The following discussion relates to a discussion of the financial condition and results of operations of Hong Kong Highpower Technology, Inc. (the "Company") and its wholly-owned subsidiary Hong Kong Highpower Technology Co., Ltd. (referred to herein as "HKHT"), and HKHT's wholly-owned subsidiaries Shenzhen Highpower Technology Co., Ltd. ("Shenzhen Highpower") and Springpower Technology (Shenzhen) Co., Ltd. ("Springpower"). HKHT's other subsidiary, HZ Highpower Technology Co. ("HZ Highpower") has not yet commenced operations.

Forward-Looking Statements

This management's discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and the related notes that are included in this Quarterly Report and the audited consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in our Annual Report on Form 10-K for the year ended December 31, 2008.

This Quarterly Report contains forward-looking statements that involve substantial risks and uncertainties. All statements other than historical facts contained in this report, including statements regarding our future financial position, capital expenditures, cash flows, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words "anticipated," "believe," "expect, "plan," "intend," "seek," "estimate," "project," "could," "may," and similar expressions are intended to identify forward-looking statements. Such statements reflect our management's current views with respect to future events and financial performance and involve risks and uncertainties, including, without limitation, the current economic downturn adversely affecting demand for the our products; fluctuations in the cost of raw materials; our dependence on, or inability to attract additional, major customers for a significant portion of our net sales; our ability to increase manufacturing capabilities to satisfy orders from new customers; changes in the laws of the PRC that affect our operations; our ability to complete construction at our new manufacturing facility on time; our ability to control operating expenses and costs related to the construction of our new manufacturing facility; the devaluation of the U.S. Dollar relative to the Renminbi; our dependence on the growth in demand for portable electronic devices and the success of manufacturers of the end applications that use our battery products; our responsiveness to competitive market conditions; our ability to successfully manufacture Li-ion batteries in the time frame and amounts expected; the market acceptance of our Li-ion products; changes in foreign, political, social, business and economic conditions that affect our production capabilities or demand for our products; and various other matters, many of which are beyond our control. Actual results may vary materially and adversely from those anticipated, believed, estimated or otherwise indicated should one or more of these risks or uncertainties occur or if any of the risks or uncertainties described in elsewhere in this report or in the "Risk Factors" section of our 2008 Annual Report occur. Consequently, all of the forward-looking statements made in this filing are qualified by these cautionary statements and there can be no assurance of the actual results or developments.

Overview

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

In addition, on November 2, 2007, concurrently with the close of the Share Exchange, we conducted a private placement transaction (the "Private Placement"). Pursuant to Subscription Agreements entered into with the investors, we sold an aggregate of 1,772,745 shares of Common stock at $1.76 per share. As a result, we received gross proceeds in the amount of $3.12 million.

Through Shenzhen Highpower, we manufacture Nickel Metal Hydride ("Ni-MH") batteries for both consumer and industrial applications. We have developed significant expertise in Ni-MH battery technology and large-scale manufacturing that enables us to improve the quality of our battery products, reduce costs, and keep pace with evolving industry standards. In 2008, we commenced manufacturing two lines of Lithium-Ion ("Li-ion") and Lithium polymer rechargeable batteries through Spring Power for higher-end, high-performance applications, such as laptops, digital cameras and wireless communication products. Our automated machinery allows us to process key aspects of the manufacturing process to ensure high uniformity and precision, while leaving the non-key aspects of the manufacturing process to manual labor.

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.

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

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

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

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

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.

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

Results of Operations

Non-GAAP Financial Results

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

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

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

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

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

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

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

                                 Three Months Ended        Six Months Ended
                                      June 30,                 June 30,
                                  2009         2008        2009        2008
                                    $            $           $           $
           Net income (loss)       968,656     684,247   1,371,622   1,414,574
           Interest expense         39,377     194,047      80,497     400,767
           Income taxes            228,752      64,298     389,819     231,178
           Depreciation            186,790     190,879     424,007     345,674
           Amortization            114,731      71,398     273,888     99,462-
           EBITDA                1,538,306   1,204,869   2,539,833   2,491,655

EBITDA for the three months ended June 30, 2009 totaled $1,538,306, compared with $1,204,869 for the comparable period in 2008. The increase was due to increase in the number of battery units sold and increased stock-based compensation expense in 2009.

EBITDA for the six months ended June 30, 2009 totaled $2,539,833, compared with $2,491,655 for the comparable period in 2008. The increase was due to increase in the number of battery units sold and increase stock-based compensation expense in 2009.

Three Months Ended June 30, 2009 and 2008

Net sales for the three months ended June 30, 2009 were $15.4 million compared to $19.0 million for the three months ended June 30, 2008, a decrease of 18.8%. This decrease was largely due to a 0.7% increase in the number of battery units sold and a 19.5% decrease in the average selling price of our battery units. The 0.7% increase in the number of battery units sold was due to increased orders from our major customers. The 19.5% decrease in the average selling price of our battery units was due to a decrease in the average cost of nickel during the three months ended June 30, 2009 compared to the comparable period in 2008. Net sales during the three months ended June 30, 2008 also included $148,052 from the sale of battery seconds. No such sales of battery seconds occurred during the three months ended June 30, 2009.

Cost of sales consists of the cost of nickel and other materials. Costs of sales were $12.4 million the three months ended June 30, 2009 as compared to $15.6 million for the comparable period in 2008. As a percentage of net sales, cost of sales decreased to 80.1% for the three months ended June 30, 2009 compared to 82.3% for the comparable period in 2008. This decrease was attributable to a 22% decrease in the average per unit cost of goods sold during three months ended June 30, 2009 as compared to the comparable period in 2008, which was offset by a 19.5% decrease in the average selling price of our battery units during the three months ended June 30, 2009 over three months ended June 30, 2008. The 22% decrease in the average per unit cost of goods sold resulted from a 50% decrease in the average cost of nickel during the three months ended June 30, 2009 compared to the comparable period in 2008.

Gross profit for the three months ended June 30, 2009 was $3.1 million, or 19.9% of net sales, compared to $3.4 million, or 17.7% of net sales, for the comparable period in 2008. Management considers gross profit to be a key performance indicator in managing our business. Gross profit margins are usually a factor of cost of sales, product mix and demand for product. The increase in our gross profit margin for the three months ended June 30, 2009 is primarily due to a 22% decrease in the average per unit cost of goods sold during three months ended June 30, 2009 as compared to the comparable period in 2008.

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

Selling and distribution costs were $580,000 for the three months ended June 30, 2009 compared to $548,000 for the comparable period in 2008. The increase was primarily due to the expansion of our salesforce. Our market share remained relatively flat attributable to the decreased demand for our products due to the global economic downturn and challenging economic conditions.

General and administrative costs were $1.0 million, or 6.8% of net sales, for the three months ended June 30, 2009, compared to $1.6 million, or 8.3% of net sales, for the comparable period in 2008. Management considers these expenses as a percentage of net sales to be a key performance indicator in managing our business. The decrease as a percentage of net sales was primarily due to a decrease in personnel and labor costs, which decreased $124,500 for the three months ended June 30, 2009 over the comparable period in 2008 due to the reduction of our indirect staff to cut indirect cost , which was offset by an increase in stock based compensation charges in the three months ended June 30, 2009.

We experienced losses on the exchange rate difference between the U.S. Dollar and the RMB of $23,000 and $331,000, respectively, in the three months ended June 30, 2009 and 2008, a significant decrease in losses, due to the slower 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. We currently engage in currency hedging, due to which we experienced a $21,000 loss on the fair value of our currency forwards in the three months ended June 30, 2009 compared to $nil in the three months ended June 30, 2008.

Interest expense was $39,000 for the three months ended June 30, 2009, as compared to $194,000 for the comparable period in 2008. The decrease was primarily due to lower borrowing levels. We decreased our borrowings by approximately $11.2 million in the three months ended June 30, 2009 as compared to the three months ended June 30, 2008. Further increases in borrowing rates would further increase our interest expense, which would have a negative effect on our results of operations.

Other income from operations, which consists of bank interest income, exchange gains and losses and sundry income, was $22,000, for the three months ended June 30, 2009, as compared to $120,000 for the three months ended June 30, 2008. The decrease was due to a $33,000 decrease in bank interest income, an $11,000 decrease in other interest income, a $7,000 decrease in other interest income and a $47,000 increase in sundry income.

During the three months ended June 30, 2009, we recorded a provision for income taxes of $229,000, as compared to $64,000 for the comparable period in 2008. The increase was a result of an increase in our net taxable income, partially offset by an increase in our tax rate.

Net income for the three months ended June 30, 2009 was $696,000, compared to net income of $684,000 for the comparable period in 2008.

Six Months Ended June 30, 2009 and 2008

Net sales for the six months ended June 30, 2009 were $26.8 million compared to $36.9 million for the six months ended June 30, 2008, a decrease of 27%. This decrease was largely due to a 10% decrease in the number of battery units sold and a 19% decrease in the average selling price of our battery units. The 10% decrease in the number of battery units sold was due to decreased orders from our major customers. The 19% decrease in the average selling price of our battery units was due to a decrease in the average cost of nickel during the six months ended June 30, 2009 compared to the comparable period in 2008. Net sales during the six months ended June 30, 2008 also included $208,052 from the sale of battery seconds. No such sales of battery seconds occurred during the six months ended June 30, 2009.

Cost of sales consists of the cost of nickel and other materials. Costs of sales were $21.3 million the six months ended June 30, 2009 as compared to $30.8 million for the comparable period in 2008. As a percentage of net sales, cost of sales decreased to 79.6% for the six months ended June 30, 2009 compared to 83.5% for the comparable period in 2008. This decrease was attributable to a 22% decrease in the average per unit cost of goods sold during six months ended June 30, 2009 as compared to the comparable period in 2008, which was offset by a 19% decrease in the average selling price of our battery units during the six months ended June 30, 2009 over six months ended June 30, 2008. The 22% decrease in the average per unit cost of goods sold resulted from a 50% decrease in the average cost of nickel during the six months ended June 30, 2009 compared to the comparable period in 2008.

Gross profit for the six months ended June 30, 2009 was $5.5 million, or 20.4% of net sales, compared to $6.1 million, or 16.5% of net sales, for the comparable period in 2008. Management considers gross profit to be a key performance indicator in managing our business. Gross profit margins are usually a factor of cost of sales, product mix and demand for product. The increase in our gross profit margin for the six months ended June 30, 2009 is primarily due to a 22% decrease in the average per unit cost of goods sold during six months ended June 30, 2009 as compared to the comparable period in 2008.

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

Selling and distribution costs were $1.1 million for the six months ended June 30, 2009 compared to $962,000 for the comparable period in 2008. The increase was primarily due to the expansion of our salesforce. Our market share remained relatively flat attributable to the decreased demand for our products due to the global economic downturn and challenging economic conditions.

General and administrative costs were $2.1 million, or 7.8% of net sales, for the six months ended June 30, 2009, compared to $2.3 million, or 6.3% of net sales, for the comparable period in 2008. Management considers these expenses as a percentage of net sales to be a key performance indicator in managing our business. The increase as a percentage of net sales was primarily due to an increase in personnel and labor costs, which increased $62,000 for the six months ended June 30, 2009 over the comparable period in 2008 due to the . . .