UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q

x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended September 30, 2009
 
OR
     
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            
 
Commission File No.:  001-34098
 
HONG KONG HIGHPOWER TECHNOLOGY, INC.
(Exact name of Registrant as specified in its charter)
 
Delaware
 
20-4062622
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
Building A1, Luoshan Industrial Zone, Shanxia, Pinghu, Longgang, Shenzhen, Guangdong, 518111,
People’s Republic of China
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)

(86) 755-89686238
 (COMPANY’S TELEPHONE NUMBER, INCLUDING AREA CODE)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x    No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes o    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” as defined in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  o                                  Accelerated filer  ¨                             
 
 Non-accelerated filer  o                                   Smaller reporting company   x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No x
 
The registrant had 13,562,597 shares of common stock, par value $0.0001 per share, outstanding as of November 11, 2009.

 
 

 

HONG KONG HIGHPOWER TECHNOLOGY, INC.
FORM 10-Q
For the Quarterly Period Ended September 30, 2009
INDEX
 
     
Page
Part I
 
Financial Information
 
           
   
Item 1.
 
 Financial Statements
 
             
       
(a)
Balance Sheets as of September 30, 2009 (Unaudited) and December 31, 2008
2
             
       
(b)
Statements of Comprehensive Income for the Three and Nine months Ended September 30, 2009 and 2008 (Unaudited)
4
             
       
(c)
Statements of Cash Flows for the Nine months Ended September 30, 2009 and 2008 (Unaudited)
5
             
       
(d)
Notes to Financial Statements (Unaudited)
7
             
   
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
34
           
   
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
41
           
   
Item 4.
 
Controls and Procedures
42
           
Part II
 
Other Information
 
           
   
Item 1.
 
Legal Proceedings
43
           
   
Item 1A.
 
Risk Factors
43
           
   
Item 2.
 
Unregistered Sale of Equity Securities and Use of Proceeds
43
           
   
Item 3.
 
Default Upon Senior Securities
43
           
   
Item 4.
 
Submission of Matters to a Vote of Security Holders
43
           
   
Item 5.
 
Other Information
43
           
   
Item 6.
 
 Exhibits
44
           
Signatures
45
 
 
1

 

Part I. Financial Information

Item 1. Financial Statements

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(Stated in US Dollars)

   
As of
 
   
September 30,
   
December 31,
 
    
2009
   
2008
 
   
(Unaudited)
   
(Audited)
 
    $    
$
 
                 
ASSETS
               
Current Assets :
               
Cash and cash equivalents
    7,203,175       4,175,780  
Restricted cash
    4,552,798       4,845,478  
Accounts receivable
    11,260,286       8,765,593  
Notes receivable
    400,876       429,815  
Prepaid expenses and other receivables – Note 8
    4,191,720       1,732,709  
Deferred charges – Stock-based compensation – Note 9
    -       216,667  
Inventories – Note 10
    10,437,454       11,208,697  
                 
Total Current Assets
    38,046,309       31,374,739  
Deferred tax assets – Note 6
    137,400       104,556  
Plant and equipment, net – Note 11
    9,962,416       7,778,477  
Leasehold land, net – Note 12
    3,002,530       3,050,510  
Intangible asset, net – Note 13
    862,500       900,000  
Currency forward – Note 7
    -       116,157  
                 
TOTAL ASSETS
    52,011,155       43,324,439  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
LIABILITIES
               
Current Liabilities :
               
Non-trading foreign currency derivatives liabilities
    5,335       293,830  
Accounts payable
    15,152,492       8,306,123  
Other payables and accrued liabilities – Note 14
    9,067,162       3,139,275  
Income taxes payable
    812,688       476,330  
Bank borrowings – Note 15
    6,495,909       14,829,228  
                 
Total Current Liabilities
    31,533,586       27,044,786  
                 
COMMITMENTS AND CONTINGENCIES – Note 17
               

(continued)

 
2

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Stated in US Dollars)

   
As of
 
   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
(Unaudited)
   
(Audited)
 
    $     $  
                 
STOCKHOLDERS’ EQUITY
               
Preferred stock
               
Par value: US$0.0001
               
Authorized: 10,000,000 shares
               
Issued and outstanding: none
    -       -  
                 
Common stock
               
Par value : US$0.0001
               
Authorized: 100,000,000 shares
               
Issued and outstanding: 2009 – 13,562,597 shares (2008 - 13,562,596 shares)
    1,356       1,356  
Additional paid-in capital
    5,048,194       5,048,194  
Accumulated other comprehensive income
    1,987,709       1,595,091  
Retained earnings
    13,440,310       9,635,012  
                 
TOTAL STOCKHOLDERS’ EQUITY
    20,477,569       16,279,653  
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
    52,011,155       43,324,439  

See notes to condensed consolidated financial statements

 
3

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Stated in US Dollars)

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
   
$
   
$
   
$
   
$
 
                                 
Net sales
    21,056,149       20,473,472       47,811,438       57,326,510  
Cost of sales
    (15,835,110 )     (16,961,664 )     (37,120,495 )     (47,731,537 )
                                 
Gross profit
    5,221,039       3,511,808       10,690,943       9,594,973  
Depreciation
    (50,120 )     (49,792 )     (169,309 )     (130,448 )
Selling and distribution costs
    (767,194 )     (799,666 )     (1,879,001 )     (1,761,386 )
General and administrative costs, including stock-based compensation
    (1,464,392 )     (1,915,367 )     (3,613,654 )     (4,256,468 )
Loss on exchange rate difference
    (6,813 )     (159,310 )     (62,402 )     (994,985 )
                                 
Income from operations
    2,932,520       587,673       4,966,577       2,451,686  
Change in fair value of currency forwards – Note 3
    (7,483 )     -       (117,106 )     29,102  
Change in fair value of warrants – Note 4
    -       (204,750 )     -       (276,000 )
Other income – Note 3
    289,843       101,179       378,432       325,833  
Interest expenses – Note 4
    (199,125 )     (159,063 )     (279,622 )     (559,830 )
Other expenses – Note 5
    (52,878 )     -       (223,963 )     -  
                                 
Income before taxes
    2,962,877       325,039       4,724,318       1,970,791  
Income taxes – Note 6
    (529,201 )     (35,683 )     (919,020 )     (266,861 )
                                 
Net income for the period
    2,433,676       289,356       3,805,298       1,703,930  
                                 
Other comprehensive income
                               
- Foreign currency translation gain
    (99,446 )     109,161       392,618       857,900  
                                 
Comprehensive income
    2,334,230       398,517       4,197,916       2,561,830  
                                 
Earnings per share of common stock
                               
  - Basic
    0.18       0.02       0.28       0.13  
                                 
  - Diluted
    0.18       0.02       0.28       0.13  
                                 
Weighted average common shares outstanding
                               
  - Basic
    13,562,597       13,562,596       13,621,466       13,088,737  
                                 
  - Diluted
    13,612,097       13,615,096       13,673,966       13,108,644  

See notes to condensed consolidated financial statements

 
4

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated in US Dollars)
   
Nine months ended
September 30,
 
   
2009
   
2008
 
   
(Unaudited)
   
(Unaudited)
 
    $     $  
Cash flows from operating activities
               
Net income
    3,805,298       1,703,930  
Adjustments to reconcile net income to net cash flows
               
provided by operating activities:
               
Amortization of intangible asset
    37,500       37,500  
Amortization of leasehold land
    47,073       -  
Bad debts written off
    58,407       4,445  
Depreciation
    648,681       548,884  
Change in fair value of currency forwards
    117,106       (29,102 )
Change in fair value of warrants
    -       276,000  
Loss on disposal of plant and equipment
    24,713       43,704  
Stock based compensation
    216,667       173,333  
                 
Changes in operating assets and liabilities:
               
(Increase) decrease in -
               
Accounts receivable
    (2,440,816 )     5,859,341  
Notes receivable
    31,136       332,982  
Deposit, prepaid expenses and other receivables
    (2,421,799 )     (1,381,578 )
Inventories
    900,504       (954,510 )
Increase (decrease) in -
               
Accounts payable
    6,723,770       (3,361,758 )
Other payables and accrued liabilities
    5,861,389       1,029,025  
Income tax payable
    298,038       1,159,544  
 
               
Net cash flows provided by operating activities
    13,907,667       5,441,740  
                 
Cash flows from investing activities
               
Acquisition of plant and equipment
    (2,757,805 )     (2,523,600 )
Proceeds from disposal of plant and equipment
    -       393  
                 
Net cash flows used in investing activities
    (2,757,805 )     (2,523,207 )
                 
Cash flows from financing activities
               
Proceeds from issuance of common stock
    -       1,486,400  
Proceeds from / (repayment) new short-term bank loans
    3,478,236       (1,437,492 )
Repayment of short-term bank loans
    (11,956,136 )     (5,298,812 )
Net advancement of other bank borrowings
    -       3,487,980  
Decrease in restricted cash
    348,706       1,243,154  
 
               
Net cash flows used in financing activities
    (8,129,194 )     (518,770 )
                 
Net increase in cash and cash equivalents
    3,020,668       2,399,763  
Effect of foreign currency translation on cash and cash equivalents
    6,727       145,593  
Cash and cash equivalents - beginning of period
    4,175,780       1,489,262  
                 
Cash and cash equivalents - end of period
    7,203,175       4,034,618  
(continued)

 
5

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(Stated in US Dollars)

   
Nine months ended
September 30,
 
   
2009
   
2008
 
   
(Unaudited)
   
(Unaudited)
 
    $     $  
Supplemental disclosures of cash flow information :
               
Cash paid for :
               
Interest
    279,622       559,830  
Income taxes
    620,983       137,530  

See notes to condensed consolidated financial statements

 
6

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

1.
Corporation information and reorganization

Hong Kong Highpower Technology, Inc. (“Highpower” or the “Company,” formerly known as SRKP 11, Inc.) was incorporated in the State of Delaware on January 3, 2006 to locate a suitable acquisition candidate to acquire.

On October 20, 2007, Highpower entered into a share exchange agreement (the “Exchange Agreement”) with Hong Kong Highpower Technology Company Limited (“HKHTC”), which was incorporated in Hong Kong on July 4, 2003 under the Hong Kong Companies Ordinance. HKHTC was organized principally to engage in the manufacturing and trading of nickel metal hydride rechargeable batteries.

As used herein, the “Company” refers to Highpower and its wholly-owned subsidiaries, unless the context indicates otherwise.

Pursuant to the Exchange Agreement, Highpower agreed to issue shares of its common stock in exchange for all of the issued and outstanding securities of HKHTC. On November 2, 2007, upon the closing of the Exchange Agreement, HKHTC had a total of 500,000 shares of common stock issued and outstanding, and Highpower issued an aggregate of 9,248,973 shares of its common stock to the shareholders of HKHTC in exchange for all of the issued and outstanding securities of HKHTC on the basis of 18.497946 shares of Highpower for each share of HKHTC. The 9,248,973 shares of common stock issued to the shareholders of HKHTC in conjunction with this transaction have been presented as outstanding for all periods presented. In addition, immediately prior to the closing of the Exchange Agreement, Highpower and certain of its stockholders agreed to cancel an aggregate of 1,597,872 shares of outstanding common stock, as a result of which there were 1,777,128 shares of common stock outstanding immediately prior to the share exchange transaction.

On November 2, 2007, concurrently with the close of the Exchange Agreement, the Company received gross proceeds of $3,120,000 in a private placement transaction (the “Private Placement”). Pursuant to subscription agreements entered into with the investors, the Company sold an aggregate of 1,772,745 shares of common stock at $1.76 per share. The investors in the Private Placement also entered into lock-up agreements pursuant to which they agreed not to sell their shares until 90 days after the Company’s common stock is listed or quoted on either the New York Stock Exchange, NYSE Amex (formerly known as the American Stock Exchange), NASDAQ Global Market, NASDAQ Capital Market or the OTC Bulletin Board, when one-tenth of their shares are released from the lock-up agreement, after which their shares will automatically be released from the lock-up agreement on a monthly basis pro rata over a nine-month period. After commissions and expenses, the Company received net proceeds of approximately $2,738,000 from the Private Placement.

 
7

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

1.
Corporation information and reorganization (Continued)

Immediately after the closing of the Exchange Agreement and Private Placement, the Company had 12,798,846 shares of common stock issued and outstanding. Upon the closing of the Exchange Agreement, the shareholders of HKHTC and their designees owned approximately 72.3% of the Company’s issued and outstanding common stock, the pre-existing shareholders of the Company owned approximately 13.9% of the Company’s issued and outstanding common stock, and the investors in the Private Placement owned 13.8% of the Company’s issued and outstanding common stock. Therefore, although HKHTC became the Company’s wholly-owned subsidiary, the transaction was accounted for as a recapitalization in the form of a reverse merger of HKHTC, whereby HKHTC was deemed to be the accounting acquirer and was deemed to have retroactively adopted the capital structure of SRKP 11. Since the transaction was accounted for as a reverse merger, the accompanying consolidated financial statements reflect the historical consolidated financial statements of HKHTC for all periods presented, and do not include the historical financial statements of SRKP 11. All costs associated with the reverse merger transaction, consisting primarily of consideration paid to the previous control parties of SRKP 11 and legal and investment banking fees and costs, were expensed as incurred as a cost of the recapitalization, and have been presented as an operating cost line item entitled fees and costs related to reorganization in the statement of operations.

In January 2008, HKHTC invested $749,971 in HZ Highpower Technology Co., Ltd. (“HZ Highpower”). HZ Highpower is a wholly-owned subsidiary of HKHTC. HZ Highpower has not commenced business as of September 30, 2009.

In June 20, 2008, HKHTC invested $250,000 in Spring Power Technology (Shenzhen) Co., Ltd. (“SZ Spring Power”, formerly known as Sure Power Technology (Shenzhen) Co., Ltd.) which became a wholly-owned subsidiary of HKHTC. On July 9, 2008, HKHTC invested an additional $750,000 in SZ Spring Power. SZ Spring Power commenced business in June 2008 and specializes in researching and manufacturing Lithium-ion rechargeable batteries.

On June 19, 2008, the Company effected a 5-for-8 reverse stock split of the Company’s issued and outstanding shares of common stock (the Reverse Stock Split”). The par value and number of authorized shares of the common stock remained unchanged.  All references to number of shares and per share amounts included in these consolidated financial statements and the accompanying notes have been adjusted to reflect the Reverse Stock Split retroactively.

On June 19, 2008, the company’s common stock commenced trading on the NYSE Amex.

On June 19, 2008, the Company issued 603,750 shares of common stock upon the closing of a public offering. The Company’s sale of common stock, which was sold indirectly by the Company to the public at a price of $3.25 per share, resulted in net proceeds of $1,486,400. These proceeds were net of underwriting discounts and commissions, fees for legal and auditing services, and other offering costs.

On June 19, 2008, the Company issued 160,000 shares of common stock upon the closing of the public offering. The shares are treated as compensation for investor relations services. The services provided are for the period of one year from the date of June 19, 2008.

 
8

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

2.
Summary of significant accounting policies
 
Description of business

The subsidiaries of the Company include the following:

Name of company
 
Place and date of 
incorporation
 
Attributable equity 
interest held
   
Principal activities
Hong Kong Highpower Technology Co., Ltd (“HKHTC”)
 
Hong Kong July 4, 2003
    100 %  
Investment holding
                 
Shenzhen Highpower Technology Co., Ltd (“SZ Highpower”)
 
PRC October 8, 2002
    100 %  
Manufacturing of batteries
                 
HZ Highpower Technology Co., Ltd (“HZ Highpower”)
 
PRC January 29, 2008
    100 %  
Inactive
                 
Spring Power Technology (Shenzhen) Co., Ltd (“SZ Spring Power”)
 
PRC June 4, 2008
    100 %  
Manufacturing of batteries
 
Basis of presentation

The accompanying consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America. The consolidated financial statements for the interim periods are unaudited. In the opinion of management, these consolidated financial statements, include all adjustments, including normal recurring adjustments, necessary for their fair presentation. Interim results are not necessarily indicative of results of operations to be expected for a full year, The accompanying consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and do not include all information and footnotes necessary for a complete presentation of financial statements in conformity with accounting principles generally accepted in the United States. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

 
9

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

2.
Summary of significant accounting policies (Continued)

On June 29, 2009, the Financial Accounting Standards Board (FASB) established the FASB Accounting Standards Codification (Codification) as the single source of authoritative U.S. generally accepted accounting principles (GAAP) for all nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) are also sources of authoritative U.S. GAAP for SEC registrants. The Codification does not change U.S. GAAP but takes previously issued FASB standards and other U.S. GAAP authoritative pronouncements, changes the way the standards are referred to, and includes them in specific topic areas. The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of the Codification did not have any impact on the Company’s financial statements.

Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.

Use of estimates

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. These accounts and estimates include, but are not limited to, the valuation of accounts receivable, inventories, deferred income taxes and the estimation on useful lives of plant and equipment. Actual results could differ from those estimates.

Comparative amounts

Certain comparative amounts in prior periods have been reclassified to conform to the current period’s presentation. The principal reclassification related to the separate presentation of loss on exchange rate difference as an operating cost line item in the statement of operations, which was previously included in general and administrative costs. These reclassifications had no effect on reported total assets, liabilities, stockholders’ equity, or net income (loss).

 
10

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
 
2.
Summary of significant accounting policies (Continued)

Economic and political risks

The Company’s operations are conducted in the People’s Republic of China (the “PRC”).  Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC and by the general state of the PRC economy.

The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad and rates and methods of taxation, among other things.
 
Concentrations of credit risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts receivable. The Company extends credit based on an evaluation of the customer’s financial condition, generally without requiring collateral or other security. In order to minimize the credit risk, the management of the Company has delegated a team responsible for determining credit limits, credit approvals and other monitoring procedures to ensure that follow-up action is taken to recover overdue debts. Further, the Company reviews the recoverable amount of each individual trade debt at each balance sheet date to ensure that adequate impairment losses are made for irrecoverable amounts. In this regard, the directors of the Company consider that the Company’s credit risk is significantly reduced. Other than set forth below, no customers represented 10% or more of the Company’s net sales and accounts receivable.

A substantial percentage of the Company's sales are made to the following customers.  Details of the customers accounting for 10% or more of total net revenue in the nine months ended September 30, 2009 and 2008 are as follows:

   
2009
   
2008
 
             
Company A
    21 %     22 %
Company B
    10 %     *  
*  Less than 10%
               
                 
      31 %     22 %

 
11

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

2.
Summary of significant accounting policies (Continued)

Concentrations of credit risk (Continued)

Details of the accounts receivable from the customers with the largest receivable balances at September 30, 2009 and December 31, 2008 are as follows:
 
 
Percentage of accounts receivable
 
    
September 30,
   
December 31,
 
   
2009
   
2008
 
             
Company A
    24 %     17 %
Company B
    *       14 %
Company C
    10 %     13 %
Company D
    12 %     *  
*  Less than 10%
               
Largest receivable balances
    46 %     44 %

Cash and cash equivalents

Cash and cash equivalents include all cash, deposits in banks and other liquid investments with initial maturities of three months or less.

Restricted cash

Certain cash balances are held as security for short-term bank borrowings and are classified as restricted cash in the Company’s balance sheets.

Accounts receivable

Accounts receivable are stated at the original amount less an allowance made for doubtful receivables, if any, based on a review of all outstanding amounts at period end.  An allowance is also made when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of receivables. Bad debts are written off when identified. The Company extends unsecured credit to customers in the normal course of business and believes all accounts receivable in excess of the allowances for doubtful receivables to be fully collectible. The Company does not accrue interest on trade accounts receivable.

The Company experienced bad debts during the nine months ended September 30, 2009 and 2008 of $58,407 and $4,445, respectively.

 
12

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

2.
Summary of significant accounting policies (Continued)

Inventories

Inventories are stated at the lower of cost or market value. Cost is determined on a weighted average basis and includes purchase costs, direct labor and factory overheads. There are no significant freight charges, inspection costs and warehousing costs incurred for any of the periods presented. In assessing the ultimate realization of inventories, management makes judgments as to future demand requirements compared to current or committed inventory levels. The Company’s reserve requirements generally increase based on management’s projected demand requirements, and decrease due to market conditions and product life cycle changes.  During the nine months period ended September 30, 2009 and 2008, the Company did not make any allowance for slow-moving or defective inventories. The Company’s production process results in a minor amount of waste materials. The Company does not record a value for the waste in its cost accounting. The Company records proceeds on an as realized basis, when the waste is sold. The Company has offset the proceeds from the sales of waste materials as a reduction of production costs. Proceeds from the sales of waste materials were approximately $132,662 and $310,110 for the nine months ended September 30, 2009 and 2008, respectively. Generally, waste materials on hand at the end of a year are nominal.

Plant and equipment

Plant and equipment are stated at cost less accumulated depreciation. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use. Maintenance, repairs and betterments, including replacement of minor items, are charged to expense; major additions to physical properties are capitalized.

Depreciation of plant and equipment is provided using the straight-line method over their estimated useful lives at the following annual rates:

Furniture, fixtures and office equipment
    20 %
Leasehold improvement
    50 %
Machinery and equipment
    10 %
Motor vehicles
    20 %

Upon sale or disposition, the applicable amounts of asset cost and accumulated depreciation are removed from the accounts and the net amount less proceeds from disposal is charged or credited to income.
 
 
13

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

2.
Summary of significant accounting policies (Continued)
 
Intangible Assets and Long-Lived Assets

FASB Accounting Standard Codification Topic 350 (ASC 850) “Intangibles – Goodwill and Other” (Formerly known as SFAS No. 142, goodwill and Other Intangible Assets (“SFAS 142”)), requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. Accordingly, the consumer battery license is being amortized over its useful life of 20 years. The Company does not have any goodwill.

The Company accounts for the impairment of long-lived assets, such as plant and equipment, leasehold land and intangible assets, under the provisions of FASB Accounting Standard Codification Topic 360 (ASC 360) “Property, Plant and Equipment – Overall” (Formerly known as SFAS No. 144, “Accounting for the Impairment of Long-Lived Assets (“SFAS 144”)”). ASC 360 establishes the accounting for impairment of long-lived tangible and intangible assets other than goodwill and for the disposal of a business. Pursuant to ASC 360, the Company periodically evaluates, at least annually, whether facts or circumstances indicate that the carrying value of its depreciable assets to be held and used may not be recoverable. If such circumstances are determined to exist, an estimate of undiscounted future cash flows produced by the long-lived asset, or the appropriate grouping of assets, is compared to the carrying value to determine whether impairment exists. In the event that the carrying amount of long-lived assets exceeds the undiscounted future cash flows, then the carrying amount of such assets is adjusted to their fair value. The Company reports an impairment cost as a charge to operations at the time it is recognized.

There was no impairment of long-lived assets for the nine months ended September 30, 2009 and 2008.

Revenue recognition

The Company recognizes revenue when the goods are delivered and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. Sales of goods represent the invoiced value of goods, net of sales returns, trade discount and allowances.

The Company does not have arrangements for returns from customers and does not have any future obligations directly or indirectly related to product resales by customers.  The Company has no incentive programs.

Advertising and promotion expenses

Advertising and promotion expenses are charged to expense as incurred.

Advertising and promotion expenses, which are included in selling and distribution costs, were not material for the nine months ended September 30, 2009 and 2008.

 
14

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

2.
Summary of significant accounting policies (Continued)

Income taxes

The Company uses the asset and liability method of accounting for income taxes pursuant to FASB Accounting Standard Codification Topic 740 (ASC 740) “Income taxes”, (Formerly known as SFAS No. 109, “Accounting for Income Taxes”). Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and loss carry forwards and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company has also adopted ASC 740, “Income taxes (Formerly known as FIN 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109”).

Comprehensive income

The Company has adopted FASB Accounting Standard Codification Topic 220 (ASC 220) “Comprehensive income” (Formerly known as SFAS No. 130, “Reporting Comprehensive Income”), which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Accumulated other comprehensive income represents the accumulated balance of foreign currency translation adjustments of the Company.

Foreign currency translation

The functional currency of the Company is the Renminbi (“RMB”). The Company maintains its financial statements in the functional currency.  Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet dates.  Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective year.

For financial reporting purposes, the financial statements of the Company, which are prepared using the functional currency, are then translated into United States dollars.  Assets and liabilities are translated at the exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates and stockholders’ equity is translated at historical exchange rates. Any translation adjustments resulting are not included in determining net income but are included in foreign exchange adjustment in other comprehensive income, a component of stockholders’ equity.

 
15

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

2.
Summary of significant accounting policies (Continued)

Foreign currency translation (Continued)
 
 
September 30,
 
   
2009
   
2008
 
             
Quarter end RMB : US$ exchange rate
    6.8178       6.8325  
Average quarterly RMB : US$ exchange rate
    6.8425       6.9566  
 
The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions.  No representation is made that RMB amounts could have been, or could be, converted into US$ at rates used in translation.

Transactions and balances

Transactions in foreign currencies are translated into the functional currency at the approximate rates of exchange ruling on the transaction date. Exchange gains and losses resulting from this translation policy are recognized in the statements of operations.

Fair value of financial instruments

The carrying values of the Company’s financial instruments, including cash and cash equivalents, restricted cash, trade and other receivables, deposits, trade and other payables, approximate their fair values due to the short-term maturity of such instruments. The carrying amounts of borrowings approximate their fair values because the applicable interest rates approximate current market rates.

The Company is exposed to certain foreign currency risk from export sales transactions and the related accounts receivable as they will affect the future operating results of the Company.

Foreign currency 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.

 
16

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

2.
Summary of significant accounting policies (Continued)

Earnings per share

The Company reports earnings per share in accordance with FASB Accounting Standard Codification Topic 260 (ASC 260) “Earnings Per Share” (Formerly known as SFAS No. 128, “Earnings Per Share”). Basic earnings per share is computed using the weighted average number of common shares outstanding during the periods presented. The weighted average number of shares represents the common stock outstanding during the years, as adjusted retroactively to reflect the November 2007 recapitalization as described at Note 1. As the Company did not have any common stock equivalents during such periods, basic and diluted earnings per share were the same for all periods presented.

Stock-Based Compensation

Effective January 1, 2006, the Company adopted FASB Accounting Standard Codification Topic 718 (ASC 718) “Compensation – Stock Compensation” (Formerly known as SFAS No. 123R, Share-Based Payment (“SFAS No. 123R”)) Under ASC 718, the Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and recognizes the costs over the period the employee is required to provide service in exchange for the award, which generally is the vesting period.

Stock-based compensation expense was $216,667 and $173,333 for the nine months ended September 30, 2009 and 2008, respectively.

 
17

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

2.
Summary of significant accounting policies (Continued)

Recently issued accounting pronouncements

ASC 805, Business Combinations (“ASC 805”) (formerly included under Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations) contains guidance that was issued by the FASB in December 2007. It requires the acquiring entity in a business combination to recognize all assets acquired and liabilities assumed in a transaction at the acquisition-date fair value, with certain exceptions. Additionally, the guidance requires changes to the accounting treatment of acquisition related items, including, among other items, transaction costs, contingent consideration, restructuring costs, indemnification assets and tax benefits. ASC 805 also provides for a substantial number of new disclosure requirements. ASC 805 also contains guidance that was formerly issued as FSP FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies which was intended to provide additional guidance clarifying application issues regarding initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. ASC 805 was effective for business combinations initiated on or after the first annual reporting period beginning after December 15, 2008. The Company implemented this guidance effective January 1, 2009. Implementing this guidance did not have an effect on the Company’s financial position or results of operations; however it will likely have an impact on the Company’s accounting for future business combinations, but the effect is dependent upon acquisitions, if any, that are made in the future.

In March 2008, the FASB issued ASC 815 (formerly SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133”) to amend and expand the disclosures about derivatives and hedging activities. The standard requires enhanced qualitative disclosures about an entity’s objectives and strategies for using derivatives, and tabular quantitative disclosures about the fair value of derivative instruments and gains and losses on derivatives during the reporting period. This standard is effective for both fiscal years and interim periods that begin after November 15, 2008. The adoption of this standard on December 29, 2008, the beginning of the Company’s fiscal year, did not have a material impact on its consolidated financial statements.

 
18

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

2.
Summary of significant accounting policies (Continued)

Recently issued accounting pronouncements (Continued)

ASC 855, Subsequent Events (“ASC 855”) (formerly Statement of Financial Accounting Standards No. 165, Subsequent Events) includes guidance that was issued by the FASB in May 2009, and is consistent with current auditing standards in defining a subsequent event. Additionally, the guidance provides for disclosure regarding the existence and timing of a company’s evaluation of its subsequent events. ASC 855 defines two types of subsequent events, “recognized” and “non-recognized”. Recognized subsequent events provide additional evidence about conditions that existed at the date of the balance sheet and are required to be reflected in the financial statements. Non-recognized subsequent events provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date and, therefore; are not required to be reflected in the financial statements. However, certain non-recognized subsequent events may require disclosure to prevent the financial statements from being misleading. This guidance was effective prospectively for interim or annual financial periods ending after June 15, 2009. The Company implemented the guidance included in ASC 855 as of April 1, 2009. The effect of implementing this guidance was not material to the Company’s financial position or results of operations.
 
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets an amendment of FASB Statement No. 140 (“Statement No. 166”). Statement No. 166 revises FASB Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Extinguishment of Liabilities a replacement of FASB Statement 125 (“Statement No. 140”) and requires additional disclosures about transfers of financial assets, including securitization transactions, and any continuing exposure to the risks related to transferred financial assets. It also eliminates the concept of a “qualifying special-purpose entity”, changes the requirements for derecognizing financial assets, and enhances disclosure requirements. Statement No. 166 is effective prospectively, for annual periods beginning after November 15, 2009, and interim and annual periods thereafter. Although Statement No. 166 has not been incorporated into the Codification, in accordance with ASC 105, the standard shall remain authoritative until it is integrated. The Company does not expect the adoption of Statement No. 166 will have a material impact on its financial position or results of operations.

 
19

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

2.
Summary of significant accounting policies (Continued)

Recently issued accounting pronouncements
 
ASC 105, Generally Accepted Accounting Principles (“ASC 105”) (formerly Statement of Financial Accounting Standards No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162) reorganized by topic existing accounting and reporting guidance issued by the Financial Accounting Standards Board (“FASB”) into a single source of authoritative generally accepted accounting principles (“GAAP”) to be applied by nongovernmental entities. All guidance contained in the Accounting Standards Codification (“ASC”) carries an equal level of authority. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. Accordingly, all other accounting literature will be deemed “non-authoritative”. ASC 105 is effective on a prospective basis for financial statements issued for interim and annual periods ending after September 15, 2009. The Company has implemented the guidance included in ASC 105 as of July 1, 2009. The implementation of this guidance changed the Company’s references to GAAP authoritative guidance but did not impact the Company’s financial position or results of operations.


 
20

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

3. 
Other income
 
 
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
    $    
$
   
$
   
$
 
                                 
Bank interest income
    9,748       56,266       42,517       135,311  
Gain on forward contract
    -       6,049       -       17,141  
Government sponsor
    210,726       -       210,726       -  
Other interest income
    -       3,379       -       20,597  
Sundry income
    69,369       35,485       125,189       152,784  
                                 
 
    289,843       101,179       378,432       325,833  
 
4. 
Interest expenses
 
 
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
   
$
   
$
   
$
   
$
 
                                 
Interest on trade related bank loan
    72,016       128,316       135,419       476,776  
Interest on short-term bank loans
    127,109       30,747       144,203       83,054  
                                 
      199,125       159,063       279,622       559,830  
 
5. 
Other expenses
 
 
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
    $     $     $     $  
                                 
Foreign exchange contract expenses
    52,878       -       223,963       -  
                                 
      52,878       -       223,963       -  
 
 
21

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Stated in US Dollars)

6. 
Income taxes

The components of the provision for income taxes are:

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
    $    
$
   
$
   
$
 
                                 
PRC income taxes
    542,205       196,231       950,513       484,349  
                                 
Deferred tax benefit
    (13,004 )     (160,548 )     (31,493 )     (217,488 )
                                 
      529,201       35,683       919,020       266,861  

The major components of deferred tax recognized in the consolidated balance sheets as of September 30, 2009 and December 31, 2008 are as follows:-

 
As of
 
   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
(Unaudited)
   
(Audited)
 
   
$
   
$
 
                 
Temporary difference on :-
               
Recognized of expenses
    (120,371 )     (93,300 )
Accelerated tax depreciation on intangible asset
    (17,029 )     (11,256 )
                 
Deferred tax assets, net
    (137,400 )     (104,556 )
                 
Recognized in the balance sheet:
               
Net deferred tax assets
    (137,400 )     (104,556 )

Effective January 1, 2008, the Company adopted FASB Accounting Standard Codification Topic 740 (ASC 740) “Income Taxes” (Formerly known as FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes (FIN 48)). ASC 740 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. The adoption of the provisions of ASC 740 did not have a material effect on the Company’s financial statements. As of September 30, 2009, no liability for unrecognized tax benefits was required to be recorded.

 
22

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Stated in US Dollars)

7. 
Risk Management Activities, Including Derivative

The Company selectively uses foreign currency forward contracts to offset the effects of foreign currency exchange rate changes on reported earnings, cash flow and net asset positions. The terms of these derivative contracts are generally for 3 months or less. Changes in the fair value of these derivative contracts are recorded in earnings to offset the impact of foreign currency transaction gains and losses attributable to certain third party and intercompany financial assets and liabilities with similar terms. The net gains and losses attributable to these activities are included in the Statement of comprehensive income, net.
 
 
As of
 
   
September 30,
   
December 31,
 
    
2009
   
2008
 
   
(Unaudited)
   
(Audited)
 
   
$
   
$
 
                 
Currency forwards (notional amount $Nil million), consisting of a put and a call
    -       116,157  
 
Due to the volatility of the US Dollar to the Company’s functional currency, the Company has put into place a hedging program to attempt to protect it from significant changes to the US Dollar, which would affect the value of the Company’s US dollar receivables and sales. At September 30, 2009, the Company did not have a series of currency forwards.

The Company recognized the following gains and losses attributable to its derivative financial instruments during the following periods:
 
 
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
   
$
   
$
   
$
   
$
 
                                 
Foreign exchange contracts, net
                               
Gains recognized in Other income, net
    -       6,049       -       17,141  
                                 
Gains recognized in Other expenses, net
    52,878       -       223,963       -  

Hedging Activities

SZ Highpower uses foreign currencies derivative instruments to manage foreign exchange resulting from fluctuations in US Dollar to the Company’s functional currency (RMB). The notional amounts of these financial instruments are based on expected cash flow from operations.

 
23

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

7.
Risk Management Activities, Including Derivative (continued)

At the inception of a derivative contract, SZ Highpower historically designated the derivative as a cash flow hedge. For all derivatives designated as cash flow hedges, SZ Highpower formally documented the relationship between the derivative contract and the hedged items, as well as the risk management objective for entering into the derivative contract. To be designated as a cash flow hedge transaction, the relationship between the derivative and the hedged items must be highly effective in achieving the offset of changes in cash flows attributable to the risk both at the inception of the derivative and on an ongoing basis. SZ Highpower historically measured hedge effectiveness on a quarterly basis and hedge accounting would be discontinued prospectively if it was determined that the derivative was no longer effective in offsetting changes in the cash flows of the hedged item. Gains and losses deferred in accumulated other comprehensive income related to cash flow hedge derivatives that became ineffective remained unchanged until the related cashflow was received. If SZ Highpower determined that it was probable that a hedged forecasted transaction would not occur, deferred gains or losses on the derivative were recognized in earnings immediately.

Derivatives, historically, were recorded on the balance sheet at fair value and changes in the fair value of derivatives were recorded each period in net income or other comprehensive income, depending on whether a derivative was designated as part of a hedge transaction and, if it was, depending on the type of hedge transaction. SZ Highpower’s derivatives historically consisted primarily of cash flow hedge transactions in which SZ Highpower was hedging the variability of cash flows related to a forecasted transaction. Period to period changes in the fair value of derivative instruments designated as cash flow hedges were reported in other comprehensive income and reclassified to net income in the periods in which the contracts are settled. The ineffective portions of the cash flow hedges were reflected in net income as an increase or decrease to other income (expense). Gains and losses on derivative instruments that did not qualify for hedge accounting were also recorded as an increase or decrease to other income (expense), in the period in which they occurred. The resulting cash flows from derivatives were reported as cash flows from operating activities.

8. 
Prepaid expenses and other receivables
 
 
As of
 
   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
(Unaudited)
   
(Audited)
 
   
$
   
$
 
                 
Purchase deposits paid
    820,272       88,459  
Advance to staff
    177,044       143,595  
Other deposits and prepayments
    1,652,560       495,325  
Value-added tax prepayment
    55,434       -  
Other receivables
    1,486,410       1,005,330  
                 
      4,191,720       1,732,709  

 
24

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

9.
Deferred charges – Stock-based compensation
 
 
As of
 
   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
(Unaudited)
   
(Audited)
 
   
$
    $  
Cost
               
Stock-based compensation – consulting fee
    520,000       520,000  
                 
Accumulated amortization
    (520,000 )     (303,333 )
                 
Net
    -       216,667  

Amortization expenses included in general and administrative costs for the nine months ended September 30, 2009 and 2008 was $216,667 and $173,333, respectively.

The Company is amortizing the $520,000 cost of stock-based compensation over a period of one year on the straight line basis.

10. 
Inventories
 
 
As of
 
   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
(Unaudited)
   
(Audited)
 
   
$
   
$
 
                 
Raw materials
    3,422,253       1,708,431  
Work in progress
    2,217,019       1,434,517  
Finished goods
    4,776,247       8,049,138  
Consumables
    -       16,611  
Packing materials
    21,935       -  
      10,437,454       11,208,697  
 
 
25

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

11. 
Plant and equipment

 
As of
 
   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
(Unaudited)
   
(Audited)
 
   
$
   
$
 
Cost
               
Furniture, fixtures and office equipment
    821,763       598,496  
Leasehold improvement
    2,792,408       712,120  
Machinery and equipment
    8,275,015       8,155,270  
Motor vehicles
    692,632       476,910  
                 
      12,581,818       9,942,796  
                 
Accumulated depreciation
               
Furniture, fixtures and office equipment
    326,918       235,613  
Leasehold improvement
    -       220,746  
Machinery and equipment
    2,002,479       1,486,624  
Motor vehicles
    290,005       221,336  
                 
      2,619,402       2,164,319  
                 
Net
               
Furniture, fixtures and office equipment
    494,845       362,883  
Leasehold improvement
    2,792,408       491,374  
Machinery and equipment
    6,272,536       6,668,646  
Motor vehicles
    402,627       255,574  
                 
      9,962,416       7,778,477  

 
The components of depreciation charged are:
 
 
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
   
$
   
$
   
$
   
$
 
                                 
Included in factory overheads
    174,554       194,795       479,372       459,813  
Included in operating expenses
    50,120       49,792       169,309       130,448  
                                 
      224,674       244,587       648,681       590,261  

 
26

 
 
HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

12. 
Leasehold land
 
 
At of
 
   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
(Unaudited)
   
(Audited)
 
   
$
   
$
 
                 
Cost
    3,112,765       3,112,765  
                 
Accumulated amortization
    (110,235 )     (62,255 )
                 
Net
    3,002,530       3,050,510  
 
The leasehold land is being amortized annually using the straight-line method over the lease terms of 50 years.

13. 
Intangible asset
 
 
As of
 
   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
(Unaudited)
   
(Audited)
 
   
$
   
$
 
Cost
               
Consumer battery license fee
    1,000,000       1,000,000  
                 
Accumulated amortization
    (137,500 )     (100,000 )
                 
Net
    862,500       900,000  

Amortization expenses included in selling and distributing costs for the nine months period ended September 30, 2009 and 2008 were $37,500 and $37,500, respectively.

Shenzhen Highpower Technology Co., Ltd. (SZ Highpower), a wholly-owned subsidiary of the Company, entered into a Consumer Battery License Agreement with Ovonic Battery Company, Inc. (Ovonic), an unrelated party, dated May 14, 2004, pursuant to which SZ Highpower acquired a royalty-bearing, non-exclusive license to use certain patents owned by Ovonic to manufacture rechargeable nickel metal hydride batteries for portable consumer applications (Consumer Batteries) in the PRC, and a royalty-bearing, non-exclusive worldwide license to use certain patents owned by Ovonic to use, sell and distribute Consumer Batteries. SZ Highpower made an up-front royalty payment to Ovonic of $50,000 in 2004.

 
27

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

13. 
Intangible asset (Continued)

On August 8, 2008, SZ Highpwer and Ovonic amended the Consumer Battery License Agreement pursuant to which SZ Highpower agreed to pay a total of $112,580, which was to be made in two equal payments of $56,290, one of which was to be made within 15 days of August 8, 2008, and the other within 45 days of August 8, 2008, as royalties for its use of the licensed technology in 2004, 2005 and 2006. Both of these payments were made during 2008 and were recorded as royalty expense in prior years, which was included in selling and distributing costs in the statement of operations.
 
The Consumer Battery License Agreement also requires the Company to pay an additional up-front royalty payment of $1,000,000 by four annual installments and an annual royalty fee based on the gross sales of consumer batteries over the term of the Consumer Battery License Agreement. Accordingly, during the year ended December 31, 2008, the Company recorded a total up-front royalty payment obligation of $1,000,000, which was included in other payables and accrued liabilities, with the related debit recorded as an intangible asset entitled consumer battery license agreement. During the nine months ended September 30, 2009, the Company recorded a total of approximately $172,501 as royalty expense, which was included in selling and distributing costs in the statement of operations. At September 30, 2009, accrued royalty fees payable was $1,104,915 (see Note 14).

The Company is amortizing the $1,000,000 cost of the Consumer Battery License Agreement over a period of 20 years on the straight line basis. The accounting for the Consumer Battery License Agreement is based on the Company’s estimate of the useful life of the underlying technology, which is based on the Company’s assessment of existing battery technology, current trends in the battery business, potential developments and improvements, and the Company’s current business plan.

14. 
Other payables and accrued liabilities
 
 
As of
 
   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
(Unaudited)
   
(Audited)
 
   
$
   
$
 
                 
Accrued expenses
    1,575,447       1,072,331  
Royalty payable
    1,104,915       1,540,900  
Sales deposits received
    6,354,664       388,261  
Value-added tax payables
    -       105,833  
Other payables
    32,136       31,950  
                 
      9,067,162       3,139,275  

 
28

 
HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

15.
Bank borrowings

   
As of
 
   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
(Unaudited)
   
(Audited)
 
   
$  
      $    
Secured:
             
Repayable within one year
             
Short term bank loans
    1,860,969       2,969,939  
Other trade related bank loans
    4,634,940       11,859,289  
                 
      6,495,909       14,829,228  

As of September 30, 2009, the above bank borrowings were secured by the following:

 
(a)
charge over bank deposits of $4,552,798 which is included in restricted cash on the Balance Sheet;

 
(b)
personal guarantee executed by the directors of the Company;

 
(c)
the legal charge over leasehold land with carrying amount $3,002,530; and

 
(d)
other financial covenant:-

The bank borrowings require one of the Company’s subsidiaries to maintain a minimum net worth of $11,734,026. The Company was in compliance with this requirement at September 30, 2009.

The interest rates of trade related bank loans were at bank’s prime lending rate per annum with various maturity dates. The rates at September 30, 2009 ranged from 5.508% to 6.804%.

The interest rates of short term bank loans were at 6.804% per annum at September 30, 2009.

 
29

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

16.
Pension plans

For employees in PRC, the Company contributes on a monthly basis to various defined contribution plans organized by the relevant municipal and provincial government in the PRC based on certain percentage of the relevant employees’ monthly salaries. The municipal and provincial governments undertake to assume the retirement benefit obligations payable to all existing and future retired employees under these plans and the Company has no further constructive obligation for post-retirement benefits beyond the contributions made. Contributions to these plans are expenses as incurred.

The assets of the schemes are controlled by trustees and held separately from those of the Company. Total pension cost was $365,348 and $334,676 for the nine months ended September 30, 2009 and 2008 respectively.

17.
Commitments and contingencies

Operating leases commitments

The Company leases factory and office premises under various non-cancelable operating lease agreements that expire at various dates through years 2009 to 2010, with an option to renew the lease. All leases are on a fixed repayment basis. None of the leases includes contingent rentals. Minimum future commitments under these agreements payable as of September 30, 2009 are as follows:

Year ending September 30
   
$
 
2009
    172,510  
2010
    509,952  
         
      682,462  

Rental expenses for the nine months ended September 30, 2009 and 2008 were $715,663 and $569,438, respectively.

Capital commitments

The Company has the following capital commitments as of September 30, 2009:

      $  
         
Purchase of plant and equipment
    224,449  

 
30

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

17.
Commitments and contingencies (Continued)

Contingencies

From time to time, the Company factors bills receivable to banks. At the time of the factoring, all rights and privileges of holding the receivables are transferred to the banks. The Company removes the asset from its books and records a corresponding expense for the amount of the discount. The Company remains contingently liable on the amount outstanding in the event the bill issuer defaults.

 
As of
 
 
September 30,
   
December 31,
 
 
2009
   
2008
 
 
(Unaudited)
   
(Audited)
 
  $          $    
             
Bills discounted
-
      -  

Other than as disclosed above, the Company had no other material contractual obligations and had no off-balance sheet guarantees or arrangement or transactions as at September 30, 2009.

 
31

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

18.
Segment Information

The Company uses the “management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. Management, including the chief operating decision maker, reviews operating results solely by monthly revenue (but not by sub-product type or geographic area) and operating results of the Company and, as such, the Company has determined that the Company has one operating segment as defined by FASB Accounting Standard Codification Topic 280 (ASC 280) “Segment Reporting” (Formerly known as SFAS 131, “Disclosures about Segments of an Enterprise and Related Information”).

Long-lived assets of the Company are located in PRC. Geographic information about the revenues and accounts receivable which are classified based on the location of the customers, is set out as follows: