- Corporate and Capital Structure: China 360° concludes that Lihua International’s corporate structure is typical of Chinese reverse mergers and is designed to comply with Chinese laws. Conclusion: China 360° independently verified the Company’s legal and capital information as consistent with capital verification reports provided directly to China 360° by the PRC’s State Administration for Industry and Commerce (“SAIC”). Click here to review the Lihua International SAIC reports.
- Facilities: China 360° reviewed land use certificates and property ownership for the Company’s two existing operating facilities, consisting of 32,954 sq. ft. of office and plant space, and found the certificates to be validly issued, in agreement with the data provided by the Company and consistent with China 360°’s visual inspection. The land use and property ownership certificates for the Company’s new 21,484 sq. ft. plant will not be issued until the project is completed, expected to be Q3 2011. Conclusion: China 360° reviewed documents relating to the construction and environmental approvals of the facility by relevant PRC authorities.
- Employees: The Company reports 350 administrative/sales/production management/production employees and China 360° examined payroll forms and employee insurance payment lists to verify the personnel number, and also conducted onsite visual inspection of the number of employees in each unit. Conclusion: The number of employees in the Company’s financial reports appears to be reasonably stated.
- Licenses and Certificates: China 360° examined Company licenses and certificates issued by various PRC governmental authorities. Because it is not standard practice to issue copies of licenses, China 360° interviewed a sampling of government officials to confirm that the Company was current on all of its verifications required to be filed with their offices. Conclusion: Based on these sample confirmations as well as the presence of government watermarks on the original licenses reviewed by China 360°, it is reasonable to conclude that the Company has received and maintained all appropriate licenses.
- Tax Reconciliation: In order to reconcile the Company’s tax filings to its audited financial information and public reports, China 360° obtained and reviewed management account financial data to confirm it agrees with what the Company purports to have filed with the SAIC; independently obtained tax reports filed with the SAIC by visiting the local tax office; independently verified the amounts filed with the State Administration of Taxation (“SAT”); reconciled balance sheet and income statements published in SAIC reports, SAT returns, and VAT returns versus management accounts for each subsidiary; obtained and reviewed the consolidation worksheet from the audit file; verified all tax payments by personally visiting the banks from which the payments were made. Conclusion: Based on China 360°’s review, China 360° has concluded that it is unlikely that the Company has filed incorrect SAT or SAIC reports, or provided China 360° with false reports that do not agree to the actual reports filed.
- Channel Checks: To verify the existence of key customers and suppliers, China 360° performed channel checks and interviews with critical customers and suppliers to ensure that purchase/sale amounts in Company records are consistent with customer/supplier records. China 360° tested a maximum of 10 samples covering 50% of overall sales and purchases and also randomly selected and independently verified contact information. Conclusion: China 360° found no material discrepancies and concludes Company reporting of purchases and sales appears to be reasonably stated. In addition, China 360° is continuing to perform additional channel checks and interviews which will be published in a subsequent report.
- Internal Controls: China 360° examined the Company’s Sarbanes Oxley Act of 2002 (“SOX”) documentation and critical internal control processes with the Company’s financial staff. The Company uses Ufida software – a very common general ledger and inventory-raw material system used by Chinese companies. China 360° operated the inventory-raw material system in person and downloaded original inventory data for the period from January 2008 to June 2011 and found the data to be consistent with financial reports. Generally speaking, the Company has done a better than average job of complying with its SOX requirements, as compared with other US-listed Chinese companies that China 360° has reviewed. From a technical perspective, China 360° noted that the Company did not follow the risk-based approach outlined by Auditing Standard No. 5, which calls for companies to identify all controls that affect financial reporting, and create a control matrix which contains a risk rating for each control, rating them high, medium or low. Conclusion: based on China 360°’s review of the documentation, the design and testing of internal controls over financial reporting appears to have been performed within the COSO (Committee of Sponsoring Organization of the Treadway Commission) framework, and the conclusion of management that internal controls over financial reporting are operating effectively appears to be reasonable based on the testing performed by the Company.
China 360° Solutions Provides Additional Information On Previously Released Report On Lihua International
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