UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q/A
 
Amendment No. 1
 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended September 30, 2007
 
OR
     
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from            to            
 
Commission File No. 000-52103
 
HONG KONG HIGHPOWER TECHNOLOGY, INC.
(Exact name of Registrant as specified in its charter)
 
Delaware
 
20-4062622
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

Building A1, Luoshan Industrial Zone, Shanxia, Pinghu, Longgang,
Shenzhen, Guangdong, 518111, People’s Republic of China
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)

(86) 755-89686238
(COMPANY’S TELEPHONE NUMBER, INCLUDING AREA CODE)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x    No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” as defined in Rule 12b-2 of the Exchange Act.

Large accelerated filer  o
Accelerated filer  ¨
Non-accelerated filer  x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No x
 
The number of shares outstanding of the registrant’s Common Stock, par value $0.001 per share, was 20,478,090 as of November 19, 2007.
 



 
EXPLANATORY NOTE

This Amendment No. 1 (this “Amendment”) on Form 10-Q/A is filed by Hong Kong Highpower Technology, Inc. (the “Company,” “we” or “us”) to amend the quarterly report on Form 10-Q for the quarter ended September 30, 2007, originally filed with the Securities and Exchange Commission (“SEC”) on November 19, 2007 (the “Original Filing”). Subsequent to the filing of the Original Filing as report on a Form 8-K filed with the SEC on January 31, 2008, management determined that our financial statements for the periods ended September 30, 2007 and 2006 should no longer be relied upon due to various accounting errors in such financial statements. This report contains the restated financial statements for the periods ended September 30, 2007 and 2006, as originally included in the Company’s Amendment No. 1 to Form S-1/A filed with the SEC on January 28, 2008, and reflects changes made in response to comments we received from the Staff of the SEC i

Unless indicated otherwise, the disclosures in this Amendment continue to describe conditions as of the date of the Original Filing, and the disclosures contained herein have not been updated to reflect events, results or developments that have occurred after the Original Filing, or to modify or update those disclosures affected by subsequent events. Among other things, forward-looking statements made in the Original Filing have not been revised to reflect events, results or developments that have occurred or facts that have become known to us after the date of the Original Filing, and such forward-looking statements should be read in their historical context. This Amendment should be read in conjunction with the Company’s filings made with the SEC subsequent to the Original Filing, including any amendments to those filings.
 
          This Amendment No. 1 on Form 10-Q/A amends the following Items:

 
·
Item 1 (Financial Statements) to reflect changes to the Company’s Condensed Consolidated Financial Statements and related notes.
 
 
·
Item 2 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) to reflect changes to Critical Accounting Policies and Estimates, Results of Operations, Liquidity and Capital Resources and New Accounting Pronouncements.
 
 
·
Item 3. (Quantitative and Qualitative Discloses About Market Risk) to reflect changes to Foreign Currency and Exchange Risk.

 
·
Part II, Item 1A to reflect changes to Risk Factors.

No other significant changes have been made to the Original Filing except:

 
·
the items previously listed;
 
 
·
the pro forma financial statements have been removed; and
 
 
·
the renumbering of certain pages and notes of this report.
 
This amendment is not intended to update other information presented in the Original Filing. As a result of this amendment, the certifications pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002, filed as exhibits to the Original Filing, have been re-executed and re-filed as of the date of this Form 10-Q/A.

Please note that the Company was 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 (the “Effective Date”), the Company closed a share exchange transaction (the “Share Exchange”) pursuant to which it (i) became the 100% parent of Hong Kong Highpower Technology Company Limited, a Hong Kong corporation (“HKHT”), which has one wholly-owned subsidiary, Shenzhen Highpower Technology Company Limited, (ii) assumed the operations of HKHT and its subsidiary, and (iii) changed its name from SRKP 11, Inc. to Hong Kong Highpower Technology, Inc. The Company originally reported the closing of the Share Exchange in the Current Report on Form 8-K filed with the SEC on November 5, 2007, with an amendment to the Form 8-K filed with the SEC on April [__], 2008. This Amendment contains information regarding the Company and HKHT, as indicated herein.
 
2

 
Since the Share Exchange closed subsequent to the reporting period covered by this Amendment, this report includes both discussion of our business as it existed as of September 30, 2007 and of the Company’s business post-Share Exchange, as the 100% parent of HKHT, to ensure that the disclosure included herein is complete and not misleading. The sections entitled “SRKP 11, INC.” describe the Company prior to November 2, 2007 and the sections entitled “HONG KONG HIGHPOWER” describe the Company on and after November 2, 2007.

3


HONG KONG HIGHPOWER TECHNOLOGY, INC.

FORM 10-Q/A
 
For the Quarterly Period Ended September 30, 2007
 
INDEX

   
Page
Part I
Financial Information
 
       
 
Item 1.
 Financial Statements
   
       
     
HONG KONG HIGHPOWER TECHNOLOGY, INC. (FORMERLY SRKP 11, INC.)
 
         
   
 a)
Balance Sheet as of September 30, 2007 (Unaudited)
5
         
   
 b)
Statements of Operations for the Three and Nine Months Ended September 30, 2007 and 2006 (Unaudited)
6
         
   
 c)
Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006 (Unaudited)
7
         
   
 d)
Notes to Financial Statements (Unaudited)
8
         
     
HONG KONG HIGHPOWER TECHNOLOGY COMPANY LIMITED
 
         
   
a)
Condensed Consolidated Balance Sheets as of September 30, 2007 (Unaudited) and December 31, 2006 (restated)
11
         
   
b)
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2007 and 2006 (Unaudited) (restated)
13
         
   
c)
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006 (Unaudited) (restated)
14
         
   
d)
Notes to Condensed Consolidated Financial Statements (Unaudited) (restated)
16
         
 
Item 2.
 Management’s Discussion and Analysis of Financial Condition and Results of Operations
42
       
 
Item 3.
 Quantitative and Qualitative Disclosures About Market Risk
48
       
 
Item 4.
 Controls and Procedures
48
       
Part II
Other Information
 
       
 
Item 1.
 Legal Proceedings
49
       
 
Item 1A.
 Risk Factors
49
       
 
Item 2.
 Unregistered Sale of Equity Securities and Use of Proceeds
64
       
 
Item 3.
 Default Upon Senior Securities
64
       
 
Item 4.
 Submission of Matters to a Vote of Security Holders
64
       
 
Item 5.
 Other Information
64
       
 
Item 6.
 Exhibits
64
       
Signatures
65

4


Part I. Financial Information
 
Item 1. Financial Statements
 
HONG KONG HIGHPOWER TECHNOLOGY, INC.
(Formerly SRKP 11, Inc.)

BALANCE SHEET
(Stated in US Dollars)
(Unaudited)

   
September 30, 2007
 
   
(Unaudited)
 
ASSETS
 
         
CURRENT ASSETS:
       
Cash
 
$
6,515
 
         
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
         
CURRENT LIABILITIES:
       
Due to Stockholders
 
$
53,000
 
         
COMMITMENTS AND CONTINGENCIES
       
         
STOCKHOLDERS' EQUITY (DEFICIT):
       
Preferred stock, $.0001 par value, 10,000,000 shares authorized, none issued
   
 
Common stock, $.0001 par value, 100,000,000 shares authorized, 5,400,000 issued and outstanding
   
540
 
Additional paid-in capital
   
1,627
 
(Deficit) accumulated during development stage
   
(48,652
)
         
Total Stockholders' Equity (Deficit)
   
(46,485
)
         
   
$
6,515
 

See accompanying notes to financial statements.

5


HONG KONG HIGHPOWER TECHNOLOGY, INC.
(Formerly SRKP 11, Inc.)

STATEMENTS OF OPERATIONS
(Stated in US Dollars)
(Unaudited)
 
               
Period From
 
Cumulative from
 
   
Three Months
 
Three Months
 
Nine Months
 
January 3, 2006
 
January 3, 2006
 
   
Ended
 
Ended
 
Ended
 
(Inception) to
 
(Inception) to
 
   
September 30, 2007
 
September 30, 2006
 
September 30, 2007
 
September 30, 2006
 
September 30, 2007
 
                                 
REVENUE
 
$
 
$
 
$
 
$
 
$
 
                                 
EXPENSES
   
9,108
   
13,801
   
15,856
   
30,420
   
48,652
 
                                 
NET (LOSS)
 
$
(9,108
)
$
(13,801
)
$
(15,856
)
$
(30,420
)
$
(48,652
)
                           
NET (LOSS) PER COMMON SHARE-BASIC
 
$
*
 
$
*
 
$
*
 
$
*
 
                           
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
   
5,400,000
   
5,400,000
   
5,400,000
   
5,400,000
 
  
* Less than $.01
 
See accompanying notes to financial statements.

6


HONG KONG HIGHPOWER TECHNOLOGY, INC.
(Formerly SRKP 11, Inc.)

STATEMENTS OF CASH FLOWS
(Stated in US Dollars)
(Unaudited)
 
       
Period From
 
Cumulative from
 
 
 
Nine Months
 
January 3, 2006
 
January 3, 2006
 
 
 
Ended
 
to
 
(Inception) to
 
   
September 30, 2007
 
September 30, 2006
 
September 30, 2007
 
                     
CASH FLOWS FROM (TO) OPERATING ACTIVITIES:
                   
Net (loss)
 
$
(15,856
)
$
(30,420
)
$
(48,652
)
                     
Net Cash (Used In) Operating Activities
   
(15,856
)
 
(30,420
)
 
(48,652
)
                     
CASH FLOWS FROM (TO) FINANCING ACTIVITIES:
                   
                     
Common stock issued for cash
   
-
   
2,167
   
2,167
 
Advances from stockholders
   
20,000
   
32,250
   
53,000
 
                     
Net Cash Provided by Financing Activities
   
20,000
   
34,417
   
55,167
 
                     
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS:
   
4,144
   
3,997
   
6,515
 
                     
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
   
2,371
   
-
   
-
 
                     
CASH AND CASH EQUIVALENTS, END OF PERIOD
 
$
6,515
 
$
3,997
 
$
6,515
 
 
See accompanying notes to financial statements.

7


HONG KONG HIGHPOWER TECHNOLOGY, INC.
(Formerly SRKP 11, Inc.)

NOTES TO FINANCIAL STATEMENTS
(Stated in US Dollars)

1.
History

SRKP 11, Inc. (the “Company”), a development stage company, was organized under the laws of the State of Delaware on January 3, 2006. The Company is in the development stage as defined in Financial Accounting Standards Board Statement No. 7. The fiscal year end is December 31.

The Company filed a Form 10-SB registration statement with the Securities and Exchange Commission (SEC) pursuant to Section 12(g) of the Securities Exchange Act of 1934. The registration statement has been declared effective as of September 4, 2006.

Effective from November 2, 2007, the Company changed its name from SRKP 11, Inc. to Hong Kong Highpower Technology, Inc.

2.
Corporation Information and Reorganization

On November 2, 2007, the Company (formerly SRKP 11, Inc.) consummated a share exchange transaction (the “Share Exchange”) pursuant to a share exchange agreement (the “Exchange Agreement”) dated as of October 20, 2007 by an among the Company, Hong Kong Highpower Technology Company Limited, a Hong Kong corporation (“HKHT”) and all of the shareholders of HKHT (the “Shareholders”), whereby the Company, in exchange for 14,798,328 shares of its common stock, acquired 100% of the capital stock of HKHT.

In addition, the Company agreed to cancel 2,556,602 shares of its common stock, such that there were 2,843,398 shares of common stock outstanding immediately prior to the Share Exchange.

3.
Summary of Significant Accounting Policies

Income Taxes
 
The Company uses the liability method of accounting for income taxes pursuant to Statement of Financial Accounting Standards No. 109. Under this method, deferred income taxes are recorded to reflect the tax consequences in future years of temporary differences between the tax basis of the assets and liabilities and their financial amounts at year-end.

For federal income tax purposes, substantially all startup and organizational expenses must be deferred until the Company commences business. The Company may elect a limited deduction of up to $5,000 in the taxable year in which the trade or business begins. The $5,000 must be reduced by the amount of startup costs in excess of $50,000. The remainder of the expenses not deductible must be amortized over a 180-month period beginning with the month in which the active trade or business begins. These expenses will not be deducted for tax purposes and will represent a deferred tax asset. The Company will provide a valuation allowance in the full amount of the deferred tax asset since there is no assurance of future taxable income. Tax deductible losses can be carried forward for 20 years until utilized.

Deferred Offering Costs
 
Deferred offering costs, consisting of legal, accounting and filing fees relating to an offering will be capitalized. The deferred offering costs will be offset against offering proceeds in the event the offering is successful. In the event the offering is unsuccessful or is abandoned, the deferred offering costs will be expensed.

8

 
HONG KONG HIGHPOWER TECHNOLOGY, INC.
(Formerly SRKP 11, Inc.)

NOTES TO FINANCIAL STATEMENTS
(Stated in US Dollars)

3.
Summary of Significant Accounting Policies (Cont’d)

Cash and Cash Equivalents
 
Cash and cash equivalents consist primarily of cash in banks and highly liquid investments with original maturities of 90 days or less.

Concentrations of Credit Risk
 
The Company maintains all cash in deposit accounts, which at times may exceed federally insured limits. The Company has not experienced a loss in such accounts.

Earnings Per Common Share
 
A basic earnings per common share is computed based upon the weighted average number of common shares outstanding during the period. Diluted earnings per share consists of the weighted average number of common shares outstanding plus the dilutive effects of options and warrants calculated using the treasury stock method. In loss periods, dilutive common equivalent shares are excluded as the effect would be anti-dilutive.

Use of Estimates in the Preparation of Financial Statements
 
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates and assumptions.

Recently Issued Accounting Pronouncements
 
The Company has adopted all recently issued accounting pronouncements. The adoption of the accounting pronouncements is not anticipated to have a material effect on the operations of the Company.

4.
Stockholders' Equity

During January 2006, the Company sold for $2,167 cash 5,400,000 shares of its $.0001 par value common stock to various investors.

9


HONG KONG HIGHPOWER TECHNOLOGY, INC.
(Formerly SRKP 11, Inc.)

NOTES TO FINANCIAL STATEMENTS
(Stated in US Dollars)

5.
Related Party Transactions
 
The Company neither owns nor leases any real or personal property. Most office services are provided without charge by WestPark Capital, Inc. The Company’s President is also the CEO of WestPark Capital. Such costs are immaterial to the financial statements. The officers and directors of the Company are involved in other business activities and may, in the future, become involved in other business opportunities that become available. Such persons may face a conflict in selecting between the Company and their other business interests. The Company has not formulated a policy for the resolution of such conflicts.

6.
Due to Stockholders

Since inception certain stockholders have advanced the Company $53,000 to pay for operating expenses. These funds have been advanced interest free, are unsecured, and are due on demand.

7.
Events after Balance Sheet Date

Private placement

Pursuant to subscription agreements entered into with certain investors, the Company sold an aggregate of 2,836,364 shares of common stock at $1.10 per share for aggregate gross proceeds of $3.12 million on November 2, 2007.
 
10


HONG KONG HIGHPOWER TECHNOLOGY COMPANY LIMITED

CONDENSED CONSOLIDATED BALANCE SHEETS
(Stated in US Dollars)

   
As of
 
   
September 30,
 
December 31,
 
 
 
2007
 
2006
 
 
 
(Unaudited)
 
(Audited)
 
 
 
 $
 
$
 
   
(restated)
 
(restated)
 
               
ASSETS
             
Current Assets :
             
Cash and cash equivalents
   
1,576,035
   
488,070
 
Restricted cash
   
4,053,585
   
1,010,580
 
Accounts receivable
   
14,489,335
   
8,127,170
 
Notes receivable
   
-
   
76,764
 
Prepaid expenses and other receivables - Note 7
   
2,779,502
   
2,612,091
 
Advance to related parties – Note 13
   
-
   
634,161
 
Inventories, net – Note 8
   
14,939,809
   
15,623,791
 
Prepaid lease payments – Note 10
   
55,443
   
-
 
               
Total Current Assets
   
37,893,709
   
28,572,627
 
Deferred tax assets – Note 6
   
25,929
   
8,443
 
Plant and equipment, net – Note 9
   
3,639,172
   
3,154,660
 
Leasehold land – Note 10
   
2,716,724
   
-
 
Intangible asset – Note 11
   
962,500
   
-
 
               
TOTAL ASSETS
   
45,238,034
   
31,735,730
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
             
               
LIABILITIES
             
Current Liabilities :
             
Accounts payable
   
19,241,449
   
17,327,402
 
Other payables accrued liabilities - Note 12
   
2,391,144
   
1,170,275
 
Income tax payable
   
41,927
   
122,710
 
Bank borrowings – Note 14
   
15,162,172
   
5,950,626
 
               
Total Current Liabilities
   
36,836,692
   
24,571,013
 
               
TOTAL LIABILITIES
   
36,836,692
   
24,571,013
 
               
COMMITMENTS AND CONTINGENCIES – Note 16
             

(continued)

11


HONG KONG HIGHPOWER TECHNOLOGY COMPANY LIMITED

CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(Stated in US Dollars)

   
As of
 
   
September 30,
 
December 31,
 
 
 
2007
 
2006
 
 
 
(Unaudited)
 
(Audited)
 
 
 
$
 
$
 
   
(restated)
 
(restated)
 
               
STOCKHOLDERS’ EQUITY
             
Preferred stock
             
Par value: US$0.0001
             
Authorized: 10,000,000 shares
             
Issued and outstanding: none
   
-
   
-
 
               
Common stock
             
Par value : US$0.0001
             
Authorized: 100,000,000 shares
             
Issued and outstanding: 14,798,328 shares
   
1,480
   
1,480
 
Additional paid-in capital
   
62,837
   
62,837
 
Accumulated other comprehensive income
   
861,811
   
470,383
 
Retained earnings
   
7,475,214
   
6,630,017
 
               
TOTAL STOCKHOLDERS’ EQUITY
   
8,401,342
   
7,164,717
 
               
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
   
45,238,034
   
31,735,730
 

See notes to condensed consolidated financial statements
 
12


HONG KONG HIGHPOWER TECHNOLOGY COMPANY LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Stated in US Dollars)

   
Three months ended
September 30,
 
Nine months ended
September 30,
 
   
2007
 
2006
 
2007
 
2006
 
 
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
 
 
 $
 
$
 
 $
 
$
 
   
(restated)
 
(restated)
 
(restated)
 
(restated)
 
                           
Net sales
   
19,879,829
   
13,571,303
   
51,886,178
   
31,210,518
 
Cost of sales
   
(17,269,784
)
 
(11,956,237
)
 
(45,372,444
)
 
(26,146,521
)
                           
Gross profit
   
2,610,045
   
1,615,066
   
6,513,734
   
5,063,997
 
Depreciation – Notes 3 and 9
   
(31,532
)
 
(19,347
)
 
(85,576
)
 
(54,837
)
Selling and distributing costs
   
(631,203
)
 
(468,283
)
 
(1,579,491
)
 
(1,049,943
)
Administrative and other operating expenses
   
(920,690
)
 
(639,736
)
 
(2,923,043
)
 
(1,458,683
)
                           
Income from operations
   
1,026,620
   
487,700
   
1,925,624
   
2,500,534
 
Fees and costs related reorganization
   
-
   
-
   
-
   
(75,229
)
Other income - Note 4
   
58,861
   
13,555
   
132,724
   
43,820
 
Interest expenses – Note 5
   
(189,446
)
 
(77,336
)
 
(438,086
)
 
(168,843
)
                           
Income before taxes
   
896,035
   
423,919
   
1,620,262
   
2,300,282
 
Income taxes - Note 6
   
(57,916
)
 
(31,785
)
 
(110,716
)
 
(168,754
)
                           
Net income for the period
   
838,119
   
392,134
   
1,509,546
   
2,131,528
 
                           
Other comprehensive income
                         
- Foreign currency translation gain
   
127,959
   
58,119
   
391,428
   
122,552
 
                           
Comprehensive income
   
966,078
   
450,253
   
1,900,974
   
2,254,080
 
                           
Net income per share of common stock
                         
- Basic and diluted
   
0.06
   
0.03
   
0.10
   
0.14
 
                           
Weighted average number of common shares outstanding
                         
- Basic and diluted
   
14,798,328
   
14,798,328
   
14,798,328
   
14,798,328
 

See notes to condensed consolidated financial statements
 
13


HONG KONG HIGHPOWER TECHNOLOGY COMPANY LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated in US Dollars)

   
Three months ended
September 30,
 
Nine months ended
September 30,
 
   
2007
 
2006
 
2007
 
2006
 
 
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
 
 
$
 
 $
 
$
 
$
 
               
(restated)
 
Cash flows from operating activities
                         
Net income
   
838,119
   
392,134
   
1,509,546
   
2,131,546
 
Adjustments to reconcile net income to net cash flows provided by operating activities :
                         
Amortisation of intangible asset
   
12,500
   
-
   
37,500
   
-
 
Bad debts written off
   
-
   
-
   
21,192
   
22,425
 
Depreciation
   
160,881
   
81,647
   
423,103
   
217,266
 
Loss on disposal of plant and equipment
   
1,508
   
1,651
   
3,848
   
3,986
 
Income taxes
   
57,916
   
31,785
   
110,716
   
168,754
 
                           
Changes in operating assets and liabilities :
                         
Accounts receivable
   
(2,613,496
)
 
(2,526,165
)
 
(5,948,915
)
 
(3,698,299
)
Notes receivable
   
67,994
   
(160,515
)
 
76,389
   
517,713
 
Prepaid expenses and other receivables
   
(595,143
)
 
(661,089
)
 
(66,464
)
 
(634,879
)
Inventories
   
146,921
   
(2,128,902
)
 
1,253,050
   
(4,799,694
)
Accounts payable
   
(789,661
)
 
3,773,470
   
1,227,858
   
5,111,468
 
Other payables and accrued liabilities
   
(5,137
)
 
(219,122
)
 
1,179,232
   
(212,197
)
Income tax payable
   
(16,110
)
 
(24,911
)
 
(211,597
)
 
(213,125
)
                           
Net cash flows used in operating activities
   
(2,733,708
)
 
(1,440,017
)
 
(384,542
)
 
(1,385,036
)
                           
Cash flows from investing activities
                         
Acquisition of plant and equipment
   
(276,796
)
 
(542,450
)
 
(789,753
)
 
(1,257,677
)
Acquisition of leasehold land
   
(9,027
)
 
-
   
(2,715,046
)
 
-
 
Acquisition of intangible asset
   
-
   
-
   
(1,000,000
)
 
-
 
Proceeds from disposal of plant and equipment
   
-
   
-
   
6,022
   
5,163
 
                           
Net cash flows used in investing activities
   
(285,823
)
 
(542,450
)
 
(4,498,777
)
 
(1,252,514
)
                           
Cash flows from financing activities
                         
Proceeds from new short-term bank loans
   
1,516
   
249,645
   
455,981
   
498,859
 
Repayment of short-term bank loans
   
(437,370
)
 
(468,057
)
 
(716,541
)
 
(904,182
)
Net advancement of other bank borrowings
   
6,033,041
   
2,451,569
   
9,060,192
   
4,368,526
 
Increase in restricted cash
   
(2,276,110
)
 
(312,977
)
 
(2,942,583
)
 
(611,750
)
Advance to related parties
   
7,996
   
174,875
   
78,290
   
(41,766
)
                           
Net cash flows provided by financing activities
   
3,329,073
   
2,095,055
   
5,935,339
   
3,309,687
 
                           
Net increase in cash and cash equivalents
   
309,542
   
112,588
   
1,052,020
   
672,137
 
Effect of foreign currency translation on cash and cash equivalents
   
21,545
   
(4,940
)
 
36,581
   
(1,081
)
Cash and cash equivalents - beginning of period
   
1,244,948
   
1,030,848
   
487,434
   
467,440
 
                           
Cash and cash equivalents - end of period
   
1,576,035
   
1,138,496
   
1,576,035
   
1,138,496
 

(continued)

14


HONG KONG HIGHPOWER TECHNOLOGY COMPANY LIMITED

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
(Stated in US Dollars)

   
Three months ended
September 30,
 
Nine months ended
September 30,
 
   
2007
 
2006
 
2007
 
2006
 
 
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
 
 
$
 
$
 
$
 
$
 
 
             
(restated)
 
Supplemental disclosures for cash flow information :
                         
Cash paid for :
                         
Interest
   
829
   
77,264
   
249,469
   
244,055
 
Income taxes
   
652
   
42,911
   
196,139
   
213,125
 

See notes to condensed consolidated financial statements
 
15


HONG KONG HIGHPOWER TECHNOLOGY COMPANY LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

1.
Corporation information and reorganization

Hong Kong Highpower Technology Company Limited (the “Company”) was incorporated in Hong Kong on July 4, 2003 under the Hong Kong Companies Ordinance. The Company was organized principally to engage in the manufacturing and trading of batteries.

The Company underwent a group reorganization (the “Reorganization”) which was approved by authorized institutions in December, 2005, pursuant to which it acquired all of the outstanding common stock of Shenzhen Highpower Technology Co., Ltd. (“SZ Highpower”) from its then existing Stockholders (the “Stockholders”), Pan Dangyu, Li Kai Man, Li Wenliang and Ma Wenwei.

The above-mentioned Stockholders are the common stockholders for both the Company and SZ Highpower. The acquisition was financed by a short-term loan bearing interest of $75,229 (equivalent to HK$584,000) which was charged to operations. The transaction was accounted for as a corporate reorganization of entities under common control.

As a result of the Reorganization in 2005, SZ Highpower became the wholly owned subsidiary of the Company and became the Company’s main operational business. The Company and its subsidiary are collectively referred to herein as the “Group.”

As of September 30, 2007, the particulars of the subsidiary are as follows:

   
Date of
 
Attributable
 
Registered
 
Name of company
 
incorporation
 
equity interest %
 
capital
 
       
Direct
 
Indirect
     
                         
Shenzhen Highpower Technology Co., Ltd. (“SZ Highpower”)
  October 8, 2002    
100
   
-
   
RMB20,000,000
 

2.
Description of business

The Company and its subsidiary are engaged in manufacturing and trading of nickel metal hydride rechargeable batteries.

16


HONG KONG HIGHPOWER TECHNOLOGY COMPANY LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

3.
Summary of significant accounting policies
 
Basis of presentation and consolidation

The accompanying condensed consolidated financial statements of the Company and its subsidiary have been prepared in accordance with generally accepted accounting principles in the United States of America for interim consolidated financial information. Accordingly, they do not include all the information and notes necessary for comprehensive consolidated financial statements.

In the opinion of the management of the Company, all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the three-month periods have been made. Results for the interim period presented are not necessarily indicative of the results that might be expected for the entire fiscal year. These condensed financial statements should be read in conjunction with the consolidated financial statements of the Company and the notes for the year ended December 31, 2006.

The consolidated financial statements include the accounts of the Company and its subsidiary. Inter-company accounts and transactions have been eliminated in consolidation.

Use of estimates

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

Economic and political risks

SZ Highpower’s operations are conducted in the People’s Republic of China (the “PRC”). Accordingly, SZ Highpower’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.

17


HONG KONG HIGHPOWER TECHNOLOGY COMPANY LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

3.
Summary of significant accounting policies (Continued)

Economic and political risks (Continued)

SZ Highpower’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. SZ Highpower’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.

Restricted cash

Deposits in banks for securities of bank borrowings that are restricted in use are classified as restricted cash.

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 the Group will not be able to collect all amounts due according to the original terms of receivables. Bad debts are written off when identified. The Group 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 Group does not accrue interest on trade accounts receivable.

During the three months ended September 30, 2007 and 2006, the Group did not experience any bad debts.

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, the management makes judgments as to future demand requirements compared to current or committed inventory levels. The Group’s reserve requirements generally increase as the management projected demand requirements; decrease due to market conditions, product life cycle changes. During the reporting periods, 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 $nil and $160,000 in the three months and nine months ended September 30, 2007, respectively, and $nil and $99,000 in the three and nine months ended September 30, 2006, respectively. Generally, waste materials on hand at the end of a year are minor.

18


HONG KONG HIGHPOWER TECHNOLOGY COMPANY LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

3.
Summary of significant accounting policies (Continued)

Leasehold land

Leasehold land, representing upfront payment for land use rights, is capitalized at its acquisition cost and amortized using the straight-line method over the lease terms.

Intangible asset

Intangible asset with limited useful lives is stated at cost less accumulated amortisation and accumulated impairment losses.

Amortisation of intangible asset is provided using the straight-line method over its estimated useful lives at the following annual rate:-

Consumer battery license fee
5%

Plant and equipment

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

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

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

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

Impairment of long-lived assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Group recognizes impairment of long-lived assets in the event that the net book values of such assets exceed the future undiscounted cashflows attributable to such assets.

No impairment of long-lived assets was recognized for any of the periods presented.

19


HONG KONG HIGHPOWER TECHNOLOGY COMPANY LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

3.
Summary of significant accounting policies (continued)

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 discount 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.

Basic and diluted earnings per share

The Company reports basic earnings or loss per share in accordance with SFAS No. 128, “Earnings Per Share.” Basic earnings per share is computed using the weighted average number of shares outstanding during the periods presented. The weighted average number of shares of the Company represents the common stock outstanding during the periods. All share amounts have been retroactively restated for the reverse merger effective November 2, 2007 (see Note 20).

The Company has no dilutive instruments outstanding, such as options and warrants. Accordingly, basic and diluted earnings per share are the same for all periods presented.

Recent accounting pronouncements

In July 2006, the FASB issued FIN 48 “Accounting for Uncertainty in Income Taxes.” This interpretation requires that the Company recognize in its financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of our 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings, if any. Adoption of FIN 48 did not have an effect on the Company’s results of operations or financial condition. The Company did not have any material unrecognized tax benefits as of January 1, 2007 or September 30, 2007.

20


HONG KONG HIGHPOWER TECHNOLOGY COMPANY LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

3.
Summary of significant accounting policies (continued)

Recent accounting pronouncements (continued)

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurement” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including any financial statements for an interim period within that fiscal year. The provisions of SFAS 157 should be applied prospectively as of the beginning of the fiscal year in which it is initially applied, except in some circumstances where it will be applied retrospectively. The Company is currently evaluating the effect, if any, of SFAS 157 on its financial statements. Although management continues to evaluate the provisions of SFAS 157, management does not believe the adoption of SFAS 157 will have a material impact on the Company’s consolidated financial statements.

In September 2006, the SEC issued SAB No. 108, which provides guidance on the process of quantifying financial statement misstatements. In SAB No. 108, the SEC staff establishes an approach that requires quantification of financial statement errors, under both the iron-curtain and the roll-over methods, based on the effects of the error on each of the Company’s financial statements and the related financial statement disclosures. SAB No. 108 is generally effective for annual financial statements in the first fiscal year ending after November 15, 2006. The transaction provisions of SAB No.108 permits existing public companies to record the cumulative effect in the first year ending after November 15, 2006 by recording correcting adjustments to the carrying values of assets and liabilities as of the beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings. The adoption of SAB No. 108 has no material effect on the Company’s financial statements.

On February 15, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of SFAS No. 115” (“SFAS 159”). The fair value option established by SFAS 159 permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. The fair value option: (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS 157. The Company did not adopt SFAS 159 early. Although management will continue to evaluate the provisions of SFAS 159, management does not believe the adoption of SFAS 159 will have a material impact on the Company’s consolidated financial statements.

21


HONG KONG HIGHPOWER TECHNOLOGY COMPANY LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

4.
Other income

   
Three months ended
September 30,
 
Nine months ended
September 30,
 
   
2007
 
2006
 
2007
 
2006
 
 
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
 
 
$
 
$
 
 $
 
$
 
                           
Bank interest income
   
23,125
   
1,956
   
34,797
   
5,162
 
Other interest income
   
16,280
   
-
   
19,287
   
-
 
Sundry income
   
19,456
   
11,599
   
78,640
   
38,658
 
                           
     
58,861
   
13,555
   
132,724
   
43,820
 

5.
Interest expenses

   
Three months ended
September 30,
 
Nine months ended
September 30,
 
   
2007
 
2006
 
2007
 
2006
 
 
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
 
 
$
 
$
 
$
 
$
 
                           
Interest on bills
   
172,142
   
72,740
   
383,954
   
137,428
 
Interest on short-term bank loans
   
17,261
   
4,596
   
41,104
   
31,415
 
Interest on other loan
   
43
   
-
   
13,028
   
-
 
                           
     
189,446
   
77,336
   
438,086
   
168,843
 

22


HONG KONG HIGHPOWER TECHNOLOGY COMPANY LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

6.
Income taxes

The components of the provision for income taxes are:

   
Three months ended
September 30,
 
Nine months ended
September 30,
 
   
2007
 
2006
 
2007
 
2006
 
 
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
 
 
$
 
$
 
$
 
$
 
                           
PRC income taxes
   
61,663
   
31,785
   
127,900
   
168,754
 
                           
Deferred tax benefit
   
(3,747
)
 
-
   
(17,184
)
 
-
 
                           
     
57,916
   
31,785
   
110,716
   
168,754
 
 
The major components of deferred tax recognized in the consolidated balance sheets as of September 30, 2007 and December 31, 2006 are as follows:

   
As of
 
   
September 30,
 
December 31,
 
 
 
2007
 
2006
 
 
 
(Unaudited)
 
(Audited)
 
   
 
$
 
               
Temporary difference on :
             
reorganization of expenses
   
(23,116
)
 
(8,443
)
accelerated tax depreciation on intangible asset
   
(2,813
)
 
-
 
               
Deferred tax assets, net
   
(25,929
)
 
(8,443
)
               
Reorganized in the balance sheet:
             
Net deferred tax assets
   
(25,929
)
 
(8,443
)

7.
Prepaid expenses and other receivables

   
As of
 
   
September 30,
 
December 31,
 
 
 
2007
 
2006
 
 
 
(Unaudited)
 
(Audited)
 
 
 
$
 
$
 
               
Purchase deposits paid
   
60,407
   
935,417
 
Advance to staff
   
16,594
   
21,540
 
Other deposits and prepayments
   
211,569
   
130,870
 
Value-added tax prepayment
   
1,032,517
   
1,220,524
 
Other receivables
   
1,458,415
   
303,740
 
               
     
2,779,502
   
2,612,091
 

23


HONG KONG HIGHPOWER TECHNOLOGY COMPANY LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

8.
Inventories

   
As of
 
   
September 30,
 
December 31,
 
 
 
2007
 
2006
 
 
 
(Unaudited)
 
(Audited)
 
 
 
$
 
$
 
               
Raw materials
   
4,265,104
   
5,040,028
 
Work in progress
   
1,676,227
   
1,415,942
 
Finished goods
   
8,923,096
   
9,096,003
 
Consumables
   
54,482
   
52,122
 
Packing materials
   
20,900
   
19,696
 
               
     
14,939,809
   
15,623,791
 

9.
Plant and equipment

   
As of
 
   
September 30,
 
December 31,
 
 
 
2007
 
2006
 
 
 
(Unaudited)
 
(Audited)
 
 
 
$
 
$
 
Cost
             
Furniture, fixtures and office equipment
   
610,029
   
510,853
 
Leasehold improvement
   
143,011
   
137,761
 
Machinery and equipment
   
3,659,430
   
2,938,971
 
Motor vehicles
   
335,614
   
250,655
 
               
     
4,748,084
   
3,838,240
 
               
Accumulated depreciation
             
Furniture, fixtures and office equipment
   
177,412
   
92,092
 
Leasehold improvement
   
80,504
   
25,888
 
Machinery and equipment
   
731,402
   
475,767
 
Motor vehicles
   
119,594
   
89,833
 
               
     
1,108,912
   
683,580
 
               
Net
             
Furniture, fixtures and office equipment
   
432,617
   
418,761
 
Leasehold improvement
   
62,507
   
111,873
 
Machinery and equipment
   
2,928,028
   
2,463,204
 
Motor vehicles
   
216,020
   
160,822
 
               
     
3,639,172
   
3,154,660
 
 
24

 
HONG KONG HIGHPOWER TECHNOLOGY COMPANY LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

9.
Plant and equipment (Continued)

The components of depreciation charged are:

   
Three months ended
September 30,
 
Nine months ended
September 30,
 
   
2007
 
2006
 
2007
 
2006
 
 
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
 
 
$
 
$
 
$
 
$
 
                           
Included in factory overheads
   
129,348
   
62,300
   
337,526
   
162,429
 
Included in operating expenses
   
31,532
   
19,347
   
85,576
   
54,837
 
                           
     
160,880
   
81,647
   
423,102
   
217,266
 

10.
Leasehold land

   
As of
 
   
September 30,
 
December 31,
 
 
 
2007
 
2006
 
 
 
(Unaudited)
 
(Audited)
 
 
 
$
 
$
 
               
Cost
   
2,772,167
   
-
 
               
Accumulated amortization
   
-
   
-
 
               
Net
   
2,772,167
   
-
 
               
Analyzed for reporting purposes as:
             
Current asset
   
55,443
   
-
 
Non-current asset
   
2,716,724
   
-
 
               
     
2,772,167
   
-
 

25


HONG KONG HIGHPOWER TECHNOLOGY COMPANY LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

11.
Intangible asset

   
As of
 
   
September 30,
 
December 31,
 
 
 
2007
 
2006
 
 
 
(Unaudited)
 
(Audited)
 
 
 
$
 
$
 
Cost
             
Consumer battery license fee
   
1,000,000
   
-
 
               
Accumulated amortization
   
37,500
   
-
 
               
Net
   
962,500
   
-
 

Amortization expenses included in selling and distributing costs for the nine months ended September 30, 2007 and 2006 are $37,500 and $Nil respectively.

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 the nine months ended September 30, 2007, the Company recorded a total of approximately $231,229 as royalty expense, which was included in selling and distributing costs in the statement of operations.  Accordingly, during the nine months ended September 30, 2007, the Company recorded a total up-front royalty payment obligation of $1,000,000, which was included in other payables and accrued liabilities at September 30, 2007, with the related debit recorded as an intangible asset entitled consumer battery license agreement. At September 30, 2007 and December 31, 2006, accrued royalty fees payable were $1,231,229 and $112,579, respectively (see Note 12).

26


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 nine months ended September 30, 2007 was $37,500.

12.
Other payables and accrued liabilities

   
As of
 
   
September 30,
 
December 31,
 
 
 
2007
 
2006
 
 
 
(Unaudited)
 
(Audited)
 
 
 
$
 
$
 
               
Accrued expenses
   
685,963
   
622,010
 
Accrued staff welfare
   
-
   
111,749
 
Royalty payable
   
1,231,229
   
112,579
 
Sales deposits received
   
153,920
   
86,182
 
Other payables
   
320,032
   
237,755
 
               
     
2,391,144
   
1,170,275
 

27


HONG KONG HIGHPOWER TECHNOLOGY COMPANY LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

13.
Advance to related parties

Advance to related parties for working capital are as follows:

   
As of
 
   
September 30,
 
December 31,
 
 
 
2007
 
2006
 
 
 
(Unaudited)
 
(Audited)
 
 
 
$
 
$
 
               
Advance to shareholders
   
-
   
634,161
 

The above advances are interest-free, unsecured and have no fixed repayment terms.

14.
Bank borrowings

   
As of
 
   
September 30,
 
December 31,
 
 
 
2007
 
2006
 
 
 
(Unaudited)
 
(Audited)
 
 
 
$
 
$
 
Secured:
             
Repayable within one year
             
Non-recurring bank loans
   
665,106
   
896,964
 
Other bank borrowings
   
14,497,066
   
5,053,662
 
               
     
15,162,172
   
5,950,626
 

As of September 30, 2007, the above banking borrowings were secured by the following:

 
(a)
charge over bank deposits of $4,053,585;

(b)
corporate guarantee executed by a third party and the Shenzhen Science and Technology Bureau; and

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

15.
Pension plans

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

The assets of the schemes are controlled by trustees and held separately from those of the Group. Total pension cost was $85,120 and $60,220 for the nine months ended September 30, 2007 and 2006 respectively. 

28


HONG KONG HIGHPOWER TECHNOLOGY COMPANY LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

16.
Commitments and contingencies

Operating leases commitments

The Group leases factory and office premises under various non-cancelable operating lease agreements that expire at various dates through years 2007 to 2010, with an option to renew the lease. All leases are on a fixed repayment basis. None of the leases includes contingent rentals. Minimum future commitments under these agreements payable as of September 30, 2007 are as follows:

Period ending September 30
 
$
 
         
2008
   
531,065
 
2009
   
492,690
 
2010
   
469,877
 
2011
   
103,111
 
         
     
1,596,743
 

Rental expenses for the nine months ended September 30, 2007 and 2006 were $307,505 and $276,938 respectively.

Capital commitments
 
The Group has the following capital commitments as of September 30, 2007:
 
   
$
 
         
Purchase of plant and equipment
   
1,490
 

Contingencies

From time to time, the Company factors bills receivable to banks.  At the time of the factoring, all rights and privileges of holding the receivables are transferred to the banks.  The Company removes the asset from its books and records a corresponding expense for the amount of the discount.  The Company remains contingently liable on the amount outstanding in the event the bill issuer defaults.

   
As of
 
   
September 30,
 
December 31,
 
 
 
2007
 
2006
 
 
 
(Unaudited)
 
(Audited)
 
 
 
$
 
$
 
               
Bills discounted
   
422,697
   
1,323,442
 

29


HONG KONG HIGHPOWER TECHNOLOGY COMPANY LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

17.
Related party transactions

Apart from the transactions as disclosed in notes 13 and 14, the Group entered into the following transactions with its related party during the nine months ended September 30, 2007 and 2006:

   
Nine months ended
September 30,
 
   
2007
 
2006
 
 
 
(Unaudited)
 
(Unaudited)
 
 
 
$
 
$
 
               
Management fee paid to Canhold International Limited
   
15,617
   
11,402
 

18.
Segment Information

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

Long-lived assets of the Group are located in PRC. Geographic information about the revenues and accounts receivable which are classified based on the location of the customers, is set out as follows:

   
Nine months ended
September 30,
 
   
2007
 
2006
 
 
 
(Unaudited)
 
(Unaudited)
 
Net revenue
 
$
 
$
 
               
Hong Kong and China
   
21,433,716
   
20,434,138
 
Asia
   
4,356,175
   
2,225,364
 
Europe
   
17,314,386
   
4,817,798
 
North America
   
8,568,668
   
3,463,866
 
South America
   
213,233
   
265,610
 
Others
   
-
   
3,742
 
               
     
51,886,178
   
31,210,518
 

30


HONG KONG HIGHPOWER TECHNOLOGY COMPANY LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

18.
Segment information (Continued)

   
As of
 
   
September 30,
 
December 31,
 
 
 
2007
 
2006
 
 
 
(Unaudited)
 
(Audited)
 
Accounts receivable
 
$
 
$
 
               
Hong Kong and China
   
3,789,289
   
5,545,244
 
Asia
   
736,762
   
262,743
 
Europe
   
6,903,057
   
1,857,294
 
North America
   
3,051,043
   
461,889
 
South America
   
9,184
   
-
 
               
     
14,489,335
   
8,127,170
 

19.
Dividends

The directors had declared and now recommend the following dividend in respect of the period ended 30th September, 2007:

   
Nine months ended
September 30,
 
   
2007
 
2006
 
 
 
(Unaudited)
 
(Unaudited)
 
Dividends
 
$
 
$
 
               
Interim dividend declared and paid :
HK$1.33 per share
   
664,348
   
-
 

20.
Subsequent event

On October 20, 2007, the Company entered into a share exchange agreement with the shareholders of Hong Kong Highpower Technology, Inc., formally known as SRKP 11, Inc. Pursuant to the share exchange agreement (the “Exchange Agreement”) the Company agreed to exchange all of its outstanding shares for the issuance by Hong Kong Highpower Technology, Inc. of an aggregate of 14,798,328 shares. The Exchange Agreement closed on November 2, 2007, as a result of which the company became a wholly owned subsidiary of Hong Kong Highpower Technology, Inc.


31


HONG KONG HIGHPOWER TECHNOLOGY COMPANY LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (restated)
(Stated in US Dollars)

21.
Restatement

The Company has restated its financial statements for the nine months ended September 30, 2007 and 2006 to correct various accounting errors. The statements of cash flows for the three and nine months ended September 30, 2007 and the three months ended September 30, 2006 are not included because no restatement is made on those statements.

The Company adjusted reorganization cost, which had previously been accounted as a charge to additional paid-in capital, to fees and costs related to reorganization. Because of these corrections, various income tax calculations were also revised, which effected net income and also caused reclassifications to cash flows. The Company also adjusted its weighted average shares outstanding used in its Earnings per calculation to reflect its actual shares outstanding under US GAAP.

In addition, the Company reclassified sales by adjusting the revenues from the second-class batteries and sale of waste material from other income to sales and cost of goods sold, respectively.

Below are summaries of the financial statements revised by the restatements described above.

32


HONG KONG HIGHPOWER TECHNOLOGY COMPANY LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006

21.
Restatement (Continued)

Condensed Consolidated Statements of Operations
Three months ended September 30, 2007 (Unaudited)

   
2007
 
2007
 
2007
 
   
(As originally
 
(As restated)
 
(Effect of
 
 
 
Reported)
 
 
 
adjustments)
 
 
 
$
 
$
 
$
 
                     
Net sales
   
19,574,160
   
19,879,829
   
305,669
 
Cost of sales
   
(17,269,784
)
 
(17,269,784
)
 
-
 
                     
Gross profit
   
2,304,376
   
2,610,045
   
305,669
 
Depreciation
   
(31,532
)
 
(31,532
)
 
-
 
Selling and distributing costs
   
(631,203
)
 
(631,203
)
 
-
 
Administrative and other operating expenses
   
(920,690
)
 
(920,690
)
 
-
 
                     
Income from operations
   
720,951
   
1,026,620
   
305,669
 
Other income
   
364,530
   
58,861
   
(305,669
)
Interest expenses
   
(189,446
)
 
(189,446
)
 
-
 
                     
Income before taxes
   
896,035
   
896,035
   
-
 
Income taxes
   
(57,916
)
 
(57,916
)
 
-
 
                     
Net income for the period
   
838,119
   
838,119
   
-
 
                     
Other comprehensive income
                   
- Foreign currency translation gain
   
127,959
   
127,959
   
-
 
                     
Comprehensive income
   
966,078
   
966,078
   
-
 
                     
Earnings per share of common stock
                   
- Basic and diluted
   
1.68
   
0.07
   
1.61
 
                     
Weighted average number of common shares outstanding<