424B3 1 v159636_424b3.htm

 
PROSPECTUS   Pursuant to Rule 424(b)(3)
File No. 333-159705
File No. 333-161726

2,300,000 Shares

Common Stock

[GRAPHIC MISSING]

Lihua International, Inc. is offering 2,300,000 shares of Common Stock $.0001 par value (the “Common Stock”). We are a reporting company under Section 13 of the Securities Exchange Act of 1934, as amended. Prior to this offering, there has been no public market for our securities. The public offering price of our Common Stock was determined by negotiation between us and the underwriters.

The public offering price of our Common Stock will be $4.00 per share. We have been approved to have our Common Stock listed on The NASDAQ Stock Market LLC under the symbol LIWA.

The purchase of the securities involves a high degree of risk. See section entitled “Risk Factors” beginning on page 12.

   
  Per Share   Total
Public offering price   $ 4.00     $ 9,200,000  
Underwriting discounts and commissions(1)   $ 0.28     $ 644,000  
Proceeds, before expenses, to Lihua International, Inc.(2)   $ 3.72     $ 8,556,000  

(1) Does not include a non-accountable fee in the amount of 1.0% of the gross proceeds of the offering.
(2) We estimate that the total expense of this offering excluding the underwriters’ discount and the non-accountable expense allowance, will be approximately $518,000.

The underwriters have a 45-day option to purchase up to 300,000 additional shares of Common Stock from Vision Opportunity China LP (the “Selling Stockholder”) solely to cover over-allotments, if any. We will not receive any proceeds from the sale of any shares of Common Stock by the Selling Stockholder in the over-allotment option.

The underwriters expect to deliver shares of Common Stock to purchasers on or about September 10, 2009.

Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 
Broadband Capital Management LLC   Rodman & Renshaw, LLC

The date of this prospectus is September 4, 2009


 
 

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  Page
PROSPECTUS SUMMARY     1  
SUMMARY CONSOLIDATED FINANCIAL DATA     9  
RISK FACTORS     12  
NOTE REGARDING FORWARD-LOOKING STATEMENTS     26  
USE OF PROCEEDS     27  
DIVIDEND POLICY     27  
CAPITALIZATION     28  
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS     29  
DETERMINATION OF OFFERING PRICE     29  
DILUTION     30  
EXCHANGE RATE INFORMATION     31  
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA     32  
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS     34  
INDUSTRY AND MARKET OVERVIEW     53  
BUSINESS     58  
OUR HISTORY AND CORPORATE STRUCTURE     70  
DIRECTORS EXECUTIVE OFFICERS AND CERTAIN SIGNIFICANT EMPLOYEES     78  
EXECUTIVE COMPENSATION     82  
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT     86  
SELLING STOCKHOLDER     91  
DESCRIPTION OF CAPITAL STOCK     93  
SHARES ELIGIBLE FOR FUTURE SALE     98  
TAXATION     100  
UNDERWRITING     107  
TRANSFER AGENT AND REGISTRAR     114  
LEGAL MATTERS     114  
EXPERTS     114  
WHERE YOU CAN FIND MORE INFORMATION     114  
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS     Q-1  

You should rely only on information contained in this prospectus or in any free writing prospectus that we may provide to you. We have not, and the underwriters have not, authorized anyone to provide you with additional information or information different from that contained in this prospectus or in any free writing prospectus that we may provide to you. We are not making an offer of these securities in any jurisdiction where the offer is not permitted. The information in this prospectus may only be accurate as of the date on the front of this prospectus regardless of time of delivery of this prospectus or any sale of our securities.

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PROSPECTUS SUMMARY

This summary highlights selected information appearing elsewhere in this prospectus. While this summary highlights what we consider to be the most important information about us, you should carefully read this prospectus and the registration statement of which this prospectus is a part in their entirety before investing in our securities, especially the risks of investing in our securities, which we discuss later in “Risk Factors,” and our consolidated financial statements and related notes beginning on page Q-1. Unless the context requires otherwise, the words “we,” “ the Company,” “us,” “our” and “Lihua” refer to Lihua International, Inc. and our subsidiaries. This prospectus assumes the over-allotment has not been exercised, unless otherwise indicated. This prospectus also assumes: (i) the automatic conversion of 5,991,706 shares of our preferred stock, par value $.0001 per share (“Preferred Stock”) into 5,991,706 shares of our Common Stock, par value $.0001 per share (“Common Stock”) upon the consummation of this Offering and (ii) the completion, as of the date of this preliminary prospectus, of the sale of 500,000 shares of Common Stock by the Selling Stockholder in a private transaction as described in the section entitled “Selling Stockholder.”

Overview

Lihua is one of the first vertically integrated companies in China to develop, design, manufacture, market and distribute low cost, high quality, alternatives to pure copper magnet wire, which include copper-clad aluminum wire (“CCA”) and recycled scrap copper wire. Primarily because of its high electrical conductivity, pure copper magnet wire is one of the fundamental building blocks in many components in a wide variety of motorized and electrical appliances such as dishwashers, microwaves and automobiles. In most instances, Lihua’s CCA and recycled scrap copper are an excellent, less costly substitute for pure copper magnet wire.

Lihua sells its products directly to manufacturers in the consumer electronics, white goods, automotive, utility, telecommunications and specialty cable industries and to distributors in the wire and cable industries. Our track record and reputation for producing high quality products in large quantities has paved the way for rapid expansion of our customer base. We have approximately 300 customers and no one customer accounts for more than 7% of our sales. At least in part because the copper magnet wire industry in China is large and growing, Lihua’s product sales are comprised of approximately 95% domestic sales and approximately 5% of export sales.

Prior to 2009, our business focused primarily on CCA. Our CCA business consists of acquiring CCA with a line diameter of 2.05 mm from our suppliers as a raw material, reducing the diameter of the CCA by drawing it and then annealing and coating it. Our final CCA product typically has diameters from 0.03 mm to 0.18 mm, depending on customer specifications. To meet strong customer demand, we substantially increased our CCA production capacity from 2,200 tons per annum as of the end of 2006 to 6,000 tons per annum as of June 30, 2009. We plan to further increase our CCA production capacity to 7,500 tons per annum by the end of 2009. In each of the following periods, our sales of CCA were as follows: 2006 – 2,009 tons, 2007 – 4,065 tons, 2008 – 5,966 tons and six months ended June 30, 2009 – 2,959 tons.

In addition to our CCA business, in the first quarter of 2009, we began to produce copper rod from recycled scrap copper. As of June 30, 2009, our scrap copper refinery capacity was approximately 25,000 tons per annum. To the extent our capacity permits, we process our copper rod into copper magnet wire. Because our output of copper rod exceeds our capacity to process it into copper magnet wire, we sell our excess copper rod to smaller wire manufacturers for further processing. During the six months ended June 30, 2009, we sold 3,602 tons of copper magnet wire and 5,559 tons of copper rod. We currently are working to expand our magnet wire production capacity so that we can use a greater proportion of our copper rod rather than selling it to other manufacturers, thereby increasing our profit margins and overall profitability. We are exploiting a range of marketing strategies for the copper magnet wire business, including cross-selling our copper magnet wire to our existing CCA customers.

Lihua is well positioned to continue to capture further market share in the magnet wire industry. CCA and copper magnet wire are increasingly being accepted as alternatives to pure copper wire. As a result, our sales and net income have grown substantially over the last three years. We generated sales of $15.7 million in 2006, $32.7 million in 2007 and $50.0 million in 2008, representing a Compound Annual Growth Rate (“CAGR”) of 78.2%. We achieved net income of $4.5 million in 2006, $7.7 million in 2007 and $11.7 million in 2008, representing a CAGR of 61.3%. Adoption of CCA and recycled copper magnet wire as

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alternatives to pure copper wire will likely increase, and we expect that our sales and net income should continue to grow as a result. During the six months ended June 30, 2009, we generated sales of $69,365,668 and net income of $10,693,720, up 180% and 83.1% from the same six-month period in 2008.

We continually pursue technological innovations and improvements in our manufacturing processes. We have obtained one utility model patent in China and have three pending invention patent applications in China related to our production process. In addition, we have entered into a technology cooperation agreement with a university in China. We believe that our emphasis on technological innovations and production efficiency has contributed significantly to our leading industry position in China and will continue to do so for the foreseeable future.

Further, significant barriers to entry make it difficult for newcomers to successfully compete with our CCA and copper magnet wire businesses. For example, with respect to CCA, it is challenging to maintain high quality during the process of drawing, annealing and coating CCA, especially finer diameter wires. Our knowledge and experience in successfully generating high quality CCA give us a strong advantage over would-be competitors. With respect to copper magnet wire, our proprietary recycling technology offers us a unique ability to produce wire of a high enough quality to serve as a substitute to pure copper wire. Our experience and technology allow us to offer products that are, in most instances, superior and more cost-effective to those potential competitors can produce. Because we are already an approved vendor for many of our customers and qualifying new vendors can be time-consuming, we believe we are further advantaged vis-à-vis potential competitors.

To avoid copper commodity risk exposure, we maintain minimal raw material inventory. We confirm raw material purchase orders for scrap copper or CCA with suppliers for each sales order only when the applicable sales order has been received. On the other hand, our principal CCA and scrap copper suppliers usually dedicate portions of their inventories as reserves to meet our manufacturing requirements. Our most significant supplier of CCA provides approximately 30% of our CCA raw material needs, but we have built a large network of reliable suppliers that deliver high quality raw materials, and accordingly, are not dependent upon any one supplier for our success.

We believe that our experienced management team will continue to leverage our leading technologies and increasing capacity to manufacture, produce, market and distribute cost-effective, high quality, CCA, recycled copper magnet wire and other alternatives to pure copper wire. If, as anticipated, worldwide demand for alternatives to pure copper wire grow and we continue to innovate and improve in our processes, we will be well positioned to compete in the copper wire market on a global scale.

Market Opportunity

Magnet wire is a basic building block of a wide range of products in information technology, electric motor and home appliances, and is a sub-category of the cable and wire industry. China is the world’s largest cable & wire producer and has experienced a growth in its magnet wire market demand that has outpaced the rest of the world in recent years. Demand in China for magnet wire is expected to continue to grow in the foreseeable future.

China was the largest copper consuming nation with an exposure of approximately 22% of the global demand in 2006. Although China’s need for copper continues to grow, China is a net importer of copper due to deficient copper reserves. The dynamics of constrained supply and growing demand, as well as the resulting price surge, contribute to the continued search and adoption of alternatives to pure copper that can meet China’s demand in a cost efficient manner. Bimetallic materials (e.g. copper clad aluminum) are an ideal substitute for pure copper that can satisfy China’s demand. In addition, China has set its industrial policies to encourage the use of scrap copper. The Chinese government’s 11th Five-Year Plan (2006-2010) has encouraged the greater use of scrap metals to help alleviate a shortfall in copper supplies within China. Due to the policy initiatives put in place by the Chinese government, we have, and expect to continue to benefit from the increase in demand and consumption of CCA magnet wire and refined copper from secondary sources in China.

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Our Strengths

We believe that the following strengths have contributed to our competitive position in China:

Leading market position and early-mover advantage;
Proprietary automated and efficient production facility that can be scaled to meet increased demand;
Proprietary production technology;
Rigorous quality control standards;
Strong technological improvement and research and development capabilities; and
Experienced management and operations teams with local market knowledge.

Our Strategies

We will continue to strive to be a leading supplier of copper replacement products in the PRC cable and wire industry by pursuing a growth strategy that includes:

Developing market driven new products and processes;
Reliable supplier network for low cost raw materials;
Production capacity expansion;
Selectively pursue acquisition opportunities; and
Strengthening our relationships with key customers and diversifying our customer base.

Our Risks and Challenges

An investment in our securities involves a high degree of risk that includes risks related to our Company, the industries in which we operate, the PRC, the ownership of our Common Stock and this Offering, including the following specific risks:

We derive most of our profits from sales of our products in China. The continued development of our business depends, in large part, on continued growth in the bimetallic industry in China.
One shareholder owns a large percentage of our outstanding securities and could significantly influence the outcome of our corporate matters.
We rely on a limited number of suppliers for most of the raw materials we use. Interruptions or shortages of supplies from our key suppliers of raw materials could disrupt production or impact our ability to increase production and sales.
The CCA and scrap copper recycling industries are becoming increasingly competitive. Therefore, we may encounter substantial competition in our business and our failure to compete effectively may adversely affect our ability to generate revenue.

See “Risk factors” beginning on page 12 for a more detailed description of these and other risks related to an investment in securities.

Company Background

From the date of our incorporation until October 31, 2008, we were a “blank check” company with nominal assets. We were originally incorporated in the State of Delaware on January 24, 2006 under the name “Plastron Acquisition Corp. I”, for the purpose of raising capital to be used to merge, acquire, or enter into a business combination with an operating business.

Our wholly owned subsidiary, Ally Profit Investments Limited was incorporated in the British Virgin Islands on March 12, 2008 under the Business Companies Act, 2004 (“Ally Profit”). In June 2008, Ally Profit became the parent holding company of a group of companies comprised of Lihua Holdings Limited (“Lihua Holdings”), a company organized under the laws of Hong Kong and incorporated on April 17, 2008, which is the 100% shareholder of each of Danyang Lihua Electron Co. Ltd. (“Lihua Electron”) and Jiangsu Lihua

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Copper Industry Co., Ltd., (“Lihua Copper”), each a limited liability company organized under the existing laws of the Peoples Republic of China, collectively referred to herein as the “PRC Operating Companies”. Lihua Electron and Lihua Copper were incorporated on December 30, 1999 and August 31, 2007, respectively. At the time of their respective formations, Lihua Electron and Lihua Copper were Foreign Invested Enterprises (“FIE”). Both Lihua Electon and Lihua Copper have been under the common management, operated on an integrated basis and ultimately controlled by Mr. Jianhua Zhu (“Mr. Zhu”), our Chairman and Chief Executive Officer, since their inception.

From inception until October 2006, Lihua Electron had originally been engaged in the manufacture and sale of audio, video, and computer plugs and sockets. On October 30, 2006, Lihua Electron changed its business to focus on the manufacture and sale of wires and cables, brass wires, copper-covered aluminum wires, and copper-covered aluminum special type electromagnetic wires. Lihua Copper was founded to focus on the development of copper scrap recycling technology and, in March 2009, we launched the manufacture and sale of low oxygen content copper cable and copper magnet wire by using scrap material.

Restructuring

In June 2008, Magnify Wealth Enterprise Limited, a British Virgin Islands holding company (“Magnify Wealth”), which at such time was 100% owned by Mr. Fo Ho Chu (“Mr. Chu”), developed a restructuring plan (the “Restructuring”). At that time, Magnify Wealth was the parent company and sole shareholder of Ally Profit, which was the parent company and sole shareholder of Lihua Holdings. The Restructuring was accomplished in two steps. The first step was for Lihua Holdings to acquire 100% of the equity interests in the PRC Operating Companies (the “PRC Subsidiary Acquisition”). The PRC Operating Companies were owned at that time by companies controlled by Mr. Zhu, and minority shareholders, Mr. Chu and Imbis Europe B.V. h/o Asia Trading (“Europe EDC”, together with Mr. Chu, the “Minority Shareholders”). After the PRC Subsidiary Acquisition was consummated, the second step was for Magnify Wealth to enter into and complete a transaction with a U.S. public reporting company, whereby that company would acquire Ally Profit, Lihua Holdings and the PRC Operating Companies (the “Ally Profit Companies”).

Legal Structure of the PRC Subsidiary Acquisition

The PRC Subsidiary Acquisition was structured to comply with PRC laws governing mergers and acquisitions (“PRC M&A Laws”). Under the PRC M&A laws, the acquisition of PRC companies by foreign companies that are controlled by PRC citizens who are affiliated with the PRC companies, is strictly regulated and requires approval from the Ministry of Commerce, which can be burdensome to obtain. Such restrictions, however, do not apply to foreign entities, which are controlled by foreign persons. So as not to violate the PRC M&A laws, in June 2008, Lihua Holdings acquired 100% of the equity interests in the PRC Subsidiaries from companies controlled by Mr. Zhu and from the Minority Shareholders.

Mr. Zhu, a PRC citizen, could not immediately receive shares of Magnify Wealth in a share exchange as consideration for the sale of his interests in the PRC Subsidiaries. In order for Mr. Zhu to receive consideration for selling his interest in the PRC Operating Companies to Lihua Holdings and with an aim to provide incentive for Mr. Zhu’s continued contribution to us, Mr. Zhu and Mr. Chu agreed that they would enter into a share transfer agreement (the “Share Transfer Agreement”) to grant Mr. Zhu an option to acquire Mr. Chu’s shares in Magnify Wealth, provided that certain financial performance thresholds were met by the Ally Profit Companies. The Share Transfer Agreement was formalized and entered into in October 2008, and amended in March 2009. Subject to registering with the State Administration of Foreign Exchange prior to the exercise and issuance of the option shares under the Share Transfer Agreement, which is an administrative task, we have been advised by PRC counsel there is no prohibition under PRC laws for Mr. Zhu to earn an equity interest in Magnify Wealth after the PRC Subsidiary Acquisition in compliance with PRC law.

As consideration for the sale of the interests by the Minority Shareholders to Lihua Holdings, in October 2008, they entered into subscription agreements with Magnify Wealth. These agreements enabled them to purchase shares in Magnify Wealth for a nominal price of US$1.00 per share. Magnify Wealth must issue the shares in tranches on February 14, 2009, 2010 and 2011 of 25%, 25% and 50%, respectively.

In October 2008, the goal of the Restructuring was realized when we entered into a share exchange agreement with Magnify Wealth and our principal stockholders (the “Share Exchange Agreement”), pursuant to which we acquired 100% of the equity of the Ally Profit Companies in exchange for the issuance of

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14,025,000 shares of our Common Stock to Magnify Wealth (the “Share Exchange”). As a result of this transaction, we are a holding company which, through our direct and indirect 100% ownership of the Ally Profit Companies, now has operations based in the PRC. Magnify Wealth owns 92.4% of our Common Stock and is now our majority stockholder. As of the date of this prospectus, the financial thresholds set out in the Share Transfer Agreement have been met, and once Mr. Zhu exercises all of his options in Magnify Wealth and the Minority Shareholders are issued all of their shares in Magnify Wealth pursuant to the subscription agreements, Mr. Zhu, Mr. Chu and Europe EDC will own approximately 81.9%, 17.3% and 0.9% of Magnify Wealth, respectively. The possible future continued dilution of Magnify Wealth’s equity ownership in us and the PRC Operating Companies will have no legal effect on us or the equity interest in the PRC Operating Companies held by Mr. Zhu and the Minority Shareholders through their ownership in Magnify Wealth.

Accounting Treatment of the Restructuring

The Restructuring is accounted for as a combination of entities under common control and a recapitalization of the PRC Operating Companies using the “as if” pooling method of accounting, with no adjustment to the historical basis of the assets and liabilities of the PRC Operating Companies. The operations of the PRC Operating Companies are consolidated as if the Restructuring occurred as of the beginning of the first accounting period presented in the financial statements provided elsewhere in this prospectus. The Restructuring is accounted for in this manner because even though Mr. Zhu transferred his equity interest in the PRC Operating Companies, he maintained legal control by remaining the managing director of the PRC Operating Companies and continuing to direct the business, operational and decision making functions of the PRC Operating Companies after the PRC Subsidiary Acquisition. The is further evidenced by Mr. Zhu’s appointment as the sole director of Magnify Wealth, Ally Profit and Lihua Holdings and Mr. Chu undertook to Mr. Zhu that no future directors would be appointed to Magnify Wealth without the consent of Mr. Zhu.

Corporate Structure

We own 100% of Ally Profit, which owns 100% of Lihua Holdings, which owns 100% of the PRC Operating Companies. Magnify Wealth is a 89.4% shareholder of our Common Stock and other public shareholders own 10.6% of our Common Stock. The following diagram illustrates our corporate and shareholder structure as of the date of this prospectus.

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The following diagram illustrates our corporate and shareholder structure immediately after completion of this Offering, Magnify Wealth will be a 58.3% shareholder of our Common Stock and other public shareholders will own 41.7% of our Common Stock.

[GRAPHIC MISSING]

Executive Offices

Our executive offices are located at Houxiang Five-Star Industry District, Danyang City, Jiangsu Province, PRC 212312. Our telephone number is +86-511 86317399.

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THE OFFERING

Securities Offered:    
    2,300,000 shares of Common Stock
Common Stock outstanding before the Offering:    
    15,500,000 shares
Common Stock to be outstanding after the Offering:    
    23,791,706 shares
Offering price:    
    $4.00 per share
Use of proceeds:    
    We intend to use the net proceeds from the offering for working capital and general corporate purposes. Additionally, we may choose to expand our business through the capital expenditure plan we have in place to maintain existing machinery and to purchase additional manufacturing equipment for our new production facility.
    The amounts and timing of our actual expenditures will depend on numerous factors, including the status of our development efforts, sales and marketing activities, the amount of cash generated or used by our operations. We may find it necessary or advisable to use portions of the proceeds for other purposes, and we will have broad discretion in the application of the net proceeds. Additionally, we may choose to expand our current business through acquisition of other complimentary businesses, products or technologies, using cash or shares. However, we have not entered into any negotiations, agreements or commitments with respect to any such acquisitions at this time. Pending these uses, the proceeds will be invested in short-term, investment grade, interest-bearing securities.
    See “Use of Proceeds” on page 27 for more information on the use of proceeds.
Risk factors:    
    Investing in these securities involves a high degree of risk. As an investor you should be able to bear a complete loss of your investment. You should carefully consider the information set forth in the “Risk Factors” section beginning on page 12.
Listing:    
    We have been approved to have our Common Stock listed on The NASDAQ Stock Market LLC (“NASDAQ”) under the symbol LIWA.

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following summary of our consolidated statement of income data for the two years ended December 31, 2007 and 2008 and consolidated balance sheet data as of December 31, 2008 presented below are derived from our audited consolidated financial statements and related notes thereto included elsewhere in this prospectus. The summary of the consolidated statement of income data for the year ended December 31, 2006 and consolidated balance sheet data as of December 31, 2006 of the Ally Profit Companies presented below have been derived from Ally Profit’s audited consolidated financial statements that are included elsewhere in this prospectus. The audited consolidated financial statements have been prepared in accordance with U.S. GAAP, and have been audited by AGCA, Inc. (f/k/a Yu and Associates), an independent registered public accounting firm. The consolidated statement of income data for the three months ended June 30, 2009 and 2008 and the consolidated balance sheet data as of June 30, 2009 have been derived from our unaudited condensed consolidated financial statements that are included elsewhere in this prospectus.

The consolidated financial statements are reported in U.S. dollar amounts and are presented in thousands, except share and per share data. This data should be read in conjunction with our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and the related notes included elsewhere in this prospectus.

The as adjusted balance sheet data reflects the balance sheet data as of June 30, 2009, as adjusted to reflect our receipt of the estimated net proceeds from our sale of 2,300,000 shares of Common Stock in this Offering at an initial offering price of $4.00 per share, after deducting the estimated underwriting discounts and commissions and estimated Offering expenses payable by us.

Consolidated Statement of Income Data
(in thousands, except for percentages)

         
    Ally Profit
Investments
Limited and
Subsidiaries
For the Year Ended
December 31,
2006
     For the Three Months Ended June 30,   For the Year December 31,
     2009   2008   2008   2007
NET REVENUE   $ 48,827     $ 15,038     $ 50,006     $ 32,677     $ 15,750  
Cost of sales     (39,096 )      (10,328 )      (33,202 )      (22,911 )      (10,649 ) 
GROSS PROFIT     9,732       4,710       16,804       9,766       5,101  
Selling expenses     (587 )      (172 )      (700 )      (417 )      (230 ) 
General and administrative expenses     (1,093 )      (403 )      (1,907 )      (455 )      (336 ) 
Income from operations     8,051       4,134       14,197       8,894       4,535  
Other income (expenses):
                                            
Interest income     47       8       68       16       4  
Interest expenses     (106 )      (106 )      (515 )      (97 )      (43 ) 
Merger cost                 (259 )             
Change in fair value of warrants     (216 )                         
Other income (expenses), net     501       (8 )      4             3  
Income before income taxes     8,277       4,030       13,495       8,813       4,499  
Provision for income taxes     (1,572 )      (528 )      (1,793 )      (1,089 )       
NET INCOME   $ 6,705     $ 3,501     $ 11,702     $ 7,724     $ 4,499  
Earnings per share
                                            
Basic   $ 0.45     $ 0.25     $ 0.75     $ 0.55     $  
Diluted   $ 0.31     $ 0.25     $ 0.70     $ 0.55     $  
Shares used in computation
                                            
Basic     15,000,000       14,025,000       14,187,945       14,025,000        
Diluted     21,818,182       14,025,000       15,327,422       14,025,000        

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  December 31,
2008
  June 30, 2009
     Actual   Actual   As adjusted
Consolidated Balance Sheet Data
                          
Cash and cash equivalents   $ 26,041,849     $ 28,144,454     $ 36,090,678  
Total assets     56,812,888       70,622,102       78,568,326  
Total liabilities     9,020,926       14,296,162       14,296,162  
Total shareholders’ equity     34,675,334       43,209,312       64,272,164  

The table below sets forth additional financial data that we believe is important to an understanding of our operations.

     
  For the Year Ended December 31,
     Lihua International, Inc. and
Subsidiaries
  Ally Profit
Investments
Limited and
Subsidiaries
     2008   2007   2006
Other Data
                          
Adjusted EBITDA   $ 15,008,980     $ 9,412,900     $ 4,867,558  
Capital Expenditures     4,852,020       3,811,851       4,854,852  

The following table includes a reconciliation of our Adjusted EBITDA to Net Income, the most directly comparable GAAP financial measure:

     
  For the Year Ended December 31,
     Lihua International, Inc. and
Subsidiaries
  Ally Profit
Investments
Limited and
Subsidiaries
     2008   2007   2006
Net Income   $ 11,701,879     $ 7,723,688     $ 4,498,919  
Depreciation and amortization     812,339       519,225       332,456  
Provision for income taxes     1,792,681       1,089,107        
Other income     (3,741 )            (2,651 ) 
Merger expenses     259,225              
Interest expenses     514,950       96,535       42,859  
Interest income     (68,353 )      (15,655 )      (4,025 ) 
Adjusted EBITDA   $ 15,008,980     $ 9,412,900     $ 4,867,558  

Non-GAAP Financial Measure

This prospectus contains disclosure of EBITDA, which is a non-financial measure within the meaning of Regulation G promulgated by the Securities and Exchange Commission. Adjusted EBITDA is not a measure of financial performance under generally accepted accounting principles (GAAP), and should not be considered in isolation or as an alternative to net income (loss), cash flows from operating activities and other measures determined in accordance with GAAP. Items excluded from Adjusted EBITDA are significant and necessary components to the operations of our business, and therefore Adjusted EBITDA should only be used as a supplemental measure of our operating performance.

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We define Adjusted EBITDA as net income before discontinued operations, interest expense, income taxes, depreciation and amortization, non-operating income (expense), and non-cash share-based compensation expenses. We believe Adjusted EBITDA is an important measure of operating performance because it allows management, investors and others to evaluate and compare our core operating results, including our return on capital and operating efficiencies, from period to period by removing the impact of our capital structure (interest expense from our outstanding debt), asset base (depreciation and amortization), tax consequences, non-operating items and non-cash share-based compensation. We also believe Adjusted EBITDA is a measure widely used by management, securities analysts, investors and others to evaluate the financial performance of the Company and other companies in our industry. Other companies may calculate Adjusted EBITDA differently, and therefore our Adjusted EBITDA may not be comparable to similarly titled measures of other companies.

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RISK FACTORS

Investing in our securities involves a great deal of risk. Careful consideration should be made of the following factors as well as other information included in this prospectus before deciding to purchase our securities. You should pay particular attention to the fact that we conduct all of our operations in China and are governed by a legal and regulatory environment that in some respects differs significantly from the environment that may prevail in the U.S. and other countries. Our business, financial condition or results of operations could be affected materially and adversely by any or all of these risks.

THE FOLLOWING MATTERS MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION, LIQUIDITY, RESULTS OF OPERATIONS OR PROSPECTS, FINANCIAL OR OTHERWISE. REFERENCE TO THIS CAUTIONARY STATEMENT IN THE CONTEXT OF A FORWARD-LOOKING STATEMENT OR STATEMENTS SHALL BE DEEMED TO BE A STATEMENT THAT ANY ONE OR MORE OF THE FOLLOWING FACTORS MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENT OR STATEMENTS.

Risks Related to Our Business

We have a limited operating history.

Our limited operating history and the early stage of development of the CCA industry and the scrap copper recycling industry in which we operate makes it difficult to evaluate our business and future prospects. Although our revenues have grown rapidly, we cannot assure you that we will maintain our profitability or that we will not incur net losses in the future. We expect that our operating expenses will increase as we expand. Any significant failure to realize anticipated revenue growth could result in operating losses.

We will continue to encounter risks and difficulties in implementing our business model.

We believe that our business model will allow us to become a leader in the CCA and the scrap copper recycling industries in which we operate. However, we can not assure you that our business model will be effective. We are susceptible to risks, including the failure to increase awareness of our products, protect our reputation and develop customer loyalty, the inability to manage our expanding operations, the failure to maintain adequate control of our expenses, and the inability to anticipate and adapt to changing conditions in the markets in which we operate as well as the impact of any changes in government regulation, mergers and acquisitions involving our competitors, technological developments, and other significant competitive and market dynamics. If we are not successful in addressing any or all of these risks, our business may be materially and adversely affected.

Quarterly operating results may fluctuate.

Our quarterly results of operations may fluctuate as a result of a number of factors, including fluctuation in the demand for and shipments of our products and changes in the price of copper which directly affect the price of our products and may influence the demand for our products. Therefore, quarter-to-quarter comparisons of results of operations have been and will be impacted by the volume of such orders and shipments. In addition, our operating results could be adversely affected by the following factors, among others, such as variations in the mix of product sales, price changes in response to competitive factors, increases in raw material costs and other significant costs, increases in utility costs (particularly electricity) and interruptions in plant operations resulting from the interruption of raw material supplies and other factors. Our operating results are also impacted during the summer months, when production at our factory declines due to the hot weather in southern China.

Fluctuating copper prices impact our business and operating results.

Copper prices, which had increased quite rapidly over the past several years, declined during 2008 and recently increased over 50% to $4,700 per ton from its low during 2008. Such prices may continue to vary significantly in the future because the copper industry is highly volatile and cyclical in nature. This affects our business both positively and negatively. For example, since our products are a substitute for pure copper wire, higher copper prices usually increase demand for our CCA products, while lower copper prices can decrease

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demand for CCA products. Numerous factors, most of which are beyond our control, influence copper price. These factors include general economic conditions, industry capacity utilization, import duties and other trade restrictions. We cannot predict copper prices in the future or the effect of fluctuations in the costs of copper on our future operating results. Consequently, fluctuations in copper prices can significantly affect our business and operating results.

Our failure to address certain deficiencies and material weaknesses in our internal controls noted by our auditors, may result in improper accounting treatment, possible fraud by employees, litigation or penalties from the government.

Our auditors, in planning and performing their audit of our financial statements for the year ended December 31, 2008, have provided us with a letter describing certain matters involving our internal control and operation they consider to be significant deficiencies or material weaknesses under the standards of the Public Company Accounting Oversight Board. Our failure to implement sufficient control to ensure all payments are made on statutory retirement systems and social securities was identified as a material weakness. In addition, the following three significant deficiencies were identified by our auditor:

our controls are not sufficient to ensure proper delivery of inventory;
sufficient controls are not available to ensure that purchases are properly approved; and
our controls are not sufficient to ensure proper reconciliation of perpetual inventory records to our general ledgers.

We intend to address the issues prior to the end of 2009. However, our failure to address these deficiencies and weaknesses may lead to improper accounting and may give rise to potential fraud by our employees, litigation or penalties from the government.

We may encounter substantial competition in our business and our failure to compete effectively may adversely affect our ability to generate revenue.

The CCA and scrap copper recycling industries are becoming increasingly competitive. Our competitors may have greater market recognition and substantially greater financial, technical, marketing, distribution, purchasing, manufacturing, personnel and other resources than we do. Furthermore, some of our competitors have manufacturing and sales forces that are geographically diversified, allowing them to reduce transportation expenses, tariff costs and currency fluctuations for certain customers in markets where their facilities are located. The principal elements of competition in the bimetallic industry are, in our opinion, pricing, product availability and quality. In order to succeed in the bimetallic industry, we must be competitive in our pricing, product availability and quality. If we fail to do so, we will not be able to compete effectively and will lose market share. In such case we may be forced to reduce our margins to retain or acquire that business, which could decrease our revenues or slow our future revenue growth and lead to a decline in profitability. Further, to the extent that, whether as a result of the increased cost of copper, the relative strength of the Chinese currency, shipping costs or other factors, we are not able to price our products competitively, our ability to sell our products in both the Chinese domestic and the international markets will suffer.

We may not be able to effectively control and manage our growth.

If our business and markets grow and develop it may be necessary for us to finance and manage expansion in an orderly fashion. In addition, we may face challenges in managing expanding product offerings. Such circumstances will increase demands on our existing management and facilities. Failure to manage this growth and expansion could interrupt or adversely affect our operations and cause production backlogs, longer product development time frames and administrative inefficiencies.

Shortages or disruptions in the availability of raw materials could have a material adverse effect on our business.

We expect that raw materials of CCA and scrap copper will continue to account for a significant portion of our cost of goods sold in the future. The prices of raw materials fluctuate because of general economic conditions, global supply and demand and other factors causing monthly variations in the costs of our raw

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materials purchases. The macro-economic factors, together with labor and other business interruptions experienced by certain suppliers, have contributed to periodic shortages in the supply of raw materials, and such shortages may increase in the future. If we are unable to procure adequate supplies of raw material to meet our future production needs and customer demand, shortages could result in a material loss of customers and revenues and adversely impact our results of operations. In addition, supply shortages or disruptions or the loss of suppliers may cause us to procure our raw materials from less cost effective sources and may have a material adverse affect on our business, revenues and results of operations.

We depend on a few suppliers for a significant portion of our principal raw materials and we do not have any long-term supply contracts in excess of one year. Interruptions of production at our key suppliers may affect our results of operations and financial performance.

We rely on a limited number of suppliers for most of the raw materials we use. Interruptions or shortages of supplies from our key suppliers of raw materials could disrupt production or impact our ability to increase production and sales. We do not have long-term or volume purchase agreements in excess of one year with most of our suppliers. Identifying and accessing alternative sources may increase our costs. Interruptions at our key suppliers could negatively impact our results of operations, financial performance and the price of our Common Stock.

Due to increased volatility of raw material prices, the timing lag between the raw material purchase and product pricing can negatively impact our profitability.

Volatility in the prices of raw materials, among other factors, may adversely impact our ability to accurately forecast demand and may have a material adverse impact on our results of operations. We mitigate the impact of changing raw material prices by passing changes in prices to our customers by adjusting prices daily to reflect changes in raw material prices, as is customary in the industry. We may not be able to adjust our product prices rapidly enough in the short-term to recover the costs of increases in raw materials. Our future profitability may be adversely affected to the extent we are unable to pass on higher raw material costs to our customers.

Increases in raw materials prices will increase our need for working capital.

As the prices of raw materials increase, our working capital requirements increase. Increases in our working capital requirements can materially adversely impact our results of operations, our cash flow and our available liquidity to fund other business needs. Furthermore, there is no assurance we would be able to finance additional working capital requirements or finance such working capital requirements on favorable terms. If we were unable to obtain financing on favorable terms, our business and results of operations may be adversely affected. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” below.

Increases in raw materials prices may increase credit and default risk with respect to our customers.

Increases in the price of our products, as raw material prices rise, may place additional demands on the working capital and liquidity needs of our customers. Accordingly, our customers’ cash flow may be negatively impacted which may have an adverse affect on the timing and amount of payment on our accounts receivable, which would in turn, negatively affect our results of operations.

If the CCA industry does not grow or grows at a slower speed than we project, our sales and profitability may be materially adversely affected.

We derive most of our profits from sales of our products in China. The continued development of our business depends, in large part, on continued growth in the bimetallic industry in China. Although China’s CCA industry has grown rapidly in the past, it may not continue to grow at the same growth rate or at all in the future. Any reduced demand for our products, any downturn or other adverse changes in China’s CCA or related industries could severely impact the profitability of our business.

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Potential environmental liability could have a material adverse effect on our operations and financial condition.

As a manufacturer, we are subject to various Chinese environmental laws and regulations on air emission, waste water discharge, solid wastes and noise. Although we believe that our operations are in substantial compliance with current environmental laws and regulations, we may not be able to comply with these regulations at all times as the Chinese environmental legal regime is evolving and becoming more stringent. Therefore, if the Chinese government imposes more stringent regulations in the future, we may have to incur additional and potentially substantial costs and expenses in order to comply with new regulations, which may negatively affect our results of operations. Further, no assurance can be given that all potential environmental liabilities have been identified or properly quantified or that any prior owner, operator, or tenant has not created an environmental condition unknown to us. If we fail to comply with any of the present or future environmental regulations in any material aspects, we may suffer from negative publicity and be subject to claims for damages that may require us to pay substantial fines or have our operations suspended or even be forced to cease operations.

Key employees are essential to growing our business.

Mr. Jianhua Zhu, Ms. Yaying Wang and Mr. Roy Yu, along with Ms. Zhu Junying, Mr. Yin Falong and Mr. Yu Niu are essential to our ability to continue to grow our business. Each of these key employees have established relationships within the industries in which we operate. Each of these employees have agreed to non-solicitation and non-compete restrictions during the course of their employment with us, however, these restrictions only extend for a one year period from termination. Further, we do not maintain, or intend to maintain, key person life insurance for any of our officers or key employees. If any of them were to leave us, our growth strategy might be hindered, which could limit our ability to increase revenue. In addition, we face competition for attracting skilled personnel. If we fail to attract and retain qualified personnel to meet current and future needs, this could slow our ability to grow our business, which could result in a decrease in market share.

In the past several years we have derived a significant portion of our revenues from a small group of customers. If we were to become dependent again upon a few customers, such dependency could negatively impact our business, operating results and financial condition.

Previously, our customer base has been highly concentrated. For the three months ended June 30, 2009 and each of the fiscal years ended December 31, 2006, 2007 and 2008, our five largest customers accounted for 13.7%, 22.5%, 14.5% and 20.2% of our total sales, respectively, and the single largest customer accounted for 3.3%, 5.0%, 3.0% and 6.6% of our total sales, respectively. As our customer base may change from year-to-year, during such years that the customer base is highly concentrated, the loss of, or reduction of our sales to, any of such major customers could have a material adverse effect on our business, operating results and financial condition.

We may need additional financing, which may not be available on satisfactory terms or at all.

Our capital requirements may be accelerated as a result of many factors, including timing of development activities, underestimates of budget items, unanticipated expenses or capital expenditures, future product opportunities with collaborators, future licensing opportunities and future business combinations. Consequently, we may need to seek additional debt or equity financing, which may not be available on favorable terms, if at all, and which may be dilutive to our stockholders.

We may seek to raise additional capital through public or private equity offerings, debt financings or additional corporate collaboration and licensing arrangements. To the extent we raise additional capital by issuing equity securities, our stockholders may experience dilution. To the extent that we raise additional capital by issuing debt securities, we may incur substantial interest obligations, may be required to pledge assets as security for the debt and may be constrained by restrictive financial and/or operational covenants. Debt financing would also be superior to our stockholders’ interest in bankruptcy or liquidation. To the extent we raise additional funds through collaboration and licensing arrangements, it may be necessary to relinquish some rights to our technologies or product candidates, or grant licenses on unfavorable terms.

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If we fail to adequately protect or enforce our intellectual property rights, or to secure rights to patents of others, the value of our intellectual property rights could diminish.

Our success, competitive position and future revenues will depend in part on our ability to obtain and maintain patent protection for our products, methods, processes and other technologies, to preserve our trade secrets, to prevent third parties from infringing on our proprietary rights and to operate without infringing the proprietary rights of third parties.

To date, we have one approved utility model patent and three patent applications filed with the State Intellectual Property Office of the PRC. However, we cannot predict the degree and range of protection patents will afford us against competitors. Third parties may find ways to invalidate or otherwise circumvent our proprietary technology. Third parties may attempt to obtain patents claiming aspects similar to our patent applications. If we need to initiate litigation or administrative proceedings, such actions may be costly whether we win or lose.

Our success also depends on the skills, knowledge and experience of our scientific and technical personnel, consultants, advisors, licensors and contractors. To help protect our proprietary know-how and inventions for which patents may be unobtainable or difficult to obtain, we rely on trade secret protection and confidentiality agreements. If any of our intellectual property is disclosed, our value would be significantly impaired, and our business and competitive position would suffer.

If we infringe the rights of third parties, we could be prevented from selling products, forced to pay damages and compelled to defend against litigation.

If our products, methods, processes and other technologies infringe proprietary rights of other parties, we could incur substantial costs, and may have to obtain licenses (which may not be available on commercially reasonable terms, if at all), redesign our products or processes, stop using the subject matter claimed in the asserted patents, pay damages, or defend litigation or administrative proceedings, which may be costly whether it wins or loses. All of the above could result in a substantial diversion of valuable management resources.

We believe we have taken reasonable steps, including comprehensive internal and external prior patent searches, to ensure we have freedom to operate and that our development and commercialization efforts can be carried out as planned without infringing others’ proprietary rights. However, we cannot guarantee that no third party patent has been filed or will be filed that may contain subject matter of relevance to our development, causing a third party patent holder to claim infringement. Resolving such issues has traditionally resulted, and could in our case result, in lengthy and costly legal proceedings, the outcome of which cannot be predicted accurately.

One shareholder owns a large percentage of our outstanding stock and could significantly influence the outcome of our corporate matters.

Currently, Magnify Wealth beneficially owns approximately 89.4% of our outstanding Common Stock and immediately after the consummation of this Offering, Magnify Wealth will own 58.3% of our outstanding Common Stock. Mr. Zhu, our Chairman and CEO, is the sole director of Magnify Wealth. As the sole director of Magnify Wealth, Mr. Zhu has the sole power to vote the shares of our Common Stock owned by Magnify Wealth, and as a result, is able to exercise significant influence over all matters that require us to obtain shareholder approval, including the election of directors to our board and approval of significant corporate transactions that we may consider, such as a merger or other sale of our company or its assets. Additionally, pursuant to the Share Transfer Agreement, Mr. Zhu has an option that vests over time, the conditions of which have been met as of the date herewith, allowing Mr. Zhu to purchase up to 3,000 shares of Magnify Wealth from Mr. Chu (the “Option Shares”). At such time as Mr. Zhu exercises and acquires, all of the Option Shares, he will own shares representing 81.9% of Magnify Wealth’s issued and outstanding shares. As of February 14, 2009, Mr. Zhu was entitled to acquire 25% of the Option Shares, which equals 750 shares. Once the Option Shares are exercised, Mr. Zhu will then also have a controlling equity interest in Magnify Wealth. This concentration of ownership in our shares by Magnify Wealth will limit your ability to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us.

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If we are unable to maintain appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, and cause investors to lose confidence in our reported financial information.

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud.

As a public company, we have significant additional requirements for enhanced financial reporting and internal controls. We will be required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent registered public accounting firm addressing these assessments. The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company.

We cannot assure you that we will not, in the future, identify areas requiring improvement in our internal control over financial reporting. We cannot assure you that the measures we will take to remediate any areas in need of improvement will be successful or that we will implement and maintain adequate controls over our financial processes and reporting in the future as we continue our growth. If we are unable to establish appropriate internal financial reporting controls and procedures, it could cause us to fail to comply with Sarbanes-Oxley and meet our reporting obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, and cause investors to lose confidence in our reported financial information.

We will incur increased costs as a result of being a public company.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the SEC, have required changes in corporate governance practices of public companies. We expect these new rules and regulations to increase our legal, accounting and financial compliance costs and to make certain corporate activities more time-consuming and costly. In addition, we will incur additional costs associated with our public company reporting requirements. We are currently evaluating and monitoring developments with respect to these new rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

Due to lower profit margins associated with the sale of copper rods, we expect our overall gross profit margin to initially decline.

Our gross margin is affected by our product mix. As a result of significant costs associated with production in our scrap recycling business, copper rod contributes a lower gross profit margin compared to our finished wire products. With the recent launch of this business, we expect that as the sales of the copper rod increases over time, there will be a decline in our gross margin, unless we are able to add additional processing capacity which we may not be able to do.

Risks Associated With Doing Business In China

There are substantial risks associated with doing business in China, as set forth in the following risk factors.

Our operations and assets in China are subject to significant political and economic uncertainties.

Changes in PRC laws and regulations, or their interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion, imports and sources of supply, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on our business, results of operations and financial condition. Under our current leadership, the Chinese government has been pursuing economic reform policies that encourage private economic activity and greater economic decentralization.

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There is no assurance, however, that the Chinese government will continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice.

We derive a substantial portion of our sales from China and a slowdown or other adverse developments in the PRC economy may materially and adversely affect our customers, demand for our services and our business.

Substantially all of our sales are generated from China. We anticipate that sales of our products in China will continue to represent a substantial proportion of our total sales in the near future. Although the PRC economy has grown significantly in recent years, we cannot assure you that such growth will continue. The industry which we are involved in the PRC is relatively new and growing, but we do not know how sensitive we are to a slowdown in economic growth or other adverse changes in the PRC economy which may affect demand for our products. A slowdown in overall economic growth, an economic downturn or recession or other adverse economic developments in the PRC may materially reduce the demand for our products and materially and adversely affect our business.

Currency fluctuations and restrictions on currency exchange may adversely affect our business, including limiting our ability to convert Chinese Renminbi into foreign currencies and, if Chinese Renminbi were to decline in value, reducing our revenue in U.S. dollar terms.

Our reporting currency is the U.S. dollar and our operations in China use their local currency as their functional currencies. Substantially all of our revenue and expenses are in Chinese Renminbi. We are subject to the effects of exchange rate fluctuations with respect to any of these currencies. For example, the value of the Renminbi depends to a large extent on Chinese government policies and China’s domestic and international economic and political developments, as well as supply and demand in the local market. Since 1994, the official exchange rate for the conversion of Renminbi to the U.S. dollar had generally been stable and the Renminbi had appreciated slightly against the U.S. dollar. However, on July 21, 2005, the Chinese government changed its policy of pegging the value of Chinese Renminbi to the U.S. dollar. Under the new policy, Chinese Renminbi may fluctuate within a narrow and managed band against a basket of certain foreign currencies. It is possible that the Chinese government could adopt a more flexible currency policy, which could result in more significant fluctuation of Chinese Renminbi against the U.S. dollar. We can offer no assurance that Chinese Renminbi will be stable against the U.S. dollar or any other foreign currency.

The income statements of our operations are translated into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currencies denominated transactions results in reduced revenue, operating expenses and net income for our international operations. Similarly, to the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency denominated transactions results in increased revenue, operating expenses and net income for our international operations. We are also exposed to foreign exchange rate fluctuations as we convert the financial statements of our foreign subsidiaries into U.S. dollars in consolidation. If there is a change in foreign currency exchange rates, the conversion of the foreign subsidiaries’ financial statements into U.S. dollars will lead to a translation gain or loss which is recorded as a component of other comprehensive income. In addition, we have certain assets and liabilities that are denominated in currencies other than the relevant entity’s functional currency. Changes in the functional currency value of these assets and liabilities create fluctuations that will lead to a transaction gain or loss. We have not entered into agreements or purchased instruments to hedge our exchange rate risks, although we may do so in the future. The availability and effectiveness of any hedging transaction may be limited and we may not be able to successfully hedge our exchange rate risks.

The application of PRC regulations relating to the overseas listing of PRC domestic companies is uncertain, and we may be subject to penalties for failing to request approval of the PRC authorities prior to listing our shares in the U.S.

On August 8, 2006, six PRC government agencies, namely, MOFCOM, SAIC, CSRC, SAFE, the State Assets Supervision and Administration Commission, and the State Administration for Taxation, jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “New M&A Rules”), which became effective on September 8, 2006. The New M&A Rules purport, among other things, to

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require offshore “special purpose vehicles”, that are (1) formed for the purpose of overseas listing of the equity interests of PRC companies via acquisition and (2) are controlled directly or indirectly by PRC companies and/or PRC individuals, to obtain the approval of the CSRC prior to the listing and trading of their securities on overseas stock exchanges. On September 21, 2006, pursuant to the New M&A Rules and other PRC Laws, the CSRC published on its official website relevant guidance with respect to the listing and trading of PRC domestic enterprises’ securities on overseas stock exchanges (the “Related Clarifications”), including a list of application materials regarding the listing on overseas stock exchange by special purpose vehicles. Based on our understanding of current PRC Laws and as advised by our PRC counsel, because (i) the CSRC currently has not issued any definitive rule or official interpretation concerning whether our offering is subject to the New M&A Rules and Related Clarifications; (ii) we were and are not a special purpose vehicle formed or controlled by PRC individuals; and (iii) conversion of Lihua Electron and Lihua Copper from a joint venture to a wholly foreign owned enterprise was and is not subject to the New M&A Rules in accordance with Rule 55 of the New M&A Rules and Guidance Manual on Administration of Entry of Foreign Investment issued by the Department of Foreign Investment Administration of the MOFCOM in December 2008, we were and are not required to obtain the approval of CSRC under the New M&A Rules in connection with this offering.

However, there are substantial uncertainties regarding the interpretation, application and enforcement of these rules, and CSRC has yet to promulgate any written provisions or formally to declare or state whether the overseas listing of a PRC-related company structured similar to ours is subject to the approval of CSRC. Any violation of these rules could result in fines and other penalties on our operations in China, restrictions or limitations on remitting dividends outside of China, and other forms of sanctions that may cause a material and adverse effect to our business, operations and financial conditions.

The new mergers and acquisitions regulations also established additional procedures and requirements that are expected to make merger and acquisition activities by foreign investors more time-consuming and complex, including requirements in some instances that the Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise that owns well-known trademarks or China’s traditional brands. We may grow our business in part by acquiring other businesses. Complying with the requirements of the new mergers and acquisitions regulations in completing this type of transactions could be time-consuming, and any required approval processes, including CSRC approval, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

We have granted stock options to one of our directors who is a PRC citizen and, our CEO, Mr. Zhu, has options to purchase shares in our majority shareholder, Magnify Wealth, which may require registration with SAFE. We may also face regulatory uncertainties that could restrict our ability to issue equity compensation to our directors and employees and other parties who are PRC citizens or residents under PRC law.

On April 6, 2007, SAFE issued the “Operating Procedures for Administration of Domestic Individuals Participating in the Employee Stock Ownership Plan or Stock Option Plan of An Overseas Listed Company, also know as “Circular 78.” It is not clear whether Circular 78 covers all forms of equity compensation plans or only those which provide for the granting of stock options. Further, it is also not clear whether Circular 78 would require SAFE approval for stock options in Magnify Wealth that are granted to Mr. Zhu. For any equity compensation plan which is so covered and is adopted by a non-PRC listed company after April 6, 2007, Circular 78 requires all participants who are PRC citizens to register with and obtain approvals from SAFE prior to their participation in the plan. In addition, Circular 78 also requires PRC citizens to register with SAFE and make the necessary applications and filings if they participated in an overseas listed company’s covered equity compensation plan prior to April 6, 2007. We have adopted an equity compensation plan and have begun to make option grants to some of our directors, one of which is a PRC citizen. Circular 78 may require PRC citizens who receive option grants to register with SAFE. We believe that the registration and approval requirements contemplated in Circular 78 will be burdensome and time consuming. If it is determined that any of our equity compensation plans, or the option grant from Magnify Wealth to Mr. Zhu are subject to Circular 78, failure to comply with such provisions may subject us and recipients of such options to fines and legal sanctions and prevent us from being able to grant equity compensation to our PRC

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employees. In that case, our ability to compensate our employees and directors through equity compensation would be hindered and our business operations may be adversely affected.

PRC SAFE Regulations regarding offshore financing activities by PRC residents have undertaken continuous changes which may increase the administrative burden we face and create regulatory uncertainties that could adversely affect our business.

Recent regulations promulgated by SAFE, regarding offshore financing activities by PRC residents have undergone a number of changes which may increase the administrative burden we face. The failure by our stockholders and affiliates who are PRC residents, including Mr. Zhu, who has sole voting power with respect to all shares held by our majority shareholder, Magnify Wealth, to make any required applications and filings pursuant to such regulations may prevent us from being able to distribute profits and could expose us and our PRC resident stockholders to liability under PRC law.

In 2005, SAFE promulgated regulations in the form of public notices, which require registrations with, and approval from, SAFE on direct or indirect offshore investment activities by PRC resident individuals. The SAFE regulations require that if an offshore company directly or indirectly formed by or controlled by PRC resident individuals, known as “SPC,” intends to acquire a PRC company, such acquisition will be subject to strict examination by the SAFE. Without registration, the PRC entity cannot remit any of its profits out of the PRC as dividends or otherwise. This could have a material adverse effect on us given that we expect to be a publicly listed company in the U.S.

Because our principal assets are located outside of the United States and with the exception of one director, our directors and all our officers reside outside of the United States, it may be difficult for you to enforce your rights based on the United States Federal securities laws against us and our officers and directors in the United States or to enforce judgments of United States courts against us or them in the PRC.

With the exception of one director, all of our officers and directors reside outside of the United States. In addition, our operating subsidiaries are located in the PRC and all of their assets are located outside of the United States. China does not have a treaty with United States providing for the reciprocal recognition and enforcement of judgments of courts. It may therefore be difficult for investors in the United States to enforce their legal rights based on the civil liability provisions of the United States Federal securities laws against us in the courts of either the United States or the PRC and, even if civil judgments are obtained in courts of the United States, to enforce such judgments in PRC courts. Further, it is unclear if extradition treaties now in effect between the United States and the PRC would permit effective enforcement against us or our officers and directors of criminal penalties, under the United States Federal securities laws or otherwise.

We may have limited legal recourse under PRC law if disputes arise under our contracts with third parties.

The Chinese government has enacted some laws and regulations dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, their experience in implementing, interpreting and enforcing these laws and regulations is limited, and our ability to enforce commercial claims or to resolve commercial disputes is unpredictable. If our new business ventures are unsuccessful, or other adverse circumstances arise from these transactions, we face the risk that the parties to these ventures may seek ways to terminate the transactions, or, may hinder or prevent us from accessing important information regarding the financial and business operations of these acquired companies. The resolution of these matters may be subject to the exercise of considerable discretion by agencies of the Chinese government, and forces unrelated to the legal merits of a particular matter or dispute may influence their determination. Any rights we may have to specific performance, or to seek an injunction under PRC law, in either of these cases, are severely limited, and without a means of recourse by virtue of the Chinese legal system, we may be unable to prevent these situations from occurring. The occurrence of any such events could have a material adverse effect on our business, financial condition and results of operations. Although legislation in China over the past 30 years has significantly improved the protection afforded to various forms of foreign investment and contractual arrangements in China, these laws, regulations and legal requirements are relatively new and their interpretation and enforcement involve uncertainties, which could limit the legal protection available to us, and foreign investors, including you. The inability to enforce or obtain a remedy under any of our future agreements could result in a significant loss of business, business opportunities or capital and could have a material adverse impact on our operations.

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We must comply with the Foreign Corrupt Practices Act.

We are required to comply with the United States Foreign Corrupt Practices Act, which prohibits U.S. companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some of our competitors, are not subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in mainland China. If our competitors engage in these practices, they may receive preferential treatment from personnel of some companies, giving our competitors an advantage in securing business or from government officials who might give them priority in obtaining new licenses, which would put us at a disadvantage. Although we inform our personnel that such practices are illegal, we can not assure you that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties.

Due to various restrictions under PRC laws on the distribution of dividends by our PRC Operating Companies, we may not be able to pay dividends to our stockholders.

The Wholly-Foreign Owned Enterprise Law (1986), as amended and The Wholly-Foreign Owned Enterprise Law Implementing Rules (1990), as amended and the Company Law of the PRC (2006) contain the principal regulations governing dividend distributions by wholly foreign owned enterprises. Under these regulations, wholly foreign owned enterprises, such as Lihua Electron and Lihua Copper, may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Additionally, Lihua Electron and Lihua Copper are required to set aside a certain amount of their accumulated profits each year, if any, to fund certain reserve funds. These reserves are not distributable as cash dividends except in the event of liquidation and cannot be used for working capital purposes. The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. We may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from the profits of Lihua Electron and Lihua Copper.

Furthermore, if our subsidiaries in China incur debt on their own in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments. If we or our subsidiaries are unable to receive all of the revenues from our operations through these contractual or dividend arrangements, we may be unable to pay dividends on our Common Stock.

Changes in foreign exchange regulations in the PRC may affect our ability to pay dividends in foreign currency or conduct other foreign exchange business.

We receive substantially all of our revenues in Renminbi, the Chinese currency, which is currently not a freely convertible currency. The restrictions on currency exchanges may limit our ability to use revenues generated in RMB to make dividends or other payments in United States dollars. The PRC government strictly regulates conversion of RMB into foreign currencies. Over the years, foreign exchange regulations in the PRC have significantly reduced the government’s control over routine foreign exchange transactions under current accounts. In the PRC, SAFE regulates the conversion of the RMB into foreign currencies. Pursuant to applicable PRC laws and regulations, foreign invested enterprises incorporated in the PRC are required to apply for “Foreign Exchange Registration Certificates.” Currently, conversion within the scope of the “current account” (e.g. remittance of foreign currencies for payment of dividends, etc.) can be effected without requiring the approval of SAFE. However, conversion of currency in the “capital account” (e.g. for capital items such as direct investments, loans, securities, etc.) still requires the approval of SAFE. In addition, failure to obtain approval from SAFE for currency conversion on the capital account may adversely impact our capital expenditure plans and our ability to expand in accordance with our desired objectives.

The PRC government also may at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining foreign currency, we may be unable to pay dividends or meet obligations that may be incurred in the future that require payment in foreign currency.

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The Chinese government exerts substantial influence over the manner in which we must conduct our business activities.

We are dependent on our relationship with the local government in the province in which we operate our business. Chinese government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, environmental regulations, land use rights, property and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of these jurisdictions may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations. Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties.

Future inflation in China may inhibit our ability to conduct business in China. In recent years, the Chinese economy has experienced periods of rapid expansion and high rates of inflation. Rapid economic growth can lead to growth in the money supply and rising inflation. If prices for our products rise at a rate that is insufficient to compensate for the rise in the costs of supplies, it may have an adverse effect on profitability. These factors have led to the adoption by Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation may in the future cause Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products.

We may have difficulty establishing adequate management, legal and financial controls in the PRC.

The PRC historically has been deficient in Western style management and financial reporting concepts and practices, as well as in modern banking, and other control systems. We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC. As a result of these factors, and especially given that we expect to be a publicly listed company in the U.S. and subject to regulation as such, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet Western standards. We may have difficulty establishing adequate management, legal and financial controls in the PRC. Therefore, we may, in turn, experience difficulties in implementing and maintaining adequate internal controls as required under Section 404 of the Sarbanes-Oxley Act of 2002 and other applicable laws, rules and regulations. This may result in significant deficiencies or material weaknesses in our internal controls which could impact the reliability of our financial statements and prevent us from complying with SEC rules and regulations and the requirements of the Sarbanes-Oxley Act of 2002. Any such deficiencies, weaknesses or lack of compliance could have a materially adverse effect on our business and the public announcement of such deficiencies could adversely impact our stock price.

It may be difficult to protect and enforce our intellectual property rights under PRC law.

Intellectual property rights in China are still developing, and there are uncertainties involved in the protection and the enforcement of such rights. We will need to pay special attention to protecting our intellectual property and trade secrets. Failure to do so could lead to the loss of a competitive advantage that could not be compensated by our damages award.

Under PRC law, we are required to obtain permits and business licenses, and our failure to do so would adversely impact our ability to conduct business in China.

We hold various permits, business licenses, and approvals authorizing their operations and activities, which are subject to periodic review and reassessment by the Chinese authorities. Standards of compliance necessary to pass such reviews change from time to time and differ from jurisdiction to jurisdiction, leading to a degree of uncertainty. If renewals, or new permits, business licenses or approvals required in connection

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with existing or new facilities or activities, are not granted or are delayed, or if existing permits, business licenses or approvals are revoked or substantially modified, we will suffer a material adverse effect. If new standards are applied to renewals or new applications, it could prove costly to us to meet any new level of compliance.

If our land use rights are revoked, we would have no operational capabilities.

Under Chinese law land is owned by the state or rural collective economic organizations. The state issues to tenants the rights to use property. Use rights can be revoked and the tenants forced to vacate at any time when redevelopment of the land is in the public interest. The public interest rationale is interpreted quite broadly and the process of land appropriation may be less than transparent. Each of our two operating subsidiaries rely on these land use rights as the cornerstone of their operations, and the loss of such rights would have a material adverse effect on our company.

Because we may not be able to obtain business insurance in the PRC, we may not be protected from risks that are customarily covered by insurance in the United States.

Business insurance is not readily available in the PRC. To the extent that we suffer a loss of a type which would normally be covered by insurance in the United States, such as product liability and general liability insurance, we would incur significant expenses in both defending any action and in paying any claims that result from a settlement or judgment.

We are subject to the environmental protection law of China.

Our manufacturing process may produce by-products such as effluent, gases and noise, which are harmful to the environment. We are subject to multiple laws governing environmental protection, such as “The Law on Environmental Protection in the PRC” and “The Law on Prevention of Effluent Pollution in the PRC,” as well as standards set by the relevant governmental authorities determining the classification of different wastes and proper disposal. We have properly attained a waste disposal permit for our manufacturing facility, which details the types and concentration of effluents and gases allowed for disposal.

China is experiencing substantial problems with environmental pollution. Accordingly, it is likely that the national, provincial and local governmental agencies will adopt stricter pollution controls. There can be no assurance that future changes in environmental laws and regulations will not impose costly compliance requirements on us or otherwise subject us to future liabilities. Our profitability may be adversely affected if additional or modified environmental control regulations are imposed upon us.

Any recurrence of severe acute respiratory syndrome, or SARS, or another widespread public health problem, could adversely affect our operations.

A renewed outbreak of SARS or another widespread public health problem in the PRC, where all of our revenue is derived, could have an adverse effect on our operations. Our operations may be impacted by a number of health-related factors, including quarantines or closures of some of our offices that could leave us without many employees to conduct our business which would materially and adversely affect our operations and financial condition.

Risks Related to our Securities

The market price for our securities may be subject to wide fluctuations and our securities may trade below the initial public offering price.

The initial public offering price of our Common Stock will be determined by negotiations between us and representatives of the underwriters, based on numerous factors we discuss under “Underwriting.” This price may not be indicative of the market price of our Common Stock after this Offering. We cannot assure you that you will be able to resell your Common Stock at or above the initial public offering price or our net asset value. The securities of a number of Chinese companies and companies with substantial operations in China have also experienced wide fluctuations subsequent to their initial public offerings, including trading at prices substantially below the initial public offering prices. Among the factors that could affect the price of our Common Stock are risk factors described in this section and other factors, including:

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announcements of competitive developments, by our competitors;
regulatory developments of our industry affecting us, our customers or our competitors;
actual or anticipated fluctuations in our quarterly operating results;
failure of our quarterly financial and operating results to meet market expectations or failure to meet our previously announced guidance, if any;
changes in financial estimates by securities research analysts;
changes in the economic performance or market valuations of our competitors;
additions or departures of our executive officers and other key personnel;
announcements regarding intellectual property litigation (or potential litigation) involving us or any of our directors and officers;
fluctuations in the exchange rates between the U.S. dollar and the Renminbi; and
release or expiration of the underwriters’ post-offering lock-up or other transfer restrictions on our outstanding Common Stock.

In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular industries or companies. For example, the capital and credit markets have been experiencing volatility and disruption for more than 12 months. Starting in September 2008, the volatility and disruption have reached extreme levels, developing into a global crisis. As a result, stock prices of a broad range of companies worldwide, whether or not they are related to financial services, have declined significantly. These market fluctuations may also have a material adverse effect on the market price of our securities.

We have never paid cash dividends and are not likely to do so in the foreseeable future.

We have never declared or paid any cash dividends on our Common Stock. We currently intend to retain any future earnings for use in the operation and expansion of our business. We do not expect to pay any cash dividends in the foreseeable future but will review this policy as circumstances dictate.

We have considerable discretion in the use of proceeds from this Offering and we may use these proceeds in ways with which you may not agree.

We intend to use the net proceeds from this Offering for general corporate purposes, including capital expenditures and funding possible future acquisitions. We have not allocated the net proceeds of this Offering to any particular project or acquisition. Rather, our board of directors and our management will have considerable discretion in the application of the net proceeds received by us. You will not have the opportunity, as part of your investment decision, to assess whether proceeds are being used appropriately. You must rely on the judgment of our board of directors and our management regarding the application of the net proceeds of this Offering. The net proceeds may be used for corporate purposes that do not improve our efforts to maintain profitability or increase the price of our securities. The net proceeds from this Offering may be placed in investments that do not produce income or that lose value.

You will experience immediate and substantial dilution in the net tangible book value of your investment and may experience further dilution in the future.

The offering price per share of Common Stock in this Offering is substantially higher than the net tangible book value per share of our outstanding Common Stock prior to this Offering. Consequently, when you purchase our Common Stock in this Offering at an offering price of $4, you will incur immediate dilution of $1.30 per share.

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We may need additional capital and may sell additional securities or other equity securities or incur indebtedness, which could result in additional dilution to our shareholders or increase our debt service obligations.

We may require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our cash resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities or equity-linked debt securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.

Substantial future sales of our securities in the public market, or the perception that these sales could occur, could cause the price of our securities to decline.

Additional sales of our securities in the public market after this Offering, or the perception that these sales could occur, could cause the market price of our securities to decline. Upon completion of this Offering, we will have 23,791,706 million shares of our Common Stock outstanding. Of that amount, approximately 5,991,706 shares of our Common Stock were issued upon the automatic conversion of most, but not all of our outstanding Preferred Stock and are freely transferable without restriction upon resale, and 20,991,706 shares of Common Stock outstanding after this Offering will be available for sale upon the expiration of varying lock-up periods beginning from the date of this prospectus, subject to volume and other restrictions as applicable under Rule 144 under the Securities Act. (See “Shares Eligible For Future Resale”). All securities sold in this Offering will be freely transferable without restriction under the Securities Act. Any or all of these shares may be released prior to expiration of the lock-up period at the discretion of the lead underwriters for this Offering. In addition, we may grant or sell additional options, restricted shares or other share-based awards in the future under our share incentive plan to our management, employees and other persons, the settlement and sale of which may further dilute our shares and drive down the price of our securities.

As of August 17, 2009 we had stock options outstanding to purchase an aggregate of 60,000 shares of our Common Stock, of which 15,000 are currently exercisable and warrants to purchase 2,000,000 shares of Common Stock. To the extent that the options and warrants are exercised, they may be exercised at prices below the price of our shares of Common Stock on the public market, resulting in a significant number of shares entering the public market and the dilution of our securities.

The possible return of shares to Magnify Wealth pending our achievement of the performance thresholds under the Escrow Agreement in the October 2008 private placement would result in a non-cash compensation expense of $15,409,091 which will have a negative impact on our Statement of Income for 2009.

Under the Escrow Agreement with the holders of the Series A Convertible Preferred Stock, if we meet the 2008 and 2009 Performance Thresholds, the Escrow Shares will be returned to Magnify Wealth and will result in a non-cash compensation expense of $15,409,091 in fiscal year 2009. We targeted $12 million in net income and $0.50 earnings per share for the fiscal year 2008 (the “2008 Performance Threshold”). For the year ended December 31, 2008, the Company’s net income was $11,701,879 which achieved 95% of the 2008 performance threshold. Because we achieved at least 95% of the 2008 Performance Threshold the Escrow Shares are continuing to be held in escrow pending the results of the 2009 Performance Threshold, which is $18 million in audited net income and $0.76 earnings per share. Because Magnify Wealth is our controlling stockholder and the return of these shares is conditioned upon our operating performance, the shares are deemed to be compensation to Magnify Wealth and under applicable accounting rules, we will have to record a non-cash charge to our earnings for the fiscal year 2009. The charges to our earnings as a result of the release of the Escrow Shares will have a negative impact on our consolidated statements of income for the fiscal year ended December 31, 2009, by reducing net income and our earnings per share.

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NASDAQ may delist our securities from quotation on its exchange which could limit investors’ ability to make transactions in our securities and subject us to additional trading restrictions.

Our Common Stock has been approved for listing on NASDAQ, a national securities exchange. We cannot assure you that our securities will meet the continued listing requirements be listed on NASDAQ in the future.

If NASDAQ delists our Common Stock from trading on its exchange, we could face significant material adverse consequences including:

a limited availability of market quotations for our securities;
a determination that our Common Stock is a “penny stock” which will require brokers trading in our Common Stock to adhere to more stringent rules and possibly resulting in a reduced level of trading activity in the secondary trading market for our Common Stock;
a limited amount of news and analyst coverage for our company; and
a decreased ability to issue additional securities or obtain additional financing in the future.

If our shares of Common Stock become subject to the SEC’s penny stock rules, broker-dealers may experience difficulty in completing customer transactions and trading activity in our securities may be adversely affected.

If at any time we have net tangible assets of $5,000,000 or less and our shares of Common Stock have a market price per share of less than $5.00, transactions in our Common Stock may be subject to the “penny stock” rules promulgated under the Securities Exchange Act of 1934. Under these rules, broker-dealers who recommend such securities to persons other than institutional accredited investors must:

make a special written suitability determination for the purchaser;
receive the purchaser’s written agreement to the transaction prior to sale;
provide the purchaser with risk disclosure documents which identify certain risks associated with investing in “penny stocks” and which describe the market for these “penny stocks” as well as a purchaser’s legal remedies; and
obtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has actually received the required risk disclosure document before a transaction in a “penny stock” can be completed.

If our Common Stock become subject to these rules, broker-dealers may find it difficult to effectuate customer transactions and trading activity in our securities may be adversely affected. As a result, the market price of our securities may be depressed, and you may find it more difficult to sell our securities.

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve substantial risks and uncertainties. These include statements about our expectations, beliefs, intentions or strategies for the future, which are indicated by words or phrases such as “anticipate,” “expect,” “intend,” “plan,” “will,” “we believe,” “management believes” and similar words or phrases. The forward-looking statements are based on our current expectations and are subject to certain risks, uncertainties and assumptions. Our actual results could differ materially from results anticipated in these forward-looking statements. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements.

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USE OF PROCEEDS

We estimate that the net proceeds from the sale of the 2,300,000 shares Common Stock in the Offering will be approximately $7,946,224, based on an initial public offering price of $4.00 per share and after deducting the underwriting discounts and commissions and estimated Offering expenses. We will not receive any proceeds from the sale of any Common Stock by the Selling Stockholder, if any, pursuant to the over-allotment option.

We intend to use the net proceeds from the offering for working capital and general corporate purposes. Additionally, we may choose to expand our business through the capital expenditure plan we have in place to maintain existing machinery and to purchase additional manufacturing equipment for our new production facility.

The amounts and timing of our actual expenditures will depend on numerous factors, including the status of our development efforts, sales and marketing activities, the amount of cash generated or used by our operations. We may find it necessary or advisable to use portions of the proceeds for other purposes, and we will have broad discretion in the application of the net proceeds. Additionally, we may choose to expand our current business through acquisition of other complimentary businesses, products or technologies, using cash or shares. However, we have not entered into any negotiations, agreements or commitments with respect to any such acquisitions at this time. Pending these uses, the proceeds will be invested in short-term, investment grade, interest-bearing securities.

DIVIDEND POLICY

We have never paid any dividends and we plan to retain earnings, if any, for use in the development of the business. Payment of future dividends, if any, will be at the discretion of the Board of Directors after taking into account various factors, including current financial condition, operating results, current and anticipated cash needs and regulations governing dividend distributions by wholly foreign owned enterprises in China.

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CAPITALIZATION

The following table summarizes our capitalization as of June 30, 2009, on an actual basis and as adjusted basis to reflect our receipt of estimated net proceeds from the sale of 2,300,000 shares of Common Stock (excluding the 300,000 shares of Common Stock which the underwriters have the option to purchase to cover over-allotments, if any) in this offering at a public offering price of $4.00 per share, and after deducting estimated underwriting discounts and commissions and estimated offering expenses of approximately $1,253,776.

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

   
  As of June 30, 2009
     Actual   As adjusted
Cash and cash equivalents     28,144,454       36,090,678  
Preferred stock, $0.0001 par, 10,000,000 shares authorized actual and as adjusted, 6,818,182 and 326,476 shares issued and outstanding actual and as adjusted     13,116,628       628,066  
Common Stock, $0.0001 par, 75,000,000 shares authorized actual and as adjusted, 15,000,000 and 23,791,706 issued and outstanding actual and as adjusted     1,500       2,379  
Additional paid-in capital     7,474,191       27,908,098  
Statutory reserves     2,603,444       2,603,444  
Retained earnings     30,538,879       30,538,879  
Accumulated other comprehensive income     2,591,298       2,591,298  
Total shareholders’ equity     43,209,312       63,644,098  
Total capitalization     56,325,940       64,272,164  

The table above includes the automatic conversion of 6,491,706 shares of Preferred Stock to Common Stock.

The table above excludes the following shares:

60,000 shares of Common Stock issuable upon the exercise of options outstanding at June 30, 2009 with a weighted average exercise price of $2.20 per share;
326,476 shares of Common Stock issuable upon the conversion of Preferred Stock owned by a certain investor, as such investor’s ownership of our Common Stock would have exceeded the cap of 9.9% if such 326,476 shares of Preferred Stock were to be converted to Common Stock. According to the terms of our Preferred Stock, holders of our Preferred Stock are restricted from converting to Common Stock if the number of shares of Common Stock to be issued pursuant to such Conversion would cause the number of shares of Common Stock owned by such holder and its affiliates at such time to equal or exceed 9.9% of our then issued and outstanding shares of Common Stock;
2,000,000 shares of Common Stock issuable upon the exercise of warrants outstanding at June 30, 2009 with a weighted average exercise price of $3.50 per share; and
1,440,000 additional shares of Common Stock reserved for issuance under our 2009 Omnibus Securities and Incentive Plan.

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MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

There is no established public trading market in our securities. Our securities are not listed for trading on any national securities exchange or over-the-counter quotation service. We have been approved to have our Common Stock listed on the NASDAQ stock exchange.

Equity Compensation Plan Information

On April 14, 2009, the Company adopted the Lihua International, Inc. 2009 Omnibus Securities and Incentive Plan (the “Plan”). The Plan includes: Distribution Equivalent Rights, Options, Performance Share Awards, Performance Unit Awards, Restricted Stock Awards, Restricted Stock Unit Awards, Stock Appreciation Rights, Tandem Stock Appreciation Rights, Unrestricted Stock Awards or any combination of the foregoing.

The aggregate number of shares of Common Stock that may be reserved for issuance under the Plan shall not exceed ten percent (10%) of the aggregate number of shares of the Common Stock which are issued and outstanding. Currently, the aggregate amount of shares of Common Stock that may be reserved for issuance under the Plan is 1.5 million shares.

Concurrently with the adoption of the Plan, we granted non-qualified stock options to purchase up to 60,000 shares of our Common Stock in the aggregate to Messrs. Bruce, Serbin and Liu, our newly appointed independent directors. The exercise is $2.20 and such options shall vest quarterly at the end of each such three month period, in equal installments over the 12 month period from date of grant. The Compensation Committee of the Board of Directors approved such grant.

DETERMINATION OF OFFERING PRICE

The representative has advised us that the underwriters propose to offer the Common Stock directly to the public at the public offering price that appears on the cover page of this prospectus. In addition, the representative may offer some of the Common Stock to other securities dealers at such price less a concession of $0.168 per share. The underwriters may also allow, and such dealers may reallow, a concession not in excess of $0.05 per share to other dealers. After the Common Stock is released for sale to the public, the representatives may change the offering price and other selling terms at various times.

Prior to this Offering, there was no public market for any of our securities. The public offering price of our Common Stock was determined by negotiation between us and the underwriters. The principal factors considered in determining the public offering price of the Common Stock included:

the information in this prospectus and otherwise available to the underwriters;
the history and the prospects for the industry in which we compete;
the ability of our management;
the prospects for our future earnings;
the present state of our development and our current financial condition;
the general condition of the economy and the securities markets in the United States at the time of this Offering;
the recent market prices of, and the demand for, publicly-traded securities of generally comparable companies; and
other factors as were deemed relevant.

We cannot be sure that the public offering price will correspond to the price at which our Common Stock will trade in the public market following this Offering or that an active trading market for our Common Stock will develop or continue after this Offering.

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DILUTION

If you invest in our securities, your investment will be diluted immediately to the extent of the difference between the public offering price per share of Common Stock you pay in this Offering, and the pro forma net tangible book value per share of Common Stock immediately after this Offering.

Pro forma net tangible book value represents the amount of our total tangible assets reduced by our total liabilities, after giving effect to the conversion of 6,491,706 shares of Preferred Stock. Tangible assets equal our total assets less goodwill and intangible assets. Pro forma net tangible book value per share represents our pro forma net tangible book value divided by the number of shares of common stock outstanding after giving effect to the conversion of 6,491,706 shares of Preferred Stock. As of June 30, 2009, our pro forma net tangible book value was $56.3 million and our pro forma net tangible book value per share was $2.62.

After giving effect to the sale of 2,300,000 shares of common stock in the offering at a public offering price of $4.00 per share, and after deducting the underwriting discount and commission and estimated Offering expenses, our adjusted pro forma net tangible book value as of June 30, 2009 would have been $64.3 million, or $2.70 per share. This represents an immediate increase in pro forma net tangible book value of $0.08 per share to existing stockholders and immediate dilution of $1.30 per share to new investors purchasing shares in the Offering.

The following table illustrates this per share dilution:

   
  As of June 30,
2009
  As Adjusted
Public offering price per share            $ 4.00  
Pro forma net tangible book value per share as of June 30, 2009   $ 2.62           
Increase in pro forma net tangible book value per share attributable to new investors     0.08        
Adjusted pro forma net tangible book value per share after the Offering           2.70  
Dilution in net tangible book value per share to new investors         $ 1.30  

The information above is as of June 30, 2009 and excludes the following:

60,000 shares of Common Stock issuable upon the exercise of options outstanding at June 30, 2009 with a weighted average exercise price of $2.20 per share;
326,476 shares of Common Stock issuable upon the conversion of Preferred Stock owned by a certain investor, as such investor’s ownership of our Common Stock would have exceeded the cap of 9.9% if such 326,476 shares of Preferred Stock were to be converted to Common Stock. According to the terms of our Preferred Stock, holders of our Preferred Stock are restricted from converting to Common Stock if the number of shares of Common Stock to be issued pursuant to such Conversion would cause the number of shares of Common Stock owned by such holder and its affiliates at such time to equal or exceed 9.9% of our then issued and outstanding shares of Common Stock;
2,000,000 shares of Common Stock issuable upon the exercise of warrants outstanding at June 30, 2009 with a weighted average exercise price of $3.50 per share; and
1,440,000 additional shares of Common Stock reserved for issuance under our 2009 Omnibus Securities and Incentive Plan.

Our adjusted pro forma net tangible book value after the offering, and the dilution to new investors in the offering, will change from the amounts shown above if the underwriters’ over-allotment option is exercised.

A $1.00 increase or decrease in the assumed public offering price per share would increase or decrease our adjusted pro forma net tangible book value per share after this Offering by approximately $0.08, and dilution per share to new investors by approximately $0.92, after deducting the underwriting discount and estimated offering expenses payable by us.

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EXCHANGE RATE INFORMATION

Our business is conducted in China and all of our revenue and the majority of our expenses are denominated in Renminbi. This prospectus contains translations of Renminbi amounts into U.S. dollars at specified rates. Unless otherwise noted, all translations from Renminbi to U.S. dollar amounts were made at the noon buying rate in the City of New York for cable transfers of Renminbi as certified for customs purposes by the Federal Reserve Bank of New York, as of December 31, 2008, which was RMB 6.8346 to $1.00. We make no representation that the Renminbi or U.S. dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all.

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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

The following selected consolidated statement of income data for the two years ended December 31, 2007 and 2008 and the selected consolidated balance sheet data (other than percentage of sales data) as of December 31, 2007 and 2008 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statement of income data for the year ended December 31, 2006 and consolidated balance sheet data as of December 31, 2006 of the Ally Profit Companies presented below have been derived from Ally Profit’s audited consolidated financial statements that are included elsewhere in this prospectus. The audited consolidated financial statements have been prepared in accordance with U.S. GAAP, and have been audited by AGCA, Inc. (f/k/a Yu and Associates), an independent registered public accounting firm. The consolidated statement of income data for the three months ended June 30, 2009 and 2008 and the consolidated balance sheet data as of June 30, 2009 have been derived from our unaudited condensed consolidated financial statements that are included elsewhere in this prospectus.

Our historical results for any period are not necessarily indicative of results to be expected for any future period. You should read the following selected financial information in conjunction with the consolidated financial statements and related notes and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

                   
                   
 
  
  
Three Months Ended June 30,
 
  
  
Year Ended December 31,
  Ally Profit Investments
Limited and
Subsidiaries
Year Ended
December 31, 2006
     2009   2008   2008   2007
     US$   % of
Sales
  US$   % of
Sales
  US$   % of
Sales
  US$   % of
Sales
  US$   % of
Sales
          (in thousands, except for percentages)     
Consolidated Statement of Income Data:
                                                                                         
Sales     48,827       100.0 %      15,038       100.0 %      50,006       100.0 %      32,676       100.0 %      15,750       100.0 % 
Cost of sales     (39,096 )      (80.1 )%      (10,328 )      (68.7 )%      (33,202 )      (66.4 )%      (22,910 )      (70.1 )%      (10,649 )      (67.6 )% 
Gross profit     9,731       19.9 %      4,710       31.3 %      16,804       33.6 %      9,766       29.9 %      5,101       32.4 % 
Selling expenses     (587 )      (1.2 )%      (172 )      (1.1 )%      (700 )      (1.4 )%      (417 )      (1.3 )%      (230 )      (1.5 )% 
General & Administrative expenses     (1,093 )      (2.2 )%      (403 )      (2.7 )%      (1,907 )      (3.8 )%      (455 )      (1.4 )%      (336 )      (2.1 )% 
Income from operations     8,051       16.5 %      4,135       27.5 %      14,197       28.4 %      8,894       27.2 %      4,535       28.8 % 
Other income (expenses):
                                                                                         
Interest income     47       .01 %      8       0.05 %      68       0.1 %      16       0.05 %      4       0.03 % 
Interest expenses     (106 )      (0.2 )%      (106 )      (0.7 )%      (515 )      (1.0 )%      (97 )      (0.3 )%      (43 )      (0.3 )% 
Merger cost                             (259 )      (0.5 )%                         
Change in fair value of warrants     (216 )      (0.4 )%                                                                   
Other income     501       1.0 %      (6 )      (0.04 )%      4       0.01 %                  3       0.02 % 
Total other income (expenses)     226       0.5 %      (104 )      (0.7 )%      (702 )      (1.4 )%      (81 )      (0.25 )%      (36 )      (0.23 )% 
Income before income taxes     8,277       17.0 %      4,030       26.8 %      13,495       27.0 %      8,813       27.0 %      4,499       28.6 % 
Provision for income tax     (1,572 )      (3.2 )%      (528 )      (3.5 )%      (1,793 )      (3.6 )%      (1,089 )      (3.3 )%             
Net income     6,705       13.7 %      3,501       23.3 %    $ 11,702       23.4 %      7,724       23.6 %      4,499       28.6 % 
Earnings per share
                                                                                         
– Basic     0.45                0.25              $ 0.75                0.55                          
– Diluted     0.31                0.25              $ 0.70                0.55                          

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  Three Months Ended June 30,
 
  
  
Year Ended December 31,
  Ally Profit Investments
Limited and
Subsidiaries
Year Ended
December 31, 2006
     2009   2008   2008   2007
     US$   % of
Sales
  US$   % of
Sales
  US$   % of
Sales
  US$   % of
Sales
  US$   % of
Sales
          (in thousands, except for percentages and operating data)     
Other Consolidated Financial Data:
                                                                                         
Gross profit margin           19.9 %            31.3 %            33.6 %            29.9 %            32.4 % 
Operating profit margin           16.5 %            27.5 %            28.4 %            27.2 %            28.8 % 
Net profit margin           13.7 %            23.3 %            23.4 %            23.6 %            28.6 % 
Consolidated Operating Data:
                                                                                         
Shipment volume (tons)     8,415             1,701             5,966             4,065             2,009        
Average selling price ($ per ton)     5,802             8,841             8,382             8,039             7,840        
Labor cost per employee on average     774.69             429.79             1,760.90             1,378.12             1,063.08        

       
  Three Months
Ended June 30,
2009
 
  
  
  
  
Year Ended December 31,
  Ally Profit
Investments
Limited and
Subsidiaries
Year Ended
December 31, 2006
     2008   2007
     US$   US$   US$   US$
     (in thousands)
Consolidated Balance Sheet Data:
                                   
Cash and cash equivalents     28,144       26,042       3,214       890  
Total assets     70,622       56,813       30,075       9,433  
Secured short-term bank loans     4,391       6,145       4,107        
Total liabilities     14,296       9,021       10,992       3,534  
Total shareholders’ equity     43,209       34,675       19,082       5,899  
Total liabilities and shareholders’ equity     70,622       56,813       30,075       9,433  

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

DISCLAIMER REGARDING FORWARD-LOOKING STATEMENTS

Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors, Cautionary Notice Regarding Forward-Looking Statements and Business sections in this registration statement. We use terms such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements. The following discussion of the financial condition and results of operation of the Company for the six months ended June 30, 2009 and the fiscal years ended December 31, 2006, 2007 and 2008, should be read in conjunction with the selected financial data, the financial statements and the notes to those statements that are included elsewhere in this registration statement. The discussion of the results of operations below which include the year ended December 31, 2006 are of the Ally Profit Companies and have been derived from Ally Profit’s audited consolidated financial statements that are included elsewhere in this prospectus. Ally Profit is deemed to be the accounting acquirer in the Share Exchange transaction consummated as of October 31, 2008, which is further described in the section, “OUR HISTORY AND CORPORATE STRUCTURE” below in this prospectus. The Share Exchange has been accounted for as a reverse acquisition using the purchase method of accounting, so that our financial statements before the date of Share Exchange are those of Ally Profit with the results of Lihua International being consolidated from the date of Share Exchange and the equity accounts being retroactively restated to reflect the reverse acquisition.

OVERVIEW

Lihua is one of the first vertically integrated companies in China to develop, design, manufacture, market and distribute low cost, high quality, alternatives to pure copper magnet wire, which include copper-clad aluminum wire (“CCA”) and recycled scrap copper wire. Primarily because of its high electrical conductivity, pure copper magnet wire is one of the fundamental building blocks in many components in a wide variety of motorized and electrical appliances such as dishwashers, microwaves and automobiles. In most instances, Lihua’s CCA and recycled scrap copper are an excellent, less costly substitute for pure copper magnet wire.

Lihua sells its products directly to manufacturers in the consumer electronics, white goods, automotive, utility, telecommunications and specialty cable industries and to distributors in the wire and cable industries. Our track record and reputation for producing high quality products in large quantities has paved the way for rapid expansion of our customer base. We have approximately 300 customers and no one customer accounts for more than 7% of our sales. At least in part because the copper magnet wire industry in China is large and growing, Lihua’s product sales are comprised of approximately 95% domestic sales and approximately 5% of export sales.

Prior to 2009, our business focused primarily on CCA. Our CCA business consists of acquiring CCA with a line diameter of 2.05 mm from our suppliers as a raw material, reducing the diameter of the CCA by drawing it and then annealing and coating it. Our final CCA product typically has diameters from 0.03 mm to 0.18 mm, depending on customer specifications. To meet strong customer demand, we substantially increased our CCA production capacity from 2,200 tons per annum as of the end of 2006 to 6,000 tons per annum as of June 30, 2009. We plan to further increase our CCA production capacity to 7,500 tons per annum by the end of 2009. In each of the following periods, our sales of CCA were as follows: 2006 – 2,009 tons, 2007 – 4,065 tons, 2008 – 5,966 tons and six months ended June 30, 2009 – 2,959 tons.

In addition to our CCA business, in the first quarter of 2009, we began to produce copper rod from recycled scrap copper. As of June 30, 2009, our scrap copper refinery capacity was approximately 25,000 tons per annum. To the extent our capacity permits, we process our copper rod into copper magnet wire. Because our output of copper rod exceeds our capacity to process it into copper magnet wire, we sell our excess copper rod to smaller wire manufacturers for further processing. During the six months ended June 30, 2009, we sold 3,602 tons of copper magnet wire and 5,559 tons of copper rod. We currently are working to expand our magnet wire production capacity so that we can use a greater proportion of our copper rod rather than

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selling it to other manufacturers, thereby increasing our profit margins and overall profitability. We are exploiting a range of marketing strategies for the copper magnet wire business, including cross-selling our copper magnet wire to our existing CCA customers.

Lihua is well positioned to continue to capture further market share in the magnet wire industry. CCA and copper magnet wire are increasingly being accepted as alternatives to pure copper wire. As a result, our sales and net income have grown substantially over the last three years. We generated sales of $15.7 million in 2006, $32.7 million in 2007 and $50.0 million in 2008, representing a Compound Annual Growth Rate (“CAGR”) of 78.2%. We achieved net income of $4.5 million in 2006, $7.7 million in 2007 and $11.7 million in 2008, representing a CAGR of 61.3%. Adoption of CCA and recycled copper magnet wire as alternatives to pure copper wire will likely increase, and we expect that our sales and net income should continue to grow as a result. During the six months ended June 30, 2009, we generated sales of $69,365,668 and net income of $10,693,720, up 180% and 83.1% from the same six-month period in 2008.

We continually pursue technological innovations and improvements in our manufacturing processes. We have obtained one utility model patent in China and have three pending invention patent applications in China related to our production process. In addition, we have entered into a technology cooperation agreement with a university in China. We believe that our emphasis on technological innovations and production efficiency has contributed significantly to our leading industry position in China and will continue to do so for the foreseeable future.

Further, significant barriers to entry make it difficult for newcomers to successfully compete with our CCA and copper magnet wire businesses. For example, with respect to CCA, it is challenging to maintain high quality during the process of drawing, annealing and coating CCA, especially finer diameter wires. Our knowledge and experience in successfully generating high quality CCA give us a strong advantage over would-be competitors. With respect to copper magnet wire, our proprietary recycling technology offers us a unique ability to produce wire of a high enough quality to serve as a substitute to pure copper wire. Our experience and technology allow us to offer products that are, in most instances, superior and more cost-effective to those potential competitors can produce. Because we are already an approved vendor for many of our customers and qualifying new vendors can be time-consuming, we believe we are further advantaged vis-à-vis potential competitors.

To avoid copper commodity risk exposure, we maintain minimal raw material inventory. We confirm raw material purchase orders for scrap copper or CCA with suppliers for each sales order only when the applicable sales order has been received. On the other hand, our principal CCA and scrap copper suppliers usually dedicate portions of their inventories as reserves to meet our manufacturing requirements. Our most significant supplier of CCA provides approximately 30% of our CCA raw material needs, but we have built a large network of reliable suppliers that deliver high quality raw materials, and accordingly, are not dependent upon any one supplier for our success.

We believe that our experienced management team will continue to leverage our leading technologies and increasing capacity to manufacture, produce, market and distribute cost-effective, high quality, CCA, recycled copper magnet wire and other alternatives to pure copper wire. If, as anticipated, worldwide demand for alternatives to pure copper wire grow and we continue to innovate and improve in our processes, we will be well positioned to compete in the copper wire market on a global scale.

Significant Factors Affecting Our Results of Operations

The most significant factors that affect our financial condition and results of operations are:

economic conditions in China;
the market price for copper;
demand for, and market acceptance of, copper replacement products;
production capacity;
supply and costs of principal raw materials; and
product mix and implications on gross margins.

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Economic conditions in China

We operate our manufacturing facilities in China and derive the majority of our revenues from sales to customers in China. As such, economic conditions in China will affect virtually all aspects of our operations, including the demand for our products, the availability and prices of our raw materials and our other expenses. China has experienced significant economic growth, achieving a CAGR, of 11% in gross domestic product from 1996 through 2007. Domestic demand for and consumption of copper and CCA products has increased substantially as a result of this growth. We believe that economic conditions in China will continue to affect our business and results of operations.

Copper prices

Generally the price of our products is set at a certain discount to local retail copper prices, and we believe our products replace or supplement copper. For these reasons, our products are affected by the market price, demand and supply of copper.

We price our copper and CCA wire products based on the market price for materials plus a fixed mark-up, which is essentially our gross profit. Despite the implications of copper price volatility on our gross and net profit margins in percentage terms, during the past three years the markup, or our gross and net profit in absolute dollar terms, has not been materially affected by the change of copper prices. Shanghai Changjiang Commodity Market, one of the major metal trading markets in China, publishes the copper trading prices twice daily. These prices typically set the range for the prices of our materials as well as finished products, and are generally followed by all industry participants.

Over the past three years, copper prices have fluctuated tremendously, with a high point of $8,730 per ton in April 2008 and a recent range averaging $3,600 per ton. We believe such volatility has forced industry participants to seek replacement and supplementary products so as to reduce their reliance on copper, and this has provided us with a unique market opportunity.

Demand for, and market awareness of, copper replacement products

During the current copper cycle, increases in copper prices from 2003 and pending in April 2008, Chinese companies realized the potential market opportunity for the production of CCA wire as a replacement to traditional copper wire. This change has lead to an improved production process and facilitated increased production volumes from China. The major industry players in China also have moved to get involved in the secondary refining process under the pressure of the copper price uncertainty and fluctuation. We believe we are one of the innovators in both movements in which China plays an important role in seeking copper replacement cable and wire products.

The copper replacement industry segment is still in an early stage of development with a limited production capacity. We believe demand for our products will continue to grow as demand for copper products grows and as market awareness of copper replacement products increases. China is an importer of deficient copper reserves, and thus PRC law and government policies are encouraging the development of copper replacement products. We expect demand for our products to continue to increase over time.

Production capacity

In order to capture the market opportunity for our products, we have expanded, and plan to continue to expand, our production capacity. Increased capacity has had, and could continue to have, a significant effect on our results of operations, by allowing us to produce and sell more products to generate higher revenues.

Supply and costs of principal raw materials

Our ability to manage our operating costs depends significantly on our ability to secure affordable and reliable supplies of raw materials. We have been able to secure a sufficient supply of raw materials, which primarily consist of CCA raw material wire and scrap copper.

The price of our primary raw materials varies with reference to copper prices, and changes in copper price affect our cost of sales. However, we are able to price our copper and CCA products based on our material procurement costs plus a fixed mark-up, which is essentially our gross profit. Therefore, despite the

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implications of copper price movement on our gross and net profit margin figures, during the past three years the mark-up, or our gross and net profit in absolute dollars, have not been materially affected by the change of copper prices.

Product mix and effect on gross margins

Our gross margin is also affected by our product mix. We produce and sell products according to customer orders. CCA magnet wire and CCA tin plated wire are final products from which we will derive the highest production markup, or gross profit, and these products account for a majority of our sales. However, we also generate a significant portion of revenue from selling semi-finished products such as CCA raw wire at a lower production cost markup, or gross profit.

The launch of our scrap copper refinery business will further change our product mix and gross margins. Generally copper rod contributes a lower gross profit margin compared to finished wire products. At the initial development stage of this new business, we believe that we have to sell more copper rod at lower profit margins. However, we expect a gradual ramping up of our wire production facilities and thus we would be able to produce and sell more copper wire at higher profit margins than copper rod over time. Nevertheless, depending on the amount of copper rod sales, we expect our overall gross margin to decline in the near future.

PRINCIPAL INCOME STATEMENT COMPONENTS

Sales

Our sales are derived from our sales of CCA wire, copper rod and wire produced from refined scrap copper, net of value-added taxes.

The most significant factors that affect our sales are shipment volume and average selling prices.

Our collection practices generally consist of cash payment on delivery. We extend credit for 30 days to 60 days to certain of our established customers.

Cost of sales

Our cost of sales primarily consists of direct material costs, and, to a lesser extent, direct labor costs and manufacturing overhead costs. Direct material costs generally accounted for the majority of our cost of sales.

Gross Profit

Our gross profit is affected primarily by the cost of raw materials, which is defined with reference to the cost of copper. We are also able to price our products based on the market price for materials plus a fixed mark-up, which is essentially our gross profit. Despite the implications of copper price volatility on our gross and net profit margins, in percentage terms in 2006, 2007 and 2008, the mark-up, or our gross and net profit in absolute dollar terms, have increased with our growing scale of production.

In March 2009, we commenced the production of copper rod and copper magnet wire, which both have lower average selling prices and contributed lower gross profit margins during the three months ended June 30, 2009.

Operating expenses

Our operating expenses consist of selling, general and administrative expenses, and research and development expenses.

Selling, general and administrative expenses

Our selling, general and administrative expenses include salaries, shipping expenses, and traveling expenses for our sales personnel, administrative staff costs and other benefits, depreciation of office equipment, professional service fees and other miscellaneous expenses related to our administrative corporate activities.

Our sales activities are conducted through direct selling by our internal sales staff. Because of the strong demand for our products, we have not had to start to aggressively market and distribute our products, and our selling expenses have been relatively small as a percentage of our revenues.

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We anticipate that our selling, general and administrative expenses will increase with the anticipated growth of our business and continued upgrades to our information technology infrastructure. We expect that our selling, general and administrative expenses will also increase as a result of compliance, investor-relations and other expenses associated with being a publicly listed company.

Other income

Other income includes interest income, interest expense, merger costs, foreign currency translation adjustments, and other income.

Our interest expense consisted of expenses related to our short term bank borrowings. We expense all interests incurred. No interest paid in the costs incurred in the construction of property, plant and equipment during 2006, 2007 and 2008 and the six months ended June 30, 2009 has been capitalized.

Interest costs incurred for the years ended December 31, 2007 and 2008, were $96,535 and $514,950, respectively, of which none were capitalized as part of the cost incurred in the construction of property, plant and equipment in those periods.

Change in fair value of warrants

The fair value of the Company’s issued and outstanding Series A warrants to purchase 1,500,000 shares of Common Stock, and Series B warrants to purchase 500,000 shares of Common Stock, increased to $2,646,855 as of June 30, 2009. As such, the Company recognized a $340,167 loss from the change in fair value of these warrants for the three months ended June 30, 2009.

Merger costs

Merger costs consisted of the expenses incurred to complete the transaction under which the company reverse merged into a reporting shell while conducting a concurrent fundraising in 2008. The amount of $259,000 was incurred for this purpose during 2008, including $159,000 legal fees and $100,000 for the purchase of the shell.

Income taxes

Under the current laws of the Cayman Islands and British Virgin Islands, we are not subject to any income or capital gains tax and dividend payments we make are not subject to any withholding tax in the Cayman Islands or British Virgin Islands. Under the current laws of Hong Kong, we are not subject to any income or capital gains tax and dividend payments we make are not subject to any withholding tax in Hong Kong.

Our two operating subsidiaries are governed by the PRC income tax laws and are subject to the PRC enterprise income tax (“EIT”). Each of the two entities files its own separate tax return. According to the relevant laws and regulations in the PRC, foreign invested enterprises established prior to January 1, 2008 were entitled to full exemption from income tax for two years beginning from the first year when enterprises become profitable and have accumulative profits and a 50% income tax reduction for the subsequent three years. Being converted into a sino-foreign joint equity enterprise in 2005, Lihua Electron was thus entitled to the EIT exemption in 2005 and 2006, and was subject to 50% income tax reduction during the period from 2007 to 2009. Set out in the following table are the EIT rates for our two PRC Operating Companies from 2006 to 2011:

           
  2006   2007   2008   2009   2010   2011
Lihua Electron           12 %      12.50 %      12.50 %      25 %      25 % 
Lihua Copper           25 %      25 %      25 %      25 %      25 % 

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2009 COMPARED TO THREE MONTHS ENDED JUNE 30, 2008

Sales

Our business for the three months ended June 30, 2009 continued to demonstrate robust growth. Net sales increased by 224.7% from $15.0 million to $48.8 million compared to the same period in 2008. This

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growth was primarily driven by strong market demand for our CCA copper wire and FRH copper rod products and was offset by the decline of the average selling price. Our average selling price declined due to the addition of lower-price copper rod in the product mix.

Cost of Sales and Gross Margin

The following table sets forth our cost of sales and gross profit, both in amounts and as a percentage of total sales for the three months ended June 30, 2009 and 2008:

         
 
  
  
  
  
Three months ended June 30,
  Growth in
three months
ended June 30,
2009 compared
to three
months ended
June 30, 2008
     2009   2008
In thousands, except for percentage   US$   % of
Sales
  US$   % of
Sales
  %
Total Sales   $ 48,827       100.0 %    $ 15,038       100.0 %      224.7 % 
Total cost of sales     (39,096 )      (80.1%)       (10,328 )      (68.7%)       278.5 % 
Gross Profit   $ 9,731       19.9 %    $ 4,710       31.3 %      106.6 % 

Total cost of sales for the three months ended June 30, 2009 was $39.1 Million, reflecting an increase of 278.5% from the same period last year. As a percentage of total sales, our cost of sales increased to 80.1% of total sales for the three months ended June 30, 2009, compared to 68.7% of total sales in the same period last year. Consequently, gross margin as a percentage of total sales decreased to 19.9% in the three months ended June 30, 2009 from 31.3% for the same period last year, principally due to the production of refined copper products, which have a lower margin compared to our CCA products.

Gross profit for the three months ended June 30, 2009 was $9.7 million, up 106.6% from gross profit of $4.7 million for the same period in 2008.

Selling, General and Administrative Expenses

The following table sets forth operating expenses and income from operations both in amounts and as a percentage of total sales for Selling, General and Administrative Expenses for the three months ended June 30, 2009 and 2008:

         
 
  
  
  
  
Three months ended June 30,
  Growth in
three months
ended June 30,
2009 compared
to three
months ended
June 30, 2008
     2009   2008
In thousands, except for percentage   US$   % of
Sales
  US$   % of
Sales
  %
Gross profit   $ 9,731       19.9 %    $ 4,710       31.3 %      106.6 % 
Operating Expenses:
                                            
Selling expenses     (587 )      (1.2 )%      (172 )      (1.1 )%      241.2 % 
General & administrative expenses     (1,093 )      (2.2 )%      (403 )      (2.7 )%      171.1 % 
Total operating expense     (1,680 )      (3.4 )%      (575 )      (3.8 )%      192.1 % 
Income from operations   $ 8,051       16.5 %    $ 4,135       27.5 %      94.7 % 

Total selling, general and administrative expenses were approximately $1,680,000 for the three months ended June 30, 2009, compared to approximately $575,000 for the same period last year, an increase of 192.1%.

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Selling expenses were approximately $587,000 in the three months ended June 30, 2009, an increase of 241.2% compared to the same period last year. The increase was attributable to:

Increased costs related to product distribution and insurance as a result of expanded business volume; and
Increased staffing costs as we continued to expand the sales force during the period,

General & administrative expenses were approximately $1,093,000 in the three months ended June 30, 2009, an increase of 171.1% compared to the same period last year. Factors which caused this increase were higher administrative and professional fees associated with the Company being a public reporting company and our expanded scale of operations.

Interest Expense

Interest expense was $105,667 for the three months ended June 30, 2009, compared to $106,337 for the same period last year. The decrease was mainly due to the repayment of short term bank loans which were used for working capital purposes.

Income tax

For the three months ended June 30, 2009, income tax expense was $1,572,190, reflecting an effective tax rate of 19.0%. The effective tax rate for the same period in 2008 was 13.1%.

In 2008 and 2009, Lihua Electron was subject to an EIT rate of 12.5%, and Lihua Copper was subject to an EIT rate of 25%.

Net Income

Net income for the three months ended June 30, 2009 was $6.7 million, or 13.7% of net revenue, compared to $3.5 million, or 23.3% of net revenue, in the same period in 2008.

Foreign Currency Translation Gains

During the three months ended June 30, 2009, the RMB steadily rose against the US dollar, and we recognized a foreign currency translation gain of $28,259.

YEAR ENDED DECEMBER 31, 2008 COMPARED TO YEAR ENDED DECEMBER 31, 2007

Sales

Net sales increased by 53% from $32.7 million in 2007 to $50.0 million in 2008. This increase was primarily due to increased sales volume of CCA magnet wire as driven by strong market demand, facilitated by the increase in our wire production capacity from 4,200 tons in 2007 to 6,000 tons in 2008. The increase in the overall average selling price from $8,039 in 2007 to $8,382 in 2008 also contributed to our higher revenues in 2008. The average selling price increase year-over-year is a result of larger portion of CCA magnet wire sales in our sales mix, which increased from 1,735 tons in 2007 to 4,087 tons in 2008. The percentage of our total sales represented by sales of CCA Magnet wire increased from 43% in 2007 to 69% in 2008 accordingly.

Cost of Sales and Gross Margin

Total cost of sales for the year ended December 31, 2008 was $33.2 million, reflecting an increase of 44.9% from 2007. As a percentage of total sales, our cost of sales decreased to 66.4% of total sales for 2008, compared to 70.1% of total sales in 2007. Consequently, gross margin as a percentage of total sales increased to 33.6% for 2008 from 29.9% for 2007, on the back of higher average selling prices and lower copper prices. Gross profit for the year ended December 31, 2008 was $16.8 million, up 72.1% from gross profit of $9.8 million for the same period in 2007.

Selling, General and Administrative Expenses

The following table sets forth operating expenses and income from operations both in amounts and as a percentage of total sales for the years ended December 31, 2008 and 2007.

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  Year Ended December 31,   Growth in
2008 compared
with 2007
     2008   2007
     US$   % of
Sales
  US$   % of
Sales
Gross profit   $ 16,804       33.6 %    $ 9,766       29.9 %      72.0 % 
Operating Expenses:
                                            
Selling expenses     (700 )      (1.4%)       (417 )      (1.3%)       67.8 % 
G & A expenses     (1,907 )      (3.8%)       (455 )      (1.4%)       319.2 % 
Total operating expense     (2,607 )      (5.2%)       (872 )      (2.7%)       198.9 % 
Income from operations   $ 14,197       28.4 %    $ 8,894       27.2 %      59.6 % 

Total selling, general and administrative expenses were $2.6 million for the year ended December 31, 2008, compared to $872,000 for the year ended December 31, 2007.

Selling expenses were $700,000 in 2008, an increase of 67.8% compared to 2007. The increase was attributable to:

Increased costs related to product distribution and insurance as a result of expanded business volume; and
Increased staffing costs related to a bigger sales team, and an increase to 9 sales offices in 2008 compared to 6 in 2007,

General & administrative expenses were $1.9 million in 2008, an increased of 319.1% compared to 2007. The increase was mainly due to:

Increased professional fees incurred in connection with capital-raising and financial reporting activities;
An increase in share-based compensation expenses of $367,250; and
An increase resulting from the increase in our scale of operations.

Interest Expense

Interest expense was $514,950 for the year ended December 31, 2008, compared to $96,535 for the year ended December 31, 2007. The increase is largely due to accrued interest from additional bank loans utilized during the period. The loans were used for working capital and capital expenditures for the expansion of production.

Income tax

For 2008, income tax expense was $1,792,681, reflecting an effective tax rate of 13.3% and an increase of 64.6% from $1,089,107 for 2007. The effective tax rate for 2007 was 12.4%.

In 2007 and 2008, Lihua Electron was entitled to a 50% reduction from the EIT and thus was subject to EIT rates of 12.0% and 12.5%, respectively.

Net Income

Net income for the year ended December 31, 2008 was $11.7 million, or 23.4% of net revenue, compared to $7.7 million, or 23.6% of net revenue, in the same period in 2007.

Foreign Currency Translation Gains

During the year ended December 31, 2008, the RMB steadily rose against the US dollar. As a result we recognized a foreign currency translation gain of $1,622,035.

YEAR ENDED DECEMBER 31, 2007 COMPARED TO DECEMBER 31, 2006

Sales

Sales in 2007 were $32.7 million, an increase of $17 million from sales of $15.7 million in 2006. Our 2007 sales increase was primarily attributable to an increase in total tons shipped due to strong market

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demand for our products and an increase in the price of our products due to an increase in the price of our main raw material, copper. Total tons shipped increased 102% year-on-year to 4,065 versus 2,009 tons in 2006. The increase in tons shipped was a result of strong customer demand associated with the acceleration of CCA as a substitute for pure copper in small size electronic motors. To keep pace with the strong demand we increased our capacity from 10 lines at year-end 2006 to 19 lines at year-end 2007. In 2007, the average selling price per ton was $8,039, compared to $7,839 in 2006, representing an increase of $200 or 2.6%. The average selling price increase year-over-year resulted primarily from: (i) the increase in the price of copper, our main raw material, and (ii) more shipments of our higher selling price product CCA magnet wire which increased from 466 tons in 2006 to 1,735 tons in 2007. Sales of CCA magnet wire accounted for 43% of our total sales versus 23% in 2006.

Cost of Sales and Gross Margin

Total cost of sales for the year ended December 31, 2007 was $22.9 million, an increase of 115.1% from 2006. As a percentage of total sales, our cost of sales increased to 70.1% of total sales for 2007, compared to 67.6% of total sales in 2006. Consequently, gross margin as a percentage of total sales decreased to 29.9% for 2007 from 32.4% for 2006, principally due to higher copper prices driving an increase in our raw material price. Gross profit for the year ended December 31, 2007 was $9.8 million, up 91.5% from gross profit of $5.1 million for the same period in 2006.

Selling, General and Administrative Expenses

The following table sets forth the components of operating expenses and income from operations both in amounts and as a percentage of total sales for the years ended December 31, 2007 and 2006.

       
  Year Ended December 31,
     2007   Ally Profit Investment Limited and Subsidiaries 2006
(In thousands)   US$   % of
Sales
  US$   % of
Sales
Gross profit   $ 9,766       29.9 %    $ 5,101       32.4 % 
Operating Expenses:
                                   
Selling expenses     (417 )      (1.3 )%      (230 )      (1.5 )% 
G & A expenses     (455 )      (1.4 )%      (336 )      (2.1 )% 
Total operating expenses     (872 )      (2.7 )%      (566 )      (3.6 )% 
Income from operations   $ 8,894       27.2 %    $ 4,535       28.8 % 

Total selling, general and administrative expenses was $872,000 for the year ended December 31, 2007, compared to $566,000 for the year ended December 31, 2006.

Selling expenses were $417,000 in 2007, an increase of 81.7% compared to 2006. The increase was attributable to:

Increased costs related to product distribution and insurance as a result of expanded business volume; and
Increased staffing costs related to a bigger sales team, and an increase to 6 sales offices in 2007 compared to 2 in 2006,

General & Administrative expenses were $455,000 in 2007, an increase of 35.4% compared to 2006. The increase was partially due to an increase in other selling, general and administrative expenses of $0.1 million resulting from the increase in our scale of operations.

Interest Expense

Interest expense was $96,535 for the year ended December 31, 2007, compared to $42,859 for the year ended December 31, 2006. The increase is largely due to accrued interest from additional bank loans utilized during the period. The loans were used for working capital and capital expenditures for the expansion of production.

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Income tax

For 2007, income tax expense was $1,089,107, reflecting an effective tax rate of 12.4%, compared to $0 for the same period in 2006.

The PRC Operating Companies are subject to PRC income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which they operate, i.e. the PRC. In accordance with the relevant tax laws in the PRC, the Company’s subsidiary, Danyang Lihua Electron, was subject to an EIT rate of 24% on its taxable income for the years ended December 31, 2007 and 2006 since it is located in economic development zone. However, Danyang Lihua Electron is a production-based foreign investment enterprise and granted an EIT holiday for the two years ended December 31, 2006 and 2005 and a 50% reduction on the EIT rate for the three years ended December 31, 2007, 2008 and 2009.

Net Income

Net income for the twelve-month period ended December 31, 2007 was $7.7 million, or 23.6% of net revenue, compared to $4.5 million, or 28.6% of net revenue, in the same period in 2006.

Foreign Currency Translation Gains

During the twelve months ended December 31, 2007, the RMB steadily rose against the US dollar. As a result we recognized a foreign currency translation gain of $802,502.

LIQUIDITY AND CAPITAL RESOURCES

The following table summarizes our cash flows for each of the periods indicated:

         
  Six Months Ended June 30,   Year Ended December 31,
     2009   2008   2008   2007   Ally Profit Investment Limited and Subsidiaries 2006
Net cash provided by operating activities   $ 5,745,577     $ 8,911,914     $ 15,837,702     $ 2,123,478     $ 5,268,917  
Net cash used in investing activities     (2,947,312 )      (1,366,392 )      (4,693,086 )      (11,560,119 )      (4,854,852 ) 
Net cash provided/(used) by financing activities     (706,466 )      450,963       10,966,675       11,290,295       129,218  
Effect of exchange rate on cash and cash equivalents     10,806       527,653       716,909       469,516       109,763  
Cash and cash equivalents at beginning of period     26,041,849       3,213,649       3,213,649       890,479       237,433  
Cash and cash equivalents at end of period   $ 28,144,454     $ 11,737,787     $ 26,041,849     $ 3,213,649     $ 890,479  

Operating activities

For the six months ended June 30, 2009, cash provided by operating activities totaled $5.7 million compared to $8.9 million in the same period of 2008. This was primarily attributable to: i) a $4.8 million increase in net earnings, ii) a $2.8 million accounts receivable increase driven by revenue growth; ii) a $7.3 million inventory increase, principally in copper rods, to support planned expansion and sales growth in copper wire; iii) a $1.2 million increase in income tax payable; and iv) a $3.5 million increase in account payable as a result of an increase in the purchase of raw material to accommodate growing demand.

For the year ended December 31, 2008, cash provided by operating activities totaled $15.8 million compared to $2.1 million in 2007. This is principally attributable to: (i) a $4.0 million increase in net earnings; (ii) a decrease in working capital, and in particular a decrease of $2.0 million in inventory levels resulting from an intentional build up of raw material inventory levels in 2007 in anticipation of copper price increases; iii) better accounts receivable collection; and (iv) the add-back of non cash charges related to capital raising and financial reporting activities, namely a share-based compensation charge of $0.4 million and a warrant-related charge of $90,000.

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For the year ended December 31, 2007, cash provided by operating activities totaled $2.1 million compared to $5.3 million in 2006. This is principally attributable to i) a $3.2 million increase in net earnings; ii) a $4.1 million increase in accounts receivable and a $0.7 million increase in notes receivable as we revalued the credit of our major customers and extended the collection period of most of them; and iii) an increase of $1.3 million in inventory levels resulting from an intentional build up of inventory levels in 2007 in anticipation of raw material price increases.

Investing activities

For the six months ended June 30, 2009 we had a net cash outflow of $2.9 million from investing activities for the purchase of property, plant and equipment, primarily as a result of capital investment in new equipment and machinery, and building up new workshops, all being part of our planned expansion.

For the year ended December 31, 2008, cash outflow for investing activities was approximately $4.7 million, primarily as a result of capital investment in land-use rights, in new equipment and machinery, and in office building improvements, all being part of our planned expansion. The capital investment on new equipment and machinery related to the construction of the new Lihua Copper production facility, which began production in March 2009.

For the year ended December 31, 2007, cash outflow for investing activities was approximately $11.6 million, primarily due to our: (i) lending of $3.2 million to a related party, which had been repaid in 2008; (ii) capital investment of $3.8 million in new equipment and machinery; and (iii) capital investment of $4.5 million in land-use rights. Going forward, the company has no intention to lend to related parties.

Financing activities

For the six months ended June 30, 2009 we had a net cash outflow of $706,466 from financing activities which constituted a repayment of bank loans of $3.2 million, offset by $1,050,000 released from the escrowed cash related to an October 2008 private placement as the Company satisfied certain legal post-closing conditions, and the borrowing of $1.5 million short term bank loans for working capital related to recently added production lines.

Financing activities provided net cash inflow of $11.0 million during the year ended December 31, 2008 primarily as a result of generating the net proceeds of approximately $12.0 million from the issue of convertible Preferred Stock in a private placement in October 2008. We drew down approximately $12.0 million from our existing credit facilities to meet working capital needs and repaid approximately $10.2 million of our existing credit facilities. Our working capital financing carries maturity periods ranging from three to six months, while the short-term and revolving nature of these credit facilities is common in China. The majority of these short-term credit facilities are guaranteed by Tianyi Telecom, a related party, as well as our inventories and fixed assets. We intend to renew these loans once they become due and do not believe we will encounter difficulty in doing so on acceptable terms because we have pledgable assets and have access to corporate guarantors, and we have a strong credit profile. We expect that the terms for these loans will be similar, in both interest rate and duration, to the current loans. If for some reason we are not able to renew those bank loans, we have sufficient funds to execute our business plan.

Financing activities provided net cash inflow of $11.3 million during the year ended December 31, 2007 primarily from advances from a related party, drawdown of bank loans and proceeds from issuance of capital.

Capital expenditure

Our capital expenditures are principally comprised of construction and purchases of property, plant and equipment for expansion of our production facilities. In 2006, 2007 and 2008, we funded our capital expenditures primarily through cash flows from operating activities and the proceeds of bank borrowings, and equity issuance. We intend to fund our future capital expenditures through cash flows from operations and the net proceeds from this Offering.

In 2009, as we accelerate our expansion, we expect continued capital expenditure for maintaining existing machines and adding manufacturing equipment in our new facility, which is adjacent to our old facility. In the new production facilities we currently have two horizontal smelters, which can produce 25,000 tons refinery copper per year, we plan to have one new vertical smelter in 2011 while increasing our refinery copper to

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100,000 tons per year. With our current capacity of production lines, we can produce 6,000 tones of CCA wire and 6,000 tons of copper wire. Therefore, we plan to have six new production lines in production by the end of 2009 while increasing our copper wire production capacity to 14,000 tons per year. Of that capacity, 10,000 tons per year will be copper magnet wire and 4,000 tons per year will be copper fine wire. We also plan to have another four production lines in production by the end of 2009, increasing our CCA wire production capacity to 7,500 tons per year. Of that capacity, 5,500 tons per year will be CCA magnet wire and 2,000 ton per year will be CCA fine wire. We believe that our existing cash, cash equivalents and cash flows from operations, proceeds from this Offering, and our revolving credit facility, will be sufficient to meet our presently anticipated future cash needs to bring all of our facilities into full production. We may, however, require additional cash resources due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue.

We intend to expand our operations as quickly as reasonably practicable to capitalize on the demand opportunity for our products. Net investment into facilities, machinery and equipment were $4.9 million, $3.8 million and 4.9 million for the fiscal years ended December 31, 2006, 2007 and 2008, respectively and were $16.1 million in the aggregate as of the three months ended March 31, 2009. We estimate that we will require $4.3 million to meet our capital expenditure program over the next twelve months. We regularly review our cash funding requirements and attempt to meet those requirements through a combination of cash on hand, cash provided by operations and available borrowings under bank lines of credit. We believe that we can continue to meet our cash funding requirements for our business in this manner over the next twelve months.

Our capital expenditures are set forth below for the period as indicated:

         
  Six months ended June 30,   Year Ended December 31,
     2009   2008   2008   2007   Ally Profit Investment Limited and Subsidiaries 2006
(In thousands)                         
Construction of plant and production facilities   $ 1,704     $ 771     $ 3,076     $ 994     $ 354  
Purchase of machinery and equipment     1,243       1,048       1,776       2,818       4,501  
Total capital expenditure   $ 2,947     $ 1,819     $ 4,852     $ 3,812     $ 4,855  

Obligations under Material Contracts

We had the following capital commitment of as of December 31, 2008:

 
Purchase of machinery – within one year   $ 910,125  
Acquisition or construction of buildings – within one year     1,049,895  
     $ 1,960,020  

Other than the contractual obligations and commercial commitments set forth above, we did not have any other long-term debt obligations, capital commitments, purchase obligations or other long-term liabilities as of December 31, 2008.

Market Risks

We are exposed to various types of market risks, including changes in interest rates, foreign exchange rates and inflation in the normal course of business.

Interest rate risk

We are subject to risks resulting from fluctuations in interest rates on our bank balances. A substantial portion of our cash is held in China in interest bearing bank deposits and denominated in RMB. To the extent that we may need to raise debt financing in the future, upward fluctuations in interest rates will increase the cost of new debt. We do not currently use any derivative instruments to manage our interest rate risk.

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Commodity price risk

Certain raw materials used by us are subject to price volatility caused by supply conditions, political and economic variables and other unpredictable factors. The primary purpose of our commodity price management activities is to manage the volatility associated with purchases of commodities in the normal course of business. We do not speculate on commodity prices.

We are primarily exposed to price risk related to our purchase of copper used in the manufacture of our products. We purchase most of our raw materials at prevailing market prices. We do not have formal long-term purchase contracts with our suppliers and, therefore, we are exposed to the risk of fluctuating raw material prices. Our raw material price risk is mitigated because we generally in excess of one year attempt to pass changes in raw material costs to our customers.

We did not have any commodity price derivatives or hedging arrangements outstanding at December 31, 2008 and did not employ any commodity price derivatives during the fiscal year ended December 31, 2008.

Foreign exchange risk

We carry out the majority of our transactions in Renminbi. Therefore, we have limited exposure to foreign exchange fluctuations. A substantial portion of our cash is held in China in interest bearing bank deposits and denominated in RMB. The Renminbi is not a freely convertible currency. The PRC government may take actions that could cause future exchange rates to vary significantly from current or historical exchange rates. Fluctuations in exchange rates may adversely affect the value of any dividends we declare. See “Risk Factors — PRC laws and foreign exchange controls may affect our ability to receive dividends and other payments from our PRC Operating Companies.”

Inflation risk

In recent years, China has not experienced significant inflation or deflation and thus inflation and deflation have not had a significant effect on our business during the past three years. According to the National Bureau of Statistics of China, inflation as measured by the consumer price index in China was 1.5%, 4.8% and 5.9% in 2006, 2007 and 2008, respectively.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Critical Accounting Policies

The Company’s consolidated financial statements were prepared in accordance with generally accepted accounting principles, which require management to make subjective decisions, assessments and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the judgment increases, such judgments become even more subjective. While management believes its assumptions are reasonable and appropriate, actual results may be materially different from estimated. Management has identified certain critical accounting policies, described below, that require significant judgment to be exercised by management.

Revenue recognition

Revenue is recognized when the following four revenue criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectibility is reasonably assured.

Sales revenue is recognized net of sales discounts and returns at the time when the merchandise is sold to the customer. Based on historical experience, management estimates that sales returns are immaterial and has not made allowance for estimated sales returns. Sales revenue is presented net of value added and sales related taxes in accordance with the guidance in EITF 06-3.

Share-Based Payments

We account for share-based compensation awards to employees in accordance with SFAS No. 123R, “Share-based Payment” which requires that share-based payment transactions with employees be measured based on the grant-date fair value of the equity instrument issued and recognized as compensation expense over the requisite service period.

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We account for share-based compensation awards to non-employees in accordance with SFAS 123R and EITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued To Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”, or EITF 96-18. Under SFAS 123R and EITF 96-18, stock compensation granted to non-employees has been determined as the fair value of the consideration received or the fair value of equity instrument issued, whichever is more reliably measured and is recognized as expenses as the goods or services are received.

In conjunction with the Private Placement, we entered into a make good escrow agreement with the Investors (the “Securities Escrow Agreement”), pursuant to which Magnify Wealth initially placed 6,818,182 of Common Stock (equal to 100% of the number of shares of Common Stock underlying the Investor Shares) (the “Escrow Shares”) into an escrow account. The Escrow Shares are being held as security for the achievement of performance thresholds for fiscal years 2008 and 2009.

According to the Accounting Interpretation and Guidance of the staff of the SEC, the placement of shares in escrow is viewed as a recapitalization similar to a reverse stock split. The agreement to release the shares upon achievement of certain criteria is presumed to be a separate compensatory arrangement with the registrant. Accordingly, when the Escrow Shares are released back to Magnify Wealth, an expense equal to the amount of the grant-date fair value of $2.26 per share of the Company’s Common Stock as of October 31, 2008, or the date of the Securities Escrow Agreement will be recognized in the Company’s financial statements in accordance with SFAS No. 123R, “Accounting for Stock-Based Compensation”. Otherwise, if the net income threshold is not met and the Escrow Shares are released to the investors instead, it will be accounted for as a capital transaction with the investors resulting in no income or expense being recognized in the Company’s financial statements.

For the year ended December 31, 2008, our net income was $11,701,879 which achieved 95% of the 2008 performance threshold. All of the Escrow Shares will continue to be held in escrow and none has yet been released to either Magnify Wealth or the Investors. As the release of the Escrow Shares requires the attainment of the performance thresholds for both 2008 and 2009, we will only commence to recognize compensation expense around the middle of fiscal year 2009 when we will be able to evaluate whether it is probable that we will achieve the 2009 performance threshold to provide for the ultimate release of the Escrow Shares back to Magnify Wealth. For the year ended December 31, 2008, no compensation expense has been recognized in this regard.

Our Common Stock is not publicly traded. We have determined that our Common Stock had a fair value of $2.260 per share at October 31, 2008, or the date of the Securities Escrow Agreement, based on a retrospective valuation of our enterprise fair value performed by an unrelated valuation firm, Grant Sherman Appraisal Limited. The valuation has been prepared consistent with the guidance outlined in the American Institute of Certified Public Accountants Practice Aids, “Valuation of Privately — Held Company Equity Securities Issued as Compensation”.

We are a group of entities comprising Lihua International Inc., Ally Profit, Lihua Holdings, Lihua Copper and Lihua Electron, for which different valuation approaches have been considered and used.

Because Lihua International, Inc., Ally Profit and Lihua Holdings are holding companies only and have no revenue, both market and income approaches have been considered not applicable, and only an asset-based approach has been applied. Lihua Copper has not generated revenue and has little expense history. Accordingly, both market and income approaches have been considered inappropriate and an asset-based approach has been applied.

Because Lihua Electron has an established financial history of profitable operations and generation of positive cash flows, an income approach has been applied using the discounted cash flow method. We developed our discounted cash flow analysis based on our projected cash flows from 2009 through 2011, including, among other things, our estimates of future revenue growth, gross margins, capital expenditures and working capital requirements, driven by assumed market growth rates, and estimated costs as well as appropriate discount rates. A market approach was not applied because we concluded that there was significant limitation in identifying true comparable enterprises with readily determinable fair values.

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Accounting for Series A Convertible Preferred Stock and Warrants

On October 31, 2008, we entered into and completed a securities purchase agreement (“Purchase Agreement”) with certain accredited investors (the “Investors”) for the issuance and sale by the Company in a private placement (“Private Placement”) of 6,818,182 shares of Series A Convertible Preferred Stock (“Preferred Stock”, or “Investor Shares”) and Series A warrants to purchase 1,500,000 shares of Common Stock (the “Investor Shares”). The Company received $13,656,538 in proceeds from this Private Placement after paying fees and expenses.

Pursuant to the Securities Escrow Agreement entered into by us in conjunction with the Private Placement, if we fail to achieve certain net income thresholds for fiscal years 2008 and/or 2009, additional shares of our Common Stock would be released to the holders of the Preferred Stock. As a result, the holders of the Preferred Stock could acquire a majority of the voting power of our outstanding Common Stock. In such a situation, we would not be able to control the approval of “any merger, consolidation or similar capital reorganization of its Common Stock”, i.e. events which could trigger the right of Preferred Stock holder to request for redemption. EITF D-98, “Classification and Measurement of Redeemable Securities”, provides that preferred securities that are redeemable for cash are to be classified outside of permanent equity if they are redeemable upon the occurrence of an event that is not solely within the control of the issuer. Therefore, the Preferred Stock have been classified out of permanent equity in accordance with EITF D-98. For the year ended December 31, 2008, our net income was $11,701,879 which achieved 95% of the 2008 net income threshold and, according to the terms of the Securities Escrow Agreement, all of the escrow shares will continue to be held in escrow and no Preferred Share has been released to the preferred stockholders. If the 2009 net income threshold is achieved, the Preferred Stock will be reclassified to permanent equity.

Accounting for allocation of proceeds from Private Placement

In accordance with EITF 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments”, the proceeds from the Private Placement were first allocated between the Preferred Stock and the warrants issued in connection with the Private Placement based upon their estimated fair values as of the closing date, resulting in an aggregate amount of $539,910 being allocated to the Series A Warrants and the 250,000 Series B Warrants issued to Broadband.

Then, we calculated the fair value of the embedded conversion feature of the Preferred Stock of $1,002,115 using EITF 98-5 intrinsic value model in accordance with EITF 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments”. The intrinsic value of the beneficial conversion feature was calculated by comparing the effective conversion price, which was determined based on the proceeds from the Private Placement allocated to the convertible Preferred Stock, and the fair value of our Common Stock of $2.26 at the commitment date, which was determined with the assistance of an unrelated valuation firm as discussed above. The fair value of $1,002,115 of the beneficial conversion feature has been recognized as a reduction to the carrying amount of the convertible Preferred Stock and an addition to paid-in capital.

In accordance with Issue 6 of EITF 00-27, the discount on the Preferred Stock resulting from beneficial conversion feature was amortized to retained earnings, because the Preferred Stock are immediately convertible upon issuance and have no stated redemption date. Amortization of the discount resulting from beneficial conversion feature is considered analogous to a return to holders of perpetual preferred stock and has been accounted for as a reduction to net income available to Common Stock holders for the purpose of calculation of earnings per share.

We have evaluated the circumstances under which the Preferred Stock may become redeemable at the option of holders and concluded it is not probable that the Preferred Stock will become redeemable. Therefore, no accretion charge has been recognized regarding any change in the redemption value of the Preferred Stock.

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The fair values of Series A and Series B Warrants were determined using the Black-Scholes option pricing method with the following assumptions:

 
Fair value of Common Stock at October 31, 2008:   $ 2.26  
Exercise price:   $ 3.50  
Contractual life (years):     5  
Dividend yield:      
Expected volatility:     31.61 % 
Risk-free interest rate:     2.79 % 

Prior to this offering, our Common Stock is not publicly traded. We have determined that our Common Stock had a fair value of $2.26 per share at October 31, 2008 based on a retrospective valuation performed by an unrelated valuation firm, Grant Sherman Appraisal Limited, discussed above. The valuation has been prepared consistent with the methods outlined in the American Institute of Certified Public Accountants Practice Aids, “Valuation of Privately-Held Company Equity Securities Issued as Compensation” as discussed above.

Because prior to this offering, our Common Stock is not publicly traded, historical volatility information is not available. In accordance with SFAS No. 123R, “Accounting for Stock-Based Compensation”, with the assistance of an unrelated valuation firm, Grant Sherman Appraisal Limited, we identified five similar public entities for which share and option price information was available, and considered the historical volatilities of those public entities’ share prices in calculating the expected volatility appropriate to us (i.e. the calculated value). The risk-free rate of return reflects the interest rate for United States Treasury Note with similar time-to-maturity to that of the warrants.

The fair value of $90,000 of the 250,000 Series B Warrants issued to Penumbra for services was charged to operations for the year ended December 31, 2008.

Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”, which requires an asset and liability approach for financial accounting and reporting for income taxes and allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years.

The Company considers current tax laws and its interpretation of them when making judgments, assumptions and estimates relative to current provision for income tax. The Company also assesses a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more likely than-not that some portion, or all, of the deferred tax assets will not be realized. Such evidence includes the Company’s estimates of future taxable income and tax planning strategies. Changes in relevant tax laws, and the Company’s judgments, assumptions and estimates relative to current provision for income tax could have resulted in material differences in the amount of income taxes provided in the Company’s consolidated financial statements.

Effective October 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109,” or FIN 48, which clarifies the accounting and disclosure for uncertainty in tax positions, as defined in that statement. FIN 48 requires that the Company recognizes the impact of a tax position in the financial statements if that position is more likely than not of being sustained upon audit by the tax authority, based on the technical merits of the position. The amount recognized is measured as the largest amount of benefit that is more likely than not of being realized upon ultimate settlement. The final outcome of the tax uncertainty is dependent upon various matters including tax examinations, interpretation of tax laws or expiration of statutes of limitation. The adoption of FIN 48 had no material effect on the Company’s financial statements.

Impairment of long-lived assets

The Company reviews and evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. An impairment is considered to exist if the total estimated future cash flows on an undiscounted basis are less than the carrying amount of

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the assets, including goodwill, if any. An impairment loss is measured and recorded based on discounted estimated future cash flows. In estimating future cash flows, assets are grouped at the lowest level for which there is identifiable cash flows that are largely independent of future cash flows from other asset groups.

Accounts receivable

Accounts receivable is stated at cost, net of allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses resulting from the failure of customers to make required payments. The Company reviews the accounts receivable on a periodic basis and makes allowances where there is doubt as to the collectibility of individual balances. In evaluating the collectibility of individual receivable balances, the Company considers many factors, including the age of the balance, the customer’s payment history, its current credit-worthiness and current economic trends.

Inventories

Inventories are stated at the lower of cost, determined on a weighted average basis, or market. Costs of inventories include purchase and related costs incurred in bringing the products to their present location and condition. Market value is determined by reference to selling prices after the balance sheet date or to management’s estimates based on prevailing market conditions. The management will write down the inventories to market value if it is below cost. The management also regularly evaluates the composition of its inventories to identify slow-moving and obsolete inventories to determine if valuation allowance is required.

Foreign currency translation

The Company uses the United States dollars (“US Dollar” or “US$” or “$”) for financial reporting purposes. The Company maintain s books and records in its functional currency, Chinese Renminbi (“RMB”), being the primary currency of the economic environment in which its operations are conducted. In general, the Company translates its assets and liabilities into US Dollar using the applicable exchange rates prevailing at the balance sheet date, and the statement of income is translated at average exchange rates during the reporting period. Adjustments resulting from the translation of the Company’s financial statements are recorded as accumulated other comprehensive income.

The exchange rates used to translate amounts in RMB into US Dollar for the purposes of preparing the consolidated financial statements were as follows:

       
  June 30, 2009   December 31, 2008   December 31, 2007   December 31, 2006
Balance sheet items, except for paid-in capital and retained earnings, as of year end     US$1=RMB6.8319       US$1=RMB6.8346       US$1=RMB7.3046       US$1=RMB7.8087  
Amounts included in the statements of income, and statements of cash flows for the year     US$1=RMB6.8299       US$1=RMB6.9452       US$1=RMB7.6071       US$1=RMB7.9735  

No representation is made that RMB amounts have been, or would be, converted into US$ at the above rates.

Recently issued accounting pronouncements

In December 2007, the FASB issued SFAS 141(R), “Business Combinations”, which replaces SFAS 141, “Business Combinations”. SFAS 141R retains the fundamental requirements in SFAS 141 that the acquisition method of accounting (which SFAS 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. SFAS 141R requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. This replaces

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SFAS 141’s cost-allocation process, which required the cost of an acquisition to be allocated to the individual assets acquired and liabilities assumed based on their estimated fair values. SFAS 141R also requires the acquirer in a business combination achieved in stages (sometimes referred to as a step acquisition) to recognize the identifiable assets and liabilities, as well as the non-controlling interest in the acquiree, at the full amounts of their fair values (or other amounts determined in accordance with SFAS 141R). SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. This statement does not currently affect our financial statements.

In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51” (“SFAS No. 160”), which establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a non-controlling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 (that is, fiscal 2009 for the Company). Management does not expect that this Statement will have an effect on our consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — An Amendment of FASB Statement No. 133” (“SFAS No. 161”), which changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This statement will be effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 (that is, fiscal 2009 for the Company). Management does not expect that this Statement will have an effect on our consolidated financial statements.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”. This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. Management does not expect that this Statement will have an effect on our consolidated financial statements.

In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts — an interpretation of FASB Statement No. 60”. This Statement interprets Statement 60, “Accounting and Reporting by Insurance Enterprises” and amends existing accounting pronouncements to clarify their application to the financial guarantee insurance contracts included within the scope of this Statement. This Statement requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. This Statement also clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities. This Statement is effective for financial statements issued for fiscal years beginning after December 15, 2008 (that is, fiscal 2009 for the Company), and all interim periods within those fiscal years. Management does not expect that this Statement will have an effect on our consolidated financial statements.

In June 2008, the FASB issued EITF 08-4, “Transition Guidance for Conforming Changes to Issue No. 98-5.” The objective of EITF 08-4 is to provide transition guidance for conforming changes made to EITF 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”, that result from EITF 00-27 “Application of Issue No. 98-5 to Certain Convertible Instruments”, and SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. This Issue is effective for financial statements issued for fiscal years ending after December 15, 2008 and has no effect on our financial statements.

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In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset in a Market That Is Not Active” (FSP 157-3), which clarifies the application of SFAS 157 when the market for a financial asset is inactive. Specifically, FSP 157-3 clarifies how (1) management’s internal assumptions should be considered in measuring fair value when observable data are not present, (2) observable market information from an inactive market should be taken into account, and (3) the use of broker quotes or pricing services should be considered in assessing the relevance of observable and unobservable data to measure fair value. We adopted the provisions of FSP 157-3, which did not impact our financial position or results of operations.

In December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities” (“FSP FAS 140-4 and FIN 46(R)-8”). FSP FAS 140-4 and FIN 46(R)-8 amends FAS 140 and FIN 46(R) to require additional disclosures regarding transfers of financial assets and interest in variable interest entities. FSP FAS 140-4 and FIN 46(R)-8 is effective for interim or annual reporting periods ending after December 15, 2008. FSP FAS 140-4 and FIN 46(R)-8 did not have any impact on our financial statements.

In January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets”. FSP EITF 99-20-1 changes the impairment model included within EITF 99-20 to be more consistent with the impairment model of SFAS 115. FSP EITF 99-20-1 achieves this by amending the impairment model in EITF 99-20 to remove its exclusive reliance on “market participant” estimates of future cash flows used in determining fair value. Changing the cash flows used to analyze other-than-temporary impairment from the “market participant” view to a holder’s estimate of whether there has been a “probable” adverse change in estimated cash flows allows companies to apply reasonable judgment in assessing whether an other-than-temporary impairment has occurred. The adoption of FSP EITF 99-20-1, which is effective for annual reporting periods ending after December 15, 2008, will not have a material impact on our consolidated financial statements.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

On December 16, 2008, we dismissed DeJoya Griffith & Company LLC (“DeJoya”), as our independent registered public accounting firm. The reports of DeJoya on our financial statements for each of the past two fiscal years contained no adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles, except as that the reports of DeJoya for the fiscal years ended December 31, 2007 and 2006 indicated conditions which raised substantial doubt about the Company’s ability to continue as a going concern. The decision to change independent accountants was approved by our Board of Directors on December 16, 2008.

During our two most recent fiscal years and through December 19, 2008, the date of filing our Current Report on Form 8-K announcing the dismissal of DeJoya, we have had no disagreements with DeJoya on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of DeJoya, would have caused it to make reference to the subject matter of such disagreements in its report on our financial statements for such periods.

During our two most recent fiscal years there have been no reportable events as defined under Item 304(a)(1)(v) of Regulation S-K adopted by the SEC.

DeJoya provide us with a letter addressed to the SEC stating that it agreed with the above statements. This letter was filed as an exhibit to our Current Report on Form 8-K, which was filed with the SEC on December 19, 2008.

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INDUSTRY AND MARKET OVERVIEW

Cable and Wire Market

According to International Cablemakers’ Federation, China is the world’s largest cable & wire producer. The following chart illustrates China’s historical industry leading position in global and wire production from 2003 – 2007:

[GRAPHIC MISSING]

Source: International Cablemakers’ Federation, 2009

Magnet Wire Market

Magnet wire represents a sub-category in the cable and wire industry. Magnet wire is an insulated copper or aluminum electrical conductor used in motors, transformers and other electromagnetic equipment. When wound into a coil and energized, magnet wire creates an electromagnetic field. This effect can be used for a variety of purposes, such as energy generation and transformation, which has made magnet wire a basic building block of motorized appliances, automobiles, industrial machinery, residential and commercial heating, ventilating, air conditioning and refrigeration (HVACR) systems, computers, telephones, cell phones, and televisions.

According to a publicly available report by Gobi International, a provider of statistical market research reports and forecasts on insulated wire and cable, in 2006 global consumption of magnet wire was more that $10 billion. The report also indicated that China has the largest demand for magnet wire in the world, and forecasted demand is expected to grow by 38.3% from 2007 to 2012, the highest among all major economies.

The growth in China’s magnet wire market has significantly outpaced the global market since 2000. According to Beijing Kaiboxin Enterprise Consulting Company Ltd (“Kaiboxin”), a China based provider of industry research reports and forecasts, from 2000 to 2005, the global demand for magnet wire increased at a CAGR of 3%, while that of China increased at 17% during the same period. In 2005 China accounted for approximately 29% of the worldwide market, and it is expected to account for 48% of the global market share in 2015.

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The following charts indicate the historical and projected growth of the Chinese magnet wire market. As evidenced in the charts, the information technology sector is projected to experience the largest percentage growth through 2015. On a historical basis, in 2005, the electric motor sector represented the largest sub-sector with 53% of the overall market.

China’s Magnet Wire Market

 
Projected Growth by Sector   2005 Share of Total Demand
[GRAPHIC MISSING]   [GRAPHIC MISSING]

Source: Kaiboxin, 2007

Copper

Copper ranks third in the world consumption of metals after iron and aluminum. Copper’s chemical, physical and aesthetic properties make it attractive for many applications including electronics and communications, construction, transportation, and industrial equipment. The chief commercial use of copper is based on its electrical conductivity which is second only to that of silver among all metals. About three quarters of total consumption is accounted for by electrical uses, including power transmission and generation, building wiring, telecommunication, and electrical and electronic products.

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According to International Copper Study Group (“ICSG”), world refined copper consumption grew from 14.9 million metric tons (“Mt”) in 2001 to 18.5 million Mt in 2007, a CAGR of 3.7%, as indicated by the following chart:

World Copper Consumption

(Metric Tons)

[GRAPHIC MISSING]

Source: Copper Development Association Inc., 2008

However, ICSG projected copper consumption to be 18.25 million Mt in 2008 and 18.9 million Mt in 2009, with production projected be 18.4 Mt in 2008 and 19.2 Mt in 2009. This resulted in a supply surplus in 2008 of 109,000 Mt, and the surplus is projected to increase to 277,000 Mt in 2009.

The following chart indicates the major global refined copper consuming nations in the world in 2006, as determined by ICSG. China ranked the largest in the world with a market share of 22%:

Major Copper Consuming Nations, 2006

[GRAPHIC MISSING]

Source: Copper Development Association Inc., 2008

According to ICSG, in 2006, China consumed 627,000 more tons of refined copper than it produced from primary sources. The shortfall in production was satisfied through recycling of scrap copper as well as copper imports, which are more expensive due to freight costs. We believe that the continued urbanization of China should continue to drive strong copper consumption within China in the future.

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The dynamics of constrained supply and growing Chinese demand, as well as the resulting price surge, has contributed to the continued search for cost effective alternatives to pure copper. Manufacturers in the cable and wire industry have begun pursuing and adopting alternative technologies, including the use of scrap copper and cheaper metal aluminum.

Scrap Copper

The secondary copper recovery process is comprised of mature technologies comprised of pyro-metallurgical processes. This process is divided into four separate operations: scrap pre-treatment, smelting, alloying, and casting. Pre-treatment includes the cleaning and consolidation of scrap in preparation for smelting. Smelting consists of heating and treating the scrap for separation and purification of specific metals. Alloying involves the addition of other metals to copper to obtain desirable qualities characteristic of the combination of metals. In the casting process, the molten metal is poured into moulds for being turned into different shapes.

According to ICSG, secondary refined copper accounted for approximately 15.2% of refined copper production in 2007. A price spread between refined copper and scrap copper, reflecting the profit for the recycling process, fluctuates in relation to the movement of copper prices, as well as scrap consumption. The following charts illustrate that the price spread increased steadily together with the copper price and worldwide secondary refined production during 2004 to 2007:

 
Copper Price vs. Price Spread
between Copper and Scrap
  Worldwide Secondary Refined Production
[GRAPHIC MISSING]   [GRAPHIC MISSING]
Source: LME, ICSG   Source: ICSG

China is a net exporter of copper and has deficient copper reserves. In recent years, China has significantly grown its refining capacity. To meet increased demand, China has been importing raw materials including scrap copper to fill the gap. According to China Metals Information Network, China’s importation of scrap copper increased significantly to 5.58 million Mt in 2007 from 2.5 million Mt in 2000. China’s government has also established industrial policies to encourage the use of scrap copper. In 2007 the import duty on scrap copper in China, historically 1.5%, was removed. In China’s 11th Five-Year (2006 – 2010) Plan it encouraged the greater use of scrap metals to help alleviate a shortfall in supplies and set the target consumption of secondary copper at 35% of total national copper consumption.

Copper Clad Aluminum (“CCA”) Wire

CCA bimetallic materials are an ideal substitute for pure copper, a major raw material component of magnet wire, and a prime alternative to satisfy China’s demand. Bimetallic materials have been in existence for decades, but until recently they have only been selectively adopted due to higher production costs and historically low copper prices. However, as the price of copper increased in recent years, companies have started to use CCA bimetallic materials as an alternative.

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CCA wire is enameled magnet wire composed of an inner aluminum core and outer copper cladding. CCA wire has a significant cost advantage over copper because its main constituent, aluminum is a cheaper metal. In addition to the cost advantages, the properties of CCA wire include:

Lighter than pure copper wire;
Higher conductivity and strength than pure aluminum wire; and
Better solderability than aluminum, due to the lack of an oxide layer which prevents solder adhesion when soldering bare aluminum.

However, CCA wire has a high fabrication cost, as the cladding process is more complex than conventional wire-drawing. As a result, developed economies have not widely used CCA.

As a result of the changes in the market conditions in recent years, Chinese companies perceived a potential market opportunity and installed capacity for production of CCA wire. This has in turn resulted in improvements in the production process and made increased production volumes of CCA wire available from China. As a result of the increased production capacity, China has become leading global supplier in CCA market.

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BUSINESS

Overview

Lihua is one of the first vertically integrated companies in China to develop, design, manufacture, market and distribute low cost, high quality, alternatives to pure copper magnet wire, which include copper-clad aluminum wire (“CCA”) and recycled scrap copper wire. Primarily because of its high electrical conductivity, pure copper magnet wire is one of the fundamental building blocks in many components in a wide variety of motorized and electrical appliances such as dishwashers, microwaves and automobiles. In most instances, Lihua’s CCA and recycled scrap copper are an excellent, less costly substitute for pure copper magnet wire.

Lihua sells its products directly to manufacturers in the consumer electronics, white goods, automotive, utility, telecommunications and specialty cable industries and to distributors in the wire and cable industries. Our track record and reputation for producing high quality products in large quantities has paved the way for rapid expansion of our customer base. We have approximately 300 customers and no one customer accounts for more than 7% of our sales. At least in part because the copper magnet wire industry in China is large and growing, Lihua’s product sales are comprised of approximately 95% domestic sales and approximately 5% of export sales.

Prior to 2009, our business focused primarily on CCA. Our CCA business consists of acquiring CCA with a line diameter of 2.05 mm from our suppliers as a raw material, reducing the diameter of the CCA by drawing it and then annealing and coating it. Our final CCA product typically has diameters from 0.03 mm to 0.18 mm, depending on customer specifications. To meet strong customer demand, we substantially increased our CCA production capacity from 2,200 tons per annum as of the end of 2006 to 6,000 tons per annum as of June 30, 2009. We plan to further increase our CCA production capacity to 7,500 tons per annum by the end of 2009. In each of the following periods, our sales of CCA were as follows: 2006 – 2,009 tons, 2007 – 4,065 tons, 2008 – 5,966 tons and six months ended June 30, 2009 – 2,959 tons.

In addition to our CCA business, in the first quarter of 2009, we began to produce copper rod from recycled scrap copper. As of June 30, 2009, our scrap copper refinery capacity was approximately 25,000 tons per annum. To the extent our capacity permits, we process our copper rod into copper magnet wire. Because our output of copper rod exceeds our capacity to process it into copper magnet wire, we sell our excess copper rod to smaller wire manufacturers for further processing. During the six months ended June 30, 2009, we sold 3,602 tons of copper magnet wire and 5,559 tons of copper rod. We currently are working to expand our magnet wire production capacity so that we can use a greater proportion of our copper rod rather than selling it to other manufacturers, thereby increasing our profit margins and overall profitability. We are exploiting a range of marketing strategies for the copper magnet wire business, including cross-selling our copper magnet wire to our existing CCA customers.

Lihua is well positioned to continue to capture further market share in the magnet wire industry. CCA and copper magnet wire are increasingly being accepted as alternatives to pure copper wire. As a result, our sales and net income have grown substantially over the last three years. We generated sales of $15.7 million in 2006, $32.7 million in 2007 and $50.0 million in 2008, representing a Compound Annual Growth Rate (“CAGR”) of 78.2%. We achieved net income of $4.5 million in 2006, $7.7 million in 2007 and $11.7 million in 2008, representing a CAGR of 61.2%. Adoption of CCA and recycled copper magnet wire as alternatives to pure copper wire will likely increase, and we expect that our sales and net income should continue to grow as a result. During the six months ended June 30, 2009, we generated sales of $69,365,668 and net income of $10,693,720, up 180% and 83.1% from the same six-month period in 2008.

We continually pursue technological innovations and improvements in our manufacturing processes. We have obtained one utility model patent in China and have three pending invention patent applications in China related to our production process. In addition, we have entered into a technology cooperation agreement with a university in China. We believe that our emphasis on technological innovations and production efficiency has contributed significantly to our leading industry position in China and will continue to do so for the foreseeable future.

Further, significant barriers to entry make it difficult for newcomers to successfully compete with our CCA and copper magnet wire businesses. For example, with respect to CCA, it is challenging to maintain

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high quality during the process of drawing, annealing and coating CCA, especially finer diameter wires. Our knowledge and experience in successfully generating high quality CCA give us a strong advantage over would-be competitors. With respect to copper magnet wire, our proprietary recycling technology offers us a unique ability to produce wire of a high enough quality to serve as a substitute to pure copper wire. Our experience and technology allow us to offer products that are, in most instances, superior and more cost-effective to those potential competitors can produce. Because we are already an approved vendor for many of our customers and qualifying new vendors can be time-consuming, we believe we are further advantaged vis-à-vis potential competitors.

To avoid copper commodity risk exposure, we maintain minimal raw material inventory. We confirm raw material purchase orders for scrap copper or CCA with suppliers for each sales order only when the applicable sales order has been received. On the other hand, our principal CCA and scrap copper suppliers usually dedicate portions of their inventories as reserves to meet our manufacturing requirements. Our most significant supplier of CCA provides approximately 30% of our CCA raw material needs, but we have built a large network of reliable suppliers that deliver high quality raw materials, and accordingly, are not dependent upon any one supplier for our success.

We believe that our experienced management team will continue to leverage our leading technologies and increasing capacity to manufacture, produce, market and distribute cost-effective, high quality, CCA, recycled copper magnet wire and other alternatives to pure copper wire. If, as anticipated, worldwide demand for alternatives to pure copper wire grow and we continue to innovate and improve in our processes, we will be well positioned to compete in the copper wire market on a global scale.

Our Strengths

We believe that the following strengths have contributed to our competitive position in China:

Leading market position and early-mover advantage.  We are one of the leading CCA wire producers in China, as measured by our current annual superfine wire production capacity of 6,000 tons. We have targeted to increase our annual CCA wire production capacity to 7,500 tons by the end of 2009 through internal expansion.

We believe we were one of the first companies in China to produce CCA superfine wire on a commercial scale This early-mover advantage in China coupled with our reputation for high quality products has enabled us to establish a wide array of customer and supplier relationships and to expand our relationships with our existing customers. We have recently launched commercial production of superfine wires that are manufactured from refined scrap copper and are also in the process of developing a super-micro-fine wire production technology.

We believe we are well positioned to leverage our increasing production scale and to expand our customer base and product portfolio, to meet China’s growing demand for cable and wire products.

Proprietary automated and efficient production facility that can be scaled to meet increased demand.  To cope with surging demand, we have continuously expanded our production facility in a very rapid way: our production capacity increased from 2,200 tons per annum in 2006 to 6,000 tons per annum as of June 30, 2009. We have targeted to increase our annual production capacity in CCA magnet wire, copper wire, and scrap copper refinery to 7,500, 14,000 and 25,000 tons, respectively, by the end of 2009, and to 15,000, 50,000 and 100,000 tons, respectively, by the end of 2011. We launched production in our new plant in March 2009, which occupies about 66,000 sq. meters and is 6 times of the size of our old plant.

Efficient proprietary production technology.  We continually pursue technological improvements to our manufacturing processes via our strong in-house development teams. We have obtained one utility model patent for our manufacturing process, and have three other pending invention patents related to our production processes. In addition, we have entered into technology cooperation agreements with research institutes to develop new techniques and processes. Our research and development (“R&D”) efforts have generated technological improvements that have been instrumental in controlling our production costs and increasing our operational efficiency. The combination of our trade secrets and our proprietary production technology enables us to use lower-cost recycled copper feedstock and to produce wire with a smaller line diameter.

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Rigorous quality control standards.  Consistent with our continuing commitment to quality, we impose rigorous quality control standards at each stage of our production process. Since January 2007, our plant has maintained ISO9001:2000, a certification of quality management systems maintained by the International Organization of Standardization and administered by certification and accreditation bodies, which is subject to annual review. For copper magnet wire, we obtained a National Industrial Production License for copper magnet wire in January 2009 and satisfied the UL standard in October 2008. According to a test report dated April 17, 2008, China’s Machinery Industry Quality Supervision and Test Center For Electrical Material and Special Wire and Cable, a government inspection and testing agency, recycle copper rod produced by us satisfied the national standard for electrical copper wire, GB/T3952-1998. We believe these testing results demonstrate our commitment to producing high-quality products as well as providing us with a competitive advantage over certain domestic competitors in the event China implements stricter fuel-quality standards in the future.

Strong technology improvement and R&D capabilities.  Our technology improvement and R&D infrastructure includes a team of more than 30 professionals focusing on quality assurance, equipment maintenance, process maintenance and improvement, and new product and process R&D. We absorb most of the technology related expenses in our production costs, and thus have only incurred R&D costs at very low levels in past years. However, we believe our overall technology-related spending is greater than many of our China-based competitors. We were granted one utility model patent and have three pending invention patents relating to our production process. We believe our knowledge and experience in R&D are the key reason why we were able to become one of the earliest and leading CCA manufacturers in China and enabled us the ability to expedite the launch of our refined superfine copper wire production. As a result, we have been able to take advantage of the emerging market opportunity as a result of copper price volatility in recent years.

Experienced management and operations teams with local market knowledge.  Our senior management team and key operating personnel have extensive management skills, relevant operating experience and industry knowledge. Mr. Zhu, our founder, Chairman and CEO, has extensive experience managing and operating companies in the cable and wire industry. We believe our management team’s in-depth knowledge of the Chinese market will enable us to formulate sound expansion strategies and to take advantage of market opportunities.

Our Strategies

We will continue to strive to be a leading supplier of copper replacement products in the PRC cable and wire industry, while maximizing shareholder value and pursuing a growth strategy that includes:

Developing market driven new products and processes.  We consistently pursue technological improvements to our manufacturing processes and new product development through our strong in-house technology development team. Our R&D efforts have generated technological improvements that have been instrumental in controlling our production costs and increasing our operational efficiency. Our combination of trade secrets and proprietary production technology enables us to use lower-cost feedstock and to attain higher product quality. Through innovation and further production efficiencies, we believe our emphasis on R&D will enable us to maintain our position as a leading copper replacement product supplier in the PRC cable and wire industry.

Reliable supplier network for low cost raw materials.  We maintain a long-term supply relationship with several key suppliers. We believe many of our suppliers prefer to sell raw materials to us due to our track record for prompt payment as well as our ability to accept large quantities of raw materials. Our long-standing supplier relationships provide us with a competitive advantage in China, and we intend to broaden these relationships to parallel our efforts to increase the scale of our production facilities, thereby maintaining a diverse supplier network while leveraging our purchasing power to obtain favorable price and delivery terms. With the launch of the scrap copper refinery business, we have also established a scrap copper warehouse in one of the largest scrap metal markets in China.

Production capacity expansion.  In order to accommodate the rapidly increasing demand of our products, we have expanded, and plan to continue to expand, our manufacturing capacity. An increase in capacity has a significant effect on our results of operations, both in allowing us to produce and sell more products and achieve higher revenues, and in lowering our manufacturing costs resulting from economies of scale. We have

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expanded rapidly since we launched our CCA wire production in 2006. The following table sets forth information on the historical development of our production facilities:

   
  Plant 1   Plant 2
Location   Danyang, Jiangsu   Danyang, Jiangsu
Began construction   March 1999   March 2008
Began production   January 2006   March 2009
Capacity as of March 31, 2009 (mt per year)   CCA wire-6,000   Copper refinery-25,000
Copper wire-6,000
Site area (square meteres)   11,000   66,000

We believe our expansion strategy will enable us to benefit from continued growth in overall copper demand in China. The following sets out our future plan to ramp up our annual manufacturing capacity:

     
  By the end of
     2009   2010   2011
Copper wire (MT)     14,000       20,000       50,000  
CCA wire (MT)     7,500       10,000       15,000  
Copper refinery (MT)     25,000       25,000       100,000  

Selectively pursue acquisition opportunities.  Although we have not identified a potential acquisition target(s), we may in the future look to acquire businesses or assets that may enhance our market position.

Strengthening our relationships with key customers and diversifying our customer base.  We intend to strengthen our existing relationships with key customers while further expanding our customer base. We plan to continue providing high-quality and cost-competitive products to our existing customers and use our existing customer network and strong industry reputation to expand geographically to strategic locations across China. We plan to increase our sales service personnel to further expand our supplier and customer base and to provide increased coverage of the market. To assist our efforts, we intend to continue to use customer feedback to improve our service quality and strengthen our long-term customer base.

Manufacturing Process

Copper recycling and wire processing

Our copper recycling pre-treatment phase utilizes our proprietary cleaning technology with respect to which we have applied for an invention patent. The process involves manually or mechanically sorting, stripping, shredding and magnetically separating the scrap copper. The scrap copper is then compacted and pre-treated with numerous chemicals. Following the pre-treatment phase, the metal is smelted and fire refined in a furnace. The furnace refining process commences with loading the furnace with the pre-treated metal, smelting it, and then refining and reducing it. Thereafter, the molten copper is continually belt cast and further treated, and the copper rod is ultimately wound into bundles for further processing or sale.

Our fine and superfine wire drawing process utilizes either our recycled copper rod or CCA and involves drawing the wire to the desired final diameter. Whether using recycled copper rod or CCA, the drawing process entails multiple steps, including heat treating, annealing, baking, cooling, quenching and spooling, as may be necessary to achieve the desired wire diameter and other customer specifications. The CCA drawing process, however, is more complex than the process for using recycled copper rod, and utilizes our proprietary trade secrets to ensure that the wire maintains the original bimetallic bond from the raw material. The fine or superfine wire is either sold to customers or is coated and further processed to become magnet wire.

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The following illustration is a simplified outline of our process:

[GRAPHIC MISSING]

Products

Copper Clad Aluminum (CCA)

CCA is an electrical conductor consisting of an outer sleeve of copper that is metallurgically bonded to a solid aluminum core. This structure is set out in the following CCA illustration:

[GRAPHIC MISSING]

Note: The illustration is not drawn to scale.

Over the past five years, CCA has become a viable and popular alternative to pure copper wire. In comparison with solid copper wire, CCA raw material costs are generally 35% to 40% lower per ton. CCA and pure copper raw materials are purchased based on weight. Since aluminum accounts for approximately eighty six percent (86%) by volume of CCA wire, each ton of CCA wire can yield 2.5 times the length of each ton of solid copper wire. Our CCA products are a cost effective substitute for pure copper wire in a wide variety of applications such as wire and cable, consumer electronic products, white goods, automotive parts, utility applications, telecommunications, and specialty cables.

We produce CCA wire with the line diameter in the range of 0.03 mm to 0.18 mm. We produce and distribute wire in the following forms:

Raw wire.  Raw wire is sold to smaller wire manufacturers for further processing; and
Magnet wire.  Magnet wire can be fine or super fine and is the basic building block of a wide range of motorized appliances and is mainly used for its electrical conductivity.
Tin plated wire.  Tin plated wire is mainly used for the transmission of audio and visual signals.

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We produce in accordance with customer orders and we customize our products based on customer specifications. Customer specifications vary depending on the end use of the CCA wire, but are primarily determined based upon two measurements, the thickness of the copper layer on the aluminum core and the diameter of the CCA wire.

Copper Rod

In March 2009, we launched the manufacturing of copper rod from our newly acquired continuous production system for fire refining, melting and rod casting. We use scrap copper as the raw material to manufacture and sell copper rods. In addition, we produce cable and copper magnet wire from copper rods.

The following table has set out the end uses of copper rod based wire products:

Cable

Used for:
telephone drop wire and conductors;
electric utilities; transmission lines, grid wire, fence and structured grounds;
industrial drop wire, magnet wire, battery cables, automotive wiring harnesses; and
electronics: radio frequency shielding

Magnet wire

Used in:
electronic motors, transformers, water pumps, automobile meters, energy, industrial, commercial, and residential industries.

Quality Control

We apply rigorous quality control standards and have implemented safety procedures at all phases of our production process. Since January 2007, our plant has maintained ISO9001:2000, a certification of quality management systems maintained by the International Organization of Standardization and administered by certification and accreditation bodies.

Quality assurance efforts have been made on various lines of products in the following ways:

Copper magnet wire.  We strictly follow the mandatory national product standard in China, and obtained National Industrial Production License for copper magnet wire in January 2009 and satisfied UL standards in October 2008.
Scrap copper refinery.  According to a test report dated April 17, 2008 of China’s Machinery Industry Quality Supervision and Test Center For Electrical Material and Special Wire and Cable, a government inspection and testing agency, our copper rods satisfied the national standard for electrical copper wire, GB/T3952-1998.
CCA wire.  We strictly follow the industry recommended standards.

We believe the testing results we have obtained demonstrate our commitment to producing high-quality products and provide us with a competitive advantage over certain domestic competitors in the event China implements stricter quality standards in the future.

Raw Materials and Suppliers

We primarily use CCA wire with a line diameter of 2.05 mm, produced by our bimetallic wire suppliers, to manufacture superfine CCA wire. Our raw material procurement policy is to use only long-term suppliers who have demonstrated quality control, reliability and maintain multiple supply sources so that supply problems with any one supplier will not materially disrupt our operations. In order to avoid copper price volatility exposure, we do not maintain raw material inventory. We confirm raw material purchase orders with suppliers only when the relevant sales orders are received. On the other hand, our principal suppliers usually dedicate portions of their inventories as reserves to meet our manufacturing requirements. Suppliers are generally paid with a credit term of 30 days.

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For our scrap copper refinery, we primarily use No. 2 scrap copper in our production of two types of recycled copper: cable and magnet wire. We purchase the materials through dealers and the scrap metal market. We have recently established a scrap copper raw material warehouse in one of China’s largest scrap metal markets. Scrap copper is generally purchased with cash on delivery terms. We believe that we will have access to an adequate supply of scrap copper on satisfactory commercial terms due to the numerous scrap dealers located throughout Guangdong Province in the PRC.

For each of the fiscal years ended December 31, 2006, 2007 and 2008, and the three months ended June 30, 2009 our five largest suppliers accounted for 100% of our total purchases, and our single largest supplier accounted for 31.9%, 26.8%, 46.5% and 21.1% of our total purchases, respectively. We believe that we will have access to and an adequate supply of CCA wire on satisfactory commercial terms. We purchases raw materials needed for our CCA wire from the following principal suppliers:

Fushi International (Dalian) Bimetallic Cable Co., Ltd.
Soviet Cloud Electricity Limited Company
Jiangsu Heyang Wire and Cable Co., Ltd.
Changzhou Jieer Letter Composition Metal Material Limited Company
Suzhou Guoxin Wire and Cable Technology Limited Company

Sales, Marketing and Distribution

Chinese domestic market sales account for a majority of our revenue. We target our sales efforts primarily in the coastal provinces of Guangdong, Fujian, Zhejiang, Jiangsu and Shanghai areas, where the majority of our customers are located. We have a sales staff of approximately 30 employees. We maintain 9 sales offices in China, including 3 in Guangdong, 3 in Zhejiang, 1 in Fujian, 1 in Shandong, and 1 in Anhui. We participate in industry expositions in which we showcase our products and services and from which we obtain new customers.

Beginning in 2008, we launched an export business and generated $0.3 million from overseas markets, We currently have customers in Brazil, India, Pakistan and Vietnam to which we directly sell our products. For each of 2006, 2007, 2008 and the three months ended June 30, 2009, we generated $0.8 million, $1.2 million, $2.1 million and $1.3 million, respectively, of our total revenue from our online market platform operated through Alibaba’s trading site, an online marketplace for both international and domestic manufacturers and trading companies in a variety of industries.

We have a small fleet of trucks that deliver merchandise to customers located within three hours from our production facilities. Alternatively, we contract with independent third-party trucking companies to deliver our products when necessary.

Customers

We sell our products in China either directly to manufacturers or through distributors in the wire and cable industries and manufacturers in the consumer electronics, white goods, automotive, utility, telecommunications and specialty cable industries. For 2006, 2007, 2008 and the three months ended June 30, 2009, we did not have any single customer which accounted for over 10% of our total revenue.

For the three months ended June 30, 2009 and each of the fiscal years ended December 31, 2006, 2007 and 2008, our five largest customers accounted for 13.7%, 22.5%, 14.5% and 20.2% of our total sales, respectively, and the single largest customer accounted for 3.3%, 5.0%, 3.0% and 6.6% of our total sales, respectively. We generally extend unsecured credit for 30 days to large or established customers with good credit history. Management reviews its accounts receivable on a regular basis to determine if the allowance for doubtful accounts is adequate at each quarter-end.

Competition

China is the world’s largest producer and market for cable and wire. Our sales are predominantly in the PRC, and as a result, our primary competitors are PRC domestic companies. To a lesser degree we face competition from international companies.

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We believe being located in China provides us with a number of competitive factors within our industry, such as:

Pricing.  A producer’s flexibility to control pricing of products and the ability to use economies of scale to secure competitive pricing advantages;
Technology.  A producer’s ability to manufacture products efficiently, utilize low-cost raw materials, and to achieve better production quality; and
Barriers to entry.  A producer’s technical knowledge, access to capital, local market knowledge and established relationships with suppliers and customers to support the development of commercially viable production facilities.

Competition in the bimetallic industry, particularly in China, can be characterized by rapid growth and a concentration of manufacturers. We believe we differentiate ourselves by being an early mover in the industry, and by offering superior product quality, timely delivery and better value. We believe we have the following advantages over our competitors:

the performance and cost effectiveness of our products;
our ability to manufacture and deliver products in required volumes, on a timely basis, and at competitive prices;
superior quality and reliability of our products;
our after-sale support capabilities, from both an engineering and an operational perspective;
excellence and flexibility in operations;
effectiveness of customer service and our ability to send experienced operators and engineers as well as a seasoned sales force to assist our customers; and
overall management capability.

Research and Development

Our superfine wire manufacturing technology was developed and refined in-house by our technology improvement and R&D team. This team comprises over 30 professionals focusing on quality assurance, equipment maintenance, process maintenance and improvement, and new product and process R&D.

We absorb most of the development technology related expenses in our production costs, and thus have only reported R&D costs at very low levels in the past years. In the three months ended June 30, 2009, and for each the fiscal years ended December 31, 2006, 2007 and 2008, we reported R&D costs of $35,643, $32,504, $56,143 and $60,041, respectively. However, we believe our overall technology development related spending is greater than many of our China-based competitors.

We believe our commitment to, and knowledge and experience in, R&D are the key reasons why we were one of the earliest and leading CCA wire manufacturers. This expertise has enabled us to e