ASUs on its consolidated financial statements.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
2.
|
Summary of significant accounting policies (continued)
|
Recently issued accounting pronouncements
(continued)
During 2016, the Company have made
significant progress toward its evaluation of the potential changes from adopting the new standard on its future financial reporting
and disclosures. The Company has established a cross-functional implementation team on assessment on the five-step model of the
new standard to its revenue contracts. The adoption of this guidance is not expected to have a material effect on our result of
operations, financial position or liquidity. The management has not yet selected a transition method. The Company anticipates adopting
this new guidance on January 1, 2018, and plans on giving additional updates on its progress and further conclusions on its Form-10Q’s
during the first and second quarters of 2017.
In July 2015, the FASB issued Accounting
Standards Update (ASU) 2015-11, Simplifying the Measurement of Inventory. Under this ASU, inventory will be measured at the “lower
of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The
ASU defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable
costs of completion, disposal, and transportation.” No other changes were made to the current guidance on inventory measurement.
ASU 2015-11 is effective for interim and annual periods beginning after December 15, 2016. Early application is permitted and should
be applied prospectively. The Company does not expect the adoption of this guidance to have a material impact on its consolidated
financial statements.
In November 2015, the FASB issued
Accounting Standards Update (ASU) No. 2015-17, Income Taxes (Topic 740). To simplify the presentation of deferred income taxes,
the amendments in this Update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement
of financial position. The amendments in this Update apply to all entities that present a classified statement of financial position.
The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented
as a single amount is not affected by the amendments in this Update. For public business entities, the amendments in this Update
are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within
those annual periods. Earlier application is permitted. The adoption of this guidance is not expected to have a material impact
on the Company's consolidated financial condition, results of operations or cash flows.
On February 25, 2016, the FASB issued
Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). It requires that a lessee recognize the assets and liabilities that
arise from operating leases. A lessee should recognize in the statement of financial position a liability to make lease payments
(the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases
with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not
to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases
at the beginning of the earliest period presented using a modified retrospective approach. Public business entities should apply
the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal
years (i.e., January 1, 2019, for a calendar year entity). Early application is permitted for all public business entities and
all nonpublic business entities upon issuance. The Company is currently evaluating the impact of adopting ASU 2016-02 on its consolidated
financial statements.
In March 2016, the FASB issued Accounting
Standards Update (ASU) 2016-07, Investments-Equity Method and Joint Venture (Topic 323). The amendments require that the equity
method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s
previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method
accounting. It is effective for all entities for the fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2016. Earlier application is permitted. The adoption of this guidance is not expected to have a material impact on
the Company's consolidated financial condition, results of operations or cash flows.
HIGHPOWER INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
2.
|
Summary of significant accounting policies (continued)
|
Recently issued accounting pronouncements
(continued)
In March 2016, the FASB issued Accounting
Standards Update (ASU) 2016-09, Compensation—Stock Compensation (Topic 718). Under this update, share-based payment transactions
simplified several aspects of the accounting, including the income tax consequences, classification of awards as either equity
or liabilities, and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic
entities. For public business entities, the amendments in this Update are effective for annual periods beginning after December
15, 2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual
period. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial condition,
results of operations or cash flows.
In August 2016, the FASB issued Accounting
Standards Update (ASU) 2016-15, Statement of Cash Flows (Topic 230). The amendments in this update provide guidance on eight specific
cash flow issue. It applies to all entities. For public business entities, the amendments in this Update are effective for annual
periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted for any
entity in any interim or annual period. The Company is currently evaluating the impact of adopting ASU 2016-15 on its consolidated
financial statements.
In October 2016, the FASB issued
Accounting Standards Update (ASU) 2016-16, Income Taxes (Topic 740). The amendments in this Update is to improve the accounting
for the income tax consequences of intra-entity transfers of assets other than inventory and align the recognition of income tax
consequences for intra-entity transfers of assets other than inventory with International Financial Reporting Standards (IFRS).
Public business entities should apply the amendments in ASU 2016-16 for fiscal years beginning after December 15, 2017, including
interim periods within those fiscal years. Early adoption is permitted for any entity in any interim or annual period. The Company
is currently evaluating the impact of adopting ASU 2016-16 on its consolidated financial statements.
In November 2016, the FASB issued
Accounting Standards Update (ASU) 2016-18, Statement of Cash Flows (Topic 230). The amendments in this Update require that a statement
of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted
cash or restricted cash equivalents. The amendments in this Update are effective for public business entities for fiscal years
beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective
for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019.
Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period,
any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company is currently
evaluating the impact of adopting ASU 2016-18 on its consolidated financial statements
The Company does not believe other
recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the consolidated
financial position, statements of operations and cash flows.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
$
|
|
Securities for bank acceptance bill
|
|
|
10,541,105
|
|
|
|
11,392,231
|
|
Time deposits
|
|
|
151,083
|
|
|
|
263,973
|
|
Government subsidy deposit
|
|
|
521,452
|
|
|
|
-
|
|
|
|
|
11,213,640
|
|
|
|
11,656,204
|
|
As of December 31, 2016, cash of
$10.5 million is restricted by five banks for bank acceptance bill; cash of $0.2 million is restricted by Bank of China for short-term
bank loan; cash of $0.5 million is restricted under supervision by the Government due to government subsidy granted.
As of December 31, 2015, cash of
$11.4 million is restricted by six banks for line of credit; cash of $0.3 million is the time deposit with maturity of more than
three months.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
4.
|
Accounts receivable, net
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
$
|
|
Accounts receivable
|
|
|
49,460,347
|
|
|
|
38,211,951
|
|
Less: allowance for doubtful accounts
|
|
|
3,179,578
|
|
|
|
2,072,085
|
|
|
|
|
46,280,769
|
|
|
|
36,139,866
|
|
The Company recorded bad debt expense
of $1,176,208 and $949 for the years ended December 31, 2016 and 2015, respectively. The Company wrote off accounts receivable
directly of $42,897 and $403,735 for the years ended December 31, 2016 and 2015, respectively.
|
5.
|
Prepayments and other receivables
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
$
|
|
Purchase deposits paid
|
|
|
3,205,852
|
|
|
|
3,752,125
|
|
Value-added tax (“VAT”) prepayment
|
|
|
1,100,319
|
|
|
|
546,358
|
|
Rental deposit
|
|
|
266,883
|
|
|
|
414,843
|
|
Prepaid insurance fee
|
|
|
259,113
|
|
|
|
206,424
|
|
Advances to staff for daily operations
|
|
|
81,502
|
|
|
|
39,886
|
|
Compensation receivable for land occupation (1)
|
|
|
455,115
|
|
|
|
486,370
|
|
Other receivables from third parties (2)
|
|
|
1,508,278
|
|
|
|
-
|
|
Prepaid expense
|
|
|
477,925
|
|
|
|
614,898
|
|
|
|
|
7,354,987
|
|
|
|
6,060,904
|
|
Less: allowance for doubtful accounts (1)
|
|
|
455,115
|
|
|
|
-
|
|
|
|
|
6,899,872
|
|
|
|
6,060,904
|
|
(1) The Company accrued fully allowance
for the long-aging compensation receivable for land occupation.
(2) Other receivables from third
parties represent payment of $532,389 due on demand and the receivable of equipment deposit from an equipment supplier of $975,889.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
$
|
|
Raw materials
|
|
|
6,492,755
|
|
|
|
4,320,455
|
|
Work in progress
|
|
|
4,878,856
|
|
|
|
4,568,530
|
|
Finished goods
|
|
|
10,608,180
|
|
|
|
9,994,401
|
|
Packing materials
|
|
|
21,083
|
|
|
|
17,167
|
|
Consumables
|
|
|
206,459
|
|
|
|
317,778
|
|
|
|
|
22,207,333
|
|
|
|
19,218,331
|
|
7.
|
|
Property, plant and equipment, net
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
$
|
|
Cost
|
|
|
|
|
|
|
|
|
Construction in progress
|
|
|
715,188
|
|
|
|
1,678,961
|
|
Furniture, fixtures and office equipment
|
|
|
4,025,635
|
|
|
|
3,882,594
|
|
Leasehold improvement
|
|
|
5,865,909
|
|
|
|
4,092,668
|
|
Machinery and equipment
|
|
|
27,526,572
|
|
|
|
29,295,041
|
|
Motor vehicles
|
|
|
1,496,628
|
|
|
|
1,643,173
|
|
Building
|
|
|
21,797,158
|
|
|
|
23,046,056
|
|
|
|
|
61,427,090
|
|
|
|
63,638,493
|
|
Less: accumulated depreciation
|
|
|
17,922,099
|
|
|
|
16,174,307
|
|
|
|
|
43,504,991
|
|
|
|
47,464,186
|
|
The Company recorded depreciation
expenses of $4,797,968 and $4,794,162 for the years ended December 31, 2016 and 2015, respectively.
During the years ended December
31, 2016 and 2015, deferred income related to government grants of $229,951 and $2,547,545, respectively, was reduced from the
carrying amount of property, plant and equipment.
During the years ended December
31, 2016 and 2015, the Company recorded $530,914 and $nil of impairment loss of machinery and equipment, respectively.
The buildings comprising the Huizhou
facilities were pledged as collateral for bank loans as of December 31, 2016 and 2015. The carrying amounts of the buildings were
$8,864,837 and $9,715,879 as of December 31, 2016 and 2015, respectively.
The building located in Longgang,
Shenzhen, Guangdong was pledged as collateral for bank loans as of December 31, 2016. The carrying amount of the buildings was
$394,640 as of December 31, 2016.
The buildings comprising the Ganzhou
facilities were pledged as collateral for short-term loans and bank acceptance bills drawn under certain lines of credit. The carrying
amounts of the building were $2,594,975 and $2,703,743 as of December 31, 2016 and 2015, respectively.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
$
|
|
Cost
|
|
|
|
|
|
|
|
|
Land located in Huizhou
|
|
|
3,089,739
|
|
|
|
3,301,923
|
|
Land located in Ganzhou
|
|
|
1,205,368
|
|
|
|
1,288,146
|
|
|
|
|
4,295,107
|
|
|
|
4,590,069
|
|
Accumulated amortization
|
|
|
(672,672
|
)
|
|
|
(627,066
|
)
|
Net
|
|
|
3,622,435
|
|
|
|
3,963,003
|
|
As of December 31, 2016, land use
rights included certain parcels of land located in Huizhou City, Guangdong Province, PRC and Ganzhou City, Jiangxi Province, PRC.
Land use rights for land in Huizhou City with an area of approximately 126,605 square meters and in Ganzhou City with an area of
approximately 58,669 square meters will expire on May 23, 2057 and January 4, 2062, respectively.
Land use rights are being amortized
annually using the straight-line method over a contract term of 50 years. Estimated amortization for the coming years is as follows:
|
|
$
|
|
2017
|
|
|
89,720
|
|
2018
|
|
|
89,720
|
|
2019
|
|
|
89,720
|
|
2020
|
|
|
89,720
|
|
2021
|
|
|
89,720
|
|
Thereafter
|
|
|
3,173,835
|
|
|
|
|
3,622,435
|
|
The Company recorded amortization
expenses of $89,720 and $95,720 for the years ended December 31, 2016 and 2015, respectively.
The land use rights for land located
in Huizhou and Ganzhou City were both pledged as collateral for bank loans as of December 31, 2016 and 2015.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
The Company
is amortizing the $1,000,000 cost of the Consumer Battery License Agreement with a License Provider over a period of 20 years on
the straight line basis in accordance with the terms of license.
Amortization
expenses included in research and development expenses were $50,000 for both years ended December 31, 2016 and 2015.
On April 1,
2016, the Company entered into an investment agreement with Huizhou Yipeng Energy Technology Co. Ltd. ("Yipeng"), whereby
the Company acquired 5% equity interest of Yipeng for RMB5,000,000 ($719,445). On June 30, 2016, the Company entered into an Agreement
for Equity Transfer and Capital Increase and Supplementary Agreements with Yipeng and its shareholders (collectively, the “Equity
Purchase Agreement”).
Pursuant to
the terms of the Equity Purchase Agreement, the Company will purchase up to 50% of Yipeng’s equity on two closings: (1) on
August 10, 2016, in addition to the existing 5% shares of Yipeng, the Company agreed to pay approximately $2.2 million in cash
and transfer equipment worth approximately $6.5 million in exchange for the purchase of 30.4% of the shares of Yipeng, and (2)
prior to November 5, 2016, provided that Yipeng has been approved to be listed in the catalogue of Industrial Standards of Auto
Mobile Power Battery Cell (the “Catalogue”) prior to October 31, 2016, the Company will pay approximately $2.8 million
in cash and transfer equipment worth approximately $5.0 million in exchange for an additional 14.6% of the shares of Yipeng. The
Company also has the right to purchase in the future an additional 1% of the shares from Yipeng’s founding shareholders at
a price of approximately $0.4 million which would result in an aggregate ownership of 51% of Yipeng.
On August 10,
2016, the Company consummated the first closing pursuant to the terms of the Equity Purchase Agreement. As of December 31, 2016,
the Company has invested an aggregate of $9.4 million in exchange for 35.4% of the equity interest of Yipeng, which was recorded
under equity method.
Yipeng failed
to be listed in the Catalogue prior to October 31, 2016 because the PRC government did not assess any new xEV cell and system manufacturers
as originally expected in September 2016. As a result, the Company postponed the second closing until Yipeng is listed in the Catalogue.
The equity in
earnings of investee was $351,755 for the year ended December 31, 2016.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
11.
|
Other payables and accrued liabilities
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
$
|
|
Accrued expenses
|
|
|
1,011,866
|
|
|
|
451,911
|
|
Accrued payroll
|
|
|
6,094,843
|
|
|
|
3,365,029
|
|
Royalty payable
|
|
|
400,773
|
|
|
|
461,055
|
|
VAT payable
|
|
|
554,064
|
|
|
|
959,422
|
|
Sales deposits received
|
|
|
1,582,141
|
|
|
|
562,696
|
|
Other payables
|
|
|
1,504,869
|
|
|
|
492,379
|
|
|
|
|
11,148,556
|
|
|
|
6,292,492
|
|
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
Highpower and its direct
and indirect wholly and majority owned subsidiaries file tax returns separately.
1) VAT
Pursuant to the Provisional Regulation
of the PRC on VAT and the related implementing rules, all entities and individuals ("taxpayers") that are engaged in
the sale of products in the PRC are generally required to pay VAT at a rate of 17% of the gross sales proceeds received, less any
deductible VAT already paid or borne by the taxpayers. Further, when exporting goods, the exporter is entitled to a portion of
or all the refund of VAT that it has already paid or incurred. The Company’s PRC subsidiaries are subject to VAT at 17% of
their revenues.
2) Income tax
United States
Highpower was incorporated in Delaware
and is subject to U.S. federal income tax with a system of graduated tax rates ranging from 15% to 35%. No deferred U.S. taxes are recorded
since all accumulated profits in the PRC will be permanently reinvested in the PRC.
Hong Kong
HKHTC, which was incorporated
in Hong Kong, is subject to a corporate income tax rate of 16.5%.
PRC
In accordance with the relevant
tax laws and regulations of the PRC, a company registered in the PRC is subject to income taxes within the PRC at the applicable
tax rate on taxable income.
In China, the companies granted
with National High-tech Enterprise (“NHTE”) status enjoy 15% income tax rate. This status needs to be renewed every
three years. If these subsidiaries fail to renew NHTE status, they will be subject to income tax at a rate of 25% after the expiration
of NHTE status. All the PRC subsidiaries received NHTE status and enjoy 15% income tax rate for calendar year 2016 and 2015.
The components of the provision
for income taxes expenses are:
|
|
For the years ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
$
|
|
Current
|
|
|
1,471,933
|
|
|
|
809,629
|
|
Deferred
|
|
|
(32,756
|
)
|
|
|
9,107
|
|
Total income tax expense
|
|
|
1,439,177
|
|
|
|
818,736
|
|
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
The reconciliation of income taxes
expenses computed at the statutory tax rate applicable to the Company to income tax expenses is as follows:
|
|
For the years ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
$
|
|
Income before tax
|
|
|
7,066,954
|
|
|
|
4,279,006
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes at applicable income tax rate
|
|
|
1,866,878
|
|
|
|
988,833
|
|
Effect of preferential tax rate
|
|
|
(959,453
|
)
|
|
|
60,060
|
|
R&D expenses eligible for super deduction
|
|
|
(546,088
|
)
|
|
|
(546,156
|
)
|
Non-deductible expenses
|
|
|
146,493
|
|
|
|
59,122
|
|
Change in valuation allowance
|
|
|
931,347
|
|
|
|
256,877
|
|
Effective enterprise income tax
|
|
|
1,439,177
|
|
|
|
818,736
|
|
3) Deferred tax assets
Deferred tax assets and deferred tax
liabilities reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purpose and the tax bases used for income tax purpose. The following represents the tax effect of each major type of
temporary difference.
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Tax loss carry-forward
|
|
|
4,274,881
|
|
|
|
3,382,543
|
|
Allowance for doubtful receivables
|
|
|
121,932
|
|
|
|
47,197
|
|
Impairment for inventory
|
|
|
98,276
|
|
|
|
217,733
|
|
Difference for sales cut-off
|
|
|
14,245
|
|
|
|
33,071
|
|
Deferred income
|
|
|
114,224
|
|
|
|
131,992
|
|
Property, plant and equipment subsidized by government grant
|
|
|
468,313
|
|
|
|
490,883
|
|
Impairment for property, plant and equipment
|
|
|
76,248
|
|
|
|
-
|
|
Total gross deferred tax assets
|
|
|
5,168,119
|
|
|
|
4,303,419
|
|
Valuation allowance
|
|
|
(3,690,358
|
)
|
|
|
(2,759,105
|
)
|
Total net deferred tax assets
|
|
|
1,477,761
|
|
|
|
1,544,314
|
|
The following represents the amounts
and expiration dates of operating loss carried forwards for tax purpose:
|
|
|
|
$
|
|
|
|
2019
|
|
|
|
300,520
|
|
|
2020
|
|
|
|
1,553,667
|
|
|
2021 and thereafter
|
|
|
|
2,042,635
|
|
|
Total
|
|
|
|
3,896,822
|
|
Valuation allowance was provided against
deferred tax assets in entities where it was determined, it was more likely than not that the benefits of the deferred tax assets
will not be realized. The Company had deferred tax assets which consisted of tax loss carry-forwards and others, which can be carried
forward to offset future taxable income. The management determines it is more likely than not that part of deferred tax assets
could not be utilized, so allowance was provided as of December 31, 2016 and 2015.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
Notes payable are presented to certain
suppliers as a payment against the outstanding trade payables.
Notes payable are mainly bank acceptable
bills which are non-interest bearing and generally mature within six months. The outstanding bank acceptance bills are secured
by restricted cash deposited in banks. Outstanding bank acceptance bills were $30,658,000 and $30,379,170 as of December 31, 2016
and 2015, respectively (See Note 16).
The outstanding trade acceptances
to suppliers as of December 31, 2016 and 2015 were $nil and $110,996, respectively. These trade acceptances were non-interest bearing
and mature within one year. No security deposit was needed.
As of December 31, 2016, the bank
borrowings were for working capital and capital expenditure purposes and were secured by personal guarantees executed by certain
directors of the Company, the time deposits with a carrying amount of $151,083, the land use right with a carrying amount of $3,622,435,
the building with a carrying amount of $11,854,452, respectively (See Note 16).
The loans as of December 31, 2016
were primarily obtained from four banks with interest rates ranging from 4.35% to 5.87% per annum. The interest expenses were $925,115
and $739,662 for the years ended December 31, 2016 and 2015, respectively.
The weighted average interest rate
of short-term loans outstanding was 5.18% and 5.51% per annum as of December 31, 2016 and 2015, respectively.
|
15.
|
Non-financial institution borrowings
|
In 2016, the Company obtained borrowings
from a third party non-financial institution and an individual, which were used for working capital and capital expenditure purposes.
The borrowings are personally guaranteed by the Company’s Chief Executive Officer, Mr. Dang Yu Pan. For the year ended December
31, 2016, the Company paid $601,133 back to the third party non-financial institution.
The interest rate for both borrowings
is 5.66% per annum, and the borrowings would be repaid anytime no later than August 31, 2017. The interest expenses were $157,740
for the year ended December 31, 2016.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
The Company entered into various credit
contracts and revolving lines of credit, which were used for short-term loans (See Note 14) and bank acceptance bills (See Note
13). The following tables summarize the unused lines of credit as of December 31, 2016 and 2015:
|
|
December 31, 2016
|
Lender
|
|
Starting date
|
|
Maturity date
|
|
Line of credit
|
|
|
Unused line of
credit
|
|
|
|
|
|
|
|
$
|
|
|
$
|
|
Bank of China (1)
|
|
7/11/2016
|
|
7/11/2019
|
|
|
12,590,290
|
|
|
|
1,444,934
|
|
China Everbright Bank Co., Ltd. (1)
|
|
12/28/2016
|
|
12/27/2017
|
|
|
7,194,452
|
|
|
|
7,194,452
|
|
Industrial and Commercial Bank of China (1)
|
|
7/1/2016
|
|
6/30/2017
|
|
|
7,194,452
|
|
|
|
4,316,671
|
|
China Minsheng Banking Corp., Ltd. (1)
|
|
11/1/2016
|
|
11/1/2017
|
|
|
3,597,226
|
|
|
|
287,778
|
|
Bank of China (1)
|
|
7/12/2016
|
|
7/12/2019
|
|
|
10,483,344
|
|
|
|
111
|
|
Industrial Bank Co., Ltd.(1)
|
|
10/28/2016
|
|
10/28/2017
|
|
|
7,194,452
|
|
|
|
2,409,882
|
|
Hua Xia Bank Co., Ltd. (2)
|
|
6/1/2016
|
|
6/1/2017
|
|
|
4,316,671
|
|
|
|
2,298,681
|
|
Bank of China (1)
|
|
7/25/2016
|
|
7/25/2019
|
|
|
3,837,041
|
|
|
|
124,892
|
|
Hongkong and Shanghai Banking
Corporation Limited (1)
|
|
8/26/2016
|
|
7/15/2017
|
|
|
4,000,000
|
|
|
|
4,000,000
|
|
Total
|
|
|
|
|
|
|
60,407,928
|
|
|
|
22,077,401
|
|
|
|
December 31, 2015
|
Lender
|
|
Starting date
|
|
Maturity date
|
|
|
Line of credit
|
|
|
Unused line of
credit
|
|
|
|
|
|
|
|
|
$
|
|
|
$
|
|
Bank of China (1)
|
|
7/13/2015
|
|
|
9/13/2016
|
|
|
|
13,762,455
|
|
|
|
4,707,595
|
|
Bank of China (1)
|
|
7/1/2015
|
|
|
6/30/2016
|
|
|
|
11,203,276
|
|
|
|
155,498
|
|
Ping An Bank Co., Ltd.
|
|
12/10/2015
|
|
|
12/9/2016
|
|
|
|
10,763,931
|
|
|
|
3,878,818
|
|
China Minsheng Banking Corp., Ltd. (1)
|
|
7/16/2015
|
|
|
7/16/2016
|
|
|
|
4,393,441
|
|
|
|
1,916,253
|
|
Industrial Bank Co., Ltd. (1)
|
|
7/15/2015
|
|
|
7/15/2016
|
|
|
|
9,226,227
|
|
|
|
7,079,785
|
|
China Everbright Bank Co., Ltd. (1)
|
|
6/232015
|
|
|
6/22/2016
|
|
|
|
7,688,523
|
|
|
|
3,647,289
|
|
Industrial and Commercial Bank of China (1)
|
|
10/1/2015
|
|
|
10/1/2016
|
|
|
|
7,688,523
|
|
|
|
4,613,113
|
|
Jiang Su Bank Co., Ltd.
|
|
11/4/2015
|
|
|
11/3/2016
|
|
|
|
2,306,557
|
|
|
|
995,703
|
|
Hongkong and Shanghai Banking Corporation Limited (1)
|
|
9/1/2015
|
|
|
7/15/2016
|
|
|
|
8,000,000
|
|
|
|
8,000,000
|
|
Total
|
|
|
|
|
|
|
|
|
75,032,933
|
|
|
|
34,994,054
|
|
|
(1)
|
The lines of credits are guaranteed by the Company’s
Chief Executive Officer, Mr. Dang Yu Pan.
|
|
(2)
|
The lines of credit is guaranteed by the Company’s
Chief Executive Officer, Mr. Dang Yu Pan, and his wife.
|
Certain of the agreements governing
the Company’s loans include standard affirmative and negative covenants, including restrictions on granting additional pledges
on the Company’s property and incurring additional debt and obligations to provide advance notice of major corporate actions,
and other covenants including: that the borrower may not serve as a guarantor for more than double its net assets; that the borrower
is restricted in certain circumstances from using the loans in connection with related party transactions or other transactions
with affiliates; that the borrower must provide monthly reports to certain lenders describing the actual use of loans; that the
borrower may need to obtain approval to engage in major corporate transactions; and that the borrower may need to obtain approval
to increase overseas investments, guarantee additional debt or incur additional debt by an amount which exceeds 20% of its total
net assets should the lender determine that such action would have a material impact on the ability of the borrower to repay the
loan. The covenants in these loan agreements could prohibit the Company from incurring any additional debt without consent from
its lenders. The Company believes it would be able to obtain consents from the lenders in the event it needed to do so. The agreements
governing the Company’s loans may also include covenants that, in certain circumstances, may require the Company’s
PRC operating subsidiaries to give notice to, or obtain consent from, certain of their lenders prior to making a distribution of
net profit, as well as covenants restricting the ability of the Company’s PRC operating subsidiaries from extending loans.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
|
December 31,
|
|
|
|
2015
|
|
|
|
$
|
|
Long term loans from Bank of China
|
|
|
1,845,245
|
|
Less: current portion of long-term loans
|
|
|
1,845,245
|
|
Long-term loans, net of current portion
|
|
|
-
|
|
On January 13, 2012, the Company
borrowed $8.0 million (RMB50 million) from Bank of China, which is guaranteed by the Company’s Chief Executive Officer,
Mr. Dang Yu Pan. It is five-year long-term loan, with an annual interest rate of 5.23%, which was equal to 110% of the
benchmark-lending rate of the People’s Bank of China (“PBOC”) as of December 31, 2015. Interest expenses
are to be paid quarterly. It was repaid in full in 2016.
The interest expenses were $43,197
and $219,704 for the years ended December 31, 2016 and 2015, respectively.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
18.
|
Share-based compensation
|
2008 Omnibus Incentive Plan
The 2008 Omnibus Incentive Plan (the
"2008 Plan") was approved by the Company’s Board of Directors on October 29, 2008 and approved 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 adjustment in the event of a recapitalization in accordance with the terms of the 2008 Plan.
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 may have a contractual term of up to ten years and generally vest over three to five years with an exercise price
equal to the fair market value on the date of grant. Incentive stock options (ISOs) granted must have an exercise price equal to
or greater than the fair market value of the Company’s common stock on the date of grant. Repricing of stock options and
SARs is permitted without stockholder approval. If a particular award agreement so provides, certain change in control transactions
may cause such awards granted under the 2008 Plan to vest at an accelerated rate, unless the awards are continued or substituted
for in connection with the transaction. As of December 31, 2016, 801,363 shares of common stock remained available for issuance
pursuant to awards granted under the 2008 Plan.
Options Granted to Employees
|
|
Number of
Shares
|
|
|
Weighted
Average Exercise
Price
|
|
|
Remaining
Contractual
Term in Years
|
|
|
|
|
|
|
$
|
|
|
|
|
Outstanding, January 1, 2015
|
|
|
760,286
|
|
|
|
2.92
|
|
|
|
7.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
75,000
|
|
|
|
4.43
|
|
|
|
-
|
|
Exercised
|
|
|
(16,933
|
)
|
|
|
2.63
|
|
|
|
-
|
|
Forfeited
|
|
|
(26,336
|
)
|
|
|
2.63
|
|
|
|
-
|
|
Canceled
|
|
|
(5,091
|
)
|
|
|
2.63
|
|
|
|
-
|
|
Outstanding, December 31, 2015
|
|
|
786,926
|
|
|
|
3.08
|
|
|
|
6.90
|
|
Exercisable, December 31, 2015
|
|
|
587,407
|
|
|
|
3.16
|
|
|
|
6.56
|
|
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US
Dollars)
|
18.
|
Share-based compensation (continued)
|
Options Granted to Employees (continued)
|
|
Number of
Shares
|
|
|
Weighted
Average Exercise
Price
|
|
|
Remaining
Contractual
Term in Years
|
|
|
|
|
|
|
$
|
|
|
|
|
Outstanding, January 1, 2016
|
|
|
786,926
|
|
|
|
3.08
|
|
|
|
6.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
190,000
|
|
|
|
2.66
|
|
|
|
-
|
|
Exercised
|
|
|
(13,312
|
)
|
|
|
2.63
|
|
|
|
-
|
|
Forfeited
|
|
|
(41,678
|
)
|
|
|
2.15
|
|
|
|
-
|
|
Canceled
|
|
|
(366,544
|
)
|
|
|
3.47
|
|
|
|
-
|
|
Outstanding, December 31, 2016
|
|
|
555,392
|
|
|
|
2.70
|
|
|
|
7.39
|
|
Exercisable, December 31, 2016
|
|
|
381,392
|
|
|
|
2.76
|
|
|
|
6.67
|
|
Intrinsic value is calculated as the
amount by which the current market value of a share of common stock exceeds the exercise price multiplied by the number of option
shares. The aggregate intrinsic value of options vested and expected to vest as of December 31, 2016 and December 31, 2015 was
approximately $8,000 and $178,000, respectively. The aggregate intrinsic value of options exercised during the years ended December
31, 2016 and 2015 was approximately $5,000 and $36,000, respectively. In 2016, the Company received $35,010 in cash from the exercise
of stock options. In 2015, of the 16,933 shares exercised, 9,467 were withheld from the option holders to cover the exercise price
of the awards being exercised.
During the year ended December 31,
2016, the Company granted options to purchase 190,000 shares to two employees at a weighted-average grant-date fair value of $2.66
per share. Four employees exercised their option to purchase 13,312 shares of the Company’s common stock. Thirteen employees
resigned and their options to purchase a total of 41,678 shares of the Company’s common stock were forfeited. These employees
had resigned with 386,920 shares vested, which if not exercised with 90 days after termination, will be cancelled. Of these vested
shares 13,312 shares were exercised and 366,544 shares were cancelled in the period, and 7,064 were outstanding and exercisable
as of December 31, 2016.
During the year ended December 31,
2015, the Company granted options to purchase 75,000 shares to two employees at a weighted-average grant-date fair value of $3.12
per share. Nine employees exercised their option to purchase 16,933 shares of the Company’s common stock. Six employees had
resigned and their options to purchase a total of 26,336 shares of the Company’s common stock were forfeited. These employees
had resigned with 20,166 shares vested, which if not exercised with 90 days after termination they will be cancelled. Of these
vested shares 7,735 were exercised and 5,091 were cancelled in the period, and 7,340 were outstanding and exercisable as of December
31, 2015.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US
Dollars)
|
18.
|
Share-based compensation (continued)
|
Options Granted to Employees (continued)
The estimated fair value of share-based
compensation to employees is recognized as a charge against income on a ratable basis over the requisite service period, which
is generally the vesting period of the award. The fair value of each stock option grant was estimated on the date of grant using
the Black-Scholes option pricing model under the following assumptions:
|
|
For the years ended December 31,
|
|
|
2016
|
|
|
2015
|
Dividend yield
|
|
|
-
|
|
|
|
-
|
Risk-free interest rate
|
|
|
1.21%-1.4%
|
|
|
|
1.54%-1.71%
|
Expected term (in years)
|
|
|
5-6.05
|
|
|
|
5.0-6.05
|
Volatility
|
|
|
76.98%-79.55%
|
|
|
|
78.57%-89.73%
|
Total Share-based Compensation Expense
As of December 31, 2016, the gross
amount of unrecognized share-based compensation expense relating to unvested share-based awards held by employees was approximately
$215,000, which the Company anticipates recognizing as a charge against income over a weighted average period of 2.09 years.
In connection with the grant of stock
options to employees the Company recorded stock-based compensation charges in general and administrative expenses of $317,946 and
$653,000, respectively, for the years ended December 31, 2016 and 2015. No stock-based compensation charges were recorded for non-employees
for the years ended December 31, 2016 and 2015.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
The following table sets forth the
computation of basic and diluted earnings per common share for the years ended December 31, 2016 and 2015.
|
|
For the years ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
$
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income attributable to the Company
|
|
|
6,117,927
|
|
|
|
3,854,082
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
|
|
|
|
|
|
|
|
- Basic
|
|
|
15,105,235
|
|
|
|
15,096,166
|
|
- Dilutive effects of equity incentive awards
|
|
|
8,679
|
|
|
|
190,030
|
|
- Diluted
|
|
|
15,113,914
|
|
|
|
15,286,196
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
- Basic
|
|
|
0.41
|
|
|
|
0.26
|
|
- Diluted
|
|
|
0.40
|
|
|
|
0.25
|
|
Diluted earnings per share takes into
account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted
into common stock.
555,392 shares of outstanding stock
options with a total dilutive effect of 3,435 shares were included in the computation of diluted EPS for the year ended December
31, 2016. There were 740,001 warrants with a total dilutive effect of 5,244 shares were included in the computation of diluted
EPS for the year ended December 31, 2016.
786,926 shares of outstanding stock
options and 31,427 shares of forfeited or cancelled stock options with a total dilutive effect of 150,161 shares were included
in the computation of diluted EPS for the year ended December 31, 2015. There were 740,001 warrants with a total dilutive effect
of 39,869 shares were included in the computation of diluted EPS for the year ended December 31, 2015.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
In April 2014, the Company and certain
institutional investors entered into a securities purchase agreement, pursuant to which the Company sold 1,000,000 shares of common
stock and warrants to purchase 500,000 shares of common stock in a registered direct offering at a price of $5.05 per fixed combination
for aggregate proceeds of $5.05 million.
The warrants have an initial exercise
price of $6.33 per share and are exercisable until April 17, 2017. The exercise price of the warrants, and in some cases the number
of shares issuable upon exercise of the warrants, will be subject to appropriate adjustment in relation to certain events. In addition,
if the Company issues shares in the future at a price below $6.33 per share, the exercise price of the warrants will be reduced
to such lower price. No adjustment will be made to the number of shares purchasable in such event.
The warrants were classified as a
liability. The fair value of the warrants liability is re-measured at each reporting period. As of December 31, 2016 and 2015 the
fair value of warrant liability was $259 and $140,549, respectively. For the years ended December 31, 2016 and 2015, the Company
recognized a gain of $140,290 and $927,125, respectively, on the change in the fair value of the warrant liability.
The fair value of the warrants as
of December 31, 2016 and 2015 were calculated using the Black-Scholes pricing model with the following assumptions:
|
|
For the years ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Expected volatility
|
|
|
56.79
|
%
|
|
|
79.85
|
%
|
Risk-free interest rate
|
|
|
0.53
|
%
|
|
|
0.56
|
%
|
Expected term (in years)
|
|
|
0.30
|
|
|
|
1.30
|
|
Dividend rate
|
|
|
-
|
|
|
|
-
|
|
The movement of the warrant for the years ended December
31, 2016 and 2015 is as following:
|
|
Warrants
|
|
|
Weighted
Average Exercise
Price
|
|
|
Remaining
Contractual Term
in Years
|
|
|
|
|
|
|
$
|
|
|
|
|
Outstanding, January 1, 2015
|
|
|
500,001
|
|
|
|
6.33
|
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, December 31, 2015
|
|
|
500,001
|
|
|
|
6.33
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, January 1, 2016
|
|
|
500,001
|
|
|
|
6.33
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, December 31, 2016
|
|
|
500,001
|
|
|
|
6.33
|
|
|
|
0.3
|
|
The Company revalued the warrants
utilizing a binomial model as of December 31, 2016 and 2015 with no material difference in the value.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
21.
|
Defined contribution plan
|
Full-time employees of the Company
in the PRC participate in a government mandated defined contribution plan, pursuant to which certain pension benefits, medical
care, employee housing fund and other welfare benefits (“the Benefits”) are provided to employees. Chinese labor regulations
require that the PRC operating subsidiaries of the Company make contributions to the government for these benefits based on certain
percentages of the employees’ salaries. Except for contributions made related to the Benefits, the Company has no legal obligation.
The total contributions made, which
were expensed as incurred, were $1,614,299 and $1,868,879 for the years ended December 31, 2016 and 2015, respectively.
|
22.
|
Non-controlling interest
|
As of December 31, 2016 and 2015,
non-controlling interest related to the 30% minority interest in GZ Highpower in the consolidated balance sheet was $329,343 and
$853,483, respectively.
For the years ended December 31, 2016
and 2015, non-controlling interest related to GZ Highpower in the consolidated statements of operations was loss of $490,150 and
$393,812, respectively.
|
23.
|
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 2017 to 2021, with
an option to renew the lease. All leases are on a fixed repayment basis. None of the leases include contingent rentals. Minimum
future commitments under these agreements as of December 31, 2016 are as follows:
For the years ending December 31
|
|
$
|
|
2017
|
|
|
2,329,897
|
|
2018
|
|
|
2,033,393
|
|
2019
|
|
|
1,574,790
|
|
2020
|
|
|
920,280
|
|
2021
|
|
|
920,280
|
|
|
|
|
7,778,640
|
|
Rent expenses for the years ended
December 31, 2016 and 2015 were $1,858,577 and $1,639,444, respectively.
Investment commitment
On June 30, 2016, the Company entered
into the Equity Purchase Agreement with Yipeng and the shareholders. Up to the date of issuance of this consolidated financial
statements, the Company postponed the second closing as a result of the unfulfilled contract conditions (See Note 10).
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
23.
|
Commitments and contingencies (continued)
|
Contingencies
On January 14, 2016, FirsTrust China,
Ltd (“FirsTrust”) filed an amended complaint in the Delaware Chancery Court (amending its initial complaint filed February
25, 2015) naming Highpower as the defendant asserting a cause of action for breach of contract and conversion of stock, and seeking
damages in the form of issuance of 150,000 shares or the value of such shares, plus interest thereon, attorneys’ fees and
costs and expenses. On February 4, 2016, Highpower filed an answer, affirmative defenses and counterclaim against FirsTrust asserting
claims for equitable rescission, declaratory relief and breach of contract, and seeking rescission of the contract, return of the
200,000 warrants and 150,000 shares of Highpower stock previously issued to FirsTrust, plus interest, attorneys’ fees and
costs and expenses. On January 24, 2017, the court denied FirsTrust’s motion for judgment on the pleadings. The parties are
continuing with pre-trial discovery, as well as settlement discussions. The Company believes that it has meritorious defenses and
counterclaims and intends to defend and prosecute them vigorously.
HIGHPOWER INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
The reportable segments are components
of the Company that offer different products and are separately managed, with separate financial information available that is
separately evaluated regularly by the Company’s chief operating decision maker (“CODM”), the Chief Executive
Officer, in determining the performance of the business. The Company categorizes its business into three reportable segments, namely
(i) Lithium Batteries; (ii) Ni-MH Batteries; and (iii) New Materials.
The CODM evaluates performance based
on each reporting segment’s net sales, cost of sales, gross profit and total assets. Net sales, cost of sales, gross profit
and total assets by segments is set out as follows:
|
|
For the years ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
$
|
|
Net sales
|
|
|
|
|
|
|
|
|
Lithium Batteries
|
|
|
112,128,757
|
|
|
|
78,624,405
|
|
Ni-MH Batteries
|
|
|
57,211,657
|
|
|
|
64,566,252
|
|
New Materials
|
|
|
4,510,699
|
|
|
|
2,990,354
|
|
Total
|
|
|
173,851,113
|
|
|
|
146,181,011
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
|
|
|
|
|
|
|
Lithium Batteries
|
|
|
87,721,456
|
|
|
|
63,644,284
|
|
Ni-MH Batteries
|
|
|
43,163,019
|
|
|
|
50,842,135
|
|
New Materials
|
|
|
4,884,167
|
|
|
|
3,748,516
|
|
Total
|
|
|
135,768,642
|
|
|
|
118,234,935
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
Lithium Batteries
|
|
|
24,407,301
|
|
|
|
14,980,121
|
|
Ni-MH Batteries
|
|
|
14,048,638
|
|
|
|
13,724,117
|
|
New Materials
|
|
|
(373,468
|
)
|
|
|
(758,162
|
)
|
Total
|
|
|
38,082,471
|
|
|
|
27,946,076
|
|
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
|
|
$
|
|
|
$
|
|
Total Assets
|
|
|
|
|
|
|
|
|
Lithium Batteries
|
|
|
115,116,508
|
|
|
|
82,006,317
|
|
Ni-MH Batteries
|
|
|
37,994,369
|
|
|
|
41,590,201
|
|
New Materials
|
|
|
10,220,873
|
|
|
|
10,607,966
|
|
Total
|
|
|
163,331,750
|
|
|
|
134,204,484
|
|
HIGHPOWER INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
24.
|
Segment information (continued)
|
All long-lived assets of the Company
are located in the PRC. Geographic information about the sales and accounts receivable based on the location of the Company’s
customers is set out as follows:
|
|
For the years ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
$
|
|
Net sales
|
|
|
|
|
|
|
|
|
China mainland
|
|
|
101,459,371
|
|
|
|
68,201,408
|
|
Asia, others
|
|
|
43,764,963
|
|
|
|
43,547,384
|
|
Europe
|
|
|
17,958,060
|
|
|
|
26,101,398
|
|
North America
|
|
|
9,371,838
|
|
|
|
7,450,898
|
|
South America
|
|
|
759,472
|
|
|
|
499,669
|
|
Africa
|
|
|
284,692
|
|
|
|
190,489
|
|
Others
|
|
|
252,717
|
|
|
|
189,765
|
|
|
|
|
173,851,113
|
|
|
|
146,181,011
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
$
|
|
Accounts receivable
|
|
|
|
|
|
|
|
|
China mainland
|
|
|
29,663,633
|
|
|
|
23,832,388
|
|
Asia, others
|
|
|
10,441,358
|
|
|
|
6,443,781
|
|
Europe
|
|
|
3,875,979
|
|
|
|
5,324,389
|
|
North America
|
|
|
2,260,840
|
|
|
|
433,458
|
|
South America
|
|
|
26,610
|
|
|
|
-
|
|
Africa
|
|
|
378
|
|
|
|
55,240
|
|
Others
|
|
|
11,971
|
|
|
|
50,610
|
|
|
|
|
46,280,769
|
|
|
|
36,139,866
|
|
HIGHPOWER INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
25.
|
Related party balance and transaction
|
Related party balance
The outstanding amounts of Yipeng
were as follows:
|
|
December 31, 2016
|
|
|
|
$
|
|
Accounts receivable
|
|
|
7,125,140
|
|
Other receivable (1)
|
|
|
392,110
|
|
Account due from Yipeng
|
|
|
7,517,250
|
|
|
|
|
|
|
Accounts payable (2)
|
|
|
1,516,557
|
|
Other payable (3)
|
|
|
5,756
|
|
Amount due to Yipeng
|
|
|
1,522,313
|
|
(1) Other receivable represented the
difference between the transfer of equipment to Yipeng approximately $7.2 million and the capital injection in Yipeng by equipment
approximately $6.8 million. The receivable will be settled in 2017.
(2) Accounts payable represented $1.3
million technical support fee and $0.2 million equipment rental fee to Yipeng.
(3) Other payable represented the
rental security deposit received from Yipeng and will be returned when the rental contract is due in 2017.
Related party transaction
The details of the transactions with
Yipeng were as follows:
|
|
Period from May 2, 2016 to December 31, 2016
|
|
|
|
$
|
|
Income:
|
|
|
|
|
Sales
|
|
|
9,345,285
|
|
Rental income
|
|
|
38,188
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
Technical support expenses
|
|
|
992,359
|
|
Equipment rental fees
|
|
|
246,143
|
|
Sales quantity deposit paid
|
|
|
751,416
|
|
Purchase
|
|
|
254
|
|
The Company has evaluated subsequent
events through the issuance of the consolidated financial statements and no subsequent event is identified that would have required
adjustment or disclosure in the consolidated financial statements.