XNAS:HPJ Highpower International Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For The Quarterly Period Ended June 30, 2012

 

OR

 

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For The Transition Period From            To            

 

COMMISSION FILE NO.:  001-34098

 

HIGHPOWER INTERNATIONAL, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware   20-4062622

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

Building A1, 68 Xinxia Street, Pinghu, Longgang,

Shenzhen, Guangdong, 518111, People’s Republic of China

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)

 

(86) 755-89686292

(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 ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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 x      No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” as defined in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ¨ Accelerated filer  ¨
   
Non-accelerated filer  ¨ Smaller reporting company   x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨      No x

 

The registrant had 13,582,106 shares of common stock, par value $0.0001 per share, outstanding as of August 12, 2012. The registrant’s common stock is listed on the Nasdaq Global Market under the stock symbol “HPJ.”

 

 
 

 

HIGHPOWER INTERNATIONAL, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED June 30, 2012

INDEX

 

        Page
Part I Financial Information  
         
  Item 1. Consolidated  Financial Statements  
         
    (a) Consolidated Balance Sheets as of June 30, 2012 (Unaudited) and December 31, 2011 1
         
    (b) Consolidated Statements of Operations and Comprehensive Income (loss) for the Three and Six Months Ended June 30, 2012 and 2011 (Unaudited) 3
         
    (c) Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011 (Unaudited) 4
         
    (d) Notes to Consolidated Financial Statements (Unaudited) 5
         
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 30
       
  Item 3. Quantitative and Qualitative Disclosures About Market Risk 37
       
  Item 4. Controls and Procedures 38
       
Part II Other Information  
       
  Item 1. Legal Proceedings 38
       
  Item 2. Unregistered Sale of Equity Securities and Use of Proceeds 38
       
  Item 3. Default Upon Senior Securities 38
       
  Item 4. Mine Safety Disclosures 38
       
  Item 5. Other Information 38
       
  Item 6. Exhibits 40
         
Signatures 41

 

 
 

 

Item 1. Consolidated Financial Statements

 

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Stated in US Dollars)

 

   June 30,   December 31, 
   2012   2011 
   (Unaudited)     
   $   $ 
ASSETS          
Current Assets:          
Cash and cash equivalents   5,119,991    5,175,623 
Restricted cash   18,017,812    12,708,999 
Accounts receivable, net   25,753,706    21,129,418 
Notes receivable   1,731,336    515,107 
Prepayments   3,638,489    4,251,723 
Other receivables   789,134    1,041,614 
Inventories   16,368,579    13,512,942 
Total Current Assets   71,419,047    58,335,426 
           
Property, plant and equipment, net   28,979,438    25,462,656 
Land use rights, net   4,384,150    3,132,965 
Intangible asset, net   725,000    750,000 
Deferred tax assets   745,328    857,209 
Foreign currency derivatives assets   -    15,653 
           
TOTAL ASSETS   106,252,963    88,553,909 
           
LIABILITIES AND EQUITY          
           
LIABILITIES          
Current Liabilities:          
Foreign currency derivatives liabilities   15,969    - 
Accounts payable   23,842,503    22,153,822 
Deferred revenue   648,298    - 
Notes payable   20,801,187    17,909,843 
Letter of credit   -    2,880,000 
Other payables and accrued liabilities   8,361,253    6,941,063 
Income taxes payable   477,770    411,536 
Short-term loan   14,179,842    9,545,383 
           
Total Current Liabilities   68,326,822    59,841,647 
           
Long-term loan   7,867,697    - 
           
TOTAL LIABILITIES   76,194,519    59,841,647 

 

1
 

 

HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)

(Stated in US Dollars)

 

   June 30,   December 31, 
   2012   2011 
   (Unaudited)     
   $   $ 
EQUITY          
Stockholder’s 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, 13,582,106 shares issued and outstanding at June 30, 2012 and December 31, 2011)   1,358    1,358 
Additional paid-in capital   5,924,400    5,831,237 
Statutory and other reserves   2,726,390    2,726,390 
Retained earnings   16,145,555    15,638,656 
Accumulated other comprehensive income   4,376,658    4,514,621 
           
Total equity for the Company’s stockholders   29,174,361    28,712,262 
           
Non-controlling interest   884,083    - 
           
TOTAL EQUITY   30,058,444    28,712,262 
           
TOTAL LIABILITIES AND EQUITY   106,252,963    88,553,909 

 

See notes to consolidated financial statements

 

2
 

 

\HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Stated in US Dollars)

 

   Three months ended
 June 30,
   Six months ended
June 30,
 
   2012   2011   2012   2011 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
   $   $   $   $ 
Net sales   29,377,682    29,708,154    49,980,465    56,658,820 
Cost of sales   (23,369,258)   (24,942,124)   (40,299,782)   (47,892,431)
Gross profit   6,008,424    4,766,030    9,680,683    8,766,389 
                     
Research and development costs   (1,233,585)   (873,383)   (2,117,931)   (1,478,428)
Selling and distribution costs   (1,282,499)   (980,663)   (2,481,399)   (2,155,348)
General and administrative costs, including                    
stock-based compensation   (2,263,983)   (2,098,497)   (4,278,468)   (4,205,335)
Income (loss) on exchange rate difference   153,360    (297,768)   122,030    (470,703)
Gain (loss) on derivative instruments   (304,147)   156,380    32,956    (234,196)
Equity loss in an associate   -    (2,199)   -    (3,971)
Income from operations   1,077,570    669,900    957,871    218,408 
                     
Other income   61,185    66,119    228,218    218,255 
Interest expenses   (301,123)   (170,591)   (313,441)   (260,142)
Income before taxes   837,632    565,428    872,648    176,521 
                     
Income taxes expense   (362,941)   (137,017)   (416,266)   (142,778)
Net income   474,691    428,411    456,382    33,743 
                     
Less: net loss attributable to non-controlling interest   (29,023)   -    (50,517)   - 
Net income attributable to the Company   503,714    428,411    506,899    33,743 
                     
Comprehensive income                    
Net income   474,691    428,411    456,382    33,743 
Foreign currency translation (loss) gain   (300,800)   3,015    (155,895)   (15,768)
Comprehensive income   173,891    431,426    300,487    17,975 
                     
Less: comprehensive loss attributable to non-controlling interest   (46,997)   -    (68,449)   - 
Comprehensive income attributable to the Company   220,888    431,426    368,936    17,975 
                     
Earnings per share of common stock attributable to the Company                    
- Basic   0.04    0.03    0.04    - 
- Diluted   0.04    0.03    0.04    - 
                     
Weighted average common shares outstanding                    
- Basic   13,582,106    13,582,106    13,582,106    13,582,106 
- Diluted   13,582,106    13,582,661    13,582,106    13,582,578 

 

See notes to consolidated financial statements

 

3
 

 

HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Stated in US Dollars)

 

   Six months ended June 30, 
   2012   2011 
   (Unaudited)   (Unaudited) 
   $   $ 
Cash flows from operating activities          
Net income   456,382    33,743 
Adjustments to reconcile net loss to net cash provided by operating activities :          
Depreciation and amortization   999,544    883,231 
Allowance for doubtful accounts   282,127    61,026 
Loss on disposal of property, plant and equipment   56,703    6,636 
Equity loss in an associate   -    3,971 
Loss on derivative instruments   31,278    234,196 
Deferred income tax   106,644    - 
Share based payment   93,164    277,180 
Changes in operating assets and liabilities :          
Accounts receivable   (4,971,615)   (629,177)
Notes receivable   (1,227,504)   (550,505)
Prepayments   591,874    (3,889,931)
Other receivable   240,454    11,223 
Inventories   (2,907,198)   899,528 
Accounts payable   5,680,116    (2,000,570)
Deferred  revenue   652,157    - 
Other payables and accrued liabilities   1,481,165    60,682 
Income taxes payable   69,855    (1,072,317)
Net cash flows provided by (used in) operating activities   1,635,146    (5,671,084)
           
Cash flows from investing activities          
Acquisition of plant and equipment   (8,484,171)   (2,930,714)
Acquisition of land use right   (1,326,010)   - 
Net cash flows used in investing activities   (9,810,181)   (2,930,714)
           
Cash flows from financing activities          
Proceeds from short-term bank loans   5,871,646    7,086,802 
Repayment of short-term bank loans   (1,196,676)   (8,422,290)
Proceeds from long-term bank loans   7,914,523    - 
Proceeds from notes payable   19,682,410    18,387,317 
Repayment of notes payable   (16,633,527)   (10,225,663)
Proceeds from letter of credit   -    5,508,490 
Repayment  of letter of credit   (2,880,000)   - 
Proceeds from non-controlling interest   949,743    - 
Decrease in restricted cash   (5,387,117)   (5,167,034)
Net cash flows provided by financing activities   8,321,002    7,167,622 
Effect of foreign currency translation on cash and cash equivalents   (201,599)   466,547 
Net decrease in cash and cash equivalents   (55,632)   (967,629)
Cash and cash equivalents - beginning of period   5,175,623    8,490,629 
Cash and cash equivalents - end of period   5,119,991    7,523,000 
           
Supplemental disclosures for cash flow information :          
Cash paid for :          
Income taxes   239,767    386,314 
Interest expenses   590,399    386,313 
Non-cash transactions          
Accounts payable for construction in progress   1,501,464    - 

 

See notes to consolidated financial statements

 

4
 

 

HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES

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 June 30, 2012, the paid-in capital was approximately RMB15,000,000 ($2,381,293).

 

On March 8, 2012, the Company 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.

 

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
            
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.
March 8, 2012
   100%  Inactive

 

5
 

 

HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

 

2.Summary of significant accounting policies

 

Basis of presentation

 

The accompanying consolidated balance sheet as of June 30, 2012, which has been derived from audited financial statements, and the unaudited interim consolidated financial statements as of June 30, 2012 and for the three and six month periods ended June 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, have been condensed or omitted pursuant to such rules and regulations, although we believe 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 June 30, 2012, its consolidated results of operations for the three and six month periods ended June 30, 2012 and 2011, and its cash flows for the six month period ended June 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 SZ Highpower exceed their interests in SZ Highpower’s equity, the excess, and any further losses attributable to the stockholders and the non-controlling interests, is attributed to those interests.

 

6
 

 

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 six months ended June 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 six months ended June 30, 2012 and 2011 were 17.8% and 21%, respectively.

 

The Company’s top two third-party customers accounted for an aggregate of 33% of the accounts receivable as of June 30, 2012 and 25% 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 are classified as restricted cash in the Company’s balance sheets.

 

Accounts receivable

 

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

 

7
 

 

HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

 

2.Summary of significant accounting policies (continued)

 

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.

 

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

 

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.

 

8
 

 

HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

 

2.Summary of significant accounting policies (continued)

 

Deferred Revenue

 

Deferred revenue represents the government grants received related to developing property, and would be recognized over the useful lives of the assets. The Company received a grant of $648,298 on May 28, 2012 from 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, by 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 in accordance with ASC Topic 605. 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 costs directly attributable to the conduct of research and development programs, including the cost of salaries, employee benefits, materials, supplies, maintenance of research equipment. All costs associated with research and development are expensed as incurred.

 

Advertising

 

Advertising which generally represents the cost 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 six months ended June 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.

 

9
 

 

HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

 

2.Summary of significant accounting policies (continued)

 

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 June 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.

 

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.

 

10
 

 

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 forward foreign currency exchange contracts and future contracts related to nickel to reduce the impact of foreign currency exchange rate risk and nickel fair value risk. Management considered that the currency forwards and future contracts 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.

 

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 902,500 options and warrants outstanding as of June 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.

 

11
 

 

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 December 2011, The FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05. ASU 2011-12 defers the requirement that companies present reclassification adjustments for each component of accumulated other comprehensive income (“AOCI”) in both net income and other comprehensive income (“OCI”) on the face of the financial statements. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

 

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 will adopt this ASU beginning with its Quarterly Report on Form 10-Q for the three months ended September 30, 2012. There should be no material impact on the consolidated financial statements upon adoption.

 

Except for the ASUs above, in the period ended August 10, 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.

 

13
 

 

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 loss of derivative instruments related to currency forwards as an operating cost line item in the statement of operations, which was previously included in other income for settled transactions and other comprehensive income under cash flow hedge for unsettled transactions; 2) the separate presentation of research and development costs as an operating cost line item in the statement of operations, which was previously included in general and administrative costs; and 3) correcting accounting errors such as recognition of capitalized interest.

 

The Company also identified errors in the consolidated statements of operations and comprehensive income (loss) related to the weighted average number of common stock outstanding for diluted earnings per common share for the three months and six months ended June 30, 2011. The Company should exclude potential common stock in the diluted EPS computation in periods of losses from continuing operations, as their effect would be anti-dilutive.

 

The following table summarizes the adjustments made to the previously reported consolidated statement of operations and comprehensive income (loss) for the three and six months ended June 30, 2011, and consolidated statement of cash flows for the six months ended June 30, 2011.

 

Selected consolidated statement of operations and comprehensive income (loss) information for the three and six months ended June 30, 2011:

 

   Three months ended June 30, 2011   Six months ended June 30, 2011 
   As
previously
reported
   Corrections   As
corrected
   As
previously
reported
   Corrections   As
corrected
 
                         
Research and development costs   (873,383)   -    (873,383)   (1,508,461)   30,033    (1,478,428)
Selling and distribution costs   (980,663)   -    (980,663)   (2,166,813)   11,465    (2,155,348)
General and administrative costs,  including stock-based compensation   (2,098,497)   -    (2,098,497)   (4,163,837)   (41,498)   (4,205,335)
Gain (loss) on derivative instruments   (244,013)   400,393    156,380    (694,604)   460,408    (234,196)
                               
Income from operations   269,507    400,393    669,900    (242,000)   460,408    218,408 
Other income   176,222    (110,103)   66,119    408,770    (190,515)   218,255 
Interest expense   (233,677)   63,086    (170,591)   (386,314)   126,172    (260,142)
Other expense   -    -    -    (23,964)   23,964    - 
                               
Income before taxes   212,052    353,376    565,428    (243,508)   420,029    176,521 
                               
Net Income   75,035    353,376    428,411    (386,286)   420,029    33,743 
                               
Other comprehensive income (loss) - Loss(Income) on cash flow hedge   290,290    (290,290)   -    293,857    (293,857)   - 
                               
Comprehensive income   368,340    63,086    431,426    (108,197)   126,172    17,975 
                               
Weighted average number of common stock outstanding - Diluted   13,817,981    (235,320)   13,582,661    13,817,981    (235,403)   13,582,578 

 

14
 

 

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 six months ended June 30, 2011:

 

   Six months ended June 30, 2011 
   As previously
reported
   Corrections   As corrected 
             
Cash flows from operating activities               
Net (loss) income   (386,286)   420,029    33,743 
                
Adjustments to reconcile net income to net cash provided by operating activities:               
Allowance for doubtful accounts   -    61,026    61,026 
Equity gain in an associate   -    3,971    3,971 
Bad debt write off   56,821    (56,821)   - 
Gain on derivative instruments   694,604    (460,408)   234,196 
Changes in operating assets and liabilities               
Prepayments   (3,878,708)   (11,223)   (3,889,931)
Other receivables   -    11,223    11,223 
Inventories   946,233    (46,705)   899,528 
Net cash flows provided by operating activities   (5,592,176)   (78,908)   (5,671,084)
                
Cash flows from financing activities               
Proceeds from bank borrowings   12,595,292    (5,508,490)   7,086,802 
Proceeds from notes payable   8,161,654    10,225,663    18,387,317 
Repayment of notes payable   -    (10,225,663)   (10,225,663)
Proceeds from letter of credit   -    5,508,490    5,508,490 
Effect of foreign currency translation on cash and cash equivalents   387,639    78,908    466,547 

 

15
 

 

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

 

4.Accounts receivable, net

 

As of June 30, 2012 and December 31, 2011, accounts receivable include the following:

 

   June 30,   December 31, 
   2012   2011 
   (Unaudited)     
   $   $ 
         
Accounts receivable   26,333,600    21,520,763 
Less: allowance for doubtful debts   579,894    391,345 
           
    25,753,706    21,129,418 

 

The Company experienced bad debt expenses of $282,127 and $61,026, respectively, during the six months ended June 30, 2012 and 2011, and $261,909 and $55,804, respectively, during the three months ended June 30, 2012 and 2011.

 

The Company wrote off $91,295 and $56,821, respectively, in accounts receivable in the six months ended June 30, 2012 and 2011. 

 

5.Prepayments

 

   June 30,   December 31, 
   2012   2011 
   (Unaudited)     
   $   $ 
         
Purchase deposits paid   1,653,566    2,718,685 
Advance to staff   146,868    48,678 
Other deposits and prepayments   795,344    871,679 
Valued-added tax prepayment   1,042,711    612,681 
           
    3,638,489    4,251,723 

 

6.Other receivables

 

   June 30,   December 31, 
   2012   2011 
   (Unaudited)     
   $   $ 
         
Deposit for land use right   497,704    755,354 
Other receivable   291,430    286,260 
           
    789,134    1,041,614 

 

16
 

 

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

 

7.Inventories

 

   June 30,   December 31, 
   2012   2011 
   (Unaudited)     
   $   $ 
         
Raw materials   4,364,271    4,508,201 
Work in progress   1,886,424    900,440 
Finished goods   9,960,920    7,923,101 
Packing materials   11,728    15,581 
Consumables   145,236    165,619 
           
    16,368,579    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. $462,263 and $523,921 was written down for inventories as of June 30, 2012 and December 31, 2011, respectively.

 

8.Property, plant and equipment, net

 

   June 30,   December 31, 
   2012   2011 
   (Unaudited)     
   $   $ 
Cost        
Construction in progress   17,321,808    14,016,485 
Furniture, fixtures and office equipment   2,868,040    2,734,321 
Leasehold improvement   97,539    98,305 
Machinery and equipment   14,067,257    13,429,090 
Motor vehicles   1,228,547    1,225,948 
Building   266,624    268,717 
    35,849,815    31,772,866 
Less: accumulated depreciation   6,870,377    6,310,210 
           
    28,979,438    25,462,656 

 

The Company recorded depreciation expenses of $931,714 and $825,008 for the six months ended June 30, 2012 and 2011, respectively, and $470,414 and $409,043 for the three months ended June 30, 2012 and 2011, respectively.

 

The capitalized interest recognized in construction in progress was $742,923 and $492,716 as of June 30, 2012 and December 31, 2011, respectively.

 

No property, plant and equipment were pledged as collateral for bank loans as of June 30, 2012 and December 31, 2011.

 

17
 

 

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

 

9.Land use right, net

 

   June 30,   December 31, 
   2012   2011 
   (Unaudited)     
   $   $ 
         
Cost          
Land located in Huizhou   3,378,872    3,405,396 
Land located in Ganzhou   1,318,164    - 
    4,697,036    3,405,396 
Accumulated amortization   (312,886)   (272,431)
           
    4,384,150    3,132,965 

 

As of June 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 $4,384,150. 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 $42,830 and $39,646 for the six months ended June 30, 2012 and 2011, respectively, and $23,144 and $16,828 for the three months ended June 30, 2012 and 2011, respectively.

 

The land use right for land located in Huizhou City was pledged as collateral for bank loans as of June 30, 2012 and December 31, 2011.

 

10.Intangible asset, net

 

   June 30,   December 31, 
   2012   2011 
   (Unaudited)     
   $   $ 
Cost          
Consumer battery license fee   1,000,000    1,000,000 
Accumulated amortization   (275,000)   (250,000)
           
    725,000    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 six months ended June 30, 2012 and 2011 was $25,000 and $25,000 for the three months ended June 30, 2012 and 2011.

 

18
 

 

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

 

11.Other payables and accrued liabilities

 

   June 30,   December 31, 
   2012   2011 
   (Unaudited)     
   $   $ 
         
Accrued expenses   2,756,255    4,348,657 
Royalty payable   925,089    877,905 
Sales deposits received   1,676,010    1,196,711 
Other payables   3,003,899    517,790 
           
    8,361,253    6,941,063 

 

12.Taxation

 

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.

 

19
 

 

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

 

12.Taxation (continued)

 

The components of the provision for income taxes are:

 

   Three months ended   Six months ended 
   June 30,   June 30, 
   2012   2011   2012   2011 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
   $   $   $   $ 
Current   213,774    137,017    309,622    142,778 
Deferred   149,167    -    106,644    - 
                     
Total   362,941    137,017    416,266    142,778 

 

The reconciliation of income taxes expenses computed at the statutory tax rate applicable to the Company is as follows:

 

   Three months ended   Six months ended 
   June 30,   June 30, 
   2012   2011   2012   2011 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
   $   $   $   $ 
(Loss) income before tax   837,632    565,428    872,648    176,521 
                     
Provision for income taxes at                    
applicable income tax rate   259,430    105,191    234,102    (52,536)
Effect of preferential tax rate   (109,868)   (98,185)   (173,445)   (88,831)
Non-deductible expenses   966    329,328    112,777    342,013 
Change in valuation allowance   212,413    (199,317)   242,832    (57,868)
                     
Effective enterprise income tax   362,941    137,017    416,266    142,778 

 

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.

 

   June 30,   December 31, 
   2012   2011 
   (Unaudited)     
   $   $ 
Tax loss carry-forward   442,409    591,542 
Allowance for doubtful receivables   71,144    85,400 
Allowance for inventory obsolescence   115,566    134,248 
Fair value change of currency forwards   288    (19,415)
Difference for sales cut-off   115,921    65,434 
           
    745,328    857,209 

 

20
 

 

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

 

13.Notes payable

 

Notes payable are presented to certain suppliers as a payment against the outstanding trade payables. These notes payable are bank guarantee promissory notes which are non-interest bearing and generally mature within six months. The outstanding bank guarantee promissory notes are secured by restricted cash deposited in banks. Outstanding notes payable were $20,801,187 and $17,909,843 as of June 30, 2012 and December 31, 2011, respectively.

 

14.Short-term loans

 

   June 30,   December 31, 
   2012   2011 
   (Unaudited)     
   $   $ 
           
Guaranteed and repayable within one year Short- term bank loans   14,179,842    9,545,383 

 

As of June 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 $3,074,773 pledged as collateral.

 

The loans were primarily obtained for general working capital, carried interest rates ranging from 3.21% to 7.55% per annum.

 

15.Long-term loans

 

   June 30,   December 31, 
   2012   2011 
   (Unaudited)     
   $   $ 
           
Secured and repayable over one year Long- term bank loans   7,867,697    - 

 

As of June 30, 2012, the above bank borrowings were for working capital purposes and were guaranteed by personal guarantees executed by certain directors of the Company. The loans summarized in below table were five-year long-term loans, with interest rate of 7.59% per annum with interest payable quarterly.

 

Lender  Amount   Annual rate   Date of Start  Repayment date
   $           
               
Bank of China   1,573,539    7.590%  2012-1-21  2017-1-21
Bank of China   3,147,079    7.590%  2012-2-15  2017-2-15
Bank of China   3,147,079    7.590%  2012-3-28  2017-3-28
                 
    7,867,697            

 

21
 

 

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

 

16.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 June 30, 2012, approximately 1,303,000 shares of our common stock remained available for issuance under the 2008 Plan.

 

Share-based compensation related to employees

 

       Weighted     
       Average   Contractual 
   Number   Exercise   Term in 
   of Share   Price   Years 
             
Outstanding, January 1,2012   630,000   $3.04      
                
Granted   100,000   $1.15      
Exercised   -    -      
Forfeited   (65,000)  $2.51      
                
Outstanding, June 30, 2012   665,000   $2.81    8.86 
                
Exercisable, June 30, 2012   120,000   $3.48    8.58 

 

22
 

 

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

 

16.Share-based compensation expenses (continued)

 

Share-based compensation related to employees (continued)

 

During the six months ended June 30, 2012 the Company granted 100,000 shares to one employee at an exercise price of $1.15 per share. During the six months ended June 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 June 30, 2012.The weighted-average fair value of options granted to employees for the six month periods ended June 30, 2012 and 2011 were $0.74 per share and $1.52 per share, respectively, were calculated using the Black-Scholes pricing model, with the following weighted-average assumptions:

 

   Three months ended June 30,   Six months ended June 30, 
   2012   2011   2012   2011 
                 
Expected volatility   -    40.35%   71.78%   40.01%
Risk-free interest rate   -    2.06%   1.09%   2.47%
Expected term from grant date (in years)   -    6.00    6.25    6.16 
Dividend rate   -    -    -    - 
Forfeiture rate   -    -    9.78%   3.51%
                     
Fair value   -   $0.75   $0.74   $1.52 

 

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.

 

Share-based compensation related to nonemployees

 

   Number   Exercise   Contractual Term 
   of Share   Price   Years 
             
Outstanding, January 1, 2012   15,000   $3.41      
                
Granted   -    -      
Exercised   -    -      
Forfeited   -    -      
                
Outstanding, June 30, 2012   15,000   $3.41    8.67 
                
Exercisable, June 30, 2012   3,000   $3.41    8.67 

 

23
 

 

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

 

16.Share-based compensation expenses (continued)

 

Share-based compensation related to nonemployees (continued)

 

The measurement date for nonemployee options is the earlier of the date that a performance commitment is reached or the date at which performance is complete. The Company considers that the measurement date is the date the performance is complete (the vesting date of the shares covered by the option).The stock-based compensation cost of options granted to nonemployees is initially measured on the grant date using the Black-Scholes model and is remeasured over the vesting period as earned. The resulting value is recognized as an expense over the period in which services are received.

 

During the six months ended June 30, 2011, the Company granted options to purchase 15,000 shares of common stock to a consultant at a per share exercise price of $3.41, in exchange for services from the consultant. The Company granted no options to nonemployees during the six months ended June 30, 2012.

 

The grant date fair values of stock options granted to nonemployees were calculated using the Black-Scholes pricing model with the following weighted-average assumptions:

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2012   2011   2012   2011 
Expected volatility   -    -    -    39.45%
Risk-free interest rate   -    -    -    2.53%
Expected term from grant date (in years)   -    -    -    6.50 
Dividend rate   -    -    -    - 
                     
Fair value   -    -    -   $1.22 

 

Total share-based payment expenses

 

No share-based compensation expense was capitalized in the periods presented. At June 30, 2012, the gross amount of unrecognized share-based compensation expense relating to unvested share-based awards held by employees was approximately $0.5 million, which the Company anticipates recognizing as a charge against income over a weighted average period of 2.58 years. At June 30, 2012, options to purchase 12,000 held by nonemployees were unvested and subject to remeasurement.

 

In connection with the grant of stock options to employees and nonemployees, the Company recorded share-based compensation charges of $51,831 and $261, respectively, for the three month period ended June 30, 2012 and stock-based compensation charges of $48,708 and $(148), respectively, for the three-month period ended June 30, 2011. The Company recorded share-based compensation charges of $92,632 and $533, respectively, for the six-month period ended June 30, 2012 and stock-based compensation charges of $276,419 and $761, respectively, for the six-month period ended June 30, 2011.

 

24
 

 

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

 

16.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 six month periods ended June 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.

 

25
 

 

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

 

17.Earnings per share

 

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 EPS 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 six months ended June 30, 2012 and 2011, and the three months ended June 30, 2012 and 2011.

 

   Three months ended June 30,   Six months ended June 30, 
   2012   2011   2012   2011 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
   $   $   $   $ 
Numerator:                
Net income attributable to the Company   503,714    428,411    506,899    33,743 
                     
Denominator:                    
Weighted-average shares outstanding   13,582,106    13,582,106    13,582,106    13,582,106 
Effect of dilutive securities   -    555    -    472 
                     
Denominator:                    
Weighted-average shares diluted   13,582,106    13,582,661    13,582,106    13,582,578 
Basic earnings per common share  attributable to the Company   0.04    0.03    0.04    - 
Diluted earnings per common share  attributable to the Company   0.04    0.03    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 current period 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 current period, since the stock’s average market price did not exceed the exercise price.

 

26
 

 

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

 

18.Share warrants

 

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 June 30, 2012, warrants to purchase 47,500 shares of common stock were still outstanding.

 

19.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 $507,397 and $402,316 for the six months ended June 30, 2012 and 2011, respectively, and $281,355 and $227,011 for the three months ended June 30, 2012 and 2011, respectively.

 

27
 

 

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

 

20.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 June 30, 2012 are as follows:

 

   $ 
2012   576,679 
2013   589,855 
2014   306,727 
2015   294,929 
2016   294,929 
      
    2,063,119 

 

Rent expenses for the six months ended June 30, 2012 and 2011 were $618,849 and $542,219, respectively, for the three months ended June 30, 2012 and 2011, rent expenses were $308,603 and $288,080, respectively.

 

Capital commitments and contingencies

 

The Company had contracted capital commitments of $2,010,634 for the construction of Ganzhou plant as of June 30, 2012, and $1,755,387 for the construction of the Huizhou plant as of December 31, 2011.

 

28
 

 

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

 

21.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.

 

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

 

   Three months ended June 30,   Six months ended June 30, 
   2012   2011   2012   2011 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
   $   $   $   $ 
Net revenue                    
Hong Kong and China   14,772,662    16,558,325    27,592,602    33,292,799 
Asia   2,345,866    1,852,180    3,464,946    3,327,630 
Europe   7,459,918    7,148,067    11,806,378    13,617,347 
North America   4,719,437    4,114,324    7,016,240    6,309,050 
South America   -    (2,363)   -    29,883 
Africa   27,690    -    48,190    - 
Others   52,109    37,621    52,109    82,111 
                     
    29,377,682    29,708,154    49,980,465    56,658,820 

 

   June 30,   December 31, 
   2012   2011 
   (Unaudited)     
   $   $ 
Accounts receivable          
Hong Kong and China   13,368,767    14,359,354 
Asia   1,468,229    740,289 
Europe   8,384,059    4,973,601 
North America   2,532,651    1,036,100 
South America   -    18,950 
Africa   -    1,124 
           
    25,753,706    21,129,418 

 

29
 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion relates to the financial condition and results of operations of Highpower International, Inc. (the “Company”) and its wholly-owned subsidiary Hong Kong Highpower Technology Company Limited (referred to herein as “HKHTC”), and HKHTC’s wholly-owned subsidiaries Shenzhen Highpower Technology Company Limited (“SZ Highpower”), Springpower Technology (Shenzhen) Company Limited (“SZ Springpower”), Icon Energy System Company Limited (“ICON”) and Huizhou Energy Technology (Huizhou) Co. (“HZ Highpower”) which has not yet commenced operations. SZ Highpower’s 60%-owned subsidiary, Ganzhou Highpower Technology Company Limited (“GZ Highpower”), and its other wholly-owned subsidiary, Huizhou Highpower Technology Company Limited (“HZ HTC”), which was founded on March 8, 2012, is scheduled to commence operations in August 2012.

 

Forward-Looking Statements

 

This management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and the related notes that are included in this Quarterly Report and the audited consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K for the year ended December 31, 2011 (the “Annual Report”).

 

This Quarterly Report contains forward-looking statements that involve substantial risks and uncertainties. All statements other than historical facts contained in this report, including statements regarding our future financial position, results of operations, cash flows, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words “anticipates,” “believes,” “expects, “plans,” “intends,” “seeks,” “estimates,” “projects,” “predicts” “could,” “should” “would” “will” “may,” “might”, and similar expressions, or the negative of such expressions, are intended to identify forward-looking statements. Such statements reflect our management’s current views with respect to future events and financial performance and involve risks and uncertainties, including, without limitation, the current economic downturn adversely affecting demand for our products; fluctuations in the cost of raw materials; our dependence on, or inability to attract additional, major customers for a significant portion of our net sales; our ability to increase manufacturing capabilities to satisfy orders from new customers; changes in the laws of the P.R.C. that affect our operations; our ability to complete construction at our new manufacturing facility on time; our ability to control operating expenses and costs related to the construction of our new manufacturing facility; the devaluation of the U.S. Dollar relative to the Renminbi; our dependence on the growth in demand for portable electronic devices and the success of manufacturers of the end applications that use our battery products; our responsiveness to competitive market conditions; our ability to successfully manufacture lithium batteries in the time frame and amounts expected; the market acceptance of our lithium products; changes in foreign, political, social, business and economic conditions that affect our production capabilities or demand for our products; and various other matters, many of which are beyond our control. Actual results may vary materially and adversely from those anticipated, believed, estimated or otherwise indicated should one or more of these risks or uncertainties occur or if any of the risks or uncertainties described in elsewhere in this report or in the “Risk Factors” section of our Annual Report occur. Consequently, all of the forward-looking statements made in this filing are qualified by these cautionary statements and there can be no assurance of the actual results or developments.

 

Overview

 

Highpower was incorporated in the state of Delaware on January 3, 2006 and originally organized as a “blank check” shell company to investigate and acquire a target company or business seeking the perceived advantages of being a publicly held corporation. On November 2, 2007, we closed a share exchange transaction, pursuant to which we (i) became the 100% parent of HKHTC and its wholly-owned subsidiary, SZ Highpower, (ii) assumed the operations of HKHTC and its subsidiary and (iii) changed our name from Highpower Technology, Inc. to Highpower International, Inc. on October 20, 2010.

 

HKHTC was incorporated in Hong Kong in 2003, under the Companies Ordinance of Hong Kong. HKHTC formed HZ Highpower and SZ Springpower in 2008. HZ Highpower has not yet commenced business operations as of August 9, 2012. HKHTC formed another wholly-owned subsidiary, Icon Energy System Company Limited., a company organized under the laws of the P.R.C., in February 2011, and it commenced operations in July 2011.

 

30
 

 

SZ Highpower was founded in 2001 in the P.R.C. SZ Highpower formed a subsidiary, GZ Highpower, which commenced business operations in September 2010. On February 8, 2012, GZ Highpower increased its registered capital from RMB2,000,000 ($293,574) to RMB30,000,000 ($4,762,586). SZ Highpower holds 60% of the equity interest of GZ Highpower and four other founding management members hold the remaining 40%. In March 8, 2012, SZ Highpower founded another wholly-owned subsidiary, Huizhou Highpower Technology Company Limited, under the P.R.C. laws. HZ HTC engages in the manufacture of batteries.

 

Through SZ Highpower, we manufacture Nickel Metal Hydride (“Ni-MH”) batteries for both consumer and industrial applications. We have developed significant expertise in Ni-MH battery technology and large-scale manufacturing that enables us to improve the quality of our battery products, reduce costs, and keep pace with evolving industry standards. In 2008, we commenced manufacturing two lines of Lithium-Ion (“Li-ion”) and Lithium polymer rechargeable batteries through SZ Springpower for higher-end, high-performance applications, such as laptops, digital cameras and wireless communication products. Our automated machinery allows us to process key aspects of the manufacturing process to ensure high uniformity and precision, while leaving the non-key aspects of the manufacturing process to manual labor.

 

We employ a broad network of sales staff in China and Hong Kong, which target key customers by arranging in-person sales presentations and providing post-sale services. The sales staff works with our customers to better address customers’ needs.

 

In 2010, we began a new materials business in which we buy and resell certain raw materials related to our battery manufacturing operations. This new materials business generates revenue and income and helps us understand our raw material supply chain, control our raw material costs and ensure that we have a steady supply of raw materials for our battery manufacturing operations to reduce our reliance on external suppliers.

 

Critical Accounting Policies and Estimates

 

The Securities and Exchange Commission (“SEC”) defines critical accounting policies as those that are, in management's view, most important to the portrayal of our financial condition and results of operations and those that require significant judgments and estimates.

 

The preparation of these consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities at the date of our financial statements. We base our estimates on historical experience, actuarial valuations and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Some of those judgments can be subjective and complex and, consequently, actual results may differ from these estimates under different assumptions or conditions. While for any given estimate or assumption made by our management there may be other estimates or assumptions that are reasonable, we believe that, given the current facts and circumstances, it is unlikely that applying any such other reasonable estimate or assumption would materially impact the financial statements. The accounting principles we utilized in preparing our consolidated financial statements conform in all material respects to U.S. GAAP.

 

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.

 

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

 

31
 

 

Revenue Recognition. We recognize revenue in accordance with ASC Topic 605. 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.

 

We do not have arrangements for returns from customers and do not have any future obligations directly or indirectly related to product resale by the customer. We have no incentive programs.

 

Inventories. Inventories are stated at the lower of cost or market value. Costs are determined on a weighted-average method. Inventories include raw materials, packing materials, work-in-process, consumables 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. While 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.

 

Income Taxes. The Company recognizes deferred 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 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.

 

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.

 

Results of Operations

 

Three Months Ended June 30, 2012 and 2011

 

Net sales for the three months ended June 30, 2012 were $29.4 million compared to $29.7 million for the three months ended June 30, 2011, a decrease of 1.1%. The net decrease of $0.3 million was primarily due to a $5.4 million decrease in revenue from our New Materials business, which was partially offset by an increase of $3.4 million in revenue from our lithium batteries sold and an increase of $1.7 million in revenue from our Ni-MH batteries sold. Revenues from our New Materials business dropped to $408,579 for the three months ended June 30, 2012 from $5.8 million for the three months ended June 30, 2011, a decrease of 92.9%.The decrease in new materials business is due to strategic shift to full scale battery and e-waste recycling business. In addition, revenue from our lithium batteries sold and our Ni-MH batteries sold increased 55.6% and 9.7%, respectively. The increase in lithium batteries business is due to a 28.8% increase in the volume of batteries sold and a 20.8% increase in the average selling price resulting from our sale of higher quality and higher capacity battery products,.The increase in Ni-MH batteries business is due to a15.7% increase in the volume of Ni-MH battery units sold ,which was partly offset a 5.2% decrease in the average selling price of Ni-MH battery units sold.

 

32
 

 

Cost of sales consists of the cost of direct materials, direct labor and overhead allocated.  Costs of sales were $23.4 million for the three months ended June 30, 2012, as compared to $24.9 million for the same period in 2011. As a percentage of net sales, cost of sales decreased to 79.5% for the three months ended June 30, 2012 compared to 84% for the same period in 2011.  This decrease was attributable to decreases of raw material prices including a 29.4% decrease in the average price of nickel units, from the comparable period in 2011.

 

Gross profit for the three months ended June 30, 2012 was $6.0 million, or 20.5% of net sales, compared to $4.8 million, or 16.0% of net sales, for the same period in 2011. Management considers gross profit margin a key performance indicator in managing our business. Gross profit margins are usually a factor of cost of sales, product mix and demand for product. The increase in our gross profit margin for the three months ended June 30, 2012 was primarily due to a 5.0% decrease in the average unit cost of our Ni-MH batteries and an 8.2% decrease in the average unit cost of our lithium batteries sold.  In addition, revenue from our New Materials business decreased to $408,579 for the three months ended June 30, 2012 from $5.8 million for the three months ended June 30, 2011, which business has lower gross profit margins than our other business operations.

 

To cope with pressure on our gross margins we intend to control production costs by entering into long term contracts to lock in the raw material prices at the appropriate timing. Additionally, we have reorganized the Company’s production structure and have focused more attention on employee training to enhance efficiency. We also intend to expand our market share by investing in greater promotion of our products in regions such as the U.S. and Europe, and by expanding our sales team with more experienced international sales personnel. We have also begun production capacity expansion for our lithium batteries business to take advantage of the strong demand globally.

 

Research and development expenses were approximately $1.2 million, or 4.2% of net sales for the three months ended June 30, 2012 as compared to approximately $873,383 or 2.9% of net sales for the comparable period in 2011, an increase of 41.2%. The increase was due to the expansion of our workforce to expand our research and development and management functions.

 

Selling and distribution costs were $1.3 million, or 4.4% of net sales, for the three months ended June 30, 2012 compared to $980,663, or 3.3% of net sales, for the same period in 2011. The percentage increase was mainly due to the expansion of our sales team with more experienced international sales personnel.

  

General and administrative costs were $2.3 million, or 7.7% of net sales, for the three months ended June 30, 2012, compared to $2.1 million, or 7.1% of net sales, for the same period in 2011. The slight increase was due to an increase in labor costs.

 

We experienced (loss) gain on the exchange rate difference between the U.S. Dollar and the RMB of approximately $153,360 and $(298,000), respectively, in the three months ended June 30, 2012 and 2011. The difference on exchange rate gain (loss) was due to the appreciation of the U.S. Dollar relative to the RMB over the respective periods. 

 

We experienced a loss on derivative instruments of approximately $304,147 in the three months ended June 30, 2012, which included a gain of $13,345 on settled currency forwards and a loss of $317,492 on unsettled currency forwards, as compared to a gain of $156,380 for the comparable period in 2011, which included a loss of $244,013 on the forward contract of nickel, a gain of $110,103 on settled currency forwards and a gain of $290,290 on unsettled currency forwards which was previously presented in other comprehensive income under cash flow hedge in 2011. The correction resulted in a reduction of $290,290 for the net income for the three months ended June 30, 2011.

 

Interest expense was approximately $301,123 for the three months ended June 30, 2012, as compared to approximately $170,591 of interest expense for the same period in 2011. The fluctuation was primarily due to a $121,653 increase in interest expense related to bank borrowings from $233,677 for the three months ended June 30, 2011 to $355,330 for the same period of 2012, resulting from higher borrowing levels and interest rates. We increased borrowings under our long-term loan to approximately $7.9 million for the three months ended June 30, 2012 as compared to zero for the three months ended June 30, 2011. The increase in interest expense was also due to an $8,879 decrease in capitalized interest expenses from $63,086 for the three months ended June 30, 2011 to $54,207 for the three months ended June 30, 2012. The decrease in capitalized interest expenses was due to an increase in payments for the construction of the Huizhou facilities. Further increases in borrowing rates would further increase our interest expense, which would have a negative effect on our results of operations.

 

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Other income, which consists of bank interest income, government grants and sundry income, was approximately $61,185 for the three months ended June 30, 2012, as compared to approximately $66,119 for the three months ended June 30, 2011, a decrease of $4,934. The slight decrease was due to a decrease in bank interest income.

 

During the three months ended June 30, 2012, we recorded a provision for income tax expense of $362,941, as compared to income tax expense of $137,017 for the same period in 2011. The increase was due to the increased income before taxes during this period.

 

Net income attributable to the Company for the three months ended June 30, 2012 was $503,714 compared to net income attributable to the Company of $428,411 for the same period in 2011.

 

Six Months Ended June 30, 2012 and 2011

 

Net sales for the six months ended June 30, 2012 were $50.0 million compared to $56.7 million for the six months ended June 30, 2011, a decrease of 11.8%. The net decrease of $6.7 million was primarily due to a $12.0 million decrease in revenue from our New Materials business, which was partially offset by an increase of $4.9 million in revenue from our lithium batteries sold and increase of $406,959 in revenue from our Ni-MH batteries sold. Revenues from our New Materials business dropped to $733,572 for the six months ended June 30, 2012 from $12.7 million for the six months ended June 30, 2011, a decrease of 94.2%. The decrease in new materials business is due to strategic shift to full scale battery and e-waste recycling business. In addition, revenue from our lithium batteries sold and our Ni-MH batteries sold increased 49.6% and 1.2%, respectively. The increase in lithium batteries business is due to a 29.0% increase in the volume of batteries sold and a 16.0% increase in the average selling price resulting from our sale of higher quality and higher capacity battery products,The increase in Ni-MH batteries business is due to a 1.5% increase in the volume of Ni-MH battery units sold, which was partly offset by a 0.3% decrease in the average selling price of Ni-MH battery units sold.

 

Cost of sales consists of the cost of direct materials, direct labor and overhead allocated.  Costs of sales were $40.3 million for the six months ended June 30, 2012, as compared to $47.9 million for the same period in 2011. As a percentage of net sales, cost of sales decreased to 80.6% for the six months ended June 30, 2012 compared to 84.5% for the same period in 2011.  This decrease was attributable to decreases of raw material prices including a 28.1% decrease in the average price of nickel units, from the comparable period in 2011.

 

Gross profit for the six months ended June 30, 2012 was $9.7 million, or 19.4% of net sales, compared to $8.8 million, or 15.5% net sales, for the same period in 2011. Management considers gross profit margin a key performance indicator in managing our business. Gross profit margins are usually a factor of cost of sales, product mix and demand for product. The increase in our gross profit margin for the six months ended June 30, 2012 was primarily due to a 4.2% decrease in the average unit cost of our lithium batteries sold.  In addition, revenue from our New Materials business decreased to $703,874 for the six months ended June 30, 2012 from $12.5 million for the six months ended June 30, 2011, which business has lower gross profit margins than our other business operations.

 

To cope with pressure on our gross margins we intend to control production costs by entering into long term contracts to lock in raw material prices at the appropriate timing. Additionally, we have reorganized the Company’s production structure and have focused more attention on employee training to enhance efficiency. We also intend to expand our market share by investing in greater promotion of our products in regions such as the U.S. and Europe, and by expanding our sales team with more experienced international sales personnel. We have also begun production capacity expansion for our lithium batteries business to take advantage of the strong demand globally.

 

Research and development expenses were approximately $2.1 million, or 4.2% of net sales for the six months ended June 30, 2012 as compared to approximately $.1.5 million, or 2.6% of net sales for the comparable period in 2011, an increase of 43.3%. The increase was due to the expansion of our workforce to expand our research and development and management functions.

 

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Selling and distribution costs were $2.5 million, or 5.0% of net sales, for the six months ended June 30, 2012 compared to $2.2 million, or 3.8% of net sales, for the same period in 2011. The percentage increase was mainly due to the expansion of our sales team with more experienced international sales personnel.

 

General and administrative costs were $4.3 million, or 8.6% of net sales, for the six months ended June 30, 2012, compared to $4.2 million, or 7.4% of net sales, for the same period in 2011. The slight increase was due to an increase in labor costs.

 

We experienced (loss) gain on the exchange rate difference between the U.S. Dollar and the RMB of approximately $122,030 and $(470,704), respectively, in the six months ended June 30, 2012 and 2011. The difference on exchange rate gain (loss) was due to the appreciation of the U.S. Dollar relative to the RMB over the respective periods.

 

We experienced a gain on derivative instruments of approximately $32,956 in the six months ended June 30, 2012, which included a gain of $64,234 on settled currency forwards and a loss of $31,278 on unsettled currency forwards, as compared to a loss of $234,196 for the comparable period in 2011, which included a loss of $694,604 on the forward contract of nickel, a gain of $166,551 on settled currency forwards and a gain of $293,857 on unsettled currency forwards which was previously presented in other comprehensive income under cash flow hedge in 2011. The correction resulted in a reduction of $293,857 of the net income for the six months ended June 30, 2011.

 

Interest expense was approximately $313,441 for the six months ended June 30, 2012, as compared to approximately $260,142 of interest expense for the same period in 2011. The fluctuation was due to a $178,263 increase in interest expense related to bank borrowings from $386,313 for the six months ended June 30, 2011 to $564,576 for the same period of 2012, resulting from higher borrowing levels and interest rates. We increased borrowings under our long-term loan to approximately $7.9 million for the six months ended June 30, 2012 as compared to zero for the six months ended June 30, 2011. The capitalized interest expenses increased by $124,964 from $126,171 for the six months ended June 30, 2011 to $251,135 for the six months ended June 30, 2012, which would offset the increase of interest expenses. The increase in capitalized interest expenses was due to an increase in payments for the construction of the Huizhou facilities. Further increases in borrowing rates would further increase our interest expense, which would have a negative effect on our results of operations.

 

Other income, which consists of bank interest income, government grants and sundry income, was approximately $228,218 for the six months ended June 30, 2012, as compared to approximately $218,255 for the six months ended June 30, 2011, an increase of $9,963. The increase was due to an increase in bank interest income.

 

During the six months ended June 30, 2012, we recorded a provision for income tax expense of $416,266, as compared to income tax expense of $142,778 for the same period in 2011. The increase was due to the income before taxes during this period.

 

Net income attributable to the Company for the six months ended June 30, 2012 was $506,899, compared to net income attributable to the Company of $33,743 for the same period in 2011.

 

Foreign Currency and Exchange Risk

 

Though the reporting currency is the US$, the Company maintains its financial records in the functional currency of Renminbi (“RMB”). Substantially all of our operations are conducted in the P.R.C. and we pay the majority of our expenses in RMB. Approximately 70% of our sales are made in U.S. Dollars. During the six months ended June 30, 2012, the exchange rate of the RMB to the U.S. Dollar devalued 0.2% from the level at the end of December 31, 2011. A future appreciation of the RMB against the U.S. Dollar would increase our costs when translated into U.S. Dollars and could adversely affect our margins unless we make sufficient offsetting sales. Conversion of RMB into foreign currencies is regulated by the People’s Bank of China through a unified floating exchange rate system. Although the P.R.C. government has stated its intention to support the value of the RMB, there can be no assurance that such exchange rate will not continue to appreciate significantly against the U.S. Dollar. Exchange rate fluctuations may also affect the value, in U.S. Dollar terms, of our net assets. In addition, the RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. Due to the volatility of the US Dollar to our functional currency, the Company put into place in 2008 a hedging program to attempt to protect it from significant changes to the US Dollar which affects the value of its US dollar receivables and sales. As of June 30, 2012, the Company had a series of currency forwards totaling a notional amount $30.5 million expiring from July 2012 to April 2013. The terms of these derivative contracts are generally for 24 months or less. Changes in the fair value of these derivative contracts are recorded in earnings to offset the impact of loss on derivative instruments. The net gains of $32,956 attributable to these activities are included in “gain (loss) of derivative instruments” for the six months ended June 30, 2012.

 

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Liquidity and Capital Resources

 

We had cash and cash equivalents of approximately $5.1 million as of June 30, 2012, as compared to $5.2 million as of December 31, 2011. Our funds are kept in financial institutions located in the P.R.C. which do not provide insurance for amounts on deposit.  Moreover, we are subject to the regulations of the P.R.C. which restrict the transfer of cash from the P.R.C., except under certain specific circumstances. Accordingly, such funds may not be readily available to us to satisfy obligations incurred outside the P.R.C. 

 

To provide liquidity and flexibility in funding our operations, we borrow amounts under bank facilities and other external sources of financing. As of June 30, 2012, we had in place general banking facilities with seven financial institutions aggregating $63.0 million. The maturity of these facilities is generally less than five years. The facilities are subject to regular review and approval. Certain of these banking facilities are guaranteed by our Chief Executive Officer, Mr. Dang Yu Pan and our subsidiaries, and contain customary affirmative and negative covenants for secured credit facilities of this type. However, these covenants do not have any impact on our ability to undertake additional debt or equity financing. Interest rates are generally based on the banks’ reference lending rates. No significant commitment fees are required to be paid for the banking facilities. As of June 30, 2012, we had utilized approximately $37.6 million under such general credit facilities and had available unused credit facilities of $25.4 million.

 

For the six months ended June 30, 2012, net cash provided by operating activities was approximately $1.6 million, as compared to net cash used in operating activities of $5.7 million for the comparable period in 2011. The net cash increase of $7.2 million provided by operating activities is primarily attributable to, among other items, an increase of $7.7 million in cash inflow from accounts payable, an increase of $4.5 million in cash inflow from prepayments, an increase of $1.4 million in cash inflow from other payable and accrued liabilities, an increase of $1.1 million in cash inflow from income taxes payable , which was significantly offset by a decrease of approximately $4.3 million in accounts receivable, a decrease of $3.8 million in inventories. The cash inflow increases in accounts payable and prepayments were, to a great extent, attributable to our increasingly strict recovery policies. The cash outflow increase in inventories was mainly due to an increase in our purchases of raw materials. The cash outflow increase in accounts receivable was due to extending in days sales outstanding from 66 days to 84 days.

 

Net cash used in investing activities was $9.8 million for the six months ended June 30, 2012 compared to $2.9 million for the comparable period in 2011. The net increase of $6.9 million cash used in investing activities was primarily attributable to an increase in the acquisition of plant and equipment for the new factory under construction in Huizhou, which we expect will be operational in August 2012. We are equipping the factory with new machines with more advanced manufacturing capabilities. In addition, we acquired 58,669 square meters land use right worth of $1,327,923 in Ganzhou, Jiangxi province, China in February 2012.

 

Net cash provided by financing activities was $8.3 million during the six months ended June 30, 2012, as compared to net cash provided by financing activities of $7.2 million for the six months ended June 30, 2011. The increase in net cash provided by financing activities was primarily attributable to an increase of $7.9 million in proceeds from long-term bank loans, a decrease of $7.2 million in repayment of short-term bank loans, an increase of $949,743 in proceeds from non-controlling interest, an increase of $1.3 million in proceeds from notes payable and a decrease of $6.4 million in repayment of notes payable, which was partly offset by a decrease of $1.2 million in proceeds from short-term bank loans, a decrease of $5.5 million in proceeds from letter of credit and a decrease of $220,083 in restricted cash. The significant increase was mainly due to an increase in our long-term loan to fund the new factory located in Huizhou. We also utilize notes payable to meet our working capital needs. The increase in restricted cash was caused by the increase in proceeds from notes payable.

 

For the six months ended June 30, 2012 and 2011, our inventory turnover was 3.3 times and 4.4 times, respectively. The average days outstanding of our accounts receivable at June 30, 2012 was 84 days, as compared to 66 days at June 30, 2011. Inventory turnover and average days outstanding are key operating measures that management relies on to monitor our business. In the next 12 months, we expect to expand our research, development and manufacturing of lithium-based batteries and anticipate additional capital expenditures.

 

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We are required to contribute a portion of our employees’ total salaries to the Chinese government’s social insurance funds, including medical insurance, unemployment insurance and job injuries insurance, and a housing assistance fund, in accordance with relevant regulations. Total contributions to the funds were approximately $281,355 and $277,011 for the three months ended June 30, 2012 and 2011, respectively and $507,397 and $402,316 for the six months ended June 30, 2012 and 2011, respectively. We expect the amount of our contribution to the government’s social insurance funds to increase in the future as we expand our workforce and operations.

 

Based upon our present plans, we believe that cash on hand, cash flow from operations and funds available under our bank facilities will be sufficient to meet our capital needs for the next 12 months.  However, our ability to maintain sufficient liquidity depends partially on our ability to achieve anticipated levels of revenue, while continuing to control costs. If we did not have sufficient available cash, we would have to seek additional debt or equity financing through other external sources, which may not be available on acceptable terms, or at all. Failure to maintain financing arrangements on acceptable terms would have a material adverse effect on our business, results of operations and financial condition.

 

The use of working capital is primarily for the maintenance of our accounts receivable and inventory. We provide our major customers with payment terms ranging from 30 to 75 days. Additionally, our production lead time is approximately 30 to 40 days, from the inspection of incoming materials, to production, testing and packaging. We need to keep a large supply of raw materials, work-in-process and finished goods inventory on hand to ensure timely delivery of our products to customers. We use two methods to support our working capital needs: (i) paying our suppliers under payment terms ranging from 30 to 60 days; and (ii) using short-term bank loans. Upon receiving payment for our accounts receivable, we pay our short-term loans. Our working capital management practices are designed to ensure that we maintain sufficient working capital.

 

Recent Accounting Pronouncements

 

In December 2011, The FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in ASU 2011-05. ASU 2011-12 defers the requirement that companies present reclassification adjustments for each component of accumulated other comprehensive income (“AOCI”) in both net income and other comprehensive income (“OCI”) on the face of the financial statements. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

 

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 improve 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 will adopt this ASU beginning with its Quarterly Report on Form 10-Q for the three months ended September 30, 2012. There should be no material impact on the consolidated financial statements upon adoption.

 

Except for the ASUs above, in the period ended August 10, 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.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not required for a smaller reporting company.

 

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Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain “disclosure controls and procedures”, which are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, as appropriate to allow timely decisions regarding required disclosure.

 

Based on an evaluation carried out as of the end of the period covered by this quarterly report, under the supervision and with the participation of our management, including our CEO and CFO, who have concluded that, our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) were effective as of June 30, 2012.

 

Changes in Internal Control over Financial Reporting

 

Based on the evaluation of our management as required by paragraph (d) of Rule 13a-15 of the Exchange Act, there were no changes in our internal control over financial reporting that occurred during our quarter ended June 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Part II. Other Information

 

Item 1. Legal Proceedings

 

On August 20, 2007, a lawsuit was filed against Shenzhen Highpower and various other defendants by Energizer, S.A. in the United States District Court for the Southern District of New York. The lawsuit arises out of a fire that occurred on a cargo vessel carrying batteries sold to Energizer by Shenzhen Highpower that resulted in damages to various third parties. Energizer alleges that it is entitled to indemnification from Shenzhen Highpower for any damages or losses that it becomes liable to pay to third parties as a result of the fire. Energizer seeks indemnity and/or contribution from Shenzhen Highpower for such sums, together with expenses, including attorneys’ fees and costs.

 

On June 25, 2012, Shenzhen Highpower paid USD1,500,000 along with the contributions from other defendant parties involved in the case through third party mediation. Subsequently, the litigation was withdrawn. Shenzhen Highpower is indemnified from any further liabilities. Energizer continues to be one of our customers.

 

Item 2.  Unregistered Sale of Equity Securities and Use of Proceeds

 

None.

 

Item 3.  Default Upon Senior Securities

 

None.

 

Item 4.  Mine Safety Disclosures

 

Not applicable.

 

Item 5.  Other Information

 

Zhuhai China Resources Bank of Co., Ltd., Shenzhen Branch

 

On April 28, 2012, SZ Highpower entered into a credit contract revolving line of credit in the amount of RMB40,000,000(US$6.3 million)with Zhuhai China Resources Bank Co., Ltd, Shenzhen Branch. The Comprehensive Credit Line is jointly guaranteed by SZ Springpower and our Chief Executive Officer, Mr. Dang Yu Pan, and expires on April 28, 2013.

 

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The following events constitute a default under the Comprehensive Credit Line: SZ Highpower offers false information or hides true and important information to Zhuhai China Resources Bank Co., Ltd, Shenzhen Branch, does not cooperate with the investigation, reviewing, and inspection; SZ Highpower does not accept supervision of Zhuhai China Resources Bank Co., Ltd, Shenzhen Branch about the usage situation of the credit or involved operation and financial activities; SZ Highpower does not use the loan and/or other credit according to the Contract and the specific contract; SZ Highpower does not repay the loan, advances and other credit capital and interest timely and fully according to the Contract and the specific contract; SZ Highpower does not repay the loan, advances and other credit capital and interest of SZ Highpower in other financial institution timely and fully; SZ Highpower assigns the credit in the Contract to a third party with the agreement of Zhuhai China Resources Bank Co., Ltd, Shenzhen Branch, or manages and demands the matured claim indifferently, or disposes of existing assets with no cost or other inappropriate method; or the occurrence of other situations Zhuhai China Resources Bank Co., Ltd, Shenzhen Branch thinks may damage the legitimate rights of Zhuhai China Resources Bank Co., Ltd, Shenzhen Branch, If any of the following occur and the guarantor refuses to eliminate the condition or SZ Highpower does not cooperate with the bank to remedy the situation, SZ Highpower shall be in breach of the agreement: the guarantor hides its actual ability of undertaking guarantee responsibility, or do not acquire the authorization of the competent authority; the guarantor does not apply for the annual inspection of the registration procedure on time; the guarantor manages and demands the matured claim indifferently, or disposes existing assets with no cost or other inappropriate method, If any of the following occur and a mortgagor refuses to eliminate the condition or SZ Highpower does not cooperate with the bank to remedy the situation, SZ Highpower shall be in breach: the mortgagor does not have the ownership or disposition of pledges, or the ownership is in controversy; the pledges may have situations such as leased, closed down, detained, superintended, exist legal precedent priority (including but not limited the priority of construction), and/or hid these situations; the mortgagor transfers, leases, re-pledges or disposes pledges with inappropriate method without the writing agreement of Zhuhai China Resources Bank Co., Ltd, Shenzhen Branch, or has the writing agreement of Zhuhai China Resources Bank Co., Ltd, Shenzhen Branch, but does not repay the loan SZ Highpower owes to Zhuhai China Resources Bank Co., Ltd, Shenzhen Branch, using the income of disposal of pledges according to the requirements of Zhuhai China Resources Bank Co., Ltd, Shenzhen Branch; the mortgagor does not safe keep, maintain, repair the pledges, and result in depreciation and damages on pledges; or the mortgagor’s behavior endangers the pledges, result in depreciation on the pledges value; or during the mortgage period, the mortgagor insures for the pledges not according to the requirements of Zhuhai China Resources Bank Co., Ltd, Shenzhen Branch.

 

If any of the events of default under the contract occur, China Resources Bank has the right to taking the following measures respectively or simultaneously: reduce line of credit in the Contract, or stop the use of the remaining credit amount; take back capital and interest and related costs of issued loans contained in the maximum line of credit in advance; during the credit period, Zhuhai China Resources Bank Co., Ltd, Shenzhen Branch can request SZ Highpower add the amount of security, or transfer the deposits of other accounts of SZ Highpower opened in Zhuhai China Resources Bank Co., Ltd, Shenzhen Branch to the security account for paying off the security provided by Zhuhai China Resources Bank Co., Ltd, Shenzhen Branch in the Contract in the future, or deposit them in a third party for the security Zhuhai China Resources Bank Co., Ltd, Shenzhen Branch to pay for SZ Highpower in advance in future; deduct any deposits on the bank accounts of SZ Highpower opened in all branches of Zhuhai China Resources Bank Co., Ltd, Shenzhen Branch and Zhuhai China Resources Bank Co., Ltd., for pay off of all debts in the Contract and specific contract; SZ Highpower should pay all the losses caused to Zhuhai China Resources Bank Co., Ltd, Shenzhen Branch because of the breaking contract by SZ Highpower; and has the right to retain the recourse under the Contract.

 

Loan Agreement with Wing Lung Bank Limited

 

On April 2, 2012, Hong Kong Highpower Technology Company Limited entered into an agreement for banking facilities with Wing Lung Bank Limited with facility limits of HKD21,000,000 ($3.3 million), with terms of one year. The interest rate is 2.65% per annum above Hong Kong Interbank Offered Rate.

 

The following events constitute an event of default under the Contract: HKHTC’s failure to provide any documents requested by Wing Lung Bank, including but not limited, to proof supporting the disposal of loan proceeds in accordance with the approved loan purpose , any substantial change to the general nature of the existing business, and any adverse changes affecting the company, and any difficulty in repaying or servicing outstanding interest and principal; HKHTC’s failure to apply proceeds of any drawing only for the purpose as set out in this letter; HKHTC’s unauthorized transfer the proceeds of any drawing to any account maintained by HKHTC or any person or corporation with any branch or office of any financial institution in the People’s Republic of China; HKHTC’s failure to apply proceeds of any drawing in compliance with relevant laws and regulations of Hong Kong and the People’s Republic of China; HKHTC’s failure to deliver certified copies of its audited accounts to Wing Lung Bank within 180 days after each financial year end, together with a certificate signed by directors in compliance with all the terms and conditions.

 

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Item 6. Exhibits

 

(a)           Exhibits

 

Exhibit    
Number   Description of Document
     
10.1   Bank loan contract dated April 28, 2012 by and between Zhuhai China Resources Bank of Co., Ltd., Shenzhen Branch and Shenzhen Highpower and corresponding guarantee agreements (translated to English)
10.2   Bank Loan contract dated April 20, 2012 by and between Wing Lung Bank  and Hong Kong Highpower Technology Company Limited.
31.1   Certification of Chief Executive Officer Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2   Certification of Chief Financial Officer Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1   Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

  This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

 

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HIGHPOWER INTERNATIONAL, INC.

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  Highpower International, Inc.
     
Dated: August 16, 2012   /s/ Dang Yu Pan
  By: Dang Yu Pan
  Its: Chairman of the Board and Chief Executive Officer (principal executive officer)
     
    /s/ Henry Sun
  By: Henry Sun
  Its: Chief Financial Officer (principal financial and accounting officer)

 

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XNAS:HPJ Highpower International Inc Quarterly Report 10-Q Filling

Highpower International Inc XNAS:HPJ Stock - Get Quarterly Report SEC Filing of Highpower International Inc XNAS:HPJ stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

XNAS:HPJ Highpower International Inc Quarterly Report 10-Q Filing - 6/30/2012
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