424B3 1 v161784_424b3.htm
 
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-156120
 
Prospectus
 
LIHUA INTERNATIONAL, INC.

8,993,182 Shares of Common Stock

This prospectus relates to the resale of up to 8,993,182 shares (the “Shares”) of Common Stock, par value $0.0001 per share (the “Common Stock”) of Lihua International, Inc., a Delaware corporation, that may be sold from time to time by the selling stockholders named in this prospectus on page 20 (the “Selling Stockholders”).  The shares of Common Stock offered under this prospectus  includes (i) 6,993,182 shares of Common Stock currently issued and outstanding, (ii) 1,500,000 shares of Common Stock issuable upon exercise of Series A Warrants, and (iii) 500,000 shares of Common Stock issuable upon exercise of Series B Warrants (collectively, the “Warrants”).
 
We will not receive any proceeds from the sale of the Shares by the Selling Stockholders. To the extent the Warrants are exercised for cash, if at all, we will receive the exercise price for those Warrants. The Selling Stockholders may sell their shares of Common Stock on any stock exchange, market or trading facility on which the shares are traded or quoted or in private transactions. These sales may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices.

Our Common Stock is traded on the NASDAQ Capital Market, under the symbol “LIWA”. The closing price of our Common Stock on September 18, 2009 was $6.92.

THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE SHARES ONLY IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT. SEE “RISK FACTORS” BEGINNING ON PAGE 9 FOR A DISCUSSION OF RISKS APPLICABLE TO US AND AN INVESTMENT IN OUR COMMON STOCK.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

The date of this prospectus is October 2, 2009

 

 

Table of Contents

PROSPECTUS SUMMARY
    2  
         
THE OFFERING
    7  
         
SUMMARY CONSOLIDATED FINANCIAL DATA
    8  
         
RISK FACTORS
    9  
         
NOTE REGARDING FORWARD-LOOKING STATEMENTS
    21  
         
USE OF PROCEEDS
    21  
         
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
     21  
         
SELLING STOCKHOLDERS
    22  
         
PLAN OF DISTRIBUTION
    27  
         
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
    32  
         
BUSINESS
    52  
         
DIRECTORS AND EXECUTIVE OFFICERS
    75  
         
EXECUTIVE COMPENSATION
    77  
         
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
    80  
         
DESCRIPTION OF CAPITAL STOCK
    84  
         
TRANSFER AGENT AND REGISTRAR
    91  
         
LEGAL MATTERS
    91  
         
EXPERTS
    91  
         
WHERE YOU CAN FIND MORE INFORMATION
    91  
         
INDEX TO AUDITED FINANCIAL STATEMENTS
    Q-1  
 
 

 
 
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 Common Stock, especially the risks of investing in our Common Stock, which we discuss later in “Risk Factors,” and our consolidated  financial statements and related notes beginning on page F-1. Unless the context requires otherwise, the words “we,” the “Company,” us” and “our” refer to Lihua International, Inc. and our subsidiaries.

The Company
 
Overview
 
We are primarily engaged in the value-added manufacturing of bimetallic composite conductor wire, such as copper clad aluminum (“CCA”) fine wire, CCA magnet wire and CCA tin plated wire and sales to distributors in the wire and cable industries and to manufacturers in the consumer electronics, white goods, automotive, utility, telecommunications and specialty cable industries.  At the end of the first quarter of 2009, we began utilizing refined, or recycled, copper to manufacture and sell low content oxygen copper cable and copper magnet wire to our existing customer base.

Copper is one of the most widely used metals in the world. Copper’s chemical, physical and aesthetic properties make it attractive for many domestic, industrial and high-end technology applications. Some of the major uses of copper include: electronics and communications, construction, transportation, and industrial equipment. We believe that about three quarters of total copper use is accounted for by electrical uses, including power transmission and generation, building wiring, telecommunication, and electrical and electronic products. We believe that building construction is the single largest market, followed by electronics and electronic products, transportation, industrial machinery, and consumer and general products.

According to a publicly available report from the International Copper Study Group, in 2006, China consumed 627,000 tons more refined copper than it produced. This shortfall is satisfied through recycling of copper as well copper imports which are more expensive due to freight costs. China’s growth is expected to continue driving strong copper consumption in the coming years. These factors should contribute to the continued search and adoption of alternatives to pure copper, such as bimetallic composite conductor wire, that can meet China’s demand in a less costly manner.  In addition, we will also seek to capitalize on the large demand for copper in China by entering the market as a low cost provider of pure copper products.

Growth Strategy

Our goal is to become a worldwide leader in the CCA magnet wire industry. We seek to grow our Lihua Electron business in the following manner:

·
Manufacturing   We will strive to maintain and expand our profit margins by enhancing equipment management, optimizing processes and product structures, perfecting the supplier system and cutting production costs.

·
Capacity Expansion   Since our production lines have been running at full capacity for several years we intend to increase the number of production lines to better meet strong customer demand.
 
 
2


Corporate Structure
 
The following diagram illustrates our corporate and shareholder structure as of the date of this prospectus.  All of our subsidiaries are owned directly by us.
 
 
 

 
 
 
3

 
 
The following diagram illustrates our corporate and shareholder structure, assuming: (i) the issuance of shares of Common Stock being sold pursuant to this prospectus upon full exercise of the Warrants, (ii) the exercise of the option held by Mr. Jianhua Zhu, our Chairman and CEO, to acquire 3,000 shares of Magnify Wealth Enterprise Limited, a British Virgin Islands holding company (“Magnify Wealth”) from Mr. Fo Ho Chu, and (iii) the subscription by Mr. Chu and Imbis Europe B.V. h/o Asia Trading (EDC) (“ Europe EDC”) to acquire 632 and 32 shares, respectively, of Magnify Wealth.
 

 
 
4

 
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 of Plastron Acquisition Corp. 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. ( “Lihua Electron ” ) and Jiangsu Lihua Copper Industry Co., Ltd., (“Lihua Copper ”), each a limited liability company organized under the existing laws of the Peoples Republic of China.  Lihua Electron and Lihua Copper were incorporated on December 30, 1999 and August 31, 2007, respectively.  From time to time, we refer to  Lihua Electron and Lihua Copper collectively as the “PRC Subsidiaries”.  We changed our name from Plastron Acquisition Corp. to Lihua International, Inc. on September 22, 2008.
 
Lihua Electron is a leading value-added manufacturer of bimetallic composite conductor wire, such as copper clad aluminum (“CCA”) fine wire, CCA magnet wire and CCA tin plated wire. Lihua Electron sells to distributors in the wire and cable industries and to manufacturers in the consumer electronics, white goods, automotive, utility, telecommunications and specialty cable industries. Lihua Copper, our other PRC subsidiary, which began operations at the end of the first quarter 2009, utilizes refined, or recycled, copper to manufacture and sell low content oxygen copper cable and copper magnet wire to Lihua Electron’s existing customer base.
 
Restructuring

In June 2008, Magnify Wealth, which is 100% owned by 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 Subsidiaries (the “PRC Subsidiary Acquisition”). The PRC Subsidiaries were owned at that time by companies controlled by our CEO, Mr. Zhu, and  minority shareholders, Mr. Chu and Europe EDC (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 Subsidiaries (the “Ally Profit Companies”).

Legal Structure of the PRC Subsidiary Acquisition

The PRC Subsidiary Acquisition was structured to comply with the 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 approval is 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.  Since PRC M&A laws would have prohibited Mr. Zhu, a PRC citizen, from immediately receiving shares of Magnify Wealth in a share exchange as consideration for the sale of his interests in the PRC Subsidiaries, Mr. Zhu and Mr. Chu instead agreed that they would enter into a 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,  there is no prohibition under PRC laws for Mr. Zhu to earn an interest in Magnify Wealth after the PRC Subsidiary Acquisition is consummated 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 amount per share.

In October 2008, the goal of the Restructuring was realized when we entered into a share exchange agreement with Magnify Wealth, pursuant to which we acquired 100% of the equity of the Ally Profit Companies in exchange for the issuance of 14,025,000 shares of our Common Stock to Magnify Wealth.  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 approximately 57.5% of our common stock and is 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.
 
5

 
The possible future continued dilution of Magnify Wealth’s equity ownership in us and the PRC Subsidiaries will have no legal effect on us or on the equity interest in the PRC Subsidiaries 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 Subsidiaries using the “as if” pooling method of accounting, with no adjustment to the historical basis of the assets and liabilities of the PRC Subsidiaries.  The operations of the PRC Subsidiaries 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 Subsidiaries, he maintained legal control by remaining as the managing director of the PRC Subsidiaries and continuing to direct the business, operational and decision making functions of the PRC Subsidiaries after the PRC Subsidiary Acquisition was consummated.  Furthermore, Mr. Chu appointed Mr. Zhu to be the sole director of Magnify Wealth, Ally Profit and Lihua Holdings.

Executive Offices

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

 
6

 

THE OFFERING

The Offering

This prospectus relates to the sale by the Selling Stockholders of up to 8,993,182 shares of our Common Stock, which includes (i) 6,993,182 shares of Common Stock; (ii) 1,500,000 shares of Common Stock underlying our Series A Warrants, and (iii) 500,000 shares of Common Stock underlying our Series B Warrants.

Common Stock outstanding prior to offering
 
24,118,183
     
Total shares of Common Stock offered by Selling Stockholders
 
8,993,182
     
Common Stock to be outstanding after the offering (assuming full exercise of the Warrants)
 
26,118,183
     
Use of proceeds of sale
 
We will not receive any of the proceeds from the sale of the shares of Common Stock by the Selling Stockholders. However, to the extent that the Warrants are exercised for cash, we will receive proceeds from any exercise of the Warrants up to an aggregate of $7,000,000. We intend to use any proceeds received from the exercise of the Warrants, for working capital and other general corporate purposes.
     
Risk Factors
 
See “Risk Factors” beginning on page 9 and other information included in this prospectus for a discussion of factors you should consider before deciding to invest in shares of our Common Stock.
 
 
7

 
 
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 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.
 
(in thousands, except for percentages)

  
 
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
 
Cost of sales
   
(39,096
)   
   
(10,328
)   
   
(33,202
)   
   
(22,911
)   
GROSS PROFIT
   
9,732
     
4,710
     
16,804
     
9,766
 
Selling expenses
   
(587
)   
   
(172
)   
   
(700
)   
   
(417
)   
General and administrative expenses
   
(1,093
)   
   
(403
)   
   
(1,907
)   
   
(455
)   
Income from operations
   
8,051
     
4,134
     
14,197
     
8,894
 
Other income (expenses):
   
  
     
  
     
  
     
  
 
Interest income
   
47
     
8
     
68
     
16
 
Interest expenses
   
(106
)   
   
(106
)   
   
(515
)   
   
(97
)   
Merger cost
   
     
     
(259
)   
   
 
Change in fair value of warrants
   
(216
)   
   
     
     
 
Other income (expenses), net
   
501
     
(8
)   
   
4
     
 
Income before income taxes
   
8,277
     
4,030
     
13,495
     
8,813
 
Provision for income taxes
   
(1,572
)   
   
(528
)   
   
(1,793
)   
   
(1,089
)   
NET INCOME
 
$
6,705
   
$
3,501
   
$
11,702
   
$
7,724
 
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
 
   
December 31,
2008
   
June 30, 2009
 
   
Actual
   
Actual
 
Consolidated Balance Sheet Data
           
Cash and cash equivalents
  $ 26,041,849     $ 28,144,454  
Total assets
    56,812,888       70,622,102  
Total liabilities
    9,020,926       14,296,162  
Total shareholders’ equity
    34,675,334       43,209,312  
 
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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 Common Stock. 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 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 create 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 prices 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.

 
9

 

Fluctuating copper prices impact our business and operating results.

Copper prices, which have 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 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 recycled 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 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.

 
10

 

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.

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.

 
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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 to find such financing 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.

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.

 
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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 we win or lose. 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 57.5% 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 of this prospectus, 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 approximately 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.
 
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, 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.

 
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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 may incur significant increased costs as a result of being a public company.

As a public company, we incur significant legal, accounting and other expenses. 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 the implementation of 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 continue to evaluate and monitor our costs to implement these rules and regulations 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. 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.

 
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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 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 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 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.
 
 
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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.

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.

 
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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.
 
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, 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.

 
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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 a 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 our 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 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.

 
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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 the Common Stock
 
The market price for our securities may be subject to wide fluctuations.
 
The securities of a number of Chinese companies and companies with substantial operations in China have experienced wide fluctuations in their stock price. Among the factors that could affect the price of our Common Stock are risk factors described in this section and other factors, including:
 
 
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.

 
19

 
 
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 or the perception that these sales could occur, could cause the market price of our securities to decline. We currently have 24,118,183 shares of our Common Stock outstanding. Of that amount, approximately 3,100,000 shares of Common Stock are freely transferable without restriction upon resale, and 21,018,183 shares of Common Stock will be available for sale upon the expiration of varying lock-up periods some of which are subject to volume and other restrictions as applicable under Rule 144 under the Securities Act. 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 September 18, 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 2,138,000 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.
 
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 is currently listed on the NASDAQ Capital Market. 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.
 
 
20

 
 
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.

USE OF PROCEEDS

We will not receive any of the proceeds from any sales of the shares offered for sale and sold under this prospectus by the selling stockholders. However, to the extent that the Warrants are exercised for cash, we will receive proceeds from any exercise of the Warrants up to an aggregate of $7,000,000. Under the terms of the Warrants, cashless exercise is permitted but only after April 30, 2010 and then only if a registration statement covering the shares of common stock underlying the Warrants is not effective and the per share market value is higher than the exercise price of the Warrants. We intend to use the proceeds from the exercise of the Warrants, if any, for working capital and other general corporate purposes. We cannot assure you that any of the Warrants will ever be exercised or exercised for cash, if at all.
 
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
Market Information
 
Our Common Stock is listed on The NASDAQ Capital Market (“NASDAQ”) under the trading symbol “LIWA”. Prior to September 4, 2009 our Common Stock was not listed on any national securities exchange or quoted on any over-the counter market. The last reported sale price for our Common Stock on NASDAQ on September 18, 2009 was $6.92 per share.
 
The following table shows the range of high and low sale prices of our Common Stock during the third quarter of 2009, which represents the only period during which our Common Stock has been listed for trading.
 
Year
 
Period
 
High
   
Low
 
   
               
2009
 
Third Quarter (September 4 through September 18)
  $
7.50
    $
5.20
 
 
Holders
 
As of September 18, 2009, there were approximately 32 record holders of our common stock.
 
Dividends
 
We have never paid any dividends and we plan to retain earnings, if any, for use in the development of our 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.

Equity Repurchases
 
No repurchases of our common stock were made during the first or second quarter of 2009.
 
 
21

 

SELLING STOCKHOLDERS

We are registering for resale shares of our Common Stock that are issued and outstanding and shares of Common Stock Underlying Warrants held by the Selling Stockholders identified below. We are registering the shares to permit the Selling Stockholders and their pledgees, donees, transferees and other successors-in-interest that receive their shares from a Selling Stockholder as a gift, partnership distribution or other non-sale related transfer after the date of this prospectus to resell the shares when and as they deem appropriate in the manner described in the “Plan of Distribution”.

The following table sets forth:

·
the name of the Selling Stockholders,

·
the number of shares of our Common Stock that the Selling Stockholders beneficially owned prior to the offering for resale of the shares under this prospectus,

·
the maximum number of shares of our Common Stock that may be offered for resale for the account of the Selling Stockholders under this prospectus, and

·
the number and percentage of shares of our Common Stock to be beneficially owned by the Selling Stockholders after the offering of the shares (assuming all of the offered shares are sold by the Selling Stockholders).

Of the 8,993,182 shares being registered for resale under this prospectus, 975,000 shares were issued prior to the Share Exchange by us in transactions exempt from registration under Section 4(2) of the Securities Act, and/or Regulation D promulgated thereunder. The number of shares being registered by the selling stockholders named below takes into effect a 3.006012-to-1 forward stock split effected on September 16, 2008. Upon the completion of the stock split, the 2,259,480 shares of the company’s Common Stock outstanding  immediately prior to the stock split were converted into 6,792,024 shares of Common Stock, of which 5,817,026 shares of Common Stock were repurchased by the company from the stockholders on October 31, 2008.

·
390,000 shares in the aggregate being registered were originally issued to Messrs. Rapp, Chapman and Wagenheim in a private placement by the company consummated in March 2006.
·
585,000 shares in the aggregate being registered were originally issued to BCM Equity Partners II LLC, Penumbra Worldwide LTD. and Gerald Scott Klayman in a private placement by the company consummated in June 2008. Subsequently, in October 2008, BCM Equity Partners II LLC distributed its shares of common stock to Messrs. Allen, Raskas, Appel and Hocker, each of whom are listed in the selling security holder table.
 
Except for Messrs. Wagenheim, Rapp and Chapman, none of the selling stockholders has been an officer or director of the Company or any of its predecessors or affiliates within the last three years, nor has any selling stockholder had a material relationship with the Company.

Except for Broadband Capital Management LLC (“Broadband”), none of the selling stockholders is a broker dealer or an affiliate of a broker dealer. None of the selling stockholders, including Broadband Capital Management LLC has any agreement or understanding to distribute any of the shares being registered.
 
Messrs. Allen, Appel, Chapman, Hocker, Rapp, Raskas and Wagenheim  are employees of Broadband.

We entered into an exclusive placement agent agreement (the "Placement Agent Agreement") with Broadband on June 29, 2008, which was subsequently amended on August 14, 2008, for Broadband to act as our financial advisor and investment banker in the Private Placement and provide general financial advisory and investment banking services. At closing, we paid Broadband $975,000 for their services. Additionally, Broadband received Warrants to purchase up to 250,000 shares  of our common stock at an exercise price of $3.50.
 
We entered into an amended and restated letter agreement (the "Penumbra Agreement") with Penumbra Worldwide, Ltd. on October 27, 2008 for Penumbra to provide business consulting services to the Company including advising management on overall business strategy, assisting with corporate governance, coordinating with legal and audit teams and providing investor relations for the Company. The Penumbra Agreement is for a 15 month term. For its services, Penumbra was issued warrants to purchase 250,000 shares of our common stock at an exercise price of $3.50.
 
The remaining shares being registered for resale under this prospectus were issued in the Private Placement.
 
Each selling stockholder may offer for sale all or part of the shares from time to time. The table below assumes that the selling stockholders will sell all of the shares offered for sale. A selling stockholder is under no obligation, however, to sell any shares pursuant to this prospectus.

 
22

 
 
Name of Selling Stockholder
 
Shares
Beneficially
Owned Prior to
Offering(1)
   
Maximum
Number of
Shares to be Sold (2)
   
Number of
Shares
Owned After
Offering
   
Percentage
Ownership
After
Offering (3)
 
                         
Common Stock and Series A Warrants                        
Vision Opportunity China LP (4)
   
2,381,818
     
3,081,818
     
-0-
     
-0-
 
CMHJ Technology Fund II, L.P. (5)
   
2,381,818
     
2,772,727
     
-0-
     
-0-
 
Snow Hill Developments Limited (6)
   
1,159,000
     
1,159,000
     
-0-
     
-0-
 
Silver Rock II, Ltd. (7)
   
122,000
     
122,000
     
-0-
     
-0-
 
Timothy P. Hanley & Monica A. Hanley (8)
   
55,455
     
55,455
     
-0-
     
-0-
 
Rohan Oza (9)
   
55,455
     
55,455
     
-0-
     
-0-
 
Michael J. Attkiss (10)
   
44,364
     
44,364
     
-0-
     
-0-
 
Alpha Capital Anstalt (11)
   
43,809
     
43,809
     
-0-
     
-0-
 
Roscoe E. Dean IV (12)
   
27,727
     
27,727
     
-0-
     
-0-
 
David W. Forti & Jennifer Hall Forti (13)
   
27,727
     
27,727
     
-0-
     
-0-
 
Milton J. Wallace & Patricia Wallace, Jt. Ten. (14)
   
27,727
     
27,727
     
-0-
     
-0-
 
Joseph Muoio & Margaret Muoio (15)
   
13,864
     
13,864
     
-0-
     
-0-
 
Mike Balducci (16)
   
13,864
     
13,864
     
-0-
     
-0-
 
Stanley Raskas (17)
   
13,864
     
13,864
     
-0-
     
-0-
 
Gerald Scott Klayman (18)
   
57,118
     
57,118
     
-0-
     
-0-
 
Penumbra Worldwide, LTD (19)
   
1,663
     
1,663
     
-0-
     
-0-
 
Common Stock
                               
Philip Wagenheim (20)
   
65,033
     
65,033
     
-0-
     
-0-
 
Michael Rapp (21)
   
129,967
     
129,967
     
-0-
     
-0-
 
Clifford Chapman (22)
   
195,000
     
195,000
     
-0-
     
-0-
 
Charles W. Allen (23)
   
29,250
     
29,250
     
-0-
     
-0-
 
Ari Raskas (24)
   
24,375
     
24,375
     
-0-
     
-0-
 
Jeff Appel (25)
   
24,375
     
24,375
     
-0-
     
-0-
 
Corby T. Hocker (26)
   
19,500
     
19,500
     
-0-
     
-0-
 
Gerald Scott Klayman
   
243,750
     
243,750
     
-0-
     
-0-
 
Penumbra Worldwide, Ltd.
   
243,750
     
243,750
     
-0-
     
-0-
 
Series B Warrants
                               
Philip Wagenheim
   
33,350
     
33,350
     
-0-
     
-0-
 
Michael Rapp
   
60,650
     
60,650
     
-0-
     
-0-
 
Clifford Chapman
   
100,000
     
100,000
     
-0-
     
-0-
 
Charles W. Allen
   
15,000
     
15,000
     
-0-
     
-0-
 
Ari Raskas
   
12,500
     
12,500
     
-0-
     
-0-
 
Jeff Appel
   
12,500
     
12,500
     
-0-
     
-0-
 
Corby T. Hocker
   
10,000
     
10,000
     
-0-
     
-0-
 
David Prince (27)
   
6,000
     
6,000
     
-0-
     
-0-
 
Gerald Scott Klayman
   
125,000
     
125,000
     
-0-
     
-0-
 
Penumbra Worldwide, LTD
   
125,000
     
125,000
     
-0-
     
-0-
 
Total
   
7,902,273
     
8,993,182
     
-0-
     
-0-
 
 
 
23

 
 
(1)
Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, securities that are currently convertible or exercisable into shares of our Common Stock, or convertible or exercisable into shares of our Common Stock within 60 days of the date hereof are deemed outstanding. Such shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of any other person. Except as indicated in the footnotes to the following table, each stockholder named in the table has sole voting and investment power with respect to the shares set forth opposite such stockholder’s name. The percentage of beneficial ownership is based on 24,118,183 shares of Common Stock outstanding as of September 18, 2009.
 
(2)
Includes the total number of shares of common stock that such Selling Stockholder intends to sell, regardless of the 9.9% beneficial ownership limitation, more fully explained in footnote 3.
 
(3)
Pursuant to the terms of the Series A Warrant at no time may such Selling Stockholder exercise the Series A Warrant for shares of our Common Stock if the exercise would result in such Selling Stockholder beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act and the rules thereunder) more than 9.9% of our then issued and outstanding shares of Common Stock; provided, however, that upon such Selling Stockholder  providing us with sixty-one days’ notice that such Selling Stockholder wishes to waive the cap, then the cap will be of no force or effect with regard to all or a portion of the shares referenced in the waiver notice. The 9.9% beneficial ownership limitation does not prevent such Selling Stockholder from selling some of its holdings and then receiving additional shares. Accordingly, each such Selling Stockholder could exercise and sell more than 9.9% of our Common Stock without ever at any one time holding more than this limit.
 
(4)
Consists of 2,381,818 shares of Comon Stock and Series A Warrants to purchase up to 700,000 shares of Common Stock. Vision Capital Advisors, LLC, a Delaware limited liability company, which serves as the investment manager to Vision Opportunity China LP, and Adam Benowitz, the managing member of Vision Capital Advisors, share voting and dispositive power over the shares held by Vision Opportunity China LP. Vision Capital Advisors and Mr. Benowitz may each be deemed to beneficially own the shares of Common Stock held by Vision Opportunity China LP. Each disclaims beneficial ownership of such shares. The address  for  Vision Opportunity China LP is c/o Vision Capital Advisors, LLC,  20 West 55th Street, 5th Floor,  New York, NY 10019-5373.
   
(5)
Consists of 2,772,727 shares of Common Stock and Series A Warrants to purchase up to 500,000 shares of Common Stock.  CMHJ Partners L.P., a Cayman Islands limited partnership (“CMHJ Partners”) and the general partners of CMHJ Technology Fund II, L.P. (the “Fund”), and CMHJ Partners Ltd., a Cayman Islands limited liability company (“CMHJ”) and the general partner of CMHJ Partners, share voting and dispositive power over the shares held by the Fund. CMHJ Partners and CMHJ may each be deemed to beneficially own the shares of Common Stock held by the Fund. CMHJ Partners and CMHJ each disclaim beneficial ownership of such shares. The address  for  CMHJ is Suite 803, Lippo Plaza 222 Huai Hai Zhong Road Shanghai 200021, PRC.

(6)
Consists of 950,000 shares of Common Stock and Series A Warrants to purchase up to 209,000 shares of Common Stock. Zhenwei Lu, the General Manager of China Merchants Technology Holdings Co. Ltd has sole voting and dispositive power over the shares of Snow Hill Developments Limited. The address for Snow Hill Developments Limited is P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands.

(7)
Consists of 100,000 shares of Common Stock and Series A Warrants to purchase up to 22,000 shares of Common Stock. Rima Salam, a director of Silver Rock II, Ltd.  has sole voting and dispositive power over the shares of Silver Rock II, Ltd.  The address for Silver Rock II, Ltd. is c/o Ezzat Jallad Villa 52 Umm Suqeimm 3 Dubai UAE
 
 
24

 
 
(8)
Consists of 45,455 shares of Common Stock and Series A Warrants to purchase up to 10,000 shares of Common Stock.  Timothy and Monica Hanley share voting and dispositive power over their shares.

(9)
Consists of 45,455 shares of Common Stock and Series A Warrants to purchase up to 10,000 shares of Common Stock.
 
(10)
Consists of 36,364 shares of Common Stock and Series A Warrants to purchase up to 8,000 shares of Common Stock.
 
(11)
Consists of 35,909 shares of Common Stock and Series A Warrants to purchase up to 7,900 shares of Common Stock.
 
(12)
Consists of 22,727 shares of Common Stock and Series A Warrants to purchase up to 5,000 shares of Common Stock.
 
(13)
Consists of 22,727 shares of Common Stock and Series A Warrants to purchase up to 5,000 shares of Common Stock.  David and Jennifer Forti share voting and dispositive power over their shares.
 
(14)
Consists of 22,727 shares of Common Stock and Series A Warrants to purchase up to 5,000 shares of Common Stock.  Milton and Patricia Wallace share voting and dispositive power over their shares.
 
(15)
Consists of 11,364 shares of Common Stock and Series A Warrants to purchase up to 2,500 shares of Common Stock.  Joseph and Margaret Muoio share voting and dispositive power over their shares.
 
(16)
Consists of 11,364 shares of Common Stock and Series A Warrants to purchase up to 2,500 shares of Common Stock.
 
(17)
Consists of 11,364 shares of Common Stock and Series A Warrants to purchase up to 2,500 shares of Common Stock.
 
(18)
Consists of 46,818 shares of Common Stock and Series A Warrants to purchase up to 10,300 shares of Common Stock.
 
(19)
Consists of 1,363 shares of Common Stock and Series A Warrants to purchase up to 300 shares of Common Stock. Samuel May is the sole director of Penumbra Worldwide Ltd., and has sole voting and dispositive power over the shares.   Penumbra Worldwide Ltd. provides business and investor relations consulting services to the company.  The address for Penumbra Worldwide Ltd. is  Unit D, 11 th Floor, Ho Lee Commercial Building, 38-34 D’Aguilar Street Central, Hong Kong.

 
25

 
 
(20)
Mr. Wagenheim is an employee of Broadband Capital Management, LLC, which was financial adviser and placement agent to the Company in the private placement.  Mr. Wagenheim was Secretary and a director of the Company prior to the Share Exchange.

(21)
Mr. Rapp is an employee of Broadband Capital Management, LLC, which was financial adviser and placement agent to the Company in the private placement Mr. Rapp was Chief Executive Officer, Principal Financial Officer and a director of the Company prior to the Share Exchange.

(22)
Mr. Chapman is an employee of Broadband Capital Management, LLC, which was financial adviser and placement agent to the Company in the private placement.  Mr. Chapman was a director of the Company prior to the Share Exchange.

(23)
Mr. Allen is an employee of Broadband Capital Management, LLC, which was financial adviser and placement agent to the Company in the private placement.

(24)
Mr. Raskas is an employee of Broadband Capital Management, LLC, which was financial adviser and placement agent to the Company in the private placement.

(25)
Mr. Appel is an employee of Broadband Capital Management, LLC, which was financial adviser and placement agent to the Company in the private placement.

(26)
Mr. Hocker is an employee of Broadband Capital Management, LLC, which was financial adviser and placement agent to the Company in the private placement.

(27)
Mr. Prince is an employee of Broadband Capital Management, LLC, which was financial adviser and placement agent to the Company in the private placement.
 
 
26

 

PLAN OF DISTRIBUTION

The Selling Stockholders and any of their pledgees, donees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of Common Stock being offered under this prospectus on any stock exchange, market or trading facility on which shares of our Common Stock are traded or quoted or in private transactions. These sales may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices. The Selling Stockholders may use any one or more of the following methods when disposing of shares:

 
·
ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;

 
·
block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;

 
·
purchases by a broker-dealer as principal and resales by the broker-dealer for its account;

 
·
an exchange distribution in accordance with the rules of the applicable exchange;

 
·
privately negotiated transactions;

 
·
to cover short sales made after the date that the registration statement of which this prospectus is a part is declared effective by the SEC;

 
·
broker-dealers may agree with the Selling Stockholders to sell a specified number of such shares at a stipulated price per share;

 
·
a combination of any of these methods of sale; and

 
·
any other method permitted pursuant to applicable law.

The shares may also be sold under Rule 144 under the Securities Act of 1933, as amended, if available for a selling stockholder, rather than under this prospectus. The Selling Stockholders have the sole and absolute discretion not to accept any purchase offer or make any sale of shares if they deem the purchase price to be unsatisfactory at any particular time.

The Selling Stockholders may pledge their shares to their brokers under the margin provisions of customer agreements. If a selling stockholder defaults on a margin loan, the broker may, from time to time, offer and sell the pledged shares.

Broker-dealers engaged by the Selling Stockholders may arrange for other broker-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated, which commissions as to a particular broker or dealer may be in excess of customary commissions to the extent permitted by applicable law.

If sales of shares offered under this prospectus are made to broker-dealers as principals, we would be required to file a post-effective amendment to the registration statement of which this prospectus is a part. In the post-effective amendment, we would be required to disclose the names of any participating broker-dealers and the compensation arrangements relating to such sales.

The Selling Stockholders and any broker-dealers or agents that are involved in selling the shares offered under this prospectus may be deemed to be “underwriters” within the meaning of the Securities Act in connection with these sales. Commissions received by these broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Any broker-dealers or agents that are deemed to be underwriters may not sell shares offered under this prospectus unless and until we set forth the names of the underwriters and the material details of their underwriting arrangements in a supplement to this prospectus or, if required, in a replacement prospectus included in a post-effective amendment to the registration statement of which this prospectus is a part.

 
27

 

The Selling Stockholders and any other persons participating in the sale or distribution of the shares offered under this prospectus will be subject to applicable provisions of the Exchange Act, and the rules and regulations under that act, including Regulation M. These provisions may restrict activities of, and limit the timing of purchases and sales of any of the shares by, the Selling Stockholders or any other person. Furthermore, under Regulation M, persons engaged in a distribution of securities are prohibited from simultaneously engaging in market making and other activities with respect to those securities for a specified period of time prior to the commencement of such distributions, subject to specified exceptions or exemptions. All of these limitations may affect the marketability of the shares.

Broadband Capital Management LLC (“Broadband”) is a registered broker dealer and a FINRA member firm and certain of its associated persons are listed as Selling Stockholders in this prospectus. Broadband served as placement agent in our recently completed private placement offering, and received, in addition to cash commissions and reimbursement of some expenses, Series B warrants to purchase an aggregate of 250,000 shares of our Common Stock with an exercise price of $3.50 per share.  Broadband assigned all of the 250,000 Class B Warrants it received as compensation to the officers and registered employees named as Selling Stockholders in this prospectus as allowed under NASD Rule 2710 (g)(2).

The warrants held by Broadband’s associated persons expire on October 30, 2013. The 250,000 shares of Common Stock issued or issuable upon exercise of the Series B Warrants received by Broadband are restricted from sale, transfer, assignment, pledge or hypothecation or from being the subject of any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the securities by any person for a period of 180 days immediately following the effective date of the registration statement of which this prospectus forms a part, except transfers of the warrants to officers or partners of Broadband as allowed under Rule 2710 (g)(1) and (2).

Broadband has indicated to us its willingness to act as selling agent on behalf of certain of the Selling Stockholders named in the prospectus under the section titled "Selling Stockholders" that purchased our privately placed securities. All shares sold, if any, on behalf of Selling Stockholders by Broadband would be in transactions executed by Broadband on an agency basis and commissions charged to its customers in connection with each transaction shall not exceed a maximum of 5% of the gross proceeds. Broadband does not have an underwriting agreement with us and/or the Selling Stockholders and no Selling Stockholder is required to execute transactions through Broadband. Further, other than any existing brokerage relationship as customers with Broadband, no Selling Stockholders has any pre-arranged agreement, written or otherwise, with Broadband to sell their securities through Broadband.

Rule 2710 requires members firms to satisfy the filing requirements of Rule 2710 in connection with the resale, on behalf of Selling Stockholders, of the securities on a principal or agency basis. NASD Notice to Members 88-101 states that in the event a Selling Stockholder intends to sell any of the shares registered for resale in this prospectus through a member of FINRA participating in a distribution of our securities, such member is responsible for insuring that a timely filing, if required, is first made with the Corporate Finance Department of FINRA and disclosing to FINRA the following:

 
·
it intends to take possession of the registered securities or to facilitate the transfer of such certificates;

 
·
the complete details of how the Selling Stockholders’ shares are and will be held, including location of the particular accounts;

 
·
whether the member firm or any direct or indirect affiliates thereof have entered into, will facilitate or otherwise participate in any type of payment transaction with the Selling Stockholders, including details regarding any such transactions; and

 
·
in the event any of the securities offered by the Selling Stockholders are sold, transferred, assigned or hypothecated by any Selling Stockholder in a transaction that directly or indirectly involves a member firm of FINRA or any affiliates thereof, that prior to or at the time of said transaction the member firm will timely file all relevant documents with respect to such transaction(s) with the Corporate Finance Department of FINRA for review.
 
 
28

 

No FINRA member firm may receive compensation in excess of that allowable under FINRA rules, including Rule 2710, in connection with the resale of the securities by the selling shareholders, which total compensation may not exceed 8%.

If any of the shares of Common Stock offered for sale pursuant to this prospectus are transferred other than pursuant to a sale under this prospectus, then subsequent holders could not use this prospectus until a post-effective amendment or prospectus supplement is filed, naming such holders. We offer no assurance as to whether any of the Selling Stockholders will sell all or any portion of the shares offered under this prospectus.

We have agreed to pay all fees and expenses we incur incident to the registration of the shares being offered under this prospectus. However, each selling stockholder and purchaser is responsible for paying any discounts, commissions and similar selling expenses they incur.

We and the Selling Stockholders have agreed to indemnify one another against certain losses, damages and liabilities arising in connection with this prospectus, including liabilities under the Securities Act.

 
29

 
 
SELECTED FINANCIAL 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 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,
 
   
2009
   
2008
   
2008
   
2007
 
   
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 %
Cost of sales
    (39,096 )     (80.1 )%     (10,328 )     (68.7 )%     (33,202 )     (66.4 )%     (22,910 )     (70.1 )%
Gross profit
    9,731       19.9 %     4,710       31.3 %     16,804       33.6 %     9,766       29.9 %
Selling expenses
    (587 )     (1.2 )%     (172 )     (1.1 )%     (700 )     (1.4 )%     (417 )     (1.3 )%
General & Administrative expenses
    (1,093 )     (2.2 )%     (403 )     (2.7 )%     (1,907 )     (3.8 )%     (455 )     (1.4 )%
Income from operations
    8,051       16.5 %     4,135       27.5 %     14,197       28.4 %     8,894       27.2 %
Other income (expenses):
                                                               
Interest income
    47       .01 %     8       0.05 %     68       0.1 %     16       0.05 %
Interest expenses
    (106 )     (0.2 )%     (106 )     (0.7 )%     (515 )     (1.0 )%     (97 )     (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 %            
Total other income (expenses)
    226       0.5 %     (104 )     (0.7 )%     (702 )     (1.4 )%     (81 )     (0.25 )%
Income before income taxes
    8,277       17.0 %     4,030       26.8 %     13,495       27.0 %     8,813       27.0 %
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 %
Earnings per share
                                                               
– Basic
    0.45               0.25             $ 0.75               0.55          
– Diluted
    0.31               0.25             $ 0.70               0.55          

 
30

 

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

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

 
31

 
 
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, 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 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 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.

 
32

 
 
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.

 
33

 
 
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 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.

 
34

 
 
 
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.

 
35

 
 
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 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.

 
36

 
 
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
 
   
2009
   
2008
   
June 30, 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
 
   
2009
   
2008
   
June 30, 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%.
 
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:

 
37

 

 
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.

 
38

 
 
   
Year Ended December 31,
   
Growth in
2008 compared
 
  
 
2008
   
2007
   
with 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 %