UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended June 30, 2011
 
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.:  001-34098
 
HIGHPOWER INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
 
Delaware
 
20-4062622
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)

Building A1, 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)


Former Name

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x    No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x    No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” as defined in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  ¨
Accelerated filer  ¨
   
Non-accelerated filer  ¨
Smaller reporting company   x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨    No x
 
The registrant had 13,582,106 shares of common stock, par value $0.0001 per share, outstanding as of August 11, 2011.
 
 
 

 

HIGHPOWER INTERNATIONAL, INC.
 FORM 10-Q
 For the Quarterly Period Ended June 30, 2011
 INDEX
 
       
Page
Part I
 
Financial Information
 
           
   
Item 1.
 
 Financial Statements
 
             
       
(a)
Balance Sheets as of June 30, 2011 (Unaudited) and December 31, 2010
1
             
       
(b)
Statements of Operations for the Three and Six Months Ended June 30, 2011 and 2010 (Unaudited)
3
             
       
(c)
Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010 (Unaudited)
4
             
       
(d)
Notes to Financial Statements (Unaudited)
5
             
   
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
28
           
   
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
34
           
   
Item 4.
 
Controls and Procedures
35
           
Part II
 
Other Information
 
           
   
Item 1.
 
Legal Proceedings
35
           
   
Item 1A.
 
Risk Factors
35
           
   
Item 2.
 
Unregistered Sale of Equity Securities and Use of Proceeds
36
           
   
Item 3.
 
Default Upon Senior Securities
36
           
   
Item 4.
 
Removed and Reserved
36
           
   
Item 5.
 
Other Information
36
           
   
Item 6.
 
 Exhibits
37
           
Signatures
38

 
 

 
 
Item 1. Financial Statements
 
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(Stated in US Dollars)

   
As of
 
   
June 30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
   
(Audited)
 
   
$
   
$
 
ASSETS
           
Current Assets:
           
Cash and cash equivalents
    7,523,000       8,490,629  
Restricted cash
    11,211,994       6,044,960  
Accounts receivable
    21,475,717       20,846,540  
Notes receivable
    807,078       256,574  
Prepaid expenses and other receivables – Note 7
    7,109,918       3,231,211  
Inventories – Note 10
    12,501,199       13,447,432  
                 
Total Current Assets
    60,628,906       52,317,346  
Plant and equipment, net – Note 11
    16,297,018       13,652,254  
Leasehold land, net – Note 12
    3,089,698       3,022,293  
Intangible asset, net – Note 13
    775,000       800,000  
Investment in an associate – Note 14
    99,151       103,123  
Investment securities – Note 15
    55,698       53,904  
                 
TOTAL ASSETS
    80,945,471       69,948,920  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
LIABILITIES
               
Current Liabilities:
               
Non-trading foreign currency derivatives liabilities
    -       77,699  
Accounts payable
    11,406,634       13,407,204  
Other payables and accrued liabilities – Note 19
    4,999,285       4,983,269  
Income taxes payable
    91,690       1,164,007  
Bank borrowings – Note 20
    35,624,129       22,539,032  
                 
Total Current Liabilities
    52,121,738       42,171,211  
                 
COMMITMENTS AND CONTINGENCIES – Note 22
               
                 

 (continued)
 
 
1

 
 
HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Stated in US Dollars)

   
As of
 
   
June 30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
   
(Audited)
 
   
$
   
$
 
STOCKHOLDERS’ EQUITY
           
Preferred Stock
           
Par value: $0.0001
           
   Authorized: 10,000,000 shares
           
   Issued and outstanding: none
    -       -  
                 
Common stock
               
Par value : $0.0001
               
Authorized: 100,000,000 shares
               
Issued and outstanding: 2011 –13,582,106 shares
(2010 –13,582,106 shares)
    1,358       1,358  
Additional paid-in capital
    5,457,498       5,180,318  
Accumulated other comprehensive income
    3,337,023       2,475,749  
Retained earnings
    20,027,854       20,120,284  
                 
TOTAL STOCKHOLDERS’ EQUITY
    28,823,733       27,777,709  
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
    80,945,471       69,948,920  
 
See accompanying notes to condensed consolidated financial statements
 
 
2

 
 
HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Stated in US Dollars)

   
Three months ended
 June 30,
   
Six months ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
   
$
   
$
   
$
   
$
 
                         
Net sales
    29,708,154       28,978,114       56,658,820       49,201,486  
Cost of sales
    (24,942,124 )     (23,578,703 )     (47,892,431 )     (39,555,745 )
                                 
Gross profit
    4,766,030       5,399,411       8,766,389       9,645,741  
Research and development costs
    (873,383 )     (467,987 )     (1,508,461 )     (808,811 )
Selling and distribution costs
    (980,663 )     (1,121,484 )     (2,166,813 )     (1,884,639 )
General and administrative costs, including stock-based compensation
    (2,098,497 )     (1,758,799 )     (4,163,837 )     (2,929,723 )
Loss on exchange rate difference
    (297,768 )     (130,130 )     (470,703 )     (152,484 )
Loss on financial instruments
    (244,013 )     -       (694,604 )     -  
Share of loss of an associate
    (2,199 )     -       (3,971 )     -  
                                 
Income from operations
    269,507       1,921,011       (242,000 )     3,870,084  
Other income – Note 3
    176,222       126,026       408,770       203,400  
Interest expenses – Note 4
    (233,677 )     (101,111 )     (386,314 )     (167,444 )
Other expenses - Note 5
    -       -       (23,964 )     -  
                                 
Income before taxes
    212,052       1,945,926       (243,508 )     3,906,040  
Income taxes – Note 6
    (137,017 )     (360,579 )     (142,778 )     (739,993 )
                                 
Net income for the period
    75,035       1,585,347       (386,286 )     3,166,047  
                                 
Other comprehensive income
                               
- Foreign currency translation gain
    3,015       (7,898 )     (15,768 )     (23,495 )
- Cash flow hedge
    290,290       (2,515 )     293,857       2  
                                 
Comprehensive income
    368,340       1,574,934       (108,197 )     3,142,554  
                                 
Earnings per share of common stock
                               
  - Basic
    0.01       0.12       (0.03 )     0.23  
- Diluted
    0.01       0.12       (0.03 )     0.23  
                                 
Weighted average number of common stock
                               
  - Basic
    13,582,106       13,582,106       13,582,106       13,582,106  
  - Diluted
    13,817,981       13,732,096       13,817,981       13,732,096  
 
See accompanying notes to condensed consolidated financial statements
 
 
3

 
 
HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES

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

   
Six months ended June 30,
 
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
 
   
$
   
$
 
Cash flows from operating activities
           
Net (loss)/income
    (386,286 )     3,166,047  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Amortization of intangible asset
    25,000       25,000  
Amortization of leasehold land
    33,223       31,853  
Depreciation
    825,008       674,296  
Loss on disposal of plant and equipment
    6,636       48,381  
Loss on financial instruments
    694,604       -  
Share based payment
    277,180       80,372  
Bad debt written off
     56,821       5,626  
Changes in operating assets and liabilities:
               
(Increase) decrease in -
               
Accounts receivable
    (629,177 )     (4,604,365 )
Notes receivable
    (550,505 )     (266,209 )
Prepaid expenses and other receivables
    (3,878,708 )     (1,979,423 )
Inventories
    946,233       (4,385,862 )
     Increase (decrease) in -
               
Accounts payable
    (2,000,570 )     9,837,912  
Other payables and accrued liabilities
    60,682       893,755  
Income taxes payable
    (1,072,317 )     (286,852 )
                 
Net cash flows (used in)/provided by operating activities
    (5,592,176 )     3,240,531  
                 
Cash flows from investing activities
               
Acquisition of plant and equipment
    (2,930,714 )     (2,563,278 )
   Sale proceeds of plant and equipment
    -       (142,515 )
                 
Net cash flows used in investing activities
    (2,930,714 )     (2,705,793 )
                 
Cash flows from financing activities
               
Proceeds from new short-term bank loans
    12,595,292       4,803,830  
Repayment of short-term bank loans
    (8,422,290 )        
  Repayment of other secured loans
    -       (3,437,764 )
Net (repayment) advancement of other bank borrowings
    8,161,654          
Increase in restricted cash
    (5,167,034 )     (1,206,238 )
                 
Net cash flows provided by financing activities
    7,167,622       159,828  
                 
Net increase in cash and cash equivalents
    (1,355,268 )     694,566  
Effect of foreign currency translation on cash and
cash equivalents
    387,639       (113,627 )
Cash and cash equivalents - beginning of period
    8,490,629       2,967,586  
                 
Cash and cash equivalents - end of period
    7,523,000       3,548,525  
                 
Supplemental disclosures for cash flow information :
               
   Cash paid for:
               
      Interest
    386,314       167,445  

See accompanying notes to condensed consolidated financial statements
 
 
4

 
 
HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
 
1.  
Organization and Basis of Presentation

Highpower International, Inc. (“Highpower” or the “Company,” formerly known as Hong Kong Highpower Technology, Inc.) was incorporated in the State of Delaware on January 3, 2006 to locate a suitable acquisition candidate to acquire.  As used herein, the “Company” refers to Highpower and its wholly-owned subsidiary, Hong Kong Highpower Technology Company Limited (“HKHTC”), and HKHTC’s wholly-owned subsidiaries, unless the context indicates otherwise.

HKHTC was organized principally to engage in the manufacturing and marketing of nickel metal hydride rechargeable batteries.

In January 2008, HKHTC invested $749,971 in Huizhou Highpower Technology Co., Ltd. (“HZ Highpower”). HZ Highpower is a wholly-owned subsidiary of HKHTC. HZ Highpower has not commenced business as at June 30, 2011

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

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

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

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

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 were for the period of one year pursuant to a contract dated June 19, 2008, which has expired.

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

On May 25, 2010, the Company invested $142,514 in Springpower International, Inc. (“Springpower International”) which became an associate of HKHTC. Springpower International is incorporated in Canada and it mainly researches and develops advanced, high performance battery materials and clean energy materials.

On September 21, 2010, the Company invested $293,574 in Ganzhou Highpower Technology Co., Ltd. (“GZ Highpower”). GZ Highpower is a wholly owned subsidiary of SZ Highpower. GZ Highpower engages in the trading and research of battery materials.

On October 21, 2010, the Company invested an additional $2,000,000 in HZ Highpower.

On October 20, 2010, with stockholders’ approval, Hong Kong Highpower Technology, Inc. officially changed its name to Highpower International, Inc.

On April 2, 2011, the Company invested $1,000,000 in Icon Energy System Co., Ltd. (“ICON”) which is a wholly-owned subsidiary of HKHTC.  ICON is expected to engage in the research and production of advanced battery packs and systems.
 
 
5

 
 
HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES

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

The subsidiaries of the Company include the following:

Name of company
Place and date incorporation
Attributable equity interest held
Principal activities
Hong Kong Highpower Technology Co., Ltd.  (“HKHTC”)
 
Hong Kong
July 4, 2003
100%
Investment holding
Shenzhen Highpower Technology Co., Ltd.  (“SZ Highpower”)
 
PRC
October 8, 2002
100%
Manufacturing of batteries
Highpower Energy Technology (Huizhou) Co., Ltd.  (“HZ Highpower”)
 
PRC
January 29, 2008
100%
Inactive
Springpower Technology (Shenzhen) Co., Ltd.  (“SZ Springpower”)
 
PRC
June 4, 2008
100%
Manufacturing of batteries
Ganzhou Highpower Technology Co., Ltd.  (“GZ Highpower”)
PRC
September 21, 2010
100%
Processing, marketing and research of battery materials
Icon Energy System Co., Ltd.
(“ICON”)
PRC
February 23, 2011
100%
Research and production of advanced battery packs and systems

 
The associate of the Company is the following:

Name of company
Place and date incorporation
Attributable equity interest held
Principal activities
Springpower International, Inc.
(“Springpower International”)
Canada
March 22, 2010
40%
Research and development of advanced batteries
 
2.
Summary of significant accounting policies

Basis of presentation

The accompanying financial statements are stated in US dollars and have been prepared in accordance with generally accepted accounting principles in the United States of America.  While the information presented in the accompanying interim financial statements is unaudited, it includes all adjustments which are in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows for the interim period presented in accordance with accounting principles generally accepted in the United States of America.  All adjustments are of a normal recurring nature.
 
Although these interim financial statements follow the same accounting policies and methods of their application as the Company’s December 31, 2010 annual financial statements, they do not include all information and footnotes required by generally accepted accounting principles for complete financial statements.  Accordingly, it is suggested that these interim financial statements be read in conjunction with the Company’s December 31, 2010 annual financial statements.
 
 
6

 
 
HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES

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

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

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

Associate

Associate is entity over which the Company has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are  accounted for using the equity method of accounting and are initially recognized at cost. The Company’s investment in associates includes goodwill identified on acquisition, net of any accumulated impairment loss.

The Company’s share of its associates’ post-acquisition profits or losses is recognized in the income statement, and its share of post-acquisition movements in other comprehensive income is recognized in other comprehensive income.

Use of estimates

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

Comparative amounts

Certain comparative amounts in prior periods have been reclassified to conform to the current period’s presentation. The principal reclassification related to the separate presentation of loss on exchange rate difference as an operating cost line item in the statement of operations, which was previously included in general and administrative costs. These reclassifications had no effect on reported total assets, liabilities, stockholders’ equity, or net income (loss).

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.
 
 
7

 
 
HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
 
Concentrations of credit risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts receivable. The Company extends credit based on an evaluation of the customer’s financial condition, generally without requiring collateral or other security. In order to minimize the credit risk, the management of the Company has delegated a team responsible for determining credit limits, credit approvals and other monitoring procedures to ensure that follow-up action is taken to recover overdue debts. Further, the Company reviews the recoverable amount of each individual trade debt at each balance sheet date to ensure that adequate impairment losses are made for irrecoverable amounts. In this regard, the management of the Company considers that the Company’s credit risk is significantly reduced.

During the six months ended June 30, 2011, there was one customer, Energizer Holdings, Inc., that accounted for 10% or more of total net revenue. The percentages of total net sales from Energizer Holdings, Inc. in the six months ended June 30, 2011 and 2010 were 21% and 19%, respectively.

Cash and cash equivalents

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

Restricted cash

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

Accounts receivable

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

The Company experienced bad debts of $56,821 and $5,626 during the six months ended June 30, 2011 and 2010, respectively.
 
Inventories

Inventories are stated at the lower of cost or market value. Cost is determined on a weighted average basis and includes purchase costs, direct labor and factory overheads. There are no significant freight charges, inspection costs and warehousing costs incurred for any of the periods presented. In assessing the ultimate realization of inventories, management makes judgments as to future demand requirements compared to current or committed inventory levels. The Company’s reserve requirements generally increase based on management’s projected demand requirements, and decrease due to market conditions and product life cycle changes.  During the six months ended June 30, 2011 and 2010, 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. Proceeds from the sales of waste materials were approximately $97,293 and $38,730 for the six months ended June 30, 2011 and 2010, respectively. Generally, waste materials on hand at the end of a year are nominal.
 
 
8

 
 
HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES

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

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

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

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

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

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

Investment Securities

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

Management have strategic investments in certain debt and equity securities that are included in noncurrent “Investment securities” on our Consolidated Balance Sheets accounted for using the cost methods of accounting.

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

Intangible Assets and Long-Lived Assets

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

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

There was no impairment of long-lived assets for the six months ended June 30, 2011 and 2010.
 
 
9

 
 
HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES

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

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

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

Advertising and promotion expenses

Advertising and promotion expenses are charged to expense as incurred.

Advertising and promotion expenses, which are included in selling and distribution costs, were not material for the six months ended June 30, 2011 and 2010.

Income taxes

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

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

Comprehensive income

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

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.
 
 
10

 
 
HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES

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

   
June 30, 2011
   
June 30, 2010
 
             
Quarter end RMB : US$ exchange rate
    6.4634       6.8279  
Average quarterly RMB : US$ exchange rate
    6.5394       6.8271  

The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions.  No representation is made that RMB amounts could have been, or could be, converted into US$ at rates used in translation.

Transactions and balances

Transactions in foreign currencies are translated into the functional currency at the approximate rates of exchange ruling on the transaction date. Exchange gains and losses resulting from this translation policy are recognized in the statements of operations.

Fair value of financial instruments

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

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

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.
 
 
11

 
 
HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES

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

The Company reports earnings per share in accordance with FASB Accounting Standard Codification Topic 260 (“ASC 260”) “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. Diluted earnings per common share computations are based on the weighted average number of common shares outstanding during the period, plus the dilutive effect of stock options, warrants and restricted stock awards.

Stock-Based Compensation

The Company accounts for stock-based payment transactions in which the Company receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. Stock-based compensation cost for restricted stock units (“RSUs”) is measured based on the closing fair market value of the Company’s common stock on the date of grant. Stock-based compensation cost for stock options is estimated at the grant date based on each option’s fair-value as calculated by the Black-Scholes-Merton (“BSM”) option-pricing model. The Company recognizes stock-based compensation cost as expense ratably on a straight-line basis over the requisite service period. The Company will recognize a benefit from stock-based compensation in equity if an incremental tax benefit is realized by following the ordering provisions of the tax law. In addition, the Company accounts for the indirect effects of stock-based compensation on the research tax credit, the foreign tax credit and the domestic manufacturing deduction through the income statement. Further information regarding stock-based compensation can be found in Note 8, “Shareholders’ Equity and Stock-Based Compensation.”

Share-based compensation expense was $277,180 and $80,372 and for the six months ended June 30, 2011 and 2010, respectively.

Recently issued accounting pronouncements

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

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

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

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

 
 
HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES

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

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

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

In February 2010, FASB issued ASU 2010-9 Subsequent Events (Topic 855) Amendments to Certain Recognition and Disclosure Requirements ("ASU 2010-9"). ASU 2010-9 amends disclosure requirements within Subtopic 855-10. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. This change alleviates potential conflicts between Subtopic 855-10 and the SEC's requirements. ASU 2010-9 is effective for interim and annual periods ending after June 15, 2010. The Company does not expect the adoption of ASU 2010-09 to have a material impact on its results of operations or financial position.

Effective July 1, 2010, we adopted the update to the accounting standard regarding derivatives and hedging (Topic 815). This update clarifies how to determine whether embedded credit derivatives, including those interests held in collateralized debt obligations and synthetic collateralized debt obligations, should be bifurcated and accounted for separately. The adoption of this standard did not have a significant impact on our results of operations.

In December 2010, the FASB issued Accounting Standards Update ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations (Topic 805). The update requires public companies to disclose pro forma information for business combinations that occur in the current reporting period. The disclosures include pro forma revenue and earnings of the combined entity for the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period. This guidance is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010, with early adoption permitted. The Company’s adoption of FASB ASU No. 2010-29 effective December 1, 2010 did not have an impact on the Company’s consolidated results of operations or financial position but did result in additional disclosures.
 
 
13

 
 
HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
 
3.
Other income

   
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
   
$
   
$
   
$
   
$
 
                         
Bank interest income
    24,006       20,605       55,561       49,853  
Foreign exchange contract income
    110,103       3,774       166,551       5,356  
Government sponsor
    461       35,266       79,939       49,913  
Sundry income
    41,652       66,381       106,719       98,278  
                                 
      176,222       126,026       408,770       203,400  

4. 
Interest expenses

   
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
   
$
   
$
   
$
   
$
 
                         
Interest on trade related bank loan
    99,970       91,928       182,372       152,001  
Interest on short-term bank loans
    133,708       9,183       203,942       15,443  
                                 
      233,678       101,111       386,314       167,444  

5.
Other expenses

   
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
   
$
   
$
   
$
   
$
 
                          
Sundry expenses
    -       -       23,964       -  
 
 
14

 
 
HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES

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
June 30,
   
Six months ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
   
$
   
$
   
$
   
$
 
                         
PRC income taxes
    137,017       360,579       142,778       739,993  

Accounting for Uncertainty in Income Taxes

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

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

7.
Prepaid expenses and other receivables

   
As of
 
   
June 30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
 
   
$
   
$
 
             
Purchase deposits paid
    5,002,758       688,041  
Advance to staff
    269,140       72,047  
Other deposits and prepayments
    406,203       500,362  
Valued-added tax prepayment
    621,578       975,552  
Other receivables
    810,239       995,209  
                 
      7,109,918       3,231,211  

8. 
Share – based compensation expenses

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

2008 Omnibus Incentive Plan

The 2008 Omnibus Incentive Plan (the “2008 Plan”) was approved by the Company’s Board of Directors on October 30, 2008 and became effective upon the approval of the Company’s stockholders on December 11, 2008. The 2008 Plan has a ten year term. The 2008 Plan reserves two million shares of common stock for issuance, subject to increase from time to time by the number of shares: (i) subject to outstanding awards granted under the Company’s prior equity compensation plans that terminate without delivery of any stock (to the extent such shares would have been available for issuance under such prior plan), and (ii) subject to awards assumed or substituted in connection with the acquisition of another company.

The 2008 Plan authorizes the issuance of awards including stock options, restricted stock units (RSUs), restricted stock, unrestricted stock, stock appreciation rights (SARs) and other equity and/or cash performance incentive awards to employees, directors, and consultants of the Company. Subject to certain restrictions, the Compensation Committee of the Board of Directors has broad discretion to establish the terms and conditions for awards under the 2008 Plan, including the number of shares, vesting conditions and the required service or performance criteria. Options and SARs have a contractual term of ten years and generally vest over four to five years with an exercise price equal to the fair market value on the date of grant. Incentive stock options (ISOs) granted must have an exercise price equal to the fair market value on the date of grant. Repricing of stock options and SARs is prohibited without stockholder approval. Certain change in control transactions may cause awards granted under the 2008 Plan to vest, unless the awards are continued or substituted for in connection with the transaction. At June 30, 2011, approximately 1,113,000 shares of our common stock remained available for issuance pursuant to awards granted under the 2008 Plan.
 
 
15

 
 
HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
 
Stock-Based Compensation Related to employees

   
 
Number
   
Weighted Average Exercise
   
Contractual Term in
 
   
of Share
   
Price
   
Years
 
                   
Outstanding, January 1, 2011
    -       -        
                       
Granted
    885,000     $ 3.52        
Exercised
    -       -        
Forfeited
    (30,000 )   $ 3.55        
                       
Outstanding, June 30, 2011
    855,000     $ 3.52       9.56  
                         
Exercisable, June 30, 2011
    90,000     $ 3.55       9.56  

During the six months ended June 30, 2011 the Company granted 885,000 options to eleven employees at a weighted average exercise price of $3.52. At the date of this report, two employees had resigned and a total of 30,000 options had been forfeited in accordance with the terms and conditions of the plan.

The weighted-average fair value of options granted to employees for the three and six month periods ended June 30, 2011 was $0.75 per share and $1.52 per share, respectively as calculated using the Black Scholes pricing model, with the following weighted-average assumptions:

   
Three months
   
Six months
 
   
ended
   
ended
 
   
June 30, 2011
   
June 30, 2011
 
             
Expected volatility
    40.35 %     40.01 %
Risk-free interest rate
    2.06 %     2.47 %
Expected term from grant datein years
    6.00       6.16  
Dividend rate
    -       -  
                 
Fair value
  $ 0.75     $ 1.52  

Stock-Based Compensation Related to Nonemployees

   
Number
   
Exercise
   
Contractual Term
 
   
of Share
   
Price
   
Years
 
                   
Outstanding, January 1, 2011
    -       -        
                       
Granted
    15,000     $ 3.41        
Exercised
    -       -        
Forfeited
    -       -        
                       
Outstanding, June 30, 2011
    15,000     $ 3.41       9.68  
                         
Exercisable, June 30, 2011
    -       -       -  
 
 
16

 
 
HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
 
There were no options exercised during the six month period ending June 30, 2011. The stock-based compensation cost of options granted to nonemployees is initially measured on the grant date using the Black-Scholes model and is remeasured over the vesting period as earned. The resulting value is recognized as an expense over the period in which services are received.

During the six months ended June 30, 2011 the Company granted options to purchase 15,000 shares of common stock to a consultant at a per share exercise price of $3.41, in exchange for services from the consultant.

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

   
Three months
   
Six months
 
   
ended
   
ended
 
   
June 30, 2011
   
June 30, 2011
 
             
Expected volatility
    -       39.45 %
Risk-free interest rate
    -       2.53 %
Expected term from grant datein years
    -       6.50  
Dividend rate
    -       -  
                 
Fair value
    -     $ 1.22  

Expected Term

The expected term of stock options represents the weighted-average period that the stock options are expected to remain outstanding. There have been no stock option exercises to date upon which to base an estimate of the expected term.  The Company determined it appropriate to estimate the expected term using the “simplified” method as prescribed by the Securities and Exchange Commission, or SEC, in Staff Accounting Bulletin No. 107, or SAB 107, as amended by SAB 110. The simplified method determines an expected term based on the average of the weighted average vesting term and the contractual term of the option.

Expected Volatility

The Company has limited stock trading history and it is not able to reasonably estimate the fair value of its equity share options because it is not practicable for it to estimate the expected volatility of its share price. The expected volatilities used for the three and six month periods ended June 30, 2011 are based upon the volatilities of a peer group of comparable publicly traded companies. This peer group was selected by the Company using criteria including similar industry, similar stage of development and comparable market capitalization.

Risk-Free Interest Rate

The risk-free interest rate assumption is based on U.S. Treasury instruments with a term consistent with the expected term of the Company’s stock options.
 
 
17

 
 
HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES

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

The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and therefore, used an expected dividend yield of zero in the valuation model.

Forfeitures

The Company estimates forfeitures at the time of grant and revises the estimates in subsequent periods if actual forfeitures differ from what was estimated. The Company uses historical data to estimate pre-vesting option forfeitures and records stock-based compensation expense only for those awards that are expected to vest. All stock-based payment awards are amortized on a ratable basis over the requisite service periods of the awards, which are generally the vesting periods. The Company records stock-based compensation expense only for those awards that are expected to vest.

Total Share-Based Compensation Expense

No share-based compensation expense was capitalized in the periods presented. At June 30, 2011 the gross amount of unrecognized share-based compensation expense relating to unvested share-based awards was approximately $1.0 million, which the Company anticipates recognizing as a charge against income over a weighted average period of 3.06 years.

In connection with the grant of stock options to employees and nonemployees, the Company recorded stock-based compensation charges of $48,708 and $(148), respectively, for the three month period ended June 30 2011 and stock-based compensation charges of $276,419 and $761, respectively, for the six month period ended June 30, 2011. At June 30, 2011, options held by nonemployees to purchase 15,000 shares were unvested and subject to remeasurement.

The estimated fair value of share-based awards is recognized as a charge against income on a ratable basis over the requisite service period, which is generally the vesting period of the award. Total share-based compensation expense recognized in our condensed consolidated statements of operations for the three and six months ended June 30, 2011 and 2010 was as follows:

Summary of Compensation Expense
             
   
Three months ended.
June 30,
   
Three months ended.
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Costs of revenue
  $ 10,583       -     $ 78,525     $ . -  
General and administrative
    15,512     $ 7,195       46,313       80,372  
Sales and marketing
    22,465       -       152,342       -  
                                 
Total share-based compensation expenses
  $ 48,560     $ 7,195     $ 277,180     $ 80,372  

9. 
Earning per share

Basic earning per common share is computed by dividing income available to common shareholders by the weighted-averages number of shares of common stock outstanding during the period. Diluted earning per common share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock outstanding that would have been outstanding if the potentially dilutuve securities had been issued. Potentially dilutive securities include outstanding stock options, restricted shares. The dilutive effect of potentially dilutive securities is reflected in diluted earning per common share by application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of the Company’s common stock can result in a greater dilutive effect from potentially dilutive securities.
 
 
18

 
 
HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
 
The following tables set forth the computation of basic and diluted earnings per common share for the six months ended June 30, 2011 and 2010.

   
Six months ended
 
   
June 30,
   
June 30,
 
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
 
   
$
   
$
 
Numerator:
           
Net (loss)/income
    (386,286 )     3,166,047  
                 
Denominator:
               
Weighted-average shares outstanding
    13,582,106       13,582,106  
Effect of dilutive securities
    235,875       149,990  
Denominator:
               
                 
Weighted-average shares diluted
    13,817,981       13,732,096  
                 
Basic earning per common share
   
(0.03)
     
0.23
 
                 
Diluted earning per common share
   
(0.03)
     
0.23
 
 
10. 
Inventories

   
As of
 
   
June 30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
 
   
$
    $  
             
Raw materials
    3,846,184       3,743,307  
Work in progress
    1,125,255       1,847,390  
Finished goods
    7,512,333       7,841,283  
Packing materials
    17,427       15,452  
                 
      12,501,199       13,447,432  
 
 
19

 
 
HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
 
11. 
Plant and equipment

   
As of
 
   
June 30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
   
(Audited)
 
   
$
    $  
Cost
           
  Construction in progress
    5,435,875       3,499,495  
Furniture, fixtures and office equipment
    2,566,568       2,310,868  
Leasehold improvement
    487,341       732,560  
Machinery and equipment
    11,788,768       10,783,907  
Motor vehicles
    1,100,505       1,045,843  
Building
    262,156       253,709  
                 
      21,641,213       18,626,382  
                 
Accumulated depreciation
               
Construction in progress
    -       -  
Furniture, fixtures and office equipment
    1,191,234       962,193  
Leasehold improvement
    101,358       691,393  
Machinery and equipment
    3,514,770       2,890,437  
Motor vehicles
    516,172       417,193  
Building
    20,661       12,912  
                 
      5,344,195       4,974,128  
                 
Net
               
Construction in progress
    5,435,875       3,499,495  
Furniture, fixtures and office equipment
    1,375,334       1,348,675  
Leasehold improvement
    385,983       41,167  
Machinery and equipment
    8,273,998       7,893,470  
Motor vehicles
    584,333       628,650  
Building
    241,495       240,797  
                 
      16,297,018       13,652,254  

The components of depreciation charged are:

   
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
   
$
   
$
   
$
   
$
 
                         
Included in factory overheads
    330,946       244,005       633,340       535,335  
Included in operating expenses
    78,098       69,719       191,668       138,961  
                                 
      409,044       313,724       825,008       674,296  

12. 
Leasehold land

   
As of
 
   
June 30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
   
(Audited)
 
   
$
   
$
 
             
Cost
    3,322,256       3,215,205  
                 
Accumulated amortization
    (232,558 )     (192,912 )
                 
Net
    3,089,698       3,022,293  

The leasehold land is being amortized annually using the straight-line method over the lease terms of 50 years.
 
 
20

 
 
HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
 
13. 
Intangible asset – Consumer battery license

   
As of
 
   
June 30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
   
(Audited)
 
   
$
   
$
 
Cost
           
Consumer battery license fee
    1,000,000       1,000,000  
                 
Accumulated amortization
    (225,000 )     (200,000 )
                 
Net
    775,000       800,000  

Amortization expenses included in selling and distribution costs for the six months ended June 30, 2011 and 2010 was $25,000.

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

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

The Consumer Battery License Agreement also requires the Company to pay an additional up-front royalty payment of $1,000,000 by four annual installments and an annual royalty fee based on the gross sales of consumer batteries over the term of the Consumer Battery License Agreement. Accordingly, during the year ended December 31, 2007, the Company recorded a total up-front royalty payment obligation of $1,000,000, which was included in other payables and accrued liabilities, with the related debit recorded as an intangible asset entitled consumer battery license agreement. During the three months ended June 30, 2011, the Company recorded a total of approximately $121,190 as royalty expense, which was included in selling and distribution costs in the statement of operations. At June 30, 2011, accrued royalty fees payable was $847,368 (see Note 19).

The Company is amortizing the $1,000,000 cost of the Consumer Battery License Agreement over a period of 20 years on the straight line basis. The accounting for the Consumer Battery License Agreement is based on the Company’s estimate of the useful life of the underlying technology, which is based on the Company’s assessment of existing battery technology, current trends in the battery business, potential developments and improvements, and the Company’s current business plan.

14. 
Investment in an associate

   
As of
 
   
June 30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
   
(Audited)
 
   
$
   
$
 
             
Acquisition of associate
    142,514       142,514  
Share of loss - accumulated
    (43,363 )     (39,391 )
                 
Net
    99,151       103,123  
 
 
21

 
 
HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
 
On 22 March 2010, the group acquired 40% of the share capital of Springpower International, Inc, which is an intellectual properties development company operating in Canada. The group‘s share of the results of its associate and its aggregated assets and liabilities, are as follows:
 
Name
Country of Incorporation
Assets
Liabilities
Revenue
Loss
% Interest Held
At June 30, 2011
           
   
$
$
$
$
 
Springpower International, Inc.
Canada
359,645
85,715
3,234
111,641
40%
At December 31, 2010
           
   
$
$
$
$
 
Springpower International, Inc
Canada
369,052
78,612
3,045
101,523
40%

15. 
Investment Securities

   
As of
 
   
June 30,
2011
(Unaudited)
   
December 31,
2010
(Audited)
 
   
$
   
$
 
             
Investment securities - cost method
    55,698       53,904  

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

16. 
Fair Value Measurements

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

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

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

Level 3 — unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions.
 
 
22

 
 
HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES

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

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

The following table details the fair value measurements of assets and liabilities within the three levels of the fair value hierarchy at June 30 2011 and December 31 2010:

         
Fair Value Measurements at reporting date using
 
   
 
 
June 30, 2011
   
Quoted Price in active Markets for identical assets
(level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Other Unobservable Inputs
(Level 3)
 
   
 
   
 
   
 
   
 
 
Assets
                       
Accounts receivable
    21,475,717       -       -       21,475,717  
Prepaid expenses and other receivables
    7,109,918       -       -       7,109,918  
Notes receivable
    807,078       -       -       807,078  

Liabilities
                       
Non-trading foreign currency derivatives liabilities
    -       -       -       -  
Accounts payable
    11,406,634       -       -       11,406,634  
Other payables and accrued liabilities
    4,999,285       -       -       4,999,285  

         
Fair Value Measurements at reporting date using
 
   
 
 
December 31, 2010
   
Quoted Price in active Markets for identical assets
(level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Other Unobservable Inputs
(Level 3)
 
   
 
   
 
   
 
   
 
 
Assets
                       
Accounts receivable
    20,846,540       -       -       20,846,540  
Prepaid expenses and other receivables
    3,231,210       -       -       3,231,210  
Notes receivable
    256,574       -       -       256,574  
                                 
Liabilities
                               
Non-trading foreign currency derivatives liabilities
    77,699       -       77,699       -  
Accounts payable
    13,407,204       -       -       13,407,204  
Other payables and accrued liabilities
    4,983,269       -       -       4,983,269  
 
 
23

 
 
HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
 
 
 
Level 2 financial assets represent the fair value of our foreign currency exchange contracts that were valued using pricing models that take into account the contract terms as well as multiple inputs are applicable, such as currency rate. Level 3 financial assets represent the fair value of our accounts receivables.

17. 
Risk Management Activities, Including Derivative

The Company recognized the following gains and losses attributable to its derivative financial instruments during the following periods:
 
   
Six months ended June 30,
 
      2011       2010  
   
(Unaudited)
   
(Unaudited)
 
                 
Foreign exchange contracts, net
               
Gain recognized in Other income, net
    166,551       5,356  
 
Hedging Activities

Due to the volatility of the US Dollar to the Company’s functional currency, the Company has put into place a hedging program to attempt to protect it from significant changes to the US Dollar, which would affect the value of the Company’s US dollar receivables and sales. At June 30, 2011, the Company had a series of currency forwards totaling a notional amount US$25,500,000 expiring from July 2011 to January 2012.

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.

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 cash flow 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.
 
 
24

 
 
HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
 
The cost of the effective portion of the cash flow hedges was $293,857 and $11,039 for the six months ended June 30, 2011 and 2010, respectively.

18. 
Change in fair value of share warrants

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

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

On December 16, 2009, a warrant holder exercised 5,000 shares of the warrants via a cashless exercise. The Company issued 2,510 shares of common stock upon the exercise of the warrants at no consideration. At June 30, 2011, warrants to purchase 47,500 shares of common stock were still outstanding.

19. 
Other payables and accrued liabilities

   
As of
 
   
June 30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited$)
   
(Unaudited)
 
   
$
   
$
 
             
Accrued expenses
    2,315,767       2,469,391  
Royalty payable
    847,368       1,159,594  
Sales deposits received
    1,331,647       1,007,201  
Other payables
    504,503       347,083  
                 
      4,999,285       4,983,269  

20.
Bank borrowings

   
As of
 
   
June 30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
 
   
$
    $  
Secured:
           
Repayable within one year
           
Short term bank loans
    16,927,377       8,306,299  
Other trade related bank loans
    18,696,752       14,232,733  
                 
      35,624,129       22,539,032  

As of June 30, 2011, the above bank borrowings were secured by the following:

 
(a)
charge over bank deposits of $11,211,994 which is included in restricted cash on the Balance sheet;
 
 
25

 
 
HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
 
(b)  
personal guarantee executed by the directors of the Company;

(c)  
the legal charge over leasehold land with carrying amount $3,089,698 (see Note 12); and

(d)  
other financial covenant

The interest rates of trade related bank loans were at bank’s prime lending rate per annum with various maturity dates. The rates at June 30, 2011 ranged from 5.1% to 7.0%.

21. 
Pension plans

For employees in PRC, the Company contributes on a monthly basis to various defined contribution plans organized by the relevant municipal and provincial government in the PRC based on certain 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 Company 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 Company. Total pension cost was $402,316 and $268,196 for the six months ended June 30, 2011 and 2010, respectively.

22. 
Commitments and contingencies

Operating leases commitments

The Company leases factory and office premises under various non-cancelable operating lease agreements that expire at various dates through years 2010 to 2011, with an option to renew the lease. All leases are on a fixed repayment basis. None of the leases includes contingent rentals. Minimum future commitments under these agreements payable as of June 30, 2011 are as follows:

Period ending June 30,
 
$
 
       
2011
    532,843  
2012
    442,765  
         
      975,608  

Rent expenses for the six months ended June 30, 2011 and 2010 were $542,219 and $462,413, respectively.

23. 
Segment Information

The Company uses the “management approach” in determining reportable operating segments.  The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. Management, including the chief operating decision maker, reviews operating results solely by monthly revenue (but not by sub-product type or geographic area) and operating results of the Company and, as such, the Company has determined that the Company has one operating segment as defined by FASB Accounting Standard Codification Topic 280 (ASC 280) “Segment Reporting”.
 
 
26

 
 
HIGHPOWER INTERNATIONAL, INC AND SUBSIDIARIES

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

   
Six months ended June 30,
 
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
 
   
$
   
$
 
Net revenue
           
Hong Kong and China
    33,292,799       32,326,801  
Asia
    3,327,630       2,512,843  
Europe
    13,617,347       8,990,128  
North America
    6,309,050       5,122,431  
South America
    29,883       846  
Others
    82,111       248,437  
                 
      56,658,820       49,201,486  
 
   
As of
 
   
June 30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
 
   
$
    $  
Accounts receivable
           
Hong Kong and China
    16,082,593       14,944,284  
Asia
    439,064       603,275  
Europe
    3,780,350       3,441,242  
North America
    1,166,297       1,847,730  
South America
    192       2,080  
Africa
    7,221       7,929  
                 
      21,475,717       20,846,540  
 
 
27

 
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion relates to a discussion of the financial condition and results of operations of Highpower International, Inc. (the “Company”) and its wholly-owned subsidiary Hong Kong Highpower Technology Co., Ltd. (referred to herein as “HKHT”), and HKHT’s wholly-owned subsidiaries Shenzhen Highpower Technology Co., Ltd. (“Shenzhen Highpower”) and Springpower Technology (Shenzhen) Co., Ltd. (“Spring power”). HKHT’s other subsidiary, HZ Highpower Technology Co. (“HZ Highpower”) has not yet commenced operations. Shenzhen Highpower’s wholly-owned subsidiary, Ganzhou Highpower Technology Co., Ltd. (“GZ Highpower”), commenced business operations in September 2010. HKHT formed another wholly-owned subsidiary, Icon Energy System Co., Ltd., a company organized under the laws of the PRC, in February 2011, which has  commenced operations in April 2011.

Forward-Looking Statements

This management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and the related notes that are included in this Quarterly Report and the audited consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K for the year ended December 31, 2010.

This Quarterly Report contains forward-looking statements that involve substantial risks and uncertainties. All statements other than historical facts contained in this report, including statements regarding our future financial position, capital expenditures, cash flows, business strategy and plans and objectives of management for future operations, are 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. Such statements reflect our management’s current views with respect to future events and financial performance and involve risks and uncertainties, including, without limitation, the current economic downturn adversely affecting demand for the our products; fluctuations in the cost of raw materials; our dependence on, or inability to attract additional, major customers for a significant portion of our net sales; our ability to increase manufacturing capabilities to satisfy orders from new customers; changes in the laws of the PRC that affect our operations; our ability to complete construction at our new manufacturing facility on time; our ability to control operating expenses and costs related to the construction of our new manufacturing facility; the devaluation of the U.S. Dollar relative to the Renminbi; our dependence on the growth in demand for portable electronic devices and the success of manufacturers of the end applications that use our battery products; our responsiveness to competitive market conditions; our ability to successfully manufacture Li-ion batteries in the time frame and amounts expected; the market acceptance of our Li-ion products; changes in foreign, political, social, business and economic conditions that affect our production capabilities or demand for our products; and various other matters, many of which are beyond our control. Actual results may vary materially and adversely from those anticipated, believed, estimated or otherwise indicated should one or more of these risks or uncertainties occur or if any of the risks or uncertainties described in elsewhere in this report or in the “Risk Factors” section of our 2010 Annual Report occur. Consequently, all of the forward-looking statements made in this filing are qualified by these cautionary statements and there can be no assurance of the actual results or developments.

Overview

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 to Hong Kong Highpower Technology, Inc.  On October 20, 2010 we changed our name to Highpower International, Inc. On February 23, 2011, we created Icon Energy System Co., Ltd.

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.  Shenzhen Highpower formed GZ Highpower in September 2010.  GZ Highpower commenced business operations in September 2010. HZ Highpower has not yet commenced business operations. HKHT formed another wholly-owned subsidiary, Icon Energy System Co., Ltd., a company organized under the laws of the PRC, in February 2011, which has not yet commenced operations.

Through Shenzhen Highpower, we manufacture Nickel Metal Hydride (“Ni-MH”) batteries for both consumer and industrial applications. We have developed significant expertise in Ni-MH battery technology and large-scale manufacturing that enables us to improve the quality of our battery products, reduce costs, and keep pace with evolving industry standards. In 2008, we commenced manufacturing two lines of Lithium-Ion (“Li-ion”) and Lithium polymer rechargeable batteries through Spring Power 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.
 
 
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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 s