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 September 30, 2010.




or




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




For the
transition period from
             to
            .




Commission
File Number 000-52650




LIHUA INTERNATIONAL, INC.


(Exact
name of registrant as specified in its charter)





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





Houxiang
Five Star Industry District


Danyang
City, Jiangsu Province, PR China 212312


(Address
of Principal Executive Offices including zip code)




+86
51 86317399


(Registrant’s
Telephone Number, Including Area Code)




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




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   ̈  No   ̈




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





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




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




There
were 29,163,526 shares of the Registrant’s Common Stock issued and outstanding
on November 5, 2010.







Lihua
International, Inc.


Index
to Form 10-Q





PagePart I.
              Financial
      Information
              
              1Item
      1. Unaudited Condensed Financial Statements
              
              1Condensed
      Consolidated Balance Sheets as of September 30, 2010 and December 31,
      2009
              
              1Condensed
      Consolidated Statements of Income and Comprehensive Income for the three
      months and nine months ended September 30, 2010 and 2009
              
              2Condensed
      Consolidated Statement of Stockholders’ Equity for the nine months ended
      September 30, 2010
              
              3Condensed
      Consolidated Statements of Cash Flows for the nine months ended September
      30, 2010 and 2009
              
              4Notes
      to Unaudited Condensed Consolidated Financial Statements
              
              5Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
              
              17Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
              
              29Item
      4. Controls and Procedures
              
              30Part II.
              Other
      Information
              
              31Item
      1. Legal Proceedings
              
              31Item
      1A. Risk Factors
              
              31Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
              
              31Item
      3. Defaults Upon Senior Securities
              
              31Item
      4. (Removed and Reserved)
              
              31Item
      5. Other Information
              
              31Item
      6. Exhibits
              
              31SIGNATURES
              
              32








PART
I — FINANCIAL INFORMATION


Item
1.  UNAUDITED CONDENSED FINANCIAL STATEMENTS


LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


(AMOUNTS
EXPRESSED IN US DOLLARS)





September 30,
                            
                            
                            December 31,2010
                            
                            
                            2009(Unaudited)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                            
                            $
                            92,959,686
                            
                            
                            $
                            34,614,838Restricted
      cash
                            
                            
                            -
                            
                            
                            
                            575,000Accounts
      receivable, net
                            
                            
                            29,199,881
                            
                            
                            
                            10,996,430Other
      receivables and current assets
                            
                            
                            138,662
                            
                            
                            
                            493,006Prepaid
      land use right – current portion
                            
                            
                            175,787
                            
                            
                            
                            172,515Deferred
      income tax assets
                            
                            
                            40,740
                            
                            
                            
                            98,068Inventories
                            
                            
                            16,019,128
                            
                            
                            
                            17,534,254Total
      current assets
                            
                            
                            138,533,884
                            
                            
                            
                            64,484,111OTHER
      ASSETSProperty,
      plant and equipment, net
                            
                            
                            18,505,327
                            
                            
                            
                            18,424,080Construction
      in progress
                            
                            
                            64,698
                            
                            
                            
                            59,558Deposits
      for plant and equipment
                            
                            
                            -
                            
                            
                            
                            28,163Deposit
      for land use right
                            
                            
                            4,476,877
                            
                            
                            
                            -Prepaid
      land use right – long-term portion
                            
                            
                            8,191,122
                            
                            
                            
                            8,168,039Intangible
      assets
                            
                            
                            4,342
                            
                            
                            
                            2,812Total
      non-current assets
                            
                            
                            31,242,366
                            
                            
                            
                            26,682,652Total
      assets
                            
                            $
                            169,776,250
                            
                            
                            $
                            91,166,763LIABILITIES AND SHAREHOLDERS'
      EQUITYCURRENT
      LIABILITIESShort
      term bank loans
                            
                            $
                            2,238,438
                            
                            
                            $
                            2,196,772Accounts
      payable
                            
                            
                            16,203,682
                            
                            
                            
                            4,923,360Other
      payables and accruals
                            
                            
                            1,766,616
                            
                            
                            
                            681,097Income
      taxes payable
                            
                            
                            3,901,373
                            
                            
                            
                            1,584,292Warrant
      liabilities
                            
                            
                            7,268,119
                            
                            
                            
                            14,275,483Total
      current liabilities
                            
                            
                            31,378,228
                            
                            
                            
                            23,661,004Total
      liabilities
                            
                            
                            31,378,228
                            
                            
                            
                            23,661,004SHAREHOLDERS'
      EQUITYPreferred
      stock: $0.0001 par value, 10,000,000 shares authorized, none issued and
      outstanding
                            
                            
                            -
                            
                            
                            
                            -Common
      stock, $0.0001 par value: 75,000,000 shares authorized,29,143,432
      and 24,154,083 shares issued and outstanding
                            
                            
                            2,914
                            
                            
                            
                            2,416Additional
      paid-in capital
                            
                            
                            68,299,321
                            
                            
                            
                            28,692,812Statutory
      reserves
                            
                            
                            8,231,398
                            
                            
                            
                            5,400,994Retained
      earnings
                            
                            
                            56,560,458
                            
                            
                            
                            30,780,307Accumulated
      other comprehensive income
                            
                            
                            5,303,931
                            
                            
                            
                            2,629,230Total
      shareholders' equity
                            
                            
                            138,398,022
                            
                            
                            
                            67,505,759Total
      liabilities and shareholders' equity
                            
                            $
                            169,776,250
                            
                            
                            $
                            91,166,763




See
accompanying notes to these condensed consolidated financial
statements


1


LIHUA INTERNATIONAL, INC. AND
SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)


(AMOUNTS
EXPRESSED IN US DOLLARS)




For the Three Months
                    Ended September 30,
                
                
                For the Nine Months
                    Ended September 30,2010
                
                
                2009
                
                
                2010
                
                
                2009Revenue
                
                $
                96,337,451
                
                
                $
                40,913,348
                
                
                $
                235,060,503
                
                
                $
                110,279,536Cost
      of goods sold
                
                
                (81,215,627
                )
                
                
                (31,155,238
                )
                
                
                (193,617,089
                )
                
                
                (84,926,800
                )Gross
      profit
                
                
                15,121,824
                
                
                
                9,758,110
                
                
                
                41,443,414
                
                
                
                25,352,736Selling
      expenses
                
                
                (422,209
                )
                
                
                (451,689
                )
                
                
                (1,443,506
                )
                
                
                (1,242,142
                )General
      and administrative expenses
                
                
                (1,192,225
                )
                
                
                (1,184,877
                )
                
                
                (3,970,721
                )
                
                
                (2,820,335
                )Income
      from operations
                
                
                13,507,390
                
                
                
                8,121,544
                
                
                
                36,029,187
                
                
                
                21,290,259Other
      income (expenses):Interest
      income
                
                
                80,289
                
                
                
                66,395
                
                
                
                174,705
                
                
                
                137,809Interest
      expense
                
                
                (30,090
                )
                
                
                (62,796
                )
                
                
                (99,548
                )
                
                
                (281,605
                )Exchange
      expenses
                
                
                (31,810
                )
                
                
                (436
                )
                
                
                (31,810
                )
                
                
                (545
                )Gain
      on extinguishment of warrant liabilities
                
                
                -
                
                
                
                -
                
                
                
                135,369
                
                
                
                -Change
      in fair value of warrants
                
                
                (128,994
                )
                
                
                (8,035,650
                )
                
                
                2,105,835
                
                
                
                (8,375,817
                )Other
      income (expenses)
                
                
                22,305
                
                
                
                -
                
                
                
                (46,092
                )
                
                
                500,753Total
      other income (expenses), net
                
                
                (88,300
                )
                
                
                (8,032,487
                )
                
                
                2,238,459
                
                
                
                (8,019,405
                )Income
      before income tax
                
                
                13,419,090
                
                
                
                89,057
                
                
                
                38,267,646
                
                
                
                13,270,854Provision
      for income tax
                
                
                (3,563,385
                )
                
                
                (1,425,505
                )
                
                
                (9,657,091
                )
                
                
                (3,761,427
                )Net
      income
                
                
                9,855,705
                
                
                
                (1,336,448
                )
                
                
                28,610,555
                
                
                
                9,509,427Other
      comprehensive income:Foreign
      currency translation adjustment
                
                
                1,927,900
                
                
                
                17,296
                
                
                
                2,674,701
                
                
                
                37,117Total
      comprehensive income
                
                $
                11,783,605
                
                
                $
                (1,319,152
                )
                
                $
                31,285,256
                
                
                $
                9,546,544Earnings
      per shareBasic
                
                $
                0.34
                
                
                $
                (0.08
                )
                
                $
                1.04
                
                
                $
                0.61Diluted
                
                $
                0.33
                
                
                $
                (0.08
                )
                
                $
                1.01
                
                
                $
                0.57Weighted
      average number of shares outstandingBasic
                
                
                29,143,432
                
                
                
                17,081,324
                
                
                
                27,473,883
                
                
                
                15,701,399Diluted
                
                
                29,968,087
                
                
                
                17,081,324
                
                
                
                28,318,052
                
                
                
                16,811,976




See
      accompanying notes to these condensed consolidated financial
      statements.


2


LIHUA INTERNATIONAL, INC. AND
SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)


(AMOUNTS
EXPRESSED IN US DOLLARS)





Common Stock
                
                
                Additional
                
                
                
                
                
                
                
                
                Accumulated
                  OtherNumber of
                    shares
                
                
                Amount
                
                
                Paid-in
                    Capital
                
                
                Statutory
                    Reserves
                
                
                Retained
                    Earnings
                
                
                Comprehensive
                    Income
                
                
                TotalAt
      January 1, 2010
                
                
                24,154,083
                
                
                $
                2,416
                
                
                $
                28,692,812
                
                
                $
                5,400,994
                
                
                $
                30,780,307
                
                
                $
                2,629,230
                
                
                $
                67,505,759Net
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                28,610,555
                
                
                
                -
                
                
                
                28,610,555Foreign
      currency translation adjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,674,701
                
                
                
                2,674,701Comprehensive
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                31,285,256Exercise
      of warrants
                
                
                703,634
                
                
                
                70
                
                
                
                7,216,090
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                7,216,160Issuance
      of common stock
                
                
                4,285,715
                
                
                
                428
                
                
                
                32,069,089
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                32,069,517Share-based
      payments to employees and directors
                
                
                -
                
                
                
                -
                
                
                
                321,330
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                321,330Appropriation
      of statutory reserves
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,830,404
                
                
                
                (2,830,404
                )
                
                
                -
                
                
                
                -At
      September 30, 2010 (Unaudited)
                
                
                29,143,432
                
                
                $
                2,914
                
                
                $
                68,299,321
                
                
                $
                8,231,398
                
                
                $
                56,560,458
                
                
                $
                5,303,931
                
                
                $
                138,398,022




See
      accompanying notes to these condensed consolidated financial
      statements.


3


LIHUA INTERNATIONAL, INC. AND
SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


(AMOUNTS
EXPRESSED IN US DOLLARS)


Nine Months Ended
                    September 30,2010
                  
                  
                  2009CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income
                  
                  $
                  28,610,555
                  
                  
                  $
                  9,509,427Adjustments
      to reconcile net income to cash provided by operating
      activities:Depreciation
      and amortization
                  
                  
                  1,599,171
                  
                  
                  
                  972,370Loss
      on disposal of fixed assets
                  
                  
                  123,513
                  
                  
                  
                  -Share-based
      compensation costs
                  
                  
                  321,330
                  
                  
                  
                  251,903Change
      in fair value of warrants
                  
                  
                  (2,105,835)
                  
                  
                  
                  8,375,817Gain
      on extinguishment of warrant liabilities
                  
                  
                  (135,369)
                  
                  
                  
                  -Deferred
      income tax benefits
                  
                  
                  58,268
                  
                  
                  
                  23,403(Increase)
      decrease in assets:Accounts
      receivable
                  
                  
                  (17,711,584)
                  
                  
                  
                  (2,135,285)Notes
      receivable
                  
                  
                  -
                  
                  
                  
                  322,009Other
      receivables and current assets
                  
                  
                  358,042
                  
                  
                  
                  (745,424)Inventories
                  
                  
                  1,818,980
                  
                  
                  
                  (12,088,420)Increase
      (decrease) in liabilities:Accounts
      payable
                  
                  
                  11,013,062
                  
                  
                  
                  3,598,516Other
      payables and accruals
                  
                  
                  1,055,929
                  
                  
                  
                  (53,452)Income
      taxes payable
                  
                  
                  2,251,484
                  
                  
                  
                  1,023,692Net
      cash provided by operating activities
                  
                  
                  27,257,546
                  
                  
                  
                  9,054,556CASH
      FLOWS FROM INVESTING ACTIVITIESPayment
      of deposit for land use right
                  
                  
                  (4,407,293)
                  
                  
                  
                  -Acquisition
      of property, plant and equipment
                  
                  
                  (1,301,573)
                  
                  
                  
                  (3,748,024)Net
      cash used in investing activities
                  
                  
                  (5,708,866)
                  
                  
                  
                  (3,748,024)CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from public offering of common stock,
                  
                  
                  32,069,517
                  
                  
                  
                  7,864,000New
      short-term bank loans
                  
                  
                  -
                  
                  
                  
                  1,464,343Repayment
      to related parties
                  
                  
                  -
                  
                  
                  
                  (2,407)Proceeds
      from exercise of warrants
                  
                  
                  2,450,000
                  
                  
                  
                  -Release
      of restricted cash related to private placement of stock and
      warrants
                  
                  
                  575,000
                  
                  
                  
                  1,050,000Repayments
      of short-term bank loans
                  
                  
                  -
                  
                  
                  
                  (3,221,555)Net
      cash provided by financing activities
                  
                  
                  35,094,517
                  
                  
                  
                  7,154,381Foreign
      currency translation adjustment
                  
                  
                  1,701,651
                  
                  
                  
                  14,336INCREASE
      IN CASH AND CASH EQUIVALENTS
                  
                  
                  58,344,848
                  
                  
                  
                  12,475,249CASH
      AND CASH EQUIVALENTS, at the beginning of the period
                  
                  
                  34,614,838
                  
                  
                  
                  26,041,849CASH
      AND CASH EQUIVALENTS, at the end of the period
                  
                  $
                  92,959,686
                  
                  
                  $
                  38,517,098NON-CASH
      INVESTING AND FINANCING TRANSACTIONS:Share-based compensation
      to employees and directors
                  
                  $
                  321,330
                  
                  
                  $
                  251,903Issuance
      of common stock to settle warrant liabilities
                  
                  $
                  4,766,160
                  
                  
                  
                  -SUPPLEMENTAL
      DISCLOSURE INFORMATIONCash
      paid for interest
                  
                  $
                  99,548
                  
                  
                  $
                  281,605Cash
      paid for income taxes
                  
                  $
                  7,347,339
                  
                  
                  $
                  2,714,332




See
accompanying notes to these condensed consolidated financial statements.


4





NOTE
      1
            DESCRIPTION
      OF BUSINESS AND ORGANIZATION




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




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




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




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




NOTE
      2
            SUMMARIES
      OF SIGNIFICANT ACCOUNTING POLICIES





Principle
of consolidation




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




Basis
of preparation




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


5




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




Research
and development costs




Research
and development costs are expensed as incurred, and charged to general and
administrative expense. For the nine months ended September 30, 2010 and 2009,
research and development costs were $115,325 and $90,534,
respectively.




Advertising
costs




The
Company expenses all advertising costs as incurred.  The total amount
of advertising costs charged to general and administrative expense were $4,501
and $14,021 for the nine months ended September 30, 2010 and 2009,
respectively.




Shipping
and handling costs




Substantially
all costs of shipping and handling of products to customers are included in
selling expense.  Shipping and handling costs for the nine months
ended September 30, 2010 and 2009 were $1,133,793 and $942,929,
respectively.




Foreign
currency




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




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





September 30, 2010
                                  
                                  December 31, 2009Balance
      sheet items, except for equity accounts
                                  
                                  US$1=RMB
      6.7011
                                  
                                  US$1=RMB6.8282Three
      months ended September 30,2010
                                  
                                  2009Items
      in the statements of income and cash flows
                                  
                                  US$1=RMB
      6.7725
                                  
                                  US$1=RMB
      6.8310Nine
      months ended September 30,2010
                                  
                                  2009Items
      in the statements of income and cash flows
                                  
                                  US$1=RMB
      6.8069
                                  
                                  US$1=RMB6.8321




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


6




Recent
accounting pronouncements




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




In
February 2010, the Financial Accounting Standards Board (“FASB”) issued
authoritative guidance that amends the disclosure requirements related to
Subsequent Events (Topic 855). This guidance includes the definition of a
Securities and Exchange Commission filer, removes the definition of a public
entity, redefines the reissuance disclosure requirements and allows public
companies to omit the disclosure of the date through which subsequent events
have been evaluated. This guidance is effective for financial statements issued
for interim and annual periods ending after February 2010. This guidance did not
materially impact the Company’s results of operations or financial position, but
did require changes to the Company’s disclosures in its financial
statements.




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




In July
2010, the FASB issued ASU 2010-20, “Receivables (Topic 310): Disclosures about
the Credit Quality of Financing Receivables and the Allowance for Credit
Losses”.  This ASU amends Topic 310 to improve the disclosures that an
entity provides about the credit quality of its financing receivables and the
related allowance for credit losses. As a result of these amendments, an entity
is required to disaggregate by portfolio segment or class certain existing
disclosures and provide certain new disclosures about its financing receivables
and related allowance for credit losses. For public entities, the disclosures as
of the end of a reporting period are effective for interim and annual reporting
periods ending on or after December 15, 2010. The disclosures about activity
that occurs during a reporting period are effective for interim and annual
reporting periods beginning on or after December 15, 2010. Except for the
expanded disclosure requirements, the adoption of this ASU is not expected to
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.




NOTE
      3
            FAIR
      VALUE MEASUREMENTS AND FINANCIAL
INSTRUMENTS




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




·
            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


7




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




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





Assets
and liabilities measured at fair value on a recurring basis using significant
observable inputs (Level 2) from January 1, 2010 to September 30, 2010 are
summarized as follows:





Warrant
                                  liabilityBalance
      at January 1, 2010
                                
                                $
                                14,275,483Exercise
      of warrants
                                
                                
                                (4,901,529
                                )Change
      in fair value included in earnings
                                
                                
                                (2,105,835
                                )Balance
      at September 30, 2010
                                
                                $
                                7,268,119




The
Company did not identify any other non-recurring assets and liabilities that are
required to be presented on the consolidated balance sheets at fair value in
accordance with the relevant accounting standards.




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




Derivative
Instruments – Warrants




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




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





Market
      price of common stock:
                  
                  $
                  8.66
                  
                  
                  $
                  8.66Exercise
      price:
                  
                  
                  3.50
                  
                  
                  $
                  4.80Remaining
      contractual life (years):
                  
                  
                  3.08
                  
                  
                  
                  3.93Dividend
      yield:
                  
                  
                  −
                  
                  
                  
                  −Expected
      volatility:
                  
                  
                  46.14
                  %
                  
                  
                  41.94
                  %Risk-free
      interest rate:
                  
                  
                  0.65
                  %
                  
                  
                  0.92
                  %




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


8




NOTE
      4
            RESTRICTED
      CASH




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




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




NOTE
      5
            ACCOUNTS
      RECEIVABLE, NET




Accounts
receivable consisted of the following:


September 30
                  
                  
                  December 312010
                  
                  
                  2009(Unaudited)Accounts
      receivable
                  
                  $
                  29,199,881
                  
                  
                  $
                  10,996,430Less:
      Allowance for doubtful debts
                  
                  
                  -
                  
                  
                  
                  -Accounts
      receivable, net
                  
                  $
                  29,199,881
                  
                  
                  $
                  10,996,430




NOTE 6
            OTHER
      RECEIVABLES AND CURRENT ASSETS




Other
receivables and current assets consisted of the following:


September 30
                  
                  
                  December 312010
                  
                  
                  2009(Unaudited)Prepayment
                  
                  $
                  83,525
                  
                  
                  $
                  -Recoverable
      value added tax
                  
                  
                  -
                  
                  
                  
                  475,708Other
      receivables
                  
                  
                  55,137
                  
                  
                  
                  17,298Less:
      Allowance for valuation and doubtful debts
                  
                  
                  -
                  
                  
                  
                  -$
                  138,662
                  
                  
                  $
                  493,006




NOTE
      7
            INVENTORIES




Inventories
by major categories are summarized as follows:


September 30
                    
                    
                    December 312010
                    
                    
                    2009(Unaudited)Raw
      materials
                    
                    $
                    10,162,307
                    
                    
                    $
                    8,832,262Work
      in progress
                    
                    
                    1,865,137
                    
                    
                    
                    1,316,422CCA
      and copper wire
                    
                    
                    2,503,472
                    
                    
                    
                    3,052,604Copper
      rod and anode
                    
                    
                    1,488,212
                    
                    
                    
                    4,332,966$
                    16,019,128
                    
                    
                    $
                    17,534,254


9




NOTE
      8
            INTANGIBLE
      ASSETS


September 30
                  
                  
                  December 312010
                  
                  
                  2009(Unaudited)Computer
      software, cost
                  
                  $
                  10,990
                  
                  
                  $
                  7,030Less:
      Accumulated amortization
                  
                  
                  (6,648)
                  
                  
                  
                  (4,218
                  )$
                  4,342
                  
                  
                  $
                  2,812




Amortization
expenses for the nine months ended September 30, 2010 and 2009 were $2,325 and
$702.




NOTE
      9
            PREPAID
      LAND USE RIGHTS




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




The
amount expensed on prepaid land use right for the nine months ended September
30, 2010 and 2009 were $130,450 and $129,312, respectively.  The
estimated expense of the prepaid land use rights over each of the next five
years and thereafter will be $175,787 per annum.




As of
September 30, 2010, the deposit for land use rights represented the payment made
by Lihua Copper to acquire a 50-year right to use a parcel of land pursuant to
the land use rights transfer agreement between Lihua Copper and the PRC local
land authority dated November 5, 2010, for consideration of $4,834,893 (RMB
32,399,100). The land will be used for the extension of Lihua Copper’s existing
factory buildings. As of September 30, 2010, Lihua Copper paid $4,476,877
(RMB30,000,000) as a deposit for the above land use right, but the relevant
formalities were not completed, and therefore Lihua Copper had not yet obtained
the legal title to the land use rights.




NOTE 10
            PROPERTY,
      PLANT AND EQUIPMENT, NET




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


September 30
                  
                  
                  December 312010
                  
                  
                  2009(Unaudited)Cost:Buildings
                  
                  $
                  9,857,444
                  
                  
                  $
                  9,736,531Office
      equipment
                  
                  
                  340,173
                  
                  
                  
                  321,741Motor
      vehicles
                  
                  
                  597,792
                  
                  
                  
                  315,727Machinery
                  
                  
                  12,554,499
                  
                  
                  
                  11,491,642Total
      cost
                  
                  
                  23,349,908
                  
                  
                  
                  21,865,641Less:
      Accumulated depreciation
                  
                  
                  (4,844,581
                  )
                  
                  
                  (3,441,561
                  )Net
      book value
                  
                  $
                  18,505,327
                  
                  
                  $
                  18,424,080




Depreciation
expense for the nine months ended September 30, 2010 and 2009 was $1,466,396 and
$842,004, respectively.


10




NOTE 11
            CONSTRUCTION
      IN PROGRESS




Construction
in progress consisted of the following:


September 30
                            
                            
                            December 312010
                            
                            
                            2009(Unaudited)Construction
      of plant and equipment
                            
                            $
                            1,276
                            
                            
                            $
                            31,000Construction
      of buildings
                            
                            
                            63,422
                            
                            
                            
                            28,558$
                            64,698
                            
                            
                            $
                            59,558




NOTE 12
            SHORT
      TERM BANK LOANS




Short-term
bank loans consisted of the following:


September 30
                            
                            
                            December 312010
                            
                            
                            2009(Unaudited)Bank
      loan granted by Agricultural Bank of China, with interest rate of
      5.31% p.a., guaranteed by Mr. Jianhua Zhu Tianyi Telecom, maturing on
      August 20, 2010 but fully repaid on April 20, 2010
                            
                            $
                            -
                            
                            
                            $
                            732,257Bank
      loan granted by Agricultural Bank of China, Danyang Branch with an
      interest rate of 5.31% p.a., guaranteed by Mr. Jianhua Zhu Tianyi Telecom,
      matured and fully repaid on April 15, 2010
                            
                            
                            -
                            
                            
                            
                            761,548Bank
      loan granted by Agricultural Bank of China, Danyang Branch with an
      interest rate of 5.31% p.a., guaranteed by Mr. Jianhua Zhu Tianyi Telecom,
      matured and fully repaid on April 20, 2010
                            
                            
                            -
                            
                            
                            
                            702,967Bank
      loan granted by Agricultural Bank of China, Danyang Branch with an
      interest rate of 5.31% p.a., guaranteed by Mr. Jianhua Zhu and Tianyi
      Telecom and maturing on April 21, 2011
                            
                            
                            2,238,438
                            
                            
                            
                            -Total
                            
                            $
                            2,238,438
                            
                            
                            $
                            2,196,772




NOTE
      13
            OTHER
      PAYABLES AND ACCRUALS




Other
payables and accruals consisted of the following:


September 30
                      
                      
                      December 312010
                      
                      
                      2009(Unaudited)Accrued
      staff costs
                      
                      $
                      461,722
                      
                      
                      $
                      476,978Other
      taxes payable
                      
                      
                      1,266,410
                      
                      
                      
                      181,286Other
      payables
                      
                      
                      38,484
                      
                      
                      
                      22,833$
                      1,766,616
                      
                      
                      $
                      681,097


11




NOTE
      14
            COMMON
      STOCK AND COMMON STOCK PURCHASE
WARRANTS




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




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




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




Warrants Outstanding
                      
                      
                      Warrants ExercisableNumber of
                        underlying
                        shares
                      
                      
                      Weighted
                        Average
                        Exercise
                        Price
                      
                      
                      Average
                        Remaining
                        Contractual
                        Life (years)
                      
                      
                      Number of
                        underlying
                        shares
                      
                      
                      Weighted
                        Average
                        Exercise
                        Price
                      
                      
                      Average
                        Remaining
                        Contractual
                        Life (years)Balance,
      December 31, 2009
                      
                      
                      2,102,100
                      
                      
                      $
                      3.59
                      
                      
                      
                      3.93
                      
                      
                      
                      1,964,100
                      
                      
                      $
                      3.50
                      
                      
                      
                      3.
      86Granted
      / Vested
                      
                      
                      -Forfeited
                      
                      
                      -Exercised
                      
                      
                      (706,000
                      )
                      
                      
                      3.50Balance,
      September 30, 2010 (Unaudited)
                      
                      
                      1,396,100
                      
                      
                      $
                      3.63
                      
                      
                      
                      3.17
                      
                      
                      
                      1,396,100
                      
                      
                      $
                      3.63
                      
                      
                      
                      3.17




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




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




NOTE
      15
            SHARE-BASED
      COMPENSATION




Common
Stock awarded to Employees by a Majority Shareholder




The
Company recognized compensation expense of $190,688, related to the restricted
shares granted by a principal stockholder to Mr. Yang “Roy” Yu, the Company’s
Chief Financial Officer (CFO), based on the grant-date fair value of the
Company’s common stock of $2.26 per share, for the nine months ended September
30, 2010.




Options
granted to Independent Directors and Employees




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




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


12




In
accordance with the guidance provided in ASC Topic 718, Stock Compensation ,
(formerly SFAS 123R), the compensation costs associated with these options are
recognized, based on the grant-date fair values of these options, over the
requisite service period, or vesting period. Accordingly the Company recognized
a compensation expense of $130,642 for the nine months ended September 30,
2010.




Options
granted to Independent Directors and Employees




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




Number of
                        underlying
                        shares
                      
                      
                      Weighted-
                        Average
                        Exercise
                        Price
                        Per Share
                      
                      
                      Aggregate
                        Intrinsic
                        Value (1)
                      
                      
                      Weighted-
                        Average
                        Contractual Life
                        Remaining in
                        YearsOutstanding
      at December 31, 2009
                      
                      
                      65,000
                      
                      
                      $
                      4.06
                      
                      
                      $
                      415,450
                      
                      
                      
                      9.2Granted
                      
                      
                      60,000
                      
                      
                      
                      8.49
                      
                      
                      
                      -
                      
                      
                      
                      10Exercised
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Expired
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Forfeited
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Outstanding
      at September 30, 2010 (Unaudited)
                      
                      
                      125,000
                      
                      
                      $
                      6.38
                      
                      
                      $
                      323,650
                      
                      
                      
                      8.92Exercisable
      at September 30, 2010 (Unaudited)
                      
                      
                      75,000
                      
                      
                      $
                      4.99
                      
                      
                      $
                      277,100
                      
                      
                      
                      8.25




(1)
            The
      intrinsic value of the stock option at September 30, 2010 is the amount by
      which the market value of the Company’s common stock of $8.66 as of
      September 30, 2010 exceeds the exercise price of the
    option.




NOTE
      16
            INCOME
      TAXES




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




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




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




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


13




The new
Tax Law also imposes a 10% withholding income tax for dividends distributed by a
foreign invested enterprise to its immediate holding company outside China for
distribution of earnings generated after January 1, 2008. Under the New Tax Law,
the distribution of earnings generated prior to January 1, 2008 is exempt from
the withholding tax. As our subsidiaries in the PRC will not be distributing its
earnings to the Company for the years ended December 31, 2009 and 2010, no
deferred tax liability has been recognized for the undistributed earnings of
these PRC subsidiaries through September 30, 2010. Total undistributed earnings
of these PRC subsidiaries at September 30, 2010 was RMB 518,183,086
($77,328,063).




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




The
Company’s provision for income taxes consisted of:


For the three months
                    
                    
                    For the nine monthsEnded September 30,
                    
                    
                    Ended September 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009(Unaudited)
                    
                    
                    (Unaudited)
                    
                    
                    (Unaudited)
                    
                    
                    (Unaudited)Current
      – PRC
                    
                    $
                    3,564,137
                    
                    
                    $
                    1,425,505
                    
                    
                    $
                    9,598,823
                    
                    
                    $
                    3,738,024Deferred
                    
                    
                    (752)
                    
                    
                    
                    -
                    
                    
                    
                    58,268
                    
                    
                    
                    23,403Provision
      for income tax
                    
                    $
                    3,563,385
                    
                    
                    $
                    1,425,505
                    
                    
                    $
                    9,657,091
                    
                    
                    $
                    3,761,427




A
reconciliation of the provision for income taxes determined at the local income
tax to the Company’s effective income tax rate is as follows:




For the three months
                  
                  
                  For the nine monthsEnded September 30,
                  
                  
                  Ended September 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009(Unaudited)
                  
                  
                  (Unaudited)
                  
                  
                  (Unaudited)
                  
                  
                  (Unaudited)Pre-tax
      income
                  
                  $
                  13,419,090
                  
                  
                  $
                  241,221
                  
                  
                  $
                  38,267,646
                  
                  
                  $
                  13,270,854United
      States federal corporate income tax rate
                  
                  
                  34%
                  
                  
                  
                  34%
                  
                  
                  
                  34%
                  
                  
                  
                  34%Income
      tax computed at United States statutory corporate income tax
      rate
                  
                  
                  4,562,491
                  
                  
                  
                  82,015
                  
                  
                  
                  13,011,000
                  
                  
                  
                  4,512,090Reconciling
      items:Impact
      of tax holiday of Lihua Electron
                  
                  
                  -
                  
                  
                  
                  (789,956)
                  
                  
                  
                  -
                  
                  
                  
                  (2,092,082)Non-deductible
      expenses
                  
                  
                  234,338
                  
                  
                  
                  197,499
                  
                  
                  
                  701,773
                  
                  
                  
                  431,031Change
      in fair value of warrants
                  
                  
                  43,858
                  
                  
                  
                  2,732,121
                  
                  
                  
                  (762,009)
                  
                  
                  
                  2,847,778Rate
      differential for PRC earnings
                  
                  
                  (1,276,936)
                  
                  
                  
                  (776,488)
                  
                  
                  
                  (3,416,781)
                  
                  
                  
                  (1,993,549)Other
                  
                  
                  (366)
                  
                  
                  
                  (19,686)
                  
                  
                  
                  123,108
                  
                  
                  
                  56,159$
                  3,563,385
                  
                  
                  $
                  1,425,505
                  
                  
                  $
                  9,657,091
                  
                  
                  $
                  3,761,427




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


September 30
                        2010
                      
                      
                      December 31
                        2009(Unaudited)Deferred income tax assets -
      current:Unrealized
      intercompany profit in inventory
                      
                      $
                      40,740
                      
                      
                      $
                      98,068Less:
      Valuation allowance
                      
                      
                      −
                      
                      
                      
                      −$
                      40,740
                      
                      
                      $
                      98,068




14




As of
September 30, 2010 and December 31, 2010, the Company has no material
unrecognized tax benefits which would favorably affect the effective income tax
rate in future periods and does not believe that there will be any significant
increases or decreases of unrecognized tax benefits within the next twelve
months. No interest or penalties relating to income tax matters have been
imposed on the Company during the nine month periods ended September 30, 2010
and 2009, and no provision for interest and penalties is deemed necessary as of
September 30, 2010 and December 31, 2010.




According
to the PRC Tax Administration and Collection Law, the statute of limitations is
three years if the underpayment of taxes is due to computational errors made by
the taxpayer or its withholding agent. The statute of limitations extends to
five years under special circumstances, which are not clearly defined. In the
case of a related party transaction, the statute of limitations is ten years.
There is no statute of limitations in the case of tax evasion.




NOTE
      17
            EARNINGS
      PER SHARE




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


For the three months
                    
                    
                    For the nine monthsEnded September 30,
                    
                    
                    Ended September 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009(Unaudited)
                    
                    
                    (Unaudited)
                    
                    
                    (Unaudited)
                    
                    
                    (Unaudited)Income
      available to common shareholders:-
      Basic
                    
                    $
                    9,855,705
                    
                    
                    $
                    (1,336,448)
                    
                    
                    $
                    28,610,555
                    
                    
                    $
                    9,509,427-
      Diluted
                    
                    $
                    9,855,705
                    
                    
                    $
                    (1,336,448)
                    
                    
                    $
                    28,610,555
                    
                    
                    $
                    9,509,427Weighted
      average number of shares:-
      Basic
                    
                    
                    29,143,432
                    
                    
                    
                    17,081,324
                    
                    
                    
                    27,473,883
                    
                    
                    
                    15,701,399-
      Effect of dilutive convertible preferred stock
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,110,577-
      Effect of dilutive warrants and options
                    
                    
                    824,655
                    
                    
                    
                    -
                    
                    
                    
                    844,169
                    
                    
                    
                    --
      Diluted
                    
                    
                    29,968,087
                    
                    
                    
                    17,081,324
                    
                    
                    
                    28,318,052
                    
                    
                    
                    16,811,976Net
      income per share-
      Basic
                    
                    $
                    0.34
                    
                    
                    $
                    (0.08)
                    
                    
                    $
                    1.04
                    
                    
                    $
                    0.61-
      Diluted
                    
                    $
                    0.33
                    
                    
                    $
                    (0.08)
                    
                    
                    $
                    1.01
                    
                    
                    $
                    0.57




15




NOTE
      18
            RELATED
      PARTY TRANSACTIONS




(1)
              Sales




For the
nine months ended September 30, 2010 and 2009, revenue included sales of
$1,373,604 and $169,865, respectively that were made to Tianyi
Telecom.  The controlling stockholders of Tianyi Telecom are related
to Ms. Yaying Wang, our COO and one of our directors.




(2)
              Guarantees




As of
September 30, 2010, Mr. Jianhua Zhu, the Company’s CEO and director, and Tianyi
Telecom provided guarantees for the Company’s short-term bank loans of
$2,238,438  (See Note 12 above).




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




NOTE
      19
            CERTAIN
      RISKS AND CONCENTRATION




Credit
risk and major customers




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




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




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




Risk
arising from operations in foreign countries




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




NOTE
      20
            SEGMENT
      DATA AND RELATED INFORMATION




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




The
Company’s major product categories are (1) wire manufacturing, consisting of (a)
CCA fine and superfine wire, which is an electrical conductor consisting of an
outer sleeve of copper that is metallurgically bonded to a solid aluminum core,
and (b) copper fine and superfine wire, manufactured from recycled copper rod;
(2) refined copper rod; and (3) refined copper anode, the latter two of which
are fire refined from scrap copper.  The manufacturing of refined
copper was launched in the first quarter of 2009.


16




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 nine monthsEnded September 30,
                  
                  
                  Ended September 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009(Unaudited)
                  
                  
                  (Unaudited)
                  
                  
                  (Unaudited)
                  
                  
                  (Unaudited)Net
      revenue :Copper
      and CCA wire
                  
                  $
                  60,655,407
                  
                  
                  $
                  26,328,851
                  
                  
                  $
                  169,593,208
                  
                  
                  $
                  68,819,526Copper
      anode
                  
                  
                  35,682,044
                  
                  
                  
                  -
                  
                  
                  
                  35,682,044
                  
                  
                  
                  -Copper
      rod
                  
                  
                  -
                  
                  
                  
                  14,584,497
                  
                  
                  
                  29,785,251
                  
                  
                  
                  41,460,010$
                  96,337,451
                  
                  
                  $
                  40,913,348
                  
                  
                  $
                  235,060,503
                  
                  
                  $
                  110,279,536Gross
      profit:Copper
      and CCA wire
                  
                  $
                  12,219,344
                  
                  
                  $
                  8,224,862
                  
                  
                  $
                  35,917,148
                  
                  
                  $
                  21,320,208Copper
      anode
                  
                  
                  2,902,480
                  
                  
                  
                  -
                  
                  
                  
                  2,902,480
                  
                  
                  
                  -Copper
      rod
                  
                  
                  -
                  
                  
                  
                  1,533,248
                  
                  
                  
                  2,623,786
                  
                  
                  
                  4,032,528$
                  15,121,824
                  
                  
                  $
                  9,758,110
                  
                  
                  $
                  41,443,414
                  
                  
                  $
                  25,352,736




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




OVERVIEW




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




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




In the
first quarter of 2009, with the completion of a 25,000 ton per annum capacity
smelter, we introduced a new production process and product line which enables
us to produce pure copper products from scrap copper.  The new
production process involves the fire refining of bulk recycled copper into high
purity, low oxygen content copper rods (also known as fire-refined
high-conductivity rods).  We then either sell these large diameter
(8mm) copper rods into a range of markets, or further process these rods into
much smaller diameter (e.g., 0.03 mm) copper wire (also known as “superfine”
copper wire). We believe this recycled superfine copper wire is generally a more
cost effective product for our customers, compared with pure copper wire
manufactured from newly mined copper.   We launched production of
copper anode in July 2010, in conjunction with the completion of our second
copper smelter, with an annual capacity of 25,000 tons. The completion of this
second smelter doubles our recycled copper refining and manufacturing capacity
to 50,000 tons per year. Copper anode is the fundamental building block for
almost all pure copper products, and holds a wide range of potential end market
uses.  We believe that our pricing advantage on our refined copper
products can be maintained regardless of fluctuations in the commodity price of
copper.




We
believe we were among the first manufacturers to commercialize CCA superfine
wire production in China. Currently we have three different CCA products: CCA
fine wire, CCA magnet wire and CCA tin plated wire. CCA fine wire is the raw
material for CCA magnet wire and CCA tin plated wire.  In the case of
CCA magnet wire, we coat the CCA fine wire with a special magnetic coating,
while in the case of CCA tin plated wire, we plate the CCA fine wire with a very
thin layer of tin.  The value added nature of our CCA superfine wire
products lies in our ability and technology to draw down from much larger
diameter CCA raw wire, and further process it to produce super fine CCA magnet
wire and CCA tin plated wire. As a result, CCA magnet wire and CCA tin plated
wire command higher market prices and higher gross margins than plain CCA fine
wire.  We draw pure copper wire from the refined pure copper rod we
produce.  The pure copper wire we produce has three main sub
categories of products: fine wire, magnet wire and tin plated wire. These three
copper wire products have the similar characteristics as the three CCA wire
products mentioned above.


17




We have
expanded our business from the CCA superfine wire segment into the refined
copper products business because we believe that the refined copper products
business allows us to sell into the much bigger pure copper products market and
offers us the ability to grow more rapidly while utilizing the proprietary
equipment and technology that we possess relating to both the scrap copper
cleaning as well as superfine wire drawing.  We believe that the
ability to sell into the large and growing copper and copper replacement
products market in China offers us substantial opportunity to increase our sales
in the future.   We anticipate that we will continue to expand
production capacity in both refined copper products and CCA wire, but that the
majority of our investment and resulting planned growth in sales volume will
occur in the refined copper products business, which caters to a much bigger
pure copper products market, compared with the CCA wire market.




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




Our
market for copper anode is very large and diverse as copper anode is the raw
material for copper cathode, which in turn is the foundation for most pure
copper products.  For our other three main product categories (copper
rod, copper wire and CCA wire), our markets overlap to a degree, and are
characterized by their breadth and depth, with a very large number of current
and potential customers for each product category. Copper rod is a raw material
used in wire and cable production.  Our refined copper products
(copper anode, copper rod and copper wire), which are manufactured from recycled
scrap copper, compete directly with copper products made from “virgin” (e.g.
newly mined) copper.  To date, our raw material costs for bulk scrap
copper have been lower than prices for “virgin” copper, which provides us with a
pricing advantage in the market.  During 2010, we sold copper anode to
a few copper conglomerates which use our product to produce copper
cathode.  We sold copper rod to approximately 50 customers, most of
which are producers of smaller diameter copper wire used in power cables ranging
in size from high voltage power transmission cables to white good applications
such as internal wiring in household appliances and consumer
electronics.  Our copper wire, which is sold in a variety of diameters
and may have undergone further in-line processing such as coating with plastic,
is sold to many of the same types of end-use customers who purchase copper wire
from our copper rod customers.  These include manufacturers of a wide
range of power cables and products that incorporate wiring, such as household
appliances, automobiles, consumer electronics and telecommunications
equipment.  Our CCA wire is sold to many of these manufacturers
also.  CCA wire sells at a lower cost per unit of weight than pure
copper wire, due to the relatively lower density of the aluminum core which
makes up most of the volume of CCA wire.  Our CCA wire offers
conductivity performance characteristics that are only marginally below those of
pure copper wire, which means they are attractive in a wide variety of product
applications where a slight reduction in conductivity standards is tolerable
(such as most of the household appliance, automotive, consumer electronics and
telecommunications applications).  Examples of relatively high
tolerance product applications where our CCA wire would not provide an
acceptable replacement option for pure copper wire would be military/space
equipment and wiring in nuclear power plants.  One low tolerance
product category that requires pure copper wire rather than our less costly CCA
wire is electric motors, which require pure copper wire windings.  The
markets for each of our product lines are growing rapidly, due both to growing
demand in China for copper products including all types of basic wire raw
materials and the relative cost advantages our product lines carry over “virgin”
pure copper competitor products.


18




We
believe that we are well positioned to continue to capture further market share
in the copper and replacement product industry. Our refined copper products
produced from recycled copper and CCA wire are increasingly being accepted as
cheaper alternatives to pure copper products. As a result, our sales and net
income have increased substantially during the last three years. We generated
sales of $32.5 million, $50.0 million, $161.5 million and $235.1 million for the
years ended December 31, 2007, 2008 and 2009 and the nine months ended September
30, 2010, respectively. We achieved net income of $7.7 million, $11.7 million,
$13.7 million and $28.6 million for the years ended December 31, 2007, 2008 and
2009 and the nine months ended September 30, 2010, respectively.  In
2009, we had a non-cash charge of $11.9 million, which resulted from the change
in the fair value of the warrants issued to investors in conjunction with the
Company’s issuance of convertible preferred stock in October 2008. Excluding the
impact of this non-cash charge, net income for 2009 was $25.6 million, up 118.7%
from the same period last year.  For the nine months ended September
30, 2010, we had a non-cash gain of $ 2.1 million, which resulted from the
change in the fair value of the warrants, excluding the impact of this non-cash
gain, net income for the nine months ended September 30, 2009 was $26.5 million,
up 48.2% from the same period last year.




Our
capacity to sell our copper anode, copper rod, recycled copper wire products
(drawn from copper rod) and CCA wire products (drawn from larger diameter CCA
wire) is limited by the equipment we have installed to produce these
products.  Our copper anode and copper rod are made from bulk scrap
copper, which is cleaned, purified and smelted in large capacity smelter
units.  At the present time we have two smelting facilities allocated
to copper rod and copper anode production. Each smelting facility is capable of
producing 25,000 tons per year.  For the nine months ended September
30, 2010, we sold 4,866 tons of copper anode and 3,994 tons of copper
rod.  As of September 30, 2010, we operated approximately 80 high
speed wire drawing machines, which draw larger diameter copper rod or CCA rod
into much finer diameter wires, with a total capacity of approximately 7,500
tons per annum of CCA wire and approximately 20,000 tons per annum of copper
wire.  Certain of these drawing machines incorporate additional
production steps such as coating, annealing or magnetizing the fine wire
produced.  These drawing machines are manufactured to our design and
specifications by custom equipment manufacturers located in China.  We
are not dependent on any single custom equipment manufacturer for the
fabrication of our drawing lines.  We have added six high-capacity
copper wire drawing production lines in first half 2010, all of which are used
to draw copper wire from our copper rod, and increased our annual capacity to
20,000 tons of copper wire, close to the 25,000 tons annual output of the
smelter for copper rod production.  In the third quarter of this year,
we have added a new smelter with 25,000 tons of annual capacity and started
copper anode production.  On the planned new plant construction site,
we are planning to add two new smelters with 25,000 tons of annual capacities
each, which are anticipated to be completed in the second half of year
2011.  Accordingly, we do not anticipate that our sales will be
capacity-constrained in the near future, even if we continue to experience rapid
sales growth.




Significant
Factors Affecting Our Results of Operations




The most
significant factors that 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 CAGR of
9.65% in gross domestic product from 1999 through 2009. Domestic demand for and
consumption of copper and CCA products have increased substantially as a result
of this growth. We believe that economic conditions in China will continue to
affect our business and results of operations.


19




Copper
prices




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




We price
our refined copper and CCA wire products based on the market price for materials
plus a fixed dollar mark-up, which is essentially our gross profit. As copper
prices rise, our fixed dollar mark-up per ton processed represents a relatively
lower percentage of our gross sales (which is generally based on tons processed)
and therefore our gross profit margin as a percentage of sales is relatively
lower; as copper prices decline, the inverse is true and we report relatively
higher gross profit margins on a percentage basis.  Despite the
implications of copper price volatility on our gross and net profit margins in
percentage terms, during the past three years the markup, or our gross and net
profit in absolute dollar terms, has not been materially affected by the change
of copper prices. Shanghai Changjiang Commodity Market, one of the major metal
trading markets in China, publishes the copper trading prices twice daily. These
prices typically set the range for the prices of our materials as well as
finished products, and are generally followed by all industry
participants.




Production
capacity




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




Supply
and costs of principal raw materials




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




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




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.  In our wire products (pure copper wire and
CCA wire), magnet wire and tin plated wire are final products from which we
will derive the highest production markup, or gross profit.  We also
generate a significant portion of revenue from selling semi-finished products
such as fine wire at a lower production cost markup, or gross
profit.




Generally,
copper anode and copper rod products contributes a lower gross profit margin
compared to the wire products.  However, given the quick turnover and
large volume production of the refined copper products, as well as primarily
cash on delivery payment terms with our customers, the return on invested
capital for the refined copper products and working capital turnover are much
better than that of the wire products.




PRINCIPAL
INCOME STATEMENT COMPONENTS




Sales




Our sales
are derived from sales of our products net of value-added taxes.




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


20




Our
collection practices generally consist of cash payment on delivery. However, we
also extend credit for 30 days to 60 days to certain of our established
customers in the CCA wire category.




Cost
of sales




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




Gross
Profit




Our gross
profit is affected primarily by the cost of raw materials, which is defined with
reference to the cost of copper.  We are also able to price our
products based on the market price for materials plus a fixed dollar mark-up,
which is essentially our gross profit.




Operating
expenses




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




Selling,
general and administrative expenses




Our
selling expenses include shipping expenses, salaries and traveling expenses for
our sales personnel.  Our general and administrative expenses include
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.




Other
income and expense




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




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




Change
in fair value of warrants




The fair
value of the Company’s issued and outstanding Series A Warrants and Series B
Warrants, and the Warrants issued to placement agents in conjunction with the
company’s initial public offering in September 2009, decreased to $7,268,119 as
of September 30, 2010 as a result of the decrease of our stock price. As such,
the Company recognized a $2,105,835 gain, which is a non-cash benefit from the
change in fair value of these warrants for the nine months ended September 30,
2010.




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.


21




The new
Tax Law also imposes a 10% withholding income tax for dividends distributed by a
foreign invested enterprise to its immediate holding company outside China for
distribution of earnings generated after January 1, 2008. Under the New Tax Law,
the distribution of earnings generated prior to January 1, 2008 is exempt from
the withholding tax. As our subsidiaries in the PRC will not be distributing
their earnings to the Company for the years ended December 31, 2009 and 2010 to
the Company, no deferred tax liability has been recognized for the undistributed
earnings of these PRC subsidiaries through September 30, 2010. Total
undistributed earnings of these PRC subsidiaries at September 30, 2010 was RMB
518,183,086 ($77,328,063).




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




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




RESULTS
OF OPERATIONS




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




Sales




Our
business for the three months ended September 30, 2010 continued to demonstrate
robust growth.  Net sales increased by 135.5% from $40.9 million in
the three months ended September 30, 2009 to $96.3 million in the three months
ended September 30, 2010. This growth was primarily driven by strong market
demand in all of our four main products.




Three
      months ended September 30,2010
              
              
              2009Sales
              
              
              Volume
                (m.t.)
              
              
              Average
                price
              
              
              Sales
              
              
              Volume
                (m.t.)
              
              
              Average
                priceCCA
      and Copper wire
              
              $
              60,655,407
              
              
              
              7,320
              
              
              $
              8,286
              
              
              $
              26,328,851
              
              
              
              3,576
              
              
              $
              7,363Copper
      Anode
              
              
              35,682,044
              
              
              
              4,866
              
              
              
              7,333
              
              
              
              -
              
              
              
              -
              
              
              
              -Copper
      rod
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              14,584,497
              
              
              
              2,473
              
              
              
              5,897Total
              
              $
              96,337,451
              
              
              
              12,186
              
              
              $
              7,906
              
              
              $
              40,913,348
              
              
              
              6,049
              
              
              $
              6,764




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 September 30, 2010
and 2009:


22





Three months ended September 30,
              
              
              Change in
                three months
                ended
                September 30,
                2010
                compared to
                three months
                ended
                September 30,In thousands, except for
              
              2010
              
              
              2009
              
              
              2009Percentage
              
              US$
              
              
              % of Sales
              
              
              US$
              
              
              % of Sales
              
              
              %Total
      Sales
              
              $
              96,337
              
              
              
              100.0
              %
              
              $
              40,913
              
              
              
              100.0
              %
              
              
              135.5
              %Total
      Cost of Sales
              
              
              (81,216
              )
              
              
              (84.3
              )%
              
              
              (31,155
              )
              
              
              (76.1
              )%
              
              
              160.7
              %Gross
      Profit
              
              $
              15,122
              
              
              
              15.7
              %
              
              $
              9,758
              
              
              
              23.9
              %
              
              
              55.0
              %




Total
cost of sales for the three month ended September 30, 2010 was $81.2 million,
reflecting an increase of 160.7% from the same period last year. As a percentage
of total sales, our cost of sales increased to 84.3% of total sales for the
quarter ended September 30, 2010, compared to 76.1% of total sales in the same
period last year. Consequently, gross margin as a percentage of total sales
decreased to 15.7% in the quarter ended September 30, 2010 from 23.9% for the
same period last year, principally due to the sharp increase in copper prices,
as well as the addition of copper anode product to the sales mix. During the
three months ended September 30, 2010, the average copper price was RMB48,735
per metric ton compared to RMB39,652 from the same period last year, reflecting
an increase of 22.9%.




Gross
profit for the three months ended September 30, 2010 was $15.1 million, up 55.0%
from gross profit of $9.8 million for the same period in 2009.




Selling,
General and Administrative Expenses




The
following table sets forth operating expenses and income from operations both in
amounts and as a percentage of total sales for Selling and General and
Administrative Expenses for the three months ended September 30, 2010 and
2009:




Three months ended September 30,
              
              
              Change in
                three months
                ended
                September 30,
                2010
                compared to
                three months
                ended
                September 30,In thousands, except for
              
              2010
              
              
              2009
              
              
              2009Percentage
              
              US$
              
              
              % of Sales
              
              
              US$
              
              
              % of Sales
              
              
              %Gross
      profit
              
              $
              15,122
              
              
              
              15.7
              %
              
              $
              9,758
              
              
              
              23.9
              %
              
              
              55.0
              %Operating
      expenses:Selling
      expenses
              
              
              (422
              )
              
              
              (0.4
              )%
              
              
              (452
              )
              
              
              (1.1
              )%
              
              
              (6.5
              )%General
      & administrative expenses
              
              
              (1,192
              )
              
              
              (1.2
              )%
              
              
              (1,185
              )
              
              
              (2.9
              )%
              
              
              0.6
              %Total
      operating expense
              
              
              (1,614
              )
              
              
              (1.6
              )%
              
              
              (1,637
              )
              
              
              (4.0
              )%
              
              
              (1.4
              )%Income
      from operations
              
              $
              13,507
              
              
              
              14.1
              %
              
              $
              8,121
              
              
              
              19.9
              %
              
              
              66.3
              %


23




Total
selling, general and administrative expenses were $1,614,000 for the three
months ended September 30, 2010, compared to $1,637,000 for the same period last
year, a decrease of 1.4%.




Selling
expenses were $422,000 for the three months ended September 30, 2010, a decrease
of 6.5% compared to the same period last year, which was a result of decreased
sales commission costs incurred period-on-period.




General and
administrative expenses were $1,192,000 for the three months ended September 30,
2010, an increase of 0.6% 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 $30,090 for the three months ended September 30, 2010, compared to
$62,796 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 September 30, 2010, income tax expense was $3,563,385,
reflecting an effective tax rate of 26.3%.  The effective tax rate for the
same period in 2009 was 17.5%.  Effective tax rates have been
calculated excluding the non cash charge for the fair value change of
warrants.




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




Net
Income




Net
income for the three months ended September 30, 2010 was $9.9 million, or
10.2% of net revenue, compared to a loss of $1.3 million, or -3.3.% of net
revenue, in the same period in 2009.  The net income for the period
ended September 30, 2009 was impacted by an $8.0 million non-cash charge as a
result of the change in the fair value of the warrants issued to investors in
conjunction with the Company’s issuance of convertible preferred stock in
October 2008. Excluding the impact of this non-cash charge, net income for the
three months ended September 30, 2009 was $6.7 million.




Foreign
Currency Translation Gains




During
the three months ended September 30, 2010, the RMB rose against the US dollar,
and we recognized a foreign currency translation gain of
$1,927,900.


24




NINE
MONTHS ENDED SEPTEMBER 30, 2010 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2009




Sales




For the
nine months ended September 30, 2010, our net sales were $235.1 million,
representing an increase of $124.8 million or 113.1% compared to the nine months
ended September, 2009. This increase was primarily due to the launch of the new
smelting capacity in the third quarter of 2010 and the increase of copper
price.  Please see the table below for more details regarding the
product sales breakdown by specific category.




Nine months ended September 30,2010
              
              
              2009Sales
              
              
              Volume
                (m.t.)
              
              
              Average
                price
              
              
              Sales
              
              
              Volume
                (m.t.)
              
              
              Average
                priceCCA
      and Copper wire
              
              $
              169,593,208
              
              
              
              20,339
              
              
              $
              8,338
              
              
              $
              68,819,526
              
              
              
              10,137
              
              
              $
              6,789Copper
      Anode
              
              
              35,682,044
              
              
              
              4,866
              
              
              
              7,333
              
              
              
              -
              
              
              
              -
              
              
              
              -Copper
      rod
              
              
              29,785,251
              
              
              
              3,994
              
              
              
              7,457
              
              
              
              41,460,010
              
              
              
              8,032
              
              
              
              5,162Total
              
              $
              235,060,503
              
              
              
              29,199
              
              
              $
              8,050
              
              
              $
              110,279,536
              
              
              
              18,169
              
              
              $
              6,070




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 nine months ended September 30, 2010
and 2009:




Nine months ended September 30,
              
              
              Change in nine
                months ended
                September 30,
                2010
                compared to
                nine months
                ended
                September 30,In thousands, except for
              
              2010
              
              
              2009
              
              
              2009Percentage
              
              US$
              
              
              % of Sales
              
              
              US$
              
              
              % of Sales
              
              
              %Total
      Sales
              
              $
              235,060
              
              
              
              100.0
              %
              
              $
              110,280
              
              
              
              100.0
              %
              
              
              113.1
              %Total
      Cost of Sales
              
              
              (193,617
              )
              
              
              (82.4
              )%
              
              
              (84,927
              )
              
              
              (77.0
              )%
              
              
              128.0
              %Gross
      Profit
              
              $
              41,443
              
              
              
              17.6
              %
              
              $
              25,353
              
              
              
              23.0
              %
              
              
              63.5
              %




Total
cost of sales for the nine months ended September 30, 2010 was $193.6 million,
reflecting an increase of 128.0% from the same period last year. As a percentage
of total sales, our cost of sales increased to 82.4% of total sales for the nine
months ended September 30, 2010, compared to 77.0% of total sales in the same
period last year. Consequently, gross margin as a percentage of total sales
decreased to 17.6% in the nine months ended September 30, 2010 from 23.0% for
the same period last year, principally due to i) the addition of refined copper
products, which have a lower margin compared to our wire products; and ii) the
sharp increase in copper price. During the first nine months of 2010, the
average copper price was RMB48,891 compared to RMB33,266 from the same period
last year, reflecting an increase of 47.0%.


25




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 and General and
Administrative Expenses for the nine months ended September 30, 2010 and
2009:




Nine months ended September 30,
              
              
              Change in nine
                months ended
                September 30,
                2010
                compared to
                nine months
                ended
                September 30,In thousands, except for
              
              2010
              
              
              2009
              
              
              2009Percentage
              
              US$
              
              
              % of Sales
              
              
              US$
              
              
              % of Sales
              
              
              %Gross
      profit
              
              $
              41,443
              
              
              
              17.6
              %
              
              $
              25,353
              
              
              
              23.0
              %
              
              
              63.5
              %Operating
      expenses:Selling
      expenses
              
              
              (1,444
              )
              
              
              (0.6
              )%
              
              
              (1,242
              )
              
              
              (1.1
              )%
              
              
              16.2
              %General
      & administrative expenses
              
              
              (3,971
              )
              
              
              (1.7
              )%
              
              
              (2,820
              )
              
              
              (2.6
              )%
              
              
              40.8
              %Total
      operating expense
              
              
              (5,415
              )
              
              
              (2.3
              )%
              
              
              (4,062
              )
              
              
              (3.7
              )%
              
              
              33.3
              %Income
      from operations
              
              $
              36,029
              
              
              
              15.3
              %
              
              $
              21,290
              
              
              
              19.3
              %
              
              
              69.2
              %




Total
selling, general and administrative expenses were $5,415,000 for the nine months
ended September 30, 2010, compared to $4,062,000 for the same period last year,
an increase of 33.3%.




Selling
expenses were $1,444,000 in the nine months ended September 30, 2010, an
increase of 16.2% 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
      staff costs as we continued to expand the sales force during the
      period




General
and administrative expenses were $3,971,000 in the nine months ended September
30, 2010, an increase of 40.8% 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 $99,548 for the nine months ended September 30, 2010, compared to
$281,605 for the same period of last year. The decrease is largely due to the
repayment of short term bank loans which were used for working capital
purposes.




Income
Tax




For the
nine months ended September 30, 2010, income tax expense was $9,657,091,
reflecting an effective tax rate of 26.7%.  The effective tax rate for the
same period in 2009 was 17.4% Effective tax rates have been calculated excluding
the non cash charge for the fair value change of warrants.




In 2009,
Lihua Electron was subject to an EIT rate of 12.5%, and Lihua Copper was subject
to an EIT rate of 25%.  Starting 2010, both entities’ EIT rate is
25%.


26




Net
Income




Net
income for the nine months ended September 30, 2010 was $28.6 million, which
includes $2.1 million non cash gain as a result of the change in the fair value
of the warrants.  Excluding the impact of this non-cash gain, net
income for the nine months ended September 30, 2010 was $26.5 million, or 11.3%
of net revenue.  Net income for the nine months ended September 30,
2009 was impacted by a $8.4 million non-cash charge as a result of the change in
the fair value of the warrants.  Excluding the impact of this non-cash
charge, net income for the nine months ended September 30, 2009 was $17.9
million.




Foreign
Currency Translation Gains




During
the nine months ended September 30, 2010, the RMB rose against the US dollar,
and we recognized a foreign currency translation gain of
$2,674,701.




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 in the
capital markets.




As of
September 30, 2010, we had approximately $93.0 million in cash, up $58.3 million
from $34.6 million at December 31, 2009.  The following table
summarizes our cash flows for each of the periods indicated:




For the nine months ended
                  September 30,2010
              
              
              2009(US$)Net
      cash provided by operating activities
              
              $
              27,257,546
              
              
              $
              9,054,556Net
      cash used in investing activities
              
              
              (5,708,866
              )
              
              
              (3,748,024
              )Net
      cash provided by financing activities
              
              
              35,094,517
              
              
              
              7,154,381Effect
      of exchange rate changes
              
              
              1,701,651
              
              
              
              14,336Cash
      and cash equivalents at beginning of period
              
              
              34,614,838
              
              
              
              26,041,849Cash
      and cash equivalents at end of period
              
              $
              92,959,686
              
              
              $
              38,517,098




Operating
activities




For the
nine months ended September 30, 2010, cash provided by operating activities
totaled $27.3 million compared to $9.1 million in the same period of 2009. This
was primarily attributable to: i) a $28.6 million increase in net earnings; ii)
a $17.7 million accounts receivable increase driven by revenue growth; iii) a
$1.8 million inventory decrease, resulting from more efficient use of raw
materials and finished goods; iv) a $2.1 million non-cash gain as a result of
change in fair value of warrants issued; v) a $2.3 million increase in income
tax payable as a result of the change of income tax rate and increase in
earnings; and vi) a $11.0 million accounts payable increase due to the growth of
sales and cost of goods sold.




Investing
activities




For the
nine months ended September 30, 2010, we had a net cash outflow of $5.7 million
from investing activities for deposits paid for land use rights and 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.


27




Financing
activities




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




Capital
expenditures




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




In 2010,
as we accelerate our expansion, we expect continued capital expenditure for
maintaining existing machines and adding manufacturing equipment in our new
facility, which is adjacent to our existing facility. We currently have two
smelting facilities which can produce a total of 50,000 tons of refined copper
products per year.  We plan to add additional smelting facilities in
2011 and increase our refined copper capacity to 100,000 tons per year. With our
current capacity of production lines, we can produce 7,500 tons of CCA wire and
20,000 tons of copper wire.  We currently do not have any plans to add
any new drawing capacities for the remainder of 2010 and year 2011. For the 2010
capacity expansion, we believe that our existing cash, cash equivalents and cash
flows from operations and our revolving credit facility will be sufficient to
meet our presently anticipated future cash needs to bring all of our facilities
into full production. We may, however, require additional cash resources due to
changing business conditions or other future developments, including any
investments or acquisitions we may decide to pursue.




Accounts
receivable




In the
nine month period ended September 30, 2010, we produced 20,339 tons of CCA and
copper wire, 4,866 tons of copper anode and 3,994 tons of copper
rod.  In the first nine months of 2009, we produced 10,137 tons of CCA
and copper wire and 8,032 tons of copper rod. As CCA is an emerging product in
China, Lihua extends credit terms to some of its larger customers. However, pure
copper products, such as our copper rod and copper wire, are in such high demand
that we don’t have to extend credit terms. Our customers often purchase more
than one type of product from us (for example, one customer may purchase both
CCA wire and copper wire).  CCA wire purchases are generally accorded
30 to 60 day payment terms, depending upon the creditworthiness of the customer,
while the copper wire (and copper rod and anode) purchases are payable upon
delivery to the customer, which may occur two to seven days after we ship the
product and recognize our revenue. This decision to extend terms or to collect
payment upon receipt (essentially a “cash sale”, although due to the shipping
time this effectively becomes a very short receivable), is based primarily upon
the product type. We may extend terms for CCA purchases to a credit-worthy
customer, but for that same customer require payment upon delivery for purchases
of copper anode, rod and/or copper wire.




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




For the period ended,September 30, 2010
                
                
                September 30, 2009CCA
      wire and Copper wire
                
                $
                17,557,017
                
                
                $
                5,545,756Copper
      Anode
                
                
                11,642,864
                
                
                
                —Copper
      rod
                
                
                —
                
                
                
                1,637,372Total
                
                
                29,199,881
                
                
                
                7,183,128


28




Item 3.  
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




Foreign
Exchange Risk




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




Our
functional currency is the Chinese Renminbi. We conduct substantially all of our
operations through our PRC operating companies, and their financial performance
and position are measured in terms of Renminbi. Our raw materials are primarily
procured, sold and delivered in the PRC for Renminbi. The majority of our net
revenue is denominated in Renminbi.




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




Since
July 2005, the Renminbi has no longer been pegged to the U.S. dollar. Although
currently the Renminbi exchange rate versus the U.S. dollar is restricted to a
rise or fall of no more than 0.3% per day and the People’s Bank of China
regularly intervenes in the foreign exchange market to prevent significant
short-term fluctuations in the exchange rate, the Renminbi may appreciate or
depreciate significantly in value against the U.S. dollar in the medium to long
term. Moreover, it is possible that in the future the PRC authorities may lift
restrictions on fluctuations in the Renminbi exchange rate and lessen
intervention in the foreign exchange market. As of September 30, 2010, the
exchange rate of RMB to $1 was RMB 6.7011.




Any
devaluation of the Renminbi against the U.S. dollar would consequently have an
adverse effect on our financial performance and asset values when measured in
terms of U.S. dollars. On the other hand, the appreciation of the Renminbi could
make our customers’ products more expensive to purchase because many of our
customers are involved in the export of goods, which may have an adverse impact
on their sales. A decrease in sales by our customers could have an adverse
effect on our operating results. In addition, as of September 30, 2010 and
December 31, 2009, we had cash denominated in Renminbi amounting to RMB
622,932,152 (USD 92,959,686) and RMB 236,357,036 (USD 34,614,838). Also, from
time to time we may have Renminbi denominated borrowings. Accordingly, a
decoupling of the Renminbi may affect our financial performance in the
future.




We
recognized a foreign currency translation adjustment of approximately RMB
18,206,422 (USD 2,674,701) for the nine months ended September 30, 2010. We do
not currently engage in hedging activities.  As such, we may in the
future experience economic loss as a result of any foreign currency exchange
rate fluctuations.




Interest
Rate Risk




We are
exposed to interest rate risk arising from short-term variable rate borrowings
from time to time. Our future interest expense will fluctuate in line with any
change in our borrowing rates. We do not have any derivative financial
instruments and believe our exposure to interest rate risk and other relevant
market risks is not material. Our bank borrowings amounted to RMB 15,000,000
(USD 2,238,438) as of September 30, 2010. Based on the variable nature of the
underlying interest rate, the bank borrowings approximated fair value at that
date.




If there
was a hypothetical 1% change in interest rates, the net impact to our annual
earnings and cash flows would be approximately RMB 150,000 (USD 22,384). The
potential change in cash flows and earnings is calculated based on the change in
the net interest expense over a one year period due to an immediate 1% change in
price.


29




Inflation




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




ITEM 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.




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




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




Changes
in Internal Control over Financial Reporting




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


30




PART
II — OTHER INFORMATION




Item 1.
LEGAL PROCEEDINGS





None.




Item 1A.
RISK FACTORS





There
have been no material changes in the Company’s risk factors from those
previously disclosed in the Company’s


Form
10-K/A for the year ended December 31, 2009.




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




None.




Item 3.
DEFAULTS UPON SENIOR SECURITIES




None.




Item 4.
(Removed and Reserved)




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).


31




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.November
      15, 2010
                    By:
                    /s/
      Jianhua ZhuJianhua
      Zhu, Chairman and Chief Executive Officer(Principal
      Executive Officer)November
      15, 2010
                    By:
                    /s/
      Yang “Roy” YuYang
      “Roy” Yu, Chief Financial Officer(Principal
      Accounting
Officer)


32