Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form 10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
|
For
the Quarterly Period Ended June 30, 2008
|
|
OR
|
|
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For
the transition period
from to
Commission
File No.: 000-52103
HONG
KONG HIGHPOWER TECHNOLOGY, INC.
(Exact
name of Registrant as specified in its charter)
Delaware
|
|
20-4062622
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer
Identification
Number)
|
Building
A1, Luoshan Industrial Zone, Shanxia, Pinghu, Longgang, Shenzhen, Guangdong,
518111,
People’s
Republic of China
(ADDRESS
OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)
(86)
755-89686238
(COMPANY’S
TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No o
Indicate
by check mark whether the registrant 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.
|
|
Accelerated
filer ¨
|
|
|
|
Non-accelerated
filer x
|
|
Smaller
reporting company ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No x
The
registrant had 13,562,596 shares of common stock, par value $0.001 per share,
outstanding as of August 12, 2008.
HONG
KONG HIGHPOWER TECHNOLOGY, INC.
FORM 10-Q
For
the Quarterly Period Ended June 30, 2008
INDEX
|
|
|
|
Page
|
Part I
|
|
Financial
Information
|
|
|
|
|
|
|
|
|
Item
1.
|
Financial
Statements
|
1
|
|
|
|
|
|
|
|
|
|
(a)
|
Balance
Sheets as of June 30, 2008 (Unaudited) and December 31, 2007
|
1
|
|
|
|
|
|
|
|
|
|
(b)
|
Statements
of Operations for the Three and Six Months Ended June 30, 2008 and
2007
(Unaudited)
|
3
|
|
|
|
|
|
|
|
|
|
(c)
|
Statements
of Cash Flows for the Six Months Ended June 30, 2008 and 2007
(Unaudited)
|
4
|
|
|
|
|
|
|
|
|
|
(d)
|
Notes
to Financial Statements (Unaudited)
|
6
|
|
|
|
|
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
27
|
|
|
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
33
|
|
|
|
|
|
|
|
Item
4.
|
Controls
and Procedures
|
33
|
|
|
|
|
|
Part II
|
|
Other
Information
|
|
|
|
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
34
|
|
|
|
|
|
|
|
Item
1A.
|
Risk
Factors
|
34
|
|
|
|
|
|
|
|
Item
2.
|
Unregistered
Sale of Equity Securities and Use of Proceeds
|
48
|
|
|
|
|
|
|
|
Item
3.
|
Default
Upon Senior Securities
|
49
|
|
|
|
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
49
|
|
|
|
|
|
|
|
Item
5.
|
Other
Information
|
49
|
|
|
|
|
|
|
|
Item
6.
|
Exhibits
|
49
|
|
|
|
|
|
Signatures
|
|
|
|
50
|
Part I.
Financial Information
Item
1. Financial Statements
HONG
KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Stated
in US Dollars)
|
|
As
of
|
|
|
|
June
30,
|
|
December
31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Audited)
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
2,999,604
|
|
|
1,489,262
|
|
Restricted
cash
|
|
|
6,873,512
|
|
|
5,453,650
|
|
Accounts
receivable
|
|
|
12,678,294
|
|
|
15,906,175
|
|
Notes
receivable
|
|
|
295,835
|
|
|
386,482
|
|
Prepaid
expenses and other receivables – Note 8
|
|
|
6,198,518
|
|
|
2,501,796
|
|
Deferred
charges – Stock-based compensation – Note 9
|
|
|
476,666
|
|
|
|
|
Inventories,
net – Note 10
|
|
|
20,153,229
|
|
|
14,371,289
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
49,675,658
|
|
|
40,108,654
|
|
Deferred
tax assets – Note 7
|
|
|
87,134
|
|
|
28,277
|
|
Deposit
paid for acquisition of machinery
|
|
|
-
|
|
|
1,115,123
|
|
Plant
and equipment, net – Note 11
|
|
|
5,653,651
|
|
|
3,789,382
|
|
Leasehold
land
|
|
|
3,126,977
|
|
|
2,928,495
|
|
Intangible
asset – Note 12
|
|
|
925,000
|
|
|
950,000
|
|
Currency
forward – Note 3
|
|
|
29,102
|
|
|
-
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
|
59,497,522
|
|
|
48,919,931
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Current
Liabilities :
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
22,905,357
|
|
|
19,561,118
|
|
Other
payables accrued liabilities – Note 13
|
|
|
3,585,622
|
|
|
2,320,956
|
|
Income
tax payable
|
|
|
366,991
|
|
|
73,768
|
|
Bank
borrowings – Note 14
|
|
|
16,844,321
|
|
|
15,410,542
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
43,702,291
|
|
|
37,366,384
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
43,702,291
|
|
|
37,366,384
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES – Note 17
|
|
|
|
|
|
|
|
(continued)
HONG
KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS (Continued)
(Stated
in US Dollars)
|
|
As
of
|
|
|
|
June
30,
|
|
December
31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Audited)
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
|
|
|
|
|
Par
value: US$0.0001
|
|
|
|
|
|
|
|
Authorized:
10,000,000 shares
|
|
|
|
|
|
|
|
Issued
and outstanding: none
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
|
|
|
|
|
Par
value: US$0.0001
|
|
|
|
|
|
|
|
Authorized:
100,000,000 shares
|
|
|
|
|
|
|
|
Issued
and outstanding: 2008 – 13,562,596 shares (2007 – 12,798,846
shares)
|
|
|
1,356
|
|
|
1,280
|
|
Additional
paid-in capital
|
|
|
4,844,013
|
|
|
2,765,870
|
|
Accumulated
other comprehensive income
|
|
|
1,906,763
|
|
|
1,157,872
|
|
Retained
earnings
|
|
|
9,043,099
|
|
|
7,628,525
|
|
|
|
|
|
|
|
|
|
TOTAL
STOCKHOLDERS’ EQUITY
|
|
|
15,795,231
|
|
|
11,553,547
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
59,497,522
|
|
|
48,919,931
|
|
See
accompanying notes to condensed consolidated financial
statements.
HONG
KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Stated
in US Dollars)
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
19,021,476
|
|
|
20,466,844
|
|
|
36,853,038
|
|
|
32,006,349
|
|
Cost
of sales
|
|
|
(15,646,609
|
)
|
|
(17,619,570
|
)
|
|
(30,769,873
|
)
|
|
(28,102,660
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
3,374,867
|
|
|
2,847,274
|
|
|
6,083,165
|
|
|
3,903,689
|
|
Depreciation
|
|
|
(31,285
|
)
|
|
(28,240
|
)
|
|
(80,656
|
)
|
|
(54,044
|
)
|
Selling
and distribution costs
|
|
|
(547,697
|
)
|
|
(475,202
|
)
|
|
(961,720
|
)
|
|
(948,288
|
)
|
General
and administrative costs, including stock-based
compensation
|
|
|
(1,571,405
|
)
|
|
(865,646
|
)
|
|
(2,341,101
|
)
|
|
(1,800,945
|
)
|
Loss
on exchange rate difference
|
|
|
(330,788
|
)
|
|
(129,075
|
)
|
|
(835,675
|
)
|
|
(201,408
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
893,692
|
|
|
1,349,111
|
|
|
1,864,013
|
|
|
899,004
|
|
Change
in fair value of currency forwards – Note 3
|
|
|
-
|
|
|
-
|
|
|
29,102
|
|
|
-
|
|
Change
in fair value of warrants – Note 4
|
|
|
(71,250
|
)
|
|
-
|
|
|
(71,250
|
)
|
|
-
|
|
Other
income – Note 5
|
|
|
120,120
|
|
|
32,193
|
|
|
224,654
|
|
|
73,863
|
|
Interest
expenses – Note 6
|
|
|
(194,017
|
)
|
|
(111,165
|
)
|
|
(400,767
|
)
|
|
(248,640
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before taxes
|
|
|
748,545
|
|
|
1,270,139
|
|
|
1,645,752
|
|
|
724,227
|
|
Income
taxes – Note 7
|
|
|
(64,298
|
)
|
|
(96,049
|
)
|
|
(231,178
|
)
|
|
(52,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the period
|
|
|
684,247
|
|
|
1,174,090
|
|
|
1,414,574
|
|
|
671,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Foreign currency translation gain
|
|
|
516,654
|
|
|
138,116
|
|
|
748,739
|
|
|
263,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
|
1,200,901
|
|
|
1,312,206
|
|
|
2,163,313
|
|
|
934,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Basic
|
|
|
0.05
|
|
|
0.13
|
|
|
0.11
|
|
|
0.07
|
|
-
Diluted
|
|
|
0.05
|
|
|
0.13
|
|
|
0.11
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Basic
|
|
|
12,899,560
|
|
|
9,248,973
|
|
|
12,849,203
|
|
|
9,248,973
|
|
-
Diluted
|
|
|
12,906,483
|
|
|
9,248,973
|
|
|
12,852,665
|
|
|
9,248,973
|
|
See
accompanying notes to condensed consolidated financial
statements.
HONG
KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated
in US Dollars)
|
|
Six
months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
$
|
|
$
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
Net
income
|
|
|
1,414,574
|
|
|
671,427
|
|
Adjustments
to reconcile net income to net cash flows provided by operating activities
:
|
|
|
|
|
|
|
|
Amortization
of intangible asset
|
|
|
25,000
|
|
|
25,000
|
|
Bad
debts written off
|
|
|
1,258
|
|
|
21,121
|
|
Depreciation
|
|
|
345,674
|
|
|
262,222
|
|
Change
in fair value of currency forwards
|
|
|
(29,102
|
)
|
|
-
|
|
Loss
on disposal of plant and equipment
|
|
|
17,551
|
|
|
2,340
|
|
Stock
based compensation
|
|
|
114,584
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
(Increase)
decrease in -
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
4,209,356
|
|
|
(3,335,419
|
)
|
Notes
receivable
|
|
|
90,315
|
|
|
8,395
|
|
Deposit,
prepaid expenses and other receivables
|
|
|
(2,761,398
|
)
|
|
528,679
|
|
Inventories
|
|
|
(4,701,466
|
)
|
|
1,106,129
|
|
Increase
(decrease) in -
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
1,973,774
|
|
|
2,017,519
|
|
Other
payables and accrued liabilities
|
|
|
1,127,082
|
|
|
184,369
|
|
Income
tax payable
|
|
|
226,163
|
|
|
(142,687
|
)
|
|
|
|
|
|
|
|
|
Net
cash flows provided by operating activities
|
|
|
2,053,365
|
|
|
1,349,095
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
Acquisition
of plant and equipment
|
|
|
(1,935,077
|
)
|
|
(512,957
|
)
|
Acquisition
of leasehold land
|
|
|
-
|
|
|
(2,706,019
|
)
|
Proceeds
from disposal of plant and equipment
|
|
|
-
|
|
|
6,003
|
|
|
|
|
|
|
|
|
|
Net
cash flows used in investing activities
|
|
|
(1,935,077
|
)
|
|
(3,212,973
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock
|
|
|
1,963,067
|
|
|
-
|
|
Proceeds
from new short-term bank loans
|
|
|
-
|
|
|
454,465
|
|
Repayment
of short-term bank loans
|
|
|
(1,423,993
|
)
|
|
(279,171
|
)
|
Repayment
from other loans
|
|
|
2,475,343
|
|
|
-
|
|
Net
advancement of other bank borrowings
|
|
|
(670,659
|
)
|
|
3,027,151
|
|
Decrease
in restricted cash
|
|
|
(1,026,983
|
)
|
|
(666,473
|
)
|
Advance
to related parties
|
|
|
-
|
|
|
70,294
|
|
|
|
|
|
|
|
|
|
Net
cash flows provided by financing activities
|
|
|
1,316,775
|
|
|
2,606,266
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
1,435,063
|
|
|
742,388
|
|
Effect
of foreign currency translation on cash and cash
equivalents
|
|
|
75,279
|
|
|
14,490
|
|
Cash
and cash equivalents - beginning of period
|
|
|
1,489,262
|
|
|
488,070
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents - end of period
|
|
|
2,999,604
|
|
|
1,244,948
|
|
(continued)
HONG
KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Stated
in US Dollars)
|
|
Six
months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
$
|
|
$
|
|
Supplemental
disclosures of cash flow information :
|
|
|
|
|
|
|
|
Cash
paid for :
|
|
|
|
|
|
|
|
Interest
|
|
|
400,767
|
|
|
248,640
|
|
Income
taxes
|
|
|
5,015
|
|
|
195,487
|
|
See
accompanying notes to condensed consolidated financial
statements.
HONG
KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
1.
Corporation
information and
reorganization
Hong
Kong
Highpower Technology, Inc. (formerly SRKP 11, Inc. or “SRKP 11”) was
incorporated in the State of Delaware on January 3, 2006 to locate a suitable
acquisition candidate to acquire.
On
October 20, 2007, SRKP 11 entered into a share exchange agreement (the “Exchange
Agreement”) with Hong Kong Highpower Technology Company Limited (“HKHTC”), which
was incorporated in Hong Kong on July 4, 2003 under the Hong Kong Companies
Ordinance. HKHTC was organized principally to engage in the manufacturing and
trading of nickel metal hydride rechargeable batteries.
As
used
herein, the “Company” refers to Hong Kong Highpower Technology, Inc. and its
wholly-owned subsidiaries, HKHTC, Shenzhen Highpower Technology Co., Ltd. (“SZ
Highpower”), HZ Highpower Technology Co., Ltd. (“HZ Highpower”) and Sure Power
Technology (Shenzhen) Co., Ltd. (“Sure Power”), unless the context indicates
otherwise.
Pursuant
to the Exchange Agreement, SRKP 11 agreed to issue shares of its common stock
in
exchange for all of the issued and outstanding securities of HKHTC. On November
2, 2007, upon the closing of the Exchange Agreement, HKHTC had a total of
500,000 shares of common stock issued and outstanding, and SRKP 11 issued an
aggregate of 9,248,973 shares of its common stock to the shareholders of HKHTC
in exchange for all of the issued and outstanding securities of HKHTC on the
basis of 18.497946 shares of SRKP 11 for each share of HKHTC. The 9,248,973
shares of common stock issued to the shareholders of HKHTC in conjunction with
this transaction have been presented as outstanding for all periods presented.
In addition, immediately prior to the closing of the Exchange Agreement, SRKP
11
and certain of its stockholders agreed to cancel an aggregate of 1,597,872
shares of outstanding common stock, as a result of which there were 1,777,128
shares of common stock outstanding immediately prior to the share exchange
transaction.
On
November 2, 2007, concurrently with the close of the Exchange Agreement, the
Company received gross proceeds of $3,120,000 in a private placement transaction
(the “Private Placement”). Pursuant to subscription agreements entered into with
the investors, the Company sold an aggregate of 1,772,745 shares of common
stock
at $1.76 per share. The investors in the Private Placement also entered into
lock-up agreements pursuant to which they agreed not to sell their shares until
90 days after the Company’s common stock is listed or quoted on either the New
York Stock Exchange, American Stock Exchange, NASDAQ Global Market, NASDAQ
Capital Market or the OTC Bulletin Board, when one-tenth of their shares are
released from the lock-up agreement, after which their shares will automatically
be released from the lock-up agreement on a monthly basis pro rata over a
nine-month period. After commissions and expenses, the Company received net
proceeds of approximately $2,738,000 from the Private Placement.
HONG
KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
1.
|
Corporation
information and
reorganization (Continued)
|
Immediately
after the closing of the Exchange Agreement and Private Placement, the Company
had 12,798,846 shares of common stock issued and outstanding. Upon the closing
of the Exchange Agreement, the shareholders of HKHTC and their designees owned
approximately 72.3% of the Company’s issued and outstanding common stock, the
pre-existing shareholders of the Company owned approximately 13.9% of the
Company’s issued and outstanding common stock, and the investors in the Private
Placemen owned 13.8% of the Company’s issued and outstanding common stock.
Therefore, although HKHTC became the Company’s wholly-owned subsidiary, the
transaction was accounted for as a recapitalization in the form of a reverse
merger of HKHTC, whereby HKHTC was deemed to be the accounting acquirer and
was
deemed to have retroactively adopted the capital structure of SRKP 11. Since
the
transaction was accounted for as a reverse merger, the accompanying consolidated
financial statements reflect the historical consolidated financial statements
of
HKHTC for all periods presented, and do not include the historical financial
statements of SRKP 11. All cost associated with the reverse merger transaction,
consisting primarily of consideration paid to the pervious control parties
of
SRKP 11 and legal and investment banking fees and costs, were expensed as
incurred as a cost of the recapitalization.
In
December 2005, HKHTC underwent a group reorganization (the “Reorganization”),
which was approved by authorized institutions, pursuant to which it acquired
all
of the outstanding common stock of Shenzhen Highpower Technology Co., Ltd.
(“SZ
Highpower”) from its then existing stockholders, Pan Dangyu, Li Kai Man, Li
Wenliang and Ma Wenwei (the “Stockholders”). SZ Highpower was incorporated on
October 8, 2002 in the People’s Republic of China.
The
above-mentioned Stockholders were the common stockholders for both HKHTC and
SZ
Highpower. The acquisition was financed by a short-term loan bearing interest
of
$75,229 (equivalent to HK$584,000), which was charged to operations. The
transaction was accounted for as a corporate reorganization of entities under
common control.
As
a
result of the Reorganization in 2005, SZ Highpower became the wholly-owned
subsidiary of HKHTC and became its main operating business.
In
January 2008, HKHTC invested $749,971 to HZ Highpower. HZ Highpower became
a
wholly-owned subsidiary of HKHTC. HZ Highpower has not commenced business as
of
June 30, 2008.
On
June
20, 2008, HKHTC invested $250,000 in Sure Power, which became a wholly-owned
subsidiary of HKHTC. Sure Power commenced business in June 2008 and specializes
in researching and manufacturing Lithium-ion rechargeable batteries.
HONG
KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
|
Summary
of significant accounting
policies
|
Basis
of presentation
The
accompanying consolidated financial statements of the Company have been prepared
in accordance with generally accepted accounting principles in the United States
of America. The consolidated financial statements for the interim periods are
unaudited. In the opinion of management, these consolidated financial
statements, include all adjustments, including normal recurring adjustments,
necessary for their fair presentation. Interim results are not necessarily
indicative of results of operations to be expected for a full year. The
accompanying consolidated financial statements have been prepared in accordance
with the rules and regulations of the Securities and Exchange Commission and
do
not include all information and footnotes necessary for a complete presentation
of financial statements in conformity with accounting principles generally
accepted in the United States. These financial statements should be read in
conjunction with the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2007.
Consolidation
The
consolidated financial statements include the accounts of the Company and its
subsidiaries. Intercompany accounts and transactions have been eliminated in
consolidation.
Use
of
estimates
In
preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosures of contingent assets and liabilities at the dates of the financial
statements, as well as the reported amounts of revenues and expenses during
the
reporting periods. These accounts and estimates include, but are not limited
to,
the valuation of accounts receivable, inventories, deferred income taxes and
the
estimation on useful lives of plant and equipment. Actual results could differ
from those estimates.
Comparative
amounts
Certain
comparative amounts in prior periods have been reclassified to conform to the
current period’s presentation. The principal reclassification related to the
separate presentation of loss on exchange rate difference as an operating cost
line item in the statement of operations, which was previously included in
general and administrative costs. These reclassifications had no effect on
reported total assets, liabilities, stockholders’ equity, or net income
(loss).
HONG
KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
|
Summary
of significant accounting policies
(Continued)
|
Economic
and political risks
The
Company’s operations are conducted in the People’s Republic of China (the
“PRC”). Accordingly, the Company’s business, financial condition and results of
operations may be influenced by the political, economic and legal environment
in
the PRC and by the general state of the PRC economy.
The
Company’s operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America
and
Western Europe. These include risks associated with, among others, the
political, economic and legal environment and foreign currency exchange. The
Company’s results may be adversely affected by changes in the political and
social conditions in the PRC and by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency
conversion, remittances abroad and rates and methods of taxation, among other
things.
Concentrations
of credit risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of accounts receivable. The Company extends
credit based on an evaluation of the customer’s financial condition, generally
without requiring collateral or other security. In order to minimize the credit
risk, the management of the Company has delegated a team responsible for
determining credit limits, credit approvals and other monitoring procedures
to
ensure that follow-up action is taken to recover overdue debts. Further, the
Company reviews the recoverable amount of each individual trade debt at each
balance sheet date to ensure that adequate impairment losses are made for
irrecoverable amounts. In this regard, the directors of the Company consider
that the Company’s credit risk is significantly reduced. Other than set forth
below, no customers represented 10% or more of the Company’s net sales and
accounts receivable.
A
substantial percentage of the Company's sales are made to the following
customers. Details of the customers accounting for 10% or more of total net
revenue in any of the six months ended June 30, 2008 and 2007 are as
follows:
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Company
A
|
|
|
22
|
%
|
|
20
|
%
|
Company
B
|
|
|
*
|
|
|
14
|
%
|
*
Less than 10%
|
|
|
|
|
|
|
|
|
|
|
22
|
%
|
|
34
|
%
|
HONG
KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
|
Summary
of significant accounting policies
(Continued)
|
Concentrations
of credit risk (Continued)
Details
of the accounts receivable from the customers with the largest receivable
balances at June 30, 2008 and 2007 are as follows:
|
|
Percentage
of accounts
receivable
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Company
A
|
|
|
27
|
%
|
|
30
|
%
|
Company
B
|
|
|
22
|
%
|
|
31
|
%
|
Largest
receivable balances
|
|
|
49
|
%
|
|
61
|
%
|
Cash
and cash equivalents
Cash
and
cash equivalents include all cash, deposits in banks and other liquid
investments with initial maturities of three months or less.
Restricted
cash
Certain
cash balances are held as security for short-term bank borrowings and are
classified as restricted cash in the Company’s balance sheets.
Accounts
receivable
Accounts
receivable are stated at the original amount less an allowance made for doubtful
receivables, if any, based on a review of all outstanding amounts at period
end.
An allowance is also made when there is objective evidence that the Company
will
not be able to collect all amounts due according to the original terms of
receivables. Bad debts are written off when identified. The Company extends
unsecured credit to customers in the normal course of business and believes
all
accounts receivable in excess of the allowances for doubtful receivables to
be
fully collectible. The Company does not accrue interest on trade accounts
receivable.
The
Company experienced bad debts during the six months ended June 30, 2008 and
2007
of $1,258 and $21,121, respectively.
HONG
KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
|
Summary
of significant accounting policies
(Continued)
|
Inventories
Inventories
are stated at the lower of cost or market value. Cost is determined on a
weighted average basis and includes purchase costs, direct labor and factory
overheads. There are no significant freight charges, inspection costs and
warehousing costs incurred for any of the periods presented. In assessing the
ultimate realization of inventories, management makes judgments as to future
demand requirements compared to current or committed inventory levels. The
Company’s reserve requirements generally increase based on management’s
projected demand requirements, and decrease due to market conditions and product
life cycle changes. During the six months period ended June 30, 2008 and 2007,
the Company did not make any allowance for slow-moving or defective inventories.
The Company’s production process results in a minor amount of waste materials.
The Company does not record a value for the waste in its cost accounting. The
Company records proceeds on an as realized basis, when the waste is sold. The
Company has offset the proceeds from the sales of waste materials as a reduction
of production costs. Proceeds from the sales of waste materials were
approximately $208,052 and $160,170 for the six month periods ended June 30,
2008 and 2007, respectively. Generally, waste materials on hand at the end
of a
year are nominal.
Plant
and equipment
Plant
and
equipment are stated at cost less accumulated depreciation. Cost represents
the
purchase price of the asset and other costs incurred to bring the asset into
its
existing use. Maintenance, repairs and betterments, including replacement of
minor items, are charged to expense; major additions to physical properties
are
capitalized.
Depreciation
of plant and equipment is provided using the straight-line method over their
estimated useful lives at the following annual rates:
Furniture,
fixtures and office equipment
|
|
|
20
|
%
|
Leasehold
improvement
|
|
|
50
|
%
|
Machinery
and equipment
|
|
|
10
|
%
|
Motor
vehicles
|
|
|
20
|
%
|
Upon
sale
or disposition, the applicable amounts of asset cost and accumulated
depreciation are removed from the accounts and the net amount less proceeds
from
disposal is charged or credited to income.
HONG
KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2. Summary
of significant accounting policies (Continued)
Intangible
Assets and Long-Lived Assets
SFAS
No. 142, goodwill and Other Intangible Assets (“SFAS 142”), requires
purchased intangible assets other than goodwill to be amortized over their
useful lives unless these lives are determined to be indefinite.
Accordingly, the consumer battery license is being amortized over its useful
life of 20 years. The Company does not have any goodwill.
The
Company accounts for the impairment of long-lived assets, such as plant and
equipment, leasehold land and intangible assets, under the provisions of SFAS
No. 144, “Accounting for the Impairment of Long-Lived Assets (“SFAS 144”)”.
SFAS 144 establishes the accounting for impairment of long-lived tangible and
intangible assets other than goodwill and for the disposal of a business.
Pursuant to SFAS No. 144, the Company periodically evaluates, at least
annually, whether facts or circumstances indicate that the carrying value of
its
depreciable assets to be held and used may not be recoverable. If
such circumstances are determined to exist, an estimate of undiscounted future
cash flows produced by the long-lived asset, or the appropriate grouping of
assets, is compared to the carrying value to determine whether impairment
exists. In the event that the carrying amount of long-lived assets exceeds
the undiscounted future cash flows, then the carrying amount of such assets
is
adjusted to their fair value. The Company reports an impairment cost as a
charge to operations at the time it is recognized.
There
was
no impairment of long-lived assets for the six months ended June 30, 2008 and
2007.
Revenue
recognition
The
Company recognizes revenue when the goods are delivered and the customer takes
ownership and assumes risk of loss, collection of the relevant receivable is
probable, persuasive evidence of an arrangement exists and the sales price
is
fixed or determinable. Sales of goods represent the invoiced value of goods,
net
of sales returns, trade and allowances.
The
Company does not have arrangements for returns from customers and does not
have
any future obligations directly or indirectly related to product resales by
customers. The Company has no incentive programs.
Advertising
and promotion expenses
Advertising
and promotion expenses are charged to expense as incurred.
Advertising
and promotion expenses, which are included in selling and distribution costs,
were not material for the six months ended June 30, 2008 and
2007.
HONG
KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
|
Summary
of significant accounting policies
(Continued)
|
Income
taxes
The
Company uses the asset and liability method of accounting for income taxes
pursuant to SFAS No. 109, “Accounting for Income Taxes”. Under the asset and
liability method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and liabilities and
loss
carry forwards and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. The
Company has also adopted FIN 48, “Accounting for Uncertainty in Income Taxes -
an interpretation of FASB Statement No. 109”.
Comprehensive
income
The
Company has adopted SFAS No. 130, “Reporting Comprehensive Income”, which
establishes standards for reporting and display of comprehensive income, its
components and accumulated balances. Accumulated other comprehensive income
represents the accumulated balance of foreign currency translation adjustments
of the Company.
Foreign
currency translation
The
functional currency of the Company is the Renminbi (“RMB”). The Company
maintains its financial statements in the functional currency. Monetary assets
and liabilities denominated in currencies other than the functional currency
are
translated into the functional currency at rates of exchange prevailing at
the
balance sheet dates. Transactions denominated in currencies other than the
functional currency are translated into the functional currency at the exchange
rates prevailing at the dates of the transaction. Exchange gains or losses
arising from foreign currency transactions are included in the determination
of
net income for the respective period.
For
financial reporting purposes, the financial statements of the Company, which
are
prepared using the functional currency, are then translated into United States
dollars. Assets and liabilities are translated at the exchange rates at the
balance sheet dates and revenue and expenses are translated at the average
exchange rates and stockholders’ equity is translated at historical exchange
rates. Any translation adjustments resulting are not included in determining
net
income but are included in foreign exchange adjustment in other comprehensive
income, a component of stockholders’ equity.
HONG
KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
|
Summary
of significant accounting policies
(Continued)
|
Foreign
currency translation (Continued)
|
|
June 30, 2008
|
|
June 30, 2007
|
|
Quarter
end RMB : US$ exchange rate
|
|
|
6.8670
|
|
|
7.6120
|
|
Average
quarterly RMB : US$ exchange rate
|
|
|
7.0225
|
|
|
7.7014
|
|
The
RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No
representation is made that RMB amounts could have been, or could be, converted
into US$ at rates used in translation.
Transactions
and balances
Transactions
in foreign currencies are translated into the functional currency at the
approximate rates of exchange ruling on the transaction date. Exchange gains
and
losses resulting from this translation policy are recognized in the statements
of operations.
Fair
value of financial instruments
The
carrying values of the Company’s financial instruments, including cash and cash
equivalents, restricted cash, trade and other receivables, deposits, trade
and
other payables, approximate their fair values due to the short-term maturity
of
such instruments. The carrying amounts of borrowings approximate their fair
values because the applicable interest rates approximate current market
rates.
The
Company is exposed to certain foreign currency risk from export sales
transactions and the related accounts receivable as they will affect the future
operating results of the Company.
Basic
and diluted earnings per share
The
Company computes earnings per share (“EPS’) in accordance with Statement of
Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS No. 128”),
and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). SFAS No. 128
requires companies with complex capital structures to present basic and diluted
EPS. Basic EPS is measured as the income or loss available to common
shareholders divided by the weighted average common shares outstanding for
the
period. Diluted EPS is similar to basic EPS but presents the dilutive effect
on
a per share basis of potential common shares (e.g., convertible securities,
options, and warrants) as if they had been converted at the beginning of the
periods presented, or issuance date, if later. Potential common shares that
have
an anti-dilutive effect (i.e., those that increase income per share or decrease
loss per share) are excluded from the calculation of diluted
EPS.
HONG
KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
Summary
of significant accounting policies (Continued)
Adoption
of New Accounting Policies
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, “Fair Value Measurements” (“SFAS No. 157”), which establishes a
formal framework for measuring fair value under Generally Accepted Accounting
Principles (“GAAP”). SFAS No. 157 defines and codifies the many definitions of
fair value included among various other authoritative literature, clarifies
and,
in some instances, expands on the guidance for implementing fair value
measurements, and increases the level of disclosure required for fair value
measurements. Although SFAS No. 157 applies to and amends the provisions of
existing FASB and American Institute of Certified Public Accountants (“AICPA”)
pronouncements, it does not, of itself, require any new fair value measurements,
nor does it establish valuation standards. SFAS No. 157 applies to all other
accounting pronouncements requiring or permitting fair value measurements,
except for: SFAS No. 123R, share-based payment and related pronouncements,
the
practicability exceptions to fair value determinations allowed by various other
authoritative pronouncements, and AICPA Statements of Position 97-2 and 98-9
that deal with software revenue recognition. SFAS No. 157 was effective January
1, 2008. In late February 2008, the Company purchased currency forwards to
arbitrage the Dollar/RMB relationship. The Company used level one fair value
inputs to determine the value the currency forwards (see Note 6), Level 1 fair
value inputs include quoted prices (unadjusted) in active markets for
identical asset or liabilities that the Company has the ability to access as
of
the measurement date. Financial assets and liabilities utilizing Level 1 inputs
include active exchange-traded securities and exchange-based
derivatives.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities” (“SFAS No. 159”), which provides companies with an option to report
selected financial assets and liabilities at fair value. SFAS No. 159’s
objective is to reduce both complexity in accounting for financial instruments
and the volatility in earnings caused by measuring related assets and
liabilities differently. Generally accepted accounting principles have required
different measurement attributes for different assets and liabilities that
can
create artificial volatility in earnings. SFAS No. 159 helps to mitigate this
type of accounting-induced volatility by enabling companies to report related
assets and liabilities at fair value, which would likely reduce the need for
companies to comply with detailed rules for hedge accounting. SFAS No. 159
also establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes
for
similar types of assets and liabilities. SFAS No. 159 requires companies to
provide additional information that will help investors and other users of
financial statements to more easily understand the effect of the company’s
choice to use fair value on its earnings. SFAS No. 159 also requires companies
to display the fair value of those assets and liabilities for which the company
has chosen to use fair value on the face of the balance sheet. SFAS No. 159
does
not eliminate disclosure requirements included in other accounting standards,
including requirements for disclosures about fair value measurements included
in
SFAS No. 157 and SFAS No. 107. SFAS No. 159 was effective January 1,
2008.
HONG
KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
Summary
of significant accounting policies (Continued)
Recently
Issued Accounting Pronouncements
In
February 2008, FASB issued FASB Staff Position (“FSP”) FAS 157-1 “Application of
FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurement for Purposes of Lease
Classification or Measurement under Statement 13,” and FSP FAS 157-2, “Effective
Date of FASB Statement No. 157.” FSP FAS 157-1 amends the scope of SFAS No. 157
and other accounting standards that address fair value measurements for purpose
of lease classification or measurement under Statement 13. The FSP is effective
on initial adoption of Statement 157, FSP FAS 157-2 defers the effective date
of
SFAS No. 157 to fiscal years beginning after November 15, 2008 for all
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis. We do not expect the adoption of FSP FAS 157-1 and FSP FAS 157-2 will
have a material impact on our consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” and SFAS
No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an
amendment to ARB No. 51”. SFAS No. 141(R) and SFAS No. 160 require most
identifiable assets, liabilities, noncontrolling interests and goodwill acquired
in a business combination to be recorded at “full fair value” and require
noncontrolling interests (previously referred to as minority interests) to
be
reported as a component of equity, which changes the accounting for transactions
with noncontrolling interest holders. Both statements are effective for periods
beginning on or after December 15, 2008, and earlier adoption is prohibited.
SFAS No. 141(R) will be applied to business combinations occurring after the
effective date. SFAS No. 160 will be applied prospectively to all noncontrolling
interests, including any that arose before the effective date. We are currently
evaluating the impact of adopting SFAS No. 160 on our consolidated financial
statements.
In
March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities,” which requires enhanced disclosures about an entity’s
derivative and hedging activities. This Statement is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008. We do not expect the adoption of SFAS 161 will have a material impact
on our results of operations and financial position.
In
May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). This statement identifies the sources of
accounting principles and the framework for selecting the principles used in
the
preparation of financial statements of nongovernmental entities that are
presented in accordance with generally accepted accounting principles (“GAAP”).
With the issuance of this statement, the FASB concluded that the GAAP hierarchy
should be directed toward the entity and not its auditor, and reside in the
accounting literature established by the FASB as opposed to the American
Institute of Certified Public Accountants (“AICPA”) Statement on Auditing
Standards No. 69, “The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles.” This statement is effective 60 days following
the Securities and Exchange Commission’s approval of the Public Company
Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting Principles.” We do not
expect the adoption of SFAS 162 will have a material impact on our results
of
operations and financial position.
HONG
KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
3.
Risk
Management Activities, Including Derivative
The
Company selectively uses foreign currency forward contracts to offset the
effects of foreign currency exchange rate changes on reported earnings, cash
flow and net asset positions. The terms of these derivative contracts are
generally for 3 months or less. Changes in the fair value of these derivative
contracts are recorded in earnings to offset the impact of foreign currency
transaction gains and losses attributable to certain third party and
intercompany financial assets and liabilities with similar terms. The net gains
and losses attributable to these activities are included in Other income,
net.
|
|
As
of
|
|
|
|
June
30,
|
|
December
31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Audited)
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Currency
forwards (notional amount $5 million), consisting
of a put and a call
|
|
|
29,102
|
|
|
-
|
|
Due
to
the volatility of the US Dollar to the Company’s functional currency, the
Company has put into place a hedging program to attempt to protect it from
significant changes to the US Dollar, which would affect the value of the
Company’s US dollar receivables and sales. In late February 2008, the Company
entered in a series of currency hedges totaling a notional amount US$5,000,000
expiring from October 2008 to February 2009. The foreign currency forwards
provide for potential losses to the Company if the dollar weakens below an
average rate of 6.5 RMB to the US Dollar. The Company would have gains if the
US
Dollar strengthens against the RMB. Settlement of the notional amounts will
be
made 20% each month starting in October 2008 and ending in February
2009.
The
Company recognized the following gains and losses attributable to its derivative
financial instruments during the following periods:
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange contracts, net Gains recognized in Other
income, net
|
|
|
11,092
|
|
|
-
|
|
|
11,092
|
|
|
-
|
|
HONG
KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
4.
Change
in fair value of share warrants
On
June
19, 2008, the Company issued to WestPark Capital, Inc. warrants to purchase
52,500 shares of common stock at an exercise price of $3.90 per share in
connection with the initial public offering. The warrants have a term of five
years and are exercisable no sooner than one year and no later than five
years.
The
fair
value of the warrants at June 19, 2008, the date of issue, is $276,000 and
the
value at an exercise price is $204,750 respectively. Accordingly, a change
in
fair value of the warrants of $71,250 is debited to the condensed consolidated
statement of operations.
The
fair
value of the warrants is appraised by an independent qualified
valuer.
5. Other
income
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Bank
interest income
|
|
|
41,032
|
|
|
9,688
|
|
|
79,045
|
|
|
11,672
|
|
Gain
on forward contract
|
|
|
11,092
|
|
|
-
|
|
|
11,092
|
|
|
-
|
|
Other
interest income
|
|
|
6,501
|
|
|
3,007
|
|
|
17,218
|
|
|
3,007
|
|
Sundry
income
|
|
|
61,495
|
|
|
19,498
|
|
|
117,299
|
|
|
59,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120,120
|
|
|
32,193
|
|
|
224,654
|
|
|
73,863
|
|
6.
Interest
expenses
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on trade related bank loan
|
|
|
164,479
|
|
|
86,047
|
|
|
348,460
|
|
|
211,812
|
|
Interest
on short-term bank loans
|
|
|
29,538
|
|
|
12,133
|
|
|
52,307
|
|
|
23,843
|
|
Interest
on other loan
|
|
|
-
|
|
|
12,985
|
|
|
-
|
|
|
12,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
194,017
|
|
|
111,165
|
|
|
400,767
|
|
|
248,640
|
|
HONG
KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
7.
Income taxes
The
components of the provision for income taxes are:
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
PRC
income taxes
|
|
|
17,937
|
|
|
109,486
|
|
|
174,313
|
|
|
66,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax benefit
|
|
|
46,361
|
|
|
(13,437
|
)
|
|
55,679
|
|
|
(13,437
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64,298
|
|
|
96,049
|
|
|
229,992
|
|
|
52,800
|
|
The
major
components of deferred tax recognized in the consolidated balance sheets as
of
June 30, 2008 and December 31, 2007 are as follows:
|
|
As
of
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Audited)
|
|
|
|
$ |
|
$
|
|
|
|
|
|
|
|
Temporary
difference on:
|
|
|
|
|
|
|
|
Reorganization
of expenses
|
|
|
(75,884
|
)
|
|
(24,527
|
)
|
Accelerated
tax depreciation on intangible asset
|
|
|
(11,250
|
)
|
|
(3,750
|
)
|
|
|
|
|
|
|
|
|
Deferred
tax assets, net
|
|
|
(87,134
|
)
|
|
(28,277
|
)
|
|
|
|
|
|
|
|
|
Reorganization
in the balance sheet:
|
|
|
|
|
|
|
|
Net
deferred tax assets
|
|
|
(87,134
|
)
|
|
(28,277
|
)
|
Effective
January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting
for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,
Accounting for Income Taxes (FIN 48). FIN 48 addresses the determination of
whether tax benefits claimed or expected to be claimed on a tax return should
be
recorded in the financial statements. Under FIN 48, the Company may recognize
the tax benefit from an uncertain tax position only if it is more likely than
not that the tax position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. The tax benefits
recognized in the financial statements from such a position should be measured
based on the largest benefit that has a greater than fifty percent likelihood
of
being realized upon ultimate settlement. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties on income taxes,
accounting in interim periods and requires increased disclosures. The adoption
of the provisions of FIN 48 did not have a material effect on the Company’s
financial statements. As of June 30, 2008, no liability for unrecognized tax
benefits was required to be recorded.
HONG
KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
8.
Prepaid
expenses and other receivables
|
|
As
of
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Audited)
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Purchase
deposits paid
|
|
|
899,430
|
|
|
264,138
|
|
Advance
to staff
|
|
|
175,466
|
|
|
74,502
|
|
Other
deposits and prepayments*
|
|
|
2,596,147
|
|
|
147,503
|
|
Value-added
tax prepayment
|
|
|
2,066,019
|
|
|
1,103,063
|
|
Other
receivables
|
|
|
461,456
|
|
|
912,590
|
|
|
|
|
6,198,518
|
|
|
2,501,796
|
|
*Includes
prepayment of machinery costs of $1,565,703 paid by a subsidiary.
9.
|
Deferred
charges – Stock-based
compensation
|
|
|
As
of
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Audited)
|
|
|
|
$
|
|
$
|
|
Cost
|
|
|
|
|
|
|
|
Stock-based
compensation – consulting fee
|
|
|
520,000
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Accumulated
amortization
|
|
|
43,334
|
|
|
-
|
|
Net
|
|
|
476,666
|
|
|
-
|
|
Amortization
expenses included in general and administrative costs for the six months period
ended June 30, 2008 was $43,334.
The
Company is amortizing the $520,000 cost of stock-based compensation over a
period of one year on the straight line basis.
10.
Inventories
|
|
As
of
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Audited)
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Raw
materials
|
|
|
4,676,717
|
|
|
4,507,255
|
|
Work
in progress
|
|
|
2,603,270
|
|
|
1,694,997
|
|
Finished
goods
|
|
|
12,571,824
|
|
|
8,101,083
|
|
Consumables
|
|
|
60,115
|
|
|
49,197
|
|
Packing
materials
|
|
|
241,303
|
|
|
18,757
|
|
|
|
|
20,153,229
|
|
|
14,371,289
|
|
HONG
KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
11.
Plant and equipment
|
|
As
of
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Audited)
|
|
|
|
$
|
|
$
|
|
Cost
|
|
|
|
|
|
|
|
Furniture,
fixtures and office equipment
|
|
|
506,402
|
|
|
643,196
|
|
Leasehold
improvement
|
|
|
914,923
|
|
|
146,622
|
|
Machinery
and equipment
|
|
|
5,561,017
|
|
|
3,940,847
|
|
Motor
vehicles
|
|
|
389,195
|
|
|
344,088
|
|
|
|
|
|
|
|
|
|
|
|
|
7,371,537
|
|
|
5,074,753
|
|
|
|
|
|
|
|
|
|
Accumulated
depreciation
|
|
|
|
|
|
|
|
Furniture,
fixtures and office equipment
|
|
|
184,653
|
|
|
211,342
|
|
Leasehold
improvement
|
|
|
146,840
|
|
|
100,864
|
|
Machinery
and equipment
|
|
|
1,202,767
|
|
|
834,206
|
|
Motor
vehicles
|
|
|
183,626
|
|
|
138,959
|
|
|
|
|
|
|
|
|
|
|
|
|
1,717,886
|
|
|
1,285,371
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
Furniture,
fixtures and office equipment
|
|
|
321,749
|
|
|
431,854
|
|
Leasehold
improvement
|
|
|
768,083
|
|
|
45,758
|
|
Machinery
and equipment
|
|
|
4,358,250
|
|
|
3,106,641
|
|
Motor
vehicles
|
|
|
205,569
|
|
|
205,129
|
|
|
|
|
|
|
|
|
|
|
|
|
5,653,651
|
|
|
3,789,382
|
|
The
components of depreciation charged are:
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
$ |
|
$
|
|
$ |
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Included
in factory overheads
|
|
|
159,594
|
|
|
126,164
|
|
|
265,018
|
|
|
208,178
|
|
Included
in operating expenses
|
|
|
37,285
|
|
|
28,240
|
|
|
80,656
|
|
|
54,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
196,879
|
|
|
154,404
|
|
|
345,674
|
|
|
262,222
|
|
HONG
KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
12.
Intangible
asset
|
|
As
of
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Audited)
|
|
|
|
$
|
|
$
|
|
Cost
|
|
|
|
|
|
|
|
Consumer
battery license fee
|
|
|
1,000,000
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
Accumulated
amortization
|
|
|
75,000
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
925,000
|
|
|
950,000
|
|
Amortization
expenses included in selling and distribution costs for the six months period
ended June 30, 2008 and 2007 were $25,000.
Shenzhen
Highpower Technology Co., Ltd. (SZ Highpower), a wholly-owned subsidiary of
the
Company, entered into a Consumer Battery License Agreement with Ovonic Battery
Company, Inc. (Ovonic), an unrelated party, dated May 14, 2004, pursuant to
which SZ Highpower acquired a royalty-bearing, non-exclusive license to use
certain patents owned by Ovonic to manufacture rechargeable nickel metal hydride
batteries for portable consumer applications (Consumer Batteries) in the PRC,
and a royalty-bearing, non-exclusive worldwide license to use certain patents
owned by Ovonic to use, sell and distribute Consumer Batteries. SZ
Highpower made an up-front royalty payment to Ovonic of $50,000 in
2004.
On
August
8, 2007, SZ Highpwer and Ovonic amended the Consumer Battery License Agreement
pursuant to which SZ Highpower agreed to pay a total of $112,580, which was
to
be made in two equal payments of $56,290, one of which was to be made within
15
days of August 8, 2007, and the other within 45 days of August 8, 2007, as
royalties for its use of the licensed technology in 2004, 2005 and 2006.
Both of these payments were made during 2007 and were recorded as royalty
expense in prior years, which was included in selling and distributing costs
in
the statement of operations.
The
Consumer Battery License Agreement also requires the Company to pay an
additional up-front royalty payment of $1,000,000 by four annual installments
and an annual royalty fee based on the gross sales of consumer batteries over
the term of the Consumer Battery License Agreement. Accordingly, during the
year
ended December 31, 2007, the Company recorded a total up-front royalty payment
obligation of $1,000,000, which was included in other payables and accrued
liabilities, with the related debit recorded as an intangible asset entitled
consumer battery license agreement. During the six months ended June 30, 2008,
the Company recorded a total of approximately $151,729 as royalty expense,
which
was included in selling and distributing costs in the statement of operations.
At June 30, 2008, accrued royalty fees payable was $1,526,892 (see Note
13).
The
Company is amortizing the $1,000,000 cost of the Consumer Battery License
Agreement over a period of 20 years on the straight line basis. The
accounting for the Consumer Battery License Agreement is based on the Company’s
estimate of the useful life of the underlying technology, which is based on
the
Company’s assessment of existing battery technology, current trends in the
battery business, potential developments and improvements, and the Company’s
current business plan.
HONG
KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
13.
Other payables and accrued liabilities
|
|
As
of
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Audited)
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Accrued
expenses
|
|
|
893,348
|
|
|
765,760
|
|
Accrued
staff welfare
|
|
|
41,603
|
|
|
90,316
|
|
Royalty
payable
|
|
|
1,526,892
|
|
|
1,327,026
|
|
Sales
deposits received
|
|
|
1,080,707
|
|
|
136,295
|
|
Other
payables
|
|
|
43,072
|
|
|
1,559
|
|
|
|
|
|
|
|
|
|
|
|
|
3,585,622
|
|
|
2,320,956
|
|
14.
Bank borrowings
|
|
As
of
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Audited)
|
|
|
|
$
|
|
$
|
|
Secured:
|
|
|
|
|
|
|
|
Repayable
within one year
|
|
|
|
|
|
|
|
Short
term bank loans
|
|
|
1,164,986
|
|
|
2,454,838
|
|
Other
trade related bank loans
|
|
|
15,679,335
|
|
|
12,955,704
|
|
|
|
|
|
|
|
|
|
|
|
|
16,844,321
|
|
|
15,410,542
|
|
As
of
June 30, 2008, the above bank borrowings were secured by the
following:
|
(a)
|
charge
over bank deposits of $6,873,512 which is included in restricted
cash on
the Balance sheet;
|
|
(b)
|
personal
guarantee executed by the directors of the
Company;
|
|
(c)
|
the
legal charge over leasehold land with carrying amount $3,126,977;
and
|
|
(d)
|
other
financial covenant:-
|
The
bank
borrowings require one of the Company’s subsidiaries to maintain a minimum net
worth of $10,217,693. The Company was in compliance with this requirement at
June 30, 2008.
The
interest rates of trade related bank loans were at bank’s prime lending rate per
annum with various maturity dates. The rates at June 30, 2008 ranged from 5.508%
to 6.804%.
The
interest rates of short term bank loans were at 6.804% per annum at June 30,
2008.
HONG
KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
On
June,
19, 2008, the Company’s common stock commenced trading on the American Stock
Exchange.
On
June
19, 2008, the Company issued 603,750 shares of common stock upon the closing
of
an initial public offering. The Company’s sale of common stock, which was sold
indirectly by the Company to the public at a price of $3.25 per share, resulted
in net proceeds of $1,486,400. These proceeds were net of underwriting discounts
and commissions, fees for legal and auditing services, and other offering
costs.
On
June
19, 2008, the Company issued 160,000 shares of common stock upon the closing
of
an initial public offering. The shares are treated as compensation for investor
relations services. The services provided are for the period of one year from
the date of June 19, 2008.
16.
Pension
plans
For
employees in PRC, the Group contributes on a monthly basis to various defined
contribution plans organized by the relevant municipal and provincial government
in the PRC based on certain percentage of the relevant employees’ monthly
salaries. The municipal and provincial governments undertake to assume the
retirement benefit obligations payable to all existing and future retired
employees under these plans and the Group has no further constructive obligation
for post-retirement benefits beyond the contributions made. Contributions to
these plans are expenses as incurred.
The
assets of the schemes are controlled by trustees and held separately from those
of the Group. Total pension cost was $48,840 and $56,043 for the six months
ended June 30, 2008 and 2007, respectively.
17.
Commitments
and contingencies
Operating
leases commitments
The
Company leases factory and office premises under various non-cancelable
operating lease agreements that expire at various dates through years 2008
to
2010, with an option to renew the lease. All leases are on a fixed repayment
basis. None of the leases includes contingent rentals. Minimum future
commitments under these agreements payable as of June 30, 2008 are as
follows:
Year
ending June 30
|
|
$
|
|
2008
|
|
|
470,960
|
|
2009
|
|
|
832,853
|
|
2010
|
|
|
372,287
|
|
2011
|
|
|
-
|
|
|
|
|
1,676,100
|
|
Rental
expenses for the six months ended June 30, 2008 and 2007 were $292,506 and
$202,035, respectively.
HONG
KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
17.
Commitments
and contingencies (Continued)
Capital
commitments
The
Company has the following capital commitments as of June 30, 2008:
|
|
$
|
|
|
|
|
|
Purchase
of plant and equipment
|
|
|
1,178,559
|
|
Contingencies
From
time
to time, the Company factors bills receivable to banks. At the time of the
factoring, all rights and privileges of holding the receivables are transferred
to the banks. The Company removes the asset from its books and records a
corresponding expense for the amount of the discount. The Company remains
contingently liable on the amount outstanding in the event the bill issuer
defaults.
|
|
As
of
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Audited)
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Bills
discounted
|
|
|
500,794
|
|
|
106,378
|
|
Other
than as disclosed above, the Company had no other material contractual
obligations and had no off-balance sheet guarantees or arrangement or
transactions as at June 30, 2008.
18.
Related
party transactions
Apart
from the transactions as disclosed in Notes 14 and 15, the Company entered
into
the following transactions with a related party during the six months ended
June
30, 2008 and 2007:
|
|
Six
months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Management
fee paid to Canhold International Limited
|
|
|
-
|
|
|
10,278
|
|
Mr.
Li
Kai Man is a director of both the Company’s subsidiary, HKHTC, and Canhold
International Limited.
HONG
KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
19.
Segment
Information
The
Company uses the “management approach” in determining reportable operating
segments. The management approach considers the internal organization and
reporting used by the Company’s chief operating decision maker for making
operating decisions and assessing performance as the source for determining
the
Company’s reportable segments. Management, including the chief operating
decision maker, reviews operating results solely by monthly revenue (but not
by
sub-product type or geographic area) and operating results of the Company and,
as such, the Company has determined that the Company has one operating segment
as defined by SFAS 131, “Disclosures about Segments of an Enterprise and Related
Information ”.
Long-lived
assets of the Group are located in PRC. Geographic information about the
revenues and accounts receivable which are classified based on the location
of
the customers, is set out as follows:
|
|
Six months ended
June 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
Net
revenue
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Hong
Kong and China
|
|
|
13,346,458
|
|
|
15,636,952
|
|
Asia
|
|
|
2,719,708
|
|
|
2,657,731
|
|
Europe
|
|
|
15,306,697
|
|
|
9,079,531
|
|
North
America
|
|
|
5,187,455
|
|
|
4,602,551
|
|
South
America
|
|
|
159,329
|
|
|
29,584
|
|
Others
|
|
|
133,391
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
36,853,038
|
|
|
32,006,349
|
|
|
|
As of
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Audited)
|
|
Accounts
receivable
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Hong
Kong and China
|
|
|
2,746,222
|
|
|
4,258,010
|
|
Asia
|
|
|
646,897
|
|
|
1,023,284
|
|
Europe
|
|
|
7,549,229
|
|
|
6,761,615
|
|
North
America
|
|
|
1,702,031
|
|
|
3,863,266
|
|
South
America
|
|
|
6,281
|
|
|
-
|
|
Others
|
|
|
27,634
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
12,678,294
|
|
|
15,906,175
|
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion relates to a discussion of the financial condition and
results of operations of Hong Kong Highpower Technology, Inc. (the “Company”)
and its wholly-owned subsidiary Hong Kong Highpower Technology Co., Ltd.
(referred to herein as “HKHT”), and HKHT’s wholly-owned subsidiaries Shenzhen
Highpower Technology Co., Ltd. (“Shenzhen Highpower”) and Sure Power Technology
(Shenzhen) Co., Ltd. (“Sure Power”). This management’s discussion and analysis
of financial condition and results of operations should be read in conjunction
with its financial statements and the related notes, and the other financial
information included in this information statement.
Forward-Looking
Statements
This
report contains forward-looking statements. The words “anticipated,” “believe,”
“expect, “plan,” “intend,” “seek,” “estimate,” “project,” “could,” “may,” and
similar expressions are intended to identify forward-looking statements. These
statements include, among others, information regarding future operations,
future capital expenditures, and future net cash flow. Such statements reflect
our management’s current views with respect to future events and financial
performance and involve risks and uncertainties, including, without limitation,
general economic and business conditions, changes in foreign, political, social,
and economic conditions, regulatory initiatives and compliance with governmental
regulations, the ability to achieve further market penetration and additional
customers, and various other matters, many of which are beyond our control.
Should one or more of these risks or uncertainties occur, or should underlying
assumptions prove to be incorrect, actual results may vary materially and
adversely from those anticipated, believed, estimated or otherwise indicated.
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
HKHT
was
incorporated in Hong Kong in 2003. HKHT operates its business primarily through
its wholly-owned subsidiary, Shenzhen Highpower Technology Co., Ltd., a company
organized under the laws of the PRC. Shenzhen Highpower was founded in
2001.
On
October 20, 2007, SRKP 11, Inc., a Delaware corporation (“SRKP 11”),
entered into a share exchange agreement (the “Exchange Agreement”), with HKHT
and its shareholders, pursuant to which these shareholders would transfer all
of
the issued and outstanding securities of HKHT to SRKP 11 in exchange for
14,798,328 shares of SRKP 11’s common stock. On November 2, 2007, the Share
Exchange closed and HKHT became a wholly-owned subsidiary of SRKP 11, which
immediately changed its name to “Hong
Kong
Highpower Technology, Inc.”
A
total
of 14,798,328 shares were issued to the former shareholders of HKHT.
In
addition, on November 2, 2007, concurrently with the close of the Share
Exchange, we conducted a private placement transaction (the “Private
Placement”). Pursuant to Subscription Agreements entered into with the
investors, we sold an aggregate of 2,836,364 shares of Common stock at $1.10
per
share. As a result, we received gross proceeds in the amount of $3.12 million.
Through
Shenzhen Highpower, we manufacture Nickel Metal Hydride (“Ni-MH”) rechargeable
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. 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.
In
January 2008, we formed a new wholly-owned subsidiary, HZ Highpower Technology
Co. (“HZ Highpower”) located in the East Lake New Technology Development zone in
the PRC through which we will manufacture Ni-MH rechargeable batteries. HZ
Highpower has not yet commenced business operations. We expect that HZ Highpower
will commence operations in the fourth quarter of 2009. In June 2008, HKHT
formed a new wholly-owned subsidiary, Sure Power Technology (Shenzhen) Co.,
Ltd.
(“Sure Power”). Sure Power commenced business in June 2008, specializing in
researching and manufacturing of Lithium-ion rechargeable batteries.
We
employ
a broad network of salespersons 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.
Critical
Accounting Policies and Estimates
The
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 generally accepted accounting
principles in the United States of America.
Use
of estimates.
In
preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosures of contingent assets and liabilities at the dates of the financial
statements, as well as the reported amounts of revenues and expenses during
the
reporting periods. These accounts and estimates include, but are not limited
to,
the valuation of accounts receivable, inventories, deferred income taxes and
the
estimation on useful lives of plant and equipment. Actual results could differ
from those estimates.
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 we will not
be
able to collect all amounts due according to the 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.
Inventories.
Inventories
are stated at the lower of cost or market value. Cost is determined on a
weighted average basis and includes purchase costs, direct labor and factory
overheads. In assessing the ultimate realization of inventories, management
makes judgments as to future demand requirements compared to current or
committed inventory levels. Our reserve requirements generally increase based
on
management’s projected demand requirements, and decrease due to market
conditions and product life cycle changes. Our production process results in
a
minor amount of waste materials. We do not record a value for the waste in
its
cost accounting. We record proceeds on an as realized basis, when the waste
is
sold. We offset the proceeds from the sales of waste materials as a reduction
of
production costs.
Revenue
recognition.
We
recognize revenue when the goods are delivered and the customer takes ownership
and assumes risk of loss, collection of the relevant receivable is probable,
persuasive evidence of an arrangement exists and the sales price is fixed or
determinable. Sales of goods represent the invoiced value of goods, net of
sales
returns, trade and allowances.
We
do not
have arrangements for returns from customers and does not have any future
obligations directly or indirectly related to product resales by the customer.
We have no incentive programs.
Income
taxes.
We use
the asset and liability method of accounting for income taxes pursuant to SFAS
No. 109 “Accounting for Income Taxes.” Under the asset and liability method of
SFAS 109, deferred tax assets and liabilities are recognized for the future
tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and loss carry
forwards and their respective tax bases. Deferred tax assets and liabilities
are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized.
Foreign
currency translation.
Our
functional currency is the Renminbi (“RMB”). We maintain our financial
statements in the functional currency. Monetary assets and liabilities
denominated in currencies other than the functional currency are translated
into
the functional currency at rates of exchange prevailing at the balance sheet
dates. Transactions denominated in currencies other than the functional currency
are translated into the functional currency at the exchange rates prevailing
at
the dates of the transaction. Exchange gains or losses arising from foreign
currency transactions are included in the determination of net income for the
respective periods.
For
financial reporting purposes, our financial statements which are prepared using
the functional currency have been translated into U.S. Dollars. Assets and
liabilities are translated at the exchange rates at the balance sheet dates
and
revenue and expenses are translated at the average exchange rates and
stockholders’ equity is translated at historical exchange rates. Any translation
adjustments resulting are not included in determining net income but are
included in foreign exchange adjustment to other comprehensive income, a
component of stockholders’ equity.
The
RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No representation
is made that RMB amounts could have been, or could be, converted into U.S.
Dollars at rates used in translation.
Results
of Operations
Net
sales
for the three months ended June 30, 2008 were $19.0 million compared to
$20.5 million for the three months ended June 30, 2007, a decrease of 7.1%.
This decrease was largely due to a 4% decrease in the average selling price
of
our battery units, which we adjust in accordance with the fluctuating cost
of
nickel and the exchange rate between the U.S. Dollar and RMB, and a 3% decrease
in the number of battery units sold. The 3% decrease in the number of battery
units sold was due to decreased orders from our major customer, Uniross
Batteries (HK) Ltd.
Cost
of
sales consists of the cost of nickel and other materials. Costs of sales were
$15.6 million the three months ended June 30, 2008 as compared to
$17.6 million for the comparable period in 2007. As a percentage of net
sales, cost of sales decreased to 82.3% for the three months ended March 31,
2008 compared to 86.1% for the comparable period in 2007. This decrease was
attributable to an 8.6% decrease in the average per unit cost of goods sold
during three months ended June 30, 2008 as compared to the comparable period
in
2007 due to the decrease in the cost of nickel, offset by a 4% decrease in
the
average selling price of our battery units during the three months ended June
30, 2008 over three months ended June 30, 2007.
Gross
profit for the three months ended June 30, 2008 was $3.4 million, or 17.7%
of
net sales, compared to $2.8 million, or 13.9% of net sales, for the
comparable period in 2007. Management considers gross profit to be 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, 2008 is primarily
due to an 8.6% decrease in the average per unit cost of goods sold.
Selling
and distribution costs were $548,000 for the three months ended June 30, 2008
compared to $475,000 for the comparable period in 2007. The increase was due
to
the expansion of our team of sales representatives.
General
and administrative expenses were $1.6 million, or 8.3% of net sales, for the
three months ended June 30, 2008, compared to $866,000, or 4.2% of net sales,
for the comparable period in 2007. Management considers these expenses as a
percentage of net sales to be a key performance indicator in managing our
business. The increase as a percentage of net sales was due to increased labor
costs and costs associated with our initial public offering and listing on
the
American Stock Exchange (“AMEX”). Labor costs increased $230,000 for the three
months ended June 30, 2008 over the comparable period in 2007 due to the
expansion of our workforce to expand production. Costs associated with our
initial public offering and listing on AMEX increased $260,000 for the three
months ended June 30, 2008 over the comparable period in 2007, which consisted
primarily of legal, investment banking fees and accounting fees and costs.
We
experienced losses on the exchange rate difference between the U.S. Dollar
and
the RMB of $331,000 and $129,000, respectively, in the three months ended June
30, 2008 and 2007, an increase of 256%, due to the devaluation of the U.S.
Dollar relative to the RMB over the respective periods. Beginning in 2008,
to
cope with devaluation of the U.S. Dollar relative to the RMB, we are engaging
in
currency hedging and adjusting the selling price of batteries to vary with
the
U.S. Dollar exchange rate relative to the RMB.
Interest
expenses were $194,000 for the three months ended June 30, 2008, as compared
to
$111,000 for the comparable period in 2007. The increase was primarily due
to
both higher borrowing levels and higher interest rate. We increased our
borrowings by approximately $435,000 in the three months ended June 30, 2008
as
compared to the three months ended June 30, 2007. Further increases in borrowing
rates would further increase our interest expense, which would have a negative
effect on our results of operations.
Other
income from operations, which consists of bank interest income, exchange gains
and losses and sundry income, was $120,000, for the three months ended June
30,
2008, as compared to $32,000 for the three months ended June 30, 2007, an
increase of 273%. The increase was due to a $31,000 increase in bank interest
income, a $3,500 increase in other interest income, a $42,000 increase in sundry
income and an $11,000 gain on a forward contract.
During
the three months ended June 30, 2008, we recorded a provision for income taxes
of $64,000, as compared to $96,000 for the comparable period in 2007. The
decrease was a result of a decrease in our net income profit margin.
Net
income for the three months ended June 30, 2008 was $684,000, compared to net
income of $1.2 million for the comparable period in 2007.
Six
Months Ended June 30, 2008
Net
sales
for the six months ended June 30, 2008 were $36.9 million compared to
$32.0 million for the six months ended June 30, 2007, an increase of 15.1%.
This increase was largely due to a 5.8% increase in the average selling price
of
our battery units, which we were able to implement due to an agreement with
our
major customers permitting us to raise the prices on our battery products in
accordance with the cost of nickel and exchange rate between the U.S. Dollar
and
RMB, an 8.8% increase in the number of battery units sold and $91,000 from
the
sale of battery seconds during six months ended June 30, 2008. The 8.8% increase
in the number of battery units sold was due to increased orders from our major
customer, Energizer Battery Manufacturing, Inc.
Cost
of
sales consists of the cost of nickel and other materials. Costs of sales were
$30.8 million the six months ended June 30, 2008 as compared to
$28.1 million for the comparable period in 2007. As a percentage of net
sales, cost of sales decreased to 82.4% for the six months ended June 30, 2008
compared to 87.8% for the comparable period in 2007. This decrease was
attributable to a 5.8% increase in the average selling price of our battery
units during the six months ended June 30, 2008 over the six months ended June
30, 2007, offset by a 0.6% increase in the average per unit cost of goods sold
during the six months ended June 30, 2008 as compared to the comparable period
in 2007 due to the devaluation of the U.S. Dollar relative to the
RMB.
Gross
profit for the six months ended June 30, 2008 was $6.1 million, or 16.5% of
net
sales, compared to $3.9 million, or 12.2% of net sales, for the comparable
period in 2007. Management considers gross profit to be 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, 2008 is primarily due to a
5.8%
increase in the average selling price of our battery units.
Selling
and distribution costs were $962,000 for the six months ended June 30, 2008
compared to $948,000 for the comparable period in 2007. The increase was due
to
the expansion of our team of sales representatives.
General
and administrative expenses were $2.3 million, or 6.4% of net sales, for
the six months ended June 30, 2008, compared to $1.8 million, or 5.6% of net
sales, for the comparable period in 2007. Management considers these expenses
as
a percentage of net sales to be a key performance indicator in managing our
business. The increase as a percentage of net sales was due to increased labor
costs and costs associated with our initial public offering and listing on
AMEX.
Labor costs increased $180,000 for the six months ended June 30, 2008 over
the
comparable period in 2007 due to the expansion of our workforce to expand
production. Costs associated with our initial public offering and listing on
AMEX increased $260,000 for the six months ended June 30, 2008 over the
comparable period in 2007, which consisted primarily of legal and investment
banking fees and accounting fees and costs.
We
experienced losses on the exchange rate difference between the U.S. Dollar
and
the RMB of $836,000 and $201,000, respectively, in the six months ended June
30,
2008 and 2007, an increase of 415%, due to the devaluation of the U.S. Dollar
relative to the RMB over the respective periods. Beginning in 2008, to cope
with
devaluation of the U.S. Dollar relative to the RMB, we are engaging in currency
hedging and adjusting the selling price of batteries to vary with the U.S.
Dollar exchange rate relative to the RMB.
Interest
expenses were $401,000 for the six months ended June 30, 2008, as compared
to
$249,000 for the comparable period in 2007. The increase was primarily due
to
both higher borrowing levels and higher interest rate. We increased our
borrowings by approximately $769,000 in the six months ended June 30, 2008
as
compared to the six months ended June 30, 2007. Further increases in borrowing
rates would further increase our interest expense, which would have a negative
effect on our results of operations.
Other
income from operations, which consists of bank interest income, exchange gains
and losses and sundry income, was $225,000, for the six months ended June 30,
2008, as compared to $74,000 for the six months ended June 30, 2007, an increase
of 204%. The increase was due to a $67,000 increase in bank interest income,
a
$14,000 increase in other interest income, a $58,000 increase in sundry income
and an $11,000 gain on forward contract in the six months ended June 30,
2008.
During
the six months ended June 30, 2008, we recorded a provision for income taxes
of
$231,000, as compared to $53,000 for the comparable period in 2007. The increase
was a result of an increase in our net income profit margin.
Net
income for the six months ended June 30, 2008 was $1.4 million, compared to
$671,000 for the comparable period in 2007.
Liquidity
and Capital Resources
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,
2008, we had in place general banking facilities with four financial
institutions aggregating $28.6 million. The maturity of these facilities is
generally up to one year. The facilities are subject to annual review and
approval. These banking facilities are guaranteed by us and some of our
stockholders, including Dang Yu Pan, Wen Liang Li and Wen Wei Ma, 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, 2008, we had
utilized approximately $16.9 million under such general credit facilities and
had available unused credit facilities of $11.8 million.
On
November 2, 2007, upon the closing of a private placement, we received gross
proceeds of $3.12 million in a private placement transaction (the “Private
Placement”). Pursuant to Subscription Agreements entered into with the
investors, we sold an aggregate of 1,772,745 shares of Common Stock at $1.76
per
share. For its services in connection with the Share Exchange and as placement
agent, the placement agent received an aggregate commission equal to 10% of
the
gross proceeds from the Private Placement, in addition to $30,000 in connection
with the execution of the Exchange Agreement and a $40,000 success fee for
the
Share Exchange, for an aggregate amount fee of $382,000.
For
the
six months ended June 30, 2008, net cash provided by operating activities was
approximately $2.1 million, as compared to approximately $1.3 million for the
comparable period in 2007. The increase in net cash provided by operating
activities is primarily attributable to a
decrease in accounts receivable levels.
Net
cash
used in investing activities was $1.9 million for the six months ended June
30,
2008 compared to $3.2 million for the comparable period in 2007. The decrease
of
cash used in investing activities was primarily attributable to the acquisition
of land equity in HuiZhou in the comparable period in 2007. Net cash provided
by
financing activities was $1.3 million for the six months ended June 30, 2008
as
compared to net cash used by financing activities of $2.6 million for the
comparable period in 2007. The decrease in net cash provided by financing
activities was attributable to a repayment of short-term bank loans of
approximately $1,423,000 in 2008.
For
the
six months ended June 30, 2008, our inventory turnover was 1.78 times, as
compared to 1.85 times at June 30, 2007. The average days outstanding of our
accounts receivable at June 30, 2008 were 70 days, as compared to 56 days at
June 30, 2007. 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 of
approximately $3.0 million.
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. 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 fund 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.
Recent
Accounting Pronouncements
In
February 2008, FASB issued FASB Staff Position (“FSP”) FAS 157-1 “Application of
FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurement for Purposes of Lease
Classification or Measurement under Statement 13,” and FSP FAS 157-2, “Effective
Date of FASB Statement No. 157.” FSP FAS 157-1 amends the scope of SFAS No. 157
and other accounting standards that address fair value measurements for purpose
of lease classification or measurement under Statement 13. The FSP is effective
on initial adoption of Statement 157, FSP FAS 157-2 defers the effective date
of
SFAS No. 157 to fiscal years beginning after November 15, 2008 for all
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis. We do not expect the adoption of FSP FAS 157-1 and FSP FAS 157-2 will
have a material impact on our consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” and SFAS
No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an
amendment to ARB No. 51”. SFAS No. 141(R) and SFAS No. 160 require most
identifiable assets, liabilities, noncontrolling interests and goodwill acquired
in business combination to be recorded at “full fair value” and require
noncontrolling interests (previously referred to as minority interests) to
be
reported as a component of equity, which changes the accounting for transactions
with noncontrolling interest holders. Both statements are effective for periods
beginning on or after December 15, 2008, and earlier adoption is prohibited.
SFAS No. 141(R) will be applied to business combinations occurring after the
effective date. SFAS No. 160 will be applied prospectively to all noncontrolling
interests, including any that arose before the effective date. We are currently
evaluating the impact of adopting SFAS No. 160 on our consolidated financial
statements.
In
March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities,” which requires enhanced disclosures about an entity’s
derivative and hedging activities. This Statement is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008. We do not expect the adoption of SFAS 161 will have a material impact
on our results of operations and financial position.
In
May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). This statement identifies the sources of
accounting principles and the framework for selecting the principles used in
the
preparation of financial statements of nongovernmental entities that are
presented in accordance with generally accepted accounting principles (“GAAP”).
With the issuance of this statement, the FASB concluded that the GAAP hierarchy
should be directed toward the entity and not its auditor, and reside in the
accounting literature established by the FASB as opposed to the American
Institute of Certified Public Accountants (“AICPA”) Statement on Auditing
Standards No. 69, “The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles.” This statement is effective 60 days following
the Securities and Exchange Commission’s approval of the Public Company
Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting Principles.” We do not
expect the adoption of SFAS 162 will have a material impact on our results
of
operations and financial position.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
Credit
Risk
We
are
exposed to credit risk from our cash at bank, fixed deposits and contract
receivables. The credit risk on cash at bank and fixed deposits is limited
because the counterparts are recognized financial institutions. Contract
receivables are subject to credit evaluations. We periodically record a
provision for doubtful collections based on an evaluation of the collectibility
of contract receivables by assessing, among other factors, the customer’s
willingness or ability to pay, repayment history, general economic conditions
and our ongoing relationship with the customers.
Foreign
Currency and Exchange Risk
The
Company maintains its financial statements in the functional currency of
Renminbi (“RMB”). Substantially all of our operations are conducted in the PRC
and we pay the majority of our expenses in RMB. Substantially all of our
operations are conducted in the PRC and we pay the majority of our expenses
in
RMB. However, approximately 75% of our sales are made in U.S. Dollars. During
the six months ended June 30, 2008, the exchange rate of the RMB to the U.S.
Dollar increased approximately 6% from the level at the end of December 31,
2007. This fluctuation resulted in a slight increase in our material costs
during the six months ended June 30, 2008. 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 PRC 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 US Dollar. Exchange rate fluctuations
may
also affect the value, in US 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 U.S. Dollar to our functional currency, the Company has put
into place a hedging program to attempt to protect it from significant changes
to the US Dollar, which would affect the value of the Company’s US Dollar
receivables and sales. In late February 2008, the Company entered in a series
of
currency hedges totaling a notional amount US$5,000,000 expiring from October
2008 to February 2009. The foreign currency forwards provide for potential
losses to the Company if the dollar weakens below an average rate of 6.5 RMB
to
the US Dollar. The Company would have gains if the U.S. Dollar strengthens
against the RMB. Settlement of the notional amounts will be made 20% each month
starting in October 2008 and ending in February 2009.
Country
Risk
The
substantial portion of our business, assets and operations are located and
conducted in Hong Kong and China. While these economies have experienced
significant growth in the past twenty years, growth has been uneven, both
geographically and among various sectors of the economy. The Chinese government
has implemented various measures to encourage economic growth and guide the
allocation of resources. Some of these measures benefit the overall economy
of
Hong Kong and China, but may also have a negative effect on us. For example,
our
operating results and financial condition may be adversely affected by
government control over capital investments or changes in tax regulations
applicable to us. If there are any changes in any policies by the Chinese
government and our business is negatively affected as a result, then our
financial results, including our ability to generate revenues and profits,
will
also be negatively affected.
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, our CEO and CFO have concluded that, as of the end
of
such period, our disclosure controls and procedures (as defined in
Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934) were effective as of June 30, 2008.
Changes
in Internal Control Over Financial Reporting
Based
on
the evaluation of our management as required by paragraph (d) of Rule 13a-15
or
15d-15 of the Exchange Act, there were no changes in our internal control over
financial reporting that occurred during our last fiscal year that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting. Please see Item 5 of Part II for a discussion
of our internal control over financial reporting subsequent to the closing
of
the Share Exchange.
Part II.
Other Information
Item
1. Legal Proceedings
Not
applicable.
Any
investment in our common stock involves a high degree of risk. Investors should
carefully consider the risks described below and all of the information
contained in this report before deciding whether to purchase our common stock.
While there have been no material changes from the risk factors disclosed in
the
“Risk Factors” section of our annual report on Form 10-K for the year ended
December 31, 2007, we set forth our risk factors below. Our business, financial
condition or results of operations could be materially adversely affected by
these risks if any of them actually occur. Our shares of common stock are not
currently listed or quoted for trading on any national securities exchange
or
national quotation system. If and when our common stock is traded, the trading
price could decline due to any of these risks, and an investor may lose all
or
part of his or her investment. Some of these factors have affected our financial
condition and operating results in the past or are currently affecting us.
This
Report also contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including
the risks described below and elsewhere in this report.
RISKS
RELATED TO OUR OPERATIONS
Our
limited operating history may not serve as an adequate basis to evaluate our
future prospects and results of operations.
We
have a
limited operating history. We were established in GuangZhou, China in 2001
and
commenced operations in Shenzhen in 2002. Our limited operating history may
not
provide a meaningful basis for an investor to evaluate our business, financial
performance and prospects. We may not be able to:
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maintain
our leading position in the Ni-MH battery
market;
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successfully
develop our Li-ion battery
business;
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retain
existing customers or acquire new
customers;
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diversify
our revenue sources by successfully developing and selling our products
in
the global battery market and other
markets;
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keep
up with evolving industry standards and market
developments;
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respond
to competitive market conditions;
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maintain
adequate control of our expenses;
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manage
our relationships with our
suppliers;
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attract,
train, retain and motivate qualified personnel;
or
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protect
our proprietary technologies.
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If
we are
unsuccessful in addressing any of these challenges, our business may be
materially and adversely affected.
Our
business depends in large part on the growth in demand for portable electronic
devices.
Many
of
our battery products are used to power various portable electronic devices.
Therefore, the demand for our batteries is substantially tied to the market
demand for portable electronic devices. A growth in the demand for portable
electronic devices will be essential to the expansion of our business. We intend
to expand manufacturing capabilities at our manufacturing facilities in order
to
meet the increased demand for our products. A decrease in the demand for
portable electronic devices would likely have a material adverse effect on
our
results of operations.
Our
success depends on the success of manufacturers of the end applications that
use
our battery products.
Because
our products are designed to be used in other products, our success depends
on
whether end application manufacturers will incorporate our batteries in their
products. Although we strive to produce high quality battery products, there
is
no guarantee that end application manufacturers will accept our products. Our
failure to gain acceptance of our products from these manufacturers could result
in a material adverse effect on our results of operations.
Additionally,
even if a manufacturer decides to use our batteries, the manufacturer may not
be
able to market and sell its products successfully. The manufacturer’s inability
to market and sell its products successfully could materially and adversely
affect our business and prospects because this manufacturer may not order new
products from us. Therefore, our business, financial condition, results of
operations and future success would be materially and adversely
affected.
We
are and will continue to be subject to rapidly declining average selling prices,
which may harm our results of operations.
Portable
consumer electronic devices, such as cellular phones, DVD players, and laptop
computers are subject to rapid declines in average selling prices due to rapidly
evolving technologies, industry standards and consumer preferences. Therefore,
electronic device manufacturers expect suppliers, such as our company, to cut
their costs and lower the price of their products to lessen the negative impact
on the electronic device manufacturer’s own profit margins. As a result, we have
previously reduced the price of some of our battery products and expect to
continue to face market-driven downward pricing pressures in the future. Our
results of operations will suffer if we are unable to offset any declines in
the
average selling prices of our products by developing new or enhanced products
with higher selling prices or gross profit margins, increasing our sales volumes
or reducing our production costs.
Our
success is highly dependent on continually developing new and advanced products,
technologies, and processes and failure to do so may cause us to lose our
competitiveness in the battery industry and may cause our profits to
decline.
To
remain
competitive in the battery industry, it is important to continually develop
new
and advanced products, technologies, and processes. There is no assurance that
competitors’ new products, technologies, and processes will not render our
existing products obsolete or non-competitive. Alternately, changes in
legislative, regulatory or industry requirements or in competitive technologies
may render certain of our products obsolete or less attractive. Our
competitiveness in the battery market therefore relies upon our ability to
enhance our current products, introduce new products, and develop and implement
new technologies and processes. We currently only manufacture and market Nickel
Metal Hydride batteries and if our competitors develop alternative products
with
more enhanced features than our products, our financial condition and results
of
operations would be materially and adversely affected.
The
research and development of new products and technologies is costly and time
consuming, and there are no assurances that our research and development of
new
products will either be successful or completed within anticipated timeframes,
if at all. Our failure to technologically evolve and/or develop new or enhanced
products may cause us to lose competitiveness in the battery market and may
cause our profits to decline. In addition, in order to compete effectively
in
the battery industry, we must be able to launch new products to meet our
customers’ demands in a timely manner. However, we cannot provide assurance that
we will be able to install and certify any equipment needed to produce new
products in a timely manner, or that the transitioning of our manufacturing
facility and resources to full production under any new product programs will
not impact production rates or other operational efficiency measures at our
manufacturing facility. In addition, new product introductions and applications
are risky, and may suffer from a lack of market acceptance, delays in related
product development and failure of new products to operate properly. Any failure
by us successfully to launch new products, or a failure by our customers to
accept such products, could adversely affect our results.
We
have historically depended on a limited number of customers for a significant
portion of our revenues and this dependence is likely to
continue.
We
have
historically depended on a limited number of customers for a significant portion
of our net sales. Our top five customers accounted for approximately 62.4%,
57%
and 37.4% of our net sales for the six months ended June 30, 2008 and the years
ended December 31, 2007 and 2006, respectively. We anticipate that a limited
number of customers will continue to contribute to a significant portion of
our
net sales in the future. Maintaining the relationships with these significant
customers is vital to the expansion and success of our business, as the loss
of
a major customer could expose us to risk of substantial losses. Our sales and
revenue could decline and our results of operations could be materially
adversely affected if one or more of these significant customers stops or
reduces its purchasing of our products, or if we fail to expand our customer
base for our products.
Significant
order cancellations, reductions or delays by our customers could materially
adversely affect our business.
Our
sales
are typically made pursuant to individual purchase orders, and we generally
do
not have long-term supply arrangements with our customers, but instead work
with
our customers to develop nonbinding forecasts of future requirements. Based
on
these forecasts, we make commitments regarding the level of business that we
will seek and accept, the timing of production schedules and the levels and
utilization of personnel and other resources. A variety of conditions, both
specific to each customer and generally affecting each customer’s industry, may
cause customers to cancel, reduce or delay orders that were either previously
made or anticipated. Generally, customers may cancel, reduce or delay purchase
orders and commitments without penalty, except for payment for services rendered
or products competed and, in certain circumstances, payment for materials
purchased and charges associated with such cancellation, reduction or delay.
Significant or numerous order cancellations, reductions or delays by our
customers could have a material adverse effect on our business, financial
condition or results of operations.
Substantial
defaults by our customers on accounts receivable or the loss of significant
customers could have a material adverse effect on our
business.
A
substantial portion of our working capital consists of accounts receivable
from
customers. If customers responsible for a significant amount of accounts
receivable were to become insolvent or otherwise unable to pay for products
and
services, or to make payments in a timely manner, our business, results of
operations or financial condition could be materially adversely affected. An
economic or industry downturn could materially adversely affect the servicing
of
these accounts receivable, which could result in longer payment cycles,
increased collection costs and defaults in excess of management’s expectations.
A significant deterioration in our ability to collect on accounts receivable
could also impact the cost or availability of financing available to
us.
Certain
disruptions in supply of and changes in the competitive environment for raw
materials integral to our products may adversely affect our
profitability.
We
use a
broad range of materials and supplies, including metals, chemicals and other
electronic components in our products. A significant disruption in the supply
of
these materials could decrease production and shipping levels, materially
increase our operating costs and materially adversely affect our profit margins.
Shortages of materials or interruptions in transportation systems, labor
strikes, work stoppages, war, acts of terrorism or other interruptions to or
difficulties in the employment of labor or transportation in the markets in
which we purchase materials, components and supplies for the production of
our
products, in each case may adversely affect our ability to maintain production
of our products and sustain profitability. If we were to experience a
significant or prolonged shortage of critical components from any of our
suppliers and could not procure the components from other sources, we would
be
unable to meet our production schedules for some of our key products and to
ship
such products to our customers in timely fashion, which would adversely affect
our sales, margins and customer relations.
Our
industry is subject to supply shortages and any delay or inability to obtain
product components may have a material adverse effect on our
business.
Our
industry is subject to supply shortages, which could limit the amount of supply
available of certain required battery components. Any delay or inability to
obtain supplies may have a material adverse effect on our business. During
prior
periods, there have been shortages of components in the battery industry and
the
availability of raw materials has been limited by some of our suppliers. We
cannot assure investors that any future shortages or allocations would not
have
such an effect on our business. A future shortage can be caused by and result
from many situations and circumstances that are out of our control, and such
shortage could limit the amount of supply available of certain required
materials and increase prices affecting our profitability.
Our
principal raw material is nickel, which is available from a limited number
of
suppliers in China. The price of nickel has been volatile during 2007. The
price
of nickel rose 67% from January 2007 to May 2007, but dropped 45% from May
2007
to September 2007. The prices of nickel and other raw materials used to make
our
batteries increase and decrease due to factors beyond our control, including
general economic conditions, domestic and worldwide demand, labor costs or
problems, competition, import duties, tariffs, energy costs, currency exchange
rates and those other factors described under “Certain disruptions in supply of
and changes in the competitive environment for raw materials integral to our
products may adversely affect our profitability.” In an environment of
increasing prices for nickel and other raw materials, competitive conditions
may
impact how much of the price increases we can pass on to our customers and
to
the extent we are unable to pass on future price increases in our raw materials
to our customers, our financial results could be adversely affected.
Our
operations would be materially adversely affected if third-party carriers were
unable to transport our products on a timely basis.
All
of
our products are shipped through third party carriers. If a strike or other
event prevented or disrupted these carriers from transporting our products,
other carriers may be unavailable or may not have the capacity to deliver our
products to our customers. If adequate third party sources to ship our products
were unavailable at any time, our business would be materially adversely
affected.
We
may not be able to increase our manufacturing output in order to maintain our
competitiveness in the battery industry.
We
believe that our ability to provide cost-effective products represents a
significant competitive advantage over our competitors. In order to continue
providing such cost-effective products, we must maximize the efficiency of
our
production processes and increase our manufacturing output to a level that
will
enable us to reduce the per-unit production cost of our products. Our ability
to
increase our manufacturing output is subject to certain significant limitations,
including:
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our
ability raise capital to acquire additional raw materials and expand
our
manufacturing facilities;
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delays
and cost overruns, due to increases in raw material prices and problems
with equipment vendors;
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delays
or denial of required approvals and certifications by relevant government
authorities;
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diversion
of significant management attention and other resources;
and
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failure
to execute our expansion plan
effectively.
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If
we are
not able to increase our manufacturing output and reduce our per-unit production
costs, we may be unable to maintain our competitive position in the battery
industry. Moreover, even if we expand our manufacturing output, we may not
be
able to generate sufficient customer demand for our products to support our
increased production output.
The
market for our products and services is very competitive and, if we cannot
effectively compete, our business will be harmed.
The
market for our products and services is very competitive and subject to rapid
technological change. Many of our competitors are larger and have significantly
greater assets, name recognition and financial, personnel and other resources
than we have. As a result, our competitors may be in a stronger position to
respond quickly to potential acquisitions and other market opportunities, new
or
emerging technologies and changes in customer requirements. We cannot assure
you
that we will be able to maintain or increase our market share against the
emergence of these or other sources of competition. Failure to maintain and
enhance our competitive position could materially adversely affect our business
and prospects.
Warranty
claims, product liability claims and product recalls could harm our business,
results of operations and financial condition.
Our
business inherently exposes us to potential warranty and product liability
claims, in the event that our products fail to perform as expected or such
failure of our products results, or is alleged to result, in bodily injury
or
property damage (or both). Such claims may arise despite our quality controls,
proper testing and instruction for use of our products, either due to a defect
during manufacturing or due to the individual’s improper use of the product. In
addition, if any of our designed products are or are alleged to be defective,
then we may be required to participate in a recall of them.
Existing
PRC laws and regulations do not require us to maintain third party liability
insurance to cover product liability claims. Although we have obtained products
liability insurance, if a warranty or product liability claim is brought against
us, regardless of merit or eventual outcome, or a recall of one of our products
is required, such claim or recall may result in damage to our reputation, breach
of contracts with our customers, decreased demand for our products, costly
litigation, additional product recalls, loss of revenue, and the inability
to
commercialize some products.
Manufacturing
or use of our battery products may cause accidents, which could result in
significant production interruption, delay or claims for substantial damages.
Our
batteries can pose certain safety risks, including the risk of fire. While
we
implement stringent safety procedures at all stages of battery production that
minimize such risks, accidents may still occur. Any accident, regardless of
where it occurs, may result in significant production interruption, delays
or
claims for substantial damages caused by personal injuries or property
damages.
We
cannot guarantee the protection of our intellectual property rights and if
infringement of our intellectual property rights occurs, including
counterfeiting of our products, our reputation and business may be adversely
affected.
To
protect the reputation of our products, we have sought to file or register
our
intellectual property, as appropriate, in the PRC where we have our primary
business presence. As of June 30, 2008, we have registered two trademarks as
used on our battery products, one in English and in the other in its Chinese
equivalent. Our products are currently sold under these trademarks in the PRC,
and we plan to expand our products to other international markets. There is
no
assurance that there will not be any infringement of our brand name or other
registered trademarks or counterfeiting of our products in the future, in China
or elsewhere. Should any such infringement and/or counterfeiting occur, our
reputation and business may be adversely affected. We may also incur significant
expenses and substantial amounts of time and effort to enforce our trademark
rights in the future. Such diversion of our resources may adversely affect
our
existing business and future expansion plans.
As
of
June 30, 2008, we held four Chinese patents and had three Chinese patent
applications pending. Additionally, we have licensed patented technology from
Ovonic Battery Company, Inc. related to the manufacture of Ni-MH batteries.
We
believe that obtaining patents and enforcing other proprietary protections
for
our technologies and products have been and will continue to be very important
in enabling us to compete effectively. However, there can be no assurance that
our pending patent applications will issue, or that we will be able to obtain
any new patents, in China or elsewhere, or that our or our licensors’ patents
and proprietary rights will not be challenged or circumvented, or that these
patents will provide us with any meaningful competitive advantages. Furthermore,
there can be no assurance that others will not independently develop similar
products or will not design around any patents that have been or may be issued
to us or our licensors. Failure to obtain patents in certain foreign countries
may materially adversely affect our ability to compete effectively in those
international markets. If a sufficiently broad patent were to be issued from
a
competing application in China or elsewhere, it could have a material adverse
effect upon our intellectual property position in that particular market.
In
addition, our rights to use the licensed proprietary technologies of our
licensors depends on the timely and complete payment for such rights pursuant
to
license agreements between the parties; failure to adhere to the terms of these
agreements could result in the loss of such rights and could materially and
adversely affect our business.
If
our products are alleged to or found to conflict with patents that have been
or
may be granted to competitors or others, our reputation and business may be
adversely affected.
Rapid
technological developments in the battery industry and the competitive nature
of
the battery products market make the patent position of battery manufacturers
subject to numerous uncertainties related to complex legal and factual issues.
Consequently, although we either own or hold licenses to certain patents in
the
PRC, and are currently processing several additional patent applications in
the
PRC, it is possible that no patents will issue from any pending applications
or
that claims allowed in any existing or future patents issued or licensed to
us
will be challenged, invalidated, or circumvented, or that any rights granted
there under will not provide us adequate protection. As a result, we may be
required to participate in interference or infringement proceedings to determine
the priority of certain inventions or may be required to commence litigation
to
protect our rights, which could result in substantial costs. Further, other
parties could bring legal actions against us claiming damages and seeking to
enjoin manufacturing and marketing of our products for allegedly conflicting
with patents held by them. Any such litigation could result in substantial
cost
to us and diversion of effort by our management and technical personnel. If
any
such actions are successful, in addition to any potential liability for damages,
we could be required to obtain a license in order to continue to manufacture
or
market the affected products. There can be no assurance that we would prevail
in
any such action or that any license required under any such patent would be
made
available on acceptable terms, if at all. Failure to obtain needed patents,
licenses or proprietary information held by others may have a material adverse
effect on our business. In addition, if we were to become involved in such
litigation, it could consume a substantial portion of our time and resources.
Also, with respect to licensed technology, there can be no assurance that the
licensor of the technology will have the resources, financial or otherwise,
or
desire to defend against any challenges to the rights of such licensor to its
patents.
We
rely on trade secret protections through confidentiality agreements with our
employees, customers and other parties; the breach of such agreements could
adversely affect our business ands results of operations.
We
also
rely on trade secrets, which we seek to protect, in part, through
confidentiality and non-disclosure agreements with our employees, customers
and
other parties. There can be no assurance that these agreements will not be
breached, that we would have adequate remedies for any such breach or that
our
trade secrets will not otherwise become known to or independently developed
by
competitors. To the extent that consultants, key employees or other third
parties apply technological information independently developed by them or
by
others to our proposed projects, disputes may arise as to the proprietary rights
to such information that may not be resolved in our favor. We may be involved
from time to time in litigation to determine the enforceability, scope and
validity of our proprietary rights. Any such litigation could result in
substantial cost and diversion of effort by our management and technical
personnel.
The
failure to manage growth effectively could have an adverse effect on our
employee efficiency, product quality, working capital levels, and results of
operations.
Any
significant growth in the market for our products or our entry into new markets
may require and expansion of our employee base for managerial, operational,
financial, and other purposes. As of June 30, 2008, we had approximately 2,510
full time employees. During any growth, we may face problems related to our
operational and financial systems and controls, including quality control and
delivery and service capacities. We would also need to continue to expand,
train
and manage our employee base. Continued future growth will impose significant
added responsibilities upon the members of management to identify, recruit,
maintain, integrate, and motivate new employees.
Aside
from increased difficulties in the management of human resources, we may also
encounter working capital issues, as we will need increased liquidity to finance
the purchase of raw materials and supplies, development of new products, and
the
hiring of additional employees. For effective growth management, we will be
required to continue improving our operations, management, and financial systems
and control. Our failure to manage growth effectively may lead to operational
and financial inefficiencies that will have a negative effect on our
profitability. We cannot assure investors that we will be able to timely and
effectively meet that demand and maintain the quality standards required by
our
existing and potential customers.
We
are dependent on certain key personnel and loss of these key personnel could
have a material adverse effect on our business, financial condition and results
of operations.
Our
success is, to a certain extent, attributable to the management, sales and
marketing, and operational and technical expertise of certain key personnel.
Each of the named executive officers performs key functions in the operation
of
our business. The loss of a significant number of these employees could have
a
material adverse effect upon our business, financial condition, and results
of
operations.
We
are dependent on a technically trained workforce and an inability to retain
or
effectively recruit such employees could have a material adverse effect on
our
business, financial condition and results of operations.
We
must
attract, recruit and retain a sizeable workforce of technically competent
employees to develop and manufacture our products and provide service support.
Our ability to implement effectively our business strategy will depend upon,
among other factors, the successful recruitment and retention of additional
highly skilled and experienced engineering and other technical and marketing
personnel. There is significant competition for technologically qualified
personnel in our business and we may not be successful in recruiting or
retaining sufficient qualified personnel consistent with our operational
needs.
Our
planned expansion into new and existing international markets poses additional
risks and could fail, which could cost us valuable resources and affect our
results of operations.
We
plan
to expand sales of our products into new and existing international markets
including developing and developed countries, such as Japan, Russia, India,
and Brazil. These markets are untested for our products and we face risks
in expanding the business overseas, which include differences in regulatory
product testing requirements, intellectual property protection (including
patents and trademarks), taxation policy, legal systems and rules, marketing
costs, fluctuations in currency exchange rates and changes in political and
economic conditions.
Our
quarterly results may fluctuate because of many factors and, as a result,
investors should not rely on quarterly operating results as indicative of future
results.
Fluctuations
in operating results or the failure of operating results to meet the
expectations of public market analysts and investors may negatively impact
the
value of our securities. Quarterly operating results may fluctuate in the future
due to a variety of factors that could affect revenues or expenses in any
particular quarter. Fluctuations in quarterly operating results could cause
the
value of our securities to decline. Investors should not rely on
quarter-to-quarter comparisons of results of operations as an indication of
future performance. As a result of the factors listed below, it is possible
that
in future periods results of operations may be below the expectations of public
market analysts and investors. This could cause the market price of our
securities to decline. Factors that may affect our quarterly results include:
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vulnerability
of our business to a general economic downturn in China;
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fluctuation
and unpredictability of costs related to the raw material used to
manufacture our products;
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seasonality
of our business;
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changes
in the laws of the PRC that affect our operations;
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competition
from our competitors; and
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our
ability to obtain necessary government certifications and/or licenses
to
conduct our business.
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RISKS
RELATED TO DOING BUSINESS IN CHINA
Substantially
all of our assets are located in the PRC and substantially all of our revenues
are derived from our operations in China, and changes in the political and
economic policies of the PRC government could have a significant impact upon
the
business we may be able to conduct in the PRC and accordingly on the results
of
our operations and financial condition.
Our
business operations may be adversely affected by the current and future
political environment in the PRC. The Chinese government exerts substantial
influence and control over the manner in which we must conduct our business
activities. Our ability to operate in China may be adversely affected by changes
in Chinese laws and regulations, including those relating to taxation, import
and export tariffs, raw materials, environmental regulations, land use rights,
property and other matters. Under the current government leadership, the
government of the PRC has been pursuing economic reform policies that encourage
private economic activity and greater economic decentralization. There is no
assurance, however, that the government of the PRC will continue to pursue
these
policies, or that it will not significantly alter these policies from time
to
time without notice.
Our
operations are subject to PRC laws and regulations that are sometimes vague
and
uncertain. Any changes in such PRC laws and regulations, or the interpretations
thereof, may have a material and adverse effect on our business.
The
PRC’s
legal system is a civil law system based on written statutes. Unlike the common
law system prevalent in the United States, decided legal cases have little
value
as precedent in China. There are substantial uncertainties regarding the
interpretation and application of PRC laws and regulations, including but not
limited to, the laws and regulations governing our business, or the enforcement
and performance of our arrangements with customers in the event of the
imposition of statutory liens, death, bankruptcy or criminal proceedings.
The Chinese government has been developing a comprehensive system of commercial
laws, and considerable progress has been made in introducing laws and
regulations dealing with economic matters such as foreign investment, corporate
organization and governance, commerce, taxation and trade. However, because
these laws and regulations are relatively new, and because of the limited volume
of published cases and judicial interpretation and their lack of force as
precedents, interpretation and enforcement of these laws and regulations involve
significant uncertainties. New laws and regulations that affect existing and
proposed future businesses may also be applied retroactively.
Our
principal operating subsidiary, Shenzhen Highpower Technology Co., Ltd,
(“Shenzhen Highpower”) is considered a foreign invested enterprise under PRC
laws, and as a result is required to comply with PRC laws and regulations,
including laws and regulations specifically governing the activities and conduct
of foreign invested enterprises. We cannot predict what effect the
interpretation of existing or new PRC laws or regulations may have on our
businesses. If the relevant authorities find us in violation of PRC laws or
regulations, they would have broad discretion in dealing with such a violation,
including, without limitation:
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revoking
our business license, other licenses or
authorities;
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requiring
that we restructure our ownership or operations;
and
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requiring
that we discontinue any portion or all of our
business.
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The
scope of our business license in China is limited, and we may not expand or
continue our business without government approval and renewal,
respectively.
Our
principal operating subsidiary, Shenzhen Highpower, is a wholly foreign-owned
enterprise, commonly known as a WFOE. A WFOE can only conduct business within
its approved business scope, which ultimately appears on its business license.
Our license permits us to design, manufacture, sell and market battery products
throughout the PRC. Any amendment to the scope of our business requires further
application and government approval. In order for us to expand our business
beyond the scope of our license, it will be required to enter into a negotiation
with the authorities for the approval to expand the scope of our business.
We
cannot assure investors that Shenzhen Highpower will be able to obtain the
necessary government approval for any change or expansion of its business.
We
are subject to a variety of environmental laws and regulations related to our
manufacturing operations. Our failure to comply with environmental laws and
regulations may have a material adverse effect on our business and results
of
operations.
We
are
subject to various environmental laws and regulations that require us to obtain
environmental permits for our battery manufacturing operations. We have an
environmental permit from the Shenzhen Environment Protection Bureau Longgang
Bureau (the “Bureau”) covering our manufacturing operations that expires on
December 31, 2010. Historically, under a previous permit which expired in
September 2007, we substantially exceeded the approved annual output limit
of
Ni-MH rechargeable batteries set forth in the permit. Although we do not
currently expect to exceed the approved annual output limits under the new
permit, we cannot guarantee that this will be the case. Additionally, our
current permit does not cover one of our existing premises at our manufacturing
facility. If we fail to comply with the provisions of our permit, we could
be
subject to fines, criminal charges or other sanctions by regulators, including
the suspension or termination of our manufacturing operations.
We
cannot
assure you that at all times we will be in compliance with environmental laws
and regulations or our environmental permits or that we will not be required
to
expend significant funds to comply with, or discharge liabilities arising under,
environmental laws, regulations and permits.
Recent
PRC regulations relating to acquisitions of PRC companies by foreign entities
may create regulatory uncertainties that could restrict or limit our ability
to
operate, including our ability to pay dividends. Our failure to obtain the
prior
approval of the China Securities Regulatory Commission, or the CSRC, for any
offering and the listing and trading of our common stock could have a material
adverse effect on our business, operating results, reputation and trading price
of our common stock.
The
PRC
State Administration of Foreign Exchange, or “SAFE,” issued a public notice in
November 2005, known as Circular 75, concerning the use of offshore holding
companies in mergers and acquisitions in China. The public notice provides
that
if an offshore company controlled by PRC residents intends to acquire a PRC
company, such acquisition will be subject to registration with the relevant
foreign exchange authorities. The public notice also suggests that registration
with the relevant foreign exchange authorities is required for any sale or
transfer by the PRC residents of shares in an offshore holding company that
owns
an onshore company. The PRC residents must each submit a registration form
to
the local SAFE branch with respect to their ownership interests in the offshore
company, and must also file an amendment to such registration if the offshore
company experiences material events, such as changes in the share capital,
share
transfer, mergers and acquisitions, spin-off transactions or use of assets
in
China to guarantee offshore obligations. If any PRC resident stockholder of
an
offshore holding company fails to make the required SAFE registration and
amended registration, the onshore PRC subsidiaries of that offshore company
may
be prohibited from distributing their profits and the proceeds from any
reduction in capital, share transfer or liquidation to the offshore entity.
Failure to comply with the SAFE registration and amendment requirements
described above could result in liability under PRC laws for evasion of
applicable foreign exchange restrictions. Most of our PRC resident stockholders,
as defined in the SAFE notice, have not registered with the relevant branch
of
SAFE, as currently required, in connection with their equity interests in HKHT.
Because of uncertainty in how the SAFE notice will be interpreted and enforced,
we cannot be sure how it will affect our business operations or future plans.
For example, Shenzhen Highpower’s ability to conduct foreign exchange
activities, such as the remittance of dividends and foreign currency-denominated
borrowings, may be subject to compliance with the SAFE notice by our PRC
resident beneficial holders. Failure by our PRC resident beneficial holders
could subject these PRC resident beneficial holders to fines or legal sanctions,
restrict our overseas or cross-border investment activities, limit Shenzhen
Highpower’s ability to make distributions or pay dividends or affect our
ownership structure, which could adversely affect our business and
prospects.
On
August
8, 2006, the PRC Ministry of Commerce (“MOFCOM”), joined by the State-owned
Assets Supervision and Administration Commission of the State Council, the
State
Administration of Taxation, the State Administration for Industry and Commerce,
the China Securities Regulatory Commission and SAFE, released a substantially
amended version of the Provisions for Foreign Investors to Merge with or Acquire
Domestic Enterprises (the “Revised M&A Regulations”), which took effect
September 8, 2006. These new rules significantly revised China’s regulatory
framework governing onshore-to-offshore restructurings and foreign acquisitions
of domestic enterprises. These new rules signify greater PRC government
attention to cross-border merger, acquisition and other investment activities,
by confirming MOFCOM as a key regulator for issues related to mergers and
acquisitions in China and requiring MOFCOM approval of a broad range of merger,
acquisition and investment transactions. Further, the new rules establish
reporting requirements for acquisition of control by foreigners of companies
in
key industries, and reinforce the ability of the Chinese government to monitor
and prohibit foreign control transactions in key industries.
Among
other things, the revised M&A Regulations include new provisions that
purport to require that an offshore special purpose vehicle, or SPV, formed
for
listing purposes and controlled directly or indirectly by PRC companies or
individuals must obtain the approval of the CSRC prior to the listing and
trading of such SPV’s securities on an overseas stock exchange. On September 21,
2006, the CSRC published on its official website procedures specifying documents
and materials required to be submitted to it by SPVs seeking CSRC approval
of
their overseas listings. However, the application of this PRC regulation remains
unclear with no consensus currently existing among the leading PRC law firms
regarding the scope and applicability of the CSRC approval requirement.
Highpower’s PRC counsel, Zhong Lun Law Firm has advised us that because we
completed our onshore-to-offshore restructuring before September 8, 2006, the
effective date of the new regulation, it is not necessary for us to submit
the
application to the CSRC for its approval, and the listing and trading of our
common stock does not require CSRC approval.
If
the
CSRC or another PRC regulatory agency subsequently determines that CSRC approval
was required, we may face regulatory actions or other sanctions from the CSRC
or
other PRC regulatory agencies. These regulatory agencies may impose fines and
penalties on our operations in the PRC, limit our operating privileges in the
PRC, delay or restrict the repatriation of the proceeds from an offering of
securities into the PRC, or take other actions that could have a material
adverse effect on our business, financial condition, results of operations,
reputation and prospects, as well as the trading price of our common stock.
The
CSRC or other PRC regulatory agencies also may take actions requiring us, or
making it advisable for us, to halt any offering before settlement and delivery
of the securities offered. Consequently, if investors engage in market trading
or other activities in anticipation of and prior to settlement and delivery,
they do so at the risk that settlement and delivery may not occur.
Also,
if
later the CSRC requires that we obtain its approval, we may be unable to obtain
a waiver of the CSRC approval requirements, if and when procedures are
established to obtain such a waiver. Any uncertainties and/or negative publicity
regarding this CSRC approval requirement could have a material adverse effect
on
the trading price of our common stock. Furthermore, published news reports
in
China recently indicated that the CSRC may have curtailed or suspended overseas
listings for Chinese private companies. These news reports have created further
uncertainty regarding the approach that the CSRC and other PRC regulators may
take with respect to us.
It
is
uncertain how our business operations or future strategy will be affected by
the
interpretations and implementation of Circular 75 and the Revised M&A
Regulations. It is anticipated that application of the new rules will be subject
to significant administrative interpretation, and we will need to closely
monitor how MOFCOM and other ministries apply the rules to ensure that our
domestic and offshore activities continue to comply with PRC law. Given the
uncertainties regarding interpretation and application of the new rules, we
may
need to expend significant time and resources to maintain compliance.
The
foreign currency exchange rate between U.S. Dollars and Renminbi could adversely
affect our financial condition.
To
the
extent that we need to convert U.S. Dollars into Renminbi for our operational
needs, our financial position and the price of our common stock may be adversely
affected should the Renminbi appreciate against the U.S. Dollar at that time.
Conversely, if we decide to convert our Renminbi into U.S. Dollars for the
operational needs or paying dividends on our common stock, the dollar equivalent
of our earnings from our subsidiaries in China would be reduced should the
dollar appreciate against the Renminbi.
Until
1994, the Renminbi experienced a gradual but significant devaluation against
most major currencies, including dollars, and there was a significant
devaluation of the Renminbi on January 1, 1994 in connection with the
replacement of the dual exchange rate system with a unified managed floating
rate foreign exchange system. Since 1994, the value of the Renminbi relative
to
the U.S. Dollar has remained stable and has appreciated slightly against the
U.S. Dollar. Countries, including the United States, have argued that the
Renminbi is artificially undervalued due to China’s current monetary policies
and have pressured China to allow the Renminbi to float freely in world markets.
In July 2005, the PRC government changed its policy of pegging the value of
the
Renminbi to the dollar. Under the new policy the Renminbi is permitted to
fluctuate within a narrow and managed band against a basket of designated
foreign currencies. While the international reaction to the Renminbi revaluation
has generally been positive, there remains significant international pressure
on
the PRC government to adopt an even more flexible currency policy, which could
result in further and more significant appreciation of the Renminbi against
the
dollar.
Because
most of our sales are made in U.S. Dollars and most of our expenses are paid
in
RMB, devaluation of the U.S. Dollar could negatively impact our results of
operations.
The
value
of RMB is subject to changes in China’s governmental policies and to
international economic and political developments. In January, 1994, the PRC
government implemented a unitary managed floating rate system. Under this
system, the People’s Bank of China, or PBOC, began publishing a daily base
exchange rate with reference primarily to the supply and demand of RMB against
the U.S. Dollar and other foreign currencies in the market during the previous
day. Authorized banks and financial institutions are allowed to quote buy and
sell rates for RMB within a specified band around the central bank’s daily
exchange rate. On July 21, 2005, PBOC announced an adjustment of the
exchange rate of the U.S. Dollar to RMB from 1:8.27 to 1:8.11 and modified
the
system by which the exchange rates are determined. This modification has
resulted in an approximate 7.3% appreciation of the RMB against the U.S. Dollar
from July 21, 2005 to May 2, 2007. While the international reaction to
the RMB revaluation has generally been positive, there remains significant
international pressure on the PRC government to adopt an even more flexible
currency policy, which could result in further fluctuations of the exchange
rate
of the U.S. Dollar against the RMB, including future devaluations. Because
most
of our net sales are made in U.S. Dollars and most of our expenses are paid
in
RMB, any future devaluation of the U.S. Dollar against the RMB could negatively
impact our results of operations.
Inflation
in the PRC could negatively affect our profitability and
growth.
While
the
PRC economy has experienced rapid growth, such growth has been uneven among
various sectors of the economy and in different geographical areas of the
country. Rapid economic growth can lead to growth in the money supply and rising
inflation. During the past decade, the rate of inflation in China has been
as
high as approximately 20% and China has experienced deflation as low as
approximately minus 2%. If prices for our products and services rise at a rate
that is insufficient to compensate for the rise in the costs of supplies such
as
raw materials, it may have an adverse effect on our profitability. In order
to
control inflation in the past, the PRC government has imposed controls on bank
credits, limits on loans for fixed assets and restrictions on state bank
lending. The implementation of such policies may impede economic growth. In
October 2004, the People’s Bank of China, the PRC’s central bank, raised
interest rates for the first time in nearly a decade and indicated in a
statement that the measure was prompted by inflationary concerns in the Chinese
economy. In April 2006, the People’s Bank of China raised the interest rate
again. Repeated rises in interest rates by the central bank would likely slow
economic activity in China which could, in turn, materially increase our costs
and also reduce demand for our products and services.
Failure
to comply with the United States Foreign Corrupt Practices Act could subject
us
to penalties and other adverse consequences.
As
our
ultimate holding company is a Delaware corporation, we are subject to the United
States Foreign Corrupt Practices Act, which generally prohibits United States
companies from engaging in bribery or other prohibited payments to foreign
officials for the purpose of obtaining or retaining business. Foreign companies,
including some that may compete with us, are not subject to these prohibitions.
Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices
may occur from time-to-time in the PRC. We can make no assurance, however,
that
our employees or other agents will not engage in such conduct for which we
might
be held responsible. If our employees or other agents are found to have engaged
in such practices, we could suffer severe penalties and other consequences
that
may have a material adverse effect on our business, financial condition and
results of operations.
If
we make equity compensation grants to persons who are PRC citizens, they may
be
required to register with the State Administration of Foreign Exchange of the
PRC, or SAFE. We may also face regulatory uncertainties that could restrict
our
ability to adopt an equity compensation plan for our directors and employees
and
other parties under PRC law.
On
April
6, 2007, SAFE issued the “Operating Procedures for Administration of Domestic
Individuals Participating in the Employee Stock Ownership Plan or Stock Option
Plan of An Overseas Listed Company, also know as “Circular 78.” It is not clear
whether Circular 78 covers all forms of equity compensation plans or only those
which provide for the granting of stock options. For any plans which are so
covered and are adopted by a non-PRC listed company after April 6, 2007,
Circular 78 requires all participants who are PRC citizens to register with
and
obtain approvals from SAFE prior to their participation in the plan. In
addition, Circular 78 also requires PRC citizens to register with SAFE and
make
the necessary applications and filings if they participated in an overseas
listed company’s covered equity compensation plan prior to April 6, 2007. We
intend to adopt an equity compensation plan in the future and make option grants
to our officers and directors, most of who are PRC citizens. Circular 78 may
require our officers and directors who receive option grants and are PRC
citizens to register with SAFE. We believe that the registration and approval
requirements contemplated in Circular 78 will be burdensome and time consuming.
If it is determined that any of our equity compensation plans are subject to
Circular 78, failure to comply with such provisions may subject us and
participants of our equity incentive plan who are PRC citizens to fines and
legal sanctions and prevent us from being able to grant equity compensation
to
our PRC employees. In that case, our ability to compensate our employees and
directors through equity compensation would be hindered and our business
operations may be adversely affected.
We
have enjoyed certain preferential tax concessions and the loss of these
preferential tax concessions may cause its tax liabilities to increase and
its
profitability to decline.
Our
operating subsidiary, Shenzhen Highpower, is subject to a reduced enterprise
income tax rate of 15%, which is only granted to high-technology enterprises
operating in the Shenzhen Special Economic Zone. From
2005
to 2007, Shenzhen Highpower enjoyed a preferential income tax rate of 7.5%
due
to its status as a new business and high-tech enterprise. That status
expired on December 31, 2007. The expiration of the preferential tax
treatment will increase our tax liabilities and reduce our profitability.
Additionally, the PRC Enterprise Income Tax Law (the “EIT Law”) was enacted on
March 16, 2007. Under the EIT Law, effective January 1, 2008, China will adopt
a
uniform tax rate of 25.0% for all enterprises (including foreign-invested
enterprises) and cancel several tax incentives enjoyed by foreign-invested
enterprises. Since the PRC government has not announced implementation measures
for the transitional policy with regards to such preferential tax rates, we
cannot reasonably estimate the financial impact of the new tax law to us at
this
time. Any future increase in the enterprise income tax rate applicable to us
or
other adverse tax treatments, could increase our tax liabilities and reduce
our
net income.
Any
recurrence of Severe Acute Respiratory Syndrome (SARS), Avian Flu, or another
widespread public health problem, in the PRC could adversely
affect
our operations.
A
renewed
outbreak of SARS, Avian Flu or another widespread public health problem in
China, where all of our manufacturing facilities are located and where the
substantial portion of our sales occur, could have a negative effect on our
operations. Our business is dependent upon its ability to continue to
manufacture products. Such an outbreak could have an impact on our operations
as
a result of:
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quarantines
or closures of some of our manufacturing facilities, which would
severely
disrupt our operations,
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the
sickness or death of our key officers and employees,
and
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a
general slowdown in the Chinese
economy.
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Any
of
the foregoing events or other unforeseen consequences of public health problems
could adversely affect our operations.
A
downturn in the economy of the PRC may slow our growth and
profitability.
The
growth of the Chinese economy has been uneven across geographic regions and
economic sectors. There can be no assurance that growth of the Chinese economy
will be steady or that any downturn will not have a negative effect on our
business, especially if it results in either a decreased use of our products
or
in pressure on us to lower our prices.
Because
our business is located in the PRC, we may have difficulty establishing adequate
management, legal and financial controls, which it is required to do in order
to
comply with U.S. securities laws.
PRC
companies have historically not adopted a Western style of management and
financial reporting concepts and practices, which includes strong corporate
governance, internal controls and, computer, financial and other control
systems. Most of our middle and top management staff are not educated and
trained in the Western system, and we may difficulty hiring new employees in
the
PRC with such training. In addition, we may have difficulty in hiring and
retaining a sufficient number of qualified employees to work in the PRC. As
a
result of these factors, we may experience difficulty in establishing
management, legal and financial controls, collecting financial data and
preparing financial statements, books of account and corporate records and
instituting business practices that meet Western standards. Therefore, we may,
in turn, experience difficulties in implementing and maintaining adequate
internal controls as required under Section 404 of the Sarbanes-Oxley Act of
2002. This may result in significant deficiencies or material weaknesses in
our
internal controls which could impact the reliability of its financial statements
and prevent us from complying with SEC rules and regulations and the
requirements of the Sarbanes-Oxley Act of 2002. Any such deficiencies,
weaknesses or lack of compliance could have a materially adverse effect on
our
business.
Investors
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions in China based upon U.S. laws,
including the federal securities laws or other foreign laws against us or our
management.
Most
of
our current operations, including the manufacturing and distribution of our
products, are conducted in China. Moreover, all of our directors and officers
are nationals and residents of China or Hong Kong. All or substantially all
of
the assets of these persons are located outside the United States and in the
PRC. As a result, it may not be possible to effect service of process within
the
United States or elsewhere outside China upon these persons. In addition,
uncertainty exists as to whether the courts of China would recognize or enforce
judgments of U.S. courts obtained against us or such officers and/or directors
predicated upon the civil liability provisions of the securities laws of the
United States or any state thereof, or be competent to hear original actions
brought in China against us or such persons predicated upon the securities
laws
of the United States or any state thereof.
RISKS
RELATED TO OUR CAPITAL STRUCTURE
The
price of our common stock may be volatile, and if an active trading market
for
our common stock does not develop, the price of our common stock may suffer
and
decline.
Prior
to
our initial public offering and listing of our common stock on the American
Stock Exchange on June 19, 2008, there has been no public market for our
securities in the United States. Accordingly, we cannot assure you that an
active trading market will develop or be sustained or that the market price
of
our common stock will not decline. The price at which our common stock will
trade after our initial public offering is likely to be highly volatile and
may
fluctuate substantially due to many factors, some of which are outside of our
control.
Shares
eligible for future sale may adversely affect the market price of our common
stock, as the future sale of a substantial amount of outstanding stock in the
public marketplace could reduce the price of our common
stock.
In
June
2008, we completed a public offering and sale of 603,750 shares of common stock,
all of which are currently freely tradeable. In addition, pursuant to the terms
of the Share Exchange, we filed a registration statement with the Securities
and
Exchange Commission to register a total of 1,772,745 shares of our common stock
issued in a Private Placement that was conducted in connection with the Share
Exchange in November 2007. The registration statement was declared effective
by
the Securities and Exchange Commission in June 2008. The investors in the
Private Placement also entered into a lock-up agreement pursuant to which they
agreed not to sell their shares until ninety (90) days after our common stock
was listed on the American Stock Exchange, when one-tenth of their shares are
released from the lock up, after which their shares will automatically be
released from the lock up on a monthly basis pro rata over a nine month
period.
We
also
registered 817,479 shares of common stock held by certain of our stockholders
immediately prior to the Share Exchange in a registration statement declared
effective in June 2008. In addition, registered a total of 959,649 shares of
common stock that are held by affiliates of Westpark Capital, Inc. that were
our
stockholders prior to the Share Exchange in a registration statement declared
effective in August 2008. All of the shares included in an effective
registration statement as described above may be freely sold and transferred
except if subject to a lock up agreement.
Additionally,
subject to lock-up agreements entered into with WestPark Capital, Inc. pursuant
to which the former stockholders of HKHT and their designees agreed not to
sell
their shares until June 20, 2009, the former shareholders of HKHT and/or their
designees may be eligible to sell all or some of our shares of common stock
by
means of ordinary brokerage transactions in the open market pursuant to Rule
144, promulgated under the Securities Act (“Rule 144”), subject to certain
limitations. In general, pursuant to Rule 144, a non-affiliate stockholder
(or
stockholders whose shares are aggregated) who has satisfied a six-month holding
period, and provided that there is current public information available, may
sell all of its securities. Rule 144 also permits the sale of securities,
without any limitations, by a non-affiliate that has satisfied a one-year
holding period. Any substantial sale of common stock pursuant to any resale
prospectus or Rule 144 may have an adverse effect on the market price of our
common stock by creating an excessive supply.
Following
the Share Exchange, the former principal shareholders of HKHT have significant
influence over us.
Our
officers and directors beneficially own or control approximately 60.0% of our
outstanding shares as of the closing of our initial public offering on July
24,
2008. If these stockholders were to act as a group, they would have a
controlling influence in determining the outcome of any corporate transaction
or
other matters submitted to our stockholders for approval, including mergers,
consolidations and the sale of all or substantially all of our assets, election
of directors, and other significant corporate actions. Such stockholders may
also have the power to prevent or cause a change in control. In addition,
without the consent of the former HKHT stockholders, we could be prevented
from
entering into transactions that could be beneficial to us. The interests of
these stockholders may differ from the interests of our other
stockholders.
If
we fail to maintain effective internal controls over financial reporting, the
price of our common stock may be adversely affected.
We
are
required to establish and maintain appropriate internal controls over financial
reporting. Failure to establish those controls, or any failure of those controls
once established, could adversely impact our public disclosures regarding our
business, financial condition or results of operations. Any failure of these
controls could also prevent us from maintaining accurate accounting records
and
discovering accounting errors and financial frauds. Rules adopted by the SEC
pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require annual
assessment of our internal control over financial reporting, and attestation
of
this assessment by our independent registered public accountants. The SEC
extended the compliance dates for non-accelerated filers, as defined by the
SEC.
Accordingly, we included management's assessment of our internal control over
financial reporting as of the end of the previous fiscal year in our annual
report on Form 10-K for the year ended December 31, 2007. The attestation
requirement of management’s assessment by our independent registered public
accountants will first apply to our annual report for the 2008 fiscal year.
The
standards that must be met for management to assess the internal control over
financial reporting as effective are new and complex, and require significant
documentation, testing and possible remediation to meet the detailed standards.
We may encounter problems or delays in completing activities necessary to make
an assessment of our internal control over financial reporting. In addition,
the
attestation process by our independent registered public accountants is new
and
we may encounter problems or delays in completing the implementation of any
requested improvements and receiving an attestation of our assessment by our
independent registered public accountants. If we cannot assess our internal
control over financial reporting as effective, or our independent registered
public accountants are unable to provide an unqualified attestation report
on
such assessment, investor confidence and share value may be negatively
impacted.
In
addition, management’s assessment of internal controls over financial reporting
may identify weaknesses and conditions that need to be addressed in our internal
controls over financial reporting or other matters that may raise concerns
for
investors. Any actual or perceived weaknesses and conditions that need to be
addressed in our internal control over financial reporting, disclosure of
management’s assessment of our internal controls over financial reporting, or
disclosure of our public accounting firm’s attestation to or report on
management’s assessment of our internal controls over financial reporting may
have an adverse impact on the price of our common stock.
We
may not be able to achieve the benefits we expect to result from the Share
Exchange.
On
October 20, 2007, we entered into the Exchange Agreement with all of the
shareholders of HKHT, pursuant to which we agreed to acquire 100% of the issued
and outstanding securities of HKHT in exchange for shares of our common stock.
On November 2, 2007, the Share Exchange closed, HKHT became our 100%-owned
subsidiary and our sole business operations became that of HKHT. We also have
a
new Board of Directors and management consisting of persons from HKHT and
changed our corporate name from SRKP 11, Inc. to Hong Kong Highpower Technology,
Inc.
We
may
not realize the benefits that we hoped to receive as a result of the Share
Exchange, which include:
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access
to the capital markets of the United
States;
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the
increased market liquidity expected to result from exchanging stock
in a
private company for securities of a public company that may eventually
be
traded;
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the
ability to use registered securities to make acquisition of assets
or
businesses;
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increased
visibility in the financial
community;
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enhanced
access to the capital markets;
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improved
transparency of operations; and
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perceived
credibility and enhanced corporate image of being a publicly traded
company.
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There
can
be no assurance that any of the anticipated benefits of the Share Exchange
will
be realized in respect to our new business operations. In addition, the
attention and effort devoted to achieving the benefits of the Share Exchange
and
attending to the obligations of being a public company, such as reporting
requirements and securities regulations, could significantly divert management’s
attention from other important issues, which could materially and adversely
affect our operating results or stock price in the future.
Compliance
with changing regulation of corporate governance and public disclosure will
result in additional expenses.
Changing
laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC
regulations, have created uncertainty for public companies and significantly
increased the costs and risks associated with accessing the public markets
and
public reporting. Our management team will need to invest significant management
time and financial resources to comply with both existing and evolving standards
for public companies, which will lead to increased general and administrative
expenses and a diversion of management time and attention from revenue
generating activities to compliance activities.
Our
common stock may be considered a “penny stock,” and thereby be subject to
additional sale and trading regulations that may make it more difficult to
sell.
Our
common stock may be considered to be a “penny stock” if it does not qualify for
one of the exemptions from the definition of “penny stock” under Section 3a51-1
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our
common stock may be a “penny stock” if it meets one or more of the following
conditions (i) the stock trades at a price less than $5.00 per share; (ii)
it is
NOT traded on a “recognized” national exchange; (iii) it is NOT quoted on the
Nasdaq Capital Market, or even if so, has a price less than $5.00 per share;
or
(iv) is issued by a company that has been in business less than three years
with
net tangible assets less than $5 million.
The
principal result or effect of being designated a “penny stock” is that
securities broker-dealers participating in sales of our common stock will be
subject to the “penny stock” regulations set forth in Rules 15-2 through 15g-9
promulgated under the Exchange Act. For example, Rule 15g-2 requires
broker-dealers dealing in penny stocks to provide potential investors with
a
document disclosing the risks of penny stocks and to obtain a manually signed
and dated written receipt of the document at least two business days before
effecting any transaction in a penny stock for the investor’s account. Moreover,
Rule 15g-9 requires broker-dealers in penny stocks to approve the account of
any
investor for transactions in such stocks before selling any penny stock to
that
investor. This procedure requires the broker-dealer to (i) obtain from the
investor information concerning his or her financial situation, investment
experience and investment objectives; (ii) reasonably determine, based on that
information, that transactions in penny stocks are suitable for the investor
and
that the investor has sufficient knowledge and experience as to be reasonably
capable of evaluating the risks of penny stock transactions; (iii) provide
the
investor with a written statement setting forth the basis on which the
broker-dealer made the determination in (ii) above; and (iv) receive a signed
and dated copy of such statement from the investor, confirming that it
accurately reflects the investor’s financial situation, investment experience
and investment objectives. Compliance with these requirements may make it more
difficult and time consuming for holders of our common stock to resell their
shares to third parties or to otherwise dispose of them in the market or
otherwise.
We
do not foresee paying cash dividends in the foreseeable future and, as a result,
our investors’ sole source of gain, if any, will depend on capital appreciation,
if any.
We
do not
plan to declare or pay any cash dividends on our shares of common stock in
the
foreseeable future and currently intend to retain any future earnings for
funding growth. As a result, you should not rely on an investment in our
securities if you require the investment to produce dividend income. Capital
appreciation, if any, of our shares may be your sole source of gain for the
foreseeable future. Moreover, you may not be able to resell your shares in
our
company at or above the price you paid for them.
Item
2. Unregistered Sale of Equity Securities and Use of Proceeds
On
June
19, 2008, we issued 160,000 shares of our common stock to Nascent Value, LLC
in
consideration for the signing of an agreement for investor relations and
consulting services. The securities were offered and issued to Nascent Value,
LLC in reliance upon exemptions from registration pursuant to Section 4(2)
under
the Securities Act of 1933, as amended, and Rule 506 promulgated thereunder.
Nascent Value, LLC qualified as an accredited investor (as defined by Rule
501
under the Securities Act of 1933, as amended).
On
June
19, 2008, upon the closing of our initial public offering, we issued to WestPark
Capital, Inc. warrants to purchase up to 52,500 shares of our common stock
in
exchange for its underwriting services provided to us in connection with our
initial public offering. The warrants are exercisable at a per share exercise
price of $3.90, subject to standard anti-dilution adjustments for stock splits
and similar transactions, and will expire after five years. The securities
were
issued to WestPark Capital in reliance upon exemptions from registration
pursuant to Section 4(2) under the Securities Act of 1933, as amended, and
Rule
506 promulgated thereunder.
Use
of
Proceeds
On
June
24, 2008, we completed our initial public offering of common stock in which
we
sold 603,750 shares of common stock (including 78,750 shares sold pursuant
to
the underwriter’s full exercise of their over-allotment option) at an issue
price of $3.25 per share. The SEC declared the registration statements for
the
initial public offering, File Nos. 333-147355 and 333-151793, each effective
on
June 19, 2008 and June 20, 2008, respectively. The managing underwriter for
the
offering was WestPark Capital, Inc. We raised a total of approximately $2.0
million in gross proceeds from our initial public offering, or approximately
$1.2 million in net proceeds after deducting underwriting discounts and
commissions of approximately $196,000 and other offering costs of approximately
$551,000.
As
of
June 30, 2008, we have used approximately $1.2 million of such proceeds for
working capital purposes to finance our existing operations.
Item
3. Default Upon Senior Securities
Not
applicable.
Item
4. Submission of Matters to a Vote of Security Holders
Not
applicable.
Item
5. Other Information
Not
applicable.
(a) Exhibits
Exhibit
Number
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Description of Document
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21.1
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List
of Subsidiaries
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31.1
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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.
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31.2
|
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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.
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32.1
|
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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.*
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*
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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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HONG
KONG HIGHPOWER TECHNOLOGY, INC.
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.
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Hong
Kong Highpower Technology, Inc.
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Dated:
August 12, 2008
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/s/
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Dang
Yu Pan
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By:
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Dang
Yu Pan
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Its:
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Chairman
of the Board and Chief Executive Officer
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/s/
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Yu
Zhi Qui
|
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By:
|
Yu
Zhi Qui
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Its:
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Chief
Financial Officer
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