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, 2009.




or




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




For the
transition period from
             to
            .




Commission
File 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  o
            Accelerated
      Filer  oNon-Accelerated
      Filer  o (Do not check if
      a smaller reporting company)
            Smaller
      reporting company x




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




There
were 15,000,000 shares of the Registrant’s Common Stock issued and outstanding
on July 27, 2009.









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, 2009 (Unaudited) and December
      31, 2008 (Audited)
            1Condensed
      Consolidated Statements of Income and Comprehensive Income (Unaudited) for
      the three months and six months ended June 30, 2009 and
    2008
            2Condensed
      Consolidated Statement of Stockholders’ Equity (Unaudited) for the six
      months ended June 30, 2009
            3Condensed
      Consolidated Statements of Cash Flows (Unaudited) for the six months ended
      June 30, 2009 and 2008
            4Notes
      to Unaudited Condensed Consolidated Financial Statements
            5Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
            28Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
            39Item
      4T. Controls and Procedures
            39Part II.
            Other
      InformationItem
      1. Legal Proceedings
            40Item
      1A. Risk Factors
            40Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
            40Item
      3. Defaults Upon Senior Securities
            40Item
      4. Submission of Matters to a Vote of Security Holders
            40Item
      5. Other Information
            41Item
      6. Exhibits
            41SIGNATURES
            42









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
      31,2009
            
            
            2008(Unaudited)
            
            
            (Audited)CURRENT
      ASSETSCash
      and cash equivalents
            
            $
            28,144,454
            
            
            $
            26,041,849Restricted
      cash
            
            
            700,000
            
            
            
            1,750,000Notes
      receivable, net
            
            
            -
            
            
            
            321,892Accounts
      receivable, net
            
            
            7,845,743
            
            
            
            5,042,739Other
      receivables and current assets
            
            
            612,071
            
            
            
            -Prepaid
      land use right – current portion
            
            
            172,421
            
            
            
            172,353Inventories
            
            
            7,921,451
            
            
            
            586,938Total
      current assets
            
            
            45,396,140
            
            
            
            33,915,771OTHER
      ASSETSBuildings,
      machinery and equipment, net
            
            
            15,261,689
            
            
            
            7,440,943Construction
      in progress
            
            
            1,102,122
            
            
            
            6,017,941Deposits
      for buildings, machinery and equipment
            
            
            608,823
            
            
            
            1,077,892Prepaid
      land use right-long term portion
            
            
            8,249,815
            
            
            
            8,332,732Intangible
      assets
            
            
            3,513
            
            
            
            4,214Deferred
      income tax assets
            
            
            -
            
            
            
            23,395Total
      non-current assets
            
            
            25,225,962
            
            
            
            22,897,117Total
      assets
            
            $
            70,622,102
            
            
            $
            56,812,888CURRENT
      LIABILITIESShort
      term bank loans
            
            $
            4,391,165
            
            
            $
            6,145,202Accounts
      payable
            
            
            5,119,202
            
            
            
            1,643,544Other
      payables and accruals
            
            
            572,835
            
            
            
            830,744Income
      taxes payable
            
            
            1,566,105
            
            
            
            401,436Total
      current liabilities
            
            
            11,649,307
            
            
            
            9,020,926OTHER
      LIABILITIESCommon
      stock purchase warrants
            
            
            2,646,855
            
            
            
            -Total
      liabilities
            
            
            14,296,162
            
            
            
            9,020,926COMMITMENT
      AND CONTINGENCIES (Note 21)Series
      A redeemable convertible preferred stock: $0.0001 par
    value:10,000,000
      shares authorized (liquidation preference of $2.2 per share), 6,818,182
      shares issued and outstanding
            
            
            13,116,628
            
            
            
            13,116,628SHAREHOLDERS'
      EQUITYCommon
      stock, $0.0001 par value: 75,000,000 shares authorized,15,000,000
      shares issued and outstanding
            
            
            1,500
            
            
            
            1,500Additional
      paid-in capital
            
            
            7,474,191
            
            
            
            7,976,976Statutory
      reserves
            
            
            2,603,444
            
            
            
            2,603,444Retained
      earnings
            
            
            30,538,879
            
            
            
            21,521,937Accumulated
      other comprehensive income
            
            
            2,591,298
            
            
            
            2,571,477Total
      shareholders' equity
            
            
            43,209,312
            
            
            
            34,675,334Total
      liabilities and shareholders' equity
            
            $
            70,622,102
            
            
            $
            56,812,888





See
accompanying notes to these condensed consolidated financial
statements




- 1
-




LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES


UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME


AND
COMPREHENSIVE INCOME


(AMOUNTS
EXPRESSED IN US DOLLARS)




For
      the Three Months
            
            
            For
      the Six MonthsEnded
      June 30,
            
            
            Ended
      June 30,2009
            
            
            2008
            
            
            2009
            
            
            2008Revenue
            
            $
            48,827,343
            
            
            $
            15,037,603
            
            
            $
            69,365,668
            
            
            $
            24,768,712Cost
      of goods sold
            
            
            (39,095,534
            )
            
            
            (10,328,094
            )
            
            
            (53,923,184
            )
            
            
            (17,032,015
            )Gross
      profit
            
            
            9,731,809
            
            
            
            4,709,509
            
            
            
            15,442,484
            
            
            
            7,736,697Selling
      expenses
            
            
            (587,356
            )
            
            
            (172,122
            )
            
            
            (790,445
            )
            
            
            (257,631
            )General
      and administrative expenses
            
            
            (1,093,499
            )
            
            
            (403,379
            )
            
            
            (1,635,562
            )
            
            
            (595,310
            )Income
      from operations
            
            
            8,050,954
            
            
            
            4,134,008
            
            
            
            13,016,477
            
            
            
            6,883,756Other
      income (expenses):Interest
      income
            
            
            47,182
            
            
            
            7,608
            
            
            
            71,417
            
            
            
            10,234Interest
      expenses
            
            
            (105,667
            )
            
            
            (106,337
            )
            
            
            (218,796
            )
            
            
            (182,632
            )Change
      in fair value of warrants
            
            
            (215,952
            )
            
            
            -
            
            
            
            (340,167
            )
            
            
            -Other
            
            
            500,702
            
            
            
            (5,706
            )
            
            
            500,702
            
            
            
            (5,622
            )Total
      other income (expenses)
            
            
            226,265
            
            
            
            (104,435
            )
            
            
            13,156
            
            
            
            (178,020
            )Income
      before income tax
            
            
            8,277,219
            
            
            
            4,029,573
            
            
            
            13,029,633
            
            
            
            6,705,736Provision
      for income tax
            
            
            (1,572,190
            )
            
            
            (528,082
            )
            
            
            (2,335,913
            )
            
            
            (866,641
            )Net
      income
            
            
            6,705,029
            
            
            
            3,501,491
            
            
            
            10,693,720
            
            
            
            5,839,095Other
      comprehensive income:Foreign
      currency translation adjustment
            
            
            28,259
            
            
            
            618,795
            
            
            
            19,821
            
            
            
            1,492,445Total
      comprehensive income
            
            $
            6,733,288
            
            
            $
            4,120,286
            
            
            $
            10,713,541
            
            
            $
            7,331,540Earnings
      per shareBasic
            
            $
            0.45
            
            
            $
            0.25
            
            
            $
            0.71
            
            
            $
            0.42Diluted
            
            $
            0.31
            
            
            $
            0.25
            
            
            $
            0.49
            
            
            $
            0.42Weighted
      average number of shares outstandingBasic
            
            
            15,000,000
            
            
            
            14,025,000
            
            
            
            15,000,000
            
            
            
            14,025,000Diluted
            
            
            21,818,182
            
            
            
            14,025,000
            
            
            
            21,818,182
            
            
            
            14,025,000




See
accompanying notes to these condensed consolidated financial
statements.




- 2
-




LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


(AMOUNTS
EXPRESSED IN US DOLLARS)





AccumulatedCommon
      Stock
            
            
            Additional
            
            
            
            
            
            
            
            
            OtherNumber
      of
            
            
            
            
            
            Paid-in
            
            
            Statutory
            
            
            Retained
            
            
            ComprehensiveShares
            
            
            Amount
            
            
            Capital
            
            
            Reserves
            
            
            Earnings
            
            
            Income
            
            
            TotalAt
      December 31, 2008, as previously reported (Audited)
            
            
            15,000,000
            
            
            $
            1,500
            
            
            $
            7,976,976
            
            
            $
            2,603,444
            
            
            $
            21,521,937
            
            
            $
            2,571,477
            
            
            $
            34,675,334Cumulative
      effect of reclassification of common stock purchase
    warrants
            
            
            -
            
            
            
            -
            
            
            
            (629,910
            )
            
            
            -
            
            
            
            (1,676,778
            )
            
            
            -
            
            
            
            (2,306,688
            )At
      January 1, 2009, as adjusted (Unaudited)
            
            
            15,000,000
            
            
            
            1,500
            
            
            
            7,347,066
            
            
            
            2,603,444
            
            
            
            19,845,159
            
            
            
            2,571,477
            
            
            
            32,368,646Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            10,693,720
            
            
            
            -
            
            
            
            10,693,720Foreign
      currency translation adjustment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            19,821
            
            
            
            19,821Comprehensive
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            10,713,541Share-based
      payment to employee
            
            
            -
            
            
            
            -
            
            
            
            127,125
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            127,125At
      June 30, 2009 (Unaudited)
            
            
            15,000,000
            
            
            $
            1,500
            
            
            $
            7,474,191
            
            
            $
            2,603,444
            
            
            $
            30,538,879
            
            
            $
            2,591,298
            
            
            $
            43,209,312




See
accompanying notes to these condensed consolidated financial
statements.




- 3
-




LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES


UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(AMOUNTS
EXPRESSED IN US DOLLARS)





Six
      months ended June 30,2009
            
            
            2008CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income
            
            $
            10,693,720
            
            
            $
            5,839,095Adjustments
      to reconcile net income to cash provided by operating
      activities:Depreciation
      and amortization
            
            
            604,419
            
            
            
            346,620Share-based
      compensation expense
            
            
            127,125
            
            
            
            -Change
      in fair value of warrants
            
            
            340,167
            
            
            
            -(Increase)
      decrease in assets:Accounts
      receivable
            
            
            (2,800,642
            )
            
            
            2,196,606Notes
      receivables
            
            
            321,976
            
            
            
            47,579Other
      receivables and current assets
            
            
            (612,001
            )
            
            
            10,079Inventories
            
            
            (7,333,315
            )
            
            
            (340,848
            )Deferred
      income tax assets
            
            
            23,401
            
            
            
            -Increase
      (decrease) in liabilities:Accounts
      payable
            
            
            3,474,552
            
            
            
            514,095Other
      payables and accruals
            
            
            (258,182
            )
            
            
            191,390Income
      taxes payable
            
            
            1,164,357
            
            
            
            107,298Net
      cash provided by operating activities
            
            
            5,745,577
            
            
            
            8,911,914CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase
      of buildings, machinery and equipment
            
            
            (2,947,312
            )
            
            
            (1,819,099
            )Prepayment
      for land use right
            
            
            -
            
            
            
            (3,536,768
            )Proceeds
      from related parties
            
            
            -
            
            
            
            3,989,475Net
      cash used in investing activities
            
            
            (2,947,312
            )
            
            
            (1,366,392
            )CASH
      FLOWS FROM FINANCING ACTIVITIESNew
      short-term bank loans
            
            
            1,463,722
            
            
            
            6,366,183Repayment
      to related parties
            
            
            -
            
            
            
            (2,378,452
            )Release
      of restricted cash related to Private Placement (Note 21)
            
            
            1,050,000
            
            
            
            -Repayments
      of short-term bank loans
            
            
            (3,220,188
            )
            
            
            (3,536,768
            )Net
      cash provided by (used in) financing activities
            
            
            (706,466
            )
            
            
            450,963Foreign
      currency translation adjustment
            
            
            10,806
            
            
            
            527,653INCREASE
      IN CASH AND CASH EQUIVALENTS
            
            
            2,102,605
            
            
            
            8,524,138CASH
      AND CASH EQUIVALENTS, at the beginning of the period
            
            
            26,041,849
            
            
            
            3,213,649CASH
      AND CASH EQUIVALENTS, at the end of the period
            
            $
            28,144,454
            
            
            $
            11,737,787SUPPLEMENTAL
      DISCLOSURE INFORMATIONInterest
      paid
            
            $
            218,796
            
            
            $
            182,632Income
      taxes paid
            
            $
            1,148,155
            
            
            $
            866,641MAJOR
      NON-CASH TRANSACTION:Shares-based
      payment to employee
            
            $
            127,125
            
            
            $
            -





See
accompanying notes to these condensed consolidated financial
statements.




- 4
-




NOTE 1 − DESCRIPTION OF BUSINESS AND
ORGANIZATION





Lihua
International, Inc. (“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 located in the People’s
Republic of China, Danyang Lihua Electron Co., Ltd. and Jiangsu Lihua Copper
Industry Co., Ltd.





As of
June 30, 2009, 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
            $2,200,000
            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
            $15,000,000
            100%
            Manufacturing
      and sales of refined copper.





NOTE 2− SUMMARIES OF SIGNIFICANT
ACCOUNTINGPOLICIES





Principle
of consolidation




These
condensed consolidated financial statements include the financial statements of
Lihua International, Inc. and its subsidiaries.  All significant
inter-company balances or transactions are 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 for any interim periods are not necessarily indicative of
the results that may be reported for the entire year.  The accompanying
condensed consolidated financial statements have been prepared in accordance
with the rules and regulations of the Securities and Exchange Commission and do
not include all information and footnotes necessary for a complete presentation
of financial statements in conformity with accounting principles generally
accepted in the United States. These unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and accompanying footnotes included in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2008.





Foreign
currency translation




The
Company uses United States dollars (“US Dollars” or “US$” or “$”) for financial
reporting purposes. However, the Company maintains the books and records in its
functional currency, Chinese Renminbi (“RMB”), being the primary currency of the
economic environment in which its operations are conducted. In general, the
Company translates its assets and liabilities into US Dollars using the
applicable exchange rates prevailing at the balance sheet date, and the
statement of income is translated at average exchange rates during the reporting
period. 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.




- 5
-





The
exchange rates used to translate amounts in RMB into U.S. Dollars for the
purposes of preparing the consolidated financial statements were as
follows:




As of June 30,
      2009
            As of December 31,
      2008Balance
      sheet items, except for equity accounts
            US$1=
      RMB6.8319
            US$1=
      RMB6.8346Three
      months ended June 30,2009
            2008Items
      in the statements of income and cash flows
            US$1=
      RMB6.8299
            US$1=
      RMB 6.9645Six months ended June
30,2009
            2008Items
      in the statements of income and cash flows
            US$1=
      RMB6.8328
            US$1=
      RMB 7.0686





Research
and development costs




Research
and development costs are expensed as incurred. During the six months ended June
30, 2009 and 2008, research and development costs were $59,208 and $19,838,
respectively.





Advertising
costs




The
Company expenses all advertising costs as incurred.  The total amounts
of advertising costs charged to selling, general and administrative expense were
$13,022 and $7,130 for the six months ended June 30, 2009 and 2008,
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, 2009 and 2008 were $610,212 and
$155,701, respectively.





Recent
Accounting Pronouncement Adopted




Effective
January 1, 2009, the Company adopted the provisions of EITF 07-5, "Determining
Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock”
(“EITF 07-5”). EITF 07-5 applies to any freestanding financial instruments or
embedded features that have the characteristics of a derivative, as defined by
SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities,” and to any freestanding financial instruments that are potentially
settled in an entity’s own common stock. As a result of adopting EITF 07-5, the
Company’s issued and outstanding Series A Warrants to purchase 1,500,000 shares
of Common Stock and Series B Warrants to purchase 500,000 shares of Common Stock
which were previously treated as equity pursuant to the scope exception in
paragraph 11(a) of SFAS No. 113, were no longer afforded equity treatment. These
warrants expire in 5 years from October 31, 2008 and have an exercise price of
$3.50, which is subject to a downward adjustment if the Company issues
additional shares of Common Stock or securities exercisable, convertible or
exchangeable for Common Stock at a price less than the exercise price for a
period of two years from October 31, 2008.





As such,
effective January 1, 2009, the Company reclassified the fair value of the Series
A and Series B Warrants from equity to liability as if these warrants were
treated as a derivative liability since their date of issue on October 31, 2008.
On January 1, 2009, the Company recognized a cumulative-effect adjustment of
$2,306,688, and $1,676,778 was reclassified from beginning retained earnings and
$629,910 from additional paid-in capital to a long-term warrant liability to
recognize the fair value of such warrants on such date. The fair value of these
warrants increased to $2,646,855 as of June 30, 2009. As such, the Company
recognized a $340,167 loss from the change in fair value of these warrants for
the six months ended June 30, 2009.




- 6
-





These
1,500,000 Series A and 250,000 Series B Warrants were initially issued in
connection with the October 2008 private placement of 6,818,182 shares of Series
A preferred stock, which are further disclosed in Note 14. 250,000 Series B
Warrants were issued for business and investor relations consulting services.
These warrants were not issued with the intent of effectively hedging any future
cash flow, fair value of any asset, liability or any net investment in a foreign
operation. These warrants do not qualify for hedge accounting, and as such, all
future changes in the fair value of these warrants will be recognized in
statement of income until such time as the warrants are exercised or expire.
These warrants do not trade in an active securities market, and as such, the
Company estimates the fair value of these warrants using the Black-Scholes
option pricing model using the following assumptions:





June
      30, 2009
            
            
            January
      1, 2009Estimated
      fair value of common stock:
            
            $
            3.878
            
            
            $
            3.850Exercise
      price:
            
            $
            3.50
            
            
            $
            3.50Remaining
      contractual life (years):
            
            
            4.34
            
            
            
            4.83Dividend
      yield:
            
            
            -
            
            
            
            -Expected
      volatility:
            
            
            37.15
            %
            
            
            30.58
            %Risk-free
      interest rate:
            
            
            2.22
            %
            
            
            1.49
            %





The
Company’s common stock is not publicly traded. The Company has determined the
fair value of its common stock based on retrospective valuations prepared
consistent with the methods outlined in the American Institute of Certified
Public Accountants Practice Aids, “Valuation of Privately-Held Company
Equity Securities Issued as Compensation” and based on a discounted
future cash flow approach that used the Company’s estimates of revenue, driven
by assumed market growth rates, and estimated costs as well as appropriate
discount rates.





As the
Company’s stock is not publicly traded, historical volatility information is not
available. In accordance with SFAS No. 123R, “Accounting for Stock-Based
Compensation”, the Company identified five similar public entities for
which share and option price information was available, and considered the
historical volatilities of those public entities’ share prices in calculating
the expected volatility appropriate to the Company (i.e. the calculated value).
The risk-free rate of return reflects the interest rate for United States
Treasury Note with similar time-to-maturity to that of the
Warrants.





In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements” (“SFAS 157”), which defines fair value, establishes a framework
for measuring fair value in GAAP, and expands disclosures about fair value
measurements. SFAS 157 does not require any new fair value measurements, but
provides guidance on how to measure fair value by providing a fair value
hierarchy used to classify the source of the information. In February 2008,
the FASB deferred the effective date of SFAS 157 by one year for certain
non-financial assets and non-financial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). On January 1, 2008, the Company adopted the
provisions of SFAS 157, except as it applies to those nonfinancial assets and
nonfinancial liabilities for which the effective date has been delayed by one
year, which the Company adopted on January 1, 2009. The adoption of SFAS 157 did
not have a material effect on the Company’s financial position or results of
operations. The book values of cash, accounts receivable, accounts payable and
short-term bank loans approximate their respective fair values due to the
short-term nature of these instruments.





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:





•
            Level
      one — Quoted market prices in active markets for identical assets or
      liabilities;•
            Level
      two — Inputs other than level one inputs that are either directly or
      indirectly observable; and•
            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.




- 7
-




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 (unaudited):




Fair
      value measurement using inputs considered as
            
            Fair
      value atLevel
      1
            
            Level
      2
            
            Level
      3
            
            June
      30, 2009Liabilities:Derivative
      instruments − Warrants
            
            $
            —
            
            
            $
            —
            
            
            $
            2,646,855
            
            
            $
            2,646,855Total
            
            $
            —
            
            
            $
            —
            
            
            $
            2,646,855
            
            
            $
            2,646,855





A
discussion of the valuation techniques used to measure fair value for the
warrants listed above is provided above in this footnote. There were no assets
or liabilities measured at fair value on a non-recurring basis during the six
months ended June 30, 2009.





Effective January 1, 2009, the first day of
fiscal 2009, the Company adopted FASB Staff Position Financial Accounting
Standard 142-3 (“FSP FAS 142-3”), “Determination of the Useful Life of
Intangible Assets.” FSP FAS 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142 ("SFAS 142"),
“Goodwill and Other Intangible Assets.” The Company will apply FSP FAS
142-3 prospectively to intangible assets acquired subsequent to the adoption
date, January 1, 2009.  The adoption of FSP FAS 142-3 had no impact on
the Company’s Condensed Consolidated Financial
Statements.





Effective
January 1, 2009, the Company adopted, Statement of Financial Accounting
Standards No. 161 (“SFAS 161”), “Disclosures about Derivative Instruments and
Hedging Activities,” which amends and expands Statement of Financial Accounting
Standards No. 133, “Accounting for Derivative Instruments and Hedging
Activities.” SFAS 161 requires tabular disclosure of the fair value of
derivative instruments and their gains and losses.  SFAS 161 also
requires disclosure regarding the credit-risk related contingent features in
derivative agreements, counterparty credit risk, and strategies and objectives
for using derivative instruments. The adoption of SFAS 161 did not have a
material impact on the Company’s Condensed Consolidated Financial
Statements.





Effective
January 1, 2009, the Company adopted Statement of Financial Accounting Standards
No. 160 (“SFAS 160”), “Noncontrolling Interests in Consolidated Financial
Statements — an amendment of ARB No. 51.” SFAS 160 amends Accounting Research
Bulletin No. 51, “Consolidated Financial Statements” to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in
a subsidiary, which is sometimes referred to as minority interest, is an
ownership interest in the consolidated entity that should be reported as equity
in the Company’s Consolidated Financial Statements. Among other requirements,
this Statement requires that the consolidated net income attributable to the
parent and the noncontrolling interest be clearly identified and presented on
the face of the consolidated income statement. The adoption of SFAS 160 did not
have a material impact on the Company’s Condensed Consolidated Financial
Statements.





Effective
January 1, 2009, the Company adopted Statement of Financial Accounting Standards
No. 141 (revised 2007) (“SFAS 141R”), “Business Combinations.” SFAS 141R
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any noncontrolling interest in an acquiree and the goodwill
acquired. The Company will apply SFAS 141R to any business combinations
subsequent to adoption.





In April
2009, the FASB issued FASB Staff Position Financial Accounting Standard
141R-1 (“FSP FAS 141R-1”), “Accounting for Assets Acquired and Liabilities
Assumed in a Business Combination That Arise from Contingencies.” FSP FAS 141R-1
amends SFAS 141R to require that an acquirer recognize at fair value, at the
acquisition date, an asset acquired or a liability assumed in a business
combination that arises from a contingency if the acquisition-date fair value of
that asset or liability can be determined during the measurement period. If the
acquisition-date fair value of such an asset acquired or liability assumed
cannot be determined, the acquirer should apply the provisions of SFAS 5,
“Accounting for Contingencies”, to determine whether the
contingency should be recognized at the acquisition date or after such date. FSP
FAS 141R-1 is effective for business combinations whose acquisition date is on
or after the first reporting period beginning after December 15, 2008.
Accordingly, the Company adopted this FSP during the first quarter of 2009. The
adoption of FSP FAS 141R-1 did not have a material impact on the
Company’s Condensed Consolidated Financial Statements.




- 8
-





New
accounting pronouncement to be adopted




In
December 2008, the FASB issued FASB Staff Position FAS 132(R)-1 (“FSP FAS
132(R)-1”), “Employers’ Disclosures about Postretirement Benefit Plan Assets.”
The FSP expands the disclosure requirements about plan assets for defined
benefit pension plans and postretirement plans. The Company is required to adopt
FSP FAS 132(R)-1 in the fourth quarter of 2009. The Company is currently
assessing the impact that this FSP may have on the disclosures in the Company’s
Consolidated Financial Statements.




In April
2009, the FASB issued FASB Staff Position No. FAS 107-1 and APB 28-1 ("FSP FAS
107-1 and APB 28-1"), "Interim Disclosures about Fair Value of Financial
Instruments." The FSP amends SFAS 107, "Disclosure about Fair Value of Financial
Instruments," and Accounting Principles Board Opinion No. 28, "Interim Financial
Reporting," to require disclosures about fair value of financial
instruments for interim reporting periods of publicly traded companies as well
as in annual financial statements. The Company is required to adopt FSP FAS
107-1 and APB 28-1 in the second quarter of 2009. The Company does not currently
believe that adopting this FSP will have a material impact on the Company’s
Consolidated Financial Statements.




In April
2009, the FASB issued FASB Staff Position No. FSP FAS 115-2 and FAS 124-2 ("FSP
FAS 115-2 and FAS 124-2"), "Recognition and Presentation of Other-Than-Temporary
Impairments." The FSP amends the other-than-temporary impairment guidance in
U.S. GAAP for debt securities to make the guidance more operational and to
improve the presentation and disclosure of other-than-temporary impairments on
debt and equity securities in the financial statements. This FSP does not amend
existing recognition and measurement guidance related to other-than-temporary
impairments of equity securities. The Company is required to adopt FSP FAS 115-2
and FAS 124-2 in the second quarter of 2009.  The Company does not
currently believe that adopting this FSP will have a material impact on the
Company’s Consolidated Financial Statements.




In April
2009, the FASB issued FASB Staff Position No. FAS 157-4 ("FSP FAS 157-4"),
"Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly." The FSP provides additional guidance for estimating fair value in
accordance with FASB Statement No. 157, "Fair Value Measurements", when the
volume and level of activity for the asset or liability have significantly
decreased. This FSP also includes guidance on identifying circumstances that
indicate a transaction is not orderly. The Company is required to adopt FSP FAS
157-4 in the second quarter of 2009.  The Company does not currently
believe that adopting this FSP will have a material impact on the Company’s
Consolidated Financial Statements.




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.




- 9
-





NOTE
3 − RESTRICTED CASH





As of
June 30, 2009 and December 31, 2008, $700,000 and $1,750,000 in total was held
in escrow arising from agreements in conjunction with the Private Placement,
which are further disclosed in Notes 14 and 21.





Restricted
cash consisted of the following:


June
      30,
              2009
            
            
            December
      31,
              2008(Unaudited)
            
            
            (Audited)Guarantee
      fund for financing agreement
            
            $
            -
            
            
            $
            800,000Special
      fund for listing
            
            
            500,000
            
            
            
            750,000Special
      fund for employee pensions
            
            
            200,000
            
            
            
            200,000$
            700,000
            
            
            $
            1,750,000





NOTE 4 − NOTESRECEIVABLE,NET





Notes
receivable arose from sale of goods and represented commercial drafts issued by
customers to the Company that were guaranteed by bankers of the customers. Notes
receivable were interest-free with maturity dates of 3 or 6 months from date of
issuance.





Notes
receivable consisted of the following:


June
      30,
              2009
            
            
            December
      31,
              2008(Unaudited)
            
            
            (Audited)Notes
      receivable
            
            $
            -
            
            
            $
            321,892Less:
      Allowance for doubtful debts
            
            
            -
            
            
            
            -Notes
      receivable, net
            
            $
            -
            
            
            $
            321,892








NOTE5 − ACCOUNTS RECEIVABLE,NET





Accounts
receivable consisted of the following:


June
      30,
              2009
            
            
            December
      31,
              2008(Unaudited)
            
            
            (Audited)Accounts
      receivable
            
            $
            7,845,743
            
            
            $
            5,042,739Less:
      Allowance for doubtful debts
            
            
            -
            
            
            
            -Accounts
      receivable, net
            
            $
            7,845,743
            
            
            $
            5,042,739




- 10
-




NOTE
6 − OTHER RECEIVABLES AND CURRENT ASSETS





Other
receivables and current assets consisted of the following:


June
      30,
              2009
            
            
            December
      31,
              2008(Unaudited)
            
            
            (Audited)Other
      receivables
            
            $
            95,050
            
            
            $
            -Recoverable
      value added tax
            
            
            517,021
            
            
            
            -Less:
      Allowance for valuation and doubtful debts
            
            
            -
            
            
            
            -$
            612,071
            
            
            $
            -





NOTE7 − INVENTORIES





Inventories
by major categories are summarized as follows:





June
      30,
              2009
            
            
            December
      31,
              2008(Unaudited)
            
            
            (Audited)Raw
      materials
            
            $
            3,952,625
            
            
            $
            160,234Work
      in progress
            
            
            649,936
            
            
            
            29,013CCA
      wire
            
            
            1,176,726
            
            
            
            397,691Refined
      copper
            
            
            2,142,164
            
            
            
            -$
            7,921,451
            
            
            $
            586,938





NOTE
8 − INTANGIBLE ASSETS





June
      30,
              2009
            
            
            December
      31,
              2008(Unaudited)
            
            
            (Audited)Computer
      software, cost
            
            $
            7,026
            
            
            $
            7,023Less:
      Accumulated amortization
            
            
            (3,513
            )
            
            
            (2,809
            )$
            3,513
            
            
            $
            4,214





Amortization
expenses for the six months ended June 30, 2009 and 2008 were $702 and
$679.




- 11
-





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
buildings 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.  As of June 30, 2009, the Company has obtained the relevant PRC
property ownership and land use rights certificates.





The
amount expensed on prepaid land use rights for the six months ended June 30,
2009 and 2008 were $86,199 and $34,684, respectively.  The estimated
expense of the prepaid land use rights over each of the next five years and
thereafter will be $172,421.




NOTE
10 − BUILDINGS, MACHINERY AND EQUIPMENT, NET





Buildings,
machinery and equipment, net consisted of the following:


June
      30,
              2009
            
            
            December
      31,
              2008(Unaudited)
            
            
            (Audited)Cost:Buildings
            
            $
            7,966,216
            
            
            $
            1,367,189Office
      equipment
            
            
            272,707
            
            
            
            61,767Motor
      vehicles
            
            
            256,922
            
            
            
            137,423Machinery
            
            
            9,244,297
            
            
            
            7,834,657Total
      cost
            
            
            17,740,142
            
            
            
            9,401,036Less:
      Accumulated depreciation
            
            
            (2,478,453
            )
            
            
            (1,960,093
            )Net
      book value
            
            $
            15,261,689
            
            
            $
            7,440,943





Depreciation
expenses for the six months ended June 30, 2009 and 2008 were $517,518 and
$311,257, respectively.





NOTE
11 − CONSTRUCTION IN PROGRESS





Construction
in progress consisted of the following:


June
      30,
              2009
            
            
            December
      31,
              2008(Unaudited)
            
            
            (Audited)Construction
      of equipment
            
            $
            354,386
            
            
            $
            1,295,315Construction
      of buildings
            
            
            747,736
            
            
            
            4,722,626$
            1,102,122
            
            
            $
            6,017,941





- 12
-




NOTE
12 − SHORT TERM BANK LOANS





Short-term
bank loans consisted of the following:


June
      30,
              2009
            
            
            December
      31,
              2008(Unaudited)
            
            
            (Audited)Bank
      loan granted by Bank of Jiangsu, with an interest rate of 6.66% p.a.,
      guaranteed by a related company, Danyang Tianyi Telecommunication Co.,
      Ltd. (“Tianyi Telecom”), and maturing on November 18, 2009
            
            $
            2,195,583
            
            
            $
            2,194,715Bank
      loan granted by Agriculture Bank of China, with interest rates ranging
      from 6.903% p.a. to 9.711% p.a., guaranteed by Tianyi Telecom and maturing
      on August 21, 2009
            
            
            731,861
            
            
            
            731,572Bank
      loan granted by Agriculture Bank of China, Danyang Branch with an interest
      rate of 5.31% p.a., guaranteed by Tianyi Telecom. The bank loan will
      mature on April 15, 2010, with interest due on the 20th day of each month
      and principal
            
            
            761,135
            
            
            
            -Bank
      loan granted by Agriculture Bank of China, Danyang Branch with an interest
      rate of 5.31% p.a., guaranteed by Tianyi Telecom.  The bank loan
      will mature on May 21, 2010, with interest due on the 20th day of each
      month and principal
            
            
            702,586
            
            
            
            -Bank
      loan granted by China Construction Bank with interest rates ranging from
      6.372% p.a. to 8.964% p.a., guaranteed by Tianyi Telecom, matured and
      fully repaid on March 6, 2009.
            
            
            -
            
            
            
            1,170,514Bank
      loan granted by Agriculture Bank of China, with interest rates ranging
      from 6.903% p.a. to 9.711% p.a., guaranteed by Tianyi Telecom, matured and
      fully repaid on April 15, 2009
            
            
            -
            
            
            
            760,835Bank
      loan granted by Agriculture Bank of China, with interest rates ranging
      from 6.903% p.a. to 9.711% p.a., guaranteed by Tianyi Telecom and matured
      and fully repaid on May 20, 2009
            
            
            -
            
            
            
            702,309Bank
      loan granted by China Construction Bank, with interest rates ranging from
      5.841% p.a. to 8.217% p.a., guaranteed by Tianyi Telecom, and matured and
      fully repaid on April 29, 2009
            
            
            -
            
            
            
            585,257$
            4,391,165
            
            
            $
            6,145,202





NOTE
13 − OTHER PAYABLES AND ACCRUALS





Other
payables and accruals consisted of the following:


June
      30,
              2009
            
            
            December
      31,
              2008(Unaudited)
            
            
            (Audited)Accrued
      staff costs
            
            $
            111,512
            
            
            $
            380,472Other
      taxes payable
            
            
            66,608
            
            
            
            335,152Other
      payables
            
            
            394,715
            
            
            
            115,120$
            572,835
            
            
            $
            830,744




- 13
-




NOTE
14 − SHAREHOLDERS’ EQUITY





The
Company’s Articles of Incorporation grant the Board of Directors the
authority, without any further vote or action by stockholders, to issue
preferred stock in one or more series, fix the number of shares constituting the
series and establish the preferences, limitations and relative rights, including
dividend rights, dividend rate, voting rights, terms of redemption, redemption
price or prices, redemption rights and liquidation preferences of the shares of
the series.





Series
A Redeemable Convertible Preferred Stock





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





The
principal terms of the Preferred Shares are as follows:





Conversion: At any time on or
after our issuance of Preferred Shares, each share of Preferred Shares will be
convertible, at the option of the holder thereof (subject to certain ownership
percentage limitations set forth in the Certificate of Designations), into one
share of Common Stock, subject to adjustment from time to time, upon the
occurrence of certain events described below. The rate of conversion (the
“Conversion Rate”) is determined by dividing $2.20 per share (the “Liquidation
Preference Amount”) by the conversion price of $2.20 (the “ConversionPrice”), subject to
adjustment as discussed below.





In the
event the Company does not timely convert and deliver Preferred Shares into
shares of Common Stock after request of a holder to so convert, and the holder
must purchase shares of Common Stock, in excess of the price for which the
holder sold such shares, the Company must make a payment in cash to the holder
in the amount of the excess paid and the Company will not honor the conversion
request and will reinstate the number of Preferred Shares for which such
conversion was not honored.





If at any
time, the Company consummate a bona fide offering of shares of Common Stock of
at least $5,000,000, all outstanding Preferred Shares shall automatically
convert to shares of Common Stock (subject to certain ownership percentage
limitations set forth in the Certificate of Designations of the Series A
Preferred Shares).





Liquidation Rights: The
Preferred Shares will, in the event of any distributions or payments in the
event of the voluntary or involuntary liquidation, dissolution or winding up of
the Company rank senior to Common Stock and to any other class or series of
stock which may be issued not designated as ranking senior to or pari passu with
the Preferred Shares in respect of the right to participate in distributions or
payments upon any liquidation, dissolution or winding up of the Company. In the
event of any voluntary or involuntary liquidation, dissolution or winding up,
the holders of shares of Preferred Shares will be entitled to receive, out of
assets available for distribution to stockholders, an amount equal to the
Liquidation Preference Amount before any payment shall be made or any assets
distributed to the holders of Common Stock or any stock which ranks junior to
the Preferred Shares. In the event of a liquidation, dissolution or winding up
of the Company, the rights of holders of Preferred Shares to convert such shares
into shares of Common Stock shall terminate prior to the date fixed for the
payment to the holders of Preferred Shares of any amounts distributable to them
in the event of any such liquidation, dissolution or winding up.




- 14
-





NOTE
14 − SHAREHOLDERS’ EQUITY – CONTINUED





Series
A Redeemable Convertible Preferred Stock – continued





Redemption Rights: None of
Preferred Shares may be redeemed without the express written consent of each
holder of such shares. If the Company cannot issue shares of Common Stock upon a
conversion because the Company does not have a sufficient number of shares of
Common Stock authorized and available, then with respect to the unconverted
Preferred Shares, the holder of such Preferred Shares, solely at such holder's
option, may require the Company to redeem from such holder those Preferred
Shares with respect to which the Company is unable to issue Common Stock in
accordance with such holder's conversion notice at a price per share payable in
cash equal to one hundred thirty percent of the Liquidation Preference
Amount.





Simultaneously
with the occurrence of any merger, consolidation or similar capital
reorganization of Common Stock, each holder of Preferred Shares shall have the
right, at such holder's option, to require the Company to redeem all or a
portion of such holder's Preferred Shares at a price per share equal to one
hundred ten percent of the Liquidation Preference Amount.





Dividend Rights:Preferred
Shares will not be entitled to receive dividends unless the Company pays
dividends to holders of our Common Stock. If the Company pays dividends to
holders of Common Stock, holders of Preferred Shares will be entitled to
receive, on each share of Preferred Shares held by them, dividends of equal
amount or value as dividends that would have been payable on the number of
underlying shares of Common Stock into which such Preferred Shares would be
convertible, if such shares of Preferred Shares had been converted on the date
for determination of holders of Common Stock entitled to receive such
dividends.





Adjustments to Conversion Price,
Conversion Rate and Other Similar Adjustments:The number of shares of
Common Stock into which the Series A Preferred shall be converted, or the
Conversion Price, as the case may be, shall be subject to upward or downward
adjustment from time to time, as applicable, in the event of a (i) combination,
stock split, recapitalization or reclassification of the Common Stock, (ii)
merger, consolidation or similar capital reorganization of the Common Stock,
(iii) distribution of stock dividends or (iv) issuance of additional shares of
Common Stock or securities convertible into Common Stock at a price less than
$2.20.





Voting Rights:Holders of
Preferred Shares shall vote together as a separate class on all matters which
impact the rights, value, or ranking of the Preferred Shares. Holders of
Preferred Shares shall vote on an "as converted" basis, together with holders of
Common Stock, as a single class, in connection with any proposal submitted to
stockholders to: (i) increase the number of authorized shares of capital stock,
(ii) to approve the sale of any of capital stock, (iii) adopt an employee stock
option plan, or (iv) effect any merger, consolidation, sale of all or
substantially all of assets, or related consolidation or combination
transaction.





Conversion Restriction:
Holders of Preferred Shares are restricted from converting to Common Stock if
the number of shares of Common Stock to be issued pursuant to such Conversion
would cause the number of shares of Common Stock owned by such holder and its
affiliates at such time to equal or exceed 9.9% of the then issued and
outstanding shares of Common Stock; provided, however, that upon a holder of the
Series A Preferred providing the Company with sixty-one (61) days notice that
such holder wishes to waive this restriction such holder may be entitled to
waive this restriction.




- 15
-


.


NOTE
14 − SHAREHOLDERS’ EQUITY – CONTINUED





Series
A Redeemable Convertible Preferred Stock – continued





Accounting
for Preferred Shares





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





Series
A Warrants





In
conjunction with the issuance of the Preferred Shares, the Company issued Series
A Warrants to purchase up to 1,500,000 shares of Common Stock at an exercise
price of $3.50 per share issued and outstanding. The Series A Warrants have a
term of exercise expiring 5 years from October 31, 2008. The Series A Warrants
at the option of the holder, may be exercised by cash payment of the exercise
price or, commencing 18 months following the closing of the Private Placement,
if the per share market value of one share of Common Stock is greater than the
exercise price and a registration statement under the Securities Act of 1933, as
amended, covering the shares of Common Stock underlying the Series A Warrants is
not then declared ineffective by the SEC, in lieu of exercising the Series A
Warrants by payment of cash, a holder may exercise the Series A Warrant by a
cashless exercise by surrender of the Series A Warrant, in which event the
Company will issue to the holder a number of shares of our Common Stock computed
using the following formula:





X =
      Y - (A)(Y)
              BWhere
            X
      =
            the
      number of shares of Common Stock to be issued to the
    holder.Y
      =
            the
      number of shares of Common Stock issuable upon exercise of the Series A
      Warrant in accordance with the terms of the Series A Warrant by means of a
      cash exercise rather than a cashless exercise.A
      =
            the
      Exercise Price.B
      =
            the
      per share market value of one share of Common Stock on the trading day
      immediately preceding the date of such
election.





The
Company will not receive any additional proceeds to the extent that the Series A
Warrants are exercised by cashless exercise.




- 16
-




NOTE
14 − SHAREHOLDERS’ EQUITY – CONTINUED





Series
A Warrants – continued





The
exercise price and number of shares of our Common Stock issuable upon exercise
of the Series A Warrants may be adjusted in certain circumstances, including in
the event of a stock dividend, or our recapitalization, reorganization, merger
or consolidation and the issuance of rights to purchase additional shares of our
Common Stock or to receive other securities convertible into additional shares
of Common Stock.





For a
period of two years following the original issue date of the Series A Warrants
(the “Full Ratchet Period”), in the event the Company issues any additional
shares of Common Stock or securities exercisable, convertible or exchangeable
for Common Stock at a price per share less than the exercise price then in
effect or without consideration, then the exercise price upon each such issuance
will be adjusted to a price equal to the consideration per share paid for such
additional shares of Common Stock.





No
fractional shares will be issued upon exercise of the Series A Warrants. If,
upon exercise of a Series A Warrant, a holder would be entitled to receive a
fractional interest in a share, the Company will pay to the holder cash equal to
such fraction multiplied by the then fair market value of one full
share.





Pursuant
to the terms of the Series A Warrants, the Company will not effect the exercise
of any Series A Warrant, and no person who is a holder of any Series A Warrant
has the right to exercise the Series A Warrant, to the extent that after giving
effect to such exercise, such person would beneficially own in excess of 9.9% of
the then outstanding shares of our Common Stock. However, the holder is entitled
to waive this cap upon 61 days notice to the Company.





The
Company has the right to redeem up to 9.9% of the Series A Warrants at a price
equal to $0.01 per share of Common Stock underlying such warrants if (i) our
Common Stock is traded on a national securities exchange, (ii) the daily volume
weighted average price of our Common Stock is above $8.87 for 30 consecutive
trading days ending on the date of the notice of redemption, and (iii) the
average daily trading volume for the trading period is greater than 300,000
shares per day; provided, that all shares underlying such Series A Warrants are
registered pursuant to an effective registration statement and the Company
simultaneously calls all of the Series A Warrants on the same terms. The Company
will have the right, but not the obligation, to redeem the Series A Warrants at
any time, and from time to time, provided that at such time, the foregoing
conditions have been met, but in no event can the Company redeem the Series A
Warrants more than once in any thirty (30) trading day period.





Series
B Warrants





In
connection with the Private Placement, Broadband Capital Management, LLC
(“Broadband”) acted as the Company’s financial advisor and placement agent.
Broadband received Series B warrants to purchase 250,000 shares of the Company’s
Common Stock at an exercise price per share of $3.50.





On
October 31, 2008, the Company issued Series B Warrants to purchase 250,000
shares of the Registrant’s Common Stock at an exercise price of $3.50 to
Penumbra Worldwide Ltd. (“Penumbra”). Penumbra is not a broker dealer and the
Series B Warrants were not issued as compensation for underwriting activities,
but as compensation for business and investor relations consulting services
performed by Penumbra.




- 17
-





NOTE
14 − SHAREHOLDERS’ EQUITY – CONTINUED





The
Series B Warrants have a term of exercise expiring 5 years from October 31,
2008. The Series B Warrants, at the option of the holder, may be exercised by
cash payment of the exercise price or by “cashless exercise”. The Company will
not receive any additional proceeds to the extent that warrants are exercised by
cashless exercise.





If the
per share market value of one share of Common Stock is greater than the exercise
price and at the time of election, the average trading volume of Common Stock
exceeds 100,000 shares for the immediately preceding 30 trading days, in lieu of
exercising the Series B Warrant by payment of cash, the holder may exercise the
Series B Warrant by cashless exercise by surrendering the Series B Warrant, in
which event the Company will issue to the holder a number of shares of our
Common Stock computed using the following formula:





X =
      Y - (A)(Y)
              BWhere:
            X
      =
            the
      number of shares of Common Stock to be issued to the
    Holder.Y
      =
            the
      number of shares of Common Stock issuable upon exercise of the Series B
      Warrant in accordance with the terms of the Series B Warrant by means of a
      cash exercise rather than a cashless exercise.A
      =
            the
      exercise price.B
      =
            the
      volume weighted average price of the Common Stock for the 30 trading day
      period immediately preceding the date of such
  election.








The
exercise price and number of shares of Common Stock issuable upon exercise of
the warrants may be adjusted in certain circumstances, including in the event of
a stock dividend, or our recapitalization, reorganization, merger or
consolidation and the issuance of rights to purchase additional shares of Common
Stock or to receive other securities convertible into additional shares of
Common Stock.





For a
period of two years following the original issue date of the Series B Warrant
(the “Weighted Average Period”), in the event the Company issues any additional
shares of Common Stock or securities exercisable, convertible or exchangeable
for Common Stock at a price per share less than the exercise price then in
effect or without consideration, then the exercise price then in effect shall be
multiplied by a fraction (i) the numerator of which shall be equal to the sum of
(x) the number of shares of outstanding Common Stock immediately prior to the
issuance of such additional shares of Common Stock plus (y) the number of shares
of Common Stock (rounded to the nearest whole share) which the aggregate
consideration price per share paid for the total number of such additional
shares of Common Stock so issued would purchase at a price per share equal to
the exercise price then in effect and (ii) the denominator of which shall be
equal to the number of shares of outstanding Common Stock immediately after the
issuance of such additional shares of Common Stock.





No
fractional shares will be issued upon exercise of the warrants. If, upon
exercise of a warrant, a holder would be entitled to receive a fractional
interest in a share, the Company will pay to the holder cash equal to such
fraction multiplied by the then fair market value of one full
share.




- 18
-





NOTE
14 − SHAREHOLDERS’ EQUITY – CONTINUED





Allocation
of Proceeds from Private Placement





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





Then, the
fair value of the embedded conversion feature of the Preferred Shares of
$1,002,115 was calculated using EITF 98-5 intrinsic value model in accordance
with EITF 00-27, “Application of Issue No. 98-5 to Certain Convertible
Instruments”, limited to the amount of the proceeds allocated to the convertible
instrument. The intrinsic value of the beneficial conversion feature was
calculated by comparing the effective conversion price, which was determined
based on the proceeds from the Private Placement allocated to the convertible
Preferred Shares, and the fair value of the Company’s common stock of $2.26 at
the commitment date, which was determined based on retrospective valuations
prepared consistent with the methods outlined in the American Institute of
Certified Public Accountants Practice Aids, “Valuation of Privately-Held Company
Equity Securities Issued as Compensation” and based on a discounted
future cash flow approach that used the Company’s estimates of revenue, driven
by assumed market growth rates, and estimated costs as well as appropriate
discount rates. The fair value of $1,002,115 of the beneficial conversion
feature has been recognized as a reduction to the carrying amount of the
convertible Preferred Shares and an addition to paid-in capital.





The
following table sets out the accounting for the Preferred Shares:





Proceeds
      of the Private Placement (net of fees and expenses)
            
            $
            13,656,538Allocation
      of proceeds to Series A Warrants and 250,000 Series B
    Warrants
            
            
            (539,910
            )Allocation
      of proceeds to beneficial conversion feature
            
            
            (1,002,115
            )Amortization
      of discount resulting from the accounting for a beneficial conversion
      feature, deemed analogous to a dividend to the Preferred Shares
      holders
            
            
            1,002,115Series
      A Convertible Preferred Stock at December 31, 2008 and June 30,
      2009
            
            $
            13,116,628




- 19
-




NOTE
15 − SHARE-BASED COMPENSATION





Make
Good Escrow Agreement





In
conjunction with the Private Placement, the Company also entered into a make
good escrow agreement with the Investors (the “Securities Escrow Agreement”),
pursuant to which Magnify Wealth Enterprise Limited (“Magnify Wealth”) initially
placed 6,818,182 shares of Common Stock (equal to 100% of the number of shares
of Common Stock underlying the Investor Shares) (the “Escrow Shares”) into an
escrow account. The Escrow Shares are being held as security for the achievement
of $12 million in audited net income and $0.50 earnings per share for the fiscal
year 2008 (the “2008 Performance Threshold”) and $18 million in audited net
income and $0.76 earnings per share for the fiscal year 2009 (the “2009
Performance Threshold”). The calculation of earnings per share of $0.76 for the
fiscal year 2009 shall exclude up to $5,000,000 in shares of Common Stock issued
in a bona fide initial public offering, however, any shares issued in excess of
$5,000,000 shall be included in the calculation of earnings per share for the
fiscal year 2009. If the Company achieves the 2008 Performance Threshold and the
2009 Performance Threshold, the Escrow Shares will be released back to Magnify
Wealth. If either the 2008 Performance Threshold or 2009 Performance Threshold
is not achieved, an aggregate number of Escrow Shares (such number to be
determined by the formula set forth in the Securities Escrow Agreement) will be
distributed to the Investors, based upon the number of Investor Shares (on an as
converted basis) purchased in the Private Placement and still beneficially owned
by such Investor, or such successor, assign or transferee, at such time. If less
than 50% of the 2008 or 2009 Performance threshold is achieved, based on the
formula set forth in the Securities Escrow Agreement, a certain amount of Escrow
Shares may be released. If the Company achieves at least 50% but less than 95%
of the 2008 or 2009 performance thresholds, based on the formula set forth in
the Securities Escrow Agreement, a certain number of Escrow shares may be
released. If the Company achieves at least 95% of either the 2008 or 2009
performance thresholds, the Escrow shares will continue to be held in escrow. If
any Investor transfers Investor Shares purchased pursuant to the Purchase
Agreement, the rights to the Escrow Shares shall similarly transfer to such
transferee, with no further action required by the Investor, the transferee or
the Company. Pursuant to the Securities Escrow Agreement, if any Escrow Shares
are delivered to Investors as a result of the Company’s failure to fully achieve
the 2008 Performance Thresholds, Magnify Wealth shall deliver that number of
additional shares of Common Stock as is necessary to maintain 100% of the number
of original Escrow Shares in the escrow account at all times. With respect to
the 2008 and 2009 performance thresholds, net income shall be defined in
accordance with US GAAP and reported by us in the Company’s audited financial
statements for each of 2008 and 2009, plus any amounts that may have been
recorded as charges or liabilities on the 2008 and 2009 audited financial
statements, respectively, as a result of (i) the Private Placement, including
without limitation, as a result of the issuance and/or conversion of the
Investor Shares, (ii) the release of the Escrow Shares to the Magnify Wealth
pursuant to the terms of the Escrow Agreement, (iii) the issuance of ordinary
shares held by the sole shareholder of Magnify Wealth to Mr. Jianhua Zhu, our
Chairman and Chief Executive Offier, upon the exercise of options granted to Mr.
Zhu by shareholders of Magnify Wealth, as of the date thereof.




- 20
-





NOTE 15
− SHARE-BASED COMPENSATION – CONTINUED





Make
Good Escrow Agreement – continued





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





For the
year ended December 31, 2008, the Company’s net income was $11,701,879 which
achieved 95% of the 2008 performance threshold. All of the Escrow Shares will
continue to be held in escrow and none has yet been released to either Magnify
Wealth or the Investors. As the release of the Escrow Shares requires the
attainment of the performance thresholds for both 2008 and 2009, the Company
will only commence to recognize compensation expense when the Company will be
able to evaluate whether it is probable that the Company will achieve the 2009
performance threshold to provide for the ultimate release of the Escrow Shares
back to Magnify Wealth.  For the six months ended June 30, 2009, no
compensation expense has been recognized on the make good arrangement. If the
2009 performance threshold is also met and all of the Escrow Shares are released
back to Magnify Wealth, a compensation expense of $15,409,091 will be recognized
in fiscal year 2009.





Share-based
payments awarded to employees by a shareholder





Pursuant
to a contractual arrangement between Magnify Wealth and Mr. Yang “Roy” Yu, our
Chief Financial Officer, Mr. Yu is entitled to receive up to 450,000 shares of
the Company’s common stock issued to Magnify Wealth in an October 31, 2008 share
exchange between Magnify Wealth and our principal stockholders that time (the
“Share Exchange”). 112,500 of such shares were transferred to Mr. Yu immediately
upon consummation of the Share Exchange. As of June 30, 2009, the remaining
337,500 shares have remained in an escrow account and shall be released to Mr.
Yu in three equal installments of 112,500 shares issuable on the first, second
and third anniversary of the consummation of the Share Exchange.  In
connection with these share-based payments to Mr. Yu, the Company recognized a
compensation expense of $127,125, 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,
2009.





NOTE
16 − OTHER INCOME





For
      the Three Months
            
            
            For
      the Six MonthsEnded
      June 30,
            
            
            Ended
      June 30,2009
            
            
            2008
            
            
            2009
            
            
            2008(Unaudited)
            
            
            (Unaudited)
            
            
            (Unaudited)
            
            
            (Unaudited)Gain
      on sales of scraps
            
            $
            500,702
            
            
            $
            -
            
            
            $
            500,702
            
            
            $
            -Others
            
            
            -
            
            
            
            (5,706
            )
            
            
            -
            
            
            
            (5,622
            )$
            500,702
            
            
            $
            (5,706
            )
            
            $
            500,702
            
            
            $
            (5,622
            )




- 21
-




NOTE
17 − INCOME TAXES





The
Company’s PRC subsidiaries are subject to PRC income taxes on an entity
basis on income arising in or derived from the tax jurisdiction in which they
operate, i.e. the PRC.  In accordance with the relevant tax laws in
the PRC, the Company’s subsidiary, Danyang Lihua, was subject to an enterprise
income tax (“EIT”) rate of 24% on its taxable income for periods before January
1, 2008 because it is located in an economic development
zone.  Furthermore, Danyang Lihua 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 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, Danyang Lihua has
continued to be entitled to the 50% reduction on its EIT rate for the two years
ended December 31, 2008 and 2009.





The
Company’s provision for income taxes consisted of:





For
      the three months
            
            
            For
      the six monthsEnded
      June 30,
            
            
            Ended
      June 30,2009
            
            
            2008
            
            
            2009
            
            
            2008(Unaudited)
            
            
            (Unaudited)
            
            
            (Unaudited)
            
            
            (Unaudited)Current
      – PRC
            
            $
            1,572,190
            
            
            $
            528,082
            
            
            $
            2,312,512
            
            
            $
            866,641Deferred
            
            
            -
            
            
            
            -
            
            
            
            23,401
            
            
            
            -$
            1,572,190
            
            
            $
            528,082
            
            
            $
            2,335,913
            
            
            $
            866,641




- 22
-




NOTE
18 − EARNINGS PER SHARE





All per
share data including earnings per share has been retroactively restated to
reflect the reverse acquisition on October 31, 2008 whereby the 14,025,000
shares of common stock issued by the Company (nominal acquirer) to the
shareholder of Ally Profit (nominal acquiree) are deemed to be the number of
shares outstanding for the period prior to the reverse acquisition. For the
period after the reverse acquisition, the number of shares considered to be
outstanding is the actual number of shares outstanding during that
period.





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 30,2009
            
            
            2008
            
            
            2009
            
            
            2008(Unaudited)
            
            
            (Unaudited)
            
            
            (Unaudited)
            
            
            (Unaudited)Income
      available to common shareholders:-
      Basic
            
            $
            6,705,029
            
            
            $
            3,501,491
            
            
            $
            10,693,720
            
            
            $
            5,839,095-
      Diluted
            
            $
            6,705,029
            
            
            $
            3,501,491
            
            
            $
            10,693,720
            
            
            $
            5,839,095Weighted
      average number of shares:-
      Basic
            
            
            15,000,000
            
            
            
            14,025,000
            
            
            
            15,000,000
            
            
            
            14,025,000-
      Effect of dilutive convertible preferred stock
            
            
            6,818,182
            
            
            
            -
            
            
            
            6,818,182
            
            
            
            --
      Diluted
            
            
            21,818,182
            
            
            
            14,025,000
            
            
            
            21,818,182
            
            
            
            14,025,000Net
      income per share-
      Basic
            
            $
            0.45
            
            
            $
            0.25
            
            
            $
            0.71
            
            
            $
            0.42-
      Diluted
            
            $
            0.31
            
            
            $
            0.25
            
            
            $
            0.49
            
            
            $
            0.42








NOTE
19 −RELATED PARTY TRANSACTIONS





(1)  Sales


For the
six months ended June 30, 2009 and 2008, the Company’s sales included $169,847
and $182,020, respectively that were made to Tianyi Telecom and Jiangsu Dongya
Electronic Co., Ltd.  Tianyi Telecom is owned by the brother of Ms.
Yaying Wang, our Chief Operational Officer and director and wife of the
Company’s CEO.





(2)  Guarantees


At June
30, 2009, Tianyi Telecom provided guarantees for the Company’s short-term bank
loans of $4,391,165 (see Note 12 above).




- 23
-




NOTE
20 −CONCENTRATION OF RISKS





Credit
risk





As of
June 30, 2009 and December 31, 2008, 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, 2009 and 2008, all of the Company’s sales arose in the
PRC.  In addition, all accounts receivable as of June 30, 2009 and
December 31, 2008 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, 2009.  As of December 31, 2008, there was
one customer who accounted for 14.4% of the accounts receivable of the Company.
 Except for the aforementioned customer, there was no other single customer
who accounted for more than 10% of the Company’s accounts receivable as of
December 31, 2008. There was no single customer who constituted more than 10% of
the Company’s revenue for the six months ended June 30, 2009 or
2008.




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.





NOTE
21 −COMMITMENTS AND CONTINGENCIES





Capital
commitment





June
      30, 2009(Unaudited)Contracted
      but not provided for:Purchase
      of machinery - within one year
            
            $
            188,588Acquisition
      or construction of buildings – within one year
            
            
            519,875$
            708,463





Agreements
in Conjunction with the Private Placement





Escrow Agreements:  In conjunction with the Private Placement discussed in Note
14, the Company entered into an escrow agreement with the Investors (the
“Closing Escrow Agreement”), pursuant to which the Investors deposited the funds
in the aggregate amount of $15,000,000 for the purchase and sale of the Investor
Shares (the “Escrowed Funds”) into an escrow account which was disbursed at the
closing of the Private Placement. Pursuant to the Closing Escrow Agreement,
$1,000,000 of the Escrowed Funds were not released from the escrow account (the
“Held Back Escrow Funds”) until the escrow agent received written notice that
the Company had caused Lihua Copper to fulfill one hundred percent of its
registered capital obligation of $15,000,000 no later than 90 days from the
closing date, as well as comply with other covenants. Before December 31, 2008,
the registered capital of $15,000,000 of Lihua Copper was fully paid, as
certified and approved by the relevant PRC business authority.




- 24
-


NOTE
21 −COMMITMENTS AND CONTINGENCIES – CONTINUED





Agreements
in Conjunction with the Private Placement – continued





Additionally,
the Company entered into a public relations escrow agreement with the Investors
(the “Public Relations Escrow Agreement”), pursuant to which the Company agreed
to deposit $750,000 in an escrow account (the “Public Relations Escrowed
Funds”). $125,000 from the Public Relations Escrowed Funds shall be released
when the Company appoint a Vice President of Investor Relations, an additional
$250,000 shall be released once the Company has complied with all Nasdaq
Corporate Governance standards, and the remaining $375,000 shall be released as
invoices become due for the purpose of any investor and public relations
activities. As negotiated with Vision Opportunity China L.P. (“Vision”), the
lead investor in the Private Placement who wishes to ensure that quality firms
handle certain affairs of the Company, if the Company fails to timely comply
with the foregoing obligations, or fails to fulfill a request to change the
Company’s auditor upon such request by any holder of five percent of our Common
Stock in the aggregate on a fully diluted basis, or fails to hire an internal
control consultant acceptable to Vision within three months of the Closing
Date,  the Company will pay liquidated damages of 0.5% of the
aggregate purchase price paid by for the Investor Shares on the expiration date
to comply with such covenant and for each 30 day period thereafter, up to 10% of
the aggregate purchase price, which the Investors may require that the Company
pay from the Public Relations Escrowed Funds. In the event such liquidated
payments are made, the Company shall return an amount equal to the amount of
liquidated damages paid, back into the Public Relations Escrow
Funds.





On
February 11, 2009, the parties to the Escrow Agreement entered into a First
Supplement to the Escrow Agreement pursuant to which it was agreed (i) to
release $800,000 of the Held Back Escrow Funds to the Company for having
complied with all of the Held Back Release Conditions within 90 days of the
Closing Date, and (ii) to hold $200,000 of the Held Back Escrow Funds to cover
any contingent liabilities relating to unpaid employee social insurance and
housing payments from periods prior to 2009. The $200,000 is to be held in
escrow until June 30, 2010 to cover any claims from employees relating to the
unpaid costs. $800,000 was released from escrow to the Company on March 4,
2009.





Pursuant
to the Private Placement, the Company also has an obligation to have its shares
of Common Stock listed on a national securities exchange no later than October
31, 2009 (the “Listing Date”). In the event that the Company does not list on a
national securities exchange in the proscribed time period and manner provided
for in the Purchase Agreement, then the Ally Profit Shareholder shall transfer
750,000 shares (the “Listing Penalty Shares”) of Common Stock to the Investors,
with no additional consideration due from the Investors. However, if the Company
is requested by certain Investors to have its shares of Common stock quoted on
the Over-the-Counter Bulletin Board (“OTCBB Demand”) prior to the Listing Date,
the Company shall do so and then the Company will have an additional 18 months
to list on a national securities exchange. If the Company fails to comply with
the OTCBB Demand in a timely manner or, to then list on a national securities
exchange within the 18-month period, the Listing Penalty Shares shall be
transferred to the Investors.





The
Company’s contingent obligations to pay liquidated damages under the Closing
Escrow Agreement, Public Relations Escrow Agreement and the Securities Purchase
Agreement, and to deliver Listing Penalty Shares will be recognized and measured
separately in accordance with SFAS 5, “Accounting for Contingencies”, and FASB
Interpretation No. 14, “Reasonable Estimation of the Amount of a
Loss”.  Any loss recognized on a probable delivery of Listing Penalty
Shares will be measured based on the grant-date fair value of the shares as of
October 31, 2008, or the date of the Securities Purchase Agreement between the
Company and certain investors.  The Company believes that it has
fulfilled its obligations under the agreements in conjunction with the Private
Placement up to June 30, 2009, therefore no liquidated damages have been
accrued.




- 25
-




NOTE
21 −COMMITMENTS AND CONTINGENCIES – CONTINUED





Agreements
in Conjunction with the Private Placement – continued





Registration Rights
Agreement: In connection with the Private Placement, the Company entered
into a registration rights agreement dated as of October 31, 2008 with the
Investors in which the Company agreed to file on the 45th day following the
Closing Date a registration statement with the SEC to register for resale (i)
the Investor Shares, (ii) shares of our Common Stock underlying the Series A
Warrants and Series B Warrants (the “Registrable Securities), (iii) shares of
Common Stock issuable in connection with anti-dilution provisions in the
Certificate of Designation and the Series A Warrants and Series B Warrants, (iv)
Common Stock owned by the shareholders of Lihua prior to the Share Exchange, (v)
shares of Common Stock issuable upon any stock split, dividend or other
distribution recapitalization or similar event and (vi) the Listing Penalty
Shares and Escrow Shares upon demand. The Company has agreed to use our best
efforts to have the registration statement declared effective within 150
calendar days following the date of the Registration Rights Agreement, or 180
calendar days following the date of the Registration Rights Agreement in the
case of a full review of the initial registration statement by the SEC. The
Company is required to keep the registration statement continuously effective
under the Securities Act for an effectiveness period to end on the earlier of
the date when all of the securities covered by the registration statement have
been sold or the date on which such securities may be sold without any
restriction pursuant to Rule 144. The Company will pay liquidated damages of 1%
of the dollar amount of the Preferred Shares sold in the Private Placement per
month, payable in cash, up to a maximum of 10%, if the registration statement is
not filed or declared effective within the foregoing time periods or ceases to
be effective prior to the expiration of the effectiveness period. However, no
liquidated damages are to be paid with respect to any Registrable Securities
that the Company is not permitted to include in the registration statement due
to the SEC’s application of Rule 415. Upon the demand of an Investor or
Investors owning in the aggregate at least 50% of the Listing Penalty Shares or
Escrow Shares, the Company shall file another registration statement covering
those shares and any other Registrable Securities that remain unregistered at
the time of such demand.





On April
29, 2009, the Company and the Investors entered into a waiver and consent
whereby the investors agreed to waive the requirement under the Registration
Rights Agreement to have the registration statement declared effective prior to
the 180th
calendar day following the date of the Registration Rights Agreement and
consented to the extension of the date by which the Company is required to have
the registration statement effective from the 180th to the
194th
calendar day following the date of the Registration Rights
Agreement.  The Registration Statement was declared effective on May
13, 2009.





The
Company accounts for the Registration Rights Agreement in accordance with FSP
EITF 00-19-2, “Accounting for Registration Payment Arrangements”. The Company’s
contingent obligation to make liquidated damages under the Registration Rights
Agreement will be recognized and measured separately in accordance with SFAS 5,
“Accounting for Contingencies”, and FASB Interpretation No. 14, “Reasonable
Estimation of the Amount of a Loss”. If it is probable that the Company will be
required to make any payments to the investors for non-fulfillment of the
conditions provided for in the Registration Rights Agreement, an estimate of the
contingent payment will be made and accrued for in the Company’s financial
statements. At March 31, 2009, no provision for liquidated damages was
made.




- 26
-




NOTE
22 – SEGMENT DATA AND RELATED INFORMATION




The
Company operates in one business segment, manufacturing and sale of copper clad
aluminum (“CCA”) superfine wire produced from refined copper materials. 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) CCA, which is an electrical conductor
consisting of an outer sleeve of copper that is metallurgically bonded to a
solid aluminum core, and (2) 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 30,2009
            
            
            2008
            
            
            2009
            
            
            2008(Unaudited)
            
            
            (Unaudited)
            
            
            (Unaudited)
            
            
            (Unaudited)Net
      revenue from unaffiliated customers:CCA
      wire
            
            $
            26,181,152
            
            
            $
            15,037,603
            
            
            $
            42,490,559
            
            
            $
            24,768,712Refined
      copper
            
            
            22,646,191
            
            
            
            -
            
            
            
            26,875,109
            
            
            
            -$
            48,827,343
            
            
            $
            15,037,603
            
            
            $
            69,365,668
            
            
            $
            24,768,712Gross
      profit:CCA
      wire
            
            $
            7,867,294
            
            
            $
            4,709,509
            
            
            $
            13,033,513
            
            
            $
            7,736,697Refined
      copper
            
            
            1,864,515
            
            
            
            -
            
            
            
            2,408,971
            
            
            
            -$
            9,731,809
            
            
            $
            4,709,509
            
            
            $
            15,442,484
            
            
            $
            7,736,697




- 27
-





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





FORWARD-LOOKING
STATEMENTS





This
quarterly report on Form 10-Q and other reports filed by the Company from time
to time with the Securities and Exchange Commission (collectively the “Filings”)
contain or may contain forward-looking statements and information that are based
upon beliefs of, and information currently available to, the Company’s
management as well as estimates and assumptions made by Company’s management.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which are only predictions and speak only as of the date hereof.
When used in the filings, the words “anticipate”, “believe”, “estimate”,
“expect”, “future”, “intend”, “plan”, or the negative of these terms and similar
expressions as they relate to the Company or the Company’s management identify
forward-looking statements. Such statements reflect the current view of the
Company with respect to future events and are subject to risks, uncertainties,
assumptions, and other factors, including the risks contained in the “Risk
Factors” section of the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2008 filed with the Securities and Exchange Commission,
relating to the Company’s industry, the Company’s operations and results of
operations, and any businesses that the Company may acquire. Should one or more
of these risks or uncertainties materialize, or should the underlying
assumptions prove incorrect, actual results may differ significantly from those
anticipated, believed, estimated, expected, intended, or planned.




Although
the Company believes that the expectations reflected in the forward-looking
statements are reasonable, the Company cannot guarantee future results, levels
of activity, performance, or achievements. Except as required by applicable law,
including the securities laws of the United States, the Company does not intend
to update any of the forward-looking statements to conform these statements to
actual results.




Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States (“GAAP”). These accounting principles
require us to make certain estimates, judgments and assumptions. We believe that
the estimates, judgments and assumptions upon which we rely are reasonable based
upon information available to us at the time that these estimates, judgments and
assumptions are made. These estimates, judgments and assumptions can affect the
reported amounts of assets and liabilities as of the date of the financial
statements as well as the reported amounts of revenues and expenses during the
periods presented. Our financial statements would be affected to the extent
there are material differences between these estimates and actual results. In
many cases, the accounting treatment of a particular transaction is specifically
dictated by GAAP and does not require management’s judgment in its application.
There are also areas in which management’s judgment in selecting any available
alternative would not produce a materially different result.  The
following discussion should be read in conjunction with our consolidated
financial statements and notes thereto appearing elsewhere in this
report.





OVERVIEW




We are
principally engaged in the production of copper replacement cable and wire
products which include copper clad aluminum (“CCA”) wire and wire produced from
refined scrap 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. We have experienced substantial growth in
recent years. Our aggregate annual CCA wire production capacity increased from
2,200 tons per annum in fiscal 2006 to a production capacity of 6,000 tons per
annum as of June 30, 2009. We sold 2,009, 4,065, 5,966 and 2,959 tons of CCA
wire during the 2006, 2007, 2008 and six months ended June 30, 2009,
respectively. We plan to increase our annual CCA production capacity to 7,500
tons by the end of 2009. Our output capacity is determined by the type and width
of wire our customers demand. Our current capacity of 6,000 tons is an estimate
of our capacity for CCA wire of average diameter.




- 28
-




We
introduced a new production process and product line in the first quarter of
2009.  This new line of business involves the fire refining of bulk
recycled copper into high purity, low oxygen content copper rods (also known as
Fire-Refined High-Conductivity (“FRHC”) rods).  We then either sell
these large diameter (8mm) copper rods into a range of markets, or we further
process these rods into much smaller diameter (e.g., 0.04 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, compared to
wire manufactured from newly mined copper, particularly when copper prices surge
or remain high.   We believe that our pricing advantage can be
maintained regardless of fluctuations in the commodity price of
copper.  As of June 30, 2009, our copper refinery capacity was
approximately 25,000 tons of FRHC copper rods per annum, of which approximately
6,000 tons can be further processed into superfine copper wire. During the six
months ended June 30, 2009, we sold 3,602 tons of superfine copper wire and
5,559 tons of FRHC copper rods.




Our sales
and net income have increased substantially during the last three years and in
2009. We generated sales of $15.7 million, $32.7 million and $50.0 million for
the years ended December 31, 2006, 2007 and 2008, respectively. We achieved net
income of $4.5 million $7.7 million and $11.7 million for the years ended
December 31, 2006, 2007 and 2008, respectively.  During the six months
ended June 30, 2009, we achieved revenue of $69.4 million and net profit of
$10.7 million, up 180.1% and 83.1% from the same period last year.





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.




Significant
Factors Affecting Our Results of Operations




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




·
            economic
      conditions in China;




·
            the
      market price for copper;




·
            demand
      for, and market acceptance of, copper replacement
  products;




·
            production
      capacity;




·
            supply
      and costs of principal raw materials;
and




·
            product
      mix and implications on gross
margins.




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
cumulative annual growth rate (“CAGR”), of 11% in gross domestic product from
1996 through 2007. Domestic demand for and consumption of copper and CCA
products has increased substantially as a result of this growth. We believe that
economic conditions in China will continue to affect our business and results of
operations.




Copper
prices




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




- 29
-




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




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




Demand
for, and market awareness of, copper replacement products




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




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




Production
capacity




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




Supply
and costs of principal raw materials




Our
ability to manage our operating costs depends significantly on our ability to
secure affordable and reliable supplies of raw materials. We have been able to
secure a sufficient supply of raw materials, which primarily consist of CCA raw
material wire and scrap copper.  We have recently vertically
integrated into scrap copper refining, in part to insure that we have an
adequate supply of controlled cost, high purity, low oxygen content copper rod,
which is an important raw material in many of our finished
products.




The price
of our primary raw materials varies with reference to copper prices, and changes
in copper price affect our cost of sales.  However, we are able to
price our copper and CCA products based on our material procurement costs plus a
fixed mark-up, which is essentially our gross profit.  Therefore,
despite the implications of copper price movement on our gross and net profit
margin figures, during the past three years the mark-up, or our gross and net
profit in absolute dollars, have not been materially affected by the change of
copper prices.




Product
mix and effect on gross margins




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




- 30
-




The
launch of our scrap copper refinery business will further change our product mix
and gross margins.  Generally FRHC copper rod contributes a lower
gross profit margin compared to finished wire products.  During the
initial development stage of this new business, we have been selling more of our
FRHC copper rod into the market, at relatively lower profit
margins.  However, we are planning to increase the capacity of our
wire production facilities to enable us to consume internally more of the FRHC
copper rod that we produce, thereby allowing us to sell more copper wire at
higher profit margins than copper rod over time.  Nevertheless,
depending on the amount of FRHC copper rod sales, we expect that our overall
gross margins will be lower than those we achieved in 2008 and prior years when
we sold only higher value-added copper and CCA wire products.




PRINCIPAL
INCOME STATEMENT COMPONENTS




Sales




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




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




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




Cost
of sales




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





Gross
Profit




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




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




Operating
expenses




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




Selling,
general and administrative expenses




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




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




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.




- 31
-




Other
income




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




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





Change
in fair value of warrants




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





Other




The other
income was generated as a gain on sales of scraps during the six months ended
June 30, 2009.




Income
taxes




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




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





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




RESULTS
OF OPERATIONS




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





Sales





Our
business for the three months ended June 30, 2009 continued to demonstrate
robust growth.  Net sales increased by 224.7% from $15.0 million to
$48.8 million compared to the same period in 2008. This growth was primarily
driven by strong market demand for our CCA copper wire and FRH copper rod
products and was offset by the decline of the average selling
price.  Our average selling price declined due to the addition of
lower-price copper rod in the product mix.




- 32
-





Cost
of Sales and Gross Margin





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





Three
      months ended June 30,
            
            
            Growth
      in three months ended
              June
      30, 2009 compared to three months ended June 30, 20082009
            
            
            2008In
      thousands, except for percentage
            
            US$
            
            
            %
      of Sales
            
            
            US$
            
            
            %
      of Sales
            
            
            %Total
      Sales
            
            $
            48,827
            
            
            
            100.0
            %
            
            $
            15,038
            
            
            
            100.0
            %
            
            
            224.7
            %Total
      cost of sales
            
            
            (39,096
            )
            
            
            (80.1
            %)
            
            
            (10,328
            )
            
            
            (68.7
            %)
            
            
            278.5
            %Gross
      Profit
            
            $
            9,731
            
            
            
            19.9
            %
            
            $
            4,710
            
            
            
            31.3
            %
            
            
            106.6
            %




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





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




Selling,
General and Administrative Expenses




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





Three months ended June
      30,
            
            
            Growth in
              three
      months
              ended
              June 30,
      2009
              compared
              to
      three months ended June 30, 20082009
            
            
            2008In
      thousands, except for percentage
            
            US$
            
            
            %
      of Sales
            
            
            US$
            
            
            %
      of Sales
            
            
            %Gross
      profit
            
            $
            9,731
            
            
            
            19.9
            %
            
            $
            4,710
            
            
            
            31.3
            %
            
            
            106.6
            %Operating
      Expenses:Selling
      expenses
            
            
            (587
            )
            
            
            (1.2
            )%
            
            
            (172
            )
            
            
            (1.1
            )%
            
            
            241.2
            %General
      & administrative expenses
            
            
            (1,093
            )
            
            
            (2.2
            )%
            
            
            (403
            )
            
            
            (2.7
            )%
            
            
            171.1
            %Total
      operating expense
            
            
            (1,680
            )
            
            
            (3.4
            )%
            
            
            (575
            )
            
            
            (3.8
            )%
            
            
            192.1
            %Income
      from operations
            
            $
            8,051
            
            
            
            16.5
            %
            
            $
            4,135
            
            
            
            27.5
            %
            
            
            94.7
            %




- 33
-




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




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




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




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




Interest
Expense




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





Income
tax




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




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





Net
Income




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




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-




Foreign
Currency Translation Gains




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




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




Sales





For the
six months ended June 30, 2009, our net sales were $69.4 million, representing
an increase of $44.6 million or 180.1% compared to the six months ended June,
2008. 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.  We also increased our sales
volume of CCA wire in response to strong market demand, facilitated by the
increase in our wire production capacity.




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, 2009 and
2008:





Six
      months ended June 30,
            
            
            Growth
      in six months ended June 30, 2009 compared to six months ended June 30,
      20082009
            
            
            2008In
      thousands, except for percentage
            
            US$
            
            
            %
      of Sales
            
            
            US$
            
            
            %
      of Sales
            
            
            %Total
      Sales
            
            $
            69,365
            
            
            
            100.0
            %
            
            $
            24,769
            
            
            
            100.0
            %
            
            
            180.1
            %Total
      cost of sales
            
            
            (53,923
            )
            
            
            (77.7
            %)
            
            
            (17,032
            )
            
            
            (68.8
            %)
            
            
            216.6
            %Gross
      Profit
            
            $
            15,442
            
            
            
            22.3
            %
            
            $
            7,737
            
            
            
            31.2
            %
            
            
            99.6
            %




Total
sales for the six months ended June 30, 2009 was $69.4 million, reflecting an
increase of 180.1% from the same period last year. As a percentage of total
sales, our cost of sales increased to 77.7% of total sales for the six months
ended June 30, 2009, compared to 68.8% of total sales in the same period last
year. Consequently, gross margin as a percentage of total sales decreased to
22.3% in the six months ended June 30, 2009 from 31.2% for the same period last
year, principally due to the production of refined copper products, which have a
lower margin compared to our CCA products.




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-




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, 2009 and
2008:


Six months ended June
      30,
            
            
            Growth in
              six
      months
              ended
              June 30,
      2009
              compared
              to
      six months ended
              June
      30,20082009
            
            
            2008In
      thousands, except for percentage
            
            US$
            
            
            %
      of Sales
            
            
            US$
            
            
            %
      of Sales
            
            
            %Gross
      profit
            
            $
            15,442
            
            
            
            22.3
            %
            
            $
            7,737
            
            
            
            31.2
            %
            
            
            99.6
            %Operating
      Expenses:Selling
      expenses
            
            
            (790
            )
            
            
            (1.1
            )%
            
            
            (258
            )
            
            
            (1.0
            )%
            
            
            206.8
            %General
      & administrative expenses
            
            
            (1,636
            )
            
            
            (2.4
            )%
            
            
            (595
            )
            
            
            (2.4
            )%
            
            
            174.7
            %Total
      operating expense
            
            
            (2,426
            )
            
            
            (3.5
            )%
            
            
            (853
            )
            
            
            (3.4
            )%
            
            
            184.4
            %Income
      from operations
            
            $
            13,016
            
            
            
            18.8
            %
            
            $
            6,884
            
            
            
            27.8
            %
            
            
            89.1
            %








Total
selling, general and administrative expenses were approximately $2,426,000 for
the six months ended June 30, 2009, compared to approximately $853,000 for the
same period last year, an increase of 184.4%




Selling
expenses were approximately $790,000 in the six months ended June 30, 2009, an
increase of 206.8% compared to the same period last year. The increase was
attributable to:




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




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




General
& administrative expenses were approximately $1,636,000 in the six months
ended June 30, 2009, an increased of 174.7% compared to the same period last
year. Factors which caused this increase were higher administrative and
professional fees associated with the Company being a public reporting company
and our expanded scale of operations.




Interest
Expense




Interest
expense was $218,796 for the six months ended June 30, 2009, compared to
$182,632 for the same period of last year. The increase is largely due to
accrued interest from additional bank loans utilized during the
period.  The loans were used for working capital and capital
expenditures for the expansion of production.




Income
tax




For the
six months ended June 30, 2009, income tax expense was $2,335,913,
reflecting an effective tax rate of 17.9%.  The effective tax rate for the
same period was 12.9%.




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




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-




Net
Income




Net
income for the six months ended June 30, 2009 was $10.7 million, or 15.4%
of net revenue, compared to $5.8 million, or 23.6% of net revenue, in the
same period in 2008.




Foreign
Currency Translation Gains




During
the six months ended June 30, 2009, the RMB steadily rose against the US dollar,
and we recognized a foreign currency translation gain of $19,821.





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 from
capital market. However, up to June 30, 2009, neither our cash flows from
operations nor our bank loans had been sufficient to keep pace with the growth
of our business and provide sufficient working capital to meet increased demand
and production expansion.





As of
June 30, 2009, we had approximately $28.1 million in cash, up $2.1 million from
$26.0 million at December 31, 2008.The following table summarizes our cash flows
for each of the periods indicated:





Six Months
              Ended June 30,2009
            
            
            2008(US$)Net
      cash provided by operating activities
            
            $
            5,745,577
            
            
            $
            8,911,914Net
      cash used in investing activities
            
            
            (2,947,312
            )
            
            
            (1,366,392
            )Net
      cash provided by (used in) financing activities
            
            
            (706,466
            )
            
            
            450,963Effect
      of exchange rate on cash and cash equivalents
            
            
            10,806
            
            
            
            527,653Cash
      and cash equivalents at beginning of period
            
            
            26,041,849
            
            
            
            3,213,649Cash
      and cash equivalents at end of period
            
            $
            28,144,454
            
            
            $
            11,737,787




Operating
activities




For the
six months ended June 30, 2009, cash provided by operating activities totaled
$5.7 million compared to $8.9 million in the same period of 2008. This was
primarily attributable to: i) a $10.7 million increase in net earnings, ii) a
$2.8 million accounts receivable increase driven by revenue growth; ii) a $7.3
million inventory increase, principally in copper rods, to support planned
expansion and sales growth in copper wire; iii) a $1.2 million increase in
income tax payable; and iv) a $3.5 million increase in account payable as a
result of an increase in the purchase of raw material to accommodate growing
demand.




Investing
activities




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




Financing
activities




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




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-




Capital
expenditure




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




In 2009,
as we accelerate our expansion, we expect continued capital expenditure for
maintaining existing machines and adding manufacturing equipment in our new
facility, which is adjacent to our old facility. In the new production
facilities we currently have two horizontal smelters, which can produce 25,000
tons refinery copper per year. We plan to add one new vertical smelter in 2011
with a capacity of 75,000 tons, which would increase our refinery copper
capacity to 100,000 tons per year. With our current capacity of production
lines, we can produce 6,000 tones of CCA wire and 6,000 tons of copper wire. We
plan to add six new production lines by the end of 2009 to increase our copper
wire production capacity to a total of 14,000 tons per year (an increase of
8,000 tons). Of that increased total capacity, 10,000 tons per year will be
copper magnet wire and 4,000 tons per year will be copper fine wire. We also
plan to add four new CCA wire production lines by the end of 2009, increasing
our projected total CCA wire production capacity to 7,500 tons per year. Of that
increased total capacity, 5,500 tons per year will be CCA magnet wire and 2,000
ton per year will be CCA fine wire. We believe that our existing cash, cash
equivalents and cash flows from operations, proceeds from equity financing, and
our revolving credit facility, will be sufficient to meet our presently
anticipated future cash needs to bring all of our facilities into full
production. We may, however, require additional cash resources due to changing
business conditions or other future developments, including any investments or
acquisitions we may decide to pursue.





We
regularly review our cash funding requirements and attempt to meet those
requirements through a combination of cash on hand, cash provided by operations
and available borrowings under bank lines of credit.  We believe that we
can continue to meet our cash funding requirements for our business in this
manner over the next twelve months.




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





Six months ended
              June 30,2009
            
            
            2008(In
      thousands)Construction
      of plant and production facilities
            
            $
            1,704
            
            
            $
            771Purchase
      of machinery and equipment
            
            
            1,243
            
            
            
            1,048Total
      capital expenditure
            
            $
            2,947
            
            
            $
            1,819




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-





Item 3.  
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




As a “smaller reporting company”, the Company is not required to
provide this information.




Item 4T. 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.





Our
management, under the supervision of our Chief Executive Officer and Chief
Financial Officer, performed an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures as of June 30, 2009.
Based on that evaluation, our management, including the Chief Executive Officer
and Chief Financial Officer, concluded that our disclosure controls and
procedures were effective as of June 30, 2009.




Changes
in Internal Control over Financial Reporting




Our
auditors, in planning and performing their audit of our financial statements for
the year ended December 31, 2008, provided us with a letter in May of 2009
describing certain matters involving our internal control and operations they
consider to be a material weakness or significant deficiencies under the
standards of the Public Company Accounting Oversight Board. Our auditors
identified as a material weakness our failure to implement sufficient control to
ensure all payments are made on statutory retirement systems and social security
funds.  The Company is in the process of implementing procedures to
ensure that all payments are properly made on statutory retirement systems and
social security funds.





In
addition, the following four significant deficiencies were identified by our
auditor:





1.
            Our
      controls are not sufficient to ensure proper delivery of
      inventory;2.
            Sufficient
      controls are not available to ensure that purchases are properly
      approved;3.
            Our
      controls are not sufficient to ensure proper reconciliation of perpetual
      inventory records to our general ledgers; and4.
            We
      do not have established policies and procedures on fixed assets additions
      and disposals.





Since the
close of the fiscal quarter ended June 30, 2009, we have begun the process of
implementing the following remediation steps to address the significant
deficiencies discussed above:





1.
            Establish
      pre-numbered sales orders to track all shipments to customers and ensure
      the completeness of order processing;2.
            Use
      of pre-numbered purchase order approved by proper management before
      release to vendors;3.
            Establish
      policies, procedures and operational systems to ensure that inventory
      records are maintained on a consistent basis; and4.
            Establish
      formal policies and procedures regarding the acquisition and disposal of
      fixed assets.




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-




We
believe these remediation steps will correct the material weakness and material
deficiencies discussed above. We have also engaged one of the top four
accounting firms to provide consulting services in relation to the assessment of
the structure of our internal control framework and documentation and design of
our internal controls over financial reporting. We will assess the
effectiveness of our remediation efforts in connection with our management's
tests of internal control over financial reporting in conjunction with our
fiscal year 2009 testing procedures. Except as discussed above, we have not
identified any changes in our internal control over financial reporting during
the second quarter of 2009 that have materially affected, or are 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 for the year
ended December 31, 2008.




Item 1A. RISK FACTORS




As a
“smaller reporting company” the Company is not required to provide information
required by this Item.




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




None.




Item 3. DEFAULTS UPON SENIOR
SECURITIES




None.





Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS




None.




- 40
-




Item 5. OTHER INFORMATION




None.




Item 6. EXHIBITS




(b)           Exhibits




Exhibit
              No.
            
            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).




- 41
-




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.July
      28, 2009
            By:
            /s/
      Jianhua ZhuJianhua
      Zhu, Chairman and Chief Executive Officer(Principal
      Executive Officer)July
      28, 2009
            By:
            /s/ Yang “Roy” YuYang
      “Roy” Yu Chief Financial Officer(Principal
      Financial Officer)




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-