UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION





WASHINGTON,
D.C. 20549





FORM
10-K





ý ANNUAL REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF
              THE
      SECURITIES EXCHANGE ACT OF 1934FOR
      THE FISCAL YEAR ENDED DECEMBER 31, 2008ORo 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:




Common
Stock, $0.0001 par value





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 o No ý




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 oNo ý






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 ý No o





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.  o




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




Large
      accelerated filer   o
            Accelerated
      filer  o




Non-accelerated
      filer     o
            Smaller
      reporting company ý




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




The
registrant’s common stock commenced trading on the NYSE Amex on June 19, 2008.
The aggregate market value of the registrant's voting and non-voting common
stock held by non-affiliates of the registrant as of June 30, 2008, the last
business day of the registrant’s most recently completed second fiscal quarter
(based on the price at which the registrant’s common stock was last sold on such
date) was approximately $26,032,800.




There
were 13,562,596 shares outstanding of the registrant’s common stock, par value
$0.0001 per share, as of March 26, 2009. The registrant’s common stock is listed
on the NYSE Amex 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, 2008





ITEM
      1.
                BUSINESS
                1ITEM
      1A:
                RISK
      FACTORS
                10ITEM
      1B.
                UNRESOLVED
      STAFF COMMENTS
                25ITEM
      2.
                PROPERTIES
                25ITEM
      3.
                LEGAL
      PROCEEDINGS
                27ITEM
      4.
                SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
                27PART
      II
                
                27ITEM
      5.
                MARKET
      FOR REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES
                27ITEM
      6.
                SELECTED
      CONSOLIDATED FINANCIAL DATA
                30ITEM
      7.
                MANAGEMENT’S
      DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS
                30ITEM
      7A.
                QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                41ITEM
      8.
                FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
                41ITEM
      9.
                CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
                41ITEM
      9A.
                CONTROLS
      AND PROCEDURES
                42ITEM
      9B.
                OTHER
      INFORMATION
                43PART
      III
                
                44ITEM
      10.
                DIRECTORS,
      EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
                44ITEM
      11.
                EXECUTIVE
      COMPENSATION
                46ITEM
      12.
                SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
                48ITEM
      13.
                CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
                49ITEM
      14.
                PRINCIPAL
      ACCOUNTING FEES AND SERVICES.
                50PART
      IV
                
                51ITEM
      15.
                EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES
                51SIGNATURES
                
                51


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.





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:


1





·
            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.




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




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




2


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 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 produce two major series of Li-ion batteries & Li-polymer
batteries with hundreds of different models for each
series.  Currently, we produce approximately 400,000 Li-ion battery
units per month.





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.




4


·
            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 segments as a percentage of net sales is set forth
below:





Year
      Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006Consumer
      Batteries
                  
                  
                  80
                  %
                  
                  
                  80
                  %
                  
                  
                  77
                  %Industrial
      Batteries
                  
                  
                  19
                  %
                  
                  
                  19
                  %
                  
                  
                  21
                  %Materials
                  
                  
                  1
                  %
                  
                  
                  1
                  %
                  
                  
                  2
                  %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 56% of our nickel
supply.  Our top three suppliers of lithium account for approximately
45% 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:





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




·
            testing
      samples of raw materials from
suppliers;




·
            implementing
      sampling systems and sample files;




5


·
            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 1,800 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 and Li-ion production for the Company.  The new facility’s
production capacity will be approximately three times that of our current
production facility in Shenzhen.





Major
Customers





During
the years ended December 31, 2008 and 2007, approximately 57% and 56% 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 year ended December 31, 2008, one
customer, Energizer Battery Manufacturing, Inc., who accounted for 23% of our
net sales.  During the year ended December 31, 2007, we had two major
customers, Energizer Battery Manufacturing, Inc. and Uniross Batteries (HK)
Ltd., who accounted  for 24% and 17% of sales,
respectively.





Sales
and Marketing





We have a
broad sales network of approximately 50 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.





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.




6


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 31,2008
                  
                  
                  2007
                  
                  
                  2006China
      and Hong Kong
                  
                  
                  41.2
                  %
                  
                  
                  39.5
                  %
                  
                  
                  65.4
                  %Europe
                  
                  
                  37.3
                  
                  
                  
                  34.6
                  
                  
                  
                  16.4North
      America
                  
                  
                  14.5
                  
                  
                  
                  17.5
                  
                  
                  
                  10.2Asia
                  
                  
                  6.4
                  
                  
                  
                  8.1
                  
                  
                  
                  7.4South
      America and Others
                  
                  
                  0.6
                  
                  
                  
                  0.3
                  
                  
                  
                  0.6Total
                  
                  
                  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 41.2% of our products
distributed to Hong Kong and China, 14.5% to the United States, 37.3% to Europe
and 7.0% 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 75 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, 2008 and 2007 we expended $340,929 and $248,782,
respectively, in research and development.





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.




7


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 five patents in China and have three 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
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.





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).




8


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.





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.


9





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, 2008, we had approximately 1,800 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.





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.




10


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 57%, 56%
and 37.4% of our net sales for the years ended December 31, 2008, 2007 and 2006,
respectively. We anticipate that a limited number of customers will continue to
contribute to a significant portion of our net sales in the future. Maintaining
the relationships with these significant customers is vital to the expansion and
success of our business, as the loss of a major customer could expose us to risk
of substantial losses. Our sales and revenue could decline and our results of
operations could be materially adversely affected if one or more of these
significant customers stops or reduces its purchasing of our products, or if we
fail to expand our customer base for our products.


11





Significant
order cancellations, reductions or delays by our customers could materially
adversely affect our business.





Our sales
are typically made pursuant to individual purchase orders, and we generally do
not have long-term supply arrangements with our customers, but instead work with
our customers to develop nonbinding forecasts of future requirements. Based on
these forecasts, we make commitments regarding the level of business that we
will seek and accept, the timing of production schedules and the levels and
utilization of personnel and other resources. A variety of conditions, both
specific to each customer and generally affecting each customer’s industry, may
cause customers to cancel, reduce or delay orders that were either previously
made or anticipated. Generally, customers may cancel, reduce or delay purchase
orders and commitments without penalty, except for payment for services rendered
or products competed and, in certain circumstances, payment for materials
purchased and charges associated with such cancellation, reduction or delay.
Significant or numerous order cancellations, reductions or delays by our
customers could have a material adverse effect on our business, financial
condition or results of operations.





Substantial
defaults by our customers on accounts receivable or the loss of significant
customers could have a material adverse effect on our business.





A
substantial portion of our working capital consists of accounts receivable from
customers. If customers responsible for a significant amount of accounts
receivable were to become insolvent or otherwise unable to pay for products and
services, or to make payments in a timely manner, our business, results of
operations or financial condition could be materially adversely affected. An
economic or industry downturn could materially adversely affect the servicing of
these accounts receivable, which could result in longer payment cycles,
increased collection costs and defaults in excess of management’s expectations.
A significant deterioration in our ability to collect on accounts receivable
could also impact the cost or availability of financing available to
us.





Certain
disruptions in supply of and changes in the competitive environment for raw
materials integral to our products may adversely affect our
profitability.





We use a
broad range of materials and supplies, including metals, chemicals and other
electronic components in our products. A significant disruption in the supply of
these materials could decrease production and shipping levels, materially
increase our operating costs and materially adversely affect our profit margins.
Shortages of materials or interruptions in transportation systems, labor
strikes, work stoppages, war, acts of terrorism or other interruptions to or
difficulties in the employment of labor or transportation in the markets in
which we purchase materials, components and supplies for the production of our
products, in each case may adversely affect our ability to maintain production
of our products and sustain profitability. If we were to experience a
significant or prolonged shortage of critical components from any of our
suppliers and could not procure the components from other sources, we would be
unable to meet our production schedules for some of our key products and to ship
such products to our customers in timely fashion, which would adversely affect
our sales, margins and customer relations.





Our
industry is subject to supply shortages and any delay or inability to obtain
product components may have a material adverse effect on our
business.





Our
industry is subject to supply shortages, which could limit the amount of supply
available of certain required battery components. Any delay or inability to
obtain supplies may have a material adverse effect on our business. During prior
periods, there have been shortages of components in the battery industry and the
availability of raw materials has been limited by some of our suppliers. We
cannot assure investors that any future shortages or allocations would not have
such an effect on our business. A future shortage can be caused by and result
from many situations and circumstances that are out of our control, and such
shortage could limit the amount of supply available of certain required
materials and increase prices affecting our profitability.





Our
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 has been volatile during 2007. The price
of nickel rose 67% from January 2007 to May 2007, but dropped 45% from May 2007
to September 2007. The prices of nickel and other raw materials used to make our
batteries increase and decrease due to factors beyond our control, including
general economic conditions, domestic and worldwide demand, labor costs or
problems, competition, import duties, tariffs, energy costs, currency exchange
rates and those other factors described under “Certain disruptions in supply of
and changes in the competitive environment for raw materials integral to our
products may adversely affect our profitability.” In an environment of
increasing prices for nickel and other raw materials, competitive conditions may
impact how much of the price increases we can pass on to our customers and to
the extent we are unable to pass on future price increases in our raw materials
to our customers, our financial results could be adversely
affected.


12





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.





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.


13





Existing
PRC laws and regulations do not require us to maintain third party liability
insurance to cover product liability claims. Although we have obtained products
liability insurance, if a warranty or product liability claim is brought against
us, regardless of merit or eventual outcome, or a recall of one of our products
is required, such claim or recall may result in damage to our reputation, breach
of contracts with our customers, decreased demand for our products, costly
litigation, additional product recalls, loss of revenue, and the inability to
commercialize some products.





Manufacturing
or use of our battery products may cause accidents, which could result in
significant production interruption, delay or claims for substantial
damages.





Our
batteries can pose certain safety risks, including the risk of fire. While we
implement stringent safety procedures at all stages of battery production that
minimize such risks, accidents may still occur. Any accident, regardless of
where it occurs, may result in significant production interruption, delays or
claims for substantial damages caused by personal injuries or property
damages.





We
cannot guarantee the protection of our intellectual property rights and if
infringement of our intellectual property rights occurs, including
counterfeiting of our products, our reputation and business may be adversely
affected.





To
protect the reputation of our products, we have sought to file or register our
intellectual property, as appropriate, in the PRC where we have our primary
business presence. As of December 31, 2008, we have registered two trademarks as
used on our battery products, one in English and in the other in its Chinese
equivalent. Our products are currently sold under these trademarks in the PRC,
and we plan to expand our products to other international markets. There is no
assurance that there will not be any infringement of our brand name or other
registered trademarks or counterfeiting of our products in the future, in China
or elsewhere. Should any such infringement and/or counterfeiting occur, our
reputation and business may be adversely affected. We may also incur significant
expenses and substantial amounts of time and effort to enforce our trademark
rights in the future. Such diversion of our resources may adversely affect our
existing business and future expansion plans.





As of
December 31, 2008, we held five Chinese patents and had three Chinese patent
applications pending. Additionally, we have licensed patented technology from
Ovonic Battery Company, Inc. related to the manufacture of Ni-MH batteries. We
believe that obtaining patents and enforcing other proprietary protections for
our technologies and products have been and will continue to be very important
in enabling us to compete effectively. However, there can be no assurance that
our pending patent applications will issue, or that we will be able to obtain
any new patents, in China or elsewhere, or that our or our licensors’ patents
and proprietary rights will not be challenged or circumvented, or that these
patents will provide us with any meaningful competitive advantages. Furthermore,
there can be no assurance that others will not independently develop similar
products or will not design around any patents that have been or may be issued
to us or our licensors. Failure to obtain patents in certain foreign countries
may materially adversely affect our ability to compete effectively in those
international markets. If a sufficiently broad patent were to be issued from a
competing application in China or elsewhere, it could have a material adverse
effect upon our intellectual property position in that particular
market.





In
addition, our rights to use the licensed proprietary technologies of our
licensors depends on the timely and complete payment for such rights pursuant to
license agreements between the parties; failure to adhere to the terms of these
agreements could result in the loss of such rights and could materially and
adversely affect our business.





If
our products are alleged to or found to conflict with patents that have been or
may be granted to competitors or others, our reputation and business may be
adversely affected.





Rapid
technological developments in the battery industry and the competitive nature of
the battery products market make the patent position of battery manufacturers
subject to numerous uncertainties related to complex legal and factual issues.
Consequently, although we either own or hold licenses to certain patents in the
PRC, and are currently processing several additional patent applications in the
PRC, it is possible that no patents will issue from any pending applications or
that claims allowed in any existing or future patents issued or licensed to us
will be challenged, invalidated, or circumvented, or that any rights granted
there under will not provide us adequate protection. As a result, we may be
required to participate in interference or infringement proceedings to determine
the priority of certain inventions or may be required to commence litigation to
protect our rights, which could result in substantial costs. Further, other
parties could bring legal actions against us claiming damages and seeking to
enjoin manufacturing and marketing of our products for allegedly conflicting
with patents held by them. Any such litigation could result in substantial cost
to us and diversion of effort by our management and technical personnel. If any
such actions are successful, in addition to any potential liability for damages,
we could be required to obtain a license in order to continue to manufacture or
market the affected products. There can be no assurance that we would prevail in
any such action or that any license required under any such patent would be made
available on acceptable terms, if at all. Failure to obtain needed patents,
licenses or proprietary information held by others may have a material adverse
effect on our business. In addition, if we were to become involved in such
litigation, it could consume a substantial portion of our time and resources.
Also, with respect to licensed technology, there can be no assurance that the
licensor of the technology will have the resources, financial or otherwise, or
desire to defend against any challenges to the rights of such licensor to its
patents.


14





We
rely on trade secret protections through confidentiality agreements with our
employees, customers and other parties; the breach of such agreements could
adversely affect our business ands results of operations.





We also
rely on trade secrets, which we seek to protect, in part, through
confidentiality and non-disclosure agreements with our employees, customers and
other parties. There can be no assurance that these agreements will not be
breached, that we would have adequate remedies for any such breach or that our
trade secrets will not otherwise become known to or independently developed by
competitors. To the extent that consultants, key employees or other third
parties apply technological information independently developed by them or by
others to our proposed projects, disputes may arise as to the proprietary rights
to such information that may not be resolved in our favor. We may be involved
from time to time in litigation to determine the enforceability, scope and
validity of our proprietary rights. Any such litigation could result in
substantial cost and diversion of effort by our management and technical
personnel.





The
failure to manage growth effectively could have an adverse effect on our
employee efficiency, product quality, working capital levels, and results of
operations.





Any
significant growth in the market for our products or our entry into new markets
may require and expansion of our employee base for managerial, operational,
financial, and other purposes. As of December 31, 2008, we had approximately
1,800 full time employees. During any growth, we may face problems related to
our operational and financial systems and controls, including quality control
and delivery and service capacities. We would also need to continue to expand,
train and manage our employee base. Continued future growth will impose
significant added responsibilities upon the members of management to identify,
recruit, maintain, integrate, and motivate new employees.








Aside
from increased difficulties in the management of human resources, we may also
encounter working capital issues, as we will need increased liquidity to finance
the purchase of raw materials and supplies, development of new products, and the
hiring of additional employees. For effective growth management, we will be
required to continue improving our operations, management, and financial systems
and control. Our failure to manage growth effectively may lead to operational
and financial inefficiencies that will have a negative effect on our
profitability. We cannot assure investors that we will be able to timely and
effectively meet that demand and maintain the quality standards required by our
existing and potential customers.





We
are dependent on certain key personnel and loss of these key personnel could
have a material adverse effect on our business, financial condition and results
of operations.





Our
success is, to a certain extent, attributable to the management, sales and
marketing, and operational and technical expertise of certain key personnel.
Each of the named executive officers performs key functions in the operation of
our business. The loss of a significant number of these employees could have a
material adverse effect upon our business, financial condition, and results of
operations.





We
are dependent on a technically trained workforce and an inability to retain or
effectively recruit such employees could have a material adverse effect on our
business, financial condition and results of operations.





We must
attract, recruit and retain a sizeable workforce of technically competent
employees to develop and manufacture our products and provide service support.
Our ability to implement effectively our business strategy will depend upon,
among other factors, the successful recruitment and retention of additional
highly skilled and experienced engineering and other technical and marketing
personnel. There is significant competition for technologically qualified
personnel in our business and we may not be successful in recruiting or
retaining sufficient qualified personnel consistent with our operational
needs.


15





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 in recent months, 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. Furthermore, although our total revenues continue to improve in the
third quarter of 2008, 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:


16





·
            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 obtain necessary 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, the laws and regulations governing our business, or the enforcement
and performance of our arrangements with customers in the event of the
imposition of statutory liens, death, bankruptcy or criminal proceedings. The
Chinese government has been developing a comprehensive system of commercial
laws, and considerable progress has been made in introducing laws and
regulations dealing with economic matters such as foreign investment, corporate
organization and governance, commerce, taxation and trade. However, because
these laws and regulations are relatively new, and because of the limited volume
of published cases and judicial interpretation and their lack of force as
precedents, interpretation and enforcement of these laws and regulations involve
significant uncertainties. New laws and regulations that affect existing and
proposed future businesses may also be applied retroactively.





Our
principal operating subsidiary, Shenzhen Highpower Technology Co., Ltd,
(“Shenzhen Highpower”) is considered a foreign invested enterprise under PRC
laws, and as a result is required to comply with PRC laws and regulations,
including laws and regulations specifically governing the activities and conduct
of foreign invested enterprises. We cannot predict what effect the
interpretation of existing or new PRC laws or regulations may have on our
businesses. If the relevant authorities find us in violation of PRC laws or
regulations, they would have broad discretion in dealing with such a violation,
including, without limitation:





·
            levying
      fines;




·
            revoking
      our business license, other licenses or
  authorities;




17


·
            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 that require us to obtain
environmental permits for our battery manufacturing operations. We have an
environmental permit from the Shenzhen Environment Protection Bureau Longgang
Bureau (the “Bureau”) covering our manufacturing operations that expires on
December 31, 2010. Historically, under a previous permit which expired in
September 2007, we substantially exceeded the approved annual output limit of
Ni-MH rechargeable batteries set forth in the permit. Although we do not
currently expect to exceed the approved annual output limits under the new
permit, we cannot guarantee that this will be the case. Additionally, our
current permit does not cover one of our existing premises at our manufacturing
facility. If we fail to comply with the provisions of our permit, we could be
subject to fines, criminal charges or other sanctions by regulators, including
the suspension or termination of our manufacturing operations.





We
cannot assure you that at all times we will be in compliance with environmental
laws and regulations or our environmental permits or that we will not be
required to expend significant funds to comply with, or discharge liabilities
arising under, environmental laws, regulations and permits.





Recent
PRC regulations relating to acquisitions of PRC companies by foreign entities
may create regulatory uncertainties that could restrict or limit our ability to
operate, including our ability to pay dividends. Our failure to obtain the prior
approval of the China Securities Regulatory Commission, or the CSRC, for any
offering and the listing and trading of our common stock could have a material
adverse effect on our business, operating results, reputation and trading price
of our common stock.





The PRC
State Administration of Foreign Exchange, or “SAFE,” issued a public notice in
November 2005, known as Circular 75, concerning the use of offshore holding
companies in mergers and acquisitions in China. The public notice provides that
if an offshore company controlled by PRC residents intends to acquire a PRC
company, such acquisition will be subject to registration with the relevant
foreign exchange authorities. The public notice also suggests that registration
with the relevant foreign exchange authorities is required for any sale or
transfer by the PRC residents of shares in an offshore holding company that owns
an onshore company. The PRC residents must each submit a registration form to
the local SAFE branch with respect to their ownership interests in the offshore
company, and must also file an amendment to such registration if the offshore
company experiences material events, such as changes in the share capital, share
transfer, mergers and acquisitions, spin-off transactions or use of assets in
China to guarantee offshore obligations. If any PRC resident stockholder of an
offshore holding company fails to make the required SAFE registration and
amended registration, the onshore PRC subsidiaries of that offshore company may
be prohibited from distributing their profits and the proceeds from any
reduction in capital, share transfer or liquidation to the offshore entity.
Failure to comply with the SAFE registration and amendment requirements
described above could result in liability under PRC laws for evasion of
applicable foreign exchange restrictions. Most of our PRC resident stockholders,
as defined in the SAFE notice, have not registered with the relevant branch of
SAFE, as currently required, in connection with their equity interests in HKHT.
Because of uncertainty in how the SAFE notice will be interpreted and enforced,
we cannot be sure how it will affect our business operations or future plans.
For example, Shenzhen Highpower’s ability to conduct foreign exchange
activities, such as the remittance of dividends and foreign currency-denominated
borrowings, may be subject to compliance with the SAFE notice by our PRC
resident beneficial holders. Failure by our PRC resident beneficial holders
could subject these PRC resident beneficial holders to fines or legal sanctions,
restrict our overseas or cross-border investment activities, limit Shenzhen
Highpower’s ability to make distributions or pay dividends or affect our
ownership structure, which could adversely affect our business and
prospects.


18





On August
8, 2006, the PRC Ministry of Commerce (“MOFCOM”), joined by the State-owned
Assets Supervision and Administration Commission of the State Council, the State
Administration of Taxation, the State Administration for Industry and Commerce,
the China Securities Regulatory Commission and SAFE, released a substantially
amended version of the Provisions for Foreign Investors to Merge with or Acquire
Domestic Enterprises (the “Revised M&A Regulations”), which took effect
September 8, 2006. These new rules significantly revised China’s regulatory
framework governing onshore-to-offshore restructurings and foreign acquisitions
of domestic enterprises. These new rules signify greater PRC government
attention to cross-border merger, acquisition and other investment activities,
by confirming MOFCOM as a key regulator for issues related to mergers and
acquisitions in China and requiring MOFCOM approval of a broad range of merger,
acquisition and investment transactions. Further, the new rules establish
reporting requirements for acquisition of control by foreigners of companies in
key industries, and reinforce the ability of the Chinese government to monitor
and prohibit foreign control transactions in key industries.





Among
other things, the revised M&A Regulations include new provisions that
purport to require that an offshore special purpose vehicle, or SPV, formed for
listing purposes and controlled directly or indirectly by PRC companies or
individuals must obtain the approval of the CSRC prior to the listing and
trading of such SPV’s securities on an overseas stock exchange. On September 21,
2006, the CSRC published on its official website procedures specifying documents
and materials required to be submitted to it by SPVs seeking CSRC approval of
their overseas listings. However, the application of this PRC regulation remains
unclear with no consensus currently existing among the leading PRC law firms
regarding the scope and applicability of the CSRC approval requirement.
Highpower’s PRC counsel, Zhong Lun Law Firm has advised us that because we
completed our onshore-to-offshore restructuring before September 8, 2006, the
effective date of the new regulation, it is not necessary for us to submit the
application to the CSRC for its approval, and the listing and trading of our
common stock does not require CSRC approval.





If the
CSRC or another PRC regulatory agency subsequently determines that CSRC approval
was required, we may face regulatory actions or other sanctions from the CSRC or
other PRC regulatory agencies. These regulatory agencies may impose fines and
penalties on our operations in the PRC, limit our operating privileges in the
PRC, delay or restrict the repatriation of the proceeds from an offering of
securities into the PRC, or take other actions that could have a material
adverse effect on our business, financial condition, results of operations,
reputation and prospects, as well as the trading price of our common stock. The
CSRC or other PRC regulatory agencies also may take actions requiring us, or
making it advisable for us, to halt any offering before settlement and delivery
of the securities offered. Consequently, if investors engage in market trading
or other activities in anticipation of and prior to settlement and delivery,
they do so at the risk that settlement and delivery may not occur.





Also, if
later the CSRC requires that we obtain its approval, we may be unable to obtain
a waiver of the CSRC approval requirements, if and when procedures are
established to obtain such a waiver. Any uncertainties and/or negative publicity
regarding this CSRC approval requirement could have a material adverse effect on
the trading price of our common stock. Furthermore, published news reports in
China recently indicated that the CSRC may have curtailed or suspended overseas
listings for Chinese private companies. These news reports have created further
uncertainty regarding the approach that the CSRC and other PRC regulators may
take with respect to us.





It is
uncertain how our business operations or future strategy will be affected by the
interpretations and implementation of Circular 75 and the Revised M&A
Regulations. It is anticipated that application of the new rules will be subject
to significant administrative interpretation, and we will need to closely
monitor how MOFCOM and other ministries apply the rules to ensure that our
domestic and offshore activities continue to comply with PRC law. Given the
uncertainties regarding interpretation and application of the new rules, we may
need to expend significant time and resources to maintain
compliance.





The
foreign currency exchange rate between U.S. Dollars and Renminbi could adversely
affect our financial condition.





To the
extent that we need to convert U.S. Dollars into Renminbi for our operational
needs, our financial position and the price of our common stock may be adversely
affected should the Renminbi appreciate against the U.S. Dollar at that time.
Conversely, if we decide to convert our Renminbi into U.S. Dollars for the
operational needs or paying dividends on our common stock, the dollar equivalent
of our earnings from our subsidiaries in China would be reduced should the
dollar appreciate against the Renminbi.


19





Until
1994, the Renminbi experienced a gradual but significant devaluation against
most major currencies, including dollars, and there was a significant
devaluation of the Renminbi on January 1, 1994 in connection with the
replacement of the dual exchange rate system with a unified managed floating
rate foreign exchange system. Since 1994, the value of the Renminbi relative to
the U.S. Dollar has remained stable and has appreciated slightly against the
U.S. Dollar. Countries, including the United States, have argued that the
Renminbi is artificially undervalued due to China’s current monetary policies
and have pressured China to allow the Renminbi to float freely in world markets.
In July 2005, the PRC government changed its policy of pegging the value of the
Renminbi to the dollar. Under the new policy the Renminbi is permitted to
fluctuate within a narrow and managed band against a basket of designated
foreign currencies. While the international reaction to the Renminbi revaluation
has generally been positive, there remains significant international pressure on
the PRC government to adopt an even more flexible currency policy, which could
result in further and more significant appreciation of the Renminbi against the
dollar.





Because
most of our sales are made in U.S. Dollars and most of our expenses are paid in
RMB, devaluation of the U.S. Dollar could negatively impact our results of
operations.





The value
of RMB is subject to changes in China’s governmental policies and to
international economic and political developments. In January, 1994, the PRC
government implemented a unitary managed floating rate system. Under this
system, the People’s Bank of China, or PBOC, began publishing a daily base
exchange rate with reference primarily to the supply and demand of RMB against
the U.S. Dollar and other foreign currencies in the market during the previous
day. Authorized banks and financial institutions are allowed to quote buy and
sell rates for RMB within a specified band around the central bank’s daily
exchange rate. On July 21, 2005, PBOC announced an adjustment of the exchange
rate of the U.S. Dollar to RMB from 1:8.27 to 1:8.11 and modified the system by
which the exchange rates are determined. This modification has resulted in an
approximate 7.3% appreciation of the RMB against the U.S. Dollar from July 21,
2005 to May 2, 2007. While the international reaction to the RMB revaluation has
generally been positive, there remains significant international pressure on the
PRC government to adopt an even more flexible currency policy, which could
result in further fluctuations of the exchange rate of the U.S. Dollar against
the RMB, including future devaluations. Because most of our net sales are made
in U.S. Dollars and most of our expenses are paid in RMB, any future devaluation
of the U.S. Dollar against the RMB could negatively impact our results of
operations.





Inflation
in the PRC could negatively affect our profitability and growth.





While the
PRC economy has experienced rapid growth, such growth has been uneven among
various sectors of the economy and in different geographical areas of the
country. Rapid economic growth can lead to growth in the money supply and rising
inflation. During the past decade, the rate of inflation in China has been as
high as approximately 20% and China has experienced deflation as low as
approximately minus 2%. If prices for our products and services rise at a rate
that is insufficient to compensate for the rise in the costs of supplies such as
raw materials, it may have an adverse effect on our profitability. In order to
control inflation in the past, the PRC government has imposed controls on bank
credits, limits on loans for fixed assets and restrictions on state bank
lending. The implementation of such policies may impede economic growth. In
October 2004, the People’s Bank of China, the PRC’s central bank, raised
interest rates for the first time in nearly a decade and indicated in a
statement that the measure was prompted by inflationary concerns in the Chinese
economy. In April 2006, the People’s Bank of China raised the interest rate
again. Repeated rises in interest rates by the central bank would likely slow
economic activity in China which could, in turn, materially increase our costs
and also reduce demand for our products and services.





Failure
to comply with the United States Foreign Corrupt Practices Act could subject us
to penalties and other adverse consequences.





As our
ultimate holding company is a Delaware corporation, we are subject to the United
States Foreign Corrupt Practices Act, which generally prohibits United States
companies from engaging in bribery or other prohibited payments to foreign
officials for the purpose of obtaining or retaining business. Foreign companies,
including some that may compete with us, are not subject to these prohibitions.
Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices
may occur from time-to-time in the PRC. We can make no assurance, however, that
our employees or other agents will not engage in such conduct for which we might
be held responsible. If our employees or other agents are found to have engaged
in such practices, we could suffer severe penalties and other consequences that
may have a material adverse effect on our business, financial condition and
results of operations.


20





If
we make equity compensation grants to persons who are PRC citizens, they may be
required to register with the State Administration of Foreign Exchange of the
PRC, or SAFE. We may also face regulatory uncertainties that could restrict our
ability to adopt an equity compensation plan for our directors and employees and
other parties under PRC law.





On April
6, 2007, SAFE issued the “Operating Procedures for Administration of Domestic
Individuals Participating in the Employee Stock Ownership Plan or Stock Option
Plan of An Overseas Listed Company, also know as “Circular 78.” It is not clear
whether Circular 78 covers all forms of equity compensation plans or only those
which provide for the granting of stock options. For any plans which are so
covered and are adopted by a non-PRC listed company after April 6, 2007,
Circular 78 requires all participants who are PRC citizens to register with and
obtain approvals from SAFE prior to their participation in the plan. In
addition, Circular 78 also requires PRC citizens to register with SAFE and make
the necessary applications and filings if they participated in an overseas
listed company’s covered equity compensation plan prior to April 6, 2007. We
intend to adopt an equity compensation plan in the future and make option grants
to our officers and directors, most of who are PRC citizens. Circular 78 may
require our officers and directors who receive option grants and are PRC
citizens to register with SAFE. We believe that the registration and approval
requirements contemplated in Circular 78 will be burdensome and time consuming.
If it is determined that any of our equity compensation plans are subject to
Circular 78, failure to comply with such provisions may subject us and
participants of our equity incentive plan who are PRC citizens to fines and
legal sanctions and prevent us from being able to grant equity compensation to
our PRC employees. In that case, our ability to compensate our employees and
directors through equity compensation would be hindered and our business
operations may be adversely affected.





We
have enjoyed certain preferential tax concessions and the loss of these
preferential tax concessions may cause its tax liabilities to increase and its
profitability to decline.





Our
operating subsidiary, Shenzhen Highpower, 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 25.0% 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 will be gradually
increased starting in 2008 and 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.





Any
recurrence of Severe Acute Respiratory Syndrome (SARS), Avian Flu, or another
widespread public health problem, in the PRC could adversely affect our
operations.





A renewed
outbreak of SARS, Avian Flu or another widespread public health problem in
China, where all of our manufacturing facilities are located and where the
substantial portion of our sales occur, could have a negative effect on our
operations. Our business is dependent upon its ability to continue to
manufacture products. Such an outbreak could have an impact on our operations as
a result of:





·
            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.




21


Any of
the foregoing events or other unforeseen consequences of public health problems
could adversely affect our operations.





A
downturn in the economy of the PRC may slow our growth and
profitability.





The
growth of the Chinese economy has been uneven across geographic regions and
economic sectors. There can be no assurance that growth of the Chinese economy
will be steady or that any downturn will not have a negative effect on our
business, especially if it results in either a decreased use of our products or
in pressure on us to lower our prices.





Because
our business is located in the PRC, we may have difficulty establishing adequate
management, legal and financial controls, which it is required to do in order to
comply with U.S. securities laws.





PRC
companies have historically not adopted a Western style of management and
financial reporting concepts and practices, which includes strong corporate
governance, internal controls and, computer, financial and other control
systems. Most of our middle and top management staff are not educated and
trained in the Western system, and we may difficulty hiring new employees in the
PRC with such training. In addition, we may have difficulty in hiring and
retaining a sufficient number of qualified employees to work in the PRC. As a
result of these factors, we may experience difficulty in establishing
management, legal and financial controls, collecting financial data and
preparing financial statements, books of account and corporate records and
instituting business practices that meet Western standards. Therefore, we may,
in turn, experience difficulties in implementing and maintaining adequate
internal controls as required under Section 404 of the Sarbanes-Oxley Act of
2002. This may result in significant deficiencies or material weaknesses in our
internal controls which could impact the reliability of its financial statements
and prevent us from complying with SEC rules and regulations and the
requirements of the Sarbanes-Oxley Act of 2002. Any such deficiencies,
weaknesses or lack of compliance could have a materially adverse effect on our
business.





Investors
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions in China based upon U.S. laws,
including the federal securities laws or other foreign laws against us or our
management.





Most of
our current operations, including the manufacturing and distribution of our
products, are conducted in China. Moreover, all of our directors and officers
are nationals and residents of China or Hong Kong. All or substantially all of
the assets of these persons are located outside the United States and in the
PRC. As a result, it may not be possible to effect service of process within the
United States or elsewhere outside China upon these persons. In addition,
uncertainty exists as to whether the courts of China would recognize or enforce
judgments of U.S. courts obtained against us or such officers and/or directors
predicated upon the civil liability provisions of the securities laws of the
United States or any state thereof, or be competent to hear original actions
brought in China against us or such persons predicated upon the securities laws
of the United States or any state thereof.





RISKS
RELATED TO OUR CAPITAL STRUCTURE





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





Prior to
our initial public offering and listing of our common stock on the NYSE Amex on
June 19, 2008, there was no public market for our securities in the United
States. Accordingly, we cannot assure you that an active trading market will
develop or be sustained or that the market price of our common stock will not
decline.  The price at which our common stock had traded has been
highly volatile, with a high and low sales price of $1.68 and $8.35,
respectively, as through March 27, 2009. 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:





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




·
            changes
      in securities analysts’
expectations;




22


·
            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. In addition, pursuant to the terms
of the Share Exchange, we filed a registration statement with the Securities and
Exchange Commission to register a total of 1,772,745 shares of our common stock
issued in a Private Placement that was conducted in connection with the Share
Exchange in November 2007. The registration statement was declared effective by
the Securities and Exchange Commission in June 2008. The investors in the
Private Placement also entered into a lock-up agreement pursuant to which they
agreed not to sell their shares until ninety (90) days after our common stock
was listed on the NYSE Amex, when one-tenth of their shares are released from
the lock up, after which their shares will automatically be released from the
lock up on a monthly basis pro rata over a nine month period.





We also
registered 817,479 shares of common stock held by certain of our stockholders
immediately prior to the Share Exchange in the registration statement declared
effective 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. that were our
stockholders 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 except if subject to a lock up agreement.





Additionally,
subject to lock-up agreements entered into with WestPark Capital, Inc. pursuant
to which the former stockholders of HKHT and their designees agreed not to sell
their shares until June 20, 2009, the former shareholders of HKHT and/or their
designees may be eligible to sell all or some of our shares of common stock by
means of ordinary brokerage transactions in the open market pursuant to Rule
144, promulgated under the Securities Act (“Rule 144”), subject to certain
limitations. In general, pursuant to Rule 144, a non-affiliate stockholder (or
stockholders whose shares are aggregated) who has satisfied a six-month holding
period, and provided that there is current public information available, may
sell all of its securities. Rule 144 also permits the sale of securities,
without any limitations, by a non-affiliate that has satisfied a one-year
holding period. Any substantial sale of common stock pursuant to any resale
prospectus or Rule 144 may have an adverse effect on the market price of our
common stock by creating an excessive supply.





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.




23


If
we fail to maintain effective internal controls over financial reporting, the
price of our common stock may be adversely affected.





We are
required to establish and maintain appropriate internal controls over financial
reporting. Failure to establish those controls, or any failure of those controls
once established, could adversely impact our public disclosures regarding our
business, financial condition or results of operations. Any failure of these
controls could also prevent us from maintaining accurate accounting records and
discovering accounting errors and financial frauds. Rules adopted by the SEC
pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require annual
assessment of our internal control over financial reporting, and attestation of
this assessment by our independent registered public accountants. The SEC
extended the compliance dates for non-accelerated filers, as defined by the SEC.
Accordingly, we included management's assessment of our internal control over
financial reporting as of the end of the previous fiscal year in our annual
report on Form 10-K for the year ended December 31, 2007. The attestation
requirement of management’s assessment by our independent registered public
accountants will first apply to our annual report for the 2009 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.




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.


24





Compliance
with changing regulation of corporate governance and public disclosure will
result in additional expenses.





Changing
laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC
regulations, have created uncertainty for public companies and significantly
increased the costs and risks associated with accessing the public markets and
public reporting. Our management team will need to invest significant management
time and financial resources to comply with both existing and evolving standards
for public companies, which will lead to increased general and administrative
expenses and a diversion of management time and attention from revenue
generating activities to compliance activities.





Our
common stock may be considered a “penny stock,” and thereby be subject to
additional sale and trading regulations that may make it more difficult to
sell.





Our
common stock may be considered to be a “penny stock” if it does not qualify for
one of the exemptions from the definition of “penny stock” under Section 3a51-1
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our
common stock may be a “penny stock” if it meets one or more of the following
conditions (i) the stock trades at a price less than $5.00 per share; (ii) it is
NOT traded on a “recognized” national exchange; (iii) it is NOT quoted on the
Nasdaq Capital Market, or even if so, has a price less than $5.00 per share; or
(iv) is issued by a company that has been in business less than three years with
net tangible assets less than $5 million.





The
principal result or effect of being designated a “penny stock” is that
securities broker-dealers participating in sales of our common stock will be
subject to the “penny stock” regulations set forth in Rules 15-2 through 15g-9
promulgated under the Exchange Act. For example, Rule 15g-2 requires
broker-dealers dealing in penny stocks to provide potential investors with a
document disclosing the risks of penny stocks and to obtain a manually signed
and dated written receipt of the document at least two business days before
effecting any transaction in a penny stock for the investor’s account. Moreover,
Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any
investor for transactions in such stocks before selling any penny stock to that
investor. This procedure requires the broker-dealer to (i) obtain from the
investor information concerning his or her financial situation, investment
experience and investment objectives; (ii) reasonably determine, based on that
information, that transactions in penny stocks are suitable for the investor and
that the investor has sufficient knowledge and experience as to be reasonably
capable of evaluating the risks of penny stock transactions; (iii) provide the
investor with a written statement setting forth the basis on which the
broker-dealer made the determination in (ii) above; and (iv) receive a signed
and dated copy of such statement from the investor, confirming that it
accurately reflects the investor’s financial situation, investment experience
and investment objectives. Compliance with these requirements may make it more
difficult and time consuming for holders of our common stock to resell their
shares to third parties or to otherwise dispose of them in the market or
otherwise.





We
do not foresee paying cash dividends in the foreseeable future and, as a result,
our investors’ sole source of gain, if any, will depend on capital appreciation,
if any.





We do not
plan to declare or pay any cash dividends on our shares of common stock in the
foreseeable future and currently intend to retain any future earnings for
funding growth. As a result, you should not rely on an investment in our
securities if you require the investment to produce dividend income. Capital
appreciation, if any, of our shares may be your sole source of gain for the
foreseeable future. Moreover, you may not be able to resell your shares in our
company at or above the price you paid for them.





ITEM
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.


25





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 484,000 square meters 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,
2008.





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
                September
      30, 2009Workshop
      A2 & dormitory, Luo Shan Industrial Park, Shan Xia Community, Ping Hu
      Street, Long Gang District, Shenzhen
                81,117
                Industry
      & Residence
                September
      30, 20094th
      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





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.




26


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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





On
December 11, 2008, we held our annual meeting of stockholders. Of the 13,562,596
shares eligible to vote, 10,502,481, or 77.4%, votes were returned, formulating
a quorum. At the annual stockholders meeting, the following matters were
submitted to stockholders for vote: Proposal I—Election of directors; Proposal
II—Ratification of the appointment of Dominic K.F. Chan & Co. as our
independent auditors for the year ending December 31, 2008; and Proposal III
—Approval of the Hong Kong Highpower Technology, Inc. 2008 Omnibus Incentive
Plan.





Proposal I—Election of Directors





The
results of voting on these proposals are as follows:




Director
                  
                  For
                  
                  
                  Against
                  
                  
                  Withheld
                  
                  
                  Abstain
                  
                  ElectedDang
      Yu Pan
                  
                  
                  10,502,331
                  
                  
                  
                  0
                  
                  
                  
                  150
                  
                  
                  
                  0
                  
                  YesWen
      Liang Li
                  
                  
                  10,499,331
                  
                  
                  
                  0
                  
                  
                  
                  3,150
                  
                  
                  
                  0
                  
                  YesChao
      Li
                  
                  
                  10,502,331
                  
                  
                  
                  0
                  
                  
                  
                  150
                  
                  
                  
                  0
                  
                  YesXinhai
      Li
                  
                  
                  10,499,331
                  
                  
                  
                  0
                  
                  
                  
                  3,150
                  
                  
                  
                  0
                  
                  YesPing
      Li
                  
                  
                  10,502,331
                  
                  
                  
                  0
                  
                  
                  
                  150
                  
                  
                  
                  0
                  
                  Yes




All
directors are elected at our annual meeting of stockholders.





Proposal
II—Ratification of the appointment of Dominic K.F. Chan & Co. as our
independent auditors for the year ending December 31, 2008.





Proposal
II was approved with 10,50,981 shares voted for, 0 voted against and 1,500
abstained from voting, thereby, ratifying the appointment of Dominic K.F. Chan
& Co. as our independent auditors for the year ending December 31,
2008.





Proposal
III—Approval of the Hong Kong Highpower Technology, Inc. 2008 Omnibus Incentive
Plan.





Proposal
III was approved with 10,086,285 shares voted for, 311,514 voted against and
1,150 abstained from voting, thereby, approving the Hong Kong Highpower
Technology, Inc. 2008 Omnibus Incentive Plan.





PART
II





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





Market
Information


Prior to
June 19, 2008, our shares of common stock were not listed or quoted for trading
on any national securities exchange or national quotation system. On June 19,
2008 our common stock began trading on the NYSE Amex under the symbol
“HPJ”.  The closing price of our common stock on March 27, 2009 on the
NYSE Amex was $2.80.





27


The
following table summarizes the high and low sales prices for our common stock
for the periods indicated:





2008High
                  
                  
                  LowYear
      Ended December 31, 2008Second
      Quarter (June 19, 2008 to June 30, 2008)
                  
                  $
                  8.35
                  
                  
                  $
                  4.75Third
      Quarter
                  
                  
                  4.78
                  
                  
                  
                  1.68Fourth
      Quarter
                  
                  
                  3.85
                  
                  
                  
                  2.50





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;




·
            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 27, 2009, we had 94 common stockholders of record.





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 year ended December 31, 2008.  We paid
cash dividends of $665,182 during the year ended December 31,
2007.


28


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.


29


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 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, 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.





Recent
Events





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. The warrants are exercisable at a per share price of
$3.90 and expire if unexercised after five years.


30




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.


31





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.





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.




32


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.




Results
of Operations





The
following table sets forth the consolidated statements of operations of the
Company for the years ended December 31, 2008, 2007 and 2006 (U.S.
dollars):


Consolidated Statements of
      Operations
                    
                    Year Ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006(in
      thousands)Net
      Sales
                    
                    $
                    75,004
                    
                    
                    $
                    73,262
                    
                    
                    $
                    44,376Cost
      of Sales
                    
                    
                    (62,239
                    )
                    
                    
                    (63,791
                    )
                    
                    
                    (36,959
                    )Gross
      profit
                    
                    $
                    12,765
                    
                    
                    $
                    9,470
                    
                    
                    $
                    7,417Depreciation
                    
                    
                    (194
                    )
                    
                    
                    (121
                    )
                    
                    
                    (80
                    )Selling
      and distribution costs
                    
                    
                    (2,416
                    )
                    
                    
                    (2,096
                    )
                    
                    
                    (1,634
                    )General
      and administrative costs including stock-based
compensation
                    
                    
                    (6,098
                    )
                    
                    
                    (3,461
                    )
                    
                    
                    (1,960
                    )Loss
      on exchange rate difference
                    
                    
                    (1,182
                    )
                    
                    
                    (855
                    )
                    
                    
                    (199
                    )Fees
      and costs related to reorganization
                    
                    
                    -
                    
                    
                    
                    (582
                    )
                    
                    
                    (75
                    )Income
      from operations
                    
                    $
                    2,875
                    
                    
                    $
                    2,357
                    
                    
                    $
                    3,468Change
      in fair value of currency forwards
                    
                    
                    116
                    
                    
                    
                    -
                    
                    
                    
                    -Change
      in fair value of warrants
                    
                    
                    (276
                    )
                    
                    
                    -
                    
                    
                    
                    -Other
      Income
                    
                    
                    463
                    
                    
                    
                    149
                    
                    
                    
                    59Interest
      expense
                    
                    
                    (642
                    )
                    
                    
                    (696
                    )
                    
                    
                    (254
                    )Income
      before taxes
                    
                    $
                    2,535
                    
                    
                    $
                    1,809
                    
                    
                    $
                    3,273Income
      taxes
                    
                    
                    (529
                    )
                    
                    
                    (145
                    )
                    
                    
                    (241
                    )Net
      income
                    
                    $
                    2,006
                    
                    
                    $
                    1,664
                    
                    
                    $
                    3,032Net
      income per common share – basic and diluted
                    
                    $
                    0.15
                    
                    
                    $
                    0.17
                    
                    
                    $
                    0.33Weighted
      average common shares outstanding-basic
                    
                    
                    13,205,599
                    
                    
                    
                    9,832,493
                    
                    
                    
                    9,248,973-diluted
                    
                    
                    13,233,353
                    
                    
                    
                    9,832,493
                    
                    
                    
                    9,248,973Dividends
      declared per common share
                    
                    
                    -
                    
                    
                    $
                    0.07
                    
                    
                    
                    -




33


EBITDA





In
evaluating our business, we consider and use EBITDA, a financial measure not in
accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), as
a supplemental measure of our operating performance. We define EBITDA as net
income (loss) before net interest expense, provision (benefit) for income taxes,
and depreciation and amortization. We use EBITDA as a supplemental measure to
review and assess our operating performance and to enhance comparability between
periods. We also believe the use of EBITDA facilitates the use by investors of
operating performance comparisons from period to period and company to company
by backing out potential differences caused by variations in such items as the
book amortization of intangible assets (affecting relative amortization
expense), the age and book value of facilities and equipment (affecting relative
depreciation expense), and capital structure (affecting relative interest
expense). We also present EBITDA because we believe it is frequently used by
securities analysts, investors and other interested parties as an alternate
measure of financial performance. We reconcile EBITDA to net income (loss), the
most comparable financial measure under U.S. GAAP.





We
believe that EBITDA permits a comparative assessment of our operating
performance, relative to our performance based on our U.S. GAAP results, while
isolating the effects of interest, taxes, depreciation and amortization, which
may vary from period to period without any correlation to underlying operating
performance. We provide information relating to our EBITDA so that securities
analysts, investors and other interested parties have the same data that we
employ in assessing our overall operations. We believe that trends in our EBITDA
are a valuable indicator of our operating performance and of our ability to
produce operating cash flows to fund working capital needs, to service debt
obligations and to fund capital expenditures.





The term
EBITDA is not defined under U.S. GAAP, and is not a measure of operating income,
operating performance or liquidity presented in accordance with U.S. GAAP. Our
EBITDA has limitations as an analytical tool, and when assessing our operating
performance, EBITDA should not be considered in isolation, or as a substitute
for net income (loss) or other consolidated statement of operations data
prepared in accordance with U.S. GAAP. Some of these limitations include, but
are not limited to, the following:





·
            EBITDA
      (1) does not reflect our cash expenditures or future requirements for
      capital expenditures or contractual commitments; (2) does not reflect
      changes in, or cash requirements for, our working capital needs; (3) does
      not reflect the interest expense, or the cash requirements necessary to
      service interest or principal payments, on our debt; (4) does not reflect
      income taxes or the cash requirements for any tax payments; and (5) does
      not reflect all of the costs associated with operating our
      business;


·
            although
      depreciation and amortization are non-cash charges, the assets being
      depreciated and amortized often will have to be replaced in the future,
      and EBITDA does not reflect any cash requirements for such replacements;
      and


·
            other
      companies may calculate EBITDA differently than we do, limiting its
      usefulness as a comparative
measure.





We
compensate for these limitations by relying primarily on our U.S. GAAP results
and using EBITDA only supplementally. EBITDA is calculated as follows for the
periods presented:





Years
      Ended December 31,2008
                    $
                  
                  
                  2007
                    $
                  
                  
                  2006
                    $Net
      Income
                  
                  
                  2,006,487
                  
                  
                  
                  1,663,690
                  
                  
                  
                  3,032,327Interest
      expense
                  
                  
                  642,161
                  
                  
                  
                  696,132
                  
                  
                  
                  253,617Income
      taxes
                  
                  
                  528,950
                  
                  
                  
                  145,458
                  
                  
                  
                  240,487Depreciation
                  
                  
                  838,725
                  
                  
                  
                  560,073
                  
                  
                  
                  343,841Amortization
                  
                  
                  111,939
                  
                  
                  
                  50,000
                  
                  
                  
                  -EBITDA
                  
                  
                  4,128,262
                  
                  
                  
                  3,115,353
                  
                  
                  
                  3,870,272





The
increase in EBITDA for the year ended December 31, 2008 as compared to the year
ended December 31, 2007 was due to in part to the decreased costs of nickel in
2008, which had a a 40% decrease in the average cost of nickel during the year
ended December 31, 2008 compared to the comparable period in
2007.  During the year ended December 31, 2008, we were able to
implement an average 7.6% increase in the selling price of our battery
units.  EBITDA for the year ended December 31, 2008 as compared to the
year ended December 31, 2007 was negatively impacted by loss on exchange rate
difference of $1.2 million in 2008, as compared to $855,000 in
2007.  The decrease in EBITDA for the year ended December 31, 2007 as
compared to the year ended December 31, 2006, was due in part to the increased
costs of nickel in 2007, which we could not immediately pass along to our
customers in 2007 through higher battery prices due to fixed-priced contracts.
EBITDA for the year ended December 31, 2007 as compared to the year ended
December 31, 2006 was also negatively impacted by fees and costs related to the
reorganization of $582,269 in 2007, as compared to $75,229 in 2006, and loss on
exchange rate difference of $854,873 in 2007, as compared to $199,231 in
2006.


34





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. .





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.


35





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.





Years
Ended December 31, 2007 and 2006





Net sales
for year the ended December 31, 2007 were $73.3 million compared to $44.4
million for the year ended December 31, 2006, an increase of 65.1%. The increase
in net sales for the year ended December 31, 2007 over the year ended December
31, 2006 was due to a 31% increase in the average selling price of our battery
units and a 26% increase in the number of battery units sold, including $160,170
from the sale of battery seconds during the year ended December 31, 2007. The
31% increase in the average selling price of our battery units was due to our
agreement with our major customers in March 2007 to adjust the selling prices of
our batteries in accordance with the market price of nickel. Prior to March
2007, we fulfilled customer orders under fixed-price, long-term sales contracts
under which the selling price of the batteries was determined according to
nickel costs prior to the sharp increase in the cost of nickel which began at
the end of 2006 and we were, therefore, unable to pass along the increased
nickel costs on to our customers. However, after March 2007, we were able to
adjust the sales price of our batteries based on the cost of nickel. The
increase in the number of battery units sold in 2007 was primarily attributable
to increased 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
$63.8 million for the year ended December 31, 2007 as compared to $37.0 million
for the comparable period in 2006. As a percentage of net sales, cost of sales
increased to 87.1% for the year ended December 31, 2007 compared to 83.3% for
the comparable period in 2006. This was attributable to a 38% increase in the
average per unit cost of goods sold during the year ended December 31, 2007 as
compared to the comparable period in 2006, which resulted from a 61% increase in
the average cost of nickel during the year ended December 31, 2007 compared to
the comparable period in 2006.





Gross
profit for the year ended December 31, 2007 was $9.5 million, or 12.9% of net
sales, compared to $7.4 million, or 16.7% of net sales, respectively, for the
comparable period in 2006. 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 decrease in
our gross profit margin for the year ended December 31, 2007 is primarily due to
increases in the price of nickel which we did not pass along to our customers
for a portion of 2007 due to our sales price commitments.





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
samples for potential customers 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.


36





Selling
and distribution costs were $2.1 million for the year ended December 31, 2007,
compared to $1.6 million for the comparable period in 2006. The increase was due
to the expansion of our market share, which increased 2% in terms of the
worldwide market in volume and 1.5% in terms of worldwide market value in 2007
over 2006. Our market share increased due to our increased promotion of our
products and our expansion of our team of sales representatives.





General
and administrative costs were $3.5 million, or 4.7% of net sales, for the year
ended December 31, 2007, compared to $2.0 million, or 4.4% of net sales, for the
comparable period in 2006.  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 $380,000 for year ended
December 31, 2007 over the comparable period in 2006 due to the expansion of our
technician and marketing team to expand our market share. 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 $855,000 and $199,000, respectively, in the years ended December 31,
2007 and 2006, an increase of 330%, due to the devaluation of the U.S. Dollar
relative to the RMB over the respective periods. Beginning in 2008, to cope with
devaluation of the U.S. Dollar relative to the RMB, we are engaging in currency
hedging and adjusting the selling price of batteries to vary with the U.S.
Dollar exchange rate relative to the RMB.





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 $582,000 and $75,000 for the years ended December
31, 2007 and 2006, respectively (as restated).





Other
income from operations, which consists of bank interest income sundry income,
was $149,000, for the year ended December 31, 2007, as compared to $59,000 for
the year ended December 31, 2006, an increase of 153.7%. The increase was
increases of $64,000 and $26,000 in bank interest income and sundry income,
respectively.





Interest
expense was $696,000 for the year ended December 31, 2007, as compared to
$254,000 for the respective comparable period in 2006. The increase was
primarily due to higher borrowing levels. We increased our borrowings by $9.46
million in the year ended December 31, 2007 as compared to the year ended
December 31, 2006. 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, 2007, we recorded a provision for income taxes of
$145,000, as compared to $240,000 for the respective comparable period in 2006.
The decrease in income taxes for the year ended December 31, 2007 as compared to
the year ended December 30, 2006 was a result of a decrease in our net taxable
income.





Net
income for the year ended December 31, 2007 was $1.7 million, compared to a net
income of $3.0 million for the comparable period in 2006.





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, 2008, we had in place general banking facilities with four financial
institutions aggregating $23.18 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, 2008, we had
utilized approximately $14.83 million under such general credit facilities and
had available unused credit facilities of $8.35 million.


37





On
November 2, 2007, upon the closing of a private placement, we received gross
proceeds of $3.12 million in a private placement transaction (the “Private
Placement”). Pursuant to Subscription Agreements entered into with the
investors, we sold an aggregate of 1,772,745 shares of Common Stock at $1.76 per
share. 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. For
its services in connection with the Share Exchange and as placement agent, the
placement agent received an aggregate commission equal to 10% of the gross
proceeds from the Private Placement, in addition to $30,000 in connection with
the execution of the Exchange Agreement and a $40,000 success fee for the Share
Exchange, for an aggregate amount fee of $382,000.





For the
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. For Fiscal 2007, net cash used in operating
activities was $1.5 million as compared to $2.1 million for Fiscal 2006. The
decrease in net cash used by operating activities is primarily attributable to a
decrease in inventory levels.





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
investing activities was $4.9 million for the year ended December 31, 2007
compared to $1.7 million for the comparable period in 2006. The increase of cash
used in investing activities was primarily attributable to the acquisition of
land equity in HuiZhou, and deposits paid for the acquisition of
equipment.





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.  Net cash provided by financing activities was $7.4 million for
the year ended December 31, 2007 as compared to $3.8 million for the
comparable period in 2006. The increase in net cash provided by financing
activities was attributable to an increase in bank borrowings of $9.46 million
in 2007.





For
Fiscal 2008 and 2007, our inventory turnover was 4.87 and 4.25 times,
respectively. The average days outstanding of our accounts receivable at
December 31, 2008 were 59 days, as compared to 60 days at December 31, 2007.
Inventory turnover and average days outstanding are key operating measures that
management relies on to monitor our business.  In the next 12 months,
we expect to expand our research, development and manufacturing of lithium-based
batteries and anticipate additional capital expenditures of approximately
$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 $30,000 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.


38





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, 2007 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
                  $5.27
      million
                  
                  $0.87
      million
                  
                  Dang
      Yu Pan, Wen Liang Li, Wen Wei MaShenzhen
      Development Bank Co., Ltd
                  $4.93
      million
                  
                  $3.62  million
                  
                  Dang
      Yu PanShanghai
      Pudong Development Bank Co. Ltd.
                  $9.52
      million
                  
                  $8.19  million
                  
                  Dang
      Yu PanCitibank
      (China) Co., ltd.
                  $3.46
      million
                  
                  $2.15  million
                  
                  Dang
      Yu Pan, Wen Liang Li, Wen Wei
Ma





Pursuant
to the Letter of Undertaking related to the loan from the Bank of China, Mr.
Pan, Mr. Li and Mr. Ma agreed to enter into a guarantee contract with the bank
to guarantee all the outstanding debts of our subsidiary, Shenzhen Highpower,
whether such debts are payments, obligations or liabilities already existing or
contingent.





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.


39





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





Contractual
obligations





This
table summarizes our known contractual obligations and commercial commitments at
December 31, 2008.





Payments
      due by periodTotal
                
                
                Less
      than 1
                  year
                
                
                1-3
      years
                
                
                3-5
      years
                
                
                More
      than 5
                  yearsCredit
      Facilities
                
                $
                14,829,228
                
                
                $
                14,829,228
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Purchase
      Obligations (1)
                
                $
                8,306,123
                
                
                $
                8,306,123
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -License
      Agreement
                
                $
                1,540,900
                
                
                $
                1,540,900
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Capital
      Commitment
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Total
                
                $
                24,676,251
                
                
                $
                24,676,251
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -


(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





In
December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 141(R), “Business Combinations” and SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements – an amendment to ARB
No. 51”. SFAS No. 141(R) and SFAS No. 160 require most
identifiable assets, liabilities, noncontrolling interests and goodwill acquired
in a business combination to be recorded at “full fair value” and require
noncontrolling interests (previously referred to as minority interest) to be
reported as a component of equity, which changes the accounting for transactions
with noncontrolling interest holders. Both statements are effective for periods
beginning on or after December 15, 2008, and earlier adoption is
prohibited. SFAS No. 141(R) will be applied to business combinations
occurring after the effective date. SFAS No. 160 will be applied
prospectively to all noncontrolling interests, including any that arose before
the effective date. SFAS No. 160 will be effective for us on January 1, 2009. We
do not expect the initial adoption of SFAS No. 160 will have a material effect
on our consolidated financial statements.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities”, which requires enhanced disclosures about
an entity’s derivatives and hedging activities. This Statement is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008. Since SFAS No. 161 only provides for additional
disclosure requirements, management assessed that there will be no impact on our
results of operations and financial position.





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS No. 162”). This statement identifies the sources
of accounting principles and the framework for selecting the principles used in
the preparation of financial statements of nongovernmental entities that are
presented in accordance with generally accepted accounting principles (“GAAP”).
With the issuance of this statement, the FASB concluded that the GAAP hierarchy
should be directed toward the entity and not its auditor, and reside in the
accounting literature established by the FASB as opposed to the American
Institute of Certified Public Accountants “AICPA”) Statement on Auditing
Standards No. 69, “The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles.” This statement is effective 60 days following
the Securities and Exchange Commission’s approval of the Public Company
Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting Principles.” We do not
expect the adoption of SFAS No. 162 will have a material impact on our results
of operations and financial position.


40





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, 2007, the exchange
rate of the RMB to the U.S. Dollar increased approximately 6.9% from the level
at the end of December 31, 2006. This fluctuation resulted in a slight increase
in our material costs during the year ended December 31, 2007. 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 2008 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, 2008, the Company had a series of
currency forwards totaling a notional amount US$11,000,000 expiring from January
2009 to July 2009. 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 116,157 attributable to these activities are
included in “other income” for the year ended December 31, 2008.





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





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.


41





ITEM
9A.  CONTROLS AND PROCEDURES





(a)
Evaluation of disclosure controls and procedures





Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in the reports that we file or submit
under the Exchange Act is 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, 2008. 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, 2008, our internal control over financial
reporting is effective based on those criteria.





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.




42


(c)
Changes in internal control over financial reporting




There
were no changes in our internal control over financial reporting that occurred
during our last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.





ITEM
9B.  OTHER INFORMATION





On
November 28, 2008, 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 RMB36,360,000 (US$5.3 million) with Bank of China Limited ( “Bank
of China”), of which RMB1,360,000 (US$200,000) is for a factoring line of credit
and RMB35,000,000 (US$5.1 million) is for an opening domestic line of
credit.  The Agreement expires on November 20, 2009.
  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; accelerate the
maturity of any amount outstanding under the Agreement; 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.
  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.
  The
information included in this Item 9B is provided in accordance with Item 1.01
and Item 2.03 of Form 8-K.


43




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
                  41
                  Chairman
      of the Board and Chief Executive OfficerWen
      Liang Li
                  43
                  Vice
      President, Chief Technology Officer and DirectorWen
      Wei Ma
                  39
                  Vice
      President of ManufacturingHenry
      Ngan
                  36
                  Chief
      Financial OfficerWen
      Jia Xiao
                  32
                  Vice
      President of Quality ControlXinhai
      Li
                  46
                  DirectorChao
      Li
                  64
                  DirectorPing
      Li
                  44
                  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.





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.





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.




44


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.





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.





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.





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 NYSE Amex, 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 NYSE Amex 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 NYSE Amex 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.




·
            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.


45


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. The Company’s current officers, directors and beneficial holders of 10% or
more of its equity securities became subject to such requirement and to date,
based solely upon a review of Forms 3, 4 and 5 and any amendments thereto
furnished to the Company during its most recent fiscal year, none of the
Company’s officers or directors has failed to file on a timely basis, as
disclosed in the above forms, reports required by Section 16(a) of the Exchange
Act during the most recent fiscal year.





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, 2008 and 2007 of the principal executive
officer.





The
following table sets forth information concerning the compensation earned during
the fiscal years ended December 31, 2008 and 2007 by our current Chief
Executive Officer.  None of our other executive officers who were
employed by us during the year ended December 31, 2008 received compensation
exceeding $100,000 during the fiscal 2008.





Name and Position
                      
                      Year
                      
                      Salary
                      
                      
                      Bonus
                      
                      
                      All
      other compensation (1)
                      
                      
                      TotalDang
      Yu Pan
                      
                      2008
                      
                      $
                      18,000
                      
                      
                      $
                      -
                      
                      
                      $
                      25,000
                      (2)
                      
                      $
                      43,000Chief
      Executive Officer and
                      
                      2007
                      
                      $
                      18,000
                      
                      
                      $
                      -
                      
                      
                      $
                      25,000
                      (3)
                      
                      $
                      43,000Chairman
      of the Board


_________


(1)  Relates
to automobile, housing and medical personal benefits.


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


(3)  Includes
$12,000 for fees earned or paid in cash for service as a director of
HKHT.


46


Outstanding
Equity Awards at 2008 Fiscal Year End





There
were no option exercises or options outstanding in 2008.





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, which will be granted on August 1, 2009
and  vest in equal installments on January 31, 2010 and 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.





We have
no other employment agreements with any of our other executive
officers.





Director
Compensation





The
following table shows information regarding the compensation earned during the
fiscal year ended December 31, 2008 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
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                20,000
                (1)Chao
      Li
                
                
                18,000
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                18,000Xinhai
      Li
                
                
                18,000
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                18,000Ping
      Li
                
                
                18,000
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                18,000




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.


47


Securities
Authorized for Issuance under Equity Compensation Plans




The following table provides
information as of December 31, 2008 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
                  -
                  
                  $
                  -
                  
                  2,000,000
                  (1)Equity
      compensation plans not approved by security holders
                  -
                  
                  
                  -
                  
                  -Total
                  -
                  
                  
                  N/A
                  
                  2,000,000





(1)
            In
      October 2008, the Company adopted the 2008 Omnibus Incentive Plan. The
      Incentive Plan currently has 2,000,000 shares authorized for
      issuance.  No awards have been issued pursuant to the Incentive
      Plan.





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 27, 2009 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 27, 2009 certain information with respect
to beneficial ownership of our common stock based on 13,562,596 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





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





The
number of shares of our common stock outstanding as of March 27, 2009 excludes
52,500 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
              
              5,179,429
      (1)
              
              38.19%Wen
      Liang Li
              
              Vice
      President, Chief Technology Officer and Director
              
              2,034,770
              
              15.00%Wen
      Wei Ma
              
              Vice
      President of Manufacturing
              
              924,897
              
              6.82%Xinhai
      Li
              
              Director
              
              -
              
              -Chao
      Li
              
              Director
              
              -
              
              -Ping
      Li
              
              Director
              
              -
              
              -Officers
      and Directors as a Group (total of 8 persons)
              
              
              
              8,139,096
      (1)
              
              60.01%




(1)
            Includes
      (i) an aggregate of 1,387,356 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.




48


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





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
              $5.27
      million
              $0.87
      million
              Dang
      Yu Pan, Wen Liang Li, Wen Wei MaShenzhen
      Development Bank Co., Ltd
              $4.93
      million
              $3.62  million
              Dang
      Yu PanShanghai
      Pudong Development Bank Co. Ltd.
              $9.52
      million
              $8.19  million
              Dang
      Yu PanCitibank
      (China) Co., ltd.
              $3.46
      million
              $2.15  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.


49




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, 2008
and December 31, 2007 and fees billed for other services rendered by Dominic
K.F. Chan & Co. during those periods.





Year
      ended December 31,2008
                
                
                2007Audit
      Fees(1)
                
                $
                73,000
                
                
                $
                67,000Audit-Related
      Fees (2)
                
                
                -
                
                
                
                -Tax
      Fees
                
                
                -
                
                
                
                -All
      Other Fees
                
                
                -
                
                
                
                -Total
                
                $
                73,000
                
                
                $
                67,000





(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).


50





PART
IV





ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES





1.
            Financial
      Statements: See “Index to Consolidated Financial Statements” in Part II,
      Item 8 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 April 8, 2009.








Hong
      Kong Highpower Technology, Inc.(Registrant)Dated:
      April 8, 2009
            /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
                  By:  Dang
      Yu Pan
                Chief
      Executive Officer and
                  Chairman
      of the Board
                  (Principal
      Executive Officer)
                April
      8, 2009/s/  Henry
      Ngan
                  By:  Henry
      Ngan
                Chief
      Financial Officer
                  (Principal
      Financial and Accounting Officer)
                April
      8, 2009/s/  Wen
      Liang Li
                  Wen
      Liang Li
                Vice
      President, Chief Technology Officer and Director
                April
      8, 2009/s/  Xinhai
      Li
                  Xinhai
      Li
                Director
                April
      8, 2009/s/  Chao
      Li
                  Chao
      Li
                Director
                April
      8, 2009/s/Ping
      Li
                  Ping
      Li
                Director
                April
      8, 2009


51


EXHIBIT
INDEX





Exhibit


Number
            Description





2.1
            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).




52


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).





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 28, 2008 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.





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.




53





HONG
KONG HIGHPOWER TECHNOLOGY, INC.





CONSOLIDATED
FINANCIAL STATEMENTS


DECEMBER
31, 2008, 2007 AND 2006





PageReport
      of Independent Registered Public Accounting Firm
                F-2Financial
      Statements:Consolidated
      Balance Sheets as of  December 31, 2008 and 2007
                F-3Consolidated
      Statements of Operations for the years ended December 31, 2008, 2007, and
      2006
                F-5Consolidated
      Statements of Stockholders' Equity and Comprehensive Income for the years
      ended December 31, 2008, 2007, and 2006
                F-6Consolidated
      Statements of Cash Flows for the years ended December 31, 2008, 2007, and
      2006
                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, 2008 and 2007, and the related statements of
operations, stockholders’ equity and comprehensive income, and cash flows for
the years ended December 31, 2008, 2007 and 2006.  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, 2008 and 2007, and the consolidated results
of their operations and their cash flows for the years ended December 31, 2008,
2007 and 2006, in conformity with accounting principles generally accepted in
the United States of America.











Dominic
K.F. Chan & Co


Certified
Public Accountants


Hong
Kong


Date:
March 21, 2009


F-2


HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





CONSOLIDATED
BALANCE SHEETS


(Stated
in US Dollars)





At
      December 31,2008
                            
                            
                            2007$
                            
                            
                            $ASSETSCurrent
      Assets:Cash
      and cash equivalents
                            
                            
                            4,175,780
                            
                            
                            
                            1,489,262Restricted
      cash
                            
                            
                            4,845,478
                            
                            
                            
                            5,453,650Accounts
      receivable
                            
                            
                            8,765,593
                            
                            
                            
                            15,906,175Notes
      receivable
                            
                            
                            429,815
                            
                            
                            
                            386,482Prepaid
      expenses and other receivables – Note6
                            
                            
                            1,732,709
                            
                            
                            
                            2,501,796Deferred
      charges – Stock-based compensation – Note 7
                            
                            
                            216,667
                            
                            
                            
                            -Inventories –Note8
                            
                            
                            11,208,697
                            
                            
                            
                            14,371,289Prepaid
      lease payments
                            
                            
                            -
                            
                            
                            
                            58,570Total
      Current Assets
                            
                            
                            31,374,739
                            
                            
                            
                            40,167,224Deferred
      tax assets – Note5
                            
                            
                            104,556
                            
                            
                            
                            28,277Deposit
      paid for acquisition of machinery
                            
                            
                            -
                            
                            
                            
                            1,115,123Plant
      and equipment, net – Note9
                            
                            
                            7,778,477
                            
                            
                            
                            3,789,382Leasehold
      land – Note10
                            
                            
                            3,050,510
                            
                            
                            
                            2,869,925Intangible
      asset, net – Note11
                            
                            
                            900,000
                            
                            
                            
                            950,000Currency
      forward – Note12
                            
                            
                            116,157
                            
                            
                            
                            -TOTAL
      ASSETS
                            
                            
                            43,324,439
                            
                            
                            
                            48,919,931LIABILITIES
      AND STOCKHOLDERS’ EQUITYLIABILITIESCurrent
      Liabilities :Non-trading
      foreign currency derivatives liabilities
                            
                            
                            293,830
                            
                            
                            
                            -Accounts
      payable
                            
                            
                            8,306,123
                            
                            
                            
                            19,561,118Other
      payables and accrued liabilities – Note 14
                            
                            
                            3,139,275
                            
                            
                            
                            2,320,956Income
      taxes payable
                            
                            
                            476,330
                            
                            
                            
                            73,768Bank
      borrowings –Note
      15
                            
                            
                            14,829,228
                            
                            
                            
                            15,410,542Total
      Current Liabilities
                            
                            
                            27,044,786
                            
                            
                            
                            37,366,384COMMITMENTS
      AND CONTINGENCIES –Note
      17





(continued)


F-3


HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





CONSOLIDATED
BALANCE SHEETS (continued)


(Stated
in US Dollars)








At
      December 31,2008
                        
                        
                        2007$
                        
                        
                        $STOCKHOLDERS’
      EQUITYPreferred
      StockPar
      value: $0.0001Authorized:
      10,000,000 sharesIssued
      and outstanding: none
                        
                        
                        -
                        
                        
                        
                        -Common
      stockPar
      value : $0.0001Authorized:
      100,000,000 sharesIssued
      and outstanding: 2008 –13,562,596 shares(2007 –12,798,846
      shares)
                        
                        
                        1,356
                        
                        
                        
                        1,280Additional
      paid-in capital
                        
                        
                        5,048,194
                        
                        
                        
                        2,765,870Accumulated
      other comprehensive income
                        
                        
                        1,595,091
                        
                        
                        
                        1,157,872Retained
      earnings
                        
                        
                        9,635,012
                        
                        
                        
                        7,628,525TOTAL
      STOCKHOLDERS’ EQUITY
                        
                        
                        16,279,653
                        
                        
                        
                        11,553,547TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                        
                        
                        43,324,439
                        
                        
                        
                        48,919,931





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 31,2008
                    
                    
                    2007
                    
                    
                    2006$
                    
                    
                    $
                    
                    
                    $Net
      sales
                    
                    
                    75,004,242
                    
                    
                    
                    73,261,720
                    
                    
                    
                    44,375,682Cost
      of sales
                    
                    
                    (62,238,982
                    )
                    
                    
                    (63,791,248
                    )
                    
                    
                    (36,958,529
                    )Gross
      profit
                    
                    
                    12,765,260
                    
                    
                    
                    9,470,472
                    
                    
                    
                    7,417,153Depreciation
                    
                    
                    (194,496
                    )
                    
                    
                    (120,517
                    )
                    
                    
                    (80,213
                    )Selling
      and distribution costs
                    
                    
                    (2,416,220
                    )
                    
                    
                    (2,095,594
                    )
                    
                    
                    (1,634,366
                    )General
      and administrative costs including stock-based
compensation
                    
                    
                    (6,097,580
                    )
                    
                    
                    (3,460,592
                    )
                    
                    
                    (1,960,271
                    )Loss
      on exchange rate difference
                    
                    
                    (1,182,076
                    )
                    
                    
                    (854,873
                    )
                    
                    
                    (199,231
                    )Fees
      and costs related to reorganization
                    
                    
                    -
                    
                    
                    
                    (582,269
                    )
                    
                    
                    (75,229
                    )Income
      from operations
                    
                    
                    2,874,888
                    
                    
                    
                    2,356,627
                    
                    
                    
                    3,467,843Change
      in fair value of currency forwards – Note 12
                    
                    
                    115,568
                    
                    
                    
                    -
                    
                    
                    
                    -Change
      in fair value of warrants –Note
13
                    
                    
                    (276,000
                    )
                    
                    
                    -
                    
                    
                    
                    -Other
      income – Note
      3
                    
                    
                    463,142
                    
                    
                    
                    148,653
                    
                    
                    
                    58,588Interest
      expense –Note
      4
                    
                    
                    (642,161
                    )
                    
                    
                    (696,132
                    )
                    
                    
                    (253,617
                    )Income
      before taxes
                    
                    
                    2,535,437
                    
                    
                    
                    1,809,148
                    
                    
                    
                    3,272,814Income
      taxes – Note5
                    
                    
                    (528,950
                    )
                    
                    
                    (145,458
                    )
                    
                    
                    (240,487
                    )Net
      income
                    
                    
                    2,006,487
                    
                    
                    
                    1,663,690
                    
                    
                    
                    3,032,327Net
      Income per common share-
      Basic
                    
                    
                    0.15
                    
                    
                    
                    0.17
                    
                    
                    
                    0.33-
      Diluted
                    
                    
                    0.15
                    
                    
                    
                    0.17
                    
                    
                    
                    0.33Weighted
      average common shares outstanding-
      Basic
                    
                    
                    13,205,599
                    
                    
                    
                    9,832,493
                    
                    
                    
                    9,248,973-
      Diluted
                    
                    
                    13,233,353
                    
                    
                    
                    9,832,493
                    
                    
                    
                    9,248,973




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, 2006
                  
                  
                  9,248,973
                  
                  
                  
                  925
                  
                  
                  
                  63,392
                  
                  
                  
                  195,053
                  
                  
                  
                  3,597,690
                  
                  
                  
                  3,857,060Net
      income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,032,327
                  
                  
                  
                  3,032,327Foreign
      currency translation Adjustments
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  275,330
                  
                  
                  
                  -
                  
                  
                  
                  275,330Total
      comprehensive income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,307,657Balance,
      December 31, 2006
                  
                  
                  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
                  
                  
                  
                  16,279,653





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 31,2008
                        
                        
                        2007
                        
                        
                        2006$
                        
                        
                        $Cash
      flows from operating activitiesNet
      income
                        
                        
                        2,006,487
                        
                        
                        
                        1,663,690
                        
                        
                        
                        3,032,327Adjustments
      to reconcile net income to net cash flows provided by (used in)
      operating activities :Bad
      debts written off
                        
                        
                        4,460
                        
                        
                        
                        3,649
                        
                        
                        
                        22,878Depreciation
                        
                        
                        838,725
                        
                        
                        
                        560,073
                        
                        
                        
                        343,841Amortization
      of intangible asset
                        
                        
                        50,000
                        
                        
                        
                        50,000
                        
                        
                        
                        -Amortization
      of leasehold land
                        
                        
                        61,939Loss
      on disposal of plant and equipment
                        
                        
                        44,198
                        
                        
                        
                        20,046
                        
                        
                        
                        32,844Change
      in fair value of currency forwards
                        
                        
                        (115,568
                        )
                        
                        
                        -
                        
                        
                        
                        -Change
      in fair value of warrants
                        
                        
                        276,000
                        
                        
                        
                        -
                        
                        
                        
                        -Stock
      based compensation
                        
                        
                        303,333
                        
                        
                        
                        -
                        
                        
                        
                        -Changes
      in operating assets and liabilities:(Increase)
      decrease in -Accounts
      receivable
                        
                        
                        8,095,692
                        
                        
                        
                        (7,018,013
                        )
                        
                        
                        (3,155,007
                        )Notes
      receivable
                        
                        
                        (40,702
                        )
                        
                        
                        (309,829
                        )
                        
                        
                        620,101Prepaid
      expenses and other receivables
                        
                        
                        2,093,103
                        
                        
                        
                        305,785
                        
                        
                        
                        (1,826,594
                        )Inventories
                        
                        
                        4,046,251
                        
                        
                        
                        2,183,344
                        
                        
                        
                        (9,556,898
                        )Increase
      (decrease) in -Accounts
      payable
                        
                        
                        (12,422,508
                        )
                        
                        
                        1,082,433
                        
                        
                        
                        8,387,286Other
      payables and accrued liabilities
                        
                        
                        721,654
                        
                        
                        
                        78,974
                        
                        
                        
                        (32,771
                        )Income
      taxes payable
                        
                        
                        321,781
                        
                        
                        
                        (74,825
                        )
                        
                        
                        (27
                        )Net
      cash provided by (used in) operating activities
                        
                        
                        6,284,845
                        
                        
                        
                        (1,454,673
                        )
                        
                        
                        (2,132,020
                        )Cash
      flows from investing activitiesAcquisition
      of plant and equipment
                        
                        
                        (4,614,385
                        )
                        
                        
                        (1,030,725
                        )
                        
                        
                        (1,733,167
                        )Acquisition
      of land
                        
                        
                        -
                        
                        
                        
                        (2,832,348
                        )
                        
                        
                        -Proceeds
      from disposal of plant and equipment
                        
                        
                        -
                        
                        
                        
                        32,976
                        
                        
                        
                        13,747Deposit
      paid for acquisition of machinery
                        
                        
                        -
                        
                        
                        
                        (1,115,123
                        )
                        
                        
                        -Net
      cash used in investing activities
                        
                        
                        (4,614,385
                        )
                        
                        
                        (4,945,220
                        )
                        
                        
                        (1,719,420
                        )Cash
      flows from financing activitiesProceeds
      from issuance of common stock
                        
                        
                        1,486,400
                        
                        
                        
                        2,738,000
                        
                        
                        
                        -Proceeds
      from new short-term bank loans
                        
                        
                        2,932,586
                        
                        
                        
                        2,374,241
                        
                        
                        
                        879,630Repayment
      of short-term bank loans
                        
                        
                        (2,573,781
                        )
                        
                        
                        (923,316
                        )
                        
                        
                        (973,876
                        )Proceeds
      from/(repayment of) other loans
                        
                        
                        (5,316,389
                        )
                        
                        
                        4,173,106
                        
                        
                        
                        -Net
      advancement of other bank borrowings
                        
                        
                        3,414,456
                        
                        
                        
                        3,155,109
                        
                        
                        
                        4,955,996Decrease
      / (Increase) in restricted cash
                        
                        
                        946,508
                        
                        
                        
                        (4,234,327
                        )
                        
                        
                        (991,050
                        )Repayment
      from / (Advance to) related parties
                        
                        
                        -
                        
                        
                        
                        726,169
                        
                        
                        
                        (38,495
                        )Dividend
      paid
                        
                        
                        -
                        
                        
                        
                        (665,182
                        )
                        
                        
                        -Net
      cash provided by financing activities
                        
                        
                        889,780
                        
                        
                        
                        7,343,800
                        
                        
                        
                        3,832,205Net
      increase (decrease) in cash and cash equivalents
                        
                        
                        2,560,240
                        
                        
                        
                        943,907
                        
                        
                        
                        (19,235
                        )Effect
      of foreign currency translation on cash and cash
    equivalents
                        
                        
                        126,278
                        
                        
                        
                        57,285
                        
                        
                        
                        40,279Cash
      and cash equivalents - beginning of year
                        
                        
                        1,489,262
                        
                        
                        
                        488,070
                        
                        
                        
                        467,026Cash
      and cash equivalents - end of year
                        
                        
                        4,175,780
                        
                        
                        
                        1,489,262
                        
                        
                        
                        488,070


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 SKRP
11, Inc.) was incorporated in the State of Delaware on January 3, 2006 to locate
a suitable acquisition candidate to acquire.





On
October 20, 2007, Highpower entered into a share exchange agreement (the
“Exchange Agreement”) with Hong Kong Highpower Technology Company Limited
(“HKHTC”), which was incorporated in Hong Kong on July 4, 2003 under the Hong
Kong Companies Ordinance.  HKHTC was organized principally to engage
in the manufacturing and trading of nickel metal hydride rechargeable
batteries.





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





Pursuant
to the Exchange Agreement, Highpower agreed to issue shares of its common stock
in exchange for all of the issued and outstanding securities of
HKHTC.  On November 2, 2007, upon the closing of the Exchange
Agreement, HKHTC had a total of 500,000 shares of common stock issued and
outstanding, and Highpower issued an aggregate of 9,248,973 shares of its common
stock to the shareholders of HKHTC in exchange for all of the issued and
outstanding securities of HKHTC on the basis of 18.497946 shares of Highpower
for each share of HKHTC. The 9,248,973 shares of common stock issued to the
shareholders of HKHTC in conjunction with this transaction have been presented
as outstanding for all periods presented.  In addition, immediately
prior to the closing of the Exchange Agreement, Highpower and certain of its
stockholders agreed to cancel an aggregate of 1,597,872 shares of outstanding
common stock, as a result of which there were 1,777,128 shares of common stock
outstanding immediately prior to the share exchange transaction.





On
November 2, 2007, concurrently with the close of the Exchange Agreement, the
Company received gross proceeds of $3,120,000 in a private placement transaction
(the “Private Placement”).  Pursuant to subscription agreements
entered into with the investors, the Company sold an aggregate of 1,772,745
shares of common stock at $1.76 per share.  The investors in the
Private Placement also entered into lock-up agreements pursuant to which they
agreed not to sell their shares until 90 days after the Company’s common stock
is listed or quoted on either the New York Stock Exchange, NYSE Amex (formerly
known as the American Stock Exchange), NASDAQ Global Market, NASDAQ Capital
Market or the OTC Bulletin Board, when one-tenth of their shares are released
from the lock-up agreement, after which their shares will automatically be
released from the lock-up agreement on a monthly basis pro rata over a
nine-month period.  After commissions and expenses, the Company
received net proceeds of approximately $2,738,000 from the Private
Placement.


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)





Immediately
after the closing of the Exchange Agreement and Private Placement, the Company
had 12,798,846 shares of common stock issued and outstanding.  Upon
the closing of the Exchange Agreement, the shareholders of HKHTC and their
designees owned approximately 72.3% of the Company’s issued and outstanding
common stock, the pre-existing shareholders of the Company owned approximately
13.9% of the Company’s issued and outstanding common stock, and the investors in
the Private Placemen owned 13.8% of the Company’s issued and outstanding common
stock. Therefore, although HKHTC became the Company’s wholly-owned subsidiary,
the transaction was accounted for as a recapitalization in the form of a reverse
merger of HKHTC, whereby HKHTC was deemed to be the accounting acquirer and was
deemed to have retroactively adopted the capital structure of SRKP 11. Since the
transaction was accounted for as a reverse merger, the accompanying consolidated
financial statements reflect the historical consolidated financial statements of
HKHTC for all periods presented, and do not include the historical financial
statements of SRKP 11, Inc.. All costs associated with the reverse merger
transaction, consisting primarily of consideration paid to the previous control
parties of SRKP 11 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.





In
January 2008, HKHTC invested $749,971 to HZ Highpower. HZ Highpower is a
wholly-owned subsidiary of HKHTC. HZ Highpower has not commenced business as of
December 31, 2008.





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 the wholly-own subsidiary of HKHTC. In July 9, 2008, HKHTC
invested an additional $750,000 in SZ Spring Power. SZ Spring Power commenced
business on June 2008 and specializes in researching and manufacturing of
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.





On June
19, 2008, the company’s common stock commenced 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-9


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.





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.





Consolidation





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





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)





Use of
estimates





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


Comparative
amounts





Certain
comparative amounts have been reclassified to conform to the current period’s
presentation.  These reclassifications had no effect on reported total
assets, liabilities, stockholders’ equity, or net income.





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.


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





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.





In 2008,
the Company had one major customer, representing 23% of sales; accounts
receivable from this customer at December 31, 2008 was $1,430,000.  In
2007, the Company had two major customers, representing 24% and 17% of sales
respectively; accounts receivable from these customers at December 31, 2007 were
$8,300,000.





Cash and cash
equivalents





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





Restricted
cash





Certain
cash balances are held as security for short-term bank borrowings and are
classified as restricted cash in the Company’s balance sheets.





Accounts receivable





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





During
the years ended December 31, 2008, 2007 and 2006, the Company experienced bad
debts of $4,460, $3,649 and $22,878, respectively.


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)





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, 2008, 2007 and 2006, the Company did not make any allowance for
slow-moving or defective inventories. The Company’s production process results
in a minor amount of waste materials.  The Company does not record a
value for the waste in its cost accounting. The Company records proceeds on an
as realized basis, when the waste is sold. The Company has offset the proceeds
from the sales of waste materials as a reduction of production costs. Proceeds
from the sales of waste materials were approximately $412,311 in 2008, $160,000
in 2007 and $99,000 in 2006. Generally, waste materials on hand at the end of a
year are nominal.





Plantand
equipment





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





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





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





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


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)





Intangible Assets and Long-Lived
Assets





SFAS
No. 142, goodwill and Other Intangible Assets (“SFAS 142”), requires
purchased intangible assets other than goodwill to be amortized over their
useful lives unless these lives are determined to be indefinite. 
Accordingly, the consumer battery license is being amortized over its useful
life of 20 years.  The Company does not have any goodwill.





The
Company accounts for the impairment of long-lived assets, such as plant and
equipment, leasehold land and intangible assets, under the provisions of SFAS
No. 144, “Accounting for the Impairment of Long-Lived Assets (“SFAS
144”)”.  SFAS 144 establishes the accounting for impairment of long-lived
tangible and intangible assets other than goodwill and for the disposal of a
business.  Pursuant to SFAS 144, the Company periodically evaluates, at
least annually, whether facts or circumstances indicate that the carrying value
of its depreciable assets to be held and used may not be recoverable. 
If such circumstances are determined to exist, an estimate of undiscounted
future cash flows produced by the long-lived asset, or the appropriate grouping
of assets, is compared to the carrying value to determine whether impairment
exists.  In the event that the carrying amount of long-lived assets
exceeds the undiscounted future cash flows, then the carrying amount of such
assets is adjusted to their fair value.  The Company reports an impairment
cost as a charge to operations at the time it is recognized.





There was
no impairment of long-lived assets in 2006, 2007 or 2008.





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 $48,210, $68,169 and $96,045 for the years
ended December 31, 2008, 2007 and 2006, respectively, and are included in
selling and distribution costs.


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)





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.





On
January 1, 2007, the Group adopted Financial Accounting Standards Board
(“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of Statement of Financial Accounting Standards
No. 109 (“FIN 48”). FIN 48 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
FIN 48 did not have a significant effect on the consolidated financial
statements.





Comprehensive
income





The
Company has adopted SFAS No. 130, “Reporting Comprehensive Income”, which
establishes standards for reporting and display of comprehensive income, its
components and accumulated balances.  Accumulated other comprehensive
income represents the accumulated balance of foreign currency translation
adjustments of the Company.


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)





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.





2008
                  
                  
                  2007
                  
                  
                  2006Year
      end RMB : US$ exchange rate
                  
                  
                  6.898
                  
                  
                  
                  7.332
                  
                  
                  
                  7.804Average
      yearly RMB : US$ exchange rate
                  
                  
                  6.933
                  
                  
                  
                  7.581
                  
                  
                  
                  7.958





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-16


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 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 as described at Note 1. As the Company did
not have any common stock equivalents during such years, basic and diluted
earnings per share were the same for all periods presented.


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)





Stock-Based
Compensation





Effective
January 1, 2006, the Company adopted Statements of Financial Accounting
Standards (“SFAS”) No. 123R, Share-Based Payment (“SFAS
No. 123R”). Under SFAS No. 123R, the Group measures the cost of employee
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award and recognizes the costs over the period the
employee is required to provide service in exchange for the award, which
generally is the vesting period.





Share-based
compensation expense was $303,333, Nil and Nil and for the years ended December
31, 2008, 2007 and 2006, respectively.





Recently issued accounting
pronouncements





In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” and
SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements – an amendment to ARB No. 51”. SFAS No. 141(R) and SFAS
No. 160 require most identifiable assets, liabilities, noncontrolling
interests and goodwill acquired in a business combination to be recorded at
“full fair value” and require noncontrolling interests (previously referred to
as minority interest) to be reported as a component of equity, which changes the
accounting for transactions with noncontrolling interest holders. Both
statements are effective for periods beginning on or after December 15,
2008, and earlier adoption is prohibited. SFAS No. 141(R) will be applied
to business combinations occurring after the effective date. SFAS No. 160
will be applied prospectively to all noncontrolling interests, including any
that arose before the effective date. SFAS No. 160 is effective for the Company
on January 1, 2009. The Company does not expect the initial adoption of SFAS No.
160 will have a material effect on the Company’s consolidated financial
statements.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities”, which requires enhanced disclosures about
an entity’s derivatives and hedging activities. This Statement is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008. Since SFAS No. 161 only provides for additional
disclosure requirements, management assessed that there will be no impact on the
results of operations and financial position.




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)





Recently issued accounting
pronouncements(Continued)





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS No. 162”). This statement identifies the sources
of accounting principles and the framework for selecting the principles used in
the preparation of financial statements of nongovernmental entities that are
presented in accordance with generally accepted accounting principles (“GAAP”).
With the issuance of this statement, the FASB concluded that the GAAP hierarchy
should be directed toward the entity and not its auditor, and reside in the
accounting literature established by the FASB as opposed to the American
Institute of Certified Public Accountants “AICPA”) Statement on Auditing
Standards No. 69, “The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles.” This statement is effective 60 days following
the Securities and Exchange Commission’s approval of the Public Company
Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting Principles.” The Company
does not expect the adoption of SFAS No. 162 will have a material impact on the
results of operations and financial position.








3.
            Other
      income





Years
      Ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006$
                    
                    
                    $
                    
                    
                    $Bank
      interest income
                    
                    
                    149,558
                    
                    
                    
                    75,546
                    
                    
                    
                    11,626Gain
      on forward contract
                    
                    
                    50,357
                    
                    
                    
                    -
                    
                    
                    
                    -Sundry
      income
                    
                    
                    263,227
                    
                    
                    
                    73,107
                    
                    
                    
                    46,962463,142
                    
                    
                    
                    148,653
                    
                    
                    
                    58,588





4.
            Interest
      expense





Years
      Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006$
                  
                  
                  $
                  
                  
                  $Interest
      on trade related bank loans
                  
                  
                  166,867
                  
                  
                  
                  547,573
                  
                  
                  
                  208,269Interest
      on short-term bank loans
                  
                  
                  475,294
                  
                  
                  
                  135,369
                  
                  
                  
                  45,348Interest
      on other loans
                  
                  
                  -
                  
                  
                  
                  13,190
                  
                  
                  
                  -642,161
                  
                  
                  
                  696,132
                  
                  
                  
                  253,617


F-19


HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)




5.
            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 2006, 2007 and 2008.





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 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 will unify 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 is 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 2008.





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 2006, 2007
and 2008.





The
      components of income before income taxes
are:





Years
      Ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006$
                    
                    
                    $
                    
                    
                    $United
      States
                    
                    
                    (579,333
                    )
                    
                    
                    (490,234
                    )
                    
                    
                    -Hong
      Kong
                    
                    
                    (6,367
                    )
                    
                    
                    689,749
                    
                    
                    
                    (76,601
                    )People’s
      Republic of China
                    
                    
                    3,121,137
                    
                    
                    
                    1,609,633
                    
                    
                    
                    3,349,4152,535,437
                    
                    
                    
                    1,809,148
                    
                    
                    
                    3,272,814


F-20





HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





5.
            Income
      taxes (continued)





The
components of the provision for income taxes are:





Years
      Ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006$
                    
                    
                    $
                    
                    
                    $PRC
      income taxCurrent
      year
                    
                    
                    603,072
                    
                    
                    
                    173,735
                    
                    
                    
                    241,313Deferred
      taxes
                    
                    
                    (74,122
                    )
                    
                    
                    (28,277
                    )
                    
                    
                    (826
                    )528,950
                    
                    
                    
                    145,458
                    
                    
                    
                    240,487





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, 2008, 2007 and 2006,
respectively.





Years
      Ended December 31,2008
                      
                      
                      2007
                      
                      
                      2006$
                      
                      
                      $
                      
                      
                      $Income
      before taxes
                      
                      
                      2,535,437
                      
                      
                      
                      1,809,148
                      
                      
                      
                      3,272,814Provision
      for income taxes at applicable income tax rate
                      
                      
                      633,859
                      
                      
                      
                      271,372
                      
                      
                      
                      490,922Change
      in valuation allowance
                      
                      
                      (44,218
                      )
                      
                      
                      -
                      
                      
                      
                      -Income
      not subject to tax
                      
                      
                      (17,335
                      )
                      
                      
                      (84,614
                      )
                      
                      
                      (2,522
                      )Non-deductible
      expenses for income tax purposes
                      
                      
                      400,153
                      
                      
                      
                      229
                      
                      
                      
                      11,490Tax
      exemption of PRC subsidiary
                      
                      
                      (413,605
                      )
                      
                      
                      (133,885
                      )
                      
                      
                      (243,835
                      )Tax
      rate differential
                      
                      
                      (29,904
                      )
                      
                      
                      94,865
                      
                      
                      
                      825Others
                      
                      
                      -
                      
                      
                      
                      (2,509
                      )
                      
                      
                      (16,393
                      )528,950
                      
                      
                      
                      145,458
                      
                      
                      
                      240,487


F-21





HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





5.
            Income
      taxes (continued)





The major
components of deferred tax recognized in the consolidated balance sheets as of
December 31, 2008 and 2007 are as follows :-





At
      December 312008
                    
                    
                    2007$
                    
                    
                    $Temporary
      difference on:Recognition
      of expenses
                    
                    
                    (93,300
                    )
                    
                    
                    (24,527
                    )Accelerated
      tax depreciation on intangible assets
                    
                    
                    (11,256
                    )
                    
                    
                    (3,750
                    )Deferred
      tax assets, net
                    
                    
                    (104,556
                    )
                    
                    
                    (28,277
                    )Recognized
      in the balance sheet:Net
      deferred tax assets
                    
                    
                    (104,556
                    )
                    
                    
                    (28,277
                    )





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





Years
      Ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006$
                    
                    
                    $
                    
                    
                    $Statutory
      income tax rate
                    
                    
                    25
                    %
                    
                    
                    15
                    %
                    
                    
                    15
                    %Exempted
      income tax rate
                    
                    
                    10
                    %
                    
                    
                    7.5
                    %
                    
                    
                    7.5
                    %Income
      tax exemption
                    
                    
                    413,605
                    
                    
                    $
                    133,885
                    
                    
                    $
                    243,835Tax
      effect derived from exemption(per
      share)
                    
                    $
                    0.03
                    
                    
                    $
                    0.01
                    
                    
                    $
                    0.03


F-22


HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





5.
            Income
      taxes (continued)





Accounting
for Uncertainty in Income Taxes





The
Company adopted the provisions of FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN
48”), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in an enterprise’s financial statements in accordance
with SFAS No.109, “Accounting for Income Taxes”, 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. FIN
48 also provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure and
transition.





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





6.
            Prepaid
      expenses and other receivables





As
      December 31,2008
                  
                  
                  2007$
                  
                  
                  $Purchase
      deposits paid
                  
                  
                  88,459
                  
                  
                  
                  264,138Advance
      to staff
                  
                  
                  143,595
                  
                  
                  
                  74,502Other
      deposits and prepayments
                  
                  
                  495,325
                  
                  
                  
                  147,503Value-added
      tax prepayment
                  
                  
                  -
                  
                  
                  
                  1,103,063Other
      receivables
                  
                  
                  1,005,330
                  
                  
                  
                  912,5901,732,709
                  
                  
                  
                  2,501,796





7.
            Deferred
      charges – Stock-based compensation





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





Amortization
      expenses included in general and administrative costs for the year ended
      2008 and 2007 were $303,000 and $Nil
  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-23


HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





8.
            Inventories





At
      December 31,2008
                    
                    
                    2007$
                    
                    
                    $Raw
      materials
                    
                    
                    1,708,431
                    
                    
                    
                    4,507,255Work
      in progress
                    
                    
                    1,434,517
                    
                    
                    
                    1,694,997Finished
      goods
                    
                    
                    8,049,138
                    
                    
                    
                    8,101,083Consumables
                    
                    
                    -
                    
                    
                    
                    49,197Packing
      materials
                    
                    
                    16,611
                    
                    
                    
                    18,75711,208,697
                    
                    
                    
                    14,371,289




9.
            Plant
      and equipment





At
      December 31,2008
                  
                  
                  2007$
                  
                  
                  $CostFurniture,
      fixtures and office equipment
                  
                  
                  598,496
                  
                  
                  
                  643,196Leasehold
      improvement
                  
                  
                  712,120
                  
                  
                  
                  146,622Machinery
      and equipment
                  
                  
                  8,155,270
                  
                  
                  
                  3,940,847Motor
      vehicles
                  
                  
                  476,910
                  
                  
                  
                  344,0889,942,796
                  
                  
                  
                  5,074,753Accumulated
      depreciationFurniture,
      fixtures and office equipment
                  
                  
                  235,613
                  
                  
                  
                  211,342Leasehold
      improvement
                  
                  
                  220,746
                  
                  
                  
                  100,864Machinery
      and equipment
                  
                  
                  1,486,624
                  
                  
                  
                  834,206Motor
      vehicles
                  
                  
                  221,336
                  
                  
                  
                  138,9592,164,319
                  
                  
                  
                  1,285,371NetFurniture,
      fixtures and office equipment
                  
                  
                  362,883
                  
                  
                  
                  431,854Leasehold
      improvement
                  
                  
                  491,374
                  
                  
                  
                  45,758Machinery
      and equipment
                  
                  
                  6,668,646
                  
                  
                  
                  3,106,641Motor
      vehicles
                  
                  
                  255,574
                  
                  
                  
                  205,1297,778,477
                  
                  
                  
                  3,789,382


F-24


HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





9.
            Plant
      and equipment (continued)





The
      components of depreciation charged
are:





Years
      ended December 31,2008
                    
                    
                    2007$
                    
                    
                    $Included
      in cost of sales and selling and distribution costs
                    
                    
                    644,229
                    
                    
                    
                    439,556Included
      in operating expenses
                    
                    
                    194,496
                    
                    
                    
                    120,517838,725
                    
                    
                    
                    560,073





10.
            Leasehold
      land





At
      December 31,2008
                      
                      
                      2007$
                      
                      
                      $Cost
                      
                      
                      3,112,765
                      
                      
                      
                      2,869,925Accumulated
      amortization
                      
                      
                      (62,255
                      )
                      
                      
                      -Net
                      
                      
                      3,050,510
                      
                      
                      
                      2,869,925





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





11.
            Intangible
      asset - Consumer battery license





At
      December 31,2008
                      
                      
                      2007$
                      
                      
                      $CostConsumer
      battery license
                      
                      
                      1,000,000
                      
                      
                      
                      1,000,000Accumulated
      amortization
                      
                      
                      (100,000
                      )
                      
                      
                      (50,000
                      )Net
                      
                      
                      900,000
                      
                      
                      
                      950,000





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


F-25


HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





11.
            Intangible
      asset - Consumer battery license (continued)





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





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




The
Consumer Battery License Agreement also requires the Company to pay an
additional up-front royalty payment of $1,000,000 by four annual installments
and an annual royalty fee based on the gross sales of consumer batteries over
the term of the Consumer Battery License Agreement. During 2008, the Company
recorded a total of


approximately
$273,005 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 2008
and 2007, accrued royalty fees payable were $1,540,900 and $1,327,026,
respectively (see Note 13).




The
Company is amortizing the $1,000,000 cost of the Consumer Battery License
Agreement over a period of 20 years on the straight line basis.  The
accounting for the Consumer Battery License Agreement is based on the Company’s
estimate of the useful life of the underlying technology, which is based on the
Company’s assessment of existing battery technology, current trends in the
battery business, potential developments and improvements, and the Company’s
current business plan.  Amortization expense related to the Consumer
Battery License Agreement included in selling and distributing costs during the
years ended December 31, 2008, 2007 and 2006 were $50,000, $50,000 and $Nil,
respectively.





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





Years
      ending December 31
                    
                    $2009
                    
                    
                    50,0002010
                    
                    
                    50,0002011
                    
                    
                    50,0002012
                    
                    
                    50,0002013
                    
                    
                    50,0002014
      and thereafter
                    
                    
                    650,000




F-26


HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





12.
            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 Other income,
net.





As
      December 31,2008
                  
                  
                  2007$
                  
                  
                  $Currency
      forwards (notional amount $11 million),
                    consisting
      of a put and a call
                  
                  
                  116,157
                  
                  
                  
                  -





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, 2008, the Company had
a series of currency forwards totaling a notional amount US$11,000,000 expiring
from January 2009 to July 2009.





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





Years
      Ended December 31,2008
                          
                          
                          2007
                          
                          
                          2006$
                          
                          
                          $
                          
                          
                          $Foreign
      exchange contracts, netGains
      recognized in Other income, net
                          
                          
                          50,357
                          
                          
                          
                          -
                          
                          
                          
                          -





Hedging
Activities





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-27


HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





12.
            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.





13.
            Change
      in fair value of share warrants





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





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


F-28


HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





14.
            Other
      payables and accrued liabilities





At
      December 31,2008
                  
                  
                  2007$
                  
                  
                  $Accrued
      expenses
                  
                  
                  1,072,331
                  
                  
                  
                  765,760Accrued
      staff welfare
                  
                  
                  -
                  
                  
                  
                  90,316Royalty
      fee
                  
                  
                  1,540,900
                  
                  
                  
                  1,327,026Sales
      deposits received
                  
                  
                  388,261
                  
                  
                  
                  136,295Value-added
      tax payables
                  
                  
                  105,833
                  
                  
                  
                  -Other
      payables
                  
                  
                  31,950
                  
                  
                  
                  1,5593,139,275
                  
                  
                  
                  2,320,956





15.
            Bank
      borrowings





At
      December 31,2008
                    
                    
                    2007$
                    
                    
                    $Secured:Repayable
      within one yearShort
      term bank loans
                    
                    
                    2,969,939
                    
                    
                    
                    2,454,838Other
      trade related bank loans
                    
                    
                    11,859,289
                    
                    
                    
                    12,955,70414,829,228
                    
                    
                    
                    15,410,542





As of
December 31, 2008 the Company’s banking facilities are comprised of the
following:





AmountFacilities
      granted
                    
                    Granted
                    
                    
                    Utilized
                    
                    
                    Unused$
                    
                    
                    $
                    
                    
                    $Short
      term bank loans
                    
                    
                    7,175,587
                    
                    
                    
                    2,969,939
                    
                    
                    
                    4,205,648Other
      trade related loan facilities including:-
      Accounts payable financing
                    
                    
                    16,005,068
                    
                    
                    
                    11,859,289
                    
                    
                    
                    4,145,77923,180,655
                    
                    
                    
                    14,829,228
                    
                    
                    
                    8,351,427


F-29


HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





15.
            Bank
      borrowings (continued)





As of
December 31, 2008 the above bank borrowings were secured by the
following:





(a)
            charge
      over bank deposits of $4,845,478 which is included in restricted cash on
      the Balance sheet;





(c)
            personal
      guarantee executed by the directors of the
  Company;





(d)
            the
      legal charge over leasehold land with carrying amount $3,050,510;
      and





(e)
            other
      financial covenant:-





The bank
borrowings require one of the Company’s subsidiaries to maintain a minimum net
worth of $11,596,909 The Company was in compliance with this requirement at
December 31, 2008.





The
interest rates of trade related bank loans were at bank’s prime lending rate per
annum with various maturity dates. The rates at December 31, 2008
ranged from 6.5% to 8%.





The
interest rates of short term bank loans were at 4.86% per annum at December 31,
2008.








16.
            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 $432,402, $148,193 and $91,353 for the years ended
December 31, 2008, 2007 and 2006, respectively.


F-30


HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





17.
            Commitments
      and contingencies





Operating leases
commitments





The
Company leases factory and office premises under various non-cancelable
operating lease agreements that expire at various dates through years 2009 to
2010, 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, 2008 are as follows:-





Years
      ending December 31
                  
                  $2009
                  
                  
                  936,8692010
                  
                  
                  449,6751,386,544





Rental
expense for the years ended 2008, 2007 and 2006 were $1,019,505, $429,450 and
$367,582, respectively.





Contingencies





From time
to time, the Company sells bills receivable (letters of credits) to banks. 
At the time of the sale, all rights and privileges of holding the receivables
are transferred to the banks.  The Company removes the asset from its books
and records a corresponding expense for the amount of the discount.  The
Company remains contingently liable on the amount outstanding in the event the
correspondent bank, the bill issuer defaults on the letters of credit which
is remote.





At
      December 31,2008
                  
                  
                  2007$
                  
                  
                  $Bills
      discounted
                  
                  
                  -
                  
                  
                  
                  106,378








18.
            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, 2008, 2007 and 2006:-





Year
      Ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006$
                    
                    
                    $
                    
                    
                    $Management
      fee paid to Canhold International Limited
                    
                    
                    -
                    
                    
                    
                    21,134
                    
                    
                    
                    15,302


F-31


HONG
KONG HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





19.
            Segment
      information





The
Company uses the “management approach” in determining reportable operating
segments.  The management approach considers the internal organization and
reporting used by the Company’s chief operating decision maker for making
operating decisions and assessing performance as the source for determining the
Company’s reportable segments. Management, including the chief operating
decision maker, reviews operating results solely by monthly revenue (but not by
sub-product type or geographic area) and operating results of the Company and,
as such, the Company has determined that the Company has one operating segment
as defined by SFAS No.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 31,2008
                    
                    
                    2007
                    
                    
                    2006Net
      revenue
                    
                    $
                    
                    
                    $
                    
                    
                    $Hong
      Kong and China
                    
                    
                    30,893,163
                    
                    
                    
                    28,919,384
                    
                    
                    
                    29,009,277Asia
                    
                    
                    4,810,282
                    
                    
                    
                    5,965,339
                    
                    
                    
                    3,294,838Europe
                    
                    
                    27,979,918
                    
                    
                    
                    25,318,608
                    
                    
                    
                    7,288,751North
      America
                    
                    
                    10,885,903
                    
                    
                    
                    12,851,807
                    
                    
                    
                    4,511,914South
      America
                    
                    
                    434,976
                    
                    
                    
                    206,582
                    
                    
                    
                    270,90275,004,242
                    
                    
                    
                    73,261,720
                    
                    
                    
                    44,375,682





At
      December 31,2008
                    
                    
                    2007
                    
                    
                    2006Accounts
      receivable
                    
                    $
                    
                    
                    $
                    
                    
                    $Hong
      Kong and China
                    
                    
                    5,012,472
                    
                    
                    
                    4,258,010
                    
                    
                    
                    5,545,244Asia
                    
                    
                    169,376
                    
                    
                    
                    1,023,284
                    
                    
                    
                    262,743Europe
                    
                    
                    2,695,166
                    
                    
                    
                    6,761,615
                    
                    
                    
                    1,857,294North
      America
                    
                    
                    875,022
                    
                    
                    
                    3,863,266
                    
                    
                    
                    461,889South
      America
                    
                    
                    13,558
                    
                    
                    
                    -
                    
                    
                    
                    -8,765,594
                    
                    
                    
                    15,906,175
                    
                    
                    
                    8,127,170


F-32


HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





20.
            Dividends





The
directors have declared and the Company has paid the following dividends in
respect of the years ended December 31, 2008, 2007 and 2006: -





At
      December 31,2008
                  
                  
                  2007
                  
                  
                  2006$
                  
                  
                  $
                  
                  
                  $DividendsInterim
      dividend declared and paid on September 30, 2007 of approximately $ 0.07
      per share:
                  
                  
                  -
                  
                  
                  
                  665,182
                  
                  
                  
                  -




F-33


HONG KONG
HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Stated
in US Dollars)





21.
            Quarterly
      Results of Operations (unaudited)





The
following table sets forth unaudited quarterly results of operations for the
years ended December 31, 2008 and 2007. 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
      31,2008
                  
                  
                  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 shares
                    outstandingBasic
                  
                  
                  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





Three
      Months Ended
                  
                  
                  Year
      EndedMarch
      31,
                  
                  
                  June
      30,
                  
                  
                  September
      30,
                  
                  
                  December
      31,
                  
                  
                  December
      31,2007
                  
                  
                  2007
                  
                  
                  2007
                  
                  
                  2007
                  
                  
                  2007$
                  
                  
                  $
                  
                  
                  $
                  
                  
                  $
                  
                  
                  $Net
      revenue
                  
                  
                  11,539,505
                  
                  
                  
                  20,466,844
                  
                  
                  
                  19,879,829
                  
                  
                  
                  21,375,542
                  
                  
                  
                  73,261,720Gross
      profit
                  
                  
                  1,056,415
                  
                  
                  
                  2,847,274
                  
                  
                  
                  2,610,045
                  
                  
                  
                  2,956,738
                  
                  
                  
                  9,470,472Net
      income
                  
                  
                  (502,663
                  )
                  
                  
                  1,174,090
                  
                  
                  
                  838,119
                  
                  
                  
                  154,144
                  
                  
                  
                  1,663,690Net
      income per common share:Basic
      and diluted
                  
                  
                  (0.06
                  )
                  
                  
                  0.13
                  
                  
                  
                  0.09
                  
                  
                  
                  0.01
                  
                  
                  
                  0.17Weighted
      average common shares
                    outstandingBasic
      and diluted
                  
                  
                  9,248,973
                  
                  
                  
                  9,248,973
                  
                  
                  
                  9,248,973
                  
                  
                  
                  11,564,076
                  
                  
                  
                  9,832,493




F-34