Highpower International 10Q 2018 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended September 30, 2018

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Transition Period From To

COMMISSION FILE NO. 001-34098

HIGHPOWER INTERNATIONAL, INC.

(Exact name of Registrant as specified in its charter)

Delaware

20-4062622

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

Building A1, 68 Xinxia Street, Pinghu, Longgang,

Shenzhen, Guangdong, 518111, People’s Republic of China

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(86) 755-89686238

(COMPANY’S TELEPHONE NUMBER, INCLUDING AREA CODE)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).�� Yesx No¨

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

Large accelerated filer¨	Accelerated filer¨
Non-accelerated filerx	Smaller reporting companyx
Emerging growth company¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes¨ Nox

The registrant had 15,559,658 shares of common stock, par value $0.0001 per share, outstanding as of, November 13, 2018.

HIGHPOWER INTERNATIONAL, INC.

FORM10-Q

FOR THE QUARTERLY PERIOD ENDED September 30, 2018

INDEX

				Page
Part I	Financial Information

	Item 1.	Consolidated Financial Statements

		(a)	Condensed Consolidated Balance Sheets as of September 30, 2018 (Unaudited) and December 31, 2017	2

		(b)	Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)	4

		(c)	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017 (Unaudited)	5

		(d)	Condensed Consolidated Statements of Change in Equity for the Nine Months Ended September 30, 2018 and 2017 (Unaudited)	6

		(e)	Notes to Condensed Consolidated Financial Statements (Unaudited)	7

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		24

	Item 4.	Controls and Procedures		24

Part II	Other Information

	Item 1.	Legal Proceedings		25

	Item 1A.	Risk Factors		25

	Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds		25

	Item 3.	Default Upon Senior Securities		25

	Item 4.	Mine Safety Disclosures		25

	Item 5.	Other Information		25

	Item 6.	Exhibits		30

Signatures				31

Item 1. Consolidated Financial Statements

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Stated in US Dollars)

	September 30,	December 31,
	2018	2017
	(Unaudited)
	$	$
ASSETS
Current Assets:
Cash	7,981,782	14,502,171
Restricted cash	31,622,572	25,953,946
Accounts receivable, net	81,610,241	58,252,999
Amount due from a related party	259,995	1,165,838
Notes receivable	273,164	2,606,517
Advances to suppliers	4,487,495	6,050,531
Prepayments and other receivables	8,804,905	4,268,527
Foreign exchange derivative assets	-	236,436
Inventories	58,567,663	42,946,644

Total Current Assets	193,607,817	155,983,609

Property, plant and equipment, net	51,452,906	46,520,776
Long-term prepayments	3,778,665	3,715,445
Land use rights, net	2,444,474	2,639,631
Other assets	719,028	748,431
Deferred tax assets, net	1,260,108	750,267
Long-term investments	10,535,177	9,906,379

TOTAL ASSETS	263,798,175	220,264,538

LIABILITIES AND EQUITY

LIABILITIES
Current Liabilities:
Accounts payable	69,311,491	60,368,012
Deferred government grants	472,949	309,638
Short-term loans	24,318,587	10,128,646
Non-financial institution borrowings	8,701,075	10,756,158
Notes payable	54,989,994	54,859,478
Foreign exchange derivative liabilities	480,459	-
Amount due to related parties	6,127,007	-
Other payables and accrued liabilities	24,279,551	12,243,345
Income taxes payable	3,972,006	3,609,391

Total Current Liabilities	192,653,119	152,274,668

Income taxes payable, noncurrent	-	777,685

TOTAL LIABILITIES	192,653,119	153,052,353

COMMITMENTS AND CONTINGENCIES	-	-

See notes to condensed consolidated financial statements

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Stated in US Dollars)

	September 30,			December 31,
	2018			2017
	(Unaudited)
	$			$
EQUITY
Stockholders’ equity
Preferred stock
(Par value: $0.0001, Authorized: 10,000,000 shares, Issued and outstanding: none)		-			-
Common stock
(Par value: $0.0001, Authorized: 100,000,000 shares, 15,559,658 shares issued and outstanding at September 30, 2018 and 15,509,658 at December 31, 2017, respectively)		1,556			1,551
Additional paid-in capital		13,657,599			12,709,756
Statutory and other reserves		6,549,815			6,549,815
Retained earnings		52,190,975			44,481,568
Accumulated other comprehensive (loss) income		(1,254,889	)		3,469,495

TOTAL EQUITY		71,145,056			67,212,185

TOTAL LIABILITIES AND EQUITY		263,798,175			220,264,538

See notes to condensed consolidated financial statements

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Stated in US Dollars)

	*Three months ended* *September 30,*						*Nine months ended* *September 30,*
	2018			2017			2018			2017
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
	$			$			$			$
Net sales		90,557,479			71,405,560			205,264,892			164,972,338
Cost of sales		(73,047,063	)		(57,845,224	)		(168,878,223	)		(129,405,402	)
Gross profit		17,510,416			13,560,336			36,386,669			35,566,936

Research and development expenses		(3,535,882	)		(2,433,928	)		(9,690,479	)		(6,385,144	)
Selling and distribution expenses		(2,625,016	)		(1,859,762	)		(6,721,762	)		(5,220,985	)
General and administrative expenses		(5,796,496	)		(3,959,731	)		(13,821,494	)		(10,034,694	)
Foreign currency transaction gain (loss)		1,925,179			(816,593	)		2,581,418			(1,645,095	)
Total operating expenses		(10,032,215	)		(9,070,014	)		(27,652,317	)		(23,285,918	)

Income from operations		7,478,201			4,490,322			8,734,352			12,281,018

Changes in fair value of warrant liability		-			-			-			259
Changes in fair value of foreign exchange derivative assets (liabilities)		(410,061	)		(146,481	)		(831,486	)		(146,481	)
Government grants		261,538			345,941			1,580,037			904,753
Other income (expense)		27,998			(251,166	)		108,140			44,480
Equity in earnings of investees		184,803			1,087			501,123			106,412
Gain on dilution in equity method investee		-			5,071			-			496,396
Gain on sales of long-term investment		-			1,664,377			-			1,664,377
Interest (expense) income		(518,912	)		57,663			(1,073,578	)		(926,185	)
Income before taxes		7,023,567			6,166,814			9,018,588			14,425,029

Income taxes expenses		(909,539	)		(1,013,919	)		(1,309,181	)		(2,197,392	)
Net income		6,114,028			5,152,895			7,709,407			12,227,637

Less: net income attributable to non-controlling interest		-			128,702			-			296,558
Net income attributable to the Company		6,114,028			5,024,193			7,709,407			11,931,079

Comprehensive income
Net income		6,114,028			5,152,895			7,709,407			12,227,637
Foreign currency translation (loss) gain		(3,392,724	)		1,258,937			(4,724,384	)		2,743,650
Comprehensive income		2,721,304			6,411,832			2,985,023			14,971,287

Less: comprehensive income attributable to non-controlling interest		-			139,461			-			317,807
Comprehensive income attributable to the Company		2,721,304			6,272,371			2,985,023			14,653,480

Earnings per share of common stock attributable to the Company
- Basic		0.39			0.33			0.50			0.78
- Diluted		0.39			0.32			0.49			0.77

Weighted average number of common stock outstanding
- Basic		15,559,658			15,369,674			15,542,076			15,270,898
- Diluted		15,597,257			15,518,764			15,600,546			15,563,012

See notes to condensed consolidated financial statements

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Stated in US Dollars)

	Nine Months Ended September 30,
	2018			2017
	(Unaudited)			(Unaudited)
	$			$
Cash flows from operating activities
Net income		7,709,407			12,227,637
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		4,494,518			3,792,178
(Reversal) allowance for doubtful accounts, net		(787,034	)	��	48,866
Loss on disposal of property, plant and equipment		223,040			57,277
Deferred tax		(581,710	)		153,625
Changes in fair value of foreign exchange derivative assets (liabilities)		741,786			166,387
Equity in earnings of investees		(501,123	)		(106,412	)
Gain on dilution in equity method investee		-			(496,396	)
Gain on sales of long-term investment		-			(1,664,377	)
Share based compensation		735,348			86,921
Changes in fair value of warrant liability		-			(259	)
Changes in operating assets and liabilities:
Accounts receivable		(25,743,046	)		(8,517,071	)
Other assets		(8,097	)		-
Notes receivable		2,305,455			(5,543,798	)
Advances to suppliers		1,289,133			-
Prepayments and other receivables		(4,568,639	)		(8,775,985	)
Amount due from a related party		885,886			7,691,900
Amount due to related parties		-			(1,557,682	)
Inventories		(18,990,697	)		(11,753,127	)
Accounts payable		9,857,431			7,049,819
Deferred government grants		256,932			11,637
Other payables and accrued liabilities		13,135,351			1,394,691
Income taxes payable		(223,682	)		156,744
Net cash flows used in operating activities		(9,769,741	)		(5,577,425	)

Cash flows from investing activities
Acquisitions of property, plant and equipment		(9,796,130	)		(7,297,901	)
Proceeds from sale of long-term investment		-			10,453,475
Payment for long-term investment		(321,067	)		-
Net cash flows (used in) provided by investing activities		(10,117,197	)		3,155,574

Cash flows from financing activities
Proceeds from short-term loans		21,427,063			8,797,727
Repayments of short-term loans		(5,866,424	)		(17,594,229	)
Proceeds from a related party		6,031,465			-
Proceeds from non-financial institution borrowings		-			10,306,243
Repayments of non-financial institution borrowings		(1,528,888	)		(3,828,033	)
Proceeds from notes payable		86,130,613			62,193,463
Repayments of notes payable		(82,740,379	)		(48,408,417	)
Proceeds from exercise of employee options		-			635,484
Net cash flows provided by financing activities		23,453,450			12,102,238
Effect of foreign currency translation on cash and restricted cash		(4,418,275	)		2,591,502
Net (decrease) increase in cash and restricted cash		(851,763	)		12,271,889
Cash and restricted cash - beginning of period		40,456,117			20,538,033
Cash and restricted cash - end of period		39,604,354			32,809,922

Supplemental disclosures for cash flow information:
Cash paid for:
Income taxes		2,114,573			1,464,592
Interest expenses		1,285,288			1,402,447
Non-cash transactions
Shares issued for legal case settlement		212,500			-
Offset of deferred government grant and property, plant and equipment		66,398			171,403

See notes to condensed consolidated financial statements

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGE IN EQUITY

(Stated in US Dollars)

	Common stock				Additional		Statutory					Accumulated other
	Shares		Amount		paid-in capital		and other reserves		Retained earnings			comprehensive income			Non-controlling interest		Total
			$		$		$		$			$			$		$
Balance, January 1, 2017		15,114,991		1,511		11,580,934		4,992,463		29,266,068			(873,582	)		329,343		45,296,737
Proceeds from exercise of stock options		61,261		6		161,111		-		-			-			-		161,117
Foreign currency translation adjustments		-		-		-		-		-			(26,659	)		2,658		(24,001	)
Share-based compensation expenses		-		-		24,401		-		-			-			-		24,401
Net income		-		-		-		-		2,535,649			-			76,893		2,612,542
Balance, March 31, 2017		15,176,252		1,517		11,766,446		4,992,463		31,801,717			(900,241	)		408,894		48,070,796

Proceeds from exercise of stock options		180,308		19		462,670		-		-			-			-		462,689
Foreign currency translation adjustments		-		-		-		-		-			1,500,882			7,832		1,508,714
Share-based compensation expenses		-		-		20,415		-		-			-			-		20,415
Net income		-		-		-		-		4,371,237			-			90,963		4,462,200
Balance, June 30, 2017		15,356,560		1,536		12,249,531		4,992,463		36,172,954			600,641			507,689		54,524,814

Proceeds from exercise of stock options		119,440		1		11,677		-		-			-			-		11,678
Foreign currency translation adjustments		-		-		-		-		-			1,248,178			10,759		1,258,937
Share-based compensation expenses		-		10		45,997		-		-			-			-		46,007
Net income		-		-		-		-		5,024,193			-			128,702		5,152,895
Balance, September 30, 2017		15,476,000		1,547		12,307,205		4,992,463		41,197,147			1,848,819			647,150		60,994,331

Balance, January 1, 2018		15,509,658		1,551		12,709,756		6,549,815		44,481,568			3,469,495			-		67,212,185
Foreign currency translation adjustments		-		-		-		-		-			2,836,556			-		2,836,556
Share-based compensation expenses		-		-		241,421		-		-			-			-		241,421
Net income		-		-		-		-		(1,118,936	)		-			-		(1,118,936	)
Balance, March 31, 2018		15,509,658		1,551		12,951,177		6,549,815		43,362,632			6,306,051			-		69,171,226

Shares issued for legal case settlement		50,000		5		212,495		-		-			-			-		212,500
Foreign currency translation adjustments		-		-		-		-		-			(4,168,216	)		-		(4,168,216	)
Share-based compensation expenses		-		-		246,696		-		-			-			-		246,696
Net income		-		-		-		-		2,714,315			-			-		2,714,315
Balance, June 30, 2018		15,559,658		1,556		13,410,368		6,549,815		46,076,947			2,137,835			-		68,176,521

Foreign currency translation adjustments		-		-		-		-		-			(3,392,724	)		-		(3,392,724	)
Share-based compensation expenses		-		-		247,231		-		-			-			-		247,231
Net income		-		-		-		-		6,114,028			-			-		6,114,028
Balance, September 30, 2018		15,559,658		1,556		13,657,599		6,549,815		52,190,975			(1,254,889	)		-		71,145,056

See notes to consolidated financial statements

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

The Company and basis of presentation

The consolidated financial statements include the financial statements of Highpower International, Inc. ("Highpower") and its 100%-owned subsidiary Hong Kong Highpower Technology Company Limited (“HKHTC”), HKHTC’s wholly-owned subsidiary Shenzhen Highpower Technology Company Limited (“SZ Highpower”), SZ Highpower’s wholly owned subsidiary Huizhou Highpower Technology Company Limited (“HZ HTC”) and SZ Highpower’s and HKHTC’s jointly owned subsidiaries, Springpower Technology (Shenzhen) Company Limited (“SZ Springpower”) and Icon Energy System Company Limited (“ICON”). Highpower and its direct and indirect wholly owned subsidiaries are collectively referred to as the "Company".

Basis of presentation

The condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information, the instructions to Form 10-Q and Article 8 of Regulation S-X. They do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. The interim financial information should be read in conjunction with the Financial Statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on April 4, 2018.

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair presentation of the Company’s consolidated financial position as of September 30, 2018, its consolidated results of operations for the three and nine months ended September 30, 2018, cash flows for the nine months ended September 30, 2018 and change in equity for the three and nine months ended September 30, 2018, as applicable, have been made. Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the operating results that may be expected for the year ending December 31, 2018 or any future periods.

Concentrations of credit risk

One major customer accounted for 12.6% and 11.6% of the total sales for the three months ended September 30, 2018 and 2017, respectively. No customer accounted for 10.0% or more of total sales during the nine months ended September 30, 2018 and 2017.

One supplier accounted for 21.1% and 13.5% of the total purchase amount during the three and nine months ended September 30, 2018, respectively. No supplier accounted for 10% or more of the total purchase amount during the three and nine months ended September 30, 2017.

No customer accounted for 10.0% or more of the accounts receivable as of September 30, 2018. One customer accounted for 10.1% of the accounts receivable as of December 31, 2017.

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

Summary of significant accounting policies

Recently issued accounting standards

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which was subsequently modified in August 2015 by ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date. This guidance will be effective for fiscal years (and interim reporting periods within those years) beginning after December 15, 2017. In 2016, the FASB issued additional ASUs that clarify the implementation guidance on principal versus agent considerations (ASU 2016-08), on identifying performance obligations and licensing (ASU 2016-10), and on narrow-scope improvements and practical expedients (ASU 2016-12) as well as on the revenue recognition criteria and other technical corrections (ASU 2016-20). In 2017, the FASB issued Accounting Standards Update (ASU) 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20), which was originally issued in ASU 2014-09.

Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. It also impacts certain other areas, such as the accounting for costs to obtain or fulfill a contract. The standard also requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

Management has adopted this standard effective January 1, 2018 using the modified-retrospective approach, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. The adoption of ASC 606 did not have a material impact on the Company’s condensed consolidated balance sheet, statement of operations and statement of cash flows for the nine months period ended September 30, 2018. See Note 3 for disclosures required by ASC 606 and the updated accounting policy for revenue recognition.

On February 25, 2016, the FASB issued ASU 2016-02, Leases (Topic 842). It requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted for all public business entities and all nonpublic business entities upon issuance. In July 2018, the FASB issued Accounting Standards Update (ASU) 2018-11, Lease (Topic 842) Targeted Improvements. The amendments in this Update provide entities with an additional (and optional) transition method to adopt the new leases standard and provide lessors with a practical expedient, by class of underlying asset, to not separate nonlease components from the associated lease component and, instead, to account for those components as a single component if the nonlease components otherwise would be accounted for under the new revenue guidance (Topic 606). The Company is currently evaluating the impact of adopting ASU 2016-02 and ASU 2018-11 on its consolidated financial statements.

In March 2018, the FASB issued ASU No. 2018-05, Income Tax (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. This update adds SEC paragraphs pursuant to the SEC Staff Accounting Bulletin No. 118, which expresses the view of the staff regarding application of Topic 740, Income Taxes, in the reporting period that includes December 22, 2017 - the date on which the Tax Act was signed into law. The Company is currently evaluating the impact of adopting ASU 2018-05 on its consolidated financial statements.

The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the consolidated financial position, statements of operations and cash flows.

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

Revenue Recognition

The Company adopted ASC 606 using the modified retrospective method as applied to customer contracts that were not completed as of January 1, 2018. As a result, financial information for reporting periods beginning after January 1, 2018 are presented under ASC 606, while comparative financial information has not been adjusted and continues to be reported in accordance with the Company’s historical accounting policy for revenue recognition prior to the adoption of ASC 606.

Revenue is recognized when (or as) the Company satisfies performance obligations by transferring a promised goods to a customer. Revenue is measured at the transaction price which is based on the amount of consideration that the Company expects to receive in exchange for transferring the promised goods to the customer. Contracts with customers are comprised of customer purchase orders, invoices and written contracts. Given the nature of our business, customer product orders are fulfilled at a point in time and not over a period of time.

The majority of domestic sales contracts transfer control to customers upon receipt of product by customers. The majority of oversea sales contracts transfer control to customers when goods were delivered to the carriers. In most jurisdictions where the Company operates, sales are subject to Value Added Tax (“VAT”). Revenue is presented net of VAT.

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

The following table disaggregates product sales by business segment by geography which provides information as to the major source of revenue. See Note 16 for additional description of our reportable business segments and the products being sold in each segment.

	Three months ended September 30, 2018						Nine months ended September 30, 2018
	Lithium Business		Ni-MH Batteries and Accessories		Consolidated		Lithium Business		Ni-MH Batteries and Accessories		Consolidated
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Primary Geographic Markets		$		$		$		$		$		$
China Mainland		27,534,539		8,964,442		36,498,981		74,408,401		23,276,348		97,684,749
Asia, others		38,657,192		5,955,794		44,612,986		73,751,756		11,799,526		85,551,282
Europe		1,670,050		5,651,287		7,321,337		3,736,805		12,971,795		16,708,600
North America		732,342		1,139,319		1,871,661		1,797,672		3,237,063		5,034,735
Others		-		252,514		252,514		-		285,526		285,526
Total sales		68,594,123		21,963,356		90,557,479		153,694,634		51,570,258		205,264,892

The Company has elected to apply the practical expedient in paragraph ASC 606-10-50-14 and does not disclose information about remaining performance obligations (i) contracts that have an original expected length of one year or less; and (ii) contracts where revenue is recognized as invoiced.

We do not have amounts of contract assets since revenue is recognized as control of goods is transferred. Our contract liabilities consist of advance payments from customers. Our contract liabilities are reported in a net position on a customer-by-customer basis at the end of each reporting period. All contract liabilities are expected to be recognized as revenue within one year and are included in other payables and accrued liabilities in our Condensed Consolidated Balance Sheet.

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

Accounts receivable, net

	September 30,		December 31,
	2018		2017
	(Unaudited)
	$		$
Accounts receivable		82,024,427		61,431,785
Less: allowance for doubtful accounts		414,186		3,178,786
		81,610,241		58,252,999

The Company wrote off $2,430,392 for the three and nine months ended September 30, 2018, respectively.

Inventories

	September 30,		December 31,
	2018		2017
	(Unaudited)
	$		$
Raw materials		30,485,367		21,428,315
Work in progress		11,460,231		6,931,486
Finished goods		16,246,238		14,284,563
Packing materials		32,108		36,797
Consumables		343,719		265,483
		58,567,663		42,946,644

Property, plant and equipment, net

	September 30,		December 31,
	2018		2017
	(Unaudited)
	$		$
Cost
Construction in progress		4,518,370		1,330,643
Furniture, fixtures and office equipment		6,895,368		5,794,983
Leasehold improvement		6,856,560		7,080,409
Machinery and equipment		37,235,730		33,176,416
Motor vehicles		1,495,382		1,498,605
Buildings		19,034,923		20,169,197
		76,036,333		69,050,253
Less: accumulated depreciation		24,583,427		22,529,477
		51,452,906		46,520,776

The Company recorded depreciation expenses of $4,407,773 and $3,688,755 for the nine months ended September 30, 2018 and 2017, respectively, and $1,462,535 and $1,327,273 for the three months ended September 30, 2018 and 2017, respectively.

During the nine months ended September 30, 2018, the Company deducted deferred government grants of $66,398 on the carrying amount of property, plant and equipment. During the year ended December 31, 2017, the Company deducted deferred government grants of $263,948 in calculating the carrying amount of property, plant and equipment.

The buildings comprising the Huizhou facilities were pledged as collateral for bank loans. The net carrying amounts of the buildings were $8,534,563 and $9,224,694 as of September 30, 2018 and December 31, 2017, respectively.

The building located in Shenzhen, Guangdong was pledged as collateral for bank loans. The net carrying amount of the buildings was $357,117 and $396,843 as of September 30, 2018 and December 31, 2017, respectively.

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

Long-term investments

	September 30, 2018					December 31, 2017
	(Unaudited)
	$		Interest %			$		Interest %
Equity method investments
-Ganzhou Highpower Technology Company Limited (“GZ Highpower”) (1)		8,187,264		31.294	%		8,102,520		31.294	%
-Shenzhen V-power Innovative Technology Co., Ltd (“V-power”) (2)		645,499		49.000	%		-		N/A
Cost method investment
-Huizhou Yipeng Energy Technology Co Ltd. (“Yipeng”) (3)		1,702,414		4.654	%		1,803,859		4.654	%
		10,535,177					9,906,379

(1) Investment in GZ Highpower

On December 21, 2017, after the completion of the capital increase to GZ Highpower by other shareholders, the Company lost the controlling power over GZ Highpower and deconsolidated GZ Highpower. Thereafter, the investment was recorded under the equity method.

The equity in earnings of investee was $233,531 and $569,745 for the three and nine months ended September 30, 2018, respectively.

(2) Investment in V-power

On February 28, 2018, the Company signed an investment agreement (the “Agreement”) with a related company and a group of individuals (the “Founder Team”) with an aggregate amount of RMB4.9 million (approximately $0.7 million) for 49% of the equity interest of V-power, which was recorded under the equity method. Pursuant to the terms of the Agreement, the Company shall complete the capital injection to V-power no later than December 31, 2018. In addition, the Company agreed to transfer the 15% of original equity interest of V-power to the Founder Team as compensation under voluntary assignment as any of the following requirements met: 1. annual sales revenue higher or equal to RMB30 million before the first capital increase of V-power; 2. valuation of V-power higher or equal to RMB30 million before equity issuance. As of September 30, 2018, the Company injected RMB2.1million (approximately $0.3 million) to V-power, and the unpaid amount was recorded as amount due to a related party (See Note 16).

The equity in loss of investee was $48,728 and $68,622 for the three and nine months ended September 30, 2018, respectively.

(3) Investment in Yipeng

In 2017, after the completion of the capital injection to Yipeng and the equity transfer payment received by the Company from the other shareholder, the Company’s equity ownership in Yipeng decreased from 35.4% to 4.654%, and the Company lost the ability to exercises significant influence over Yipeng, discontinued the use of equity method and applied the cost method in accounting.

The equity in earnings of investee was $1,087 and $106,412 for the three and nine months ended September 30, 2017, respectively.

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

Taxation

Highpower and its direct and indirect wholly owned subsidiaries file tax returns separately.

1) VAT

Pursuant to the Provisional Regulation of the PRC on VAT and the related implementing rules, all entities and individuals ("taxpayers") that are engaged in the sale of products in the PRC are generally required to pay VAT, at a rate of which was changed from 17% to 16% on May 1, 2018 of the gross sales proceeds received, less any deductible VAT already paid or borne by the taxpayers. Further, when exporting goods, the exporter is entitled to a portion of or all the refund of VAT that it has already paid or incurred. The Company’s PRC subsidiaries are subject to VAT of their revenues.

2) Income tax

United States

Tax Reform

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into legislation. The 2017 Tax Act significantly revises the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 34% to 21%, imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax.

On December 22, 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740, Income Taxes. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements.

As of September 30, 2018, the Company has not completed its accounting for certain tax effects of enactment of the Tax Act; however, the Company has made reasonable estimates of the effects on our existing deferred tax balances and the one-time transition tax. The Company expects to finalize these provisional estimates before the end of 2018 after completing our reviews and analysis, including reviews and analysis of any interpretations issued during this re-measurement period.

The one-time transition tax is based on the total post-1986 earnings and profits (“E&P”) for which the Company has previously deferred U.S. income taxes. The Company expects to make adjustments to this provisional estimate based on additional clarifying and interpretative technical guidance to be issued related to the calculation of the one-time transition tax.

The Tax Act subjects a U.S. shareholder to tax on Global Intangible Low Taxed Income (GILTI) earned by foreign subsidiaries. The Company currently does not expect to incur GILTI in 2018. The Company has not determined its accounting policy with respect to GILTI and has therefore included the 2018 estimate of current year GILTI, if any, as a period cost and included as part of the estimated annual effective tax rate. The 2018 estimated annual effective tax rate also includes the 2018 impact of all other U.S. tax reform provisions that were effective on January 1, 2018.

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

Taxation (continued)

Hong Kong

HKHTC, which was incorporated in Hong Kong, is subject to a corporate income tax rate of 16.5%.

PRC

In accordance with the relevant tax laws and regulations of the PRC, a company registered in the PRC is subject to income taxes within the PRC at the applicable tax rate on taxable income.

In China, the companies granted with National High-tech Enterprise (“NHTE”) status enjoy 15% income tax rate. This status needs to be renewed every three years. If these subsidiaries fail to renew NHTE status, they will be subject to income tax at a rate of 25% after the expiration of NHTE status. All the PRC subsidiaries received NHTE status and enjoy 15% income tax rate for calendar year 2018 and 2017.

The components of the provision for income taxes expense are:

	*Three months ended* *September 30,*						*Nine months ended* *September 30,*
	2018			2017			2018			2017
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
	$			$			$			$
Current		992,371			1,123,967			1,890,891			2,043,767
Deferred		(82,832	)		(110,048	)		(581,710	)		153,625
Total income tax expenses		909,539			1,013,919			1,309,181			2,197,392

The reconciliation of income taxes expenses computed at the PRC statutory tax rate to income tax expense is as follows:

	*Three months ended* *September 30,*						*Nine months ended* *September 30,*
	2018			2017			2018			2017
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
	$			$			$			$
Income before tax		7,023,567			6,166,814			9,018,588			14,425,029

Provision for income taxes at PRC statutory income tax rate (25%)		1,755,892			1,541,704			2,254,647			3,606,257
Impact of different tax rates in other jurisdictions		(59,978	)		(12,220	)		36,568			(5,582	)
Effect of PRC preferential tax rate		(606,360	)		(675,946	)		(872,787	)		(1,464,929	)
R&D expenses eligible for super deduction		(193,645	)		(4,571	)		(528,537	)		(447,510	)
Other non-deductible expenses		62,508			31,769			111,259			65,764
Change in valuation allowance of deferred tax assets		(48,878	)		133,183			308,031			443,392
Effective enterprise income tax expenses		909,539			1,013,919			1,309,181			2,197,392

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

Taxation (continued)

3) Deferred tax assets, net

Deferred tax assets and deferred tax liabilities reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purpose and the tax bases used for income tax purpose. The following represents the tax effect of each major type of temporary difference.

	September 30,			December 31,
	2018			2017
	(Unaudited)
	$			$
Tax loss carry-forward		1,598,750			991,766
Allowance for doubtful receivables		62,127			136,562
Impairment for inventory		436,679			222,289
Difference for sales cut-off		3,691			17,322
Deferred government grants		70,942			46,446
Property, plant and equipment subsidized by government grant		248,358			269,344
Impairment for property, plant and equipment		137,171			58,304
Total gross deferred tax assets		2,557,718			1,742,033
Valuation allowance		(1,297,610	)		(991,766	)
Total net deferred tax assets		1,260,108			750,267

As of September 30, 2018, the Company had net operating loss carry-forwards in Hong Kong of $5,584,833 and United States of $1,791,016 without expiration and in the PRC of $2,007,596, which will expire in 2022.

The Company has deferred tax assets which consisted of tax loss carry-forwards and other items that can be carried forward to offset future taxable income. Management determined it is more likely than not that part of the deferred tax assets could not be utilized, so a valuation allowance was provided for as of September 30, 2018 and December 31, 2017. The net valuation allowance decreased by $47,485 and increased by approximately $0.1 million during the three months ended September 30, 2018 and 2017, respectively. The net valuation allowance increased by approximately $0.3 million and $0.4 million during the nine months ended September 30, 2018 and 2017, respectively.

Notes payable

Notes payable presented to certain suppliers as a payment against the outstanding trade payables.

Notes payable are mainly bank acceptance bills which are non-interest bearing and generally mature within six months. The outstanding bank acceptance bills are secured by restricted cash deposited in banks. Outstanding bank acceptance bills were $54,989,994 and $54,859,478 as of September 30, 2018 and December 31, 2017, respectively.

10.

Short-term loans

As of September 30, 2018 and December 31, 2017, short-term loans consisted of bank borrowings for working capital and capital expenditure purposes and were secured by personal guarantees executed by certain directors of the Company, time deposits with a carrying amount of $2,716,196 and $3,982,226, land use right with a carrying amount of $2,444,474 and $2,639,631, and buildings with a carrying amount of $8,891,680 and $9,621,537, respectively.

The loans were primarily obtained from three banks with interest rates ranging from 5.2200% to 6.5250% per annum and 5.0000% to 5.8725% per annum as of September 30, 2018 and December 31, 2017, respectively. The interest expenses were $531,684 and $700,708 for the nine months ended September 30, 2018 and 2017, respectively. The interest expenses were $301,085 and $163,552 for the three months ended September 30, 2018 and 2017, respectively.

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

11.

Non-financial institution borrowings

As of September 30, 2018, the Company obtained borrowings from a third-party individual in an amount of $8,701,075 which were used for working capital and capital expenditure purposes. The interest rates for the borrowings were 5.66% per annum. The borrowings are personally guaranteed by the Company's Chief Executive Officer, Mr. Dang Yu Pan.

The interest expense of the above borrowings was $422,554 and $468,817 for the nine months ended September 30, 2018 and 2017, respectively. The interest expense was $125,591 and $171,064 for the three months ended September 30, 2018 and 2017, respectively.

12.

Lines of credit

The Company entered into various credit contracts and revolving lines of credit, which were used for short-term loans and bank acceptance bills. As of September 30, 2018, the total and unused lines of credit were $107.9 million and $44.7 million with maturity dates from October 2018 to September 2019. As of December 31, 2017, the total and unused lines of credit were $79.8 million and $31.3 million with maturity dates from March 2018 to July 2019.

These lines of credit were guaranteed by the Company’s Chief Executive Officer, Mr. Dang Yu Pan or Mr. Dang Yu Pan and his wife. The Company’s buildings and the land use right were pledged as collateral for these line of credit.

13.

Earnings per share

The following table sets forth the computation of basic and diluted earnings per common share for the three and nine months ended September 30, 2018 and 2017.

	*Three months ended* *September 30,*				*Nine months ended* *September 30,*
	2018		2017		2018		2017
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
	$		$		$		$
Numerator:
Net income attributable to the Company		6,114,028		5,024,193		7,709,407		11,931,079

Denominator:
Weighted-average shares outstanding
- Basic		15,559,658		15,369,674		15,542,076		15,270,898
- Dilutive effects of equity incentive awards		37,599		149,090		58,470		292,114
- Diluted		15,597,257		15,518,764		15,600,546		15,563,012

Net income per share:
- Basic		0.39		0.33		0.50		0.78
- Diluted		0.39		0.32		0.49		0.77

Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Potential dilutive securities are excluded from the calculation of diluted EPS in loss periods as their effect would be anti-dilutive.

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

14.

Defined contribution plan

Full-time employees of the Company in the PRC participate in a government mandated defined contribution plan, pursuant to which certain pension benefits, medical care, employee housing fund and other welfare benefits (“the Benefits”) are provided to employees. Chinese labor regulations require that the PRC operating subsidiaries of the Company make contributions to the government for these benefits based on certain percentages of the employees’ salaries. Except for contributions made related to the Benefits, the Company has no legal obligation.

The total contributions made, which were expensed as incurred, were $2,380,819 and $1,824,009 for the nine months ended September 30, 2018 and 2017, respectively, and $997,267 and $698,912 for the three months ended September 30, 2018 and 2017, respectively.

15.

Segment information

The reportable segments are components of the Company that offer different products and are separately managed, with separate financial information available that is separately evaluated regularly by the Company’s chief operating decision maker (“CODM”), the Chief Executive Officer, in determining the performance of the business. The Company categorizes its business into three reportable segments, namely (i) Lithium Business; (ii) Ni-MH Batteries and Accessories; and (iii) New Materials.

The CODM evaluates performance based on each reporting segment’s net sales, cost of sales, gross profit and total assets. Net sales, cost of sales, gross profit and total assets by segments is set out as follows:

	*Three months ended* *September 30,*				*Nine months ended* *September 30,*
	2018		2017		2018		2017
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
	$		$		$		$
Net sales
Lithium Business		68,594,123		49,302,659		153,694,634		113,802,201
Ni-MH Batteries and Accessories		21,963,356		14,273,058		51,570,258		38,584,272
New Materials		-		7,829,843		-		12,585,865
Total		90,557,479		71,405,560		205,264,892		164,972,338

Cost of Sales
Lithium Business		54,730,548		39,691,844		125,277,530		89,642,088
Ni-MH Batteries and Accessories		18,316,515		11,211,627		43,600,693		29,413,142
New Materials		-		6,941,753		-		10,350,172
Total		73,047,063		57,845,224		168,878,223		129,405,402

Gross Profit
Lithium Business		13,863,575		9,610,815		28,417,104		24,160,113
Ni-MH Batteries and Accessories		3,646,841		3,061,431		7,969,565		9,171,130
New Materials		-		888,090		-		2,235,693
Total		17,510,416		13,560,336		36,386,669		35,566,936

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

15.

Segment information (continued)

	September 30,		December 31,
	2018		2017
	(Unaudited)
	$		$
Total Assets
Lithium Business		212,524,600		171,881,450
Ni-MH Batteries and Accessories		51,273,575		48,383,088
Total		263,798,175		220,264,538

All long-lived assets of the Company are located in the PRC. Geographic information about the sales and accounts receivable based on the locations of the Company’s customers is set out as follows:

	*Three months ended* *September 30,*				*Nine months ended* *September 30,*
	2018		2017		2018		2017
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
	$		$		$		$
Net sales
China Mainland		36,498,981		40,140,175		97,684,749		94,387,905
Asia, others		44,612,986		24,496,337		85,551,282		50,284,507
Europe		7,321,337		6,456,220		16,708,600		14,921,627
North America		1,871,661		178,262		5,034,735		4,841,329
Others		252,514		134,566		285,526		536,970
		90,557,479		71,405,560		205,264,892		164,972,338

	September 30,		December 31,
	2018		2017
	(Unaudited)
	$		$
Accounts receivable
China Mainland		36,314,021		37,636,478
Asia, others		36,761,224		15,294,527
Europe		7,966,358		5,189,859
North America		493,677		94,585
Others		74,961		37,550
		81,610,241		58,252,999

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

16.

Related party balance and transaction

Related party balance

	September 30,		December 31,
	2018		2017
	(Unaudited)
	$		$
Accounts receivable		258,825		632,704
Other receivable		1,170		533,134
Amount due from a related party- GZ Highpower		259,995		1,165,838

Other payable-investment (1)		406,050		-
Loan from Mr. Dang Yu Pan (2)		5,720,957		-
Amount due to related parties		6,127,007		-

(1) The Company signed an investment agreement with an aggregate amount of RMB4.9 million (approximately $0.7 million) in investing for 49% of the equity interest of V-power which was set up on March 1, 2018. On April 28, 2018, the Company injected RMB2.1 million (approximately $0.3 million) to V-power, and the unpaid amount was recorded as amount due to a related party. (See Note 7)

(2) The Company entered into a loan agreement with a maximum amount of RMB60 million (approximately $8.7 million) with Mr. Dang Yu Pan on July 20, 2018. As of September 30, 2018, the Company withdrew an aggregate amount of RMB39.45 million (approximately $5.7 million). The interest rate is 5.65% per annum. The Company accrued interest expense $58,037 for the three and nine months ended September 30, 2018, respectively.

Related party transaction

The details of the transactions with GZ Highpower were as follows:

	*Three months ended* *September 30,*					*Nine months ended* *September 30,*
	2018			2017		2018		2017
	(Unaudited)			(Unaudited)		(Unaudited)		(Unaudited)
	$			$		$		$
Income:
Sales		525,983			-		1,184,917		-

Repayment:
Other receivable		(12,986	)		-		530,461		-

The details of the transactions with Yipeng were as follows:

	Period from January 1, 2017 to July 27, 2017		Period from July 1, 2017 to July 27, 2017
	(Unaudited)		(Unaudited)
	$		$
Income:
Sales		2,781,745		734,889
Rental income		26,687		8,376

Expenses:
Equipment rental fee		383,351		58,121

17.

Subsequent event

The Company has evaluated subsequent events through the issuance of the unaudited condensed consolidated financial statements and no other subsequent event is identified that would have required adjustment or disclosure in the consolidated financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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, 2017 filed with SEC on April 4, 2018 (the “Annual Report”).

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are not historical facts, and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. All statements, other than statements of historical fact included in this Form 10-Q including, without limitation, statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the Company’s financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. Words such as “expect,” “believe,” “anticipate,” “intend,” “estimate,” “seek” and variations and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performance, but reflect management’s current beliefs, based on information currently available. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to the Risk Factors section of the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”). The Company’s securities filings can be accessed on the EDGAR section of the SEC’s website at www.sec.gov. Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

Overview

Net sales increased by $19.2 million, or 26.8%, during the third quarter of 2018 compared to the same quarter in 2017. Excluding GZ Highpower, net sales increased 41.8% to $90.6 million from $63.9 million. The main driver was our lithium business, including high-end consumer products, industrial applications and increased demand for artificial intelligence products.

Lithium business net sales increased by $19.3 million, or 39.1%, during the third quarter of 2018 compared to the same quarter in 2017.

Ni-MH batteries and accessories net sales increased by $7.7 million, or 53.9%, during the third quarter of 2018 compared to the same quarter in 2017.

Gross profit during the third quarter of 2018 was $17.5 million, or 19.3% of net sales, compared to $13.6 million, or 19.0% of net sales, for the comparable period in 2017.

In the third quarter of 2018, our gross profit margin increased by 1.9% compared to the second quarter of 2018. Due to the uncertainty of trade conflict between the USA and China, raw material price fluctuation and exchange rate impact, we will closely monitor all of these potential risks to drive continuous business growth.

Investment in V-power

On February 28, 2018, the Company signed an investment agreement (the “Agreement”) with an aggregate amount of RMB4.9 million (approximately $0.7 million) for 49% of the equity interest of V-power. Pursuant to the terms of the Agreement, the Company shall complete the capital injection to V-power no later than December 31, 2018. On April 28, 2018, the Company injected RMB2.1 million (approximately $0.3 million) to V-power. V-power now focuses on the development of electronic vehicle battery management systems (“EV BMS”), and in the future V-power intends to gradually extend the business to design and produce EV power modules, energy storage systems (“ESS”) and related products.

Critical Accounting Policies

See Note 2 to the accompanying unaudited condensed consolidated financial statements for our critical accounting policies.

Results of Operations

The following table sets forth the unaudited consolidated statements of operations of the Company for the three and nine months ended September 30, 2018 and 2017, both in US$ and as a percentage of net sales.

Consolidated Statements of Operations

	Three months ended September 30,												Nine months ended September 30,
	2018						2017						2018						2017
	(Unaudited)						(Unaudited)						(Unaudited)						(Unaudited)
	$			%			$			%			$			%			$			%
Net sales		90,557			100.0	%		71,406			100.0	%		205,265			100.0	%		164,972			100.0	%
Cost of sales		(73,047	)		(80.7	)%		(57,846	)		(81.0	)%		(168,878	)		(82.3	)%		(129,405	)		(78.4	)%
Gross profit		17,510			19.3	%		13,560			19.0	%		36,387			17.7	%		35,567			21.6	%

Research and development expenses		(3,536	)		(3.9	)%		(2,434	)		(3.4	)%		(9,690	)		(4.7	)%		(6,385	)		(3.9	)%
Selling and distribution expenses		(2,625	)		(2.9	)%		(1,860	)		(2.6	)%		(6,722	)		(3.3	)%		(5,221	)		(3.2	)%
General and administrative expenses		(5,796	)		(6.4	)%		(3,960	)		(5.5	)%		(13,821	)		(6.7	)%		(10,035	)		(6.1	)%
Foreign currency transaction gain (loss)		1,925			2.1	%		(816	)		(1.1	)%		2,580			1.3	%		(1,645	)		(1.0	)%
Income from operations		7,478			8.3	%		4,490			6.1	%		8,734			4.3	%		12,281			7.4	%

Changes in fair value of warrant liability		-			-			-			-			-			-			-			-
Changes in fair value of foreign exchange derivative assets (liabilities)		(410	)		(0.5	)%		(146	)		(0.2	)%		(831	)		(0.4	)%		(146	)		(0.1	)%
Government grants		262			0.3	%		346			0.5	%		1,580			0.8	%		905			0.5	%
Other income (expense)		28			0.0	%		(251	)		(0.4	)%		109			0.1	%		45			0.0	%
Equity in earnings of investees		185			0.2	%		1			0.0	%		501			0.2	%		106			0.1	%
Gain on dilution in equity method investee		-			-			5			0.0	%		-			-			496			0.3	%
Gain on sales of long-term investment		-			-			1,664			2.3	%		-			-			1,664			1.0	%
Interest (expense) income		(519	)		(0.6	)%		58			0.1	%		(1,074	)		(0.5	)%		(926	)		(0.6	)%
Income before taxes		7,024			7.8	%		6,167			8.6	%		9,019			4.4	%		14,425			8.7	%

Income taxes expenses		(910	)		(1.0	)%		(1,014	)		(1.4	)%		(1,310	)		(0.6	)%		(2,197	)		(1.3	)%
Net income		6,114			6.8	%		5,153			7.2	%		7,709			3.8	%		12,228			7.4	%

Less: net income attributable to non-controlling interest		-			-			129			0.2	%		-			-			297			0.2	%
Net income attributable to the Company		6,114			6.8	%		5,024			7.0	%		7,709			3.8	%		11,931			7.2	%

Net sales

Net sales for the three months ended September 30, 2018 were $90.6 million compared to $71.4 million for the comparable period in 2017, an increase of $19.2 million, or 26.8%.

Net sales for the nine months ended September 30, 2018 were $205.3 million compared to $165.0 million for the comparable period in 2017, an increase of $40.3 million, or 24.4%. The increase was driven by our lithium business, which was partially offset by the impact of the deconsolidation of GZ Highpower. Net sales of Lithium business increased by $39.9 million, or 35.1%, during the nine months ended September 30, 2018, compared to the comparable period in 2017. Ni-MH batteries and accessories net sales increased by $13.0 million, or 33.7%, during the nine months ended September 30, 2018, compared to the comparable period in 2017. The increase in net sales was mainly due to the optimization of our sales structure.

Gross profit

Gross profit for the three months ended September 30, 2018 was $17.5 million, or 19.3% of net sales, compared to $13.6 million, or 19.0% of net sales, for the comparable period in 2017.

Gross profit for the nine months ended September 30, 2018 was $36.4 million, or 17.7% of net sales, compared to $35.6 million, or 21.6% of net sales, for the comparable period in 2017. This decrease of gross profit margin was mainly due to high raw material prices.

Research and development expenses

Research and development expenses were $3.5 million, or 3.9% of net sales, for the three months ended September 30, 2018, compared to $2.4 million, or 3.4% of net sales, for the comparable period in 2017.

Research and development expenses were $9.7 million, or 4.7% of net sales, for the nine months ended September 30, 2018, compared to $6.4 million, or 3.9% of net sales, for the comparable period in 2017. The Company will continue to invest on R&D activities in the future.

Selling and distribution expenses

Selling and distribution expenses were $2.6 million, or 2.9% of net sales, for the three months ended September 30, 2018, compared to $1.9 million, or 2.6% of net sales, for the comparable period in 2017.

Selling and distribution expenses were $6.7 million, or 3.3% of net sales, for the nine months ended September 30, 2018, compared to $5.2 million, or 3.2% of net sales, for the comparable period in 2017. The percent of net sales remained stable.

General and administrative expenses

General and administrative expenses were $5.8 million, or 6.4% of net sales, for the three months ended September 30, 2018, compared to $4.0 million, or 5.5% of net sales, for the comparable period in 2017.

General and administrative expenses were $13.8 million, or 6.7% of net sales, for the nine months ended September 30, 2018, compared to $10.0 million, or 6.1% of net sales, for the comparable period in 2017. The increase was mainly due to the increase of payroll related and amortization of share-based compensation.

Foreign currency transaction gain (loss)

We experienced a gain of $1.9 million and a loss of $0.8 million for the three months ended September 30, 2018 and 2017, respectively, on the exchange rate difference between the US$ and the RMB.

We experienced a gain of $2.6 million and a loss of $1.6 million for the nine months ended September 30, 2018 and 2017, respectively, on the exchange rate difference between the US$ and the RMB. The gain (loss) in exchange rate difference was due to the influence of the RMB relative to the US$ over the respective periods.

Changes in fair value of foreign exchange derivative assets (liabilities)

We experienced a loss on derivative instruments of $0.4 million and $0.1 million for the three months ended September 30, 2018 and 2017, respectively.

We experienced a loss on derivative instruments of $0.8 million and $0.1 million for the nine months ended September 30, 2018 and 2017, respectively.

Government grants

Government grants were $0.3 million for the three months ended September 30, 2018, compared to $0.3 million for the comparable period in 2017.

Government grants were $1.6 million for the nine months ended September 30, 2018, compared to $0.9 million for the comparable period in 2017.

Other income (expense)

Other income was $27,998 for the three months ended September 30, 2018, compared to other expense was $251,166 for the comparable period in 2017.

Other income was $108,140 for the nine months ended September 30, 2018, compared to $44,480 for the comparable period in 2017.

Equity in earnings of investees

Equity in earnings of investees were $184,803 for the three months ended September 30, 2018, compared to equity in earnings of investee $1,087 for the comparable period in 2017.

Equity in earnings of investees were $501,123 for the nine months ended September 30, 2018, compared to $106,412 for the comparable period in 2017.

Gain on dilution in equity method investee

Gain on dilution in equity method investee, which was due to the equity issuance of equity method investee (Yipeng) to a third party, were $5,071 and $496,396 for the three and nine months ended September 30, 2017.

Interest (expense) income

Interest expense was $518,912 for the three months ended September 30, 2018, compared to interest income of $57,663 for the comparable period in 2017.

Interest expense was $1.1 million for the nine months ended September 30, 2018, compared to $0.9 million for the comparable period in 2017.

Income taxes expenses

Income taxes expenses were $0.9 million for the three months ended September 30, 2018, compared to $1.0 million for the comparable period in 2017.

Income taxes expenses were $1.3 million for the nine months ended September 30, 2018, compared to $2.2 million for the comparable period in 2017.

Net income

Net income attributable to the Company for the three months ended September 30, 2018 was $6.1 million. Net income attributable to the Company (excluding net gain attributable to non-controlling interest) of $5.0 million for the comparable period in 2017, increased by $1.1 million, or 21.7%.

Net income attributable to the Company for the nine months ended September 30, 2018 was $7.7 million. Net income attributable to the Company (excluding net gain attributable to non-controlling interest) of $11.9 million for the comparable period in 2017, decreased by $4.2 million, or 35.4%.

Reconciliation of Net Income to EBITDA

A table reconciling earnings before interest, income tax, depreciation and amortization (“EBITDA”), a non-GAAP financial measure, to the appropriate GAAP measure is included with the Company's financial information below. EBITDA was derived by taking earnings before interest expense (net), taxes, depreciation and amortization. The presentation of this additional information is not meant to be considered in isolation or as a substitute for results prepared in accordance with U.S. GAAP. The Company believes this non-GAAP measure is useful to investors as it provides a basis for evaluating the Company's operating results in the ordinary course of its operations. This non-GAAP measure is not based on any comprehensive set of accounting rules or principles. The Company believes that non-GAAP measures have limitations in that they do not reflect all of the amounts associated with its results of operations as determined in accordance with U.S. GAAP and that these measures should only be used to evaluate the Company's results of operations in conjunction with, and not in lieu of, the corresponding GAAP measures.

	*Three months ended* *September 30,*					*Nine months ended* *September 30,*
	2018		2017			2018		2017
	(Unaudited)		(Unaudited)			(Unaudited)		(Unaudited)
	$		$			$		$
Net income attributable to the Company		6,114,028		5,024,193			7,709,407		11,931,079

Interest expenses		518,912		(57,663	)		1,073,578		926,185
Income taxes expenses		909,539		1,013,919			1,309,181		2,197,392
Depreciation and Amortization		1,490,646		1,362,196			4,494,518		3,792,178

EBITDA		9,033,125		7,342,645			14,586,684		18,846,834

Key financial items excluding GZ Highpower

The Company deconsolidated GZ Highpower on December 21, 2017. Since the Company no longer presents GZ Highpower’s operations and comprehensive income as a result of the deconsolidation, the table below shows the comparative figures of key financial items excluding the effect of GZ Highpower:

	Three months ended September 30,						Nine months ended September 30,
	2018			2017			2018			2017
	(Unaudited)			(Unaudited)			(Unaudited)			*(Unaudited)*
	$			$			$			$
Sales:
Lithium Business		68,594,123			49,302,659			153,694,634			113,802,201
Ni-MH Batteries and Accessories		21,963,356			14,273,058			51,570,258			38,584,272
Sales to GZ Highpower		-			288,466			-			492,944
Net sales (excluding GZ Highpwer)		90,557,479			63,864,183			205,264,892			152,879,417
Gross profit (excluding GZ Highpwer)		17,510,416			12,648,471			36,386,669			33,331,242
Gross profit margin (excluding GZ Highpwer)		19.3	%		19.8	%		17.7	%		21.8	%

Net income:
Net income		6,114,028			5,152,895			7,709,407			12,227,637
Less: Net income of GZ Highpower		-			429,010			-			988,528
Net income (excluding GZ Highpwer)		6,114,028			4,723,885			7,709,407			11,239,109

Liquidity and Capital Resources

We had cash and restricted cash of approximately $39.6 million as of September 30, 2018, compared to $40.5 million as of December 31, 2017.

To provide liquidity and flexibility in funding our operations, we borrow funds under bank facilities and other external sources of financing. As of September 30, 2018, we had lines of credit with eight financial institutions aggregating $107.9 million. The maturities of these facilities vary from October 2018 to September 2019. The facilities are subject to regular review and approval. Certain of these bank facilities are guaranteed by our Chief Executive Officer, Mr. Dang Yu Pan, pledged by land use right and buildings, and contain customary affirmative and negative covenants for secured credit facilities of this type. Interest rates are generally based on the banks’ reference lending rates. No significant commitment fees are required to be paid for the bank facilities. As of September 30, 2018, we had utilized approximately $63.2 million under such general credit facilities and had available unused credit facilities of $44.7 million.

Net cash used in operating activities was approximately $9.8 million for the nine months ended September 30, 2018, compared to net cash used in operating activities of $5.6 million for the comparable period in 2017. The net cash increase of $4.2 million used in operating activities is primarily due to an increase of $17.2 million in cash outflow from accounts receivable, an increase of $11.7 million in cash inflow from other payables and accrued liabilities.

Net cash used in investing activities was $10.1 million for the nine months ended September 30, 2018, compared to net cash provided by investing activities of $3.2 million for the comparable period in 2017. The net cash increase of $13.3 million used in investing activities is primarily due to a cash inflow of $10.5 million from proceeds from sale of long-term investment in 2017.

Net cash provided by financing activities was $23.5 million for the nine months ended September 30, 2018, compared to $12.1 million for the comparable period in 2017. The net cash increase of $11.4 million in net cash provided by financing activities was primarily attributable to an increase of $12.6 million in cash inflow from proceeds from short-term loans, an increase of $23.9 million in cash inflow from proceeds from notes payable, a decrease of $11.7 million in cash outflow from repayments of short-term loans, and an increase of $34.3 million in cash outflow from repayments of notes payable.

Our inventory turnover was 6.7 times and 4.5 times for the nine months ended September 30, 2018 and 2017, respectively. The average days outstanding of our accounts receivable was 92 days at September 30, 2018, compared to 77 days at December 31, 2017. The lower inventory turnover was mainly due to our reserve on main raw material because of the high raw material price in the first half year of 2018.

We believe that available cash and unused credit facilities should enable the Company to meet presently anticipated cash needs for at least the next 12 months after the date that the financial statements are issued.

Recent Accounting Standards

Please refer to Note 2 (Recently issued accounting standards).

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not required for a smaller reporting company.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

(a) Evaluation of disclosure controls and procedures

Disclosure controls and procedures are controls and other procedures that are designed and adopted by management to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is properly recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that all necessary information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.

As of the end of the period covered by this Quarterly Report, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.

(b) Changes in Internal Control over Financial Reporting

There were no significant changes in our internal controls over financial reporting that occurred during the quarter ended September 30, 2018, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings

See the Company’s Form 10-Q for the period ended June 30, 2018 as filed with the SEC on August 13, 2018 for a description of the settlement and dismissal on August 1, 2018 of the FirsTrust matter.

Item 1A. Risk Factors

Any investment in our common stock involves a high degree of risk. Investors should carefully consider the risks described herein and in our Annual Report on Form 10-K for the year ended December 31, 2017 as filed with the SEC on April 4, 2018 and all of the information contained in our public filings before deciding whether to purchase our common stock. Other than as set forth below, there have been no material revisions to the “Risk Factors” as set forth in our Annual Report on Form 10-K.

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds

None.

Item 3. Default Upon Senior Securities

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information

Working Capital Loan Contract between SZ Springpower and Industrial and Commercial Bank of China Ltd. Shenzhen Henggang Branch

On August 8, 2018, SZ Springpower entered into a working capital loan contract with Industrial and Commercial Bank of China Ltd., Shenzhen Henggang Branch providing for an aggregate loan of RMB10,000,000 ($1,450,179) to be used as current funds for production and operations. SZ Springpower must withdraw the facility before November 6, 2018, after which time the bank may cancel all or part of the facility. The term of the loan is 12 months from the first withdrawal date. The interest rate is 5.4378%, which equals to the one year benchmarked by interbank rates, float 51.4%. The loan is guaranteed by HKHTC, HZ HTC, SZ Highpower and our Chief Executive Officer, Dang Yu Pan. The balance of loan was $1,450,179 as of September 30, 2018.

The following constitute events of default under the loan contract: the borrower failure to repay principal, interest, and other payables in accordance with the provisions specified in this contract; or failure to fulfill any other obligations in this contract, or contrary to the statements, guarantee and commitments in this contract; the guarantees in this contract have adversely changed to the Lender’s loan, and the borrower is not available to provide other guarantees approved by the lender failure to pay off any other debts due by the borrower, or failure to fulfill or breach other obligations in this contract, or likely to affect the performance of the obligations in this contract; the financial performance of the profitability, debt payment ability, operating capacity and cash flow of the Borrower exceed the agreed standards, or deterioration has been or may affect the obligations in this contract; the borrower’s ownership structure, operation, external investment has changed adversely, which have affected or may affect the fulfillment of the obligations in this contract; the borrower involves or may involve significant economic disputes, litigation, arbitration, or asset seizure, detention or enforcement, or judicial or administrative authorities for investigation or take disciplinary measures in accordance with the laws, or illegal with relevant state regulations or policies in accordance with the laws, or exposure by media, which have affected or may affect the fulfillment of the obligations in this contract; the borrower’s principal individual investors, key management officer’s change, disappearances or restriction of personal liberty, likely to affect the performance of the obligations in this contract; using false contracts with related parties, using no actual transaction to extract the lender’s funds or credit, or evasion of lender’s loan right through related party transactions; having been or may be out of business, dissolution, liquidation, business reorganizations, business license has been revoked or bankruptcy; breaches food safety, production safety, environmental protection and other environmental and social risk management related laws and regulations, regulatory requirements or industry standards, resulting in accidents, major environmental and social risk events, likely to affect the performance of the obligations in this contract; in this contract, the borrower's credit rating, level of profitability, asset-liability ratio, net cash flow of operating and other indicators do not meet the credit conditions of the lender; or without the lender’s written contract, pledges guarantee or provides assurance guarantees to other party, likely to affect the performance of the obligations in this contract; other adverse situations may affect in the realization of loan right in this contract.

Upon the occurrence of an event of default, the bank may: request the borrower rectify the event of default within a specified time period; cancel or terminate the borrower’s the unused portion of the credit line and other financing arrangements in whole or in part; declare all amounts outstanding under the contract immediately due and payable; require the borrower to compensate the bank for losses it incurs as a result of the event of default; or other measures permitted under applicable law or other necessary measures.

Working Capital Loan Contracts between ICON and Bank of China, Buji Sub-branch

On September 3, 2018, ICON entered into two working capital loan contracts with Bank of China, Buji Sub-branch providing for an aggregate loan of RMB10,000,000 ($1,450,179) to be used by ICON to purchase raw materials. The term of the loan is 12 months from the first withdrawal date. ICON must withdraw the facility within 30 days from September 11, 2018, after which time the bank may cancel all or part of the facility. The interest rate will equal the one year benchmarked by interbank rates, plus 2.215%. The loan is guaranteed by SZ Springpower, SZ Highpower, HZ HTC and our Chief Executive Officer, Dang Yu Pan. The balance of loan was $1,450,179 as of September 30, 2018.

On September 19, 2018, ICON entered into two working capital loan contracts with Bank of China, Buji Sub-branch providing for an aggregate loan of RMB10,000,000 ($1,450,179) to be used by ICON to purchase raw materials. The term of the loan is 12 months from the first withdrawal date. ICON must withdraw the facility within 30 days from September 21, 2018, after which time the bank may cancel all or part of the facility. The interest rate will equal the one year benchmarked by interbank rates, plus 2.215%. The loan is guaranteed by SZ Springpower, SZ Highpower, HZ HTC and our Chief Executive Officer, Dang Yu Pan. The balance of loan was $1,450,179 as of September 30, 2018.

The following constitute events of default under each loan agreement: failure to comply with repayment obligations under the agreement or any affiliated credit lines contract; failure to use borrowed funds according to the specified purposes; any statement made by ICON in the agreement is untrue or in violation of any commitments in the loan agreement or affiliated loan contracts; failure to provide an additional guarantor as required by the loan agreement; significant business difficulties or risks, deteriorated financial losses or losses of assets, or other financial crisis; breach of covenants in other credit agreements with the bank or affiliated institutions of the bank; any guarantor breaches a contract or defaults under any agreement with the bank or affiliated institutions of the bank; termination of its business or engagement due to any wind-up, cancellation or bankruptcy issues; involvement or potential involvement in significant economic disputes, litigation, arbitration or assets seizure or confiscation, or its involvement in other judicial proceedings or administrative punishment proceedings that have affected or may affect its capacity to perform its obligations under the affiliated specific credit line contract; an abnormal change in any major individual investor or key management member of ICON or such a person or entity’s becoming subject to investigation or restriction by the judiciary, which have or may affect ICON’s performance of obligation under affiliated specific credit line contract; Bank of China’s discovery of any situation that may affect the financial position or performance capacities of ICON or a guarantor after the bank’s annual review of ICON’s financial position and performance; failure to provide the relevant documentation acceptable to Bank of China about the inflows and outflows of large-sum and abnormal capital in capital recovery account; or being in violation of other rights and obligations under the affiliated specific credit line contract.

Upon the occurrence of an event of default, the bank may: request ICON or any guarantor to rectify the event of default within a specified time period; reduce, temporarily suspend or permanently terminate ICON’s credit limit in whole or in part; temporarily suspend or permanently terminate in part or in whole ICON’s application for specific credit line under the agreement; announce the immediate expiration of all the credit lines granted under the affiliated specific credit line contract as well as other contracts; terminate or release the contract, terminate or release in part or in whole any of the affiliated specific credit line contract as well as the other contracts executed between ICON and the bank; require compensation from ICON on the losses thereafter caused; hold ICON’s deposit account at the bank in custody for repayment of amounts due under the contract; exercise the real rights for security; request repayment from a guarantor; or take any other procedures deemed necessary by the bank.

Loan Contract between SZ Highpower and Ping An Bank Co., Ltd. Shenzhen Branch

On June 28, 2018, SZ Highpower entered into a working capital loan contract with Ping An Bank Co., Ltd. Shenzhen Branch providing for an aggregate loan of $1,500,000 to be used by SZ Highpower to purchase raw materials. The term of the loan is 12 months from the first withdrawal date. The interest rate will equal to the LIBOR of the withdraw date, plus 2.85%. The loan is guaranteed by SZ Springpower, HZ HTC and our Chief Executive Officer, Dang Yu Pan. The balance of used facility was $1,500,000 as of September 30, 2018.

The following constitute events of default under the loan contract: SZ Highpower changes the method of payment under the contract; SZ Highpower’s failure to timely repay the principal, interest and other payable under the contract; SZ Highpower’s failure to use the loan proceeds for the prescribed purposes; SZ Highpower’s violation of any statement, warranty and commitment with the bank; SZ Highpower’s violation of any other obligations in the contract; SZ Highpower’s concealment of true important information; SZ Highpower or a guarantor’s evasion of bank debts on purpose through related party transactions or otherwise; SZ Highpower or a guarantor’s transfer of property or use of assets to avoid debts by way of gratis, unreasonably-low priced transactions or for other improper means; SZ Highpower’s use of false contracts and arrangements sighed with any other third party to get funds or credit from the bank, including but not limited to pledge or discount of the notes receivable and other claims without actual trading background; SZ Highpower or a guarantor’s violation of any other contract (including but not limited to credit contract, loan contract and guarantee contract) signed with the bank or other banks or issuance of any bonds; the guarantor’s violation of the guarantee contract (including but not limited to guarantee contract, mortgage contract and pledge contract) or occurrence of any breach of the guarantee contract, or the guarantee contract is in vain or cancelled; there is obvious reduction or loss of the guaranty value, or dispute about the ownership of the guaranty, or the guaranty is sealed up, detained, frozen, deducted, detained or sold by auction; the occurrence of a merger, split, acquisition, reorganization, equity transfer, increase in debt financing or any other major event involving SZ Highpower that the bank believes might affect the safety of the loans; SZ Highpower or a guarantor’s business term has expired within the credit line period, and SZ Highpower or a guarantor fails to handle the procedures for renewal.

Upon the occurrence of an event of default, the bank may: temporarily suspend or permanently terminate SZ Highpower’s credit limit in whole or in part; announce the immediate maturity of all or part of the credit under the contract and request the payment of part or all the principal, interest and expenses immediately; request overdue interest from SZ Highpower caused by the default; request SZ Highpower to keep cash deposit for paying undue acceptance, L/G, L/C or other credit business; request SZ Highpower to provide new guarantee measures accepted by the bank; deduct the sum in SZ Highpower or a guarantor’s account at the bank to discharge all or part of the liabilities of the bank without prior consent by the bank; require the guarantors to undertake the guarantee responsibility; take a legal action to collect the debts, fees and other losses from SZ Highpower by judicial procedure.

Comprehensive Credit Line Contract between ICON and Bank of China, Buji Sub-branch

Comprehensive Credit Line Contract between SZ Springpower and Bank of China, Buji Sub-branch

On September 3, 2018, ICON entered into a comprehensive credit line contract with Bank of China, Buji Sub-branch, which provides for a revolving line of credit of up to RMB70,000,000 ($10,151,254), consisting of up to RMB50,000,000 ($7,250,895) in loans and up to RMB20,000,000 ($2,900,358) in bank acceptance. ICON may withdraw the loan, from time to time as needed, but must make specific drawdown application on and before September 3, 2019. The loan is guaranteed by SZ Springpower, SZ Highpower, HZ HTC and our Chief Executive Officer, Dang Yu Pan. The balance of used facility was $9,098,859 as of September 30, 2018.

On September 3, 2018, SZ Springpower entered into a comprehensive credit line contract with Bank of China, Buji Sub-branch, which provides for a revolving line of credit of up to RMB80,000,000 ($11,601,433), consisting of up to RMB40,000,000 ($5,800,716) in loans and up to RMB40,000,000 ($5,800,716) in bank acceptance. SZ Springpower may withdraw the loan, from time to time as needed, but must make specific drawdown application on and before September 3, 2019. The loan is guaranteed by SZ Highpower, HZ HTC and our Chief Executive Officer, Dang Yu Pan. The balance of used facility was $11,054,715 as of September 30, 2018.

The following constitute events of default under each loan agreement: failure to comply with repayment obligations under the agreement or any affiliated credit lines; failure to use borrowed funds according to the specified purposes; any statement made by the borrower in the agreement is untrue or in violation of any commitments in the loan agreement or affiliated loan contracts; failure to provide an additional guarantor as required by the loan agreement; significant business difficulties or risks, deteriorated financial losses or losses of assets, or other financial crisis; violation of other rights and obligations under the agreement; or breach of covenants by the borrower or any guarantor in other credit agreements with the bank or affiliated institutions of the bank.

Upon the occurrence of an event of default, the bank may: request the borrower or any guarantor to rectify the event of default within a specified time period; reduce, temporarily suspend or permanently terminate the borrower’s credit limit in whole or in part; temporarily suspend or permanently terminate in part or in whole the borrower’s application for specific credit line under the agreement; announce the immediate expiration of all the credit lines granted under the agreement and affiliated specific credit line contracts; terminate or release the agreement, terminate or release in part or in whole any of the affiliated specific credit line contracts as well as the other contracts executed between the borrower and the bank; require compensation from the borrower on the losses thereafter caused; hold the borrower’s deposit account at the bank in custody for repayment of amounts due under the agreement; exercise the real rights for security; request repayment from a guarantor; or take any other procedures deemed necessary by the bank.

Comprehensive Credit Contract between HZ HTC and Guangdong Huaxing Bank Co., Ltd. Huizhou Branch

On September 13, 2018, HZ HTC entered into a comprehensive credit line contract with Guangdong Huaxing Bank Co., Ltd. Huizhou Branch, which provides for a revolving line of credit of up to RMB160,000,000 ($23,202,866). HZ HTC may withdraw from each loan, from time to time as needed, but must make a specific drawdown application on or before August 7, 2019, after which time the bank may cancel all or part of the facilities. The comprehensive credit line shall be automatically terminated if the bank does not issue any credit line to HZ HTC prior to February 8, 2019. The loan is guaranteed by SZ Highpower, our Chief Executive Officer, Dang Yu Pan and HZ HTC’s accounts receivable. The balance of used facility was $8,849,790 as of September 30, 2018.

The following constitute events of default by HZ HTC under the loan agreement: HZ HTC violates agreed obligations under this Contract or any specific business contract during the validity of this Contract, or HZ HTC expressly indicates or indicates through its acts that it does not perform the agreed obligations under this Contract or any specific business contract during the validity of this Contract; the relevant certificates and documents submitted by HZ HTC to The bank or the representations, warranties and commitments made by HZ HTC are not true, not accurate or not complete, or have false record, misleading statement or major omission; HZ HTC conceals some important true information, or fails to coordinate The bank’s investigation, examination and inspection; HZ HTC changes the purpose of the loan funds without authorization, or conducts illegal transactions by use of the loan or bank loans; HZ HTC violates any other similar contract (including but not limited to credit contract, loan contract and guarantee contract) concluded and signed with The bank or with any third party, or debt securities issued by HZ HTC, or any dispute arising from such contract or securities is under litigation or arbitration; HZ HTC’s guarantor violates the guarantee contract (including but not limited to guarantee contract, mortgage contract and pledge contract) or has any breach of the guarantee contract, or the guarantee contract has not taken effect, is invalid or is canceled; HZ HTC has any one of the following behaviors, being negligent in managing and claiming the creditor’s right due, or disposing and transferring its main properties free of charge, or at unreasonable low price or by other improper means, or escaping debts; HZ HTC illegally get funds or credit from The bank or other banks by using a false contract and arrangement with a third party (including but not limited to HZ HTC's affiliated parties), including but not limited to pledge or discount of the notes receivable and other claims without actual trading background; HZ HTC evades bank claims through affiliated transactions or by other means; HZ HTC's operation conditions go into major problems, such as deterioration of financial conditions, serious financial losses, loss of assets (including but not limited to loss of assets caused due to external guarantee) or other financial crisis; HZ HTC has any illegal management behavior, and is subject to administrative punishment or criminal sanction, or is being investigated by relevant authorities, or is likely to be subject to administrative punishment or criminal sanction; HZ HTC has the following changes, such as division, consolidation, major merger, acquisition and reconstruction, disposal of major assets, reduction of capital, liquidation, reorganization, being announced bankruptcy or being dissolved; HZ HTC's controlling shareholder or actual controller is changed that The bank thinks having affected or likely to affect realization of creditor's rights hereunder; or there is any significant event of HZ HTC's controlling shareholder, actual controller, legal representative or senior management personnel, including but not limited to due to illegal management behavior, subject to administrative punishment or criminal sanction, or being investigated by relevant authorities, or likely to be subject to administrative punishment or criminal sanction, or is involved in a lawsuit or arbitration case, or serious deterioration of financial conditions, being announced bankruptcy or dissolved; There is adverse change to the industry where HZ HTC is located, which The bank thinks having affected or likely to affect realization of creditor's rights hereunder; HZ HTC fails to handle settlement or deposit or relevant business with The bank according to provisions; other circumstances related to HZ HTC which endanger or likely to endanger realization of creditor’s right.

Upon the occurrence of an event of default under the Comprehensive Credit Contract, the bank may: to adjust, cancel or terminate the comprehensive credit line hereunder, or to adjust the valid period of the line; to announce immediate maturity of all or part of HZ HTC's debts; to demand HZ HTC to immediately repay all or part of the credit line used; to demand HZ HTC to add security or take other measures to ensure The bank’s lawful rights and interests not infringed; to make deduction directly from the account of HZ HTC and the guarantor to repay all the debts under this Contract and the specific business contract (including the debts The bank requests for prepayment), without obtaining HZ HTC’s consent in advance; to exercise the suretyship, ask the surety to perform suretyship liability, or realize claim through disposal of the mortgaged property and/or pledged property.

Loan agreement between Shenzhen Highpower Technology Co., Ltd. and Mr. Dang Yu Pan

On July 20, 2018, SZ Highpower entered into a loan agreement with Mr. Dang Yu Pan (Lender) providing for an aggregate loan of RMB60,000,000 (US$8,701,075) to be used by SZ Highpower as working capital. SZ Highpower can withdraw the loan on and before March 20, 2019. SZ Highpower must repay the principal and interest before the maturity day on March 20, 2019. The interest rate is 5.65%, which equals to 130% of one year’s benchmark-lending rate of the People’s Bank of China. The balance of used facility was $5,720,957 as of September 30, 2018.

Item 6. Exhibits

Exhibit Number		Description of Document

10.1		Working Capital Loan Contract dated August 8, 2018, between Springpower Technology Co., Ltd and Industrial and Commercial Bank of China Ltd., Shenzhen Henggang Branch (translated to English).

10.2		Working Capital Loan Contract dated September 3, 2018, between Icon Energy System (Shenzhen) Co., Ltd and Bank of China, Buji Sub-branch (translated to English).

10.3		Working Capital Loan Contract dated September 19, 2018, between Icon Energy System (Shenzhen) Co., Ltd. and Bank of China, Buji Sub-branch (translated to English).

10.4		Loan Contract dated June 28, 2018, between Shenzhen Highpower Technology Co., Ltd and Ping An Bank Co., Ltd., Shenzhen Branch (translated to English).

10.5		Comprehensive Credit Line Contract dated September 3, 2018, between Icon Energy System (Shenzhen) Co., Ltd. and Bank of China, Buji Sub-branch (translated to English).

10.5(a)		Maximum Amount Guaranty Contract dated September 3, 2018, between Huizhou Highpower Technology Co., Ltd., and Bank of China, Buji Sub-branch (translated to English).

10.5(b)		Maximum Amount Guaranty Contract dated September 3, 2018, between Dangyu Pan and Bank of China, Buji Sub-branch (translated to English).

10.5(c)		Maximum Amount Guaranty Contract dated September 3, 2018, between Springpower Technology (Shenzhen) Co., Ltd., and Bank of China, Buji Sub-branch (translated to English).

10.5(d)		Maximum Amount Guaranty Contract dated September 3, 2018, between Shenzhen Highpower Technology Co., Ltd., and Bank of China, Buji Sub-branch (translated to English).

10.6		Comprehensive Credit Line Contract dated September 3, 2018, between Springpower Technology (Shenzhen) Co., Ltd. and Bank of China, Buji Sub-branch (translated to English).

10.6(a)		Maximum Amount Guaranty Contract dated September 3, 2018, between Huizhou Highpower Technology Co., Ltd., and Bank of China, Buji Sub-branch (translated to English).

10.6(b)		Maximum Amount Guaranty Contract dated September 3, 2018, between Dangyu Pan and Bank of China, Buji Sub-branch (translated to English).

10.6(c)		Maximum Amount Guaranty Contract dated September 3, 2018, between Shenzhen Highpower Technology Co., Ltd., and Bank of China, Buji Sub-branch (translated to English).

10.7		Comprehensive Credit Line Contract dated September 13, 2018, between Huizhou Highpower Technology Co., Ltd., and Guangdong Huaxing Bank Co., Ltd., Huizhou Branch (translated to English).

10.7(a)		Maximum Suretyship Guaranty Contract dated September 13, 2018, between Shenzhen Highpower Technology Co., Ltd., and Guangdong Huaxing Bank Co., Ltd., Huizhou Branch (translated to English).

10.7(b)		Maximum Suretyship Guaranty Contract dated September 13, 2018, between Pan Dangyu and Guangdong Huaxing Bank Co., Ltd., Huizhou Branch (translated to English).

10.7(c)		Maximum Pledge Guaranty Contract dated September 13, 2018, between Huizhou Highpower Technology Co., Ltd., and Guangdong Huaxing Bank Co., Ltd., Huizhou Branch (translated to English).

10.8		Loan Agreement dated July 20, 2018, between Shenzhen Highpower Technology Co., Ltd., and Pan Dangyu (translated to English).

31.1		Certification of Chief Executive Officer Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*		Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

HIGHPOWER INTERNATIONAL, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Highpower International, Inc.

Dated: November 13, 2018		/s/ Dang Yu Pan
	By:	Dang Yu Pan
	Its:	Chairman of the Board and Chief Executive Officer (principal executive officer and duly authorized officer)

		/s/ Shengbin (Sunny) Pan
	By:	Shengbin (Sunny) Pan
	Its:	Chief Financial Officer (principal financial and accounting officer)

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Highpower International (HPJ) 10-Q2018 Q3 Quarterly report

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