-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UA412G+5+4yV6YZ6TPR6mnV6Lmx3DyI2SrGaMnqFfhx1CsO6pPuyITl0yV3iIP+P O6GLc/OclYfK9Z9OJcoklw== 0001144204-08-035698.txt : 20080804 0001144204-08-035698.hdr.sgml : 20080804 20080618060237 ACCESSION NUMBER: 0001144204-08-035698 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 20080618 DATE AS OF CHANGE: 20080707 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Hong Kong Highpower Technology, Inc. CENTRAL INDEX KEY: 0001368308 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690] IRS NUMBER: 204062622 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-147355 FILM NUMBER: 08904539 BUSINESS ADDRESS: STREET 1: BLDG A1 LUOSHAN INDUSTRIAL ZONE STREET 2: SHANXIA PINGHU LONGGANG CITY: SHENZHEN GUANGDONG STATE: F4 ZIP: 518111 BUSINESS PHONE: 86 755 896 86238 MAIL ADDRESS: STREET 1: BLDG A1 LUOSHAN INDUSTRIAL ZONE STREET 2: SHANXIA PINGHU LONGGANG CITY: SHENZHEN GUANGDONG STATE: F4 ZIP: 518111 FORMER COMPANY: FORMER CONFORMED NAME: Hong Kong Highpower Technology DATE OF NAME CHANGE: 20071105 FORMER COMPANY: FORMER CONFORMED NAME: SRKP 11 INC DATE OF NAME CHANGE: 20060706 FORMER COMPANY: FORMER CONFORMED NAME: SKRP 11 INC DATE OF NAME CHANGE: 20060705 S-1/A 1 v117674_s1a.htm Unassociated Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
PRE-EFFECTIVE AMENDMENT NO. 4 ON
FORM S-1/A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
 

 
HONG KONG HIGHPOWER TECHNOLOGY, INC.
(Name of Registrant As Specified in its Charter)

Delaware
3690
20-4062622
(State or Other Jurisdiction of
(Primary Standard Industrial
(I.R.S. Employer Identification No.)
Incorporation
Classification Code Number)
 
or Organization)
   
 
Building A1, Luoshan Industrial Zone,
Shanxia, Pinghu, Longgang,
Shenzhen, Guangdong, 518111
People’s Republic of China
(Address and Telephone Number of Principal Executive Offices)
 

 
Dang Yu Pan
Building A1, Luoshan Industrial Zone,
Shanxia, Pinghu, Longgang,
Shenzhen, Guangdong, 518111
People’s Republic of China
(86) 755-89686238
(Name, Address and Telephone Number of Agent for Service)
 

 
Copies to
Thomas J. Poletti, Esq.
Katherine J. Blair, Esq.
Kirkpatrick & Lockhart Preston Gates Ellis LLP
10100 Santa Monica Blvd., 7th Floor
Los Angeles, CA 90067
Telephone (310) 552-5000
Facsimile (310) 552-5001
 
Joseph V. Stubbs, Esq.
Scott Galer, Esq.
Stubbs Alderton & Markiles, LLP
15260 Ventura Boulevard, 20th Floor
Sherman Oaks, California 91403
Telephone (818) 444-4500
Facsimile (818) 444-4520
 

 
Approximate Date of Proposed Sale to the Public: From time to time after the effective date of this Registration Statement

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.R

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. £

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. £

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement the same offering. £
 
CALCULATION OF REGISTRATION FEE

       
Proposed
 
Proposed
     
       
Maximum
 
Maximum
 
Amount of
 
Title of Each Class of
 
Amount To Be
 
Offering Price
 
Aggregate
 
Registration
 
Securities To Be Registered
  
Registered (1)
  
Per Share
  
Offering Price
 
Fee
 
Common Stock, $.0001 par value per share
   
546,250
(2)  
$
3.25
(2)
$
1,775,312
(2)
$
54.50
 
Common Stock, $.0001 par value per share
   
2,590,244
(3)
$
3.25
(4)  
$
8,418,293
(4)  
$
258.44
 
Total Registration Fee
                      
$
312.94
(5)
 
 
(1)
In accordance with Rule 416(a), the Registrant is also registering hereunder an indeterminate number of additional shares of common stock that shall be issuable pursuant to Rule 416 to prevent dilution resulting from stock splits, stock dividends or similar transactions.

 
(2)
The registration fee for securities to be offered by the Registrant is based on an estimate of the Proposed Maximum Aggregate Offering Price of the securities, and such estimate is solely for the purpose of calculating the registration fee pursuant to Rule 457(o). Includes shares which the underwriter has the option to purchase to cover over-allotments, if any.

 
(3)
This Registration Statement also covers the resale under a separate resale prospectus (the “Resale Prospectus”) by selling stockholders of the Registrant of up to 2,590,244 shares of Common Stock previously issued to such selling stockholders as named in the Resale Prospectus.

 
(4)
Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457.

 
(5)
The Company has previously paid $609.37.
 

 
The Registrant amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall hereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until the registration statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine.
 




EXPLANATORY NOTE

This Registration Statement contains two prospectuses, as set forth below.

 
·
IPO Prospectus. A prospectus to be used for the initial public offering by the Registrant of up to 475,000 shares of the Registrant's common stock (in addition to 71,250 shares that may be sold upon exercise of the underwriter’s over-allotment option) (the "IPO Prospectus") through the underwriter named on the cover page of the IPO Prospectus.

 
·
Resale Prospectus. A prospectus to be used for the resale by selling stockholders of up to 2,590,244 shares of the Registrant’s common stock (the “Resale Prospectus”).

The Resale Prospectus is substantively identical to the IPO Prospectus, except for the following principal points:

 
·
they contain different outside and inside front covers;
 
·
they contain different Offering sections in the Prospectus Summary section beginning on page 1;
 
·
they contain different Use of Proceeds sections on page 24;
 
·
the Dilution section is deleted from the Resale Prospectus on page 26;
 
·
a Selling Stockholder section is included in the Resale Prospectus beginning on page 68A;
 
·
references in the IPO Prospectus to the Resale Prospectus will be deleted from the Resale Prospectus;
 
·
the Underwriting section from the IPO Prospectus on page 72 is deleted from the Resale Prospectus and a Plan of Distribution is inserted in its place;
 
·
the Legal Matters section in the Resale Prospectus on page 74 deletes the reference to counsel for the underwriter; and
 
·
the outside back cover of the IPO Prospectus is deleted from the Resale Prospectus.

The Registrant has included in this Registration Statement, after the financial statements, a set of alternate pages to reflect the foregoing differences of the Resale Prospectus as compared to the IPO Prospectus.
 
Notwithstanding the Resale Prospectus, certain of the selling stockholders named in the Resale Prospectus holding an aggregate of 1,772,745 shares of common stock that were purchased in a private placement that closed on November 2, 2007 have agreed that they will not sell any of such securities until ninety (90) days after our common stock begins to be listed or quoted on either the New York Stock Exchange, American Stock Exchange, NASDAQ Global Market, NASDAQ Capital Market or the OTC Bulletin Board, when one-tenth of their shares are released from the lock up, after which their shares will automatically be released from the lock up on a monthly basis pro rata over a nine month period.
 

 
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission becomes effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.
 
PROSPECTUS

Subject to Completion, Dated June 18, 2008

 
475,000 SHARES
 
HONG KONG HIGHPOWER TECHNOLOGY, INC.

COMMON STOCK
 

 
We are a reporting company under Section 13 of the Securities Exchange Act of 1934, as amended. However, our shares of common stock are not currently listed or quoted for trading on any national securities exchange or national quotation system. The American Stock Exchange has approved the listing of our common stock under the ticker symbol “HPJ,” subject to official notice of issuance. The public offering price of our common stock will be $3.25 per share.
 
The purchase of the securities involves a high degree of risk. See section entitled “Risk Factors” beginning on page 6.
 

 

 
 
Per Share
 
Total
 
Public offering price 
 
$
[___
]
$
[___
]
Underwriting discounts and commissions 
 
$
[___
]
$
[___
]
Proceeds, before expenses, to Hong Kong Highpower Technology, Inc. 
 
$
[___
]
$
[___
]

 
The underwriter has a 45-day option to purchase up to 71,250 additional shares of common stock from us solely to cover over-allotments, if any.
 
The underwriter expects to deliver the shares of common stock to purchasers on or about __________, 2008.
 
Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved of anyone’s investment in these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 


WestPark Capital, Inc.
 

 
The Date of this Prospectus is: ____________________, 2008


 
Outside Company headquarters in Shenzhen
 
Consumer batteries manufactured by the Company (not to scale)

Industrial batteries manufactured by the Company (not to scale)
 


TABLE OF CONTENTS
 
PROSPECTUS SUMMARY
   
1
 
SUMMARY FINANCIAL DATA
   
5
 
RISK FACTORS
   
6
 
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
   
22
 
USE OF PROCEEDS
   
24
 
DIVIDEND POLICY
   
24
 
CAPITALIZATION
   
25
 
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
   
26
 
DILUTION
   
26
 
ACCOUNTING FOR THE SHARE EXCHANGE
   
27
 
SELECTED CONSOLIDATED FINANCIAL DATA
   
28
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   
29
 
DESCRIPTION OF BUSINESS
   
45
 
MANAGEMENT
   
56
 
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
   
63
 
BENEFICIAL OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
   
64
 
DESCRIPTION OF SECURITIES
   
66
 
SHARES ELIGIBLE FOR FUTURE SALE
   
69
 
UNDERWRITING
   
72
 
LEGAL MATTERS
   
74
 
EXPERTS
   
74
 
ADDITIONAL INFORMATION
   
74
 
INDEX TO FINANCIAL STATEMENTS
   
F-1
 
PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS
   
II-1
 
SIGNATURES
   
II-8
 
 

Please read this prospectus carefully. It describes our business, our financial condition and results of operations. We have prepared this prospectus so that you will have the information necessary to make an informed investment decision.

You should rely only on information contained in this prospectus. We have not, and the underwriter has not, authorized any other person to provide you with different information. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any state where the offer or sale is not permitted. The information in this prospectus is complete and accurate as of the date on the front cover, but the information may have changed since that date.
 

 

 
PROSPECTUS SUMMARY
 
Because this is only a summary, it does not contain all of the information that may be important to you. You should carefully read the more detailed information contained in this prospectus, including our financial statements and related notes. Our business involves significant risks. You should carefully consider the information under the heading "Risk Factors" beginning on page 6. Except as otherwise specified, all information in this prospectus and all per share information has been adjusted to reflect a reverse stock split that is to be effected prior to the completion of this offering in which each 8 outstanding shares of our common stock will be converted into 5 shares of our common stock.

Hong Kong Highpower Technology, Inc.

We specialize in the development, manufacturing and marketing of rechargeable Nickel Metal Hydride (“Ni-MH”) batteries and related products primarily in China. Our batteries are used in a variety of electronic devices, including:

 
·
personal portable electronic devices, such as digital cameras, DVD players, electric razors and electric toothbrushes;
 
 
·
electric toys, such as radio-controlled cars;
 
 
·
industrial applications, such as industrial lighting, medical devices and communications equipment;
 
 
·
power tools; and
 
 
·
electric bikes.
 
Additionally, we are in the production stage of manufacturing a line of rechargeable Lithium-ion (“Li-ion”) batteries by producing samples for potential customers. Our manufacturing and products development facilities are located in the People’s Republic of China (“PRC”), which enables us to produce cost-effective products and increases our competitiveness in the rechargeable battery market. Most of our products are distributed worldwide to markets in Europe, the United States, China, Hong Kong, Southeast Asia, Taiwan and emerging markets, such as India, Latin America and Russia.

Corporate Information

We were incorporated in the State of Delaware on January 3, 2006. We were originally organized as a “blank check” shell company to investigate and acquire a target company or business seeking the perceived advantages of being a publicly held corporation.

On November 2, 2007, we closed a share exchange transaction, described below, pursuant to which we (i) became the 100% parent of Hong Kong Highpower Technology Company Limited, a Hong Kong company (“HKHT”), and HKHT’s wholly-owned subsidiary Shenzhen Highpower Technology Co., Ltd., a company formed under the laws of the People’s Republic of China (“Shenzhen Highpower”), (ii) assumed the operations of HKHT and its subsidiary and (iii) changed our name from SRKP 11, Inc. to Hong Kong Highpower Technology, Inc.

We are a reporting company under Section 13 of the Securities Exchange Act of 1934, as amended. However, our shares of common stock are not currently listed or quoted for trading on any national securities exchange or national quotation system. The American Stock Exchange has approved the listing of our common stock under the ticker symbol “HPJ,” subject to official notice of issuance.

Shenzhen Highpower and HKHT were founded in founded in 2001 and 2003, respectively. HKHT formed another subsidiary, HZ Highpower Technology Ltd. in January 2008 which has not yet commenced operations.

Our corporate offices are located at Building A1, Luoshan Industrial Zone, Shanxia, Pinghu, Longgang, Shenzhen, Guangdong, 518111, People’s Republic of China. Our telephone number is (86) 755-89686238.

1



 
Recent Events

Reverse Stock Split

On May 27, 2008, we filed a definitive information statement on Schedule 14C with the Securities and Exchange Commission (“SEC”) announcing that our Board of Directors and our stockholders have approved an amendment to our Certificate of Incorporation to effect a 5-for-8 reverse stock split of all of our issued and outstanding shares of common stock (the “Reverse Stock Split”). To effect the Reverse Stock Split, we will file the amendment to the Certificate of Incorporation with the Secretary of the State of Delaware, which will not be done sooner than 20 days after the information statement was mailed to our stockholders. We anticipate that the Reverse Stock Split will occur before the effective date of the offering contemplated herein, as the holders of a majority of the outstanding shares of our common stock have provided their consent to such corporate action. The par value and number of authorized shares of our common stock will remain unchanged. All references to number of shares and per share amounts included in this prospectus gives effect to the Reverse Stock Split. The number of shares and per share amounts included in the consolidated financial statements and the accompanying notes, included in the F- section have been adjusted to reflect the Reverse Stock Split retroactively. Unless otherwise indicated, if and when we effect the Reverse Stock Split, all outstanding shares and earnings per share information contained in this prospectus gives effect to the Reverse Stock Split.

Completion of Share Exchange

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

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

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

Pursuant to the terms of the Share Exchange, we agreed to register a total of 1,777,128 shares of common stock held by our stockholders immediately prior to the Share Exchange. Of these 1,777,128 shares, 817,479 shares are covered by a resale registration statement filed in connection with the Private Placement (described below), which we originally filed with the Securities and Exchange Commission (“SEC”) on November 13, 2007, and 959,649 shares, which are held by affiliates of WestPark Capital, Inc. (“WestPark”), are to be included in a subsequent registration statement which we originally agreed to file no later than the tenth (10th) day after the end of the six (6) month period that immediately followed November 13, 2007 (the “Required Filing Date”). Although we have not yet filed the registration statement to cover the 959,649 shares held by the WestPark affiliates, we have agreed to extend the Required Filing Date so that we will file the registration statement as soon as practicable after his offering. WestPark acted as the placement agent in the Private Placement.

With respect to the registration statement that we will file to cover the 959,649 shares of common stock held by the WestPark affiliates, we agreed to use our reasonable best efforts to cause the registration statement to become effective within 150 days after the filing date or 180 days after the filing date if the registration statement is subject to a full review by the SEC. In addition, we agreed to use our reasonable best efforts to maintain the registration statement effective for a period of 24 months at our expense. We also agreed to a penalty provision pursuant to which we will issue additional shares of our common stock to the WestPark affiliates if we fail to timely file and maintain the registration statement. Although we have not yet filed the registration statement to cover the shares held by the WestPark affiliates, the penalties related to timely filing have been waived based on the Company’s agreement to file the registration statement as soon as practicable after this offering.

2

 

 
Immediately after the closing of the Share Exchange, we changed our corporate name from “SRKP 11, Inc.” to “Hong Kong Highpower Technology, Inc.” The shares of our common stock are not currently listed or quoted for trading on any national securities exchange or national quotation system. The American Stock Exchange has approved the listing of our common stock under the ticker symbol “HPJ,” subject to official notice of issuance.

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

Private Placement

On November 2, 2007, concurrently with the close of the Share Exchange, we received gross proceeds of $3.1 million in a private placement transaction (the “Private Placement”). Pursuant to subscription agreements entered into with the investors, we sold an aggregate of 1,772,745 shares of common stock at $1.76 per share. The investors in the Private Placement also entered into a lock up agreement pursuant to which they agreed not to sell their shares until ninety (90) days after our common stock begins to be listed or quoted on either the New York Stock Exchange, American Stock Exchange, NASDAQ Global Market, NASDAQ Capital Market or the OTC Bulletin Board, when one-tenth of their shares are released from the lock up, after which their shares will automatically be released from the lock up on a monthly basis pro rata over a nine month period. After commissions and expenses related to the Private Placement, we received net proceeds of approximately $2,738,000 in the Private Placement. The purpose of the Private Placement was to raise working capital. All of the proceeds from the Private Placement were used for working capital and the development of our lithium-ion battery manufacturing business.

We agreed to file a registration statement covering the common stock sold in the Private Placement within thirty days of the closing of the Share Exchange pursuant to the subscription agreement with each investor. We filed the registration statement within that timeframe. We are required to use our reasonable best efforts to cause the registration statement to become effective within one hundred and 150 days after the closing or 180 days after the closing if the registration statement is subject to a full review by the SEC. We are also required to use our reasonable best efforts to maintain the registration statement effective for a period of 24 months at our expense.

WestPark acted as placement agent in connection with the Private Placement. For its services in connection with the Share Exchange and as placement agent, WestPark received an aggregate commission equal to 10% of the gross proceeds from the Private Placement, in addition to $30,000 in connection with the execution of the Exchange Agreement and a $40,000 success fee for the Share Exchange, for an aggregate amount fee of $382,000. No other consideration was paid to WestPark or to SRKP 11 in connection with the Share Exchange or Private Placement. Some of the controlling shareholders and control persons of WestPark were also, prior to the completion of the Share Exchange, controlling shareholders and control persons of our company, including Richard Rappaport, who is the Chief Executive Officer of WestPark and was the President and a significant shareholder of our company prior to the Share Exchange, and Anthony C. Pintsopoulos, who is the Chief Financial Officer of WestPark and was a controlling stockholder and an officer and director of our company prior to the Share Exchange. Each of Messrs. Rappaport and Pintsopoulos resigned from all of their executive and director positions with our company upon the closing of the Share Exchange.
 
3

 

 
The Offering

Common stock offered we are offering
 
 
475,000 shares (1)
 
Common stock outstanding after the offering
 
 
13,273,846 shares (2)
 
Offering price
 
 
$3.25 per share
 
Use of proceeds
 
 
We intend to use the net proceeds of this offering for general corporate purposes. See "Use of Proceeds" on page 24 for more information on the use of proceeds.
 
Risk factors
 
 
Investing in these securities involves a high degree of risk. As an investor you should be able to bear a complete loss of your investment. You should carefully consider the information set forth in the “Risk Factors” section beginning on page 6.
 


 
(1)
Excludes up to 71,250 shares that may be sold upon the underwriter’s over-allotment option. We are also concurrently registering for resale under a separate prospectus up to 2,590,244 shares of our common stock held by the selling stockholders named under a prospectus. None of these securities are being offered by us and we will not receive any proceeds from the sale of these shares. For additional information, see above under “Prospectus Summary - Recent Events.”

 
(2)
Based on 12,798,846 shares of common stock issued and outstanding as of June 17, 2008 and excludes 160,000 shares of common stock that the Company has agreed to issue upon effectiveness of the registration statement of which this prospectus is a part.
 
4

 

 
SUMMARY FINANCIAL DATA
 
The following summary financial information contains consolidated statement of operations data for the three months ended March 31, 2008 and 2007 (unaudited) and for each of the years in the five-year period ended December 31, 2007 and the consolidated balance sheet data as of March 31, 2008 and year-end for each of the years in the five-year period ended December 31, 2007. The consolidated statement of operations data and balance sheet data were derived from the audited consolidated financial statements, except for data for periods ended and as of March 31, 2008 and 2007 and December 31, 2003. Such financial data should be read in conjunction with the consolidated financial statements and the notes to the consolidated financial statements starting on page F-1 and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Consolidated Statements of
Operations
 
Three Months Ended March 31,
 
Year Ended December 31,
 
   
2008
 
2007
 
2007
 
2006
 
2005
 
2004
 
2003
 
 
 
(unaudited)
 
(unaudited)
 
(restated)
 
(restated) 
 
 
     
(unaudited)
 
                               
 
 
(in thousands)
 
Net sales
 
$
17,832
 
$
11,540
 
$
73,262
 
$
44,376
 
$
25,010
 
$
10,956
 
$
3,599
 
 
                                     
Cost of sales
   
(15,123
)
 
(10,483
)
 
(63,791
)
 
(36,959
)
 
(20,757
)
 
(9,306
)
 
(3,290
)
 
                                     
Gross profit
   
2,708
   
1,056
   
9,471
   
7,417
   
4,253
   
1,651
   
309
 
 
                                     
Depreciation
   
(49
)
 
(26
)
 
(121
)
 
(80
)
 
(46
)
 
(25
)
 
(10
)
                                             
Selling and distribution costs
   
(414
)
 
(473
)
 
(2,096
)
 
(1,634
)
 
(857
)
 
(641
)
 
(61
)
                                             
General and administrative costs
   
(770
)
 
(935
)
 
(3,461
)
 
(1,960
)
 
(854
)
 
(549
)
 
(181
)
                                             
Loss on exchange rate difference
   
(505
)
 
(72
)
 
(855
)
 
(199
)
 
-
   
-
   
-
 
                                             
Fees and costs related to reorganization
   
-
   
-
   
(582
)
 
(75
)
 
-
   
-
   
-
 
                                             
Income (loss) from operations
   
970
   
(450
)
 
2,357
   
3,468
   
2,496
   
435
   
57
 
                                             
Change in fair value of currency forwards
   
29
   
-
   
-
   
-
   
-
   
-
   
-
 
                                             
Other income
   
105
   
42
   
149
   
59
   
58
   
33
   
-
 
 
                                     
Interest expense
   
(207
)
 
(137
)
 
(696
)
 
(254
)
 
(55
)
 
(10
)
 
-
 
 
                                     
Income (loss) before taxes
   
897
   
(546
)
 
1,809
   
3,273
   
2,499
   
458
   
57
 
 
                                     
Income taxes
   
(167
)
 
43
   
(145
)
 
(241
)
 
(188
)
 
17
   
-
 
                                             
Net income (loss)
 
$
730
 
$
(503
)
$
1,664
 
$
3,032
 
$
2,311
 
$
475
 
$
57
 
                                             
Net income (loss) per common share – basic and diluted
 
$
0.06
 
$
(0.05
)
$
0.17
 
$
0.33
 
$
0.25
 
$
0.05
 
$
0.01
 
                                             
Weighted average common shares outstanding – basic and diluted
   
12,798,846
   
9,248,973
   
9,832,493
   
9,248,973
   
9,248,973
   
9,248,973
   
9,248,973
 
                                             
Dividends declared per common share
 
$
-
 
$
-
 
$
0.07
 
$
-
 
$
-
 
$
-
 
$
-
 
 
Consolidated Balance Sheets
 
As of March 31,
 
As of December 31,
 
   
2008
 
2007
 
2006
 
2005
 
2004
 
2003
 
 
 
(unaudited)
     
 
 
 
 
 
 
(unaudited)
 
 
         
(in thousands)
 
                           
Current Assets
 
$
42,560
 
$
40,167
 
$
28,573
 
$
12,851
 
$
6,322
 
$
1,910
 
Total Assets
   
51,883
   
48,920
   
31,736
   
14,585
   
7,378
   
2,317
 
Current Liabilities
   
39,378
   
37,366
   
24,571
   
10,728
   
5,907
   
2,056
 
Total Liabilities
   
39,378
   
37,366
   
24,571
   
10,728
   
5,907
   
2,140
 
Total Stockholders’ Equity
   
12,505
   
11,554
   
7,165
   
3,857
   
1,472
   
177
 
  
5

 
RISK FACTORS
 
Any investment in our common stock involves a high degree of risk. Investors should carefully consider the risks described below and all of the information contained in this prospectus before deciding whether to purchase our common stock. Our business, financial condition or results of operations could be materially adversely affected by these risks if any of them actually occur. Our shares of common stock are not currently listed or quoted for trading on any national securities exchange or national quotation system. If and when our common stock is traded, the trading price could decline due to any of these risks, and an investor may lose all or part of his investment. Some of these factors have affected our financial condition and operating results in the past or are currently affecting our company. This prospectus also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks we face as described below and elsewhere in this prospectus. With respect to this discussion, the terms, “we,” “us,” or “our” refer to Hong Kong Highpower Technology, Inc., and our 100%-owned subsidiary Hong Kong Highpower Technology Company Limited (“HKHT”) and its wholly-owned subsidiaries, Shenzhen Highpower Technology Co., Ltd. (“Shenzhen Highpower”) and HZ Highpower Technology Co., Ltd.
 
RISKS RELATED TO OUR OPERATIONS

Our limited operating history may not serve as an adequate basis to evaluate our future prospects and results of operations.
 
We have a limited operating history. We were established in GuangZhou, China in 2001 and commenced operations in Shenzhen in 2002. Our limited operating history may not provide a meaningful basis for an investor to evaluate our business, financial performance and prospects. We may not be able to:

 
maintain our leading position in the Ni-MH battery market;

 
successfully develop our Li-ion battery business;

 
retain existing customers or acquire new customers;

 
diversify our revenue sources by successfully developing and selling our products in the global battery market and other markets;

 
keep up with evolving industry standards and market developments;

 
respond to competitive market conditions;

 
maintain adequate control of our expenses;
 
 
·
manage our relationships with our suppliers;
 
 
·
attract, train, retain and motivate qualified personnel; or
 
 
·
protect our proprietary technologies.

If we are unsuccessful in addressing any of these challenges, our business may be materially and adversely affected.

Our business depends in large part on the growth in demand for portable electronic devices.

Many of our battery products are used to power various portable electronic devices. Therefore, the demand for our batteries is substantially tied to the market demand for portable electronic devices. A growth in the demand for portable electronic devices will be essential to the expansion of our business. We intend to expand manufacturing capabilities at our manufacturing facilities in order to meet the increased demand for our products. A decrease in the demand for portable electronic devices would likely have a material adverse effect on our results of operations.

6


Our success depends on the success of manufacturers of the end applications that use our battery products.

Because our products are designed to be used in other products, our success depends on whether end application manufacturers will incorporate our batteries in their products. Although we strive to produce high quality battery products, there is no guarantee that end application manufacturers will accept our products. Our failure to gain acceptance of our products from these manufacturers could result in a material adverse effect on our results of operations.

Additionally, even if a manufacturer decides to use our batteries, the manufacturer may not be able to market and sell its products successfully. The manufacturer’s inability to market and sell its products successfully could materially and adversely affect our business and prospects because this manufacturer may not order new products from us. Therefore, our business, financial condition, results of operations and future success would be materially and adversely affected.

We are and will continue to be subject to rapidly declining average selling prices, which may harm our results of operations.

Portable consumer electronic devices, such as cellular phones, DVD players, and laptop computers are subject to rapid declines in average selling prices due to rapidly evolving technologies, industry standards and consumer preferences. Therefore, electronic device manufacturers expect suppliers, such as our company, to cut their costs and lower the price of their products to lessen the negative impact on the electronic device manufacturer’s own profit margins. As a result, we have previously reduced the price of some of our battery products and expect to continue to face market-driven downward pricing pressures in the future. Our results of operations will suffer if we are unable to offset any declines in the average selling prices of our products by developing new or enhanced products with higher selling prices or gross profit margins, increasing our sales volumes or reducing our production costs.

Our success is highly dependent on continually developing new and advanced products, technologies, and processes and failure to do so may cause us to lose our competitiveness in the battery industry and may cause our profits to decline.

To remain competitive in the battery industry, it is important to continually develop new and advanced products, technologies, and processes. There is no assurance that competitors’ new products, technologies, and processes will not render our existing products obsolete or non-competitive. Alternately, changes in legislative, regulatory or industry requirements or in competitive technologies may render certain of our products obsolete or less attractive. Our competitiveness in the battery market therefore relies upon our ability to enhance our current products, introduce new products, and develop and implement new technologies and processes. We currently only manufacture and market Nickel Metal Hydride batteries and if our competitors develop alternative products with more enhanced features than our products, our financial condition and results of operations would be materially and adversely affected.

The research and development of new products and technologies is costly and time consuming, and there are no assurances that our research and development of new products will either be successful or completed within anticipated timeframes, if at all. Our failure to technologically evolve and/or develop new or enhanced products may cause us to lose competitiveness in the battery market and may cause our profits to decline. In addition, in order to compete effectively in the battery industry, we must be able to launch new products to meet our customers’ demands in a timely manner. However, we cannot provide assurance that we will be able to install and certify any equipment needed to produce new products in a timely manner, or that the transitioning of our manufacturing facility and resources to full production under any new product programs will not impact production rates or other operational efficiency measures at our manufacturing facility. In addition, new product introductions and applications are risky, and may suffer from a lack of market acceptance, delays in related product development and failure of new products to operate properly. Any failure by us successfully to launch new products, or a failure by our customers to accept such products, could adversely affect our results.
 
7


We have historically depended on a limited number of customers for a significant portion of our revenues and this dependence is likely to continue.

We have historically depended on a limited number of customers for a significant portion of our net sales. Our top five customers accounted for approximately 67.5%, 57% and 37.4% of our net sales for the three months ended March 31, 2008 and the years ended December 31, 2007 and 2006, respectively. We anticipate that a limited number of customers will continue to contribute to a significant portion of our net sales in the future. Maintaining the relationships with these significant customers is vital to the expansion and success of our business, as the loss of a major customer could expose us to risk of substantial losses. Our sales and revenue could decline and our results of operations could be materially adversely affected if one or more of these significant customers stops or reduces its purchasing of our products, or if we fail to expand our customer base for our products.

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

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

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

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

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

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

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

Our industry is subject to supply shortages, which could limit the amount of supply available of certain required battery components. Any delay or inability to obtain supplies may have a material adverse effect on our business.

8


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

Our future operating results may be affected by fluctuations in costs of raw materials, such as nickel. 

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

All of our products are shipped through third party carriers. If a strike or other event prevented or disrupted these carriers from transporting our products, other carriers may be unavailable or may not have the capacity to deliver our products to our customers. If adequate third party sources to ship our products were unavailable at any time, our business would be materially adversely affected.

We may not be able to increase our manufacturing output in order to maintain our competitiveness in the battery industry.

We believe that our ability to provide cost-effective products represents a significant competitive advantage over our competitors. In order to continue providing such cost-effective products, we must maximize the efficiency of our production processes and increase our manufacturing output to a level that will enable us to reduce the per-unit production cost of our products. Our ability to increase our manufacturing output is subject to certain significant limitations, including:

 
·
our ability raise capital to acquire additional raw materials and expand our manufacturing facilities;
 
 
·
delays and cost overruns, due to increases in raw material prices and problems with equipment vendors;
 
 
·
delays or denial of required approvals and certifications by relevant government authorities;
 
 
·
diversion of significant management attention and other resources; and
 
 
·
failure to execute our expansion plan effectively.
 
If we are not able to increase our manufacturing output and reduce our per-unit production costs, we may be unable to maintain our competitive position in the battery industry. Moreover, even if we expand our manufacturing output, we may not be able to generate sufficient customer demand for our products to support our increased production output.

The market for our products and services is very competitive and, if we cannot effectively compete, our business will be harmed.

The market for our products and services is very competitive and subject to rapid technological change. Many of our competitors are larger and have significantly greater assets, name recognition and financial, personnel and other resources than we have. As a result, our competitors may be in a stronger position to respond quickly to potential acquisitions and other market opportunities, new or emerging technologies and changes in customer requirements. We cannot assure you that we will be able to maintain or increase our market share against the emergence of these or other sources of competition. Failure to maintain and enhance our competitive position could materially adversely affect our business and prospects.

9

 
Warranty claims, product liability claims and product recalls could harm our business, results of operations and financial condition.

Our business inherently exposes us to potential warranty and product liability claims, in the event that our products fail to perform as expected or such failure of our products results, or is alleged to result, in bodily injury or property damage (or both). Such claims may arise despite our quality controls, proper testing and instruction for use of our products, either due to a defect during manufacturing or due to the individual’s improper use of the product. In addition, if any of our designed products are or are alleged to be defective, then we may be required to participate in a recall of them.

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

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

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

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

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

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

10


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

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

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

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

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

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

Any significant growth in the market for our products or our entry into new markets may require and expansion of our employee base for managerial, operational, financial, and other purposes. As of March 31, 2008, we had approximately 2,480 full time employees. During any growth, we may face problems related to our operational and financial systems and controls, including quality control and delivery and service capacities. We would also need to continue to expand, train and manage our employee base. Continued future growth will impose significant added responsibilities upon the members of management to identify, recruit, maintain, integrate, and motivate new employees.

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

11

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

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

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

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

Our planned expansion into new and existing international markets poses additional risks and could fail, which could cost us valuable resources and affect our results of operations.

We plan to expand sales of our products into new and existing international markets including developing and developed countries, such as Japan, Russia, India, and Brazil.  These markets are untested for our products and we face risks in expanding the business overseas, which include differences in regulatory product testing requirements, intellectual property protection (including patents and trademarks), taxation policy, legal systems and rules, marketing costs, fluctuations in currency exchange rates and changes in political and economic conditions.

Our quarterly results may fluctuate because of many factors and, as a result, investors should not rely on quarterly operating results as indicative of future results.

Fluctuations in operating results or the failure of operating results to meet the expectations of public market analysts and investors may negatively impact the value of our securities. Quarterly operating results may fluctuate in the future due to a variety of factors that could affect revenues or expenses in any particular quarter. Fluctuations in quarterly operating results could cause the value of our securities to decline. Investors should not rely on quarter-to-quarter comparisons of results of operations as an indication of future performance. As a result of the factors listed below, it is possible that in future periods results of operations may be below the expectations of public market analysts and investors. This could cause the market price of our securities to decline. Factors that may affect our quarterly results include:
 
 
vulnerability of our business to a general economic downturn in China;

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

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

 
competition from our competitors; and
 
12


 
our ability to obtain necessary government certifications and/or licenses to conduct our business.

RISKS RELATED TO DOING BUSINESS IN CHINA

Substantially all of our assets are located in the PRC and substantially all of our revenues are derived from our operations in China, and changes in the political and economic policies of the PRC government could have a significant impact upon the business we may be able to conduct in the PRC and accordingly on the results of our operations and financial condition.

Our business operations may be adversely affected by the current and future political environment in the PRC. The Chinese government exerts substantial influence and control over the manner in which we must conduct our business activities. Our ability to operate in China may be adversely affected by changes in Chinese laws and regulations, including those relating to taxation, import and export tariffs, raw materials, environmental regulations, land use rights, property and other matters. Under the current government leadership, the government of the PRC has been pursuing economic reform policies that encourage private economic activity and greater economic decentralization. There is no assurance, however, that the government of the PRC will continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice.

Our operations are subject to PRC laws and regulations that are sometimes vague and uncertain. Any changes in such PRC laws and regulations, or the interpretations thereof, may have a material and adverse effect on our business.

The PRC’s legal system is a civil law system based on written statutes. Unlike the common law system prevalent in the United States, decided legal cases have little value as precedent in China. There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including but not limited to, the laws and regulations governing our business, or the enforcement and performance of our arrangements with customers in the event of the imposition of statutory liens, death, bankruptcy or criminal proceedings. The Chinese government has been developing a comprehensive system of commercial laws, and considerable progress has been made in introducing laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade. However, because these laws and regulations are relatively new, and because of the limited volume of published cases and judicial interpretation and their lack of force as precedents, interpretation and enforcement of these laws and regulations involve significant uncertainties. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively.
 
Our principal operating subsidiary, Shenzhen Highpower Technology Co., Ltd, (“Shenzhen Highpower”) is considered a foreign invested enterprise under PRC laws, and as a result is required to comply with PRC laws and regulations, including laws and regulations specifically governing the activities and conduct of foreign invested enterprises. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our businesses. If the relevant authorities find us in violation of PRC laws or regulations, they would have broad discretion in dealing with such a violation, including, without limitation:

 
levying fines;

 
revoking our business license, other licenses or authorities;

 
requiring that we restructure our ownership or operations; and

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

The scope of our business license in China is limited, and we may not expand or continue our business without government approval and renewal, respectively.

Our principal operating subsidiary, Shenzhen Highpower, is a wholly foreign-owned enterprise, commonly known as a WFOE. A WFOE can only conduct business within its approved business scope, which ultimately appears on its business license. Our license permits us to design, manufacture, sell and market battery products throughout the PRC. Any amendment to the scope of our business requires further application and government approval. In order for us to expand our business beyond the scope of our license, it will be required to enter into a negotiation with the authorities for the approval to expand the scope of our business. We cannot assure investors that Shenzhen Highpower will be able to obtain the necessary government approval for any change or expansion of its business.

13

 
We are subject to a variety of environmental laws and regulations related to our manufacturing operations. Our failure to comply with environmental laws and regulations may have a material adverse effect on our business and results of operations.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We have enjoyed certain preferential tax concessions and the loss of these preferential tax concessions may cause its tax liabilities to increase and its profitability to decline.
 
Our operating subsidiary, Shenzhen Highpower, is subject to a reduced enterprise income tax rate of 15%, which is granted to all enterprises operating in the Shenzhen Special Economic Zone. From 2005 to 2007, Shenzhen Highpower enjoyed a preferential income tax rate of 7.5% due to its status as a new business and high-tech enterprise. That status expired on December 31, 2007. The expiration of the preferential tax treatment will increase our tax liabilities and reduce our profitability. Additionally, the PRC Enterprise Income Tax Law (the “EIT Law”) was enacted on March 16, 2007. Under the EIT Law, effective January 1, 2008, China will adopt a uniform tax rate of 25.0% for all enterprises (including foreign-invested enterprises) and cancel several tax incentives enjoyed by foreign-invested enterprises. Since the PRC government has not announced implementation measures for the transitional policy with regards to such preferential tax rates, we cannot reasonably estimate the financial impact of the new tax law to us at this time. Any future increase in the enterprise income tax rate applicable to us or other adverse tax treatments, could increase our tax liabilities and reduce our net income.

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

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

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

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

 
a general slowdown in the Chinese economy.

Any of the foregoing events or other unforeseen consequences of public health problems could adversely affect our operations.
 
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A downturn in the economy of the PRC may slow our growth and profitability.

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

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

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

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

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

RISKS RELATED TO OUR CAPITAL STRUCTURE

There is no current trading market for our common stock, and there is no assurance of an established public trading market, which would adversely affect the ability of our investors to sell their securities in the public market.
 
Our common stock is not currently listed or quoted for trading on any national securities exchange or national quotation system. The American Stock Exchange (“AMEX”) has approved the listing of our common stock under the ticker symbol “HPJ,” subject to official notice of issuance. However, there is no guarantee that AMEX, or any other exchange or quotation system, will permit our shares to be listed and traded. If we fail to obtain a listing on the American Stock Exchange, we may seek quotation on the OTC Bulletin Board. The Financial Industry Regulatory Authority has enacted changes that limit quotations on the OTC Bulletin Board to securities of issuers that are current in their reports filed with the Securities and Exchange Commission. The effect on the OTC Bulletin Board of these rule changes and other proposed changes cannot be determined at this time. The OTC Bulletin Board is an inter-dealer, over-the-counter market that provides significantly less liquidity than the NASDAQ Global Market or AMEX. Quotes for stocks included on the OTC Bulletin Board are not listed in the financial sections of newspapers as are those for the NASDAQ Global Market or AMEX. Therefore, prices for securities traded solely on the OTC Bulletin Board may be difficult to obtain and holders of common stock may be unable to resell their securities at or near their original offering price or at any price.

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Shares eligible for future sale may adversely affect the market price of our common stock, as the future sale of a substantial amount of outstanding stock in the public marketplace could reduce the price of our common stock.
 
Pursuant to the terms of the Share Exchange, we agreed to file a registration statement with the Securities and Exchange Commission to register the shares of our common stock issued in an equity financing that that was conducted in connection with the Share Exchange that closed on November 2, 2007. The investors in the Private Placement also entered into a lock-up agreement pursuant to which they agreed not to sell their shares until ninety (90) days after our common stock begins to be listed or quoted on either the New York Stock Exchange, American Stock Exchange, NASDAQ Global Market, NASDAQ Capital Market or the OTC Bulletin Board, after which their shares will automatically be released from the lock up on a monthly basis.

We also agreed to register all of the 1,777,128 shares of common stock held by our stockholders who were stockholders immediately prior to the Share Exchange. Of the 1,777,128 shares held by our stockholders prior to the Share Exchange, we agreed to register 817,479 shares in the registration statement filed in connection with the Private Placement and the remaining 959,649 shares in a subsequent registration statement to be filed by us as soon as practicable after the registration statement, of which this prospectus is a part, is declared effective. All of the shares included in an effective registration statement as described above may be freely sold and transferred except if subject to a lock up agreement.

Additionally, subject to lock-up agreement entered into with WestPark Capital, Inc. pursuant to which the former stockholders of HKHT and their designees agreed not to sell their shares for a period of 12 months from the date of this prospectus, the former shareholders of HKHT and/or their designees may be eligible to sell all or some of our shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act (“Rule 144”), subject to certain limitations. In general, pursuant to Rule 144, a non-affiliate stockholder (or stockholders whose shares are aggregated) who has satisfied a six-month holding period, and provided that there is current public information available, may sell all of its securities. Rule 144 also permits the sale of securities, without any limitations, by a non-affiliate that has satisfied a one-year holding period. Any substantial sale of common stock pursuant to any resale prospectus or Rule 144 may have an adverse effect on the market price of our common stock by creating an excessive supply.
 
Following the Share Exchange, the former principal shareholders of HKHT have significant influence over us.

The former shareholders of HKHT beneficially own or control approximately 72.3% of our outstanding shares as of the close of the Share Exchange. If these shareholders were to act as a group, they would have a controlling influence in determining the outcome of any corporate transaction or other matters submitted to our stockholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets, election of directors, and other significant corporate actions. Such shareholders may also have the power to prevent or cause a change in control. In addition, without the consent of the former HKHT shareholders, we could be prevented from entering into transactions that could be beneficial to us. The interests of the former HKHT shareholders may differ from the interests of our other stockholders.

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

We are required to establish and maintain appropriate internal controls over financial reporting. Failure to establish those controls, or any failure of those controls once established, could adversely impact our public disclosures regarding our business, financial condition or results of operations. Any failure of these controls could also prevent us from maintaining accurate accounting records and discovering accounting errors and financial frauds. Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require annual assessment of our internal control over financial reporting, and attestation of this assessment by our independent registered public accountants. The SEC extended the compliance dates for non-accelerated filers, as defined by the SEC. Accordingly, we included management's assessment of our internal control over financial reporting as of the end of the previous fiscal year in our annual report on Form 10-K for the year ended December 31, 2007. The attestation requirement of management’s assessment by our independent registered public accountants will first apply to our annual report for the 2008 fiscal year. The standards that must be met for management to assess the internal control over financial reporting as effective are new and complex, and require significant documentation, testing and possible remediation to meet the detailed standards. We may encounter problems or delays in completing activities necessary to make an assessment of our internal control over financial reporting. In addition, the attestation process by our independent registered public accountants is new and we may encounter problems or delays in completing the implementation of any requested improvements and receiving an attestation of our assessment by our independent registered public accountants. If we cannot assess our internal control over financial reporting as effective, or our independent registered public accountants are unable to provide an unqualified attestation report on such assessment, investor confidence and share value may be negatively impacted.

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In addition, management’s assessment of internal controls over financial reporting may identify weaknesses and conditions that need to be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors. Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting, disclosure of management’s assessment of our internal controls over financial reporting, or disclosure of our public accounting firm’s attestation to or report on management’s assessment of our internal controls over financial reporting may have an adverse impact on the price of our common stock.

We may not be able to achieve the benefits we expect to result from the Share Exchange.
 
On October 20, 2007, we entered into the Exchange Agreement with all of the shareholders of HKHT, pursuant to which we agreed to acquire 100% of the issued and outstanding securities of HKHT in exchange for shares of our common stock. On November 2, 2007, the Share Exchange closed, HKHT became our 100%-owned subsidiary and our sole business operations became that of HKHT. We also have a new Board of Directors and management consisting of persons from HKHT and changed our corporate name from SRKP 11, Inc. to HKHT.

We may not realize the benefits that we hoped to receive as a result of the Share Exchange, which include:

 
access to the capital markets of the United States;
 
 
the increased market liquidity expected to result from exchanging stock in a private company for securities of a public company that may eventually be traded;
 
 
the ability to use registered securities to make acquisition of assets or businesses;
 
 
increased visibility in the financial community;
 
 
enhanced access to the capital markets;
 
 
improved transparency of operations; and
 
 
perceived credibility and enhanced corporate image of being a publicly traded company.

There can be no assurance that any of the anticipated benefits of the Share Exchange will be realized in respect to our new business operations. In addition, the attention and effort devoted to achieving the benefits of the Share Exchange and attending to the obligations of being a public company, such as reporting requirements and securities regulations, could significantly divert management’s attention from other important issues, which could materially and adversely affect our operating results or stock price in the future.

Compliance with changing regulation of corporate governance and public disclosure will result in additional expenses.
 
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC regulations, have created uncertainty for public companies and significantly increased the costs and risks associated with accessing the public markets and public reporting. Our management team will need to invest significant management time and financial resources to comply with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities.
 
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Our common stock may be considered a “penny stock,” and thereby be subject to additional sale and trading regulations that may make it more difficult to sell.
 
Our common stock, which is not currently listed or quoted for trading, may be considered to be a “penny stock” if it does not qualify for one of the exemptions from the definition of “penny stock” under Section 3a51-1 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) once, and if, it starts trading. Our common stock may be a “penny stock” if it meets one or more of the following conditions (i) the stock trades at a price less than $5.00 per share; (ii) it is NOT traded on a “recognized” national exchange; (iii) it is NOT quoted on the Nasdaq Capital Market, or even if so, has a price less than $5.00 per share; or (iv) is issued by a company that has been in business less than three years with net tangible assets less than $5 million.
 
The principal result or effect of being designated a “penny stock” is that securities broker-dealers participating in sales of our common stock will be subject to the “penny stock” regulations set forth in Rules 15-2 through 15g-9 promulgated under the Exchange Act. For example, Rule 15g-2 requires broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document at least two business days before effecting any transaction in a penny stock for the investor’s account. Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor’s financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult and time consuming for holders of our common stock to resell their shares to third parties or to otherwise dispose of them in the market or otherwise.

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

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

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

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

·
Our reliance on our major customers for a large portion of our net sales;
 
·
Our reliance on a limited number of suppliers for nickel, our principal raw material;
 
·
Our ability to develop and market new products;
 
·
Our ability to establish and maintain a strong brand;
 
·
Continued maintenance of certificates, permits and licenses required to conduct business in China;
 
·
Protection of our intellectual property rights;
 
·
The market acceptance of our products;
 
·
Exposure to product liability and defect claims;
 
·
Changes in the laws of the PRC that affect our operations;
 
·
Any recurrence of severe acute respiratory syndrome, or SARS;
 
·
Our ability to obtain all necessary government certifications and/or licenses to conduct our business;
 
·
Development of a public trading market for our securities;
 
·
The cost of complying with current and future governmental regulations and the impact of any changes in the regulations on our operations; and
 
·
The other factors referenced in this prospectus, including, without limitation, under the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business.”
 
The risks included above are not exhaustive. Other sections of this prospectus may include additional factors that could adversely impact our business and operating results. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and we cannot predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward looking statements.

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You should not rely upon forward-looking statements as predictions of future events. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assume responsibility for the accuracy and completeness of the forward-looking statements. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus to conform these statements to actual results or to changes in our expectations.
 
You should read this prospectus, and the documents that we reference in this prospectus and have filed as exhibits to this prospectus with the Securities and Exchange Commission, completely and with the understanding that our actual future results, levels of activity, performance and achievements may materially differ from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

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USE OF PROCEEDS
 
We estimate that the net proceeds from the sale of the 475,000 shares of common stock in the offering will be approximately $843,000 after deducting the estimated underwriting discounts and commissions and estimated offering expenses. If the underwriter’s over-allotment option is exercised in full, we estimate that our net proceeds will be approximately $1.0 million.

The principal purposes of this offering are to increase our working capital, to create a public market for our common stock, and to facilitate our future access to the public capital markets. The net proceeds will be used for general corporate purposes. We cannot specify with certainty the particular uses for the net proceeds. The amounts and timing of our actual expenditures will depend on numerous factors, including the status of our development efforts, sales and marketing activities, the amount of cash generated or used by our operations and competition. We may find it necessary or advisable to use portions of the proceeds for other purposes, and we will have broad discretion in the application of the net proceeds. We have no current intentions to acquire any other businesses. Pending these uses, the proceeds will be invested in short-term, investment grade, interest-bearing securities.

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

We paid cash dividends of $665,182 during the year ended December 31, 2007. We did not pay cash dividends in the three months ended March 31, 2008 or the years ended December 31, 2006 or 2005.

24


CAPITALIZATION
 
The following table summarizes our capitalization as of March 31, 2008 (unaudited), on an actual basis and as adjusted basis to reflect our receipt of estimated net proceeds from the sale of 475,000 shares of common stock (excluding the 71,250 shares which the underwriter has the option to purchase to cover over-allotments, if any) in this offering at a public offering price of $3.25 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses of approximately $701,000.

You should read this table in conjunction with “Use of Proceeds,” “Summary Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 
 
 
March 31, 2008
 
 
 
Actual
 
As adjusted
 
 
 
  (unaudited, in thousands)
 
Long term debt
 
$
 
$
 
Stockholders' equity:
             
Preferred stock, $0.0001 par value, 10,000,000 shares authorized, 0 shares issued and outstanding at September 30, 2007
   
   
 
Common stock, $0.0001 par value, 100,000,000 shares authorized, 12,798,846 issued and outstanding at March 31, 2008, and 13,223,846 shares issued and outstanding on an as-adjusted basis at March 31, 2008(1)
   
1
   
1
 
Additional paid in capital
   
2,766
   
3,759
 
Accumulated other comprehensive income
   
1,397
   
1,397
 
Retained earnings
   
8,341
   
8,341
 
Total stockholders' equity
 
$
12,505
 
$
13,498
 
Total capitalization
 
$
12,505
 
$
13,498
 
 

(1)
The number of our shares of common stock shown above to be outstanding after this offering is based on 12,798,846 shares outstanding as of March 31, 2008 and excludes 160,000 shares that the Company has agreed to issue upon the effectiveness of the registration statement of which this prospectus is a part.

25


 
There has never been a public trading market for our common stock and our shares of common stock are not currently listed or quoted for trading on any national securities exchange or national quotation system. The American Stock Exchange has approved the listing of our common stock under the ticker symbol “HPJ,” subject to official notice of issuance. As of June 17, 2008, we had 91 registered stockholders.

DILUTION
 
If you invest in our shares of common stock, your interest will be diluted immediately to the extent of the difference between the public offering price per share you will pay in this offering and the net tangible book value per share of common stock immediately after this offering.
 
Investors participating in this offering will incur immediate, substantial dilution. Our net tangible book value as of March 31, 2008 was $11.6 million, or $0.90 per share (unaudited) based on 12,798,846 shares of common stock outstanding, excluding 160,000 shares of common stock that the Company has agreed to issue upon the effectiveness of the registration statement of which this prospectus is a part. Assuming the sale by us of 475,000 shares of common stock offered in this offering at a public offering price of $3.25 per share, and after deducting the estimated underwriting discount and commissions and estimated offering expenses, our as adjusted net tangible book value as of March 31, 2008 would have been $12.4 million, or $0.93 per share. This represents an immediate increase in net tangible book value of $0.03 per share to our existing stockholders and an immediate dilution of $2.32 per share to the new investors purchasing shares of common stock in this offering.
 
The following table illustrates this per share dilution:
 
Public offering price per share 
       
$
3.25
 
Net tangible book value per share as of March 31, 2008
 
$
0.90
       
Increase per share attributable to new public investors
   
0.03
       
 
             
Net tangible book value per share after this offering
         
0.93
 
 
             
Dilution per share to new public investors
         
2.32
 
 
The following table sets forth, on an as adjusted basis as of March 31, 2008, the difference between the number of shares of common stock purchased from Hong Kong Highpower Technology, Inc., the total cash consideration paid, and the average price per share paid by our existing stockholders and by new public investors before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, using a public offering price of $3.25 per share of common stock:

 
 
Shares Purchased
 
Total Cash Consideration 
 
 
 
 
 
Number
 
Percent
 
Amount
(in thousands)
 
Percent
 
Average Price Per 
Share
 
Existing stockholders
   
12,798,846
   
96.4
%
$
2,767
   
64.2
%
$
0.22
 
New investors
   
475,000
   
3.6
%
$
1,544
   
35.8
%
$
3.25
 
Total
   
13,273,846
   
100
%
$
4,311
   
100
%
     
 
The total consideration amount for shares of common stock held by our existing stockholders includes total cash paid for our outstanding shares of common stock as of March 31, 2008 and excludes the value of securities that we have issued for services. If the underwriter’s over-allotment option of 71,250 shares of common stock is exercised in full, the number of shares held by existing stockholders will be reduced to 95.9% of the total number of shares to be outstanding after this offering; and the number of shares held by the new investors will be increased to 546,250 shares, or 4.1%, of the total number of shares of common stock outstanding after this offering.

26

 
The discussion and tables above is based on 12,798,846 shares of common stock issued and outstanding as of March 31, 2008, excluding 160,000 shares of common stock that the Company has agreed to issue upon the effectiveness of the registration statement of which this prospectus is a part. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

ACCOUNTING FOR THE SHARE EXCHANGE
 
The acquisition of HKHT by us pursuant to the Share Exchange was accounted for as a recapitalization by us. The recapitalization was, at the time of the Share Exchange, the merger of a private operating company (HKHT) into a non-operating public shell corporation (us) with nominal net assets and as such is treated as a capital recapitalization, rather than a business combination. As a result, the assets of the operating company are recorded at historical cost. The transaction is the equivalent to the issuance of stock by the private company for the net monetary assets of the shell corporation. The pre-acquisition financial statements of HKHT are treated as the historical financial statements of the consolidated companies. The financial statements presented will reflect the change in capitalization for all periods presented, therefore the capital structure of the consolidated enterprise, being the capital structure of the legal parent, is different from that appearing in the financial statements of HKHT in earlier periods due to this recapitalization.

27


SELECTED CONSOLIDATED FINANCIAL DATA
 
The following selected consolidated statement of operations data contains consolidated statement of operations data for the three months ended March 31, 2008 and 2007 (unaudited) and for each of the years in the five-year period ended December 31, 2007 and the consolidated balance sheet data as of March 31, 2008 and year-end for each of the years in the five-year period ended December 31, 2007. The consolidated statement of operations data and balance sheet data were derived from the audited consolidated financial statements, except for data for periods ended and as of March 31, 2008 and 2007 and December 31, 2003. Such financial data should be read in conjunction with the consolidated financial statements and the notes to the consolidated financial statements starting on page F-1 and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Consolidated Statements of Operations
 
Three Months Ended March 31,
 
Year Ended December 31,
 
 
 
2008
 
2007
 
2007
 
2006
 
2005
 
2004
 
2003
 
 
 
(unaudited)
 
(unaudited)
 
(restated)
 
(restated) 
 
 
 
 
 
(unaudited)
 
                               
 
 
(in thousands)
 
Net sales
 
$
17,832
 
$
11,540
 
$
73,262
 
$
44,376
 
$
25,010
 
$
10,956
 
$
3,599
 
 
                           
   
   
 
Cost of sales
   
(15,123
)
 
(10,483
)
 
(63,791
)
 
(36,959
)
 
(20,757
)
 
(9,306
)
 
(3,290
)
 
                           
   
   
 
Gross profit
   
2,708
   
1,056
   
9,471
   
7,417
   
4,253
   
1,651
   
309
 
 
                           
   
   
 
Depreciation
   
(49
)
 
(26
)
 
(121
)
 
(80
)
 
(46
)
 
(25
)
 
(10
)
                                             
Selling and distribution costs
   
(414
)
 
(473
)
 
(2,096
)
 
(1,634
)
 
(857
)
 
(641
)
 
(61
)
                                             
General and administrative costs
   
(770
)
 
(935
)
 
(3,461
)
 
(1,960
)
 
(854
)
 
(549
)
 
(181
)
                                             
Loss on exchange rate difference
   
(505
)
 
(72
)
 
(855
)
 
(199
)
 
-
   
-
   
-
 
                                             
Fees and costs related to reorganization
   
-
   
-
   
(582
)
 
(75
)
 
-
   
-
   
-
 
                                             
Income (loss) from operations
   
970
   
(450
)
 
2,357
   
3,468
   
2,496
   
435
   
57
 
                                             
Change in fair value of currency forwards
   
29
   
-
   
-
   
-
   
-
   
-
   
-
 
                                             
Other income
   
105
   
42
   
149
   
59
   
58
   
33
   
-
 
 
                           
   
   
 
Interest expense
   
(207
)
 
(137
)
 
(696
)
 
(254
)
 
(55
)
 
(10
)
 
-
 
 
                           
   
   
 
Income (loss) before taxes
   
897
   
(546
)
 
1,809
   
3,273
   
2,499
   
458
   
57
 
 
                           
   
   
 
Income taxes
   
(167
)
 
43
   
(145
)
 
(241
)
 
(188
)
 
17
   
-
 
                                             
Net income (loss)
 
$
730
 
$
(503
)
$
1,664
 
$
3,032
 
$
2,311
 
$
475
 
$
57
 
                                             
Net income (loss) per common share - basic and diluted
 
$
0.06
 
$
(0.05
)
$
0.17
 
$
0.33
 
$
0.25
 
$
0.05
 
$
0.01
 
                                             
Weighted average common shares outstanding - basic and diluted
   
12,798,846
   
9,248,973
   
9,832,493
   
9,248,973
   
9,248,973
   
9,248,973
   
9,248,973
 
                                             
Dividends declared per common share
 
$
-
 
$
-
 
$
0.07
 
$
-
 
$
-
 
$
-
 
$
-
 

Consolidated Balance Sheets
 
As of March 31,
 
As of December 31,
 
   
2008
 
2007
 
2006
 
2005
 
2004
 
2003
 
 
 
(unaudited)
     
 
 
 
 
 
 
(unaudited)
 
 
         
(in thousands)
 
                           
Current Assets
 
$
42,560
 
$
40,167
 
$
28,573
 
$
12,851
 
$
6,322
 
$
1,910
 
Total Assets
   
51,883
   
48,920
   
31,736
   
14,585
   
7,378
   
2,317
 
Current Liabilities
   
39,378
   
37,366
   
24,571
   
10,728
   
5,907
   
2,056
 
Total Liabilities
   
39,378
   
37,366
   
24,571
   
10,728
   
5,907
   
2,140
 
Total Stockholders’ Equity
   
12,505
   
11,554
   
7,165
   
3,857
   
1,472
   
177
 

28


MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes, and the other financial information included in this prospectus.

This prospectus contains forward-looking statements. The words “anticipated,” “believe,” “expect, “plan,” “intend,” “seek,” “estimate,” “project,” “could,” “may,” and similar expressions are intended to identify forward-looking statements. These statements include, among others, information regarding future operations, future capital expenditures, and future net cash flow. Such statements reflect our management’s current views with respect to future events and financial performance and involve risks and uncertainties, including, without limitation, general economic and business conditions, changes in foreign, political, social, and economic conditions, regulatory initiatives and compliance with governmental regulations, the ability to achieve further market penetration and additional customers, and various other matters, many of which are beyond our control. Should one or more of these risks or uncertainties occur, or should underlying assumptions prove to be incorrect, actual results may vary materially and adversely from those anticipated, believed, estimated or otherwise indicated. Consequently, all of the forward-looking statements made in this prospectus 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 described below, pursuant to which we (i) became the 100% parent of Hong Kong Highpower Technology Company Limited , a Hong Kong Company (“HKHT”), and its wholly-owned subsidiary, Shenzhen Highpower Technology Co., Ltd. (“Shenzhen Highpower”), a company formed under the laws of the People’s Republic of China (“PRC” or “China”), (ii) assumed the operations of HKHT and its subsidiary and (iii) changed our name from SRKP 11, Inc. to Hong Kong Highpower Technology, Inc. HKHT was incorporated in Hong Kong in 2003, under the Companies Ordinance of Hong Kong.

In addition, on November 2, 2007, concurrently with the close of the Share Exchange, we conducted a private placement transaction (the “Private Placement”). Pursuant to Subscription Agreements entered into with the investors, we sold an aggregate of 1,772,745 shares of Common stock at $1.76 per share. As a result, we received gross proceeds in the amount of $3.1 million.

Through Shenzhen Highpower, we manufacture Ni-MH rechargeable batteries for both consumer and industrial applications. We have developed significant expertise in Ni-MH battery technology and large-scale manufacturing that enables us to improve the quality of our battery products, reduce costs, and keep pace with evolving industry standards. Our automated machinery allows us to process key aspects of the manufacturing process to ensure high uniformity and precision, while leaving the non-key aspects of the manufacturing process to manual labor.

We employ a broad network of salespersons in China and Hong Kong, which target key customers by arranging in-person sales presentations and providing post-sale services. The sales staff works with our customers to better address customers’ needs.

Recent Events

Reverse Stock Split

On May 27, 2008, we filed a definitive information statement on Schedule 14C with the Securities and Exchange Commission (“SEC”) announcing that our Board of Directors and our stockholders have approved an amendment to our Certificate of Incorporation to effect a 5-for-8 reverse stock split of all of our issued and outstanding shares of common stock (the “Reverse Stock Split”). To effect the Reverse Stock Split, we will file the amendment to the Certificate of Incorporation with the Secretary of the State of Delaware, which will not be done sooner than 20 days after the information statement was mailed to our stockholders. We anticipate that the Reverse Stock Split will occur before the effective date of the offering contemplated herein, as the holders of a majority of the outstanding shares of our common stock have provided their consent to such corporate action. The par value and number of authorized shares of our common stock will remain unchanged. All references to number of shares and per share amounts included in this prospectus gives effect to the Reverse Stock Split. The number of shares and per share amounts included in the consolidated financial statements and the accompanying notes, included in the F- section have been adjusted to reflect the Reverse Stock Split retroactively. Unless otherwise indicated, if and when we effect the Reverse Stock Split, all outstanding shares and earnings per share information contained in this prospectus gives effect to the Reverse Stock Split.

29


Share Exchange

On October 20, 2007, we entered into a share exchange agreement (“Exchange Agreement”) with all of the shareholders of HKHT, pursuant to which we agreed to issue an aggregate of 9,248,973 shares of our common stock in exchange for all of the issued and outstanding securities of HKHT (the “Share Exchange”). Upon the closing of the Share Exchange on November 2, 2007, we issued an aggregate of 9,248,973 shares of our common stock to the shareholders of HKHT and/or their designees in exchange for all of the issued and outstanding securities of HKHT. In addition, immediately prior to the closing of the Share Exchange and the Private Placement, as described below, we and certain of our shareholders agreed to cancel an aggregate of 1,597,872 shares of common stock such that there were 1,777,128 shares of common stock outstanding immediately prior to the Share Exchange and Private Placement. We issued no fractional shares in connection with the Share Exchange. Upon the closing of the Share Exchange, we (i) became the 100% parent of HKHT, and HKHT’s wholly-owned subsidiary Shenzhen Highpower, (ii) assumed the operations of HKHT and its subsidiary, and (iii) changed our name from SRKP 11, Inc. to Hong Kong Highpower Technology, Inc.

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

Pursuant to the terms of the Share Exchange, we agreed to register a total of 1,777,128 shares of common stock held by our stockholders immediately prior to the Share Exchange. Of these 1,777,128 shares, 817,479 shares are covered by a resale registration statement filed in connection with the Private Placement (described below), which we originally filed with the Securities and Exchange Commission (“SEC”) on November 13, 2007, and 959,649 shares, which are held by affiliates of WestPark Capital, Inc. (“WestPark”), are to be included in a subsequent registration statement which we originally agreed to file no later than the tenth (10th) day after the end of the six (6) month period that immediately followed November 13, 2007 (the “Required Filing Date”). Although we have not yet filed the registration statement to cover the 959,649 shares held by the WestPark affiliates, we have agreed to extend the Required Filing Date so that we will file the registration statement as soon as practicable after his offering. WestPark acted as the placement agent in the Private Placement.

With respect to the registration statement that we will file to cover the 959,649 shares of common stock held by the WestPark affiliates, we agreed to use our reasonable best efforts to cause the registration statement to become effective within 150 days after the filing date or 180 days after the filing date if the registration statement is subject to a full review by the SEC. In addition, we agreed to use our reasonable best efforts to maintain the registration statement effective for a period of 24 months at our expense. We also agreed to a penalty provision pursuant to which we will issue additional shares of our common stock to the WestPark affiliates if we fail to timely file and maintain the registration statement. Although we have not yet filed the registration statement to cover the shares held by the WestPark affiliates, the penalties related to timely filing have been waived based on the Company’s agreement to file the registration statement as soon as practicable after this offering.

Immediately after the closing of the Share Exchange, we changed our corporate name from “SRKP 11, Inc.” to “Hong Kong Highpower Technology, Inc.” The shares of our common stock are not currently listed or quoted for trading on any national securities exchange or national quotation system. The American Stock Exchange has approved the listing of our common stock under the ticker symbol “HPJ,” subject to official notice of issuance.

30


Private Placement

On November 2, 2007, concurrently with the close of the Share Exchange, we received gross proceeds of $3.1 million in a private placement transaction (the “Private Placement”). Pursuant to subscription agreements entered into with the investors, we sold an aggregate of 1,772,745 shares of common stock at $1.76 per share. The investors in the Private Placement also entered into a lock up agreement pursuant to which they agreed not to sell their shares until ninety (90) days after our common stock begins to be listed or quoted on either the New York Stock Exchange, American Stock Exchange, NASDAQ Global Market, NASDAQ Capital Market or the OTC Bulletin Board, when one-tenth of their shares are released from the lock up, after which their shares will automatically be released from the lock up on a monthly basis pro rata over a nine month period. After commissions and expenses related to the Private Placement, we received net proceeds of approximately $2,738,000 in the Private Placement.

We agreed to file a registration statement covering the common stock sold in the Private Placement within thirty days of the closing of the Share Exchange pursuant to the subscription agreement with each investor. We filed the registration statement within that timeframe. We are required to use our reasonable best efforts to cause the registration statement to become effective within one hundred and 150 days after the closing or 180 days after the closing if the registration statement is subject to a full review by the SEC. We are also required to use our reasonable best efforts to maintain the registration statement effective for a period of 24 months at our expense.

WestPark acted as placement agent in connection with the Private Placement. For its services in connection with the Share Exchange and as placement agent, WestPark received an aggregate commission equal to 10% of the gross proceeds from the Private Placement, in addition to $30,000 in connection with the execution of the Exchange Agreement and a $40,000 success fee for the Share Exchange, for an aggregate amount fee of $382,000. No other consideration was paid to WestPark or to SRKP 11 in connection with the Share Exchange or Private Placement. Some of the controlling shareholders and control persons of WestPark were also, prior to the completion of the Share Exchange, controlling shareholders and control persons of our company, including Richard Rappaport, who is the Chief Executive Officer of WestPark and was the President and a significant shareholder of our company prior to the Share Exchange, and Anthony C. Pintsopoulos, who is the Chief Financial Officer of WestPark and was a controlling stockholder and an officer and director of our company prior to the Share Exchange. Each of Messrs. Rappaport and Pintsopoulos resigned from all of their executive and director positions with our company upon the closing of the Share Exchange.

Critical Accounting Policies and Estimates

The SEC defines critical accounting policies as those that are, in management's view, most important to the portrayal of our financial condition and results of operations and those that require significant judgments and estimates.

The preparation of these consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities at the date of our financial statements. We base our estimates on historical experience, actuarial valuations and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Some of those judgments can be subjective and complex and, consequently, actual results may differ from these estimates under different assumptions or conditions. While for any given estimate or assumption made by our management there may be other estimates or assumptions that are reasonable, we believe that, given the current facts and circumstances, it is unlikely that applying any such other reasonable estimate or assumption would materially impact the financial statements. The accounting principles we utilized in preparing our consolidated financial statements conform in all material respects to generally accepted accounting principles in the United States of America.

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

31


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

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

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

Inventories. Inventories are stated at the lower of cost or market value. Cost is determined on a weighted average basis and includes purchase costs, direct labor and factory overheads. In assessing the ultimate realization of inventories, management makes judgments as to future demand requirements compared to current or committed inventory levels. Our reserve requirements generally increase based on management’s projected demand requirements, and decrease due to market conditions and product life cycle changes. Our production process results in a minor amount of waste materials. We do not record a value for the waste in our cost accounting. We record proceeds on an as realized basis, when the waste is sold. We offset the proceeds from the sales of waste materials as a reduction of production costs.

Income Taxes. We use the asset and liability method of accounting for income taxes pursuant to SFAS No. 109, “Accounting for Income Taxes.” Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and loss carry forwards and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. We have also adopted FIN 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109”.
 
Foreign Currency Translation. Our functional currency is the Renminbi (“RMB”). We maintain our financial statements in the functional currency. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet dates. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.

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

32


Results of Operations

The following table sets forth our statements of operations for the three months ended March 31, 2008 and 2007 (unaudited) and the years ended December 31, 2007, 2006 and 2005 in U.S. dollars:

   
Three Months Ended
March 31,
 
 
Year Ended December 31,
 
   
2008
 
2007
 
2007
 
2006
 
2005
 
   
(unaudited)
 
(unaudited)
 
(restated)
 
(restated)
     
                       
   
(in thousands)
 
 
         
 
 
 
 
 
 
Net sales
 
$
17,832
 
$
11,540
 
$
73,262
 
$
44,376
 
$
25,010
 
 
                             
Cost of sales
   
(15,123
)
 
(10,483
)
 
(63,791
)
 
(36,959
)
 
(20,757
)
 
                             
Gross profit
   
2,708
   
1,056
   
9,471
   
7,417
   
4,253
 
 
                             
Depreciation
   
(49
)
 
(26
)
 
(121
)
 
(80
)
 
(46
)
                                 
Selling and distribution costs
   
(414
)
 
(473
)
 
(2,096
)
 
(1,634
)
 
(857
)
                                 
General and administrative costs
   
(770
)
 
(935
)
 
(3,461
)
 
(1,960
)
 
(854
)
                                 
Loss on exchange rate difference
   
(505
)
 
(72
)
 
(855
)
 
(199
)
 
-
 
                                 
Fees and costs related to reorganization
   
-
   
-
   
(582
)
 
(75
)
 
-
 
                                 
Income (loss) from operations
   
970
   
(450
)
 
2,357
   
3,468
   
2,496
 
                                 
Change in fair value of currency forwards
   
29
   
-
   
-
   
-
   
-
 
                                 
Other income
   
105
   
42
   
149
   
59
   
58
 
 
                             
Interest expense
   
(207
)
 
(137
)
 
(696
)
 
(254
)
 
(55
)
 
                             
Income (loss) before taxes
   
897
   
(546
)
 
1,809
   
3,273
   
2,499
 
 
                             
Income taxes
   
(167
)
 
43
   
(145
)
 
(241
)
 
(188
)
                                 
Net income (loss)
 
$
730
 
$
(503
)
$
1,664
 
$
3,032
 
$
2,311
 
                                 
Net income (loss) per common share – basic and diluted
 
$
0.06
 
$
(0.05
)
$
0.17
 
$
0.33
 
$
0.25
 
                                 
Weighted average common shares outstanding – basic and diluted
   
12,798,846
   
9,248,973
   
9,832,493
   
9,248,973
   
9,248,973
 


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

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We believe that EBITDA permits a comparative assessment of our operating performance, relative to our performance based on our U.S. GAAP results, while isolating the effects of interest, taxes, depreciation and amortization, which may vary from period to period without any correlation to underlying operating performance. We provide information relating to our EBITDA so that securities analysts, investors and other interested parties have the same data that we employ in assessing our overall operations. We believe that trends in our EBITDA are a valuable indicator of our operating performance and of our ability to produce operating cash flows to fund working capital needs, to service debt obligations and to fund capital expenditures.
     
The term EBITDA is not defined under U.S. GAAP, and is not a measure of operating income, operating performance or liquidity presented in accordance with U.S. GAAP. Our EBITDA has limitations as an analytical tool, and when assessing our operating performance, EBITDA should not be considered in isolation, or as a substitute for net income (loss) or other consolidated statement of operations data prepared in accordance with U.S. GAAP. Some of these limitations include, but are not limited to, the following:

·  
EBITDA (1) does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; (2) does not reflect changes in, or cash requirements for, our working capital needs; (3) does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; (4) does not reflect income taxes or the cash requirements for any tax payments; and (5) does not reflect all of the costs associated with operating our business;
 
·  
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements; and
 
·  
other companies may calculate EBITDA differently than we do, limiting its usefulness as a comparative measure.
 
We compensate for these limitations by relying primarily on our U.S. GAAP results and using EBITDA only supplementally. EBITDA is calculated as follows for the periods presented:

 
 
Three Months Ended March 31
 
Years Ended December 31
 
 
 
2008
 
2007
 
2007
 
2006
 
2005
 
 
 
$
 
$
 
$
 
$
 
$
 
Net income (loss)
   
730,327
   
(502,663
)
 
1,663,690
   
3,032,327
   
2,311,031
 
Interest expense
   
206,750
   
137,475
   
696,132
   
253,617
   
54,971
 
Income taxes
   
166,880
   
(43,249
)
 
145,458
   
240,487
   
187,634
 
Depreciation
   
154,795
   
46,275
   
560,073
   
343,841
   
182,307
 
Amortization
   
12,500
   
12,500
   
50,000
   
-
   
-
 
EBITDA
   
1,271,252
   
(349,662
)
 
3,115,353
   
3,870,272
   
2,735,943
 

The decrease in EBITDA for the year ended December 31, 2007 as compared to the year ended December 31, 2006, and the increase in EBITDA for the three months ended March 31, 2008 as compared to the three months ended March 31, 2007 was due in part to the increased costs of nickel in 2007, which we could not immediately pass along to our customers in 2007 through higher battery prices due to fixed-priced contracts. During the three months ended March 31, 2008, we were able to implement an average 24% increase in the selling price of our battery units.  EBITDA for the year ended December 31, 2007 as compared to the year ended December 31, 2006 was also negatively impacted by fees and costs related to the reorganization of $582,269 in 2007, as compared to $75,229 in 2006, and loss on exchange rate difference of $854,873 in 2007, as compared to $199,231 in 2006.  EBITDA for the three months ended March 31, 2008 as compared to the three months ended March 31, 2007 was negatively impacted by loss on exchange rate difference of $504,887 in 2008, as compared to $72,333 in 2007.

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Three Months ended March 31, 2008 and 2007

Net sales for the three months ended March 31, 2008 were $17.8 million compared to $11.5 million for the three months ended March 31, 2007, an increase of 54.5%. This increase was largely due to a 24% increase in the average selling price of our battery units, which we were able to implement due to an agreement with our major customers permitting us to raise the prices on our battery products in accordance with the cost of nickel and exchange rate between the U.S. Dollar and RMB, and a 24.4% increase in the number of battery units sold and $91,000 from the sale of battery seconds during three months ended March 31, 2008. The 24.4% increase in the number of battery units sold was due to increased orders from our major customers, Energizer Battery Manufacturing, Inc. and Uniross Batteries (HK) Ltd.

Cost of sales consists of the cost of nickel and other materials. Costs of sales were $15.1 million the three months ended March 31, 2008 as compared to $10.5 million for the comparable period in 2007. As a percentage of net sales, cost of sales decreased to 84.8% for the three months ended March 31, 2008 compared to 90.8 % for the comparable period in 2007. This decrease was attributable to a 24% increase in the average selling price of our battery units during the three months ended March 31, 2008 over three months ended March 31, 2007, offset by a 16% increase in the average per unit cost of goods sold during three months ended March 31, 2008 as compared to the comparable period in 2007 due to the devaluation of the U.S. Dollar relative to the RMB.
 
Gross profit for the three months ended March 31, 2008 was $2.7 million, or 15.2% of net sales, compared to $1.1 million, or 9.2% of net sales, for the comparable period in 2007. Management considers gross profit to be a key performance indicator in managing our business. Gross profit margins are usually a factor of cost of sales, product mix and demand for product. The increase in our gross profit margin for the three months ended March 31, 2008 is primarily due to the 24% increase in the average selling price of our battery units.

Selling and distribution costs were $414,000 for the three months ended March 31, 2008 compared to $473,000 for the comparable period in 2007. The decrease was due to decreased commission rates that we paid to sales representatives and sales offices.

General and administrative costs were $770,000, or 4.3% of net sales, for the three months ended March 31, 2008, compared to $935,000, or 8.1% of net sales, for the comparable period in 2007. Management considers these expenses as a percentage of net sales to be a key performance indicator in managing our business. The decrease as a percentage of net sales was mainly due to a decrease in labor and personnel costs due to the adjustment of our technician and administrative team.

We experienced losses on the exchange rate difference between the U.S. Dollar and the RMB of $505,000 and $72,000, respectively, in the three months ended March 31, 2008 and 2007, an increase of 601%, due to the devaluation of the U.S. Dollar relative to the RMB over the respective periods. Although our sales contracts do not automatically adjust to reflect changes in exchange rates, to cope with devaluation of the U.S. Dollar relative to the RMB, each time that we enter into new sales contracts with new or existing customers we adjust the selling price of batteries in anticipation of an increase, and to make up for any potential change, in the exchange rate between the two currencies. Beginning in 2008, we are engaging in currency hedging, due to which we experienced a $29,000 gain on the fair value of our currency forwards in the three months ended March 31, 2008. 

Interest expense was $207,000 for the three months ended March 31, 2008, as compared to $137,000 for the comparable period in 2007. The increase was primarily due to both higher borrowing levels and higher interest rate. We increased our borrowings by approximately $334,000 in the three months ended March 31, 2008 as compared to the three months ended March 31, 2007. Further increases in borrowing rates would further increase our interest expense, which would have a negative effect on our results of operations.

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Other income from operations, which consists of bank interest income, exchange gains and losses and sundry income, was $105,000, for the three months ended March 31, 2008, as compared to $42,000 for the three months ended Mach 31, 2006, an increase of 150.9%. The increase was due to a $36,000 increase in bank interest income, an $11,000 increase in other interest income and a $16,000 increase in sundry income.
 
During the three months ended March 31, 2008, we recorded a provision for income taxes of $167,000, as compared to a credit of $43,000 for the comparable period in 2007. The increase was a result of an increase in our net taxable income.
 
Net income for the three months ended March 31, 2008 was $730,000, compared to a net loss of $503,000 for the comparable period in 2007.
 
Years ended December 31, 2007 and 2006

Net sales for year the ended December 31, 2007 were $73.3 million compared to $44.4 million for the year ended December 31, 2006, an increase of 65.1%. The increase in net sales for the year ended December 31, 2007 over the year ended December 31, 2006 was due to a 31% increase in the average selling price of our battery units and a 26% increase in the number of battery units sold, including $160,170 from the sale of battery seconds during the year ended December 31, 2007. The 31% increase in the average selling price of our battery units was due to our agreement with our major customers in March 2007 to adjust the selling prices of our batteries in accordance with the market price of nickel. Prior to March 2007, we fulfilled customer orders under fixed-price, long-term sales contracts under which the selling price of the batteries was determined according to nickel costs prior to the sharp increase in the cost of nickel which began at the end of 2006 and we were, therefore, unable to pass along the increased nickel costs on to our customers. However, after March 2007, we were able to adjust the sales price of our batteries based on the cost of nickel. The increase in the number of battery units sold in 2007 was primarily attributable to increased orders from our major customers, Energizer Battery Manufacturing, Inc. and Uniross Batteries (HK) Ltd.

Cost of sales consists of the cost of nickel and other materials. Costs of sales were $63.8 million for the year ended December 31, 2007 as compared to $37.0 million for the comparable period in 2006. As a percentage of net sales, cost of sales increased to 87.1% for the year ended December 31, 2007 compared to 83.3% for the comparable period in 2006. This was attributable to a 38% increase in the average per unit cost of goods sold during the year ended December 31, 2007 as compared to the comparable period in 2006, which resulted from a 61% increase in the average cost of nickel during the year ended December 31, 2007 compared to the comparable period in 2006.

Gross profit for the year ended December 31, 2007 was $9.5 million, or 12.9% of net sales, compared to $7.4 million, or 16.7% of net sales, respectively, for the comparable period in 2006. Management considers gross profit to be a key performance indicator in managing our business. Gross profit margins are usually a factor of cost of sales, product mix and demand for product. The decrease in our gross profit margin for the year ended December 31, 2007 is primarily due to increases in the price of nickel which we did not pass along to our customers for a portion of 2007 due to our sales price commitments.

To cope with pressure on our gross margins we intend to control production costs by preparing budgets for each department and comparing actual costs with our budgeted figures monthly and quarterly. Additionally, we have reorganized the Company’s production structure and have focused more attention on employee training to enhance efficiency. We also intend to expand our market share by investing in greater promotion of our products in regions such as the U.S., Russia, Europe and India, and by expanding our sales team with more experienced sales personnel. We have also begun production of a line of Li-ion batteries as samples for potential customers to complement our current Ni-MH battery products so that we are less vulnerable to price increases in nickel. We intend to expand production of our Li-ion battery products in the future.
 
Selling and distribution costs were $2.1 million for the year ended December 31, 2007, compared to $1.6 million for the comparable period in 2006. The increase was due to the expansion of our market share, which increased 2% in terms of the worldwide market in volume and 1.5% in terms of worldwide market value in 2007 over 2006. Our market share increased due to our increased promotion of our products and our expansion of our team of sales representatives.

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General and administrative costs were $3.5 million, or 4.7% of net sales, for the year ended December 31, 2007, compared to $2.0 million, or 4.4% of net sales, for the comparable period in 2006. Management considers these expenses as a percentage of net sales to be a key performance indicator in managing our business. The increase as a percentage of net sales was primarily due to an increase in personnel and labor costs, which increased $380,000 for year ended December 31, 2007 over the comparable period in 2006 due to the expansion of our technician and marketing team to expand our market share. Although we anticipate our general and administrative expenses to continue to increase on an absolute dollar basis as a result of additional legal, accounting and other related costs from becoming a public reporting company, we do not believe that general and administrative expenses as a percentage net sales will trend upward as we believe that our net sales will also increase.

We experienced losses on the exchange rate difference between the U.S. Dollar and the RMB of $855,000 and $199,000, respectively, in the years ended December 31, 2007 and 2006, an increase of 330%, due to the devaluation of the U.S. Dollar relative to the RMB over the respective periods. Beginning in 2008, to cope with devaluation of the U.S. Dollar relative to the RMB, we are engaging in currency hedging and adjusting the selling price of batteries to vary with the U.S. Dollar exchange rate relative to the RMB.

All costs associated with the reverse merger transaction, consisting primarily of consideration paid to the previous control parties of SRKP 11 and legal and investment banking fees and costs, were expensed as incurred as a cost of the recapitalization, and have been presented as an operating cost line item entitled “fees and costs related to reorganization” in the statement of operations. These costs were $582,000 and $75,000 for the years ended December 31, 2007 and 2006, respectively (as restated).
 
Interest expense was $696,000 for the year ended December 31, 2007, as compared to $254,000 for the respective comparable period in 2006. The increase was primarily due to higher borrowing levels. We increased our borrowings by $9.46 million in the year ended December 31, 2007 as compared to the year ended December 31, 2006. Increases in borrowing rates would further increase our interest expense, which would have a negative effect on our results of operations.
 
During the year ended December 31, 2007, we recorded a provision for income taxes of $145,000, as compared to $240,000 for the respective comparable period in 2006. The decrease in income taxes for the year ended December 31, 2007 as compared to the year ended December 30, 2006 was a result of a decrease in our net taxable income.
 
Net income for the year ended December 31, 2007 was $1.7 million, compared to a net income of $3.0 million for the comparable period in 2006.

Years ended December 31, 2006 and 2005

Net sales for the year ended December 31, 2006 were $44.4 million as compared to $25.0 million for the year ended December 31, 2005, an increase of 78%. This increase was largely due to a 75.6% increase in the number of battery units sold, including an increase in the sales of battery seconds of $356,478. We believe that this increase in net sales is a sustainable trend because worldwide demand for Ni-MH batteries is growing at a rate of 15% per year, excluding the market for hybrid electrical vehicle (“HEV”) batteries, according to a report by Avicenne Forecasts dated June 2007. With Japanese battery factories increasingly shifting their production to HEV batteries, we will be able to increase our market share for the sale of Ni-MH batteries.

Cost of sales for the year ended December 31, 2006 was $37.0 million or 83.6% of net sales, as compared to $20.8 million for the year ended December 31, 2005 or 83.0% of net sales. The increase in total dollars and as a percentage of net sales was attributable to higher costs associated with our products, principally due to the rising cost of nickel which began in late 2006.


Gross profit for the year ended December 31, 2006 was $7.4 million, or 16.7% of net sales, compared to $4.3 million, or 17.0% of net sales for the year ended December 31, 2005. The decrease in our gross profit margin for the year ended December 31, 2006 is primarily due to an increase in the price of nickel that we were unable to pass along to customers in the form of higher prices charged for our battery products. During 2006 when the cost of nickel began to rise, we were unable to raise our battery prices to account for the increase in the cost of nickel because we sold our batteries under fixed-price agreement under which the prices were determined prior to the increase in the cost of nickel.

37