UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION





WASHINGTON,
D.C. 20549





FORM
10-K






      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
              THE
      SECURITIES EXCHANGE ACT OF 1934FOR
      THE FISCAL YEAR ENDED DECEMBER 31, 2009OR
      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
              THE
      SECURITIES EXCHANGE ACT OF 1934FOR
      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
      No.)Building
      A1, Luoshan Industrial Zone,
              Shanxia,
      Pinghu, Longgang,
              Shenzhen,
      Guangdong, 518111
              People’s
      Republic of China
            
            N/A(Address
      of principal executive offices)
            
            (Zip
      Code)





Registrant’s telephone number,
including area code: (86)
755-89686238





SECURITIES
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:




Title
      of
            Name
      of each exchangeEach
      Class
            on which
      registeredCommon
      Stock, $0.0001 par value
            Nasdaq
      Global Market





SECURITIES
REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:




None.


Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.




Yes  No þ




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.




Yes  No þ







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 þ
No 




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
             
☒





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 the definitions of “large accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act:.





Large
accelerated filer  
                          
  Accelerated
filer  


Non-accelerated
filer                                  Smaller
reporting company þ





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





The
aggregate market value of the registrant's issued and outstanding shares of
common stock held by non-affiliates of the registrant as of June 30, 2009 (based
on the price at which the registrant’s common stock was last sold on such date)
was approximately $8.1 million.





There
were 13,582,106 shares outstanding of the registrant’s common stock, par value
$0.0001 per share, as of March 29, 2010. The registrant’s common stock commenced
trading on the Nasdaq Global Market on December 21, 2009.  Prior to
December 21, 2009, shares of common stock were listed for trading on the NYSE
Amex.  The registrant’s common stock is listed on the Nasdaq Global
Market under the ticker symbol “HPJ.”





Documents
Incorporated by Reference:  None.










TABLE
OF CONTENTS





HONG
KONG HIGHPOWER TECHNOLOGY, INC.


TABLE
OF CONTENTS TO ANNUAL REPORT ON FORM 10-K


For
the Fiscal Year Ended December 31, 2009





ITEM
      1. BUSINESS
            
            
            1ITEM
      1A.  RISK FACTORS
            
            
            11ITEM
      1B. UNRESOLVED STAFF COMMENTS
            
            
            31ITEM
      2. PROPERTIES
            
            
            31ITEM
      3. LEGAL PROCEEDINGS
            
            
            32ITEM
      4. RESERVED
            
            
            32PART
      II
            
            
            33ITEM
      5. MARKET FOR REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS
      AND ISSUER PURCHASES OF EQUITY SECURITIES
            
            
            33ITEM
      6. SELECTED CONSOLIDATED FINANCIAL DATA
            
            
            35ITEM
      7. MANAGEMENT’S DISCUSSION AND ANALYSIS and results of
      operations
            
            
            35ITEM
      7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK
            
            
            47ITEM
      8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
            
            
            47ITEM
      9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
      FINANCIAL DISCLOSURE
            
            
            48ITEM
      9A. CONTROLS AND PROCEDURES
            
            
            48ITEM
      9B. OTHER INFORMATION
            
            
            49PART
      III
            
            
            51ITEM
      10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE
      GOVERNANCE
            
            
            51ITEM
      11. EXECUTIVE COMPENSATION
            
            
            53ITEM
      12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
      AND RELATED STOCKHOLDER MATTERS
            
            
            55ITEM
      13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
      DIRECTOR INDEPENDENCE
            
            
            56ITEM
      14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
            
            
            57PART
      IV
            
            
            58ITEM
      15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
            
            
            58SIGNATURES
            
            
            58EXHIBT
      INDEX
            
            
            59INDEX
      TO FINANCIAL STATEMENTS
            
            
            F-1


i




CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS




The
information contained in this Form 10-K, includes some statements that are not
purely historical and that are “forward-looking statements.” Such
forward-looking statements include, but are not limited to, statements regarding
our company’s and our management’s expectations, hopes, beliefs, intentions or
strategies regarding the future, including our financial condition, results of
operations, and the expected impact of the share exchange. In addition, any
statements that refer to projections, forecasts or other characterizations of
future events or circumstances, including any underlying assumptions, are
forward-looking statements. The words “anticipates,” “believes,” “continue,”
“could,” “estimates,” “expects,” “intends,” “may,” “might,” “plans,” “possible,”
“potential,” “predicts,” “projects,” “seeks,” “should,” “will,” “would” and
similar expressions, or the negatives of such terms, may identify
forward-looking statements, but the absence of these words does not mean that a
statement is not forward-looking.





The
forward-looking statements contained in this Form 10-K are based on current
expectations and beliefs concerning future developments and the potential
effects on the parties and the transaction. There can be no assurance that
future developments actually affecting us will be those anticipated. These
forward-looking statements involve a number of risks, uncertainties (some of
which are beyond the parties’ control) or other assumptions that may cause
actual results or performance to be materially different from those expressed or
implied by these forward-looking statements, including the
following:




·
            The
      current economic downturn adversely affecting demand for our
      products;·
            Our
      reliance on our major customers for a large portion of our net
      sales;·
            Our
      reliance on a limited number of suppliers for nickel, our principal raw
      material;·
            Our
      ability to develop and market new products;·
            Our
      ability to establish and maintain a strong brand;·
            Protection
      of our intellectual property rights;·
            The
      market acceptance of our products, including our new line of Lithium-ion
      batteries;·
            Our
      ability to successfully manufacture Lithium-ion batteries in the time
      frame and amounts expected;·
            Exposure
      to product liability and defect claims;·
            Changes
      in the laws of the PRC that affect our operations;·
            Our
      ability to obtain and maintain all necessary government certifications
      and/or licenses to conduct our business;


·
            Development
      of an active trading market for our securities;·
            The
      cost of complying with current and future governmental regulations and the
      impact of any changes in the regulations on our operations;
      and


·
            The
      other factors referenced in this Form 10-K, including, without limitation,
      under the sections entitled “Risk Factors,” “Financial Information,”
      “Management’s Discussion and Analysis of Financial Condition and Results
      of Operations,” and “Business.”




These
risks and uncertainties, along with others, are also described above under the
heading “Risk Factors.” Should one or more of these risks or uncertainties
materialize, or should any of the parties’ assumptions prove incorrect, actual
results may vary in material respects from those projected in these
forward-looking statements. Moreover, we operate in a very competitive and
rapidly changing environment. New risk factors emerge from time to time and we
cannot predict all such risk factors, nor can we assess the impact of all such
risk factors on our business or the extent to which any factor, or combination
of factors, may cause actual results to differ materially from those contained
in any forward looking statements. The Company undertakes no obligation to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, except as may be required under
applicable securities laws.




ii




PART
I





ITEM
1.                      BUSINESS





With
respect to this discussion, the terms, “we,” “us,” or “our” refer to Hong Kong
Highpower Technology, Inc., and our 100%-owned subsidiary Hong Kong Highpower
Technology Company Limited (“HKHT”) and its wholly-owned subsidiaries Shenzhen
Highpower Technology Co., Ltd. (“Shenzhen Highpower”), HZ Highpower Technology
Co., Ltd. (“HZ Highpower”) and Springpower Technology (Shenzhen) Company Limited
(formerly named Sure Power Technology (Shenzhen) Co., Ltd.)
(“Springpower”).





Corporate
Information





We were
incorporated in the state of Delaware on January 3, 2006. We were originally
organized as a “blank check” shell company to investigate and acquire a target
company or business seeking the perceived advantages of being a publicly held
corporation. On November 2, 2007, we closed a share exchange transaction,
pursuant to which we (i) became the 100% parent of HKHT and its wholly-owned
subsidiary, Shenzhen Highpower, (ii) assumed the operations of HKHT and its
subsidiary and (iii) changed our name from SRKP 11, Inc. to Hong Kong Highpower
Technology, Inc. HKHT was incorporated in Hong Kong in 2003 under the Companies
Ordinance of Hong Kong. Shenzhen Highpower was founded in 2001.  HKHT
formed HZ Highpower and Springpower in 2008.  HZ Highpower has not yet
commenced business operations.





In
addition, on November 2, 2007, concurrently with the close of the share exchange
transaction, 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. In 2008, we commenced
manufacturing Lithium-ion (“Li-ion”) rechargeable batteries through
Springpower.  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.





Industry





General





Rapid
advancements in electronic technology have expanded the number of
battery-powered devices in recent years. As these devices have come to feature
more sophisticated functions, more compact sizes and lighter weights, the
sources of power that operate these products have been required to deliver
increasingly higher levels of energy. This has stimulated consumer demand for
higher-energy batteries capable of delivering longer service between recharges
or battery replacement. In contrast to non-rechargeable batteries, after a
rechargeable battery is discharged, it can be recharged and reused many times.
Rechargeable batteries generally can be used in many non- rechargeable battery
applications, as well as high energy drain applications such as electric toys,
power tools, portable computers and other electronics, medical devices, and many
other consumer products.





High
energy density and long achievable cycle life are important characteristics of
rechargeable battery technologies. Energy density refers to the total electrical
energy per unit volume stored in a battery. High energy density batteries
generally are longer lasting power sources providing longer operating time and
necessitating fewer battery recharges. Greater energy density will permit the
use of batteries of a given weight or volume for a longer time period. Long
cycle life is a preferred feature of a rechargeable battery because it allows
the user to charge and recharge many times before noticing a difference in
performance. Long achievable cycle life, particularly in combination with high
energy density, is desirable for applications requiring frequent battery
recharges.




1





The
initial technology for rechargeable batteries was nickel cadmium (“Ni-Cad”).
Ni-Cad batteries are offered in a variety of sizes and shapes but suffer from
low energy density and low cycle life. In addition, disposal of Ni-Cad batteries
poses environmental issues due to the high toxicity level of cadmium. To meet
the demand for higher performing rechargeable batteries, nickel-metal hydride
(“Ni-MH”) batteries were developed. Electrically, Ni-MH batteries are similar to
the Ni-Cad counterparts but utilize a hydrogen-absorbing alloy instead of
cadmium. High capacity Ni-MH batteries can replace Ni-Cad batteries in many
devices because they operate on the same voltage and possess similar power and
fast charge capabilities, while offering the advantage of greater energy
density. In devices such as power tools, electric toys, personal portable
electronic devices and electric vehicles, Ni-MH batteries optimize equipment
performance. Ni-MH batteries have several advantages including:





High
      capacity - Because of the use of hydrogen as a cathode material,
      Ni-MH batteries have up to a 40 percent longer service life than ordinary
      Ni-Cad batteries of equivalent
size.




Long cycle
      life - Up to 1,000 charge/discharge
  cycles.




No memory
      effect - Ni-Cad batteries suffer from a memory effect - when
      charging, the user must ensure that they are totally flat first, otherwise
      they 'remember' how much charge they used to have and die much quicker.
      Ni-MH batteries have a negligible memory effect, making charging quicker
      and more convenient.




Performs at
      extreme temperatures - Capable of operation on discharge from
      -20°C
      to 50°C
      (-4°F
      to 122°F)
      and charge from 0°C
      to 45°C
      (32°F
      to 113oF).




Environmentally
      friendly- Zero percent
      cadmium or other toxic chemicals such as
  mercury.




Cost
      efficiency- Rechargeable
      Ni-MH batteries are substantially less expensive than rechargeable
      lithium-ion batteries.




The first
rechargeable Li-ion batteries were commercialized in 1991. Rechargeable Li-ion
batteries are produced as cylindrical lithium-ion or prismatic lithium-polymer
batteries. The energy density of Li-ion is typically twice that of the standard
nickel-cadmium. Li-ion batteries are low maintenance, with no memory effect and
no scheduled cycling required to prolong battery life. In addition, the
self-discharge is less than half compared to nickel-cadmium, making lithium-ion
well suited for modern applications, such as power tools, electric bicycles,
laptops, LED lights, portable medical devices, digital cameras, and MP3
players.





Despite
its overall advantages, Li-ion technology has limitations that include
fragility, aging, capacity deterioration and higher manufacturing cost.
Manufacturers are constantly working to improve Li-ion technology with new and
enhanced chemical combinations. Li-ion batteries have several advantages
including:





High
      capacity— Up to 100% higher energy density compared to standard
      nickel-cadmium batteries.




Low
      self-discharge— Self-discharge can be less than half that of
      nickel-based batteries.




Low
      maintenance— No periodic discharge is needed and there is no
      memory effect. Specialty cells can provide very high current to
      applications such as power tools.




Flexible
      form factor— Prismatic lithium
      polymer batteries can be produced in a wide variety of form factors for
      different products and
applications.




Li-ion
batteries also have several limitations:




Requires
      protection circuit to maintain voltage and current within safe
      limits.




Subject
      to aging when not in use - storage in a cool place at 40% charge reduces
      the aging effect.




2




Transportation
      restrictions - shipment of larger quantities may be subject to regulatory
      control.




Manufacturing
      cost is approximately 40% greater than
  nickel-cadmium.




China




China’s
market share of battery production is expected to increase. China has a number
of benefits in battery manufacturing, which are expected to drive this
growth:




—
            Low
      Costs.  China
      continues to have a significant low cost of labor as well as easy access
      to raw materials and land.




—
            Proximity
      to electronics supply chain.  Electronics
      manufacturing in general continues to shift to China, giving China-based
      manufacturers a further cost and cycle time
  advantage.




—
            Proximity
      to end-markets.  China has
      focused in recent years on building its research, development and
      engineering skill base in all aspects of higher end manufacturing,
      including batteries.




Competitive
Strengths





We
believe the following competitive strengths contribute to our success and
differentiate us from our competitors:





Experienced
management team





Our
senior management team has extensive business and industry experience. Our
principal stockholder and Chairman, Mr. Dang Yu Pan, has over 10 years of
experience in China’s battery industry. Additionally, other members of our
senior management team have significant experience with respect to other key
aspects of our operations, including product design, manufacturing, and sales
and marketing.




Market
position





Since our
inception, we have primarily focused on the research, development and
manufacture of Ni-MH battery cells. We have developed significant expertise in
Ni-MH battery technology and large-scale manufacturing that enables us to
improve the quality of our products, reduce costs, and keep pace with evolving
industry standards. Our Ni-MH rechargeable batteries have been developed to
respond to a number of specific market requirements such as recyclability, high
power, high energy density, long life, low cost and other important
characteristics for consumer and OEM applications. They are suitable for almost
all applications where high currents and deep discharges are
required.  Our wholly-owned subsidiary, Springpower Technology
(Shenzhen) Co, Ltd., is a company that specializes in the research,
manufacturing and marketing Lithium-ion rechargeable batteries.  Our
Li-ion manufacturing operations started in 2008, and although we are making
progress in our Lithium-ion operations, these operations remain a small part of
our overall company.





Well-established
distribution channels





We sell
our products to original equipment manufacturers and a well-established network
of distributors and resellers, allowing us to penetrate customer markets
worldwide. Our relationship with many of our distributors extends from our
inception in 2001. We also continue to screen and identify our strongest
customers in each distribution channel and to focus our sales efforts towards
the largest and fastest growing distributors and resellers.





Proven
product manufacturing capabilities





We
selectively use automation in our manufacturing process to ensure a high
uniformity and precision in our products while maintaining our
cost-competitiveness. We use automated machinery in key stages of the
manufacturing process while using manual labor for other stages to take
advantage of the availability of low-cost, skilled labor in China. We have
received several accreditations, including The International Organization for
Standardization (ISO) 9001: 2000, ISO 14001, Conformity Europende (CE) and
Underwriters Laboratories Inc. (UL), attesting to our quality management
requirements, manufacturing safety, controls, procedures and environmental
performance.




3





Customer
service expertise





We work
closely with our major customers in order to ensure high levels of customer
satisfaction. To provide superior service and foster customer trust and loyalty,
we offer flexible delivery methods and product feedback opportunities to our
customers. Our sales representatives and marketing personnel undergo extensive
training, providing them with the skills necessary to answer product and
service-related questions, proactively educate potential customers about our
products, and promptly resolve customer inquiries.





Our
Strategy





Our goal
is to become a global leader in the development and manufacture of rechargeable
battery products. We intend to achieve this goal by implementing the following
strategies:





Continue to pursue cost-effective
opportunities





Our
operating model, coupled with our modern manufacturing processes, has resulted
in economies of scale, a low cost structure, and an ability to respond rapidly
to customer demands. We intend to achieve greater cost-effectiveness by
expanding our production capacity, increasing our productivity and efficiency in
the manufacturing process and seeking to reducing the per unit cost of
production through the use of advanced technologies.





Aggressively pursue distribution
channels





We intend
to broaden the scope of our distribution arrangements to increase sales
penetration in targeted markets. We intend to select additional distributors
based on their access to markets and retail outlets that are candidates for our
products. In addition, we intend to expand our international sales presence and
diversify our revenue sources by taking efforts to increase the percentage of
our net revenues attributable to sales to emerging new markets.





Expand existing and new product
offerings





Since the
commencement of our battery operations in 2001, we have expanded our product
offerings to  multiple product lines, which include in each product
line batteries of varying sizes, capacities and voltages. We intend to expand
our existing lines of Ni-MH batteries for use in other applications, such as
hybrid-electric cars, and devote additional resources to the development of our
new line of rechargeable Li-ion batteries for higher-end, high-performance
applications, such as laptop batteries.





Enhance marketing efforts to increase
brand awareness





We
continue to devote our efforts towards brand development and utilize marketing
concepts in an attempt to enhance the marketability of our
products.





Products





Our Ni-MH
rechargeable batteries are versatile solutions for many diverse applications due
to their long life, environmentally friendly materials, high power and energy,
low cost and safe applications. Developed to meet the requirement for
increasingly higher levels of energy demanded by today’s electronic products,
our Ni-MH rechargeable batteries can offer up to increased capacity and higher
energy density over similarly sized standard Ni-Cad rechargeable batteries. As a
result, users can expect a longer time between charges and longer running time.
Our Ni-MH rechargeable batteries are available in both cylindrical and prismatic
shapes.





In 2009,
we completed the construction and build-out of several production lines for the
development and manufacturing of a range of Li-ion rechargeable batteries and
products. We produce two major series of Li-ion batteries & Li-polymer
batteries with hundreds of different models for each
series.  Currently, we produce in excess of 800,000 Li-ion battery
units per month.




4





We
produce an extensive line of batteries, falling into two main
categories:





Consumer
      Batteries – Relative to ordinary Ni-Cad rechargeable batteries, as
      well as their non-rechargeable counterparts, our Ni-MH and Li-ion
      batteries offer higher power capacity allowing for longer working time and
      shortened charging time during equivalent working periods. We produce A,
      AA and AAA sized batteries in blister packing as well as chargers and
      battery packs.




Industrial Batteries– These batteries are designed for electric bikes, power tools and
      electric toys. They are specifically designed for high-drain discharge
      applications, possessing low internal resistance, more power, and longer
      discharging time.




We also
recycle batteries and resell the recycled materials to some of our customers. We
are currently testing this market and anticipate expanding our battery recycling
operations in the future.





Net sales
for each of our product categories as a percentage of net sales is set forth
below:





Year
      Ended December 31,2009
            
            
            2008
            
            
            2007Consumer
      Batteries
            
            
            79
            %
            
            
            80
            %
            
            
            80
            %Industrial
      Batteries
            
            
            20
            %
            
            
            19
            %
            
            
            19
            %Materials
            
            
            1
            %
            
            
            1
            %
            
            
            1
            %100
            %
            
            
            100
            %
            
            
            100
            %





Supply
of Raw Materials





The cost
of the raw materials used in our rechargeable batteries is a key factor in the
pricing of our products. We purchase materials in volume which allows us the
ability to negotiate better pricing with our suppliers. Our purchasing
department locates eligible suppliers of raw materials striving to use only
those suppliers who have previously demonstrated quality control and
reliability.





Currently,
we purchase our raw materials, consisting primarily of metal materials including
nickel oxide, nickel foam, metal hydride alloy and other battery components,
such as membranes, from suppliers located in China and Japan.  For our
Li-ion batteries, we purchase raw materials consisting primarily of LiCo02,
graphite, electrolyte and tab.  We believe that the raw materials and
components used in manufacturing our rechargeable batteries are available from
enough sources to be able to satisfy our manufacturing needs; however, some of
our materials, such as nickel, are available from a limited number of suppliers.
Our top three suppliers of nickel account for 50% of our nickel
supply.  Our top three suppliers of lithium account for approximately
30% of our lithium supply.  Presently, our relationships with our
current suppliers are generally good and we expect that our suppliers will be
able to meet the anticipated demand for our products in the future.





At times,
the pricing and availability of raw materials can be volatile, attributable to
numerous factors beyond the Company’s control, including general economic
conditions, currency exchange rates, industry cycles, production levels or a
supplier’s tight supply. To the extent that we experience cost increases we may
seek to pass such cost increases on to our customers, but cannot provide any
assurance that we will be able to do so successfully or that our business,
results of operations and financial condition would not be adversely affected by
increased volatility of the cost and availability of raw materials.





Quality
Control





We
consider quality control an important element of our business practices. We have
stringent quality control systems that are implemented by more than 100
company-trained staff members to ensure quality control over each phase of the
production process, from the purchase of raw materials through each step in the
manufacturing process. Supported by advanced equipment, we utilize a scientific
management system and precision inspection measurement, capable of supplying
stable, high-quality rechargeable batteries. Our quality control department
executes the following functions:




5





·
            setting
      internal controls and regulations for semi-finished and finished
      products;


·
            testing
      samples of raw materials from suppliers;


·
            implementing
      sampling systems and sample files;


·
            maintaining
      quality of equipment and instruments; and


·
            articulating
      the responsibilities of quality control
staff.




We
monitor quality and reliability in accordance with the requirements of QSR, or
Quality System Review, and ISO 9001 systems. We have received European Union’s
CE attestation, UL authentication, ISO 9001:2000 and ISO 14001 certification. We
have passed stringent quality reviews and thus obtained OEM qualifications from
various domestic cellular phone brand names. With our strong technological
capabilities and use of automated equipment for core aspects of the
manufacturing process, we believe our product quality meets or even exceeds in
certain key aspects international industry standards.





Manufacturing





The
manufacture of rechargeable batteries requires coordinated use of machinery and
raw materials at various stages of manufacturing. We have a large-scale
production base that includes a 484,000 square feet factory, a dedicated design,
sales and marketing team, and approximately 2,247 company-trained employees. We
use automated machinery to process key aspects of the manufacturing process to
ensure high uniformity and precision, while leaving the non-key aspects of the
manufacturing process to manual labor. We intend to further improve our
automated production lines and strive to continue investing in our manufacturing
infrastructure to further increase our manufacturing capacity, helping us to
control the per unit cost of our products.





The
primary raw materials used in production of rechargeable batteries include
electrode materials, electrolytes, foils, cases and caps and separators. The
electrodes are manufactured using active materials, conductive agents and binder
which are mixed with liquid. These mixtures are then uniformly coated onto the
thin metal foil, then after drying, the electrodes are cut down to the
designated sizes. The positive electrode and negative electrode are then wound
together with a separator and inserted into a can, and electrolyte is filled.
The sealing completes the battery cell assembly. Some of these cells are then
integrated into packages which are customized into a wide variety of
configurations to interface with different electronic devices.





In
October 2008, we commenced construction of our new manufacturing facility in
Huizhou, Guangdong Province.  The new facility will eventually house
all Ni-MH production for the Company.  The new facility’s production
capacity will be approximately two to three times that of our current production
facility in Shenzhen. The construction is progressing according to plan, the
estimated completion date based on the current run rate is around 4th quarter
2010,





Major
Customers





During
the years ended December 31, 2009 and 2008, approximately 47% and 57% of our net
sales were generated from our five largest customers, respectively. The
percentages of net sales disclosed for each of our major customers includes
sales to groups of customers under common control or that could be deemed
affiliates of such major customers. During the years ended December 31, 2009 and
2008, one major customer Energizer Battery Manufacturing, Inc. accounted for 20%
and 23%, respectively, of our net revenues.  No other customer
accounted for more than 10% of net revenues during 2009 or 2008.





Sales
and Marketing





We have a
broad sales network of approximately 102 salespersons in China and have one
branch office in Hong Kong. Our sales staff in each of our offices targets key
customers by arranging in-person sales presentations and providing post-sales
services. Our sales staff works closely with our customers so that we can better
address their needs and improve the quality and features of our products. We
offer different price incentives to encourage large-volume and long-term
customers.




6





Sales to
our customers are based primarily on purchase orders we receive from time to
time rather than firm, long-term purchase commitments from our customers.
Uncertain economic conditions and our general lack of long-term purchase
commitments with our customers make it difficult for us to predict revenue
accurately over the longer term. Even in those cases where customers are
contractually obligated to purchase products from us, we may elect not to
enforce our contractual rights immediately because of the long-term nature of
our customer relationships and for other business reasons, and instead may
negotiate accommodations with customers regarding particular
situations.





We target
sales of our rechargeable batteries and charging systems through original
equipment manufacturers (“OEMs”), as well as distributors and resellers focused
on our target markets. We have contractual arrangements with distributors who
market our products on a commission basis in particular areas. Although OEM
agreements typically contain volume-based pricing based on expected volumes,
typically prices are rarely adjusted retroactively if contract volumes are not
achieved. We attempt to adjust future prices accordingly, but our ability to
adjust prices is generally based on market conditions which we cannot
control.





Net sales
based on the location of our customers as a percentage of net sales is set forth
below:





Year
      Ended December 31,2009
            
            
            2008
            
            
            2007China
      and Hong Kong
            
            
            47.0
            %
            
            
            41.2
            %
            
            
            39.5
            %Europe
            
            
            32.8
            
            
            
            37.3
            
            
            
            34.6North
      America
            
            
            14.1
            
            
            
            14.5
            
            
            
            17.5Asia
            
            
            5.6
            
            
            
            6.4
            
            
            
            8.1South
      America, Africa and Others
            
            
            0.5
            
            
            
            0.6
            
            
            
            0.3Total
            
            
            100.0
            %
            
            
            100.0
            %
            
            
            100.0
            %


* Less
than 1%.





While the
largest portion of our sales are made to customers in China and Hong Kong, our
products are distributed worldwide, with approximately 47.0% of our products
distributed to Hong Kong and China, 32.8% to Europe, 14.1% to the United States,
and 6.1% to other markets.





We engage
in marketing activities such as attending industry-specific conferences and
exhibitions to promote our products and brand name. We also advertise in
industry journals and magazines and through the Internet to market our products.
We believe these activities help in promote our products and brand name among
key industry participants.





Research
and Development





To
enhance our product quality, reduce cost, and keep pace with technological
advances and evolving market trends, we have established an advanced research
and development center. Our research and development center is not only focused
on enhancing our Ni-MH-based technology by developing new products and improving
the performance of our current products, but also seeks to develop alternative
technologies such as the line of rechargeable Li-ion batteries we are currently
developing for higher-end, high performance applications. Our research and
development center is currently staffed with over 115 research and development
technicians who overlook our techniques department, product development
department, material analysis lab, and performance testing lab. These
departments work together to research new material and techniques, test battery
performance, inspect products and to test performance of machines used in the
manufacturing process.





For years
ended December 31, 2009 and 2008 we expended $1,059,341 and $340,929,
respectively, in research and development.





Strategic
Partnership with Freudenberg Nonwovens





In 2009,
we entered into a strategic R&D partnership with Freudenberg
Nonwovens.  Freudenberg will utilize our R&D Center research
facilities in China to test their various separators.  Freudenberg
Nonwovens was the first to introduce nonwovens to the market over 70 years ago
and is now the largest and most diverse manufacturer of nonwovens in the world
today.  Freudenberg ́s battery separator, which is one of their
nonwovens, has been ranked as number one in the battery separator industry.
Separators are considered an integral material for Ni-MH rechargeable
batteries.  We strongly believe the relationship with Freudenberg
Nonwovens will continue to improve our NiMH product quality, strengthen our
R&D in nonwoven knowledge which can create mutual benefits in the NiMH
battery development.




7





Competition





We face
competition from many other battery manufacturers, many of which have
significantly greater name recognition and financial, technical, manufacturing,
personnel and other resources than we have. We compete against other Ni-MH and
Li-ion battery producers, as well as manufacturers of other rechargeable and
non-rechargeable batteries. The main types of rechargeable batteries currently
on the market include: lead-acid; nickel-cadmium; nickel metal hydride; liquid
lithium-ion and lithium-ion polymer. Competition is typically based on design,
quality, reliability, and performance. The technology behind Ni-MH rechargeable
batteries has consistently improved over time and we continue to enhance our
products to meet the competitive threats from its competitors. Our primary
competitors in the Ni-MH battery market or other similar competing rechargeable
battery products include SANYO Electric Co., Ltd. Global, Matsushita Industrial
Co., Ltd. (Panasonic), BYD Company Ltd., GPI International, Ltd., and GS Yuasa
Corporation. Our primary competitors in the Li-ion battery market or other
similar competing rechargeable battery products include Desay Corp., Coslight
Group, Tianjin Lishen Battery Co. Ltd., and ATL.





Intellectual
Property





We rely
on a combination of patent and trade secret protection and other unpatented
proprietary information to protect our intellectual property rights and to
maintain and enhance our competitiveness in the battery industry. We currently
hold nine patents in China and have two patent applications pending in
China. We also have two registered trademarks in China, which include “HFR”
and its Chinese equivalent.





Shenzhen
Highpower is party to a license agreement with Ovonic Battery Company, Inc.
(“Ovonic”) under which Ovonic granted Shenzhen Highpower (1) a royalty-bearing,
non-exclusive license to use certain patents owned by Ovonic to manufacture
Ni-MH batteries for portable consumer applications (“Consumer Batteries”) in the
PRC and (2) a royalty-bearing, non-exclusive worldwide license to use certain
patents owned by Ovonic to use, sell and distribute Consumer Batteries. The
renewal agreement will remain in effect until the licensed patents under the
agreement expire. Pursuant to the renewed agreement, Shenzhen Highpower will pay
a license fee of up to $1.0 million based on gross sales of Consumer
Batteries.





We also
rely on unpatented technologies to protect the proprietary nature of our product
and manufacturing processes. We require that our management team and key
employees enter into confidentiality agreements that require the employees to
assign the rights to any inventions developed by them during the course of their
employment with us. The confidentiality agreements include noncompetition and
nonsolicitation provisions that remain effective during the course of employment
and for periods following termination of employment, which vary depending on
position and location of the employee.





PRC
Government Regulations





Environmental
Regulations





The major
environmental regulations applicable to us include the PRC Environmental
Protection Law, the PRC Law on the Prevention and Control of Water Pollution and
its Implementation Rules, the PRC Law on the Prevention and Control of Air
Pollution and its Implementation Rules, the PRC Law on the Prevention and
Control of Solid Waste Pollution, and the PRC Law on the Prevention and Control
of Noise Pollution. We aim to comply with environmental laws and regulations and
have acquired an ISO14004:2004 Environment Systems Certification and QC080000
Hazardous Substance Process Management System.





We
constructed our manufacturing facilities with the PRC’s environmental laws and
requirements in mind. We currently outsource the disposal of solid waste to a
third party-contractor. In late 2007, we renewed our environmental permit, which
expired in September 2007, from the Shenzhen Environment Protection Bureau
Longgang Bureau covering our manufacturing operations and providing for an
annual output limit of Ni-MH rechargeable batteries. Our new permit, which
expires on December 31, 2010, does not include one of our current premises at
our manufacturing facility. Although we substantially exceeded the approved
annual output limit of Ni-MH rechargeable batteries set forth in our old permit,
we do not expect to exceed the approved annual output limit set forth in our new
permit. If we fail to comply with the provisions of the renewed permit, we could
be subject to fines, criminal charges or other sanctions by regulators,
including the suspension or termination of our manufacturing operations. We have
not been named as a defendant in any legal proceedings alleging violation of
environmental laws. Other than the expiration of our environmental approval, we
have no reasonable basis to believe that there is any threatened claim, action
or legal proceedings against us that would have a material adverse effect on our
business, financial condition or results of operations due to any non-compliance
with environmental laws.




8





Patent
Protection in China





The PRC’s
intellectual property protection regime is consistent with those of other modern
industrialized countries. The PRC has domestic laws for the protection of rights
in copyrights, patents, trademarks and trade secrets. The PRC is also a
signatory to most of the world’s major intellectual property conventions,
including:





—
            Convention
      establishing the World Intellectual Property Organization (WIPO
      Convention) (June 4, 1980);




—
            Paris
      Convention for the Protection of Industrial Property (March 19,
      1985);




—
            Patent
      Cooperation Treaty (January 1, 1994);
and




—
            The
      Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs)
      (November 11, 2001).




Patents
in the PRC are governed by the China Patent Law and its Implementing
Regulations, each of which went into effect in 1985. Amended versions of the
China Patent Law and its Implementing Regulations came into effect in 2001 and
2003, respectively.





The PRC
is signatory to the Paris Convention for the Protection of Industrial Property,
in accordance with which any person who has duly filed an application for a
patent in one signatory country shall enjoy, for the purposes of filing in the
other countries, a right of priority during the period fixed in the convention
(12 months for inventions and utility models, and 6 months for industrial
designs).





The
Patent Law covers three kinds of patents, i.e., patents for inventions, utility
models and designs respectively. The Chinese patent system adopts the principle
of first to file. This means that, where more than one person files a patent
application for the same invention, a patent can only be granted to the person
who first filed the application. Consistent with international practice, the PRC
only allows the patenting of inventions or utility models that possess the
characteristics of novelty, inventiveness and practical applicability. For a
design to be patentable, it should not be identical with or similar to any
design which, before the date of filing, has been publicly disclosed in
publications in the country or abroad or has been publicly used in the country,
and should not be in conflict with any prior right of another.





PRC law
provides that anyone wishing to exploit the patent of another must conclude a
written licensing contract with the patent holder and pay the patent holder a
fee. One rather broad exception to this, however, is that, where a party
possesses the means to exploit a patent but cannot obtain a license from the
patent holder on reasonable terms and in reasonable period of time, the PRC
State Intellectual Property Office, or SIPO, is authorized to grant a compulsory
license. A compulsory license can also be granted where a national emergency or
any extraordinary state of affairs occurs or where the public interest so
requires. SIPO, however, has not granted any compulsory license up to now. The
patent holder may appeal such decision within three months from receiving
notification by filing a suit in a people’s court.





PRC law
defines patent infringement as the exploitation of a patent without the
authorization of the patent holder. A patent holder who believes his patent is
being infringed may file a civil suit or file a complaint with a PRC local
Intellectual Property Administrative Authority, which may order the infringer to
stop the infringing acts. Preliminary injunction may be issued by the People’s
Court upon the patentee’s or the interested parties’ request before instituting
any legal proceedings or during the proceedings. Evidence preservation and
property preservation measures are also available both before and during the
litigation. Damages in the case of patent infringement is calculated as either
the loss suffered by the patent holder arising from the infringement or the
benefit gained by the infringer from the infringement. If it is difficult to
ascertain damages in this manner, damages may be reasonably determined in an
amount ranging from one to more times of the license fee under a contractual
license. The infringing party may be also fined by Administration of Patent
Management in an amount of up to three times the unlawful income earned by such
infringing party. If there is no unlawful income so earned, the infringing party
may be fined in an amount of up to RMB500,000, or approximately
$62,500.




9





Tax





Pursuant
to the Provisional Regulation of China on Value Added Tax and their implementing
rules, all entities and individuals that are engaged in the sale of goods, the
provision of repairs and replacement services and the importation of goods in
China are generally required to pay VAT at a rate of 17.0% of the gross sales
proceeds received, less any deductible VAT already paid or borne by the
taxpayer. Further, when exporting goods, the exporter is entitled to a portion
of or all the refund of VAT that it has already paid or borne. Our imported raw
materials that are used for manufacturing export products and are deposited in
bonded warehouses are exempt from import VAT.





Foreign
Currency Exchange





Under the
PRC foreign currency exchange regulations applicable to us, the Renminbi is
convertible for current account items, including the distribution of dividends,
interest payments, trade and service-related foreign exchange transactions.
Conversion of Renminbi for capital account items, such as direct investment,
loan, security investment and repatriation of investment, however, is still
subject to the approval of the PRC State Administration of Foreign Exchange, or
SAFE. Foreign-invested enterprises may only buy, sell and/or remit foreign
currencies at those banks authorized to conduct foreign exchange business after
providing valid commercial documents and, in the case of capital account item
transactions, obtaining approval from the SAFE. Capital investments by
foreign-invested enterprises outside of China are also subject to limitations,
which include approvals by the Ministry of Commerce, the SAFE and the State
Reform and Development Commission.





Dividend
Distributions





Under
applicable PRC regulations, foreign-invested enterprises in China may pay
dividends only out of their accumulated profits, if any, determined in
accordance with PRC accounting standards and regulations. In addition, a
foreign-invested enterprise in China are required to set aside at least 10.0% of
their after-tax profit based on PRC accounting standards each year to its
general reserves until the accumulative amount of such reserves reach 50.0% of
its registered capital. These reserves are not distributable as cash dividends.
The board of directors of a foreign-invested enterprise has the discretion to
allocate a portion of its after-tax profits to staff welfare and bonus funds,
which may not be distributed to equity owners except in the event of
liquidation.





Employees





At
December 31, 2009, we had approximately 2,247 employees, all of which are
employed full-time. There are no collective bargaining contracts covering any of
our employees. We believe our relationship with our employees is
satisfactory.




10





ITEM
1A:                      RISK
FACTORS





Any
investment in our common stock involves a high degree of risk. Potential
investors should carefully consider the material risks described below and all
of the information contained in this Form 10-K before deciding whether to
purchase any of our securities. Our business, financial condition or results of
operations could be materially adversely affected by these risks if any of them
actually occur. None of our securities are currently listed or quoted for
trading on any national securities exchange or national quotation system. If and
when our securities are traded, the trading price could decline due to any of
these risks, and an investor may lose all or part of his 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 faced described below and
elsewhere in this Form 10-K.





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:


—
            maintain
      our leading position in the Ni-MH battery market;—
            retain
      existing customers or acquire new customers;—
            diversify
      our revenue sources by successfully developing and selling our products in
      the global battery market and other markets;—
            keep
      up with evolving industry standards and market developments;—
            respond
      to competitive market conditions;—
            maintain
      adequate control of our expenses;—
            manage
      our relationships with our suppliers;—
            attract,
      train, retain and motivate qualified personnel; or—
            protect
      our proprietary technologies





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. Our
results of operations may be adversely affected by decreases in the general
level of economic activity. Decreases in consumer spending that may result from
the current global economic downturn may weaken demand for items that use our
battery products. A decrease in the demand for portable electronic devices would
likely have a material adverse effect on our results of
operations.  We are unable to predict the duration and severity of the
current disruption in financial markets and the global adverse economic
conditions and the effect such events might have on our business.





11





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 predominately manufacture and
market Ni-MH batteries, and to a lesser extent, Li-ion and Li-polymer
batteries.  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 47%, 57%
and 56% of our net sales for the years ended December 31, 2009, 2008 and 2007,
respectively. One customer, Energizer Battery Manufacturing, Inc., accounted for
20% and 23% of our net revenues for the years ended December 31, 2009 and 2008,
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.




12





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. Two customer represented an aggregate of 42% of our accounts
receivable as of December 31, 2009.  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
future operating results may be affected by fluctuations in costs of raw
materials, such as nickel.





Our
principal raw material is nickel, which is available from a limited number of
suppliers in China. The price of nickel was volatile during 2009 and could be
volatile again. The price of nickel rose 59% from January2009 to December 2009.
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.




13





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:





·
            our
      ability raise capital to acquire additional raw materials and expand our
      manufacturing facilities;


·
            delays
      and cost overruns, due to increases in raw material prices and problems
      with equipment vendors;


·
            delays
      or denial of required approvals and certifications by relevant government
      authorities;


·
            diversion
      of significant management attention and other resources;
    and


·
            failure
      to execute our expansion plan effectively.




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.




14





Our
business may be adversely affected by the global economic and construction
industry downturn, in addition to the continuing uncertainties in the financial
markets.





The
global economy is currently in a pronounced economic downturn. Global financial
markets are continuing to experience disruptions, including severely diminished
liquidity and credit availability, declines in consumer confidence, declines in
economic growth, increases in unemployment rates, and uncertainty about economic
stability. Given these uncertainties, there is no assurance that there will not
be further deterioration in the global economy, the global financial markets and
consumer confidence. If economic conditions deteriorate further, our business
and results of operations could be materially and adversely
affected.





Additionally,
sales of consumer items such as portable electronic devices, has slowed and
there has been adverse changes in employment levels, job growth, consumer
confidence and interest rates.  Our future results of operations may
experience substantial fluctuations from period to period as a consequence of
these factors, and such conditions and other factors affecting consumer spending
may affect the timing of orders. Thus, any economic downturns generally would
have a material adverse effect on our business, cash flows, financial condition
and results of operations.





Additionally,
the inability of our customers and suppliers to access capital efficiently, or
at all, may have other adverse effects on our financial condition. For example,
financial difficulties experienced by our customers or suppliers could result in
product delays; increase accounts receivable defaults; and increase our
inventory exposure. The inability of our customers to borrow money to fund
purchases of our products reduces the demand for our products and services and
may adversely affect our results from operations and cash flow. These risks may
increase if our customers and suppliers do not adequately manage their business
or do not properly disclose their financial condition to us.





Although
we believe we have adequate liquidity and capital resources to fund our
operations internally, in light of current market conditions, our inability to
access the capital markets on favorable terms, or at all, may adversely affect
our financial performance. The inability to obtain adequate financing from debt
or capital sources could force us to self-fund strategic initiatives or even
forego certain opportunities, which in turn could potentially harm our
performance.





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.  Additionally, our insurance policy
imposes a ceiling for maximum coverage and high deductibles and we may be unable
to obtain sufficient amounts from our policy to cover a product liability
claim.  We may not be able to obtain any insurance coverage for
certain types of product liability claims, as our policy excludes coverage of
certain types of claims.  In such cases, we may still incur
substantial costs related to a product liability claim, which could adversely
affect our results of operations.





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.




15





Our
labor costs are likely to increase as a result of changes in Chinese labor
laws.





We expect
to experience an increase in our cost of labor due to recent changes in Chinese
labor laws which are likely to increase costs further and impose restrictions on
our relationship with our employees. In June 2007, the National People’s
Congress of the PRC enacted new labor law legislation called the Labor Contract
Law and more strictly enforced existing labor laws. The new law, which became
effective on January 1, 2008, amended and formalized workers’ rights concerning
overtime hours, pensions, layoffs, employment contracts and the role of trade
unions. As a result of the new law, we have had to increase the salaries of our
employees, provide additional benefits to our employees, and revise certain
other of our labor practices. The increase in labor costs has increased our
operating costs, which increase we have not always been able to pass through to
our customers. In addition, under the new law, employees who either have worked
for us for 10 years or more or who have had two consecutive fixed-term contracts
must be given an “open-ended employment contract” that, in effect, constitutes a
lifetime, permanent contract, which is terminable only in the event the employee
materially breaches our rules and regulations or is in serious dereliction of
his or her duties. Such non-cancelable employment contracts will substantially
increase our employment related risks and limit our ability to downsize our
workforce in the event of an economic downturn. No assurance can be given that
we will not in the future be subject to labor strikes or that we will not have
to make other payments to resolve future labor issues caused by the new laws.
Furthermore, there can be no assurance that the labor laws will not change
further or that their interpretation and implementation will vary, which may
have a negative effect upon our business and results of operations.





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 December 31, 2009, 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
December 31, 2009, we held nine Chinese patents and had two 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.




16





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 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 December 31, 2009, we had approximately
2,247 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.




17





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
expansion into the Li-ion battery business is subject to substantial risks,
which could result in a material adverse effect on our results of
operations.





In
September 2008, we completed the construction and build-out of two production
lines for the development and manufacturing of a range of Li-ion rechargeable
batteries and products. We have limited experience in the development and
production of Li-ion batteries, and due to this inexperience, we may be unable
to manufacture our Li-ion battery products in the time frame and amounts
expected or be unable to successfully commercialize our Li-ion products. The
lithium ion battery market is competitive and risky and we are unsure whether
our Li-ion products will gain market acceptance. We are competing against
numerous competitors with greater financial resources than us, and due to the
difficulties of entry into these markets, we may be unsuccessful and not be able
to complete in the Li-ion battery industry.





Adverse
capital and credit market conditions may significantly affect our ability to
meet liquidity needs, access to capital and cost of capital.





The
capital and credit markets have been experiencing extreme volatility and
disruption, including, among other things, extreme volatility in securities
prices, severely diminished liquidity and credit availability, ratings
downgrades of certain investments and declining valuations of others.
Governments have taken unprecedented actions intended to address extreme market
conditions that have included severely restricted credit and declines in real
estate values. In some cases, the markets have exerted downward pressure on
availability of liquidity and credit capacity for certain issuers. While
currently these conditions have not impaired our ability to utilize our current
credit facilities and finance our operations, there can be no assurance that
there will not be a further deterioration in financial markets and confidence in
major economies such that our ability to access credit markets and finance our
operations, including the financing of the construction of our new manufacturing
facility, might be impaired. Without sufficient liquidity, we may be forced to
curtail our operations and our planned expansion of our new Li-ion battery line
and construction of our new manufacturing facility. Adverse market conditions
may limit our ability to replace, in a timely manner, maturing liabilities and
access the capital necessary to operate and grow our business. As such, we may
be forced to delay raising capital or bear an unattractive cost of capital which
could decrease our profitability and significantly reduce our financial
flexibility. The current tightening of credit in financial markets could
adversely affect the ability of our customers to obtain financing for purchases
of our products and could result in a decrease in or cancellation of orders for
our products. Our results of operations, financial condition, cash flows and
capital position could be materially adversely affected by disruptions in the
financial markets.





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:




18





·
            vulnerability
      of our business to a general economic downturn in
China;


·
            fluctuation
      and unpredictability of costs related to the raw material used to
      manufacture our products;


·
            seasonality
      of our business;


·
            changes
      in the laws of the PRC that affect our operations;


·
            competition
      from our competitors; and


·
            our ability to obtainnecessary government
      certifications and/or licenses to conduct our
    business.




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, governmental approvals required for conducting business and
investments, laws and regulations governing the battery industry, national
security-related laws and regulations and export/import laws and regulations, as
well as commercial, antitrust, patent, product liability, environmental laws and
regulations, consumer protection, and financial and business taxation laws and
regulations.





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:




19





·
            levying
      fines;


·
            revoking
      our business license, other licenses or authorities;


·
            requiring
      that we restructure our ownership or operations; and


·
            requiring
      that we discontinue any portion or all of our business.


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 in China.  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.





To the
extent we ship our products outside of the PRC, or to the extent our products
are used in products sold outside of the PRC, they may be affected by the
following: The transportation of non-rechargeable and rechargeable lithium
batteries is regulated by the International Civil Aviation Organization (ICAO),
and corresponding International Air Transport Association (IATA), Pipeline &
Hazardous Materials Safety Administration (PHMSA), Dangerous Goods Regulations
and the International Maritime Dangerous Goods Code (IMDG), and in the PRC by
General Administration of Civil Aviation of China and Maritime Safety
Administration of People’s Republic of China. These regulations are based on the
United Nations (UN) Recommendations on the Transport of Dangerous Goods Model
Regulations and the UN Manual of Tests and Criteria. We currently ship our
products pursuant to ICAO, IATA and PHMSA hazardous goods regulations. New
regulations that pertain to all lithium battery manufacturers went into effect
in 2003 and 2004, and additional regulations went into effect on October 1,
2009. The regulations require companies to meet certain testing, packaging,
labeling and shipping specifications for safety reasons. We comply with all
current PRC and international regulations for the shipment of our products, and
will comply with any new regulations that are imposed. We have established our
own testing facilities to ensure that we comply with these regulations. If we
were unable to comply with the new regulations, however, or if regulations are
introduced that limit our ability to transport our products to customers in a
cost-effective manner, this could have a material adverse effect on our
business, financial condition and results of operations.




20





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.  Additionally, these
regulations may change in a manner that could have a material adverse effect on
our business, results of operations and financial condition. We have made and
will continue to make capital and other expenditures to comply with
environmental requirements.





Furthermore,
our failure to comply with applicable environmental laws and regulations
worldwide could harm our business and results of operations. The manufacturing,
assembling and testing of our products require the use of hazardous materials
that are subject to a broad array of environmental, health and safety laws and
regulations. Our failure to comply with any of these applicable laws or
regulations could result in:





·
            regulatory
      penalties, fines and legal liabilities;


·
            suspension
      of production;


·
            alteration
      of our fabrication, assembly and test processes; and


·
            curtailment
      of our operations or sales.


In
addition, our failure to manage the use, transportation, emission, discharge,
storage, recycling or disposal of hazardous materials could subject us to
increased costs or future liabilities. Existing and future environmental laws
and regulations could also require us to acquire pollution abatement or
remediation equipment, modify our product designs or incur other expenses
associated with such laws and regulations. Many new materials that we are
evaluating for use in our operations may be subject to regulation under existing
or future environmental laws and regulations that may restrict our use of one or
more of such materials in our manufacturing, assembly and test processes or
products. Any of these restrictions could harm our business and results of
operations by increasing our expenses or requiring us to alter our manufacturing
processes.





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.




21





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.





If
our land use rights are revoked, we would be forced to relocate
operations.





Under
Chinese law land is owned by the state or rural collective economic
organizations. The state issues to the land users the land use right
certificate. Land use rights can be revoked and the land users forced to vacate
at any time when redevelopment of the land is in the public interest. The public
interest rationale is interpreted quite broadly and the process of land
appropriation may be less than transparent. We acquired approximately 1.36
million square feet of land equity in HuiZhou, GuangDong China from the HuiZhou
State-Owned Land Resource in 2007, upon which we began constructing our new
manufacturing facility.  Any loss of this land use right would require
us to identify and relocate our manufacturing and other facilities which could
have a material adverse effect on our financial conditions and results of
operations.




22





We
will not be able to complete an acquisition of prospective acquisition targets
in the PRC unless their financial statements can be reconciled to U.S. generally
accepted accounting principles in a timely manner.





Companies
based in the PRC may not have properly kept financial books and records that may
be reconciled with U.S. generally accepted accounting principles. If we attempt
to acquire a significant PRC target company and/or its assets, we would be
required to obtain or prepare financial statements of the target that are
prepared in accordance with and reconciled to U.S. generally accepted accounting
principles. Federal securities laws require that a business combination meeting
certain financial significance tests require the public acquirer to prepare and
file historical and/or pro forma financial statement disclosure with the SEC.
These financial statements must be prepared in accordance with, or be reconciled
to U.S. generally accepted accounting principles and the historical financial
statements must be audited in accordance with the standards of the Public
Company Accounting Oversight Board (United States), or PCAOB. If a proposed
acquisition target does not have financial statements that have been prepared in
accordance with, or that can be reconciled to, U.S. generally accepted
accounting principles and audited in accordance with the standards of the PCAOB,
we will not be able to acquire that proposed acquisition target. These financial
statement requirements may limit the pool of potential acquisition targets with
which we may acquire and hinder our ability to expand our retail operations.
Furthermore, if we consummate an acquisition and are unable to timely file
audited financial statements and/or pro forma financial information required by
the Exchange Act, such as Item 9.01 of Form 8-K, we will be ineligible to use
the SEC’s short-form registration statement on Form S-3 to raise capital, if we
are otherwise eligible to use a Form S-3. If we are ineligible to use a Form
S-3, the process of raising capital may be more expensive and time consuming and
the terms of any offering transaction may not be as favorable as they would have
been if we were eligible to use Form S-3.





We
face risks related to natural disasters, terrorist attacks or other events in
China that may affect usage of public transportation, which could have a
material adverse effect on our business and results of operations.





Our
business could be materially and adversely affected by natural disasters,
terrorist attacks or other events in China.  For example, in early
2008, parts of China suffered a wave of strong snow storms that severely
impacted public transportation systems. In May 2008, Sichuan Province in China
suffered a strong earthquake measuring approximately 8.0 on the Richter scale
that caused widespread damage and casualties.  The May 2008 Sichuan
earthquake has had a material adverse effect on the general economic conditions
in the areas affected by the earthquake.  Any future natural
disasters, terrorist attacks or other events in China could cause a reduction in
usage of or other severe disruptions to, public transportation systems and could
have a material adverse effect on our business and results of
operations.





We
face uncertainty from China’s Circular on Strengthening the Administration of
Enterprise Income Tax on Non-Resident Enterprises' Share Transfer (“Circular
698”) that was released in December 2009 with retroactive effect from January 1,
2008.





The
Chinese State Administration of Taxation (SAT) released a circular (Guoshuihan
No. 698 – Circular 698) on December 15, 2009 that addresses the transfer of
shares by nonresident companies.  Circular 698, which is effective
retroactively to January 1, 2008, may have a significant impact on many
companies that use offshore holding companies to invest in
China.  Circular 698, which provides parties with a short period of
time to comply its requirements, indirectly taxes foreign companies on gains
derived from the indirect sale of a Chinese company.  Where a foreign
investor indirectly transfers equity interests in a Chinese resident enterprise
by selling the shares in an offshore holding company, and the latter is located
in a country or jurisdiction where the effective tax burden is less than 12.5%
or where the offshore income of his, her, or its residents is not taxable, the
foreign investor is required to provide the tax authority in charge of that
Chinese resident enterprise with the relevant information within 30 days of the
transfers. Moreover, where a foreign investor indirectly transfers equity
interests in a Chinese resident enterprise through an abuse of form of
organization and there are no reasonable commercial purposes such that the
corporate income tax liability is avoided, the PRC tax authority will have the
power to re-assess the nature of the equity transfer in accordance with PRC’s
“substance-over-form” principle and deny the existence of the offshore holding
company that is used for tax planning purposes.




23





There is
uncertainty as to the application of Circular 698.  For example, while
the term "indirectly transfer" is not defined, it is understood that the
relevant PRC tax authorities have jurisdiction regarding requests for
information over a wide range of foreign entities having no direct contact with
China. Moreover, the relevant authority has not yet promulgated any formal
provisions or formally declared or stated how to calculate the effective tax in
the country or jurisdiction and to what extent and the process of the disclosure
to the tax authority in charge of that Chinese resident
enterprise.  In addition, there are not any formal declarations with
regard to how to decide “abuse of form of organization” and “reasonable
commercial purpose,” which can be utilized by us to balance if our company
complies with the Circular 698.  As a result, we may become at risk of
being taxed under Circular 698 and we may be required to expend valuable
resources to comply with Circular 698 or to establish that we should not be
taxed under Circular 698, which could have a material adverse effect on our
financial condition and results of operations.





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 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%. According to the National Bureau of Statistics of China,
the change in China’s Consumer Price Index increased to 8.5% in April
2008.  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.




24





Furthermore,
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. In January 2010, the Chinese government took steps to
tighten the availability of credit including ordering banks to increase the
amount of reserves they hold and to reduce or limit their 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.





Because
our funds are held in banks which do not provide insurance, the failure of any
bank in which we deposit our funds could affect our ability to continue in
business.





Banks and
other financial institutions in the PRC do not provide insurance for funds held
on deposit. A significant portion of our assets are in the form of cash
deposited with banks in the PRC, and in the event of a bank failure, we may not
have access to our funds on deposit. Depending upon the amount of money we
maintain in a bank that fails, our inability to have access to our cash could
impair our operations, and, if we are not able to access funds to pay our
suppliers, employees and other creditors, we may be unable to continue in
business.





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 known 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 whom 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.




25





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, enjoyed preferential tax concessions
in the PRC, which were 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,
when we then enjoyed a preferential tax rate of 15%.  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, which became effective
January 1, 2008, China adopted a uniform tax rate of 25% for all enterprises
(including foreign-invested enterprises) and canceled several tax incentives
enjoyed by foreign-invested enterprises. However, for foreign-invested
enterprises established before the promulgation of the EIT Law, a five-year
transition period is provided during which the tax rate gradually increased
starting in 2008 and will be equal to the new 25% tax rate at the end of the
transition period. We believe that our profitability will be negatively affected
in the near future as a result of the new EIT Law. 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.





Under
the New EIT Law, we and HKHT may be classified as “resident enterprises” of
China for tax purpose, which may subject us and KHT to PRC income tax on taxable
global income.





Under the
new PRC Enterprise Income Tax Law (the “New EIT Law”) and its implementing
rules, both of which became effective on January 1, 2008. Under the New EIT Law,
enterprises are classified as resident enterprises and non-resident enterprises.
An enterprise established outside of China with its “de facto management bodies”
located within China is considered a “resident enterprise,” meaning that it can
be treated in a manner similar to a Chinese domestic enterprise for enterprise
income tax purposes. The implementing rules of the New EIT Law define de facto
management body as a managing body that in practice exercises “substantial and
overall management and control over the production and operations, personnel,
accounting, and properties” of the enterprise. Due to the short history of the
New EIT law and lack of applicable legal precedents, it remains unclear how the
PRC tax authorities will determine the PRC tax resident treatment of a foreign
company such as us and HKHT. Both our and HKHT’s members of management are
located in China. If the PRC tax authorities determine that we or HKHT is a
“resident enterprise” for PRC enterprise income tax purposes, a number of PRC
tax consequences could follow. First, we may be subject to the enterprise income
tax at a rate of 25% on our worldwide taxable income, including interest income
on the proceeds from this offering, as well as PRC enterprise income tax
reporting obligations. Second, the New EIT Law provides that dividend paid
between “qualified resident enterprises” is exempted from enterprise income tax.
A recent circular issued by the State Administration of Taxation regarding the
standards used to classify certain Chinese-invested enterprises controlled by
Chinese enterprises or Chinese group enterprises and established outside of
China as “resident enterprises” clarified that dividends and other income paid
by such “resident enterprises” will be considered to be PRC source income,
subject to PRC withholding tax, currently at a rate of 10%, when recognized by
non-PRC shareholders. It is unclear whether the dividends that we or HKHT
receives from Shenzhen Highpower will constitute dividends between “qualified
resident enterprises” and would therefore qualify for tax exemption, because the
definition of qualified resident enterprises is unclear and the relevant PRC
government authorities have not yet issued guidance with respect to the
processing of outbound remittances to entities that are treated as resident
enterprises for PRC enterprise income tax purposes. We are actively monitoring
the possibility of “resident enterprise” treatment for the applicable tax years
and are evaluating appropriate organizational changes to avoid this treatment,
to the extent possible. As a result of the New EIT Law, our historical operating
results will not be indicative of our operating results for future periods and
the value of our common stock may be adversely affected.





Dividends
payable by us to our foreign investors and any gain on the sale of our shares
may be subject to taxes under PRC tax laws.





If
dividends payable to our shareholders are treated as income derived from sources
within China, then the dividends that shareholders receive from us, and any gain
on the sale or transfer of our shares, may be subject to taxes under PRC tax
laws.




26





Under the
New EIT Law and its implementing rules, PRC enterprise income tax at the rate of
10% is applicable to dividends payable by us to our investors that are
non-resident enterprises so long as such non-resident enterprise investors do
not have an establishment or place of business in China or, despite the
existence of such establishment of place of business in China, the relevant
income is not effectively connected with such establishment or place of business
in China, to the extent that such dividends have their sources within the PRC.
Similarly, any gain realized on the transfer of our shares by such investors is
also subject to a 10% PRC income tax if such gain is regarded as income derived
from sources within China and we are considered as a resident enterprise which
is domiciled in China for tax purpose. Additionally, there is a possibility that
the relevant PRC tax authorities may take the view that the purpose of us and
HKHT is holding Shenzhen Highpower, and the capital gain derived by our overseas
shareholders or investors from the share transfer is deemed China-sourced
income, in which case such capital gain may be subject to a PRC withholding tax
at the rate of up to 10%. If we are required under the New EIT Law to withhold
PRC income tax on our dividends payable to our foreign shareholders or investors
who are non-resident enterprises, or if you are required to pay PRC income tax
on the transfer or our shares under the circumstances mentioned above, the value
of your investment in our shares may be materially and adversely
affected.





In
January, 2009, the State Administration of Taxation promulgated the Provisional
Measures for the Administration of Withholding of Enterprise Income Tax for
Non-resident Enterprises (“Measures”), pursuant to which, the entities which
have the direct obligation to make the following payment to a non-resident
enterprise shall be the relevant tax withholders for such non-resident
enterprise, and such payment includes: incomes from equity investment (including
dividends and other return on investment), interests, rents, royalties, and
incomes from assignment of property as well as other incomes subject to
enterprise income tax received by non-resident enterprises in China. Further,
the Measures provides that in case of equity transfer between two non-resident
enterprises which occurs outside China, the non-resident enterprise which
receives the equity transfer payment shall, by itself or engage an agent to,
file tax declaration with the PRC tax authority located at place of the PRC
company whose equity has been transferred, and the PRC company whose equity has
been transferred shall assist the tax authorities to collect taxes from the
relevant non-resident enterprise. However, it is unclear whether the Measures
refer to the equity transfer by a non-resident enterprise which is a direct or
an indirect shareholder of the said PRC company. Given these Measures, there is
a possibility that we may have an obligation to withhold income tax in respect
of the dividends paid to non-resident enterprise investors.





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, such as the H1N1 virus, where all of our manufacturing facilities are
located and where the substantial portion of our sales occur, or the measures
taken by the governments of affected countries against such potential outbreaks,
could have a negative effect on our operations or those of our suppliers and
customers. 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:





·
            quarantines
      or closures of some of our manufacturing facilities, which would severely
      disrupt our operations,


·
            the
      sickness or death of our key officers and employees,
and


·
            a
      general slowdown in the Chinese economy.


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.




27





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.





Contract
drafting, interpretation and enforcement in China involves significant
uncertainty.





We have
entered into numerous contracts governed by PRC law, many of which are material
to our business. As compared with contracts in the United States, contracts
governed by PRC law tend to contain less detail and are not as comprehensive in
defining contracting parties’ rights and obligations. As a result, contracts in
China are more vulnerable to disputes and legal challenges. In addition,
contract interpretation and enforcement in China is not as developed as in the
United States, and the result of any contract dispute is subject to significant
uncertainties. Therefore, we cannot assure you that we will not be subject to
disputes under our material contracts, and if such disputes arise, we cannot
assure you that we will prevail.





We
could be liable for damages for defects in our products pursuant to the Tort
Liability Law of the PRC.





The Tort
Liability Law of the People’s Republic of China, which was passed during the
12th Session of the Standing Committee of the 11th National People’s Congress on
December 26, 2009, states that manufacturers are liable for damages caused by
defects in their products and sellers are liable for damages attributable to
their fault. If the defects are caused by the fault of third parties such as the
transporter or storekeeper, manufacturers and sellers are entitled to claim for
compensation from these third parties after paying the compensation
amount.





RISKS
RELATED TO OUR CAPITAL STRUCTURE





The
price of our common stock is volatile and you might not be able to resell your
securities at or above the price you have paid.





Since our
initial public offering and listing of our common stock in October 2007, the
price at which our common stock had traded has been highly volatile, with a high
and low sales price of $1.23 and $9.82, respectively, as through March 29, 2010.
You might not be able to sell the shares of our common stock at or above the
price you have paid. The stock market has experienced extreme volatility that
often has been unrelated to the performance of its listed companies. Moreover,
only a limited number of our shares are traded each day, which could increase
the volatility of the price of our stock. These market fluctuations might cause
our stock price to fall regardless of our performance. The market price of our
common stock might fluctuate significantly in response to many factors, some of
which are beyond our control, including the following:




28





·
            actual
      or anticipated fluctuations in our annual and quarterly results of
      operations;


·
            changes
      in securities analysts’ expectations;


·
            variations
      in our operating results, which could cause us to fail to meet analysts’
      or investors’ expectations;


·
            announcements
      by our competitors or us of significant new products, contracts,
      acquisitions, strategic partnerships, joint ventures or capital
      commitments;


·
            conditions
      and trends in our industry;


·
            general
      market, economic, industry and political conditions;


·
            changes
      in market values of comparable companies;


·
            additions
      or departures of key personnel;


·
            stock
      market price and volume fluctuations attributable to inconsistent trading
      volume levels; and


·
            future
      sales of equity or debt securities, including sales which dilute existing
      investors.


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. We registered  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 and a total of
817,479 shares of common stock held by certain of our stockholders immediately
prior to the Share Exchange pursuant to a registration statement that was
declared effective by the Securities and Exchange Commission in June 2008. In
addition, we registered a total of 959,649 shares of common stock that are held
by affiliates of Westpark Capital, Inc. who were stockholders of our company
prior to the Share Exchange pursuant to a registration statement that was
declared effective in August 2008. All of the shares included in an effective
registration statement as described above may be freely sold and
transferred.





Additionally,
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.





A
few principal stockholders have significant influence over us.





Three of
our stockholders beneficially own or control approximately 60.0% of our
outstanding shares. 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 these three stockholders, we could be prevented
from entering into transactions that could be beneficial to us. The interests of
these three stockholders may differ from the interests of our other
stockholders.




29





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
attestation requirement of management’s assessment by our independent registered
public accountants will first apply to our annual report for the 2010 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:





·
            access
      to the capital markets of the United States;


·
            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;


·
            the
      ability to use registered securities to make acquisition of assets or
      businesses;


·
            increased
      visibility in the financial community;


·
            enhanced
      access to the capital markets;


·
            improved
      transparency of operations; and


·
            perceived
      credibility and enhanced corporate image of being a publicly traded
      company.




30




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.





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
1B. UNRESOLVED STAFF COMMENTS





Not
applicable to smaller reporting companies.





ITEM
2.  PROPERTIES





Our
registered office in Hong Kong is located at Flat 4, 13/F, Block 4, Taiping
Industrial Centre, 51A Ting Kok Road, Tai Po, N.T. Hong Kong.





All of
our manufacturing operations are currently located in mainland China at Luoshan
Industrial Zone, Pinghu, Longgang, Shenzhen, Guangdong, China, 518111. Our
facilities cover approximately 487,000 square feet of total space, consisting of
manufacturing plants, dormitories and research and development facilities. We
lease our manufacturing facilities from various landlords under a total of six
leases with varying terms ranging, which are renewed upon expiration. All leases
have been fully prepaid until the expiration date. The table below lists the
locations, approximate square footage, principal use and lease expiration dates
of the facilities used in our manufacturing operations as of December 31,
2009.





Location
            
            Area
              (square
      feet)
            
            Principal
      Use
            
            Lease
              expiration
      dateWorkshop
      A1 & dormitory, Luo Shan Industrial Park, Shan Xia Community, Ping Hu
      Street, Long Gang District, Shenzhen
            
            58,986
            
            Industry
      & Residence
            
            December
      31, 2011Workshop
      A2 & dormitory, Luo Shan Industrial Park, Shan Xia Community, Ping Hu
      Street, Long Gang District, Shenzhen
            
            81,117
            
            Industry
      & Residence
            
            December
      31, 20114th
      Floor, Building A, (4th
      Floor, Building 1 & 2nd
      Floor, Building B2 ) Workshop, B2 Area, Luo Shan Industrial Park, Shan Xia
      Community, Ping Hu Street, Long Gang District, Shenzhen
            
            94,722
            
            Industry
      & Residence
            
            June
      14, 2010Storage,
      Building 2, (6th
      Floor, Building 1)Area B2, Luo Shan Industrial Park, Shan Xia Community,
      Ping Hu Street, Long Gang District, Shenzhen
            
            50,698
            
            Industry
      & Residence
            
            December
      31, 20101st-4th
      Floor, Building 12, (1st-7th
      Floor, Building 9), Da Wang Industrial Park, Xin Xia Road, Ping Hu Street,
      Long Gang District, Shenzhen
            
            55,897
            
            Industry
      & Residence
            
            September
      30, 2010Workshop
      & dormitory , chong Tou Hu village, Renming Road,Guang Lan Street, Bao
      An District, Shenzhen
            
            146,336
            
            Industry
      & Residence
            
            September
      15, 2010





31






In China,
only the PRC government and peasant collectives may own land. In February 2007,
we acquired approximately 1.36 million square feet of land equity in Industry
Development Zone, New Lake, MaAn Town, HuiCheng District, HuiZhou, GuangDong,
China for a total of RMB26 million under land use right grant from the HuiZhou
State-Owned Land Resource Bureau that gives us the right to use the land for 50
years and an agreement with the government of MaAn Town. In the event we wish to
continue to use the land after the 50-year period, we must apply for an
extension at least one year prior to the land grant’s expiration. We began
construction of our new manufacturing facility on this site in October, 2008 and
anticipate that the new facility will be completed in the fourth quarter of
2011, at which time we will move our entire manufacturing operations to the new
location. In accordance with the terms of the land use right, we began
development of the land within one year of receiving the certificate, which we
received in June 2007.





Our
rights with respect to the land use right grant permit us to develop the land
and construct buildings for industrial applications. We have the right to
transfer or rent the land and use it as collateral for our loans.





ITEM
3.  LEGAL PROCEEDINGS





On August
20, 2007, a lawsuit was filed against Shenzhen China and various other
defendants by Energizer, S.A. in the United States District Court for the
Southern District of New York. The lawsuit arises out of a fire that occurred on
a cargo vessel carrying batteries sold to Energizer by Shenzhen China that
resulted in damages to various third parties. Energizer alleges that it is
entitled to indemnification from Shenzhen Highpower for any damages or losses
that it becomes liable to pay to third parties as a result of the fire.
Energizer seeks indemnity and/or contribution from Shenzhen Highpower for such
sums, together with expenses, including attorneys’ fees and costs. Our insurance
company has provided us with counsel in this case. We believe that we have
meritorious defenses against the claims asserted by Energizer, and intend to
vigorously defend the lawsuit. Energizer continues to be one of our largest
customers.




ITEM
4.  RESERVED




32




PART
II





ITEM 5.  MARKET FOR
REGISTRANT’S COMMON STOCK,RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES





Market
Information





From June
19, 2008 to December 18, 2009, our shares of common stock were listed for
trading on the NYSE Amex under the ticket symbol “HPJ.”  On December
21, 2009, our common stock commenced trading on the NASDAQ Global Market under
the symbol "HPJ."





On March
29, 2010 the closing sales price for our common stock on the NASDAQ Global
Market was $6.40 per share.





The
following table summarizes the high and low sales prices of our common stock as
reported by the NYSE Amex (on and prior to December 18, 2009) and NASDAQ (on and
after December 21, 2009).





High
            
            
            LowYear
      ended December 31, 2009Fourth
      Quarter
            
            $
            9.07
            
            
            $
            2.59Third
      Quarter
            
            $
            3.89
            
            
            $
            1.23Second
      Quarter
            
            $
            3.05
            
            
            $
            1.43First
      Quarter
            
            $
            3.19
            
            
            $
            2.00Year
      ended December 31, 2008Fourth
      Quarter
            
            $
            3.85
            
            
            $
            2.50Third
      Quarter
            
            $
            4.78
            
            
            $
            1.68Second
      Quarter (June 19, 2008 to June 30, 2008)
            
            $
            8.35
            
            
            $
            4.75





The stock
market in general has experienced extreme stock price fluctuations in the past
few years. In some cases, these fluctuations have been unrelated to the
operating performance of the affected companies. Many companies have experienced
dramatic volatility in the market prices of their common stock. We believe that
a number of factors, both within and outside its control, could cause the price
of our common stock to fluctuate, perhaps substantially. Factors such as the
following could have a significant adverse impact on the market price of our
common stock:





·
            Our
      financial position and results of operations;


·
            Our
      ability to obtain additional financing and, if available, the terms and
      conditions of the financing;


·
            Concern
      as to, or other evidence of, the reliability and efficiency of our
      proposed products or our competitors’ products;


·
            Announcements
      of innovations or new products by us or our
competitors;


·
            Federal
      and state governmental regulatory actions and the impact of such
      requirements on our business;


·
            The
      development of litigation against us;


·
            Period-to-period
      fluctuations in our operating results;


·
            Changes
      in estimates of our performance by any securities
  analysts;


·
            The
      issuance of new equity securities pursuant to a future offering or
      acquisition;




33




·
            Changes
      in interest rates;


·
            Competitive
      developments, including announcements by competitors of new products or
      significant contracts, acquisitions, strategic partnerships, joint
      ventures or capital commitments;


·
            Investor
      perceptions of our company; and


·
            General
      economic and other national conditions.


Stockholders





As of
March 29, 2010 we had 30 stockholders of record. This number does not include an
indeterminate number of stockholders whose shares are held by brokers in street
name.





Dividends





We do not
expect to declare or pay any cash dividends on our common stock in the
foreseeable future, and we currently intend to retain future earnings, if any,
to finance the expansion of our business. The decision whether to pay cash
dividends on our common stock will be made by our board of directors, in its
discretion, and will depend on our financial condition, operating results,
capital requirements and other factors that the board of directors considers
significant.





We did
not pay cash dividends in the years ended December 31, 2009 or
2008.





Transfer
Agent





The
transfer agent and registrar for our common stock is Corporate Stock Transfer,
Inc.





Equity
Compensation Plan Information





Our
equity compensation plan information is provided as set forth in Part III, Item
11 herein.





Additional
Information





Copies of
our annual reports, quarterly reports, current reports, and any amendments to
those reports, are available free of charge on the Internet at www.sec.gov. All
statements made in any of our filings, including all forward-looking statements,
are made as of the date of the document in which the statement is included, and
we do not assume or undertake any obligation to update any of those statements
or documents unless we are required to do so by law.




34




ITEM
6. SELECTED CONSOLIDATED FINANCIAL DATA





Not applicable for a smaller
reporting company.





ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS





Forward-Looking
Statements





The following
discussion should be read in conjunction with our consolidated financial
statements and related notes included elsewhere in this report. 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. Our
actual results could differ materially from those anticipated in these
forward-looking statements, which are subject to a number of risks,
uncertainties and assumptions described in the “Risk Factors” section and
elsewhere in this report.Consequently, all
of the forward-looking statements made in this report are qualified by these
cautionary statements and there can be no assurance of the actual results or
developments.





Overview





We were
incorporated in the state of Delaware on January 3, 2006. We were originally
organized as a “blank check” shell company to investigate and acquire a target
company or business seeking the perceived advantages of being a publicly held
corporation. On November 2, 2007, we closed a share exchange transaction,
pursuant to which we (i) became the 100% parent of HKHT and its wholly-owned
subsidiary, Shenzhen Highpower, (ii) assumed the operations of HKHT and its
subsidiary and (iii) changed our name from SRKP 11, Inc. to Hong Kong Highpower
Technology, Inc. HKHT was incorporated in Hong Kong in 2003, under the Companies
Ordinance of Hong Kong. Shenzhen Highpower was founded in founded in
2001.  HKHT also has two other subsidiaries, HZ Highpower and
Springpower.  HZ Highpower has not yet commenced business
operations.





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 1,772,745 shares of Common stock at $1.76 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”) for both
consumer and industrial applications. We have developed significant expertise in
Ni-MH battery technology and large-scale manufacturing that enables us to
improve the quality of our battery products, reduce costs, and keep pace with
evolving industry standards. In 2008, we commenced manufacturing two lines of
Lithium-Ion (“Li-ion”) and Lithium polymer rechargeable batteries through
Springpower for higher-end, high-performance applications, such as laptops,
digital cameras and wireless communication products.  Our automated
machinery allows us to process key aspects of the manufacturing process to
ensure high uniformity and precision, while leaving the non-key aspects of the
manufacturing process to manual labor.





We employ
a broad network of 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.





Background





Public
Offering





In June
2008, we completed a public offering consisting of 603,750 shares of our common
stock. Our sale of common stock, which was sold indirectly by us to the public
at a price of $3.25 per share, resulted in net proceeds of approximately
$984,000. These proceeds were net of underwriting discounts and commissions,
fees for legal and auditing services, and other offering costs. Upon the closing
of the offering, we sold to the underwriter warrants to purchase up to 52,500
shares of our common stock.  In December 2009, a total of 2,510 shares
of common stock were issued upon the cashless exercise of 5,000 of the warrants.
The remaining 47,500 outstanding warrants are exercisable at a per share price
of $3.90 and expire if unexercised after five years.




35





Reverse
Stock Split





On June
19, 2008, we effected a 5-for-8 reverse stock split of all of our issued and
outstanding shares of common stock (the “Reverse Stock Split”) by filing an
amendment to our Certificate of Incorporation with the Secretary of the State of
Delaware. The par value and number of authorized shares of our common stock
remained unchanged. The number of shares and per share amounts included in the
consolidated financial statements and the accompanying notes included in the F-
section have been adjusted to reflect the Reverse Stock Split retroactively.
Unless otherwise indicated, all references to number of share, per share amounts
and earnings per share information contained in this report give effect to the
Reverse Stock Split.





Share
Exchange





On
October 20, 2007, we entered into a share exchange agreement (the “Exchange
Agreement”) with all of the shareholders of HKHT, consisting of 35 shareholders.
Pursuant to the Exchange Agreement, we agreed to issue shares of our common
stock in exchange for all of the issued and outstanding securities of HKHT (the
“Share Exchange”). The Share Exchange closed on November 2, 2007. Upon the
closing of the Share Exchange, we (i) became the 100% parent of HKHT, and HKHT’s
wholly-owned subsidiary Shenzhen Highpower, (ii) assumed the operations of HKHT
and its subsidiary and (iii) changed our name from SRKP 11, Inc. to Hong Kong
Highpower Technology, Inc.





Upon the
closing of the Share Exchange, we issued an aggregate of 9,248,973 shares of our
common stock to the shareholders of HKHT and/or their designees in exchange for
all of the issued and outstanding securities of HKHT. In addition, immediately
prior to the closing of the Share Exchange and the Private Placement, as
described below, we and certain of our stockholders agreed to cancel an
aggregate of 1,597,872 shares of common stock such that there were 1,777,128
shares of common stock outstanding immediately prior to the Share Exchange and
Private Placement. We issued no fractional shares in connection with the Share
Exchange.





Immediately
after the closing of the Share Exchange and Private Placement, we had 12,798,846
outstanding shares of common stock. Upon the closing of the Share Exchange, the
shareholders of HKHT and their designees owned approximately 72.3% of our issued
and outstanding common stock, the pre-existing stockholders of the Company owned
13.9% and investors in the Private Placement (described below) (that closed
concurrently with the Share Exchange) owned 13.8% of our outstanding common
stock.





Pursuant
to the terms of the Share Exchange, we agreed to register a total of 1,777,128
shares of common stock held by our stockholders immediately prior to the Share
Exchange. Of these 1,777,128 shares, 817,479 shares are covered by a resale
registration statement filed with the Securities and Exchange Commission (“SEC”)
in connection with the Private Placement (described below) and declared
effective on June 19, 2008. The remaining 959,649 shares, which are held by
affiliates of WestPark Capital, Inc. (“WestPark”), are covered by a resale
registration statement declared effective by the SEC on August 4, 2008. WestPark
acted as the placement agent in the Private Placement.





Immediately
after the closing of the Share Exchange, we changed our corporate name from
“SRKP 11, Inc.” to “Hong Kong Highpower Technology, Inc.” Shares of our common
stock are currently listed for trading on the NYSE Amex under the ticker symbol
“HPJ.”





The
transactions contemplated by the Exchange Agreement were intended to be a
“tax-free” incorporation pursuant to the provisions of Section 351 of the
Internal Revenue Code of 1986, as amended.





Private
Placement





On
November 2, 2007, concurrently with the close of the Share Exchange, we received
gross proceeds of $3.1 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. 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. After commissions and expenses related to the
Private Placement, we received net proceeds of approximately $2,738,000 in the
Private Placement. The purpose of the Private Placement was to raise working
capital. All of the proceeds from the Private Placement were used for working
capital and the development of our lithium-ion battery manufacturing
business.




36





We filed
a registration statement covering the common stock sold in the Private Placement
which was declared effective by the SEC on June 19, 2008.  We are
required to use our reasonable best efforts to maintain the registration
statement effective for a period of 24 months at our expense.





WestPark
acted as placement agent in connection with the Private Placement. For its
services in connection with the Share Exchange and as placement agent, WestPark
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. No other consideration was paid to WestPark or
to SRKP 11 in connection with the Share Exchange or Private Placement. Some of
the controlling shareholders and control persons of WestPark were also, prior to
the completion of the Share Exchange, controlling shareholders and control
persons of our company, including Richard Rappaport, who is the Chief Executive
Officer of WestPark and was the President and a significant shareholder of our
company prior to the Share Exchange, and Anthony C. Pintsopoulos, who is the
Chief Financial Officer of WestPark and was a controlling stockholder and an
officer and director of our company prior to the Share Exchange. Each of Messrs.
Rappaport and Pintsopoulos resigned from all of their executive and director
positions with our company upon the closing of the Share Exchange.





Critical
Accounting Policies, Estimates and Assumptions





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




37





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 discount and allowances.





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





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 our 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.





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,
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. We have also adopted FIN 48,
“Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 109.”





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, 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.




38




Results
of Operations





The
following table sets forth the consolidated statements of operations of the
Company for the years ended December 31, 2009, 2008 and 2007 (U.S.
dollars):





Consolidated Statements of
      Operations
            
            Year
      Ended December 31,2009
            
            
            2008
            
            
            2007(in
      thousands except share and per share information)Net
      Sales
            
            $
            70,331
            
            
            $
            75,004
            
            
            $
            73,262Cost
      of Sales
            
            
            (55,300
            )
            
            
            (62,239
            )
            
            
            (63,791
            )Gross
      profit
            
            $
            15,031
            
            
            $
            12,765
            
            
            $
            9,470Depreciation
            
            
            (270
            )
            
            
            (194
            )
            
            
            (121
            )Selling
      and distribution costs
            
            
            (2,355
            )
            
            
            (2,416
            )
            
            
            (2,096
            )General
      and administrative costs including stock-based
compensation
            
            
            (6,405
            )
            
            
            (6,098
            )
            
            
            (3,461
            )Loss
      on exchange rate difference
            
            
            (60
            )
            
            
            (1,182
            )
            
            
            (855
            )Fees
      and costs related to reorganization
            
            
            -
            
            
            
            -
            
            
            
            (582
            )Income
      from operations
            
            $
            5,941
            
            
            $
            2,875
            
            
            $
            2,357Change
      in fair value of currency forwards
            
            
            (117
            )
            
            
            116
            
            
            
            -Change
      in fair value of warrants
            
            
            -
            
            
            
            (276
            )
            
            
            -Other
      Income
            
            
            509
            
            
            
            463
            
            
            
            149Interest
      expense
            
            
            (528
            )
            
            
            (642
            )
            
            
            (696
            )Other
      expenses
            
            
            (214
            )
            
            
            -
            
            
            
            -Income
      before taxes
            
            $
            5,591
            
            
            $
            2,535
            
            
            $
            1,809Income
      taxes
            
            
            (1,148
            )
            
            
            (529
            )
            
            
            (145
            )Net
      income
            
            $
            4,443
            
            
            $
            2,006
            
            
            $
            1,664Net
      income per common share – basic and diluted
            
            $
            0.33
            
            
            $
            0.15
            
            
            $
            0.17Weighted
      average common shares outstanding-basic
            
            
            13,608,265
            
            
            
            13,205,599
            
            
            
            9,832,493-diluted
            
            
            13,667,697
            
            
            
            13,233,353
            
            
            
            9,832,493Dividends
      declared per common share
            
            
            
            
            
            
            -





39




Years
ended December 31, 2009 and 2008





Net sales
for year the ended December 31, 2009 were $70.3 million compared to $75.0
million for the year ended December 31, 2008, a decrease of 6.2%. The decrease
in net sales for the year ended December 31, 2009 over the year ended December
31, 2008 was due to a 21% decrease in the average selling price of our battery
units, and a 19% increase in the number of battery units sold.  The
increase in the number of battery units sold in 2009 was primarily attributable
to increased orders from our major customers, Energizer Battery Manufacturing,
Inc. and Gigaset Communications GmbH.  Sales of battery seconds
decreased from $412,311 during the year ended December 31, 2008 to $213,849
during the year ended December 31, 2009.The 21% decrease in the average selling
price of our battery units was due to adjusting the selling prices of our
batteries in accordance with the market price of nickel.





Cost of
sales consists of the cost of nickel and other materials. Costs of sales were
$55.3 million for the year ended December 31, 2009 as compared to $62.2 million
for the comparable period in 2008. As a percentage of net sales, cost of sales
decreased to 78.6% for the year ended December 31, 2009 compared to 83.0% for
the comparable period in 2008. This was attributable to a 25% decrease in the
average per unit cost of goods sold during the year ended December 31, 2009 as
compared to the comparable period in 2008, which resulted from a 30% decrease in
the average cost of nickel during the year ended December 31, 2009 compared to
the comparable period in 2008.





Gross
profit for the year ended December 31, 2009 was $15.0 million, or 21.4% of net
sales, compared to $12.8 million, or 17.0% of net sales, respectively, for the
comparable period in 2008. 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 year ended December 31, 2009 is primarily due to
a 30% decrease in the average cost of nickel during the year ended December 31,
2009 compared to the comparable period in 2008.





To cope
with pressure on our gross margins we intend to control production costs by
preparing budgets for each department and comparing actual costs with our
budgeted figures monthly and quarterly. Additionally, we have reorganized the
Company’s production structure and have focused more attention on employee
training to enhance efficiency. We also intend to expand our market share by
investing in greater promotion of our products in regions such as the U.S.,
Russia, Europe and India, and by expanding our sales team with more experienced
sales personnel. We have also begun production of a line of Li-ion batteries as
to complement our current Ni-MH battery products so that we are less vulnerable
to price increases in nickel. We intend to expand production of our Li-ion
battery products in the future





Selling
and distribution costs were $2.4 million for the year ended December 31, 2009,
compared to $2.4 million for the comparable period in 2008.  Selling
and distribution costs remained flat due to our enhanced selling and
distribution cost controls.





General
and administrative costs were $6.4 million, or 9.1% of net sales, for the year
ended December 31, 2009, compared to $6.1 million, or 8.1% of net sales, for the
comparable period in 2008. 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 primarily due to an increase in
personnel &labor costs and research &development
expenses.  Labor and personnel costs increased $216,772 for year ended
December 31, 2009 over the comparable period in 2008 due to the expansion of our
technician and administrative team to expand our market
share.  Research and development expenses increased $718,412 for the
year ended December 31, 2009 over the year ended December 31, 2008 due to our
increased commitment to advance our research and development activities.
Although we anticipate our general and administrative expenses to continue to
increase on an absolute dollar basis as a result of additional legal, accounting
and other related costs from becoming a public reporting company, we do not
believe that general and administrative expenses as a percentage net sales will
trend upward as we believe that our net sales will also increase.





We
experienced losses on the exchange rate difference between the U.S. Dollar and
the RMB of $60,000 and $1.2 million, respectively, in the years ended December
31, 2009 and 2008, a decrease of 94.9%, due to the stabilization of the U.S.
Dollar relative to the RMB over the respective periods.  In 2009, to
cope with devaluation of the U.S. Dollar relative to the RMB, we engaged in
currency hedging and adjusted the selling price of batteries to vary with the
U.S. Dollar exchange rate relative to the RMB.




40





Other
income from operations, which consists of bank interest income, forward contract
gains and losses and sundry income, was $509,000, for the year ended December
31, 2009, as compared to $463,000 for the year ended December 31, 2008, an
increase of 10.0%. The increase was due to a gain related to a local government
sponsor which was the sponsor for our listing on the NYSE Amex from the Shenzhen
government of $248,000 in 2009, partially offset by decreases of $87,000 and
$65,000 in bank interest income and sundry income, respectively, and a gain of
$50,000 on a forward contract in 2008.





Interest
expense was $528,000 for the year ended December 31, 2009, as compared to
$642,000 for the respective comparable period in 2008. The decrease was
primarily due to lower borrowing levels. We decreased our borrowings by $40,000
in the year ended December 31, 2009 as compared to the year ended December 31,
2008. Increases in borrowing rates would further increase our interest expense,
which would have a negative effect on our results of operations.





During
the year ended December 31, 2009, we recorded a provision for income taxes of
$1.1 million, as compared to $529,000 for the respective comparable period in
2008. The increase in income taxes for the year ended December 31, 2009 as
compared to the year ended December 30, 2008 was a result of an increase in our
net taxable income.





Net
income for the year ended December 31, 2009 was $4.4 million, compared to a net
income of $2.0 million for the comparable period in 2008, an increase of
121%.





Years
ended December 31, 2008 and 2007





Net sales
for year the ended December 31, 2008 were $75.0 million compared to $73.3
million for the year ended December 31, 2007, an increase of 2.4%. The increase
in net sales for the year ended December 31, 2008 over the year ended December
31, 2007 was due to a 7.6% increase in the average selling price of our battery
units, including $412,311and $160,170 from the sale of battery seconds during
the years ended December 31, 2008 and 2007, respectively, which was partially
offset by a 4.5% decrease in the number of battery units
sold.  The 7.6%increase in the average selling price of our battery
units was due to our agreement with our major customers to adjust the selling
prices of our batteries in accordance with the market price of nickel and the
devaluation of the U.S. Dollar relative to the RMB. The decrease in the number
of battery units sold in 2008 was primarily attributable to decreased orders
from our major customers, Energizer Battery Manufacturing, Inc. and Uniross
Batteries (HK) Ltd.





Cost of
sales consists of the cost of nickel and other materials. Costs of sales were
$62.2 million for the year ended December 31, 2008 as compared to $63.8 million
for the comparable period in 2007. As a percentage of net sales, cost of sales
decreased to 83.0% for the year ended December 31, 2008 compared to 87.1% for
the comparable period in 2007. This was attributable to a 2% decrease in the
average per unit cost of goods sold during the year ended December 31, 2008 as
compared to the comparable period in 2007, which resulted from a 40% decrease in
the average cost of nickel during the year ended December 31, 2008 compared to
the comparable period in 2007.





Gross
profit for the year ended December 31, 2008 was $12.8 million, or 17.0% of net
sales, compared to $9.5 million, or 12.9% of net sales, respectively, 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 year ended December 31, 2008 is primarily due to
a 40% decrease in the average cost of nickel during the year ended December 31,
2008 compared to the comparable period in 2007.





To cope
with pressure on our gross margins we intend to control production costs by
preparing budgets for each department and comparing actual costs with our
budgeted figures monthly and quarterly. Additionally, we have reorganized the
Company’s production structure and have focused more attention on employee
training to enhance efficiency. We also intend to expand our market share by
investing in greater promotion of our products in regions such as the U.S.,
Russia, Europe and India, and by expanding our sales team with more experienced
sales personnel. We have also begun production of a line of Li-ion batteries as
to complement our current Ni-MH battery products so that we are less vulnerable
to price increases in nickel. We intend to expand production of our Li-ion
battery products in the future.





Selling
and distribution costs were $2.4 million for the year ended December 31, 2008,
compared to $2.1 million for the comparable period in 2007. The increase in
selling and distribution costs was primarily due to the expansion of the
company’s salesforce.  Our market share decreased attributed to the
decreased demand for our products due to the global economic downturn and
challenging  economic conditions. .




41





General
and administrative costs were $6.1 million, or 8.1% of net sales, for the year
ended December 31, 2008, compared to $3.5 million, or 4.7% 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 primarily due to an increase in
personnel and labor costs, which increased $47,500 for year ended December
31, 2008 over the comparable period in 2007 due to the expansion of our
technician and marketing team to expand our market share and $303,000 in
stock based compensation charges in 2008. Although we anticipate our general and
administrative expenses to continue to increase on an absolute dollar basis as a
result of additional legal, accounting and other related costs from becoming a
public reporting company, we do not believe that general and administrative
expenses as a percentage net sales will trend upward as we believe that our net
sales will also increase.





We
experienced losses on the exchange rate difference between the U.S. Dollar and
the RMB of $1.2 million and $855,000, respectively, in the years ended December
31, 2008 and 2007, an increase of 38.3%, due to the devaluation of the U.S.
Dollar relative to the RMB over the respective periods. In 2008, to cope with
devaluation of the U.S. Dollar relative to the RMB, we engaged in currency
hedging and adjusted the selling price of batteries to vary with the U.S. Dollar
exchange rate relative to the RMB.





All costs
associated with the reverse merger transaction, consisting primarily of
consideration paid to the previous control parties of Highpower and legal and
investment banking fees and costs, were expensed as incurred as a cost of the
recapitalization, and have been presented as an operating cost line item
entitled “fees and costs related to reorganization” in the statement of
operations. These costs were $Nil and $582,000 for the years ended December
31, 2008 and 2007, respectively.





Other
income from operations, which consists of bank interest income, forward contract
gains and losses and sundry income, was $463,000, for the year ended December
31, 2008, as compared to $149,000 for the year ended December 31, 2007, an
increase of 211.6%. The increase was due to a gain on forward contract of
$50,000 in 2008, and increases of $74,000 and $190,000 in bank interest income
and sundry income, respectively.





Interest
expense was $642,000 for the year ended December 31, 2008, as compared to
$696,000 for the respective comparable period in 2007. The decrease was
primarily due to lower borrowing levels. We decreased our borrowings by
$0.58 million in the year ended December 31, 2008 as compared to the year
ended December 31, 2007. Increases in borrowing rates would further increase our
interest expense, which would have a negative effect on our results of
operations.





During
the year ended December 31, 2008, we recorded a provision for income taxes of
$529,000, as compared to $145,000 for the respective comparable period in 2007.
The increase in income taxes for the year ended December 31, 2008 as compared to
the year ended December 30, 2007 was a result of an increase in our net taxable
income.





Net
income for the year ended December 31, 2008 was $2.0 million, compared to a net
income of $1.7 million 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 December
31, 2009, we had in place general banking facilities with four financial
institutions aggregating $27.0 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
shareholders, 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 December 31, 2009, we had
utilized approximately $14.8 million under such general credit facilities and
had available unused credit facilities of $12.2 million.




42





For the
year ended December 31, 2009, net cash provided by operating activities was
approximately $3.3 million, as compared to net cash provided by operating
activities of $6.3 million for the comparable period in 2008. The decrease in
net cash provided by operating activities is primarily attributable to an
increase in accounts receivable levels.  For the year ended December
31, 2008, net cash provided by operating activities was approximately $6.3
million, as compared to net cash used in operating activities of $1.5 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 $3.7 million for the year ended December 31,
2009 compared to $4.6 million for the comparable period in 2008. The decrease of
cash used in investing activities was primarily attributable to a decrease in
the acquisition of plant and equipment over the respective periods. Net cash
used in investing activities was $4.6 million for the year ended December 31,
2008 compared to $4.9 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 for the comparable period in 2007.





Net cash
used in financing activities was $778,000 for the year ended December 31,
2009 as compared to net cash provided by financing activities of $890,000 for
the comparable period in 2008. The decrease in net cash provided by financing
activities is primarily attributable to the issuance of common stock in
2008.  Net cash provided by financing activities was $890,000 for the
year ended December 31, 2008 as compared to $7.4 million for the comparable
period in 2007. The decrease in net cash provided by financing activities is
primarily attributable to a decrease in bank borrowings of $9.46 million in
2007.





For
Fiscal 2009 and 2008, our inventory turnover was 5.1 and 4.87 times,
respectively. The average days outstanding of our accounts receivable at
December 31, 2009 were 60 days, as compared to 59 days at December 31, 2008.
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 $1.0
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 these contributions will
contribute to administrative and other operating expenses in an amount of
approximately $65,000 per month based on the size of our current workforce. 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.





The use
of working capital is primarily for the maintenance of our accounts receivable
and inventory. We provide our major customers with payment terms ranging from 30
to 75 days. Additionally, our production lead time is approximately 30 to 40
days, from the inspection of incoming materials, to production, testing and
packaging. We need to keep a large supply of raw materials and work in process
and finished goods inventory on hand to ensure timely delivery of our products
to our customers. We use two methods to support our working capital needs: (1)
paying our suppliers under payment terms ranging from 30 to 60 days; and (2)
using short-term bank loans. We use our accounts receivable as collateral for
our loans. Upon receiving payment for our accounts receivable, we pay our
short-term loans. Our working capital management practices are designed to
ensure that we maintain sufficient working capital.





Guarantees
of Bank Loans





Dang Yu
Pan, our Chairman and Chief Executive Officer, Wen Liang Li, our Vice President,
Chief Technology Officer and director, and Wen Wei Ma, our Vice President of
Manufacturing, each have provided personal guarantees under our outstanding
banking facilities. The following table shows the amount outstanding on each of
our bank loans as of December 31, 2009 and the identity of the officer(s) who
guaranteed each loan.




43





Name
      of Bank
            
            Amount
      Granted
            
            Amount
      Outstanding Under Loan
            
            Guaranteed
      by OfficersBank
      Of China
            
            $14.65
      million
            
            $7.07
      million
            
            Dang
      Yu Pan, Wen Liang Li, Wen Wei MaShenzhen
      Development Bank Co., Ltd
            
            $1.34
      million
            
            $1.34  million
            
            Dang
      Yu PanShanghai
      Pudong Development Bank Co. Ltd.
            
            $8.05
      million
            
            $5.12  million
            
            Dang
      Yu PanCitibank
      (China) Co., ltd.
            
            $2.99
      million
            
            $1.26  million
            
            Dang
      Yu Pan, Wen Liang Li, Wen Wei Ma




Each of
Springpower Technology (Shenzhen) Co., Ltd., a wholly-owned subsidiary of Hong
Kong Highpower Technology Co., Ltd., Dang Yu Pan, Wen Liang Li and Wen Wei Ma
entered into a guarantee agreement to guarantee Shenzhen Highpower’s obligations
under the Agreement and Line of Credit with Bank of China. The Company may not
enter into any counter-guarantee agreement or similar agreement that impairs the
rights of the Bank of China under the Agreement.





Pursuant
to the guarantee agreement related to the loan with Shenzhen Development Bank
Co., Ltd., Mr. Pan guaranteed all of the principal, interest, compound interest
and penalty interest of all debts incurred by our subsidiary, Shenzhen
Highpower, as well as expenses incurred by realization of creditor’s rights,
which include notification costs, fees of service, survey fees, lawyer’s
fees, legal costs, travel expenses, evaluation costs, auctioneer’s fees,
attachment fees and enforcement charges. The guarantee is irrevocable and
remains in effect until two years after the expiration of the credit extended
pursuant to the loan agreement.





Pursuant
to the guarantee agreement related to the loan with Shanghai Pudong Development
Bank Co., Ltd., Mr. Pan guaranteed the principal, interests, damages,
compensations, service charges and other fees arising out from the loan.
Pursuant to the guarantee, Mr. Pan may not take certain actions without first
obtaining the bank’s written consent, including: (a) selling, gifting, leasing,
lending, transferring, mortgaging, pledging or otherwise disposing of, partially
or fully, his substantial assets; (b) providing a guarantee for a third party,
which materially and adversely influences his financial conditions or his
capacity to perform its obligations under the guarantee; (c) declaring
bankruptcy; or (d) executing any contract/agreement that substantially adversely
influences his capacity to perform his obligations under the guarantee. Mr. Pan
must also notify the bank upon the occurrence of certain events including (a)
any event causing any of his representations or warranties to become untrue; (b)
his involvement in an action or arbitration; (c) a change in his address or
employment; or (d) a claim by other creditors for his bankruptcy. In the event
of an enumerated event of default, the bank may declare accelerate repayment of
the loan and require Mr. Pan to repay the loan in accordance with the guarantee
or require our subsidiary, Shenzhen Highpower to supplement the security
deposit. In addition, Mr. Pan will be liable for any damages to the bank in the
event of the occurrence of an event of default.





Pursuant
to the Letters of Guarantee related to the loan with Citibank China Co., Ltd.,
each of the guarantors guaranteed to pay any or all of the outstanding debts,
including principal, interest, charges, defaults interest, penalties, costs,
expenditures, compensation, payments, and other expenses, due and payable by our
subsidiary, Shenzhen Highpower. Each of the guarantors agreed not to claim,
enforce or exercise any right of subrogation he may obtain under the guarantee.
Additionally, each guarantor waived any right to act as a debtee or claim any
rights to the assets of Shenzhen Highpower, or compete with the bank in the case
of a bankruptcy or liquidation of Shenzhen Highpower. Each guarantor also agreed
that should he fail to make a payment obligation under the guarantee when due
and payable, the bank may set off such debts with any deposit or other assets
held or controlled by the bank or with any amount owed by the bank to the
guarantor. Pursuant to the guarantee, each of the guarantors agreed, unless
otherwise agreed by the bank, so long as any debt remains unpaid to: (a) comply
with all applicable laws and orders of any government authorities having
jurisdiction; (b) pay all taxes and charges so as to not cause a lien, mortgage
or any burden or rights on any of guarantor’s assets; (c) and sign any document
reasonably requested by the bank. Also, the guarantors may not, without the
bank’s prior written consent, undertake or guarantee any other obligation of any
individual or entity or sell, lease or dispose of a material part of their
assets. Each guarantor is jointly and severally liable for all debts with each
other guarantor.





We did
not and do not intend to pay any compensation to any of the guarantors for the
guarantees.





Contractual
obligations




44





This
table summarizes our known contractual obligations and commercial commitments at
December 31, 2009.





Payments
      due by periodTotal
            
            
            Less than 1
              year
            
            
            1-3 years
            
            
            3-5 years
            
            
            More than 5
              yearsCredit
      Facilities
            
            $
            14,787,715
            
            
            $
            14,787,715
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Purchase
      Obligations (1)
            
            $
            10,738,714
            
            
            $
            10,738,714
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -License
      Agreement
            
            $
            1,071,787
            
            
            $
            1,071,787
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Total
            
            $
            26,598,215
            
            
            $
            26,598,215
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -




(1)
Primarily represents obligations to purchase specified quantities of raw
materials.





Inflation
and Seasonality





Inflation
and seasonality have not had a significant impact on our operations during the
last two fiscal years.





Off-Balance
Sheet Arrangements





We do not
have any off-balance sheet debt, nor do we have any transactions, arrangements
or relationships with any special purpose entities.





New
Accounting Pronouncements





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




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




ASC 855,
Subsequent Events (“ASC 855”) (formerly Statement of Financial Accounting
Standards No. 165, Subsequent Events) includes guidance that was issued by
the FASB in May 2009, and is consistent with current auditing standards in
defining a subsequent event. Additionally, the guidance provides for disclosure
regarding the existence and timing of a company’s evaluation of its subsequent
events. ASC 855 defines two types of subsequent events, “recognized” and
“non-recognized”. Recognized subsequent events provide additional evidence about
conditions that existed at the date of the balance sheet and are required to be
reflected in the financial statements. Non-recognized subsequent events provide
evidence about conditions that did not exist at the date of the balance sheet
but arose after that date and, therefore; are not required to be reflected in
the financial statements. However, certain non-recognized subsequent events may
require disclosure to prevent the financial statements from being misleading.
This guidance was effective prospectively for interim or annual financial
periods ending after June 15, 2009. The Company implemented the guidance
included in ASC 855 as of April 1, 2009. The effect of implementing this
guidance was not material to the Company’s financial position or results of
operations.




45




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





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





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





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





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




46





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





ITEM
7A.  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. Approximately 75% of our sales
are made in U.S. Dollars. During the year ended December 31, 2009, the exchange
rate of the RMB to the U.S. Dollar increased approximately 0.1% from the level
at the end of December 31, 2008. This fluctuation resulted in a slight increase
in our material costs during the year ended December 31, 2009. 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 U.S. Dollar. Exchange rate
fluctuations may also affect the value, in U.S. Dollar terms, of our net assets.
In addition, the RMB is not freely convertible into foreign currency and all
foreign exchange transactions must take place through authorized institutions.
Due to the volatility of the US Dollar to our functional currency the Company
put into place in 2009 a hedging program to attempt to protect it from
significant changes to the US Dollar which affect the value of its US dollar
receivables and sales. At December 31, 2009, the Company had a series of
currency forwards totaling a notional amount US$6,500,000 expiring from January
2010 to July 2010. The terms of these derivative contracts are generally for 12
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. The net gains of 214,092 attributable to these activities are
included in “other expenses” for the year ended December 31, 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
8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA




47





The
information required by this Item 8 is incorporated by reference to information
begins on Page F-1 of this Form 10-K.





ITEM
9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE





None.





ITEM
9A.  CONTROLS AND PROCEDURES





(a)
Evaluation of disclosure controls and procedures





Disclosure
controls and procedures are internal controls and other internal audit
procedures that are designed and adopted by management to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Security Exchange Act 1934 is properly recorded, processed, summarized
and reported, within the time periods specified in the Securities and Exchange
Commission's rules and regulations. Disclosure controls and procedures include,
without limitation, internal controls and internal audit procedures designed to
ensure that all necessary information required to be disclosed by the Company in
the reports that we file or submit under the Security Exchange Act 1934 is
properly recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms and that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is
accumulated and communicated to our management, including our principal
executive and financial officers, as appropriate to allow timely decisions
regarding required disclosure.





As of the
end of the period covered by this Annual Report, we conducted an evaluation,
under the supervision and with the participation of our Chief Executive Officer
and Chief Financial Officer, of our disclosure controls and procedures (as
defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon
this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that the Company’s disclosure controls and procedures are
effective.





(b)  Management’s
Report on Internal Control over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting, as
defined in Exchange Act Rule 13a-15(f), is a process designed by, or under the
supervision of, our principal executive and principal financial officers and
effected by our Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that:





·
            Pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and dispositions of our
      assets;





·
            Provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that our receipts and expenditures are being
      made only in accordance with authorizations of our management and
      directors; and





·
            Provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use of disposition of our assets that could have
      a material effect on the financial
statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate. All internal control systems, no matter
how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. Our management assessed the
effectiveness of our internal control over financial reporting as of December
31, 2009. In making this assessment, our management used the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in Internal Control-Integrated Framework. Based on this assessment, management
believes that as of December 31, 2009, our internal control over financial
reporting is effective based on those criteria.




48





This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.





(c)
Changes in internal control over financial reporting





The
Company has engaged Victory Consultants Limited, an independent internal control
consulting firm, to evaluate our SOX 404 internal control and procedures. The
primary objective is to streamline our internal control structure. The
consulting firm will study and examine our well-defined line of responsibility
and delegation of authority for our functional operation areas so that they can
evaluate whether responsibility lines are clearly be drawn. Then, they will
introduce a comprehensive system with key auditable internal control and
procedures integrated. The consulting company will help develop an internal
control environment that allows continuous input by various levels of management
and employees with an effective and efficient information flow and internal
communication network. A periodic risk assessment exercise will be performed to
enhance our system’s integrity and to assess areas of risk. Our internal control
department will develop additional control activities to ensure the effective
function of our controls. The internal audit department will directly report to
our audit committee. The anticipated changes in internal control over financial
reporting will enhance our control environment with improving internal
information flow and communication network. We will identify new risks through a
constant risk assessment process and make our control activities an effective
tool of monitoring our internal controls. The pillar of our internal control
improvement is the audit committee of the board of directors that interacts with
our internal control department, top management, and our external auditors to
ensure a proper and reliable financial report with a reasonable
assurance.  Other than as described above, there have not been any
changes in the Company’s internal control over financial reporting during the
quarter ended December 31, 2009 that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting..




ITEM
9B.  OTHER INFORMATION





On
November 24, 2009, Shenzhen Highpower Technology Co., Ltd. entered into an
Agreement of Line of Credit (the “Agreement”) for a revolving line of credit in
the amount of RMB100,000,000 (US$14.65 million) with Bank of China Limited
(“Bank of China”), which includes a RMB20,000,000 (US$2.93) short-term line of
credit, a RMB75,000,000 (US$10.96 million) line of trade financing and a
RMB5,000,000 (US$732,000)  line of foreign currency trading earnest
money. The Agreement expires on November 23, 2010.





Each of
Springpower Technology (Shenzhen) Co., Ltd., a wholly-owned subsidiary of Hong
Kong Highpower Technology Co., Ltd., Dang Yu Pan, Wen Liang Li and Wen Wei Ma
entered into a guarantee agreement to guarantee Shenzhen Highpower’s obligations
under the Agreement. The Company may not enter into any counter-guarantee
agreement or similar agreement that impairs the rights of the Bank of China
under the Agreement.





The
following events constitute a default under the Agreement: failure to perform
its payment or settlement obligations under the Agreement or any agreements
entered into with the Bank of China pursuant to the Agreement; failure to use
the funds for purposes as stated in the Agreement, breach of any representations
in the Agreement or any agreements entered into with the Bank of China pursuant
to the Agreement; failure to provide a new guarantee and replacement guarantor
in circumstances including merger, sale of assets and bankruptcy; termination of
business or bankruptcy; breach of any other agreements related to the Agreement
default under any other contract with the Bank of China or its related
organizations; and any guarantor’s breach of the guarantee contract or default
under any other contract with the Bank of China or its related
organizations.





Upon the
occurrence of any events of default under the Agreement, the Bank of China may
require Shenzhen Highpower or the guarantors to correct the default within a
specified time period; reduce, suspend or terminate the line of credit, the
Agreement, or any other agreement between the parties in whole or in part;
suspend or terminate the issuance of any loan not issued, any trading financing
business and letter of guarantee not handled; accelerate the maturity of any
amount outstanding under the Agreement; terminate or cancel the Agreement,
terminate or cancel other agreements between Shenzhen Highpower and the Bank of
China in whole or in part; require Shenzhen Highpower to indemnify losses caused
by the default to the Bank of China;deduct
any sum owed by the Bank of China from Shenzhen Highpower’s bank account with
the Bank of China; exercise its security interest; require the guarantors to
undertake their guarantee responsibility; or any other measures deemed necessary
by the Bank of China.




49





In the
event that Shenzhen Highpower’s total line of credit with all banks exceeds
RMB140 million, the Bank of China may suspend credit issued to Shenzhen
Highpower.  Additionally, Shenzhen Highpower must obtain the consent
of the Bank of China prior to applying for any credit from other commercial
banks.  In the event that Shenzhen Highpower fails to obtain the prior
consent of the bank before obtaining such credit, the Bank of China may
terminate the line of credit.




Shenzhen
Highpower Technology Co., Ltd. entered into a new financing agreement with
Shanghai Pudong Development Bank Co. Ltd. effective October 29, 2009 with terms
substantially similar to the previous loan agreement, except that the amount
granted has been increased to $8.05 million.  The new agreement
expires on October 29, 2010.  Pursuant to the new agreement, Shenzhen
Highpower must obtain the bank’s written approval before (i) decreasing its
registered capital or conducting a significant structuring reform, such as a
split, merger, reorganization, restructuring into a stockholding system, or
canceling, dissolving, shutting-down, or changing its operational method by
means of contracting, leasing, joint operation, or entrusting; (ii) the
occurrence of any significant event related to its external investment or a
transfer of its assets; or (iii) the occurrence of any significant ownership
issues related to the ownership of its
shares.


The
information included in this Item 9B is provided in accordance with Item 1.01
and Item 2.03 of Form 8-K.




50




PART
III




ITEM
10.  DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE
GOVERNANCE





The
following individuals constitute our board of directors and executive
management:





Name
            
            Age
            
            PositionDang
      Yu Pan
            
            42
            
            Chairman
      of the Board and Chief Executive OfficerWen
      Liang Li
            
            44
            
            Vice
      President, Chief Technology Officer and DirectorWen
      Wei Ma
            
            40
            
            Vice
      President of ManufacturingHenry
      Ngan
            
            37
            
            Chief
      Financial OfficerWen
      Jia Xiao
            
            33
            
            Vice
      President of Quality ControlXinhai
      Li
            
            47
            
            DirectorChao
      Li
            
            65
            
            DirectorPing
      Li
            
            45
            
            Director





Dang Yu
Pan has been the Chairman of the Board and Chief Executive officer of the
Company and HKHT since November 2007 and July 2003, respectively. Mr. Pan is the
founder of Shenzhen Highpower and has served as the Chairman of the Board and
Chief Executive Officer of Shenzhen Highpower since October 2002. From May 2001
to October 2002, Mr. Pan was the General Manager and Chairman of the Board of
Guangzhou HaoPeng Technology Co., Ltd. From January 1997 to July 2000, Mr. Pan
was the Vice General Manager of Nanhai Shida Battery Co., Ltd. From January 1995
to December 1996, Mr. Pan served as a director of the HuangPu Aluminum Factory.
Additionally, from August 1990 to December 1994, Mr. Pan worked in the sales
department of the Guangzhou Aluminum Products Factory. Mr. Pan received a
bachelor’s degree in metallurgical engineering from Central South University in
China in 1990. We believe Mr. Pan’s qualifications to sit on our Board
include his extensive understanding of our business, our products and the
battery industry that he has acquired over his 12 years working in the battery
industry, including over 7 years as an officer and director of as a director of
Shenzhen Highpower.





Wen Liang
Li has been a director of the Company since November 2007 and a director
of HKHT since July 2003. Since January 2003, Mr. Li. has served as a director
and as Vice General Manager and Chief Technology Officer of Shenzhen Highpower.
From January 1996 to December 2002, Mr. Li served as Vice General Manager of
Zhuhai Taiyi Battery Co., Ltd., a battery manufacturer. Mr. Li received a
master’s degree in Electrochemistry from the Harbin Institute of Technology in
China in 1991. We believe that Mr. Li’s 18 years of working experience in the
battery industry, including 7 years as an officer and director of Shenzhen
Highpower, well qualify Mr. Li to serve on our Board.





Wen Wei Ma
has served as the Company’s Vice President of Manufacturing since November 2007
and as a director of HKHT since July 2003. Mr. Ma has served as a director and
as a Vice General Manager of Manufacturing of Shenzhen Highpower since October
2002. Mr. Ma received a diploma in chymic analysis from the Guangzhou Trade
School of Light Industry in China in 1989.





Henry Nganhas served as the Chief Financial Officer of the Company since February
2009. Prior to joining the Company, Mr. Ngan had served as Vice President and
Senior Equity Analyst at Brean Murray Carret & Co. in New York City since
July 2008.  Prior to that, Mr. Ngan served as an Equity Research
Analyst at Buckingham Research Group in New York from June 2004 to January 2008
and at Robotti & Company from October 2002 until June 2004.  Mr.
Ngan received a bachelor’s degree in Accounting from the University at Albany,
State University of New York in 1995 and an MBA in Finance and Information &
Communication Systems from Fordham University in 2004.  Mr. Ngan is a
Certified Public Accountant in the State of New York.





Jia Wei
Xiao has served as Vice President of Quality Control of the Company since
November 2007 and as Vice General Manager of Quality Control of Shenzhen
Highpower since October 2005. From October 2002 to September 2005, Mr. Xhio
served as the Minister of the Quality Control Department of Shenzhen Highpower.
Mr. Xiao received a bachelor’s degree in Check Technology and Instrument in 2000
from the China Institute of Metrology.




51





Xinhai Li
has served as a director of the Company since January 2008. Sine August 1990,
Mr. Li has served as a director and professor at the China Central South
University Metallurgical Science and Engineering School in China. Mr. Li
received a PhD in Physical Chemistry of Metallurgy from China Central South
University in August 1990.  We believe that Mr. Li’s qualifications to
sit on our Board include his extensive understanding of our business and his
understanding of U.S. GAAP and financial statements.





Chao Li
has served as a director of the Company since January 2008. Since August 2000,
Mr. Li has served as Chairman of the Guangdong Association of Productivity. From
July 1991 to November 2004, Mr. Li served as the Vice-Chairman of the
Development Research Center for the PRC Government of Guangdong Province. Mr. Li
received a bachelor’s degree in metallurgy from Central South University in
China in August 1969.  We believe that Mr. Li’s qualifications to sit
on our Board include his extensive understanding of our business and his
understanding of U.S. GAAP and financial statements.





Ping Li
has served as a director of the Company since January 2008. Since July 2003, Mr.
Li has served as the Managing Director of Investment at ChinaVest, a venture
capital firm. From February 2002 to July 2003, Mr. Li served as Chief Financial
Officer of Great Wall Technology Co., Ltd., an investment technology company.
Mr. Li received a master’s degree in biology from Columbia University in 1989
and an MBA in finance in 1994 from the Wharton School of the University of
Pennsylvania.  We believe that Mr. Li’s qualifications to sit on our
Board include his knowledge of the capital market and his experience, expertise
and background with respect to accounting matters, including his experience as a
chief financial officer and familiarity with U.S. GAAP and financial
statements.





Family
Relationships





There are
no family relationships among any of the officers and directors.





Director
Independence





Subject
to certain exceptions, under the listing standards of the NASDAQ Stock Market,
LLC, a listed company’s board of directors must consist of a majority of
independent directors. Currently, our board of directors has determined that
each of the non-management directors, Xinhai Li, Chao Li and Ping Li, is an
“independent” director as defined by the listing standards of the NASDAQ
Marketplace Rules currently in effect and approved by the U.S. Securities and
Exchange Commission (“SEC”) and all applicable rules and regulations of the
SEC.  All members of the Audit, Compensation and Nominating Committees
satisfy the “independence” standards applicable to members of each such
committee. The board of directors made this affirmative determination regarding
these directors’ independence based on discussion with the directors and on its
review of the directors’ responses to a standard questionnaire regarding
employment and compensation history; affiliations, family and other
relationships; and transactions with the Company. The board of directors
considered relationships and transactions between each director or any member of
his immediate family and the Company and its subsidiaries and affiliates. The
purpose of the board of director’s review with respect to each director was to
determine whether any such relationships or transactions were inconsistent with
a determination that the director is independent under the NASDAQ Marketplace
Rules.





Board
Committees





Audit
Committee





We
established our Audit Committee in January 2008. The Audit Committee consists of
Xinhai Li, Chao Li and Ping Li, each of whom is an independent director. Mr.
Ping Li, Chairman of the Audit Committee, is an “audit committee financial
expert” as defined under Item 407(d) of Regulation S-K. The purpose of the Audit
Committee is to represent and assist our board of directors in its general
oversight of our accounting and financial reporting processes, audits of the
financial statements and internal control and audit functions. The Audit
Committee’s responsibilities include:





·
            The
      appointment, replacement, compensation, and oversight of work of the
      independent auditor, including resolution of disagreements between
      management and the independent auditor regarding financial reporting, for
      the purpose of preparing or issuing an audit report or performing other
      audit, review or attest services.




52




·
            Reviewing
      and discussing with management and the independent auditor various topics
      and events that may have significant financial impact on our company or
      that are the subject of discussions between management and the independent
      auditors.





The board
of directors has adopted a written charter for the Audit Committee. A copy of
the Audit Committee Charter is posted on the Company’s website at: www.haopengbattery.com.





Compensation Committee





We
established our Compensation Committee in January 2008. The Compensation
Committee consists of Xinhai Li and Chao Li, each of whom is an independent
director. Xinhai Li is the Chairman of the Compensation Committee. The
Compensation Committee is responsible for the design, review, recommendation and
approval of compensation arrangements for the Company’s directors, executive
officers and key employees, and for the administration of our equity incentive
plans, including the approval of grants under such plans to our employees,
consultants and directors. The Compensation Committee also reviews and
determines compensation of our executive officers, including our Chief Executive
Officer. The board of directors has adopted a written charter for the
Compensation Committee. A current copy of the Compensation Committee Charter is
posted on the Company’s website at: www.haopengbattery.com.





Nominating
Committee





The
Nominating Committee consists of Xinhai Li and Chao Li, each of whom is an
independent director. Chao Li is the Chairman of the Nominating Committee. The
Nominating Committee assists in the selection of director nominees, approves
director nominations to be presented for stockholder approval at our annual
general meeting and fills any vacancies on our board of directors, considers any
nominations of director candidates validly made by stockholders, and reviews and
considers developments in corporate governance practices. The board of directors
has adopted a written charter for the Nominating Committee. A current copy of
the Nominating Committee Charter is posted on the Company’s website at: www.haopengbattery.com.





Section
16(a) Beneficial Ownership Reporting Compliance





The
Company’s securities are currently registered under Section 12 of the Securities
Exchange Act of 1934, as amended. As a result, and pursuant to Rule 16a-2, the
Company’s directors and officers and holders of 10% or more of its common stock
are currently required to file statements of beneficial ownership with regards
to their ownership of equity securities under Sections 13 or 16 of the Exchange
Act. Based on a review of written representations from our executive
officers and directors, other than a Form 4 for one transaction by Henry Ngan,
we believe that during the fiscal year ended December 31, 2009, our directors,
officers and owners of more than 10% of our common stock complied with all
applicable filing requirements





Code
of Ethics





The
Company’s board of directors has adopted a Code of Business Conduct and Ethics,
which applies to all directors, officers and employees. The purpose of the Code
is to promote honest and ethical conduct. The Code is posted on the Company’s
Web site located at www.haopengbattery.com, and
is available in print, without charge, upon written request to the Company at
Hong Kong Highpower Technology, Inc., Building A1, Luoshan Industrial Zone,
Shanxia, Pinghu, Longgang, Shenzhen, Guangdong, 518111, People’s Republic of
China. The Company intends to post promptly any amendments to or waivers of the
Code on its Web site.




ITEM
11.  EXECUTIVE COMPENSATION





Summary
Compensation Table




The
following table sets forth information concerning the compensation for the
fiscal years ended December 31, 2009 and 2008 of the principal executive
officer.




53





The
following table sets forth information concerning the compensation earned during
the fiscal years ended December 31, 2009 and 2008 by our current Chief
Executive Officer.





Name and Position
            Year
            
            Salary
            
            
            Bonus
            
            
            Stock
      Awards (1)
            
            
            All
      other compensation
            
            
            TotalDang
      Yu Pan
            2009
            
            $
            18,000
            
            
            
            -
            
            
            $
            -
            
            
            $
            25,000
            (2)
            
            $
            43,000Chief
      Executive Officer and
            2008
            
            $
            18,000
            
            
            $
            -
            
            
            $
            -
            
            
            $
            25,000
            (2)
            
            $
            43,000Chairman
      of the BoardHenry
      Ngan (3)
            2009
            
            $
            137,500
            
            
            
            -
            
            
            $
            137,870
            
            
            $
            -
            
            
            $
            275,370Chief
      Financial Officer and
            
            
            $
            
            
            
            $
            
            
            
            $
            
            
            
            $
            
            
            
            $








(1)  The
amounts disclosed reflect the value of awards for grants of restricted stock.
These stock awards reflect the full grant date fair values in accordance with
FASB ASC Topic 718.


(2)  Includes
$25,000 for fees earned or paid in cash for service as a director of the
Company.


(3) Mr.
Ngan was appointed Chief Financial Officer and Corporate Secretary of the
Company effective February 1, 2009.





Outstanding
Equity Awards at 2009 Fiscal Year End





Stock
      AwardsName
            
            Number
      of
              shares
      of units of stock that have not vested
              (#)
            
            
            Market
      value of shares or units of stock that have not vested
              ($)
            
            
            Equity incentive
      plan awards: Number of unearned shares, units or other rights that
      have not vested
              (#)
            
            
            Equity incentive
      plan awards: Market or payout value of unearned shares, units or
      other rights that have not vested
              ($)Henry
      Ngan
            
            
            -
            
            
            
            -
            
            
            
            8,500
            (1)
            
            $
            65,535




(1) These
shares vest on January 31, 2011.





Employment Agreements and Termination of Employment and
Change of Control Arrangements





We
entered into an Offer Letter of Employment with our new Chief Financial Officer,
Henry Ngan, effective February 2009.  Pursuant to the Offer Letter,
Mr. Ngan is entitled to a base salary at an annual rate of $150,000 and 17,000
shares of restricted common stock of the Company under the Company’s 2008
Omnibus Incentive Plan, 8,500 of which vested on January 31, 2010 and 8,500 of
which vest on January 31, 2011.  Mr. Ngan is also entitled to
reasonable vacation and sick time and reimbursement for the cost of standard
medical and dental insurance premiums and for business expenses.





Director
Compensation





The
following table shows information regarding the compensation earned during the
fiscal year ended December 31, 2009 by members of board of directors.
Compensation information for Dang Yu Pan, our Chief Executive Officer and
Chairman of the Board, is described in the summary compensation table
above.





Name
            
            Fees
      Earned or Paid in Cash
              ($)
            
            
            Stock
      Awards
              ($)
            
            
            Option
              Awards
      ($)
            
            
            Non-Equity
      Incentive Plan Compensation ($)
            
            
            Change
      in Pension Value and Nonqualified Deferred Compensation
      Earnings
            
            
            All
      Other Compensation
              ($)
            
            
            Total
              ($)Wen
      Liang Li
            
            
            20,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            20,000Chao
      Li
            
            
            18,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            18,000Xinhai
      Li
            
            
            18,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            18,000Ping
      Li
            
            
            18,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            18,000




54




Dang Yu
Pan and Wen Liang Li are management board members. We offer our management board
members a total compensation package, which includes salary, bonus and director
fees, based on benchmarks reported by Shenzhen Labor Bureau. Once we determine
the total compensation for our management board members using the benchmarks, we
allocate a portion of their total annual compensation to compensation for
services rendered as board members. In the future, we expect to continue to
allocate a portion of our management board members’ total annual compensation as
compensation for their service as directors.





We do not
have a formal policy with respect to the compensation of our non-executive board
members.  We pay our non-executive directors for their services at the
rate of $1,500 to $2,500 per month.





Directors
are eligible to receive, from time to time, grants of options to purchase shares
under our equity incentive plan.





Securities
Authorized for Issuance under Equity Compensation Plans




The following table provides
information as of December 31, 2009 regarding compensation plans, including
any individual compensation arrangements, under which equity securities of Hong
Kong Highpower Technology, Inc. are authorized for issuance.





Plan
      Category
            
            Number
              of Securities
              to
      be issued
              upon
              exercise
      of
              outstanding
              options,
              warrants
              and
      rights
            
            Weighted-
              average
              exercise
              price
      of
              outstanding
              options,
              warrants
              and
      rights
            
            Number
              of securities
              remaining
              available
      for
              future
              issuance
              under
      equity
              compensation
              plansEquity
      compensation plans approved by security holders
            
            -
            
            $
            -
            
            1,983,000
            (1)Equity
      compensation plans not approved by security holders
            
            -
            
            
            -
            
            -Total
            
            -
            
            
            N/A
            
            1,983,000





(1)
            In
      October 2008, the Company adopted the 2008 Omnibus Incentive Plan. The
      Incentive Plan currently has 1,983,000 shares authorized for
      issuance.





ITEM
12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS





Beneficial
ownership is determined in accordance with the rules of the SEC. In computing
the number of shares beneficially owned by a person and the percentage of
ownership of that person, shares of common stock subject to options and warrants
held by that person that are currently exercisable or become exercisable within
60 days of March 29, 2010 are deemed outstanding even if they have not actually
been exercised. Those shares, however, are not deemed outstanding for the
purpose of computing the percentage ownership of any other person.





The
following table sets forth as of March 29, 2010 certain information with respect
to beneficial ownership of our common stock based on 13,582,106 issued and
outstanding shares of common stock, by:





·
            Each
      person known to be the beneficial owner of 5% or more of the outstanding
      common stock of our company;





·
            Each
      named executive officer;





·
            Each
      director; and




55




·
            All
      of the executive officers and directors as a
  group.





The
number of shares of our common stock outstanding as of March 29, 2010 excludes
47,500 shares of our common stock issuable upon exercise of outstanding
warrants.   Unless otherwise indicated, the persons and entities
named in the table have sole voting and sole investment power with respect to
the shares set forth opposite the stockholder’s name, subject to community
property laws, where applicable. Unless otherwise indicated, the address of each
stockholder listed in the table is c/o Building A1, Luoshan Industrial Zone,
Shanxia, Pinghu, Longgang, Shenzhen, Guangdong, 518111, People’s Republic of
China.





Name
      and Address
                of
      Beneficial Owner
            
            Title
            
            Amount
      and Nature of Beneficial Ownership
            
            Percent
      of ClassDirectors
      and Executive OfficersDang
      Yu Pan
            
            Chief
      Executive Officer andChairman
      of the Board
            
            4,396,035
      (1)
            
            32.41%Wen
      Liang Li
            
            Vice
      President, Chief Technology Officer and Director
            
            2,034,770
            
            14.98%Wen
      Wei Ma
            
            Vice
      President of Manufacturing
            
            924,897
            
            6.81%Henry
      Ngan
            
            Chief
      Financial Officer and Corporate Secretary
            
            17,000
            
            *Xinhai
      Li
            
            Director
            
            -
            
            -Chao
      Li
            
            Director
            
            -
            
            -Ping
      Li
            
            Director
            
            -
            
            -Officers
      and Directors as a Group (total of 8 persons)
            
            
            
            7,372,702
      (1)
            
            54.36%




*less
than 1%.





(1)
            Includes
      (i) an aggregate of  603,962 shares over which Mr. Pan has
      voting power and the right to acquire ownership pursuant to a loan
      agreement dated February 5, 2007 between Mr. Pan and other shareholders,
      including, Wen Jia Xiao, Vice President of Quality Control, who holds
      166,482 shares, and (ii) 369,959 shares held by a company that is 100%
      owned by Mr. Pan.





ITEM
13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE





Hong
Kong Highpower Technology Co., Ltd.





Hong Kong
Highpower Technology Co., Ltd. (“HKHT”), a wholly-owned subsidiary of Hong Kong
Highpower Technology, Inc., and each of HKHT’s wholly owned –subsidiaries
Shenzhen Highpower Technology Co., Ltd., HZ Highpower Technology Co., Ltd. and
Springpower Technology (Shenzhen) Company Limited, each have interlocking
executive and director positions with the Company.





Guarantee
Agreements




56





Dang Yu
Pan, our Chairman and Chief Executive Officer, Wen Liang Li, our Vice President,
Chief Technology Officer and director, and Wen Wei Ma, our Vice President of
Manufacturing, each have provided personal guarantees under our outstanding
banking facilities. The following table shows the amount outstanding on each of
our bank loans as of December 31, 2008 and the identity of the officer(s) who
guaranteed each loan.




Name
      of Bank
            
            Amount
      Granted
            
            Amount
      Outstanding Under Loan
            
            Guaranteed
      by OfficersBank
      Of China
            
            $14.65
      million
            
            $7.07
      million
            
            Dang
      Yu Pan, Wen Liang Li, Wen Wei MaShenzhen
      Development Bank Co., Ltd
            
            $1.34
      million
            
            $1.34
      million
            
            Dang
      Yu PanShanghai
      Pudong Development Bank Co. Ltd.
            
            $8.05
      million
            
            $5.12
      million
            
            Dang
      Yu PanCitibank
      (China) Co., ltd.
            
            $2.99
      million
            
            $1.26
      million
            
            Dang
      Yu Pan, Wen Liang Li, Wen Wei Ma





Policy
for Approval of Related Party Transactions





We do not
currently have a formal related party approval policy for review and approval of
transactions required to be disclosed pursuant to Item 404 (a) of Regulation
S-K.





Director
Independence





See Item
10 “Directors, Officers and Corporation Governance” for a discussion of board
member independence.




ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES.





The
following table presents fees, including reimbursements for expenses, for
professional audit services rendered by Dominic K.F. Chan & Co. for the
audits of the Company’s annual financial statements and interim reviews of the
Company’s quarterly financial statements for the years ended December 31, 2009
and December 31, 2008 and fees billed for other services rendered by Dominic
K.F. Chan & Co. during those periods.





Year
      ended December 31,2009
            
            
            2008Audit
      Fees(1)
            
            $
            73,000
            
            
            $
            73,000Audit-Related
      Fees
            
            
            -
            
            
            
            -Tax
      Fees
            
            
            -
            
            
            
            -All
      Other Fees
            
            
            -
            
            
            
            -Total
            
            $
            73,000
            
            
            $
            73,000





(1) These
are fees for professional services performed by Dominic K.F. Chan & Co. for
the audit of our annual financial statements, review of our quarterly reports,
and review of our Registration Statement on Form S-1.





Pre-Approval
Policy





The Audit
Committee on an annual basis reviews audit and non-audit services performed by
the independent registered public accounting firm for such services. The audit
committee pre-approves (i) auditing services (including those performed for
purposes of providing comfort letters and statutory audits) and (ii)
non-auditing services that exceed a de minimis standard established by the
committee, which are rendered to the Company by its outside auditors (including
fees).





57




PART
IV





ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES





1.
              Financial
      Statements: See “Index to Consolidated Financial Statements” in Part II,
      Item 7 of this annual report on Form
10-K.





2.
            Financial
      Statement Schedule: Not applicable.





3.
              Exhibits:
      The exhibits listed in the accompanying “Index to Exhibits” are filed or
      incorporated by reference as part of this Form
  10-K.





SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) 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, in the City of Shenzhen, People’s
Republic of China, on March 30, 2010.




Hong
      Kong Highpower Technology, Inc.
                (Registrant)Dated:
      March 30, 2010
              
              /s/ 
      Dang Yu PanBy:
      Dang Yu PanChief
      Executive Officer andChairman
      of the Board (Principal Executive Officer)





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Company in the capacities
and on the dates indicated.







Signature
            
            Capacity
            
            Date/s/  Dang Yu
      Pan
            
            Chief
      Executive Officer and
            
            March
      30, 2010By:  Dang
      Yu Pan
            
            Chairman
      of the Board(Principal
      Executive Officer)/s/  Henry
      Ngan
            
            Chief
      Financial Officer
            
            March
      30, 2010By:  Henry
      Ngan
            
            (Principal
      Financial and Accounting Officer)/s/  Wen Liang
      Li
            
            Vice
      President, Chief Technology Officer and Director
            
            March
      30, 2010Wen
      Liang Li/s/  Xinhai
      Li
            
            Director
            
            March
      30, 2010Xinhai
      Li/s/  Chao
      Li
            
            Director
            
            March
      30, 2010Chao
      Li/s/  Ping
      Li
            
            Director
            
            March
      30, 2010Ping
      Li




58




EXHIBIT
INDEX





Exhibit
              Number
            Description2.1
            Share
      Exchange Agreement, dated as of October 20, 2007, by and among the
      Registrant, Hong Kong Highpower Technology Company Limited and all of the
      shareholders of Hong Kong Highpower Technology Company Limited
      (incorporated by reference to Exhibit 2.1 to the Registrant’s Current
      Report on Form 8-K filed with the Securities and Exchange Commission on
      November 5, 2007).





3.1
            Certificate
      of Incorporation (incorporated by reference from Exhibit 3.1 to the
      Registration Statement on Form 10-SB (File No. 000-52103) filed with the
      Securities and Exchange Commission on July 5,
  2006).





3.2
            Bylaws
      (incorporated by reference from Exhibit 3.2 to the Registration Statement
      on Form 10-SB (File No. 000-52103) filed with the Securities and Exchange
      Commission on July 5, 2006).





3.3
            Articles
      of Merger Effecting Name Change (incorporated by reference from Exhibit
      3.3 to the Current Report on Form 8-K filed with the Securities and
      Exchange Commission on November 5,
2007).





10.1
            Form
      of Subscription Agreement (incorporated by reference from Exhibit 10.1 to
      the Current Report on Form 8-K filed with the Securities and Exchange
      Commission on November 5, 2007).





10.2*
            Amended
      Consumer Battery License Agreement, amended as of August 8, 2007, by and
      between Shenzhen Highpower Technology Co., Ltd and Ovonic Battery Company,
      Inc. (incorporated by reference from Exhibit 10.2 to the Annual Report on
      Form 10-K filed with the Securities and Exchange Commission on April 11,
      2008).





10.3
            State-owned
      Land Use Rights Grant Contract No. 441302 – B – 112 dated as of
      May 23, 2007, by and between the Land and Resources Bureau of Huizhou
      City, Guangdong Province and Shenzhen Highpower Technology Co., Ltd.
      (translated to English) (incorporated by reference from Exhibit 10.4 to
      the Current Report on Form 8-K filed with the Securities and Exchange
      Commission on November 5, 2007).





10.4
            Commercial
      Acceptance Bill Discount Quotation Agreement dated as of June 18, 2007 by
      and between Shenzhen Development Bank Shenzhen Ai Guo Road Branch and
      Shenzhen Highpower Technology Co., Ltd. (translated to English)
      (incorporated by reference from Exhibit 10.6 to the Current Report on Form
      8-K filed with the Securities and Exchange Commission on November 5,
      2007).





10.4(a)
            Guaranty
      Contract for Maximum Credit Line dated as of June 18, 2007 by and between
      Dang Yu Pan and Shenzhen Development Bank Shenzhen Ai Guo Road Branch
      (translated to English) (incorporated by reference from Exhibit 10.5(a) to
      Amendment No. 1 to the Registration Statement on Form S-1/A filed with the
      Securities and Exchange Commission on January 28,
  2008).





10.5
            Facility
      Quotation Agreement dated as of September 18, 2007 by and between Shanghai
      Pudong Development Bank Shenzhen Long Hua Branch and Shenzhen Highpower
      Technology Co., Ltd. (translated to English) (incorporated by reference
      from Exhibit 10.7 to the Current Report on Form 8-K filed with the
      Securities and Exchange Commission on November 5,
  2007).





10.5(a)
            Contract
      for Guarantee of Maximum Line of Credit dated as of September 18, 2007 by
      and between Dang Yu Pan and Shanghai Pudong Development Bank Shenzhen
      Branch (translated to English) (incorporated by reference from Exhibit
      10.6(a) to Amendment No. 1 to the Registration Statement on Form S-1/A
      filed with the Securities and Exchange Commission on January 28,
      2008).




59





10.6
            Form
      of Registration Rights Agreement entered into by and between the
      Registrant and WestPark Capital, Inc. Affiliates (incorporated by
      reference from Exhibit 10.7 to the Registration Statement on Form S-1/A
      filed with the Securities and Exchange Commission on June 4,
      2008).





10.7
            Non-Undertaking
      Short-Term Revolving Financing Agreement dated as of October 11, 2007 by
      and between Citibank China Co., Ltd. (“Lender”) and Shenzhen Highpower
      Technology Col, Ltd. and corresponding Letters of Guarantee between Lender
      and Dang Yu Pan, Wen Wei Ma and Wen Liang Li (translated to English)
      (incorporated by reference from Exhibit 10.7 to the Annual Report on Form
      10-K filed with the Securities and Exchange Commission on April 18,
      2008).





10.8
            Agreement
      on Line of Credit dated as of November 24, 2009 by and between the Bank of
      China Limited, Shenzhen Buji Subbranch and Shenzhen Highpower Technology
      Co., Ltd. (translated to English).





10.9
            Form
      of Guaranty Contract of Maximum Amount by and between the Bank of China
      Limited, Shenzhen Buji Subbranch and the individuals and entities
      indicated in Schedule A attached to the Form of Guaranty (translated to
      English).





21.1
            List
      of Subsidiaries (incorporated by reference from Exhibit 21.1 to the Annual
      Report on Form 10-K filed with the Securities and Exchange Commission on
      April 9, 2009).





23.1
            Consent
      of Dominic K.F. Chan & Co.





31.1
            Certification
      of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K,
      as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.





31.2
            Certification
      of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation S-K,
      as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.





32.1**
            Certifications
      of 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.









*
            The Registrant received from the
      Securities and Exchange Commission an order dated June 9, 2008 granting
      confidential treatment under the Securities Exchange Act of
      1934.





**
            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.




60






HONG
KONG HIGHPOWER TECHNOLOGY, INC.





CONSOLIDATED
FINANCIAL STATEMENTS


DECEMBER
31, 2009 and 2008




PageReport
      of Independent Registered Public Accounting Firm
              
              
              F-2Financial
      Statements:Consolidated
      Balance Sheets as of  December 31, 2009 and 2008
              
              
              F-3Consolidated
      Statements of Operations for the years endedDecember 31, 2009 and
      2008
              
              
              F-5Consolidated
      Statements of Stockholders' Equity and Comprehensive Income for the years
      endedDecember
      31, 2009 and 2008
              
              
              F-6Consolidated
      Statements of Cash Flows for the years endedDecember
      31, 2009 and 2008
              
              
              F-7Notes
      to Consolidated Financial Statements
              
              
              F-8





F-1




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








To the
Board of Directors and Stockholders of


Hong Kong
Highpower Technology, Inc.





We have
audited the accompanying consolidated balance sheets of Hong Kong Highpower
Technology Inc. (the “Company”) and its subsidiaries (collectively referred to
as the “Group”) as of December 31, 2009 and 2008, and the related statements of
operations, stockholders’ equity and comprehensive income, and cash flows for
the years ended December 31, 2009, 2008 and 2007.  These consolidated
financial statements are the responsibility of the Company’s
management.  Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company and
its subsidiaries as of December 31, 2009 and 2008, and the consolidated results
of their operations and their cash flows for the years ended December 31, 2009,
2008 and 2007, in conformity with accounting principles generally accepted in
the United States of America.








/s/
Dominic K.F. Chan & Co., Certified Public Accountants


Dominic
K.F. Chan & Co


Certified
Public Accountants


Hong
Kong


Date:
March 30, 2010




F-2




HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





CONSOLIDATED
BALANCE SHEETS


(Stated
in US Dollars)





At
      December 31,2009
            
            
            2008$
            
            
            $ASSETSCurrent Assets
:Cash and cash
      equivalents
            
            
            2,967,586
            
            
            
            4,175,780Restricted cash
            
            
            5,478,418
            
            
            
            4,845,478Accounts
    receivable
            
            
            14,896,503
            
            
            
            8,765,593Notes receivable
            
            
            596,795
            
            
            
            429,815Prepaid expenses and other
      receivables – Note7
            
            
            2,366,734
            
            
            
            1,732,709Deferred
      charges – Stock-based compensation – Note8
            
            
            -
            
            
            
            216,667Inventories –Note11
            
            
            10,633,566
            
            
            
            11,208,697Total Current
      Assets
            
            
            36,939,602
            
            
            
            31,374,739Deferred tax assets
      – Note6
            
            
            -
            
            
            
            104,556Plant and equipment, net
      – Note12
            
            
            10,284,873
            
            
            
            7,778,477Leasehold
      land – Note
      13
            
            
            3,019,509
            
            
            
            3,050,510Intangible
      asset, net – Note
      14
            
            
            850,000
            
            
            
            900,000Investment
      securities– Note 15
            
            
            52,732
            
            
            
            -Currency
      forward – Note
      17
            
            
            -
            
            
            
            116,157TOTAL
      ASSETS
            
            
            51,146,716
            
            
            
            43,324,439LIABILITIES
      AND STOCKHOLDERS’ EQUITYLIABILITIESCurrent Liabilities
      :Non-trading
      foreign currency derivatives liabilities – Note 17
            
            
            11,041
            
            
            
            293,830Accounts payable
            
            
            10,738,714
            
            
            
            8,306,123Other payables and accrued
      liabilities – Note
      19
            
            
            3,563,308
            
            
            
            3,139,275Income taxes
    payable
            
            
            876,739
            
            
            
            476,330Bank borrowings –Note20
            
            
            14,787,714
            
            
            
            14,829,228Total Current
      Liabilities
            
            
            29,977,516
            
            
            
            27,044,786COMMITMENTS
      AND CONTINGENCIES –Note22





(continued)




F-3




HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





CONSOLIDATED
BALANCE SHEETS (continued)


(Stated
in US Dollars)





At
      December 31,2009
            
            
            2008$
            
            
            $STOCKHOLDERS’
      EQUITYPreferred
      StockPar
      value: $0.0001Authorized:
      10,000,000 sharesIssued
      and outstanding: none
            
            
            -
            
            
            
            -Common stockPar
      value : $0.0001Authorized: 100,000,000
      sharesIssued
      and outstanding: 2009 –13,582,106 shares
              (2008 –13,562,596
      shares)
            
            
            1,358
            
            
            
            1,356Additional paid-in
      capital
            
            
            5,065,426
            
            
            
            5,048,194Accumulated other comprehensive
      income
            
            
            2,023,858
            
            
            
            1,595,091Retained
    earnings
            
            
            14,078,558
            
            
            
            9,635,012TOTAL
      STOCKHOLDERS’ EQUITY
            
            
            21,169,200
            
            
            
            16,279,653TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            
            51,146,716
            
            
            
            43,324,439




See
accompanying notes to consolidated financial statements




F-4




HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF OPERATIONS


(Stated
in US Dollars)





Years
      Ended December 31,2009
            
            
            2008
            
            
            2007$
            
            
            $
            
            
            $Net
      sales
            
            
            70,331,277
            
            
            
            75,004,242
            
            
            
            73,261,720Cost
      of sales
            
            
            (55,299,955
            )
            
            
            (62,238,982
            )
            
            
            (63,791,248
            )Gross
      profit
            
            
            15,031,322
            
            
            
            12,765,260
            
            
            
            9,470,472Depreciation
            
            
            (270,078
            )
            
            
            (194,496
            )
            
            
            (120,517
            )Selling
      and distribution costs
            
            
            (2,354,967
            )
            
            
            (2,416,220
            )
            
            
            (2,095,594
            )General
      and administrative costs including stock-based
compensation
            
            
            (6,404,724
            )
            
            
            (6,097,580
            )
            
            
            (3,460,592
            )Loss
      on exchange rate difference
            
            
            (60,294
            )
            
            
            (1,182,076
            )
            
            
            (854,873
            )Fees
      and costs related to reorganization
            
            
            -
            
            
            
            -
            
            
            
            (582,269
            )Income
      from operations
            
            
            5,941,259
            
            
            
            2,874,888
            
            
            
            2,356,627Change
      in fair value of currency forwards – Note 17
            
            
            (117,171
            )
            
            
            115,568
            
            
            
            -Change
      in fair value of warrants –Note
18
            
            
            -
            
            
            
            (276,000
            )
            
            
            -Other
      income – Note
      3
            
            
            509,294
            
            
            
            463,142
            
            
            
            148,653Interest
      expense –Note
      4
            
            
            (527,940
            )
            
            
            (642,161
            )
            
            
            (696,132
            )Other
      expenses –Note5
            
            
            (214,092
            )
            
            
            -
            
            
            
            -Income
      before taxes
            
            
            5,591,350
            
            
            
            2,535,437
            
            
            
            1,809,148Income
      taxes – Note6
            
            
            (1,147,804
            )
            
            
            (528,950
            )
            
            
            (145,458
            )Net
      income
            
            
            4,443,546
            
            
            
            2,006,487
            
            
            
            1,663,690Net
      Income per common share-
      Basic
            
            
            0.33
            
            
            
            0.15
            
            
            
            0.17-
      Diluted
            
            
            0.33
            
            
            
            0.15
            
            
            
            0.17Weighted
      average common shares outstanding-
      Basic
            
            
            13,608,265
            
            
            
            13,205,599
            
            
            
            9,832,493-
      Diluted
            
            
            13,667,697
            
            
            
            13,233,353
            
            
            
            9,832,493




See
accompanying notes to consolidated financial statements




F-5




HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME


Stated in
US Dollars)





AccumulatedAdditional
            
            
            otherCommon
      stock
            
            
            paid-in
            
            
            comprehensive
            
            
            RetainedShares
            
            
            Amount
            
            
            capital
            
            
            income
            
            
            earnings
            
            
            Total$
            
            
            $
            
            
            $
            
            
            $
            
            
            $Balance,
      January 1, 2007
            
            
            9,248,973
            
            
            
            925
            
            
            
            63,392
            
            
            
            470,383
            
            
            
            6,630,017
            
            
            
            7,164,717Shares
      Issued in connection with reverse merger
            
            
            1,777,128
            
            
            
            178
            
            
            
            (35,345
            )
            
            
            -
            
            
            
            -
            
            
            
            (35,167
            )Shares
      issued in private placement, net of offering cost of
    $382,000
            
            
            1,772,745
            
            
            
            177
            
            
            
            2,737,823
            
            
            
            -
            
            
            
            -
            
            
            
            2,738,000Comprehensive
      incomeNet
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,663,690
            
            
            
            1,663,690Foreign
      currency translation adjustments
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            687,489
            
            
            
            -
            
            
            
            687,489Total
      comprehensive income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,351,179Dividends
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (665,182
            )
            
            
            (665,182
            )Balance,
      December 31, 2007
            
            
            12,798,846
            
            
            
            1,280
            
            
            
            2,765,870
            
            
            
            1,157,872
            
            
            
            7,628,525
            
            
            
            11,553,547Gross
      proceeds from shares sold in offering – interim closing
            
            
            160,000
            
            
            
            16
            
            
            
            519,984
            
            
            
            -
            
            
            
            -
            
            
            
            520,000Gross
      proceeds from shares sold in offering – final closing
            
            
            603,750
            
            
            
            60
            
            
            
            1,486,340
            
            
            
            -
            
            
            
            -
            
            
            
            1,486,400Stock
      based compensation
            
            
            -
            
            
            
            -
            
            
            
            276,000
            
            
            
            -
            
            
            
            -
            
            
            
            276,000Comprehensive
      incomeNet
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,006,487
            
            
            
            2,006,487Foreign
      currency translation adjustments
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            731,049
            
            
            
            -
            
            
            
            731,049Net
      deferred loss from cash flow hedges
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (293,830
            )
            
            
            -
            
            
            
            (293,830
            )Total
      comprehensive income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,443,706Balance,
      December 31, 2008
            
            
            13,562,596
            
            
            
            1,356
            
            
            
            5,048,194
            
            
            
            1,595,091
            
            
            
            9,635,012
            
            
            
            16,279,653Common
      stock issued under Omnibus incentive plan
            
            
            17,000
            
            
            
            2
            
            
            
            17,232
            
            
            
            
            
            
            
            
            
            
            
            17,234Exercise
      of warrants
            
            
            2,510
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Comprehensive
      incomeNet
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4,443,546
            
            
            
            4,443,546Foreign
      currency translation adjustments
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            145,978
            
            
            
            -
            
            
            
            145,978Settlement
      of Cash Flow Hedges
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            293,830
            
            
            
            -
            
            
            
            293,830Net
      deferred loss from cash flow hedges
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (11,041
            )
            
            
            -
            
            
            
            (11,041
            )Total
      comprehensive income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4,872,313Balance,
      December 31, 2009
            
            
            13,582,106
            
            
            
            1,358
            
            
            
            5,065,426
            
            
            
            2,023,858
            
            
            
            14,078,558
            
            
            
            21,169,200




See
accompanying notes to consolidated financial statements




F-6




HONG KONG
HIGHPOWER TECHNOLOGY, INC.AND
SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Stated
in US Dollars)




Years
      ended December 31,2009
            
            
            2008
            
            
            2007$
            
            
            $
            
            
            $Cash
      flows from operating activitiesNet income
            
            
            4,443,546
            
            
            
            2,006,487
            
            
            
            1,663,690Adjustments to reconcile net
      income to net cash flowsprovided by (used
      in) operating activities :Bad debts written
      off
            
            
            74,112
            
            
            
            4,460
            
            
            
            3,649Depreciation
            
            
            1,088,341
            
            
            
            838,725
            
            
            
            560,073Amortization
      of intangible asset
            
            
            50,000
            
            
            
            50,000
            
            
            
            50,000Amortization
      of leasehold land
            
            
            62,798
            
            
            
            61,939
            
            
            
            -Loss on disposal of plant and
      equipment
            
            
            151,825
            
            
            
            44,198
            
            
            
            20,046Change
      in fair value of currency forwards
            
            
            117,171
            
            
            
            (115,568
            )
            
            
            -Change
      in fair value of warrants
            
            
            -
            
            
            
            276,000
            
            
            
            -Stock
      based compensation
            
            
            233,897
            
            
            
            303,333
            
            
            
            -Changes in operating assets and
      liabilities :(Increase)
      decrease in -Accounts
    receivable
            
            
            (6,102,967
            )
            
            
            8,095,692
            
            
            
            (7,018,013
            )Notes
receivable
            
            
            (164,724
            )
            
            
            (40,702
            )
            
            
            (309,829
            )Prepaid expenses and other
      receivables
            
            
            (606,750
            )
            
            
            2,093,103
            
            
            
            305,785Inventories
            
            
            691,174
            
            
            
            4,046,251
            
            
            
            2,183,344Increase
      (decrease) in -Accounts
payable
            
            
            2,341,687
            
            
            
            (12,422,508
            )
            
            
            1,082,433Other payables and accrued
      liabilities
            
            
            382,470
            
            
            
            721,654
            
            
            
            78,974Income taxes
      payable
            
            
            500,216
            
            
            
            321,781
            
            
            
            (74,825
            )Net
      cash provided by (used in) operating activities
            
            
            3,262,796
            
            
            
            6,284,845
            
            
            
            (1,454,673
            )Cash
      flows from investing activitiesAcquisition of plant and
      equipment
            
            
            (3,661,111
            )
            
            
            (4,614,385
            )
            
            
            (1,030,725
            )Acquisition
      of land
            
            
            -
            
            
            
            -
            
            
            
            (2,832,348
            )Proceeds
      from Investment securities
            
            
            (52,641
            )Proceeds from disposal of
      plant and equipment
            
            
            -
            
            
            
            -
            
            
            
            32,976Deposit
      paid for acquisition of machinery
            
            
            -
            
            
            
            -
            
            
            
            (1,115,123
            )Net
      cash used in investing activities
            
            
            (3,713,752
            )
            
            
            (4,614,385
            )
            
            
            (4,945,220
            )Cash
      flows from financing activitiesProceeds from issuance of common stock
            
            
            -
            
            
            
            1,486,400
            
            
            
            2,738,000Proceeds from new short-term
      bank loans
            
            
            2,924,518
            
            
            
            2,932,586
            
            
            
            2,374,241Repayment of short-term bank
      loans
            
            
            (2,995,847
            )
            
            
            (2,573,781
            )
            
            
            (923,316
            )Proceeds from/(repayment of)
      other loans
            
            
            -
            
            
            
            (5,316,389
            )
            
            
            4,173,106Net advancement of other bank
      borrowings
            
            
            (124,949
            )
            
            
            3,414,456
            
            
            
            3,155,109Decrease / (Increase) in
      restricted cash
            
            
            (581,261
            )
            
            
            946,508
            
            
            
            (4,234,327
            )Repayment from / (Advance to)
      related parties
            
            
            -
            
            
            
            -
            
            
            
            726,169Dividend
      paid
            
            
            -
            
            
            
            -
            
            
            
            (665,182
            )Net
      cash provided by financing activities
            
            
            (777,539
            )
            
            
            889,780
            
            
            
            7,343,800Net
      increase in cash and cash equivalents
            
            
            (1,228,495
            )
            
            
            2,560,240
            
            
            
            943,907Effect
      of foreign currency translation on cash and cash
    equivalents
            
            
            20,301
            
            
            
            126,278
            
            
            
            57,285Cash
      and cash equivalents - beginning of year
            
            
            4,175,780
            
            
            
            1,489,262
            
            
            
            488,070Cash
      and cash equivalents - end of year
            
            
            2,967,586
            
            
            
            4,175,780
            
            
            
            1,489,262





See
accompanying notes to consolidated financial statements




F-7




HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





1.
            Organization
      and Basis of Presentation





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





The
Company’s wholly owned subsidiary, Hong Kong Highpower Technology Company
Limited, a company incorporated in Hong Kong (“HKHTC”), was organized
principally to engage in the manufacturing and trading of nickel metal hydride
rechargeable batteries.





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





In
January 2008, HKHTC invested $749,971 in HZ Highpower Technology Co., Ltd. (“HZ
Highpower”). HZ Highpower is a wholly-owned subsidiary of HKHTC. HZ Highpower
has not commenced business as at December 31, 2009.





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





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





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





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




F-8




HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





1.
            Organization and Basis of
      Presentation(continued)





On June
19, 2008, the Company issued 160,000 shares of common stock upon the closing of
the public offering. The shares are treated as compensation for investor
relations services. The services provided are for the period of one year from
the date of June 19, 2008, subsequent to the one-year contract with this
investor relations firm, the contract has already expired.





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





Description of
business





The
subsidiaries of the Company include the following:





Name
      of company
            
            Place
      and date of incorporation
            
            Attributable
      equity interest held
            
            Principal
      activitiesHong
      Kong Highpower Technology Co., Ltd
              (“HKHTC”)
            
            Hong
      Kong
              Jul
      4, 2003
            
            100%
            
            Investment
      holdingShenzhen
      Highpower Technology Co., Ltd
              (“SZ
      Highpower”)
            
            PRC
              Oct
      8, 2002
            
            100%
            
            Manufacturing
      of batteriesHZ
      Highpower Technology Co., Ltd
              (“HZ
      Highpower”)
            
            PRC
              Jan
      29, 2008
            
            100%
            
            InactiveSpring
      Power Technology (Shenzhen) Co., Ltd
              (“SZ
      Spring Power”)
            
            PRC
              Jun
      4, 2008
            
            100%
            
            Manufacturing
      of batteries








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.




F-9








HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





2.
            Summary
      of significant accounting policies (continued)





Consolidation





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





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





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.




F-10








HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
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.




F-11





HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





2.
            Summary
      of significant accounting policies (continued)





Concentrations of credit
risk(Continued)





A
substantial percentage of the Company's sales are made to the following
customers.  Details of the customers accounting for 10% or more of
total net revenue in any of the years ended December 31, 2009 , 2008 and 2007
are as follows:





2009
            
            
            2008
            
            
            2007Company
      A
            
            
            20
            %
            
            
            23
            %
            
            
            24
            %Company
      B
            
            
            *
            
            
            
            *
            
            
            
            17
            %20
            %
            
            
            23
            %
            
            
            41
            %




* Less
than 10%





Details
of the accounts receivable from the customers with the largest receivable
balances at of December 31, 2009 and 2008 are as follows:





Percentage of accounts
      receivableDecember 31,
            
            
            December 31,2009
            
            
            2008Company
      A
            
            
            27
            %
            
            
            17
            %Company
      B
            
            
            *
            
            
            
            14
            %Company
      C
            
            
            *
            
            
            
            13
            %Company
      D
            
            
            15
            %
            
            
            **  Less
      than 10%Largest
      receivable balances
            
            
            42
            %
            
            
            44
            %




Cash and cash
equivalents





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




F-12




HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





2.
            Summary
      of significant accounting policies (continued)





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.





During
the years ended December 31, 2009, 2008 and 2007, the Company experienced bad
debts of $74,112, $4,460 and $3,649, respectively.





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 years ended
December 31, 2009, 2008 and 2007, the Company’s allowance for slow-moving or
defective inventories were $274,909 in 2009 and nil in 2008 and 2007. 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 $213,849 in 2009, $412,311 in 2008 and $160,000 in
2007. Generally, waste materials on hand at the end of a year are
nominal.




F-13




HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





2.
            Summary
      of significant accounting policies (continued)





Plant and
equipment





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





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





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





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





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





Investment
Securities





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





The
Company has strategic investments in certain equity securities that are included
in noncurrent “Investment securities” on its Consolidated Balance Sheets
accounted for using the cost method of accounting.





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




F-14




HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





2.
            Summary
      of significant accounting policies (continued)





Intangible Assets and
Long-LivedAssets





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





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





There was
no impairment of long-lived assets in 2007, 2008 or 2009.





Revenue
recognition





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





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





Advertising and promotion
expenses





Advertising
and promotion expenses are charged to expense as incurred.





Advertising
and promotion expenses amounted to $30,100, $48,210 and $68,169 for the years
ended December 31, 2009, 2008 and 2007, respectively, and are included in
selling and distribution costs.




F-15




HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





2.
            Summary
      of significant accounting policies (continued)





Income
taxes





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





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





Comprehensive
income





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




F-16








HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





2.
            Summary
      of significant accounting policies (continued)





Foreign currency
translation





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





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





2009
            
            
            2008
            
            
            2007Year
      end RMB : US$ exchange rate
            
            
            6.827
            
            
            
            6.898
            
            
            
            7.332Average
      yearly RMB : US$ exchange rate
            
            
            6.839
            
            
            
            6.933
            
            
            
            7.581





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.




F-17








HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





2.           Summary
of significant accounting policies (continued)





Fair value of financial
instruments





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





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





Foreign currency
derivative





From time
to time the Company may utilize forward foreign currency exchange contracts to
reduce the impact of foreign currency exchange rate risks. Forward contracts are
cash flow hedges of the Company’s foreign currency exposures and are recorded at
the contract’s fair value. The effective portion of the forward contract is
initially reported in “Accumulated other comprehensive income,” a component of
shareholders’ equity, with a corresponding asset or liability recorded based on
the fair value of the forward contract. When the hedged transaction is recorded
(generally when revenue on the associated sales contract is recognized), any
unrecognized gains or losses are reclassified into results of operations in the
same period. Any hedge ineffectiveness is recorded to operations in the current
period. The Company measures hedge effectiveness by comparing changes in fair
values of the forward contract and expected cash flows based on changes in the
spot prices of the underlying currencies. Cash flows from forward contracts
accounted for as cash flow hedges are classified in the same category as the
cash flows from the items being hedged.





Earnings per
share





The
Company reports earnings per share in accordance with FASB Accounting Standard
Codification Topic 260 (“ASC 260”) “Earnings Per Share” (Formerly known as SFAS
No. 128, “Earnings Per Share”). Basic earnings per share is computed using the
weighted average number of common shares outstanding during the periods
presented. The weighted average number of shares represents the common stock
outstanding during the years, as adjusted retroactively to reflect the November
2007 recapitalization Diluted earnings per common share computations are based
on the weighted average number of common shares outstanding during the period,
plus the dilutive effect of stock options, warrants and restricted stock
awards.




F-18







HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





2.           
Summary of significant accounting policies (continued)





Stock-Based
Compensation





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





Share-based
compensation expense was $233,897, 303,333 and Nil and for the years ended
December 31, 2009, 2008 and 2007, respectively.





Recently issued accounting
pronouncements





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




F-19





HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





2.           Summary
of significant accounting policies (continued)





Recently issued accounting
pronouncements(Continued)





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





ASC 855,
Subsequent Events (“ASC 855”) (formerly Statement of Financial Accounting
Standards No. 165, Subsequent Events) includes guidance that was issued by
the FASB in May 2009, and is consistent with current auditing standards in
defining a subsequent event. Additionally, the guidance provides for disclosure
regarding the existence and timing of a company’s evaluation of its subsequent
events. ASC 855 defines two types of subsequent events, “recognized” and
“non-recognized”. Recognized subsequent events provide additional evidence about
conditions that existed at the date of the balance sheet and are required to be
reflected in the financial statements. Non-recognized subsequent events provide
evidence about conditions that did not exist at the date of the balance sheet
but arose after that date and, therefore; are not required to be reflected in
the financial statements. However, certain non-recognized subsequent events may
require disclosure to prevent the financial statements from being misleading.
This guidance was effective prospectively for interim or annual financial
periods ending after June 15, 2009. The Company implemented the guidance
included in ASC 855 as of April 1, 2009. The effect of implementing this
guidance was not material to the Company’s financial position or results of
operations.





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




F-20





HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





2.           Summary
of significant accounting policies (continued)





Recently issued accounting
pronouncements(Continued)





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





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





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




F-21





HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





2.           Summary
of significant accounting policies (continued)





Recently issued accounting
pronouncements(Continued)





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





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




F-22






HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





3.           Other
income





Years
      Ended December 31,2009
            
            
            2008
            
            
            2007$
            
            
            $
            
            
            $Bank
      interest income
            
            
            62,805
            
            
            
            149,558
            
            
            
            75,546Gain
      on forward contract
            
            
            -
            
            
            
            50,357
            
            
            
            -Sundry
      income
            
            
            198,212
            
            
            
            263,227
            
            
            
            73,107Government
      sponsor
            
            
            248,277
            
            
            
            -
            
            
            
            -509,294
            
            
            
            463,142
            
            
            
            148,653








4.           Interest
expense





Years
      Ended December 31,2009
            
            
            2008
            
            
            2007$
            
            
            $
            
            
            $Interest
      on trade related bank loans
            
            
            214,721
            
            
            
            166,867
            
            
            
            547,573Interest
      on short-term bank loans
            
            
            313,219
            
            
            
            475,294
            
            
            
            135,369Interest
      on other loans
            
            
            -
            
            
            
            -
            
            
            
            13,190527,940
            
            
            
            642,161
            
            
            
            696,132





5.           Other
expenses





Years
      Ended December 31,2009
            
            
            2008
            
            
            2007$
            
            
            $
            
            
            $Foreign
      exchange contract expenses
            
            
            214,092
            
            
            
            -
            
            
            
            -214,092
            
            
            
            -
            
            
            
            -




F-23




HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





6.
            Income
      taxes





The
Company and its subsidiaries file separate income tax returns.





USA





The
Company is incorporated in the United States, and is subject to United States
federal and state income taxes. The Company did not generate taxable income in
the United States in 2007, 2008 or 2009.





PRC





Prior to
January 1, 2008, the PRC’s statutory income tax rate was 33%. In addition,
SZ Highpower, being located in the Shenzhen Special Economic Zone in the PRC,
was subject to a reduced tax rate of 15%. Since SZ Highpower agreed to operate
for a minimum of 10 years in the PRC, it is entitled to a tax holiday of a
two-year tax exemption followed by three-year 50% tax reduction from the first
profit making year after offsetting accumulated tax losses of it.





On
March 16, 2007, the National People’s Congress passed the new Corporate
Income Tax law (the “new CIT law”) which unifies the income tax rate to 25% for
all companies. The new CIT law was effective as of January 1, 2008. The new
CIT law provides a five-year transition period from its effective date for those
companies which were established before March 16, 2007 and which were
entitled to a preferential lower tax rate under the then effective tax laws or
regulations, as well as grandfathering tax holidays. The transitional tax rates
are 18%, 20%, 22%, 24% and 25% for 2008, 2009, 2010, 2011 and 2012 onwards,
respectively. Under the new tax law, it allows entities that qualify as
high-technology enterprises to be taxed at a reduced tax rate of 15%. SZ
Highpower was eligible for the reduced tax rate of 15% as of December 31, 2008.
Accordingly, SZ Highpower has used the reduced tax rate of 15% in determining
its deferred taxes as of December 31, 2008. HZ Highpower and SZ Spring Power did
not generate taxable income in the PRC in 2009.




F-24







HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)




6.
            Income
      taxes (continued)





Hong
Kong





HKHTC is
incorporated in Hong Kong, and is subject to Hong Kong Profits
Tax.  HKHTC did not generate taxable income in Hong Kong in 2007, 2008
or 2009.





The components of income before income
taxes are:





Years
      Ended December 31,2009
            
            
            2008
            
            
            2007$
            
            
            $
            
            
            $United
      States
            
            
            (216,667
            )
            
            
            (579,333
            )
            
            
            (490,234
            )Hong
      Kong
            
            
            (338,970
            )
            
            
            (6,367
            )
            
            
            689,749People’s
      Republic of China
            
            
            6,146,987
            
            
            
            3,121,137
            
            
            
            1,609,6335,591,350
            
            
            
            2,535,437
            
            
            
            1,809,148





The
components of the provision for income taxes are:





Years
      Ended December 31,2009
            
            
            2008
            
            
            2007$
            
            
            $
            
            
            $PRC
      income taxCurrent
      year
            
            
            1,042,335
            
            
            
            603,072
            
            
            
            173,735Deferred
      taxes
            
            
            105,469
            
            
            
            (74,122
            )
            
            
            (28,277
            )1,147,804
            
            
            
            528,950
            
            
            
            145,458





F-25




HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





6.
            Income
      taxes (continued)





The
following table accounts for the differences between the actual tax provision
and the amounts obtained by applying the applicable statutory income tax rate to
income before taxes for the years ended December 31, 2009, 2008 and 2007,
respectively.





Years
      Ended December 31,2009
            
            
            2008
            
            
            2007$
            
            
            $
            
            
            $Income
      before taxes
            
            
            5,591,350
            
            
            
            2,535,437
            
            
            
            1,809,148Provision
      for income taxes at applicable income tax rate
            
            
            1,397,838
            
            
            
            633,859
            
            
            
            271,372Change
      in valuation allowance
            
            
            (116,767
            )
            
            
            (44,218
            )
            
            
            -Income
      not subject to tax
            
            
            (6,425
            )
            
            
            (17,335
            )
            
            
            (84,614
            )Non-deductible
      expenses for income tax purposes
            
            
            721,648
            
            
            
            400,153
            
            
            
            229Tax
      exemption of PRC subsidiary
            
            
            (822,474
            )
            
            
            (413,605
            )
            
            
            (133,885
            )Tax
      rate differential
            
            
            (26,016
            )
            
            
            (29,904
            )
            
            
            94,865Others
            
            
            -
            
            
            
            -
            
            
            
            (2,509
            )1,147,804
            
            
            
            528,950
            
            
            
            145,458





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





At
      December 312009
            
            
            2008$
            
            
            $Temporary
      difference on:Recognition
      of expenses
            
            
            -
            
            
            
            (93,300
            )Accelerated
      tax depreciation on intangible assets
            
            
            -
            
            
            
            (11,256
            )Deferred
      tax assets, net
            
            
            -
            
            
            
            (104,556
            )Recognized
      in the balance sheet:Net
      deferred tax assets
            
            
            -
            
            
            
            (104,556
            )





F-26




HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





6.
            Income
      taxes (continued)





Based on
the above, the pro forma effect of the tax exemption of SZ Highpower is as
follows:





Years
      Ended December 31,2009
            
            
            2008
            
            
            2007$
            
            
            $
            
            
            $Statutory
      income tax rate
            
            
            25
            %
            
            
            25
            %
            
            
            15
            %Exempted
      income tax rate
            
            
            10
            %
            
            
            10
            %
            
            
            7.5
            %Income
      tax exemption
            
            
            822,474
            
            
            
            413,605
            
            
            $
            133,885Tax
      effect derived from exemption(per
      share)
            
            $
            0.06
            
            
            $
            0.03
            
            
            $
            0.01





Accounting
for Uncertainty in Income Taxes





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





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




F-27







HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





7.           Prepaid
expenses and other receivables





As
      December 31,2009
            
            
            2008$
            
            
            $Purchase
      deposits paid
            
            
            800,437
            
            
            
            88,459Advance
      to staff
            
            
            150,139
            
            
            
            143,595Other
      deposits and prepayments
            
            
            423,058
            
            
            
            495,325Value-added
      tax prepayment
            
            
            339,868
            
            
            
            -Other
      receivables
            
            
            653,232
            
            
            
            1,005,3302,366,734
            
            
            
            1,732,709





8.           Deferred
charges – Stock-based compensation





As
      December 31,2008
            
            
            2007$
            
            
            $CostStock-based
      compensation – consulting fee
            
            
            520,000
            
            
            
            520,000Accumulated
      amortization
            
            
            (520,000
            )
            
            
            (303,333
            )Net
            
            
            -
            
            
            
            216,667





Amortization
expenses included in general and administrative costs for the year ended 2009
and 2008 were $216,667 and 303,000, respectively.





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




F-28




HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





9.           Share
– based compensation expenses





The
equity awards are currently made only from the 2008 Omnibus Incentive Plan as
described below.





2008 Omnibus Incentive
Plan





The 2008
Omnibus Incentive Plan (the “2008 Plan”) was approved by the Company’s Board of
Directors on October 30, 2008 and became effective upon the approval of the
Company’s stockholders on December 11, 2008. The 2008 Plan has a ten year term.
The 2008 Plan reserves two million shares of common stock for issuance, subject
to increase from time to time by the number of shares





The 2008
Plan authorizes the issuance of awards including stock options, restricted stock
units (RSUs), restricted stock, unrestricted stock, stock appreciation rights
(SARs) and other equity and/or cash performance incentive awards to employees,
directors, and consultants of the Company. Subject to certain restrictions, the
Compensation Committee of the Board of Directors has broad discretion to
establish the terms and conditions for awards under the 2008 Plan, including the
number of shares, vesting conditions and the required service or performance
criteria. Options and SARs have a maximum term of five years, and their exercise
price may not be less than 110% of fair market value on the date of grant.
Repricing of stock options and SARs is prohibited without stockholder approval.
Each share subject to an award other than stock options or SARs will reduce the
number of shares available for issuance under the 2008 Plan by 17,000 shares.
Certain change in control transactions may cause awards granted under the 2008
Plan to vest, unless the awards are continued or substituted for in connection
with the transaction. As of December 31, 2009, there were 1,983,000 shares
authorized and available for issuance under the 2008 Plan.





The
restricted stock activity in 2009 related to the Company’s 2008 Plan was as
follows:





Weighted
              Average
              Grant Date
              PriceShares
            
            
            $Non-vested
      at January 1, 2009
            
            
            -
            
            
            
            -Granted
            
            
            17,000
            
            
            
            8.11Vested
            
            
            -
            
            
            
            -Forfeited
            
            
            -
            
            
            
            -Non-vested
      at December 31, 2009
            
            
            17,000
            
            
            
            8.11




F-29




HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





10.
            Earning
      per share





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





The
following tables set forth the computation of basic and diluted earnings per
common share for the three years ended December 31, 2009, 2008 and
2007





Years
      Ended December 31,2009
            
            
            2008
            
            
            2007Numerator:Net
      income
            
            $
            4,443,546
            
            
            $
            2,006,487
            
            
            $
            1,663,690Denominator:Weighted-average
      shares outstanding
            
            
            13,608,265
            
            
            
            13,205,599
            
            
            
            9,832,493Effect
      of dilutive securities
            
            
            59,432
            
            
            
            27,754
            
            
            
            -Weighted-average
      shares diluted
            
            
            13,667,697
            
            
            
            13,233,353
            
            
            
            9,832,493Basic
      earning per common share
            
            $
            0.33
            
            
            $
            0.15
            
            
            $
            0.17Diluted
      earning per common share
            
            $
            0.33
            
            
            $
            0.15
            
            
            $
            0.17




F-30




HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





11.           Inventories





At
      December 31,2009
            
            
            2008$
            
            
            $Raw
      materials
            
            
            4,090,897
            
            
            
            1,708,431Work
      in progress
            
            
            1,086,523
            
            
            
            1,434,517Finished
      goods
            
            
            5,441,554
            
            
            
            8,049,138Packing
      materials
            
            
            14,592
            
            
            
            16,61110,633,566
            
            
            
            11,208,697





10.           Plant
and equipment





At
      December 31,2009
            
            
            2008$
            
            
            $CostConstruction
      in progress
            
            
            1,207,274
            
            
            
            -Furniture,
      fixtures and office equipment
            
            
            1,748,650
            
            
            
            598,496Leasehold
      improvement
            
            
            750,050
            
            
            
            712,120Machinery
      and equipment
            
            
            9,040,243
            
            
            
            8,155,270Motor
      vehicles
            
            
            710,245
            
            
            
            476,910Building
            
            
            61,901
            
            
            
            -13,518,363
            
            
            
            9,942,796Accumulated
      depreciationConstruction
      in progress
            
            
            -
            
            
            
            -Furniture,
      fixtures and office equipment
            
            
            619,020
            
            
            
            235,613Leasehold
      improvement
            
            
            362,042
            
            
            
            220,746Machinery
      and equipment
            
            
            1,962,512
            
            
            
            1,486,624Motor
      vehicles
            
            
            288,931
            
            
            
            221,336Building
            
            
            985
            
            
            
            -3,233,490
            
            
            
            2,164,319NetConstruction
      in progress
            
            
            1,207,274
            
            
            
            -Furniture,
      fixtures and office equipment
            
            
            1,129,630
            
            
            
            362,883Leasehold
      improvement
            
            
            388,008
            
            
            
            491,374Machinery
      and equipment
            
            
            7,077,731
            
            
            
            6,668,646Motor
      vehicles
            
            
            421,314
            
            
            
            255,574Building
            
            
            60,916
            
            
            
            -10,284,873
            
            
            
            7,778,477




F-31




HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





12.           Plant
and equipment (continued)





The components of depreciation charged
are:





Years
      ended December 31,2009
            
            
            
            20087$
            
            
            
            $Included
      in cost of sales and selling and distribution costs
            
            
            850,731
            
            
            
            644,229Included
      in operating expenses
            
            
            237,610
            
            
            
            194,4961,088,341
            
            
            
            838,725





13.           Leasehold
land





At
      December 31,2009
            
            
            2008$
            
            
            $Cost
            
            
            3,145,322
            
            
            
            3,112,765Accumulated
      amortization
            
            
            (125,813
            )
            
            
            (62,255
            )Net
            
            
            3,019,509
            
            
            
            3,050,510





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





14.           Intangible
asset - Consumer battery license





At
      December 31,2009
            
            
            2008$
            
            
            $CostConsumer
      battery license
            
            
            1,000,000
            
            
            
            1,000,000Accumulated
      amortization
            
            
            (150,000
            )
            
            
            (100,000
            )Net
            
            
            850,000
            
            
            
            900,000





Amortization
      expenses are included in selling and distribution costs during the
      years.




F-32




HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





14.           Intangible
asset - Consumer battery license (continued)





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. During 2009, the Company
recorded a total of approximately $249,588 as royalty expense, which was
included in selling and distribution costs in the statement of operations. 
Accordingly, during the year ended December 31, 2008, the Company recorded a
total up-front royalty payment obligation of $1,000,000, which was included in
other payables and accrued liabilities at December 31, 2008, with the related
debit recorded as an intangible asset entitled consumer battery license
agreement. At December 31, 2009 and 2008, accrued royalty fees payable were
$1,071,787 and $1,540,900, respectively (see Note 19).




The
Company is amortizing the $1,000,000 cost of the Consumer Battery License
Agreement over a period of 20 years on the straight line basis.  The
accounting for the Consumer Battery License Agreement is based on the Company’s
estimate of the useful life of the underlying technology, which is based on the
Company’s assessment of existing battery technology, current trends in the
battery business, potential developments and improvements, and the Company’s
current business plan.  Amortization expense related to the Consumer
Battery License Agreement included in selling and distribution costs during the
years ended December 31, 2009, 2008 and 2007 were $50,000, $50,000 and $50,000,
respectively.





Amortization
of the License for the next five years is as follows:





Years
      ending December 31
            
            $2010
            
            
            50,0002011
            
            
            50,0002012
            
            
            50,0002013
            
            
            50,0002014
            
            
            50,0002015
      and thereafter
            
            
            600,000




F-33





HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





15.           Investment
Securities





As
      December 31,2009
            
            
            2008$
            
            
            $Investment
      securities - cost method
            
            
            52,732
            
            
            
            -52,732
            
            
            
            -





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





16.           Fair
Value Measurements





The
Company adopted FASB ASC 820, Fair Value Measurements and Disclosures (“ASC
820”), related to the Company’s financial assets and liabilities. ASC 820
defines fair value, establishes a framework for measuring fair value in
accordance with generally accepted accounting principles and expands disclosures
about fair value measurements. ASC 820 defines fair value as the price that
would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement date. ASC 820
also describes three levels of inputs that may be used to measure fair
value:





Level 1 —
quoted prices in active markets for identical assets and
liabilities.





Level 2 —
observable inputs other than quoted prices in active markets for identical
assets and liabilities.





Level 3 —
unobservable inputs in which there is little or no market data available, which
require the reporting entity to develop its own assumptions.





ASC 820
also provides guidance for determining the fair value of a financial asset when
the market for that asset is not active, and for determining fair value when the
volume and level of activity for an asset or liability have significantly
decreased and includes guidance on identifying circumstances that indicate when
a transaction is not orderly. The adoption of ASC 820 did not have a material
impact on the Company’s financial condition or results of
operations.





The
effective date for certain aspects of ASC 820 was deferred and are currently
being evaluated by the Company. Areas impacted by the deferral relate to
nonfinancial assets and liabilities that are measured at fair value, but are
recognized or disclosed at fair value on a nonrecurring basis. The effects of
these remaining aspects of ASC 820 are to be applied by the Company to fair
value measurements prospectively beginning November 1, 2009. The adoption
of the remaining aspects of ASC 820 is not expected to have a material impact on
its financial condition or results of operations. See Note 6 to the
consolidated financial statements in this Report on Form 10-K for
additional investment information.
  F-34





HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





16.           Fair
Value Measurements (Continued)





The
following table details the fair value measurements of assets and liabilities
within the three levels of the fair value hierarchy at December 31 2009 and
December 31, 2008:





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





Fair
      Value Measurements at reporting date usingDecember
      31, 2008
            
            
            Quoted
      Price in active Markets for identical assets
              (level
      1)
            
            
            Significant
      Other Observable Inputs
              (Level
      2)
            
            
            Significant
      Other Unobservable Inputs
              (Level
      3)$
            
            
            $
            
            
            $
            
            
            $AssetsAccounts
      receivable
            
            
            8,765,593
            
            
            
            -
            
            
            
            -
            
            
            
            8,765,593Notes
      receivable
            
            
            429,815
            
            
            
            -
            
            
            
            -
            
            
            
            429,815Prepaid
      expenses and other receivables
            
            
            1,732,709Currency
      forward
            
            
            116,157
            
            
            
            -
            
            
            
            116,157
            
            
            
            -LiabilitiesNon-trading
      foreign currency derivatives liabilities
            
            
            293,830
            
            
            
            -
            
            
            
            293,830
            
            
            
            -Accounts
      payable
            
            
            8,306,123
            
            
            
            -
            
            
            
            -
            
            
            
            8,306,123Other
      payables and accrued liabilities
            
            
            3,139,275
            
            
            
            -
            
            
            
            -
            
            
            
            3,139,275





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


F-35






HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





17.           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 12 months or less. Changes in the fair value of these derivative
contracts are recorded in earnings to offset the impact of foreign currency
transaction gains and losses attributable to certain third party and
intercompany financial assets and liabilities with similar terms. The net gains
and losses attributable to these activities are included in the Statement of
Comprehensive Income, net.





As
      December 31,2009
            
            
            2008$
            
            
            $Currency
      forwards (notional amount $11 million),consisting
      of a put and a call
            
            
            -
            
            
            
            116,157





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





Years
      Ended December 31,2009
            
            
            2008
            
            
            2007$
            
            
            $
            
            
            $Foreign
      exchange contracts, netGains
      recognized in Other income, net
            
            
            -
            
            
            
            50,357
            
            
            
            -Lossrecognized in Otherexpenses,net
            
            
            214,092
            
            
            
            -
            
            
            
            -





Hedging
Activities





Due to
the volatility of the US Dollar to the Company’s functional currency, the
Company has put into place a hedging program to attempt to protect it from
significant changes to the US Dollar, which would affect the value of the
Company’s US dollar receivables and sales. At December 31, 2009, the Company had
a series of currency forwards totaling a notional amount US$6,500,000 expiring
from January 2010 to August 2010.





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




F-36




HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





17.           Risk
Management Activities, Including Derivative (continued)





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





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





The cost
of the effective portion of the cash flow hedges was $11,041 and
$293,830 for the years ended December 31, 2008 and 2009,
respectively.





18.           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 was $276,000. The fair
value of the warrants is appraised by an independent qualified
valuer.





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




F-37





HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





19.           Other
payables and accrued liabilities





At
      December 31,2009
            
            
            2008$
            
            
            $Accrued
      expenses
            
            
            2,056,261
            
            
            
            1,072,331Royalty
      fee
            
            
            1,071,787
            
            
            
            1,540,900Sales
      deposits received
            
            
            259,550
            
            
            
            388,261Value-added
      tax payables
            
            
            -
            
            
            
            105,833Other
      payables
            
            
            175,710
            
            
            
            31,9503,563,308
            
            
            
            3,139,275





20.
            Bank
      borrowings





At
      December 31,2009
            
            
            2008$
            
            
            $Secured:Repayable within one
      yearShort term bank
      loans
            
            
            2,929,551
            
            
            
            2,969,939Other trade related bank
      loans
            
            
            11,858,164
            
            
            
            11,859,28914,787,715
            
            
            
            14,829,228





As of
December 31, 2009 the Company’s banking facilities are comprised of the
following:





AmountFacilities
      granted
            
            Granted
            
            
            Utilized
            
            
            Unused$
            
            
            $
            
            
            $Short
      term bank loans
            
            
            2,929,551
            
            
            
            2,929,551
            
            
            
            -Other
      trade related loan facilities including:-
      Accounts receivables financing
            
            
            1,342,573
            
            
            
            1,342,573
            
            
            
            --
      Accounts payable financing
            
            
            22,762,608
            
            
            
            10,515,591
            
            
            
            12,247,01727,034,732
            
            
            
            14,787,715
            
            
            
            12,247,017




F-38





HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





20.
            Bank
      borrowings (continued)





As of
December 31, 2009 the above bank borrowings were secured by the
following:





(a)
            charge
      over bank deposits of $5,478,418 which is included in restricted cash on
      the Balance sheet;





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





(c)           the
legal charge over leasehold land with carrying amount $3,019,509.





The
interest rates of trade related bank loans were at bank’s prime lending rate per
annum with various maturity dates.  The rates at December 31, 2009
ranged from 1.40% to 5.31%.





The
interest rates of short term bank loans were at 4.86% per annum at December 31,
2009.





21.           Pension
plans





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





Total
pension cost was $515,379, $432,402 and $148,193 for the years ended
December 31, 2009, 2008 and 2007, respectively.




F-39




HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





22.
            Commitments
      and contingencies





Operating leases
commitments





The
Company leases factory and office premises under various non-cancelable
operating lease agreements that expire at various dates through years 2010 to
2011, with a options to renew the leases.  All leases are on a fixed
payment basis.  None of the leases includes contingent
rentals.  Minimum future commitments under these agreements payable as
of December 31, 2009 are as follows:





Years
      ending December 31
            
            $2010
            
            
            812,7282011
            
            
            258,0841,070,812





Rental
expense for the years ended 2009, 2008 and 2007 were $944,575, $1,019,505 and
$429,450, respectively.





23.           Related
party transactions





Apart
from the transactions as disclosed in Notes 12 and 13, the Company entered into
the following transactions with its related party during the years ended
December 31, 2009, 2008 and 2007:





Year
      Ended December 31,2009
            
            
            2008
            
            
            2007$
            
            
            $
            
            
            $Management
      fee paid to Canhold International Limited
            
            
            -
            
            
            
            -
            
            
            
            21,134




F-40




HONG
KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





24.
            Segment
      information





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





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





Years
      Ended December 31,2009
            
            
            2008
            
            
            2007Net
      revenue
            
            $
            
            
            $
            
            
            $Hong
      Kong and China
            
            
            33,053,941
            
            
            
            30,893,163
            
            
            
            28,919,384Asia
            
            
            3,908,783
            
            
            
            4,810,282
            
            
            
            5,965,339Europe
            
            
            23,096,172
            
            
            
            27,979,918
            
            
            
            25,318,608North
      America
            
            
            9,932,122
            
            
            
            10,885,903
            
            
            
            12,851,807South
      America
            
            
            42,002
            
            
            
            434,976
            
            
            
            206,582Africa
            
            
            206,014
            
            
            
            -
            
            
            
            -Other
            
            
            92,243
            
            
            
            -
            
            
            
            -70,331,277
            
            
            
            75,004,242
            
            
            
            73,261,720





At
      December 31,2009
            
            
            2008
            
            
            2007Accounts
      receivable
            
            $
            
            
            $
            
            
            $Hong
      Kong and China
            
            
            8,511,192
            
            
            
            5,012,472
            
            
            
            4,258,010Asia
            
            
            476,659
            
            
            
            169,376
            
            
            
            1,023,284Europe
            
            
            4,050,519
            
            
            
            2,695,166
            
            
            
            6,761,615North
      America
            
            
            1,846,832
            
            
            
            875,022
            
            
            
            3,863,266South
      America
            
            
            900
            
            
            
            13,558
            
            
            
            -Africa
            
            
            10,300
            
            
            
            -
            
            
            
            -Other
            
            
            101
            
            
            
            -
            
            
            
            -14,896,503
            
            
            
            8,765,594
            
            
            
            15,906,175








F-41




HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
      in US Dollars)





25.           Dividends





The
directors have declared and the Company has paid the following dividends in
respect of the years ended December 31, 2009, 2008 and 2007:





At
      December 31,2009
            
            
            2008
            
            
            2007$
            
            
            $
            
            
            $DividendsInterim
      dividend declared and paid on September 30, 2007 of approximately$
      0.07 per share:
            
            
            -
            
            
            
            -
            
            
            
            665,182





26.           Subsequent
Events





The
Company has evaluated significant events and transactions that occurred from
January 1, 2010 through the date of this report and has determined that there
were no events or transactions other than those disclosed in this report, if
any, that would require recognition or disclosure in its Condensed Consolidated
Financial Statements for the year ended December 31, 2009.




F-42




HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
      in US Dollars)





27.           Quarterly
Results of Operations (unaudited)





The
following table sets forth unaudited quarterly results of operations for the
years ended December 31, 2009 and 2008. This unaudited quarterly
information has been derived from the Company’s unaudited financial statements
and, in the Company’s opinion, includes all adjustments, including normal
recurring adjustments, necessary for a fair presentation of the information for
the periods covered.  The operating results for any quarter are not
necessarily indicative of the operating results for any future
period.





Three
      Months Ended
            
            
            Year
      EndedMarch
      31,
            
            
            June
      30,
            
            
            September
      30,
            
            
            December
      31,
            
            
            December
      31,2009
            
            
            2009
            
            
            2009
            
            
            2009
            
            
            2009$
            
            
            $
            
            
            $
            
            
            $
            
            
            $Net
      revenue
            
            
            11,309,805
            
            
            
            15,445,484
            
            
            
            21,056,149
            
            
            
            22,519,839
            
            
            
            70,331,277Gross
      profit
            
            
            2,396,096
            
            
            
            3,073,808
            
            
            
            5,221,039
            
            
            
            4,340,379
            
            
            
            15,031,322Net
      income
            
            
            402,966
            
            
            
            968,656
            
            
            
            2,433,676
            
            
            
            638,248
            
            
            
            4,443,546Net
      income per common share:Basic
            
            
            0.03
            
            
            
            0.07
            
            
            
            0.18
            
            
            
            0.05
            
            
            
            0.33Diluted
            
            
            0.03
            
            
            
            0.07
            
            
            
            0.18
            
            
            
            0.05
            
            
            
            0.33Weighted
      average common sharesoutstandingBasic
            
            
            13,562,596
            
            
            
            13,762,217
            
            
            
            13,562,597
            
            
            
            13,566,601
            
            
            
            13,608,265Diluted
            
            
            13,562,596
            
            
            
            13,812,547
            
            
            
            13,612,097
            
            
            
            13,632,096
            
            
            
            13,667,697




Three
      Months Ended
            
            
            Year
      EndedMarch
      31,
            
            
            June
      30,
            
            
            September
      30,
            
            
            December
      31,
            
            
            December
      31,2008
            
            
            2008
            
            
            2008
            
            
            2008
            
            
            2008$
            
            
            $
            
            
            $
            
            
            $
            
            
            $Net
      revenue
            
            
            17,831,562
            
            
            
            19,021,476
            
            
            
            20,473,472
            
            
            
            17,677,732
            
            
            
            75,004,242Gross
      profit
            
            
            2,708,298
            
            
            
            3,374,867
            
            
            
            3,511,808
            
            
            
            3,170,287
            
            
            
            12,765,260Net
      income
            
            
            730,327
            
            
            
            684,247
            
            
            
            289,356
            
            
            
            302,557
            
            
            
            2,006,487Net
      (loss) income per common share:Basic
            
            
            0.06
            
            
            
            0.05
            
            
            
            0.02
            
            
            
            0.02
            
            
            
            0.15Diluted
            
            
            0.06
            
            
            
            0.05
            
            
            
            0.02
            
            
            
            0.02
            
            
            
            0.15Weighted
      average common sharesOutstandingBasic
            
            
            14,798,846
            
            
            
            12,899,560
            
            
            
            13,562,596
            
            
            
            13,711,011
            
            
            
            13,205,599Diluted
            
            
            14,798,846
            
            
            
            12,906,483
            
            
            
            13,615,096
            
            
            
            13,708,139
            
            
            
            13,233,353





F-43