Highpower International (HPJ) 10-Q 2019 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For The Quarterly Period Ended March 31, 2019

OR

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

For The Transition Period From                   To                  

COMMISSION FILE NO.001-34098

HIGHPOWER INTERNATIONAL, INC.

(Exact name of Registrant as specified in its charter)

Delaware	20-4062622
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

Building A1, 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 or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and “emerging growth company” as defined in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer x	Smaller reporting company x
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 ¨    No x

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.0001	HPJ	Nasdaq Stock Market LLC (Nasdaq Global Market)
Preferred Stock Purchase Rights	HPJ	Nasdaq Stock Market LLC (Nasdaq Global Market)

The registrant had 15,567,953 shares of common stock, par value $0.0001 per share, outstanding as of May 13, 2019.

HIGHPOWER INTERNATIONAL, INC.

FORM 10-Q

 FOR THE QUARTERLY PERIOD ENDED March 31, 2019

INDEX

				Page
Part I	Financial Information
	Item 1.	Consolidated Financial Statements
		(a)	Condensed Consolidated Balance Sheets as of March 31, 2019 (Unaudited) and December 31, 2018	2
		(b)	Condensed Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended March 31 2019 and 2018 (Unaudited)	4
		(c)	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 (Unaudited)	5
		(d)	Condensed Consolidated Statements of Change in Equity for the Three Months Ended March 31, 2019 and 2018 (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		21
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		25
	Item 4.	Controls and Procedures		25
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		26
	Item 3.	Default Upon Senior Securities		26
	Item 4.	Mine Safety Disclosures		26
	Item 5.	Other Information		26
	Item 6.	Exhibits		27
Signatures				28

1

Item 1. Consolidated Financial Statements

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Stated in US Dollars)

	March 31,		December 31,
	2019		2018
	(Unaudited)
	$		$
ASSETS
Current Assets:
Cash		24,167,300		24,916,484
Restricted cash		39,562,823		44,495,633
Accounts receivable, net		59,037,769		77,279,817
Amount due from a related party		61,131		477,663
Notes receivable		4,375,399		256,712
Advances to suppliers		926,624		2,292,843
Prepayments and other receivables		8,282,896		10,457,789
Inventories		58,456,282		54,790,461
Total Current Assets		194,870,224		214,967,402
Property, plant and equipment, net		68,148,472		56,523,177
Long-term prepayments		1,949,214		2,617,419
Land use right, net		2,476,691		2,445,751
Other assets		635,015		643,128
Deferred tax assets, net		983,879		865,370
Long-term investments		9,768,087		9,993,852
Right-of-use assets		5,272,558		-
TOTAL ASSETS		284,104,140		288,056,099
LIABILITIES AND EQUITY
LIABILITIES
Current Liabilities:
Accounts payable		68,943,619		66,486,690
Deferred government grants		473,111		464,206
Short-term loans		17,749,981		24,856,744
Non-financial institution borrowing		-		8,761,426
Notes payable		75,053,041		73,607,284
Foreign exchange derivative liabilities		2,240		521,509
Amount due to related parties		9,011,760		6,116,851
Other payables and accrued liabilities		23,733,687		25,860,703
Income taxes payable		4,246,421		4,124,719
Lease liabilities, current		1,866,177		-
Total Current Liabilities		201,080,037		210,800,132
Lease liabilities, non current		3,550,051		-
TOTAL LIABILITIES		204,630,088		210,800,132
COMMITMENTS AND CONTINGENCIES		-		-

See notes to condensed consolidated financial statements

2

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Stated in US Dollars)

	March 31,		December 31,
	2019		2018
	(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, 15,567,953 shares issued and outstanding at March 31, 2019 and 15,559,658 at December 31, 2018, respectively)		1,557		1,556
Additional paid-in capital		14,067,883		13,863,282
Statutory and other reserves		8,012,052		8,012,052
Retained earnings		56,481,633		56,173,912
Accumulated other comprehensive income (loss)		910,927		(794,835	)
TOTAL EQUITY		79,474,052		77,255,967
TOTAL LIABILITIES AND EQUITY		284,104,140		288,056,099

See notes to condensed consolidated financial statements

3

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Stated in US Dollars)

	Three months ended March 31,
	2019			2018
	(Unaudited)			(Unaudited)
	$			$
Net sales		58,113,480			49,783,453
Cost of sales		(45,452,951	)		(42,217,126	)
Gross profit		12,660,529			7,566,327
Research and development expenses		(2,986,709	)		(2,561,837	)
Selling and distribution expenses		(2,792,862	)		(1,975,096	)
General and administrative expenses		(4,823,489	)		(4,114,810	)
Foreign currency transaction loss		(1,250,895	)		(1,014,693	)
Total operating expenses		(11,853,955	)		(9,666,436	)
Income (loss) from operations		806,574			(2,100,109	)
Changes in fair value of foreign exchange derivatives		387,100			703,715
Government grants		221,435			329,820
Other income		66,698			23,561
Equity in (loss) earnings of investee		(418,204	)		156,250
Interest expenses		(470,423	)		(241,852	)
Income (loss) before income taxes		593,180			(1,128,615	)
Income taxes (expense) benefit		(285,459	)		9,679
Net income (loss)		307,721			(1,118,936	)
Comprehensive income
Net income (loss)		307,721			(1,118,936	)
Foreign currency translation gain		1,705,762			2,836,556
Comprehensive income		2,013,483			1,717,620
Earnings (loss) per share of common stock attributable to the Company
- Basic		0.02			(0.07	)
- Diluted		0.02			(0.07	)
Weighted average number of common stock outstanding
- Basic		15,566,478			15,509,658
- Diluted		15,604,907			15,509,658

See notes to condensed consolidated financial statements

4

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Stated in US Dollars)

	Three Months Ended March 31,
	2019			2018
	(Unaudited)			(Unaudited)
	$			$
Cash flows from operating activities
Net income (loss)		307,721			(1,118,936	)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		1,729,440			1,475,228
Bad debt expense		89,427			18,524
Loss on disposal of property, plant and equipment		-			21,805
Deferred taxes		(102,366	)		(356,616	)
Changes in fair value of foreign exchange derivatives		(387,100	)		(414,042	)
Equity in loss (earnings) of investee		418,204			(156,250	)
Share based compensation		204,602			241,421
Changes in operating assets and liabilities:
Accounts receivable		18,954,393			3,713,692
Notes receivable		(4,120,877	)		2,622,925
Advances to suppliers		1,412,642			(236,789	)
Prepayments and other receivables		2,379,960			(601,315	)
Amount due from a related party		426,432			285,657
Amount due to related parties		113,794			-
Inventories		(2,626,489	)		(10,779,233	)
Accounts payable		(6,016,313	)		(1,377,447	)
Deferred government grants		-			475,783
Other payables and accrued liabilities		(2,287,547	)		665,379
Income taxes payable		57,542			19,371
Net cash flows provided by (used in) operating activities		10,553,465			(5,500,843	)
Cash flows from investing activities
Acquisitions of plant and equipment		(4,336,823	)		(1,553,979	)
Payment for long-term investment		(313,073	)		(317,188	)
Net cash flows used in investing activities		(4,649,896	)		(1,871,167	)
Cash flows from financing activities
Proceeds from short-term bank loans		5,963,296			14,427,164
Repayments of short-term bank loans		(13,560,014	)		-
Proceeds from a related party		2,981,648			-
Repayments of non-financial institution borrowing		(8,944,944	)		-
Proceeds from notes payable		30,205,286			28,429,600
Repayments of notes payable		(30,171,519	)		(26,488,407	)
Payment of derivative instruments		(143,089	)		-
Net cash flows (used in) provided by financing activities		(13,669,336	)		16,368,357
Effect of foreign currency translation on cash		2,083,773			2,046,039
Net (decrease) increase in cash and restricted cash		(5,681,994	)		11,042,386
Cash and restricted cash- beginning of year		69,412,117			40,456,117
Cash and restricted cash- end of year		63,730,123			51,498,503
Supplemental disclosures for cash flow information:
Cash paid for:
Income taxes		330,283			327,565
Interest expenses		863,923			114,588
Non-cash investing and financing activities:
Purchase of plant and equipment financed by accounts payable		7,203,680			-
Reconciliation of cash and restricted cash:
Cash		24,167,300			18,859,355
Restricted cash		39,562,823			32,639,148
Total cash and restricted cash shown in the condensed consolidated statements of cash flows		63,730,123			51,498,503

See notes to condensed consolidated financial statements

5

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGE IN EQUITY

(Stated in US Dollars)

	Common stock				Additional paid-in			Statutory and other		Retained			Accumulated other comprehensive
	Shares		Amount		capital			reserves		earnings			income			Total
				$		$			$		$			$			$
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 loss		-		-		-			-		(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
Balance, January 1, 2019		15,559,658		1,556		13,863,282			8,012,052		56,173,912			(794,835	)		77,255,967
Exercise of the warrants		8,295		1		(1	)		-		-			-			-
Foreign currency translation adjustments		-		-		-			-		-			1,705,762			1,705,762
Share-based compensation expenses		-		-		204,602			-		-			-			204,602
Net income		-		-		-			-		307,721			-			307,721
Balance, March 31, 2019		15,567,953		1,557		14,067,883			8,012,052		56,481,633			910,927			79,474,052

See notes to condensed consolidated financial statements

6

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

1. Organization

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 and HKHTC’s jointly owned subsidiaries, Springpower Technology (Shenzhen) Company Limited (“SZ Springpower”) and Icon Energy System Company Limited (“ICON”) and SZ Highpower’s and SZ Springpower’s jointly owned subsidiary Huizhou Highpower Technology Company Limited (“HZ HTC”). Highpower and its direct and indirect wholly owned subsidiaries are collectively referred to as the "Company".

2. Summary of significant accounting policies

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, 2018, filed with the SEC on March 28, 2019.

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 March 31, 2019, its consolidated results of operations for the three months ended March 31, 2019, cash flows for the three months ended March 31, 2019 and change in equity for the three months ended March 31, 2019, as applicable, have been made. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the operating results that may be expected for the year ending December 31, 2019 or any future periods.

Concentrations of credit risk

One major customer accounted for 10.9% of the total sales for the three months ended March 31, 2019. There was no customer accounted for over 10% or more of the total sales during the three months ended March 31, 2018.

One supplier accounted for 12.2% and 21.2% of the total purchase amount during the three months ended March 31, 2019 and 2018, respectively.

One customer accounted for 12.6% of the accounts receivable as of March 31, 2019. No customer accounted for 10% or more of the accounts receivable as of December 31, 2018.

7

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

2. Summary of significant accounting policies (continued)

Recently issued accounting standards

On February 25, 2017, 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 (“ROU asset”) representing its right to use the underlying asset for the lease term. We adopted this guidance in the first quarter of 2019 using the modified retrospective approach, electing the package of practical expedients, and the practical expedient to not separate lease and non-lease components for data center operating leases. We also elected the optional transition method that permits adoption of the new standard prospectively, as of the effective date, without adjusting comparative periods presented. Adoption of the standard resulted in the recognition of $5.3 million of ROU assets and $5.4 million of lease liabilities on the consolidated balance sheet at adoption related to office space, data and fulfillment centers, and other corporate assets.

See Note 7 for disclosure required by ASC 842.

In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220). The amendments in this Update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this Update also require certain disclosures about stranded tax effects. Public business entities should apply the amendments in ASU 2018-02 for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The adoption of this guidance did not have a material impact on the Company's consolidated financial condition, results of operations or cash flows.

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 adoption of this guidance did not have a material impact on the Company's consolidated financial condition, results of operations or cash flows.

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.

8

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

3. Revenue Recognition

The Company follows the guidance under ASC 606 effective January 1, 2018. The following table disaggregates product sales by business segment and by geography, which provides information as to the major source of revenue. See Note 16 for additional description of the reportable business segments and the products being sold in each segment.

	Three months ended March 31, 2019
	Lithium Business		Ni-MH Batteries and Accessories		Consolidated
	(Unaudited)		(Unaudited)		(Unaudited)
	$		$		$
Primary Geographic Markets
China Mainland		23,064,520		4,906,515		27,971,035
Asia, others		17,011,230		6,059,484		23,070,714
Europe		1,403,314		3,217,017		4,620,331
North America		1,251,103		1,066,423		2,317,526
Others		-		133,874		133,874
Total sales		42,730,167		15,383,313		58,113,480

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.

The Company does not have amounts of contract assets since revenue is recognized as control of goods is transferred. The contract liabilities consist of advance payments from customers. The 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 the condensed consolidated balance sheets.

4. Accounts receivable, net

	March 31,		December 31,
	2019		2018
	(Unaudited)
	$		$
Accounts receivable		59,189,232		77,340,837
Less: allowance for doubtful accounts		151,463		61,020
		59,037,769		77,279,817

9

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

5. Inventories

	March 31,		December 31,
	2019		2018
	(Unaudited)
	$		$
Raw materials		28,701,009		25,952,099
Work in progress		9,377,147		10,192,772
Finished goods		20,141,273		18,348,119
Packing materials		31,193		14,394
Consumables		205,660		283,077
		58,456,282		54,790,461

6. Property, plant and equipment, net

	March 31,		December 31,
	2019		2018
	(Unaudited)
	$		$
Cost
Construction in progress		11,339,810		6,991,889
Furniture, fixtures and office equipment		7,699,164		7,221,527
Leasehold improvement		7,258,819		7,090,162
Machinery and equipment		48,551,295		40,316,428
Motor vehicles		1,609,150		1,508,398
Buildings		19,534,641		19,166,951
		95,992,879		82,295,355
Less: accumulated depreciation		27,844,407		25,772,178
		68,148,472		56,523,177

The construction in process represented buildings and machines under construction or testing as of March 31, 2019 and December 31, 2018.

The Company recorded depreciation expenses of $1,700,934 and $1,445,700 for the three months ended March 31, 2019 and 2018, respectively.

During the three months ended March 31, 2019, the Company deducted deferred government grants of $nil on the carrying amount of property, plant and equipment. During the year ended December 31, 2018, the Company deducted deferred government grants of $75,584 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 $8,641,385 and $8,536,246 as of March 31, 2019 and December 31, 2018, respectively.

The buildings located in Shenzhen, Guangdong was pledged as collateral for bank loans. The net carrying amount of the buildings was $354,583 and $353,752 as of March 31, 2019 and December 31, 2018, respectively.

10

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

7. Leases

The Company has various non-cancelable lease agreements for certain of the warehouses and accommodations with original lease periods expiring between 2019 and 2022. The lease terms may include options to extend or terminate the lease when it is reasonably certain the Company will exercise that option. Certain of the arrangements have free rent periods or escalating rent payment provisions. Leases with an initial term of twelve months or less are not recorded on the condensed consolidated balance sheets. The Company recognizes rental expense on a straight-line basis over the lease term.

The following table provides a summary of leases by balance sheet location as of March 31, 2019:

	Balance Sheet Location	March 31, 2019
		(Unaudited)
		$
Assets
Operating	Right-of-use assets		5,272,558
Total leased assets			5,272,558
Liabilities
Operating - current	Lease liabilities, current		1,866,177
Operating - non current	Lease liabilities, non current		3,550,051
Total lease liabilities			5,416,228

The components of lease expense for the three months ended March 31, 2019 were as follows:

	Statement of Income Location	Three months ended March 31, 2019
		(Unaudited)
		$
Lease Costs
Operating lease expense	Cost of sales, Selling and distribution expenses, General and administrative expenses, Research and development expenses		757,707
Total net lease costs			757,707

Maturity of lease liabilities under the non-cancelable operating leases as of March 31, 2019 were as follows:

	Operating
	(Unaudited)
	$
Remaining 2019		1,635,280
2020		1,888,266
2021		1,715,654
2022		745,078
Total lease payments		5,984,278
Less: interest		568,050
Present value of lease liabilities		5,416,228

11

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

7. Leases (continued)

Future minimum rental payments under the non-cancelable operating leases as of December 31, 2018 were as follows:

	Leases(1)
	$
2019		2,288,437
2020		1,790,861
2021		1,621,298
2022		668,792
		6,369,388

(1) Amounts are based on ASC 840, Leases that was superseded upon our adoption of ASC 842, Leases on January 1, 2019.

The following table provides a summary of the lease terms and discount rates for the three months ended March 31, 2019:

	Three months ended March 31, 2019
Weighted Average Remaining Lease Term
Operating leases		3.00 years
Weighted Average Discount Rate
Operating leases		6.18	%

As most of the leases do not provide an implicit rate, the Company use the incremental borrowing rate based on the information available at the lease commencement date to determine the present value of lease payments.

Supplemental information related to the leases for the three months ended March 31, 2019 is as follows:

	Three months ended March 31, 2019
	(Unaudited)
	$
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases		626,145

12

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

8. Long-term investments

	March 31, 2019					December 31, 2018
	(Unaudited)
	$		Interest %			$		Interest %
Equity method investments
-Ganzhou Highpower Technology Company Limited (“GZ Highpower”) (1)		7,490,318		31.294	%		7,683,900		31.294	%
-Shenzhen V-power Innovative Technology Co., Ltd (“V-power”) (2)		530,662		49.000	%		595,730		49.000	%
Cost method investment
-Huizhou Yipeng Energy Technology Co Ltd.		1,747,107		4.654	%		1,714,222		4.654	%
		9,768,087					9,993,852

(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 loss of investee was $341,576 for the three months ended March 31, 2019. The equity in earnings of investee was $156,250 for the three months ended March 31, 2018.

(2) Investment in V-power

On February 28, 2018, the Company signed an investment 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. 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; and 2. valuation of V-power higher or equal to RMB30 million before equity issuance. As of March 31, 2019, the Company injected RMB4.2 million (approximately $0.6 million) to V-power, and the unpaid amount was recorded as amount due to a related party (See Note 17).

The equity in loss of investee was $76,628 and $nil for the three months ended March 31, 2019 and 2018, respectively.

13

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

9. 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 on 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.

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 evaluated the Global Intangible Low Taxed Income ("GILTI") inclusion on current earnings and profits of greater than 10% owned foreign controlled corporations. The Company has evaluated whether it has additional provision amount resulted by the GILTI inclusion on current earnings and profits of its foreign controlled corporations. The law also provides that corporate taxpayers may benefit from a 50% reduction in the GILTI inclusion, which effectively reduces the 21% U.S. corporate tax rate on the foreign income to an effective rate of 10.5%. The GILTI inclusion further provides for a foreign tax credit in connection with the foreign taxes paid. In 2019, the Company recorded a GILTI inclusion of $7,830,673. However, the total tax of $245,585 is fully offset by the deemed paid foreign tax credit.

The Company completed quantification of the Tax Act impact. The final adjustment is not material.

14

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

9. Taxation (continued)

Hong Kong

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

In accordance with the relevant tax laws and regulations of Hong Kong, a company registered in Hong Kong is subject to income taxes within Hong Kong at the applicable tax rate on taxable income. In March 2018, the Hong Kong Government introduced a two-tiered profit tax rate regime by enacting the Inland Revenue (Amendment) (No.3) Ordinance 2018 (the “Ordinance”). Under the two-tiered profits tax rate regime, the first $2 million of assessable profits of qualifying corporations is taxed at 8.25% and the remaining assessable profits at 16.5%. The Ordinance is effective from the year of assessment 2018-2019. According to the policy, if no election has been made, the whole of the taxpaying entity’s assessable profits will be chargeable to Profits Tax at the rate of 16.5% or 15%, as applicable. Because the preferential tax treatment is not elected by the Company, HKHTC is subject to income tax at a 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 2019 and 2018.

The components of the income taxes expense (benefit) are:

	Three months ended March 31,
	2019			2018
	(Unaudited)			(Unaudited)
	$			$
Current		387,825			346,937
Deferred		(102,366	)		(356,616	)
Total income taxes expense (benefit)		285,459			(9,679	)

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

	Three months ended March 31,
	2019			2018
	(Unaudited)			(Unaudited)
	$			$
Income (loss) before tax		593,180			(1,128,615	)
Provision for income taxes at PRC statutory income tax rate (25%)		148,295			(282,154	)
Impact of different tax rates in other jurisdictions		118,621			58,660
Effect of PRC preferential tax rate		(190,307	)		6,453
R&D expenses eligible for super deduction		(138,394	)		-
Other non-deductible expenses		100,362			16,576
Change in valuation allowance of deferred tax assets		246,882			190,786
Effective enterprise income tax expense (benefit)		285,459			(9,679	)

15

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

9. 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.

	March 31,			December 31,
	2019			2018
	(Unaudited)
	$			$
Tax loss carry-forward		1,408,109			1,096,956
Allowance for doubtful receivables		22,719			9,153
Impairment for inventory		382,398			382,375
Difference for sales cut-off		25,340			15,526
Deferred government grants		70,967			69,631
Property, plant and equipment subsidized by government grant		246,965			250,563
Impairment for property, plant and equipment		117,384			138,122
Total gross deferred tax assets		2,273,882			1,962,326
Valuation allowance		(1,290,003	)		(1,096,956	)
Total net deferred tax assets		983,879			865,370

As of March 31, 2019, the Company had net operating loss carry-forwards in Hong Kong of $7,818,199 without expiration and in the PRC of $787,374, which will expire in 2023.

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 March 31, 2019 and December 31, 2018. The net valuation allowance increased by $0.2 million and $0.2 million during the three months ended March 31, 2019 and 2018, respectively.

10. 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 one year. The outstanding bank acceptance bills are secured by restricted cash deposited in banks. Outstanding bank acceptance bills were $75,053,041 and $73,607,284 as of March 31, 2019 and December 31, 2018, respectively.

11. Short-term loans

As of March 31, 2019, the bank borrowings were for working capital and capital expenditure purposes with maturity of one year and were secured by personal guarantees executed by the Company’s Chief Executive Officer, Mr. Dang Yu Pan, the land use right with a net carrying amount of $2,476,691 and the buildings with a net carrying amount of $8,995,968, respectively.

The loans were primarily obtained from three banks with interest rates ranging from 5.6160% to 6.5253% per annum and 5.2300% to 6.5253% per annum as of March 31, 2019 and December 31, 2018, respectively. The interest expenses were $344,983 and $111,713 for the three months ended March 31, 2019 and 2018, respectively.

16

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

12. Non-financial institution borrowing

For the three months ended March 31, 2019, the Company paid back $8,944,944 to the third party non-financial institution.

The interest expense of the above borrowing was $4,922 and $162,303 for the three months ended March 31, 2019 and 2018, respectively

13. 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 March 31, 2019, the total and unused lines of credit were $109.6 million and $33.6 million, respectively, with maturity dates from May 2019 to October 2021. As of December 31, 2018, the total and unused lines of credit were $102.6 million and $23.8 million, respectively, with maturity dates from March 2019 to October 2021.

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

14. Earnings (loss) per share

The following table sets forth the computation of basic and diluted earnings (loss) per common share for the three months ended March 31, 2019 and 2018.

	Three months ended March 31,
	2019		2018
	(Unaudited)		(Unaudited)
	$		$
Numerator:
Net income (loss) attributable to the Company		307,721		(1,118,936	)
Denominator:
Weighted-average shares outstanding
- Basic		15,566,478		15,509,658
- Dilutive effects of equity incentive awards		38,429		-
- Diluted		15,604,907		15,509,658
Net earnings (loss) per share:
- Basic		0.02		(0.07	)
- Diluted		0.02		(0.07	)

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.

17

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

15. 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 $983,374 and $653,957 for the three months ended March 31, 2019 and 2018, respectively.

16. 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 two reportable segments, namely (i) Lithium Business and (ii) Ni-MH Batteries and Accessories.

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 March 31,
	2019		2018
	(Unaudited)		(Unaudited)
	$		$
Net sales
Lithium Business		42,730,167		36,596,655
Ni-MH Batteries and Accessories		15,383,313		13,186,798
Total		58,113,480		49,783,453
Cost of Sales
Lithium Business		33,628,468		30,791,339
Ni-MH Batteries and Accessories		11,824,483		11,425,787
Total		45,452,951		42,217,126
Gross Profit
Lithium Business		9,101,699		5,805,316
Ni-MH Batteries and Accessories		3,558,830		1,761,011
Total		12,660,529		7,566,327

	March 31,		December 31,
	2019		2018
	(Unaudited)
	$		$
Total Assets
Lithium Business		221,165,885		231,795,621
Ni-MH Batteries and Accessories		62,938,255		56,260,478
Total		284,104,140		288,056,099

18

HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

16. Segment information (continued)

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 March 31,
	2019		2018
	(Unaudited)		(Unaudited)
	$		$
Net sales
China Mainland		27,971,035		28,305,763
Asia, others		23,070,714		15,754,396
Europe		4,620,331		4,537,903
North America		2,317,526		1,164,831
Others		133,874		20,560
		58,113,480		49,783,453

	March  31,		December 31,
	2019		2018
	(Unaudited)
	$		$
Accounts receivable
China Mainland		37,572,057		38,048,651
Asia, others		17,487,874		33,237,051
Europe		3,244,105		5,413,343
North America		696,234		566,769
Others		37,499		14,003
		59,037,769		77,279,817

17. Related party balance and transaction

Related party balance

	March 31		December 31,
	2019		2018
	(Unaudited)
	$		$
Accounts receivable		-		476,093
Other receivable		61,131		1,570
Amount due from a related party- GZ Highpower		61,131		477,663
Other payable-investment (1)		104,178		408,867
Loan from Mr. Dang Yu Pan (2)		8,907,582		5,707,984
Amount due to related parties		9,011,760		6,116,851

(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. On January 14, 2019, 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 8)

(2) The Company entered into a loan agreement with a maximum amount of RMB60 million (approximately $8.9 million) with Mr. Dang Yu Pan on July 20, 2018. As of March 31, 2019, the Company withdrew an aggregate amount of RMB58.2 million (approximately $8.7 million). The interest rate is 5.65% per annum. The Company accrued interest expense $113,795 for the three months ended March 31, 2019.

19

 HIGHPOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Stated in US Dollars)

17. Related party balance and transaction (continued)

Related party transaction

	Three months ended March 31,
	2019		2018
	(Unaudited)		(Unaudited)
	$		$
GZ Highpower
Sales		200,733		225,787
V-Power
Payment of investment		313,073		-
Dang Yu Pan
Loan from Dang Yu Pan		2,981,648		-
Interest expense		113,795

18. 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.

20

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, 2018 filed with SEC on March 28, 2019 (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 $8.3 million, or 16.7%, during the first quarter of 2019 compared to the same quarter in 2018. 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 $6.1 million, or 16.8%, during the first quarter of 2019 compared to the same quarter in 2018.

Ni-MH batteries and accessories net sales increased by $2.2 million, or 16.7%, during the first quarter of 2019 compared to the same quarter in 2018.

Gross profit during the first quarter of 2019 was $12.7 million, or 21.8% of net sales, compared to $7.6 million, or 15.2% of net sales, for the comparable period in 2018.

For 2019, we will continue to drive business growth and seek to continuously improve our labor efficiency.

Critical Accounting Policies

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

21

Results of Operations

The following table sets forth the unaudited consolidated statements of operations of the Company for the three months ended March 31, 2019 and 2018, both in US$ and as a percentage of net sales.

Consolidated Statements of Operations

(Dollars in Thousands, Except Per Share
Amounts)	Three months ended March 31,
	2019					2018					Increased (decreased) %
	(Unaudited)					(Unaudited)
Net Sales		58,113		100.0	%		49,783		100.0	%		16.7	%
Cost of Sales		(45,452	)	(78.2	%)		(42,217	)	(84.8	%)		7.7	%
Gross profit		12,661		21.8	%		7,566		15.2	%		67.3	%
Research and development expenses		(2,987	)	(5.1	%)		(2,562	)	(5.1	%)		16.6	%
Selling and distribution expenses		(2,793	)	(4.8	%)		(1,975	)	(4.0	%)		41.4	%
General and administrative expenses		(4,823	)	(8.3	%)		(4,115	)	(8.3	%)		17.2	%
Foreign currency transaction loss		(1,251	)	(2.2	%)		(1,015	)	(2.0	%)		23.3	%
Income (loss) from operations		807		1.4	%		(2,101	)	(4.2	%)		138.4	%
Changes in fair value of foreign exchange derivatives		386		0.7	%		704		1.4	%		(45.0	%)
Government grants		221		0.4	%		330		0.7	%		(32.9	%)
Other income		67		0.1	%		24		0.0	%		183.1	%
Equity in (loss) earnings of investee		(418	)	(0.7	%)		156		0.3	%		(367.7	%)
Interest expenses		(470	)	(0.8	%)		(242	)	(0.5	%)		94.5	%
Income (loss) before income taxes		593		1.0	%		(1,129	)	(2.3	%)		152.6	%
Income taxes (expense) benefit		(285	)	(0.5	%)		10		0.0	%		(3,049.3	%)
Net income (loss)		308		0.5	%		(1,119	)	(2.2	%)		127.5	%
Diluted earnings (loss) per common stock attributable to the Company		0.02					(0.07	)

Net sales

Net sales for the three months ended March 31, 2019 were $58.1 million compared to $49.8 million for the comparable period in 2018, an increase of $8.3 million, or 16.7%. Net sales of Lithium business increased by $6.1 million, or 16.8%, during the three months ended March 31, 2019, compared to the comparable period in 2018. Ni-MH batteries and accessories net sales increased by $2.2 million, or 16.7%, during the three months ended March 31, 2019, compared to the comparable period in 2018. The increase in net sales was mainly due to the optimization of our sales structure.

Gross profit

Gross profit for the three months ended March 31, 2019 was $12.7 million, or 21.8% of net sales, compared to $7.6 million, or 15.2% of net sales, for the comparable period in 2018. This increase was attributed to the product mix and improvement in our labor efficiency.

Research and development expenses

Research and development expenses were $3.0 million, or 5.1% of net sales, for the three months ended March 31, 2019, compared to $2.6 million, or 5.1% of net sales, for the comparable period in 2018. The Company will continue to invest on R&D activities in the future.

22

Selling and distribution expenses

Selling and distribution expenses were $2.8 million, or 4.8% of net sales, for the three months ended March 31, 2019, compared to $2.0 million, or 4.0% of net sales, for the comparable period in 2018. The increase of expenses was mainly driven by expanded business scale, including marketing expenses for more brand customers.

General and administrative expenses

General and administrative expenses were $4.8 million, or 8.3% of net sales, for the three months ended March 31, 2019, compared to $4.1 million, or 8.3% of net sales, for the comparable period in 2018.

Foreign currency transaction loss

We experienced a loss of $1.3 million and $1.0 million for the three months ended March 31, 2019 and 2018, respectively, on the exchange rate difference between the US$ and the RMB. The 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 derivatives

We experienced a gain on derivative instruments of $0.4 million and $0.7 million for the three months ended March 31, 2019 and 2018, respectively.

Government grants

Government grants were $0.2 million for the three months ended March 31, 2019, compared to $0.3 million for the comparable period in 2018.

Other income

Other income was $66,698 for the three months ended March 31, 2019, compared to other income was $23,561 for the comparable period in 2018.

Equity in (loss) earnings of investees 

Equity in loss of investees were $418,204 for the three months ended March 31, 2019, compared to equity in earnings of investee $156,250 for the comparable period in 2018.

Interest expenses

Interest expenses were $470,423 for the three months ended March 31, 2019, compared to interest expenses of $241,852 for the comparable period in 2018.

Income taxes (expense) benefit

Income taxes expense was $285,459 for the three months ended March 31, 2019, compared to income taxes benefit of $9,679 for comparable period in 2018.

Net income (loss)

Net income attributable to the Company for the three months ended March 31, 2019 was $0.3 million. Net loss attributable to the Company of $1.1 million for the comparable period in 2018, increased by $1.4 million, or 127.5%.

23

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 March 31,
	2019		2018
	(Unaudited)		(Unaudited)
		$		$
Net income (loss) attributable to the Company		307,721		(1,118,936	)
Interest expenses		470,423		241,852
Income taxes expenses (benefit)		285,459		(9,679	)
Depreciation and Amortization		1,729,440		1,475,228
EBITDA		2,793,043		588,465

Liquidity and Capital Resources

We had cash of approximately $24.2 million as of March 31, 2019, compared to $24.9 million as of December 31, 2018.

To provide liquidity and flexibility in funding our operations, we borrow funds under bank facilities and other external sources of financing. As of March 31, 2019, we had lines of credit with seven financial institutions aggregating $109.6 million. The maturities of these facilities vary from May 2019 to October 2021. 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 March 31, 2019, we had utilized approximately $76.0 million under such general credit facilities and had available unused credit facilities of $33.6 million.

Net cash provided by operating activities was approximately $10.6 million for the three months ended March 31, 2019, compared to net cash used in operating activities of $5.5 million for the comparable period in 2018. The net cash increase of $16.1 million provided by operating activities is primarily due to an increase of $15.2 million in cash inflow from accounts receivable, a decrease of $8.2 million in cash outflow from inventories and an increase of $6.7 million in cash outflow from notes receivable.

Net cash used in investing activities was $4.6 million for the three months ended March 31, 2019, compared to net cash used in investing activities of $1.9 million for the comparable period in 2018. The net cash increase of $2.7 million used in investing activities is primarily due to an increase of $2.8 million in cash outflow from acquisitions of plant and equipment.

Net cash used in financing activities was $13.7 million for the three months ended March 31, 2019, compared to net cash provided by financing activities of $16.4 million for the comparable period in 2018. The net cash increase of $30.1 million in net cash used in financing activities was primarily attributable to an increase of $13.6 million in cash outflow from repayments of short-term bank loans, a decrease of $8.5 million in cash inflow from proceeds from short-term bank loans and an increase of $8.9 million in cash outflow from repayments of non-financial institution borrowing.

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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 March 31, 2019, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings

From time to time, we are subject to certain legal proceedings, claims and disputes that arise in the ordinary course of our business. Although we cannot predict the outcomes of these legal proceedings, we do not believe these actions, in the aggregate, will have a material adverse impact on our financial position, results of operations or liquidity. We are currently not a party to any material legal proceedings

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, 2018 as filed with the SEC on March 28, 2019 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.

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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 Highpower and Bank of China, Buji Sub-branch

On January 9, 2019, SZ Highpower entered into a working capital loan contract with Bank of China, Buji Sub-branch providing for an aggregate loan of RMB40,000,000 ($5,953,001) to be used by SZ Highpower to purchase raw materials. The term of the loan is 12 months from the first withdrawal date. SZ Highpower must withdraw the facility within 30 days from January 10, 2019, 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 1.345%. The loan is guaranteed by SZ Springpower and our Chief Executive Officer, Dang Yu Pan. The Company’s real estate properties and land use rights in Huizhou also serve as collateral for the loan. The balance of loan was $4,464,751 as of March 31, 2019.

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 SZ Highpower 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 SZ Highpower or such a person or entity’s becoming subject to investigation or restriction by the judiciary, which have or may affect SZ Highpower’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 SZ Highpower or a guarantor after the bank’s annual review of SZ Highpower’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 SZ Highpower or any guarantor to rectify the event of default within a specified time period; reduce, temporarily suspend or permanently terminate SZ Highpower’s credit limit in whole or in part; temporarily suspend or permanently terminate in part or in whole SZ Highpower’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 SZ Highpower and the bank; require compensation from SZ Highpower on the losses thereafter caused; hold SZ Highpower’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.

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Comprehensive Credit Line Contract between SZ Springpower and Bank of Beijing Co., Ltd. Shenzhen Branch

On January 22, 2019, SZ Springpower entered into a comprehensive credit line contract with the Bank of Beijing Co., Ltd. Shenzhen Branch, which provides for a revolving line of credit of up to RMB50,000,000 ($7,441,251). SZ Springpower may withdraw the loan, from time to time as needed, on or before January 21, 2020. The loan is guaranteed by SZ Highpower, ICON, HZ HTC and our Chief Executive Officer, Dang Yu Pan. The used facility was $3,159,555 as of March 31, 2019.

The following constitute events of default under the loan contracts: SZ Springpower fails to use the credit limit as per the agreements in this contract or specific business contracts, or fails to pay interest, principal or other funds payable on time in full amount, or fails to timely pay fully on time, causing that Bank of Beijing pays in advance; SZ Springpower fails to (or affirmatively shows or shows that it won’t with behavior) totally and duly perform the commitments, guarantee, obligations or responsibilities under this contract or specific business contracts; the guarantor fails to totally and duly perform the commitments, guarantee, obligations or responsibilities under this contract or specific business contracts, or has other default event under the guarantee document, or the collateral / pledge (if any) is damaged, lost, the ownership is shifted, closed/ frozen / detained or compulsorily executed, or the guarantee document or any guarantee right of Bank of Beijing is regarded as invalid, revoked or dissolved without the written consent of Bank of Beijing; any significant credit finance, guarantee, compensation or other repayment liability of the credit grantee can’t be performed when mature; or the operation license of the main business or significant business is suspended or canceled, or business suspension and rectification / takeover / dissolution / declaration of bankruptcy, etc. are entered; the financial or operational status of the credit grantee has significant and adverse change, or has bad credit record, or involves in the dispute or administrative punishment, etc. that has significant adverse influence on its repayment ability or the performance of this contract and specific business contracts, or has other situation that has serious adverse influence on the creditor’s right or guarantee right of Bank of Beijing.

Upon the occurrence of an event of default, the bank may: adjust the maximum amount of the line of credit and/or cancel the comprehensive contract, terminate the unused portion of the credit line.

Basic Credit Line Contract Between SZ Springpower and Industrial Bank Co., Ltd., Shenzhen Longgang Branch

Basic Credit Line Contract Between HZ HTC and Industrial Bank Co., Ltd., Shenzhen Longgang Branch

On March 19, 2019, each of SZ Springpower and HZ HTC entered into a basic credit line contract with Industrial Bank Co., Ltd., Shenzhen Longgang Branch. SZ Springpower’s loan agreement provides for a revolving line of credit of up to RMB40,000,000 ($5,953,001) and HZ HTC’s loan agreement provides for a revolving line of credit of up to RMB20,000,000 ($2,976,501). Each Company may withdraw the loan from time to time as needed on or before March 19, 2019. SZ Springpower’s loan is guaranteed by SZ Highpower, HZ HTC, ICON and our Chief Executive Officer, Dang Yu Pan. HZ HTC’s loan is guaranteed by SZ Highpower, SZ Springpower, ICON and our Chief Executive Officer, Dang Yu Pan. The used facility of SZ Springpower and HZ HTC was $4,991,324 and $nil as of March 31, 2019.

The following constitute events of default under the loan contract: any information provided by or representation or warranty made by the borrower proves to have been untrue, inaccurate, incomplete or misleading; a deterioration or obvious weakening of the borrower’s credit standing or ability to repay the loan; a cross default under certain agreements involving the borrower or a guarantor, or their affiliated related parties; the borrower’s violation of any obligations in an affiliated specific credit line contract; the borrower’s failure to timely repay the principal, interest and fees under the contract and any specific contract; the borrower’s suspension of payment, or failure or indication that it is unable to repay, the debt due; the borrower’s termination of its business, liquidation, bankruptcy, dissolution, or revocation or cancellation of it business permit; the borrower’s involvement in a major business dispute or deteriorated financial situation; or the emergence of any other situation that endanger, damage, or may endanger, damage the bank’s rights and benefits.

Upon the occurrence of an event of default, the bank may: temporarily suspend or permanently terminate the borrower’s credit limit in whole or in part; announce the immediate expiration of all or part of the debts under the contract; terminate the contract and declare all amounts outstanding under the contract immediately due and payable; request overdue interest from the borrower caused by the default; request penalty interest; or request compensation in full from the borrower for the breach. 

Item 6. Exhibits

Exhibit Number	Description of Document
10.1	Working Capital Loan Contract dated January 9, 2019, between Shenzhen Highpower Technology Co., Ltd. and Bank of China, Buji Sub-branch, (translated to English).
10.2	Comprehensive Credit Line Contract dated January 22, 2019, between Springpower Technology (Shenzhen) Company Limited and Bank of Beijing Co., Ltd. Shenzhen Branch (translated to English).
10.2(a)	Maximum Warranty Contract dated January 22, 2019, between Icon Energy System (Shenzhen) Company Limited and Bank of Beijing Co., Ltd. Shenzhen Branch (translated to English).
10.2(b)	Maximum Warranty Contract dated January 22, 2019, between Huizhou Highpower Technology Co., Ltd. and Bank of Beijing Co., Ltd. Shenzhen Branch (translated to English).
10.2(c)	Maximum Warranty Contract dated January 22, 2019, between Shenzhen Highpower Technology Co., Ltd. and Bank of Beijing Co., Ltd. Shenzhen Branch (translated to English).
10.2(d)	Maximum Warranty Contract dated January 22, 2019, between Dang Yu Pan and Bank of Beijing Co., Ltd. Shenzhen Branch (translated to English).
10.3	Basic Credit Line Contract dated March 19, 2019, between Springpower Technology (Shenzhen) Company Limited and Industrial Bank Co., Ltd., Shenzhen Longgang Branch (translated to English).
10.3(a)	Maximum Amount Guaranty Contract dated March 19, 2019, between Icon Energy System (Shenzhen) Company Limited and Industrial Bank Co., Ltd., Shenzhen Longgang Branch (translated to English).
10.3(b)	Maximum Amount Guaranty Contract dated March 19, 2019, between Huizhou Highpower Technology Co., Ltd. and Industrial Bank Co., Ltd., Shenzhen Longgang Branch (translated to English).
10.3(c)	Maximum Amount Guaranty Contract dated March 19, 2019, between Shenzhen Highpower Technology Co., Ltd. and Industrial Bank Co., Ltd., Shenzhen Longgang Branch (translated to English).
10.3(d)	Maximum Amount Guaranty Contract dated March 19, 2019, between Dang Yu Pan and Industrial Bank Co., Ltd., Shenzhen Longgang Branch (translated to English).
10.4	Basic Credit Line Contract dated March 19, 2019, between Huizhou Highpower Technology Co., Ltd. and Industrial Bank Co., Ltd., Shenzhen Longgang Branch (translated to English).
10.4(a)	Maximum Amount Guaranty Contract dated March 19, 2019, between Icon Energy System (Shenzhen) Company Limited and Industrial Bank Co., Ltd., Shenzhen Longgang Branch (translated to English).
10.4(b)	Maximum Amount Guaranty Contract dated March 19, 2019, between Springpower Technology (Shenzhen) Company Limited and Industrial Bank Co., Ltd., Shenzhen Longgang Branch (translated to English).
10.4(c)	Maximum Amount Guaranty Contract dated March 19, 2019, between Shenzhen Highpower Technology Co., Ltd. and Industrial Bank Co., Ltd., Shenzhen Longgang Branch (translated to English).
10.4(d)	Maximum Amount Guaranty Contract dated March 19, 2019, between Dang Yu Pan and Industrial Bank Co., Ltd., Shenzhen Longgang Branch (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 Section18 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.

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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: May 13, 2019		/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/ Sunny Pan
	By:	Sunny Pan
	Its:	Chief Financial Officer (principal financial and accounting officer)

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