Attached files
file | filename |
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EX-21 - LIHUA INTERNATIONAL INC. | v178648_ex21.htm |
EX-32.1 - LIHUA INTERNATIONAL INC. | v178648_ex32-1.htm |
EX-23.1 - LIHUA INTERNATIONAL INC. | v178648_ex23-1.htm |
EX-31.2 - LIHUA INTERNATIONAL INC. | v178648_ex31-2.htm |
EX-32.2 - LIHUA INTERNATIONAL INC. | v178648_ex32-2.htm |
EX-31.1 - LIHUA INTERNATIONAL INC. | v178648_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x
|
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
fiscal year ended December 31,
2009
or
¨
|
TRANSITION REPORT UNDER
SECTION13 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
|
14-1961536
|
|
(State
or other jurisdiction of
|
||
incorporation
or organization)
|
(I.R.S.
Employer Identification No.)
|
|
c/o
Lihua Holdings Limited
|
||
Houxiang
Five-Star Industry District, Danyang City, Jiangsu Province,
PRC
|
212312
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (86) 511
86317399
Securities
registered pursuant to Section 12(b) of the Act: Common Stock, par value
$0.0001 per share
Name of
each exchange on which registered: NASDAQ Capital Market
Securities
registered pursuant to Section 12(g) of the Act: none
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes
¨
No x
Indicate
by check mark whether the registrant (1) has filed all reports required by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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 (§229.405 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 disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of “ large accelerated filer,” “ accelerated filer” and “ smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes ¨ No
x
The
aggregate market value of the voting stock held by non-affiliates of the
Registrant as of June 30, 2009 was zero.
The
number of shares outstanding of the registrant’s common stock as of March 24,
2010 was 24,857,717.
DOCUMENTS
INCORPORATED BY REFERENCE
None.
LIHUA
INTERNATIONAL, INC.
Annual
Report on Form 10-K for the Year Ended December 31, 2009
2
FORWARD
LOOKING STATEMENTS
This
Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, and Section 21E
of the Securities Exchange Act of 1934. These statements relate to future events
or our future financial performance. We have attempted to identify
forward-looking statements by terminology including “anticipates”, “believes”,
“expects”, “can”, “continue”, “could”, “estimates”, “expects”, “intends”, “may”,
“plans”, “potential”, “predict”, “should” or “will” or the negative of these
terms or other comparable terminology. These statements are only predictions.
Uncertainties and other factors, including the risks outlined under Risk Factors
contained in Item 1A of this Form 10-K, may cause our actual results,
levels of activity, performance or achievements to be materially different from
any future results, levels or activity, performance or achievements expressed or
implied by these forward-looking statements.
A variety
of factors, some of which are outside our control, may cause our operating
results to fluctuate significantly. They include:
|
·
|
the
availability and cost of products from our suppliers incorporated into our
customized module design solutions;
|
|
·
|
changes
in end-user demand for the products manufactured and sold by our
customers;
|
|
·
|
general
and cyclical economic and business conditions, domestic or foreign, and,
in particular, those in China’s copper
industries;
|
|
·
|
the
rate of introduction of new products by our
customers;
|
|
·
|
the
rate of introduction of enabling technologies by our
suppliers;
|
|
·
|
changes
in our pricing policies or the pricing policies of our competitors or
suppliers;
|
|
·
|
our
ability to compete effectively with our current and future
competitors;
|
|
·
|
our
ability to manage our growth effectively, including possible growth
through acquisitions;
|
|
·
|
our
ability to enter into and renew key corporate and strategic relationships
with our customers and suppliers;
|
|
·
|
our
implementation of share-based compensation
plans;
|
|
·
|
changes
in the favorable tax incentives enjoyed by our PRC operating
companies;
|
|
·
|
foreign
currency exchange rates
fluctuations;
|
|
·
|
adverse
changes in the securities markets;
and
|
|
·
|
legislative
or regulatory changes in China.
|
Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Our expectations are as of the date this Form 10-K is filed,
and we do not intend to update any of the forward-looking statements after the
filing date to conform these statements to actual results, unless required by
law.
We file
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and proxy and information statements and amendments to reports filed or
furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of
1934, as amended. You may read and copy these materials at the SEC’s Public
Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain
information on the operation of the public reference room by calling the SEC at
1-800-SEC-0330. The SEC also maintains a website (http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding us and other companies that file materials with the SEC
electronically. You may also obtain copies of reports filed with the SEC, free
of charge, via a link included on our website at http://www.lihuaintl.com
3
PART
I
ITEM
1.
|
BUSINESS
|
Company
Overview
Business
Overview
We were
one of the first vertically integrated companies in China to develop, design,
manufacture, market and distribute low cost, high quality, alternatives to pure
copper wire, which include copper-clad aluminum wire (“CCA”) and recycled scrap
copper wire. Primarily because of its high electrical conductivity, pure copper
wire is one of the fundamental building blocks in many components in a wide
variety of motorized and electrical appliances such as dishwashers, microwaves
and automobiles. In most instances, our CCA wire and recycled scrap copper rod
and wire products are an excellent, less costly substitute for pure copper wire
products.
We sell
our wire products directly to manufacturers in the consumer electronics, white
goods, automotive, utility, telecommunications and specialty cable industries
and to distributors in the wire and cable industries. Our track record and
reputation for producing high quality products in large quantities has paved the
way for rapid expansion of our customer base. We have approximately 300
customers and no one customer accounts for more than 7% of our sales. The copper
wire industry in China is large and growing, and essentially all of our product
sales are made to domestic customers in China.
Prior to
2009, our business focused primarily on CCA. Our CCA business consists of
acquiring CCA with a line diameter of 2.05 mm from our suppliers as a raw
material, reducing the diameter of the CCA by drawing it and then annealing and
coating it. Our final CCA product typically has diameters from 0.03 mm to 0.18
mm, depending on customer specifications. To meet strong customer demand, we
substantially increased our CCA production capacity from 2,200 tons per annum as
of the end of 2006 to 7,500 tons per annum as of December 31, 2009.
In
addition to our CCA business, in the first quarter of 2009, we began production
of copper rod from recycled scrap copper. The copper rod we produced meets the
national purity standard for pure copper. As of December 31, 2009,
our scrap copper refinery capacity was approximately 25,000 tons per annum. To
the extent our downstream wire-drawing capacity permits, we process our copper
rod into copper wire. Because our output of copper rod exceeds our capacity to
process it into copper wire, we sell our excess copper rod to other wire
manufacturers for further processing. During the nine months ended September 30,
2009, we sold 5,761 tons of copper wire and 8,032 tons of copper rod. We
currently are working to expand our wire drawing capacity so that we can use a
greater proportion of our copper rod rather than selling it to other
manufacturers, thereby increasing our profit margins and overall profitability.
We are exploiting a range of marketing strategies for the copper wire business,
including cross-selling our copper wire to our existing CCA
customers.
Our
markets for our three main product categories 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 pure copper rod,
which is manufactured from recycled scrap copper, competes directly with copper
rod made from “virgin” (e.g. newly mined) pure copper. To date, our
raw material costs for bulk scrap copper have been lower than prices for virgin
pure copper, which provides us with a pricing advantage in the
market. During 2009, we sold copper rod to approximately 100
customers, most of which are producers of smaller diameter copper wire used in
power cables ranging in size from high voltage power transmission cables to
white good applications such as internal wiring in household appliances and
consumer electronics. Our copper wire, which is sold in a variety of
diameters and may have undergone further in-line processing such as coating with
plastic, is sold to many of the same types of end-use customers who purchase
copper wire from our copper rod customers. These include
manufacturers of a wide range of power cables and products that incorporate
wiring, such as household appliances, automobiles, consumer electronics and
telecommunications equipment. Our CCA wire is sold to many of these
manufacturers as well. 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
standard is tolerable (such as most household appliance, automotive, consumer
electronics and telecommunications applications). Examples of
relatively high tolerance product applications where our CCA wire would not
provide an acceptable replacement option for pure copper wire would be
military/space equipment and wiring in nuclear power plants. One low
tolerance product category that requires pure copper wire rather than our less
costly CCA wire is electric motors, which require pure copper wire
windings. The markets for each of our three product lines are growing
rapidly, due both to growing demand in China for all types of basic wire raw
materials and the relative cost advantages our product lines carry over “virgin”
pure copper competitor products.
4
We
believe that we are well positioned to continue capturing further market share
in the copper wire industry. Our copper wire from recycled copper and CCA are
increasingly being accepted as alternatives to pure copper wire in the domestic
Chinese market. 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 and $161.5 million for the years ended December 31, 2007, 2008 and
2009, respectively. We achieved net income of $7.7 million, $11.7 million and
$16.8 million for the years ended December 31, 2007, 2008 and 2009,
respectively. In 2009, we had a non-cash charge of $8.8 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, non-GAAP
net income for 2009 was $25.6 million, up 118.7% from the same period last
year.
Our
capacity to sell our 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 rod is made from bulk scrap copper, which is
cleaned, purified and smelted in large capacity smelter units. At the
present time we have a single horizontal copper rod extrusion production line,
fed by two smelters, which is capable of producing 25,000 tons of copper rod per
year in total. In 2009 we sold 9,630 tons of copper rod, all of which was
produced on this smelter/extrusion line. As of December 31, 2009, 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
18,000 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 anticipate
that we will add six additional high-capacity drawing machines in the first two
quarters of 2010, all of which will be used to draw copper wire from our copper
rod, and which will increase our annual copper wire production capacity to
25,000 tons. We further anticipate that we will continue to add
drawing machines in the second half of 2010. Depending on anticipated
market demand, we may also add to our smelter/extrusion capacity in the second
half of 2010 or the first half of 2011, so that we can increase our production
volumes of copper rod. 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.
We
continuously pursue technological innovations and improvements in our
manufacturing processes. We have obtained one utility model patent in China and
have three pending invention patent applications in China related to our
production process. In addition, we have entered into a technology cooperation
agreement with a university in China. We believe that our emphasis on
technological innovations and production efficiency has contributed
significantly to our leading industry position in China and will continue to do
so for the foreseeable future.
Further,
significant barriers to entry make it difficult for newcomers to successfully
compete with our CCA and copper wire businesses. For example, with respect to
CCA, during the process of drawing, annealing and coating CCA, it is
technologically challenging to maintain high quality and maintain the integrity
of copper and aluminum weight and volume distribution without breakage,
especially for finer diameter wires. Our knowledge and experience in
successfully generating high quality CCA fine and super fine wires put us at a
significant advantage over would-be competitors. With respect to pure copper
wire, our proprietary recycling technology offers us a unique ability to produce
high quality pure copper wire from scrap copper. This enables us to
have a lower raw material cost base comparing to pure copper wire produced from
“virgin” pure copper sourced from copper mines. Our experience and technology
allow us to offer products that are, in most instances, superior and more
cost-effective to those that our potential competitors can produce. Because we
are already an approved vendor for many of our customers and qualifying new
vendors can be time-consuming, we believe we are further advantaged vis-à-vis
potential competitors.
5
To
minimize exposure to copper commodity risk exposure, we maintain minimal raw
material inventory. In addition, we charge a fixed dollar processing fee for
most of our products thus enabling us to pass most of the underlying copper
price exposure to our customers, and minimize our exposure to copper price
fluctuation. We confirm raw material purchase orders for scrap copper or CCA
with suppliers for each sales order only when the applicable sales order has
been received. On the other hand, our principal CCA and scrap copper suppliers
usually dedicate portions of their inventories as reserves to meet our
manufacturing requirements. Our most significant supplier of CCA provides
approximately 30% of our CCA raw material needs, but we have built a large
network of reliable suppliers that deliver high quality raw materials, and
accordingly, are not dependent upon any one supplier for our
success.
We
believe that our experienced management team will continue to leverage our
leading technologies and increasing capacity to manufacture, produce, market and
distribute cost-effective, high quality CCA, recycled copper wire and other
alternatives to pure copper wire. If, as anticipated, worldwide demand for
alternatives to pure copper wire grow and we continue to innovate and improve
our processes, we will be well positioned to compete in the copper wire market
on a global scale.
Corporate
Structure
The
following diagram illustrates our corporate structure. All of our
subsidiaries are owned directly.
Our
Strengths
We
believe that the following strengths have contributed to our competitive
position in China:
6
Leading market position and
early-mover advantage. We are one of the leading CCA wire
producers in China, as measured by our current annual superfine wire production
capacity of 7,500 tons. We are targeting to increase our annual CCA wire
production capacity to 10,000 tons by the end of 2010 through internal
expansion.
We
believe we were one of the first companies in China to produce CCA superfine
wire on a commercial scale This early-mover advantage in China coupled with our
reputation for high quality products has enabled us to establish a wide array of
customer and supplier relationships and to expand our relationships with our
existing customers. We have recently launched commercial production of superfine
wires that are manufactured from refined scrap copper and are also in the
process of developing a super-micro-fine wire production
technology.
We
believe we are well positioned to leverage our increasing production scale and
to expand our customer base and product portfolio, to meet China’s growing
demand for cable and wire products.
Proprietary automated and efficient
production facility that can be scaled to meet increased
demand. To cope with surging demand, we have continuously
expanded our production facility in a very rapid way: our production capacity
increased from 2,200 tons per annum in 2006 to 7,500 tons per annum as of
December 31, 2009. We have targeted to increase our annual production capacity
in CCA wire, copper wire, and scrap copper refinery to 10,000, 25,000 and 25,000
tons, respectively, by the end of 2010, and to 15,000, 50,000 and 100,000 tons,
respectively, by the end of 2011. We launched production in our new plant in
March 2009. This new plant occupies about 66,000 square meters and is
six times of the size of our old plant.
Efficient proprietary production
technology. We continually pursue technological improvements
to our manufacturing processes via our strong in-house development teams. We
have obtained one utility model patent for our manufacturing process, and have
three other pending invention patents related to our production processes. In
addition, we have entered into technology cooperation agreements with research
institutes to develop new techniques and processes. Our research and development
(“R&D”) efforts have generated technological improvements that have been
instrumental in controlling our production costs and increasing our operational
efficiency. The combination of our trade secrets and our proprietary production
technology enables us to use lower-cost recycled copper feedstock and to produce
wire with a smaller line diameter.
Rigorous quality control
standards. Consistent with our continuing commitment to
quality, we impose rigorous quality control standards at each stage of our
production process. Since January 2007, our plant has maintained ISO9001:2000, a
certification of quality management systems maintained by the International
Organization of Standardization and administered by certification and
accreditation bodies, which is subject to annual review. For copper magnet wire,
we obtained a National Industrial Production License for copper magnet wire in
January 2009 and satisfied the UL standard in October 2008. According to a test
report dated April 17, 2008, China’s Machinery Industry Quality Supervision and
Test Center For Electrical Material and Special Wire and Cable, a government
inspection and testing agency, recycle copper rod produced by us satisfied the
national standard for electrical copper wire, GB/T3952-1998. We believe these
testing results demonstrate our commitment to producing high-quality products as
well as providing us with a competitive advantage over certain domestic
competitors in the event China implements stricter fuel-quality standards in the
future.
Strong technology improvement and
R&D capabilities. Our technology improvement and R&D
infrastructure includes a team of more than 30 professionals focusing on quality
assurance, equipment maintenance, process maintenance and improvement, and new
product and process R&D. We absorb most of the technology related expenses
in our production costs, and thus have only incurred R&D costs at very low
levels in past years. However, we believe our overall technology-related
spending is greater than many of our China-based competitors. We were granted
one utility model patent and have three pending invention patents relating to
our production process. We believe our knowledge and experience in R&D are
the key reason why we were able to become one of the earliest and leading CCA
manufacturers in China and enabled us the ability to expedite the launch of our
refined superfine copper wire production. In addition, our newly launched scrap
copper refinery operation utilizes a proprietary cleaning solution to cleanse
and refine recycled scrap copper to high purity copper rod product which meets
the national industry standard for pure copper. As a result, we have
been able to take advantage of the emerging market opportunity given the copper
price volatility in recent years.
7
Experienced management and
operations teams with local market knowledge. Our senior
management team and key operating personnel have extensive management skills,
relevant operating experience and industry knowledge. Mr. Zhu, our founder,
Chairman and CEO, has extensive experience managing and operating companies in
the cable and wire industry. We believe our management team’s in-depth knowledge
of the Chinese market will enable us to formulate sound expansion strategies and
to take advantage of market opportunities.
Our
Strategies
We will
continue to strive to be a leading supplier of copper replacement products in
the PRC cable and wire industry, while maximizing shareholder value and pursuing
a growth strategy that includes:
Developing market driven new
products and processes. We consistently pursue technological
improvements to our manufacturing processes and new product development through
our strong in-house technology development team. Our R&D efforts have
generated technological improvements that have been instrumental in controlling
our production costs and increasing our operational efficiency. Our combination
of trade secrets and proprietary production technology enables us to use
lower-cost feedstock and to attain higher product quality. Through innovation
and further production efficiencies, we believe our emphasis on R&D will
enable us to maintain our position as a leading copper replacement product
supplier in the PRC cable and wire industry.
Reliable supplier network for low
cost raw materials. We maintain a long-term supply
relationship with several key suppliers. We believe many of our suppliers prefer
to sell raw materials to us due to our track record for prompt payment as well
as our ability to accept large quantities of raw materials. Our long-standing
supplier relationships provide us with a competitive advantage in China, and we
intend to broaden these relationships to parallel our efforts to increase the
scale of our production facilities, thereby maintaining a diverse supplier
network while leveraging our purchasing power to obtain favorable price and
delivery terms. With the launch of the scrap copper refinery business, we have
also established a scrap copper warehouse in one of the largest scrap metal
markets in China.
Production capacity
expansion. In order to accommodate the rapidly increasing
demand of our products, we have expanded, and plan to continue to expand, our
manufacturing capacity. An increase in capacity has a significant effect on our
results of operations, both in allowing us to produce and sell more products and
achieve higher revenues, and in lowering our manufacturing costs resulting from
economies of scale. We have expanded rapidly since we launched our CCA wire
production in 2006. The following table sets forth information on the historical
development of our production facilities:
Plant
1
|
Plant
2
|
||
Location
|
Danyang,
Jiangsu
|
Danyang,
Jiangsu
|
|
Began
construction
|
March
1999
|
March
2008
|
|
Began
production
|
January
2006
|
March
2009
|
|
Capacity
as of December, 2009 (metric tons per year)
|
CCA
wire-7,500
|
Copper
refinery-25,000
|
|
Copper
wire-18,000
|
|||
Site
area (square meters)
|
11,000
|
66,000
|
We
believe our expansion strategy will enable us to benefit from continued growth
in overall copper demand in China. The following sets out our future plan to
ramp up our annual manufacturing capacity:
By
the end of
|
||||||||||||
2009
|
2010
|
2011
|
||||||||||
Copper
wire (MT)
|
18,000 | 25,000 | 50,000 | |||||||||
CCA
wire (MT)
|
7,500 | 10,000 | 15,000 | |||||||||
Copper
refinery (MT)
|
25,000 | 25,000 | 100,000 |
8
Selectively pursue acquisition
opportunities. Although we have not identified a potential
acquisition target(s), we may in the future look to acquire businesses or assets
that may enhance our market position.
Strengthening our relationships with
key customers and diversifying our customer base. We intend to
strengthen our existing relationships with key customers while further expanding
our customer base. We plan to continue providing high-quality and
cost-competitive products to our existing customers and use our existing
customer network and strong industry reputation to expand geographically to
strategic locations across China. We plan to increase our sales service
personnel to further expand our supplier and customer base and to provide
increased coverage of the market. To assist our efforts, we intend to continue
to use customer feedback to improve our service quality and strengthen our
long-term customer base.
Manufacturing
Process
Copper
recycling and wire processing
Our
copper recycling pre-treatment phase utilizes our proprietary cleaning
technology with respect to which we have applied for an invention patent. The
process involves manually or mechanically sorting, stripping, shredding and
magnetically separating the scrap copper. The scrap copper is then compacted and
pre-treated with numerous chemicals. Following the pre-treatment phase, the
metal is smelted and fire refined in a furnace. The furnace refining process
commences with loading the furnace with the pre-treated metal, smelting it, and
then refining and reducing it. Thereafter, the molten copper is continually belt
cast and further treated, and the copper rod is ultimately wound into bundles
for further processing or sale.
Our fine
and superfine wire drawing process utilizes either our recycled copper rod or
CCA and involves drawing the wire to the desired final diameter. Whether using
recycled copper rod or CCA, the drawing process entails multiple steps,
including heat treating, annealing, baking, cooling, quenching and spooling, as
may be necessary to achieve the desired wire diameter and other customer
specifications. The CCA drawing process, however, is more complex than the
process for using recycled copper rod, and utilizes our proprietary trade
secrets to ensure that the wire maintains the original bimetallic bond from the
raw material. The fine or superfine wire is either sold to customers or is
coated and further processed to become magnet wire.
The
following illustration is a simplified outline of our process:
9
Products
Copper
Clad Aluminum (CCA)
CCA is an
electrical conductor consisting of an outer sleeve of copper that is
metallurgically bonded to a solid aluminum core. This structure is set out in
the following CCA illustration:
Note: The
illustration is not drawn to scale.
Over the
past five years, CCA has become a viable and popular alternative to pure copper
wire. In comparison with solid copper wire, CCA raw material costs are generally
35% to 40% lower per ton. CCA and pure copper raw materials are purchased based
on weight. Since aluminum accounts for approximately eighty six percent (86%) by
volume of CCA wire, each ton of CCA wire can yield 2.5 times the length of each
ton of solid copper wire. Our CCA products are a cost effective substitute for
pure copper wire in a wide variety of applications such as wire and cable,
consumer electronic products, white goods, automotive parts, utility
applications, telecommunications, and specialty cables.
We
produce CCA wire with the line diameter in the range of 0.03 mm to 0.18 mm. We
produce and distribute wire in the following forms:
|
·
|
Fine
wire. Fine wire is sold to smaller wire manufacturers
for further processing; and
|
|
·
|
Magnet
wire. Magnet wire can be fine or super fine and is the
basic building block of a wide range of motorized appliances and is mainly
used for its electrical
conductivity.
|
|
·
|
Tin plated
wire. Tin plated wire is mainly used for the
transmission of audio and visual
signals.
|
10
We
produce in accordance with customer orders and we customize our products based
on customer specifications. Customer specifications vary depending on the end
use of the CCA wire, but are primarily determined based upon two measurements,
the thickness of the copper layer on the aluminum core and the diameter of the
CCA wire.
Copper
Rod
In March
2009, we launched the manufacturing of copper rod from our newly acquired
continuous production system for fire refining, melting and rod casting. We use
scrap copper as the raw material to manufacture and sell copper rods. In
addition, we produce cable and copper magnet wire from copper rods.
The
following table has set out the end uses of copper rod based wire
products:
Cable
|
·
|
Used
for:
|
|
·
|
telephone
drop wire and conductors;
|
|
·
|
electric
utilities; transmission lines, grid wire, fence and structured
grounds;
|
|
·
|
industrial
drop wire, magnet wire, battery cables, automotive wiring harnesses;
and
|
|
·
|
electronics:
radio frequency shielding
|
Magnet
wire
|
·
|
Used
in:
|
|
·
|
electronic
motors, transformers, water pumps, automobile meters, energy, industrial,
commercial, and residential
industries.
|
Quality
Control
We apply
rigorous quality control standards and have implemented safety procedures at all
phases of our production process. Since January 2007, our plant has maintained
ISO9001:2000, a certification of quality management systems maintained by the
International Organization of Standardization and administered by certification
and accreditation bodies.
Quality
assurance efforts have been made on various lines of products in the following
ways:
|
·
|
Copper magnet
wire. We strictly follow the mandatory national product
standard in China, and obtained National Industrial Production License for
copper magnet wire in January 2009 and satisfied UL standards in October
2008.
|
|
·
|
Scrap copper
refinery. According to a test report dated April 17,
2008 of China’s Machinery Industry Quality Supervision and Test Center For
Electrical Material and Special Wire and Cable, a government inspection
and testing agency, our copper rods satisfied the national standard for
electrical copper wire,
GB/T3952-1998.
|
|
·
|
CCA wire. We
strictly follow the industry recommended
standards.
|
We
believe the testing results we have obtained demonstrate our commitment to
producing high-quality products and provide us with a competitive advantage over
certain domestic competitors in the event China implements stricter quality
standards in the future.
11
Raw
Materials and Suppliers
We
primarily use CCA wire with a line diameter of 2.05 mm, produced by our
bimetallic wire suppliers, to manufacture superfine CCA wire. Our raw material
procurement policy is to use only long-term suppliers who have demonstrated
quality control, reliability and maintain multiple supply sources so that supply
problems with any one supplier will not materially disrupt our operations. In
order to avoid copper price volatility exposure, we do not maintain raw material
inventory. We confirm raw material purchase orders with suppliers only when the
relevant sales orders are received. On the other hand, our principal suppliers
usually dedicate portions of their inventories as reserves to meet our
manufacturing requirements. Suppliers are generally paid with a credit term of
30 days.
For our
scrap copper refinery, we primarily use No. 2 scrap copper in our production of
two types of recycled copper: cable and magnet wire. We purchase the materials
through dealers and the scrap metal market. We have recently established a scrap
copper raw material warehouse in one of China’s largest scrap metal markets.
Scrap copper is generally purchased with cash on delivery terms. We believe that
we will have access to an adequate supply of scrap copper on satisfactory
commercial terms due to the numerous scrap dealers located throughout Guangdong
Province in the PRC.
For each
of the fiscal years ended December 31, 2007, 2008 and 2009 our five largest
suppliers accounted for 100%, 100% and 74% of our total purchases, respectively,
and our single largest supplier accounted for 26.8%, 46.5% and 20.3% of our
total purchases, respectively. We believe that we will have access to
and an adequate supply of raw material on satisfactory commercial terms. In
2009, our top five suppliers are as following:
|
·
|
Qingyuan
Zhongbian Metal Co., Ltd.
|
|
·
|
Shanghai
Jingsheng Metal Co., Ltd.
|
|
·
|
Guangfeng
Recycling Metal Co., Ltd.
|
|
·
|
Hailiang
Metal Trading Co., Ltd.
|
|
·
|
Nanhai
Zhengjing Metal Co., Ltd.
|
Sales,
Marketing and Distribution
Chinese
domestic market sales account for a majority of our revenue. We target our sales
efforts primarily in the coastal provinces of Guangdong, Fujian, Zhejiang,
Jiangsu and Shanghai areas, where the majority of our customers are located. We
have a sales staff of approximately 30 employees. We maintain 9 sales offices in
China, including 3 in Guangdong, 3 in Zhejiang, 1 in Fujian, 1 in Shandong, and
1 in Anhui. We participate in industry expositions in which we showcase our
products and services and from which we obtain new customers.
We have a
small fleet of trucks that deliver merchandise to customers located within three
hours from our production facilities. Alternatively, we contract with
independent third-party trucking companies to deliver our products when
necessary.
Customers
We sell
our products in China either directly to manufacturers or through distributors
in the wire and cable industries and manufacturers in the consumer electronics,
white goods, automotive, utility, telecommunications and specialty cable
industries. For 2007, 2008 and 2009, we did not have any single customer which
accounted for over 10% of our total revenue.
For the
year ended December 31, 2007, 2008 and 2009, our five largest customers
accounted for 14.5%, 20.2% and 6.9% of our total sales, respectively, and the
single largest customer accounted for 3.0%, 6.6% and 1.6% of our total sales,
respectively. We generally extend unsecured credit for 30 days to large or
established customers with good credit history. Management reviews its accounts
receivable on a regular basis to determine if the allowance for doubtful
accounts is adequate at each quarter-end.
12
Competition
China is
the world’s largest producer and market for cable and wire. Our sales are
predominantly in the PRC, and as a result, our primary competitors are PRC
domestic companies. To a lesser degree we face competition from international
companies.
We
believe being located in China provides us with a number of competitive factors
within our industry, such as:
|
·
|
Pricing. A
producer’s flexibility to control pricing of products and the ability to
use economies of scale to secure competitive pricing
advantages;
|
|
·
|
Technology. A
producer’s ability to manufacture products efficiently, utilize low-cost
raw materials, and to achieve better production quality;
and
|
|
·
|
Barriers to
entry. A producer’s technical knowledge, access to
capital, local market knowledge and established relationships with
suppliers and customers to support the development of commercially viable
production facilities.
|
Competition
in the bimetallic industry, particularly in China, can be characterized by rapid
growth and a concentration of manufacturers. We believe we differentiate
ourselves by being an early mover in the industry, and by offering superior
product quality, timely delivery and better value. We believe we have the
following advantages over our competitors:
|
·
|
the
performance and cost effectiveness of our
products;
|
|
·
|
our
ability to manufacture and deliver products in required volumes, on a
timely basis, and at competitive
prices;
|
|
·
|
superior
quality and reliability of our
products;
|
|
·
|
our
after-sale support capabilities, from both an engineering and an
operational perspective;
|
|
·
|
excellence
and flexibility in operations;
|
|
·
|
effectiveness
of customer service and our ability to send experienced operators and
engineers as well as a seasoned sales force to assist our customers;
and
|
|
·
|
overall
management capability.
|
Research
and Development
Our
superfine wire manufacturing technology was developed and refined in-house by
our technology improvement and R&D team. This team comprises over 30
professionals focusing on quality assurance, equipment maintenance, process
maintenance and improvement, and new product and process R&D.
We absorb
most of the development technology related expenses in our production costs, and
thus have only reported R&D costs at very low levels in the past years. For
each the fiscal years ended December 31, 2007, 2008 and 2009, we reported
R&D costs of $56,143, $60,041 and $141,258. However, we believe our overall
technology development related spending is greater than many of our China-based
competitors.
We
believe our commitment to, and knowledge and experience in, R&D are the key
reasons why we were one of the earliest and leading CCA wire manufacturers. This
expertise has enabled us to expedite the launch and expansion of our superfine
copper wire production. Therefore, we were able to take advantage of the market
opportunity that emerged as a result of the recent copper price
volatility.
We plan
to continue our R&D efforts, to maintain and strengthen our leading position
in China, and to expand into new products and markets. We are currently
developing a super-micro-fine CCA wire with line diameter below 0.025 mm, which
is used for cell phones, micro-electronic motors, micro-transformers, relays and
audiophones. We are in the process of conducting laboratory testing on these
products.
13
On
December 18, 2006, Lihua Electron entered into a long term technology
cooperation agreement (the “Long Term Technology Cooperation Agreement”) with
China Jiangsu University whereby Jiangsu University and Lihua Electron agreed to
enter into future technology project agreements and establish a “Co-Lab Center
of Jiangsu University-Danyang Lihua Electron Co. Ltd.”, which is the Research
Centre and Training Centre for Jiangsu University’s students. The Long Term
Technology Cooperation Agreement commenced on January 1, 2007 and terminates on
December 31, 2011. In connection with the Long Term Technology Cooperation
Agreement, on February 1, 2008, we entered into a technology project agreement
with China Jiangsu University for research on copper plating aluminum. Under
this agreement, we will pay all research expenses. As of the date hereof, we
have not made any such payments. Jiangsu University has agreed to develop the
technology, however, the agreement specifies that any intellectual property that
arises from the research will belong to both parties.
Intellectual
Property
Our
manufacturing processes are based on technology substantially developed in-house
by our R&D and engineering personnel. We rely on a combination of patent,
trade mark, domain names and confidentiality agreements to protect our
intellectual property. We require all members of our senior management and our
key R&D personnel to sign agreements with us which stipulate, among other
things, confidentiality obligations and restrictions on the assignment of
intellectual property.
We were
granted a utility model patent (patent no.: ZL 2008 2 0034139.8) by the State
Intellectual Property Office of the PRC for our “Oxygen-free copper rod pressure
cut off device,” effective as of April 16, 2008. The term of this patent is 10
years from the effective date. We have no foreign patents. We currently have the
following three invention patent applications in China pending:
Name
of IP right
|
Application
Number
|
Company
|
Date
of Application
|
Status
of Application
|
||||
1.
The production process for copper clad aluminum magnet
wire
|
200710131529.7
|
Lihua
Electron
|
September
4, 2007
|
Patent
pending
|
||||
2.
Production technology of copper clad magnesium aluminum
wire
|
200810023487.X
|
Lihua
Electron
|
April
16, 2008
|
Patent
pending
|
||||
3.
A copper cleaning solution
|
200810023488.4
|
Lihua
Copper
|
April
16, 2008
|
Patent
pending
|
|
·
|
We
are currently using the trademark “Lihua” for all our
products. We have applied to register the trademarks “Mei
Lihua” in China
|
|
·
|
We
are not aware of any material infringement of our intellectual property
rights.
|
Insurance
We
maintain various insurance policies to safeguard against risks and unexpected
events. In protecting against work-related casualties and injuries, we purchase
accidental injury insurance policies for our employees. In addition, we provide
social security insurance including pension insurance, unemployment insurance,
work related injury insurance and medical insurance for our employees. We also
maintain insurance for our plants, machinery, equipment, inventories and motor
vehicles. We do not have product liability insurance for our products. All of
our products have met the relevant regulatory requirements under PRC laws and we
have not been subject to any material fines or legal action involving product
non-compliance.
Our
Employees
As of
December 31, 2009, we had approximately 308
employees, all of whom except one are located in the PRC. Of our
employees, approximately 68%
work in manufacturing. The remainder of employees includes engineers, sales and
administrative personnel. As a matter of Company policy, we seek to maintain
good relations with our employees at all locations. We believe our relationship
with our employees is good.
Industry
and Market Overview
Cable
and Wire Market
According
to International Cablemakers’ Federation, China is the world’s largest cable
& wire producer. The following chart illustrates China’s historical industry
leading position in global and wire production from
2003 – 2007:
14
Source:
International Cablemakers’ Federation, 2009
Magnet
Wire Market
Magnet
wire represents a sub-category in the cable and wire industry. Magnet wire is an
insulated copper or aluminum electrical conductor used in motors, transformers
and other electromagnetic equipment. When wound into a coil and energized,
magnet wire creates an electromagnetic field. This effect can be used for a
variety of purposes, such as energy generation and transformation, which has
made magnet wire a basic building block of motorized appliances, automobiles,
industrial machinery, residential and commercial heating, ventilating, air
conditioning and refrigeration (HVACR) systems, computers, telephones, cell
phones, and televisions.
According
to a publicly available report by Gobi International, a provider of statistical
market research reports and forecasts on insulated wire and cable, in 2006
global consumption of magnet wire was more that $10 billion. The report also
indicated that China has the largest demand for magnet wire in the world, and
forecasted demand is expected to grow by 38.3% from 2007 to 2012, the highest
among all major economies.
The
growth in China’s magnet wire market has significantly outpaced the global
market since 2000. According to Beijing Kaiboxin Enterprise Consulting Company
Ltd (“Kaiboxin”), a China based provider of industry research reports and
forecasts, from 2000 to 2005, the global demand for magnet wire increased at a
CAGR of 3%, while that of China increased at 17% during the same period. In 2005
China accounted for approximately 29% of the worldwide market, and it is
expected to account for 48% of the global market share in 2015.
The
following charts indicate the historical and projected growth of the Chinese
magnet wire market. As evidenced in the charts, the information technology
sector is projected to experience the largest percentage growth through 2015. On
a historical basis, in 2005, the electric motor sector represented the largest
sub-sector with 53% of the overall market.
China’s Magnet Wire
Market
Projected
Growth by Sector
|
2005
Share of Total Demand
|
|
Source:
Kaiboxin, 2007
15
Copper
Copper
ranks third in the world consumption of metals after iron and aluminum. Copper’s
chemical, physical and aesthetic properties make it attractive for many
applications including electronics and communications, construction,
transportation, and industrial equipment. The chief commercial use of copper is
based on its electrical conductivity which is second only to that of silver
among all metals. About three quarters of total consumption is accounted for by
electrical uses, including power transmission and generation, building wiring,
telecommunication, and electrical and electronic products.
According
to International Copper Study Group (“ICSG”), world refined copper consumption
grew from 14.9 million metric tons (“Mt”) in 2001 to 18.5 million Mt in 2007, a
CAGR of 3.7%, as indicated by the following chart:
16
World Copper
Consumption
(Metric
Tons)
Source:
Copper Development Association Inc., 2008
However,
ICSG projected copper consumption to be 18.25 million Mt in 2008 and 18.9
million Mt in 2009, with production projected be 18.4 Mt in 2008 and 19.2 Mt in
2009. This resulted in a supply surplus in 2008 of 109,000 Mt, and the surplus
is projected to increase to 277,000 Mt in 2009.
The
following chart indicates the major global refined copper consuming nations in
the world in 2006, as determined by ICSG. China ranked the largest in the world
with a market share of 22%:
Major Copper Consuming
Nations, 2006
Source:
Copper Development Association Inc., 2008
According
to ICSG, in 2006, China consumed 627,000 more tons of refined copper than it
produced from primary sources. The shortfall in production was satisfied through
recycling of scrap copper as well as copper imports, which are more expensive
due to freight costs. We believe that the continued urbanization of China should
continue to drive strong copper consumption within China in the
future.
17
The
dynamics of constrained supply and growing Chinese demand, as well as the
resulting price surge, has contributed to the continued search for cost
effective alternatives to pure copper. Manufacturers in the cable and wire
industry have begun pursuing and adopting alternative technologies, including
the use of scrap copper and cheaper metal aluminum.
Scrap
Copper
The
secondary copper recovery process is comprised of pyro-metallurgical processes,
which are generally technologically mature. This recovery process is divided
into four separate operations: scrap pre-treatment, smelting, alloying, and
casting. Pre-treatment includes the cleaning and consolidation of scrap in
preparation for smelting. Smelting consists of heating and treating the scrap
for separation and purification of specific metals. Alloying involves the
addition of other metals to copper to obtain desirable qualities characteristic
of the combination of metals. In the casting process, the molten metal is poured
into molds for being turned into different shapes.
According
to ICSG, secondary refined copper accounted for approximately 15.2% of refined
copper production in 2007. A price spread between refined copper and scrap
copper, reflecting the profit for the recycling process, fluctuates in relation
to the movement of copper prices, as well as scrap consumption. The following
charts illustrate that the price spread increased steadily together with the
copper price and worldwide secondary refined production during 2004 to
2007:
Copper
Price vs. Price Spread
|
||
between
Copper and Scrap
|
Worldwide
Secondary Refined Production
|
|
Source:
LME, ICSG
|
Source:
ICSG
|
China is
a net importer of copper and has deficient copper reserves. In recent years,
China has significantly grown its refining capacity. To meet increased demand,
China has been importing raw materials including scrap copper to fill the gap.
According to China Metals Information Network, China’s importation of scrap
copper increased significantly to 5.58 million Mt in 2007 from 2.5 million Mt in
2000. China’s government has also established industrial policies to encourage
the use of scrap copper. In 2007 the import duty on scrap copper in China,
historically 1.5%, was removed. In China’s 11th Five-Year
(2006 – 2010) Plan it encouraged the greater use of scrap metals to
help alleviate a shortfall in supplies and set the target consumption of
secondary copper at 35% of total national copper consumption.
Copper
Clad Aluminum (“CCA”) Wire
CCA
bimetallic materials are an ideal substitute for pure copper, a major raw
material component of magnet wire, and a prime alternative to satisfy China’s
demand. Bimetallic materials have been in existence for decades, but until
recently they have only been selectively adopted due to higher production costs
and historically low copper prices. However, as the price of copper increased in
recent years, companies have started to use CCA bimetallic materials as an
alternative.
18
CCA wire
is the wire composed of an inner aluminum core and outer copper cladding. CCA
wire has a significant cost advantage over copper because its main constituent,
aluminum is a cheaper metal. In addition to the cost advantages, the properties
of CCA wire include:
|
·
|
Lighter
than pure copper wire;
|
|
·
|
Higher
conductivity and strength than pure aluminum wire;
and
|
|
·
|
Better
solderability than aluminum, due to the lack of an oxide layer which
prevents solder adhesion when soldering bare
aluminum.
|
However,
CCA wire has a high fabrication cost, as the cladding process is more complex
than conventional wire-drawing. As a result, developed economies have not widely
used CCA.
As a
result of the changes in the market conditions in recent years, Chinese
companies perceived a potential market opportunity and installed capacity for
production of CCA wire. This has in turn resulted in improvements in the
production process and made increased production volumes of CCA wire available
from China. As a result of the increased production capacity, China has become
leading global supplier in CCA market.
Our
Corporate History and Background
From the
date of our incorporation until October 31, 2008, we were a “blank check”
company with nominal assets. We were originally incorporated in the State of
Delaware on January 24, 2006 under the name of Plastron Acquisition Corp. for
the purpose of raising capital to be used to merge, acquire, or enter into a
business combination with an operating business.
Ally
Profit was incorporated in the British Virgin Islands on March 12, 2008 under
the Business Companies Act, 2004. In June 2008, Ally Profit became the parent
holding company of a group of companies comprised of Lihua Holdings, a company
organized under the laws of Hong Kong and incorporated on April 17, 2008, which
is the 100% shareholder of each of Lihua Electron and Lihua Copper, each a
limited liability company organized under the existing laws of the Peoples
Republic of China. Lihua Electron and Lihua Copper were incorporated on December
30, 1999 and August 31, 2007, respectively. We changed our name from Plastron
Acquisition Corp. to Lihua International, Inc. on September 22,
2008.
On
September 4, 2009, the Company’s common stock began trading on the NASDAQ
Capital Market under the symbol LIWA.
As of
March 1, 2010, details of the subsidiaries of the Company are as
follows:
Subsidiaries’ names
|
Domicile and date of
incorporation
|
Paid-up
capital
|
Effective
ownership
|
Principal activities
|
|||||
Ally
Profit Investments Limited (“Ally
Profit”)
|
British
Virgin Islands March 12, 2008
|
|
$100
|
100
|
% |
Holding
company of other subsidiaries
|
|||
Lihua
Holdings Limited (“Lihua
Holdings”)
|
Hong
Kong
April 17, 2008
|
HK$100
|
100
|
% |
Holding
company of other subsidiaries
|
||||
Danyang
Lihua Electron Co., Ltd. (“Lihua
Electron”)
|
People’s
Republic of China (“PRC”)
December 30, 1999
|
$8,200,000
|
100
|
% |
Manufacturing
and sales of bimetallic composite conductor wire such as copper clad
aluminum (CCA) wire and enameled CCA wire.
|
||||
Jiangsu
Lihua Copper Industry Co., Ltd. (“Lihua
Copper”)
|
PRC
August 31, 2007
|
$15,000,000
|
100
|
% |
Manufacturing
and sales of refined copper.
|
19
Government
Regulation
Overview
Manufacturing
Our
manufacturing operations are subject to numerous laws, regulations, rules and
specifications relating to human health and safety and the environment. These
laws and regulations address and regulate, among other matters, wastewater
discharge, air quality and the generation, handling, storage, treatment,
disposal and transportation of solid and hazardous wastes and releases of
hazardous substances into the environment. We are in compliance with all
material respects of such laws, regulations, rules, specifications and have
obtained all material permits, approvals and registrations relating to human
health and safety and the environment. In addition, third parties and
governmental agencies in some cases have the power under such laws and
regulations to require remediation of environmental conditions and, in the case
of governmental agencies, to impose fines and penalties. We make capital
expenditures from time to time to stay in compliance with applicable laws and
regulations.
Environmental
Matters
Given the
nature of our business, we generate waste water, exhaust fumes and noise during
our production process. We have implemented a comprehensive set of environmental
protection measures to treat emissions generated during our production process
to minimize the impact of our production process on the environment. These
measures include the following:
|
·
|
Waste
water. Waste water processed by our facilities meets the
Chinese standard for discharge. To conserve water resources, we also
recycle and reuse waste water generated during our production process,
which decreases our consumption of water and reduces the discharge of
waste water into the environment;
|
|
·
|
Exhaust
fumes. We generate exhaust fumes during our production
process. Exhaust fumes generated during our production process are
filtered to reduce dust, sulfur dioxide, total suspended particulate,
nitrogen oxide and organic elements. In each case, exhaust fumes are
treated to comply with national air quality standards;
and
|
|
·
|
Noise. We
generate noise through the operation of our heating, ventilation and
pumping systems. We typically reduce the noise generated by these
activities to a range of 60 decibels to 80 decibels by employing various
noise reduction measures that comply with applicable
law.
|
M&A
Rules
On August
8, 2006, six PRC regulatory agencies, namely, the PRC Ministry of Commerce, or
MOFCOM, the State Assets Supervision and Administration Commission, or SASAC,
the State Administration for Taxation, the State Administration for Industry and
Commerce, the China Securities Regulatory Commission, or CSRC, and SAFE jointly
adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by
Foreign Investors, or the M&A Rule, which became effective on September 8,
2006. According to Rule 55 of the M&A rules and Guidance Manual on
Administration of Entry of Foreign Investment issued by the Department of
Foreign Investment Administration of the Ministry of Commerce in December 2008,
conversion of a joint venture to a wholly foreign owned enterprise by way of
equity transfer from a Chinese party to a foreign party, shall not be subject to
the M&A rules, and the M&A rules are only applicable to acquisitions of
a domestic enterprise or its assets by a foreigner.
20
We have
been advised by our PRC counsel that the M&A Rule did not apply to the June
2008 restructuring or subsequent share exchange transaction. The restructuring
did not require CSRC approval because we were not a special purpose vehicle
formed or controlled by PRC Operating Companies or PRC individuals, we were
owned or substantively controlled by foreigners, and conversion of our operating
entities from a joint venture to a wholly foreign owned enterprise was not and
is not subject to the M&A rules.
The
M&A rules also require offshore companies formed for overseas listing
purposes through acquisitions of PRC domestic companies and controlled by PRC
Operating Companies or individuals to obtain the approval of the CSRC prior to
the public listing of their securities on an overseas stock exchange. On
September 21, 2006, pursuant to the New M&A Rules and other PRC Laws, the
CSRC published on its official website relevant guidance with respect to the
listing and trading of PRC domestic enterprises’ securities on overseas stock
exchanges (“Related Clarifications”), including a list of application materials
regarding the listing on overseas stock exchanges by special purpose vehicles.
However, the CSRC currently has not issued any definitive rule concerning
whether the transactions effected by the overseas listing would be subject to
the New M&A Rules and Related Clarifications. Article 238 of the PRC
Securities Law also provides that any domestic enterprise that directly or
indirectly issues any securities abroad or lists its securities abroad for
trading shall be subject to the approval of the securities regulatory authority
under the State Council according to the relevant provisions of the State
Council.
The
M&A rules do not have express provisions in terms of penalties for failure
to obtain CSRC approval prior to the public listing of our securities. However,
there are substantial uncertainties regarding the interpretation, application
and enforcement of the above rules, and CSRC has yet to promulgate any written
provisions or formally to declare or state whether the overseas listing of a
PRC-related company similar to ours is be subject to the approval of CSRC. Any
violation of these rules could result in fines and other penalties on our
operations in China, restrictions or limitations on remitting dividends outside
of China, and other forms of sanctions that may cause a material and adverse
effect to our business, operations and financial conditions.
Foreign Investment in PRC
Operating Companies
The
Foreign Investment Industrial Catalogue jointly issued by MOFCOM and the
National Development and Reform Commission (“NDRC”) in 2007 classified various
industries/business into three different categories: (i) encouraged for foreign
investment; (ii) restricted to foreign investment; and (iii) prohibited from
foreign investment. For any industry/business not covered by any of these three
categories, they will be deemed industries/business permitted to have foreign
investment. Except for those expressly provided restrictions, encouraged and
permitted industries/business are usually 100% open to foreign investment and
ownership. With regard to those industries/business restricted to or prohibited
from foreign investment, there is always a limitation on foreign investment and
ownership. The reason that our business is not subject to limitation on foreign
investment and ownership is as follows:
(i) our
business falls under the class of “manufacturing of materials for processing
beryllium copper straps, lines, pipes and rods”, which is open to 100% foreign
investment and ownership;
(ii) our
business does not fall under the industry categories that are restricted to, or
prohibited from foreign investment; and
(iii)
whether a business is subject to foreign investment restriction is subject to
interpretation by MOFCOM and/or the NDRC, restructuring of each of our operating
entities into a wholly foreign owned enterprise, each of which has been approved
by the local MOFCOM, can also directly evidence no limitation on foreign
investment and ownership to our business.
Share
Exchange
Restructuring
In June
2008, Magnify Wealth, a British Virgin Islands holding company, which was 100%
owned by Mr. Chu, developed the Restructuring. At that time, Magnify Wealth was
the parent company and sole shareholder of Ally Profit, which was the parent
company and sole shareholder of Lihua Holdings. The Restructuring was
accomplished in two steps. The first step was the PRC Subsidiary Acquisition.
After the PRC Subsidiary Acquisition, the second step was for Magnify Wealth to
enter into and complete a share exchange transaction with a US public reporting
company, whereby the US company would acquire Ally Profit, Lihua Holdings and
the PRC Operating Companies.
21
PRC Subsidiary
Acquisition
The PRC
Subsidiary Acquisition was structured to comply with PRC M&A Laws. Under PRC
M&A laws, the acquisition of PRC Operating Companies by foreign companies
that are controlled by PRC citizens who are affiliated with the PRC Operating
Companies, is strictly regulated and requires approval from MOFCOM. However,
such restrictions do not apply to foreign entities controlled by foreign
persons. These restrictions apply only at the time that PRC Operating Companies
are acquired by a foreign entity. In our case, this was July 10, 2008 when the
PRC Operating Companies were acquired by Lihua Holdings, which was ultimately
beneficially owned by Mr. Chu, a Hong Kong citizen, as the sole shareholder of
Magnify Wealth.
Lihua
Holdings acquired 100% of the equity interests in the PRC Operating Companies
from companies owned by our current CEO, Mr. Zhu, and the Minority Shareholders
of the PRC Operating Companies. In addition to being the sole shareholder of
Magnify Wealth, Mr. Chu was also a 45.46% owner of Lihua Electron, prior to the
consummation of the PRC Subsidiary Acquisition. The aggregate consideration
payable by Lihua Holdings to the shareholders of Lihua Electron was $2,200,000,
and the aggregate consideration payable by Lihua Holdings to the shareholders of
Lihua Copper was $4,371,351.
The Share
Transfer Agreement enables Mr. Zhu to receive consideration for selling his
interest in the PRC Operating Companies to Lihua Holdings by allowing him to
earn back an indirect interest in the PRC Operating Companies without violating
PRC laws. At the time of the PRC Subsidiary Acquisition, Mr. Zhu did not have
any equity interest in Lihua Holdings. As a PRC citizen, Mr. Zhu would not have
been permitted to immediately receive shares in Lihua Holdings or in Magnify
Wealth in exchange for his interests in the PRC Operating Companies. Subject to
registering with SAFE prior to the exercise and issuance of the Option Shares
under the Share Transfer Agreement, which is an administrative task, there is no
prohibition under PRC laws for Mr. Zhu to earn an interest in Magnify Wealth
after the PRC Subsidiary Acquisition was consummated, in compliance with PRC
laws. Pursuant to the original terms of the Share Transfer Agreement, Mr. Chu
granted to Mr. Zhu the option to purchase all of the 3,000 ordinary shares of
Magnify Wealth then held by Mr. Chu at the nominal price of $1.00 per share. The
Option Shares would vest and become exercisable upon the PRC Operating Companies
attaining consolidated net income performance targets for fiscal 2008, 2009, and
2010 of $8 million (“2008 Target”), $11 million and $14 million respectively. If
each performance target is met, 25% of the Option Shares would vest and become
exercisable forty-five days after December 31, 2008, 25% of the Option Shares
would vest and become exercisable forty-five days after December 31, 2009 and
the remaining 50% of the Option Shares would vest and become exercisable forty
five days after December 31, 2010. However, on March 7, 2009, Mr. Zhu and Mr.
Chu entered into an amendment to the Share Transfer Agreement whereby alternate
conditions for the achievement of the performance targets were agreed. Under the
amended agreement as long as the audited consolidated net income of Lihua
Electron and Lihua Copper for fiscal 2008 was 10% or more higher than the 2008
Target (“Alternate Performance Target”) regardless of whether the performance
targets for 2009 and 2010 are met or not, the Option Shares would vest and
become exercisable. Mr. Zhu would then be able to exercise the Option Shares in
the same percentages and on the same dates as per the original agreement. Since
our consolidated net income for 2008 was $11,701,879, which achieved the
Alternate Performance Target, Mr. Zhu will be entitled to acquire all of the
Option Shares from Mr. Chu pursuant to the following exercise schedule: (i) 25%
of the Option Shares are exercisable 45 days after February 14, 2009; (ii) an
additional 25% of the Option Shares are exercisable on February 14, 2010; and
(iii) the remaining 50% of the Option Shares are exercisable on February 14,
2011. Therefore, as of February 14, 2011, 100% of the Option Shares will be
exercisable. As of February 14, 2010, Mr. Zhu was entitled to acquire 50% of the
Option Shares, which equals 1,500 shares.
22
Also on
October 22, 2008, the Minority Shareholders entered into subscription agreements
to purchase shares in Magnify Wealth at a nominal price of $1.00 per share.
Pursuant to these subscription agreements, Mr. Chu and Europe EDC will be issued
the shares of Magnify Wealth for which they subscribed in tranches on February
14, 2009, 2010 and 2011 of 25%, 25% and 50%, respectively, which are the same
dates the Option Shares are exercisable. The number of subscription shares
issuable to Mr. Chu and Europe EDC in the aggregate, are 632 shares and 32
shares, respectively, and was determined based on the proportion of capital
contributed by each of them in the PRC Operating Companies. As of February 14,
2010, Mr. Chu was issued 316 shares of Magnify Wealth and Europe EDC was issued
16 shares of Magnify Wealth, which equals 50% of the shares of Magnify Wealth
which have been issued as per the subscription agreements as of the date
herewith. The subscription agreements enable Mr. Chu, a Hong Kong citizen, and
Europe EDC, a Dutch company, to receive an interest in Magnify Wealth in
consideration for the sale of their respective interests in the PRC Operating
Companies to Lihua Holdings. Because Mr. Chu is a Hong Kong Citizen and Europe
EDC is a Dutch company, there is no prohibition or restriction under PRC laws
against non-PRC residents or citizens acquiring shares in Magnify Wealth in
consideration for the sale of their respective interests in the PRC Operating
Companies to Lihua Holdings.
Share
Exchange Agreement and Private Placement
On
October 31, 2008 the purpose of the Restructuring was realized when we entered
into and completed the Share Exchange Agreement with Magnify Wealth and our
principal stockholders, pursuant to which we acquired 100% of the ownership of
the Ally Profit Companies in exchange for the issuance of 14,025,000 shares of
our Common Stock to Magnify Wealth.
On
October 31, 2008, we also entered into and completed a securities purchase
agreement (“Purchase Agreement”) with certain accredited investors (the
“Investors”) for the issuance and sale by us in a private placement (“Private
Placement”) of 6,818,182 shares of Series A Convertible Preferred Stock
(“Preferred Stock”, or “Investor Shares”) and Series A Warrants to purchase
1,500,000 shares of Common Stock, for aggregate gross proceeds of approximately
$15,000,000. All outstanding shares of Preferred Stock have converted
into common stock, leaving no shares of Preferred Stock
outstanding.
Make
Good Escrow
We
entered into a make good escrow agreement with the Investors (the “Securities
Escrow Agreement”), pursuant to which Magnify Wealth initially placed 6,818,182
shares of Common Stock (equal to 100% of the number of shares of Common Stock
underlying the Investor Shares) (the “Escrow Shares”) into an escrow account to
be held as security for the achievement of certain net income and earnings per
share targets in 2008 and 2009. We targeted $12 million in net income and $0.50
earnings per share for the fiscal year 2008 (the “2008 Performance Threshold”).
For the year ended December 31, 2008, the Company’s net income was $11,701,879
which achieved 95% of the 2008 performance threshold. Because we achieved at
least 95% of the 2008 Performance Threshold the Escrow Shares are continuing to
be held in escrow pending the results of the 2009 Performance Threshold, which
is $18 million in audited net income and $0.76 earnings per share. If we achieve
the 2008 Performance Threshold and the 2009 Performance Threshold, the Escrow
Shares will be released back to Magnify Wealth. If any Investor
transfers Investor Shares purchased pursuant to the Purchase Agreement, the
rights to the Escrow Shares shall similarly transfer to such transferee, with no
further action required by the Investor, the transferee or us. With respect to
the 2008 and 2009 performance thresholds, net income is defined in accordance
with US GAAP and reported by us in our audited financial statements for each of
2008 and 2009, plus any amounts that may have been recorded as charges or
liabilities on the 2008 and 2009 audited financial statements, respectively, as
a result of (i) the Private Placement, including without limitation, as a result
of the issuance and/or conversion of the Investor Shares, (ii) the release of
the Escrow Shares to Magnify Wealth pursuant to the terms of the Escrow
Agreement, (iii) the issuance of ordinary shares held by the sole shareholder of
Magnify Wealth to Mr. Zhu upon the exercise of options granted to Mr. Zhu by
shareholder of Magnify Wealth, as of the date thereof. We have met
the 2008 and 2009 performance thresholds and the Escrow Shares will be released
back to Magnify Wealth.
ITEM 1A.
|
RISK
FACTORS
|
In
addition to the other information in this Form 10-K, readers should carefully
consider the following important factors. These factors, among others, in some
cases have affected, and in the future could affect, our financial condition and
results of operations and could cause our future results to differ materially
from those expressed or implied in any forward-looking statements that appear in
this on Form 10-K or that we have made or will make elsewhere.
23
Risks
Related to Our Business
Due
to increased volatility of raw material prices, the timing lag between the raw
material purchase and product pricing can negatively impact our
profitability.
Volatility
in the prices of raw materials, among other factors, may adversely impact our
ability to accurately forecast demand and may have a material adverse impact on
our results of operations. We mitigate the impact of changing raw material
prices by passing changes in prices to our customers by adjusting prices daily
to reflect changes in raw material prices, as is customary in the industry. We
may not be able to adjust our product prices rapidly enough in the short-term to
recover the costs of increases in raw materials. Our future profitability may be
adversely affected to the extent we are unable to pass on higher raw material
costs to our customers.
Key
employees are essential to growing our business.
Mr.
Jianhua Zhu, Ms. Yaying Wang and Mr. Roy Yu, along with Ms. Zhu Junying, Mr. Yin
Falong and Mr. Yu Niu are essential to our ability to continue to grow our
business. Each of these key employees have established relationships within the
industries in which we operate. Each of these employees have agreed to
non-solicitation and non-compete restrictions during the course of their
employment with us, however, these restrictions only extend for a one year
period from termination. Further, we do not maintain, or intend to maintain, key
person life insurance for any of our officers or key employees. If any of them
were to leave us, our growth strategy might be hindered, which could limit our
ability to increase revenue. In addition, we face competition for attracting
skilled personnel. If we fail to attract and retain qualified personnel to meet
current and future needs, this could slow our ability to grow our business,
which could result in a decrease in market share.
In
the past several years we have derived a significant portion of our revenues
from a small group of customers. If we were to become dependent again upon a few
customers, such dependency could negatively impact our business, operating
results and financial condition.
Previously,
our customer base has been highly concentrated. For the year ended December 31,
2009 and each of the fiscal years ended December 31, 2006, 2007 and 2008, our
five largest customers accounted for 6.9%, 22.5%, 14.5% and 20.2% of our total
sales, respectively, and the single largest customer accounted for 1.6%, 5.0%,
3.0% and 6.6% of our total sales, respectively. As our customer base may change
from year-to-year, during such years that the customer base is highly
concentrated, the loss of, or reduction of our sales to, any of such major
customers could have a material adverse effect on our business, operating
results and financial condition.
One
shareholder owns a large percentage of our outstanding stock and could
significantly influence the outcome of our corporate matters.
Currently,
Magnify Wealth beneficially owns approximately 55.3% of our outstanding Common
Stock. Mr. Zhu, our Chairman and CEO, is the sole director of Magnify Wealth. As
the sole director of Magnify Wealth, Mr. Zhu has the sole power to vote the
shares of our Common Stock owned by Magnify Wealth, and as a result, is able to
exercise significant influence over all matters that require us to obtain
shareholder approval, including the election of directors to our board and
approval of significant corporate transactions that we may consider, such as a
merger or other sale of our company or its assets. Additionally, pursuant to the
Share Transfer Agreement, Mr. Zhu has an option that vests over time, the
conditions of which have been met as of the date herewith, allowing Mr. Zhu to
purchase up to 3,000 shares of Magnify Wealth from Mr. Chu (the “Option
Shares”). At such time as Mr. Zhu exercises and acquires, all of the Option
Shares, he will own shares representing 81.9% of Magnify Wealth’s issued and
outstanding shares. As of March 23, 2010, Mr. Zhu was entitled to acquire 50% of
the Option Shares, which equals 1,500 shares. Once the Option Shares are
exercised, Mr. Zhu will then also have a controlling equity interest in Magnify
Wealth. This concentration of ownership in our shares by Magnify Wealth will
limit your ability to influence corporate matters and may have the effect of
delaying or preventing a third party from acquiring control over
us.
24
Risks
Associated With Doing Business In China
There are
substantial risks associated with doing business in China, as set forth in the
following risk factors.
The
application of PRC regulations relating to the overseas listing of PRC domestic
companies is uncertain, and we may be subject to penalties for failing to
request approval of the PRC authorities prior to listing our shares in the
U.S.
On August
8, 2006, six PRC government agencies, namely, MOFCOM, SAIC, CSRC, SAFE, the
State Assets Supervision and Administration Commission, and the State
Administration for Taxation, jointly issued the Regulations on Mergers and
Acquisitions of Domestic Enterprises by Foreign Investors (the “New M&A Rules”),
which became effective on September 8, 2006. The New M&A Rules purport,
among other things, to require offshore “special purpose vehicles”, that are (1)
formed for the purpose of overseas listing of the equity interests of PRC
companies via acquisition and (2) are controlled directly or indirectly by PRC
companies and/or PRC individuals, to obtain the approval of the CSRC prior to
the listing and trading of their securities on overseas stock exchanges. On
September 21, 2006, pursuant to the New M&A Rules and other PRC Laws, the
CSRC published on its official website relevant guidance with respect to the
listing and trading of PRC domestic enterprises’ securities on overseas stock
exchanges (the “Related
Clarifications”), including a list of application materials regarding the
listing on overseas stock exchange by special purpose vehicles. Based on our
understanding of current PRC Laws and as advised by our PRC counsel, because (i)
the CSRC currently has not issued any definitive rule or official interpretation
concerning whether our offering is subject to the New M&A Rules and Related
Clarifications; (ii) we were and are not a special purpose vehicle formed or
controlled by PRC individuals; and (iii) conversion of Lihua Electron and Lihua
Copper from a joint venture to a wholly foreign owned enterprise was and is not
subject to the New M&A Rules in accordance with Rule 55 of the New M&A
Rules and Guidance Manual on Administration of Entry of Foreign Investment
issued by the Department of Foreign Investment Administration of the MOFCOM in
December 2008, we were and are not required to obtain the approval of CSRC under
the New M&A Rules in connection with this offering.
However,
there are substantial uncertainties regarding the interpretation, application
and enforcement of these rules, and CSRC has yet to promulgate any written
provisions or formally to declare or state whether the overseas listing of a
PRC-related company structured similar to ours is subject to the approval of
CSRC. Any violation of these rules could result in fines and other penalties on
our operations in China, restrictions or limitations on remitting dividends
outside of China, and other forms of sanctions that may cause a material and
adverse effect to our business, operations and financial
conditions.
The new
mergers and acquisitions regulations also established additional procedures and
requirements that are expected to make merger and acquisition activities by
foreign investors more time-consuming and complex, including requirements in
some instances that the Ministry of Commerce be notified in advance of any
change-of-control transaction in which a foreign investor takes control of a PRC
domestic enterprise that owns well-known trademarks or China’s traditional
brands. We may grow our business in part by acquiring other businesses.
Complying with the requirements of the new mergers and acquisitions regulations
in completing this type of transactions could be time-consuming, and any
required approval processes, including CSRC approval, may delay or inhibit our
ability to complete such transactions, which could affect our ability to expand
our business or maintain our market share.
25
We
have granted stock options to one of our directors who is a PRC citizen and, our
CEO, Mr. Zhu, has options to purchase shares in our majority shareholder,
Magnify Wealth, which may require registration with SAFE. We may also face
regulatory uncertainties that could restrict our ability to issue equity
compensation to our directors and employees and other parties who are PRC
citizens or residents under PRC law.
On April
6, 2007, SAFE issued the “Operating Procedures for Administration of Domestic
Individuals Participating in the Employee Stock Ownership Plan or Stock Option
Plan of An Overseas Listed Company, also know as “Circular 78.” It is not clear
whether Circular 78 covers all forms of equity compensation plans or only those
which provide for the granting of stock options. Further, it is also not clear
whether Circular 78 would require SAFE approval for stock options in Magnify
Wealth that are granted to Mr. Zhu. For any equity compensation plan which is so
covered and is adopted by a non-PRC listed company after April 6, 2007, Circular
78 requires all participants who are PRC citizens to register with and obtain
approvals from SAFE prior to their participation in the plan. In addition,
Circular 78 also requires PRC citizens to register with SAFE and make the
necessary applications and filings if they participated in an overseas listed
company’s covered equity compensation plan prior to April 6, 2007. We have
adopted an equity compensation plan and have begun to make option grants to some
of our directors, one of which is a PRC citizen. Circular 78 may require PRC
citizens who receive option grants to register with SAFE. We believe that the
registration and approval requirements contemplated in Circular 78 will be
burdensome and time consuming. If it is determined that any of our equity
compensation plans, or the option grant from Magnify Wealth to Mr. Zhu are
subject to Circular 78, failure to comply with such provisions may subject us
and recipients of such options to fines and legal sanctions and prevent us from
being able to grant equity compensation to our PRC employees. In that case, our
ability to compensate our employees and directors through equity compensation
would be hindered and our business operations may be adversely
affected.
Because
our principal assets are located outside of the United States and with the
exception of one director, our directors and all our officers reside outside of
the United States, it may be difficult for you to enforce your rights based on
the United States Federal securities laws against us and our officers and
directors in the United States or to enforce judgments of United States courts
against us or them in the PRC.
With the
exception of one director, all of our officers and directors reside outside of
the United States. In addition, our operating subsidiaries are located in the
PRC and all of their assets are located outside of the United States. China does
not have a treaty with United States providing for the reciprocal recognition
and enforcement of judgments of courts. It may therefore be difficult for
investors in the United States to enforce their legal rights based on the civil
liability provisions of the United States Federal securities laws against us in
the courts of either the United States or the PRC and, even if civil judgments
are obtained in courts of the United States, to enforce such judgments in PRC
courts. Further, it is unclear if extradition treaties now in effect between the
United States and the PRC would permit effective enforcement against us or our
officers and directors of criminal penalties, under the United States Federal
securities laws or otherwise.
Because
we may not be able to obtain business insurance in the PRC, we may not be
protected from risks that are customarily covered by insurance in the United
States.
Business
insurance is not readily available in the PRC. To the extent that we suffer a
loss of a type which would normally be covered by insurance in the United
States, such as product liability and general liability insurance, we would
incur significant expenses in both defending any action and in paying any claims
that result from a settlement or judgment.
Risks
Related to our Securities
We
may need additional capital and may sell additional securities or other equity
securities or incur indebtedness, which could result in additional dilution to
our shareholders or increase our debt service obligations.
We may
require additional cash resources due to changed business conditions or other
future developments, including any investments or acquisitions we may decide to
pursue. If our cash resources are insufficient to satisfy our cash requirements,
we may seek to sell additional equity or debt securities or obtain a credit
facility. The sale of additional equity securities or equity-linked debt
securities could result in additional dilution to our shareholders. The
incurrence of indebtedness would result in increased debt service obligations
and could result in operating and financing covenants that would restrict our
operations. We cannot assure you that financing will be available in amounts or
on terms acceptable to us, if at all.
26
NASDAQ
may delist our securities from quotation on its exchange which could limit
investors’ ability to make transactions in our securities and subject us to
additional trading restrictions.
Our
Common Stock is traded on NASDAQ, a national securities exchange. We cannot
assure you that our securities will meet the continued listing requirements be
listed on NASDAQ in the future.
If NASDAQ
delists our Common Stock from trading on its exchange, we could face significant
material adverse consequences including:
·
|
a
limited availability of market quotations for our
securities;
|
·
|
a
determination that our Common Stock is a “penny stock” which will require
brokers trading in our Common Stock to adhere to more stringent rules and
possibly resulting in a reduced level of trading activity in the secondary
trading market for our Common
Stock;
|
·
|
a
limited amount of news and analyst coverage for our company;
and
|
·
|
a
decreased ability to issue additional securities or obtain additional
financing in the future.
|
If
our shares of Common Stock become subject to the SEC’s penny stock rules,
broker-dealers may experience difficulty in completing customer transactions and
trading activity in our securities may be adversely affected.
If at any
time we have net tangible assets of $5,000,000 or less and our shares of Common
Stock have a market price per share of less than $5.00, transactions in our
Common Stock may be subject to the “penny stock” rules promulgated under the
Securities Exchange Act of 1934. Under these rules, broker-dealers who recommend
such securities to persons other than institutional accredited investors
must:
·
|
make
a special written suitability determination for the
purchaser;
|
·
|
receive
the purchaser’s written agreement to the transaction prior to
sale;
|
·
|
provide
the purchaser with risk disclosure documents which identify certain risks
associated with investing in “penny stocks” and which describe the market
for these “penny stocks” as well as a purchaser’s legal remedies;
and
|
·
|
obtain
a signed and dated acknowledgment from the purchaser demonstrating that
the purchaser has actually received the required risk disclosure document
before a transaction in a “penny stock” can be
completed.
|
If our
Common Stock become subject to these rules, broker-dealers may find it difficult
to effectuate customer transactions and trading activity in our securities may
be adversely affected. As a result, the market price of our securities may be
depressed, and you may find it more difficult to sell our
securities.
ITEM
2.
|
PROPERTIES
|
Under the
current PRC law, land is owned by the state, and parcels of land in rural areas
which is known as collective land is owned by the rural collective economic
organization “Land use rights” are granted to an individual or entity after
payment of a land use right fee is made to the applicable state or rural
collective economic organization. Land use rights allow the holder the right to
use the land for a specified long-term period.
We occupy
our properties located in Danyang City, Jiangsu Province, PRC under land use
rights for purposes of production, R&D and employee living quarters. We have
land use rights, all expiring in 2058, for a total of approximately 77,000
square meters of land for all of our existing plants and plants under
construction.
On April
12, 2009, Lihua Copper entered into a lease agreement for a cargo yard located
at Liangdong Industrial Development Area, LiangQingTang, Dali, Guangdong
Province, Nanhai District in China. The lease is for a five year term, which
began on May 2, 2009 and terminates on May 1, 2014. From May 2, 2009 to May 1,
2012, the monthly rent is RMB 28,000 ($4,105), from May 2, 2012 to May 1, 2013,
the monthly rent is RMB 31,000 ($4,544), and from May 2, 2013 to May 1, 2014,
the monthly rent is RMB 33,000 ($4,837).
27
We
believe that our existing facilities and equipment are well maintained and in
good operating condition, and are sufficient to meet our needs for the
foreseeable future.
ITEM
3.
|
LEGAL
PROCEEDINGS
|
We may be
subject to legal proceedings, investigations and claims incidental to the
conduct of our business from time to time. We are not currently a party to any
litigation or other legal proceedings brought against us. We are also not aware
of any legal proceeding, investigation or claim, or other legal exposure that
has a more than remote possibility of having a material adverse effect on our
business, financial condition or results of operations.
PART
II
ITEM
4.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
Our
common stock has been quoted on the Nasdaq Capital Market (“Nasdaq”) under the
trading symbol “LIWA” since September 4, 2009. The closing price for our common
stock on Nasdaq on March 24, 2010, was $8.64 per share.
The
following table shows by each fiscal quarter and partial period, where
applicable, the range of high and low bid prices reported by Nasdaq, in each
fiscal quarter from September 4, 2009, the date of our initial public offering,
to March 24, 2010.
2010
|
High
|
Low
|
||||||
First
quarter – March 24
|
$
|
11.77
|
$
|
7.50
|
2009
September
4, 2009 – September 30, 2009
|
$
|
10.20
|
$
|
4.60
|
||||
Fourth
quarter
|
$
|
12.69
|
$
|
6.26
|
At March
24, 2010, there were 24,857,717 shares of our common stock outstanding. Our
shares of common stock are held by approximately 24 stockholders of record. The
number of record holders was determined from the records of our transfer agent
and does not include beneficial owners of common sock whose shares are held in
the names of various security brokers, dealers, and registered clearing
agencies.
Dividends
We have
never paid any dividends and we plan to retain earnings, if any, for use in the
development of the business. Payment of future dividends, if any, will be at the
discretion of the Board of Directors after taking into account various factors,
including current financial condition, operating results, current and
anticipated cash needs and regulations governing dividend distributions by
wholly foreign owned enterprises in China.
Recent
Sales of Unregistered Securities
None
Use of Proceeds from Registered
Offering
On
September 10, 2009, we consummated a public offering of 2,300,000 shares of
common stock at a public offering price of $4.00 per share and an over-allotment
of an additional 300,000 shares for gross proceeds of approximately $10,400,000
and net proceeds of $9,580,000, after deducting underwriting discounts and
offering commissions. There were no payments, direct or indirect,
made to any directors, officers, or their associates; to persons owning 10%
percent or more of any class of our equity securities of the issuer; or our
affiliates of the issuer, or direct or indirect payments to
others.
28
We
offered the shares sold in the offering pursuant to Registration Statements on
Forms S-1, as amended (Registration Statement Nos. 333-159705 and 333-161726)
filed with the Securities and Exchange Commission), which were declared
effective by the SEC on September 4, 2009. We used approximately $4
million of net proceeds from the offering for working capital and general
corporate purposes and approximately $3.9 of net proceeds to purchase additional
high speed fine wire drawing machines to process excess copper rod.
The
offering was underwritten by Broadband Capital Management LLC and Rodman &
Renshaw, LLC, who acted as joint book-running managers for the
offering.
Equity Compensation Plan
Information
See “Item 11. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters” for
disclosure regarding our Equity Compensation Plans.
ITEM
5.
|
SELECTED
FINANCIAL DATA
|
The
following selected consolidated statement of income data, and other consolidated
financial data for the years ended December 31, 2009 and 2008 and the
selected consolidated balance sheet data (other than U.S. dollar data) as of
December 31, 2009 and 2008 are derived from our audited consolidated
financial statements included elsewhere in the prospectus. Our consolidated
financial statements are prepared in accordance with U.S. GAAP. Our historical
results for any period are not necessarily indicative of results to be expected
for any future period. You should read the following selected financial
information in conjunction with the consolidated financial statements and
related notes and the information under “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” included elsewhere in this
prospectus.
29
Year Ended December 31,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
US$
|
%
of Sales
|
US$
|
%
of Sales
|
|||||||||||||
(in
thousands, except for percentages, pershare and operating
data)
|
||||||||||||||||
Consolidated
Statement of Income Data:
|
||||||||||||||||
Sales
|
||||||||||||||||
CCA
and Copper wire
|
109,398 | 67.7 | % | 50,006 | 100.0 | % | ||||||||||
Refined
Copper rod
|
52,146 | 32.3 | % | — | — | |||||||||||
Total
Sales
|
161,544 | 100.0 | % | 50,006 | 100.0 | % | ||||||||||
Cost
of sales
|
||||||||||||||||
CCA
and Copper wire
|
(78,081 | ) | -48.3 | % | (33,202 | ) | -66.4 | % | ||||||||
Refined
Copper rod
|
(47,230 | ) | -29.2 | % | — | — | ||||||||||
Total
cost of sales
|
(125,311 | ) | -77.6 | % | (33,202 | ) | -66.4 | % | ||||||||
Gross
profit
|
36,233 | 22.4 | % | 16,804 | 33.6 | % | ||||||||||
Selling
expenses
|
(1,722 | ) | -1.1 | % | (700 | ) | -1.4 | % | ||||||||
Admin
expenses
|
(3,992 | ) | -2.5 | % | (1,907 | ) | -3.8 | % | ||||||||
Income
from operations
|
30,519 | 18.9 | % | 14,197 | 28.4 | % | ||||||||||
Interest
income
|
174 | 0.1 | % | 68 | 0.1 | % | ||||||||||
Interest
expenses
|
(335 | ) | -0.2 | % | (515 | ) | -1.0 | % | ||||||||
Merger
cost
|
— | — | (259 | ) | -0.5 | % | ||||||||||
Change
in fair value of warrants
|
(8,831 | ) | -5.5 | % | ||||||||||||
Other
income (expenses)
|
501 | 0.3 | % | 4 | 0.01 | % | ||||||||||
Income
before tax
|
22,027 | 13.6 | % | 13,495 | 27.0 | % | ||||||||||
Income
tax
|
(5,248 | ) | -3.2 | % | (1,793 | ) | -3.6 | % | ||||||||
Net
income
|
16,779 | 10.4 | % | 11,702 | 23.4 | % | ||||||||||
Earnings
per share
|
||||||||||||||||
—Basic
|
0.94 | 0.75 | ||||||||||||||
—Diluted
|
0.88 | 0.70 | ||||||||||||||
Other
Consolidated Financial Data:
|
||||||||||||||||
Gross
profit margin(1)
|
22.4 | % | 33.6 | % | ||||||||||||
Operating
profit margin(1)
|
18.9 | % | 28.4 | % | ||||||||||||
Net
profit margin(1)
|
10.4 | % | 23.4 | % | ||||||||||||
Consolidated
Operating Data:
|
||||||||||||||||
Shipment
volume (ton)
|
||||||||||||||||
CCA
and Copper wire
|
15,353 | 5,966 | ||||||||||||||
Refined
Copper rod
|
9,630 | — | ||||||||||||||
Average
selling price ($ per ton)
|
||||||||||||||||
CCA
and Copper wire
|
7,126 | 8,382 | ||||||||||||||
Refined
Copper rod
|
5,595 | — | ||||||||||||||
Consolidated
Balance Sheet Data:
|
||||||||||||||||
Cash
and cash equivalents
|
34,615 | 26,042 | ||||||||||||||
Accounts
receivable
|
10,996 | 5,043 | ||||||||||||||
Inventories
|
17,534 | 587 | ||||||||||||||
Property,
plant and equipment
|
18,424 | 7,441 | ||||||||||||||
Total
assets
|
91,167 | 56,813 | ||||||||||||||
Secured
short-term bank loans
|
2,197 | 6,145 | ||||||||||||||
Total
liabilities
|
9,386 | 9,021 | ||||||||||||||
Total
shareholders’ equity
|
81,781 | 34,675 | ||||||||||||||
Total
liabilities and shareholders’ equity
|
91,167 | 56,813 |
ITEM
6.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The
following discussion of the financial condition and results of operation of the
Company for the fiscal years ended December 31, 2008 and 2009, should be read in
conjunction with the selected financial data, the financial statements and the
notes to those statements that are included elsewhere in this filing. Our
discussion includes forward-looking statements based upon current expectations
that involve risks and uncertainties, such as our plans, objectives,
expectations and intentions. Actual results and the timing of events could
differ materially from those anticipated in these forward-looking statements as
a result of a number of factors, including those set forth under the Risk
Factors, Cautionary Notice Regarding Forward-Looking Statements and Business
sections in this registration statement. We use terms such as “anticipate,”
“estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,”
“intend,” “may,” “will,” “should,” “could,” and similar expressions to identify
forward-looking statements.
30
OVERVIEW
We are
principally engaged in the production of copper replacement cable and wire
products which include CCA wire and pure copper wire produced from refined scrap
copper.
We
manufacture and sell three major types of copper replacement wire and cable
products: CCA wire, pure copper wire and pure copper rod. The pure
copper wire and pure copper rod products are produced from refined scrap copper
utilizing our proprietary scrap copper recycling and cleaning technology and
process.
We are
currently one of the leading CCA superfine wire producers in China. Furthermore,
we believe we were among one of the first manufacturers which commercialized CCA
superfine wire production in China. Currently we have three different CCA
products: CCA fine wire, CCA magnet wire and CCA tin plated wire. CCA fine wire
is the raw material for CCA magnet wire and CCA tin plated wire. In
the case of CCA magnet wire, we coat the CCA fine wire with a special magnetic
coating, while in the case of CCA tin plated wire, we plate the CCA fine wire
with a very thin layer of tin. The value added-ness 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.
In the
first quarter of 2009, we introduced a new production process and product line
which enables us to produce pure copper products from scrap
copper. The new production process involves the fire refining of bulk
recycled copper into high purity, low oxygen content copper rods (also known as
fire-refined high-conductivity rods). We then either sell these large
diameter (8mm) copper rods into a range of markets, or we further process these
rods into much smaller diameter (e.g., 0.03 mm) copper wire (also known as
“superfine” copper wire). We believe this recycled superfine copper wire is
generally a more cost effective product for our customers, comparing with pure
copper wires manufactured from newly mined copper. We believe
that our pricing advantage can be maintained regardless of fluctuations in the
commodity price of copper.
We have
expanded our business from the CCA superfine wire segment into the recycled
copper rod and wire business because we believe that the recycled copper rod and
wire segment allows us to sell into the much bigger pure copper wire market and
offers us the ability to grow more rapidly while utilizing the proprietary
equipment and technology that we possess relating to superfine wire
drawing. We believe that both the CCA superfine wire and the copper
rod and wire segments are growing markets and offer us substantial opportunity
to increase our sales in the future. In absolute terms, the copper
rod and copper wire markets are much larger than the CCA superfine wire market,
which although fast growing as pure copper wire substitute, still has its own
limitations and cannot replace the entire pure copper wire
market. While the copper rod and copper wire markets generally carry
lower gross margins than our higher value-added CCA fine wire products, the
potential absolute dollar value of gross profit available to us from the copper
rod and wire markets are greater than those available from the CCA fine wire
market. We anticipate that we will continue to expand production
capacity in both segments, but that the majority of our investment and resulting
planned growth in sales volume will occur in the copper rod and fine wire
segment, which caters to a much bigger pure copper products market, comparing
with the CCA wire market.
We sell
our products primarily in China, either through distributors or directly to
users, including distributors in the wire and cable industries and manufacturers
in the consumer electronics, white goods, automotive, utility,
telecommunications and specialty cable industries.
31
Our
markets for our three main product categories (CCA wire, copper wire and copper
rod) overlap to a degree, and are characterized by their breadth and depth, with
a very large number of current and potential customers for each product
category. Copper rod is a raw material used in wire and cable
production. Our copper rod, which is manufactured from recycled scrap
copper, competes directly with copper rod made from “virgin” (e.g. newly mined)
copper. To date, our raw material costs for bulk scrap copper have
been lower than prices for “virgin” copper, which provides us with a pricing
advantage in the market. During 2009, we sold copper rod to
approximately 100 customers, most of which are producers of smaller diameter
copper wire used in power cables ranging in size from high voltage power
transmission cables to white good applications such as internal wiring in
household appliances and consumer electronics. Our copper wire, which
is sold in a variety of diameters and may have undergone further in-line
processing such as coating with plastic, is sold to many of the same types of
end-use customers who purchase copper wire from our copper rod
customers. These include manufacturers of a wide range of power
cables and products that incorporate wiring, such as household appliances,
automobiles, consumer electronics and telecommunications
equipment. Our CCA wire is sold to many of these manufacturers
also. CCA wire sells at a lower cost per unit of weight than pure
copper wire, due to the relatively lower density of the aluminum core which
makes up most of the volume of CCA wire. Our CCA wire offers
conductivity performance characteristics that are only marginally below those of
pure copper wire, which means they are attractive in a wide variety of product
applications where a slight reduction in conductivity standards is tolerable
(such as most of the household appliance, automotive, consumer electronics and
telecommunications applications). Examples of relatively high
tolerance product applications where our CCA wire would not provide an
acceptable replacement option for pure copper wire would be military/space
equipment and wiring in nuclear power plants. One low tolerance
product category that requires pure copper wire rather than our less costly CCA
wire is electric motors, which require pure copper wire windings. The
markets for each of our three product lines are growing rapidly, due both to
growing demand in China for all types of basic wire raw materials and the
relative cost advantages our product lines carry over “virgin” pure copper
competitor products.
We
believe that we are well positioned to continue to capture further market share
in the copper wire industry. CCA and copper wire produced from recycled copper
are increasingly being accepted as cheaper alternatives to pure copper wire. As
a result, Our sales and net income have increased substantially during the last
three years. We generated sales of $32.5 million, $50.0 million and $161.5
million for the years ended December 31, 2007, 2008 and 2009, respectively. We
achieved net income of $7.7 million, $11.7 million and $16.8 million for the
years ended December 31, 2007, 2008 and 2009, respectively. In 2009,
we had a non-cash charge of $8.8 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.
Our
capacity to sell our 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 rod is made from bulk scrap copper, which is
cleaned, purified and smelted in large capacity smelter units. At the
present time we have a single horizontal copper rod extrusion production line,
fed by two smelters, which is capable of producing 25,000 tons of copper rod per
year in total. As noted above, for the fiscal year ended December 31,
2009, we sold 9,630 tons of copper rod, all of which was produced on this
smelter/extrusion line. As of December 31, 2009, 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 18,000 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 anticipate
that we will add six additional high-capacity drawing machines in the first two
quarters of 2010, all of which will be used to draw copper wire from our copper
rod, and which will increase our annual capacity to 25,000 tons of copper wire,
equivalent to the annual output of the existing smelters. We further
anticipate that we will continue to add drawing machines in the second half of
2010. We may also add to our smelter/extrusion capacity in the second
half of 2010 or the first half of 2011, so that we can increase our production
volumes of copper rod. 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;
|
32
|
·
|
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
11% in gross domestic product from 1996 through 2007. Domestic demand for and
consumption of copper and CCA products have increased substantially as a result
of this growth. We believe that economic conditions in China will continue to
affect our business and results of operations.
Copper
prices
Generally
the price of our products is set at a certain discount to local retail copper
prices, and we believe our products replace or supplement copper. For these
reasons, our products are affected by the market price, demand and supply of
copper.
We price
our recycled copper and CCA wire products based on the market price for
materials plus a fixed dollar mark-up, which is essentially our gross profit.
Despite the implications of copper price volatility on our gross and net profit
margins in percentage terms, during the past three years the markup, or our
gross and net profit in absolute dollar terms, has not been materially affected
by the change of copper prices. Shanghai Changjiang Commodity Market, one of the
major metal trading markets in China, publishes the copper trading prices twice
daily. These prices typically set the range for the prices of our materials as
well as finished products, and are generally followed by all industry
participants.
Production
capacity
In order
to capture the market opportunity for our products, we have expanded, and plan
to continue to expand, our production capacity. Increased capacity has had, and
could continue to have, a significant effect on our results of operations, by
allowing us to produce and sell more products to generate higher revenues and
net income.
Supply
and costs of principal raw materials
Our
ability to manage our operating costs depends significantly on our ability to
secure affordable and reliable supplies of raw materials. We have been able to
secure a sufficient supply of raw materials, which primarily consist of CCA raw
material wire and scrap copper.
The price
of our primary raw materials varies with reference to copper prices, and changes
in copper price affect our cost of sales. However, we are able to
price our copper and CCA products based on our material procurement costs plus a
fixed dollar mark-up, which is essentially our gross
profit. Therefore, despite the implications of copper price movement
on our gross and net profit margin figures, during the past three years the
mark-up, or our gross and net profit in absolute dollars, have not been
materially affected by the change in copper prices.
Product
mix and effect on gross margins
Our gross
margin is also affected by our product mix. We produce and sell products
according to customer orders. CCA magnet wire and CCA tin plated wire
are final products from which we will derive the highest production markup, or
gross profit. We also generate a significant portion of revenue from
selling semi-finished products such as CCA fine wire at a lower production cost
markup, or gross profit.
33
The March
2009 launch of our scrap copper refinery business has changed our product mix
and gross margins. Generally, copper rod contributes a lower gross
profit margin compared to finished wire products. We are still at an
early development stage of this new business segment, and our copper rod
production capacity exceeds our copper wire drawing
capacity. Therefore, we currently must sell a percentage of our
copper rod production into the open market on an unimproved basis, at lower
profit margins. However, we expect a gradual ramping up of our wire
production facilities and thus we will likely be able to utilize a substantial
proportion of our copper rod production capacity as raw material for our copper
wire production. As a result, we expect to sell more copper wire at higher
profit margins than copper rod over time.
PRINCIPAL
INCOME STATEMENT COMPONENTS
Sales
Our sales
are derived from sales of CCA wire, copper wire and copper rod produced from
refined scrap copper, net of value-added taxes.
The most
significant factors that affect our sales are shipment volume and average
selling prices.
Our
collection practices generally consist of cash payment on delivery. However, we
also extend credit for 30 days to 60 days to certain of our established
customers.
Cost
of sales
Our cost
of sales primarily consists of direct material costs, and, to a lesser extent,
direct labor costs and manufacturing overhead costs. Direct material costs
generally accounted for the majority of our cost of sales.
Gross
Profit
Our gross
profit is affected primarily by the cost of raw materials, which is defined with
reference to the cost of copper. We are also able to price our
products based on the market price for materials plus a fixed dollar mark-up,
which is essentially our gross profit.
Operating
expenses
Our
operating expenses consist of selling, general and administrative expenses, and
research and development expenses.
Selling,
general and administrative expenses
Our
selling, general and administrative expenses include salaries, shipping
expenses, and traveling expenses for our sales personnel, administrative staff
costs and other benefits, depreciation of office equipment, professional service
fees and other miscellaneous expenses related to our administrative corporate
activities.
Our sales
activities are conducted through direct selling by our internal sales
staff. Because of the strong demand for our products, we have not had
to start to aggressively market and distribute our products, and our selling
expenses have been relatively small as a percentage of our
revenues.
We
anticipate that our selling, general and administrative expenses will increase
with the anticipated growth of our business and continued upgrades to our
information technology infrastructure. We expect that our selling, general and
administrative expenses will also increase as a result of compliance,
investor-relations and other expenses associated with being a publicly listed
company.
Other
income and expense
Other
income and expense include interest income, interest expense, merger costs,
foreign currency translation adjustments, and other income.
34
Our
interest expense consist 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 to purchase
1,500,000 shares of Common Stock, and Series B Warrants to purchase 500,000
shares of Common Stock, increased to $11,137,849 as of December 31, 2009. As
such, the Company recognized a $8,831,161 loss, which is a non-cash charge from
the change in fair value of these warrants for the year ended December 31,
2009.
Other
The other
income was generated as a gain on sales of scrap raw materials in
2009.
Income
taxes
Under the
current laws of the Cayman Islands and British Virgin Islands, we are not
subject to any income or capital gains tax, and dividend payments we make are
not subject to any withholding tax in the Cayman Islands or British Virgin
Islands. Under the current laws of Hong Kong, we are not subject to any income
or capital gains tax and dividend payments we make are not subject to any
withholding tax in Hong Kong.
Our two
operating subsidiaries are governed by the PRC income tax laws and are subject
to the PRC enterprise income tax (“EIT”). Each of the two entities
files its own separate tax return. According to the relevant laws and
regulations in the PRC, foreign invested enterprises established prior to
January 1, 2008 were entitled to full exemption from income tax for two years
beginning from the first year when enterprises become profitable and have
accumulative profits and a 50% income tax reduction for the subsequent three
years. Being converted into a sino-foreign joint equity enterprise in
2005, Lihua Electron was thus entitled to the EIT exemption in 2005 and 2006,
and 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
|
2011
|
|||||||||||||||||||
Lihua
Electron
|
– | 12 | % | 12.50 | % | 12.50 | % | 25 | % | 25 | % | |||||||||||||
Lihua
Copper
|
– | 25 | % | 25 | % | 25 | % | 25 | % | 25 | % |
RESULTS
OF OPERATIONS
YEAR
ENDED DECEMBER 31, 2009 COMPARED TO YEAR ENDED DECEMBER 31, 2008
Sales
Our
business for the year ended December 31, 2009 continued to demonstrate robust
growth. Net sales increased by 223.0% from $50.0 million in 2008 to
$161.5 million in 2009. This growth was primarily driven by strong market demand
in our CCA and copper wire products as well as the launch of our scrap copper
refinery business. The growth was offset by a decline of the average selling
price (measured on a per-ton sold basis). Our average selling price
declined with the addition of lower-price copper rod in the mix. In 2008 we did
not sell any copper rod or wire – 100% of our sales volume was comprised of CCA
wire. In 2009, the majority of our sales volume was comprised of copper rod and
copper wire. Please see the table below for more details regarding
the product sales breakdown by specific category.
35
Year ended December 31,
|
||||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
Sales
|
Volume
(m.t.)
|
Average
price
|
Sales
|
Volume
(m.t.)
|
Average
price
|
|||||||||||||||||||
CCA
and copper wire
|
$ | 109,397,857 | 15,353 | 7,126 | 50,006,057 | 5,966 | 8,382 | |||||||||||||||||
Copper
rod
|
$ | 52,145,577 | 9,630 | 5,595 | — | — | ||||||||||||||||||
Total
|
$ | 161,543,434 | 24,983 | $ | 6,547 | 50,006,057 | 5,966 | $ | 8,382 |
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 year ended December 31, 2009 and
2008:
Year ended December 31,
|
Growth in
year ended
December 31,
2009
compared to
year ended
December 31,
2008
|
|||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||
In
thousands, except for percentage
|
US$
|
%
of Sales
|
US$
|
%
of Sales
|
%
|
|||||||||||||||
Total
Sales
|
$ | 161,544 | 100.0 | % | $ | 50,006 | 100.0 | % | 223.0 | % | ||||||||||
Total
cost of sales
|
(125,311 | ) | (77.6 | )% | (33,202 | ) | (66.4 | )% | 277.4 | % | ||||||||||
Gross
Profit
|
$ | 36,233 | 22.4 | % | $ | 16,804 | 33.6 | % | 115.6 | % |
Total
cost of sales for the year ended December 31, 2009 was $125.3 Million,
reflecting an increase of 277.4% from the same period last year. As a percentage
of total sales, our cost of sales increased to 77.6% of total sales for the year
ended December 31, 2009, compared to 66.4% of total sales in the same period
last year. Consequently, gross margin as a percentage of total sales decreased
to 22.4% in the year ended December 31, 2009 from 33.6% for the same period last
year, principally due to the addition of refined copper products, which have a
lower margin compared to our CCA products.
Gross
profit for the year ended December 31, 2009 was $36.2 million, up 115.6% from
gross profit of $16.8 million for the same period in 2008.
Selling,
General and Administrative Expenses
The
following table sets forth operating expenses and income from operations both in
amounts and as a percentage of total sales for Selling, General and
Administrative Expenses for the year ended December 31, 2009 and
2008:
Year ended December 31,
|
Growth in
year ended
December 31,
2009
compared to
year ended
December 31,
2008
|
|||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||
In
thousands, except for percentage
|
US$
|
%
of Sales
|
US$
|
%
of Sales
|
%
|
|||||||||||||||
Gross
profit
|
$ | 36,233 | 22.4 | % | $ | 16,804 | 33.6 | % | 115.6 | % | ||||||||||
Operating
Expenses:
|
||||||||||||||||||||
Selling
expenses
|
(1,722 | ) | (1.1 | )% | (700 | ) | (1.4 | )% | 146.0 | % | ||||||||||
General
& administrative expenses
|
(3,992 | ) | (2.5 | )% | (1,907 | ) | (3.8 | )% | 109.3 | % | ||||||||||
Total
operating expense
|
(5,714 | ) | (3.6 | )% | (2,607 | ) | (5.2 | )% | 119.2 | % | ||||||||||
Income
from operations
|
$ | 30,519 | 18.9 | % | $ | 14,197 | 28.4 | % | 115.0 | % |
36
Total
selling, general and administrative expenses were $5,714,000 for the year ended
December 31, 2009, compared to $2,607,000 for the same period last year, and
increase of 119.2%.
Selling
expenses were $1,722,000 for the year ended December 31, 2009, an increase of
146.0% compared to the same period last year. The increase was attributable
to:
|
·
|
Increased
costs related to product distribution and insurance as a result of
expanded business volume; and
|
|
·
|
Increased
staffing costs as we continued to expand the sales force during the
period,
|
General
& administrative expenses were $3,992,000 for the year ended December 31,
2009, an increase of 109.3% 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 $335,335 for the year ended December 31, 2009, compared to $514,950
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
year ended December 31, 2009, income tax expense was $5,247,647, reflecting
an effective tax rate of 23.8% from operation. The effective tax rate for
the same period in 2008 was 13.3%.
In 2008
and 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%.
Net
Income
Net
income for the year ended December 31, 2009 was $16.8 million, or 10.4% of
net revenue, compared to $11.7 million, or 23.4% of net revenue, in the
same period in 2008. The net income for the year ended December 31, 2009 was
impacted by an $8.8 million non-cash charge as a result of the change of 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 year ended December 31, 2009 was $25.6
million, up 118.9% from the same period last year.
Foreign
Currency Translation Gains
During
the year ended December 31, 2009, the RMB rose slightly against the US dollar,
and we recognized a foreign currency translation gain of $57,753.
LIQUIDITY
AND CAPITAL RESOURCES
We have
historically financed our operations and capital expenditures through cash flows
from operations, bank loans and fund raising through issuing new shares from
capital market.
As of
December 31, 2009, we had approximately $34.6 million in cash, up $8.6 million
from $26.0 million at December 31, 2008.The following table summarizes our cash
flows for each of the periods indicated:
37
Year Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
(US$)
|
||||||||
Net
cash provided by operating activities
|
$ | 8,427,074 | $ | 15,837,702 | ||||
Net
cash used in investing activities
|
(5,094,444 | ) | (4,693,086 | ) | ||||
Net
cash provided by financing activities
|
5,210,460 | 10,966,675 | ||||||
Effect
of exchange rate on cash and cash equivalents
|
29,899 | 716,909 | ||||||
Cash
and cash equivalents at beginning of period
|
26,041,849 | 3,213,649 | ||||||
Cash
and cash equivalents at end of period
|
$ | 34,614,838 | $ | 26,041,849 |
Operating
activities
For the
year ended December 31, 2009, cash provided by operating activities totaled $8.4
million compared to $15.8 million in the same period of 2008. This was primarily
attributable to: i) a $16.8 million increase in net earnings; ii) a $5.9 million
accounts receivable increase driven by revenue growth; iii) a $16.9 million
inventory increase, principally in copper rods, to support planned expansion and
sales growth in copper wire; iv) a $1.1 million increase in income tax payable;
v) a $2.9 million accounts payable increase due to the growth of revenue; and
vi) net income was offset by a $8.8 million non cash charge, which was caused by
the increase of fair value of the warrants issued to investors in conjunction
with the Company’s issuance of convertible Preferred Stock in October
2008.
Investing
activities
For the
year ended December 31, 2009 we had a net cash outflow of $5.1 million from
investing activities for the purchase of property, plant and
equipment, primarily as a result of capital investment in new equipment and
machinery, and building up new workshops, all being part of our planned
expansion.
Financing
activities
For the
year ended December 31, 2009 we had a net cash inflow of $5.2 million from
financing activities which was primly driven by (i) $7.9 million proceeds from
issuance of new shares in an Initial Public Offering in September; (ii) $1.2
million released from the escrowed cash related to our October 2008 issuance of
convertible Preferred Stock, as the Company satisfied certain legal post-closing
conditions; (iii) the borrowing of $2.2 million in short term bank loans for
working capital related to recently added production lines; (iv) offset by a
repayment of bank loans of $6.2 million.
Capital
expenditure
Our
capital expenditures are principally comprised of construction and purchases of
property, plant and equipment for expansion of our production facilities. In
2007, 2008 and 2009, we funded our capital expenditures primarily through cash
flows from operating activities and the proceeds of bank borrowings, and equity
issuance.
In 2010,
as we accelerate our expansion, we expect continued capital expenditure for
maintaining existing machines and adding manufacturing equipment in our new
facility, which is adjacent to our old facility. In the new production
facilities we currently have two horizontal smelters, which can produce 25,000
tons of refined copper rods per year. With our current capacity of production
lines, we can produce 7,500 tons of CCA wire and 18,000 tons of copper wire.
Therefore, we plan to have six new high speed production lines in production by
the end of the second quarter of 2010 while increasing our copper wire
production capacity to 25,000 tons per year. Of that capacity, 15,000 tons per
year will be copper magnet wire and 10,000 tons per year will be copper fine
wire. We also plan to have another four production lines in production by the
end of 2010, increasing our CCA wire production capacity to 10,000 tons per
year. Of that capacity, 6,000 tons per year will be CCA magnet wire and 4,000
ton per year will be CCA fine wire. We believe that our existing cash, cash
equivalents and cash flows from operations, proceeds from our initial public
offering and our revolving credit facility will be sufficient to meet our
presently anticipated future cash needs to bring all of our facilities into full
production. We may, however, require additional cash resources due to changing
business conditions or other future developments, including any investments or
acquisitions we may decide to pursue.
38
Accounts
receivable
Our Days
Sales Outstanding (DSO) has improved from 36 days to 26 days in 2009 because of
the change in our product mix. In 2008, we produced 5,966 tons of CCA wire,
which was the only product during that year. In the first quarter of 2009, we
commenced operations of our smelter/extrusion production line that manufactures
recycled copper rod. In 2009, we produced 15,353 tons of CCA and copper wire and
9,630 tons of copper rod, but during the same period of 2008 we only produced
5,966 tons of CCA wire. As CCA is an emerging product in China, Lihua extends
credit terms to some of its larger customers. However, pure copper products,
such as our copper rod and copper wire, are in such high demand that we don’t
have to extend credit terms, which is the primary reason our overall DSO has
improved as we have introduced recycled copper wire and copper rod as new
product lines. Our customers often purchase more than one type of product from
us (for example, one customer may purchase both CCA wire and copper
wire). CCA wire purchases are generally accorded 30 to 60 day payment
terms, depending upon the creditworthiness of the customer, while the copper
wire (and copper rod) purchases are payable upon delivery to the customer, which
may occur two to seven days after we ship the product and recognize our revenue.
This decision to extend terms or to collect payment upon receipt (essentially a
“cash sale”, although due to the shipping time this effectively becomes a very
short receivable), is based primarily upon the product type. We may extend terms
for CCA purchases to a credit-worthy customer, but for that same customer
require payment upon delivery for purchases of copper rod and/or copper
wire.
The table
below shows the breakdown of accounts receivable by products:
Year ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Accounts
Receivable
|
Accounts
Receivable
|
|||||||
CCA
wire and Copper wire
|
$ | 8,714,670 | $ | 5,042,739 | ||||
Copper
rod
|
2,281,760 | — | ||||||
Total
|
10,996,430 | 5,042,739 |
ITEM
6A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Not
applicable.
ITEM
7.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Our
consolidated financial statements and the notes thereto begin on page F-1 of
this Annual Report.
ITEM
8.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
ITEM
8A(T).
|
CONTROLS
AND PROCEDURES
|
(a)
|
Evaluation
of Disclosure Controls and
Procedures.
|
39
Disclosure
Controls
Under the
supervision and with the participation of management, including our chief
executive officer and the chief financial officer, we conducted an evaluation of
the effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act,
as of the end of December 31, 2009. Based on this evaluation, our chief
executive officer and chief financial officer concluded as of December 31, 2009
that our disclosure controls and procedures were effective such that the
material information required to be included in our SEC reports is recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms relating to our company, including our consolidating
subsidiaries, and was made known to them by others within those entities,
particularly during the period when this report was being prepared.
Management’s
Report on Internal Control Over Financial Reporting
Internal
control over financial reporting refers to the process designed by, or under the
supervision of, our Chief Executive Officer and Chief Financial Officer, and
effected by our board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles, and includes those policies and
procedures that:
(1)
|
Pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our
assets;
|
(2)
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being
made only in accordance with authorization of our management and
directors; and
|
(3)
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisitions, use or disposition of our assets that could
have a material effect on the financial
statements.
|
Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations. Internal
control over financial reporting is a process that involves human diligence and
compliance and is subject to lapses in judgment and breakdowns resulting from
human failures. Internal control over financial reporting also can be
circumvented by collusion or improper management override. Because of such
limitations, there is a risk that material misstatements may not be prevented or
detected on a timely basis by internal control over financial reporting.
However, these inherent limitations are known features of the financial
reporting process. Therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, this risk. Management is responsible
for establishing and maintaining adequate internal control over financial
reporting for the company.
Management
has used the framework set forth in the report entitled Internal
Control—Integrated Framework published by the Committee of Sponsoring
Organizations of the Treadway Commission, known as COSO, to evaluate the
effectiveness of the Company’s internal control over financial reporting. Based
on this assessment, management has concluded that our internal control over
financial reporting was effective as of December 31, 2009.
This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting. Our
management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only our management’s report in this annual
report.
40
(b)
|
Changes
in Internal Controls.
|
In
addition, no change in our internal control over financial reporting (as defined
in Rules 13a-15 or 15d-15 under the 1934 Act) occurred during the fourth quarter
of the year ended December 31, 2009, that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
ITEM
8B.
|
OTHER
INFORMATION
|
None.
PART
III
ITEM
9.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
Directors
and Executive Officers
The
following table sets forth information about our directors and executive
officers as of March 24, 2010.
Name
|
Age
|
Position
|
||
Jianhua
Zhu
|
48
|
Chief
Executive Officer, President and Director
|
||
Yang
“Roy” Yu
|
27
|
Chief
Financial Officer and Treasurer
|
||
Yaying
Wang
|
47
|
Chief
Operating Officer, Secretary and Director
|
||
Robert
C. Bruce*
|
47
|
Independent
Director
|
||
Jonathan
P. Serbin*
|
40
|
Independent
Director
|
||
Kelvin
Lau*
|
47
|
Independent
Director
|
||
Yin
Falong
|
45
|
Chief
Engineer
|
||
Yu
Niu
|
36
|
Chief
Engineer
|
||
Zhu
Junyin
|
31
|
VP,
Sales and
Marketing
|
_________
* Denotes membership on the Audit Committee, Nominating and
Corporate Goverance Committee and Comp
41
Below is
the five year employment history of each director, executive officer and
significant employees listed above.
Jianhua Zhu, President and
Chief Executive Officer of the Company and the Chairman of the Board of
Directors, has over 20 years of experience in China’s copper industry. From
Lihua Electron’s inception in October 1999 and from Lihua Copper’s inception in
September 2007 until July 30, 2008, Mr. Zhu served as the sole member of the
board of directors. Mr. Zhu currently serves as the Executive Director of Lihua
Electron and Lihua Copper. In addition to overall management of the Company, Mr.
Zhu is responsible for corporate and product development and governmental
regulations.
Yang “Roy” Yu, is the
Company’s Chief Financial Officer and Treasurer. Mr. Yu served as a member of
the Board of Directors from June 24, 2008 until his resignation on December 8,
2008. Between June 2006 and April 2008, Mr. Yu was the Executive Vice President
at Fushi Copperweld, Inc. (NASDAQ: FSIN). From May 2005 until June 2006, Mr. Yu
was the Chief Financial Officer of Songzai International Holding Group, Inc.
(OTCBB: SGZH). From October 2004 until May 2005, Mr. Yu was the Vice President
at Yinhai Technology and Development Co. Mr. Yu attended London Southbank
University from 2001 to 2004, where he holds a degree in accounting and
finance.
42
Yaying Wang, Chief Operating
Officer and a member of the Board of Directors, has over 20 years of experience
in China’s copper industry. Ms. Wang has strong technical knowledge of copper
and extensive industry relationships. In addition to her responsibilities as
COO, Ms. Wang is responsible for the Sales and Production
Departments.
Robert C. Bruce, Independent
Director. Mr. Bruce has served as an independent member of our Board of
Directors since April 8, 2009. Mr. Bruce is President of Oakmont Advisory Group,
LLC, a financial management consulting firm located in Portland, Maine. Prior to
founding Oakmont Advisory Group, from 1999 through 2004, Mr. Bruce served as
Chief Operating Officer, Treasurer and Director for Enterix Inc., a
privately-held, venture-funded medical device and laboratory services company
that was purchased by Quest Diagnostics. He also previously served as Chief
Financial Officer for Advantage Business Services (1997 to 1998), a
privately-held national payroll processing and tax filing business that was
subsequently acquired by PayChex. Mr. Bruce serves as a member of the board of
directors of ImmuCell Corporation (NASDAQ: ICCC) and China North East Petroleum
Holdings Ltd. (NYSE Amex: NEP). Mr. Bruce received his MBA from the Yale School
of Management, and a Bachelor of Arts degree from Princeton
University.
Jonathan P. Serbin,
Independent Director. Mr. Serbin has served as an independent member of our
Board of Directors since April 8, 2009. He is current the Chief Executive
Officer of D Mobile, Inc., a seller of mobile content in China. Prior to D
Mobile, Inc., Mr. Serbin was Chief Financial Officer at EBT Mobile from July
2004 through December 2007. He was also previously the Chief Financial Officer
of Hana Biosciences, a biotech development company from January 2004 through
July 2004. Mr. Serbin holds a B.A. from Washington University, St. Louis, a J.D.
from Boston University and an MBA from Columbia University
Siu Ki “Kelvin” Lau,
Independent Director. Mr. Lau has served as an independent member of
our Board of Directors since October 20, 2009. Mr. Lau has more than
20 years of experience in investment banking and the finance industry. Mr. Lau
is currently Managing Director of Capital Markets & Corporate Finance at
Mizuho Securities Asia Limited, a Japanese investment bank and securities
company, where he leads the structuring and execution of equity and
equity-linked capital market transactions and financial advisory activities for
Greater China. From May 1997 through mid-November 2008, he worked in the Hong
Kong investment banking units of Singapore based DBS Banking group, where he was
Managing Director since April 2002 and supervised the origination, structuring
and execution of equity capital markets and corporate finance transactions in
North Asia. He was Director at the investment banking unit of Credit Agricole
Indoseuz during March 1993 and May 1997. Mr. Lau is a fellow member of the
Chartered Association of Certified Accountants of the United Kingdom and a
member of the Hong Kong Institute of Certified Public Accountants. He holds a
Bachelor of Science Degree in Economics from University of London.
Zhu Junying, VP Sales and
Marketing. Ms. Zhu has served as the VP of sales of Lihua Electron since its
inception in 1999. Ms. Zhu has more than 10 years working experience in Copper
Clad Aluminum magnet wire industry. She had held various executive management
positions since Lihua Electron was established, including VP of operations, from
2001 to 2005. During her career, Ms. Zhu has focused on the business
development, strategic market planning, key account management, contract
negotiation and loss prevention. Ms. Zhu graduated from Changzhou Accounting
College with a degree in marketing.
Yin Falong, Chief Engineer.
Mr. Yin has served as the Production Manager of Lihua Copper since its inception
in 2008. Mr. Yin has more than 15 years working experience in copper casting and
rolling production line management and has focused on the fire refinery high
conductivity copper industry since the market started in China in 2002. He had
held executive management positions with a number of copper enterprises prior to
joining our company from 2003 to 2007, including Executive Vice President of
R&D and production of Hongli Copper Co., Ltd. from 2006 to 2007. During his
career, Mr. Yin has focused on the development, design, and processes of pure
copper and fire refinery high conductivity copper production. He has designed a
proprietary technique for the modified processes of fire refinery high
conductivity copper production used by Lihua Copper and has extensive experience
in production management. Mr. Yin graduated from Shanghai Smelting Technology
College.
Yu Niu, Chief Engineer. Mr. Yu
has served as Production Manager of Lihua Electron since 2008. Mr. Yu has more
than 15 years working experience in the enameling wire industry. He has held
executive management positions with a number of copper enterprises prior to
joining our company, including Production Manager of Precision Wire Co., Wuxi.
from 2007 to 2008. During his career, Mr. Yu has focused on the development,
design, and processes of enameling wire production. Mr. Yu graduated from
Nantong Industrial University with a degree in engineering.
43
Family
Relationships
Mr.
Jianhua Zhu, our Chief Executive Officer, President and Chairman, and Ms. Yaying
Wang, our Chief Operating Officer and a director, are married. There are no
other family relationships among our executive officers, directors and
significant employees.
Involvement in Certain Legal
Proceedings
There
have been no events under any bankruptcy act, no criminal proceedings and no
judgments, injunctions, orders or decrees material to the evaluation of the
ability and integrity of any director, executive officer, promoter or control
person of our Company during the past five years.
Corporate
Governance
Board
of Directors
We have
five members serving on our Board of Directors, of which a majority are
independent directors. All actions of the Board of Directors require the
approval of a majority of the directors in attendance at a meeting at which a
quorum is present. During the fiscal year ended December 31, 2009, the Board of
Directors met two times and took action by written consent on four occasions.
All of the directors participated in the board meetings. Each director is
expected to participate, either in person or via teleconference, in meetings of
our Board of Directors and meetings of committees of our Board of Directors in
which each director is a member, and to spend the time necessary to properly
discharge such director’s respective duties and responsibilities. We do not have
a written policy with regard to directors’ attendance at annual meetings of
stockholders; however, all directors are encouraged to attend the annual
meeting.
44
Board
Committees
The Board
of Directors has an Audit Committee, Nominating and Corporate Governance
Committee and a Compensation Committee, each of which was formed on April 14,
2009.
Audit
Committee
The audit
committee members consist of Robert C. Bruce, Jonathan P. Serbin and Kelvin Lau.
Each of these members would be considered “independent” as defined by Rule 5605
of NASDAQ’s Marketplace Rules, as determined by our board of
directors. During the fiscal year ended December 31, 2009, the Audit
Committee met four
times.
The audit
committee oversees our financial reporting process on behalf of the board of
directors. The committee’s responsibilities include the following
functions:
|
·
|
approve
and retain the independent auditors to conduct the annual audit of our
books and records;
|
|
·
|
review
the proposed scope and results of the
audit;
|
|
·
|
review
and pre-approve the independent auditors’ audit and non-audited services
rendered;
|
|
·
|
approve
the audit fees to be paid;
|
|
·
|
review
accounting and financial controls with the independent auditors and our
internal auditors and financial and accounting
staff;
|
|
·
|
review
and approve transactions between us and our directors, officers and
affiliates;
|
|
·
|
recognize
and prevent prohibited non-audit
services;
|
|
·
|
meeting
separately and periodically with management and our internal auditor and
independent auditors; and
|
The Audit
Committee operates under a written charter. Robert C. Bruce serves as the
Chairman of our Audit Committee.
Our board
of directors has determined that we have at least one audit committee financial
expert, as defined by the rules and regulations of the SEC and NASDAQ, serving
on our audit committee, and that Robert C. Bruce is the “audit committee
financial expert”.
Nominating
and Corporate Governance Committee
The
Nominating and Governance Committee is responsible for identifying potential
candidates to serve on our board and its committees. The committee’s
responsibilities include the following functions:
|
·
|
making
recommendations to the board regarding the size and composition of the
board;
|
|
·
|
identifying
and recommending to the board nominees for election or re-election to the
board, or for appointment to fill any
vacancy;
|
45
|
·
|
establishing
procedures for the nomination
process;
|
|
·
|
advising
the board periodically with respect to corporate governance matters and
practices, including periodically reviewing corporate governance
guidelines to be adapted by the board;
and
|
|
·
|
establishing
and administering a periodic assessment procedure relating to the
performance of the board as a whole and its individual
members.
|
Each of
Messrs. Bruce, Serbin and Lau are the members of the Nominating and Corporate
Governance Committee. The Nominating and Corporate Governance Committee operate
under a written charter. Mr. Lau is the Chairman of the Nominating and Corporate
Governance Committee.
The
Nominating and Corporate Governance Committee evaluates all nominees, including
current directors who may be up for re-election, based on several different
professional criteria and in accordance with the minimum requirements as
established in its charter and in the Company’s Articles of Incorporation and
Bylaws. The Nominating and Corporate Governance Committee will consider
candidates recommended by stockholders. Stockholders can recommend qualified
candidates for the Board of Directors by submitting the candidate’s name and
qualifications to: Kelvin Lau, Chairman, Nominating and Corporate Governance
Committee, Lihua International, Inc., Flat E 9/F Tower 1, The Waterfront, 1
Austin Road West, Tsim Sha Tsui, Kowloon, Hong Kong. There are no differences in
the manner in which the Nominating and Corporate Governance Committee evaluates
nominees for director based on whether the nominee was recommended by a
stockholder. Among other things, the Nominating and Corporate Governance
Committee takes into account, when acting upon nominees, factors such as
familiarity with the industry in which the Company operates, experience in
working with China-based companies, the relevant expertise of its directors and
director nominees, whether the director or nominee would be considered
independent, the time that the director or nominee will be able to devote to
Company matters, experience with US public companies, language skills and other
factors. The Nominating and Corporate Governance Committee believes that it is
appropriate to include representation of senior management on the Board of
Directors.
Compensation
Committee
The
Compensation Committee is responsible for making recommendations to the board
concerning salaries and incentive compensation for our officers and employees
and administers our stock option plans. Its responsibilities include the
following functions:
|
·
|
reviewing
and recommending policy relating to the compensation and benefits of our
officers and employees, including reviewing and approving corporate goals
and objectives relevant to the compensation of our chief executive officer
and other senior officers; evaluating the performance of these officers in
light of those goals and objectives; and setting compensation of these
officers based on such evaluations;
|
|
·
|
administering
our benefit plans and the issuance of stock options and other awards under
our stock plans; and reviewing and establishing appropriate insurance
coverage for our directors and executive
officers;
|
|
·
|
recommending
the type and amount of compensation to be paid or awarded to members of
our board of directors, including consulting, retainer, meeting, committee
and committee chair fees and stock option grants or awards;
and
|
|
·
|
reviewing
and approving the terms of any employment agreements, severance
arrangements, change-of-control protections and any other compensatory
arrangements for our executive
officers.
|
Each of
Messrs. Bruce, Serbin and Lau are the members of the Compensation Committee. The
Compensation Committee operates under a written charter. Mr. Serbin is Chairman
of Compensation Committee. No member of our Compensation Committee has at any
time been an officer or employee of ours or our subsidiaries. No interlocking
relationship exists between our Board of Directors or Compensation Committee and
the Board of Directors or Compensation Committee of any other company, nor has
any interlocking relationship existed in the past.
46
Code
of Ethics
We
adopted a Corporate Code of Ethics and Conduct on December 31, 2007. The Code of
Ethics is designed to deter wrongdoing and to promote ethical conduct and full,
fair, accurate, timely and understandable reports that the Company files or
submits to the Securities and Exchange Commission and others. A copy of the Code
of Ethics is included as Exhibit 14.1 to our Annual Report on Form 10-KSB, filed
with the SEC on February 26, 2008. A copy of the Code of Ethics is available on
our website at www.lihuaintl.com. A
printed copy of the Code of Ethics may also be obtained free of charge by
writing to us at our headquarters located at Houxiang Five-Star Industry
District, Danyang City, Jiangsu Province, PRC 212312.
Security Holder Recommendations
for Board Nominees
There have been no changes to the procedures by which our
stockholders may recommend nominees to the Board of Directors.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a)
of the Securities Exchange Act of 1934, as amended, or the Exchange Act,
requires our executive officers, directors and persons who beneficially own more
than 10% of a registered class of our equity securities to file with the
Securities and Exchange Commission initial reports of ownership and reports of
changes in ownership of our common stock and other equity securities. These
executive officers, directors, and greater than 10% beneficial owners are
required by SEC regulation to furnish us with copies of all Section 16(a)
forms filed by such reporting persons.
Based
solely on our review of such forms furnished to us and written representations
from certain reporting persons, we believe that all filing requirements
applicable to our executive officers, directors and greater than 10% beneficial
owners were complied with during 2009, except that Robert Bruce did not timely
file one Form 4 reflecting his purchase of 10,000 shares of Common Stock and
Jonathan Serbin did not timely file one Form 3 and one Form 4 reflecting a grant
of a stock option to purchase 20,000 shares.
REPORT
OF THE AUDIT COMMITTEE
The role
of the Audit Committee is to assist the Board of Directors in its oversight of
the Company’s financial reporting process. As set forth in the Charter,
management of the Company is responsible for the preparation, presentation and
integrity of the Company’s financial statements, accounting and financial
reporting principles and internal controls and procedures designed to assure
compliance with accounting standards and applicable laws and regulations. The
independent auditors are responsible for auditing the Company’s financial
statements and expressing an opinion as to their conformity with generally
accepted accounting principles.
In the performance of this
oversight function, the Audit Committee has reviewed and discussed the audited
financial statements for the fiscal year ended December 31, 2009 with
management, and has discussed with the independent auditors the matters required
to be discussed by Statement of Auditing Standards No. 61, Communication with
Audit Committee, as currently in effect. The Audit Committee has received the
written disclosures and the letter from the independent auditors required by
Independence Standards Board Standard No. 1, Independence Discussions with Audit
Committees, as currently in effect, and has discussed with the independent
auditors the independent auditors’ independence; and based on the review and
discussions referred above, the Audit Committee recommended to the Board of
Directors that the audited financial statements be included in the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2009 for
filing with the SEC.
The
members of the Audit Committee are not professionally engaged in the practice of
auditing or accounting, are not experts in the fields of accounting or auditing,
including in respect of auditor independence. Members of the Committee rely
without independent verification on the information provided to them and on the
representations made by management and the independent accountants. Accordingly,
the Audit Committee’s oversight does not provide an independent basis to
determine that management has maintained appropriate accounting and financial
reporting principles or appropriate internal control and procedures designed to
assure compliance with accounting standards and applicable laws and regulations.
Furthermore, the Audit Committee’s consideration and discussions referred to
above do not assure that the audit of the Company’s financial statements has
been carried out in accordance with generally accepted accounting principles or
that the Company’s auditors are in fact “independent”.
47
Based
upon the reports, review and discussions described in this report, and subject
to the limitations on the role and responsibilities of the Committee referred to
above and in the Charter, the Committee recommended to the Board that the
audited financial statements be included in the Company’s Annual Report on Form
10-K for the year ended December 31, 2009, be filed with the Securities and
Exchange Commission.
THE
AUDIT COMMITTEE
Jonathan
P. Serbin
Robert.
C. Bruce
Kelvin
Lau
48
ITEM
10.
|
EXECUTIVE
COMPENSATION
|
We strive
to provide our named executive officers with a competitive base salary that is
in line with their roles and responsibilities.
We
believe that other peer companies in China which are listed on U.S. stock
markets would be the most appropriate to use for salary comparison
purposes. However, none of our direct competitors are public companies in
the U.S. We have looked at Fushi International (Dalian) Bimetallic Cable
Co., Ltd., one of our suppliers, which is listed on the Nasdaq Stock
Market. The salaries of Fushi’s CEO and CFO are $240,000 and $180,000 per
year, respectively. Fushi has substantially higher revenues than we do and
therefore, taking this into consideration, we believe that the compensation of
our executive officers is appropriate.
It is not
uncommon for companies with operations primarily in China operations to have
base salaries and bonuses as the sole and only form of compensation. The base
salary level is established and reviewed based on the level of responsibilities,
the experience and tenure of the individual and the current and potential
contributions of the individual. The base salary is compared to similar
positions within comparable peer companies and with consideration of the
executive’s relative experience in his or her position. Based on an evaluation
of available information with respect to the base salaries of executives of our
competitors, the base salary and bonus paid to our named executive officers is
in line with our competitors. Base salaries are reviewed periodically and at the
time of promotion or other changes in responsibilities.
On April
14, 2009, the Company adopted the Lihua International, Inc. 2009 Omnibus
Securities and Incentive Plan (the “Plan”). The Plan includes: Distribution
Equivalent Rights, Options, Performance Share Awards, Performance Unit Awards,
Restricted Stock Awards, Restricted Stock Unit Awards, Stock Appreciation
Rights, Tandem Stock Appreciation Rights, Unrestricted Stock Awards or any
combination of the foregoing. We will consider other elements of compensation,
including without limitation, short and long term compensation, cash and
non-cash, and other equity-based compensation. We believe our current
compensation package is comparative to our peers in the industry and aimed to
retain and attract talented individuals.
The
following table sets forth the compensation paid or accrued by us for each
of the Company’s last two completed fiscal years to our Chief
Executive Officer and each of our two other officers whose compensation exceeded
$100,000.
Summary
Compensation Table
Name and Principal
Position)(1)(3)
|
Fiscal
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-equity
Incentive
Plan
Compensation
($)
|
Change
in
Pension
Value
and
Nonqualified
Deferred
Compensation
Earnings
($)
|
All
Other
Compensation
($)
|
Total
($)
|
|||||||||||||||||
Mr.
Jianhua Zhu
|
2009
|
180,000
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
180,000
|
|||||||||||||||||
CEO
and President
|
2008
|
30,000
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
30,000
|
|
||||||||||||||||
Mr. Yang “Roy”
Yu
(2)
|
2009
|
150,000
|
-0-
|
-0
|
-0-
|
-0-
|
-0-
|
-0-
|
150,000
|
|||||||||||||||||
Chief
Financial Officer
|
2008
|
25,000
|
-0-
|
1,017,000
|
-0-
|
-0-
|
-0-
|
-0-
|
1,042,000
|
|
||||||||||||||||
Ms.
Yaying Wang
|
2009
|
150,000
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
150,000
|
|||||||||||||||||
Chief
Operating Officer
|
2008
|
25,000
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
25,000
|
|
||||||||||||||||
2007
|
2,805
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
2,805
|
|
49
(1) The
salary presented was converted into US dollars from RMB at a conversion rate of
6.8310 for the year ended December 31, 2009. Our named executive officers reside
in China and therefore may receive their annual compensation in
RMB.
(2) In
October 2008, Mr. Yu entered into a contractual agreement with our principal
shareholder, Magnify Wealth. Under the terms of the agreement, Mr. Yu is
entitled to receive up to 450,000 shares of the Company’s Common Stock owned by
Magnify Wealth. 112,500 of such shares were transferred to Mr. Yu immediately
upon consummation of the Share Exchange. 112,500 of such shares were released to
Mr. Yu on the first anniversary of the consummation of the Share Exchange. As of
December 31, 2009, the remaining 225,000 shares remain in an escrow account and
shall be released to Mr. Yu in two equal installments of 112,500 shares issuable
on the second and third anniversary of the consummation of the Share
Exchange.
(3) Messrs.
Zhu and Yu and Ms. Wang were not appointed executive officers of the Company
until October 31, 2008. Therefore, their salaries are pro-rated in U.S. dollars
for the year ended December 31, 2008.
Employment
Contracts and Termination of Employment, and Change-In-Control
The
following employment agreements were entered into by the PRC Subsidiaries and
the following executive officers:
Jianhua
Zhu
The PRC
Subsidiaries entered into an employment agreement with Jianhua Zhu on June 24,
2008 to serve as Chief Executive Officer and a member of the board of directors
for a term of three (3) years. Pursuant to the agreement, Mr. Zhu will receive
annual compensation equal to $180,000. In addition, Mr. Zhu is entitled to
participate in any and all benefit plans, from time to time, in effect for
employees, along with vacation, sick and holiday pay in accordance with policies
established and in effect from time to time. In the event that either of
the PRC Subsidiaries terminate the employment agreement without cause (as
defined therein), Mr. Zhu will be entitled to a severance payment of one year’s
salary from the date of termination plus all medical and dental benefits for
that time period as well. In addition, if he is no longer employed by the
Company, Mr. Zhu has agreed that neither he, nor any of his affiliates shall
directly or indirectly employ, solicit, or induce any individual, consultant,
customer or supplier who is, or was at any time during the one year period prior
to his termination date, an employee or consultant of the Company, a customer of
the Company or a supplier of the Company, cause such employee, consultant,
customer or supplier to refrain from continuing their relationship with the
Company. Mr. Zhu has also agreed to a non-compete clause whereby he shall not
engage or assist others to engage in related businesses within Beijing and
Danyang, PRC, the prescribed territory, however, he may own up to 5% of the
outstanding shares of a company engaged in a similar business if such shares are
listed on a national securities exchange. On September 26, 2008, Mr. Zhu entered
in an amendment to the Employment Agreement with the PRC Subsidiaries whereby
certain clerical errors were corrected.
50
Yang “Roy”
Yu
The PRC
Subsidiaries entered into an employment agreement with Yang Yu on June 24, 2008
to serve as Chief Financial Officer and a member of the board of directors for a
term of three (3) years. Pursuant to the agreement, Mr. Yu will receive annual
compensation equal to USD$150,000. In addition, Yang Yu is entitled to
participate in any and all benefit plans, from time to time, in effect for
employees, along with vacation, sick and holiday pay in accordance with policies
established and in effect from time to time. In the event that either of
the PRC Subsidiaries terminate the employment agreement without cause (as
defined therein), Yang Yu will be entitled to a severance payment of one years
salary from the date of termination plus all medical and dental benefits for
that time period as well. In addition, if he is no longer employed by the
Company, Mr. Yu has agreed that neither he, nor any of his affiliates shall
directly or indirectly employ, solicit, or induce any individual, consultant,
customer or supplier who is, or was at any time during the one year period prior
to his termination date, an employee or consultant of the Company, a customer of
the Company or a supplier of the Company, cause such employee, consultant,
customer or supplier to refrain from continuing their relationship with the
Company. Mr. Yu has also agreed to a non-compete clause whereby he shall not
engage or assist others to engage in related businesses within Beijing and
Danyang, PRC, the prescribed territory, however, he may own up to 5% of the
outstanding shares of a company engaged in a similar business if such shares are
listed on a national securities exchange. On September 26, 2008, Mr. Yu
entered in an amendment to the Employment Agreement with the PRC Subsidiaries
whereby certain clerical errors were corrected.
Yaying
Wang
The PRC
Subsidiaries entered into an employment agreement with Yaying Wang on June 24,
2008 to serve as Chief Operating Officer and a member of the board of directors
for a term of three (3) years. Pursuant to the agreement, Ms. Wang will receive
annual compensation equal to USD$150,000. In addition, Ms. Wang is entitled to
participate in any and all benefit plans, from time to time, in effect for
employees, along with vacation, sick and holiday pay in accordance with policies
established and in effect from time to time. In the event that either of
the PRC Subsidiaries terminate the employment agreement without cause (as
defined therein), Yaying Wang will be entitled to a severance payment of one
years salary from the date of termination plus all medical and dental benefits
for that time period as well. In addition, if she is no longer employed by the
Company, Ms. Wang has agreed that neither she, nor any of her affiliates shall
directly or indirectly employ, solicit, or induce any individual, consultant,
customer or supplier who is, or was at any time during the one year period prior
to her termination date, an employee or consultant of the Company, a customer of
the Company or a supplier of the Company, cause such employee, consultant,
customer or supplier to refrain from continuing their relationship with the
Company. Ms. Wang has also agreed to a non-compete clause whereby she shall not
engage or assist others to engage in related businesses within Beijing and
Danyang, PRC, the prescribed territory, however, she may own up to 5% of the
outstanding shares of a company engaged in a similar business if such shares are
listed on a national securities exchange. On September 26, 2008, Ms. Wang
entered in an amendment to the Employment Agreement with the PRC Subsidiaries
whereby certain clerical errors were corrected.
Grants
of Plan-Based Awards
As a smaller reporting company disclosure under this section is
not required.
51
Outstanding
Equity Awards at Fiscal Year-End
None
Option
Exercises and Stock Vested
None
Pension
Benefits
We do not
sponsor any qualified or non-qualified defined benefit plans.
Nonqualified
Deferred Compensation
We do not
maintain any non-qualified defined contribution or deferred compensation
plans.
Compensation
of Directors
Name
|
Fees Earned
or Paid in Cash
($)
|
Option
Awards
($)
|
All Other
Compensation
($)
|
Total
($)
|
||||||||||||
Rabert
Bruce
|
27,856 | 76,260 | 0 | 104,116 | ||||||||||||
Jonathan
Serbin
|
22,186 | 76,260 | 0 | 98,446 | ||||||||||||
Kelvin
Lau
|
9,000 | 164,800 | 0 | 173,800 | ||||||||||||
Liu Su | 10,600 | 19,065 | 0 | 29,665 |
________
(1) Reflects the aggregate grant date fair value to option awards
granted to the directors, determined in accordance with ASC Topic 718. For
information reqarding the grant date fair value of stock options, see Note 16,
Share-Based Compensation, to our accompanying consolidated financial
statements.
Pursuant
to independent director agreements dated April 14, 2009 between the Company and
each of Robert Bruce, Jonathan Serbin and Liu Su, independent directors, each of
Messrs. Bruce, Serbin and Su received an option grant to purchase 20,000 shares
of common stock of the Company, plus quarterly payments in cash for their
service as follows: a) a base annual retainer of $20,000, payable quarterly in
arrears, which was increased to $25,000 in September 2009 in conjunction with
the Company’s listing on NASDAQ; b) additional retainer payments, also payable
quarterly in arrears, for serving on the audit committee ($5,000 per year) and
for Mr. Bruce, as Chair of the audit committee ($7,500 per year); meeting fees
for attendance at board meetings according to the following schedule: i) for
directors resident in greater China, a fee of $1,000 per telephonic board
meeting attended, a fee of $1,500 per meeting attended in person in China, and a
fee of $5,000 per meeting attended outside of China; and ii) for directors
resident outside of China, a fee of $1,000 per telephonic board meeting
attended, a fee of $5,000 per meeting attended outside their home
country/continent, and a fee of $1,500 per meeting attended within their home
country/continent; and expense reimbursement for attendance at board meetings,
the annual general meeting of the Company and executive sessions of the
independent directors. The stock options granted to Messrs. Bruce, Serbin
and Su have an exercise price of $2.20 per share and a fair value, which was
determined after the award of the options, of $3.813 per
share. The stock options vest quarterly in arrears over the one year
term of their director agreements.
52
Mr. Su
resigned as an independent director on October 11, 2009. At that time,
5,000 of his 20,000 options had vested, and the remaining 15,000 were subject to
forfeiture.
On
October 20, 2009, we entered into an independent director agreement with Kelvin
Lau on substantially the same terms as those entered into with Messrs. Bruce,
Serbin and Su (with respect to base retainer, audit committee member retainer,
and meeting fees). Mr. Lau received an option grant to purchase 20,000
shares of common stock of the Company at an exercise price of $8.24 per
share. The option grant also vests quarterly in arrears over the one year
term of Mr. Lau's director agreement.
ITEM
11.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
SHAREHOLDER MATTERS
|
The
following table sets forth as of March 24, 2010 the number of shares of our
Common Stock beneficially owned by (i) each person who is known by us to be the
beneficial owner of more than five percent of the Company’s Common Stock; (ii)
each director; (iii) each of the named executive officers in the Summary
Compensation Table; and (iv) all directors and executive officers as a group. As
of March 24, 2010, we had 24,857,717 shares of Common Stock issued and
outstanding.
Beneficial
ownership is determined in accordance with SEC rules and generally includes
voting or investment power with respect to securities. Unless otherwise
indicated, the stockholders listed in the table have sole voting and investment
power with respect to the shares indicated. Unless otherwise noted, the
principal address of each of the stockholders, directors and officers listed
below is c/o Lihua Holdings Limited, Houxiang Five-Star Industry Distict,
Danyang City, Jiangsu Province, PRC 212312, China.
53
All share
ownership figures include shares of our Common Stock issuable upon securities
convertible or exchangeable into shares of our Common Stock within sixty (60)
days of March 24, 2010 which are deemed outstanding and beneficially owned by
such person for purposes of computing his or her percentage ownership, but not
for purposes of computing the percentage ownership of any other
person.
Name and Address of Beneficial Owner
|
Number of Shares of
Common Stock
Beneficially Owned(1)
|
Percentage of
Outstanding Shares
of Common
Stock(2) (3)
|
||||
Magnify
Wealth Enterprises Limited (4)(5)(6)
|
13,750,000
|
55.3
|
%
|
|||
CMHJ
Technology Fund II, L.P. (7)
|
2,381,818
|
9.6
|
%
|
|||
Yang
“Roy” Yu (5)
|
225,000
|
*
|
||||
Jianhua
Zhu (6)
|
13,750,000
|
55.3
|
%
|
|||
Yaying
Wang (8)
|
6,187,500
|
24.9
|
%
|
|||
Robert
C. Bruce (9) (10)
|
30,000
|
*
|
||||
Jonathan
P. Serbin (10)
|
20,000
|
*
|
||||
Siu
Ki “Kelvin” Lau (11)
|
10,000
|
*
|
||||
All
Directors and Executive Officers, as a group (6 persons)
|
14,035,000
|
56.3
|
%
|
* Less
than one percent
(1)
|
Beneficial
ownership is determined in accordance with the rules of the SEC and
generally includes voting or investment power with respect to securities.
Shares of Common Stock subject to securities anticipated to be exercisable
or convertible at or within 60 days of the date hereof, are deemed
outstanding for computing the percentage of the person holding such option
or warrant but are not deemed outstanding for computing the percentage of
any other person. The indication herein that shares are anticipated to be
beneficially owned is not an admission on the part of the listed
stockholder that he, she or it is or will be a direct or indirect
beneficial owner of those shares.
|
(2)
|
Based
upon 24,857,717 shares of Common Stock issued and
outstanding.
|
(3)
|
As
of March 24, 2010 there were 24,857,717 shares of our Common Stock
issued and outstanding. In determining the percent of Common Stock
beneficially owned on March 24, 2010, (a) the numerator is the number of
shares of Common Stock beneficially owned (including shares that he has
the right to acquire within 60 days of March 24, 2010), and (b) the
denominator is the sum of (i) the 24,857,717 shares outstanding on March
24, 2010, and (ii) the number of shares of Common Stock which
such stockholder has the right to acquire within 60 days of
March 24, 2010 .
|
54
(4)
|
The
address of Magnify Wealth is Quastisky Building, P.O. Box 4389, Road Town,
Tortola, British Virgin Islands. As the sole director of Magnify Wealth,
Mr. Zhu, our CEO and President has sole voting and investment power over
the shares.
|
(5)
|
Magnify
Wealth received 14,025,000 shares of Common Stock in the Share Exchange.
Pursuant to a contractual arrangement between Magnify Wealth and Mr. Yu,
Mr. Yu is entitled to receive up to 450,000 of the shares issued to
Magnify Wealth in the Share Exchange. 112,500 of such shares were
transferred to Mr. Yu immediately upon consummation of the Share Exchange.
112,500 of such shares were released to Mr. Yu on the first anniversary of
the consummation of the Share Exchange. The remaining 225,000 shares have
been placed into an escrow account and shall be released to Mr. Yu in two
equal installments of 112,500 shares issuable on the second and third
anniversary of the consummation of the Share Exchange. Mr. Yu will not
become the record or beneficial owner of the shares placed in escrow until
such time as the shares are released to him. Accordingly, Mr. Yu will not
have the right to vote or receive dividends on such
shares.
|
(6)
|
Includes
13,750,000 shares owned by Magnify Wealth, of which Mr. Zhu, as the sole
director of Magnify Wealth, has sole voting and investment power over the
shares. Of the 13,750,000 shares of Common Stock owned by Magnify Wealth,
Mr. Zhu is deemed to be the beneficial owner of 6,187,500 shares as a
result of the vesting of 50% of Mr. Zhu’s Option Shares, equal to 1,500
shares of Magnify Wealth, or 45.0% of Magnify Wealth’s equity ownership.
Mr. Zhu disclaims beneficial ownership over the remaining 7,562,500 shares
owned by Magnify Wealth.
|
Pursuant
to the Share Transfer Agreement, as amended, with Mr. Chu, Mr. Zhu has the
option to purchase all of the Option Shares at a price of $1.00 per share,
pursuant to the attainment of certain performance targets set forth in the
agreement. As of the date of this prospectus, 50% of the Option Shares have
vested, representing 1,500 ordinary shares of Magnify Wealth; however, Mr. Zhu
has not exercised such Option Shares. Pursuant to a March 7, 2009 amendment to
the Share Transfer Agreement, Mr. Zhu has the right to exercise the remaining
50% of the Option Shares vesting and becoming exercisable on February 14,
2011.
Also on
October 22, 2008, Mr. Chu and Europe EDC, each entered into subscription
agreements for the purchase of 632 shares and 32 shares, respectively, in
Magnify Wealth at a nominal price of US$1.00 per share. Pursuant to these
subscription agreements, Magnify Wealth will issue the shares in tranches
commencing February 14, 2009, 2010, and 2011, of 25%, 25% and 50% of the shares,
respectively. The date of issuance of the shares is the same date that Mr. Zhu’s
Option Shares vest and become exercisable, however, there are no conditions
precedent to the issuance of these shares to Mr. Chu and Europe
EDC.
If all of
the Option Shares are exercised by Mr. Zhu and all of the shares are subscribed
for by Mr. Chu and Europe EDC, Mr. Zhu, Mr. Chu and Europe EDC would own
approximately 81.9%, 17.3% and 0.9% of Magnify Wealth,
respectively.
(7)
|
CMHJ
Partners L.P., a Cayman Islands limited partnership (“CMHJ Partners”) and
the general partners of CMHJ Technology Fund II, L.P. (the “Fund”), and
CMHJ Partners Ltd., a Cayman Islands limited liability company (“CMHJ”)
and the general partner of CMHJ Partners, share voting and investment
power with the Fund with respect to the shares beneficially owned by the
Fund. CMHJ Partners and CMHJ may each be deemed to beneficially own the
shares of Common Stock held by the Fund. CMHJ Partners and CMHJ each
disclaims beneficial ownership of such shares. The 2,381,818 shares of
Common Stock are based on the ownership cap of 9.9% imposed by
the warrants issued to CMHJ. This amount does not include warrants to
purchase up to 390,909 shares of our Common Stock which cannot be
converted or exercised, respectively, because of the ownership
restrictions of the warrants issued to CMHJ. Based upon the terms
of the warrants issued to CMHJ, holders may not convert the Series A
Preferred Stock and/or exercise the warrants, if on any date, such holder
would be deemed the beneficial owner of more than 9.9% of the then
outstanding shares of our Common Stock; however, a holder can elect to
waive the cap upon 61 days notice to us, except that during the 61 day
period prior to the expiration date of their warrants, they can waive the
cap at any time, but a waiver during such period will not be effective
until the day immediately preceding the expiration date of the warrant.
The address for CMHJ is Suite 803, Lippo Plaza 222 Huai Hai Zhong Road
Shanghai 200021, PRC
|
55
(8)
|
As
Mr. Zhu’s wife, Ms. Wang is deemed to be the beneficial owner of 6,187,500
shares of Common Stock as a result of the vesting of 50% of Mr. Zhu’s
Option Shares, equal to 1,500 shares of Magnify Wealth, or 45.0% of
Magnify Wealth’s equity ownership. Ms. Wang disclaims beneficial ownership
over the remaining 7,562,500 shares owned by Magnify Wealth over which Mr.
Zhu has sole voting and investment
power.
|
(9)
|
Includes
2,000 shares of Common Stock held by Mr. Bruce’s
wife.
|
(10)
|
Mr.
Bruce and Mr. Serbin were appointed to the Company’s Board of Directors on
April 14, 2009. Mr. Bruce and Mr. Serbin were each issued an
option to purchase 20,000 shares of the Common Stock of the
Company. The options vest quarterly, in equal installments over
the 12 month period from the date of
grant.
|
(11)
|
Mr.
Lau was appointed to the Company’s Board of Directors on October 20,
2009. Mr. Lau was issued an option to purchase 20,000 shares of
Common Stock of the Company. The options vest quarterly, in equal
installments over the 12 month period from date of
grant.
|
Change
in Control
There are
no arrangements, known to the Company, including any pledge by any person of
securities of the Company the operation of which may, at a subsequent date,
result in a change in control of the Company.
Equity
Compensation Plan Information
The
following table sets forth aggregate information regarding our equity
compensation plans in effect as of December 31, 2009:
Equity
Compensation Plan Information
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
|
Weighted-
average exercise price of outstanding options,warrants and
rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
||||||||||
Plan
category
|
(a)
|
(b)
|
(c)
|
|||||||||
Equity
compensation plans approved by security holders
|
N/A | $ | N/A | N/A | ||||||||
Equity
compensation plans not approved by security holders:
|
||||||||||||
Options to purchase Common Stock | 65,000 | $ | 4.06 | 2,420,771 | ||||||||
Series B Warrants to purchase Common Stock | 464,100 | $ | 3.50 | - 0 - | ||||||||
Warrants to purchase Common Stock | 138,000 | $ | 4.80 | - 0 - | ||||||||
Total | 672,000 | $ | 3.82 | 2,420,771 |
Equity Compensation Plans not approved by
Security Holders
Options
issued under the Lihua International, Inc. 2009 Omnibus Securities and Incentive
Plan
The
Company’s Board of Directors adopted the Lihua International, Inc. 2009 Omnibus
Securities and Incentive Plan (the “2009 Plan”) on April 14, 2009.
The 2009
Plan is administered by the compensation committee of the board of directors,
which consists of three members of the board of directors, each of whom is a
“non-employee director” within the meaning of Rule 16b-3 promulgated under the
Exchange Act and an “outside director” within the meaning of Code Section
162(m).
The 2009
Plan provides for the grant of non-qualified stock options, SARs,
performance share awards, performance unit awards, distribution equivalent right
awards, restricted stock awards and unrestricted stock awards in an amount equal
to 10% of the aggregate number of shares of common stock issued and outstanding
to directors, officers, employees and independent contractors of the Company or
its affiliates. If any award expires, is cancelled, or terminates unexercised or
is forfeited, the number of shares subject thereto is again available for grant
under the 2009 Plan. The number of shares of Common Stock for which awards may
be granted to a participant under the 2009 Plan in any calendar year cannot
exceed 100,000 shares.
In
connection with the grant of an award, the compensation committee may provide
that, in the event of a change in control, any outstanding awards that are
unexercisable or otherwise unvested will become fully vested and immediately
exercisable.
The
compensation committee may adopt, amend and rescind rules relating to the
administration of the 2009 Plan, and amend, suspend or terminate the 2009 Plan,
but no amendment will be made that adversely affects in a material manner any
rights of the holder of any award without the holder’s consent, other than
amendments that are necessary to permit the granting of awards in compliance
with applicable laws. We have attempted to structure the 2009 Plan so that
remuneration attributable to stock options and other awards will not be subject
to a deduction limitation contained in Section 162(m) of the Code.
Issuance
of Series B Warrants for Services to Placement Agent and Consultant
In
October 2008, we issued Series B Warrants to:
·
|
purchase
250,000 shares of our common stock as partial compensation for services to
a financial advisor and placement agent in connection with the private
placement financing in 2008; and
|
·
|
to
purchase 250,000 shares of our common stock to a consultant as partial
compensation for business and investor relations consulting
services.
|
The
Series B warrants expire on October 31, 2013. If the per share market value of
one share of our common stock is greater than the exercise price and, at the
time of election, the average trading volume of Common Stock exceeds 100,000
shares for the immediately preceding 30 trading days, in lieu of exercising the
Series B Warrant by payment of cash, the holders may exercise the Series B
Warrant by cashless exercise by surrendering the Series B Warrant, in which
event we will issue to the holder a number of shares of our Common Stock
computed using the following formula:
X = Y
-
(A)(Y)
B
Where:X =
the number of shares of Common Stock to be issued to the Holder.
Y = the number of shares of Common
Stock issuable upon exercise of the Series B Warrant in accordancewith the terms
of the Series B Warrant by means of a cash exercise rather than a cashless
exercise.
A = the exercise price.
B = the volume weighted average price
of the Common Stock for the 30 trading day period immediately preceding the date
of such election.
Issuance
of Warrants Pursuant to Underwriting Agreement
On
September 9, 2009, pursuant to the terms of an underwriting agreement entered
into in connection with our public offering, we issued warrants to the
underwriters to purchase up to 138,000 shares of the Company’s Common Stock at a
strike price of $4.80 per share. These warrants are exercisable at any time
during a 5-year term commencing on the date that is six months from September 4,
2009.
56
ITEM
12.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
As of
December 31, 2009. Mr. Jianhua Zhu has guaranteed the Company’s short-term bank
loans with Agriculture Bank of China for $ 2,196,772. Mr. Jianhua Zhu is the
Company’s CEO, President, and Director.
As of
December 31, 2008, Tianyi Telecommunication Co., Ltd. (“Tianyi Telecom”) has
guaranteed the Company’s short-term bank loans with several commercial banks in
China in the aggregate amount of $6,145,202. Tianyi Telecom is owned by the
brother of Ms. Yaying Wang, our Chief Operational Officer and director and wife
of our CEO.
For the
years ended December 31, 2009 and 2008, our sales revenue included $471,554 and
$367,585 respectively that were made to Tianyi Telecom owned by brothers of
Ms. Yaying Wang, our Chief Operational Officer and director and wife of our
CEO.
Director
Independence
On April
14, 2009, the Board of Directors of the Company appointed Robert C. Bruce,
Jonathan P. Serbin and Su Liu to serve as independent directors. The
Board of Directors determined that each of Messrs. Bruce, Serbin and Lau were
independent as defined by Rule 5605(a)(2) of the Marketplace Rules of The NASDAQ
Stock Market, LLC (the “Marketplace Rules”) and Section 10A(m)(3) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Mr. Liu
resigned from the Board of Directors on October 11, 2009, and the Board of
Directors appointed Kelvin Lau to replace Mr. Liu. The Board of
Directors determined that Mr. Lau was independent as defined by Rule 5605(a)(2)
of the Marketplace Rules and Section 10A(m)(3) of the Exchange Act.
ITEM
13.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
On
December 16, 2008 the Board of Directors appointed AGCA, Inc. (f/k/a Yu &
Associates CPA Corporation) as independent auditors to audit our financial
statements for the fiscal year ended December 31, 2008. Prior to December 16,
2008 DeJoya Griffith & Company LLC (“DeJoya”) had served as our independent
auditor since our inception.
Public
Accounting Fees
DeJoya Griffith & Company
LLC
|
||||||
2008
|
||||||
Audit
Fees
|
$
|
8,000-
|
||||
Audit
Related Fees
|
$
|
-
|
||||
Tax
Fees
|
$
|
500-
|
||||
All
Other Fees
|
$
|
-
|
Audit
fees were for professional services rendered by DeJoya during the 2007 fiscal
year for the audit of our annual financial statements and the review of the
financial statements included in our quarterly reports on Forms 10-Q, and
services that are normally provided by DeJoya in connection with statutory and
regulatory filings or engagements for that fiscal year. Audit fees were for
professional services rendered by DeJoya during the 2008 fiscal year for the
review of the financial statements included in our first second and third
quarter reports on Forms 10-Q, and services that are normally provided by DeJoya
in connection with statutory and regulatory filings or engagements for that
fiscal year. DeJoya billed for services provided in the preparation of
consolidated tax returns. DeJoya did not bill any other fees for services
rendered to us during the fiscal years ended December 31, 2007 and 2008 for
assurance and related services in connection with the audit or review of our
financial statements.
AGCA, Inc.
|
||||||||
2009
|
2008
|
|||||||
Audit
Fees
|
$ | 78,000 | $ | 183,400 | ||||
Audit
Related Fees
|
$ | 90,000 | $ | — | ||||
Tax
Fees
|
$ | 5,000 | $ | — | ||||
All
Other Fees
|
$ | — | $ | — |
Audit
fees were for professional services rendered by AGCA during the 2009 fiscal year
for the audit of our annual financial statements and the review of the financial
statements included in our quarterly reports on Forms 10-Q, and services that
are normally provided by AGCA in connection with statutory and regulatory
filings or engagements for that fiscal year. AGCA billed for services provided
in the preparation of consolidated tax returns.
Audit
fees were for professional services rendered by AGCA, Inc. during the 2008
fiscal year for the audit of our annual financial statements and the review of
the financial statements included in our current report on form 8-K dated
November 6, 2008, and services that are normally provided by AGCA, Inc. in
connection with statutory and regulatory filings or engagements for that fiscal
year.
AGCA did
not bill any other fees for services rendered to us during the fiscal years
ended December 31, 2009 and 2008 for assurance and related services in
connection with the audit or review of our financial
statements.
57
PART
IV
ITEM
14.
|
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
|
(a) The
following are filed with this report:
|
(1)
|
The
financial statements listed on the Index to Consolidated Financial
Statements
|
|
(2)
|
Not
applicable
|
|
(3)
|
The
exhibits listed on the Exhibit Index, which include managerial contracts
or compensatory plans or
arrangements.
|
(b) The
exhibits listed on the Exhibit Index are filed as part of this
report.
(c)
Not applicable.
58
EXHIBIT
INDEX
EXHIBIT
NUMBER
|
DESCRIPTION
|
|
2.1
|
Share
Exchange Agreement dated as of October 31, 2008 (2)
|
|
2.2
|
Agreement
and Plan of Merger, dated September 19, 2008 (2)
|
|
3.1
|
Certificate
of Incorporation, as filed with the Delaware Secretary of State on January
24, 2006 (1)
|
|
3.2
|
By-Laws
(1)
|
|
3.3
|
Certificate
of Ownership and Merger, dated September 19, 2008 (2)
|
|
3.4
|
Certificate
of Designations, Preferences, Rights and Limitations of Series A Preferred
Stock (2)
|
|
4.1
|
Form
of Series A Warrant (2)
|
|
4.2
|
Form
of Series B Warrant (2)
|
|
4.3
|
Common
Stock Purchase Agreement by and between Plastron Acquisition Corp I
and Scheduled Purchasers thereto, dated June 27, 2008.
(3)
|
|
10.1
|
Securities
Purchase Agreement, dated as of October 31, 2008 (2)
|
|
10.2
|
Registration
Rights Agreement, dated as of October 31, 2008 (2)
|
|
10.3
|
Closing
Escrow Agreement, dated as of October 31, 2008 (2)
|
|
10.4
|
Securities
Escrow Agreement, dated as of October 31, 2008 (2)
|
|
10.5
|
Investor
and Public Relations Escrow Agreement, dated October 31, 2008
(2)
|
|
10.6
|
Jianhua
Zhu Employment Agreement, dated June 24, 2008 (2)
|
|
10.7
|
Yang
“Roy” Yu Employment Agreement, dated June 24, 2008 (2)
|
|
10.8
|
Yaying
Wang Employment Agreement, dated June 24, 2008 (2)
|
|
10.9
|
Jianhua
Zhu Amendment to Employment Agreement, dated September 26, 2008
(2)
|
|
10.10
|
Yang
“Roy” Yu Amendment to Employment Agreement, dated September 26, 2008
(2)
|
|
10.11
|
Yaying
Wang Amendment to Employment Agreement, dated September 26, 2008
(2)
|
|
10.12
|
Loan
Agreement with Zhenjiang Branch of Bank of Communications, dated August
26, 2008 (2)
|
|
10.13
|
Loan
agreement with Danyang Sub-branch of Agricultural Bank of China, dated
April 16, 2007 (2)
|
|
10.14
|
Loan
Agreement with Danyang Sub-branch of Agricultural Bank of China, dated May
21, 2008 (2)
|
|
10.15
|
Loan
Agreement with Danyang Sub-branch of Agricultural Bank of China, dated
August 22, 2008 (2)
|
|
10.16
|
Loan
Agreement with Danyang Sub-branch of China Construction Bank, dated March
7, 2008 (2)
|
|
10.17
|
Loan
Agreement with Danyang Sub-branch of China Construction Bank, dated April
30, 2008 (2)
|
|
10.18
|
Loan
Agreement with Danyang Sub-branch of Industrial and Commercial Bank of
China, dated April 28, 2008 (2)
|
|
10.19
|
Loan
Agreement with Danyang Sub-branch of Bank of Jiangsu, dated June 12, 2008
(2)
|
|
10.20
|
Loan
Agreement with Danyang Sub-branch of Bank of Jiangsu, dated July 27, 2008
(2)
|
|
10.21
|
Form
of Original Stockholder Lock-Up Agreement, dated October 31, 2008
(5)
|
|
10.22
|
Form
of Principal Shareholder Lock-Up Agreement, dated October 31, 2008
(5)
|
|
10.23
|
Placement
Agent Agreement with Broadband Capital LLC, dated June 29, 2008
(6)
|
|
10.24
|
Amendment
to Placement Agent Agreement with Broadband Capital LLC, dated October 27,
2008 (6)
|
|
10.25
|
Share
Transfer Agreement, dated October 22, 2008 (7)
|
|
10.26
|
Amendment
to the Share Transfer Agreement, dated March 7, 2009
(7)
|
|
10.27
|
Common
Stock Purchase Agreement by and between Plastron Acquisition Corp I and
Scheduled Purchasers thereto, dated June 27, 2008.(3)
|
|
10.28
|
Independent
Director Agreement, Robert Bruce (8)
|
|
10.29
|
Independent
Director Agreement, Jonathan Serbin (8)
|
|
10.30
|
Independent
Director Agreement, Su Liu (8)
|
|
10.31
|
Independent
Director Agreement, Kelvin Lau (9)
|
|
14
|
Code
of Business Conduct and Ethics. (4)
|
|
21
|
+
|
List
of Subsidiaries.
|
23.1
|
+
|
Consent
of AGCA, Inc.
|
31.1
|
+
|
Certification
of Chief 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 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 the Principal Financial Officer Pursuant to 18 U.S.C. 1350 (Section 906
of the Sarbanes-Oxley Act of
2002).
|
59
+ Filed
herewith.
(1)
|
Incorporated
by reference to the Company’s Form 10-SB, filed with the SEC on May 15,
2007
|
(2)
|
Incorporated
by reference to the Company’s Current Report on Form 8-K, filed with the
SEC on November 6, 2008
|
(3)
|
Incorporated
by reference to the Company’s Current Report on Form 8-K, filed with the
SEC on July 3, 2008
|
(4)
|
Incorporated
by reference to the Company’s Annual Report on Form 10-KSB, filed with the
SEC on February 26, 2008
|
(6)
|
Incorporated
by reference to the Company’s Registration Statement on Form S-1,
Amendment No. 1, filed with the SEC on February 12,
2009.
|
(7)
|
Incorporated
by reference to the Company’s Annual Report on Form 10-K file with the SEC
April 2, 2009
|
(8)
|
Incorporated
by reference to the Company’s Current Report on Form 8-K, filed with the
SEC on April 17, 2009.
|
(9)
|
Incorporated
by reference to the Company’s Current Report on Form 8-K, filed with the
SEC on October 23, 2009.
|
60
LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
F –
1
|
Consolidated
Balance Sheets
|
F –
2
|
Consolidated
Statements of Income and Comprehensive Income
|
F –
3
|
Consolidated
Statements of Stockholders’ Equity
|
F –
4
|
Consolidated
Statements of Cash Flows
|
F –
5
|
Notes
to Consolidated Financial Statements
|
F-6
– F-39
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Lihua
International, Inc.
Danyang
City, China
We have
audited the accompanying balance sheets of Lihua International, Inc. and
subsidiaries as of December 31, 2009 and 2008, and the related statements of
income and comprehensive income, stockholders’ equity, and cash flows for the
years then ended. Lihua International, Inc.’s management is
responsible for these financial statements. Our responsibility is to
express an opinion on these financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the company’s
internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Lihua International, Inc. and
subsidiaries as of December 31, 2009 and 2008, and the results of its operations
and its cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
/s/ AGCA,
Inc.
Arcadia,
California
March 30,
2010
F-1
LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE
SHEETS
As
of December 31,
|
||||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
and cash equivalents
|
$
|
34,614,838
|
$
|
26,041,849
|
||||
Restricted
cash
|
575,000
|
1,750,000
|
||||||
Notes
receivable, net
|
—
|
321,892
|
||||||
Accounts
receivable, net
|
10,996,430
|
5,042,739
|
||||||
Other
receivables and current assets
|
493,006
|
—
|
||||||
Prepaid
land use right – current portion
|
172,515
|
172,353
|
||||||
Deferred
income tax assets
|
98,068
|
23,395
|
||||||
Inventories
|
17,534,254
|
586,938
|
||||||
Total
current assets
|
64,484,111
|
33,939,166
|
||||||
OTHER
ASSETS
|
||||||||
Property,
plant and equipment, net
|
18,424,080
|
7,440,943
|
||||||
Construction
in progress
|
59,558
|
6,017,941
|
||||||
Deposits
for plant and equipment
|
28,163
|
1,077,892
|
||||||
Prepaid
land use right – long-term portion
|
8,168,039
|
8,332,732
|
||||||
Intangible
assets
|
2,812
|
4,214
|
||||||
Total
non-current assets
|
26,682,652
|
22,873,722
|
||||||
Total
assets
|
$
|
91,166,763
|
$
|
56,812,888
|
||||
LIABILITIES AND
SHAREHOLDERS' EQUITY
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Short
term bank loans
|
$
|
2,196,772
|
$
|
6,145,202
|
||||
Accounts
payable
|
4,923,360
|
1,643,544
|
||||||
Other
payables and accruals
|
681,097
|
830,744
|
||||||
Income
taxes payable
|
1,584,292
|
401,436
|
||||||
Total
current liabilities
|
9,385,521
|
9,020,926
|
||||||
Total
liabilities
|
9,385,521
|
9,020,926
|
||||||
Commitment
and contingencies (Note 23)
|
||||||||
Series
A redeemable convertible preferred stock: $0.0001 par
value:
|
||||||||
10,000,000
shares authorized (liquidation preference of $2.20 per share), none and
6,818,182 shares issued and outstanding
|
—
|
13,116,628
|
||||||
SHAREHOLDERS'
EQUITY
|
||||||||
Series
A convertible preferred stock: $0.0001 par value (liquidation preference
of $2.20 per share), 10,000,000 shares authorized, none issued and
outstanding
|
—
|
—
|
||||||
Common
stock, $0.0001 par value: 75,000,000 shares authorized,
|
||||||||
24,154,083
and 15,000,000 shares issued and outstanding
|
2,416
|
1,500
|
||||||
Additional
paid-in capital
|
39,921,717
|
7,976,976
|
||||||
Statutory
reserves
|
5,400,994
|
2,603,444
|
||||||
Retained
earnings
|
33,826,885
|
21,521,937
|
||||||
Accumulated
other comprehensive income
|
2,629,230
|
2,571,477
|
||||||
Total
shareholders' equity
|
81,781,242
|
34,675,334
|
||||||
Total
liabilities and shareholders' equity
|
$
|
91,166,763
|
$
|
56,812,888
|
See
accompanying notes to consolidated financial statements
F-2
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(AMOUNTS
EXPRESSED IN US DOLLAR)
Year Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
NET
REVENUE
|
$
|
161,543,434
|
$
|
50,006,057
|
||||
Cost
of sales
|
(125,310,613
|
)
|
(33,202,344
|
)
|
||||
GROSS
PROFIT
|
36,232,821
|
16,803,713
|
||||||
Selling
expenses
|
(1,722,242
|
)
|
(700,029
|
)
|
||||
General
and administrative expenses
|
(3,991,801
|
)
|
(1,907,043
|
)
|
||||
Income
from operations
|
30,518,778
|
14,196,641
|
||||||
Other
income (expenses):
|
||||||||
Interest
income
|
173,807
|
68,353
|
||||||
Interest
expenses
|
(335,335
|
)
|
(514,950
|
)
|
||||
Merger
expenses
|
—
|
(259,225
|
)
|
|||||
Change
in fair value of warrants classified as derivatives
|
(8,831,161
|
)
|
—
|
|||||
Other
income
|
500,834
|
3,741
|
||||||
Total
other income (expenses)
|
(8,491,855
|
)
|
(702,081
|
)
|
||||
Income
before income taxes
|
22,026,923
|
13,494,560
|
||||||
Provision
for income taxes
|
(5,247,647
|
)
|
(1,792,681
|
)
|
||||
NET
INCOME
|
16,779,276
|
11,701,879
|
||||||
OTHER
COMPREHENSIVE INCOME:
|
||||||||
Foreign
currency translation adjustments
|
57,753
|
1,622,035
|
||||||
COMPREHENSIVE
INCOME
|
$
|
16,837,029
|
$
|
13,323,914
|
||||
Net
income per share
|
||||||||
Basic
|
$
|
0.94
|
$
|
0.75
|
||||
Diluted
|
$
|
0.88
|
$
|
0.70
|
||||
Weighted
average number of shares outstanding
|
||||||||
Basic
|
17,822,890
|
14,187,945
|
||||||
Diluted
|
19,128,231
|
15,327,422
|
See
accompanying notes to consolidated financial statements.
F-3
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(AMOUNTS
EXPRESSED IN US DOLLAR)
Accumulated
|
|||||||||||||||||||||||||
Common Stock
|
Additional
|
Other
|
|||||||||||||||||||||||
Number of
|
Paid-in
|
Statutory
|
Retained
|
Comprehensive
|
|||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Reserves
|
Earnings
|
Income
|
Total
|
|||||||||||||||||||
At
January 1, 2008
|
14,025,000
|
$
|
1,403
|
$
|
4,706,022
|
$
|
1,343,338
|
$
|
12,082,279
|
$
|
949,442
|
$
|
19,082,484
|
||||||||||||
Effect
of reverse merger
|
975,000
|
97
|
1,387
|
—
|
—
|
—
|
1,484
|
||||||||||||||||||
Net
income
|
—
|
—
|
—
|
—
|
11,701,879
|
—
|
11,701,879
|
||||||||||||||||||
Foreign
currency translation adjustment
|
—
|
—
|
—
|
—
|
—
|
1,622,035
|
1,622,035
|
||||||||||||||||||
Comprehensive
income
|
13,323,914
|
||||||||||||||||||||||||
Effect
of Restructuring
|
—
|
—
|
1,270,292
|
—
|
—
|
—
|
1,270,292
|
||||||||||||||||||
Beneficial
conversion feature of convertible preferred stock (Note
15)
|
—
|
—
|
1,002,115
|
—
|
—
|
—
|
1,002,115
|
||||||||||||||||||
Amortization
of preferred stock discount resulting from accounting for a beneficial
conversion feature, deemed analogous to a dividend (Note
15)
|
—
|
—
|
—
|
—
|
(1,002,115
|
)
|
—
|
(1,002,115
|
)
|
||||||||||||||||
Warrants
for convertible preferred stock (Note 15)
|
—
|
—
|
539,910
|
—
|
—
|
—
|
539,910
|
||||||||||||||||||
Share-based
payments to employees
|
—
|
—
|
367,250
|
—
|
—
|
—
|
367,250
|
||||||||||||||||||
Warrants
issued for services
|
—
|
—
|
90,000
|
—
|
—
|
—
|
90,000
|
||||||||||||||||||
Appropriation
of statutory reserves
|
—
|
—
|
—
|
1,260,106
|
(1,260,106
|
)
|
—
|
—
|
|||||||||||||||||
At
December 31, 2008, as previously reported
|
15,000,000
|
1,500
|
7,976,976
|
2,603,444
|
21,521,937
|
2,571,477
|
34,675,334
|
||||||||||||||||||
Cumulative
effect of reclassification of common stock purchase
warrants
|
—
|
—
|
(629,910
|
)
|
—
|
(1,676,778
|
)
|
—
|
(2,306,688
|
)
|
|||||||||||||||
At
January 1, 2009, as adjusted
|
15,000,000
|
1,500
|
7,347,066
|
2,603,444
|
19,845,159
|
2,571,477
|
32,368,646
|
||||||||||||||||||
Net
income
|
—
|
—
|
—
|
—
|
16,779,276
|
—
|
16,779,276
|
||||||||||||||||||
Foreign
currency translation adjustment
|
—
|
—
|
—
|
—
|
—
|
57,753
|
57,753
|
||||||||||||||||||
Comprehensive
income
|
16,837,029
|
||||||||||||||||||||||||
Issue
of common stock in public offering
|
2,300,000
|
230
|
7,863,770
|
—
|
—
|
—
|
7,864,000
|
||||||||||||||||||
Conversion
of redeemable convertible preferred stock to common stock
|
6,818,183
|
682
|
13,115,946
|
—
|
—
|
—
|
13,116,628
|
||||||||||||||||||
Exercise
of warrants
|
35,900
|
4
|
125,646
|
—
|
—
|
—
|
125,650
|
||||||||||||||||||
Reclassification
of warrants from derivatives to equity on amendment of terms (Note
3)
|
—
|
—
|
11,137,849
|
—
|
—
|
—
|
11,137,849
|
||||||||||||||||||
Share-based
payments to employees and directors
|
—
|
—
|
331,440
|
—
|
—
|
—
|
331,440
|
||||||||||||||||||
Appropriation
of statutory reserves
|
—
|
—
|
—
|
2,797,550
|
(2,797,550
|
)
|
—
|
—
|
|||||||||||||||||
At
December 31, 2009
|
24,154,083
|
$
|
2,416
|
$
|
39,921,717
|
$
|
5,400,994
|
$
|
33,826,885
|
$
|
2,629,230
|
$
|
81,781,242
|
F-4
LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(AMOUNTS
EXPRESSED IN US DOLLAR)
Year Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
income
|
$ | 16,779,276 | $ | 11,701,879 | ||||
Adjustments
to reconcile net income to cash provided by operating
activities:
|
||||||||
Depreciation
and amortization
|
1,652,863 | 812,339 | ||||||
Merger
expenses
|
— | 259,225 | ||||||
Share-based
compensation costs
|
331,440 | 367,250 | ||||||
Warrants
issued for services
|
— | 90,000 | ||||||
Change
in fair value of warrants
|
8,831,161 | — | ||||||
Deferred
income tax benefits
|
(74,621 | ) | (23,022 | ) | ||||
(Increase)
decrease in assets:
|
||||||||
Accounts
receivable
|
(5,946,526 | ) | 701,310 | |||||
Notes
receivable
|
322,061 | 470,299 | ||||||
Other
receivables and current assets
|
(492,804 | ) | 10,259 | |||||
Inventories
|
(16,939,820 | ) | 2,154,764 | |||||
Increase
(decrease) in liabilities:
|
||||||||
Accounts
payable
|
2,932,371 | (994,285 | ) | |||||
Other
payables and accruals
|
(150,322 | ) | 312,986 | |||||
Income
taxes payable
|
1,181,995 | (25,302 | ) | |||||
Net
cash provided by operating activities
|
8,427,074 | 15,837,702 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Payment
of merger expenses for reverse acquisition
|
— | (259,225 | ) | |||||
Repayment
from a related party
|
— | 4,168,699 | ||||||
Purchase
of property, plant and equipment
|
(5,094,444 | ) | (4,852,020 | ) | ||||
Prepayment
for land use right
|
— | (3,750,540 | ) | |||||
Net
cash used in investing activities
|
(5,094,444 | ) | (4,693,086 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
New
short-term bank loans
|
2,196,772 | 11,950,700 | ||||||
Repayments
of short-term bank loans
|
(6,150,962 | ) | (10,222,888 | ) | ||||
Repayment
to related parties
|
— | (2,667,675 | ) | |||||
Release
of restricted cash related to Private Placement
|
1,175,000 | — | ||||||
Proceeds
from exercise of warrants
|
125,650 | — | ||||||
Proceeds
from Private Placement, net of restricted cash held in
escrow
|
— | 11,906,538 | ||||||
Proceeds
from public offering of common stock, net of expenses of
$1,336,000
|
7,864,000 | — | ||||||
Net
cash provided by financing activities
|
5,210,460 | 10,966,675 | ||||||
Foreign
currency translation adjustment
|
29,899 | 716,909 | ||||||
INCREASE
IN CASH AND CASH EQUIVALENTS
|
8,572,989 | 22,828,200 | ||||||
CASH
AND CASH EQUIVALENTS, at the beginning of the year
|
26,041,849 | 3,213,649 | ||||||
CASH
AND CASH EQUIVALENTS, at the end of the year
|
$ | 34,614,838 | $ | 26,041,849 | ||||
NON-CASH
INVESTING AND FINANCING TRANSACTIONS:
|
||||||||
Shares-based
compensation to employees and directors
|
$ | 331,440 | $ | 367,250 | ||||
Warrants
issued for services
|
— | 90,000 | ||||||
$ | 331,440 | $ | 457,250 | |||||
SUPPLEMENTAL
DISCLOSURE INFORMATION
|
||||||||
Cash
paid for interest
|
$ | 335,335 | $ | 514,950 | ||||
Cash
paid for income taxes
|
$ | 4,140,273 | $ | 1,841,005 |
F-5
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
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 is primarily engaged in the value-added manufacturing of bimetallic
composite conductor wire, such as copper clad aluminum (“CCA”) fine wire, CCA
magnet wire and CCA tin plated wire. From the first quarter of 2009, the
Company began to utilize refined, or recycled, copper to manufacture and
sell low content oxygen copper cable and copper magnet wire to their existing
customer base. 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
December 31, 2009, details of the subsidiaries of the Company are as
follows:
Subsidiaries’ names
|
Domicile and date
of incorporation
|
Paid-up
capital
|
Effective
ownership
|
Principal activities
|
||||||||
Ally
Profit Investments Limited (“Ally
Profit”)
|
British
Virgin Islands March
12, 2008
|
$100 | 100 | % |
Holding
company of other subsidiaries
|
|||||||
Lihua
Holdings Limited (“Lihua
Holdings”)
|
Hong
Kong April
17, 2008
|
HK$100
|
100 | % |
Holding
company of other subsidiaries
|
|||||||
Danyang
Lihua Electron Co., Ltd. (“Lihua
Electron”)
|
People’s
Republic of China (“PRC”) December
30, 1999
|
$8,200,000 | 100 | % |
Manufacturing
and sales of bimetallic composite conductor wire such as copper clad
aluminum (CCA) wire and enameled CCA wire.
|
|||||||
Jiangsu
Lihua Copper Industry Co., Ltd. (“Lihua
Copper”)
|
PRC
August 31,
2007
|
$15,000,000 | 100 | % |
Manufacturing
and sales of refined
copper.
|
REVERSE
ACQUISITION
On
October 31, 2008, the Company entered into a share exchange agreement (“Share Exchange
Agreement”) under which the Company issued 14,025,000 shares of its
Common Stock, par value $0.0001, to Magnify Wealth Enterprise Limited, the sole
shareholder of Ally Profit (the “Ally Profit
Shareholder” or “Magnify Wealth”) in
exchange for all the issued and outstanding shares of Ally Profit (the “Share Exchange”). As
a result of the Share Exchange, Ally Profit has become the Company’s
wholly-owned subsidiary and Ally Profit Shareholder acquired a majority of the
Company’s issued and outstanding stock. Concurrent with the Share Exchange, Mr.
Jianhua Zhu (the managing director of Ally Profit and all of its operating
subsidiaries, “Mr.
Zhu”) has been appointed the Chief Executive Officer of the
Company.
As a
result, the Share Exchange has been accounted for as a reverse acquisition using
the purchase method of accounting, whereby Ally Profit is deemed to be the
accounting acquirer (legal acquiree) and the Company to be the accounting
acquiree (legal acquirer). The financial statements before the date of Share
Exchange are those of Ally Profit with the results of the Company being
consolidated from the date of Share Exchange. The equity section and earnings
per share have been retroactively restated to reflect the reverse acquisition
and no goodwill has been recorded.
Ally
Profit was incorporated in the British Virgin Islands on March 12, 2008. In June
2008, pursuant to a restructuring plan set out below, Ally Profit has become the
holding company of a group of companies comprising Lihua Holdings, a company
incorporated in Hong Kong, which holds 100% equity interests in each of Danyang
Lihua and Lihua Copper, each a limited liability company organized under the
existing laws of PRC.
F-6
LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
1
|
DESCRIPTION
OF BUSINESS AND ORGANIZATION –
CONTINUED
|
RESTRUCTURING
In June
2008, pursuant to a restructuring plan (“ Restructuring ”)
intended to ensure compliance with the PRC rules and regulations, Ally Profit
through its directly wholly-owned subsidiary Lihua Holdings, acquired 100%
equity interests in Lihua Electron and Lihua Copper from companies controlled by
Mr. Zhu and other minority shareholders.
The table
below sets forth the proportion of equity interests in all entities involved
before and after the Restructuring based on subscribed registered
capital:
Magnify
Wealth
|
Ally Profit
|
Lihua
Holdings
|
Lihua Electron
|
Lihua
Copper
|
||||||||||||||||||||||||||||||||||||
Before
|
After
|
Before
|
After
|
Before
|
After
|
Before
|
After
|
Before
|
After
|
|||||||||||||||||||||||||||||||
%
|
%
|
%
|
%
|
%
|
%
|
%
|
%
|
%
|
%
|
|||||||||||||||||||||||||||||||
Shareholder
|
||||||||||||||||||||||||||||||||||||||||
Mr.
Fo-Ho Chu (“Mr.
Chu”)
|
100 | 100 | — | — | — | — | 45.46 | — | — | — | ||||||||||||||||||||||||||||||
Magnify
Wealth
|
— | — | 100 | 100 | — | — | — | — | — | |||||||||||||||||||||||||||||||
Ally
Profit
|
— | — | — | — | 100 | 100 | — | — | — | — | ||||||||||||||||||||||||||||||
Lihua
Holdings
|
— | — | — | — | — | — | — | 100 | — | 100 | ||||||||||||||||||||||||||||||
Danyang Special
Electronics Co., Ltd. (a)
|
— | — | — | — | — | — | 52.27 | — | 25 | — | ||||||||||||||||||||||||||||||
Invest Unicorn
Holdings Limited
(b)
|
— | — | — | — | — | — | — | — | 75 | — | ||||||||||||||||||||||||||||||
Imbis
Europe B.V. h/o Asia Trading (EDC) (“Europe
EDC”)
|
— | — | — | — | — | — | 2.27 | — | — | — | ||||||||||||||||||||||||||||||
100 | 100 | 100 | 100 | 100 | 100 | 100 | 100 | 100 | 100 |
(a)
|
Equity
interests in Danyang Special Electronics Co., Ltd., a PRC domestic
company, are held as to 60% by Mr. Zhu and 40% by his wife. Mr. Zhu and
his wife are acting in concert and considered parties to the same control
group.
|
(b)
|
Invest
Unicorn Holdings Limited, incorporated in the British Virgin Islands, is
100% beneficially owned by Mr. Zhu.
|
As part
of the Restructuring, Mr. Chu, the sole shareholder of Magnify Wealth, appointed
Mr. Zhu as the sole director of Magnify Wealth, Ally Profit as well as Lihua
Holdings. Additionally, Mr. Chu undertook to Mr. Zhu that no further directors
would be appointed to the board of either Magnify Wealth, Ally Profit or Lihua
Holdings without the prior written consent of Mr. Zhu. As the sole director of
Magnify Wealth, Ally Profit and Lihua Holdings, Mr. Zhu is able to control and
manage the operational, investment and business decisions of these companies,
including the ability to make the sole decisions regarding any change in these
companies’ capital structure or payment of dividends. Further, Mr. Zhu has the
ultimate authority to determine the composition of the board of directors for
these companies.
Furthermore,
as part of the Restructuring, Mr. Zhu and Mr. Chu entered into a Share Transfer
Agreement dated October 22, 2008, pursuant to which Mr. Chu granted to Mr. Zhu
the option to purchase all of the 3,000 ordinary shares of Magnify Wealth held
by Mr. Chu at the nominal price of $1.00 per share. The option shares vest and
become exercisable upon Lihua Electron and Lihua Copper attaining consolidated
net income performance targets for fiscal 2008, 2009, and 2010 of $8 million
(“2008 Target”), $11 million and $14 million respectively. If each performance
target is met, 25% of the Option Shares will vest and become exercisable
forty-five days after December 31, 2008, 25% of the Option shares will vest and
become exercisable forty-five days after December 31, 2009 and the remaining 50%
of the Option Shares will vest and become exercisable forty five days after
December 31, 2010.
The
purpose of the Share Transfer Agreement is to enable Mr. Zhu to re-acquire the
ultimate legal ownership of Lihua Electron and Lihua Copper in compliance with
PRC rules and regulations. For this reason, on March 7, 2009, Mr. Zhu and Mr. Chu entered
into an amendment to the Share Transfer Agreement whereby alternate conditions
for Mr. Zhu to exercise the Option Shares have been included such that Mr. Zhu
will be entitled to exercise all the Option Shares as long as the audited
consolidated net income of Lihua Electron and Lihua Copper for fiscal 2008 is
10% or more higher than 2008 Target (“ Alternate Performance Target ”) no matter
whether the performance targets for 2009 and 2010 are met or
not.
For the
year ended December 31, 2008, the Company’s net income was $11,701,879, which
achieved the Alternate Performance Target. Therefore, Mr. Zhu will be entitled
to exercise all of the Option Shares subject only to the vesting period which
expires forty five days after December 31, 2010.
F-7
LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
1
|
DESCRIPTION
OF BUSINESS AND ORGANIZATION –
CONTINUED
|
The
arrangement for Mr. Zhu to act as the sole director of the holding companies of
Lihua Electron and Lihua Copper, the undertaking by Mr. Chu not to appoint
additional director, as well as the Share Transfer Agreement are each
inseparable and indispensable part of the Restructuring which enables Mr. Zhu to
continue to have residual rewards of the combined entity.
Also on
October 22, 2008, the minority shareholders, namely Mr. Chu and Europe EDC,
respectively entered into a subscription agreement (“ Subscription Agreement
”) to purchase additional shares in Magnify Wealth at a nominal price of
US$1.00 per share. Pursuant to these subscription agreements, Mr. Chu and Europe
EDC will only be entitled to exercise their subscription rights at the same time
when Mr. Zhu exercises his Option Shares under the Share Transfer Agreement. The
number of subscription shares exercisable by Mr. Chu and Europe EDC was
determined based on the proportion of capital contributed by each of Mr. Zhu,
Mr. Chu and Europe EDC in Lihua Electron and Lihua Copper. The purpose of the
subscription agreements, together with the Share Transfer Agreement, is to
enable Mr. Zhu, Mr. Chu and Europe EDC to re-acquire their proportionate
ultimate legal ownership of Lihua Electron and Lihua Copper in compliance with
the PRC rules and regulations. As a result, there has been no ownership change
of the minority interests of each of the two PRC Operating
Companies.
Also as
part of the Restructuring, Lihua Holdings’ capital was established by way of
contributions from Mr. Zhu and other minority shareholders, which aggregate
amount equaled the total transfer price they were entitled to receive for the
transfer of their equity interests in Lihua Electron and Lihua Copper to Lihua
Holdings. Therefore, Mr. Zhu and the other minority shareholders, as the former
stockholders of Lihua Electron and Lihua Copper who gave up legal ownership
thereof, have not received any net cash amount. Nor has there been any cash flow
out of the combined entity during the whole period from the date of transfer of
legal ownership of Lihua Electron and Lihua Copper through the expiry of the
Share Transfer Agreement and the Subscription Agreements, at which time it is
fully expected Mr. Zhu and other minority shareholders will have re-acquired
their proportionate ultimate legal ownership of Lihua Electron and Lihua Copper.
As a result, Mr. Zhu and other minority shareholders have continued to bear the
residual risks of the combined entity.
Mr. Zhu
has retained a financial controlling interest in the combined entity through the
above-discussed residual risks and rewards. Furthermore, during and after the
Restructuring, there has been no change to the composition of the board of
directors of either Lihua Electron or Lihua Copper and Mr. Zhu continues to act
as the managing director of these companies as well as the sole director of
Magnify Wealth, Ally Profit and Lihua Holdings. Lihua Electron and Lihua Copper
have remained under common operating, management and financial control. As a
result, the Restructuring has been accounted for as a combination of entities
under common control and recapitalization of Lihua Electron and Lihua Copper
using the “as if” pooling method of accounting, with no adjustment to the
historical basis of the assets and liabilities of Lihua Electron and Lihua
Copper, and the operations were consolidated as if the Restructuring occurred as
of the beginning of the first accounting period presented in these financial
statements.
NOTE
2
|
SUMMARIES
OF SIGNIFICANT ACCOUNTING POLICIES –
CONTINUED
|
Principle
of consolidation
These
consolidated financial statements include the financial statements of Lihua
International, Inc. and its subsidiaries. All significant inter-company
balances or transactions have been eliminated on consolidation.
Basis
of preparation
These
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America.
Use
of estimates
The
preparation of these consolidated financial statements in conformity with
generally accepted accounting principles requires the Company to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the related disclosure of contingent assets and liabilities at the date of these
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. Accordingly, actual results may differ
from these estimates under different assumptions or conditions.
F-8
LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
2
|
SUMMARIES
OF SIGNIFICANT ACCOUNTING POLICIES –
CONTINUED
|
Reclassification
Certain
prior year balances have been reclassified to conform to the current year’s
financial statement presentation. These reclassifications had no impact on
previously reported financial position, results of operations, or cash
flows.
Cash
and cash equivalents
Cash and
cash equivalents consist of all cash balances and highly liquid investments with
an original maturity of three months or less. Because of the short
maturity of these investments, the carrying amounts approximate their fair
value. Restricted cash is excluded from cash and cash
equivalents.
Accounts
receivable
Accounts
receivable is stated at cost, net of allowance for doubtful accounts. The
Company maintains allowances for doubtful accounts for estimated losses, if any,
resulting from the failure of customers to make required payments. The Company
reviews the accounts receivable on a periodic basis and makes allowances where
there is doubt as to the collectibility of individual balances. In evaluating
the collectibility of individual receivable balances, the Company considers many
factors, including the age of the balance, the customer’s payment history, its
current credit-worthiness and current economic trends.
Inventories
Inventories
are stated at the lower of cost, determined on a weighted average basis, or
market. Costs of inventories include purchase and related costs incurred in
bringing the products to their present location and condition. Market value is
determined by reference to selling prices after the balance sheet date or to
management’s estimates based on prevailing market conditions. The management
will write down the inventories to market value if it is below cost. The
management also regularly evaluates the composition of its inventories to
identify slow-moving and obsolete inventories to determine if valuation
allowance is required.
Property,
plant and equipment
Property,
plant and equipment are stated at cost less accumulated depreciation and
accumulated impairment losses, if any. Gains or losses on disposals are
reflected as gain or loss in the year of disposal. The cost of improvements that
extend the life of buildings, machinery and equipment are capitalized. These
capitalized costs may include structural improvements, equipment and fixtures.
All ordinary repair and maintenance costs are expensed as incurred.
Depreciation
for financial reporting purposes is provided using the straight-line method over
the estimated useful lives of the assets as follows:
Useful Life
|
||||
(In years)
|
||||
Buildings
|
20
|
|||
Machinery
|
10
|
|||
Office
equipment & motor vehicles
|
5
|
The
carrying value of property, plant and equipment is assessed annually and when
factors indicating impairment is present, the carrying value of the fixed assets
is reduced by the amount of the impairment. The Company determines the existence
of such impairment by measuring the expected future cash flows (undiscounted and
without interest charges) and comparing such amount to the net asset carrying
value. An impairment loss, if exists, is measured as the amount by which the
carrying amount of the asset exceeds the fair value of the asset.
F-9
LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
2
|
SUMMARIES
OF SIGNIFICANT ACCOUNTING POLICIES –
CONTINUED
|
Construction
in progress
Construction
in progress includes direct costs of construction of buildings, equipments and
others. Interest incurred during the period of construction, if material,
is capitalized. Construction in progress is not depreciated until such time as
the assets are completed and put into service.
Prepaid
land use right
Lease
prepayments represent lump sum payment for land use rights in the PRC. The
amount is expensed over the period of land use rights of 50 years.
Intangible
assets
The
Company’s intangible assets include computer software. The Company’s
amortization policy on intangible assets is as follows:
Useful Life
|
|||
(In years)
|
|||
Computer
software
|
5
|
The
Company accounts for its intangible assets pursuant to FASB ASC Subtopic 350-30,
“General Intangibles Other Than Goodwill”. Under ASC 350-30-35, intangibles with
definite lives continue to be amortized on a straight-line basis over the lesser
of their estimated useful lives or contractual terms. Intangibles with
indefinite lives are evaluated at least annually for impairment by comparing the
asset's estimated fair value with its carrying value, based on cash flow
methodology.
Impairment
of goodwill is tested at least annually at the reporting unit. The test consists
of two steps. Firstly, the Company identifies potential impairment by comparing
the fair value of the reporting unit to its carrying amount, including goodwill.
If the fair value of the reporting unit is greater than its carrying amount,
goodwill is not considered impaired. Secondly, if there is impairment identified
in the first step, an impairment loss is recognized for any excess of the
carrying amount of the reporting unit’s goodwill over the implied fair value of
goodwill. The implied fair value of goodwill is determined by allocating the
fair value of the reporting unit in a manner similar to a purchase price
allocation, in accordance with FASB ASC 805-10, “Business Combinations”.
If the carrying value of a reporting unit exceeds its estimated fair value, the
Company compares the implied fair value of the reporting unit’s goodwill to its
carrying amount, and any excess of the carrying value over the fair value is
charged to earnings. The Company’s fair value estimates are based on numerous
assumptions and it is possible that actual fair value will be significantly
different than the estimates.
Impairment
of long-lived assets
The
Company reviews and evaluates its long-lived assets for impairment when events
or changes in circumstances indicate that the related carrying amounts may not
be recoverable. An impairment is considered to exist if the total estimated
future cash flows on an undiscounted basis are less than the carrying amount of
the assets, including goodwill, if any. An impairment loss is measured and
recorded based on discounted estimated future cash flows. In estimating future
cash flows, assets are grouped at the lowest level for which there is
identifiable cash flows that are largely independent of future cash flows from
other asset groups.
Revenue
recognition
Revenue
is recognized when the following four revenue criteria are met: persuasive
evidence of an arrangement exists, delivery has occurred, the selling price is
fixed or determinable, and collectibility is reasonably assured.
Sales
revenue is recognized net of value added tax, sales discounts and returns at the
time when the merchandise is sold to the customer. Based on historical
experience, management estimates that sales returns are immaterial and has not
made allowance for estimated sales returns.
F-10
LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
2
|
SUMMARIES
OF SIGNIFICANT ACCOUNTING POLICIES –
CONTINUED
|
Research
and development costs
Research
and development costs are expensed as incurred. For the years ended December 31,
2009 and 2008, research and development costs were $141,258 and $60,041,
respectively.
Advertising
costs
The
Company expenses all advertising costs as incurred. The total amount of
advertising costs charged to selling, general and administrative expense were
$21,797 and $13,640 for the years ended December 31, 2009 and 2008,
respectively.
Shipping
and handling costs
Substantially
all costs of shipping and handling of products to customers are included in
selling, general and administrative expense. Shipping and handling costs
for the years ended December 31, 2009 and 2008 were $1,303,436 and $393,321,
respectively.
Income
taxes
The
Company is subject to income taxes in the United States and other foreign
jurisdictions where it operates. The Company accounts for income taxes in
accordance with FASB ASC Topic 740, “Income Taxes”). FASB ASC Topic 740
requires an asset and liability approach for financial accounting and reporting
for income taxes and allows recognition and measurement of deferred tax assets
based upon the likelihood of realization of tax benefits in future years.
Under the asset and liability approach, deferred taxes are provided for 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. A valuation allowance is provided for deferred tax assets if it
is more likely than not these items will either expire before the Company is
able to realize their benefits, or that future deductibility is
uncertain.
The
Company’s income tax returns are subject to examination by the Internal Revenue
Service (“IRS”) and other tax authorities in the locations where it operates.
The Company assesses potentially unfavorable outcomes of such examinations based
on the criteria of FASB ASC 740-10-25-5 through 740-10-25-7 and 740-10-25-13
(formerly FASB Interpretation No. 48 (“FIN 48”) “Accounting for Uncertainty in
Income Taxes”) which the Company adopted on January 1, 2007. The
interpretation prescribes a more-likely-than-not threshold for financial
statement recognition and measurement of a tax position taken (or expected to be
taken) in a tax return. This Interpretation also provides guidance on
derecognition of income tax assets and liabilities, classification of current
and deferred income tax assets and liabilities, accounting for interest and
penalties associated with tax positions, accounting for income taxes in interim
periods and income tax disclosures.
Comprehensive
income
FASB ASC
Topic 220, “ Comprehensive Income”, establishes standards for reporting and
displaying comprehensive income and its components in the consolidated financial
statements. Accumulated other comprehensive income includes foreign currency
translation adjustments.
Stock
based compensation
The
Company accounts for share-based compensation awards to employees in accordance
with FASB ASC Topic 718, “Compensation – Stock Compensation”, which requires
that share-based payment transactions with employees be measured based on the
grant-date fair value of the equity instrument issued and recognized as
compensation expense over the requisite service period.
The
Company accounts for share-based compensation awards to non-employees in
accordance with FASB ASC Topic 718 and FASB ASC Subtopic 505-50, “Equity-Based
Payments to Non-employees”. Under FASB ASC Topic 718 and FASB ASC Subtopic
505-50, stock compensation granted to non-employees has been determined as the
fair value of the consideration received or the fair value of equity instrument
issued, whichever is more reliably measured and is recognized as expenses as the
goods or services are received.
F-11
LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
2
|
SUMMARIES
OF SIGNIFICANT ACCOUNTING POLICIES –
CONTINUED
|
Foreign
currency
The
Company uses the United States dollars (“U.S. Dollar” or “US$” or “$”) for
financial reporting purposes. The
functional currency of the parent company is the U.S. Dollar. 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:-
December 31, 2009
|
December 31, 2008
|
||
Balance
sheet items, except for equity accounts
|
US$1=RMB6.8282
|
US$1=RMB6.8346
|
|
Items
in the statements of income and cash flows
|
US$1=RMB6.8310
|
US$1=RMB6.9452
|
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.
Segment
reporting
The
Company follows FASB ASC Topic 280, “Segment Reporting”, which requires that
companies disclose segment data based on how management makes decision about
allocating resources to segments and evaluating their performance.
The
Company believes that during the years ended December 31, 2009 and 2008, it
operated mainly in one business segment – Manufacturing and sales
of copper clad aluminum (CCA) superfine wire produced from refined copper
materials. Throughout the years ended December 31, 2009 and 2008, all of
the Company’s operations were carried out mainly in one geographical segment -
China.
The
Company’s major product categories are (1) CCA, which is an electrical conductor
consisting of an outer sleeve of copper that is metallurgically bonded to a
solid aluminum core, and (2) refined copper produced from scrap copper and used
to manufacture copper rod, raw wire, cable and magnet wire. The manufacturing of
refined copper was launched in the first quarter of 2009.
Earnings
per common share
The
Company reports earnings per share in accordance with the provisions of FASB ASC
Topic 260, “Earnings per Share”." FASB ASC Topic 260 requires presentation of
basic and diluted earnings per share in conjunction with the disclosure of the
methodology used in computing such earnings per share. Basic earnings per share
excludes dilution and is computed by dividing income available to common
stockholders by the weighted average common shares outstanding during the
period. Diluted earnings per share takes into account the potential dilution
(using the treasury stock method) that could occur if securities or other
contracts to issue common stock were exercised and converted into common
stock.
All per
share data including earnings per share has been retroactively restated to
reflect the reverse acquisition on October 31, 2008 whereby the 14,025,000
shares of common stock issued by the Company (nominal acquirer) to the
shareholder of Ally Profit (nominal acquiree) are deemed to be the number of
shares outstanding for the period prior to the reverse acquisition. For the
period after the reverse acquisition, the number of shares considered to be
outstanding is the actual number of shares outstanding during that
period.
F-12
LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
2
|
SUMMARIES
OF SIGNIFICANT ACCOUNTING POLICIES –
CONTINUED
|
Commitments
and contingencies
The
Company follows FASB ASC Subtopic 450-20, “Loss Contingencies” in
determining its accruals and disclosures with respect to loss contingencies.
Accordingly, estimated losses from loss contingencies are accrued by a charge to
income when information available prior to issuance of the financial statements
indicates that it is probable that a liability could have been incurred and
the amount of the loss can be reasonably estimated. Legal expenses associated
with the contingency are expensed as incurred. If a loss contingency is not
probable or reasonably estimable, disclosure of the loss contingency is made in
the financial statements when it is at least reasonably possible that a material
loss could be incurred.
Recent
accounting pronouncements
In June
2009, the FASB established the FASB Accounting Standards CodificationTM (ASC)
as the single source of authoritative U.S. generally accepted accounting
principles (GAAP) recognized by the FASB to be applied to nongovernmental
entities. Rules and interpretive releases of the Securities and Exchange
Commission (“SEC”) under authority of federal securities laws are also sources
of authoritative GAAP for SEC registrants. The ASC superseded all previously
existing non-SEC accounting and reporting standards, and any prior sources of
U.S. GAAP not included in the ASC or grandfathered are not authoritative. New
accounting standards issued subsequent to June 30, 2009 are communicated by the
FASB through Accounting Standards Updates (ASUs). The ASC did not change current
U.S. GAAP but changes the approach by referencing authoritative literature by
topic (each a “Topic”) rather than by type of standard. The ASC has been
effective for the Company effective July 1, 2009. Adoption of the ASC did not
have a material impact on the Company’s Condensed Consolidated Financial
Statements, but references in the Company’s Notes to Consolidated Financial
Statements to former FASB positions, statements, interpretations, opinions,
bulletins or other pronouncements are now presented as references to the
corresponding Topic in the ASC.
In
January 2010, the FASB issued ASU No. 2010-05—Compensation—Stock Compensation
(Topic 718): Escrowed Share Arrangements and the Presumption of
Compensation. This Update simply codifies EITF Topic No. D-110, “Escrowed
Share Arrangements and the Presumption of Compensation” dated June 18, 2009.
EITF Topic No. D-110 includes the SEC staff announcement that clarified SEC
staff views on overcoming the presumption that for certain shareholders escrowed
share arrangements represent compensation. Historically, the SEC staff has
expressed the view that an escrowed share arrangement involving the release of
shares to certain shareholders based on performance-related criteria is presumed
to be compensatory. The SEC staff now clarifies that entities should consider
the substance of the transaction in evaluating whether the presumption of
compensation may be overcome, including whether the transaction was entered into
for a reason unrelated to employment, such as to facilitate a financing
transaction. In that situation, the staff generally believes that the escrowed
shares should be reflected as a discount in the allocation of proceeds.
According to the EITF Operating Procedures dated October 2005, SEC staff
announcements are not subject to the approval of the FASB Board and will be
effective for SEC registrants prospectively beginning from the date of the
announcement unless otherwise noted. Neither ASU No. 2010-05 nor EITF D-110
provides for any transition guidance, accordingly, the Company has adopted the
SEC staff announcement in EITF Topic No. D-110 prospectively effective from
October 1, 2009.
Effective
January 1, 2009, the Company adopted the guidance provided in FASB ASC
815-40-15-5 through 815-40-15-8 (formerly EITF 07-5, "Determining Whether an
Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock”). ASC
815-40-15-5 through 815-40-15-8 applies to any freestanding financial
instruments or embedded features that have the characteristics of a derivative,
as defined in ASC paragraph 815-10-15-83 (formerly SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities,”) and to any
freestanding financial instruments that are potentially settled in an entity’s
own common stock. As a result of adopting ASC 815-40-15, the Company’s issued
and outstanding Series A Warrants to purchase 1,500,000 shares of Common Stock
and Series B Warrants to purchase 500,000 shares of Common Stock previously
treated as equity pursuant to the scope exception in ASC 815-10-15-74 (formerly
paragraph 11(a) of SFAS No. 133) were no longer afforded equity treatment. These
warrants expire in 5 years from October 31, 2008 and have an exercise price of
$3.50, which was subject to a downward adjustment if the Company was to issue
additional shares of Common Stock or securities exercisable, convertible or
exchangeable for Common Stock at a price less than the exercise price for a
period of two years from October 31, 2008. As such, effective January 1, 2009,
the Company reclassified the fair value of the Series A and Series B Warrants
from equity to liability as if these warrants were treated as a derivative
liability since their date of issue on October 31, 2008. On January 1, 2009, the
Company recognized a cumulative-effect adjustment of $2,306,688, and $1,676,778
was reclassified from beginning retained earnings and $629,910 from additional
paid-in capital to a warrant liability to recognize the fair value of such
warrants on such date.
F-13
LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
2
|
SUMMARIES
OF SIGNIFICANT ACCOUNTING POLICIES –
CONTINUED
|
Following
the allowed one-year deferral, effective January 1, 2009, the Company
implemented ASC Topic 820, “Fair Value Measurements and Disclosures” for
nonfinancial assets and nonfinancial liabilities measured at fair value on a
nonrecurring basis. The implementation covers assets and liabilities measured at
fair value in a business combination; impaired properties, plants and equipment,
intangible assets and goodwill; initial recognition of asset retirement
obligations; and restructuring costs for which we use fair value. In 2009, the
Company did not have a business combination, impairment of goodwill or
intangible asset, or restructuring accrual requiring the use of fair value.
Because there usually is a lack of quoted market prices for long-lived assets,
the fair value of properties, plants and equipment is determined based on the
present values of expected future cash flows using inputs reflecting the
Company’s estimate of a number of variables used by industry participants when
valuing similar assets, or based on a multiple of operating cash flow validated
with historical market transactions of similar assets where possible. Fair value
used in the initial recognition of asset retirement obligations is determined
based on the present value of expected future dismantlement costs incorporating
our estimate of inputs used by industry participants when valuing similar
liabilities. There was no impact to the Company’s Consolidated Financial
Statements from the implementation of this ASC Topic for nonfinancial assets and
liabilities, and it is expected there would not be any significant impact to the
Company’s future consolidated financial statements, other than additional
disclosures.
Effective
January 1, 2009, the first day of fiscal 2009, the Company adopted FASB ASC
350-30 and ASC 275-10-50 (formerly FSP FAS 142-3, “Determination of the Useful
Life of Intangible Assets”), which amends the factors that should be considered
in developing renewal or extension assumptions used to determine the useful life
of a recognized intangible asset under SFAS No. 142, “Goodwill and Other
Intangible Assets.” The Company will apply ASC 350-30 and ASC 275-10-50
prospectively to intangible assets acquired subsequent to the adoption
date. The adoption of ASC 350-30 and ASC 275-10-50 had no impact on the
Company’s Consolidated Financial Statements.
Effective
January 1, 2009, the Company adopted FASB ASC 815-10-65 (formerly SFAS 161,
“Disclosures about Derivative Instruments and Hedging Activities”), which amends
and expands Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities." ASC 815-10-65 requires tabular
disclosure of the fair value of derivative instruments and their gains and
losses. This Statement also requires disclosure regarding the credit-risk
related contingent features in derivative agreements, counterparty credit risk,
and strategies and objectives for using derivative instruments. The adoption of
ASC 815-10-65 did not have a material impact on the Company’s Consolidated
Financial Statements.
During
2008, the Company adopted FASB ASC 820-10 (formerly FSP FAS 157-2,
“Effective Date of FASB Statement 157”), which deferred the provisions of
previously issued fair value guidance for nonfinancial assets and
liabilities to the first fiscal period beginning after November 15, 2008.
Deferred nonfinancial assets and liabilities include items such as goodwill and
other nonamortizable intangibles. Effective January 1, 2009, the Company adopted
the fair value guidance for nonfinancial assets and liabilities. The adoption of
FASB ASC 820-10 did not have a material impact on the Company’s Consolidated
Financial Statements.
Effective
January 1, 2009, the Company adopted FASB ASC 810-10-65 (formerly SFAS 160,
"Noncontrolling Interests in Consolidated Financial Statements — an amendment of
ARB No. 51"), which amends previously issued guidance to establish accounting
and reporting standards for the noncontrolling interest in a subsidiary and for
the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest
in a subsidiary, which is sometimes referred to as minority interest, is an
ownership interest in the consolidated entity that should be reported as equity
in the Company’s Consolidated Financial Statements. Among other requirements,
this Statement requires that the consolidated net income attributable to the
parent and the noncontrolling interest be clearly identified and presented on
the face of the consolidated income statement. The adoption of ASC 810-10-65 did
not have a material impact on the Company’s Consolidated Financial
Statements.
F-14
LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
2
|
SUMMARIES
OF SIGNIFICANT ACCOUNTING POLICIES –
CONTINUED
|
Effective
January 1, 2009, the Company adopted FASB ASC 805-10, (formerly SFAS 141R, Business Combinations), which
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any noncontrolling interest in an acquiree and the goodwill
acquired. In addition, the provisions in this ASC require that any
additional reversal of deferred tax asset valuation allowance established in
connection with fresh start reporting on January 7, 1998 be recorded as a
component of income tax expense rather than as a reduction to the goodwill
established in connection with the fresh start reporting. The Company will
apply ASC 805-10 to any business combinations subsequent to
adoption.
Effective
January 1, 2009, the Company adopted FASB ASC 805-20 (formerly FSP FAS 141R-1,
Accounting for Assets Acquired
and Liabilities Assumed in a Business Combination That Arise from
Contingencies), which amends ASC 805-10 to require that an acquirer
recognize at fair value, at the acquisition date, an asset acquired or a
liability assumed in a business combination that arises from a contingency if
the acquisition-date fair value of that asset or liability can be determined
during the measurement period. If the acquisition-date fair value of such an
asset acquired or liability assumed cannot be determined, the acquirer should
apply the provisions of ASC Topic 450, Contingences, to determine
whether the contingency should be recognized at the acquisition date or after
such date. The adoption of ASC
805-20 did not have a material impact on the Company’s Consolidated
Financial Statements.
Effective
July 1, 2009, the Company adopted FASB ASC 825-10-65 (formerly FASB Staff
Position (“FSP”) No. FAS 107-1 and Accounting Principles Board 28-1, Interim Disclosures about Fair
Value of Financial Instruments), which amends previous guidance to
require disclosures about fair value of financial instruments for interim
reporting periods of publicly traded companies as well as in annual financial
statements. The adoption of FASB ASC 825-10-65 did not have a material impact on
the Company’s Consolidated Financial Statements.
Effective
July 1, 2009, the Company adopted FASB ASC 320-10-65 (formerly FSP FAS 115-2 and
FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”).
Under ASC 320-10-65, an other-than-temporary impairment must be recognized if
the Company has the intent to sell the debt security or the Company is more
likely than not will be required to sell the debt security before its
anticipated recovery. In addition, ASC 320-10-65 requires impairments related to
credit loss, which is the difference between the present value of the cash flows
expected to be collected and the amortized cost basis for each security, to be
recognized in earnings while impairments related to all other factors to be
recognized in other comprehensive income. The adoption of ASC 320-10-65 did not
have a material impact on the Company’s Consolidated Financial
Statements.
Effective
July 1, 2009, the Company adopted FASB ASC 820-10-65 (formerly FSP FAS 157-4,
“Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly”), which provides guidance on how to determine the fair value of assets
and liabilities when the volume and level of activity for the asset or liability
has significantly decreased when compared with normal market activity for the
asset or liability as well as guidance on identifying circumstances that
indicate a transaction is not orderly. The adoption of ASC 820-10-65 did not
have a material impact on the Company’s Consolidated Financial
Statements.
In the
fourth quarter of fiscal 2009, the Company adopted ASC 715, Compensation –
Retirement Benefits (formerly FASB FSP FAS 132(R)-1, Employers’ Disclosures
about Postretirement Benefit Plan Assets), which expands the disclosure
requirements about plan assets for defined benefit pension plans and
postretirement plans. The adoption of these disclosure requirements has had no
material effect on the Company’s Consolidated Financial Statements.
In the
quarter ended December 31, 2009, the Company adopted ASC Update No. 2009-05,
which provides guidance on measuring the fair value of liabilities under FASB
ASC 820 (formerly SFAS 157, Fair Value Measurements). . The adoption of
this Update has had no material effect on the Company’s Consolidated Financial
Statements.
F-15
LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
2
|
SUMMARIES
OF SIGNIFICANT ACCOUNTING POLICIES –
CONTINUED
|
New
accounting pronouncement to be adopted
In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets – an amendment of FASB Statement No. 140”, (codified by ASU No.
2009-16 issued in December 2009). SFAS No. 166 limits the circumstances in
which a financial asset should be derecognized when the
transferor has not transferred the entire financial asset by taking into
consideration the transferor’s continuing involvement. The standard requires
that a transferor recognize and initially measure at fair value all assets
obtained (including a transferor’s beneficial interest) and liabilities incurred
as a result of a transfer of financial assets accounted for as a sale. The
concept of a qualifying special-purpose entity is removed from SFAS
No. 140, “Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities,” along with the exception from applying FIN
46(R), Consolidation of
Variable Interest Entities. The standard is effective for the first
annual reporting period that begins after November 15, 2009 (i.e. the
Company’s fiscal 2010). Earlier application is prohibited. It is expected the
adoption of this Statement will have no material effect on the Company’s
Consolidated Financial Statements.
In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation
No. 46(R)”, (codified by ASU No. 2009-17 issued in December 2009). The
standard amends FIN No. 46(R) to require a company to analyze whether its
interest in a variable interest entity (“VIE”) gives it a controlling financial
interest. A company must assess whether it has an implicit financial
responsibility to ensure that the VIE operates as designed when determining
whether it has the power to direct the activities of the VIE that significantly
impact its economic performance. Ongoing reassessments of whether a company is
the primary beneficiary are also required by the standard. SFAS No. 167
amends the criteria to qualify as a primary beneficiary as well as how to
determine the existence of a VIE. The standard also eliminates certain
exceptions that were available under FIN No. 46(R). This Statement will be
effective as of the beginning of each reporting entity’s first annual reporting
period that begins after November 15, 2009 (i.e. the Company’s fiscal
2010). Earlier application is prohibited. Comparative disclosures will be
required for periods after the effective date. It is expected the adoption of
this Statement will have no material effect on the Company’s Consolidated
Financial Statements.
In
August, 2009, the FASB issued Accounting Standard Update No. 2009-05 (“ASU
2009-05”) to provide guidance on measuring the fair value of liabilities under
FASB ASC 820 (formerly SFAS 157, "Fair Value Measurements"). The
Company is required to adopt ASU 2009-05 in the fourth quarter of 2009. It
is expected the adoption of this Update will have no material effect on the
Company’s Consolidated Financial Statements.
In
October 2009, the FASB concurrently issued the following ASC Updates
(ASU):
·
ASU No. 2009-13—Revenue Recognition (ASC Topic 605):
Multiple-Deliverable Revenue Arrangements (formerly EITF Issue No.
08-1). ASU No. 2009-13 modifies the revenue recognition guidance for
arrangements that involve the delivery of multiple elements, such as product,
software, services or support, to a customer at different times as part of a
single revenue generating transaction. This standard provides principles
and application guidance to determine whether multiple deliverables exist, how
the individual deliverables should be separated and how to allocate the revenue
in the arrangement among those separate deliverables. The standard also expands
the disclosure requirements for multiple deliverable revenue
arrangements.
·
ASU No. 2009-14—Software (ASC Topic 985): Certain
Revenue Arrangements That Include Software Elements (formerly EITF Issue
No. 09-3). ASU No.
2009-14 removes tangible products from the scope of software revenue recognition
guidance and also provides guidance on determining whether software deliverables
in an arrangement that includes a tangible product, such as embedded software,
are within the scope of the software revenue guidance.
ASU No.
2009-13 and ASU No. 2009-14 should be applied on a prospective basis for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010, with earlier application permitted. Alternatively, an
entity can elect to adopt these standards on a retrospective basis, but both
these standards must be adopted in the same period using the same transition
method. The Company expects to apply these ASU Updates on a prospective basis
for revenue arrangements entered into or materially modified beginning April 1,
2011. The Company is currently evaluating the potential impact these ASC
Updates may have on its financial position and results of
operations.
F-16
LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
2 SUMMARIES OF SIGNIFICANT ACCOUNTING
POLICIES – CONTINUED
New
accounting pronouncement to be adopted (continued)
In
October 2009, the FASB also issued ASU No. 2009-15—Accounting for Own-Share Lending
Arrangements in Contemplation of Convertible Debt Issuance or Other
Financing. ASU 2009-15
amends ASC 470-20, Debt with
Conversion and Other Options, to provide accounting and reporting
guidance for own-share lending arrangements issued in contemplation of
convertible debt issuance. ASU 2009-15 is effective for fiscal years beginning
on or after December 15, 2009 (i.e. the Company’s fiscal 2010) with
retrospective application required.
In
January 2010, the FASB issued the following ASC Updates:
· ASU
No. 2010-01—Equity (Topic
505): Accounting for Distributions to Shareholders with Components of Stock and
Cash. This Update clarifies that the stock portion of a distribution to
shareholders that allows them to elect to receive cash or stock with a potential
limitation on the total amount of cash that all shareholders can elect to
receive in the aggregate is considered a share issuance that is reflected in EPS
prospectively and is not a stock dividend for purposes of applying Topics 505
and 260 (Equity and Earnings Per Share). The amendments in this Update are
effective for interim and annual periods ending on or after December 15, 2009
with retrospective application.
· ASU
No. 2010-02—Consolidation
(Topic 810): Accounting and Reporting for Decreases in Ownership of a
Subsidiary. This Update amends Subtopic 810-10 and related guidance to
clarify that the scope of the decrease in ownership provisions of the Subtopic
and related guidance applies to (i) a subsidiary or group of assets that is a
business or nonprofit activity; (ii) a subsidiary that is a business or
nonprofit activity that is transferred to an equity method investee or joint
venture; and (iii) an exchange of a group of assets that constitutes a business
or nonprofit activity for a noncontrolling interest in an entity, but does not
apply to: (i) sales of in substance real estate; and (ii) conveyances of oil and
gas mineral rights. The amendments in this Update are effective beginning in the
period that an entity adopts FAS 160 (now included in Subtopic
810-10).
· ASU
No. 2010-06—Fair Value
Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements. This Update amends Subtopic 820-10 that require
new disclosures about transfers in and out of Levels 1 and 2 and activity in
Level 3 fair value measurements. This Update also amends Subtopic 820-10 to
clarify certain existing disclosures. The new disclosures and clarifications of
existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3
fair value measurements, which are effective for fiscal years beginning after
December 15, 2010.
The
Company expects that the adoption of the above Updates issued in January 2010
will not have any significant impact on its financial position and results of
operations.
Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on the Company’s Consolidated Financial
Statements upon adoption.
F-17
LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
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
|
|
·
|
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.
The
following table summarizes the changes in fair value of the Company’s
Level 3 financial instruments measured at fair value on a recurring
basis:
Year
ended
December
31,
2009
|
||||
Fair
Value Measurement Using Significant Unobservable Inputs (Level
3)
|
||||
Beginning
balance
|
$
|
—
|
||
Reclassification
due to adoption of ASC 815-40-15-5 through 815-40-15-8 (formerly EITF
07-5) as
of January 1, 2009
|
2,306,688
|
|||
Total
losses, realized and unrealized, included in earnings
|
8,831,161
|
|||
Transfer
out of Level 3 and reclassification to equity pursuant to amendment of
terms of the warrants on December 22, 2009
|
(11,137,849
|
)
|
||
Ending
balance
|
$
|
—
|
||
The
amount of total gains or losses for the year included in earnings
attributable to the change in unrealized gains or losses relating to
assets or liabilities still held at December 31, 2009.
|
$
|
—
|
Losses,
realized and unrealized, included in earnings for year 2009 are reported in
other expenses.
There
were no assets or liabilities measured at fair value on a non-recurring basis
during the years ended December 31, 2009 and 2008.
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 issued 1,500,000 Series A and 250,000 Series B Warrants in connection
with the October 2008 Private Placement of 6,818,182 shares of Series A
preferred stock, which are further disclosed in Note 15. 250,000 Series B
Warrants were issued for business and investor relations consulting services.
These warrants were not issued with the intent of effectively hedging any future
cash flow, fair value of any asset, liability or any net investment in a foreign
operation.
F-18
LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
3 FAIR VALUE MEASUREMENTS AND FINANCIAL
INSTRUMENTS – CONTINUED
Originally,
the Series A and Series B Warrants were issued with a down-round provision
whereby the exercise price would be adjusted downward in the event that, during
a period of two years following the issue date of these warrants, additional
shares of the Company’s common stock or securities exercisable, convertible or
exchangeable for the Company’s common stock were issued at a price less than the
exercise price. Therefore, according to the guidance provided in FASB ASC
815-40-15-5 through 815-40-15-8, which was adopted by the Company on January 1,
2009, the Company accounted for these warrants as derivative
liabilities.
On
December 22, 2009, the Company and the holders of the Series A and Series B
Warrants entered into agreements to amend certain provisions of the Warrants.
The amendment to the Series A Warrant removes the anti-dilution protection
rights that were applicable if the Company were to issue new shares of common
stock or common stock equivalents at a price per share less than the exercise
price of the Series A Warrant. In addition, the amendment to the
Series A Warrant added a provision to grant the holders of a majority of the
Series A Warrants an approval right until October 31, 2010, over any new
issuance of shares of common stock or common stock equivalents at a price per
share less than the exercise price of the Series A Warrant. The amendment to the
Series B Warrant removed the anti-dilution protection rights that were
applicable if the Company were to issue new shares of common stock or common
stock equivalents at a price per share less than the exercise price of the
Series B Warrant.
After the
removal of the down-round provisions of the Series A and Series B Warrants,
these warrants have been considered indexed to the Company’s own stock and were
reclassified to equity at their fair value as of December 22, 2009.
These
warrants did not qualify for hedge accounting, and as such, all changes in the
fair value of these warrants were recognized in statement of income until their
reclassification to equity on December 22, 2009.
The
Company estimates the fair value of these warrants using the Black-Scholes
option pricing model using the following assumptions:
December
22, 2009
(date
of
extinguishment
of
the
derivative
liabilities)
|
January
1, 2009
|
|||||||
Market
price and estimated fair value of common stock:
|
$ | 9.080 | $ | 3.850 | ||||
Exercise
price:
|
$ | 3.50 | $ | 3.50 | ||||
Remaining
contractual life (years):
|
3.86 | 4.83 | ||||||
Dividend
yield:
|
– | – | ||||||
Expected
volatility:
|
41.40 | % | 30.58 | % | ||||
Risk-free
interest rate:
|
1.88 | % | 1.49 | % |
Before
September 4, 2009, the Company’s common stock had not been publicly traded. The
Company has determined the fair value of its common stock as of January 1, 2009
based on retrospective valuations prepared consistent with the methods outlined
in the American Institute of Certified Public Accountants Practice Aids, “Valuation of Privately-Held Company
Equity Securities Issued as Compensation” and based on a discounted
future cash flow approach that used the Company’s estimates of revenue, driven
by assumed market growth rates, and estimated costs as well as appropriate
discount rates. Whilst the Company’s common stock began public trading on the
NASDAQ Capital Market on September 4, 2009, the fair value of the Company’s
common stock as of December 22, 2009 has been determined based on market
price.
As the
Company’s stock only begun public trading on September 4, 2009, historical
volatility information is limited and considered not representative of the
expected volatility. In accordance with ASC 718-10-30-2 (formerly SFAS No. 123R,
“Accounting for Stock-Based
Compensation”), the Company identified five similar public entities for
which share and option price information was available, and considered the
historical volatilities of those public entities’ share prices in calculating
the expected volatility appropriate to the Company (i.e. the calculated
value).
The
risk-free rate of return reflects the interest rate for United States Treasury
Note with similar time-to-maturity to that of the Warrants.
F-19
LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
4 RESTRICTED CASH
As of
December 31, 2009 and 2008, $575,000 and $1,750,000 in total was held in escrow
arising from agreements in conjunction with the Private Placement, which are
further disclosed in Notes 15 and 23.
Restricted
cash consisted of the following:
As of December 31,
|
||||||||
2009
|
2008
|
|||||||
Guarantee
fund for financing agreement
|
$
|
—
|
$
|
800,000
|
||||
Special
fund for listing
|
375,000
|
750,000
|
||||||
Special
fund for employee pensions
|
200,000
|
200,000
|
||||||
Total
|
$
|
575,000
|
$
|
1,750,000
|
All of
the restricted cash was fully released from escrow to the Company subsequently
in January 2010.
NOTE
5 NOTES RECEIVABLE,
NET
Notes
receivable arose from sale of goods and represented commercial drafts issued by
customers to the Company that were guaranteed by bankers of the customers. Notes
receivable are interest-free with maturity dates of 3 or 6 months from date of
issuance.
Notes
receivable consisted of the following:
As of December 31,
|
||||||||
2009
|
2008
|
|||||||
Notes
receivable
|
$
|
—
|
$
|
321,892
|
||||
Less:
Allowance for doubtful debts
|
—
|
—
|
||||||
Notes
receivable, net
|
$
|
—
|
$
|
321,892
|
NOTE
6 ACCOUNTS RECEIVABLE,
NET
Accounts
receivable consisted of the following:
As of December 31,
|
||||||||
2009
|
2008
|
|||||||
Accounts
receivable
|
$
|
10,996,430
|
$
|
5,042,739
|
||||
Less:
Allowance for doubtful debts
|
—
|
—
|
||||||
Accounts
receivable, net
|
$
|
10,996,430
|
$
|
5,042,739
|
NOTE
7 OTHER RECEIVABLES AND CURRENT
ASSETS
Other
receivables and current assets consisted of the following:
As of December 31,
|
||||||||
2009
|
2008
|
|||||||
Other
receivables
|
$
|
17,298
|
$
|
—
|
||||
Recoverable
value added tax
|
475,708
|
—
|
||||||
Less:
Allowance for valuation and doubtful debts
|
—
|
—
|
||||||
$
|
493,006
|
$
|
—
|
F-20
LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
8 INVENTORIES
Inventories
by major categories are summarized as follows:
As of December 31,
|
||||||||
2009
|
2008
|
|||||||
Raw
materials
|
$
|
8,832,262
|
$
|
160,234
|
||||
Work
in progress
|
1,316,422
|
29,013
|
||||||
CCA
and copper wire
|
3,052,604
|
397,691
|
||||||
Refined
copper rod
|
4,332,966
|
—
|
||||||
$
|
17,534,254
|
$
|
586,938
|
NOTE
9 INTANGIBLE
ASSETS
As of December 31,
|
||||||||
2009
|
2008
|
|||||||
Computer
software, cost
|
$
|
7,030
|
$
|
7,023
|
||||
Less:
Accumulated amortization
|
(4,218
|
)
|
(2,809
|
)
|
||||
$
|
2,812
|
$
|
4,214
|
Amortization
expenses for the years ended December 31, 2009 and 2008 were $1,405 and
$1,382.
NOTE
10 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 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. As of December 31, 2009, the Company has obtained the relevant
PRC property ownership and land use rights certificates.
The
amount expensed on prepaid land use right for the years ended December 31, 2009
and 2008 were $172,433 and $101,361, respectively. The estimated
expense of the prepaid land use rights over each of the next five years and
thereafter will be $172,515 per annum.
NOTE
11 PROPERTY, PLANT AND EQUIPMENT,
NET
Property,
plant and equipment, net consisted of the following:
As of December 31,
|
||||||||
2009
|
2008
|
|||||||
Cost:
|
||||||||
Buildings
|
$
|
9,736,531
|
$
|
1,367,189
|
||||
Office
equipment
|
321,741
|
61,767
|
||||||
Motor
vehicles
|
315,727
|
137,423
|
||||||
Machinery
|
11,491,642
|
7,834,657
|
||||||
Total
cost
|
21,865,641
|
9,401,036
|
||||||
Less:
Accumulated depreciation
|
(3,441,561
|
)
|
(1,960,093
|
)
|
||||
Net
book value
|
$
|
18,424,080
|
$
|
7,440,943
|
Depreciation
expenses for the years ended December 31, 2009 and 2008 were $1,479,025 and
$709,596, respectively.
F-21
LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
12 CONSTRUCTION IN PROGRESS
Construction
in progress consisted of the following:
As of December 31,
|
||||||||
2009
|
2008
|
|||||||
Construction
of plant and equipment
|
$
|
59,558
|
$
|
1,295,315
|
||||
Construction
of buildings
|
—
|
4,722,626
|
||||||
$
|
59,558
|
$
|
6,017,941
|
NOTE
13 SHORT TERM BANK LOANS
Short-term
bank loans consisted of the following:
As of December 31,
|
||||||||
2009
|
2008
|
|||||||
Bank
loan granted by Agriculture Bank of China, with interest rate of
5.31% p.a., guaranteed by Mr. Jianhua Zhu as of December 31, 2009 and
a related company, Danyang Tianyi Telecommunication
Co., Ltd. (“Tianyi Telecom”) as of December 31, 2008 and
maturing on August 20, 2010 (extended from August 21,
2009)
|
$
|
732,257
|
$
|
731,572
|
||||
Bank
loan granted by Agriculture Bank of China, Danyang Branch with an interest
rate of 5.31% p.a., guaranteed by Mr. Jianhua Zhu and maturing
on April 15, 2010
|
761,548
|
—
|
||||||
Bank
loan granted by Agriculture Bank of China, Danyang Branch with an interest
rate of 5.31% p.a., guaranteed by Mr. Jianhua Zhu and maturing
on May 21, 2010
|
702,967
|
—
|
||||||
Bank
loan granted by Bank of Jiangsu, with an interest rate of 6.66% p.a.,
guaranteed by Tianyi Telecom, matured and fully repaid on November 18,
2009
|
2,194,715
|
|||||||
Bank
loan granted by China Construction Bank with interest rates ranging from
6.372% p.a. to 8.964% p.a., guaranteed by Tianyi Telecom, matured and
fully repaid on March 6, 2009.
|
—
|
1,170,514
|
||||||
Bank
loan granted by Agriculture Bank of China, with interest rates ranging
from 6.903% p.a. to 9.711% p.a., guaranteed by Tianyi Telecom,
matured and fully repaid on April 15, 2009
|
—
|
760,835
|
||||||
Bank
loan granted by Agriculture Bank of China, with interest rates ranging
from 6.903% p.a. to 9.711% p.a., guaranteed by Tianyi Telecom and
matured and fully repaid on May 20, 2009
|
—
|
702,309
|
||||||
Bank
loan granted by China Construction Bank, with interest rates ranging from
5.841% p.a. to 8.217% p.a., guaranteed by Tianyi Telecom, and
matured and fully repaid on April 29, 2009
|
—
|
585,257
|
||||||
Total
|
$
|
2,196,772
|
$
|
6,145,202
|
F-22
NOTE
14 OTHER PAYABLES AND
ACCRUALS
Other
payables and accruals consisted of the following:
As of December 31,
|
||||||||
2009
|
2008
|
|||||||
Accrued
staff costs
|
$
|
476,978
|
$
|
380,472
|
||||
Other
taxes payable
|
181,286
|
335,152
|
||||||
Other
payables
|
22,833
|
115,120
|
||||||
$
|
681,097
|
$
|
830,744
|
F-23
LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
15 SHAREHOLDERS’ EQUITY
The
Company’s Article of Incorporation grants the Board of Directors the
authority, without any further vote or action by stockholders, to issue
preferred stock in one or more series, fix the number of shares constituting the
series and establish the preferences, limitations and relative rights, including
dividend rights, dividend rate, voting rights, terms of redemption, redemption
price or prices, redemption rights and liquidation preferences of the shares of
the series.
Series
A Redeemable Convertible Preferred Stock
On
October 31, 2008, the Company entered into and completed a securities purchase
agreement (“ Private
Placement ”) with certain accredited investors (the “ Investors ”) for the
issuance and sale by the Company in a private placement of 6,818,182 shares of
Series A Convertible Preferred Stock (“ Preferred Shares ”)
and Series A warrants to purchase 1,500,000 shares of Common Stock. The Company
received $13,656,538 in proceeds from this Private Placement after paying fees
and expenses.
The
principal terms of the Preferred Shares are as follows:
Conversion: At any time on or
after our issuance of Preferred Shares, each share of Preferred Shares will be
convertible, at the option of the holder thereof (subject to certain ownership
percentage limitations set forth in the Certificate of Designations), into one
share of Common Stock, subject to adjustment from time to time, upon the
occurrence of certain events described below. The rate of conversion (the “
Conversion Rate
”) is determined by dividing $2.20 per share (the “ Liquidation Preference
Amount ”) by the conversion price of $2.20 (the “ Conversion Price ”),
subject to adjustment as discussed below.
In the
event the Company does not timely convert and deliver Preferred Shares into
shares of Common Stock after request of a holder to so convert, and the holder
must purchase shares of Common Stock, in excess of the price for which the
holder sold such shares, the Company must make a payment in cash to the holder
in the amount of the excess paid and the Company will not honor the conversion
request and will reinstate the number of Preferred Shares for which such
conversion was not honored.
If at any
time, the Company consummate a bona fide offering of shares of Common Stock of
at least $5,000,000, all outstanding Preferred Shares shall automatically
convert to shares of Common Stock (subject to certain ownership percentage
limitations set forth in the Certificate of Designations of the Series A
Preferred Shares).
Liquidation Rights: The
Preferred Shares will, in the event of any distributions or payments in the
event of the voluntary or involuntary liquidation, dissolution or winding up of
Lihua rank senior to Common Stock and to any other class or series of stock
which may be issued not designated as ranking senior to or pari passu with the Preferred
Shares in respect of the right to participate in distributions or payments upon
any liquidation, dissolution or winding up of Lihua. In the event of any
voluntary or involuntary liquidation, dissolution or winding up, the holders of
shares of Preferred Shares will be entitled to receive, out of assets available
for distribution to stockholders, an amount equal to the Liquidation Preference
Amount before any payment shall be made or any assets distributed to the holders
of Common Stock or any stock which ranks junior to the Preferred Shares. In the
event of a liquidation, dissolution or winding up of Lihua, the rights of
holders of Preferred Shares to convert such shares into shares of Common Stock
shall terminate prior to the date fixed for the payment to the holders of
Preferred Shares of any amounts distributable to them in the event of any such
liquidation, dissolution or winding up.
Redemption Rights: None of
Preferred Shares may be redeemed without the express written consent of each
holder of such shares. If the Company cannot issue shares of Common Stock upon a
conversion because the Company does not have a sufficient number of shares of
Common Stock authorized and available, then with respect to the unconverted
Preferred Shares, the holder of such Preferred Shares, solely at such holder's
option, may require the Company to redeem from such holder those Preferred
Shares with respect to which the Company is unable to issue Common
Stock in accordance with such holder's conversion notice at a price per share
payable in cash equal to one hundred thirty percent of the Liquidation
Preference Amount.
Simultaneously
with the occurrence of any merger, consolidation or similar capital
reorganization of Common Stock, each holder of Preferred Shares shall have the
right, at such holder's option, to require the Company to redeem all or a
portion of such holder's Preferred Shares at a price per share equal to one
hundred ten percent of the Liquidation Preference Amount.
F-24
LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
15 SHAREHOLDERS’ EQUITY –
CONTINUED
Series
A Redeemable Convertible Preferred Stock – continued
Dividend Rights: Preferred
Shares will not be entitled to receive dividends unless the Company pays
dividends to holders of our Common Stock. If the Company pays dividends to
holders of Common Stock, holders of Preferred Shares will be entitled to
receive, on each share of Preferred Shares held by them, dividends of equal
amount or value as dividends that would have been payable on the number of
underlying shares of Common Stock into which such Preferred Shares would be
convertible, if such shares of Preferred Shares had been converted on the date
for determination of holders of Common Stock entitled to receive such
dividends.
Adjustments to Conversion Price;
Conversion Rate and Other Similar Adjustments: The number of shares of
Common Stock into which the Series A Preferred shall be converted, or the
Conversion Price, as the case may be, shall be subject to upward or downward
adjustment from time to time, as applicable, in the event of a (i) combination,
stock split, recapitalization or reclassification of the Common Stock, (ii)
merger, consolidation or similar capital reorganization of the Common Stock,
(iii) distribution of stock dividends or (iv) issuance of additional shares of
Common Stock or securities convertible into Common Stock at a price less than
$2.20.
Voting Rights: Holders of
Preferred Shares shall vote together as a separate class on all matters which
impact the rights, value, or ranking of the Preferred Shares. Holders of
Preferred Shares shall vote on an "as converted" basis, together with holders of
Common Stock, as a single class, in connection with any proposal submitted to
stockholders to: (i) increase the number of authorized shares of capital stock,
(ii) to approve the sale of any of capital stock, (iii) adopt an employee stock
option plan, or (iv) effect any merger, consolidation, sale of all or
substantially all of assets, or related consolidation or combination
transaction.
Conversion Restriction:
Holders of Preferred Shares are restricted from converting to Common Stock if
the number of shares of Common Stock to be issued pursuant to such Conversion
would cause the number of shares of Common Stock owned by such holder and its
affiliates at such time to equal or exceed 9.9% of the then issued and
outstanding shares of Common Stock; provided, however, that upon a holder of the
Series A Preferred providing the Company with sixty-one (61) days notice that
such holder wishes to waive this restriction such holder may be entitled to
waive this restriction.
Accounting
for Preferred Shares
Pursuant
to the Securities Escrow Agreement entered into by the Company as discussed
below, if the Company fails to achieve certain net income thresholds for fiscal
years 2008 and/or 2009, additional shares of the Company’s common stock would be
released to the holders of the Preferred Shares. As a result, the holders of the
Preferred Shares could acquire a majority of the voting power of the Company’s
outstanding common stock. In such a situation, the Company would not
be able to control the approval of “any merger, consolidation or similar capital
reorganization of its common stock”, i.e. events which could trigger the right
of Preferred Shares holder to request for redemption. FASB ASC 480-10-S99
(formerly EITF D-98, “ Classification and Measurement of Redeemable Securities
”), provides that preferred securities that are redeemable for cash are to be
classified outside of permanent equity if they are redeemable upon the
occurrence of an event that is not solely within the control of the issuer.
Therefore, as of December 31, 2008, the Preferred Shares were classified out of
permanent equity in accordance with FASB ASC 480-10-S99 (formerly EITF
D-98).
Conversion
during the Year
On
September 9, 2009, pursuant to the completion of the Public Offering, as
discussed below, and in accordance with the terms of the Preferred Shares, all
outstanding shares of the Preferred Stock were automatically converted into
6,818,183 shares of Common Stock.
F-25
LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
15 SHAREHOLDERS’ EQUITY –
CONTINUED
Series
A Warrants
In
conjunction with the issuance of the Preferred Shares, the Company issued Series
A Warrants to purchase up to 1,500,000 shares of Common Stock at an exercise
price of $3.50 per share issued and outstanding. The Series A Warrants have a
term of exercise expiring 5 years from October 31, 2008. The Series A Warrants
at the option of the holder, may be exercised by cash payment of the exercise
price or, commencing 18 months following the closing of the Private Placement,
if the per share market value of one share of Common Stock is greater than the
exercise price and a registration statement under the Securities Act of 1933, as
amended, covering the shares of Common Stock underlying the Series A Warrants is
not then declared ineffective by the SEC, in lieu of exercising the Series A
Warrants by payment of cash, a holder may exercise the Series A Warrant by a
cashless exercise by surrender of the Series A Warrant, in which event the
Company will issue to the holder a number of shares of our Common Stock computed
using the following formula:
X =
Y - (A)(Y)
B
|
||
Where
|
X
=
|
the
number of shares of Common Stock to be issued to the
holder.
|
Y
=
|
the
number of shares of Common Stock issuable upon exercise of the Series A
Warrant in accordance with the terms of the Series A Warrant by means of a
cash exercise rather than a cashless exercise.
|
|
A
=
|
the
Exercise Price.
|
|
B
=
|
the
per share market value of one share of Common Stock on the trading day
immediately preceding the date of such
election.
|
The
Company will not receive any additional proceeds to the extent that the Series A
Warrants are exercised by cashless exercise.
The
exercise price and number of shares of the Company’s Common Stock issuable upon
exercise of the Series A Warrants may be adjusted in certain circumstance,
including in the event of a stock dividend, or our recapitalization,
reorganization, merger or consolidation and the issuance of rights to purchase
additional shares of our Common Stock or to receive other securities convertible
into additional shares of Common Stock.
The
Series A Warrants were originally issued with anti-dilution protection provision
whereby for a period of two years following the original issue date of the
Series A Warrants (the “Full Ratchet Period”), in the event the Company issued
any additional shares of Common Stock or securities exercisable, convertible or
exchangeable for Common Stock at a price per share less than the exercise price
then in effect or without consideration, then the exercise price upon each such
issuance would be adjusted to a price equal to the consideration per share paid
for such additional shares of Common Stock.
On
December 22, 2009, the Company and the holders of the Series A Warrants entered
into agreements to amend certain provisions of the Warrants. The amendment to
the Series A Warrant removes the anti-dilution protection rights that were
applicable if the Company were to issue new shares of common stock or common
stock equivalents at a price per share less than the exercise price of the
Series A Warrant. In addition, the amendment to the Series A Warrant
added a provision to grant the holders of a majority of the Series A Warrants an
approval right until October 31, 2010, over any new issuance of shares of common
stock or common stock equivalents at a price per share less than the exercise
price of the Series A Warrant.
No
fractional shares will be issued upon exercise of the Series A Warrants. If,
upon exercise of a Series A Warrant, a holder would be entitled to receive a
fractional interest in a share, the Company will pay to the holder cash equal to
such fraction multiplied by the then fair market value of one full
share.
Pursuant
to the terms of the Series A Warrants, the Company will not effect the exercise
of any Series A Warrant, and no person who is a holder of any Series A Warrant
has the right to exercise the Series A Warrant, to the extent that after giving
effect to such exercise, such person would beneficially own in excess of 9.9% of
the then outstanding shares of our Common Stock. However, the holder is entitled
to waive this cap upon 61 days notice to the Company.
The
Company has the right to redeem up to 9.9% of the Series A Warrants at a price
equal to $0.01 per share of Common Stock underlying such warrants if (i) our
Common Stock is traded on a national securities exchange, (ii) the daily
volume weighted average price of our Common Stock is above $8.87 for 30
consecutive trading days ending on the date of the notice of redemption, and
(iii) the average daily trading volume for the trading period is greater than
300,000 shares per day ; provided, that all shares underlying such Series A
Warrants are registered pursuant to an effective registration statement and the
Company simultaneously calls all of the Series A Warrants on the same terms. The
Company will have the right, but not the obligation, to redeem the Series A
Warrants at any time, and from time to time, provided that at such time, the
foregoing conditions have been met, but in no event can the Company redeem
the Series A Warrants more than once in any thirty (30) trading day
period.
F-26
LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
15 SHAREHOLDERS’ EQUITY –
CONTINUED
Series
B Warrants
In
connection with the Private Placement, Broadband Capital Management, LLC (“Broadband”) acted as
the Company’s financial advisor and placement agent. Broadband received Series B
warrants to purchase 250,000 shares of the Company’s Common Stock at an exercise
price per share of $3.50.
On
October 31, 2008, the Company issued Series B Warrants to purchase 250,000
shares of the Registrant’s Common Stock at an exercise price of $3.50 to
Penumbra Worldwide Ltd. (“Penumbra”). Penumbra
is not a broker dealer and the Series B Warrants were not issued as compensation
for underwriting activities, but as compensation for business and investor
relations consulting services performed by Penumbra.
The
Series B Warrants have a term of exercise expiring 5 years from October 31,
2008. The Series B Warrants, at the option of the holder, may be exercised by
cash payment of the exercise price or by “cashless exercise”. The Company will
not receive any additional proceeds to the extent that warrants are exercised by
cashless exercise.
If the
per share market value of one share of Common Stock is greater than the exercise
price and at the time of election, the average trading volume of Common Stock
exceeds 100,000 shares for the immediately preceding 30 trading days, in lieu of
exercising the Series B Warrant by payment of cash, the holder may exercise the
Series B Warrant by cashless exercise by surrendering the Series B Warrant, in
which event the Company will issue to the holder a number of shares of our
Common Stock computed using the following formula:
X =
Y - (A)(Y)
B
|
||
Where:
|
X
=
|
the
number of shares of Common Stock to be issued to the
Holder.
|
Y
=
|
the
number of shares of Common Stock issuable upon exercise of the Series B
Warrant in accordance with the terms of the Series B Warrant by means of a
cash exercise rather than a cashless exercise.
|
|
A
=
|
the
exercise price.
|
|
B
=
|
the
volume weighted average price of the Common Stock for the 30 trading day
period immediately preceding the date of such
election.
|
The
exercise price and number of shares of Common Stock issuable upon exercise of
the warrants may be adjusted in certain circumstances, including in the event of
a stock dividend, or our recapitalization, reorganization, merger or
consolidation and the issuance of rights to purchase additional shares of Common
Stock or to receive other securities convertible into additional shares of
Common Stock.
The
Series B Warrants were originally issued with anti-dilution protection provision
whereby for a period of two years following the original issue date of the
Series B Warrant (the “Weighted Average Period”), in the event the Company
issued any additional shares of Common Stock or securities exercisable,
convertible or exchangeable for Common Stock at a price per share less than the
exercise price then in effect or without consideration, then the exercise price
then in effect would be multiplied by a fraction (i) the numerator of which
shall be equal to the sum of (x) the number of shares of outstanding Common
Stock immediately prior to the issuance of such additional shares of Common
Stock plus (y) the number of shares of Common Stock (rounded to the nearest
whole share) which the aggregate consideration price per share paid for the
total number of such additional shares of Common Stock so issued would purchase
at a price per share equal to the exercise price then in effect and (ii) the
denominator of which shall be equal to the number of shares of outstanding
Common Stock immediately after the issuance of such additional shares of Common
Stock.
On
December 22, 2009, the Company and the holders of the Series B Warrants entered
into agreements to amend certain provisions of the Warrants. The amendment to
the Series B Warrant removed the anti-dilution protection rights that were
applicable if the Company were to issue new shares of common stock or common
stock equivalents at a price per share less than the exercise price of the
Series B Warrant.
No
fractional shares will be issued upon exercise of the warrants. If, upon
exercise of a warrant, a holder would be entitled to receive a fractional
interest in a share, the Company will pay to the holder cash equal to such
fraction multiplied by the then fair market value of one full
share.
F-27
LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
15 SHAREHOLDERS’ EQUITY –
CONTINUED
Allocation
of Proceeds from Private Placement
In
accordance with ASC Topic 470-20, Debt with Conversion and Other
Options, (formerly EITF 00-27, “Application of Issue No. 98-5 to Certain
Convertible Instruments”), the proceeds from the Private Placement were first
allocated between the Preferred Shares and the warrants issued in connection
with the Private Placement based upon their estimated fair values as of the
closing date, resulting in an aggregate amount of $539,910 being allocated to
the Series A Warrants and the 250,000 Series B Warrants issued to
Broadband.
Then, the
fair value of the embedded conversion feature of the Preferred Shares of
$1,002,115 was calculated using the intrinsic value model in accordance with the
guidance provided in ASC Topic 470-20-30-6 (formerly EITF 00-27, “Application of
Issue No. 98-5 to Certain Convertible Instruments”), limited to the amount of
the proceeds allocated to the convertible instrument. The intrinsic value of the
beneficial conversion feature was calculated by comparing the effective
conversion price, which was determined based on the proceeds from the Private
Placement allocated to the convertible Preferred Shares, and the fair value of
the Company’s common stock of $2.26 at the commitment date, which was determined
based on retrospective valuations prepared consistent with the methods outlined
in the American Institute of Certified Public Accountants Practice Aids, “Valuation of Privately-Held Company
Equity Securities Issued as Compensation” and based on a discounted
future cash flow approach that used the Company’s estimates of revenue, driven
by assumed market growth rates, and estimated costs as well as appropriate
discount rates. The fair value of $1,002,115 of the beneficial conversion
feature has been recognized as a reduction to the carrying amount of the
convertible Preferred Shares and an addition to paid-in capital.
The
following table sets out the accounting for the Preferred Shares and the
movements during the period:
Proceeds
of the Private Placement (net of fees and expenses)
|
$ | 13,656,538 | ||
Allocation
of proceeds to Series A Warrants and 250,000 Series B
Warrants
|
(539,910 | ) | ||
Allocation
of proceeds to beneficial conversion feature
|
(1,002,115 | ) | ||
Amortization
of discount resulting from the accounting for a beneficial conversion
feature, deemed analogous to a dividend to the Preferred Shares
holders
|
1,002,115 | |||
Series
A Convertible Preferred Stock at December 31, 2008
|
13,116,628 | |||
Automatic
conversion to Common Stock pursuant to Public Offering, as discussed
below
|
(13,116,628 | ) | ||
Balance,
December 31, 2009
|
$ | — |
F-28
LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
15 SHAREHOLDERS’ EQUITY –
CONTINUED
Public
Offering of Common Stock and Issuance of Warrants
On
September 9, 2009, the Company completed a public offering (“Public Offering”) of
2,000,000 shares of Common Stock and an additional 300,000 shares exercised by
the underwriters as part of the over-allotment option, at an offering price of
$4.00 per share and raised a proceeds of $7,864,000, net of legal fees,
commission and other expenses directly related to this public
offering.
In
conjunction with the Public Offering, the Company issued warrants to the
underwriters to purchase up to 138,000 shares of the Company’s Common Stock at a
strike price of $4.80 per share. These warrants are exercisable at any time
during a 5-year term commencing on the date that is six months from September 4,
2009. The shares underlying these warrants will have registration rights
incidental upon the Company proposing to register any of its securities (other
than in connection with a registration on Form S-4 or S-8 or any successor
forms). These warrants contain standard anti-dilution provisions for stock
dividends, stock splits, stock combination, recapitalization and a change of
control transaction. Because these warrants do not contain any
contingent exercise provisions and their settlement amount will equal the
difference between the fair value of a fixed number of the Company’s equity
shares and a fixed strike price, these warrants, which are freestanding
instruments, qualify for the scope exception under the guidance provided in ASC
815-40-15-5 through 815-40-15-8, and are considered indexed to the Company’s own
stock. Accordingly, these warrants have been classified as equity.
Warrants
issued and outstanding at December 31, 2009 are as follows:
Warrants
Outstanding
|
Warrants
Exercisable
|
|||||||||||||||||||||||
Number
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,
January 1, 2008
|
—
|
|||||||||||||||||||||||
Granted
/ Vested
|
2,000,000
|
$
|
3.50
|
5.00
|
||||||||||||||||||||
Forfeited
|
—
|
|||||||||||||||||||||||
Exercised
|
—
|
|||||||||||||||||||||||
Balance,
December 31, 2008
|
2,000,000
|
$
|
3.50
|
4.17
|
2,000,000
|
$
|
3.50
|
4.17
|
||||||||||||||||
Granted
/ Vested
|
138,000
|
$
|
4.80
|
5.00
|
||||||||||||||||||||
Forfeited
|
—
|
|||||||||||||||||||||||
Exercised
|
(35,900
|
)
|
$
|
3.50
|
||||||||||||||||||||
Balance,
December 31, 2009
|
2,102,100
|
$
|
3.59
|
3.93
|
1,964,100
|
$
|
3.50
|
3.86
|
F-29
LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
15 SHAREHOLDERS’ EQUITY –
CONTINUED
Make
Good Escrow Agreement
In
conjunction with the Private Placement, the Company also entered into a make
good escrow agreement with the Investors (the “ Securities Escrow
Agreement ”), pursuant to which Magnify Wealth initially placed 6,818,182
of Common Stock (equal to 100% of the number of shares of Common Stock
underlying the Investor Shares) (the “ Escrow Shares ”) into
an escrow account. The Escrow Shares are being held as security for the
achievement of $12 million in audited net income and $0.50 earnings per share
for the fiscal year 2008 (the “ 2008 Performance
Threshold ”) and $18 million in audited net income and $0.76 earnings per
share for the fiscal year 2009 (the “ 2009 Performance
Threshold ”). The calculation of earnings per share of $0.76 for the
fiscal year 2009 shall exclude up to $5,000,000 in shares of Common Stock issued
in a bona fide initial public offering, however, any shares issued in excess of
$5,000,000 shall be included in the calculation of earnings per share for the
fiscal year 2009. If the Company achieves the 2008 Performance Threshold and the
2009 Performance Threshold, the Escrow Shares will be released back to Magnify
Wealth. If either the 2008 Performance Threshold or 2009 Performance Threshold
is not achieved, an aggregate number of Escrow Shares (such number to be
determined by the formula set forth in the Securities Escrow Agreement) will be
distributed to the Investors, based upon the number of Investor Shares (on an as
converted basis) purchased in the Private Placement and still beneficially owned
by such Investor, or such successor, assign or transferee, at such time. If less
than 50% of the 2008 or 2009 Performance threshold is achieved, based on the
formula set forth in the Securities Escrow Agreement, a certain amount of Escrow
Shares may be released. If the Company achieves at least 50% but less than 95%
of the 2008 or 2009 performance thresholds, based on the formula set forth in
the Securities Escrow Agreement, a certain number of Escrow shares may be
released. If the Company achieves at least 95% of either the 2008 or 2009
performance thresholds, the Escrow shares will continue to be held in escrow. If
any Investor transfers Investor Shares purchased pursuant to the Purchase
Agreement, the rights to the Escrow Shares shall similarly transfer to such
transferee, with no further action required by the Investor, the transferee or
the Company. Pursuant to the Securities Escrow Agreement, if any Escrow Shares
are delivered to Investors as a result of the Company’s failure to fully achieve
the 2008 Performance Thresholds, Magnify Wealth shall deliver that number of
additional shares of Common Stock as is necessary to maintain 100% of the number
of original Escrow Shares in the escrow account at all times. With respect to
the 2008 and 2009 performance thresholds, net income shall be defined in
accordance with US GAAP and reported by us in the Company’s audited financial
statements for each of 2008 and 2009, plus any amounts that may have been
recorded as charges or liabilities on the 2008 and 2009 audited financial
statements, respectively, as a result of (i) the Private Placement, including
without limitation, as a result of the issuance and/or conversion of the
Investor Shares, (ii) the release of the Escrow Shares to Magnify Wealth
pursuant to the terms of the Escrow Agreement, (iii) the issuance of ordinary
shares held by the sole shareholder of Magnify Wealth to Mr. Zhu upon the
exercise of options granted to Mr. Zhu by shareholder of Magnify Wealth, as of
the date thereof.
Because
both 2008 and 2009 performance thresholds have been met, the Escrow Shares will
be released to Magnify Wealth.
Historically,
SEC staff expressed the view that an escrow share arrangement involving the
release of shares to certain shareholders based on performance-related criteria
is presumed to be compensatory, equivalent to a reverse stock split followed by
the grant of a restricted stock award under a performance-based
plan.
However,
at the EITF meeting held on June 18, 2009 (EITF Topic No. D-110, codified by
FASB ASU No. 2010-05), the SEC staff announced that when evaluating whether the
presumption of compensation has been overcome, the substance of the arrangement,
including whether the arrangement was entered into for purposes unrelated to,
and not contingent upon, continued employment, should be
considered.
The
Company has evaluated the terms of the Securities Escrow Agreement based on the
guidance provided by the SEC staff announcement in EITF No. D-110. The
Company adopted EITF Topic No. D-110 on October 1, 2009. After a thorough
review, the Company has concluded that because the escrowed shares would be
released or distributed to the investor without regard to the continued
employment of Mr. Zhu or any other officer of the Company, the make good escrow
arrangement is in substance an inducement to facilitate the Private Placement,
rather than compensatory. The Company has accounted for the escrowed share
arrangement under the Securities Escrow Agreement according to its nature, and
therefore will not recognize a non-cash compensation charge as a result of the
Company satisfying both the 2008 and 2009 performance
thresholds
F-30
LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
16 SHARE-BASED COMPENSATION
Common
Stock awarded to Employees by a Majority Shareholder
Pursuant
to a contractual arrangement between Magnify Wealth and Mr. Yang “Roy” Yu, the
Chief Financial Officer (CFO), Mr. Yu is entitled to receive up to 450,000
shares of the Company’s common stock issued to Magnify Wealth in the Share
Exchange. 112,500 of such shares were transferred to Mr. Yu immediately upon
consummation of the Share Exchange. 112,500 of such shares were released to Mr.
Yu on the first anniversary of the consummation of the Share Exchange. As of
December 31, 2009, the remaining 225,000 shares have remained in an escrow
account and shall be released to Mr. Yu in two equal installments of 112,500
shares issuable on the second and third anniversary of the consummation of the
Share Exchange. In connection with these share-based payments to Mr.
Yu, the Company recognized a compensation expense of $254,250 based on the
grant-date fair value of the Company’s common stock of $2.26 per share, for the
years ended December 31, 2009 and 2008, respectively.
Options
granted to Independent Directors
On April
14, 2009, the Company granted options to each of its three independent
directors, Mr. Liu Su (who resigned as a director of the Company effective as of
October 11, 2009), Mr. Jonathan P. Serbin and Mr. Robert Bruce, to purchase
20,000 shares of the Company’s common stock at a strike price of $2.20 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. However, upon a change of control of the Company, the options
shall automatically become fully vested and exercisable as of the date of such
change of control.
On
October 20, 2009, the Company granted options to its independent director, Mr.
Kelvin Siu Ki Lau, to purchase 20,000 shares of the Company’s common stock at a
strike price of $8.24 per share, in consideration of his services to the
Company. These options vest quarterly at the end of each 3-month period, in
equal installments over the 12-month period from the date of grant and will
expire 10 years from the date of grant.
In
accordance with the guidance provided in ASC Topic 718, Stock Compensation, (formerly
SFAS 123R), the compensation costs associated with these options are recognized,
based on the grant-date fair values of these options, over the requisite service
period, or vesting period. Accordingly the Company recognized a compensation
expense of $77,190 for the year ended December 31, 2009.
The
Company estimates the fair value of these options using the Black-Scholes option
pricing model based on the following weighted-average assumptions:
Date
of grant:
|
April 14, 2009
|
October 20, 2009
|
||||||
Fair
value of common stock on date of grant:
|
$ | 3.813 | $ | 8.240 | ||||
Exercise
price of the options:
|
$ | 2.20 | $ | 8.240 | ||||
Expected
life of the options (years):
|
5.92 | 5.315 | ||||||
Dividend
yield:
|
— | — | ||||||
Expected
volatility:
|
30.16 | % | 34.69 | % | ||||
Risk-free
interest rate:
|
1.97 | % | 2.36 | % | ||||
Weighted
average fair value of the options (per unit)
|
$ | 2.0405 | $ | 2.9227 |
Before
September 4, 2009, the Company’s common stock had not been publicly traded. The
Company has determined the fair value of its common stock as of April 14, 2009
based on retrospective valuations prepared consistent with the methods outlined
in the American Institute of Certified Public Accountants Practice Aids, “Valuation of Privately-Held Company
Equity Securities Issued as Compensation” and based on a discounted
future cash flow approach that used the Company’s estimates of revenue, driven
by assumed market growth rates, and estimated costs as well as appropriate
discount rates.
As the
Company’s stock only begun public trading on September 4, 2009, historical
volatility information is limited and considered not representative of the
expected volatility. In accordance with ASC 718-10-30-2 (formerly SFAS No. 123R,
“Accounting for Stock-Based
Compensation”, the Company identified five similar public entities for
which share and option price information was available, and considered the
historical volatilities of those public entities’ share prices in calculating
the expected volatility appropriate to the Company (i.e. the calculated
value).
The
risk-free rate of return reflects the interest rate for United States Treasury
Note with similar time-to-maturity to that of the options.
F-31
LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE 16
|
SHARE-BASED COMPENSATION –
CONTINUED
|
Options
issued and outstanding at December 31, 2009 and their movements during the year
are as follows:
Number of
underlying
shares
|
Weighted-
Average
Exercise
Price
Per Share
|
Aggregate
Intrinsic
Value (1)
|
Weighted-
Average
Contractual Life
Remaining in
Years
|
|||||||||||||
Outstanding
at December 31, 2008
|
— | |||||||||||||||
Granted
|
80,000 | $ | 3.71 | |||||||||||||
Exercised
|
— | |||||||||||||||
Expired
|
— | |||||||||||||||
Forfeited
|
(15,000 | ) | 2.20 | |||||||||||||
Outstanding
at December 31, 2009
|
65,000 | $ | 4.06 | $ | 415,450 | 9.45 | ||||||||||
Exercisable
at December 31, 2009
|
25,000 | $ | 2.20 | $ | 206,500 | 9.29 |
(1)
|
The
intrinsic value of the stock option at December 31, 2009 is the amount by
which the market value of the Company’s common stock of $10.45 as of
December 31, 2009 exceeds the exercise price of the
option.
|
NOTE 17
|
STATUTORY
RESERVES
|
In
accordance with the PRC Companies Law, the Company’s PRC subsidiaries were
required to transfer 10% of their profits after tax, as determined in accordance
with accounting standards and regulations of the PRC, to the statutory surplus
reserve and a percentage of not less than 5%, as determined by management, of
the profits after tax to the public welfare fund. With the amendment of the PRC
Companies Law which was effective from January 1, 2006, enterprises in the PRC
were no longer required to transfer any profit to the public welfare
fund. Any balance of public welfare fund brought forward from
December 31, 2005 should be transferred to the statutory surplus
reserve. The statutory surplus reserve is
non-distributable.
NOTE 18
|
OTHER
INCOME
|
Year ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Gain
on sales of scraps
|
$
|
500,834
|
$
|
3,741
|
||||
$
|
500,834
|
$
|
3,741
|
F-32
LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE 19
|
INCOME
TAXES
|
The
Company is subject to income tax on an entity basis on income arising from the
tax jurisdiction in which they operate.
Lihua is
subject to taxes in the U.S.
Ally
Profit being incorporated in the British Virgin Islands (“BVI”) is not subject
to any income tax in the BVI.
Lihua
Holdings is generally subject to Hong Kong income tax on its taxable income
derived from trade or businesses carried out in Hong Kong at 16.5% for the two
years ended December 31, 2009. However, as Lihua Holdings has not generated any
revenue or income, no provision for Hong Kong income tax has been
made.
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 has continued to be entitled to the 50% reduction on its EIT rate
for the two years ended December 31, 2008 and 2009.
Lihua
Copper has been subject to an EIT rate of 25% for the years ended December 31,
2009 and 2008 under the New EIT Law.
The
Company’s provision for income taxes consisted of:
Year ended December 31,
|
||||||||
2009
|
2008
|
|||||||
PRC
income tax:
|
||||||||
Current
|
$
|
5,322,268
|
$
|
1,815,703
|
||||
Deferred
|
(74,621
|
)
|
(23,022
|
)
|
||||
$
|
5,247,647
|
$
|
1,792,681
|
F-33
LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE 19
|
INCOME TAXES –
CONTINUED
|
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:
Year ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Pre-tax
income
|
$
|
22,026,923
|
$
|
13,494,560
|
||||
United
States federal corporate income tax rate
|
34
|
%
|
34
|
%
|
||||
Income
tax computed at United States statutory corporate income tax
rate
|
7,489,154
|
4,588,150
|
||||||
Reconciling
items:
|
||||||||
Impact
of tax holiday of Lihua Electron
|
(3,011,804
|
)
|
(1,802,095
|
)
|
||||
Non-deductible
expenses
|
3,740,191
|
289,032
|
||||||
Rate
differential for PRC earnings
|
(2,948,838
|
)
|
(1,282,406
|
)
|
||||
Other
|
(21,056
|
)
|
−
|
|||||
Effective
tax expense
|
$
|
5,247,647
|
$
|
1,792,681
|
The
effect of the tax holiday of Lihua Electron amounted to $3,011,804 and
$1,802,095 for the years ended December 31, 2009 and 2008, equivalent to basic
earnings per share of $0.17 and $0.13, respectively, and diluted earnings per
share amount of $0.16 and $0.12, respectively.
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:
As
of December 31,
|
||||||||
2009
|
2008
|
|||||||
Deferred income tax assets:
|
||||||||
Net
operating loss carryforward – PRC
|
$
|
−
|
$
|
23,395
|
||||
Unrealized
intercompany profit in inventory
|
98,068
|
−
|
||||||
Less:
Valuation allowance
|
−
|
−
|
||||||
$
|
98,068
|
$
|
23,395
|
The
Company has analyzed the tax positions taken or expected to be taken in its tax
filings and has concluded it has no material liability related to uncertain tax
positions or unrecognized tax benefits as of December 31, 2009 and
2008.
The New
EIT Law imposes a withholding tax of 10% unless reduced by a tax treaty, for
dividends distributed by a PRC-resident enterprise to its immediate holding
company outside the PRC for earnings accumulated beginning on January 1, 2008
and undistributed earnings generated prior to January 1, 2008 are exempt from
such withholding tax. The Company has not provided for income taxes on
accumulated earnings of its PRC subsidiaries as of December 31, 2009 and 2008,
since these earnings are intended to be reinvested indefinitely in the overseas
jurisdictions. It is not practicable to estimate the amount of additional taxes
that might be payable on such undistributed earnings.
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 or other errors
made by the taxpayer or the withholding agent. The statute of
limitations extends to five years under special circumstances. In the case of
transfer pricing issues, the statute of limitation is ten years. There is no
statute of limitation in the case of tax evasion. Accordingly, the income tax
returns of the Company’s operating subsidiaries, Lihua Electron and Lihua
Copper, for the years ended December 31, 2007 through 2009 are open to
examination by the PRC state and local tax authorities.
F-34
LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE 20
|
EARNINGS PER
SHARE
|
Basic
earnings per common share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted income per common share is computed similarly to basic income
per common share except that the denominator is increased to include the number
of additional common shares that would have been outstanding if the potentially
dilutive common shares had been issued.
All per
share data including earnings per share (EPS) has been retroactively restated to
reflect the reverse acquisition on October 31, 2008 whereby the 14,025,000
shares of common stock issued by the Company (nominal acquirer) to the
shareholder of Ally Profit (nominal acquiree) are deemed to be the number of
shares outstanding for the period prior to the reverse acquisition. For the
period after the reverse acquisition, the number of shares considered to be
outstanding is the actual number of shares outstanding during that
period.
The
following table is a reconciliation of the net income and the weighted average
shares used in the computation of basic and diluted earnings per share for the
periods presented:
Year ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Income
available to common stockholders:
|
||||||||
-
Net income
|
$
|
16,779,276
|
$
|
11,701,879
|
||||
-
Amortization of Preferred Shares discount resulting from beneficial
conversion feature (see Note 15)
|
—
|
(1,002,115
|
)
|
|||||
-
Basic and Diluted
|
$
|
16,779,276
|
$
|
10,699,764
|
||||
Weighted
average number of shares:
|
||||||||
-
Basic
|
17,822,890
|
14,187,945
|
||||||
-
Effect of dilutive securities – options, warrants and convertible
preferred stock
|
1,305,341
|
1,139,477
|
||||||
-
Diluted
|
19,128,231
|
15,327,422
|
||||||
Net
income per share
|
||||||||
-
Basic
|
$
|
0.94
|
$
|
0.75
|
||||
-
Diluted
|
$
|
0.88
|
$
|
0.70
|
F-35
LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE 21
|
RELATED PARTY
TRANSACTIONS
|
(1)
|
Sales
|
For the
years ended December 31, 2009 and 2008, the sales included $471,554 and
$367,585, respectively that were made from Tianyi Telecom. The
shareholders of Tianyi Telecom have close relationship with the Company’s key
management.
(2)
|
Guarantees
|
As
of December 31, 2009 and 2008, Mr. Jianhua Zhu and Tianyi Telecom provided
guarantees for the Company’s short-term bank loans of $2,196,772 and $6,145,202
respectively. (See Note 13 above) Mr. Jianhua Zhu is the Company’s CEO, president
and director.
NOTE 22
|
CERTAIN RISKS AND
CONCENTRATION
|
Credit
risk and major customers
As of
December 31, 2009 and 2008, 100% of the Company’s cash included cash on hand and
deposits in accounts maintained within the PRC where there is currently no rule
or regulation in place for obligatory insurance to cover bank deposits in the
event of bank failure. However, the Company has not experienced any losses in
such accounts and believes it is not exposed to any significant risks on its
cash in bank accounts.
For the
years ended December 31, 2009 and 2008, all of the Company’s sales arose in the
PRC. In addition, all accounts receivable as of December 31, 2009 and
2008 were due from customers located in the PRC.
There was
no single customer who accounted for more than 10% of the accounts receivable of
the Company as of December 31, 2009. As of December 31, 2008, one customer
accounted for 14.4% of the accounts receivable of the Company. Except for the
afore-mentioned, there was no other single customer who accounted for more than
10% of the Company’s accounts receivable as of December 31, 2009 or
2008.
There was
no single customer who constituted 10% or more of the Company’s net revenue for
the years ended December 31, 2009 and 2008.
Risk
arising from operations in foreign countries
Substantially
all of the Company’s operations are conducted in China. The Company’s operations
are subject to various political, economic, and other risks and uncertainties
inherent in China. Among other risks, the Company’s operations are subject to
the risks of restrictions on transfer of funds; export duties, quotas, and
embargoes; domestic and international customs and tariffs; changing taxation
policies; foreign exchange restrictions; and political conditions and
governmental regulations.
F-36
LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE 23
|
COMMITMENTS AND
CONTINGENCIES
|
Agreements
in Conjunction with the Private Placement
In
conjunction with the Private Placement as discussed in Note 15, the Company
entered into an escrow agreement with the Investors (the “Closing Escrow
Agreement”), pursuant to which the Investors deposited the funds in the
aggregate amount of $15,000,000 for the purchase and sale of the Investor Shares
(the “Escrowed
Funds”) into an escrow account which was disbursed at the closing of the
Private Placement. Pursuant to the Closing Escrow Agreement, $1,000,000 of the
Escrowed Funds were not released from the escrow account (the “Held Back Escrow
Funds”) until the escrow agent received written notice that the Company
had caused Lihua Copper to fulfill one hundred percent of its registered capital
obligation of $15,000,000 no later than 90 days from the closing date, as well
as comply with other covenants. Before December 31, 2008, the registered capital
of $15,000,000 of Lihua Copper was fully paid up, as certified and approved by
the relevant PRC business authority.
Additionally,
the Company entered into a public relations escrow agreement with the Investors
(the “Public Relations
Escrow Agreement”), pursuant to which the Company agreed to deposit
$750,000 in an escrow account (the “Public Relations Escrowed
Funds”). $125,000 from the Public Relations Escrowed Funds shall be
released when the Company appoints a Vice President of Investor Relations, an
additional $250,000 shall be released once the Company has complied with all
Nasdaq Corporate Governance standards, and the remaining $375,000 shall be
released as invoices become due for the purpose of any investor and public
relations activities. As negotiated with Vision Opportunity China L.P. (“Vision”), the lead
investor in the Private Placement who wishes to ensure that quality firms handle
certain affairs of the Company, if the Company fails to timely comply with the
foregoing obligations, or fail to fulfill a request to change the Company’s
auditor upon such request by any holder of five percent of our Common Stock in
the aggregate on a fully diluted basis, or fail to hire an internal control
consultant acceptable to Vision within three months of the Closing
Date, the Company will pay liquidated damages of 0.5% of the
aggregate purchase price paid by for the Investor Shares on the expiration date
to comply with such covenant and for each 30 day period thereafter, up to 10% of
the aggregate purchase price, which the Investors may require that the Company
pay from the Public Relations Escrowed Funds. In the event such liquidated
payments are made, the Company shall return an amount equal to the amount of
liquidated damages paid, back into the Public Relations Escrow
Funds.
On
February 11, 2009, the parties to the Escrow Agreement entered into a First
Supplement to the Escrow Agreement pursuant to which it was agreed (i) to
release $800,000 of the Held Back Escrow Funds to the Company for having
complied with all of the Held Back Release Conditions within 90 days of the
Closing Date, and (ii) to hold $200,000 of the Held Back Escrow Funds to cover
any contingent liabilities relating to unpaid employee social insurance and
housing payments from periods prior to 2009. The $200,000 is to be held in
escrow until June 30, 2010 to cover any claims from employees relating to the
unpaid costs. $800,000 was released from escrow to the Company on March 4,
2009.
All of
the above escrowed funds were fully released to the Company subsequently in
January 2010.
Pursuant
to the Private Placement, the Company also has an obligation to have its shares
of Common Stock listed on a national securities exchange no later than October
31, 2009 (the “Listing
Date”). In the event that the Company does not list on a national
securities exchange in the proscribed time period and manner provided for in the
Purchase Agreement, then the Ally Profit Shareholder shall transfer 750,000
shares (the “Listing Penalty Shares”) of Common Stock to the Investors, with no
additional consideration due from the Investors. However, if the Company is
requested by certain Investors to have its shares of Common stock quoted on the
Over-the-Counter Bulletin Board (“OTCBB Demand”) prior
to the Listing Date, the Company shall do so and then the Company will have an
additional 18 months to list on a national securities exchange. If the Company
fails to comply with the OTCBB Demand in a timely manner or, to then list on a
national securities exchange within the 18-month period, the Listing Penalty
Shares shall be transferred to the Investors.
The
Company’s contingent obligations to pay liquidated damages under the Closing
Escrow Agreement, Public Relations Escrow Agreement and the Securities Purchase
Agreement, and to deliver Listing Penalty Shares will be recognized and measured
separately in accordance with guidance provided in ASC Topic 450, Contingencies, (formerly SFAS
5, “Accounting for Contingencies”), and ASC 450-20 (formerly FASB Interpretation
No. 14, “Reasonable Estimation of the Amount of a Loss”). Any loss
recognized on a probable delivery of Listing Penalty Shares will be measured
based on the grant-date fair value of the shares as of October 31, 2008, or the
date of the Securities Purchase Agreement between the Company and certain
investors. On September 4, 2009, the Company’s common stock began
trading on the NASDAQ Capital Market under the symbol LIWA. Hence,
the Company believes that it has fulfilled its obligations under the agreements
in conjunction with the Private Placement up to December 31, 2009 and no
liquidated damages have been accrued.
F-37
LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE 24
|
SEGMENT DATA AND RELATED
INFORMATION
|
The
Company operates in one business segment, manufacturing and sale of copper clad
aluminum (CCA) superfine wire produced from refined copper materials. The
Company also operates only in one geographical segment – China, as all of the
Company’s products are sold to customers located in China and the Company’s
manufacturing operations are located in China.
The
Company’s major product categories are (1) CCA, which is an electrical conductor
consisting of an outer sleeve of copper that is metallurgically bonded to a
solid aluminum core, and (2) refined copper produced from scrap copper and used
to manufacture copper rod, raw wire, cable and magnet wire. The manufacturing of
refined copper was launched in the first quarter of 2009.
Management
evaluates performance based on several factors, of which net revenue and gross
profit by product are the primary financial measures:
Year
ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Net
revenue from unaffiliated customers:
|
||||||||
CCA
and Copper wire
|
$
|
109,397,857
|
$
|
50,006,057
|
||||
Refined
copper rod
|
52,145,577
|
—
|
||||||
$
|
161,543,434
|
$
|
50,006,057
|
|||||
Gross
profit:
|
||||||||
CCA
and Copper wire
|
$
|
31,316,371
|
$
|
16,803,713
|
||||
Refined
copper rod
|
4,916,450
|
—
|
||||||
$
|
36,232,821
|
$
|
16,803,713
|
NOTE 25
|
SUBSEQUENT
EVENTS
|
On
January 14, 2010, 700,000 common shares were issued upon exercise of warrants by
a warrant holder.
NOTE 26
|
RESTICTED NET
ASSETS
|
The
Company’s operations are substantially conducted through Lihua Electron and
Lihua Copper. Lihua Electron and Lihua Copper may only pay dividend out of its
retained earnings determined in accordance with the accounting standards and
regulations in the PRC and after it has met the PRC requirements for
appropriation to statutory reserves (see Note 17).
In
addition, Lihua Electron and Lihua Copper’s business transactions and assets are
primarily denominated in RMB, which is not freely convertible into foreign
currencies. All foreign exchange transactions take place either through the
People’s Bank of China or other banks authorized to buy and sell foreign
currencies at the exchange rates quoted by the People’s Bank of China. Approval
of foreign currency payments by the People’s Bank of China or other regulatory
institutions requires submitting a payment application form together with
suppliers’ invoices, shipping documents and signed contracts. These currency
exchange control measures imposed by the PRC government may restrict the ability
of Lihua Electron and Lihua Copper to transfer their net assets to the Company
through loans, advances or cash dividends, which consisted of paid-up capital,
retained earnings and statutory reserves and which aggregate amount of
approximately RMB424 million (or $62 million) exceeded 25% of the Company’s
consolidated net assets. According, condensed parent company financial
statements have been prepared in accordance with Rule 5.04 and Rule 12-04 of SEC
Regulation S-X.
The
Company records its investment in subsidiaries under the equity method of
accounting as prescribed in FASB ASC
323-10 “Investments- Equity Method and Join Ventures” Such investment and
long-term loans to subsidiaries are presented on the balance sheet as
“Investments in subsidiaries” and the income of the subsidiaries is presented as
“Equity in income of subsidiaries” on the statement of income.
These
supplemental condensed parent company financial statements should be read in
conjunction with the notes to the Company’s Consolidated Financial Statements.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with U.S. GAAP have been condensed or
omitted.
As of
December 31, 2008 and 2009, there were no material contingencies, significant
provisions for long-term obligations, or guarantees of the Company, except as
separately disclosed in the Consolidated Financial Statements, if
any.
F-38
LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE 25
|
RESTICTED NET ASSETS –
CONTINUED
|
Schedule
I – Parent Company Financial Information – Lihua International,
Inc.
Condensed
Balance Sheets
As
of December 31,
|
||||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Restricted
cash
|
$ | 575,000 | $ | 1,750,000 | ||||
Total
current assets
|
575,000 | 1,750,000 | ||||||
Investments
in subsidiaries
|
81,206,242 | 46,121,962 | ||||||
Total
assets
|
$ | 81,781,242 | $ | 47,871,962 | ||||
LIABILITIES
|
||||||||
Current
liabilities:
|
||||||||
Accrued
expenses
|
$ | − | $ | 80,000 | ||||
Total
liabilities
|
− | 80,000 | ||||||
Series
A redeemable convertible preferred stock
|
− | 13,116,628 | ||||||
Shareholders’
equity
|
||||||||
Common
stock, $0.0001 par value: 75,000,000 shares authorized,
|
||||||||
24,154,083
and 15,000,000 shares issued and outstanding
|
2,416 | 1,500 | ||||||
Additional
paid-in capital
|
39,921,717 | 7,976,976 | ||||||
Retained
earnings
|
39,227,879 | 24,125,381 | ||||||
Accumulated
other comprehensive income
|
2,629,230 | 2,571,477 | ||||||
Total
shareholders' equity
|
81,781,242 | 34,675,334 | ||||||
Total
liabilities and shareholders' equity
|
$ | 81,781,242 | $ | 47,871,962 |
Condensed
Statement of Income
Year
ended December 31,
|
||||||||
2009
|
2008
|
|||||||
NET
REVENUE
|
$
|
−
|
$
|
−
|
||||
Administrative
expenses
|
(2,024,833
|
)
|
(537,250
|
)
|
||||
Other
expense:
|
||||||||
Changes
in fair value of warrants
|
(8,831,161
|
)
|
−
|
|||||
Merger
expenses
|
−
|
(259,225
|
)
|
|||||
Income
tax
|
−
|
−
|
||||||
Equity
in income of subsidiaries
|
27,635,270
|
12,498,354
|
||||||
Net
income
|
$
|
16,779,276
|
$
|
11,701,879
|
Condensed
Statement of Cash Flows
Year
ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Net
cash used in operating activities
|
$
|
(1,773,393
|
)
|
$
|
−
|
|||
Net
cash used in investing activities
|
(7,391,257
|
)
|
(11,906,538
|
)
|
||||
Net
cash provided by financing activities
|
9,164,650
|
11,906,538
|
||||||
Cash,
beginning of year
|
−
|
−
|
||||||
Cash,
end of year
|
$
|
−
|
$
|
−
|
F-39
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
LIHUA
INTERNATIONAL, INC.
|
||
Dated:
March 30, 2010
|
By:
|
/s/ Jianhua Zhu |
Name:
|
Jianhua Zhu | |
Title:
|
Chairman and Chief Executive Officer |
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Dated:
March 30, 2010
|
By:
|
/s/ Jianhua
Zhu
|
Name:
|
Jianhua
Zhu
|
|
Title:
|
Chairman
and Chief Executive Officer (Principal Executive
Officer)
|
|
Dated:
March 30, 2010
|
By:
|
/s/ Yang
“Roy” Yu
|
Name:
|
Yang
“Roy” Yu
|
|
Title:
|
Chief
Financial Officer (Principal Accounting Officer)
|
|
Dated:
March 30, 2010
|
By:
|
/s/ Yaying
Wang
|
Name:
|
Yaying
Wang
|
|
Title:
|
Director
|
|
Dated:
March 30, 2010
|
By:
|
/s/ Jonathan
Serbin
|
Name:
|
Jonathan
Serbin
|
|
Title:
|
Director
|
|
Dated:
March 30, 2010
|
By:
|
/s/ Robert
Bruce
|
Name:
|
Robert
Bruce
|
|
Title:
|
Director
|
|
Dated:
March 30, 2010
|
By:
|
/s/ Kelvin
Lau
|
Name:
|
Kelvin
Lau
|
|
Title:
|
Director
|
63