SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q




x
            Quarterly
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
      of 1934




For the
quarterly period ended June 30, 2010.




or




 ̈
            Transition
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
      of 1934




For the
transition period from
             to
            .




Commission
File Number 000-52650





LIHUA INTERNATIONAL,
INC.


(Exact
name of registrant as specified in its charter)








Delaware
              (State or Other Jurisdiction of
              Incorporation or Organization)
            14-1961536
              (I.R.S. Employer
              Identification No.)





Houxiang
Five Star Industry District


Danyang
City, Jiangsu Province, PR China 212312


(Address
of Principal Executive Offices including zip code)




+86
51 86317399


(Registrant’s
Telephone Number, Including Area Code)




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





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every, Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
    Yes  o  No  o




Indicate
by check mark if the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company


Large
      Accelerated Filer   ̈
                Accelerated
      Filer   ̈Non-Accelerated
      Filer  x (Do
      not check if a smaller reporting company)
                Smaller
      reporting company  ̈




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Securities Exchange
Act).    Yes   ̈    No  x




There
were 29,143,432 shares of the Registrant’s Common Stock issued and outstanding
on August 9, 2010.







Lihua
International, Inc.


Index
to Form 10-Q




PagePart I.
              Financial
      InformationItem
      1. Unaudited Condensed Financial Statements
              
              1Condensed
      Consolidated Balance Sheets as of June 30, 2010 (Unaudited) and December
      31, 2009 (Audited)
              
              1Condensed
      Consolidated Statements of Income and Comprehensive Income (Unaudited) for
      the three months and six months ended June 30, 2010 and
    2009
              
              2Condensed
      Consolidated Statements of Stockholders’ Equity (Unaudited) for the six
      months ended June 30, 2010
              
              3Condensed
      Consolidated Statements of Cash Flows (Unaudited) for the six months ended
      June 30, 2010 and 2009
              
              4Notes
      to Unaudited Condensed Consolidated Financial Statements
              
              5Item
      2. Management’s Discussion and Analysis of Financial Conditions and
      Results of Operations
              
              20Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
              
              31Item
      4. Controls and Procedures
              
              32Part II.
              Other
      InformationItem
      1. Legal Proceedings
              
              32Item
      1A. Risk Factors
              
              32Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
              
              32Item
      3. Defaults Upon Senior Securities
              
              33Item
      4. (Removed and Reserved)
              
              33Item
      5. Other Information
              
              33Item
      6. Exhibits
              
              33SIGNATURES
              
              34







PART I — FINANCIAL INFORMATION


Item
1.  UNAUDITED CONDENSED FINANCIAL STATEMENTS


LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


(AMOUNTS
EXPRESSED IN US DOLLARS)





June 30
                                
                                
                                December 31,2010
                                
                                
                                2009(Unaudited)
                                
                                
                                (Audited)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                                
                                $
                                87,599,894
                                
                                
                                $
                                34,614,838Restricted
      cash
                                
                                
                                -
                                
                                
                                
                                575,000Accounts
      receivable, net
                                
                                
                                17,200,526
                                
                                
                                
                                10,996,430Other
      receivables and current assets
                                
                                
                                218,696
                                
                                
                                
                                493,006Prepaid
      land use right – current portion
                                
                                
                                173,462
                                
                                
                                
                                172,515Deferred
      income tax assets
                                
                                
                                39,288
                                
                                
                                
                                98,068Inventories
                                
                                
                                15,386,399
                                
                                
                                
                                17,534,254Due
      from a related company
                                
                                
                                230,553
                                
                                
                                
                                -Total
      current assets
                                
                                
                                120,848,818
                                
                                
                                
                                64,484,111OTHER
      ASSETSProperty,
      plant and equipment, net
                                
                                
                                18,518,837
                                
                                
                                
                                18,424,080Construction
      in progress
                                
                                
                                52,062
                                
                                
                                
                                59,558Deposits
      for plant and equipment
                                
                                
                                65,781
                                
                                
                                
                                28,163Prepaid
      land use right – long-term portion
                                
                                
                                8,126,172
                                
                                
                                
                                8,168,039Intangible
      assets
                                
                                
                                5,110
                                
                                
                                
                                2,812Total
      non-current assets
                                
                                
                                26,767,962
                                
                                
                                
                                26,682,652Total
      assets
                                
                                $
                                147,616,780
                                
                                
                                $
                                91,166,763LIABILITIES AND SHAREHOLDERS'
      EQUITYCURRENT
      LIABILITIESShort
      term bank loans
                                
                                $
                                2,208,838
                                
                                
                                $
                                2,196,772Accounts
      payable
                                
                                
                                7,344,557
                                
                                
                                
                                4,923,360Other
      payables and accruals
                                
                                
                                1,133,863
                                
                                
                                
                                681,097Income
      taxes payable
                                
                                
                                3,295,357
                                
                                
                                
                                1,584,292Total
      current liabilities
                                
                                
                                13,982,615
                                
                                
                                
                                9,385,521Warrant
      liabilities
                                
                                
                                7,139,125
                                
                                
                                
                                14,275,483Total
      liabilities
                                
                                
                                21,121,740
                                
                                
                                
                                23,661,004SHAREHOLDERS'
      EQUITYPreferred
      stock: $0.0001 par value, 10,000,000 shares authorized, none issued and
      outstanding
                                
                                
                                -
                                
                                
                                
                                -Common
      stock, $0.0001 par value: 75,000,000 shares authorized,29,143,432
      and 24,154,083 shares issued and outstanding
                                
                                
                                2,914
                                
                                
                                
                                2,416Additional
      paid-in capital
                                
                                
                                68,179,944
                                
                                
                                
                                28,692,812Statutory
      reserves
                                
                                
                                7,162,010
                                
                                
                                
                                5,400,994Retained
      earnings
                                
                                
                                47,774,141
                                
                                
                                
                                30,780,307Accumulated
      other comprehensive income
                                
                                
                                3,376,031
                                
                                
                                
                                2,629,230Total
      shareholders' equity
                                
                                
                                126,495,040
                                
                                
                                
                                67,505,759Total
      liabilities and shareholders' equity
                                
                                $
                                147,616,780
                                
                                
                                $
                                91,166,763


See
accompanying notes to these condensed consolidated financial statements


1





LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)


(AMOUNTS
EXPRESSED IN US DOLLARS)




For the Three Months
                  Ended June 30,
              
              
              For the Six Months
                  Ended June 30,2010
              
              
              2009
              
              
              2010
              
              
              2009Revenue
              
              $
              75,502,350
              
              
              $
              48,827,343
              
              
              $
              138,723,052
              
              
              $
              69,365,668Cost
      of goods sold
              
              
              (61,002,044
              )
              
              
              (39,095,534
              )
              
              
              (112,401,462
              )
              
              
              (53,923,184
              )Gross
      profit
              
              
              14,500,306
              
              
              
              9,731,809
              
              
              
              26,321,590
              
              
              
              15,442,484Selling
      expenses
              
              
              (570,420
              )
              
              
              (587,356
              )
              
              
              (1,021,297
              )
              
              
              (790,445
              )General
      and administrative expenses
              
              
              (1,484,893
              )
              
              
              (1,093,499
              )
              
              
              (2,778,496
              )
              
              
              (1,635,562
              )Income
      from operations
              
              
              12,444,993
              
              
              
              8,050,954
              
              
              
              22,521,797
              
              
              
              13,016,477Other
      income (expenses):Interest
      income
              
              
              61,065
              
              
              
              47,182
              
              
              
              94,416
              
              
              
              71,417Interest
      expense
              
              
              (40,288
              )
              
              
              (105,667
              )
              
              
              (69,458
              )
              
              
              (218,796
              )Gain
      on extinguishment of warrant liabilities
              
              
              -
              
              
              
              -
              
              
              
              135,369
              
              
              
              -Change
      in fair value of warrants
              
              
              888,975
              
              
              
              (215,952
              )
              
              
              2,234,829
              
              
              
              (340,167
              )Other
      income (expenses)
              
              
              (68,397
              )
              
              
              500,702
              
              
              
              (68,397
              )
              
              
              500,702Total
      other income (expenses), net
              
              
              841,355
              
              
              
              226,265
              
              
              
              2,326,759
              
              
              
              13,156Income
      before income tax
              
              
              13,286,348
              
              
              
              8,277,219
              
              
              
              24,848,556
              
              
              
              13,029,633Provision
      for income tax
              
              
              (3,388,056
              )
              
              
              (1,572,190
              )
              
              
              (6,093,706
              )
              
              
              (2,335,913
              )Net
      income
              
              
              9,898,292
              
              
              
              6,705,029
              
              
              
              18,754,850
              
              
              
              10,693,720Other
      comprehensive income:Foreign
      currency translation adjustment
              
              
              698,345
              
              
              
              28,259
              
              
              
              746,801
              
              
              
              19,821Total
      comprehensive income
              
              $
              10,596,637
              
              
              $
              6,733,288
              
              
              $
              19,501,651
              
              
              $
              10,713,541Earnings
      per shareBasic
              
              $
              0.35
              
              
              $
              0.45
              
              
              $
              0.70
              
              
              $
              0.71Diluted
              
              $
              0.34
              
              
              $
              0.31
              
              
              $
              0.68
              
              
              $
              0.49Weighted
      average number of shares outstandingBasic
              
              
              28,484,091
              
              
              
              15,000,000
              
              
              
              26,625,272
              
              
              
              15,000,000Diluted
              
              
              29,326,571
              
              
              
              21,818,182
              
              
              
              27,477,388
              
              
              
              21,818,182




See
accompanying notes to these condensed consolidated financial
statements.


2





LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)


(AMOUNTS
EXPRESSED IN US DOLLARS)





Common Stock
                
                
                Additional
                
                
                
                
                
                
                
                
                Accumulated
                  OtherNumber of
                    shares
                
                
                Amount
                
                
                Paid-in
                    Capital
                
                
                Statutory
                    Reserves
                
                
                Retained
                    Earnings
                
                
                Comprehensive
                    Income
                
                
                TotalAt
      January 1, 2010 (Audited)
                
                
                24,154,083
                
                
                $
                2,416
                
                
                $
                28,692,812
                
                
                $
                5,400,994
                
                
                $
                30,780,307
                
                
                $
                2,629,230
                
                
                $
                67,505,759Net
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                18,754,850
                
                
                
                -
                
                
                
                18,754,850Foreign
      currency translation adjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                746,801
                
                
                
                746,801Comprehensive
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                19,501,651Exercise
      of warrants
                
                
                703,634
                
                
                
                70
                
                
                
                7,216,090
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                7,216,160Issuance
      of common stock
                
                
                4,285,715
                
                
                
                428
                
                
                
                32,069,089
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                32,069,517Share-based
      payments to employees and directors
                
                
                -
                
                
                
                -
                
                
                
                201,953
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                201,953Appropriation
      of statutory reserves
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,761,016
                
                
                
                (1,761,016
                )
                
                
                -
                
                
                
                -At
      June 30, 2010 (Unaudited)
                
                
                29,143,432
                
                
                $
                2,914
                
                
                $
                68,179,944
                
                
                $
                7,162,010
                
                
                $
                47,774,141
                
                
                $
                3,376,031
                
                
                $
                126,495,040




See
accompanying notes to these condensed consolidated financial
statements.


3


LIHUA INTERNATIONAL, INC. AND
SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


(AMOUNTS
EXPRESSED IN US DOLLARS)


Six Months Ended
                    June 30,2010
                  
                  
                  2009CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income
                  
                  $
                  18,754,850
                  
                  
                  $
                  10,693,720Adjustments
      to reconcile net income to cash provided by operating
      activities:Depreciation
      and amortization
                  
                  
                  1,009,020
                  
                  
                  
                  604,419Loss
      on disposal of fixed assets
                  
                  
                  123,182
                  
                  
                  
                  -Share-based
      compensation costs
                  
                  
                  201,953
                  
                  
                  
                  127,125Change
      in fair value of warrants
                  
                  
                  (2,234,829)
                  
                  
                  
                  340,167Gain
      on extinguishment of warrant liabilities
                  
                  
                  (135,369)
                  
                  
                  
                  -(Increase)
      decrease in assets:Accounts
      receivable
                  
                  
                  (6,112,822)
                  
                  
                  
                  (2,800,642)Notes
      receivable
                  
                  
                  -
                  
                  
                  
                  321,976Other
      receivables and current assets
                  
                  
                  274,600
                  
                  
                  
                  (612,001)Trade
      receivable from a related company
                  
                  
                  (228,887)
                  
                  
                  
                  -Inventories
                  
                  
                  2,232,887
                  
                  
                  
                  (7,333,315)Deferred
      income tax benefits
                  
                  
                  59,020
                  
                  
                  
                  23,401Increase
      (decrease) in liabilities:Accounts
      payable
                  
                  
                  2,382,124
                  
                  
                  
                  3,474,552Other
      payables and accruals
                  
                  
                  446,769
                  
                  
                  
                  (258,182)Income
      taxes payable
                  
                  
                  1,693,808
                  
                  
                  
                  1,164,357Net
      cash provided by operating activities
                  
                  
                  18,466,306
                  
                  
                  
                  5,745,577CASH
      FLOWS FROM INVESTING ACTIVITIESAcquisition
      of property, plant and equipment
                  
                  
                  (1,067,485)
                  
                  
                  
                  (2,947,312)Net
      cash used in investing activities
                  
                  
                  (1,067,485)
                  
                  
                  
                  (2,947,312)CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from public offering of common stock, net of expenses of $
      2,430,489
                  
                  
                  32,069,517
                  
                  
                  
                  -New
      short-term bank loans
                  
                  
                  -
                  
                  
                  
                  1,463,722Proceeds
      from exercise of warrants
                  
                  
                  2,450,000
                  
                  
                  
                  -Release
      of restricted cash related to private placement of stock and
      warrants
                  
                  
                  575,000
                  
                  
                  
                  1,050,000Repayments
      of short-term bank loans
                  
                  
                  -
                  
                  
                  
                  (3,220,188)Net
      cash provided by (used in) financing activities
                  
                  
                  35,094,517
                  
                  
                  
                  (706,466)Foreign
      currency translation adjustment
                  
                  
                  491,718
                  
                  
                  
                  10,806INCREASE
      IN CASH AND CASH EQUIVALENTS
                  
                  
                  52,985,056
                  
                  
                  
                  2,102,605CASH
      AND CASH EQUIVALENTS, at the beginning of the period
                  
                  
                  34,614,838
                  
                  
                  
                  26,041,849CASH
      AND CASH EQUIVALENTS, at the end of the period
                  
                  $
                  87,599,894
                  
                  
                  $
                  28,144,454NON-CASH
      INVESTING AND FINANCING TRANSACTIONS:Shares-based compensation
      to employees and directors
                  
                  $
                  201,953
                  
                  
                  $
                  127,125Issue
      of common stock to settle warrant liabilities
                  
                  $
                  4,766,160
                  
                  
                  
                  -SUPPLEMENTAL
      DISCLOSURE INFORMATIONCash
      paid for interest
                  
                  $
                  69,458
                  
                  
                  $
                  218,796Cash
      paid for income taxes
                  
                  $
                  4,340,878
                  
                  
                  $
                  1,148,155





See
accompanying notes to these condensed consolidated financial statements.


4




LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




NOTE 1
            DESCRIPTION OF BUSINESS AND
      ORGANIZATION





Lihua
      International, Inc. (“Lihua”
      or the “ Company”) was incorporated in the State of Delaware on January 24, 2006
      under the name Plastron Acquisition Corp.  On September 22,
      2008, the Company changed its name from Plastron Acquisition Corp. to
      Lihua International, Inc. The Company conducts its business through two
      operating subsidiaries, Danyang Lihua Electron Co., Ltd. and Jiangsu Lihua
      Copper Industry Co., Ltd.





On
September 4, 2009, the Company’s common stock began trading on the NASDAQ
Capital Market under the symbol LIWA.





As of
June 30, 2010, details of the subsidiaries of the Company are as
follows:





Subsidiaries’ names
                                      
                                      Domicile and date of
                                        Incorporation
                                      
                                      Paid-up capital
                                      
                                      Effective
                                        Ownership
                                      
                                      Principal activitiesAlly
      Profit Investments Limited (“ Ally
      Profit”)
                                      
                                      British
      Virgin Islands
                                        March
      12, 2008
                                      
                                      $
                                      100
                                      
                                      
                                      100
                                      %
                                      Holding
      company of other subsidiariesLihua
      Holdings Limited (“ Lihua
      Holdings ”)
                                      
                                      Hong
      Kong
                                        April
      17, 2008
                                      
                                      HK$
                                      100
                                      
                                      
                                      100
                                      %
                                      Holding
      company of other subsidiariesDanyang
      Lihua Electron Co., Ltd. (“ Lihua
      Electron ”)
                                      
                                      People’s
      Republic of China (“PRC”)
                                        December
      30, 1999
                                      
                                      $
                                      10,500,000
                                      
                                      
                                      100
                                      %
                                      Manufacturing
      and sales of bimetallic composite conductor wire such as copper clad
      aluminum (CCA) wire and enameled CCA wire.Jiangsu
      Lihua Copper Industry Co., Ltd. (“ Lihua
      Copper”)
                                      
                                      PRC
                                        August 31,
      2007
                                      
                                      $
                                      46,000,000
                                      
                                      
                                      100
                                      %
                                      Manufacturing
      and sales of refined
copper.




5


LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2
            SUMMARIES OF SIGNIFICANT
      ACCOUNTING POLICIES





Principle
of consolidation


These
condensed consolidated financial statements include the financial statements of
Lihua and its subsidiaries.  All significant inter-company balances or
transactions have been eliminated on consolidation.





Basis
of preparation


These
interim condensed consolidated financial statements are unaudited.  In
the opinion of management, all adjustments and disclosures necessary for a fair
presentation of these interim condensed consolidated financial statements have
been included.  The results reported in the condensed consolidated
financial statements of any interim periods are not necessarily indicative of
the results that may be reported for the entire year. The following (a)
condensed consolidated balance sheet as of December 31, 2009, which was derived
from audited financial statements, and (b) the unaudited interim condensed
consolidated financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission.  Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to those rules and
regulations, although the Company believes that the disclosures made are
adequate to make the information not misleading.


Reclassification Certain
prior period balances have been reclassified to conform to the current period’s
financial statement presentation. These reclassifications had no impact on
previously reported results of operations or cash flows.


Research
and development costs


Research
and development costs are expensed as incurred. For the six months ended June
30, 2010 and 2009, research and development costs were $69,703 and $59,208,
respectively.





Advertising
costs


The
Company expenses all advertising costs as incurred.  The total amount
of advertising costs charged to selling, general and administrative expense were
$1,465 and $13,022 for the six months ended June 30, 2010 and 2009,
respectively.





Shipping
and handling costs


Substantially
all costs of shipping and handling of products to customers are included in
selling, general and administrative expense.  Shipping and handling
costs for the six months ended June 30, 2010 and 2009 were $810,943 and
$610,212, respectively.





Foreign
currency


The
Company uses the United States dollars (“U.S. Dollar” or “US$” or “$”) for
financial reporting purposes.  The PRC subsidiaries within the Company
maintain their books and records in their functional currency, Chinese Renminbi
(“RMB”), being the lawful currency in the PRC.  Assets and liabilities
of the PRC subsidiaries are translated from RMB into US Dollars using the
applicable exchange rates prevailing at the balance sheet date.  Items
on the statement of operations are translated at average exchange rates during
the reporting period.  Equity accounts are translated at historical
rates.  Adjustments resulting from the translation of the Company’s
financial statements are recorded as accumulated other comprehensive
income.




The
exchange rates used to translate amounts in RMB into U.S. Dollars for the
purposes of preparing the consolidated financial statements are based on the
rates as published on the website of People’s Bank of China and are as
follows:-





June 30, 2010
                        
                        December 31, 2009Balance
      sheet items, except for equity accounts
                        
                        US$1=RMB 6.7909
                        
                        US$1=RMB6.8282Three months ended June 30,2010
                        
                        2009Items
      in the statements of income and cash flows
                        
                        US$1=RMB 6.8235
                        
                        US$1=RMB 6.8299Six months ended June 30,2010
                        
                        2009Items
      in the statements of income and cash flows
                        
                        US$1=RMB 6.8252
                        
                        US$1=RMB6.8328




No
representation is made that the RMB amounts could have been, or could be,
converted into U.S. dollars at the above rates. The value of RMB against U.S.
dollars and other currencies may fluctuate and is affected by, among other
things, changes in China’s political and economic conditions. Any significant
revaluation of RMB may materially affect the Company’s financial condition in
terms of U.S. dollar reporting.


6


LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2
            SUMMARIES OF SIGNIFICANT
      ACCOUNTING POLICIES –
CONTINUED





Recent
accounting pronouncements




Effective
January 1, 2010, the Company adopted the provisions in ASU 2010-06, “Fair Value
Measurements and Disclosures (ASC Topic 820): Improving Disclosures about Fair
Value Measurements, which requires new disclosures related to transfers in and
out of levels 1 and 2 and activity in level 3 fair value measurements, as well
as amends existing disclosure requirements on level of disaggregation and inputs
and valuation techniques. The adoption of the provisions in ASU 2010-06 did not
have an impact on the Company’s consolidated financial statements.





In
February 2010, the Financial Accounting Standards Board (“FASB”) issued
authoritative guidance that amends the disclosure requirements related to
subsequent events. This guidance includes the definition of a Securities and
Exchange Commission filer, removes the definition of a public entity,
redefines the reissuance disclosure requirements and allows public companies to
omit the disclosure of the date through which subsequent events have been
evaluated. This guidance is effective for financial statements issued for
interim and annual periods ending after February 2010. This guidance did
not materially impact the Company’s results of operations or financial position,
but did require changes to the Company’s disclosures in its financial
statements.





In April
2010, the FASB issued ASU No. 2010-13—Compensation—Stock Compensation (Topic
718), which addresses the classification of an employee share-based payment
award with an exercise price denominated in the currency of a market in which
the underlying equity security trades. This Update provides amendments to Topic
718 to clarify that an employee share-based payment award with an exercise price
denominated in the currency of a market in which a substantial portion of the
entity’s equity securities trades should not be considered to contain a
condition that is not a market, performance, or service condition. Therefore, an
entity would not classify such an award as a liability if it otherwise qualifies
as equity. The amendments in this Update are effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2010. The Company expects that the adoption of the amendments in this Update
will not have any significant impact on its financial position and results of
operations.





Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on the Company’s Consolidated Financial
Statements upon adoption.


7


LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE
    3
            FAIR VALUE MEASUREMENTS AND
      FINANCIAL INSTRUMENTS





ASC Topic
820, Fair Value Measurement
and Disclosures , defines fair value as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. This topic also
establishes a fair value hierarchy which requires classification based on
observable and unobservable inputs when measuring fair value. The fair value
hierarchy distinguishes between assumptions based on market data (observable
inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy
consists of three levels:





o
            Level one — Quoted market prices
      in active markets for identical assets or
    liabilities;


o
            Level two — Inputs other than
      level one inputs that are either directly or indirectly observable;
      and


o
            Level three — Unobservable inputs
      developed using estimates and assumptions, which are developed by the
      reporting entity and reflect those assumptions that a market participant
      would use.




Determining
which category an asset or liability falls within the hierarchy requires
significant judgment. The Company evaluates its hierarchy disclosures each
quarter.





Assets
and liabilities measured at fair value on a recurring basis are summarized as
follows:





Fair value measurement using inputs
                          
                          
                          Carrying
                            amount atFinancial instruments
                          
                          Level 1
                          
                          
                          Level 2
                          
                          
                          Level 3
                          
                          
                          June 30, 2010(Unaudited)
                          
                          
                          (Unaudited)
                          
                          
                          (Unaudited)
                          
                          
                          (Unaudited)Liabilities:Derivative
      instruments − Warrants
                          
                          $
                          —
                          
                          
                          $
                          7,139,125
                          
                          
                          $
                          —
                          
                          
                          $
                          7,139,125Total
                          
                          $
                          —
                          
                          
                          $
                          7,139,125
                          
                          
                          $
                          —
                          
                          
                          $
                          7,139,125





The
carrying values of cash and cash equivalents, trade receivables and payables,
and short-term bank loans and debts approximate their fair values due to the
short maturities of these instruments.


8


LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE
    3
            FAIR VALUE MEASUREMENTS AND
      FINANCIAL INSTRUMENTS –
CONTINUED





Derivative
Instruments – Warrants




The Company’s warrants have been classified as derivatives in
accordance with the guidance provided in FASB ASC 815-40-15-7I, because they are
denominated in U.S. dollar, which is different from the Company’s functional
currency being Renminbi.





The
Company estimates the fair value of the warrants as of June 30, 2010 using the
Black-Scholes option pricing model using the following assumptions:





Market
      price of common stock:
                                
                                $
                                8.50
                                
                                
                                $
                                8.50Exercise
      price:
                                
                                
                                3.50
                                
                                
                                $
                                4.80Remaining
      contractual life (years):
                                
                                
                                3.33
                                
                                
                                
                                4.18Dividend
      yield:
                                
                                
                                −
                                
                                
                                
                                −Expected
      volatility:
                                
                                
                                44.82
                                %
                                
                                
                                40.79
                                %Risk-free
      interest rate:
                                
                                
                                1.09
                                %
                                
                                
                                1.43
                                %




On
January 14, 2010,700,000 warrants were exercised at $3.50 each in cash. On March
12, 2010, 6,000 warrants were exercised cashless to purchase 3,634 shares of
common stock. The Company accounted for the exercise of these warrants as
extinguishment of debts in accordance with ASC 815-10-40-1,“Derivatives and Hedges –
Derecognition”. In accordance with ASC 470-50-40, “Debt – Modification and
Extinguishments – Derecognition”, an aggregate gain of $135,369 was
recognized as the difference between the reacquisition price (determined based
on the closing price of the common stock of $10.26 each issued on January 14,
2010 to settle the warrant liabilities less the exercise price of $3.50 each
received, and the closing price of the common stock of $9.40 on March 12, 2010,
respectively) and the fair values of the warrants of $6.9482 and $6.2975 each at
January 14, 2010 and March 12, 2010, respectively. The fair value of the
warrants on January 14, 2010 was determined using the Black-Scholes option
pricing model based on the following assumptions: dividend yield: 0%, expected
volatility:41.12%, risk-free interest rate: 1.87%, and expected term: 3.79
years. The fair value of the warrants on January 14, 2010 was determined using
the Black-Scholes option pricing model based on the following assumptions:
dividend yield: 0%, expected volatility: 41.70%, risk-free interest rate: 1.77%,
and expected term: 3.63 years.


9


LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 4
            RESTRICTED
      CASH





As of
December 31, 2009, $575,000 in total was held in escrow arising from agreements
in conjunction with the private placement of 6,818,182 shares of Series A
Convertible Preferred Stock and Series A warrants to purchase 1,500,000 shares
of Common Stock, completed on October 31, 2008.





All of
the restricted cash was fully released from escrow to the Company in January
2010.





NOTE 5
            ACCOUNTS RECEIVABLE,
      NET





Accounts
receivable consisted of the following:


June 30
                
                
                December 312010
                
                
                2009(Unaudited)
                
                
                (Audited)Accounts
      receivable
                
                $
                17,200,526
                
                
                $
                10,996,430Less:
      Allowance for doubtful debts
                
                
                -
                
                
                
                -Accounts
      receivable, net
                
                $
                17,200,526
                
                
                $
                10,996,430





NOTE 6
            OTHER RECEIVABLES AND CURRENT
      ASSETS





Other
receivables and current assets consisted of the following:


June 30
                  
                  
                  December 312010
                  
                  
                  2009(Unaudited)
                  
                  
                  (Audited)Prepayment
                  
                  $
                  204,177
                  
                  
                  $
                  -Recoverable
      value added tax
                  
                  
                  -
                  
                  
                  
                  475,708Other
      receivables
                  
                  
                  14,519
                  
                  
                  
                  17,298Less:
      Allowance for valuation and doubtful debts
                  
                  
                  -
                  
                  
                  
                  -$
                  218,696
                  
                  
                  $
                  493,006
  10


LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 7
            INVENTORIES





Inventories
by major categories are summarized as follows:


June 30
                
                
                December 312010
                
                
                2009(Unaudited)
                
                
                (Audited)Raw
      materials
                
                $
                10,550,901
                
                
                $
                8,832,262Work
      in progress
                
                
                1,876,752
                
                
                
                1,316,422CCA
      and copper wire
                
                
                2,560,764
                
                
                
                3,052,604Refined
      copper rod
                
                
                397,982
                
                
                
                4,332,966$
                15,386,399
                
                
                $
                17,534,254





NOTE 8
            INTANGIBLE
      ASSETS





June 30
                
                
                December 312010
                
                
                2009(Unaudited)
                
                
                (Audited)Computer
      software, cost
                
                $
                10,844
                
                
                $
                7,030Less:
      Accumulated amortization
                
                
                (5,734
                )
                
                
                (4,218
                )$
                5,110
                
                
                $
                2,812





Amortization
expenses for the six months ended June 30, 2010 and 2009 were $1,486 and
$702.





NOTE 9
            PREPAID LAND USE
      RIGHTS





The
Company has recorded as prepaid land use rights, the lump sum payments paid to
acquire long-term interest to utilize the land underlying the Company’s building
and production facility.  This type of arrangement is common for the
use of land in the PRC.  The prepaid land use rights are expensed on
the straight-line basis over the term of the land use rights of 50
years.




The
amount expensed on prepaid land use right for the six months ended June 30, 2010
and 2009 were $86,316 and $86,199, respectively.  The estimated
expense of the prepaid land use rights over each of the next five years and
thereafter will be $173,462 per annum.




11


LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 10
            PROPERTY, PLANT AND EQUIPMENT,
      NET





Property,
plant and equipment, net consisted of the following:


June 30
                
                
                December 312010
                
                
                2009(Unaudited)
                
                
                (Audited)Cost:Buildings
                
                $
                9,499,671
                
                
                $
                9,736,531Office
      equipment
                
                
                319,831
                
                
                
                321,741Motor
      vehicles
                
                
                557,924
                
                
                
                315,727Machinery
                
                
                12,377,949
                
                
                
                11,491,642Total
      cost
                
                
                22,755,375
                
                
                
                21,865,641Less:
      Accumulated depreciation
                
                
                (4,236,538
                )
                
                
                (3,441,561
                )Net
      book value
                
                $
                18,518,837
                
                
                $
                18,424,080





Depreciation
expense for the six months ended June 30, 2010 and 2009 was $921,218 and
$517,518, respectively.





NOTE 11
            CONSTRUCTION IN
      PROGRESS





Construction
in progress consisted of the following:


June 30
                
                
                December 312010
                
                
                2009(Unaudited)
                
                
                (Audited)Construction
      of plant and equipment
                
                $
                1,259
                
                
                $
                31,000Construction
      of buildings
                
                
                50,803
                
                
                
                28,558$
                52,062
                
                
                $
                59,558





NOTE 12
            SHORT TERM BANK
      LOANS





Short-term
bank loans consisted of the following:


June 30
                  
                  
                  December 312010
                  
                  
                  2009(Unaudited)
                  
                  
                  (Audited)Bank
      loan granted by Agricultural Bank of China, with interest rate of
      5.31% p.a., guaranteed by Mr. Jianhua Zhu, maturing on August 20,
      2010 but fully repaid on April 20, 2010
                  
                  $
                  -
                  
                  
                  $
                  732,257Bank
      loan granted by Agricultural Bank of China, Danyang Branch with an
      interest rate of 5.31% p.a., guaranteed by by Mr. Jianhua Zhu, matured and
      fully repaid on April 15, 2010
                  
                  
                  -
                  
                  
                  
                  761,548Bank
      loan granted by Agricultural Bank of China, Danyang Branch with an
      interest rate of 5.31% p.a., guaranteed by Mr. Jianhua Zhu, matured and
      fully repaid on April 20, 2010
                  
                  
                  -
                  
                  
                  
                  702,967Bank
      loan granted by Agricultural Bank of China, Danyang Branch with an
      interest rate of 5.31% p.a., guaranteed by Mr. Jianhua Zhu and Tianyi
      Telecom and maturing on April 21, 2011
                  
                  
                  2,208,838
                  
                  
                  
                  -Total
                  
                  $
                  2,208,838
                  
                  
                  $
                  2,196,772




12


LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
13             OTHER PAYABLES AND
ACCRUALS





Other
payables and accruals consisted of the following:


June 30
                    
                    
                    December 312010
                    
                    
                    2009(Unaudited)
                    
                    
                    (Audited)Accrued
      staff costs
                    
                    $
                    483,244
                    
                    
                    $
                    476,978Other
      taxes payable
                    
                    
                    647,686
                    
                    
                    
                    181,286Other
      payables
                    
                    
                    2,933
                    
                    
                    
                    22,833$
                    1,133,863
                    
                    
                    $
                    681,097





NOTE
14             COMMON STOCK AND COMMON STOCK PURCHASE
WARARNTS





On
January 14, 2010, 700,000 shares of common stock were issued on exercise of
700,000 warrants at an exercise price of $3.50 for cash.





On March
12, 2010, 3,634 shares of common stock were issued pursuant to the cashless
exercise of a warrant to purchase up to 6,000 shares of common stock at an
exercise price of $3.50 per share.





Warrants
issued and outstanding at June 30, 2010, and changes during the six months then
ended, are as follows:




Warrants Outstanding
                          
                          
                          Warrants ExercisableNumber of
                            underlying
                            shares
                          
                          
                          Weighted
                            Average
                            Exercise
                            Price
                          
                          
                          Average
                            Remaining
                            Contractual
                            Life (years)
                          
                          
                          Number of
                            underlying
                            shares
                          
                          
                          Weighted
                            Average
                            Exercise
                            Price
                          
                          
                          Average
                            Remaining
                            Contractual
                            Life (years)Balance,
      December 31, 2009
                          
                          
                          2,102,100
                          
                          
                          $
                          3.59
                          
                          
                          
                          3.93
                          
                          
                          
                          1,964,100
                          
                          
                          $
                          3.50
                          
                          
                          
                          3.
      17Granted
      / Vested
                          
                          
                          -Forfeited
                          
                          
                          -Exercised
                          
                          
                          (706,000
                          )
                          
                          
                          3.50Balance,
      June 30, 2010 (Unaudited)
                          
                          
                          1,396,100
                          
                          
                          $
                          3.63
                          
                          
                          
                          3.30
                          
                          
                          
                          1,396,100
                          
                          
                          $
                          3.63
                          
                          
                          
                          2.82





On
April 14, 2010, the Company closed an offering of 4,285,715 shares of its common
stock at a public offering price of $8.05 per share, which included the sale of
559,006 shares of its common stock as a result of the exercise of the
over-allotment option by the underwriters. The Company received net proceeds of
approximately $32.1 million from the offering, after deducting underwriting
discounts and estimated offering expenses.





The
offering was underwritten by Rodman & Renshaw, LLC, Chardan Capital Markets,
LLC and Brean Murray, Carret & Co., LLC, pursuant to an underwriting
agreement with the Company dated April 8, 2010. The offering was made pursuant
to the Company’s effective registration statement on Form S-3, as amended
(Registration Statement No. 333-164269), filed with the United States Securities
and Exchange Commission and, as disclosed in a prospectus supplement dated April
8, 2010 filed with the Securities and Exchange Commission.


13




LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
15             SHARE-BASED
COMPENSATION





Common
Stock awarded to Employees by a Majority Shareholder


The
Company recognized compensation expense of $127,125, related to the restricted
shares granted by a principal stockholder to Mr. Yang “Roy” Yu, the Company’s
Chief Financial Officer (CFO), based on the grant-date fair value of the
Company’s common stock of $2.26 per share, for the six months ended June 30,
2010.





Options
granted to Independent Directors and Employees


On June
7, 2010, the Company granted options to two of its employees, Ms. Daphne Huang
and Mr. Chunming Chu, to each purchase 10,000 shares of the Company’s common
stock at a strike price of $7.85 per share, in consideration for their services
to the Company. These options vest in equal quarterly installments on the last
day of the Company’s next eight fiscal quarters commencing June 30, 2010 and
will expire 10 years from the date of grant.





On June
11, 2010, the Company granted options to two of its independent directors, Mr.
Robert Bruce and Mr. Jonathan Serbin, to each purchase 20,000 shares of the
Company’s common stock at a strike price of $8.81 per share, in consideration of
their services to the Company. These options vest quarterly at the end of each
3-month period, in equal installments over the 12-month period from the date of
grant and will expire 10 years from the date of grant.





In
accordance with the guidance provided in ASC Topic 718, Stock Compensation ,
(formerly SFAS 123R), the compensation costs associated with these options are
recognized, based on the grant-date fair values of these options, over the
requisite service period, or vesting period. Accordingly the Company recognized
a compensation expense of $ 74,828 for the six months ended June 30,
2010.





Options
granted to Independent Directors and Employees


Options
issued and outstanding at June 30, 2010 and their movements during the six
months then ended are as follows:




Number of
                                  underlying
                                  shares
                                
                                
                                Weighted-
                                  Average
                                  Exercise
                                  Price
                                  Per Share
                                
                                
                                Aggregate
                                  Intrinsic
                                  Value(1)
                                
                                
                                Weighted-
                                  Average
                                  Contractual Life
                                  Remaining in
                                  YearsOutstanding
      at December 31, 2009
                                
                                
                                65,000
                                
                                
                                $
                                4.06
                                
                                
                                $
                                415,450
                                
                                
                                
                                9.2Granted
                                
                                
                                60,000
                                
                                
                                
                                8.49
                                
                                
                                
                                -
                                
                                
                                
                                10Exercised
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Expired
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Forfeited
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Outstanding
      at June 30, 2010 (Unaudited)
                                
                                
                                125,000
                                
                                
                                $
                                6.38
                                
                                
                                $
                                289,300
                                
                                
                                
                                9.17Exercisable
      at June 30, 2010 (Unaudited)
                                
                                
                                57,500
                                
                                
                                $
                                3.91
                                
                                
                                $
                                263,775
                                
                                
                                
                                8.37





(1)
            The intrinsic value of the stock
      option at June 30, 2010 is the amount by which the market value of the
      Company’s common stock of $8.50 as of June 30, 2010 exceeds the exercise
      price of the option.


14




LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
16             INCOME TAXES





The
Company is subject to income tax on an entity basis on income arising from the
tax jurisdiction in which they operate.





The
Company’s two operating subsidiaries, Lihua Electron and Lihua Copper, are
generally subject to PRC enterprise income tax (“EIT”). Before January 1,
2008, Lihua Electron was subject to an EIT rate of 24% on its taxable income
because it is located in an economic development zone.  Furthermore,
Lihua Electron is a production-based foreign investment enterprise and was
granted an EIT holiday for the two years ended December 31, 2006 and 2005 and a
50% reduction on the EIT rate for the three years ended December 31, 2007, 2008
and 2009.





On March
16, 2007, the PRC government promulgated a new tax law, China’s Unified
Enterprise Income Tax Law (“New EIT Law”), which took effect from January 1,
2008. Under the New EIT Law, foreign-owned enterprises as well as domestic
companies are subject to a uniform tax rate of 25%. The New EIT Law provides for
a grandfathering and five-year transition period from its effective date for
those enterprises which were established before the promulgation date of the New
EIT Law and which were entitled to a preferential EIT treatment. Accordingly,
Lihua Electron continued to be entitled to the 50% reduction on its EIT rate for
the two years ended December 31, 2008 and 2009 and has been subject to an EIT
rate of 25% for the year ended December 31, 2010 under the New EIT
Law.





Lihua
Copper has been subject to an EIT rate of 25% for the years ended December 31,
2010 and 2009 under the New EIT Law.





No
provision for other overseas taxes is made as neither Lihua, Ally Profit or
Lihua Holding has any taxable income in the U.S., British Virgin Islands or Hong
Kong, respectively.





The
Company’s provision for income taxes consisted of:


For the three months
                    
                    
                    For the six monthsEnded June 30,
                    
                    
                    Ended June 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009(Unaudited)
                    
                    
                    (Unaudited)
                    
                    
                    (Unaudited)
                    
                    
                    (Unaudited)Current
      – PRC
                    
                    $
                    3,371,734
                    
                    
                    $
                    1,572,190
                    
                    
                    $
                    6,034,686
                    
                    
                    $
                    2,312,512Deferred
                    
                    
                    16,322
                    
                    
                    
                    -
                    
                    
                    
                    59,020
                    
                    
                    
                    23,401$
                    3,388,056
                    
                    
                    $
                    1,572,190
                    
                    
                    $
                    6,093,706
                    
                    
                    $
                    2,335,913




Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of deferred
income tax assets are as follows:




June 30
                              2010
                            
                            
                            December 31
                              2009(Unaudited)
                            
                            
                            (Audited)Deferred income tax assets -
      current:Unrealized
      intercompany profit in inventory
                            
                            $
                            39,288
                            
                            
                            $
                            98,068Less:
      Valuation allowance
                            
                            
                            −
                            
                            
                            
                            −$
                            39,288
                            
                            
                            $
                            98,068




15




LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




NOTE
17             EARNINGS PER
SHARE





The
following table is a reconciliation of the net income and the weighted average
shares used in the computation of basic and diluted earnings per share for the
periods presented:




For the three months
                            
                            
                            For the six monthsEnded June 30,
                            
                            
                            Ended June 30,2010
                            
                            
                            2009
                            
                            
                            2010
                            
                            
                            2009(Unaudited)
                            
                            
                            (Unaudited)
                            
                            
                            (Unaudited)
                            
                            
                            (Unaudited)Income
      available to common shareholders:-
      Basic
                            
                            $
                            9,898,292
                            
                            
                            $
                            6,705,029
                            
                            
                            $
                            18,754,850
                            
                            
                            $
                            10,693,720-
      Diluted
                            
                            $
                            9,898,292
                            
                            
                            $
                            6,705,029
                            
                            
                            $
                            18,754,850
                            
                            
                            $
                            10,693,720Weighted
      average number of shares:-
      Basic
                            
                            
                            28,484,091
                            
                            
                            
                            15,000,000
                            
                            
                            
                            26,625,272
                            
                            
                            
                            15,000,000-
      Effect of dilutive convertible preferred stock
                            
                            
                            -
                            
                            
                            
                            6,818,182
                            
                            
                            
                            -
                            
                            
                            
                            6,818,182-
      Effect of dilutive warrants and options
                            
                            
                            842,480
                            
                            
                            
                            -
                            
                            
                            
                            852,116
                            
                            
                            
                            --
      Diluted
                            
                            
                            29,326,571
                            
                            
                            
                            21,818,182
                            
                            
                            
                            27,477,388
                            
                            
                            
                            21,818,182Net
      income per share-
      Basic
                            
                            $
                            0.35
                            
                            
                            $
                            0.45
                            
                            
                            $
                            0.70
                            
                            
                            $
                            0.71-
      Diluted
                            
                            $
                            0.34
                            
                            
                            $
                            0.31
                            
                            
                            $
                            0.68
                            
                            
                            $
                            0.49





NOTE
18             RELATED PARTY
TRANSACTIONS





(1)          Due
from related company





June 30
                      2010
                    
                    
                    December 31
                      2009(Unaudited)
                    
                    
                    (Audited)Tianyi
      Telecom
                    
                    $
                    230,553
                    
                    
                    $
                    −





The
controlling stockholders of Tianyi Telecom are related to Yaying Wang, our COO
and one of our directors. The balance due from related company as of June 30,
2010 is the result of sales of copper wire to Tianyi Telecom.


16




LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





(2)          Sales





For the
six months ended June 30, 2010 and 2009, the sales included $429,349 and
$182,020, respectively that were made to Tianyi
Telecom.





(3)          Guarantees





As of
June 30, 2010, Mr. Jianhua Zhu, the Company’s CEO and director, and Tianyi
Telecom provided guarantees for the Company’s short-term bank loans of
$2,208,838. (See Note 12 above).





As of December 31, 2009,
Mr. Jianhua Zhu, the Company’s CEO and director provided guarantees for the
Company’s short-term bank loans of $2,196,772. (See Note 12
above).


17




LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
19             CERTAIN RISKS AND
CONCENTRATION





Credit
risk and major customers





As of
June 30, 2010, 100% of the Company’s cash included cash on hand and deposits in
accounts maintained within the PRC where there is currently no rule or
regulation in place for obligatory insurance to cover bank deposits in the event
of bank failure. However, the Company has not experienced any losses in such
accounts and believes it is not exposed to any significant risks on its cash in
bank accounts.





For the
six months ended June 30, 2010 and 2009, all of the Company’s sales arose in the
PRC.  In addition, all accounts receivable as of June 30, 2010 and
2009 were due from customers located in the PRC.





There was
no single customer who accounted for more than 10% of the accounts receivable of
the Company as of June 30, 2010 and December 31, 2009.  There was no single
customer who constituted 10% or more of the Company’s net revenue for the six
months ended June 30, 2010 or 2009.





Risk
arising from operations in foreign countries





Substantially
all of the Company’s operations are conducted in China. The Company’s operations
are subject to various political, economic, and other risks and uncertainties
inherent in China. Among other risks, the Company’s operations are subject to
the risks of restrictions on transfer of funds; export duties, quotas, and
embargoes; domestic and international customs and tariffs; changing taxation
policies; foreign exchange restrictions; and political conditions and
governmental regulations.


18




LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
20             SEGMENT DATA AND RELATED
INFORMATION





The
Company operates in one business segment, manufacturing and sale of copper clad
aluminum (CCA) wire and copper wire produced from refined copper materials, as
well as refined copper rod. The Company also operates only in one geographical
segment – China, as all of the Company’s products are sold to customers located
in China and the Company’s manufacturing operations are located in
China.




The
Company’s major product categories are (1) wire manufacturing, consisting of (a)
CCA fine and superfine wire, which is an electrical conductor consisting of an
outer sleeve of copper that is metallurgically bonded to a solid aluminum core,
and (b) copper fine and superfine wire, manufactured from recycled copper rod;
and (2) recycled copper, consisting of fire refined copper produced from scrap
copper and used to manufacture copper rod, raw wire, cable and magnet wire. The
manufacturing of refined copper was launched in the first quarter of
2009.




Management
evaluates performance based on several factors, of which net revenue and gross
profit by product are the primary financial measures:





For the three months
                        
                        
                        For the six monthsEnded June 30,
                        
                        
                        Ended June 30,2010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009(Unaudited)
                        
                        
                        (Unaudited)
                        
                        
                        (Unaudited)
                        
                        
                        (Unaudited)Net
      revenue from unaffiliated customers:Copper
      and CCA wire
                        
                        $
                        68,318,870
                        
                        
                        $
                        26,181,152
                        
                        
                        $
                        108,937,801
                        
                        
                        $
                        42,490,559Refined
      copper rod
                        
                        
                        7,183,480
                        
                        
                        
                        22,646,191
                        
                        
                        
                        29,785,251
                        
                        
                        
                        26,875,109$
                        75,502,350
                        
                        
                        $
                        48,827,343
                        
                        
                        $
                        138,723,052
                        
                        
                        $
                        69,365,668Gross
      profit:Copper
      and CCA wire
                        
                        $
                        13,799,167
                        
                        
                        $
                        7,867,294
                        
                        
                        $
                        23,697,804
                        
                        
                        $
                        13,033,513Refined
      copper rod
                        
                        
                        701,139
                        
                        
                        
                        1,864,515
                        
                        
                        
                        2,623,786
                        
                        
                        
                        2,408,971$
                        14,500,306
                        
                        
                        $
                        9,731,809
                        
                        
                        $
                        26,321,590
                        
                        
                        $
                        15,442,484


19


Item. 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS





OVERVIEW




We are
principally engaged in the production of copper replacement products which
include copper rod and copper wire produced from refined scrap copper and CCA
wire.




We
manufacture and sell three major types of copper replacement products: pure
copper wire, pure copper rod and CCA wire.  The pure copper wire and
pure copper rod products are produced from refined scrap copper utilizing our
proprietary scrap copper recycling and cleaning technology and
process.





In the
first quarter of 2009, we introduced a new production process and product line
which enables us to produce pure copper products from scrap
copper.  The new production process involves the fire refining of bulk
recycled copper into high purity, low oxygen content copper rods (also known as
fire-refined high-conductivity rods).  We then either sell these large
diameter (8mm) copper rods into a range of markets, or we further process these
rods into a much smaller diameter (e.g., 0.03 mm) copper wire (also known as
“superfine” copper wire). We believe this recycled superfine copper wire is
generally a more cost effective product for our customers, comparing with pure
copper wires manufactured from newly mined
copper.




We are
currently one of the leading CCA superfine wire producers in China. Furthermore,
we believe we were among one of the first manufacturers which commercialized CCA
superfine wire production in China. Currently we have three different CCA
products: CCA fine wire, CCA magnet wire and CCA tin plated wire. CCA fine wire
is the raw material for CCA magnet wire and CCA tin plated wire.  In
the case of CCA magnet wire, we coat the CCA fine wire with a special magnetic
coating, while in the case of CCA tin plated wire, we plate the CCA fine wire
with a very thin layer of tin.  The value added nature of our CCA
superfine wire products lies in our ability and technology to draw down from
much larger diameter CCA raw wire, and further process it to produce super fine
CCA magnet wire and CCA tin plated wire. As a result, CCA magnet wire and CCA
tin plated wire command higher market prices and higher gross margins than plain
CCA fine wire.




We have
expanded our business from the CCA superfine wire segment into the recycled
copper rod and wire business because we believe that the recycled copper rod and
wire segment allows us to sell into the much bigger pure copper wire market and
offers us the ability to grow more rapidly while utilizing the proprietary
equipment and technology that we possess relating to superfine wire
drawing.  We believe that both the CCA superfine wire and the copper
rod and wire segments are growing markets and offer us substantial opportunity
to increase our sales in the future.  In absolute terms, the copper
rod and copper wire markets are much larger than the CCA superfine wire market,
which although fast growing as a pure copper wire substitute, still has its own
limitations and cannot replace the entire pure copper wire
market.  While the copper rod and copper wire markets generally carry
lower gross margins than our higher value-added CCA fine wire products, the
potential absolute dollar value of gross profit available to us from the copper
rod and wire markets are greater than those available from the CCA fine wire
market.  We anticipate that we will continue to expand production
capacity in both segments, but that the majority of our investment and resulting
planned growth in sales volume will occur in the refined copper products
segment, which caters to a much bigger pure copper products market, compared
with the CCA wire market.




We sell
our products primarily in China, either through distributors or directly to
users, including distributors in the wire and cable industries and manufacturers
in the consumer electronics, white goods, automotive, utility,
telecommunications and specialty cable industries.


20





Our
markets for our three main product categories (copper rod, copper wire and CCA
wire) overlap to a degree, and are characterized by their breadth and depth,
with a very large number of current and potential customers for each product
category. Copper rod is a raw material used in wire and cable
production.  Our copper rod, which is manufactured from recycled scrap
copper, competes directly with copper rod made from “virgin” (e.g. newly mined)
copper.  To date, our raw material costs for bulk scrap copper have
been lower than prices for “virgin” copper, which we believe provides us with a
pricing advantage in the market.  During 2009, we sold copper rod to
approximately 100 customers, most of which are producers of smaller diameter
copper wire used in power cables ranging in size from high voltage power
transmission cables to white good applications such as internal wiring in
household appliances and consumer electronics.  Our copper wire, which
is sold in a variety of diameters and may have undergone further in-line
processing such as coating with plastic, is sold to many of the same types of
end-use customers who purchase copper wire from our copper rod
customers.  These include manufacturers of a wide range of power
cables and products that incorporate wiring, such as household appliances,
automobiles, consumer electronics and telecommunications
equipment.  Our CCA wire is sold to many of these manufacturers
also.  CCA wire sells at a lower cost per unit of weight than pure
copper wire, due to the relatively lower density of the aluminum core which
makes up most of the volume of CCA wire.  Our CCA wire offers
conductivity performance characteristics that are only marginally below those of
pure copper wire, which means they are attractive in a wide variety of product
applications where a slight reduction in conductivity standards is tolerable
(such as most of the household appliance, automotive, consumer electronics and
telecommunications applications).  Examples of relatively high
tolerance product applications where our CCA wire would not provide an
acceptable replacement option for pure copper wire would be military/space
equipment and wiring in nuclear power plants.  One low tolerance
product category that requires pure copper wire rather than our less costly CCA
wire is electric motors, which require pure copper wire windings.  The
markets for each of our three product lines are growing rapidly, due both to
growing demand in China for all types of basic wire raw materials and the
relative cost advantages our product lines carry over “virgin” pure copper
competitor products.




We
believe that we are well positioned to continue to capture further market share
in the copper wire industry. CCA and copper wire produced from recycled copper
are increasingly being accepted as cheaper alternatives to pure copper wire. As
a result, our sales and net income have increased substantially during the last
three years. We generated sales of $32.5 million, $50.0 million, $161.5 million
and $138.7 million for the years ended December 31, 2007, 2008 and 2009 and the
six months ended June 30, 2010 respectively. We achieved net income of $7.7
million, $11.7 million, $13.7 million and $18.8 million for the years ended
December 31, 2007, 2008 and 2009 and the six months ended June 30, 2010,
respectively.  In the six months ended June 30, 2010 and 2009, we had
a non-cash gain of $2.2 million and a  non-cash charge of $0.3
million, which resulted from the change in the fair value of the warrants issued
to investors in conjunction with the Company’s issuance of convertible Preferred
Stock in October 2008 and options issued to our independent directors and
employees. Excluding the impact of this net non-cash gain, net income for the
six months ended June 30, 2010 was $16.6 million, up 49.7% from the same period
last year.




Our
copper rod is made from bulk scrap copper, which is cleaned, purified and
smelted in large capacity smelter units.  At the present time we have
a single horizontal copper rod extrusion production line, fed by two smelters,
which is capable of producing 25,000 tons of copper rod per year in
total. For the six months ended June 30, 2010, we sold 3,994 tons of copper
rod, all of which was produced by this smelter/extrusion line.  As of
June 30, 2010, we operated approximately 80 high speed wire drawing machines,
which draw larger diameter copper rod or CCA rod into much finer diameter wires,
with a total capacity of approximately 7,500 tons per annum of CCA wire and
approximately 20,000 tons per annum of copper wire.  Certain of these
drawing machines incorporate additional production steps such as coating,
annealing or magnetizing the fine wire produced.  These drawing
machines are manufactured to our design and specifications by custom equipment
manufacturers located in China.  We are not dependent on any single
custom equipment manufacturer for the fabrication of our drawing
lines.  We are adding smelter capacity in the second half of 2010, so
that we can increase our production volumes of refined copper
products.   Accordingly, we do not anticipate that our sales will
be capacity-constrained in the near future, even if we continue to experience
rapid sales growth.





Significant
Factors Affecting Our Results of Operations




The most
significant factors that may 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;


21





·
            supply and costs of principal raw
      materials; and


·
            product mix and implications on
      gross margins.




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
9.65% in gross domestic product from 1999 through 2009. Domestic demand for and
consumption of copper and CCA products have 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 recycled copper and CCA wire products based on the market price for
materials plus a fixed dollar 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.




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 and
net income.




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 dollar 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 in copper prices.  In general,
because we earn a relatively stable fixed dollar mark-up for each type of
product we manufacture, and because our products are generally sold on a price
per unit of weight basis, our gross margins will be inversely impacted by
changes in bulk copper prices.  As copper prices move higher, our
relatively fixed dollar mark-up will represent a smaller percentage of our
revenue for a given type of product.  As copper prices move lower, our
relatively fixed dollar mark-up will represent a larger percentage of our
revenue for a given type of product.




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 derive the highest production markup, or gross
profit.  We also generate a significant portion of revenue from
selling semi-finished products such as CCA fine wire at a lower production cost
markup, or gross profit.


22




The March
2009 launch of our scrap copper refinery business has changed our product mix
and gross margins.  Generally, copper rod contributes a lower gross
profit margin compared to finished wire products.  We are still at a
development stage of this new business segment, and our copper rod production
capacity exceeds our copper wire drawing capacity.  Therefore, we
currently must sell a percentage of our copper rod production into the open
market on an unimproved basis, at lower profit margins.  However, we
expect a gradual ramping up of our wire production facilities and thus we will
likely be able to utilize a substantial proportion of our copper rod production
capacity as raw material for our copper wire production. As a result, we expect
to sell more copper wire at higher profit margins than copper rod over time,
until we expand our refined copper smelting capacity, at which time initially
the copper rod production will again surpass that of the copper wire’s until we
gradually ramp up our wire drawing capacity.




PRINCIPAL
INCOME STATEMENT COMPONENTS




Sales




Our sales
are derived from sales of CCA wire, copper wire and copper rod 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. However, we
also 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 dollar mark-up,
which is essentially our gross profit.




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.




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.


23




Other
income and expense




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




Our
interest expense consists of expenses related to our short term bank
borrowings.  We expense all interest as it is incurred.





Change in fair value of
warrants




The fair
value of the Company’s issued and outstanding Series A Warrants and Series B
Warrants, and the Warrants issued to underwriters in conjunction with the
company's initial public offering in September 2009, decreased to $7,139,125 as
of June 30, 2010 as a result of 700,000 Series A warrants and 6,000 Series B
warrants exercised and the change in our stock price during the first half of
2010. As such, the Company recognized a $2,234,829 gain, which is a non-cash
benefit from the change in fair value of these warrants for the period ended
June 30, 2010.




Income
taxes




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 has been subject to the 50% income tax reduction for 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
                  
                  2011Lihua
      Electron
                  
                  
                  –
                  
                  
                  
                  12
                  %
                  12.50
                  %
                  12.50
                  %
                  25
                  %
                  25
                  %Lihua
      Copper
                  
                  
                  –
                  
                  
                  
                  25
                  %
                  25
                  %
                  25
                  %
                  25
                  %
                  25
                  %




RESULTS
OF OPERATIONS




THREE
MONTHS ENDED JUNE 30, 2010 COMPARED TO THREE MONTHS ENDED JUNE 30,
2009




Sales




Our
business for the three months ended June 30, 2010 continued to demonstrate
robust growth.  Net sales increased by 54.6% from $48.8 million in the
three months ended June 30, 2009 to $75.5 million in the three months ended June
30, 2010. This growth was driven by strong market demand in our copper rod and
copper wire products from the scrap copper refinery business, as well as in our
CCA wire products. The table below provides further detail regarding the product
sales breakdown by specific category.





Three months ended June 30,2010
                
                
                2009Sales
                
                
                Volume
                  (m.t.)
                
                
                Average
                  price
                
                
                Sales
                
                
                Volume
                  (m.t.)
                
                
                Average
                  priceCCA
      and Copper wire
                
                $
                68,318,870
                
                
                
                8,341
                
                
                $
                8,191
                
                
                $
                26,181,152
                
                
                
                3,922
                
                
                $
                6,675Copper
      rod
                
                $
                7,183,480
                
                
                
                997
                
                
                $
                7,205
                
                
                $
                22,646,191
                
                
                
                4,457
                
                
                $
                5,081Total
                
                $
                75,502,350
                
                
                
                9,338
                
                
                $
                8,085
                
                
                $
                48,827,343
                
                
                
                8,379
                
                
                $
                5,827




24





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, 2010 and
2009:




Three months ended June 30,
                              
                              
                              Change in
                                three months
                                ended June
                                30, 2010
                                compared to
                                three months
                                ended June
                                30, 20092010
                              
                              
                              2009In
      thousands, except for percentage
                              
                              US$
                              
                              
                              % of Sales
                              
                              
                              US$
                              
                              
                              % of SalesTotal
      Sales
                              
                              $
                              75,502
                              
                              
                              
                              100.0
                              %
                              
                              $
                              48,827
                              
                              
                              
                              100.0
                              %
                              
                              
                              54.6
                              %Total
      cost of sales
                              
                              
                              (61,002
                              )
                              
                              
                              (80.8
                              )%
                              
                              
                              (39,096
                              )
                              
                              
                              (80.1
                              )%
                              
                              
                              56.0
                              %Gross
      Profit
                              
                              $
                              14,500
                              
                              
                              
                              19.2
                              %
                              
                              $
                              9,732
                              
                              
                              
                              19.9
                              %
                              
                              
                              49.0
                              %




Total
cost of sales for the three months ended June 30, 2010 was $61.0 million,
reflecting an increase of 56.0% from the same period last year. As a percentage
of total sales, our cost of sales increased to 80.8% of total sales for the
quarter ended June 30, 2010, compared to 80.1% of total sales in the same period
last year, principally due to the sharp increase in copper price. Consequently,
gross margin as a percentage of total sales decreased to 19.2% in the quarter
ended June 30, 2010 from 19.9% for the same period last year.  This
slight reduction in gross margin was the result of the combination of several
offsetting factors: a) during the three months ended June 30, 2010, the average
copper price was RMB47,996 (US$7,027) per metric ton compared to RMB33,703
(US$4,935) from the same period last year, reflecting an increase of 42.4%,
which resulted in a negative impact on the company’s gross margin, and b) a
shift to selling more higher margin products (CCA and copper wire), as noted
above, has positively impacted the company’s gross margin.  Gross
profit for the three months ended June 30, 2010 was $14.5 million, up 49.0% from
gross profit of $9.7 million for the same period in 2009.




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, 2010 and
2009:


25





Three months ended June 30,
                                  
                                  
                                  Change in
                                    three months
                                    ended June
                                    30, 2010
                                    compared to
                                    three months
                                    endedJune
                                    30, 20092010
                                  
                                  
                                  2009In thousands, except for percentage
                                  
                                  US$
                                  
                                  
                                  % of Sales
                                  
                                  
                                  US$
                                  
                                  
                                  % of Sales
                                  
                                  
                                  %Gross
      profit
                                  
                                  $
                                  14,500
                                  
                                  
                                  
                                  19.2
                                  %
                                  
                                  $
                                  9,732
                                  
                                  
                                  
                                  19.9
                                  %
                                  
                                  
                                  49.0
                                  %Operating
      Expenses:Selling
      expenses
                                  
                                  
                                  (570
                                  )
                                  
                                  
                                  (0.8
                                  )%
                                  
                                  
                                  (587
                                  )
                                  
                                  
                                  (1.2
                                  )%
                                  
                                  
                                  (2.9
                                  )%General
      & administrative expenses
                                  
                                  
                                  (1,485
                                  )
                                  
                                  
                                  (2.0
                                  )%
                                  
                                  
                                  (1,093
                                  )
                                  
                                  
                                  (2.2
                                  )%
                                  
                                  
                                  35.8
                                  %Total
      operating expense
                                  
                                  
                                  (2,055
                                  )
                                  
                                  
                                  (2.8
                                  )%
                                  
                                  
                                  (1,681
                                  )
                                  
                                  
                                  (3.4
                                  )%
                                  
                                  
                                  22.2
                                  %Income
      from operations
                                  
                                  $
                                  12,445
                                  
                                  
                                  
                                  16.5
                                  %
                                  
                                  $
                                  8,051
                                  
                                  
                                  
                                  16.5
                                  %
                                  
                                  
                                  54.6
                                  %




Total
selling, general and administrative expenses were $2,055,000 for the three
months ended June 30, 2010, compared to $1,681,000 for the same period last
year, an increase of 22.2%.




Selling
expenses were $570,000 for the three months ended June 30, 2010, a decrease of
2.9% compared to the same period last year, which was a result of decreased
sales commission costs incurred period-on-period. Notwithstanding our
substantial increase in sales year over year, the Company paid a lesser amount
of commissions because a large percentage of our total sales were to larger,
non-commissionable “house accounts” during the second quarter of 2010 compared
to the second quarter of 2009.  General & administrative expenses
were $1,485,000 for the three months ended June 30, 2010, an increase of 35.8%
compared to the same period last year. Factors which caused this increase
were due to the increase of professional fees including accounting fee, legal
fee and financial advising fee for our secondary offering in April 2010; and
higher administrative and professional fees associated with the Company’s public
offering in the second fiscal quarter and our expanded scale of
operations.




Interest
Expense




Interest
expense was $40,288 for the three months ended June 30, 2010, compared to
$105,667 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, 2010, income tax expense was $3,388,056,
reflecting an effective tax rate of 25.5% from operation.  The effective
tax rate for the same period in 2009 was 19.0%.




In 2009,
Lihua Electron was subject to an enterprise income tax (“EIT”) rate of 12.5%,
and Lihua Copper was subject to an EIT rate of 25%.  Starting 2010,
both entities’ EIT rate is 25%.





Net
Income




Net
income for the three months ended June 30, 2010 was $9.9 million, or 13.1%
of net revenue, compared to $6.7 million, or 13.7% of net revenue, in the
same period in 2009.




Foreign
Currency Translation Gains




During
the three months ended June 30, 2010, the RMB rose slightly against the US
dollar, and we recognized a foreign currency translation gain of
$698,345.


26





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




Sales





For the
six months ended June 30, 2010, our net sales were $138.7 million, representing
an increase of $69.4 million or 100.0% compared to the six months ended June,
2009. This increase was primarily due to our new facility for superfine copper
wire as well as copper rod produced from refined copper materials, which started
operation at the beginning of March 2009. In the first half of 2010, the
majority of our sales volume was comprised of copper rod and copper
wire.  The table below provides further detail regarding the product
sales breakdown by specific category.





Six months ended June 30,2010
                
                
                2009Sales
                
                
                Volume
                  (m.t.)
                
                
                Average
                  price
                
                
                Sales
                
                
                Volume
                  (m.t.)
                
                
                Average
                  priceCCA
      and Copper wire
                
                $
                108,937,801
                
                
                
                13,019
                
                
                $
                8,368
                
                
                $
                42,490,559
                
                
                
                6,561
                
                
                $
                6,476Copper
      rod
                
                $
                29,785,251
                
                
                
                3,994
                
                
                $
                7,458
                
                
                $
                26,875,109
                
                
                
                5,559
                
                
                $
                4,835Total
                
                $
                138,723,052
                
                
                
                17,013
                
                
                $
                8,154
                
                
                $
                69,365,668
                
                
                
                12,120
                
                
                $
                5,723




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 six months ended June 30, 2010 and
2009:





Six months ended June 30,
                    
                    
                    Change in
                      six months
                      ended June
                      30, 2010
                      compared to
                      six months
                      ended June
                      30, 20092010
                    
                    
                    2009In thousands, except for percentage
                    
                    US$
                    
                    
                    % of Sales
                    
                    
                    US$
                    
                    
                    % of Sales
                    
                    
                    %Total
      Sales
                    
                    $
                    138,723
                    
                    
                    
                    100.0
                    %
                    
                    $
                    69,366
                    
                    
                    
                    100.0
                    %
                    
                    
                    100.0
                    %Total
      cost of sales
                    
                    
                    (112,401
                    )
                    
                    
                    (81.0
                    )%
                    
                    
                    (53,924
                    )
                    
                    
                    (77.7
                    )%
                    
                    
                    108.4
                    %Gross
      Profit
                    
                    $
                    26,322
                    
                    
                    
                    19.0
                    %
                    
                    $
                    15,442
                    
                    
                    
                    22.3
                    %
                    
                    
                    70.4
                    %




Total
cost of sales for the six months ended June 30, 2010 was $112.4 million,
reflecting an increase of 108.4% from the same period last year. As a percentage
of total sales, our cost of sales increased to 81.0% of total sales for the six
months ended June 30, 2010, compared to 77.7% of total sales in the same period
last year. Consequently, gross margin as a percentage of total sales decreased
to 19.0% in the six months ended June 30, 2010 from 22.3% for the same period
last year.  Similar to the three month margin trends detailed above,
this reduction in gross margin percentage was the result of several offsetting
factors: a) during the first half of 2010, the average copper price was RMB
49,008 (US$7,175) compared to RMB 29,738 (US$4,354) from the same period last
year, reflecting an increase of 64.8%, which negatively impacted the company’s
gross margin, and b) a shift to selling more higher margin products (CCA and
copper wire), as noted above, which positively impacted the company’s gross
margin.


27






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 six months ended June 30, 2010 and
2009:





Six months ended June 30,
                  
                  
                  Change in
                    six months
                    ended
                    June 30, 2010
                    compared
                    to six months
                    ended June
                    30, 20092010
                  
                  
                  2009In thousands, except for percentage
                  
                  US$
                  
                  
                  % of
                    Sales
                  
                  
                  US$
                  
                  
                  % of
                    Sales
                  
                  
                  %Gross
      profit
                  
                  $
                  26,322
                  
                  
                  
                  19.0
                  %
                  
                  $
                  15,442
                  
                  
                  
                  22.3
                  %
                  
                  
                  70.4
                  %Operating
      Expenses:Selling
      expenses
                  
                  
                  (1,021
                  )
                  
                  
                  (0.7
                  )%
                  
                  
                  (790
                  )
                  
                  
                  (1.1
                  )%
                  
                  
                  29.2
                  %General
      & administrative expenses
                  
                  
                  (2,778
                  )
                  
                  
                  (2.0
                  )%
                  
                  
                  (1,636
                  )
                  
                  
                  (2.4
                  )%
                  
                  
                  69.9
                  %Total
      operating expense
                  
                  
                  (3,799
                  )
                  
                  
                  (2.7
                  )%
                  
                  
                  (2,426
                  )
                  
                  
                  (3.5
                  )%
                  
                  
                  56.6
                  %Income
      from operations
                  
                  $
                  22,522
                  
                  
                  
                  16.2
                  %
                  
                  $
                  13,016
                  
                  
                  
                  18.8
                  %
                  
                  
                  73.0
                  %





Total
selling, general and administrative expenses were $3,799,000 for the six months
ended June 30, 2010, compared to $2,426,000 for the same period last year, an
increase of 56.6%





Selling
expenses were $1,021,000 in the six months ended June 30, 2010, an increase of
29.2% compared to the same period last year. The increase was attributable
to:




·
            Increased costs related to
      product distribution and insurance as a result of expanded business
      volume; and


·
            Increased staffing costs as we
      continued to expand the sales force during the
    period.





General
and administrative expenses were $2,778,000 in the six months ended June 30,
2010, an increase of 69.9% compared to the same period last year.Factors which caused this
increase were higher administrative and professional fees associated with the
Company’s public offering in the second fiscal quarter and our expanded scale of
operations.





Interest
Expense





Interest
expense was $69,458 for the six months ended June 30, 2010, compared to $218,796
for the same period of last year. The decrease is largely due to the repayment
of short term bank loans which were used for working capital
purposes.





Income
tax





For the
six months ended June 30, 2010, income tax expense was $6,093,706,
reflecting an effective tax rate of 24.5%.  The effective tax rate for the
same period in 2009 was 17.9%.





In 2009,
Lihua Electron was subject to an enterprise income tax (“EIT”) rate of 12.5%,
and Lihua Copper was subject to an EIT rate of 25%.  Starting 2010,
both entities’ EIT rate is 25%.


28





Net
Income





Net
income for the six months ended June 30, 2010 was $18.8 million, or 13.5% of net
revenue, compared to $10.7 million, or 15.4% of net revenue, in the same
period in 2009.





Foreign
Currency Translation Gains





During
the six months ended June 30, 2010, the RMB steadily rose against the US dollar,
and we recognized a foreign currency translation gain of $746,801.





LIQUIDITY AND CAPITAL
RESOURCES





We have
historically financed our operations and capital expenditures through cash flows
from operations, bank loans and fund raising through issuing new
shares.





As of
June 30, 2010, we had approximately $87.6 million in cash, up $53.0 million from
$34.6 million at December 31, 2009.  The following table summarizes
our cash flows for each of the periods indicated:




For the six months ended
                        June 30,2010
                      
                      
                      2009(US$)Net
      cash provided by operating activities
                      
                      $
                      18,466,306
                      
                      
                      $
                      5,745,577Net
      cash used in investing activities
                      
                      
                      (1,067,485
                      )
                      
                      
                      (2,947,312
                      )Net
      cash provided by financing activities
                      
                      
                      35,094,517
                      
                      
                      
                      (706,466
                      )Effect
      of exchange rate changes
                      
                      
                      491,718
                      
                      
                      
                      10,806Cash
      and cash equivalents at beginning of period
                      
                      
                      34,614,838
                      
                      
                      
                      26,041,849Cash
      and cash equivalents at end of period
                      
                      $
                      87,599,894
                      
                      
                      $
                      28,144,454





Operating
activities





For the
six months ended June 30, 2010, cash provided by operating activities totaled
$18.5 million compared to $5.7 million in the same period of 2009. This was
primarily attributable to: i) a $18.8 million increase in net earnings; ii) a
$6.1 million accounts receivable increase driven by revenue growth; iii) a $2.2
million inventory decrease, resulting from more efficient use of raw materials
and finished goods; iv) a $2.2 million non-cash gain as a result of change in
fair value of warrants issued; and v) a $2.4 million increase in accounts
payables as a result of the sharp increase in sales.





Investing
activities





For the
six months ended June 30, 2010, we had a net cash outflow of $1.1 million from
investing activities for the purchase of property, plant and
equipment, primarily as a result of capital investment in new equipment and
machinery, and building up new workshops, all being part of our planned
expansion.





Financing
activities





For the
six months ended June 30, 2010, we had a net cash inflow of $35.1 million from
financing activities which was primarily driven by $32.1 million proceeds from
the fund raising through issuing new shares in the second quarter of 2010 and
$2.5 million proceeds from the exercise of warrants of the PIPE
investors.




29


Capital
expenditure





Our
capital expenditures are principally comprised of construction and purchases of
property, plant and equipment for expansion of our production facilities. In
2007, 2008 and 2009, we funded our capital expenditures primarily through cash
flows from operating activities and the proceeds of bank borrowings, and equity
issuance.





In 2010,
as we accelerate our expansion, we expect continued capital expenditure for
maintaining existing machines and adding manufacturing equipment in our new
facility, which is adjacent to our old facility. In the new production
facilities we currently have two horizontal smelters, which can produce 25,000
tons of refined copper rods per year. We plan to add additional smelting
facility in the third quarter of 2010 and increase our total copper refinery
capacity to 50,000 tons per year. In 2011 we plan to build up another new
facility and increase our total copper refinery capacity to 100,000 tons per
year. With our current capacity of production lines, we can produce 7,500 tons
of CCA wire and 20,000 tons of copper wire, as of June 30, 2010. We plan to have
four new additional high-capacity drawing production lines in production by the
end of 2010 while increasing our CCA wire production capacity to 10,000 tons per
year. Of that capacity, 6,000 tons per year will be CCA magnet wire and 4,000
ton per year will be CCA fine wire. For the 2010 capacity expansion, we believe
that our existing cash, cash equivalents and cash flows from operations and our
revolving credit facility will be sufficient to meet our presently anticipated
future cash needs to bring all of our facilities into full production. We may,
however, require additional cash resources due to changing business conditions
or other future developments, including any investments or acquisitions we may
decide to pursue.





Accounts
receivable





Our Days
Sales Outstanding (DSO) has improved to 22 days in the six month period ended
June 30, 2010 compared with 29 days in the same period last year, because of the
change in our product mix. In the six month period ended June 30, 2010, we
produced 13,019 tons of CCA and copper wire and 3,994 tons of copper
rod.  In the first half of 2009, we produced 6,561 tons of CCA and
copper wire and 5,559 tons of copper rod. As CCA is an emerging product in
China, Lihua extends credit terms to some of its larger customers. However, pure
copper products, such as our copper rod and copper wire, are in such high demand
that we don’t have to extend credit terms, which is the primary reason our
overall DSO has improved as we have introduced recycled copper wire and copper
rod as new product lines. Our customers often purchase more than one type of
product from us (for example, one customer may purchase both CCA wire and copper
wire).  CCA wire purchases are generally accorded 30 to 60 day payment
terms, depending upon the creditworthiness of the customer, while the copper
wire (and copper rod) purchases are payable upon delivery to the customer, which
may occur two to seven days after we ship the product and recognize our revenue.
This decision to extend terms or to collect payment upon receipt (essentially a
“cash sale”, although due to the shipping time this effectively becomes a very
short receivable), is based primarily upon the product type. We may extend terms
for CCA purchases to a credit-worthy customer, but for that same customer
require payment upon delivery for purchases of copper rod and/or copper
wire.





The table
below shows the breakdown of accounts receivable by product:





For the period ended,June 30, 2010
                    
                    
                    June 30, 2009Accounts Receivable
                    
                    
                    Accounts ReceivableCCA
      wire and Copper wire
                    
                    $
                    16,550,682
                    
                    
                    $
                    5,536,104Copper
      rod
                    
                    
                    649,844
                    
                    
                    
                    2,309,639Total
                    
                    $
                    17,200,526
                    
                    
                    $
                    7,845,743




30


Item 3.  
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Foreign
Exchange Risk





Our
reporting currency is the Renminbi. Transactions in other currencies are
recorded in Renminbi at the rates of exchange prevailing when the transactions
occur. Monetary assets and liabilities denominated in other currencies are
remeasured into Renminbi at rates of exchange in effect at the balance sheet
dates. Exchange gains and losses are recorded in our statements of operations as
a component of current period earnings.





The State
Administration for Foreign Exchange, or SAFE of the PRC, under the authority of
the People’s Bank of China, controls the conversion of Renminbi into foreign
currencies. The principal regulation governing foreign currency exchange in
China is the Foreign Currency Administration Rules (1996), as amended, or the
“Rules”. Under the Rules, once various procedural requirements are met, Renminbi
is convertible for current account transactions, including trade and
service-related foreign exchange transactions and dividend payments, but not for
capital account transactions, including direct investment, loans or investments
in securities outside China, without prior approval of the SAFE of the PRC, or
its local counterparts.





Since
July 2005, the Renminbi is no longer pegged to the U.S. dollar. Although
currently the Renminbi exchange rate versus the U.S. dollar is restricted to a
rise or fall of no more than 0.3% per day and the People’s Bank of China
regularly intervenes in the foreign exchange market to prevent significant
short-term fluctuations in the exchange rate, the Renminbi may appreciate or
depreciate significantly in value against the U.S. dollar in the medium to long
term. Moreover, it is possible that in the future, the PRC authorities may lift
restrictions on fluctuations in the Renminbi exchange rate and lessen
intervention in the foreign exchange market. As of June 30, 2010, the exchange
rate of RMB to $1 was RMB 6.7909.





We conduct substantially all of our
operations through our PRC operating companies, and their financial performance
and position are measured in terms of Renminbi. Our raw materials are primarily
procured, sold and delivered in the PRC for Renminbi. The majority of our net
revenue is denominated in Renminbi. Any devaluation of the Renminbi against the
U.S. dollar would consequently have an adverse effect on our financial
performance and asset values when measured in terms of U.S. dollars. On the
other hand, the appreciation of the Renminbi could make our customers’ products
more expensive to purchase because many of our customers are involved in the
export of goods, which may have an adverse impact on their sales. A decrease in
sales by our customers could have an adverse effect on our operating results. In
addition, as of June 30, 2010 and December 31, 2009, we have cash,
primarily denominated in Renminbi, amounting to RMB 594,882,120 (USD
87,559,894) and RMB 236,357,039 (USD 34,614,838). Also, from time to time we may
have U.S. dollar denominated borrowings. Accordingly, a decoupling of the
Renminbi may affect our financial performance in the future.





We
recognized a foreign currency translation adjustment of approximately RMB
5,097,066 (USD 746,801) for the six months ended June 30, 2010. We do not
currently engage in hedging activities, as such, we may in the future experience
economic loss as a result of any foreign currency exchange rate
fluctuations.





Interest
Rate Risk





We are
exposed to interest rate risk arising from short-term variable rate borrowings
from time to time. Our future interest expense will fluctuate in line with any
change in our borrowing rates. We do not have any derivative financial
instruments and believe our exposure to interest rate risk and other relevant
market risks is not material. Our bank borrowings amounted to RMB 14,999,998
(USD 2,208,838) as of June 30, 2010. Based on the variable nature of the
underlying interest rate, the bank borrowings approximated fair value at that
date.





If there
was a hypothetical 1% change in interest rates, the net impact to earnings and
cash flows would be approximately RMB 149,999(USD 22,088). The potential change
in cash flows and earnings is calculated based on the change in the net interest
expense over a one year period due to an immediate 1% change in
price.




31


Inflation





In recent
years, China has not experienced significant inflation, and thus inflation has
not had a material impact on our results of operations. According to the
National Bureau of Statistics of China, the change in Consumer Price Index in
China was 4.8%, 5.9%, and 5.2% in 2007, 2008 and 2009 respectively.





Item 4.
            CONTROLS
      AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures





Disclosure
controls and procedures are designed to ensure that information required to be
disclosed by us in reports filed or submitted under the Securities Exchange Act
of 1934, as amended (“Exchange Act”) is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed under
the Exchange Act is accumulated and communicated to management, including the
principal executive and financial officers, as appropriate to allow timely
decisions regarding required disclosure. There are inherent limitations to the
effectiveness of any system of disclosure controls and procedures, including the
possibility of human error and the circumvention or overriding of the controls
and procedures. Accordingly, even effective disclosure controls and procedures
can only provide reasonable assurance of achieving their control
objectives.





In
connection with the preparation of the quarterly report on Form 10-Q for the
quarter ended June 30, 2010, we carried out an evaluation of the effectiveness
of our disclosure controls and procedures, which are defined in Rules 13a-15(e)
and 15d-15(e) of the Exchange Act of 1934 (the “Act”). Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by an issuer in the reports
that it files or submits under the Act is accumulated and communicated to the
issuer’s management, including its principal executive and principal financial
officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure.





Based on
this evaluation, our chief executive officer and chief financial officer
concluded that our disclosure controls and procedures were effective as of June
30, 2010.





Changes
in Internal Control over Financial Reporting





Except as
otherwise discussed herein, there have been no changes in our internal control
over financial reporting that occurred during the second fiscal quarter of 2010
covered by this Quarterly Report on Form 10-Q that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.




PART
II — OTHER INFORMATION





Item 1. LEGAL PROCEEDINGS





There
have been no material developments in the Company’s legal proceedings from those
previously disclosed in the Company’s Annual Report on Form 10-K/A for the year
ended December 31, 2009.




Item 1A.
              RISK
      FACTORS











There
have been no material changes in the Company’s risk factors from those
previously disclosed in the Company’s Form 10-K/A for the year ended December
31, 2009.





Item 2. UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS





None.




32


Item 3. DEFAULTS UPON SENIOR
SECURITIES





None.





Item 4. (Removed and
Reserved)





None.





Item 5. OTHER INFORMATION





None.





Item 6. EXHIBITS





(b)           Exhibits


ExhibitNo.
            
            Document Description31.1
            
            Certification
      of Chief Executive Officer (Principal Executive Officer) pursuant to Rule
      13A-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.31.2
            
            Certification
      of the Chief Financial Officer (Principal Financial Officer) pursuant to
      Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.32.1
            
            Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the
      Sarbanes-Oxley Act of 2002).32.2
            
            Certification
      of Chief Financial Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the
      Sarbanes-Oxley Act of 2002).10.1*
            
            Independent
      Director Agreement between the Company and Robert C. Bruce dated June 11,
      2010.10.2*
            
            Independent
      Director Agreement between the Company and Jonathan Serbin dated June 11,
      2010.





*           Incorporated
by reference to the Current Report on Form 8-K filed with the SEC on June 17,
2010.


33





SIGNATURES





In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.





LIHUA
      INTERNATIONAL, INC.August
      12, 2010
                By:
                /s/
      Jianhua ZhuJianhua
      Zhu, Chairman and Chief Executive Officer(Principal
      Executive Officer)August
      12, 2010
                By:
                Yang “Roy”
    YuYang
      “Roy” Yu, Chief Financial Officer(Principal
      Accounting Officer)




34