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 March 31, 2010
 
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 13,582,106 shares of common stock, par value $0.0001 per share, outstanding as of May11, 2010.
   


 

 
   
HONG KONG HIGHPOWER TECHNOLOGY, INC.
  
FORM 10-Q
  
For the Quarterly Period Ended March 31, 2010
  
INDEX
 
     
Page
Part I
 
Financial Information
 
           
   
Item 1.
 
 Financial Statements
 
             
       
(a)
Balance Sheets as of March 31, 2010 (Unaudited) and December 31, 2009
2
             
       
(b)
Statements of Comprehensive Income for the Three Months Ended March 31, 2010 and 2009 (Unaudited)
4
             
       
(c)
Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009 (Unaudited)
5
             
       
(d)
Notes to Financial Statements (Unaudited)
6
             
   
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
35
           
   
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
41
           
   
Item 4.
 
Controls and Procedures
42
           
Part II
 
Other Information
 
           
   
Item 1.
 
Legal Proceedings
42
           
   
Item 1A.
 
Risk Factors
42
           
   
Item 2.
 
Unregistered Sale of Equity Securities and Use of Proceeds
42
           
   
Item 3.
 
Default Upon Senior Securities
42
           
   
Item 4.
 
Submission of Matters to a Vote of Security Holders
42
           
   
Item 5.
 
Other Information
42
           
   
Item 6.
 
 Exhibits
42
           
Signatures
43

 
1

 

Item 1. Financial Statements
 
HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(Stated in US Dollars)

   
As of
 
   
March 31,
   
December 31,
 
   
2010
   
2009
 
   
(Unaudited)
   
(Audited)
 
   
$
   
$
 
ASSETS
           
Current Assets :
           
Cash and cash equivalents
    7,122,966       2,967,586  
Restricted cash
    6,054,576       5,478,418  
Accounts receivable
    13,188,095       14,896,503  
Notes receivable
    687,117       596,795  
Prepaid expenses and other receivables – Note 7
    4,569,073       2,366,734  
Inventories – Note 11
    11,285,201       10,633,566  
                 
Total Current Assets
    42,907,028       36,939,602  
 Plant and equipment, net – Note 12
    10,450,014       10,284,873  
Leasehold land, net – Note 13
    3,003,908       3,019,509  
Intangible asset, net – Note 14
    837,500       850,000  
Investment securities – Note 15
    52,734       52,732  
                 
TOTAL ASSETS
    57,251,184       51,146,716  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
LIABILITIES
               
Current Liabilities :
               
Non-trading foreign currency derivatives liabilities
    8,524       11,041  
Accounts payable
    13,347,757       10,738,714  
Other payables and accrued liabilities – Note 19
    4,086,950       3,563,308  
Income taxes payable
    1,240,533       876,739  
Bank borrowings – Note 20
    15,747,410       14,787,714  
                 
Total Current Liabilities
    34,431,174       29,977,516  
                 
COMMITMENTS AND CONTINGENCIES – Note 22
               

(continued)

 
2

 

HONG KONG HIGHPOWER TECHNOLOGY, INC AND SUBSIDIARIES

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

   
As of
 
   
March 31,
   
December 31,
 
   
2010
   
2009
 
   
(Unaudited)
   
(Audited)
 
   
$
   
$
 
STOCKHOLDERS’ EQUITY
           
Preferred Stock
           
Par value: $0.0001
           
Authorized: 10,000,000 shares
           
Issued and outstanding: none
    -       -  
                 
 Common stock
               
Par value : $0.0001
               
 Authorized: 100,000,000 shares
               
Issued and outstanding: 2010 –13,582,106 shares (2009 –13,582,106 shares)
    1,358       1,358  
Additional paid-in capital
    5,148,616       5,065,426  
Accumulated other comprehensive income
    2,010,778       2,023,858  
Retained earnings
    15,659,258       14,078,558  
                 
TOTAL STOCKHOLDERS’ EQUITY
    22,820,010       21,169,200  
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
    57,251,184       51,146,716  

See accompanying 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 March 31,
 
   
2010
   
2009
 
   
(Unaudited)
   
(Unaudited)
 
   
$
   
$
 
             
Net sales
    20,223,372       11,309,805  
Cost of sales
    (15,977,042 )     (8,913,709 )
                 
Gross profit
    4,246,330       2,396,096  
Depreciation – Notes 2 and 12
    (69,242 )     (51,114 )
Selling and distribution costs
    (752,054 )     (531,349 )
General and administrative costs including stock-based compensation
    (1,453,607 )     (1,102,922 )
Loss on exchange rate difference
    (22,354 )     (32,724 )
                 
Income from operations
    1,949,073       677,987  
Change in fair value of currency forwards
    -       (88,113 )
Other income – Note 3
    77,374       66,815  
Interest expenses – Note 4
    (66,333 )     (41,120 )
Other expenses – Note 5
    -       (51,536 )
                 
Income before income taxes
    1,960,114       564,033  
Income taxes – Note 6
    (379,414 )     (161,067 )
                 
Net income
    1,580,700       402,966  
                 
Other comprehensive income
               
- Foreign currency translation gain
    (15,597 )     35,849  
- Cash flow hedge
    2,517       -  
                 
Comprehensive income
    1,567,620       438,815  
                 
Income per common share
               
- Basic
    0.12       0.03  
                 
- Diluted
    0.12       0.03  
                 
Weighted average common shares outstanding
               
- Basic and diluted
    13,582,106       13,562,596  
                 
- Diluted
    13,632,096       13,562,596  

See accompanying notes to condensed consolidated financial statements.

 
4

 

HONG KONG HIGHPOWER TECHNOLOGY, INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated in US Dollars)

   
Three months ended March 31,
 
   
2010
   
2009
 
   
(Unaudited)
   
(Unaudited)
 
   
$
   
$
 
Cash flows from operating activities
           
Net income
    1,580,700       402,966  
Adjustments to reconcile net income to net cash provided by operating activities :
               
Amortization of intangible asset
    12,747       12,500  
Amortization of leasehold land
    15,726       15,603  
Depreciation
    360,572       237,217  
Change in fair value of currency forwards
    -       88,113  
Loss on disposal of plant and equipment
    43,885       6,807  
Share based payment
    73,177       130,000  
Bad debt written off
    41,675       -  
                 
Changes in operating assets and liabilities :
               
(Increase) decrease in -
               
Accounts receivable
    1,667,206       1,523,929  
Notes receivable
    (90,857 )     319,501  
Prepaid expenses and other receivables
    (2,202,045 )     (1,508,097 )
Inventories
    (651,133 )     2,955,285  
Increase (decrease) in -
               
Accounts payable
    2,608,364       (1,013,505 )
Other payables and accrued liabilities
    523,479       378,144  
Income taxes payable
    363,726       145,632  
                 
Net cash flows provided by operating activities
    4,347,222       3,694,095  
                 
Cash flows from investing activities
               
Acquisition of plant and equipment
    (565,454 )     (560,026 )
Sale proceeds of plant and equipment
    (2,760 )     -  
                 
Net cash flows used in investing activities
    (568,214 )     (560,026 )
                 
Cash flows from financing activities
               
Proceeds from new short-term bank loans
    -       6,791,546  
Repayment of short-term bank loans
    (2,929,416 )     -  
Repayment of other secured loans
    (1,206,776 )     -  
Net (repayment) advancement of other bank borrowings
    5,095,185       (10,168,444 )
(Decrease) Increase in restricted cash
    (575,878 )     (444,814 )
                 
Net cash flows (used in) provided by financing activities
    383,115       (3,821,712 )
                 
Net (decrease) increase in cash and cash equivalents
    4,162,123       (687,643 )
Effect of foreign currency translation on cash and cash equivalents
    (6,743 )     (55,140 )
Cash and cash equivalents - beginning of period
    2,967,586       4,175,780  
                 
Cash and cash equivalents - end of period
    7,122,966       3,432,997  
                 
Supplemental disclosures for cash flow information :
               
Cash paid for :
               
Interest
    66,333       41,120  
Income taxes
    -       15,434  
See accompanying notes to condensed consolidated financial statements

 
5

 

HONG KONG HIGHPOWER TECHNOLOGY, INC AND SUBSIDIARIES

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

1.
Organization and Basis of Presentation

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

The Company was organized principally to engage in the manufacturing and trading of nickel metal hydride rechargeable batteries.

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

In January 2008, HKHTC invested $749,971 in HZ Highpower Technology Co., Ltd. (“HZ Highpower”). HZ Highpower is a wholly-owned subsidiary of HKHTC. HZ Highpower has not commenced business as at March 31, 2010.

In June 20, 2008, HKHTC invested $250,000 in Spring Power Technology (Shenzhen) Co., Ltd. (“SZ Spring Power”, formerly known as Sure Power Technology (Shenzhen) Co., Ltd.) which became a wholly-owned subsidiary of HKHTC. On July 9, 2008, HKHTC invested an additional $750,000 in SZ Spring Power. SZ Spring Power commenced business in June 2008 and specializes in researching and manufacturing Lithium-ion rechargeable batteries.
 
On June 19, 2008, the Company effected a 5-for-8 reverse stock split of its 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.

The Company’s common stock commenced trading on the Nasdaq Global Market on December 21, 2009.  Prior to December 21, 2009, shares of the Company’s common stock were listed for trading on the NYSE Amex.

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

 
6

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

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

1.
Organization and Basis of Presentation (continued)

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

 
On November 18, 2009, HKHTC invested an additional $1,227,487 in SZ Highpower.

 
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
 
Hong Kong
    100 %  
Investment holding
(“HKHTC”)
 
Jul 4, 2003
           
                 
Shenzhen Highpower Technology Co., Ltd
 
PRC
    100 %  
Manufacturing of batteries
(“SZ Highpower”)
 
Oct 8, 2002
           
                 
HZ Highpower Technology Co., Ltd
 
PRC
    100 %  
Inactive
(“HZ Highpower”)
 
Jan 29, 2008
           
                 
Spring Power Technology (Shenzhen) Co., Ltd
 
PRC
    100 %  
Manufacturing of batteries
 (“SZ Spring Power”)
 
Jun 4, 2008
           

 
7

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

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

2.
Summary of significant accounting policies

Basis of presentation

The accompanying consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America. The consolidated financial statements for the interim periods are unaudited. In the opinion of management, these consolidated financial statements, include all adjustments, including normal recurring adjustments, necessary for their fair presentation. Interim results are not necessarily indicative of results of operations to be expected for a full year. The accompanying consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and do not include all information and footnotes necessary for a complete presentation of financial statements in conformity with accounting principles generally accepted in the United States. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

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

Consolidation

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

Use of estimates

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

 
8

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

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

2.
Summary of significant accounting policies (continued)

Comparative amounts

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

Economic and political risks

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

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

Concentrations of credit risk

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

 
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)

Concentrations of credit risk (Continued)

A substantial percentage of the Company's sales are made to the following customers.  Details of the customers accounting for 10% or more of total net revenue in any of the three months ended March 31, 2010 and 2009 are as follows:

   
2010
   
2009
 
             
Company A
    19 %     23 %
Company B
    *       14 %
*  Less than 10%
               
                 
      19 %     37 %
 
Details of the accounts receivable from the customers with the largest receivable balances at of March 31, 2010 and 2009 are as follows:

   
Percentage of accounts receivable
 
   
March 31,
   
March 31,
 
   
2010
   
2009
 
             
Company A
    25 %     16 %
Company B
    *       11 %
Company C
    18 %     *  
*  Less than 10%
               
Largest receivable balances
    43 %     27 %

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.

 
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)

Accounts receivable

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

The Company experienced bad debts of $41,675 and $Nil during the three months ended March 31, 2010 and 2009.

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 three months ended March 31, 2010 and 2009, the Company did not make any allowance for slow-moving or defective inventories. The Company’s production process results in a minor amount of waste materials. The Company does not record a value for the waste in its cost accounting. The Company records proceeds on an as realized basis, when the waste is sold. The Company has offset the proceeds from the sales of waste materials as a reduction of production costs. Proceeds from the sales of waste materials were approximately $17,362 and $18,831 for the three months ended March 31, 2010 and 2009 respectively. Generally, waste materials on hand at the end of a year are nominal.

Plant and equipment

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

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

Buildings
    5% - 10 %
Furniture, fixtures and office equipment
    20 %
Leasehold improvement
    50 %
Machinery and equipment
    10 %
Motor vehicles
    20 %

 
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)

Plant and equipment (continued)

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

Construction in progress represents the properties and plant and machinery in the course of development for production or buildings under development and are stated at cost, less any identified impairment losses.  When the construction is completed and the asset is ready for its intended use, the related cost is transferred to an appropriate category of property, plant and equipment and depreciated in accordance with the above policy.

Investment Securities

Investments in less than twenty percent owned entities are accounted for under the cost basis and are reviewed for impairment periodically.

Management have strategic investments in certain debt and equity securities that are included in noncurrent “Investment securities” on our Consolidated Balance Sheets accounted for using the cost methods of accounting.

The Company ability to realize value from our strategic investments in companies that are not publicly traded depends on the success of those companies’ businesses and their ability to obtain sufficient capital to execute their business plans.  Because private markets are not as liquid as public markets, there is also increased risk that we will not be able to sell these investments, or that when we desire to sell them we will not be able to obtain fair value for them.

Intangible Assets and Long-Lived Assets

FASB ASC 350 “Intangibles – Goodwill and Other”, requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. Accordingly, the consumer battery license is being amortized over its useful life of 20 years. The Company does not have any goodwill.

 
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)

Intangible Assets and Long-Lived Assets (continued)

The Company accounts for the impairment of long-lived assets, such as plant and equipment, leasehold land and intangible assets, under the provisions of FASB ASC 360 “Property, Plant and Equipment – Overall”. ASC 360 establishes the accounting for impairment of long-lived tangible and intangible assets other than goodwill and for the disposal of a business. Pursuant to ASC 360, the Company periodically evaluates, at least annually, whether facts or circumstances indicate that the carrying value of its depreciable assets to be held and used may not be recoverable. If such circumstances are determined to exist, an estimate of undiscounted future cash flows produced by the long-lived asset, or the appropriate grouping of assets, is compared to the carrying value to determine whether impairment exists. In the event that the carrying amount of long-lived assets exceeds the undiscounted future cash flows, then the carrying amount of such assets is adjusted to their fair value. The Company reports an impairment cost as a charge to operations at the time it is recognized.

There was no impairment of long-lived assets for the three months ended March 31, 2010 and 2009.

Revenue recognition

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

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

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 three months ended March 31, 2010 and 2009.

 
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)

Income taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in consolidated statements of income in the period that includes the enactment date or date of change in tax rate. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion or all of the deferred tax assets will not be realized.

The Company adopted FASB ASC 740, “Accounting for Uncertainty in Income Taxes” clarifies the accounting for uncertain tax positions. This interpretation requires that an entity recognizes in the consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgement occurs. The Company has elected to classify interest and penalties related to unrecognized tax benefits, if and when required, as a component of income tax expense in the consolidated statements of income. According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due to computational errors made by the taxpayer or the withholding agent. The statute of limitations is extended to five years under special circumstances, which are not clearly defined. In the case of a related party transaction, the statute of limitation is ten years. There is no statute of limitation in the case of tax evasion. The adoption of ASC 740 did not have a significant effect on the consolidated financial statements.

Comprehensive income

The Company has adopted FASB ASC 220 “Comprehensive income”, which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Accumulated other comprehensive income represents the accumulated balance of foreign currency translation adjustments of the Company.

Foreign currency translation

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

 
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)

Foreign currency translation (continued)

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

   
March 31, 2010
   
March 31,2009
 
             
Quarter end RMB : US$ exchange rate
    6.8267       6.8792  
Average quarterly RMB : US$ exchange rate
    6.8273       6.8809  

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.

 
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 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.

Earnings per share

The Company reports earnings per share in accordance with FASB Accounting Standard Codification Topic 260 (“ASC 260”) “Earnings Per Share”. Basic earnings per share is computed using the weighted average number of common shares outstanding during the periods presented. The weighted average number of shares represents the common stock outstanding during the years, as adjusted retroactively to reflect the November 2007 recapitalization as described at Note 1. Diluted earnings per common share computations are based on the weighted average number of common shares outstanding during the period, plus the dilutive effect of stock options, warrants and restricted stock awards.

Stock-Based Compensation

The Company accounts for stock-based payment transactions in which the Company receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. Stock-based compensation cost for restricted stock units (“RSUs”) is measured based on the closing fair market value of the Company’s common stock on the date of grant. Stock-based compensation cost for stock options is estimated at the grant date based on each option’s fair-value as calculated by the Black-Scholes-Merton (“BSM”) option-pricing model. The Company recognizes stock-based compensation cost as expense ratably on a straight-line basis over the requisite service period. The Company will recognize a benefit from stock-based compensation in equity if an incremental tax benefit is realized by following the ordering provisions of the tax law. In addition, the Company accounts for the indirect effects of stock-based compensation on the research tax credit, the foreign tax credit and the domestic manufacturing deduction through the income statement. Further information regarding stock-based compensation can be found in Note 9, “Shareholders’ Equity and Stock-Based Compensation.”

Share-based compensation expense was $83,190 and $130,000 and for the three months ended March 31, 2010 and 2009, respectively.

 
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)

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.

 
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 (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 August 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, which amends ASC Topic 820, Measuring Liabilities at Fair Value, which provides additional guidance on the measurement of liabilities at fair value. These amended standards clarify that in circumstances in which a quoted price in an active market for the identical liability is not available, we are required to use the quoted price of the identical liability when traded as an asset, quoted prices for similar liabilities, or quoted prices for similar liabilities when traded as assets. If these quoted prices are not available, we are required to use another valuation technique, such as an income approach or a market approach. These amended standards are effective for us beginning in the fourth quarter of fiscal year 2009. There was no material impact upon the adoption of this standard on the Company’s consolidated financial statements.

In September 2009, the FASB issued ASU 2009-06, Income Taxes (Topic 740), ”Implementation Guidance on Accounting for Uncertainty in Income Taxes and Disclosure Amendments for Nonpublic Entities”, which provides implementation guidance on accounting for uncertainty in income taxes, as well as eliminates certain disclosure requirements for nonpublic entities.  For entities that are currently applying the standards for accounting for uncertainty in income taxes, this update shall be effective for interim and annual periods ending after September 15, 2009. For those entities that have deferred the application of accounting for uncertainty in income taxes in accordance with paragraph 740-10-65-1(e), this update shall be effective upon adoption of those standards. The adoption of this standard is not expected to have an impact on the Company’s consolidated financial position and results of operations since this accounting standard update provides only implementation and disclosure amendments.

 
18

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

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

2. 
Summary of significant accounting policies (continued)

Recently issued accounting pronouncements (continued)

In September 2009, the FASB has published ASU 2009-12, “Fair Value Measurements and Disclosures (Topic 820) - Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)”. This ASU amends Subtopic 820-10, “Fair Value Measurements and Disclosures – Overall”, to permit a reporting entity to measure the fair value of certain investments on the basis of the net asset value per share of the investment (or its equivalent). This ASU also requires new disclosures, by major category of investments including the attributes of investments within the scope of this amendment to the Codification. The guidance in this update is effective for interim and annual periods ending after December 15, 2009. Early application is permitted.   The Company is in the process of evaluating the impact of this standard on its consolidated financial position and results of operations.

In October 2009, the FASB has published ASU 2009-13, “Revenue Recognition (Topic 605)-Multiple Deliverable Revenue Arrangements”, which addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. Specifically, this guidance amends the criteria in Subtopic 605-25, “Revenue Recognition-Multiple-Element Arrangements”, for separating consideration in multiple-deliverable arrangements. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method and also requires expanded disclosures. The guidance in this update is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

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

 
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 (continued)

In January 2010, the FASB issued Accounting Standards Update No. 2010-06 (ASU 2010-06), Fair Value Measurements and Disclosures which amends ASC Topic 820, adding new requirements for disclosures for Levels 1 and 2, separate disclosures of purchases, sales, issuances, and settlements relating to Level 3 measurements and clarification of existing fair value disclosures.  ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for the requirement to provide Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010 (the Company’s fiscal year 2012); early adoption is permitted.  The Company is currently evaluating the impact of adopting ASU 2009-14 on its financial statements.

3.
Other income

   
Three months ended March 31,
 
   
2010
   
2009
 
   
(Unaudited)
   
(Unaudited)
 
   
$
   
$
 
             
Bank interest income
    29,248       25,142  
Government sponsor
    14,647       -  
Foreign exchange contract income
    1,582       -  
Sundry income
    31,897       41,673  
                 
      77,374       66,815  

4.
Interest expenses

   
Three months ended March 31,
 
   
2010
   
2009
 
   
(Unaudited)
   
(Unaudited)
 
   
$
   
$
 
             
Interest on trade related bank loan
    60,073       28,200  
Interest on short-term bank loans
    6,260       12,920  
                 
      66,333       41,120  

 
20

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

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

5.
Other expenses

   
Three months ended March 31,
 
   
2010
   
2009
 
   
(Unaudited)
   
(Unaudited)
 
   
$
   
$
 
             
Foreign exchange contract expenses
    -       51,536  
                 
      -       51,536  

6.
Income taxes

The components of the provision for income taxes are:

   
Three months ended March 31,
 
   
2010
   
2009
 
   
(Unaudited)
   
(Unaudited)
 
   
$
   
$
 
             
PRC income taxes
    379,414       161,067  
                 
      379,414       161,067  

Accounting for Uncertainty in Income Taxes

The Company adopted the provisions of FASB Accounting Standard Codification Topic 740 (ASC 740) “Income Taxes”. ASC 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with ASC 740, and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The adoption of the provisions of ASC 740 did not have a material effect on the Company’s financial statements.

Based on the Company’s evaluation, the Company has concluded that there are no significant uncertain tax positions requiring recognition in its financial statements.

 
21

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

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

7.
Prepaid expenses and other receivables

   
At of
 
   
March 31,
   
December 31,
 
   
2010
   
2009
 
   
(Unaudited)
   
(Audited)
 
   
$
   
$
 
             
Purchase deposits paid
    2,998,201       800,437  
Advance to staff
    255,314       150,139  
Valued-added tax prepayment
    176,476       339,868  
Other deposits and prepayments
    346,657       423,058  
Other receivables
    792,425       653,232  
                 
      4,569,073       2,366,734  

8.
Deferred charges – Stock-based compensation

   
At of
 
   
March 31,
   
December 31,
 
   
2010
   
2009
 
   
(Unaudited)
   
(Audited)
 
   
$
   
$
 
             
Cost
           
Stock-based compensation – consulting fee
    -       520,000  
                 
Accumulated amortization
    -       (520,000 )
                 
Net
    -       -  

 
Amortization expenses included in general and administrative costs for the three months ended March 31, 2010 and 2009 were $Nil and $130,000 respectively.

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

9.
Share – based compensation expenses

 
The Company has outstanding equity awards issued under its legacy equity plans and equity plans assumed as a result of previous acquisitions. While the Company maintains a number of legacy and acquired equity incentive plans that have awards outstanding, equity awards are currently made only from the 2008 Omnibus Incentive Plan as described below.

 
22

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

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

9.
Share – based compensation expenses (continued)

 
2008 Omnibus Incentive Plan

 
The 2008 Omnibus Incentive Plan (the “2008 Plan”) was approved by the Company’s Board of Directors on October 30, 2008 and became effective upon the approval of the Company’s stockholders on December 11, 2008. The 2008 Plan has a ten year term. The 2008 Plan reserves two million shares of common stock for issuance, subject to increase from time to time by the number of shares: (i) subject to outstanding awards granted under the Company’s prior equity compensation plans that terminate without delivery of any stock (to the extent such shares would have been available for issuance under such prior plan), and (ii) subject to awards assumed or substituted in connection with the acquisition of another company.

 
The 2008 Plan authorizes the issuance of awards including stock options, restricted stock units (RSUs), restricted stock, unrestricted stock, stock appreciation rights (SARs) and other equity and/or cash performance incentive awards to employees, directors, and consultants of the Company. Subject to certain restrictions, the Compensation Committee of the Board of Directors has broad discretion to establish the terms and conditions for awards under the 2008 Plan, including the number of shares, vesting conditions and the required service or performance criteria. Options and SARs have a maximum term of five years, and their exercise price may not be less than 110% of fair market value on the date of grant. Repricing of stock options and SARs is prohibited without stockholder approval. Each share subject to an award other than stock options or SARs will reduce the number of shares available for issuance under the 2008 Plan by 17,000 shares. Certain change in control transactions may cause awards granted under the 2008 Plan to vest, unless the awards are continued or substituted for in connection with the transaction. As of March 31, 2010, there were 1,983,000 shares authorized and available for issuance under the 2008 Plan.

 
The restricted stock activity in 2010 related to the Company’s 2008 Plan was as follows:

         
Weighted
Average
Grant Date
Price
 
   
Shares
   
$
 
Non-vested at December 31, 2009
           
Granted
    17,000       8.11  
Vested
    -       -  
Forfeited
    -       -  
                 
Non-vested at March 31, 2010
    17,000       8.11  

 
23

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

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

10.
Earning per share

Basic earning per common share is computed by dividing income available to common shareholders by the weighted-averages number of shares of common stock outstanding during the period. Diluted earning per common share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock outstanding that would have been outstanding if the potentially dilutuve securities had been issued. Potentially dilutive securities include outstanding stock options, restricted shares. The dilutive effect of potentially dilutive securities is reflected in diluted earning per common share by application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of the Company’s common stock can result in a greater dilutive effect from potentially dilutive securities.

 
The following tables set forth the computation of basic and diluted earnings per common share for the three months ended March 31, 2010 and 2009.

   
Three months ended
 
   
March 31,
   
March 31,
 
   
2010
   
2009
 
   
(Unaudited)
   
(Unaudited)
 
   
$
   
$
 
Numerator:
           
Net income
    1,580,700       402,966  
                 
Denominator:
               
Weighted-average shares outstanding
    13,582,106       13,562,596  
Effect of dilutive securities
    49,990       -  
Denominator:
               
                 
Weighted-average shares diluted
    13,632,096       13,562,596  
                 
Basic earning per common share
    0.12       0.03  
                 
Diluted earning per common share
    0.12       0.03  

11.
Inventories

   
At of
 
   
March 31,
   
December 31,
 
   
2010
   
2009
 
   
(Unaudited)
   
(Unaudited)
 
   
$
   
$
 
             
Raw materials
    4,071,025       4,090,897  
Work in progress
    1,243,926       1,086,523  
Finished goods
    5,955,860       5,441,554  
Packing materials
    14,390       14,592  
                 
      11,285,201       10,633,566  

 
24

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

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

12.
Plant and equipment

   
At of
 
   
March 31,
   
December 31,
 
   
2010
   
2009
 
   
(Unaudited)
   
(Audited)
 
   
$
   
$
 
Cost
           
Construction in progress
    1,068,140       1,207,274  
Furniture, fixtures and office equipment
    1,935,902       1,748,650  
Leasehold improvement
    587,040       750,050  
Machinery and equipment
    9,297,524       9,040,243  
Motor vehicles
    731,698       710,245  
Building
    248,205       61,901  
                 
      13,868,509       13,518,363  
                 
Accumulated depreciation
               
Construction in progress
    -       -  
Furniture, fixtures and office equipment
    714,157       619,020  
Leasehold improvement
    237,267       362,042  
Machinery and equipment
    2,150,592       1,962,512  
Motor vehicles
    314,241       288,931  
Building
    2,238       985  
                 
      3,418,495       3,233,490  
                 
Net
               
Construction in progress
    1,068,140       1,207,274  
Furniture, fixtures and office equipment
    1,221,745       1,129,630  
Leasehold improvement
    349,773       388,008  
Machinery and equipment
    7,146,932       7,077,731  
Motor vehicles
    417,457       421,314  
Building
    245,967       60,916  
                 
      10,450,014       10,284,873  

The components of depreciation charged are:

   
Three months ended March 31,
 
   
2010
   
2009
 
   
(Unaudited)
   
(Unaudited)
 
   
$
   
$
 
             
Included in cost of sales and selling and distribution costs
    291,330       186,103  
Included in operating expenses
    69,242       51,114  
                 
      360,572       237,217  

 
25

 

HONG KONG HIGHPOWER TECHNOLOGY, INC AND SUBSIDIARIES

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

13.
Leasehold land

   
At of
 
   
March 31,
   
December 31,
 
   
2010
   
2009
 
   
(Unaudited)
   
(Audited)
 
   
$
   
$
 
             
Cost
    3,145,453       3,145,322  
                 
Accumulated amortization
    (141,545 )     (125,813 )
                 
Net
    3,003,908       3,019,509  

The leasehold land is being amortized annually using the straight-line method over the lease terms of 50 years.

14. 
Intangible asset – Consumer battery license

   
At of
 
   
March 31,
   
December 31,
 
   
2010
   
2009
 
   
(Unaudited)
   
(Audited)
 
   
$
   
$
 
Cost
           
Consumer battery license fee
    1,000,000       1,000,000  
                 
Accumulated amortization
    (162,500 )     (150,000 )
                 
Net
    837,500       850,000  

 
Amortization expenses included in selling and distribution costs for the three months ended March 31, 2010 and 2009 was $12,500.

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

On August 8, 2007, SZ Highpwer and Ovonic amended the Consumer Battery License Agreement pursuant to which SZ Highpower agreed to pay a total of $112,580, which was to be made in two equal payments of $56,290, one of which was to be made within 15 days of August 8, 2007, and the other within 45 days of August 8, 2007, as royalties for its use of the licensed technology in 2004, 2005 and 2006.  Both of these payments were made during 2007 and were recorded as royalty expense in prior years, which was included in selling and distribution costs in the statement of operations.

 
26

 

HONG KONG HIGHPOWER TECHNOLOGY, INC AND SUBSIDIARIES

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

14. 
Intangible asset – Consumer battery license (continued)
 
The Consumer Battery License Agreement also requires the Company to pay an additional up-front royalty payment of $1,000,000 by four annual installments and an annual royalty fee based on the gross sales of consumer batteries over the term of the Consumer Battery License Agreement. Accordingly, during the year ended December 31, 2007, the Company recorded a total up-front royalty payment obligation of $1,000,000, which was included in other payables and accrued liabilities, with the related debit recorded as an intangible asset entitled consumer battery license agreement. During the three months ended March 31, 2010, the Company recorded a total of approximately $46,623 as royalty expense, which was included in selling and distribution costs in the statement of operations. At March 31, 2010, accrued royalty fees payable was $1,143,438 (see Note 19).

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

15. 
Investment Securities

   
As of
 
   
March 31,
2010
(Unaudited)
   
December 31,
2009
(Audited)
 
   
$
   
$
 
             
Investment securities - cost method
    52,734       52,732  
                 
      52,734       52,732  

 
The investments in less than twenty percent owned entities are accounted for under the cost basis.

 
27

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

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

16. 
Fair Value Measurements

The Company adopted FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), related to the Company’s financial assets and liabilities. ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. ASC 820 defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also describes three levels of inputs that may be used to measure fair value:
 
Level 1 — quoted prices in active markets for identical assets and liabilities.
 
Level 2 — observable inputs other than quoted prices in active markets for identical assets and liabilities.
 
Level 3 — unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions.
 
ASC 820 also provides guidance for determining the fair value of a financial asset when the market for that asset is not active, and for determining fair value when the volume and level of activity for an asset or liability have significantly decreased and includes guidance on identifying circumstances that indicate when a transaction is not orderly. The adoption of ASC 820 did not have a material impact on the Company’s financial condition or results of operations.
 
The effective date for certain aspects of ASC 820 was deferred and are currently being evaluated by the Company. Areas impacted by the deferral relate to nonfinancial assets and liabilities that are measured at fair value, but are recognized or disclosed at fair value on a nonrecurring basis. The effects of these remaining aspects of ASC 820 are to be applied by the Company to fair value measurements prospectively beginning November 1, 2009. The adoption of the remaining aspects of ASC 820 is not expected to have a material impact on its financial condition or results of operations. See Note 6 to the consolidated financial statements in this Report on Form 10-K for additional investment information.

 
28

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

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

16. 
Fair Value Measurements (Continued)

The following table details the fair value measurements of assets and liabilities within the three levels of the fair value hierarchy at March 31 2010 and March 31, 2009:

         
Fair Value Measurements at reporting date using
 
   
 
March 31,
2010
   
Quoted Price
in active
Markets for
identical
assets
(level 1)
   
Significant
Other
Observable
Inputs 
(Level 2)
   
Significant
Other
Unobservable
Inputs
(Level 3)
 
   
$
   
$
   
$
   
$
 
Assets
                       
Accounts receivable
    13,188,095       -       -       13,188,095  
Prepaid expenses and other receivables
    4,569,073       -       -       4,569,073  
Notes receivable
    687,117       -       -       687,117  
                                 
Liabilities
                               
Non-trading foreign currency derivatives liabilities
    8,524       -       8,524       -  
Accounts payable
    13,347,757       -               13,347,757  
Other payables and accrued liabilities
    4,086,950       -       -       4,086,950  

         
Fair Value Measurements at reporting date using
 
   
 
December
31, 2009
   
Quoted Price
in active
Markets for
identical
assets
(level 1)
   
Significant
Other
Observable
Inputs 
(Level 2)
   
Significant
Other
Unobservable
Inputs
(Level 3)
 
   
$
   
$
   
$
   
$
 
Assets
                       
Accounts receivable
    14,896,503       -       -       14,896,503  
Prepaid expenses and other receivables
    2,366,734       -       -       2,366,734  
Notes receivable
    596,795       -       -       596,795  
                                 
Liabilities
            -                  
Non-trading foreign currency derivatives liabilities
    11,041       -       11,041       -  
Accounts payable
    10,738,714       -               10,738,714  
Other payables and accrued liabilities
    3,563,308       -       -       3,563,308  

Level 2 financial assets represent the fair value of our foreign currency exchange contracts that were valued using pricing models that take into account the contract terms as well as multiple inputs are applicable, such as currency rate. Level 3 financial assets represent the fair value of our accounts receivables.

 
29

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

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

17.
Risk Management Activities, Including Derivative

The Company recognized the following gains and losses attributable to its derivative financial instruments during the following periods:

   
Three months ended March 31,
 
   
2010
   
2009
 
   
(Unaudited)
   
(Unaudited)
 
   
$
   
$
 
Foreign exchange contracts, net
           
Gain recognized in Other income, net
    1,582       -  
                 
Gain recognized in Other expenses, net
    -       51,536  

Hedging Activities

Due to the volatility of the US Dollar to the Company’s functional currency, the Company has put into place a hedging program to attempt to protect it from significant changes to the US Dollar, which would affect the value of the Company’s US dollar receivables and sales. At March 31, 2009, the Company had a series of currency forwards totaling a notional amount US$2,500,000 expiring from April 2010 to September 2010.

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

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

 
30

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

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

17.
Risk Management Activities, Including Derivative (continued)

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

The cost of the effective portion of the cash flow hedges was $8,524 and $225,235 for the three months ended March 31, 2010 and 2009.

18. 
Change in fair value of share warrants

On June 19, 2008, the Company issued to WestPark Capital warrants to purchase 52,500 shares of common stock at an exercise price of $3.90 per share in connection with the initial public offering. The warrants have a term of five years and are exercisable no sooner than one year and no later than five years.

The fair value of the warrants at June 19, 2008, the date of issue is $276,000. The fair value of the warrants is appraised by an independent qualified valuer.

On December 16, 2009, a warrant holder exercised 5,000 shares of the warrants via a cashless exercise.  The Company issued 2,510 shares of common stock upon the exercise of the warrants at no consideration. At March 31, 2010, warrants to purchase 47,500 shares of common stock were still outstanding.

19. 
Other payables and accrued liabilities

   
At of
 
   
March 31,
   
December 31,
 
   
2010
   
2009
 
   
(Unaudited)
   
(Unaudited)
 
   
$
   
$
 
             
Accrued expenses
    1,603,855       2,056,261  
Royalty payable
    1,143,438       1,071,787  
Sales deposits received
    930,724       259,550  
Other payables
    408,933       175,710  
                 
      4,086,950       3,563,308  

 
31

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

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

20.
Bank borrowings

   
At of
 
   
March 31,
   
December 31,
 
   
2010
   
2009
 
   
(Unaudited)
   
(Audited)
 
   
$
   
$
 
Secured:
           
Repayable within one year
           
Short term bank loans
    -       2,929,551  
Other trade related bank loans
    15,747,410       11,858,163  
                 
      15,747,410       14,787,714  

As of March 31, 2010, the above bank borrowings were secured by the following:

 
(a)
charge over bank deposits of $6,054,576 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 $3,003,908 (see Note 13); and

 
(d)
other financial covenant

The interest rates of trade related bank loans were at bank’s prime lending rate per annum with various maturity dates. The rates at March 31, 2010 ranged from 6.5% to 8%.

21. 
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 $145,193 and $98,094 for the three months ended March 31, 2010 and 2009, respectively.

 
32

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

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

22.
Commitments and contingencies

Operating leases commitments

The Company leases factory and office premises under various non-cancelable operating lease agreements that expire at various dates through years 2010 to 2011, with an option to renew the lease. All leases are on a fixed repayment basis. None of the leases includes contingent rentals. Minimum future commitments under these agreements payable as of March 31, 2010 are as follows:

Period ending March 31,
 
$
 
       
2010
    565,118  
2011
    258,517  
         
      823,635  

Rent expenses for the three months ended March 31, 2010 and 2009 were $235,616 and $241,063 respectively.

23. 
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”.

 
33

 

HONG KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES

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

23. 
Segment Information (continued)

All long-lived assets of the Company are located in the PRC. Geographic information about the revenues and accounts based on the location of the Company’s customers is set out as follows:

   
Three months ended March 31,
 
   
2010
   
2009
 
   
(Unaudited)
   
(Unaudited)
 
   
$
   
$
 
Net revenue
           
             
Hong Kong and China
    12,016,686       5,013,644  
Asia
    1,134,710       539,012  
Europe
    4,628,822       4,295,698  
North America
    2,401,611       1,368,795  
South America
    41,543       -  
Others
    -       92,656  
                 
      20,223,372       11,309,805  

   
At of
 
   
March 31,
   
December 31,
 
   
2010
   
2009