NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
1.
|
Organization and basis of presentation
|
The consolidated financial statements
include the financial statements of Highpower International, Inc. (“Highpower”) and its subsidiaries, Hong Kong Highpower
Technology Company Limited (“HKHTC”), Shenzhen Highpower Technology Company Limited (“SZ Highpower”), Highpower
Energy Technology (Huizhou) Company Limited (“HZ Highpower”), Springpower Technology (Shenzhen) Company Limited (“SZ
Springpower”), Ganzhou Highpower Technology Company Limited (“GZ Highpower”), Icon Energy System Company Limited
(“ICON”) and Huizhou Highpower Technology Limited ("HZ HTC"). Highpower and its subsidiaries are collectively
referred to as the “Company”.
Highpower was incorporated in
the State of Delaware on January 3, 2006 to locate a suitable acquisition candidate to acquire. HKHTC was incorporated in Hong
Kong on July 4, 2003 and organized principally to engage in the manufacturing and trading of nickel metal hydride rechargeable
batteries. All other subsidiaries were incorporated in the People’s Republic of China (“P.R.C.”).
On February 8, 2012, GZ Highpower,
which was incorporated in September 21, 2010, increased its registered capital to RMB30,000,000 ($4,762,586) from RMB2,000,000
($293,574). SZ Highpower holds 60% of the equity interest of GZ Highpower, and four founding management members hold the remaining
40%. As of September 30, 2012, the paid-in capital was approximately RMB15,000,000 ($2,381,293).
On March 8,
2012, SZ Highpower invested RMB5,000,000 ($791,377) in HZ HTC, which is a wholly-owned subsidiary of SZ Highpower. HZ HTC engages
in the manufacture of batteries.
On September14,
2012, SZ Springpower increased its registered capital from $1,000,000 to $3,330,000. SZ Highpower paid the increased capital. As
of September 30, 2012, SZ Highpower holds 69.97% of the equity interest of SZ Springpower, and HKHTC holds the remaining 30.03%.
The subsidiaries
of the Company and their principal activities are described as follows:
Name of company
|
|
Place and date
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")
|
|
P.R.C.
October 8, 2002
|
|
|
100
|
%
|
|
Manufacturing & marketing of batteries
|
|
|
|
|
|
|
|
|
|
Highpower Energy Technology (Huizhou) Co., Ltd
("HZ Highpower")
|
|
P.R.C.
January 29, 2008
|
|
|
100
|
%
|
|
Inactive
|
|
|
|
|
|
|
|
|
|
Springpower Technology (Shenzhen) Co., Ltd
("SZ Springpower")
|
|
P.R.C.
June 4, 2008
|
|
|
100
|
%
|
|
Research & manufacturing of batteries
|
HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
1.
|
Organization and basis of presentation (continued)
|
Name of company
|
|
Place and date
incorporation
|
|
Attributable equity
interest held
|
|
|
Principal
activities
|
Ganzhou Highpower Technology Co., Ltd
("GZ Highpower")
|
|
P.R.C.
September 21, 2010
|
|
|
60
|
%
|
|
Processing, marketing and research of battery materials
|
Icon Energy System Co., Ltd.
("ICON")
|
|
P.R.C.
February 23, 2011
|
|
|
100
|
%
|
|
Research and production of advanced battery packs and systems
|
Huizhou Highpower Technology Co., Ltd
("HZ HTC")
|
|
P.R.C.
March8, 2012
|
|
|
100
|
%
|
|
Manufacturing & marketing of batteries
|
|
2.
|
Summary of significant accounting policies
|
Basis of presentation
The accompanying consolidated
balance sheet as of September 30, 2012, which has been derived from audited financial statements, and the unaudited interim consolidated
financial statements as of September 30, 2012 and for the three and nine month periods ended September 30, 2012 and 2011 have been
prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information
and note disclosures, which are normally included in financial statements prepared in accordance with accounting principles generally
accepted in the United States of America (the “U.S. GAAP”), have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures made are adequate to provide for fair presentation. The interim
financial information should be read in conjunction with the Financial Statements and the notes thereto, included in the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2011, previously filed with the SEC.
In the opinion of management,
all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s consolidated
financial position as of September 30, 2012, its consolidated results of operations for the three and nine month periods ended
September 30, 2012 and 2011, and its cash flows for the nine month period endeds September 30, 2012 and 2011, as applicable, have
been made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or
any future periods.
Principle of consolidation
The consolidated financial statements
include the accounts of the Company and its subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
Non-controlling interests represent
the ownership interests in GZ Highpower that are held by owners other than the parent and are part of the equity of the consolidated
group. The non-controlling interests are reported in the consolidated balance sheets within equity, separately from the stockholders’
equity. Net income or loss and comprehensive income or loss is attributed to the stockholders and the non-controlling interests.
If losses attributable to the stockholders and the non-controlling interests in GZ Highpower exceed their interests in GZ Highpower’s
equity, the excess, and any further losses attributable to the stockholders and the non-controlling interests, is attributed to
those interests.
HIGHPOWER INTERNATIONAL,
INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
2.
|
Summary of significant accounting policies (continued)
|
Use of estimates
The preparation of financial
statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates
and assumptions include revenues; the allowance for doubtful receivables; recoverability of the carrying amount of inventory; fair
values of financial instruments; and the assessment of deferred tax assets or liabilities. These estimates are often based on complex
judgments and assumptions that management believes to be reasonable but are inherently uncertain and unpredictable. Actual results
could differ from these estimates.
Concentrations of credit risk
Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist principally of accounts receivable. The Company extends
credit based on an evaluation of the customer’s financial condition, generally without requiring collateral or other security.
In order to minimize the credit risk, the management of the Company has delegated a team responsible for determining credit limits,
credit approvals and other monitoring procedures to ensure that follow-up action is taken to recover overdue debts. Further, the
Company reviews the recoverable amount of each individual trade debt at each balance sheet date to ensure that adequate impairment
losses are made for irrecoverable amounts. In this regard, the management of the Company considers that the Company’s credit
risk is significantly reduced.
During the three months and nine
months ended September 30, 2012 and 2011, there was one customer, Energizer Holdings, Inc., that accounted for 10% or more of total
net revenue. The percentages of total net sales from Energizer Holdings, Inc. in the three months ended September 30, 2012 and
2011 were 13.4% and 21.1%, respectively, and in the nine months ended September 30, 2012 and 2011 were 16.1% and 20.0%, respectively.
The Company’s top two third-party
customers accounted for an aggregate of 36.3% of the accounts receivable as of September 30, 2012 and 25.0% of the accounts receivable
as of December 31, 2011.
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 notes payable and foreign currency loans. These balances are classified as restricted cash in the Company’s
balance sheets.
HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO 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.
Inventories
Inventories are stated at
lower of cost or market. Cost is determined using the weighted average method. Inventory includes raw
materials, packing materials, work in progress and finished goods. The variable production overhead is allocated to each
unit of production on the basis of the actual use of the production facilities. The allocation of fixed production overhead to
the costs of conversion is based on the normal capacity of the production facilities.
Property, plant and equipment
Property, plant and equipment
are stated at cost less accumulated depreciation. Cost represents the purchase price of the asset and other costs incurred to bring
the asset into its existing use. Maintenance, repairs and betterments, including replacement of minor items, are charged to expense;
major additions to physical properties are capitalized.
Depreciation of plant and equipment
is provided using the straight-line method over their estimated useful lives at the following annual rates:
Buildings
|
|
|
5% - 10
|
%
|
Furniture, fixtures and office equipment
|
|
|
20
|
%
|
Leasehold improvement
|
|
|
50
|
%
|
Machinery and equipment
|
|
|
10
|
%
|
Motor vehicles
|
|
|
20
|
%
|
Upon sale or disposition, the
applicable amounts of asset cost and accumulated depreciation are removed from the accounts and the net amount less proceeds from
disposal is charged or credited to income.
Construction in progress represents
capital expenditures for direct costs of construction or acquisition and design fees incurred, and the interest expense directly
related to the construction. Capitalization of these costs ceases and the construction in progress is transferred to the appropriate
category of property, plant and equipment when substantially all the activities necessary to prepare the assets for their intended
use are completed. Construction in progress is not depreciated.
HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
2.
|
Summary of significant accounting policies (continued)
|
Land use rights, net
Land use rights represent payments
for the rights to use certain parcels of land for a certain period of time in the P.R.C. Land use rights are carried at cost and
charged to expense on a straight-line basis over the period the rights are granted.
Intangible assets, net
Intangible assets represent a
royalty-bearing, non-exclusive license to use certain patents owned by Ovonic Battery Company, Inc. (“Ovonic”), an
unrelated party, to manufacture rechargeable nickel metal hydride batteries for portable consumer applications (“Consumer
Batteries”) in the P.R.C, and a royalty-bearing, non-exclusive worldwide license to use certain patents owned by Ovonic to
use, sell and distribute Consumer Batteries. The value of the licenses was established based on historic acquisition costs.
Intangible assets are amortized
over their estimated useful lives, and are reviewed annually for impairment, or more frequently, if indications of possible impairment
exist.
Deferred Revenue
Deferred revenue represents the
government grants received related to developing property, and will be recognized over the useful lives of the assets. The Company
received a grant of $655,446 on May 28, 2012 from the Department of Industry and Information Technology for the construction of
the new factory in Ganzhou City, Jiangxi Province, P.R.C. The Company will apply the deferred revenue to reduce the cost basis
of the assets, upon completion of construction of the warehouse, thus reducing the annual depreciation charge over the estimated
useful life of the property, plant and equipment of the new factory.
Revenue recognition
The Company recognizes revenue
when all of the following criteria must exist in order for the Company to recognize revenue: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred or services have been rendered; (3) price to the buyer is fixed or determinable;
and (4) collectability is reasonably assured.
The Company does not have arrangements
for returns from customers and does not have any future obligations directly or indirectly related to product resale by customers.
The Company has no incentive programs.
Research and development
Research and development expenses
include expenses directly attributable to the conduct of research and development programs, including the expenses of salaries,
employee benefits, materials, supplies, maintenance of research equipment. All expenditures associated with research and development
are expensed as incurred.
HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
2.
|
Summary of significant accounting policies (continued)
|
Advertising
Advertising, which generally
represents the expenses of promotions to create or stimulate a positive image of the company or a desire to buy the company’s
products and services, is expensed as incurred. No advertising expense was recorded for the three and nine months ended September
30, 2012 and 2011.
Income taxes
The Company recognizes deferred
tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences
between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws
and statutory tax rates, applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
Uncertain tax positions
The Company accounts for uncertainty
in income taxes using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the
tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that
the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step
is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. The Company
classifies the liability for unrecognized tax benefits as current to the extent that the Company anticipates payment (or receipt)
of cash within one year. Interest and penalties related to uncertain tax positions are recognized and recorded as necessary in
the provision for income taxes. There were no uncertain tax positions in September 30, 2012 and December 31, 2011.
Comprehensive income
Recognized revenue, expenses,
gains and losses are included in net income or loss. Although certain changes in assets and liabilities are reported as separate
components of the equity section of the consolidated balance sheet, such items, along with net income or loss, are components of
comprehensive income or loss. The components of other comprehensive income or loss are consisted solely of foreign currency translation
adjustments, net of the income tax effect.
HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
2.
|
Summary of significant accounting policies (continued)
|
Foreign currency translation
and transactions
Highpower’s functional
currency is the United States dollar ("US$"). HKHTC's functional currency is the Hong Kong dollar ("HK$").
The functional currency of the Company’s subsidiaries in the P.R.C is the Renminbi ("RMB").
At the date a foreign currency
transaction is recognized, each asset, liability, revenue, expense, gain, or loss arising from the transaction is measured initially
in the functional currency of the recording entity by use of the exchange rate in effect at that date. The increase or decrease
in expected functional currency cash flows upon settlement of a transaction resulting from a change in exchange rates between the
functional currency and the currency in which the transaction is denominated is recognized as foreign currency transaction gain
or loss that is included in determining net income for the period in which the exchange rate changes. At each balance sheet date,
recorded balances that are denominated in a foreign currency are adjusted to reflect the current exchange rate.
The Company’s reporting
currency is US$. Assets and liabilities of HKHTC and the P.R.C. subsidiaries are translated at the current exchange rate at the
balance sheet dates, revenues and expenses are translated at the average exchange rates during the reporting periods, and equity
accounts are translated at historical rates. Translation adjustments are reported in other comprehensive income.
HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
2.
|
Summary of significant accounting policies (continued)
|
Fair value of financial instruments
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, bank borrowings, approximate their fair values due to the short-term maturity of such instruments.
The Company defines fair value
as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted
to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it
considers assumptions that market participants would use when pricing the asset or liability.
The Company establishes a fair
value hierarchy that requires it to maximize the use of observable inputs and to minimize the use of unobservable inputs when measuring
fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input
that is significant to the fair value measurement.
-Level 1 applies to assets or
liabilities for which there are quoted prices in active markets for identical assets or liabilities.
-Level 2 applies to assets or
liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability
such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in
markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant
inputs are observable or can be derived principally from, or corroborated by, observable market data.
-Level 3 applies to assets or
liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the
fair value of the assets or liabilities.
Derivatives
From time to time the Company
may utilize foreign currency forward contracts to reduce the impact of foreign currency exchange rate risk. Management considered
that the foreign currency forwards could not meet the criteria for designated hedging instruments and hedged transactions to qualify
for cash flow hedge or fair value hedge accounting. The currency forwards and future contracts therefore are accounted for as derivatives,
with fair value changes reported as gain (loss) of derivative instruments in income statement. The fair value balance of the foreign
currency derivatives assets was $113,402 and $15,653 as of September 30, 2012 and December 31, 2011, respectively.
Earnings per share
Basic earnings per share is
computed by dividing income attributable to holders of common shares by the weighted average number of common shares outstanding
during the year. Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts
to issue common shares were exercised or converted into common shares.
There were 727,500 and 637,500
options and warrants outstanding as of September 30, 2012 and 2011, respectively, which were not included in the calculation of
diluted income per share for the periods ended because their effect would have been anti-dilutive.
HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
2.
|
Summary of significant accounting policies (continued)
|
Recently issued accounting
pronouncements
In July 2012, the FASB issued
ASU 2012-02, “Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment."
This ASU simplifies how entities test indefinite-lived intangible assets for impairment, which improves consistency in impairment
testing requirements among long-lived asset categories. These amended standards permit an assessment of qualitative factors to
determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying
value. For assets in which this assessment concludes it is more likely than not that the fair value is more than its carrying value,
these amended standards eliminate the requirement to perform quantitative impairment testing as outlined in the previously issued
standards. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September
15, 2012, early adoption is permitted. The Company has adopted this ASU beginning with its Quarterly Report on Form 10-Q for the
three months ended September 30, 2012. There is no material impact on the consolidated financial statements upon adoption.
Except for the ASUs above, in
the period ended November 9, 2012, the FASB has issued ASU No. 2012-01 through ASU 2011-02, which is not expected to have a material
impact on the consolidated financial statements upon adoption.
HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
3.
|
Correction of previously issued consolidated financial statements
|
Certain comparative
amounts in prior periods have been corrected to conform to the current period’s presentation. The principal corrections related
to: 1) the separate presentation of research and development expenses as an operating expenses line item in the statement of operations,
which was previously included in general and administrative expenses; and 2) correcting accounting errors such as recognition of
capitalized interest.
The following
table summarizes the adjustments made to the previously reported consolidated statement of operations and comprehensive income
(loss) for the three and nine months ended September 30, 2011, and consolidated statement of cash flows for the nine months ended
September 30, 2011.
Selected consolidated statement
of operations and comprehensive income (loss) information for the three and nine months ended September 30, 2011:
|
|
Three months ended September 30, 2011
|
|
|
Nine months ended September 30, 2011
|
|
|
|
As
previously
reported
|
|
|
Corrections
|
|
|
As
corrected
|
|
|
As
previously
reported
|
|
|
Corrections
|
|
|
As
corrected
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
|
(793,702
|
)
|
|
|
(30,033
|
)
|
|
|
(823,735
|
)
|
|
|
(2,302,163
|
)
|
|
|
|
|
|
|
(2,302,163
|
)
|
Selling and distribution expenses
|
|
|
(1,487,490
|
)
|
|
|
(11,465
|
)
|
|
|
(1,498,955
|
)
|
|
|
(3,654,303
|
)
|
|
|
|
|
|
|
(3,654,303
|
)
|
General and administrative expenses, including stock-based compensation
|
|
|
(2,242,458
|
)
|
|
|
41,498
|
|
|
|
(2,200,960
|
)
|
|
|
(6,406,295
|
)
|
|
|
|
|
|
|
(6,406,295
|
)
|
Interest expense
|
|
|
(140,240
|
)
|
|
|
35,125
|
|
|
|
(105,115
|
)
|
|
|
(183,450
|
)
|
|
|
(181,807
|
)
|
|
|
(365,257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before taxes
|
|
|
(739,318
|
)
|
|
|
35,125
|
|
|
|
(704,193
|
)
|
|
|
(345,865
|
)
|
|
|
(181,807
|
)
|
|
|
(527,672
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(665,635
|
)
|
|
|
35,125
|
|
|
|
(630,510
|
)
|
|
|
(414,960
|
)
|
|
|
(181,807
|
)
|
|
|
(596,767
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
(603,836
|
)
|
|
|
35,125
|
|
|
|
(568,711
|
)
|
|
|
805,425
|
|
|
|
(181,807
|
)
|
|
|
623,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share of common stock attributable to the Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-Basic
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
(0.05
|
)
|
|
|
(0.03
|
)
|
|
|
(0.01
|
)
|
|
|
(0.04
|
)
|
-Diluted
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
(0.05
|
)
|
|
|
(0.03
|
)
|
|
|
(0.01
|
)
|
|
|
(0.04
|
)
|
HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
3.
|
Correction of previously issued consolidated financial statements (continued)
|
Selected consolidated statement
of cash flow information for the nine months ended September 30, 2011
|
|
Nine months ended September 30, 2011
|
|
|
|
As previously
reported
|
|
|
Corrections
|
|
|
As corrected
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(414,960
|
)
|
|
|
(181,807
|
)
|
|
|
(596,767
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows used in operating activities
|
|
|
(894,251
|
)
|
|
|
(181,807
|
)
|
|
|
(1,076,058
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of plant and equipment
|
|
|
(5,168,156
|
)
|
|
|
181,807
|
|
|
|
(4,986,349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows used in investing activities
|
|
|
(5,168,156
|
)
|
|
|
181,807
|
|
|
|
(4,986,349
|
)
|
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
4.
|
Accounts receivable, net
|
As of September
30, 2012 and December 31, 2011, accounts receivable include the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
25,408,181
|
|
|
|
21,520,763
|
|
Less: allowance for doubtful debts
|
|
|
1,446,760
|
|
|
|
391,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,961,421
|
|
|
|
21,129,418
|
|
The Company experienced bad debt expenses of $1,156,434
and $146,393, respectively, during the nine months ended September 30, 2012 and 2011, and $874,307 and $89,572, respectively, during
the three months ended September 30, 2012 and 2011.
The Company wrote off $102,353 and $60,426, respectively,
in accounts receivable in the nine months ended September 30, 2012 and 2011.
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Purchase deposits paid
|
|
|
1,743,114
|
|
|
|
2,718,685
|
|
Advance to staff
|
|
|
185,164
|
|
|
|
48,678
|
|
Other deposits and prepayments
|
|
|
1,164,395
|
|
|
|
871,679
|
|
Valued-added tax prepayment
|
|
|
535,575
|
|
|
|
612,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,628,248
|
|
|
|
4,251,723
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Deposit for land use right
|
|
|
503,191
|
|
|
|
755,354
|
|
Other receivable
|
|
|
308,718
|
|
|
|
286,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
811,909
|
|
|
|
1,041,614
|
|
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Raw materials
|
|
|
4,823,273
|
|
|
|
4,508,201
|
|
Work in progress
|
|
|
1,935,464
|
|
|
|
900,440
|
|
Finished goods
|
|
|
10,011,053
|
|
|
|
7,923,101
|
|
Packing materials
|
|
|
17,734
|
|
|
|
15,581
|
|
Consumables
|
|
|
177,292
|
|
|
|
165,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,964,816
|
|
|
|
13,512,942
|
|
Where there is evidence that
the utility of inventories, in their disposal in the ordinary course of business, will be less than cost, whether due to physical
deterioration, obsolescence, changes in price levels, or other causes, the inventories are written down to their fair value for
the difference with charges to cost of sales. $431,470 and $523,921 were written down for inventories as of September 30, 2012
and December 31, 2011, respectively.
|
8.
|
Property, plant and equipment, net
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
$
|
|
|
$
|
|
Cost
|
|
|
|
|
|
|
|
|
Construction in progress
|
|
|
687,287
|
|
|
|
14,016,485
|
|
Furniture, fixtures and office equipment
|
|
|
3,010,510
|
|
|
|
2,734,321
|
|
Leasehold improvement
|
|
|
98,615
|
|
|
|
98,305
|
|
Machinery and equipment
|
|
|
15,203,124
|
|
|
|
13,429,090
|
|
Motor vehicles
|
|
|
1,305,719
|
|
|
|
1,225,948
|
|
Building
|
|
|
18,141,223
|
|
|
|
268,717
|
|
|
|
|
38,446,478
|
|
|
|
31,772,866
|
|
Less: accumulated depreciation
|
|
|
7,491,032
|
|
|
|
6,310,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,955,446
|
|
|
|
25,462,656
|
|
The Company recorded depreciation
expenses of $1,565,147 and $1,262,178 for the nine months ended September 30, 2012 and 2011, respectively, and $633,433 and $437,170
for the three months ended September 30, 2012 and 2011, respectively.
The capitalized interest recognized in construction in progress was $1,038,284 and $492,716 as of
September 30, 2012 and December 31, 2011, respectively.
No property, plant and equipment
were pledged as collateral for bank loans as of September 30, 2012 and December 31, 2011.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Cost
|
|
|
|
|
|
|
|
|
Land located in Huizhou
|
|
|
3,416,123
|
|
|
|
3,405,396
|
|
Land located in Ganzhou
|
|
|
1,332,697
|
|
|
|
-
|
|
|
|
|
4,748,820
|
|
|
|
3,405,396
|
|
Accumulated amortization
|
|
|
(340,080
|
)
|
|
|
(272,431
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
4,408,740
|
|
|
|
3,132,965
|
|
As of September 30, 2012, land
use rights of the Company included certain parcels of land located in Huizhou City, Guangdong Province, the P.R.C. and Ganzhou
City, Jiangxi Province, the P.R.C., with a total net carrying value of $4,408,740. The land use rights for land with area of approximately
126,605 square meters and 58,669 square meters, which will expire on May 23, 2057 and January 4, 2062, respectively.
The land use rights are being
amortized annually using the straight-line method over the contract terms of 50 years. The Company recorded amortization expenses
of $66,332 and $49,562 for the nine months ended September 30, 2012 and 2011, respectively, and $23,502 and $16,399 for the three
months ended September 30, 2012 and 2011, respectively.
The land use right for land
located in Huizhou City was pledged as collateral for bank loans as of September 30, 2012 and December 31, 2011.
|
10.
|
Intangible asset, net
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
$
|
|
|
$
|
|
Cost
|
|
|
|
|
|
|
|
|
Consumer battery license fee
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
Accumulated amortization
|
|
|
(287,500
|
)
|
|
|
(250,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
712,500
|
|
|
|
750,000
|
|
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 over the estimated
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. Amortization
expenses included in selling and distribution costs for the nine months ended September 30, 2012 and 2011 were $37,500 and $37,500,
respectively, and $12,500 and $12,500 for the three months ended September 30, 2012 and 2011, respectively.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
11.
|
Other payables and accrued liabilities
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
|
2,989,020
|
|
|
|
4,348,657
|
|
Royalty payable
|
|
|
965,639
|
|
|
|
877,905
|
|
Sales deposits received
|
|
|
794,603
|
|
|
|
1,196,711
|
|
Other payables
|
|
|
599,871
|
|
|
|
517,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,349,133
|
|
|
|
6,941,063
|
|
The Company and its subsidiaries
file tax returns separately.
1) Value added tax
(“VAT”)
Pursuant to the Provisional
Regulation of the P.R.C. on VAT and the related implementing rules, all entities and individuals ("taxpayers") that are
engaged in the sale of products in the P.R.C. are generally required to pay VAT at a rate of 17% of the gross sales proceeds received,
less any deductible VAT already paid or borne by the taxpayers. Further, when exporting goods, the exporter is entitled to a portion
of or all the refund of VAT that it has already paid or incurred. The Company’s P.R.C. subsidiaries are subject to VAT at
17% of their revenues.
2) Income tax
United States
Highpower was incorporated in
Delaware and is subject to U.S. federal income tax with a system of graduated tax rates ranging from 15% to 35%. As Highpower does
not conduct any business in the U.S. or Delaware, it is not subject to U.S. and Delaware state corporate income tax. No deferred
U.S. taxes are recorded since all accumulated profits in the P.R.C. will be permanently reinvested in the P.R.C.
Hong Kong
HKHTC incorporated in Hong Kong,
is subject to a corporate income tax rate of 16.5%.
P.R.C.
In accordance with the relevant
tax laws and regulations of the P.R.C., a company registered in the P.R.C. is subject to income taxes within the P.R.C. at the
applicable tax rate on the taxable income.
SZ Highpower has obtained the
approval and is qualified as a New and High-Tech Enterprise ("NHTE") by the Shenzhen Tax Bureau, and according to the
P.R.C. Enterprise Income Tax Law, it is eligible to enjoy a preferential tax rate of 15% for the calendar years of 2012 and 2011.
All the other P.R.C. subsidiaries are not entitled to any tax holiday. They were subject to income tax at a rate of 25% for calendar
years 2012 and 2011.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
The components of the provision
for income taxes are:
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Current
|
|
|
407,729
|
|
|
|
85,474
|
|
|
|
717,351
|
|
|
|
228,252
|
|
Deferred
|
|
|
119,218
|
|
|
|
(159,157
|
)
|
|
|
225,862
|
|
|
|
(159,157
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
526,947
|
|
|
|
(73,683
|
)
|
|
|
943,213
|
|
|
|
69,095
|
|
The reconciliation of income
taxes expenses computed at the statutory tax rate applicable to the Company is as follows:
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Income (loss ) before tax
|
|
|
1,123,426
|
|
|
|
(704,193
|
)
|
|
|
1,996,074
|
|
|
|
(527,672
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes at applicable income tax rate
|
|
|
332,408
|
|
|
|
(68,175
|
)
|
|
|
566,510
|
|
|
|
(120,711
|
)
|
Effect of preferential tax rate
|
|
|
(128,418
|
)
|
|
|
(58,507
|
)
|
|
|
(301,863
|
)
|
|
|
(147,338
|
)
|
Non-deductible expenses
|
|
|
63,798
|
|
|
|
119,370
|
|
|
|
176,575
|
|
|
|
461,383
|
|
Change in valuation allowance
|
|
|
259,159
|
|
|
|
(66,371
|
)
|
|
|
501,991
|
|
|
|
(124,239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective enterprise income tax
|
|
|
526,947
|
|
|
|
(73,683
|
)
|
|
|
943,213
|
|
|
|
69,095
|
|
3) Deferred tax assets
Deferred tax assets and deferred
tax liabilities reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purpose and the tax bases used for income tax purpose. The following represents the tax effect of each major type of
temporary difference.
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
$
|
|
|
$
|
|
Tax loss carry-forward
|
|
|
355,435
|
|
|
|
591,542
|
|
Allowance for doubtful receivables
|
|
|
6,270
|
|
|
|
85,400
|
|
Allowance for inventory obsolescence
|
|
|
107,868
|
|
|
|
134,248
|
|
Fair value change of currency forwards
|
|
|
70,930
|
|
|
|
(19,415
|
)
|
Difference for sales cut-off
|
|
|
91,598
|
|
|
|
65,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
632,101
|
|
|
|
857,209
|
|
HIGHPOWER INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Guaranteed and repayable within one year Short-term bank loans
|
|
|
15,671,794
|
|
|
|
9,545,383
|
|
As of September 30, 2012, the
above bank borrowings were for working capital purposes and were guaranteed by personal guarantees executed by certain directors
of the Company and a land use right with carrying amount $3,091,592 pledged as collateral.
The loans were primarily obtained
for general working capital, carried interest rates ranging from 2.62% to 7.22% per annum.
The Company has executed credit
facilities with certain banks that provided for working capital in the form of bank acceptance bills. The funds borrowed under
these facilities are generally repayable within 6 months. The notes payable are non-interest bearing and do not have any restrictions
or covenants attached. Outstanding notes payable were $24,286,540 and $17,909,843 as of September 30, 2012 and December 31, 2011,
respectively.
The Company entered into some
credit contracts revolving line of credit, which were used by short-term loans and bank acceptance bills. The following tables
summarize the unused lines of credit as of September 30, 2012 and December 31, 2011:
|
|
September 30, 2012 (Unaudited)
|
Lender
|
|
Starting date
|
|
Maturity date
|
|
Line of credit
|
|
|
Unused line of credit
|
|
|
|
|
|
|
|
$
|
|
|
$
|
|
Bank of China
|
|
1/13/ 2012
|
|
1/12/2013
|
|
|
7,954,437
|
|
|
|
241,815
|
|
Wing Lung Bank Ltd.
|
|
3/29/2012
|
|
3/28/2013
|
|
|
2,600,000
|
|
|
|
-
|
|
Wing Lung Bank Ltd.
|
|
4/20/2012
|
|
4/19/2013
|
|
|
2,708,244
|
|
|
|
-
|
|
The Shanghai Commercial & Saving bank
|
|
8/8/2012
|
|
6/7/2013
|
|
|
4,000,000
|
|
|
|
-
|
|
Industrial and Commercial Bank of China
|
|
7/26/2012
|
|
7/25/2013
|
|
|
6,363,550
|
|
|
|
2,395,876
|
|
Shenzhen Development Bank Co., Ltd
|
|
12/12/2011
|
|
11/27/2012
|
|
|
15,908,874
|
|
|
|
4,672,436
|
|
China Everbright Bank
|
|
8/1/2012
|
|
7/31/2013
|
|
|
7,954,437
|
|
|
|
6,999,905
|
|
China Resources Bank Of Zhuhai
|
|
4/28/2012
|
|
4/28/2013
|
|
|
6,363,550
|
|
|
|
5,568,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
53,853,092
|
|
|
|
19,878,138
|
|
HIGHPOWER INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
15.
|
Line of credit (continued)
|
|
|
December 31, 2011
|
Lender
|
|
Starting date
|
|
Maturity date
|
|
Line of credit
|
|
|
Unused line of credit
|
|
|
|
|
|
|
|
$
|
|
|
$
|
|
Industrial and Commercial Bank of China
|
|
11/29/2011
|
|
8/31/2013
|
|
|
6,343,568
|
|
|
|
4,898,820
|
|
Shenzhen Development Bank Co., Ltd
|
|
12/12/2011
|
|
11/27/2012
|
|
|
15,858,919
|
|
|
|
10,768,206
|
|
Standard Chartered (China) Co., Ltd.
|
|
1/21/2011
|
|
3/30/2012
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
China Everbright Bank
|
|
6/9/2011
|
|
6/9/2012
|
|
|
7,929,460
|
|
|
|
3,103,590
|
|
Standard Chartered (Hong Kong) Co., Ltd.
|
|
1/21/2011
|
|
1/21/2012
|
|
|
13,000,000
|
|
|
|
10,120,000
|
|
Citibank (Hong Kong) Co., Ltd.
|
|
1/31/2011
|
|
1/31/2012
|
|
|
3,000,000
|
|
|
|
3,000,000
|
|
Industrial and Commercial Bank of China
|
|
11/29/2011
|
|
9/8/2012
|
|
|
3,171,784
|
|
|
|
-
|
|
Wing Lung Bank Ltd.
|
|
8/29/2011
|
|
3/20/2012
|
|
|
2,600,000
|
|
|
|
-
|
|
Wing Lung Bank Ltd.
|
|
8/29/2011
|
|
3/20/2012
|
|
|
2,574,665
|
|
|
|
-
|
|
Total
|
|
|
|
|
|
|
56,478,396
|
|
|
|
33,890,616
|
|
The line of credits from Bank
of China and Industrial and Commercial Bank of China are guaranteed by SZ Springpower, HK Highpower and the Company’s Chief
Executive Officer, Mr. Dang Yu Pan.
The line of credits from Shenzhen
Development Bank Co., Ltd, China Resources Bank of Zhuhai and Standard Chartered (China) Co., Ltd are jointly guaranteed by SZ
Springpower and the Company’s Chief Executive Officer, Mr. Dang Yu Pan.
The line of credit from China
Everbright Bank is guaranteed by the Company’s Chief Executive Officer, Mr. Dang Yu Pan.
Certain of the agreements governing
the Company’s loans include standard affirmative and negative covenants, including restrictions on granting additional pledges
on the Company’s property and incurring additional debt and obligations to provide advance notice of major corporate actions,
and other covenants including: the borrower may not serve as a guarantor for more than double its net assets; the borrower is restricted
in certain circumstances from using the loans in connection with related party transactions or other transactions with affiliates;
the borrower must provide monthly reports to certain lenders describing the actual use of loans; the borrower may need to obtain
approval to engage in major corporate transactions; and the borrower may need to obtain approval to increase overseas investments,
guarantee additional debt or incur additional debt by an amount which exceeds 20% of its total net assets should the lender determine
that such action will have a material impact on the ability of the borrower to repay the loan. The covenants in these loan agreements
could prohibit the Company from incurring any additional debt without consent from its lenders. The Company believes it would be
able to obtain consents from the lenders in the event it needed to do so. The agreements governing the Company’s loans may
also include covenants that, in certain circumstances, may require the Company’s PRC operating subsidiaries to give notice
to, or obtain consent from, certain of their lenders prior to making a distribution of net profit, as well as covenants restricting
the ability of the Company’s PRC operating subsidiaries from extending loans. As of September 30, 2012 and December 31, 2011,
the Company was in compliance with all material covenants in its loan agreements.
HIGHPOWER INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Long term loans from Bank of China
|
|
|
7,954,437
|
|
|
|
-
|
|
Less: current portion of long-term borrowings
|
|
|
1,749,976
|
|
|
|
-
|
|
Long-term borrowings, net of current portion
|
|
|
6,204,461
|
|
|
|
-
|
|
On January 13, 2012, the Company
borrowed $7,954,437 (RMB50 million) from Bank of China, which is guaranteed by HK Highpower, SZ Highpower, SZ Springpower and the
Company’s Chief Executive Officer, Mr. Dang Yu Pan. It is five-year long-term loan, with an annual interest rate equal to
110% of the benchmark-lending rate of PBOC, which ranged from 7.04% to 7.59% for the nine months ended September 30, 2012. Interest
expenses are to be paid quarterly.
The interest expenses were $149,637
and $318,424 for the three and nine months ended September 30, 2012, respectively.
The principal is to be repaid
quarterly from September 30, 2012. 2% of the principal should be paid on September 30, 2012 and December 30, 2012, respectively.
And each 6% should be paid every quarter after December 31, 2012 until the due date. The repayment schedule of the principal was
summarized as in below table:
|
|
$
|
|
Within 1 year
|
|
|
1,749,976
|
|
2 to 3 years
|
|
|
1,909,065
|
|
3 to 4 years
|
|
|
1,909,065
|
|
4 to 5 years
|
|
|
1,909,065
|
|
5 to 6 years
|
|
|
477,266
|
|
|
|
|
|
|
|
|
|
7,954,437
|
|
2% of the principal amounted to
$159,089 which was due on September 30, 2012 was paid on October 8, 2012.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
17.
|
Share-based compensation expenses
|
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 contractual term of ten years and generally vest over four to five years with an exercise price equal to
the fair value on the date of grant. Incentive stock options (ISOs) granted must have an exercise price equal to the fair market
value on the date of grant. Repricing of stock options and SARs is prohibited without stockholder approval. 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. At September 30, 2012, approximately 1,303,000 shares of the Company’s common stock remained available
for issuance under the 2008 Plan.
Share-based
compensation related to employees
|
|
Number
|
|
|
Weighted
Average
Exercise
|
|
|
Contractual
Term in
|
|
|
|
of Share
|
|
|
Price
|
|
|
Years
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, January 1, 2012
|
|
|
630,000
|
|
|
$
|
3.04
|
|
|
|
9.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
100,000
|
|
|
$
|
1.15
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited
|
|
|
(65,000
|
)
|
|
$
|
2.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2012
|
|
|
665,000
|
|
|
$
|
2.81
|
|
|
|
8.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2012
|
|
|
120,000
|
|
|
$
|
3.48
|
|
|
|
8.32
|
|
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
17.
|
Share-based compensation expenses (continued)
|
During the nine months ended
September 30, 2012, the Company granted 100,000 shares to one employee at an exercise price of $1.15 per share. During the nine
months ended September 30, 2012, a total of 65,000 options were forfeited in accordance with the terms and conditions of the 2008
Plan.
There were no options granted
to employees during the three months ended September 30, 2012. The weighted-average fair value of options granted to employees
for the nine month periods ended September 30, 2012 and 2011 were $0.74 per share and $1.47 per share, respectively, and were calculated
using the Black-Scholes pricing model, with the following weighted-average assumptions:
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
-
|
|
|
|
40.14
|
%
|
|
|
71.78
|
%
|
|
|
40.02
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
-
|
|
|
|
1.12
|
%
|
|
|
1.09
|
%
|
|
|
2.42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected term from grant date (in years)
|
|
|
-
|
|
|
|
6.25
|
|
|
|
6.25
|
|
|
|
6.16
|
|
Dividend rate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture rate
|
|
|
-
|
|
|
|
-
|
|
|
|
4.86
|
%
|
|
|
4.30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
|
-
|
|
|
$
|
0.52
|
|
|
|
0.74
|
|
|
$
|
1.47
|
|
The estimated
fair value of share-based compensation to employees is recognized as a charge against income on a ratable basis over the requisite
service period, which is generally the vesting period of the award.
Total
share-based payment expenses
In connection with the grant
of stock options to employees and nonemployees, the Company recorded share-based compensation charges of $52,030 and $266, respectively,
for the three-month period ended September 30, 2012 and stock-based compensation charges of $335,231 and $(354), respectively,
for the three-month period ended September 30, 2011. The Company recorded share-based compensation charges of $144,661 and $798,
respectively, for the nine-month period ended September 30, 2012 and stock-based compensation charges of $611,650 and $407, respectively,
for the nine-month period ended September 30, 2011.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
17.
|
Share-based compensation expenses (continued)
|
Expected
Term
The expected term of stock options
represents the weighted-average period that the stock options are expected to remain outstanding. There have been no stock option
exercises to date upon which to base an estimate of the expected term. The Company determined it appropriate to estimate the expected
term using the "simplified" method as prescribed by the Securities and Exchange Commission, or SEC, in Staff Accounting
Bulletin No. 107, or SAB 107, as amended by SAB 110. The simplified method determines an expected term based on the average of
the weighted average vesting term and the contractual term of the option.
Expected
Volatility
The Company has limited stock
trading history and it is not able to reasonably estimate the fair value of its equity share options because it is not practicable
for it to estimate the expected volatility of its share price. The expected volatilities used for the three and nine month periods
ended September 30, 2012 and 2011 are based upon the volatilities of a peer group of comparable publicly traded companies. This
peer group was selected by the Company using criteria including similar industry, similar stage of development and comparable market
capitalization.
Risk-Free
Interest Rate
The risk-free interest rate
assumption is based on U.S. Treasury instruments with a term consistent with the expected term of the Company’s stock options.
Dividend
Yield
The Company has never declared
or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and therefore, used an expected dividend
yield of zero in the valuation model.
Forfeitures
The Company estimates forfeitures
at the time of grant and revises the estimates in subsequent periods if actual forfeitures differ from what was estimated. The
Company uses historical data to estimate pre-vesting option forfeitures and records stock-based compensation expense only for those
awards that are expected to vest. All stock-based payment awards are amortized on a ratable basis over the requisite service periods
of the awards, which are generally the vesting periods. The Company records stock-based compensation expense only for those awards
that are expected to vest.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
Basic earnings per common share
are computed by dividing income available to common stockholders by the weighted-averages number of shares of common stock outstanding
during the period. Diluted earnings per common share is computed by dividing income available to common stockholders by the weighted-average
number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock
outstanding that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities
include outstanding stock options, warrants and restricted shares. The dilutive effect of potential dilutive securities is reflected
in diluted earnings 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 Company excludes potential common stocks in the diluted earnings per share computation in periods of losses from
continuing operations, as their effect would be anti-dilutive.
The following tables set forth
the computation of basic and diluted earnings per common share for the three months ended September 30, 2012 and 2011, and the
nine months ended September 30, 2012 and 2011.
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to the Company
|
|
|
644,362
|
|
|
|
(630,510
|
)
|
|
|
1,151,261
|
|
|
|
(596,767
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
|
|
13,582,106
|
|
|
|
13,582,106
|
|
|
|
13,582,106
|
|
|
|
13,582,106
|
|
Effect of dilutive securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares diluted
|
|
|
13,582,106
|
|
|
|
13,582,106
|
|
|
|
13,582,106
|
|
|
|
13,582,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share attributable to the Company
|
|
|
0.05
|
|
|
|
(0.05
|
)
|
|
|
0.08
|
|
|
|
(0.04
|
)
|
Diluted earnings per common share attributable to the Company
|
|
|
0.05
|
|
|
|
(0.05
|
)
|
|
|
0.08
|
|
|
|
(0.04
|
)
|
Diluted earnings per share takes
into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and
converted into common stock. Stock options totaled 680,000 shares that could potentially dilute earnings per share in the future
which were not included in the fully diluted computation for the three and nine months ended September 30, 2012 because they would
have been anti-dilutive since the stock’s average market price did not exceed the exercise price. Warrants totaled 47,500
shares that could potentially dilute earnings per share which were not included in the fully diluted computation for the three
and nine months ended September 30, 2012, since the stock’s average market price did not exceed the exercise price.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
On September 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 September 19, 2008, the issuance date, is $276,000. All warrants were evaluated for liability treatment and were determined
to be equity instruments.
On December 16, 2009, a warrant
holder exercised 5,000 shares of the warrants via a cashless exercise. The Company issued 2,510 shares of common stock upon the
exercise of the warrants at no consideration. At September 30, 2012, warrants to purchase 47,500 shares of common stock were still
outstanding.
|
20.
|
Defined contribution plan
|
Full-time employees of the Company
in the P.R.C. participate in a government mandated defined contribution plan, pursuant to which certain pension benefits, medical
care, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require that the P.R.C.
operating subsidiaries of the Company make contributions to the government for these benefits based on certain percentages of the
employees’ salaries. Except for pension benefits, medical care, employee housing fund and other welfare benefits mentioned
above, the Company has no legal obligation for the benefits beyond the contributions made.
The total amounts for such employee
benefits, which were expensed as incurred, were $784,845 and $562,074 for the nine months ended September 30, 2012 and 2011, respectively,
and $277,448 and $159,758 for the three months ended September 30, 2012 and 2011, respectively.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
|
21.
|
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 2012 to 2016,
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, 2012 are as follows:
|
|
$
|
|
2012
|
|
|
264,820
|
|
2013
|
|
|
595,888
|
|
2014
|
|
|
309,982
|
|
2015
|
|
|
298,181
|
|
2016
|
|
|
298,181
|
|
|
|
|
|
|
|
|
|
1,767,052
|
|
Rent expenses for the nine months
ended September 30, 2012 and 2011 were $928,351 and $818,652, respectively, for the three months ended September 30, 2012 and 2011,
rent expenses were $309,502 and $276,433, respectively.
Capital commitments and contingencies
The Company had contracted capital
commitments of $2,032,800 for the construction of Ganzhou plant as of September 30, 2012, and $1,755,387 for the construction of
the Huizhou plant as of December 31, 2011.
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
The Company uses the "management
approach" in determining reportable operating segments. The management approach considers the internal organization
and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance
as the source for determining the Company’s reportable segments. Management, including the chief operating decision maker,
reviews operating results solely by monthly revenue (but not by sub-product type or geographic area) and operating results of the
Company and, as such, the Company has determined that the Company has one operating segment.
All long-lived assets of the
Company are located in the P.R.C. Geographic information about revenues and accounts receivable based on the location of the Company’s
customers is set out as follows:
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China(including Hong Kong)
|
|
|
15,898,377
|
|
|
|
12,055,254
|
|
|
|
43,490,979
|
|
|
|
45,348,053
|
|
Asia ,others
|
|
|
4,814,794
|
|
|
|
1,986,907
|
|
|
|
8,279,740
|
|
|
|
5,314,537
|
|
Europe
|
|
|
6,975,938
|
|
|
|
8,958,775
|
|
|
|
18,782,316
|
|
|
|
22,576,122
|
|
North America
|
|
|
3,830,007
|
|
|
|
5,048,498
|
|
|
|
10,846,247
|
|
|
|
11,357,548
|
|
South America
|
|
|
106,759
|
|
|
|
315
|
|
|
|
106,759
|
|
|
|
30,198
|
|
Africa
|
|
|
104,409
|
|
|
|
41,581
|
|
|
|
152,599
|
|
|
|
123,692
|
|
Others
|
|
|
137,762
|
|
|
|
-
|
|
|
|
189,871
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,868,046
|
|
|
|
28,091,330
|
|
|
|
81,848,511
|
|
|
|
84,750,150
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
$
|
|
|
$
|
|
Accounts receivable
|
|
|
|
|
|
|
|
|
China(including Hong Kong)
|
|
|
14,392,770
|
|
|
|
14,359,354
|
|
Asia ,others
|
|
|
1,465,103
|
|
|
|
740,289
|
|
Europe
|
|
|
6,848,643
|
|
|
|
4,973,601
|
|
North America
|
|
|
1,215,445
|
|
|
|
1,036,100
|
|
South America
|
|
|
16,615
|
|
|
|
18,950
|
|
Africa
|
|
|
19,140
|
|
|
|
1,124
|
|
others
|
|
|
3,705
|
|
|
|
|
|
|
|
|
23,961,421
|
|
|
|
21,129,418
|
|
The Company has evaluated subsequent
events through the issuance of the consolidated financial statements and no subsequent event is identified.