Attached files
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EX-5.1 - VLOV INC. | v195194_ex5-1.htm |
EX-23.1 - VLOV INC. | v195194_ex23-1.htm |
EX-23.3 - VLOV INC. | v195194_ex23-3.htm |
EX-10.12 - VLOV INC. | v195194_ex10-12.htm |
REGISTRATION
STATEMENT NO. 333-163803
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
S-1
(Amendment
No. 2)
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
VLOV,
INC.
(Exact
name of registrant as specified in its charter)
Nevada
(State or
other jurisdiction of incorporation or organization)
2300
(Primary
Standard Industrial Classification Code Number)
20-8658254
(I.R.S.
Employer Identification Number)
11/F., Xiamen Guanyin Shan International Commercial Operation
Centre, A3-2 124
Hubin Bei
Road, Siming District, Xiamen, Fujian Province
People’s
Republic of China
(86592)
2345999
(Address,
including zip code, and telephone number, including area code, of registrant’s
principal executive offices)
Qingqing
Wu, Chief Executive Officer
11/F.,
Xiamen Guanyin Shan International Commercial Operation Centre, A3-2
124
Hubin Bei
Road, Siming District, Xiamen, Fujian Province
People’s
Republic of China
(86592)
2345999
COPY
TO:
Kevin K.
Leung, Esq.
Francis
Chen, Esq.
Richardson
& Patel LLP
10900
Wilshire Blvd., Suite 500
Los
Angeles, CA 90024
(310)
208-1182
(Name,
address, including zip code, and telephone number, including area code, of agent
for service)
FROM TIME
TO TIME AFTER THE
EFFECTIVE
DATE OF THIS REGISTRATION STATEMENT
(Approximate
date of commencement of proposed sale to the public)
If any of
the securities being registered on this form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
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
the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Smaller
reporting company x
|
CALCULATION
OF REGISTRATION FEE
Title of Each Class of
Securities to be Registered
|
Amount to
be
Registered
(1)
|
Proposed
Maximum
Per Share
Offering Price
|
Proposed
Maximum
Aggregate
Offering
Price
|
Amount of
Registration
Fee
|
||||||||||||
Common
stock, $0.00001 par value per share (including those issuable upon
conversion of series A convertible preferred stock)
|
3,406,514 | $ | 3.77 | (2) | $ | 12,842,557.78 | $ | 915.67 | ||||||||
Common
stock, $0.00001 par value per share (issuable upon exercise of common
stock purchase warrants)
|
1,716,877 | $ | 3.43 | (3) | $ | 5,888,888.11 | $ | 419.88 | ||||||||
Total
|
5,123,391 | $ | 1,335.55 | (4) |
(1)
|
Pursuant to Rule 416 under the
Securities Act of 1933, as amended (the “Securities Act”), this
registration statement shall be deemed to cover additional securities (i)
to be offered or issued in connection with any provision of any securities
purported to be registered hereby to be offered pursuant to terms which
provide for a change in the amount of securities being offered or issued
to prevent dilution resulting from stock splits, stock dividends, or
similar transactions and (ii) of the same class as the securities covered
by this registration statement issued or issuable prior to completion of
the distribution of the securities covered by this registration statement
as a result of a split of, or a stock dividend on, the registered
securities.
|
(2)
|
Estimated
solely for the purpose of calculating the amount of the registration fee
pursuant to Rule 457(c) of the Securities Act based upon the average of
the high and low prices of the common stock of the Registrant as reported
on the Over-the-Counter Bulletin Board on August 25,
2010.
|
(3)
|
Estimated solely for the purpose
of computing the amount of the registration fee pursuant to Rule 457(g)
under the Securities Act.
|
(4)
|
$1,754.53
has been previously paid.
|
The
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
The
information in this prospectus is not complete and may be changed. These
securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and no offer to buy these securities is being solicited
in any state where the offer or sale is not permitted.
VLOV,
INC.
5,123,391 shares of Common Stock
This
prospectus covers the resale by selling security holders named on page 14
of up to 5,123,391 shares of our common stock, $0.00001 par value per share,
which includes:
|
·
|
1,582,050 shares of common
stock underlying 1,582,050 outstanding shares of series A convertible
preferred stock issued in conjunction with our financing completed on
November 17, 2009 (the “Preferred Shares
Financing”);
|
|
·
|
988,180
shares of common stock converted from 988,180 shares of series A
convertible preferred stock issued in conjunction the Preferred Shares
Financing;
|
|
·
|
653,534 shares of common stock
issued in conjunction with our financing completed on December 1, 2009
(the “Common Shares Financing,” and with the Preferred Shares Financing
collectively as the “Financings”);
|
|
·
|
1,716,877 shares of common
stock underlying the common stock purchase warrants issued in conjunction
with the Financings;
|
·
|
8,250 shares of common stock from exercise of common stock purchase warrants to purchase 8,250 shares of common stock; and |
|
·
|
174,500 shares of common stock
issued in connection with a bridge financing related to our share exchange
transaction with Peng Xiang Peng Fei Investments, Limited in February
2009.
|
This
offering is not being underwritten. These securities will be offered for sale
from time to time by the selling security holders identified in this prospectus
in accordance with the terms described in the section of this prospectus
entitled “Plan of Distribution.” We will not receive any of the proceeds from
the sale of the common stock by the selling security holders.
The prices at which the selling security holders may sell the
shares of common stock that are part of this offering will be determined by the
prevailing market price for the shares at the time the shares are sold, a price
related to the prevailing market price, at negotiated prices or prices
determined, from time to time by the selling security holders. See "Plan of
Distribution."
Our securities are not listed on any national securities
exchange. Our common stock is currently quoted on the OTC Bulletin Board under
the symbol “VLOV.” The last reported per share price for our common stock was
$3.60 as quoted on the OTC Bulletin Board on August 26, 2010.
INVESTING
IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE “RISK FACTORS” BEGINNING
ON PAGE 3.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The
date of this prospectus is _________________, 2010
No offers
to sell are made, nor are offers sought, to buy these securities in any
jurisdiction where the offer or sale is not permitted. The reader should assume
that the information contained in this prospectus is accurate as of the date in
the front of this prospectus only. Our business, financial condition, results of
operations, and prospectus may have changed since that date.
TABLE
OF CONTENTS
Page
|
|
Prospectus
Summary
|
1
|
Risk
Factors
|
3
|
Special
Note Regarding Forward-Looking Statements
|
13
|
Use
of Proceeds
|
14
|
Selling
Security Holders
|
14
|
Plan
of Distribution
|
27
|
Legal
Matters
|
28
|
Experts
|
28
|
Business
|
28
|
Description
of Property
|
40
|
Summary
Financial Data
|
40
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
42
|
Legal
Proceedings
|
51
|
Management
|
51
|
Executive
Compensation
|
53
|
Security
Ownership of Certain Beneficial Holders and Management
|
55
|
Certain
Relationships and Related Party Transactions
|
57
|
Description
of Securities
|
57
|
Changes
In and Disagreements with Accountants on Accounting and Financial
Disclosure
|
61
|
Disclosure
of Commission Position on Indemnification for Securities Act
Liabilities
|
61
|
Additional
Information
|
62
|
Index
to Consolidated Financial Statements
|
F-1
|
i
PROSPECTUS
SUMMARY
This
summary contains basic information about us and this offering. The reader should
read the entire prospectus carefully, especially the risks of investing in our
common stock discussed under “Risk Factors.” Some of the statements contained in
this prospectus, including statements under “Summary” and “Risk Factors” as well
as those noted in the documents incorporated herein by reference, are
forward-looking statements and may involve a number of risks and uncertainties.
We note that our actual results and future events may differ significantly based
upon a number of factors. The reader should not put undue reliance on the
forward-looking statements in this document, which speak only as of the date on
the cover of this prospectus.
References
to “we,” “our,” “us,” the “Company,” or “VLOV” refer to VLOV, Inc. and its
subsidiaries and affiliated companies.
Our
Business
We are
an apparel producer in the People’s Republic of China (“PRC” or “China”) that
currently designs, develops and manufactures casual apparel and clothing
products 15-34 years old, middle-class Chinese male consumer s under the brand
name “V·LOV”, which we sell to our distributors for retail sales at points of
sales (“POS”) that the distributors own and operate, either directly or through
third-party retail operators. Our distributors’ POS sell our products
exclusively, and there were 519 VLOV POS in second and third-tier cities
throughout northern, central and southern China as of August 12,
2010.
Corporate
Structure
All of
our business operations are carried out by our variable interest entity (“VIE”),
Jinjiang Yinglin Jinduren Fashion Limited (“Yinglin Jinduren”), which we control
through contractual arrangements between Yinglin Jinduren and Dong Rong Capital
Investment Limited, formerly known as Korea Jinduren (International) Dress
Limited (“HK Dong Rong”), a Hong Kong company wholly-owned by Peng Xiang
Peng Fei Investments, Limited (“PXPF”), a British Virgin Islands company and our
wholly-owned subsidiary. Through these contractual arrangements, we
have the ability to substantially influence Yinglin Jinduren’s daily operations
and financial affairs, appoint its senior executives, approve all matters
requiring shareholder approval and receive, to the extent that Yinglin Jinduren
has net income, all such net income on a quarterly basis. To ensure Yinglin
Jinduren’s performance of its contractual obligations in the course of its
business operations, we have the right, but not the obligation, to provide
guarantee of such performance. As a result of these contractual arrangements,
which enable us to control Yinglin Jinduren, we are considered the primary
beneficiary of Yinglin Jinduren. Accordingly, we consolidate Yinglin Jinduren’s
results, assets and liabilities in our financial statements. Other
than our interests in the contractual arrangements and the exercise of our
rights thereunder, neither we nor PXPF and HK Dong Rong own any equity interests
in Yinglin Jinduren or carry out any other activities.
In November 2009, HK Dong Rong established a wholly-owned
subsidiary, Dong Rong (China) Co., Ltd. (“China Dong Rong”), in the PRC.
Although China Dong Rong currently has no business activities, it is our
intention and that of the equity owners of Yinglin Jinduren to transfer all of
the business operations currently conducted by Yinglin Jinduren to China Dong
Rong sometime in 2010. Such transfer will provide us with greater control over
our operating assets, which we currently control through our contractual
arrangements with Yinglin Jinduren and its owners, although such transfer has
not been completed as of the date of this prospectus, and currently there are no
arrangements or understandings with respect to such transfer, and China Dong
Rong has no operation.
Financing
Transaction – Preferred Shares Financing
In
November 2009, we completed a financing transaction with 57 accredited investors
by issuing an aggregate of 2,796,721 shares of our series A convertible
preferred stock, par value $0.00001 per share (the “Preferred Shares”) for
aggregate purchase price of approximately $8.00 million, and issued to them
warrants (the “Warrants”) to purchase up to 1,398,360 shares of common stock,
par value $0.00001 per share, for no additional consideration. There were two
closings, the first on October 27, 2009, for gross proceeds of approximately
$4.14 million, and the second on November 17, 2009, for gross proceeds of
approximately $3.86 million. The transaction was pursuant to a securities
purchase agreement that we entered into with these selling security holders.
Each Preferred Share is convertible into one share of common stock at $2.86 per
share (subject to certain adjustments) at any time at its holder’s option, and
will automatically convert upon the listing of our common stock on either the
Nasdaq Capital Market or NYSE Amex Equities. Each Warrant entitles its holder to
purchase a share of common stock at an exercise price of $3.43 per share
(subject to certain adjustments) for a period of three years. We are also
entitled to call the Warrants for cancellation if the volume-weighted average
price of our common stock for 20 consecutive days exceeds 200% of the then
applicable exercise price.
Financing
Transaction – Common Shares Financing
On
December 1, 2009, we entered into a securities purchase agreement with 17
accredited investors, pursuant to which we sold and issued to them 653,534
shares of our common stock (the “Common Shares”) for aggregate purchase price of
approximately $1.87 million, and issued to them Warrants to purchase up to
326,767 shares of common stock, for no additional consideration. Except for
their issuance date, the Warrants issued in this transaction have terms that are
identical to those Warrants issued in the Preferred Shares transaction described
above.
Financial
Results
Our
consolidated financial statements for the years ended December 31, 2009 and 2008
are included in this prospectus. For 2009 and 2008, we had
approximately $64.34 million and $51.87 million in sales, respectively, and
approximately $10.44 million and $9.19 million in net income, respectively.
1
We have also included our unaudited condensed consolidated
financial statements for the three and six months ended June 30, 2010 and
2009. For the three months ended June 30, 2010 and 2009, we had
approximately $17.95 million and $14.07 million in sales, respectively, and
approximately $4.47 million and $2.31 million in net income, respectively. For
the six months ended June 30, 2010 and 2009, we had approximately $36.01 million
and $31.94 million in sales, respectively, and approximately $5.54 million and
$6.09 million in net income, respectively.
See
“Index to Consolidated Financial Statements” on page F-1.
Risks
Affecting Our Business
We are
subject to a number of risks, which the reader should be aware of before
deciding to purchase the securities in this offering. These risks are discussed
in the summary below and in the section titled “Risk Factors” beginning on
page 3 of this prospectus.
Summary
of Risk Factors
This
document contains certain statements of a forward-looking nature. Such
forward-looking statements, including but not limited to growth and strategies,
future operating and financial results, financial expectations and current
business indicators are based upon current information and expectations and are
subject to change based on factors beyond our control. Forward-looking
statements typically are identified by the use of terms such as “look,” “may,”
“will,” “should,” “might,” “believe,” “plan,” “expect,” “anticipate,” “estimate”
and similar words, although some forward-looking statements are expressed
differently. The accuracy of such statements may be impacted by a number of
business risks and uncertainties that could cause actual results to differ
materially from those projected or anticipated, including but not limited
to:
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our ability to timely and
accurately complete orders for our
products;
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·
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our dependence on a limited
number of major customers;
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·
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our ability to expand and grow
our distribution channels;
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·
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general economic conditions which
affect consumer demand for our
products;
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·
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the effect of terrorist acts, or
the threat thereof, on consumer confidence and
spending;
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·
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acceptance in the marketplace of
our new products and changes in consumer
preferences;
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·
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foreign currency exchange rate
fluctuations;
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·
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our ability to identify and
successfully execute cost control initiatives;
and
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·
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other risks outlined above and in
our other public filings.
|
The
reader is cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this document. We undertake no
obligation to update this forward-looking information.
While our
management fully intends to make concerted efforts to manage these risks, we
cannot provide assurances that we will be able to do so successfully. See “Risk
Factors” beginning on page 3 of this prospectus.
The
Offering
We
are registering 5,123,391 shares of our common stock for sale by the selling
security holders identified in the section of this prospectus entitled “Selling
Security Holders.” As required by the securities purchase agreements that we
executed as part of the Preferred Shares Financing and Common Shares Financing
(more fully described under the section titled “Business” below), we are
registering for resale the following: (i) 3,232,014 shares of common stock
(including 1,582,050 shares of common stock underlying 1,582,050 outstanding
Preferred Shares, 988,180 shares of common stock converted from 988,180
Preferred Shares and 8,250 shares of common stock from exercise of Warrants to
purchase 8,250 shares of common stock), and (ii) 1,716,877 shares of common
stock underlying outstanding Warrants. Additionally, as required by the bridge
loan and financing agreement that HK Dong Rong entered into in connection with a
bridge financing related to the share exchange transaction between PXPF and us,
we are registering 174,500 shares of common stock issued to investors of the
bridge financing. Information regarding our common stock is included in the
section of this prospectus entitled “Description of
Securities.”
2
The
shares of common stock offered under this prospectus may be sold by the selling
security holders on the public market, in negotiated transactions with a
broker-dealer or market maker as principal or agent, or in privately negotiated
transactions not involving a broker or dealer. Information regarding the times
and manner in which the shares of common stock offered under this prospectus may
be offered and sold is provided in the sections of this prospectus entitled
“Plan of Distribution.” We will not receive any of the proceeds from
those sales. The registration of the shares of common stock offered under this
prospectus does not necessarily mean that any of these shares will ultimately be
offered or sold by the selling security holders.
General
Information
Our
principal executive offices are located at 11/F., Xiamen Guanyin Shan
International Commercial Operation Centre, A3-2 124, Hubin Bei Road, Siming
District, Xiamen, Fujian Province, China, and our telephone number is (86592)
2345999.
RISK
FACTORS
The
reader should carefully consider the risks described below together with all of
the other information included in this prospectus. The statements contained in
or incorporated into this prospectus that are not historic facts are
forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those set forth in or
implied by forward-looking statements. If any of the following risks actually
occurs, our business, financial condition or results of operations could be
harmed. In that case, the trading price of our common stock could decline, and
an investor in our securities may lose all or part of their
investment.
Risks
Relating to Our Industry
Our
sales are influenced by general economic cycles. A prolonged period of depressed
consumer spending would have a material adverse effect on our profitability.
Apparel
is a cyclical industry that is dependent upon the overall level of consumer
spending. The global economy is currently experiencing a
downturn. Purchases of trendy apparel and accessories tend to
decline in periods of uncertainty regarding future economic prospects, when
consumer spending, particularly on discretionary items, and disposable income
decline. Many factors affect the level of consumer spending in the
apparel industries, including, among others: prevailing economic conditions,
levels of employment, salaries and wage rates, energy costs, interest rates, the
availability of consumer credit, taxation and consumer confidence in future
economic conditions. During periods of economic uncertainty, we may
not be able to maintain or increase our sales to existing customers, make sales
to new customers, maintain sales levels at our existing POS, or maintain or
improve our margins from operations as a percentage of net sales. Our
customers anticipate and respond to adverse changes in economic conditions and
uncertainty by reducing inventories and canceling orders. A prolonged
period of depressed consumer spending would have a material adverse effect on
our profitability.
We
compete with companies with significantly greater resources than ours, and if we
are unable to compete effectively with these companies, our market share may
decline and our business could be harmed.
We face
intense competition in the apparel industry from other established companies
both in China and other countries. A number of our competitors may
have significantly greater financial, technological, manufacturing, sales,
marketing and distribution resources than we do. Their greater
capabilities in these areas may enable them to better withstand periodic
downturns in the apparel industry, compete more effectively on the basis of
price and production, better adapt to changes in consumer preferences or retail
requirements, devote greater resources to the marketing and sale of their
products, and more quickly develop new products. In addition, new
companies may enter the markets in which we compete, further increasing
competition in the industry. As a result, we may not be able to
compete successfully with them if we cannot continue enhancing our marketing and
management strategies, quality and value or responding appropriately to
consumers needs.
We
believe that our ability to compete successfully depends on a number of factors,
including the style and quality of our products and the strength of our brand
name, as well as many factors beyond our control. We may not be able
to compete successfully in the future, and increased competition may result in
price reductions, reduced profit margins, loss of market share and an inability
to generate cash flows that are sufficient to maintain or expand our development
and marketing of new products, which would adversely impact the trading price of
our common stock.
3
The
worldwide apparel industry is subject to ongoing pricing pressure.
The
apparel market is characterized by low barriers to entry for both suppliers and
marketers, global sourcing through suppliers located throughout the world, trade
liberalization, continuing movement of product sourcing to lower cost countries,
ongoing emergence of new competitors with widely varying strategies and
resources, and an increasing focus on apparel in the mass merchant channel of
distribution. These factors contribute to ongoing pricing pressure
throughout the supply chain. This pressure has and may continue
to:
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·
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require us to reduce wholesale
prices on existing products;
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·
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result in reduced gross margins
across our product lines;
and
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·
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increase pressure on us to
further reduce our production costs and our operating
expenses.
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Any of
these factors could adversely affect our business and financial
condition.
Fluctuation
in the price, availability and quality of raw materials could increase our cost
of goods and decrease our profitability.
We
outsource a majority of our manufacturing needs to, and purchase finished goods
from, O.E.M. manufacturers, who supply their own raw materials. For our own
production, we purchase raw materials directly from local fabric and accessory
suppliers. We may also import specialty fabrics to meet specific
customer requirements. The prices we charge for our products are
dependent in part on the market price for raw materials used to produce
them. The price, availability and quality of the raw materials for
our products may fluctuate substantially, depending on a variety of factors,
including demand, supply conditions, transportation costs, government
regulation, economic climates and other unpredictable factors. Any
raw material price increases could increase our cost of sales and decrease our
profitability unless we are able to pass higher prices on to our customers.
For the six months ended June 30, 2010, three suppliers
accounted for 14.39%, 11.75% and 10.13%, respectively, of our total
purchases of finished products and raw materials (for our own production).
For the six months ended June 30, 2009, two suppliers accounted for 14.06% and
10.46%, respectively, of our total purchases. We do not have
any long-term written agreements with any of our suppliers and do not
anticipate entering into any such agreements in the near future. We
do not believe that the loss of any of these suppliers would have a material
adverse effect on our ability to obtain finished goods or raw materials
essential to our business because we believe we can locate other suppliers in a
timely manner.
Our
continued operations depend on current fashion trends. If our designs
and products do not continue to be fashionable, our business could be adversely
affected.
Our
success depends in large part on our ability to develop, market and deliver
innovative and stylish products that are consistent and build on our brand and
image at a pace and intensity competitive with our competition. The
novelty and the design of our VLOV apparel are critical to our success and
competitive position, and the inability to continue to develop and offer unique
products to our customers could harm our business. We cannot be
certain that trendy apparel and related accessories will continue to be
fashionable. Should the trend steer away from apparel and
related accessories such as ours, our sales could decrease and our business
could be adversely affected. In addition, our future designs and
plans to expand our product offerings may not be successful, and any
unsuccessful designs or product offerings could adversely affect our
business.
Our
business and the success of our products could be harmed if we are unable to
maintain our brand image.
Our
success to date has been due in large part to the growth of our brand
image. If we are unable to timely and appropriately respond to
changing consumer demand, our brand name and brand image may be
impaired. Even if we react appropriately to changes in consumer
preferences, consumers may consider our brand image to be outdated or associate
our brand with styles that are no longer popular. In the past, many
apparel companies have experienced periods of rapid growth in revenues and
earnings followed by periods of declining sales and losses. Our
business may be similarly affected in the future.
Risks
Relating to Our Business
Our
limited operating history makes it difficult to evaluate our future prospects
and results of operations.
We have a
limited operating history. Yinglin Jinduren commenced business in 2004.
Accordingly, you should consider our future prospects in light of the risks and
uncertainties experienced by early stage companies in evolving industries such
as the apparel industry in China. Some of these risks and uncertainties relate
to our ability to:
4
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maintain our market
position;
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attract additional customers and
increase spending per
customer;
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·
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respond to competitive market
conditions;
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·
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increase awareness of our brand
and continue to develop customer
loyalty;
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·
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respond to changes in our
regulatory environment;
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·
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maintain effective control of our
costs and expenses;
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·
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raise sufficient capital to
sustain and expand our business; and
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·
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attract,
retain and motivate qualified personnel.
|
If we are
unsuccessful in addressing any of these risks and uncertainties, our business
may be materially and adversely affected.
We
may be unable to sustain our past growth or manage our future growth, which may
have a material adverse effect on our future operating results.
We have
experienced rapid growth since our inception, and have increased our net sales
from $4.74 million in 2004 to
$64.34 million in 2009. We anticipate that our future growth
rate will depend upon various factors, including the strength of our brand
image, the market success of our current and future products, the success or our
growth strategies, competitive conditions and our ability to manage our future
growth. Future growth may place a significant strain on our
management and operations. As we continue to grow in our operations, our
operational, administrative, financial and legal procedures and controls will
need to be expanded. As a result, we may need to train and manage an increasing
number of employees, which could distract our management team from our business.
Our future success will depend substantially on the ability of our management
team to manage our anticipated growth. If we are unable to anticipate or manage
our growth effectively, our future operating results could be adversely
affected.
Our
business could be harmed if we fail to maintain proper inventory
levels.
We place
orders with our O.E.M. manufacturers for most of our products when we receive
all of our customers’ orders. We do this to minimize purchasing
costs, the time necessary to fill customer orders and the risk of non-delivery.
We also maintain an inventory of certain products that we anticipate will be in
greater demand. However, we may be unable to sell the products we have ordered
in advance from manufacturers or that we have in our inventory. Inventory levels
in excess of customer demand may result in inventory write-downs, and the sale
of excess inventory at discounted prices could significantly impair our brand
image and have a material adverse effect on our operating results and financial
condition. Conversely, if we underestimate consumer demand for our products or
if our manufacturers fail to supply the quality products that we require at the
time we need them, we may experience inventory shortages. Inventory shortages
might delay shipments to customers, negatively impact retailer and distributor
relationships, and diminish brand loyalty.
We
rely on our distributors to operate our retail network.
Our
distributors operate, directly or indirectly via third parties, the V·LOV POS.
We do not own or operate any V·LOV POS ourselves. We depend on our distributors’
regional retail experience and economies of scale. We may not be able to expand
the geographical coverage of our existing distributors, or be able to engage new
distributors who have strong network and retail experience, which may
substantially impair our sales targets. We rely on our distributors in the
management and expansion of the V·LOV retail sales network. Even though we
provide retail policies and guidelines, training, advertising and marketing
support, our distributors might not carry out our visions and satisfy the needs
of our business. Our sales to distributors also may not correlate directly to
the demand for our products by end customers. If our distributors mismanage and
do not effectively expand our retail network, our business and our reputation
can be adversely affected.
We rely on outsourcing for a majority of
our manufacturing needs. Our inability to secure production sources
meeting our quality, cost, working conditions and other requirements, or
failures by our contractors to perform, could harm our sales, service levels and
reputation.
We source
a majority of our products from independent O.E.M. manufacturers who supply
their own raw materials. As a result, we must locate and secure production
capacity. We depend on these manufacturers to maintain adequate financial
resources, secure a sufficient supply of raw materials, and maintain sufficient
development and manufacturing capacity in an environment characterized by
continuing cost pressure and demands for product innovation and speed-to-market.
In addition, we do not have material long-term contracts with any of our O.E.M.
manufacturers, who generally may unilaterally terminate their relationship with
us at any time.
5
Our
dependence on O.E.M. manufacturing could subject us to difficulty in obtaining
timely delivery of products of acceptable quality. A manufacturer's failure to
timely deliver products or to meet our quality standards could cause us to miss
the delivery date requirements of our distributors. In addition, any
interference with our or our distributors’ ability to receive delivery from
those manufacturers, such as conditions at ports or issues that otherwise affect
transportation and warehousing providers, could cause delayed delivery of
products. Additionally, if we experience a significant increase in demand, or if
we need to replace any of the manufacturers that we currently use, we may have
to expand our third-party manufacturing capacity. We cannot be assured that this
capacity will be available to us, or that if available it will be available on
terms that are acceptable to us. Failing to make
timely deliveries may cause our distributors to cancel orders, refuse to accept
deliveries, impose non-compliance charges through invoice deductions or other
charge-backs, demand reduced prices or reduce future orders, any of which could
harm our sales and margins.
Our
success depends on the continued protection of our trademark and other
proprietary intellectual property rights.
Our
trademark and other intellectual property rights are important to our success
and competitive position, and the loss of or inability to enforce trademark and
other proprietary intellectual property rights could harm our business. We
devote substantial resources to the establishment and protection of our
trademark and other proprietary intellectual property rights in China. Our
efforts to establish and protect our trademark and other proprietary
intellectual property rights may not be adequate to prevent imitation or
counterfeiting of our products by others or to prevent others from seeking to
block sales of our products. Unauthorized copying of our products or
unauthorized use of our trademarks or other proprietary rights may not only
erode sales of our products but may also cause significant damage to our brand
names and our ability to effectively represent ourselves to our
customers.
Our
business could suffer from the financial instability of our
distributors.
We do not
engage in any retail sales. Instead, we sell our products to our distributors
who, in turn, sell them at the POS that they operate. As a result, financial
difficulties of our distributors could result in their reduced purchases from
us, which in turn could detrimentally affect our revenues. We sell to
certain distributors on open account with 60 to 90 day payment terms,
but these arrangements are not always possible.
The
loss of our chief executive officer or other key management personnel would have
an adverse impact on our future development and could impair our ability to
succeed.
Our performance is substantially dependent upon the expertise
of our chief executive officer, Mr. Qingqing Wu, and other key management
personnel. Mr. Wu spends all of his working time on our Company's
business, including as our Chief Designer, a role previously occupied by Mr.
Fengfei Zeng. It may be difficult to find qualified individuals to replace Mr.
Wu or other key management personnel if we were to lose any one or more of them.
The loss of Mr. Wu or any of our key management personnel could have a material
adverse effect on our business, development, financial condition, and operating
results. Furthermore, most members of our design team are not
currently under contract.
Our
quarterly revenues and operating results fluctuate as a result of a variety of
factors, including seasonal fluctuations in demand for denim and related
apparel, and accessories delivery date delays, timing of new POS
openings.
Our
quarterly revenues and operating results have varied significantly in the past
and can be expected to fluctuate in the future due to a number of factors, many
of which are beyond our control. For example, sales of our products
have historically been somewhat seasonal in nature with the strongest sales
generally occurring during the Chinese New Year holiday in early spring, Labor
Day holiday in early May, summer months, and National Day holiday in early
October. Delays in scheduling or delivery of products by our
distributors could negatively impact our net sales and results of operations for
any given quarter. The timing of new POS openings by our distributors
and the amount of revenue contributed by such new POS could also impact our net
sales and results of operations for any given quarter. As a result of
these specific and other general factors, our operating results will likely vary
from quarter to quarter and the results for any particular quarter may not be
necessarily indicative of results for the full year. Any shortfall in
revenues or net income from levels expected by securities analysts and investors
could cause a decrease in the trading price of our common stock.
We
depend on our distributors for our sales. A significant adverse change in our
relationship with a distributor or in a distributor’s performance or financial
position could harm our business and financial condition.
Presently
we have distribution agreements with 12 distributors. For the year ended
December 31, 2009, four of our distributors each accounted for 10% or more of
our total net sales, or 54.58% of our total net sales in the aggregate. For the
six months ended June 30, 2010, three of our distributors each accounted for 10%
or more of our total net sales, or 41.89% of our total net sales in the
aggregate. A decision by a major distributor, whether motivated by competitive
considerations, strategic shifts, financial requirements or difficulties,
economic conditions or otherwise, to decrease its purchases from us or to change
its manner of doing business with us, could adversely affect our business and
financial condition. In addition, although we have long-standing relationships,
we do not have long term contracts with any of our distributors. We identify
suitable distributors and enter into distributorship agreements, generally for a
term of up to 12 months, renewable on a year to year basis upon satisfying
certain criteria.
6
We do not
believe that there is any material risk of loss of any of these distributors
during the next 12 months. We believe that we could replace any of these
distributors within 12 months, such that the loss of a distributor would not
have a material adverse effect on our financial condition in the long
term. None of our affiliates are officers, directors, or material
shareholders of any of these distributors.
We
will incur increased costs as a result of being a public company.
As a
public company, we will incur significant legal, accounting and other expenses
that we did not incur as a private company prior to the Share Exchange. We
will incur costs associated with our public company reporting requirements. We
will incur costs associated with corporate governance requirements, including
certain requirements under the Sarbanes-Oxley Act of 2002, as well as rules
implemented by the SEC and the Financial Industry Regulatory Authority
(“FINRA”). We expect these rules and regulations, in particular Section 404 of
the Sarbanes-Oxley Act of 2002, to significantly increase our legal and
financial compliance costs and to make some activities more time-consuming and
costly. Like many smaller public companies, we face a significant impact from
required compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Section
404 requires management of public companies to evaluate the effectiveness of
internal control over financial reporting and the independent auditors to attest
to the effectiveness of such internal controls and the evaluation performed by
management. The SEC has adopted rules implementing Section 404 for public
companies as well as disclosure requirements. We are currently preparing for
compliance with Section 404; however, there can be no assurance that we will be
able to effectively meet all of the requirements of Section 404 as currently
known to us in the currently mandated timeframe. Any failure to implement
effectively new or improved internal controls, or to resolve difficulties
encountered in their implementation, could harm our operating results, cause us
to fail to meet reporting obligations or result in management being required to
give a qualified assessment of our internal controls over financial reporting or
our independent auditors providing an adverse opinion regarding management’s
assessment, when such opinion is required. Any such result could cause investors
to lose confidence in our reported financial information, which could have a
material adverse effect on our stock price.
We also
expect these new rules and regulations may make it more difficult and more
expensive for us to obtain director and officer liability insurance and we may
be required to accept reduced policy limits and coverage or incur substantially
higher costs to obtain the same or similar coverage. As a result, it may be more
difficult for us to attract and retain qualified individuals to serve on our
board of directors or as executive officers. We are currently evaluating and
monitoring developments with respect to these new rules, and we cannot predict
or estimate the amount of additional costs we may incur or the timing of such
costs.
We
must successfully maintain and/or upgrade our information technology
systems.
We rely
on various information technology systems to manage our operations, and we
regularly evaluate these systems against our current and expected
requirements. Although we have no current plans to implement
modifications or upgrades to our systems, we will eventually be required to make
changes to legacy systems and acquiring new systems with new
functionality. We are considering additional investments in updating
our current system to help us improve our internal control system and to meet
compliance requirements under Section 404. We are also continuing to
develop and update our internal information systems on a timely basis to meet
our business expansion needs. Any information technology system
disruptions, if not anticipated and appropriately mitigated, could have an
adverse effect on our business and operations.
Business
interruptions could adversely affect our business.
Our
operations and the operations of our suppliers and distributors are vulnerable
to interruption by fire, earthquake, hurricanes, power loss, telecommunications
failure and other events beyond our control. In the event of a major natural
disaster, we could experience business interruptions, destruction of facilities
and loss of life. In the event that a material business interruption occurs that
affects us or our suppliers or distributors, deliveries could be delayed and our
business and financial results could be harmed.
We
must attract more consumers within our targeted profile to our brand.
Our current
products are weighted towards Chinese male consumers 15 to 34 years of age.
If we are not successful in attracting consumers within our demographic profile
to our brand, our results of operation and our ability to grow will be adversely
affected.
7
Risks
Related to Our Corporate Structure
We
conduct our business through Yinglin Jinduren by means of contractual
arrangements. If the Chinese government determines that these contractual
arrangements do not comply with applicable regulations, our business could be
adversely affected. If the PRC regulatory bodies determine that the
agreements that establish the structure for operating our business in China do
not comply with PRC regulatory restrictions on foreign investment, we could be
subject to severe penalties. In addition, changes in such Chinese laws and
regulations may materially and adversely affect our business.
There are
uncertainties regarding the interpretation and application of PRC laws, rules
and regulations, including but not limited to the laws, rules and regulations
governing the validity and enforcement of the contractual arrangements between
HK Dong Rong and Yinglin Jinduren. Although we have been advised by our PRC
counsel, that based on their understanding of the current PRC laws, rules and
regulations, the structure for operating our business in China (including our
corporate structure and contractual arrangements with Yinglin Jinduren and its
owners, as well our ability to enforce our rights thereunder) comply with all
applicable PRC laws, rules and regulations, and do not violate, breach,
contravene or otherwise conflict with any applicable PRC laws, rules or
regulations, we cannot assure you that the PRC regulatory authorities will not
determine that our corporate structure and contractual arrangements violate PRC
laws, rules or regulations. If the PRC regulatory authorities determine that our
contractual arrangements are in violation of applicable PRC laws, rules or
regulations, our contractual arrangements will become invalid or unenforceable.
In addition, new PRC laws, rules and regulations may be introduced from time to
time to impose additional requirements that may be applicable to our contractual
arrangements. For example, the PRC Property Rights Law that became effective on
October 1, 2007 requires us to register with the relevant government
authority the security interests on the equity interests in Yinglin Jinduren
granted to us under the equity pledge agreements that are part of the
contractual arrangements. As we have not completed such registration, we may not
be able to enforce the security interests granted under the equity pledge
agreements.
The
Chinese government has broad discretion in dealing with violations of laws and
regulations, including levying fines, revoking business and other licenses and
requiring actions necessary for compliance. In particular, licenses and permits
issued or granted to us by relevant governmental bodies may be revoked at a
later time by higher regulatory bodies. We cannot predict the effect of the
interpretation of existing or new Chinese laws or regulations on our businesses.
We cannot assure you that our current ownership and operating structure would
not be found in violation of any current or future Chinese laws or regulations.
As a result, we may be subject to sanctions, including fines, and could be
required to restructure our operations or cease to provide certain services. Any
of these or similar actions could significantly disrupt our business operations
or restrict us from conducting a substantial portion of our business operations,
which could materially and adversely affect our business, financial condition
and results of operations.
If we, HK
Dong Rong or Yinglin Jinduren are determined to be in violation of any existing
or future PRC laws, rules or regulations or fail to obtain or maintain any of
the required governmental permits or approvals, the relevant PRC regulatory
authorities would have broad discretion in dealing with such violations,
including:
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revoking the business and
operating licenses of Yinglin Jinduren and/or voiding the contractual
arrangements;
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discontinuing or restricting the
operations of Yinglin
Jinduren;
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·
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imposing conditions or
requirements with which we or HK Dong Rong or Yinglin Jinduren may not be
able to comply;
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requiring us to restructure the
relevant ownership structure or
operations;
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restricting or prohibiting our
use of the proceeds from our initial public offering to finance our
business and operations in China;
or
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imposing fines or other forms of
economic penalties.
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As all
of our business operations are conducted by Yinglin Jinduren to which we have no
direct ownership, the imposition of any of these penalties would severely
disrupt our ability to conduct business and have a material adverse effect on
our financial condition, results of operations and prospects.
Our contractual arrangements with
Yinglin Jinduren and its owners as well as our ability to enforce our rights
thereunder may not be as effective in providing control over Yinglin Jinduren as
direct ownership.
We have no equity
ownership interest in Yinglin Jinduren, and rely on contractual arrangements to
control and operate the company and its businesses. We cannot assure you that
the owners of Yinglin Jinduren will always act in our best interests, and these
contractual arrangements may not be as effective in providing control over the
company as direct ownership. For example, Yinglin Jinduren could fail to take
actions required for our business despite its contractual obligation to do so.
If Yinglin Jinduren fails to perform under its agreements with us, we are
required by the terms of these agreements to enforce our rights by arbitration
before The China International Economic and Trade Arbitration Commission
(CIETAC). To initiate such proceeding, we must first prepare and submit an
arbitration request to CIETAC for its acceptance. Once accepted, CIETAC will
form an arbitration tribunal to hear the matter, set a hearing date and notify
Yinglin Jinduren of the proceeding. Yinglin Jinduren will have 45 days from the
receipt of such notice to prepare its statement of defense. While we have been
advised by our PRC counsel that current CIETAC rules requires a decision to be
rendered within six months from the selection of the arbitration tribunal, the
passage of any prolong period of time without resolution may disrupt and
negatively affect our business operations. Further, we must borne half of
CIETAC’s fees in addition to our own expenses incurred to prepare for such
proceeding, which fees may become prohibitively expensive as the arbitration
must take place in Shanghai and be conducted in Chinese. As we are also
contractually bound by CIETAC’s decision, in the event such decision is
unfavorable to us, we may effectively lose our control over Yinglin Jinduren and
thus our operating business, which will materially and adversely affect our
business, financial conditions and results of operations.
8
Because we rely on the consulting
services agreement with Yinglin Jinduren for our revenue, we would have no or
minimal operations and assets if this agreement is terminated, which will
severely and detrimentally affect our continuing business viability under our
current corporate structure.
We are a holding company and do not have any assets or conduct any
business operations other than the contractual arrangements between HK Dong
Rong, our indirect wholly owned subsidiary, and Yinglin Jinduren. As a result,
we currently rely entirely for our income on the fees we earn from Yinglin
Jinduren pursuant to the consulting services agreement which forms a part of the
contractual arrangements. The consulting services agreement may be terminated by
written notice of HK Dong Rong or Yinglin Jinduren in the event that: (a)
Yinglin Jinduren causes a material breach of the agreement, provided that if the
breach does not relate to a financial obligation of the breaching party, that
party may attempt to remedy the breach within 14 days following the receipt of
the written notice; (b) one party becomes bankrupt, insolvent, is the subject of
proceedings or arrangements for liquidation or dissolution, ceases to carry on
business, or becomes unable to pay its debts as they become due; (c) HK Dong
Rong terminates its operations; or (d) circumstances arise which would
materially and adversely affect the performance or the objectives of the
agreement. Additionally, HK Dong Rong may terminate the consulting services
agreement without cause. Because neither we nor our direct and indirect
subsidiaries own equity interests of Yinglin Jinduren, the termination of the
consulting services agreement would not only sever our ability to continue
receiving payments from Yinglin Jinduren under our current holding company
structure, but Yinglin Jinduren, through which all of our operations are
currently conducted, would no longer be our operating business, thereby leaving
us with no or minimal operations and assets. Although we are currently not aware
of any event or reason that may cause the consulting services agreement to
terminate, we cannot assure you that such an event or reason will not occur in
the future. In the event that the consulting services agreement is terminated,
this may have a severe and detrimental effect on our continuing business
viability under our current corporate structure, which in turn may affect the
value of your investment.
We rely principally on payments
from Yinglin Jinduren for our income, and any limitation on the ability of
Yinglin Jinduren to make such payments to us or on our ability to take such
payments could have a material adverse effect on our financial condition,
results of operations and prospects.
We
are a holding company, and rely principally on payments from Yinglin Jinduren
under the consulting services agreement for our income. If Yinglin Jinduren
incurs debt in its own name in the future, the instruments governing such debt
may restrict its ability to make payments to us. In addition, under the PRC
Enterprise Income Tax Law (the “EIT Law”), an enterprise established outside of
the PRC but whose management body is within the PRC may be classified as a
“resident enterprise” for income tax purposes. As such, if we are deemed a
"resident enterprise," a determination currently made on a case-by-case basis by
the PRC tax authority, and if the payments that we receive from Yinglin Jinduren
under the consulting services agreement are deemed dividends, we may be subject
to a 10% income tax. If this should happen or if Yinglin Jinduren’s
ability to make payments to us is otherwise restricted, our income could be
reduced significantly so as to materially and adversely affect our financial
condition, results of operations and prospects.
Management
members of Yinglin Jinduren have potential conflicts of interest with us, which
may adversely affect our business and your ability for recourse.
Mr. Qingqing Wu, our chief executive officer, is also the chairman
of Yinglin Jinduren and owns 65.91% of its equity ownership interests. Conflicts
of interests between their respective duties to our company and Yinglin Jinduren
may arise. As our directors and executive officers, they have a duty of loyalty
and care to us under U.S. and Hong Kong law when there are any potential
conflicts of interests between our company and Yinglin Jinduren. We cannot
assure you, however, that when conflicts of interest arise, every one of them
will act completely in our interests or that conflicts of interests will be
resolved in our favor. For example, they may determine that it is in Yinglin
Jinduren’s interests to sever the contractual arrangements with HK Dong Rong,
irrespective of the effect such action may have on us. Because Yinglin Jinduren
is our sole operating business we derive our income entirely from the
contractual arrangements, we would have no or minimal operations and assets if
the contractual arrangements are severed. In addition, any one of them could
violate his or her legal duties by diverting business opportunities from us to
others, thereby reducing the amount of payment that Yinglin Jinduren is
obligated to remit to us under the consulting services agreement.
In the
event that you believe that your rights have been infringed under the securities
laws or otherwise as a result of any one of the circumstances described above,
it may be difficult or impossible for you to bring an action against Yinglin
Jinduren or our officers or directors who are members of Yinglin Jinduren’s
management, all of whom reside within China. Even if you are successful in
bringing an action, the laws of China may render you unable to enforce a
judgment against the assets of Yinglin Jinduren and its management, all of which
are located in China.
You
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions in China based on United States
or other foreign laws against us or our management.
We are a
holding company and do not have any assets or conduct any business operations
other than the contractual arrangements between HK Dong Rong and Yinglin
Jinduren. In addition, all of Yinglin Jinduren’s assets are located in, and all
of our executive officers and directors reside within, China. As a result, it
may not be possible to effect service of process within the United States or
elsewhere outside China upon our executive officers and directors, including
with respect to matters arising under U.S. federal securities laws or applicable
state securities laws. Moreover, our Chinese counsel has advised us that China
does not have treaties with the United States or many other countries providing
for the reciprocal recognition and enforcement of judgment of courts. As a
result, our public shareholders may have substantial difficulty in protecting
their interests through actions against our management or directors than would
shareholders of a corporation with assets and management members located in the
United States.
Our
principle shareholder may be subject to registration requirement under current
regulations relating to offshore investment activities by PRC residents, the
non-compliance of which may subject us to fines and sanctions that could
adversely affect our business.
In
October 2005, the State Administration of Foreign Exchange (“SAFE”) promulgated
Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’
Corporate Financing and Roundtrip Investment Through Offshore Special Purpose
Vehicles, or Circular 75, that states that if PRC citizens residing in the
PRC, or PRC residents, use assets or equity interests in their PRC entities as
capital contributions to establish offshore companies or inject assets or equity
interests of their PRC entities into offshore companies to raise capital
overseas, they must register with local SAFE branches with respect to their
overseas investments in offshore companies. They must also file amendments to
their registrations if their offshore companies experience material events
involving capital variation, such as changes in share capital, share transfers,
mergers and acquisitions, spin-off transactions, long-term equity or debt
investments or uses of assets in China to guarantee offshore obligations. Under
this regulation, their failure to comply with the registration procedures set
forth in such regulation may result in restrictions being imposed on the foreign
exchange activities of the relevant PRC entity, including the payment of
dividends and other distributions to its offshore parent, as well as
restrictions on the capital inflow from the offshore entity to the PRC entity.
Although
Mr. Qingqing Wu, our principal shareholder, resides in the PRC, he is a foreign
national. As such, he has not registered with the local branch of the SAFE under
Circular No. 75. However, we cannot provide any assurance that SAFE may
nevertheless require Mr. Wu to comply with such registration requirement. Should
SAFE make such determination, failure to comply could subject us to fines or
sanctions imposed by the PRC government, which may adversely affect our
business.
9
Risks
Related to Doing Business in China
Yinglin
Jinduren is subject to restrictions on making payments to us.
We are a
holding company incorporated in Nevada and do not have any assets or conduct any
business operations other than our indirect investments in Yinglin Jinduren. As
a result of our holding company structure, we rely entirely on payments from
that company under the contractual arrangements with our indirect wholly owned
subsidiary, HK Dong Rong. The Chinese government also imposes controls on the
conversion of RMB into foreign currencies and the remittance of currencies out
of China. We may experience difficulties in completing the administrative
procedures necessary to obtain and remit foreign currency. See “Government
control of currency conversion may affect the value of your investment.”
Furthermore, if our affiliated entity in China incurs debt on their own in the
future, the instruments governing the debt may restrict their ability to make
payments. If we are unable to receive all of the revenues from our operations
through these contractual arrangements, we may be unable to pay dividends on our
ordinary shares.
Because
our assets are located overseas, shareholders may not receive distributions that
they would otherwise be entitled to if we were declared bankrupt or
insolvent.
All of
our assets are located in the PRC. Because our assets are located overseas, our
assets may be outside of the jurisdiction of U.S. courts to administer if we are
the subject of an insolvency or bankruptcy proceeding. As a result, if we
declared bankruptcy or insolvency, our shareholders may not receive the
distributions on liquidation that they would
otherwise be entitled to if our assets were to be located within the
U.S., under U.S. bankruptcy law.
Adverse
changes in economic and political policies of the PRC government could have a
material adverse effect on the overall economic growth of China, which could
adversely affect our business.
All of
our business operations are currently conducted in the PRC, under the
jurisdiction of the PRC government. Accordingly, our results of
operations, financial condition and prospects are subject to a significant
degree to economic, political and legal developments in
China. China’s economy differs from the economies of most developed
countries in many respects, including with respect to the amount of government
involvement, level of development, growth rate, and control of foreign exchange
and allocation of resources. While the PRC economy has experienced
significant growth in the past 20 years, growth has been uneven across different
regions and among various economic sectors of China. The PRC
government has implemented various measures to encourage economic development
and guide the allocation of resources. Some of these measures benefit
the overall PRC economy, but may also have a negative effect on
us. For example, our financial condition and results of operations
may be adversely affected by government control over capital investments or
changes in tax regulations that are applicable to us. Since early
2004, the PRC government has implemented certain measures to control the pace of
economic growth. Such measures may cause a decrease in the level of
economic activity in China, which in turn could adversely affect our results of
operations and financial condition.
Unprecedented
rapid economic growth in China may increase our costs of doing business, and may
negatively impact our profit margins and/or profitability.
Our
business depends in part upon the availability of relatively low-cost labor and
materials. Rising wages in China may increase our overall costs of
production. In addition, rising raw material costs, due to strong
demand and greater scarcity, may increase our overall costs of
production. If we are not able to pass these costs on to our
customers in the form of higher prices, our profit margins and/or profitability
could decline.
You
may face difficulties in protecting your interests, and your ability to protect
your rights through the U.S. federal courts may be limited, because our
subsidiaries are incorporated in non-U.S. jurisdictions, we conduct
substantially all of our operations in China, and except for our CFO all of
our officers and directors reside outside the United States.
Although
we are incorporated in Nevada, we conduct substantially all of our operations in
China through Yinglin Jinduren. Other than our CFO, all of our
officers and directors reside outside the United States and some or all of
the assets of those persons are located outside of the United
States. As a result, it may be difficult or impossible for you to
bring an action against us or against these individuals in China in the event
that you believe that your rights have been infringed under the securities laws
or otherwise. Even if you are successful in bringing an action of
this kind, the laws of the PRC may render you unable to enforce a judgment
against our assets or the assets of our directors and officers.
As a
result of all of the above, our public shareholders may have more difficulty in
protecting their interests through actions against our management, directors or
major shareholders than would shareholders of a corporation doing business
entirely within the United States.
10
The
relative lack of public company experience of our management team may put us at
a competitive disadvantage.
Our
management team in China lacks public company experience, which could
impair our ability to comply with legal and regulatory requirements such as
those imposed by Sarbanes-Oxley Act of 2002. Other than our CFO, the individuals
who now constitute our senior management have never had responsibility for
managing a publicly traded company. Such responsibilities include complying with
federal securities laws and making required disclosures on a timely basis. Our
senior management may not be able to implement programs and policies in an
effective and timely manner that adequately respond to such increased legal,
regulatory compliance and reporting requirements. Our failure to comply with all
applicable requirements could lead to the imposition of fines and penalties and
distract our management from attending to the growth of our business.
Governmental
control of currency conversion may affect the value of your
investment.
The
Chinese government imposes controls on the convertibility of RMB into foreign
currencies and, in certain cases, the remittance of currency out of China. We
receive substantially all of our revenues in RMB. Under our current structure,
our income is primarily derived from payments from Yinglin Jinduren. Shortages
in the availability of foreign currency may restrict the ability of our Chinese
subsidiaries and our affiliated entity to remit sufficient foreign currency to
pay dividends or other payments to us, or otherwise satisfy their foreign
currency denominated obligations. Under existing Chinese foreign exchange
regulations, payments of current account items, including profit distributions,
interest payments and expenditures from trade-related transactions, can be made
in foreign currencies without prior approval from China State Administration of
Foreign Exchange by complying with certain procedural requirements. However,
approval from appropriate government authorities is required where RMB is to be
converted into foreign currency and remitted out of China to pay capital
expenses such as the repayment of bank loans denominated in foreign currencies.
The Chinese government may also at its discretion restrict access in the future
to foreign currencies for current account transactions. If the foreign exchange
control system prevents us from obtaining sufficient foreign currency to satisfy
our currency demands, we may not be able to pay dividends in foreign currencies
to our stockholders.
Fluctuation
in the value of RMB may have a material adverse effect on your
investment.
The value
of RMB against the U.S. dollar and other currencies may fluctuate and is
affected by, among other things, changes in political and economic conditions.
Our revenues and costs are mostly denominated in RMB, as well as a significant
portion of our financial assets. We rely entirely on fees paid to us by our
affiliated entity in China. Any significant fluctuation in the value of RMB may
materially and adversely affect our cash flows, revenues, earnings and financial
position, and the value of, and any dividends payable on, our stock in U.S.
dollars. For example, an appreciation of RMB against the U.S. dollar would make
any new RMB denominated investments or expenditures more costly to us, to the
extent that we need to convert U.S. dollars into RMB for such purposes. An
appreciation of RMB against the U.S. dollar would also result in foreign
currency translation losses for financial reporting purposes when we translate
our RMB denominated financial assets into U.S. dollar, as U.S. dollar is our
reporting currency.
Dividends
we receive from our subsidiary located in the PRC may be subject to PRC
withholding tax.
The PRC
Enterprise Income Tax Law, or the EIT Law, and the implementation regulations
for the EIT Law issued by the PRC State Council, became effective as of
January 1, 2008. The EIT Law provides that a maximum income tax rate of 20%
is applicable to dividends payable to non-PRC investors that are “non-resident
enterprises,” to the extent such dividends are derived from sources within the
PRC, and the State Council has reduced such rate to 10% through the
implementation regulations. We have incorporated a wholly-owned subsidiary in
the PRC, China Dong Rong, which is deemed to be a wholly foreign owned
enterprise (“WFOE”). Although China Dong Rong does not currently conduct any
business, we intend for it do so in the future. If and when China Dong Rong
commences business operations, and elects to pay dividends, any such dividends
paid to us may be subject to the 10% income tax if we are considered as a
“non-resident enterprise” under the EIT Law. If we are required under the EIT
Law and its implementation regulations to pay income tax for any dividends we
receive from our WFOE, it may have a material and adverse effect on our net
income and materially reduce the amount of dividends, if any, we may pay to our
shareholders.
We
face risks related to health epidemics and other outbreaks.
Our
business could be adversely affected by the effects of an epidemic outbreak,
such as the SARS epidemic in April 2003. Any prolonged recurrence of such
adverse public health developments in China may have a material adverse effect
on our business operations. For instance, health or other government regulations
adopted in response may require temporary closure of our stores or offices. Such
closures would severely disrupt our business operations and adversely affect our
results of operations. We have not adopted any written preventive measures or
contingency plans to combat any future outbreak of SARS or any other
epidemic.
At
various times during recent years, the United States and China have had
significant disagreements over political and economic issues. Controversies may
arise in the future between these two countries. Any political or trade
controversies between the United States and China, whether or not directly
related to our business, could reduce the price of our common stock.
Risks
Related to an Investment in Our Securities
Our
common stock has limited liquidity.
Our
common stock is traded on the Over-the-Counter Bulletin Board. It is thinly
traded compared to larger more widely known companies in the same industry.
Thinly traded common stock can be more volatile than stock trading in an active
public market. We cannot predict the extent to which an active public market for
our common stock will develop or be sustained.
11
Our
stock is categorized as a penny stock. Trading of our stock may be
restricted by the SEC’s penny stock regulations which may limit a shareholder’s
ability to buy and sell our stock.
Our stock
is categorized as a penny stock. The SEC has adopted Rule 15g-9 which generally
defines “penny stock” to be any equity security that has a market price (as
defined) less than $5.00 per share or an exercise price of less than $5.00 per
share, subject to certain exceptions. Our securities are covered by the penny
stock rules, which impose additional sales practice requirements on
broker-dealers who sell to persons other than established customers and
accredited investors. The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document in a form prepared by the SEC which
provides information about penny stocks and the nature and level of risks in the
penny stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction and monthly account
statements showing the market value of each penny stock held in the customer’s
account. The bid and offer quotations, and the broker-dealer and salesperson
compensation information, must be given to the customer orally or in writing
prior to effecting the transaction and must be given to the customer in writing
before or with the customer’s confirmation. In addition, the penny stock rules
require that prior to a transaction in a penny stock not otherwise exempt from
these rules; the broker-dealer must make a special written determination that
the penny stock is a suitable investment for the purchaser and receive the
purchaser’s written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for the stock that is subject to these penny stock
rules. Consequently, these penny stock rules may affect the ability
of broker-dealers to trade our securities. We believe that the penny stock rules
discourage investor interest in and limit the marketability of our common
stock.
FINRA sales
practice requirements may also limit a shareholder’s ability to buy and sell our
stock.
In
addition to the “penny stock” rules described above, the Financial Industry
Regulatory Authority (“FINRA”) has adopted rules that require that in
recommending an investment to a customer, a broker-dealer must have reasonable
grounds for believing that the investment is suitable for that customer. Prior
to recommending speculative low priced securities to their non-institutional
customers, broker-dealers must make reasonable efforts to obtain information
about the customer’s financial status, tax status, investment objectives and
other information. Under interpretations of these rules, FINRA believes that
there is a high probability that speculative low priced securities will not be
suitable for at least some customers. The FINRA requirements make it more
difficult for broker-dealers to recommend that their customers buy our common
stock, which may limit your ability to buy and sell our stock and have an
adverse effect on the market for our shares.
We
expect to experience volatility in our stock price, which could negatively
affect shareholders’ investments.
The
market price for shares of our common stock may be volatile and may fluctuate
based upon a number of factors, including, without limitation, business
performance, news announcements or changes in general market
conditions.
Other
factors, in addition to the those risks included in this section, that may have
a significant impact on the market price of our common stock include, but are
not limited to:
|
·
|
receipt of substantial orders or
order cancellations of
products;
|
|
·
|
quality deficiencies in services
or products;
|
|
·
|
international developments, such
as technology mandates, political developments or changes in economic
policies;
|
|
·
|
changes in recommendations of
securities analysts;
|
|
·
|
shortfalls in our backlog,
revenues or earnings in any given period relative to the levels expected
by securities analysts or projected by
us;
|
|
·
|
government regulations, including
stock option accounting and tax
regulations;
|
|
·
|
energy
blackouts;
|
|
·
|
acts of terrorism and
war;
|
|
·
|
widespread
illness;
|
|
·
|
proprietary rights or product or
patent litigation;
|
|
·
|
strategic transactions, such as
acquisitions and
divestitures;
|
|
·
|
rumors
or allegations regarding our financial disclosures or practices;
or
|
12
|
·
|
earthquakes or other natural
disasters concentrated in Fujian, China where a significant portion of our
operations are based.
|
In the
past, securities class action litigation has often been brought against a
company following periods of volatility in the market price of its
securities. Due to changes in the volatility of our common stock
price, we may be the target of securities litigation in the
future. Securities litigation could result in substantial costs and
divert management’s attention and resources.
We
do not anticipate that cash dividends will be paid in the foreseeable future.
We do not
anticipate paying cash dividends on our common stock in the foreseeable future
and we may not have sufficient funds legally available to pay
dividends. Even if the funds are legally available for distribution,
we may nevertheless decide not to pay any dividends. We presently
intend to retain all earnings for our operations.
Our
common shares are not currently traded at high volume, and you may be unable to
sell at or near ask prices or at all if you need to sell or liquidate a
substantial number of shares at one time.
We cannot
predict the extent to which an active public market for its common stock will
develop or be sustained. However, we do not rule out the possibility
of applying for listing on the Nasdaq Capital Market or other markets.
Our
common shares are currently traded, but currently with low volume, based on
quotations on the “Over-the-Counter Bulletin Board”, meaning that the number of
persons interested in purchasing our common shares at or near bid prices at any
given time may be relatively small or non-existent. This situation is
attributable to a number of factors, including the fact that we are a small
company which is still relatively unknown to stock analysts, stock brokers,
institutional investors and others in the investment community that generate or
influence sales volume, and that even if we came to the attention of such
persons, they tend to be risk-averse and would be reluctant to follow an
unproven company such as ours or purchase or recommend the purchase of our
shares until such time as we became more seasoned and viable. As a
consequence, there may be periods of several days or more when trading activity
in our shares is minimal or non-existent, as compared to a seasoned issuer which
has a large and steady volume of trading activity that will generally support
continuous sales without an adverse effect on share price. We cannot
give you any assurance that a broader or more active public trading market for
our common stock will develop or be sustained, or that trading levels will be
sustained.
Shareholders
should be aware that, according to SEC Release No. 34-29093, the market for
“penny stocks” has suffered in recent years from patterns of fraud and
abuse. Such patterns include (1) control of the market for the
security by one or a few broker-dealers that are often related to the promoter
or issuer; (2) manipulation of prices through prearranged matching of purchases
and sales and false and misleading press releases; (3) boiler room practices
involving high-pressure sales tactics and unrealistic price projections by
inexperienced sales persons; (4) excessive and undisclosed bid-ask differential
and markups by selling broker-dealers; and (5) the wholesale dumping of the same
securities by promoters and broker-dealers after prices have been manipulated to
a desired level, along with the resulting inevitable collapse of those prices
and with consequent investor losses. Our management is aware of the
abuses that have occurred historically in the penny stock
market. Although we do not expect to be in a position to dictate the
behavior of the market or of broker-dealers who participate in the market,
management will strive within the confines of practical limitations to prevent
the described patterns from being established with respect to our securities.
The occurrence of these patterns or practices could increase the future
volatility of our share price.
Our
corporate actions are substantially controlled by our principal shareholders and
affiliated entities.
As
of August 24, 2010, our principal shareholders, which includes our officers and
directors, and their affiliated entities, owned approximately 53.76% of our
outstanding shares of common stock. These shareholders, acting individually or
as a group, could exert substantial influence over matters such as electing
directors and approving mergers or other business combination
transactions. In addition, because of the percentage of ownership and
voting concentration in these principal shareholders and their affiliated
entities, elections of our board of directors will generally be within the
control of these shareholders and their affiliated entities. While all of our
shareholders are entitled to vote on matters submitted to our shareholders for
approval, the concentration of shares and voting control presently lies with
these principal shareholders and their affiliated entities. As such, it would be
difficult for shareholders to propose and have approved proposals not supported
by management. There can be no assurances that matters voted upon by our
officers and directors in their capacity as shareholders will be viewed
favorably by all of our shareholders.
The
elimination of monetary liability against our directors, officers and employees
under Nevada law and the existence of indemnification rights to our directors,
officers and employees may result in substantial expenditures by our company and
may discourage lawsuits against our directors, officers and employees.
Our
Articles of Incorporation, as amended, contain a provision permitting us to
eliminate the liability of our directors for monetary damages to our company and
shareholders to the extent provided by Nevada law. We may also have contractual
indemnification obligations under our employment agreements with our officers.
The foregoing indemnification obligations could result in our company incurring
substantial expenditures to cover the cost of settlement or damage awards
against directors and officers, which we may be unable to
recoup. These provisions and resultant costs may also discourage our
company from bringing a lawsuit against directors and officers for breaches of
their fiduciary duties, and may similarly discourage the filing of derivative
litigation by our shareholders against our directors and officers even though
such actions, if successful, might otherwise benefit our company and
shareholders.
There
have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and
there may potentially be new accounting pronouncements or additional regulatory
rulings that will have an impact on our future financial position and results of
operations. The Sarbanes-Oxley Act of 2002 and other rule changes are likely to
increase general and administrative costs and expenses. In addition, insurers
are likely to increase premiums as a result of high claims rates over the past
several years, which we expect will increase our premiums for insurance
policies. Further, there could be changes in certain accounting
rules. These and other potential changes could materially increase
the expenses we report under generally accepted accounting principles, and
adversely affect our operating results.
If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report our financial results or prevent material misstatements.
We are
subject to reporting obligations under U.S. securities laws. The SEC, as
required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules
requiring every public company to include a management report on such company’s
internal controls over financial reporting in its annual report, which contains
management’s assessment of the effectiveness of our internal controls over
financial reporting. Our management may conclude that our internal controls over
our financial reporting are not effective. Our reporting obligations as a public
company will place a significant strain on our management, operational and
financial resources and systems for the foreseeable future. Effective internal
controls, particularly those related to revenue recognition, are necessary for
us to produce reliable financial reports and are important to help prevent
fraud. As a result, our failure to achieve and maintain effective internal
controls over financial reporting could result in the loss of investor
confidence in the reliability of our financial statements, which in turn could
harm our business and negatively impact the trading price of our stock.
Furthermore, we anticipate that we will incur considerable costs and use
significant management time and other resources in an effort to comply with
Section 404 and other requirements of the Sarbanes-Oxley Act.
The
full conversion and exercise of certain outstanding series A convertible
preferred stock and warrants could result in the substantial dilution of the
Company in terms of a particular percentage ownership in our Company as well as
the book value of the common shares. The sale of a large amount of common shares
received upon exercise of the warrants on the public market to finance the
exercise price or to pay associated income taxes, or the perception that such
sales could occur, could substantially depress the prevailing market prices for
our shares.
As
of August 24, 2010, there were 1,582,050 shares of series A convertible
preferred stock outstanding, as well as 1,716,877 warrants with an exercise
price of $3.43 per share. In the event of conversion or exercise of these
securities, a stockholder could suffer substantial dilution of their investment
in terms of the percentage ownership in us as well as the book value of the
common shares held. Full conversion and exercise of the outstanding series A
convertible preferred stock and warrants would have increased the outstanding
common shares as of August 24, 2010, by approximately 18.5% to
approximately 20.96 million shares.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
All
statements contained in this prospectus, other than statements of historical
facts, that address future activities, events or developments, are
forward-looking statements, including, but not limited to, statements containing
the words “believe,” “anticipate,” “expect” and words of similar import. These
statements are based on certain assumptions and analyses made by us in light of
our experience and our assessment of historical trends, current conditions and
expected future developments as well as other factors we believe are appropriate
under the circumstances. Whether actual results will conform to the expectations
and predictions of management, however, is subject to a number of risks and
uncertainties that may cause actual results to differ materially. Such risks are
in the section entitled “Risk Factors” on page 3, and in our previous SEC
filings.
Consequently,
all of the forward-looking statements made in this prospectus are qualified by
these cautionary statements, and there can be no assurance that the actual
results anticipated by management will be realized or, even if substantially
realized, that they will have the expected consequences to or effects on our
business operations.
13
USE
OF PROCEEDS
We will
not receive any proceeds from the sale of the common stock by the selling
security holders. All proceeds from the sale of such securities offered by the
selling security holders under this prospectus will be for the account of the
selling security holders, as described below in the sections entitled “Selling
Security Holders” and “Plan of Distribution.” With the exception of any
brokerage fees and commissions which are the respective obligations of the
selling security holders, we are responsible for the fees, costs and expenses of
this offering which includes our legal and accounting fees, printing costs and
filing and other miscellaneous fees and expenses.
All of
the shares covered by this prospectus are, prior to their sale under this
prospectus, issuable upon conversion of our series A convertible preferred stock
or exercise of our series A warrants.
SELLING
SECURITY HOLDERS
We are
registering the following securities:
|
·
|
1,582,050
shares of common stock underlying 1,582,050 outstanding shares of the
series A convertible preferred stock issued in conjunction with our
financing completed on November 17, 2009 (the “Preferred Shares
Financing”);
|
|
·
|
988,180
shares of common stock converted from 988,180 shares of series A
convertible preferred stock issued in conjunction with the Preferred
Shares Financing;
|
|
·
|
653,534 shares of common stock
issued in conjunction with our financing completed on December 1, 2009
(the “Common Shares Financing,” and with the Preferred Shares Financing
collectively as the “Financings”);
|
|
·
|
1,716,877 shares of common
stock underlying the common stock purchase warrants issued in conjunction
with the Financings;
|
·
|
8,250
shares of common stock from exercise of common stock purchase warrants to
purchase 8,250 shares of common stock;
and
|
|
·
|
174,500 shares of common stock
issued in connection with a bridge financing related to our share exchange
transaction with PXPF in February
2009.
|
We are
registering these securities in order to permit the selling security holders to
dispose of the shares of common stock from time to time. The selling security
holders may sell all, some, or none of their shares in this offering. See “Plan
of Distribution.”
The
table below lists the selling security holders and other information regarding
the beneficial ownership of the shares of common stock by each of the selling
security holders. Column B lists the number of shares of common stock
beneficially owned by each selling security holder as of August 24, 2010
(assuming full conversion of the Preferred Shares and exercise of the Warrants
held by such selling security holder, if any). Column C lists the shares of
common stock covered by this prospectus that may be disposed of by each of the
selling security holders. Column D lists the number of shares of common stock
that will be beneficially owned by the selling security holders assuming all of
the shares covered by this prospectus are sold. Column E lists the percentage of
class beneficially owned by the selling security holders assuming all of the
shares covered by this prospectus are sold, based on 17,849,983 of common stock
outstanding on August 24, 2010.
We cannot
provide an estimate of the number of securities that any of the selling security
holders will hold in the future. For purposes of this table, beneficial
ownership is determined in accordance with the rules of the SEC, and includes
voting power and investment power with respect to such securities.
The
inclusion of any securities in the following table does not constitute an
admission of beneficial ownership by the persons named below. Except as
indicated in the footnotes to the table, no selling security holder has had any
material relationship with us or our affiliates during the last three years.
Except as indicated below, no selling security holder is the beneficial owner of
any additional shares of common stock or other equity securities issued by us or
any securities convertible into, or exercisable or exchangeable for, our equity
securities. Except as indicated below, no selling security holder is a
registered broker-dealer or an affiliate of a broker-dealer.
14
Name
(A)
|
Securities
Beneficially
Owned Prior
to Offering
(B)
|
Securities
Being
Offered
(C)
|
Securities
Beneficially
Owned After
Offering
(D)
|
% Beneficial
Ownership
After Offering
(E)
|
||||||||||||
Ancora
Greater China Fund, LP (1)
|
194,950 | (2) | 47,590 | (3) | 147,360 | (2) | * | %(2) | ||||||||
Aran
Asset Management SA (4)
|
11,364 | (5) | 11,364 | (5) | 0 | 0 | % | |||||||||
ARC
China Investments Fund Ltd. (6)(10)(154)
|
357,342 | (7) | 357,342 | (7) | 0 | 0 | % | |||||||||
ARC
Semper China Investments Ltd. (8)(10)(156)
|
34,032 | (9) | 34,032 | (9) | 0 | 0 | % | |||||||||
Giovanni
Berloni (11)
|
5,075 | (12) | 5,075 | (12) | 0 | 0 | % | |||||||||
Jeff
Bishop (13)
|
55,964 | (14) | 55,964 | (14) | 0 | 0 | % | |||||||||
Blue
Earth Fund, LP (15)
|
131,121 | (16) | 131,121 | (16) | 0 | 0 | % | |||||||||
Anthony
Bobulinski (17)
|
52,500 | (18) | 52,500 | (18) | 0 | 0 | % | |||||||||
Kung-Hsiung
Chang (19)
|
4,725 | (20) | 4,725 | (20) | 0 | 0 | % | |||||||||
Yi-Tsung
Chang (21)
|
4,725 | (22) | 4,725 | (22) | 0 | 0 | % | |||||||||
Michael
Cohen (23)
|
105,000 | (24) | 105,000 | (24) | 0 | 0 | % | |||||||||
Ronnie
Cons and Mike Cons (25)
|
47,203 | (26) | 47,203 | (26) | 0 | 0 | % | |||||||||
Gundyco
ITF Core Capital Markets Limited (27)
|
12,187 | (28) | 12,187 | (28) | 0 | 0 | % | |||||||||
Gundyco
ITF Core Energy Enterprises Inc. (29)
|
109,362 | (30) | 109,362 | (30) | 0 | 0 | % | |||||||||
Covey
Capital Partners Master, Ltd. (31)
|
118,007 | (32) | 118,007 | (32) | 0 | 0 | % | |||||||||
EPESA,
LP, LLLP (33)(154)
|
44,580 | (34) | 44,580 | (34) | 0 | 0 | % | |||||||||
Field
Nominees Ltd. A/C 1368511 (35)
|
236,014 | (36) | 236,014 | (36) | 0 | 0 | % | |||||||||
Ephraim
Fields (37)
|
157,343 | (38) | 157,343 | (38) | 0 | 0 | % | |||||||||
ARDLUI
Holdings Limited (39)(156)
|
51,049 | (40) | 51,049 | (40) | 0 | 0 | % | |||||||||
Fiordaliso
Ltd. (41)(154)
|
51,049 | (42) | 51,049 | (42) | 0 | 0 | % | |||||||||
Fishman
Family Trust (43)
|
10,665 | (44) | 10,665 | (44) | 0 | 0 | % | |||||||||
Fitel
Nominees Limited A/C C054696 (45)
|
23,602 | (46) | 23,602 | (46) | 0 | 0 | % | |||||||||
James
Fuld, Jr. (47)
|
78,672 | (48) | 78,672 | (48) | 0 | 0 | % | |||||||||
Gilford
Securities Inc. (49) (155)
|
25,587 | (50) | 25,587 | (50) | 0 | 0 | % | |||||||||
Robert
Gleckman (51)
|
15,535 | (52) | 15,535 | (52) | 0 | 0 | % | |||||||||
Len
Goldberg and Caryl T. Goldberg (53)
|
39,336 | (54) | 39,336 | (54) | 0 | 0 | % | |||||||||
Golden
1177 LP (55)
|
120,000 | (56) | 120,000 | (56) | 0 | 0 | % | |||||||||
Jeffrey
A. Grossman (57)
|
36,714 | (58) | 36,714 | (58) | 0 | 0 | % | |||||||||
Boyd
Hinds (59)
|
26,224 | (60) | 26,224 | (60) | 0 | 0 | % | |||||||||
David
Hnatek (61)
|
52,449 | (62) | 52,449 | (62) | 0 | 0 | % | |||||||||
Hai-Lung
Huang (63)
|
8,100 | (64) | 8,100 | (64) | 0 | 0 | % | |||||||||
Hyllos
Investment Ltd. (65)
|
29,700 | (66) | 29,700 | (66) | 0 | 0 | % | |||||||||
IGSB-Stad
I, LLC (67)
|
39,336 | (68) | 39,336 | (68) | 0 | 0 | % | |||||||||
Lawrence
D. & Christine L. Isen Family Trust (69)
|
19,420 | (70) | 19,420 | (70) | 0 | 0 | % | |||||||||
JBWA2
LP (71)
|
45,000 | (72) | 45,000 | (72) | 0 | 0 | % | |||||||||
Michael
Jordan (73)
|
52,448 | (74) | 52,448 | (74) | 0 | 0 | % | |||||||||
Kaufman2
LP (75)
|
90,000 | (76) | 90,000 | (76) | 0 | 0 | % | |||||||||
Robert
Klinek and Susan Pack as Joint Tenants with Rights of Survivorship (77)
|
10,665 | (78) | 10,665 | (78) | 0 | 0 | % | |||||||||
Geoffrey
Knapp (79)
|
75,000 | (80) | 75,000 | (80) | 0 | 0 | % | |||||||||
Jacqueline
Knapp (81)(117)
|
46,550 | (82) | 46,550 | (82) | 0 | 0 | % | |||||||||
Chiao-Mi
Lee (83)
|
4,725 | (84) | 4,725 | (84) | 0 | 0 | % | |||||||||
John
S. Lemak IRA Rollover Morgan Keegan custodian (85)
|
52,500 | (86) | 52,500 | (86) | 0 | 0 | % | |||||||||
Ernst
Liniger (87)
|
7,937 | (88) | 7,937 | (88) | 0 | 0 | % | |||||||||
Loeb
Enterprises II, LLC (89)(154)
|
102,098 | (90) | 102,098 | (90) | 0 | 0 | % | |||||||||
Lumen
Capital Limited Partnership (91)
|
26,224 | (92) | 26,224 | (92) | 0 | 0 | % | |||||||||
Marketbyte
LLC Defined Benefit & Trust (93)
|
26,660 | (94) | 26,660 | (94) | 0 | 0 | % | |||||||||
Sam
Maywood (95)
|
39,942 | (96) | 39,942 | (96) | 0 | 0 | % | |||||||||
Sven
Hugo Meyer (97)(154)
|
49,600 | (98) | 49,600 | (98) | 0 | 0 | % | |||||||||
Michael
Morris (99)
|
39,336 | (100) | 39,336 | (100) | 0 | 0 | % | |||||||||
Roger
Mulhaupt (101)
|
71,416 | (102) | 71,416 | (102) | 0 | 0 | % | |||||||||
Bette
Nagelberg ACF Jenna C. Nagelberg U/CA/UTMA (103)(115)
|
31,812 | (104) | 31,812 | (104) | 0 | 0 | % | |||||||||
David
S. Nagelberg 2003 Revocable Trust U/A/D 7/2/03 (105)(115)
|
150,000 | (106) | 150,000 | (106) | 0 | 0 | % | |||||||||
Jeremy
M. Nagelberg 2007 Trust (107)(115)
|
31,812 | (108) | 31,812 | (108) | 0 | 0 | % | |||||||||
Jesse
A. Nagelberg 2007 Trust (109)(115)
|
31,812 | (110) | 31,812 | (110) | 0 | 0 | % | |||||||||
Justin
E. Nagelberg 2007 Trust (111)(115)
|
31,812 | (112) | 31,812 | (112) | 0 | 0 | % | |||||||||
Murray
J. Nagelberg (113)(115)
|
46,417 | (114) | 46,417 | (114) | 0 | 0 | % | |||||||||
Nardes
Investments SA 21414 at Fortis Banque (Suisse) SA (116)
|
233,101 | (117) | 233,101 | (117) | 0 | 0 | % | |||||||||
NBAD
Private Bank (Suite) S.A. (118)
|
73,500 | (119) | 73,500 | (119) | 0 | 0 | % | |||||||||
Nemo
Asset Management (120)
|
8,741 | (121) | 8,741 | (121) | 0 | 0 | % | |||||||||
Jeffrey
Nesses (122)
|
13,113 | (123) | 13,113 | (123) | 0 | 0 | % | |||||||||
Dermot
O’Sullivan (124)
|
5,075 | (125) | 5,075 | (125) | 0 | 0 | % | |||||||||
Gary
L. Poelstra (126)
|
10,665 | (127) | 10,665 | (127) | 0 | 0 | % | |||||||||
Pope
Investments II LLC (128)
|
470,750 | (129) | 126,910 | (3) | 343,840 | (129) | 1.93 | %(129) | ||||||||
RossPlan
LP (130)
|
67,500 | (131) | 67,500 | (131) | 0 | 0 | % | |||||||||
Rothschild
& Cie Banque (132)
|
24,300 | (133) | 24,300 | (133) | 0 | 0 | % | |||||||||
Sandor
Capital Master Fund, L.P. (134)
|
157,500 | (135) | 157,500 | (135) | 0 | 0 | % | |||||||||
Semper
Gestion S.A. (136)
|
261,975 | (137) | 261,975 | (137) | 0 | 0 | % | |||||||||
Sequoia
Aggressive Growth Fund Ltd. (138)
|
322,844 | (139) | 322,844 | (139) | 0 | 0 | % | |||||||||
Lawrence
J. Sheer (115)(140)
|
46,550 | (141) | 46,550 | (141) | 0 | 0 | % | |||||||||
Silver
Rock II, Ltd. (142)
|
150,000 | (143) | 150,000 | (143) | 0 | 0 | % | |||||||||
Taylor
International Fund Ltd. (144)
|
262,238 | (145) | 262,238 | (145) | 0 | 0 | % | |||||||||
Virtus
Trust Limited as Trustee of the Hillside Ventures Investments Trust B
(146)
|
52,098 | (147) | 52,098 | (147) | 0 | 0 | % | |||||||||
XWRT2
LP (148)
|
45,000 | (149) | 45,000 | (149) | 0 | 0 | % | |||||||||
Wilshire
Investments LLC (150)
|
26,224 | (151) | 26,224 | (151) | 0 | 0 | % | |||||||||
Zhimin
You (152)
|
10,729 | (153) | 10,729 | (153) | 0 | 0 | % | |||||||||
TOTAL
|
5,614,591 | 5,123,391 | 491,200 |
2.33
|
% |
* Less
than 1%
15
(1)
|
The address for this security
holder is One Chagrin Highlands, 2000 Auburn Drive, #305, Cleveland, OH
44122. John P. Micklitsch, as managing partner of this security holder,
has dispositive and voting power over these securities and may be deemed
to be the beneficial owner of these
securities.
|
(2)
|
Includes 47,590 shares of common
stock issued to this security holder in connection with a bridge financing
related to our share exchange transaction with PXPF (more fully described
under the section titled “Certain Relationships and Related Party
Transactions” below), all of which we are registering for resale pursuant
to the bridge loan and financing agreement (the “Bridge Financing
Agreement”) entered into as part of the bridge
financing.
|
(3)
|
Shares being registered pursuant
to the Bridge Financing
Agreement.
|
(4)
|
The address for this security
holder is Bohnhofplatz, P.O. Box 4010, 6304 Zug, Switzerland. Michael C.
Thalmann, as chairman and CEO of this security holder, has dispositive and
voting power over these securities and may be deemed to be the beneficial
owner of these securities.
|
(5)
|
Includes 6,993 shares of common
stock converted from 6,993 shares of series A preferred stock and 4,371
shares of common stock underlying the warrants issued to this selling
security holder in the Preferred Shares Financing (more fully described
under the section titled “History and Corporate Structure” below), all of
which we are registering for resale pursuant to the securities purchase
agreement that we entered into as part of the Preferred Shares Financing
(the “Preferred Shares Agreement”).
|
16
(6)
|
The address for this security
holder is 23 The Bund, 14th Floor, Shanghai, PRC. Adam Roseman, as
chairman of this security holder, has dispositive and voting power over
these securities and may be deemed to be the beneficial owner of these
securities.
|
(7)
|
Includes 242,307 shares of
common stock converted from 242,307 shares of series A preferred stock and
115,035 shares of common stock underlying the warrants issued to this
selling security holder in the Preferred Shares Financing, all of which we
are registering for resale pursuant to the Preferred Shares
Agreement.
|
(8)
|
The address for this security
holder is 5 Rue Pedro-Meylan 5, cp 109-ch 1211, Geneve 17, Switzerland.
Adam Roseman and Gregoire Vaucher, as directors of this security holder,
have dispositive and voting power over these securities and may be deemed
to be the beneficial owners of these
securities.
|
(9)
|
Includes 23,077 shares of common
stock converted from 23,077 shares of series A preferred stock and 10,955
shares of common stock underlying the warrants issued to this selling
security holder in the Preferred Shares Financing, all of which we are
registering for resale pursuant to the Preferred Shares Agreement.
|
(10)
|
Under common control and are
deemed affiliates of one
another.
|
(11)
|
The address for this security
holder is JBR, Rimal 5, Apt. 3204, P.O. Box 118222, Dubai,
UAE.
|
(12)
|
Includes 3,325 shares of
common stock converted from 3,325 shares of series A preferred stock and
1,750 shares of common stock underlying the warrants issued to this
selling security holder in the Preferred Shares Financing, all of which we
are registering for resale pursuant to the Preferred Shares
Agreement.
|
(13)
|
The address for this security
holder is 18 Sackett Road, Lee, NH
03861.
|
(14)
|
Includes 34,985 shares of common
stock underlying 34,985 shares of series A preferred stock and 20,979
shares of common stock underlying the warrants issued to this selling
security holder in the Preferred Shares Financing, all of which we are
registering for resale pursuant to the Preferred Shares
Agreement.
|
(15)
|
The address for this security
holder is 1312 Cedar Street, Santa Monica, CA 90405. Brett Conrad, as
managing member and general partner of this security holder, has
dispositive and voting power over these securities and may be deemed to be
the beneficial owner of these
securities.
|
(16)
|
Includes 52,448 shares of common
stock underlying 52,448 shares of series A preferred stock and 26,224
shares of common stock underlying the warrants issued to this selling
security holder in the Preferred Shares Financing, all of which we are
registering for resale pursuant to the Preferred Shares Agreement, as well
as 34,966 shares of common stock and 17,483 shares of common stock
underlying the warrants issued to this selling security holder in the
Common Shares Financing (more fully described under the section titled
“History and Corporate Structure” below), all of which we are registering
for resale pursuant to the securities purchase agreement that we entered
into as part of the Common Shares Financing (the “Common Shares
Agreement”).
|
(17)
|
The address for this security
holder is 10330 Santa Monica Boulevard, Los Angeles, CA
90025.
|
(18)
|
Includes 35,000 shares of
common stock converted from 35,000 shares of series A preferred stock and
17,500 shares of common stock underlying the warrants issued to this
selling security holder in the Preferred Shares Financing, all of which we
are registering for resale pursuant to the Preferred Shares
Agreement.
|
(19)
|
The address for this security
holder is 3F/3 Lane 1041 Ta-Hsuen 1st Road, Gue-Sun Dist., Kaohsiung City
804, Taiwan.
|
(20)
|
Includes 2,975 shares of
common stock converted from 2,975 shares of series A preferred stock and
1,750 shares of common stock from exercise of the warrants issued to this
selling security holder in the Preferred Shares Financing, all of which we
are registering for resale pursuant to the Preferred Shares
Agreement.
|
(21)
|
The address for this security
holder is No. 196 Jian Hwa 1st Road, Pingtung City,
Taiwan.
|
17
(22)
|
Includes 2,975 shares of
common stock converted from 2,975 shares of series A preferred stock and
1,750 shares of common stock from exercise of the warrants issued to this
selling security holder in the Preferred Shares Financing, all of which we
are registering for resale pursuant to the Preferred Shares
Agreement.
|
(23)
|
The address for this security
holder is 210 Sandringham Drive, Toronto, Ontario, Canada, M3H
1E3.
|
(24)
|
Includes 70,000 shares of common
stock underlying 70,000 shares of series A preferred stock and 35,000
shares of common stock underlying the warrants issued to this selling
security holder in the Preferred Shares Financing, all of which we are
registering for resale pursuant to the Preferred Shares
Agreement.
|
(25)
|
The address for this security
holder is 6800 Boulevard Des Grandes-Prairies, Saint-Leonard, Quebec,
Canada H1P 3P3.
|
(26)
|
Includes 29,720 shares of
common stock converted from 29,720 shares of series A preferred stock and
17,483 shares of common stock underlying the warrants issued to this
selling security holder in the Preferred Shares Financing, all of which we
are registering for resale pursuant to the Preferred Shares
Agreement.
|
(27)
|
The address for this security
holder is 1 King Street West, Suite 1505, Toronto, Canada M5H 1A1. James
Cassina, as president of this security holder, has dispositive and voting
power over these securities and may be deemed to be the beneficial owner
of these securities.
|
(28)
|
Includes 7,800 shares of
common stock converted from 7,800 shares of series A preferred stock and
4,387 shares of common stock underlying the warrants issued to this
selling security holder in the Preferred Shares Financing, all of which we
are registering for resale pursuant to the Preferred Shares
Agreement.
|
(29)
|
The address for this security
holder is P.O. Box N-10567, 2nd Terrace West, Centreville, Nassau,
Bahamas. James Cassina, as president of this security holder, has
dispositive and voting power over these securities and may be deemed to be
the beneficial owner of these
securities.
|
(30)
|
Includes 70,000 shares of
common stock converted from 70,000 shares of series A preferred stock and
39,362 shares of common stock underlying the warrants issued to this
selling security holder in the Preferred Shares Financing, all of which we
are registering for resale pursuant to the Preferred Shares
Agreement.
|
(31)
|
The address for this security
holder is 3353 Peachtree Road NE, North Tower, Suite 545, Atlanta, GA
30326, J. Christopher Lanigan and R. Scott Mayo, as directors of this
security holder, and R. Scott Winton, as chief financial officer of Covey
Capital Advisors, LLC, investment manager of this security holder, have
dispositive and voting power over these securities and may be deemed to be
the beneficial owners of these
securities.
|
(32)
|
Includes
74,301 shares of common stock converted from 74,301 shares of series A
preferred stock and 43,706 shares of common stock underlying the warrants
issued to this selling security holder in the Preferred Shares Financing,
all of which we are registering for resale pursuant to the Preferred
Shares Agreement.
|
(33)
|
The address for this security
holder is 2401 SW 145th Avenue, Miramar, FL 33027. Steven Kruss, as
general partner of this security holder, has dispositive and voting power
over these securities and may be deemed to be the beneficial owner of
these securities.
|
(34)
|
Includes 29,720 shares of
common stock converted from 29,720 shares of series A preferred stock and
14,860 shares of common stock underlying the warrants issued to this
selling security holder in the Preferred Shares Financing, all of which we
are registering for resale pursuant to the Preferred Shares
Agreement.
|
(35)
|
The address for this security
holder is GS Front Street, Hamilton Hm12, Bermuda. Linda Hodgson and May
O’Mara, as authorized signatories of this security holder, have
dispositive and voting power over these securities and may be deemed to be
the beneficial owners of these
securities.
|
(36)
|
Includes 87,413 shares of
common stock converted from 87,413 shares of series A preferred stock,
61,188 shares of common stock underlying 61,188 shares of series A
preferred stock and 87,413 shares of common stock underlying the warrants
issued to this selling security holder in the Preferred Shares Financing,
all of which we are registering for resale pursuant to the Preferred
Shares Agreement.
|
(37)
|
The address for this security
holder is 265 East 66th Street, #41A, New York, NY
10065.
|
18
(38)
|
Includes 104,895 shares of common
stock underlying 104,895 shares of series A preferred stock and 52,448
shares of common stock underlying the warrants issued to this selling
security holder in the Preferred Shares Financing, all of which we are
registering for resale pursuant to the Preferred Shares
Agreement.
|
(39)
|
The address for this security
holder is 33 Pleiadon Street, Kifissia 145 61, Athens, Greece. Euripides
Hatzistefanis and Efstratios Hatzistefanis, as the partners of this
security holder, have dispositive and voting power over these securities
and may be deemed to be the beneficial owners of these
securities.
|
(40)
|
Includes 34,615 shares of
common stock converted from 34,615 shares of series A preferred stock and
16,434 shares of common stock underlying the warrants issued to this
selling security holder in the Preferred Shares Financing, all of which we
are registering for resale pursuant to the Preferred Shares
Agreement.
|
(41)
|
The address for this security
holder is Le Patio Palace, 41 Avenue Hector Otto, MC 98000 Monaco –
Principality of Monaco. Diego Lissi, as director of this security holder,
has dispositive and voting power over these securities and may be deemed
to be the beneficial owner of these
securities.
|
(42)
|
Includes 34,615 shares of
common stock converted from 34,615 shares of series A preferred stock and
16,434 shares of common stock underlying the warrants issued to this
selling security holder in the Preferred Shares Financing, all of which we
are registering for resale pursuant to the Preferred Shares
Agreement.
|
(43)
|
The address for this security
holder is P.O. Box 1203, Rancho Santa Fe, CA 92067. Richard Fishman and
Susann Fishman, as the trustees of this security holder, have dispositive
and voting power over these securities and may be deemed to be the
beneficial owners of these
securities.
|
(44)
|
Includes 6,667 shares of common
stock underlying 6,667 shares of series A preferred stock and 3,998 shares
of common stock underlying the warrants issued to this selling security
holder in the Preferred Shares Financing, all of which we are registering
for resale pursuant to the Preferred Shares
Agreement.
|
(45)
|
The
address for this security holder is 11 Saint James's Square, Manchester,
M2 6, United Kingdom . Harry Ansell, Nicholas Lamb, Daniel Bristowe and Charles
Campbell, as investment managers of this security holder, have dispositive
and voting power over these securities and may be deemed to be the
beneficial owners of these
securities.
|
(46)
|
Includes 14,861 shares of common
stock underlying 14,861 shares of series A preferred stock and 8,741
shares of common stock underlying the warrants issued to this selling
security holder in the Preferred Shares Financing, all of which we are
registering for resale pursuant to the Preferred Shares
Agreement.
|
(47)
|
The address for this security
holder is 114 East 72nd Street, New York, NY
10021.
|
(48)
|
Includes 52,448 shares of common
stock and 26,224 shares of common stock underlying the warrants issued to
this selling security holder in the Common Shares Financing, all of which
we are registering for resale pursuant to the Common Shares
Agreement.
|
(49)
|
The address for this security
holder is 777 3rd Avenue, 17th Floor, New York, NY 10017. Robert A. Maley,
as president of this security holder, has dispositive and voting power
over these securities and may be deemed to be the beneficial owner of
these securities.
|
(50)
|
Includes 9,675 shares of common
stock underlying 9,675 shares of series A preferred stock and 15,912
shares of common stock underlying the warrants transferred to this selling
security holder by certain of the investors in the Preferred Shares
Financing pursuant to arrangements between such parties.
|
(51)
|
The address for this security
holder is 18440 St Moritz Drive, Tarzana, CA
91356.
|
(52)
|
Includes 9,708 shares of common
stock underlying 9,708 shares of series A preferred stock and 5,827 shares
of common stock underlying the warrants issued to this selling security
holder in the Preferred Shares Financing, all of which we are registering
for resale pursuant to the Preferred Shares
Agreement.
|
(53)
|
The address for this security
holder is 27 Stagecoach Road, Avon, CT
06001.
|
19
(54)
|
Includes 26,224 shares of common
stock and 13,112 shares of common stock underlying the warrants issued to
this selling security holder in the Common Shares Financing, all of which
we are registering for resale pursuant to the Common Shares
Agreement.
|
(55)
|
The address for this security
holder is #500, 1177 West Hastings Street, Vancouver, British Columbia,
V6E 2K3, Canada. Alexander Lall, as general partner of this security
holder, has dispositive and voting power over these securities and may be
deemed to be the beneficial owner of these
securities.
|
(56)
|
Includes 80,000 shares of common
stock and 40,000 shares of common stock underlying the warrants issued to
this selling security holder in the Common Shares Financing, all of which
we are registering for resale pursuant to the Common Shares
Agreement.
|
(57)
|
The address for this security
holder is 35 Rochelle Drive, New City, NY
10956.
|
(58)
|
Includes 23,602 shares of common
stock underlying 23,602 shares of series A preferred stock and 13,112
shares of common stock underlying the warrants issued to this selling
security holder in the Preferred Shares Financing, all of which we are
registering for resale pursuant to the Preferred Shares
Agreement.
|
(59)
|
The address for this security
holder is 41 West 82nd Street #9B, New York, NY
10024.
|
(60)
|
Includes 17,483 shares of common
stock and 8,741 shares of common stock underlying the warrants issued to
this selling security holder in the Common Shares Financing, all of which
we are registering for resale pursuant to the Common Shares
Agreement.
|
(61)
|
The address for this security
holder is 8000 Paseo Esmerado, Carlsbad, CA
92009.
|
(62)
|
Includes 34,966 shares of common
stock and 17,483 shares of common stock underlying the warrants issued to
this selling security holder in the Common Shares Financing, all of which
we are registering for resale pursuant to the Common Shares
Agreement.
|
(63)
|
The address for this security
holder is No.25 Alley 15 Chong Shon Tung Road, East District, Tainan City,
Taiwan.
|
(64)
|
Includes 5,100 shares of
common stock converted from 5,100 shares of series A preferred stock and
3,000 shares of common stock from exercise of the warrants issued to this
selling security holder in the Preferred Shares Financing, all of which we
are registering for resale pursuant to the Preferred Shares
Agreement.
|
(65)
|
The address for this security
holder is P.O. Box 438, Road Town, Tortola, British Virgin Islands. Sandra
Nesensohn and Peter Stephan Konig, among others , as authorized
signatories of this security holder, have dispositive and voting power
over these securities and may be deemed to be the beneficial owners of
these securities.
|
(66)
|
Includes 18,700 shares of common
stock underlying 18,700 shares of series A preferred stock and 11,000
shares of common stock underlying the warrants issued to this selling
security holder in the Preferred Shares Financing, all of which we are
registering for resale pursuant to the Preferred Shares
Agreement.
|
(67)
|
The address for this security
holder is P.O. Box 5609, Santa Barbara, CA 93150. Timothy K. Bliss, as
manager of this security holder, has dispositive and voting power over
these securities and may be deemed to be the beneficial owner of these
securities.
|
(68)
|
Includes 24,767 shares of common
stock underlying 24,767 shares of series A preferred stock and 14,569
shares of common stock underlying the warrants issued to this selling
security holder in the Preferred Shares Financing, all of which we are
registering for resale pursuant to the Preferred Shares
Agreement.
|
(69)
|
The address for this security
holder is 10673 Hunters Glen, San Diego, CA 92130. Lawrence D. Isen, as
trustee of this security holder, has dispositive and voting power over
these securities and may be deemed to be the beneficial owner of these
securities.
|
(70)
|
Includes 12,136 shares of common
stock underlying 12,136 shares of series A preferred stock and 7,284
shares of common stock underlying the warrants issued to this selling
security holder in the Preferred Shares Financing, all of which we are
registering for resale pursuant to the Preferred Shares
Agreement.
|
20
The address for this security
holder is 650 Bellevue Way NE, #3704, Bellevue, WA 98004. C. James Jensen,
as general partner of this security holder, has dispositive and voting
power over these securities and may be deemed to be the beneficial owner
of these securities.
|
(72)
|
Includes 30,000 shares of common
stock and 15,000 shares of common stock underlying the warrants issued to
this selling security holder in the Common Shares Financing, all of which
we are registering for resale pursuant to the Common Shares
Agreement.
|
(73)
|
The address for this security
holder is 15 Linden Lane, Rumson, NJ
07760.
|
(74)
|
Includes 34,965 shares of common
stock underlying 34,965 shares of series A preferred stock and 17,483
shares of common stock underlying the warrants issued to this selling
security holder in the Preferred Shares Financing, all of which we are
registering for resale pursuant to the Preferred Shares
Agreement.
|
(75)
|
The address for this security
holder is 127 W 69th Street, New York, NY 10023. Daniel Kaufman, as
general partner of this security holder, has dispositive and voting power
over these securities and may be deemed to be the beneficial owner of
these securities.
|
(76)
|
Includes 30,000 shares of common
stock and 15,000 shares of common stock underlying the warrants issued to
this selling security holder in the Common Shares Financing, as well as
30,000 shares of common stock and 15,000 shares of common stock underlying
the warrants issued to an investor in the Common Shares Financing and
subsequently transferred to this selling security holder, all of which we
are registering for resale pursuant to the Common Shares Agreement.
|
(77)
|
The address for this security
holder is P.O. Box 157, Rancho Santa Fe, San Diego, California 92067.
Robert Kleinek and Susan Pack, as joint tenants with right of survivorship
of this security holder, have joint dispositive and voting power over
these securities and may be deemed to be the beneficial owners of these
securities.
|
(78)
|
Includes 6,667 shares of common
stock underlying 6,667 shares of series A preferred stock and 3,998 shares
of common stock underlying the warrants issued to this selling security
holder in the Preferred Shares Financing, all of which we are registering
for resale pursuant to the Preferred Shares
Agreement.
|
(79)
|
The address for this security
holder is 1031 Keys Drive, Boulder City, Clark, Nevada
89005.
|
(80)
|
Includes 50,000 shares of common
stock and 25,000 shares of common stock underlying the warrants issued to
this selling security holder in the Common Shares Financing, all of which
we are registering for resale pursuant to the Common Shares
Agreement.
|
(81)
|
The address for this security
holder is 947 Huron Road, Franklin Lakes, Bergen, New Jersey
07417.
|
(82)
|
Includes 29,100 shares of common
stock underlying 29,100 shares of series A preferred stock and 17,450
shares of common stock underlying the warrants issued to this selling
security holder in the Preferred Shares Financing, all of which we are
registering for resale pursuant to the Preferred Shares
Agreement.
|
(83)
|
The address for this security
holder is No. 21 Lane 45, Wuan Street, Pingtung City,
Taiwan.
|
(84)
|
Includes 2,975 shares of
common stock converted from 2,975 shares of series A preferred stock and
1,750 shares of common stock from exercise of the warrants issued to this
selling security holder in the Preferred Shares Financing, all of which we
are registering for resale pursuant to the Preferred Shares
Agreement.
|
(85)
|
The address for this security
holder is 4410 Bordeaux Avenue, Dallas, TX 75205. John S. Lemak, as
custodian of this security holder, has dispositive and voting power over
these securities and may be deemed to be the beneficial owner of these
securities.
|
21
(86)
|
Includes 35,000 shares of common
stock and 17,500 shares of common stock underlying the warrants issued to
this selling security holder in the Common Shares Financing, all of which
we are registering for resale pursuant to the Common Shares Agreement.
|
(87)
|
The address for this security
holder is Elchweg 23, CH-8405 Winterthur, Switzerland.
|
(88)
|
Includes 5,000 shares of common
stock underlying 5,000 shares of series A preferred stock and 2,937 shares
of common stock underlying the warrants issued to this selling security
holder in the Preferred Shares Financing, all of which we are registering
for resale pursuant to the Preferred Shares Agreement.
|
(89)
|
The address for this security
holder is 70 East 55th Street, 4th Floor, New York, NY 10022. Michael
Loeb, Robert Imershein and Richard Vogel, as president and CEO, COO and
managing director of this security holder, respectively, have dispositive
and voting power over these securities and may be deemed to be the
beneficial owners of these securities.
|
(90)
|
Includes 69,231 shares of common
stock converted from 69,231 shares of series A preferred stock and 32,867
shares of common stock underlying the warrants issued to this selling
security holder in the Preferred Shares Financing, all of which we are
registering for resale pursuant to the Preferred Shares Agreement.
|
(91)
|
The address for this security
holder is 265 West Trail, Stamford, Fairfield, Connecticut 06903. Allan C.
Lichtenbery, as managing member of this security holder, has dispositive
and voting power over these securities and may be deemed to be the
beneficial owner of these securities.
|
(92)
|
Includes 17,483 shares of common
stock and 8,741 shares of common stock underlying the warrants issued to
this selling security holder in the Common Shares Financing, all of which
we are registering for resale pursuant to the Common Shares Agreement.
|
(93)
|
The address for this security
holder is 4653 Carmel Mountain Road, Suite 308-402, San Diego, CA 92130.
Lawrence D. Isen and Christian L. Isen, as trustees of this security
holder, have dispositive and voting power over these securities and may be
deemed to be the beneficial owners of these securities.
|
(94)
|
Includes 16,660 shares of common
stock underlying 16,660 shares of series A preferred stock and 10,000
shares of common stock underlying the warrants issued to this selling
security holder in the Preferred Shares Financing, all of which we are
registering for resale pursuant to the Preferred Shares Agreement.
|
(95)
|
The address for this security
holder is 6105 Avenida Cresta, La Jolla, California 92037.
|
(96)
|
Includes 25,024 shares of common
stock underlying 25,024 shares of series A preferred stock and 14,918
shares of common stock underlying the warrants issued to this selling
security holder in the Preferred Shares Financing, all of which we are
registering for resale pursuant to the Preferred Shares Agreement.
|
(97)
|
The address for this security
holder is Rue Jean, Jacquet 4, CH 1201 Geneva, Switzerland.
|
(98)
|
Includes 33,650 shares of common
stock underlying 33,650 shares of series A preferred stock and 15,950
shares of common stock underlying the warrants issued to this selling
security holder in the Preferred Shares Financing, all of which we are
registering for resale pursuant to the Preferred Shares Agreement.
|
(99)
|
The address for this security
holder is 12 Silver Birch Road, Merrick, Nassau, New York 11566.
|
(100)
|
Includes 26,224 shares of common
stock and 13,112 shares of common stock underlying the warrants issued to
this selling security holder in the Common Shares Financing, all of which
we are registering for resale pursuant to the Common Shares Agreement.
|
(101)
|
The address for this security
holder is Espigraben - 1811, 8264 Eschenz, Steckborn, Thurgau,
Switzerland.
|
(102)
|
Includes 45,000 shares of common
stock underlying 45,000 shares of series A preferred stock and 26,416
shares of common stock underlying the warrants issued to this selling
security holder in the Preferred Shares Financing, all of which we are
registering for resale pursuant to the Preferred Shares Agreement.
|
22
(103)
|
The address for this security
holder is 111 Via De La Valle, Del Mar, CA 92014. Bette Nagelberg, as
custodian of this security holder, has dispositive and voting power over
these securities and may be deemed to be the beneficial owner of these
securities.
|
(104)
|
Includes 19,887 shares of common
stock underlying 19,887 shares of series A preferred stock and 11,925
shares of common stock underlying the warrants issued to this selling
security holder in the Preferred Shares Financing, all of which we are
registering for resale pursuant to the Preferred Shares Agreement.
|
(105)
|
The address for this security
holder is 939 Coast Boulevard #210E, La Jolla, CA 92037. David S.
Nagelberg, as trustee of this security holder, has dispositive and voting
power over these securities and may be deemed to be the beneficial owner
of these securities.
|
(106)
|
Includes 100,000 shares of common
stock underlying 100,000 shares of series A preferred stock and 50,000
shares of common stock underlying the warrants issued to this selling
security holder in the Preferred Shares Financing, all of which we are
registering for resale pursuant to the Preferred Shares Agreement.
|
(107)
|
The address for this security
holder is 947 Huron Road, Franklin Lakes, NJ 07417. Mitchell Knapp and
Lawrence Sheer, as trustees of this security holder, have dispositive and
voting power over these securities and may be deemed to be the beneficial
owners of these securities.
|
(108)
|
Includes 19,887 shares of common
stock underlying 19,887 shares of series A preferred stock and 11,925
shares of common stock underlying the warrants issued to this selling
security holder in the Preferred Shares Financing, all of which we are
registering for resale pursuant to the Preferred Shares Agreement.
|
(109)
|
The address for this security
holder is 947 Huron Road, Franklin Lakes, NJ 07417. Mitchell Knapp and
Lawrence Sheer, as trustees of this security holder, have dispositive and
voting power over these securities and may be deemed to be the beneficial
owners of these securities.
|
(110)
|
Includes 19,887 shares of common
stock underlying 19,887 shares of series A preferred stock and 11,925
shares of common stock underlying the warrants issued to this selling
security holder in the Preferred Shares Financing, all of which we are
registering for resale pursuant to the Preferred Shares Agreement.
|
(111)
|
The address for this security
holder is 947 Huron Road, Franklin Lakes, NJ 07417. Mitchell Knapp and
Lawrence Sheer, as trustees of this security holder, have dispositive and
voting power over these securities and may be deemed to be the beneficial
owners of these securities.
|
(112)
|
Includes 19,887 shares of common
stock underlying 19,887 shares of series A preferred stock and 11,925
shares of common stock underlying the warrants issued to this selling
security holder in the Preferred Shares Financing, all of which we are
registering for resale pursuant to the Preferred Shares Agreement.
|
(113)
|
The address for this security
holder is 812 Plainfield Lane, Valley Stream, Nassau, New York 11581.
|
(114)
|
Includes 29,017 shares of common
stock underlying 29,017 shares of series A preferred stock and 17,400
shares of common stock underlying the warrants issued to this selling
security holder in the Preferred Shares Financing, all of which we are
registering for resale pursuant to the Preferred Shares Agreement.
|
(115)
|
Are deemed affiliates of one
another.
|
(116)
|
The address for this security
holder is Rue du Port 12, CH-1204, Geneva, Switzerland. Hubert-Lance Huet,
as manager of this security holder, has dispositive and voting power over
these securities and may be deemed to be the beneficial owner of these
securities.
|
(117)
|
Includes 145,688 shares of common
stock underlying 145,688 shares of series A preferred stock and 87,413
shares of common stock underlying the warrants issued to this selling
security holder in the Preferred Shares Financing, all of which we are
registering for resale pursuant to the Preferred Shares Agreement.
|
(118)
|
The address for this security
holder is Quai de I’lle 5, P.O. Box 5055, 1204 Geneva 11, Switzerland.
Valerie Anson, as head of middle office of this security holder, has
dispositive and voting power over these securities and may be deemed to be
the beneficial owner of these securities.
|
(119)
|
Includes 49,000 shares of
common stock converted from 49,000 shares of series A preferred stock and
24,500 shares of common stock underlying the warrants issued to this
selling security holder in the Preferred Shares Financing, all of which we
are registering for resale pursuant to the Preferred Shares
Agreement.
|
23
(120)
|
The address for this security
holder is 5 Rue Pedro Meylan 5, CH-1208 Geneva, Switzerland. Olivier
Couriol, as director of this security holder, has dispositive and voting
power over these securities and may be deemed to be the beneficial owner
of these securities.
|
(121)
|
Includes 5,827 shares of common
stock underlying 5,827 shares of series A preferred stock and 2,914 shares
of common stock underlying the warrants issued to this selling security
holder in the Preferred Shares Financing, all of which we are registering
for resale pursuant to the Preferred Shares Agreement.
|
(122)
|
The address for this security
holder is P.O. Box 8803, Rancho Santa Fe, CA 92067.
|
(123)
|
Includes 8,742 shares of common
stock and 4,371 shares of common stock underlying the warrants issued to
this selling security holder in the Common Shares Financing, all of which
we are registering for resale pursuant to the Common Shares Agreement.
|
(124)
|
The address for this security
holder is Apt 409, Saoaf 6, SBR, P.O. Box 118222, Dubai, UAE.
|
(125)
|
Includes 3,325 shares of
common stock converted
from 3,325 shares of series A preferred stock and 1,750 shares of
common stock underlying the warrants issued to this selling security
holder in the Preferred Shares Financing, all of which we are registering
for resale pursuant to the Preferred Shares Agreement.
|
(126)
|
The address for this security
holder is 1011 Brioso Drive, Suite 201, Costa Mesa, CA 92627.
|
(127)
|
Includes 6,667 shares of common
stock underlying 6,667 shares of series A preferred stock and 3,998 shares
of common stock underlying the warrants issued to this selling security
holder in the Preferred Shares Financing, all of which we are registering
for resale pursuant to the Preferred Shares Agreement.
|
(128)
|
The address for this security
holder is 5100 Poplar Avenue, Suite 805, Memphis, TN 38137. William P.
Wells, as chief manager of Pope Asset Management, LLC, the investment
advisor to this security holder, has dispositive and voting power over
these securities and may be deemed to be the beneficial owner of these
securities.
|
(129)
|
Includes 126,910 shares of common
stock issued to this security holder in connection with, and which we are
registering for resale pursuant to, the Bridge Financing Agreement.
|
(130)
|
The address for this security
holder is 130 East 65th Street, New York, NY 10065. Ross Pirasteh, as
general manager and general partner of this security holder, has
dispositive and voting power over these securities and may be deemed to be
the beneficial owner of these securities.
|
(131)
|
Includes 45,000 shares of common
stock and 22,500 shares of common stock underlying the warrants issued to
this selling security holder in the Common Shares Financing, all of which
we are registering for resale pursuant to the Common Shares Agreement.
|
(132)
|
The address for this security
holder is 29 Avenue de Messine, 75008 Paris, France. Eric Legendre,
Frederic Garcia, Patrice Renaudin and Chantal Aumasson, as managing
members of this security holder, have dispositive and voting power over
these securities and may be deemed to be the beneficial owners of these
securities.
|
(133)
|
Includes 15,300 shares of common
stock underlying 15,300 shares of series A preferred stock and 9,000
shares of common stock underlying the warrants issued to this selling
security holder in the Preferred Shares Financing, all of which we are
registering for resale pursuant to the Preferred Shares Agreement.
|
(134)
|
The address for this security
holder is 2828 Routh Street, Suite 500, Dallas, TX 75201. John S. Lemak,
as manager of this security holder, has dispositive and voting power over
these securities and may be deemed to be the beneficial owner of these
securities.
|
(135)
|
Includes 105,000 shares of common
stock and 52,500 shares of common stock underlying the warrants issued to
this selling security holder in the Common Shares Financing, all of which
we are registering for resale pursuant to the Common Shares Agreement.
|
24
(136)
|
The address for this security
holder is Rue Pedro-Meylan 5, CH-1208, Geneve, Switzerland. Blaise
Hatt-Arnold and Gregoire Vaucher, as managing members of this security
holder, have dispositive and voting power over these securities and may be
deemed to be the beneficial owners of these securities.
|
(137)
|
Includes
14,860 shares of common stock converted from 14,860 shares of series A
preferred stock, 150,087 shares of common stock underlying 150,087 shares
of series A preferred stock and 97,028 shares of common stock underlying
the warrants issued to this selling security holder in the Preferred
Shares Financing, all of which we are registering for resale pursuant to
the Preferred Shares
Agreement.
|
(138)
|
The address for this security
holder is Rue Pedro-Meylan 5, CH-1208 Geneva, Switzerland. Olivier Couriol
and Christian Navill, as directors of this security holder, have
dispositive and voting power over these securities and may be deemed to be
the beneficial owners of these securities.
|
(139)
|
Includes 206,294 shares of common
stock underlying 206,294 shares of series A preferred stock and 116,550
shares of common stock underlying the warrants issued to this selling
security holder in the Preferred Shares Financing, all of which we are
registering for resale pursuant to the Preferred Shares Agreement.
|
(140)
|
The address for this security
holder is 791 Passaic Avenue, Clifton, NJ 07012.
|
(141)
|
Includes 29,100 shares of common
stock underlying 29,100 shares of series A preferred stock and 17,450
shares of common stock underlying the warrants issued to this selling
security holder in the Preferred Shares Financing, all of which we are
registering for resale pursuant to the Preferred Shares Agreement.
|
(142)
|
The address for this security
holder is Villa # D103, Palm Jumeirah Island, Dubai, UAE. Rima Salam, as
director of this security holder, has dispositive and voting power over
these securities and may be deemed to be the beneficial owner of these
securities.
|
(143)
|
Includes 100,000 shares of
common stock converted
from 100,000 shares of series A preferred stock and 50,000 shares
of common stock underlying the warrants issued to this selling security
holder in the Preferred Shares Financing, all of which we are registering
for resale pursuant to the Preferred Shares Agreement.
|
(144)
|
The address for this security
holder is 714 South Dearborn Street, 2nd Floor, Chicago, IL 60605. Stephen
S. Taylor, as managing director of this security holder, has dispositive
and voting power over these securities and may be deemed to be the
beneficial owner of these securities.
|
(145)
|
Includes 174,825 shares of common
stock underlying 174,825 shares of series A preferred stock and 87,413
shares of common stock underlying the warrants issued to this selling
security holder in the Preferred Shares Financing, all of which we are
registering for resale pursuant to the Preferred Shares Agreement.
|
(146)
|
The address for this security
holder is Bordeaux Court, Les Echelons, St. Peter Port, Guernsey GY1 3DR.
Nicholas Moss and David Allison, as directors of this security holder,
have dispositive and voting power over these securities and may be deemed
to be the beneficial owners of these securities.
|
(147)
|
Includes 34,615 shares of
common stock converted
from 34,615 shares of series A preferred stock and 17,483 shares of
common stock underlying the warrants issued to this selling security
holder in the Preferred Shares Financing, all of which we are registering
for resale pursuant to the Preferred Shares Agreement.
|
(148)
|
The address for this security
holder is 131 Laurel Grove Avenue, Kentfield, CA 94904. Joseph Abrams, as
general partner of this security holder, has dispositive and voting power
over these securities and may be deemed to be the beneficial owner of
these securities.
|
(149)
|
Includes 30,000 shares of common
stock and 15,000 shares of common stock underlying the warrants issued to
this selling security holder in the Common Shares Financing, all of which
we are registering for resale pursuant to the Common Shares Agreement.
|
(150)
|
The address for this security
holder is 410 17th Street, #1705, Denver, CO 80202. James A Lustig, as
president of this security holder, has dispositive and voting power over
these securities and may be deemed to be the beneficial owner of these
securities.
|
25
(151)
|
Includes 17,483 shares of
common stock converted
from 17,483 shares of series A preferred stock and 8,741 shares of
common stock underlying the warrants issued to this selling security
holder in the Preferred Shares Financing, all of which we are registering
for resale pursuant to the Preferred Shares Agreement.
|
(152)
|
The address for this security
holder is 228 Taizhou Road, Building #1, Room 1002, Shanghai, China
200042.
|
(153)
|
Includes 6,755 shares of
common stock converted
from 6,755 shares of series A preferred stock and 3,974 shares of
common stock underlying the warrants issued to this selling security
holder in the Preferred Shares Financing, all of which we are registering
for resale pursuant to the Preferred Shares Agreement.
|
(154)
|
Transferred an aggregate of 9,675
Preferred Shares and Warrants to purchase up to 15,912 shares of common
stock to Gilford Securities, Inc. pursuant to arrangements between these
security holders and Gilford.
|
(155)
|
A
broker-dealer or an affiliate of a broker-dealer.
|
26
Of the
selling security holders identified above:
|
·
|
57
of them are investors in our Preferred Shares Financing completed on
November 17, 2009, in which we sold and issued an aggregate of 2,796,721
Preferred Shares at a per share purchase price of $2.86 for aggregate
purchase price of approximately $8.00 million, as well as Warrants to
purchase up to 1,398,360 shares of common stock for no additional
consideration. There were two closings, the first on October 27, 2009, for
gross proceeds of approximately $4.14 million, and the second on November
17, 2009, for gross proceeds of approximately $3.86 million. Each
Preferred Share is convertible into one share of common stock at $2.86 per
share (subject to certain adjustments) at any time at its holder’s option,
and will automatically convert upon the listing of our common stock on
either the Nasdaq Capital Market or NYSE Amex Equities. Each Warrant
entitles its holder to purchase a share of common stock at an exercise
price of $3.43 per share (subject to certain adjustments) for a period of
three years. We are also entitled to call the Warrants for cancellation if
the volume-weighted average price of our common stock for 20 consecutive
days exceeds 200% of the then applicable exercise price. Gilford
Securities, Inc. acted as the placement agent of the Preferred Shares
Financing.
|
|
·
|
16
of them are investors in our Common Shares Financing completed on December
1, 2009, in which we sold and issued an aggregate of 653,534 Common Shares
at a per share purchase price of $2.86 for aggregate purchase price of
approximately $1.87 million, as well as Warrants to purchase up to 326,767
shares of common stock for no additional consideration. The Warrants
issued to these investors have the same terms as those that we issued in
the Preferred Shares
Financing.
|
|
·
|
Two
of them, namely Pope Investments II LLC (“Pope”) and Ancora Greater China
Fund, LP (“Ancora”), are parties to a bridge loan and financing agreement
with Korea Jinduren (now called HK Dong Rong) (the “Bridge Loan
Agreement”), pursuant to which they agreed to provide a U.S. public shell
company suitable for a share exchange transaction with Korea Jinduren, and
to loan Korea Jinduren $550,000 for payment of professional fees and
expenses incurred in connection with such transaction. These investors
(along with MMH, LLC) would collectively receive shares of common stock
equal to 4% of our post-share exchange total outstanding and issued common
stock in connection with the share exchange transaction. Additionally,
these investors would be repaid the loan and collectively receive shares
of common stock equal to 1% of our post-share exchange total issued and
outstanding common stock (the “Bridge Loan Shares”) on or after October 1,
2009 and only upon the completion of a financing. The Bridge Loan
financing closed in June 2008. The Bridge Loan Agreement requires that the
Bridge Loan Shares be included in a registration statement to be filed in
connection with the
financing.
|
Each
selling security holder named above and any of their pledgees, assignees, and
successors-in-interest (each a “Selling Security Holder” and collectively the
“Selling Security Holders”) may, from time to time, sell any or all of their
shares of common stock on the OTC Bulletin Board or any other stock exchange,
market, or trading facility on which the shares are traded or in private
transactions. These sales may be at fixed or negotiated prices. A Selling
Security Holder may use any one or more of the following methods when selling
shares:
|
·
|
ordinary brokerage transactions
and transactions in which the broker-dealer solicits
purchasers;
|
|
·
|
block trades in which the
broker-dealer will attempt to sell the shares as agent but may position
and resell a portion of the block as principal to facilitate the
transaction;
|
|
·
|
purchases by a broker-dealer as
principal and resale by the broker-dealer for its
account;
|
|
·
|
an exchange distribution in
accordance with the rules of the applicable
exchange;
|
|
·
|
privately negotiated
transactions;
|
|
·
|
settlement of short sales entered
into after the effective date of the registration statement of which this
prospectus is a part;
|
|
·
|
broker-dealers may agree with the
Selling Security Holders to sell a specified number of such shares at a
stipulated price per share;
|
|
·
|
through the writing or settlement
of options or other hedging transactions, whether through an options
exchange or otherwise;
|
|
·
|
a combination of any such methods
of sale; or
|
|
·
|
any other method permitted
pursuant to applicable law.
|
The
Selling Security Holders may also sell shares under Rule 144 under the
Securities Act of 1933, as amended (the “Securities Act”), if available, rather
than under this prospectus.
Broker-dealers
engaged by the Selling Security Holders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the Selling Security Holders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated, but,
except as set forth in a supplement to this prospectus, in the case of an agency
transaction not in excess of a customary brokerage commission in compliance with
FINRA Rule 2440; and in the case of a principal transaction a markup or markdown
in compliance with FINRA IM-2440.
In
connection with the sale of the common stock or interests therein, the Selling
Security Holders may enter into hedging transactions with broker-dealers or
other financial institutions, which may in turn engage in short sales of the
common stock in the course of hedging the positions they assume. The Selling
Security Holders may also sell shares of the common stock short and deliver
these securities to close out their short positions, or loan or pledge the
common stock to broker-dealers that in turn may sell these securities. The
Selling Security Holders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
The
Selling Security Holders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be “underwriters” within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Each Selling Security Holder has informed
the Company that it does not have any written or oral agreement or
understanding, directly or indirectly, with any person to distribute their
shares of common stock.
27
The
Company is required to pay certain fees and expenses incurred by the Company
incident to the registration of the shares. The Company has agreed to indemnify
the Selling Stockholders against certain losses, claims, damages and
liabilities, including liabilities under the Securities Act.
Because
Selling Security Holders may be deemed to be “underwriters” within the meaning
of the Securities Act, they will be subject to the prospectus delivery
requirements of the Securities Act including Rule 172 thereunder. In addition,
any securities covered by this prospectus which qualify for sale pursuant to
Rule 144 under the Securities Act may be sold under Rule 144 rather than under
this prospectus. There is no underwriter or coordinating broker acting in
connection with the proposed sale of the resale shares by the Selling Security
Holders.
We agreed
to use commercially reasonable efforts to keep this prospectus effective until
the earlier of (i) the date on which all of the registrable shares may be resold
by the Selling Security Holders without registration and without regard to any
volume or manner-of-sale limitations by reason of Rule 144, or (ii) all of the
registrable shares have been sold pursuant to this prospectus or Rule 144 under
the Securities Act or any other rule of similar effect. The resale shares will
be sold only through registered or licensed brokers or dealers if required under
applicable state securities laws. In addition, in certain states, the resale
shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.
Under
applicable rules and regulations under the Securities and Exchange Act of 1934,
as amended (the “Exchange Act”), any person engaged in the distribution of the
resale shares may not simultaneously engage in market making activities with
respect to the common stock for the applicable restricted period, as defined in
Regulation M, prior to the commencement of the distribution. In addition, the
Selling Security Holders will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including Regulation M,
which may limit the timing of purchases and sales of shares of the common stock
by the Selling Security Holders or any other person. We will make copies of this
prospectus available to the Selling Security Holders and have informed them of
the need to deliver a copy of this prospectus to each purchaser at or prior to
the time of the sale (including by compliance with Rule 172 under the Securities
Act).
LEGAL
MATTERS
Richardson
& Patel LLP has rendered an opinion regarding the legality of the issuance
of the shares of common stock being registered in this prospectus. As of August
24, 2010, Richardson & Patel LLP and/or its principals holds Company
securities.
EXPERTS
The
consolidated financial statements of the Company as of December 31, 2009 and
2008 and for the years then ended appearing in this prospectus and registration
statement have been audited by Crowe Horwath LLP, an independent registered
public accounting firm, as set forth in their report appearing herein, and are
included in reliance upon such reports given on the authority of such firm as
experts in auditing and accounting.
BUSINESS
Overview
We are an
apparel producer in the People’s Republic of China (“PRC” or “China”) that
currently designs, develops, manufactures, distributes and sells casual
apparel and clothing products under the brand name “V·LOV” targeted toward 15-34
years old, middle-class Chinese male consumers.
We design
and develop our apparel and clothing products in our production facility located
in Yinglin in southeastern Fujian Province. We market and distribute our
products through independent distributors, each of whom is granted rights to
market and sell our products in a defined market or territory through a
distribution agreement. We maintain and exercise control over brand advertising
and marketing activities from our headquarters in Yinglin, where we set the tone
for integrity, consistency and direction of the V·LOV brand image throughout
China. We also have marketing staff travelling around the country to help us
enforce our visions and provide support and guidelines for our
distributors. We manufacture some of our apparel products at our
Yinglin production facility and outsource approximately 80% to 90% of
manufacturing to third parties.
All of
our business operations are carried out by our variable interest entity (“VIE”),
Jinjiang Yinglin Jinduren Fashion Limited (“Yinglin Jinduren”), which we control
through contractual arrangements between Yinglin Jinduren and Dong Rong Capital
Investment Limited, formerly known as Korea Jinduren (International) Dress
Limited (“HK Dong Rong”), which is wholly-owned by Peng Xiang Peng Fei
Investments, Limited (“PXPF”), our wholly-owned subsidiary. Other than our
interests in the contractual arrangements, neither we nor PXPF and HK Dong Rong
own any equity interests in Yinglin Jinduren, which equity interests are owned
by our chief executive officer and his brother, who is also one of our
directors.
28
History
and Corporate Structure
We
were incorporated in Nevada on October 30, 2006, originally under the name “Sino
Charter, Inc.”, with a principal business objective to provide internet-based
flight charter booking for East Asia. Prior to share exchange transaction with
PXPF described below, we were a public reporting “shell company,” as defined in
Rule 12b-2 of the Exchange Act.
On
August 1, 2008, MMH Group, LLC (“MMH”) entered into a stock purchase agreement
with Bradley Miller, who served as our sole director and officer since our
incorporation date, to acquire from him 100,000 shares of our common stock
(taking into account the reverse stock split described below). The
transaction closed on August 4, 2008, and concurrently with the closing, MMH
sold 24,000 of the shares to Ancora Greater China Fund, L.P. (“Ancora”), and
56,000 of the shares to Pope Investments II, LLC (“Pope”), leaving MMH with
20,000 shares. MMH is owned by Matthew Hayden, who was our former sole director
and officer prior to the share exchange transaction with PXPF described
below.
On
January 12, 2009, we effected a 1-for-100 reverse split of our common stock (the
“Reverse Split”) by filing a Certificate of Amendment to Articles of
Incorporation with the Nevada Secretary of State.
On
February 12, 2009, we entered into a securities purchase agreement with MMH,
Ancora and Pope, pursuant to which we sold 102,800 shares of our common stock to
MMH, 123,360 shares to Ancora and 287,840 shares to Pope. On February 13, 2009,
we sold an additional 814,500 shares of our common stock to four
purchasers.
On February
13, 2009 (the “Closing Date”), we entered into a share exchange agreement (the
“Exchange Agreement”) with PXPF and its shareholders who, immediately prior
to the closing of the transactions contemplated by the Exchange Agreement (the
“Exchange Transaction”), collectively held 100% of PXPF’s issued and outstanding
share capital (the “BVI Shareholders”). On the Closing Date, we issued
14,560,000 shares of common stock to the BVI Shareholders in exchange for all of
their equity interests in PXPF. The BVI Shareholders became our
controlling shareholders, PXPF became our wholly-owned subsidiary, and we
acquired the business and operations of PXPF. Immediately prior to the Exchange
Transaction, we had 1,454,421 shares of common stock outstanding, including
122,800 shares held by MMH, as well as 147,360 shares held by Ancora and 343,840
shares held by Pope. Immediately after the Exchange Transaction, we had
16,014,421 shares of common stock outstanding. In connection with the Exchange
Transaction, we changed our name from “Sino Charter, Inc.” to “VLOV, Inc.” on
March 4, 2009, to better reflect our business operations.
The
Exchange Transaction was accounted for as a reverse merger (recapitalization)
with PXPF deemed to be the accounting acquirer, and us as the legal acquirer.
Accordingly, the financial information presented in our financial statements is
the historical financial information of PXPF, as adjusted to give effect to the
change in the share capital as a result of the reverse merger
(recapitalization). The basis of the assets, liabilities and retained earnings
of PXPF, the accounting acquirer, have been carried over in the
recapitalization.
PXPF
was incorporated in the British Virgin Islands on April 30, 2008. PXPF was
formed by the owners of Yinglin Jinduren as a special purpose vehicle for
raising capital outside of the PRC. Other than holding 100% of the equity
interests in HK Dong Rong, PXPF has no operations of its own.
HK
Dong Rong was incorporated on January 5, 2005 originally under the name Korea
Jinduren (International) Dress Limited (“Korea Jinduren”). The company was set
up by the owners of Yinglin Jinduren as a special purpose vehicle for raising
capital outside of the PRC, and changed its name to HK Dong Rong on April 27,
2009. HK Dong Rong is wholly-owned by PXPF. Other than activities arising from
its contractual arrangements with Yinglin Jinduren, HK Dong Rong has no other
operations of its own.
Yinglin
Jinduren was organized in the PRC on January 19, 2002, and is owned by Qingqing
Wu, our Chief Executive Officer, and his brother Zhifan Wu. Yinglin
Jinduren holds the government licenses and approvals necessary to operate our
apparel business in China. PRC law currently imposes certain
restrictions on foreign ownership of PRC business entities. To comply with such
foreign ownership restrictions, neither we, PXPF nor HK Dong Rong own any equity
interests in Yinglin Jinduren, but control and receive the economic benefits of
its business operations through contractual arrangements. Through HK Dong Rong,
we have contractual arrangements with Yinglin Jinduren and its owners to obtain
substantially the same control of and rights to Yinglin Jinduren that we would
have had through direct acquisition of its equity interests. Through these
contractual arrangements, we provide consulting and other general business
operation services to Yinglin Jinduren, and also have the ability to
substantially influence its daily operations and financial affairs, since we are
able to appoint its senior executives and approve all matters requiring approval
of the equity owners. As a result of these contractual arrangements, we are able
to control Yinglin Jinduren and to receive, through a service fee earned by HK
Dong Rong, all of the net income of Yinglin Jinduren, although we have generally
allowed such amounts to be retained by Yinglin Jinduren to support its
operations. Our contractual agreements are silent as to the sharing
of losses in the event that Yinglin Jinduren incurs losses in any
period. As a result, in the event Yinglin Jinduren incurs losses, we
would expect to absorb such losses through our inability to collect the
accumulated net income due to us.
On
November 19, 2009, HK Dong Rong incorporated Dong Rong (China) Co., Ltd. in the
PRC as its wholly-owned subsidiary (“China Dong Rong”), with registered capital
of $8 million. China Dong Rong, which currently conducts no business activities,
is deemed to be a wholly foreign owned enterprise, or WFOE, as its direct parent
company, HK Dong Rong, is not a PRC company. $4 million of the registered
capital has been funded, with the balance to be funded within two years from the
incorporation date. It is our intention and that of the equity owners of Yinglin
Jinduren to transfer all of the business operations currently conducted by
Yinglin Jinduren to China Dong Rong sometime in 2010. Such transfer will provide
us with direct control over our operating assets, which we currently control
through the contractual arrangements with Yinglin Jinduren and its owners as
described below. Such transfer, however, has not been completed as of the date
of this prospectus, and currently there are no arrangements or understandings
with respect to such transfer, and China Dong Rong has no operation.
Contractual
Arrangements with Yinglin Jinduren and its Owners
Our
relationships with Yinglin Jinduren and its owners, Qingqing Wu and his brother
Zhifan Wu, are governed by a series of contractual arrangements, as we
(including our subsidiaries) do not own any equity interests in Yinglin
Jinduren. In the opinion of Allbright Law Offices, our PRC counsel; (a) the
contractual arrangements constitute valid and binding obligations of the parties
of such agreements; (b) each of the contractual arrangements and the rights and
obligations of the parties thereto are enforceable and valid in accordance with
the laws of the PRC; and (c) under Chinese laws, each of HK Dong Rong and
Yinglin Jinduren is an independent legal entity and neither of them is exposed
to liabilities incurred by the other party.
On
December 28, 2005, HK Dong Rong entered into the following contractual
arrangements with Yinglin Jinduren and its
owners:
Consulting Services
Agreement. Pursuant to the exclusive consulting services
agreement between HK Dong Rong and Yinglin Jinduren, HK Dong Rong has the
exclusive right to provide to Yinglin Jinduren general consulting services
relating to the management and operations of Yinglin Jinduren’s apparel business
(the “Services”). Additionally, HK Dong Rong owns any intellectual property
rights developed through the Services provided to Yinglin Jinduren. During the
term of this agreement, Yinglin Jinduren’s operational incomes are deposited
into a bank account designated by HK Dong Rong. Yinglin Jinduren is obligated to
pay a quarterly consulting service fee in Renminbi (“RMB”) to HK Dong Rong that
is equal to all of Yinglin Jinduren’s net income for such quarter, based on a
financial report certified by Yinglin Jinduren’s chief financial officer and
delivered to HK Dong Rong within 45 days after the end of such quarter. In
addition to such quarterly reports, Yinglin Jinduren is also obligated to report
its monthly financial results and business conditions to HK Dong Rong, as well
as provide its annual audited accounts within 90 days of the fiscal year end.
Yinglin Jinduren is also obligated to maintain accurate books and records of its
business activities and transactions, and to make all such information available
to HK Dong Rong. In the event of a breach by Yinglin Jinduren of the
foregoing or other obligations under this agreement, HK Dong Rong is entitled to
all remedies under PRC law, including recovery of direct and indirect losses as
well as legal fees. The consulting services agreement is in effect unless and
until terminated by written notice of either party in the event that: (a) the
other party causes a material breach of this agreement, provided that if the
breach does not relate to a financial obligation of the breaching party, that
party may attempt to remedy the breach within 14 days following the receipt of
the written notice; (b) the other party becomes bankrupt, insolvent, is the
subject of proceedings or arrangements for liquidation or dissolution, ceases to
carry on business, or becomes unable to pay its debts as they become due; (c) HK
Dong Rong terminates its operations; (d) Yinglin Jinduren’s business license or
any other license or approval for its business operations is terminated,
cancelled or revoked; or (e) circumstances arise which would materially and
adversely affect the performance or the objectives of the consulting services
agreement. Additionally, HK Dong Rong may terminate the consulting
services agreement without cause. Any dispute arising from this agreement that
the parties cannot resolve must be submitted for arbitration before the China
International Economic and Trade Arbitration Commission.
Because
all of our business operations are conducted by Yinglin Jinduren, we have
generally allowed Yinglin Jinduren to retain its net income in the PRC in order
to support its operations. Additionally, Yinglin Jinduren was allowed to declare
dividends, which dividends were declared and paid to Yinglin Jinduren’s owners
prior to the Exchange Transaction. Thus, immediately prior to the Exchange
Transaction, Yinglin Jinduren declared and paid the equivalent of $5,131,000 in
RMB as dividends to Mr. Wu and his brother. However, Yinglin Jinduren has not
declared or paid any dividend since the Exchange Transaction and will not do so
in the future.
29
Operating
Agreement. Pursuant to the operating agreement among HK Dong
Rong, Yinglin Jinduren and the owners of Yinglin Jinduren who collectively hold
100% of the outstanding equity interests of Yinglin Jinduren, HK Dong Rong
provides guidance and instructions on Yinglin Jinduren’s daily operations,
financial management and employment issues. The owners of Yinglin
Jinduren must designate the candidates recommended by HK Dong Rong as their
representatives on Yinglin Jinduren’s board of directors. HK Dong
Rong has the right to appoint senior executives of Yinglin
Jinduren. In addition, HK Dong Rong has the right, but not the
obligation, to guarantee the performance of Yinglin Jinduren under any
agreements or arrangements relating to Yinglin Jinduren’s business arrangements
with any third party. Yinglin Jinduren, in return, agrees to pledge
its accounts receivable and all of its assets to HK Dong
Rong. Moreover, Yinglin Jinduren agrees that without the prior
consent of HK Dong Rong, Yinglin Jinduren will not engage in any transactions
that could materially affect the assets, liabilities, rights or operations of
Yinglin Jinduren, including, without limitation, incurrence or assumption of any
indebtedness, sale or purchase of any assets or rights, incurrence of any
encumbrance on any of its assets or intellectual property rights in favor of a
third party or transfer of any agreements relating to its business operation to
any third party. The term of this agreement is the maximum period of
time permitted by law unless sooner terminated by any other agreements reached
by all parties or upon a 30-day written notice from HK Dong Rong. The
term may be extended only upon HK Dong Rong’s written confirmation prior to the
expiration of the agreement, with the extended term to be mutually agreed upon
by the parties. We have
been advised by our PRC counsel that there is no current PRC regulation
mandating the maximum length of term permissible for such
agreement.
Equity Pledge
Agreement. Under the equity
pledge agreement between the owners of Yinglin Jinduren and HK Dong Rong, the
stockholders of Yinglin Jinduren pledged all of their equity interests in
Yinglin Jinduren to HK Dong Rong to guarantee Yinglin Jinduren’s performance of
its obligations under the consulting services agreement. If Yinglin
Jinduren or its owners breach their respective contractual obligations, HK Dong
Rong, as pledgee, will be entitled to certain rights, including, but not limited
to, the right to vote with, control and sell the pledged equity
interests. The owners of Yinglin Jinduren also agreed, that upon
occurrence of any event of default, HK Dong Rong shall be granted an exclusive,
irrevocable power of attorney to take actions in the place and instead of the
owners to carry out the security provisions of the equity pledge agreement, and
take any action and execute any instrument as required by HK Dong Rong to
accomplish the purposes of the equity pledge agreement. The owners of
Yinglin Jinduren agreed not to dispose of the pledged equity interests or take
any actions that would prejudice HK Dong Rong’s interest. The equity
pledge agreement will expire two years from the fulfillment of Yinglin
Jinduren’s obligations under the consulting services agreement.
Option Agreement. Under the
option agreement between the owners of Yinglin Jinduren and HK Dong Rong, the
owners irrevocably granted HK Dong Rong or its designee an exclusive option to
purchase, to the extent permitted under Chinese law, all or part of the equity
interests in Yinglin Jinduren for the cost of the owners’ initial contributions
to Yinglin Jinduren’s registered capital or the minimum amount of consideration
permitted by applicable Chinese law. HK Dong Rong or its designee has
sole discretion to decide when to exercise the option, whether in part or in
full. The term of this agreement is ten years from January 1, 2006
and may be extended prior to its expiration by written agreement of the parties.
Proxy Agreement. Pursuant to the
proxy agreement between HK Dong Rong and the owners of Yinglin Jinduren, the
owners agreed to irrevocably grant a designee of HK Dong Rong with the right to
exercise the owners’ voting and other rights, including the rights to attend and
vote at shareholders’ meetings (or by written consent in lieu of such meetings)
in accordance with applicable laws and Yinglin Jinduren’s governing charters
comprising of its Articles of Association (the “Articles”). Under the
Articles, shareholders have the power to (a) approve the company’s business,
budget, accounting, profit distribution and loss allocation plans, (b) appoint
or remove the company’s senior executives and determine their compensations, (c)
increase or decrease the company’s registered capital, (d) approve the issuance
of debt obligations, (e) approve the company’s merger, division, dissolution or
liquidation, and (f) amend the Articles. Additionally, a shareholder holding at
least one tenth of the company’s total voting rights may call for a
shareholders’ meeting. The proxy agreement may not be terminated without
the unanimous consent of all parties, except that HK Dong Rong may terminate the
proxy agreement with or without cause upon 30-day written notice to the
owners.
As a
result of the these contractual arrangements between HK Dong Rong and Yinglin
Jinduren and its owners, we have the ability to effectively control Yinglin
Jinduren’s daily operations and financial affairs, appoint senior executives and
decide on all matters subject to owners’ approval. In other words, while Mr. Wu
and his brother continue to own 100% Yinglin Jinduren’s equity interests, they
have given us all of their rights as owners through these contractual
arrangements. Accordingly, we are considered the primary beneficiary of Yinglin
Jinduren and Yinglin Jinduren is deemed our variable interest entity
(“VIE”).
30
Our
Current Corporate Structure
|
(1)
|
Through
the Exchange Transaction, we became the parent company of PXPF, thereby
enabling Yinglin Jinduren, through PXPF and HK Dong Rong, to raise capital
in the United States. Our management includes: Mr. Qingqing Wu as
Chairman and Chief Executive Officer, Mr. Bennet P. Tchaikovsky as Chief
Financial Officer, and Dr. Jianwei Shen, Mr. Yuzhen Wu, Ms. Ying
Zhang and Mr. Jianhui Wang as members of the board of directors. As of
August 24, 2010: Mr. Qingqing Wu owns approximately
53.76% of our issued and outstanding common stock; Mr. Bennet P.
Tchaikovsky, Dr. Jianwei Shen, Mr. Yuzhan Wu, Ms. Ying Zhang and Mr.
Jianhui Wang do not own any shares of common
stock.
|
|
(2)
|
PXPF
was formed by the owners of Yinglin Jinduren as a special purpose vehicle
for raising capital outside of the PRC. The management of PXPF is
comprised of Mr. Qingqing Wu as its sole Director. We are
the sole shareholder of
PXPF.
|
|
(3)
|
HK
Dong Rong was formed by the owners of Yinglin Jinduren as a special
purpose vehicle for raising capital outside of the PRC. The management of
HK Dong Rong is comprised of Mr. Qingqing Wu as Chairman and Mr.
Lileng Lin as Director. PXPF is the sole
shareholder.
|
|
(4)
|
HK Dong Rong controls Yinglin
Jinduren through contractual arrangements designed to mimic equity
ownership of Yinglin Jinduren by HK Dong Rong. These contracts include a
consulting services agreement, operating agreement, equity pledge
agreement, option agreement, and proxy agreement.
|
|
(5)
|
The management of Yinglin
Jinduren is comprised of Mr. Qingqing Wu as Chairman and Executive
Director, and Mr. Zhifan Wu as Executive Director. Mr. Qingqing Wu and Mr.
Zhifan Wu, who are brothers, hold 65.91% and 34.09% of the ownership
interests of Yinglin Jinduren, respectively.
|
|
(6)
|
The
management of China Dong Rong is comprised of Mr. Qingqing Wu as Executive
Director.
|
Financing
Transactions
Preferred
Shares Financing
In
November 2009, we sold and issued an aggregate of 2,796,721 shares of our series
A convertible preferred stock, par value $0.00001 per share (the “Preferred
Shares”) to 57 accredited investors (collectively the “Preferred Shares
Purchasers”) at $2.86 per share for an aggregate purchase price of approximately
$8.00 million, and issued to them warrants (the “Warrants”) to purchase up to
1,398,360 shares of common stock, par value $0.00001 per share, for no
additional consideration. The transaction was pursuant to a securities purchase
agreement that we entered into with these selling security holders. There were
two closings, the first on October 27, 2009, for gross proceeds of approximately
$4.14 million (the “Initial Closing”), and the second on November 17, 2009, for
gross proceeds of approximately $3.86 million (the “Final Closing”).
The
securities purchase agreement includes customary representations and warranties
by each party thereto. We are required to file a registration statement to
register the common stock underlying the Preferred Shares and Warrants with the
SEC for resale by the Preferred Shares Purchasers within 30 days after the Final
Closing and to have the registration statement declared effective within 90 days
thereafter (or 150 days if the registration statement receives full review). If
the registration statement is not timely filed or declared effective, we will be
subject to liquidated damages of 1% of the Preferred Shares Purchasers’
aggregate purchase price per month, up to 10%, and pro-rated for partial
periods. Additionally, we agreed to use our best efforts, within 180 days of the
Final Closing, to: (a) hire a bilingual chief financial officer, (b) have a
majority of independent directors on our board of directors, and (c) establish
an audit, compensation and nominating committees. We further agreed to use our
best efforts to cause our common stock to be qualified for listing on either the
Nasdaq Capital Market or the NYSE Amex Equities (each a “Senior Listing”).
31
The
Preferred Shares are convertible into common stock at $2.86 per share (subject
to certain adjustments) at any time at the holder’s option, and will
automatically convert upon a Senior Listing. The designation, rights,
preferences and other terms and provisions of the Preferred Shares are set forth
in the Certificate of Designation filed with the Nevada Secretary of State on
October 23, 2009 (the “Certificate”). The Preferred Shares are entitled to
participate in any dividends declared and paid on our common stock on an
as-converted basis. Preferred Shares holders are also entitled to notice of any
stockholders’ meeting and shall vote together with common stock holders on an
as-converted basis. Additionally, as long as any Preferred Shares are
outstanding, we cannot, without the affirmative vote of the holders of a
majority of the then outstanding shares of the Preferred Shares, (a) alter or
change adversely the powers, preferences, or rights given to the Preferred
Shares or alter or amend the Certificate, (b) authorize or create any class of
stock ranking as to dividends, redemption or distribution of assets upon a
Liquidation (as defined in Section 5 of the Certificate) senior to or otherwise
pari passu with the Preferred Shares, (c) amend our charter documents in
any manner that adversely affects any rights of the holders of Preferred Shares,
(d) increase the number of authorized shares of Preferred Shares, or (e) enter
into any agreement with respect to any of the foregoing.
Each
Warrant entitles its holder to purchase one share of common stock at an exercise
price of $3.43 per share (subject to certain adjustments) for a period of three
years. We are also entitled to call the Warrants for cancellation of the
Warrants if the volume-weighted average price of our common stock for 20
consecutive days exceeds 200% of the then applicable exercise price.
The
conversion price of the Preferred Shares and the exercise price of the Warrants
are subject to anti-dilution adjustments in the event that we issue additional
equity, equity linked securities or securities convertible into common stock at
a purchase price less than the then applicable conversion or exercise price
(other than shares issued to our officers, directors, employees or consultants
pursuant to any stock or option plan duly adopted by a majority of our
non-employee directors, or issued upon the conversion or exercise of any
securities outstanding as of the Closing Date, or for acquisitions or strategic
transactions approved a majority of our directors). The conversion and exercises
prices are also subject to customary adjustments such as any stock dividend,
stock split, reverse stock split or other similar transaction.
In
connection with the securities purchase agreement, certain of our shareholders
entered into a Lock-up Agreement (the “Lock-up Agreement”) whereby they agreed
not to offer, sell, or other dispose of (a) 50% of their shares of common stock
for nine months from the Initial Closing, and (b) the remaining 50% of their
shares of common stock for twelve months from the Initial Closing.
In
connection with the Financing, the Company agreed to place $150,000 of the gross
proceeds from the Financing and Warrants to purchase up to 300,000 shares of
common stock in an escrow account to be expended for investor relations,
pursuant to the terms of an escrow agreement (the “Escrow Agreement”).
Gilford
Securities Incorporated (the “Placement Agent”) acted as the placement agent in
connection with the Financing. For its services, the Placement Agent received a
cash fee equal to 1% of the aggregate purchase price of the Preferred Shares
issued in the transaction. The Placement Agent also received 9,675 Preferred
Shares and Warrants to purchase up to 15,912 shares of common stock.
Common
Shares Financing
On
December 1, 2009, we entered into a securities purchase agreement with 17
accredited investors (collectively the “Common Shares Purchasers”) pursuant to
which we agreed to issue and sell up to 699,301 shares of our common stock (the
“Common Shares”) to accredited investors at $2.86 per share for an aggregate
purchase price of up to $2,000,000.86, and to issue Warrants to purchase up to
349,651 shares of our common stock for no additional consideration. At the
closing on December 1, 2009, we issued to the Common Shares Purchasers 653,534
Common Shares and Warrants to purchase up to 326,767 shares of common stock for
gross proceeds of approximately $1.87 million.
The
securities purchase agreement includes customary representations and warranties
by each party thereto. We are required to include the Common Shares and the
common stock underlying the Warrants issued to the Common Shares Purchasers in
the registration statement that we are filing for the Preferred Shares
Purchasers, and to have the registration statement declared effective within 90
days of the filing of such registration statement (or 150 days if the
registration statement receives full review). If the registration statement is
not timely filed or declared effective, we will be subject to liquidated damages
of 1% of the Common Shares Purchasers’ aggregate purchase price per month, up to
10%, and pro-rated for partial periods.
32
Other
than their issuance date, the Warrants issued to the Common Shares Purchasers
are identical to those issued to the Preferred Shares Purchasers, and entitle
their holders to purchase one share of common stock at an exercise price of
$3.43 per share (subject to certain adjustments) for a period of three years.
Our
Distribution Channel and Customers
We do not
engage directly in retail sales of our products; rather, we sell our products
to our independent distributors, each of whom is granted rights to market
and sell our products in a defined market or territory through a distribution
agreement. Presently, we have distribution agreements with 12 distributors as
follows:
Distributors
|
Geographical
Location
|
Six Months
ended June 30, 2010
Sales
(RMB)
|
Six Months
ended June 30, 2010
Sales
(US$)*
|
% of Sales
|
||||||||||
C-002
of Mingzhu 100 Market
|
Zhejiang
|
39,007,162 | 5,723,000 | 15.89 | % | |||||||||
Jingduren
Store, Tianqiao District, Jinan
|
Shandong
|
31,934,062 | 4,684,000 | 13.01 | % | |||||||||
Jinyang
Commerce Co., Ltd.
|
Hubei
|
31,878,594 | 4,676,000 | 12.98 | % | |||||||||
Jinduren
Store, Shenhe District
|
Liaoning
|
22,283,873 | 3,269,000 | 9.08 | % | |||||||||
Clothwork
Apparel, Wanma Plaza
|
Jiangxi
|
20,088,899 | 2,947,000 | 8.18 | % | |||||||||
Yunfang
Jingduren Store
|
Yunnan
|
19,840,184 | 2,910,000 | 8.08 | % | |||||||||
Jinduren
Store in Duocai Xintiandi
|
Shaanxi
|
16,942,998 | 2,485,000 | 6.90 | % | |||||||||
Yinji
Fuchun Apparel
|
Henan
|
16,630,615 | 2,440,000 | 6.78 | % | |||||||||
Nachun
Li
|
Guangxi
|
16,540,882 | 2,426,000 | 6.74 | % | |||||||||
Xinshiji
Apparel City
|
Beijing
|
13,196,789 | 1,936,000 | 5.38 | % | |||||||||
Jiaming
Tang
|
Sichuan
|
12,064,903 | 1,770,000 | 4.91 | % | |||||||||
Fujian
Minhou Yonghui Business Company Ltd.
|
Fujian
|
5,091,165 | 747,000 | 2.07 | % |
*
Based on an average exchange rate of 1RMB = 0.14730 USD for the six months ended
June 30, 2010, as quoted on www.oanda.com
.
As of
August 12, 2010, our products were sold by our distributors at 519 V·LOV retail
locations operated by our distributors throughout northern, central and southern
China. These retail locations, also known as points of sales (“POS”), include
counters, concessions, free standing stores and store-in-stores. We do not own
or operate any V·LOV retail locations ourselves; the POS are established and
owned by our distributors, each of whom operates its network of POS directly or
through third-party retail operators. A geographical breakdown of V·LOV POS
operated by our distributors as of August 12, 2010, is as
follows:
Province /City :
|
Number of
POS
|
|||
Hubei
|
62
|
|||
Shandong
|
58
|
|||
Zhejiang
|
88
|
|||
Jiangxi
|
53
|
|||
Yunnan
|
42
|
|||
Henan
|
45
|
|||
Shaanxi
|
45
|
|||
Liaoning
|
42
|
|||
Guangxi
|
24
|
|||
Beijing
|
38
|
|||
Sichuan
|
15
|
|||
Fujian
|
7
|
We
believe that our distribution model has enabled us to grow by leveraging our
distributors’ regional retail expertise and economies of scale. We
provide retail policies and guidelines, training, advertising and marketing
support as well as advertising subsidies to assist our distributors in the
management and expansion of the V·LOV retail distribution
network. To achieve brand consistency, we have established management
and operational guidelines for all our distributors to follow. These guidelines
include, but are not limited to, inventory control, sales and pricing
procedures, product and window display requirements and customer service
standards. Although our distributorship agreements do not require our
distributors to share POS sales information, our distributorship agreements
require all POS to be V·LOV’s exclusive POS, and our sales and marketing staff
travel throughout China to monitor and advise our distributors. Distributors
that maintain at least a three-year good standing relationship with us enjoy 60
to 90 days of credit while new distributors usually pay us upon our receipt of
their orders. Our total bad debt expense has been less than 1% of
revenue per year during the last three years.
33
Each
year, we hold two sales previews – typically in April/May and in November– to
showcase our new designs to our distributors. At each sales preview, the
distributors place orders for products based on designs that they believe will
appeal to their specific geographical markets, and the products are manufactured
and delivered to the distributors accordingly. We then monitor and oversee their
operations of the V·LOV POS through our marketing and sales team. Our
marketing and sales team advises and works closely with our distributors on
renovating and updating their V·LOV POS as and when necessary to achieve maximum
performance and to enable them to expand their sales distribution network. Upon
achieving performance targets, distributors may become eligible for advertising
rebates from us pursuant to our distribution agreements.
We are
constantly looking for new distributors. We select distributors based on a range
of criteria which we consider important for the operation of the overall V·LOV
retail distribution network’s goal of providing cutting edge casual wear POS. We
do not require our distributors to have any minimum number of years of relevant
experience. We assess the suitability of a distributor candidate based on, but
not limited to, the following:
|
·
|
the relevant experience in the
management and operation of casual wear retail
stores;
|
|
·
|
the ability to develop and
operate a network of retail stores in its designated sales
region;
|
|
·
|
the perceived ability to meet our
sales targets;
|
|
·
|
the suitability of its store
location and size; and
|
|
·
|
overall
creditworthiness.
|
We
identify suitable distributors and enter into distributorship agreements,
generally for a term of up to 12 months, renewable on a year to year basis upon
the distributor meeting certain criteria. We set guidelines for our
distributors in respect of the location, store layout and product display of
their V·LOV POS. We have continued to upscale our product offerings
to our distributors and have been working with our distributors to sell our
products primarily via free standing store and store-in-store POS and not
through counter and concession POS as we believe that free standing stores and
store-in-stores strengthen our brand image with consumers. In this regard, our
distributors have collectively closed more than 200 counters and concessions
since March 31, 2010 in preparation of opening new free standing stores and
store-in-stores. We anticipate that our distributors will open between 30 and 40
stand alone stores that reflect VLOV’s upscale brand image by December 31, 2010.
We allow our distributors to use authorized third party retail store operators
to operate V·LOV POS. Distributors must obtain our prior written
approval before appointing such retail store operators.
We have
contractual relationships only with our distributors and not with each POS. We
require our distributors to implement, monitor, comply with and enforce our
retail store guidelines on their POS. Except for the provision of advertising
subsidies upon satisfying sales goals, we do not make any payment, give other
sales incentives, or pay any fee to our distributors. Our distributors do
not pay us any fee other than for their purchase of our products.
We
generally assist our distributors with transferring or exchanging their unsold
inventories with our other distributors in order to reduce their inventory
levels, and at the end of each season, we may also allow our distributors to
sell their remaining inventories at discounted pricing. As a result, we have
historically had minimal returns from our distributors.
Our
Suppliers and Manufacturers
Although
we have our own manufacturing capacity at our Yinglin facility, the most
important function of that facility is to support our research and development
department in sample and prototype designs and other research and development
activities. Instead, we currently outsource approximately 80% to 90% of our
manufacturing to independent third-party factories as a part of our overall
sourcing strategy. Outsourcing work allows us to maximize production flexibility
while managing capital expenditures and costs of maintaining what would
otherwise be a massive workforce.
Historically,
we have outsourced to two types of manufacturers: (1) sub-contractors, which
require us to provide them with the raw materials for our products, and (2)
O.E.M. manufacturers, which supply their own raw materials. Beginning in 2009,
however, we shifted our outsourcing entirely to O.E.M. manufacturers.
Our
outsourcing varies seasonally depending upon such factors as current factory
capacity and customer demand. We currently work with 25 O.E.M.
manufacturers. We do not execute agreements with them since there are many
well-qualified clothing manufacturers to choose from and any of them can be
readily replaced. However, we have established good working relationships with
all of the manufacturers that we work with and do not expect to replace any of
them. Prior to entering into a relationship with an O.E.M. manufacturer, we
review and assess their product quality thoroughly. We generally agree to pay
our O.E.M. manufacturers within 30-60 days after dispatching finished goods to
our distributors. We typically place orders with our O.E.M. manufacturers when
we receive orders from our distributors.
We select
raw materials (including fabric, fasteners, thread, buttons, labels and related
materials) directly from local fabric and accessory suppliers and identify
imported specialty fabrics to meet specific distributor requirements. Our O.E.M.
manufacturers purchase these raw materials from these suppliers according to our
manufacturing and design specifications. We currently work with more than 20
suppliers. We do not execute agreements with them since there are no shortages
of suppliers and materials to choose from, and any of them can be readily
replaced. However, we have good working relationships with all of our current
suppliers and do not expect to replace any of them.
For
the three months ended June 30, 2010, two suppliers accounted for 10% or more of
our total purchases of finished products and raw materials (for our own
production): Shishi City Jiexing Apparel Industry Development Co., Ltd. for
12.53% and Quanzhou Yashen Apparels Development Co., Ltd. for 10.32%. For the
six months ended June 30, 2010, three suppliers accounted for 10% or more of our
total purchases: Shishi City Jiexing Apparel Industry Development Co., Ltd. for
14.39%, Quanzhou Yashen Apparels Development Co., Ltd. for 11.75% and Jinjiang
Yidong Apparel Manufacturing Co., Ltd for 10.13%. To date, we have not
experienced any significant difficulty in purchasing raw materials or finished
products.
34
Our
Sales and Marketing
The
strength of the V·LOV brand name and image is not only contributable to our
ability to design and produce trendy and high quality apparel; it is also
largely dependent on the skill of our sales and marketing team to promote our
products to our target consumers. We currently have 44 sales and marketing
staff. Our sales and marketing director is in charge of four departments:
sales, marketing, strategic planning and logistics.
We
actively market our brand. Our print ads appear in local newspapers and fashion
magazines, in outdoor venues such as mass transit stations, exterior bus panels
and billboards, and in indoor venues such as in-mall kiosks. We run television
and radio ads, and look to promote our brand through sponsorship of movies,
sporting events and television programs targeted at our customer demographic
profile. We also have sales and marketing guidelines for all our distributors to
follow at the V·LOV POS. These guidelines include pricing and sale procedures,
product and window display requirements and customer service standards.
Our
advertising expenses were approximately $1.37 million and $0.75 million for the
three months ended June 30, 2010 and 2009, respectively, representing 37.8% and
42.8% of our operating costs for these periods, respectively, and approximately
$2.74 million and $1.44 million for the six months ended June 30, 2010 and 2009,
representing 46.1% and 46.2% of our operating costs for these periods,
respectively.
We are
always promoting our brand to new distributors to expand our distribution
network. Management believes we can continue to benefit from our solid
reputation for providing high quality goods in the markets where we have a
presence, which provides us further opportunities to work with potentially
desirable distributors. Our marketing strategy aims to attract distributors with
the strongest branding experience within the strongest markets in order to
effectively promote our brand. Referrals from existing distributors have been
and continue to be a fruitful source of distributor candidates.
Production
and Quality Control
We are
committed to designing and manufacturing high quality garments. We
have implemented strict quality control and craft discipline systems to ensure
that our products meet certain quality and safety standards, which
include:
|
·
|
evaluate customers to make sure
we produce middle to high-end products
only;
|
|
·
|
evaluate suppliers to make sure
the raw materials could meet our standards;
|
|
·
|
inspect the manufacturing process
and fabric quality by our trained employees;
|
|
·
|
run routine checks on the fabrics
for flammability, durability, chemical content, static properties, color
retention and various other properties in our advanced testing center; and
|
|
·
|
audit the final products before
products are delivered.
|
In
addition, we work closely with our distributors so that they understand our
testing and inspection process. Due to our strict quality control and
testing process, we have not undergone any product or merchandise recalls, and
we generally do not receive any significant requests by our distributors to
return finished goods. Product returns have not resulted in material operating
expenses historically.
35
Logistics
and Inventory
O.E.M.
manufacturers, unlike sub-contractors, ship finished products directly to our
distributors after final quality inspection. As a result, we have
experienced a steady drop in inventory of finished products since we began
realigning our manufacturing needs toward O.E.M. manufacturers in September
2008. Products that we make at our facility are typically delivered to our
distributors by truck or local couriers.
The
fashion apparel industry is quite competitive in China, including brand names
and companies of all sizes, both within China and elsewhere in the world, many
of which have greater financial and manufacturing resources than
us. Nevertheless, we have been in the high fashion apparel business
since 2004 and believe that we have earned a reputation for producing high
fashion and high quality products and at competitive prices, with excellent
customer service.
We
believe that our chief competitive strength is our in-depth and thorough
understanding of our targeted customer groups in China. Mr. Qingqing Wu,
our Chief Executive Officer, now leads our design team, a role
previously occupied by Mr. Fengfei Zeng, whose contract with us expired in March
2010. Under Mr. Wu’s leadership, and with inputs from our distributors, our
design team formulates new design concepts by analyzing information on global
and local fashion trends and market research. Prototypes are reviewed by our
distributors and marketing team and further refined based on evaluations carried
out by marketing personnel before showcasing the final designs at our sales
fairs.
Currently,
there are several companies in China that we consider to be direct competitors,
including both state-owned and private companies of different
sizes. Some of our local competitors include Fairwhale and
Cabbeen. International brands such as G-STAR and jack.jones are also
competing in the same space as V·LOV.
Intellectual
Properties and Licenses
We
presently have 19 trademarks registered with the Trademark Bureau of the State
Administration of Industry and Commerce of the PRC (the “PRC Trademark Office”),
which are issued for a period of 10 years.
Additionally,
we have trademark license contracts with Mr. Qingqing Wu, our chief executive
officer, pursuant to which he has irrevocably and perpetually granted us, for no
consideration, the right to use four trademarks currently registered in his name
with the PRC Trademark Office. These trademarks were intended to be transferred
to Yinglin Jinduren for no consideration prior to the Exchange Transaction, and
the license contracts were entered into because the transfers could not be
timely completed. Mr. Wu is in the process of transferring the trademarks to us
for no consideration, although such transfers have not been completed as of the
date of this prospectus. To date, we have not used these
trademarks.
Our
trademark and other intellectual property rights are important to our success
and competitive position. We takes all necessary precautions to
protect our intellectual property. Aside from registering our
trademarks with the PRC Trademark Office to protect our intellectual property,
our marketing team also diligently conducts market research and patrols our POS
stores and other marketplaces to ensure that our intellectual property are not
being violated. In the event of any infringement upon our intellectual property
rights, we will pursue all available legal rights and remedies.
Governmental
Regulations
Fabric
Safety
We are
required to comply with central, provincial and local regulations governing
fabric safety. In order to address these compliance issues, we
have established an advanced fabric testing center to ensure that our products
meet certain quality and safety standards established by the governmental
authorities. Our testing center located in our Yinglin facility
runs routine checks on our products for flammability, durability, chemical
content, static properties, color retention and various other
properties. In addition, we work closely with our distributors so
that they understand our testing and inspection process.
36
Enterprise
Taxation
Pursuant
to the PRC Enterprise Income Tax Law (the "New Tax Law") passed by the Tenth
National People's Congress on 16 March 2007, the new PRC income tax rates for
domestic and foreign enterprises are unified at 25% effective January 1, 2008.
The enactment of the New Tax Law is not expected to have any significant
financial effect on the amounts accrued in the balance sheet in respect of
taxation payable and deferred taxation.
Value
Added Tax
The
Provisional Regulations of the People’s Republic of China Concerning Value Added
Tax promulgated by the State Council came into effect on January 1, 1994, and
was amended effective January 1, 2009. Under these regulations, as
amended, and the Implementing Rules of the Provisional Regulations of the
People’s Republic of China Concerning Value Added Tax, value added tax is
imposed on goods sold in or imported into the PRC and on processing, repair and
replacement services provided within the PRC.
Value
added tax payable in the PRC is charged on an aggregated basis at a rate of 13
or 17% (depending on the type of goods involved) on the full price collected for
the goods sold or, in the case of taxable services provided, at a rate of 17% on
the charges for the taxable services provided but excluding, in respect of both
goods and services, any amount paid in respect of value added tax included in
the price or charges, and less any deductible value added tax already paid by
the taxpayer on purchases of goods and service in the same financial
year.
Environmental
Protection Regulations
In
accordance with the Environmental Protection Law of the PRC adopted by the
Standing Committee of the NPC on 26th December, 1989, the bureau of
environmental protection of the State Council sets the national guidelines for
the discharge of pollutants. The provincial and municipal governments of
provinces, autonomous regions and municipalities may also set their own
guidelines for the discharge of pollutants within their own provinces or
districts in the event that the national guidelines are inadequate.
A company
or enterprise which causes environmental pollution and discharges other
polluting materials which endanger the public is required to implement
environmental protection methods and procedures into its business operations.
This may be achieved by setting up a system of accountability within the
company’s business structure for environmental protection; adopting effective
procedures to prevent environmental hazards such as waste gases, water and
residues, dust powder, radioactive materials and noise arising from production,
construction and other activities from polluting and endangering the
environment. The environmental protection system and procedures should be
implemented simultaneously with the commencement of and during the operation of
construction, production and other activities undertaken by the company. Any
company or enterprise which discharges environmental pollutants should report
and register such discharge with relevant bureaus of environmental protection
and pay any fines imposed for the discharge. A fee may also be imposed on the
company for the cost of any work required to restore the environment to its
original state. Companies which have caused severe pollution to the environment
are required to restore the environment or remedy the effects of the pollution
within a prescribed time limit.
If a
company fails to report and/or register the environmental pollution caused by
it, it will receive a warning or be penalized. Companies which fail to restore
the environment or remedy the effects of the pollution within the prescribed
time will be penalized or have their business licenses terminated. Companies or
enterprises which have polluted and endangered the environment must bear the
responsibility for remedying the danger and effects of the pollution, as well as
to compensate any losses or damages suffered as a result of such environmental
pollution.
Based on
the present nature of our operations, we do not believe that environmental laws
and the cost of compliance with those laws have or will have a material impact
on us or our operations.
37
Foreign
Exchange Controls
Pursuant
to the Foreign Currency Administration Rules promulgated in 1996, as amended and
various regulations issued by the State Administration of Foreign Exchange
(“SAFE”), and other relevant PRC government authorities, RMB is convertible
without prior approval from SAFE only to the extent of current account items,
such as trade-related receipts and payments, interest and dividends and after
complying with certain procedural requirements. Capital account items, such as
direct equity investments, loans and repatriation of investments, require the
prior approval from the SAFE or its local counterpart for conversion of RMB into
a foreign currency, such as U.S. dollars, and remittance of the foreign currency
outside the PRC.
Payments
for transactions that take place within the PRC must be made in RMB.
Foreign-invested enterprises may retain foreign exchange in accounts with
designated foreign exchange banks subject to limitations set by the SAFE or its
local counterpart. Unless otherwise approved, domestic enterprises must convert
all of their foreign currency receipts into RMB.
Pursuant
to the SAFE’s Notice on Relevant Issues Concerning Foreign Exchange Control on
Domestic Residents’ Corporate Financing and Roundtrip Investment Through
Offshore Special Purpose Vehicles, or Circular No. 75, issued on
October 21, 2005, (i) a PRC citizen residing in the PRC, or PRC
resident, shall register with the local branch of the SAFE before it establishes
or controls an overseas special purpose vehicle, or overseas SPV, for the
purpose of overseas equity financing (including convertible debts financing);
(ii) when a PRC resident contributes the assets of or its equity interests
in a domestic enterprise into an overseas SPV, or engages in overseas financing
after contributing assets or equity interests to an overseas SPV, such PRC
resident shall register his or her interest in the overseas SPV and the change
thereof with the local branch of the SAFE; and (iii) when the overseas SPV
undergoes a material event outside of China, such as change in share capital or
merger and acquisition, the PRC resident shall, within 30 days from the
occurrence of such event, register such change with the local branch of the
SAFE. On May 29, 2007, the SAFE issued relevant guidance to its local
branches for the implementation of Circular No. 75. This guidance
standardizes more specific and stringent supervision on the registration
requirement relating to Circular No. 75 and further requires PRC residents
holding any equity interests or options in SPVs to register with the SAFE.
Failure to comply with such registration requirement may result in liability
under PRC laws for evasion of applicable foreign exchange restrictions.
Although
Mr. Qingqing Wu, our principal shareholder, resides in the PRC, he is a foreign
national. As such, he has not registered with the local branch of the SAFE under
Circular No. 75.
Seasonality
Chinese
consumers’ spending behaviors are typically stable year to year; they are
typically affected by seasonal shopping patterns within the
year. Sales are particularly higher before the Chinese New Year
holiday in early spring, the Labor Day holiday in early May, the summer months
and the National Day holiday in early October.
We have
typically experienced seasonal fluctuations in sales volume due to the seasonal
fluctuations experienced by the majority of our customers. These
seasonal fluctuations typically result in sales increases in the first and
second quarters and sales decreases in the third and fourth quarters of each
year. The mix of product sales may vary considerably from time to
time as a result of changes in seasonal and geographic demand for particular
types of casual wear and accessories. In addition, unexpected and
abnormal changes in climate may affect sales of our products that are timed for
release during a particular season.
38
|
·
|
the timing of our competitors’
launch of new products;
|
|
·
|
consumer acceptance of our new
and existing products;
|
|
·
|
changes in the overall clothing
industry growth rates;
|
|
·
|
economic and demographic
conditions that affect consumer spending and retail
sales;
|
|
·
|
the mix of products ordered by
our distributors;
|
|
·
|
the timing of the placement and
delivery of distributor orders;
and
|
|
·
|
variation in the expenditure
necessary to support our
business.
|
As a
result, we believe that comparisons of our operating results between any interim
periods may not be meaningful and that these comparisons may not be an accurate
indicator of our future performance.
Employees
The
following table sets forth the number of our employees for each of our areas of
operations and as a percentage of our total workforce as of December 31, 2009:
|
Number of
Employees
|
% of Employees
|
||||||
Production
Development
|
253
|
66.23
|
%
|
|||||
Sales
& Marketing and Quality Assurance
|
53
|
13.87
|
%
|
|||||
Production
Management
|
24
|
6.28
|
%
|
|||||
Purchasing
|
6
|
1.57
|
%
|
|||||
Finance
|
9
|
2.36
|
%
|
|||||
Management
& Administration
|
14
|
3.67
|
%
|
|||||
Research
& Development
|
23
|
6.02
|
%
|
|||||
TOTAL
|
382
|
100
|
%
|
We
believe we are in full compliance with Chinese labor laws and regulations and
are committed to providing safe and comfortable working conditions and
accommodations for our employees.
Labor Costs. Because garment
manufacturing is a labor-intensive business, we outsource most of our
manufacturing to contract manufacturers. We rely on in-house skilled labor and
talents to design, develop and sell our products. Generally, we offer
one to three months of training to new workers to better understand our brand
and improve their relevant skills during the training
period. Management expects that our access to reasonably priced and
competent labor will continue into the foreseeable future.
Working Conditions and Employee
Benefits. We believe in the importance of
maintaining our social responsibilities, and we are committed to
providing employees with a safe, clean, comfortable working
environment and accommodations. Our employees also are entitled to time off
during public holidays. In addition, we frequently monitor contract
manufacturers’ working conditions to ensure their compliance with related labor
laws and regulations. We believe we are in full compliance with our obligations
to provide pension benefits to our workers, as mandated by the PRC government.
We strictly comply with the Chinese labor laws and regulations, and offer
reasonable wages, life insurance and medical insurance to our workers.
Compliance
with Environmental Laws
Based on
the present nature of our operations, we do not believe that environmental laws
and the cost of compliance with those laws have or will have a material impact
on us or our operations.
39
Offices
Our
principal executive office is located at 11/F., Xiamen Guanyin Shan
International Commercial Operation Centre, A3-2124, Hubin Bei Road, Siming
District, Xiamen, Fujian Province, China. Our main telephone number is
+86-0592-2345999 and fax number is +86-0592-2345777.
DESCRIPTION
OF PROPERT Y
Location
|
Principal Activities
|
Area (sq. meters)
|
Lease Expiration Date
|
|||
11/F.,
Xiamen Guanyin Shan International
Commercial
Operation Centre, A3-2 124
Hubin
Bei Road, Siming District, Xiamen,
Fujian
Province, PRC
|
Marketing,
R&D, accounting and finance
|
1,376
|
October
8, 2012
|
|||
Yinglin
Dongpu Village, Yilin
Town,
Jinjiang City, Fujian Province,
PRC
362200
|
Manufacturing
and distribution
|
2,859
|
N/A
(property owned by V·LOV)
|
We lease
our Xiamen office under a property lease agreement that expires October 7, 2012,
with monthly lease amount of RMB 39,902. We previously leased two
offices in Fujian Province, one in Shishi City for our marketing and R&D,
and the other in Quanzhou City for our accounting and finance. Both of these
leases expired and have not been renewed. Instead, all of the functions
previously carried out at these offices have been consolidated into our Xiamen
office. Rental expense was $36,000 and $66,000 during 2008 and 2009
respectively. We believe that our existing facilities are well maintained and in
good operating condition.
SUMMARY
FINANCIAL DATA
The
summary financial data set forth below should be read in conjunction with
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and our financial statements and the related notes included
elsewhere in this prospectus. We derived the financial data as of and
for the six months ended June 30, 2010 and 2009 from our unaudited
consolidated financial statements included elsewhere in this prospectus,
and as of and for years ended December 31, 2009 and 2008, from our
audited financial statements included in this prospectus. The historical results
are not necessarily indicative of the results to be expected for any future
period. All monetary amounts are expressed in U.S. dollars and, except per share
data, are in thousands.
Six Months Ended
June 30,
|
Year Ended
December 31,
|
|||||||||||||||
2010
|
2009
|
2009
|
2008
|
|||||||||||||
Income
Statement Data:
|
||||||||||||||||
Net
Sales
|
$ | 36,013 | $ | 31,939 | $ | 64,343 | $ | 51,867 | ||||||||
Cost
of Sales
|
22,254 | 20,464 | 41,080 | 33,316 | ||||||||||||
Gross
Profit
|
13,759 | 11,475 | 23,263 | 18,551 | ||||||||||||
Total
Operating Expenses
|
5,940 | 3,111 | 9,694 | 6,249 | ||||||||||||
Operating
Income
|
7,819 | 8,364 | 13,569 | 12,302 | ||||||||||||
Total
Other Income (Expense)
|
(168 | ) | (18 | ) | 982 | (44 | ) | |||||||||
Income
Before Income Taxes
|
7,651 | 8,346 | 14,551 | 12,258 | ||||||||||||
Income
Tax Provision
|
2,107 | 2,260 | 4,106 | 3,065 | ||||||||||||
Net
Income
|
$ | 5,544 | $ | 6,086 | $ | 10,445 | $ | 9,193 | ||||||||
Earnings
per share:
|
||||||||||||||||
Basic
|
$ | 0.33 | $ | 0.39 | $ | 0.41 | $ | 0.63 | ||||||||
Diluted
|
$ | 0.32 | $ | 0.39 | $ | 0.40 | $ | 0.63 | ||||||||
Weighted
average shares outstanding:
|
||||||||||||||||
Basic
|
16,856,357 | 15,657,901 | 15,898,584 | 14,560,000 | ||||||||||||
Diluted
|
17,197,674 | 15,657,901 | 15,949,034 | 14,560,000 |
40
As of June
30,
|
As of December 31,
|
|||||||||||
2010
|
2009
|
2008
|
||||||||||
Balance
Sheet Data:
|
||||||||||||
Cash
and Cash Equivalents
|
$ | 13,437 | $ | 11,036 | $ | 2,863 | ||||||
Working
Capital
|
$ | 22,525 | $ | 16,815 | $ | 6,230 | ||||||
Total
Assets
|
$ | 33,080 | $ | 27,241 | $ | 12,647 | ||||||
Total
Liabilities
|
$ | 9,424 | $ | 9,272 | $ | 5,078 | ||||||
Total
Shareholders’ Equity
|
$ | 23,656 | $ | 17,969 | $ | 7,569 |
41
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis of the results of our operations and financial
condition for the three and six months ended June 30, 2010 and 2009, and for the
fiscal years ended December 31, 2009 and 2008, should be read in conjunction
with the Summary Financial Data, our financial statements, and the notes
to those financial statements that are included elsewhere in this prospectus.
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 prospectus. We use words such as “anticipate,”
“estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,”
“intend,” “may,” “will,” “should,” “could,” and similar expressions to identify
forward-looking statements. Although we believe the expectations expressed in
these forward-looking statements are based on reasonable assumptions within the
bounds of our knowledge of our business, our actual results could differ
materially from those discussed in these statements. Factors that could
contribute to such differences include, but are not limited to, those discussed
in the “Risk Factors” section of this report. We undertake no obligation to
update publicly any forward-looking statements for any reason even if new
information becomes available or other events occur in the
future.
Overview
We
design, develop, manufacture, distribute and sell casual apparel and clothing
products in the PRC targeted toward middle-class Chinese men under the brand
name “V·LOV”. We sell our products to our independent distributors,
each of whom is granted rights to market and sell our products in a defined
market or territory. As of June 30, 2010, we had agreements with 12
distributors throughout northern, central and southern China. After
distributors place purchase orders for our products, such products are
manufactured by us and our outsourced manufacturers and delivered to our
distributors. As of August 12, 2010, our distributors owned and
operated 519 points of sales, or POS, across the PRC, including counters,
concessions and free standing stores and store-in-stores. We maintain
and exercise control over advertising and marketing activities from our
headquarters in Fujian, China, where we set the tone for integrity, consistency
and direction of the V·LOV brand image throughout China.
All of
our business operations are carried out by our variable interest entity Jinjiang
Yinglin Jinduren Fashion Limited (“Yinglin Jinduren”), which we control through
contractual arrangements between Yinglin Jinduren and our wholly-owned
subsidiary Dong Rong Capital Investment Limited (“HK Dong Rong”), a Hong Kong
company. Through these contractual arrangements, we have the ability
to control Yinglin Jinduren’s daily operations and financial affairs, appoint
its senior executives and approve all matters requiring shareholder approval,
and receive a fee equal to Yinglin Jinduren’s net income. As a result of these
contractual arrangements, we are considered the primary beneficiary of Yinglin
Jinduren’s operations. Accordingly, we consolidate Yinglin Jinduren’s results,
assets and liabilities in our financial statements. Mr. Qingqing Wu,
our Chief Executive Officer, and his brother, Mr. Zhifan Wu, hold 65.91% and
34.09%, respectively, of the ownership interests of Yinglin
Jinduren.
We
also have a wholly-owned PRC subsidiary through HK Dong Rong called Dong Rong
(China) Co., Ltd. (“China Dong Rong”). It is our intention and that of the
equity owners of Yinglin Jinduren to transfer all of the business operations
currently conducted by Yinglin Jinduren to China Dong Rong sometime in 2010. As
of the date of this prospectus, however, such transfer has not occurred and
China Dong Rong currently conducts no business activities.
Critical
Accounting Policies
Our
management’s discussion and analysis of our financial condition and results of
operations are based on our financial statements that have been prepared in
accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements as well as the reported net sales and expenses
during the reporting periods. On an ongoing basis, we evaluate our
estimates and assumptions. We base our estimates on historical
experience and on various other factors that we believe are reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under
different assumptions or conditions.
42
Our
significant accounting policies are described in Note 1 to our consolidated
financial statements. Our critical accounting policies are those
where we have made the most difficult, subjective or complex judgments in making
estimates, and/or where these estimates can significantly impact our financial
results under different assumptions and conditions. Our critical accounting
policies are:
Basis
of presentation and consolidation
As
discussed above and in Note 1 to our consolidated financial statements, our
operations are conducted through Yinglin Jinduren, a PRC company in which the
equity interests are held by Mr. Qingqing Wu, our chief executive officer, and
his brother Mr. Zhifan Wu. Through contractual arrangements, we control the
daily operations of Yinglin Jinduren, as well as all matters requiring
shareholder approval. We receive a fee equal to Yinglin Jinduren’s
net income and, in the event it were to incur losses, would be expected to
absorb those losses through our inability to collect the accumulated net income
due to us. As a result, we are considered to be the primary
beneficiary of Yinglin Jinduren’s operations and accordingly we consolidate its
assets, liabilities and results of operations in our consolidated financial
statements. We have no operations other than those conducted through
Yinglin Jinduren.
Revenue
Recognition
A
majority of our products are manufactured on our behalf by third parties, based
on orders for our products received from customers. We are responsible for
product design, product specification, pricing to the customer, the choice of
third party manufacturer, product quality and credit risk associated with the
customer receivable. As such, the Company acts as a principal, not as an agent,
and records revenues on a gross basis.
We
recognize revenues in accordance with FASB ASC 605-10-S99-1 when (a) the price
to the customer is fixed or determinable, (b) persuasive evidence of an
arrangement exists, (c) delivery has occurred and (d) collectability of the
resulting receivable is reasonably assured. Revenue from the sales of goods is
recognized on the transfer of significant risks and rewards of ownership, which
generally coincides with the time when the goods are delivered to the carrier
designated by the customer and title passes to the customer.
Accounts
receivable
Accounts
receivable, which are unsecured, are stated at the amount we expect to collect.
We continuously monitor collections and payments from our customers (our
distributors) and maintain a provision for estimated credit losses based upon
historical experience and any specific customer collection issues that have been
identified. Historically, our credit losses have not been significant and within
our expectations; however, we cannot guarantee that we will continue to
experience the same credit loss rates that have been experienced in the past.
Our
accounts receivable aging was as follows for the periods below (amounts in
thousands):
From Date of Invoice to Customer:
|
June 30, 2010
|
December 31, 2009
|
||||||
0-30
days
|
$ | 3,647 | $ | 6,914 | ||||
31-60
days
|
6,244 | 2,190 | ||||||
61-90
days
|
3,323 | - | ||||||
91-120
days
|
- | - | ||||||
121
days and above
|
- | - | ||||||
Allowance
for bad debts
|
- | - | ||||||
Total
Accounts Receivable
|
$ | 13,214 | $ | 9,104 |
On
average, we collect our receivables within 90 days. Our ability to collect is
attributed to the steps that we take prior to extending credit to our
distributors as discussed above. If we are having difficulty collecting from a
distributor, we take the following steps: cease existing shipments to the
distributor, visit the distributor to request payment on past due invoice, and
if necessary, take legal recourse. If all of these steps are unsuccessful,
management would then determine whether or not the receivable should be written
off.
All
receivables categorized between 61-90 days as of June 30, 2010 were collected as
of August 11, 2010.
Other
receivables were $9,000 and $87,000 as of June 30, 2010 and December 31, 2009,
respectively.
Income
Taxes
We are
subject to income taxes, primarily in the PRC. We believe we have adequately
provided for all taxes due but amounts asserted by tax authorities could be
greater or less than the amounts we have accrued. We have concluded all PRC
corporate income tax matters through June 30, 2010 and do not anticipate
adjustments as a result of any tax audits within the next twelve
months.
Derivative
instruments
In
connection with the sale of debt or equity instruments, we may sell warrants to
purchase our common stock. In certain circumstances, these warrants may be
classified as derivative liabilities, rather than as equity. Additionally, the
debt or equity instruments may contain embedded derivative instruments, such as
conversion options, which in certain circumstances may be required to be
bifurcated from the associated host instrument and accounted for separately as a
derivative instrument liability.
The
identification of, and accounting for, derivative instruments is complex. Our
derivative instrument liabilities are re-valued at the end of each reporting
period, with changes in the fair value of the derivative liability recorded as
charges or credits to income in the period in which the changes occur. At June
30, 2010, the warrants that we issued in connection with sales of our
series A convertible preferred stock in November 2009 and our common stock in
December 2009 are accounted for as derivative instrument liabilities, We
determine the fair value of these instruments using a binomial option pricing
model. That model requires the use of a number of assumptions, including our
expected dividend yield and the expected volatility of our common stock price
over the life of the instruments. Because of the limited trading history for our
common stock, we have estimated the future volatility of our common stock price
based on the historical experience of other entities considered comparable to
us. The identification of, and accounting for, derivative instruments and the
assumptions used to value them can significantly affect our financial
statements.
43
Results
of Operations
Results
of Operations – Three and Six Months ended June 30, 2010 as compared to Three
and Six Months ended June 30, 2009
Three Month Periods Ended June 30,
|
Six Month Periods Ended June 30,
|
|||||||||||||||||||||||||||||||
2009
|
2010
|
2009
|
2010
|
|||||||||||||||||||||||||||||
(Amounts in thousands, in U.S. Dollars, except for
percentages)
|
(Amounts in thousands, in U.S. Dollars, except for
percentages)
|
|||||||||||||||||||||||||||||||
Net
Sales
|
$ | 14,073 | 100.00 | % | $ | 17,946 | 100.00 | % | $ | 31,939 | 100.00 | % | $ | 36,013 | 100.00 | % | ||||||||||||||||
Gross
Profit
|
5,076 | 36.07 | % | 6,837 | 38.10 | % | 11,475 | 35.93 | % | 13,759 | 38.21 | % | ||||||||||||||||||||
Operating
Expense
|
1,752 | 12.45 | % | 3,627 | 20.21 | % | 3,111 | 9.74 | % | 5,940 | 16.49 | % | ||||||||||||||||||||
Income
From Operations
|
3,324 | 23.62 | % | 3,210 | 17.89 | % | 8,364 | 26.19 | % | 7,819 | 21.71 | % | ||||||||||||||||||||
Other
Expenses / (Income)
|
11 | 0.08 | % | (2,168 | ) | (12.08 | )% | 18 | 0.05 | % | 168 | 0.47 | % | |||||||||||||||||||
Income
tax expenses
|
1,003 | 7.13 | % | 911 | 5.08 | % | 2,260 | 7.08 | % | 2,107 | 5.85 | % | ||||||||||||||||||||
Net
Income
|
$ | 2,310 | 16.41 | % | $ | 4,467 | 24.89 | % | $ | 6,086 | 19.06 | % | $ | 5,544 | 15.39 | % |
Net
Sales
Net
sales for the three months ended June 30, 2010 were $17,946,000,
an increase of 27.52% from $14,073,000 for the same period in 2009, while
net sales for the six months ended June 30, 2010 were $36,013,000, an increase
of 12.76% from $31,939,000 for the same period of 2009. We generate
revenue primarily from the sales of our apparel products to our distributors,
who sell them at retail locations throughout northern, central and southern
China. These retail locations, also known as points of sales (“POS”),
include counters, concessions, free standing stores and store-in-stores. We do
not own or operate any V·LOV retail locations ourselves; the POS are established
and owned by our distributors, each of whom operates its network of POS directly
or through third-party retail operators. We design and create samples, which are
presented to our distributors at our semi-annual previews for their selection
and purchase based on what they believe will sell most effectively at their POS.
Additionally, we set guidelines for our distributors as to how our products are
to be advertised and displayed. We believe that our sales are driven by
marketing and advertising as well as by creating fashionable designs. The
increase in our sales for the three months ended June 30, 2010 was primarily
attributable to increased marketing efforts in the provinces of Liaoning and
Shandong provinces and sales in Sichuan, a province our distributors did not
operate POS during 2009. The increase in sales for the six months
ended June 30, 2010 was a result of our stronger sales results during the
second quarter of 2010 as our first quarter sales were relatively flat due to
the underperformance of some distributors.
Since
2009, we have been devoting our marketing efforts in the northeastern provinces
because of the market opportunities for our products in these provinces with
high concentrations of second and third tier cities. As a result of such focused
marketing efforts, we recorded increased sales to our distributors that operate
in these regions during the second quarter of 2010 as detailed in the table
below. We have continued to upscale our product offerings to our distributors
and have been working with our distributors to sell our products primarily via
free standing store and store-in-store POS and not through counter and
concession POS as we believe that free standing stores and store-in-stores
strengthen our brand image with consumers. In this regard, our distributors have
collectively closed more than 200 counters and concessions since March 31, 2010
in preparation of opening new free standing stores and store-in-stores. We
anticipate that our distributors will open between 30 and 40 stand alone stores
that reflect VLOV’s upscale brand image by December 31, 2010.
The
following table sets forth the geographical breakdown of our net sales for the
periods indicated:
Three Month Periods Ended June 30,
|
Six Month Periods Ended June 30,
|
|||||||||||||||||||||||||||||||||||||||
2009
|
2010
|
2009
|
2010
|
|||||||||||||||||||||||||||||||||||||
(Amounts in thousands, in U.S. Dollars,
except for percentages)
|
(Amounts in thousands, in U.S. Dollars,
except for percentages)
|
|||||||||||||||||||||||||||||||||||||||
$
|
% of
net
sales
|
$ |
% of
net
sales
|
Growth
(Decline)
in 2010
compared
with
2009
|
$ |
% of
net
sales
|
$
|
% of
net
sales
|
Growth
(Decline)
in
2010
compared
with
2009
|
|||||||||||||||||||||||||||||||
Beijing
|
$ | 649 | 4.61 | % | $ | 984 | 5.48 | % | 51.62 | % | $ | 1,467 | 4.59 | % | $ | 1,936 | 5.38 | % | 31.97 | % | ||||||||||||||||||||
Zhejiang
|
2,826 | 20.08 | % | 3,040 | 16.94 | % | 7.57 | % | 6,433 | 20.14 | % | 5,723 | 15.89 | % | (11.04 | )% | ||||||||||||||||||||||||
Shandong
|
1,549 | 11.01 | % | 2,202 | 12.27 | % | 42.16 | % | 3,519 | 11.02 | % | 4,684 | 13.01 | % | 33.11 | % | ||||||||||||||||||||||||
Jiangxi
|
1,714 | 12.18 | % | 1,749 | 9.75 | % | 2.04 | % | 3,876 | 12.14 | % | 2,947 | 8.18 | % | (23.97 | )% | ||||||||||||||||||||||||
Yunnan
|
1,421 | 10.10 | % | 1,480 | 8.25 | % | 4.15 | % | 3,218 | 10.08 | % | 2,910 | 8.08 | % | (9.57 | )% | ||||||||||||||||||||||||
Shanxi
|
1,013 | 7.20 | % | 1,264 | 7.04 | % | 24.78 | % | 2,299 | 7.20 | % | 2,485 | 6.90 | % | 8.09 | % | ||||||||||||||||||||||||
Liaoning
|
936 | 6.65 | % | 1,483 | 8.26 | % | 58.44 | % | 2,121 | 6.64 | % | 3,269 | 9.08 | % | 54.13 | % | ||||||||||||||||||||||||
Hubei
|
1,876 | 13.33 | % | 2,198 | 12.25 | % | 17.16 | % | 4,281 | 13.40 | % | 4,676 | 12.98 | % | 9.23 | % | ||||||||||||||||||||||||
Henan
|
1,018 | 7.23 | % | 1,135 | 6.32 | % | 11.49 | % | 2,322 | 7.27 | % | 2,440 | 6.78 | % | 5.08 | % | ||||||||||||||||||||||||
Guangxi
|
956 | 6.79 | % | 1,176 | 6.55 | % | 23.01 | % | 2,156 | 6.75 | % | 2,426 | 6.74 | % | 12.52 | % | ||||||||||||||||||||||||
Sichuan
|
- | - | 900 | 5.02 | % |
NA
|
- | - | 1,770 | 4.91 | % |
NA
|
||||||||||||||||||||||||||||
Fujian
|
115 | 0.82 | % | 335 | 1.87 | % | 191.30 | % | 247 | 0.77 | % | 747 | 2.07 | % | 202.43 | % | ||||||||||||||||||||||||
Total
Net Sales
|
$ | 14,073 | 100.00 | % | $ | 17,946 | 100.00 | % | 27.52 | % | $ | 31,939 | 100.00 | % | $ | 36,013 | 100.00 | % | 12.76 | % |
44
Cost
of Sales and Gross Profit Margin
The
following table sets forth the components of our cost of sales and gross profit
both in absolute amount and as a percentage of net sales.
Three Month Periods Ended June 30,
|
Six Month Periods Ended June 30,
|
|||||||||||||||||||||||||||||||
2009
|
2010
|
2009
|
2010
|
|||||||||||||||||||||||||||||
(Amounts in thousands, in U.S. Dollars, except
for percentages)
|
(Amounts in thousands, in U.S. Dollars, except
for percentages)
|
|||||||||||||||||||||||||||||||
Net Sales
|
$
|
14,073
|
100.00
|
%
|
$
|
17,946
|
100.00
|
%
|
$
|
31,939
|
100.00
|
%
|
$
|
36,013
|
100.00
|
%
|
||||||||||||||||
O.E.M.
Finished Goods
|
8,096
|
57.53
|
%
|
10,490
|
58.45
|
%
|
18,673
|
58.46
|
%
|
21,371
|
59.34
|
%
|
||||||||||||||||||||
Raw
Materials
|
353
|
2.51
|
%
|
331
|
1.84
|
%
|
716
|
2.24
|
%
|
483
|
1.34
|
%
|
||||||||||||||||||||
Labor
|
519
|
3.69
|
%
|
215
|
1.20
|
%
|
1,011
|
3.17
|
%
|
282
|
0.78
|
%
|
||||||||||||||||||||
Overhead
and Other Expenses
|
29
|
0.20
|
%
|
73
|
0.41
|
%
|
64
|
0.20
|
%
|
118
|
0.33
|
%
|
||||||||||||||||||||
Total
Cost of Sales
|
8,997
|
63.93
|
%
|
11,109
|
61.90
|
%
|
20,464
|
64.07
|
%
|
22,254
|
61.79
|
%
|
||||||||||||||||||||
Gross
Profit
|
$
|
5,076
|
36.07
|
%
|
$
|
6,837
|
38.10
|
%
|
$
|
11,475
|
35.93
|
%
|
$
|
13,759
|
38.21
|
%
|
We
presently outsource over 80% of our manufacturing to third parties, based on
orders for our products that we receive from our distributors based on the
clothing samples we design and create. Historically, we have outsourced to two
types of manufacturers: (1) sub-contractors, which require us to provide them
with the raw materials for our products, and (2) O.E.M. manufacturers, that
supply their own raw materials. Beginning in 2009, we have shifted our
outsourcing entirely to O.E.M. manufacturers. Our plan is continue outsourcing
our manufacturing needs.
As we
shifted away from sub-contracting manufacturing entirely to O.E.M. manufacturing
in 2009, the components of our cost of sales have correspondingly shifted. Raw
material costs accounted for 1.84% and 1.34% of our sales for the three months
and six months periods ended June 30, 2010, respectively, compared to 2.51% and
2.24% for the same periods ended June 30, 2009, respectively. O.E.M. finished
goods cost, representing our purchase of finished products from the O.E.M.
manufacturers, accounted for 58.45% and 59.34% of our sales for the three months
and six months periods ended June 30, 2010, respectively, compared to
57.53% and 58.46% for the same periods ended June 30, 2009,
respectively.
Labor
cost accounted for 1.20% and 0.78% of our sales for the three months and six
months periods ended June 30, 2010, compared to 3.69% and 3.17% for the same
periods in 2009. The decrease was primarily attributable to a decrease in our
own manufacturing activities and an increase in O.E.M.
manufacturing.
Total
cost of sales for the three months and six months periods ended June 30, 2010
was $11,109 ,000 and $22,254,000, respectively, an increase of 23.47% from
$8,997,000 for the same three-month period in 2009 and an increase of 8.75%
from $20,464,000 for the same six-month period in 2009 primarily due to the
increase in revenue. As a percentage of net sales, our cost of sales
was 61.90% and 61.79% for the three months and six months ended June 30,
2010 respectively, down slightly from 63.93% and 64.07% for the same three-month
and six-month periods in 2009, respectively. Consequently, gross margin as a
percentage of net sales increased to 38.10% and 38.21% for the three months and
six months ended June 30, 2010, respectively, from 36.07% and 35.93% in the same
periods in 2009, respectively. Our gross margin increased mainly due to a 5%
price increase to our distributors.
The
following table sets forth our net sales, cost of sales, gross profit and gross
margin of the geographic market segments for the periods
indicated.
|
Three Months Ended June 30,
|
|||||||||||||||||||||||||||||||
|
2009
|
2010
|
||||||||||||||||||||||||||||||
|
Net Sales
|
Cost of
sales
|
Gross
profit
|
Gross
margin
|
Net Sales
|
Cost of
sales
|
Gross
profit
|
Gross
margin
|
||||||||||||||||||||||||
(Amounts
in thousands, in U.S. Dollars, except for percentages)
|
||||||||||||||||||||||||||||||||
Beijing
|
$
|
649
|
$
|
415
|
$
|
234
|
36.06
|
%
|
$
|
984
|
$
|
609
|
$
|
375
|
38.11
|
%
|
||||||||||||||||
Zhejiang
|
2,826
|
1,810
|
1,016
|
35.95
|
%
|
3,040
|
1,883
|
1,157
|
38.06
|
%
|
||||||||||||||||||||||
Shandong
|
1,549
|
991
|
558
|
36.02
|
%
|
2,202
|
1,363
|
839
|
38.10
|
%
|
||||||||||||||||||||||
Jiangxi
|
1,714
|
1,097
|
617
|
36.00
|
%
|
1,749
|
1,084
|
665
|
38.02
|
%
|
||||||||||||||||||||||
Yunnan
|
1,421
|
910
|
511
|
35.96
|
%
|
1,480
|
916
|
564
|
38.11
|
%
|
||||||||||||||||||||||
Shanxi
|
1,013
|
649
|
364
|
35.93
|
%
|
1,264
|
782
|
482
|
38.13
|
%
|
||||||||||||||||||||||
Liaoning
|
936
|
599
|
337
|
36.00
|
%
|
1,483
|
917
|
566
|
38.17
|
%
|
||||||||||||||||||||||
Hubei
|
1,876
|
1,201
|
675
|
35.98
|
%
|
2,198
|
1,361
|
837
|
38.08
|
%
|
||||||||||||||||||||||
Henan
|
1,018
|
652
|
366
|
35.95
|
%
|
1,135
|
702
|
433
|
38.15
|
%
|
||||||||||||||||||||||
Guangxi
|
956
|
612
|
344
|
35.98
|
%
|
1,176
|
728
|
448
|
38.10
|
%
|
||||||||||||||||||||||
Sichuan
|
-
|
-
|
-
|
NA
|
900
|
557
|
343
|
38.11
|
%
|
|||||||||||||||||||||||
Fujian
|
115
|
61
|
54
|
46.96
|
%
|
335
|
207
|
128
|
38.21
|
%
|
||||||||||||||||||||||
Total
|
$
|
14,073
|
$
|
8,997
|
$
|
5,076
|
36.07
|
%
|
$
|
17,946
|
$
|
11,109
|
$
|
6,837
|
38.10
|
%
|
|
Six Months Ended June 30,
|
|||||||||||||||||||||||||||||||
|
2009
|
2010
|
||||||||||||||||||||||||||||||
|
Net Sales
|
Cost of
sales
|
Gross
profit
|
Gross
margin
|
Net Sales
|
Cost of
sales
|
Gross
profit
|
Gross
margin
|
||||||||||||||||||||||||
(Amounts
in thousands, in U.S. Dollars, except for percentages)
|
||||||||||||||||||||||||||||||||
Beijing
|
$
|
1,467
|
$
|
940
|
$
|
527
|
35.92
|
%
|
$
|
1,936
|
$
|
1,196
|
$
|
740
|
38.22
|
%
|
||||||||||||||||
Zhejiang
|
6,433
|
4,124
|
2,309
|
35.89
|
%
|
5,722
|
3,535
|
2,187
|
38.22
|
%
|
||||||||||||||||||||||
Shandong
|
3,519
|
2,256
|
1,263
|
35.89
|
%
|
4,684
|
2,894
|
1,790
|
38.22
|
%
|
||||||||||||||||||||||
Jiangxi
|
3,876
|
2,486
|
1,390
|
35.86
|
%
|
2,947
|
1,823
|
1,124
|
38.14
|
%
|
||||||||||||||||||||||
Yunnan
|
3,218
|
2,063
|
1,155
|
35.89
|
%
|
2,910
|
1,798
|
1,112
|
38.21
|
%
|
||||||||||||||||||||||
Shanxi
|
2,299
|
1,474
|
825
|
35.89
|
%
|
2,485
|
1,536
|
949
|
38.19
|
%
|
||||||||||||||||||||||
Liaoning
|
2,121
|
1,360
|
761
|
35.88
|
%
|
3,269
|
2,019
|
1,250
|
38.24
|
%
|
||||||||||||||||||||||
Hubei
|
4,281
|
2,745
|
1,536
|
35.88
|
%
|
4,676
|
2,889
|
1,787
|
38.22
|
%
|
||||||||||||||||||||||
Henan
|
2,322
|
1,488
|
834
|
35.92
|
%
|
2,440
|
1,507
|
933
|
38.24
|
%
|
||||||||||||||||||||||
Guangxi
|
2,156
|
1,382
|
774
|
35.90
|
%
|
2,426
|
1,499
|
927
|
38.21
|
%
|
||||||||||||||||||||||
Sichuan
|
-
|
-
|
-
|
NA
|
1,770
|
1,094
|
676
|
38.19
|
%
|
|||||||||||||||||||||||
Fujian
|
247
|
146
|
101
|
40.89
|
%
|
748
|
464
|
284
|
37.97
|
%
|
||||||||||||||||||||||
Total
|
$
|
31,939
|
$
|
20,464
|
$
|
11,475
|
35.93
|
%
|
$
|
36,013
|
$
|
22,254
|
$
|
13,759
|
38.21
|
%
|
45
Selling,
General and Administrative Expenses
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||||||||||||||||||
2009
|
2010
|
2009
|
2010
|
|||||||||||||||||||||||||||||
$
|
% of
Net Sales
|
$
|
% of
Net Sales
|
$
|
% of
Net Sales
|
$
|
% of
Net Sales
|
|||||||||||||||||||||||||
(Amounts in thousands, in U.S. Dollars,
except for percentages)
|
(Amounts in thousands, in U.S. Dollars,
except for percentages)
|
|||||||||||||||||||||||||||||||
Gross Profit
|
$
|
5,076
|
36.07
|
%
|
$
|
6,837
|
38.10
|
%
|
$
|
11,475
|
35.93
|
%
|
$
|
13,759
|
38.21
|
%
|
||||||||||||||||
Operating
Expenses:
|
|
|
|
|
||||||||||||||||||||||||||||
Selling
Expenses
|
1,314
|
9.34
|
%
|
2,556
|
14.24
|
%
|
2,059
|
6.45
|
%
|
4,039
|
11.22
|
%
|
||||||||||||||||||||
General
and Administrative Expenses
|
438
|
3.11
|
%
|
1,071
|
5.97
|
%
|
1,052
|
3.29
|
%
|
1,901
|
5.28
|
%
|
||||||||||||||||||||
Total
|
1,752
|
12.45
|
%
|
3,627
|
20.2
|
%
|
3,111
|
9.74
|
%
|
5,940
|
16.49
|
%
|
||||||||||||||||||||
Income
from Operations
|
$
|
3,324
|
23.62
|
%
|
$
|
3,210
|
17.89
|
%
|
$
|
8,364
|
26.19
|
%
|
$
|
7,819
|
21.71
|
%
|
Selling
expenses for the three months ended June 30, 2010 increased by 94.52% to
$2,556 000 as compared to the same period in 2009, and increased by
96.16% to $4,039,000 for the six months ended June 30, 2010 as compared to
for the same periods in 2009. The increase was mainly due
to the expenses associated with our Fall 2010 preview held in May 2010 and
to increased advertising costs. In order to increase our brand image and
awareness, we anticipate that our selling expenses will continue to increase in
absolute dollars as well as a percentage of sales. We expect that our selling
expenses will continue to increase as we continue our marketing efforts to
support our existing distribution network as well as to penetrate potential new
markets in these regions.
General
and administrative expenses increased by 144.52% from $438,000 for the three
months ended June 30, 2009 to $1,071,000 for the same period in 2010, and
increased by 80.70% from $1,052,000 for the six months ended June 30, 2009 to
$1,901,000 for the same period in 2010. The increase was mainly due
to the increase in expenses related to operating as a US publicly traded company
and $292,000 in liquidated damages accrued for the three and six months ended
June 30, 2010 from not having an effective registration statement registering
the shares of common stock issued in connection with our fourth quarter 2009
financings, including the shares underlying the warrants issued in the
financings. As we continue to further improve our operating infrastructure and
incur expenses related to being a U.S. public company, we anticipate that our
general and administrative expenses will continue to increase in absolute
dollars as well as a percentage of total revenues.
Change
in Fair Value of Derivative Liability
We
issued common stock purchase warrants to the investors in our financings
completed from October 2009 through December 2009. These warrants are accounted
for at fair value as derivative instruments and are marked-to-market each
period, with changes in the fair value charged or credited to income each period
and do not impact cash flow as these are non-cash charges. During the three and
six months ended June 30, 2010, we recorded a gain of $2,166,000 and a charge of
$175,000, respectively. In future periods, we may experience significant gains
or losses, as the value of these warrants fluctuates in response to changes in
our stock price.
Income
Tax Expenses
Income
tax expense for the three months and six months ended June 30, 2010 amounted to
$911,000 and $2,107,000, respectively, compared to $1,003,000 and $2,260,000
respectively, for the same three-month and six-month periods in
2009. Our statutory income tax rate for 2010 is 25%, the same as in
2009.
The
following table reconciles the theoretical tax expense calculated at the
statutory rates to the Company’s effective tax expense for the six months ended
June 30, 2010 and 2009 respectively.
Reconciliation
of effective tax expense (in thousands):
|
Six
Months Ended June 30,
|
|||||||
2010
|
2009
|
|||||||
Theoretical
tax expense calculated at PRC statutory enterprise income tax rate of
25%
|
$
|
1,990
|
$
|
2,087
|
||||
Tax
effect of non-deductible expenses
|
117
|
173
|
||||||
Effective
tax expense
|
$
|
2,107
|
$
|
2,260
|
Net
Income
As a
result of the foregoing, net income for the three months and six months ended
June 30, 2010 were $4,467,000 and 5,544,000 respectively, an increase of 93.38%
from $2,310,000 for the same three-month period in 2009, but a decrease of 8.91%
from $6,086,000 for the same six-month period in 2009.
Results
of Operations – Year ended December 31, 2009 as compared to Year ended December
31, 2008
|
Year Ended December 31,
|
|||||||||||||||
|
2009
|
2008
|
||||||||||||||
Amount
|
% of net sales
|
Amount
|
% of net sales
|
|||||||||||||
|
(Amounts in thousands, in U.S. Dollars, except for percentages)
|
|||||||||||||||
Net
Sales
|
$ | 64,343 | 100.00 | % | $ | 51,867 | 100.00 | % | ||||||||
Gross
Profit
|
$ | 23,263 | 36.15 | % | $ | 18,551 | 35.77 | % | ||||||||
Operating
Expenses
|
$ | 9,694 | 15.07 | % | $ | 6,249 | 12.05 | % | ||||||||
Income
From Operations
|
$ | 13,569 | 21.08 | % | $ | 12,302 | 23.72 | % | ||||||||
Other
Expenses / (Income)
|
$ | (982 | ) | (1.53 | )% | $ | 44 | 0.08 | % | |||||||
Income
Tax Expense
|
$ | 4,106 | 6.38 | % | $ | 3,065 | 5.91 | % | ||||||||
Net
Income
|
$ | 10,445 | 16.23 | % | $ | 9,193 | 17.73 | % |
Net
Sales
Net
sales were $64,343,000 for the year ended December 31, 2009 compared with
$51,867,000 for 2008, an increase of $12,476,000 or 24%. We generate
revenue primarily from the sales of our apparel products to our distributors,
who retail them throughout northern, central and southern
China. These retail locations, also known as points of sales (“POS”),
include counters, concessions, free standing stores and store-in-stores. We
design and create samples, which are presented to our distributors at our
biannual previews for their selection and purchase based on what they believe
will sell most effectively in their POS. Additionally, we set guidelines for our
distributors as to how our products are to be advertised and displayed. We
believe that our sales are driven by marketing and advertising as well as by
creating fashionable designs. We do not own or operate any V·LOV retail
locations ourselves; the POS are established and owned by our distributors, each
of whom operates its network of POS directly or through third-party retail
operators. The increase in our sales was primarily attributable to our marketing
efforts and the increase in the number of POS in our distributors’ retail sales
network, from 689 in 2008 to 742 in 2009.
46
The
following table sets forth the geographical breakdown of our net
sales for the periods indicated:
Year Ended December 31,
|
||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||
(Amounts in thousands, in U.S. Dollars,
except for percentages)
|
||||||||||||||||||||
Amount
|
% of
net sales
|
Amount
|
% of
net sales
|
Growth (Decline)
in 2009
compared
with 2008
|
||||||||||||||||
Beijing
|
$ | 2,963 | 4.60 | % | $ | 1,707 | 3.29 | % | 73.58 | % | ||||||||||
Zhejiang
|
$ | 12,206 | 18.97 | % | $ | 13,361 | 25.76 | % | (8.64 | )% | ||||||||||
Shandong
|
$ | 7,204 | 11.20 | % | $ | 5,407 | 10.42 | % | 33.23 | % | ||||||||||
Jiangxi
|
$ | 6,997 | 10.87 | % | $ | 7,910 | 15.25 | % | (11.54 | )% | ||||||||||
Yunnan
|
$ | 6,345 | 9.86 | % | $ | 4,854 | 9.36 | % | 30.72 | % | ||||||||||
Shanxi
|
$ | 4,634 | 7.20 | % | $ | 3,051 | 5.88 | % | 51.88 | % | ||||||||||
Liaoning
|
$ | 4,896 | 7.61 | % | $ | 2,741 | 5.29 | % | 78.62 | % | ||||||||||
Hubei
|
$ | 8,712 | 13.54 | % | $ | 6,600 | 12.72 | % | 32.00 | % | ||||||||||
Henan
|
$ | 4,668 | 7.26 | % | $ | 2,915 | 5.62 | % | 60.14 | % | ||||||||||
Guangxi
|
$ | 4,360 | 6.78 | % | $ | 2,841 | 5.48 | % | 53.47 | % | ||||||||||
Sichuan
|
$ | 829 | 1.29 | % | $ | - | - | % |
-
|
% | ||||||||||
Fujian
|
$ | 529 | 0.82 | % | $ | 480 | 0.93 | % | 10.21 | % | ||||||||||
Total
Net Sales
|
$ | 64,343 | 100.00 | % | $ | 51,867 | 100.00 | % | 24.05 | % |
Cost
of Sales and Gross Profit Margin
The
following table sets forth the components of our cost of sales and gross profit
both in absolute amount and as a percentage of total net sales.
|
Year Ended December 31,
|
|||||||||||||||
|
2009
|
2008
|
||||||||||||||
Amount
|
% of net sales
|
Amount
|
% of net sales
|
|||||||||||||
|
(Amounts in thousands, in U.S. Dollars, except for percentages)
|
|||||||||||||||
Net
Sales
|
$ | 64,343 | 100.0 | % | $ | 51,867 | 100.00 | % | ||||||||
O.E.M.
Finished Goods Cost
|
$ | 36,605 | 56.89 | % | $ | 26,267 | 50.64 | % | ||||||||
Raw
Materials
|
$ | 3,040 | 4.72 | % | $ | 4,758 | 9.17 | % | ||||||||
Labor
|
$ | 1,168 | 1.82 | % | $ | 759 | 1.46 | % | ||||||||
Subcontract
Production Costs
|
$ | - | - | % | $ | 809 | 1.56 | % | ||||||||
Overhead
and Other Expenses
|
$ | 267 | 0.42 | % | $ | 723 | 1.40 | % | ||||||||
Total
Cost of Sales
|
$ | 41,080 | 63.85 | % | $ | 33,316 | 64.23 | % | ||||||||
Gross
Profit
|
$ | 23,263 | 36.15 | % | $ | 18,551 | 35.77 | % |
A
majority of our products are manufactured on our behalf by third parties, based
on orders for our products that we receive from our distributors based on the
clothing samples we design and create. Historically, we have outsourced to two
types of manufacturers: (1) sub-contractors, which require us to provide them
with the raw materials for our products, and (2) O.E.M. manufacturers, which
supply their own raw materials. Beginning in 2009, we have shifted our
outsourcing entirely to O.E.M. manufacturers.
As we
shifted away from sub-contract manufacturing entirely to O.E.M. manufacturing in
2009, the components of our cost of sales have correspondingly shifted. Raw
material costs and subcontract production costs accounted for 4.72% and 0%,
respectively, of our total net sales in 2009, compared with 9.17% and 1.56%,
respectively, in 2008. With the shift to O.E.M. manufacturing, O.E.M. finished
goods cost, representing our purchase of finished products from the O.E.M.
manufacturers, correspondingly increased, accounting for 56.89% of our total net
sales in 2009, compared with 50.64% in 2008.
Labor
cost accounted for 1.82% of our total net sales in 2009, compared with 1.46% in
2008. The increase was primarily attributable to increases in management and
quality control costs in tandem with the increase in O.E.M. finished goods cost,
from $26,267,000 for 2008 to $36,605,000 for 2009.
Overhead
and other expenses were 0.42% of our total net sales in 2009, compared with
1.39% for 2008. The decrease was primarily attributable to the reduction of our
own production activities and volume.
Total
cost of sales for 2009 was $41,080,000, an increase of 23.30% from $33,316,000
for 2008. As a percentage of total net sales, our cost of sales decreased to
63.85% of total net sales for 2009, down from 64.23% of total net sales for
2008. Consequently, gross margin as a percentage of total net sales increased to
36.15% for 2009 from 35.77% for 2008. Our gross margin increased mainly due to
the general recovery of the Chinese economy in 2009 and our customers’
acceptance of increases in selling prices.
47
The
following table sets forth our total net sales, cost of sales, gross profit and
gross margin of the geographic market segments for the periods indicated.
Year Ended December 31,
|
||||||||||||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||||||||||
Net Sales
|
Cost of
sales
|
Gross
profit
|
Gross
profit
%
|
Net Sales
|
Cost of
sales
|
Gross
profit
|
Gross
profit
%
|
|||||||||||||||||||||||||
(Amounts in thousands, in U.S. Dollars, except for percentages)
|
||||||||||||||||||||||||||||||||
Beijing
|
$ | 2,963 | $ | 1,890 | $ | 1,073 | 36.21 | % | $ | 1,707 | $ | 1,108 | $ | 599 | 35.09 | % | ||||||||||||||||
Zhejiang
|
$ | 12,206 | $ | 7,790 | $ | 4,416 | 36.18 | % | $ | 13,361 | $ | 8,580 | $ | 4,781 | 35.78 | % | ||||||||||||||||
Shandong
|
$ | 7,204 | $ | 4,597 | $ | 2,607 | 36.19 | % | $ | 5,407 | $ | 3,479 | $ | 1,928 | 35.66 | % | ||||||||||||||||
Jiangxi
|
$ | 6,997 | $ | 4,467 | $ | 2,530 | 36.16 | % | $ | 7,910 | $ | 5,079 | $ | 2,831 | 35.79 | % | ||||||||||||||||
Yunnan
|
$ | 6,345 | $ | 4,049 | $ | 2,296 | 36.19 | % | $ | 4,854 | $ | 3,119 | $ | 1,735 | 35.74 | % | ||||||||||||||||
Shanxi
|
$ | 4,634 | $ | 2,957 | $ | 1,677 | 36.19 | % | $ | 3,051 | $ | 1,964 | $ | 1,087 | 35.63 | % | ||||||||||||||||
Liaoning
|
$ | 4,896 | $ | 3,123 | $ | 1,773 | 36.21 | % | $ | 2,741 | $ | 1,768 | $ | 973 | 35.50 | % | ||||||||||||||||
Hubei
|
$ | 8,712 | $ | 5,559 | $ | 3,153 | 36.19 | % | $ | 6,600 | $ | 4,217 | $ | 2,383 | 36.11 | % | ||||||||||||||||
Henan
|
$ | 4,668 | $ | 2,979 | $ | 1,689 | 36.18 | % | $ | 2,915 | $ | 1,857 | $ | 1,058 | 36.30 | % | ||||||||||||||||
Guangxi
|
$ | 4,360 | $ | 2,782 | $ | 1,578 | 36.19 | % | $ | 2,841 | $ | 1,816 | $ | 1,025 | 36.08 | % | ||||||||||||||||
Sichuan
|
$ | 829 | $ | 527 | $ | 302 | 36.43 | % | $ | - | $ | - | $ | - | - | % | ||||||||||||||||
Fujian
|
$ | 529 | $ | 360 | $ | 169 | 31.95 | % | $ | 480 | $ | 329 | $ | 151 | 31.46 | % | ||||||||||||||||
Total
|
$ | 64,343 | $ | 41,080 | $ | 23,263 | 36.15 | % | $ | 51,867 | $ | 33,316 | $ | 18,551 | 35.77 | % |
Selling,
General and Administrative Expenses
Year Ended December 31,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
Amount
|
% of
Net Sales
|
Amount
|
% of
Net Sales
|
|||||||||||||
(Amounts in thousands, in U.S. Dollars, except for percentages)
|
||||||||||||||||
Gross
Profit
|
$ | 23,263 | 36.15 | % | $ | 18,551 | 35.77 | % | ||||||||
Operating
Expenses:
|
||||||||||||||||
Selling
Expenses
|
4,604 | 7.16 | % | 3,547 | 6.84 | % | ||||||||||
General
and Administrative Expenses
|
5,090 | 7.91 | % | 2,702 | 5.21 | % | ||||||||||
Total
|
9,694 | 15.07 | % | 6,249 | 12.05 | % | ||||||||||
Income
from Operations
|
13,569 | 21.08 | % | 12,302 | 23.72 | % |
Selling expenses were $4,604,000 in
2009, compared with $3,547,000 in, an increase of $1,057,000 or
29.80%. The increase was mainly due to a $495,000 increase in
promotional and advertising expenses, from $2,684,000 for 2008 to $3,179,000 for
2009. In order to increase
our brand image and awareness, we anticipate that our selling expenses will
continue to increase in absolute dollars and as a greater percentage of total
revenue, as we continue our marketing efforts to support our existing
distribution network as well as to penetrate potential new
markets.
General and
administrative expenses increased from $2,702,000 for 2008 to $5,090,000 for
2009, an increase of $2,388,000 or 88.38%. The increase was mainly
due to the professional fees incurred in connection with our reverse acquisition
transaction in February 2009, including legal and accounting fees. As we
continue to further improve our operating infrastructure and incur expenses
related to being a U.S. public company, we anticipate that our general and
administrative expenses will continue to increase in absolute dollars as well as
a percentage of total revenues.
Change
in Fair Value of Derivative Liability
We
issued common stock purchase warrants to the investors in our financings
completed in November and December 2009. These warrants are accounted
for at fair value as derivative instruments and are marked-to-market each
period, with changes in the fair value charged or credited to income each
period. In 2009, the fair value of these warrants declined between the time they
were issued and year end, and we recognized a gain of $1,009,000, primarily as a
result of the reduction in our stock price. As a result, we had other
income added to our net income for the year ended December 31, 2009 as opposed
to other expenses for the prior year. In future periods, we will continue to
experience significant gains or losses as the value of these warrants fluctuates
in response to changes in our stock price.
Interest
Expense
Interest
expense was $58,000 for 2009 compared with $67,000 for 2008 mainly due to an
additional $1,000,000 short-term loan we obtained in 2009 to supplement our
working capital.
Income
Tax Expenses
In both
2008 and 2009, we were subject to income tax at a rate of 25%. Income tax
expense for 2008 and 2009 amounted to $3,065,000 and $4,106,000, respectively.
The increase in income tax expense was attributable to the increase in
assessable profit for the year ended December 31, 2009.
Net
Income
Net
income was $10,445,000 for the year ended December 31, 2009, compared with
$9,193,000 for the year ended December 31, 2008, an increase of $1,252,000 or
13.62%.
Net
Income Attributable to Common Shareholders
In
connection with the Preferred Shares issued in our financing completed in
November 2009, $4,003,000 of our net income for the year ended December 31, 2009
was deemed dividend on the Preferred Shares, resulting in $6,442,000 in net
income attributable to our common shareholders for 2009, compared with
$9,193,000 of net income attributable to common shareholders from a year ago, a
29.92% decrease.
48
Liquidity
and Capital Resources
Six
Months ended June 30, 2010
Net
cash provided by operating activities in the six months ended June 30, 2010 was
$3,048,000, compared with $4,323,000 net cash provided by operating
activities in the same period of 2009, a decrease of $1,275,000. This
decrease was primarily attributable an increase in accounts receivable of
$1,892,000 and a decrease in accounts payable of $1,049,000. The decrease in
operating cash flow was offset by a $1,710,000 decrease in trade deposits.
Our accounts receivable balance increased as some distributors paid later, but
within trade terms. Our trade deposit balance decreased from drawdown on
deposits for orders placed after our Fall 2010 preview.
Net
cash used in investing activities was $3,027,000 in the six
months ended June 30, 2010, compared with $nil cash provided by investing
activities in the same period of 2009. This decrease in net cash provided by
investing activities was mainly due to a time deposit balance made of $3,020,000
which matures on September 30, 2010.
Net
cash provided by financing activities was $2,325,000 in the six
months ended June 30, 2010, compared with net cash used in financing activities
of $4,895,000 in the same period of 2009. This increase in net cash
provided by financing activities was primarily due to repayment from a director
of $2,428,000 on March 29, 2010. Additionally, dividends in the amount of
$5,130,000 were declared and paid by Yinglin Jinduren to its equity owners
during the six months ended June 30, 2009 (prior to our share exchange
transaction with PXPF in February 2009). No dividends have been declared or paid
since, including during the six months ended June 30, 2010.
As of
June 30, 2010, we had cash and cash equivalents of $13,437,000, total current
assets of $31,873,000 and current liabilities of $5,508,000, which is net of the
$3,840,000 derivative liability. The $3,840,000 derivative liability
relating to our warrants will be allocated to equity when the warrants are
exercised and eliminated when the warrants expire. The $3,840,000 derivative
liability does not require a cash settlement. We presently finance our
operations primarily from the cash flow from our operations, and we anticipate
that this will continue to be our primary source of funds to finance our
short-term cash needs. Our cash balance as of August 13, 2010 was
$9,539,706.
Year
ended December 31, 2009
As of
December 31, 2009, we had cash and cash equivalents of $11,036,000, other
current assets of $14,976,000 and current liabilities of $9,197,000. We
presently finance our operations primarily from the cash flow from our
operations, and we anticipate that this will continue to be our primary source
of funds to finance our short-term cash needs. We raised approximately $8
million in November 2009 from private placement of our Preferred Shares and
Warrants, and an additional $1.87 million in December 2009 from private
placement of our common stock and Warrants, for general working capital,
including for marketing and brand promotion, and expansion and/or enhancement of
our existing distribution network and facilities. Depending on the extent of
such activities, if any, we may need additional capital.
Net cash
provided by operating activities in 2009 was $5,668,000 compared with $9,027,000
in 2008. This decrease was mainly attributable to trade deposits paid of
$2,307,000 near the end of 2009.
Net cash
provided by investing activities was $51,000 in 2009, compared with $114,000 net
cash provided by investing activities in 2008. This decrease in 2009 was mainly
due to a decrease in advances from a Company director.
Net cash
provided by financing activities was $2,452,000 in 2009, compared with net cash
used of $9,389,000 in 2008. The increase in net cash provided by financing
activities was mainly due to the equity financings that we completed in November
and December 2009. Also, $2,428,000 was converted into RMB to avoid currency
translation losses from RMB appreciation against the U.S. dollars and held in
trust in a personal RMB account of Mr. Qingqing Wu, our chief executive officer,
which amount we did not deposit back into our account until after the fiscal
year end. In 2008 and 2009, Yinglin Jinduren paid dividends to its equity
owners, in the amount of $5,131,000 and $9,389,000 for 2009 and 2008
respectively, which were declared and paid prior to our reverse acquisition of
PXPF. Since the completion of the reverse acquisition, neither we nor Yinglin
Jinduren have declared or paid any dividend, nor do we currently expect to
declare or pay any dividends.
As of
December 31, 2009, we had inventories of $285,000, compared with $514,000 as of
December 31, 2008. The decrease in inventories resulted from the continuing
shift to outsourcing our manufacturing requirements for a majority of our
products, with finished goods shipped directly to our distributors after final
quality inspection. As a result, raw material and finished goods as of December
31, 2009 decreased to $145,000 and $125,000, respectively, from $262,000 and
$229,000, respectively, as of December 31, 2008.
As of
December 31, 2009, our accounts and other receivables amounted to $9,191,000, an
increase of 17.2% from $7,843,000 as of December 31, 2008. The debtor turnover
ratio increased to 48 days as of December 31, 2009 from 44 days as of December
31, 2008. The increase in accounts receivable was mainly due to increases in
sales and delay of payment by our distributors. Although the debtor turnover
ratio increased by 4 days, the average settlement days were still less than 90
days and within the credit period we grant to our distributors.
As of
December 31, 2009, we had accounts payables of $2,565,000, compared with
$2,040,000 as of December 31, 2008, an increase of 26%. The increase was mainly
due to an increase in amount of O.E.M. finished goods purchased resulting from
our increased sales. As of December 31, 2008, most of our accounts payables were
aged less than 90 days. With increasing cash inflows during 2009, we were able
to settle our outstanding payables and as a result, most of our accounts
payables as of December 31, 2009 were aged less than 90 days.
As of
December 31, 2009, we had accrued expenses and other payables of $583,000,
compared with $543,000 as of December 31, 2008. The change was mainly due to
settlement of advertising subsidies payable in 2009 and our accrual of $300,000
in penalties anticipated with the registration statement filed in connection
with our November and December 2009 financings.
49
Quantitative
and Qualitative Disclosures about Market Risk
We are a
“smaller reporting company” as defined by Regulations S-K and as such, are not
required to provide this information.
Contractual
Obligations and Off-Balance Sheet Arrangements
Contractual
Obligations
We have
certain fixed contractual obligations and commitments that include future
estimated payments. Changes in our business needs, cancellation provisions,
changing interest rates, and other factors may result in actual payments
differing from the estimates. We cannot provide certainty regarding the timing
and amounts of payments. We present below a summary of the most significant
assumptions used in our determination of amounts presented in the tables in
order to assist in the review of this information within the context of our
consolidated financial position, results of operations, and cash
flows.
The
following tables summarize our contractual obligations as of June 30, 2010, and
the effect that these obligations are expected to have on our liquidity and cash
flows in future periods.
|
Payments Due by Period
|
|||||||||||
Total
|
Less than 1
year
|
1 Year +
|
||||||||||
(in thousands of dollars)
|
||||||||||||
Contractual Obligations
:
|
||||||||||||
Total
Indebtedness
|
$
|
589
|
$
|
589
|
$
|
-
|
||||||
Operating
Leases
|
159
|
35
|
124
|
|||||||||
Total
Contractual Obligations:
|
$
|
748
|
$
|
624
|
$
|
124
|
Total
indebtedness consists of installment loans from financial institutions in the
PRC.
Operating
lease amounts include minimum lease payments under our non-cancelable operating
lease for office facilities, as well as limited computer and office equipment
that we utilize under certain lease arrangements.
Off-Balance
Sheet Arrangements
Under the
operating agreement between our subsidiary HK Dong Rong and our variable
interest entity Yinglin Jinduren, it was agreed that, if any guarantee for the
performance of Yinglin Jinduren for any contract or loan was required, HK Dong
Rong would agree to provide such guarantee. To date, no such
guarantees have been provided. We have not entered into any other financial
guarantees or other commitments to guarantee the payment obligations of any
third parties. We do not use off-balance sheet derivative financial instruments
to hedge or partially hedge interest rate exposure nor do we maintain any other
off-balance sheet arrangements for the purpose of credit enhancement, hedging
transactions, or other financial or investment purposes. We have not entered
into any derivative contracts that are indexed to our shares and classified as
shareholder’s equity or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any variable interest in
any unconsolidated entity that provides financing, liquidity, market risk or
credit support to us or engages in leasing, hedging or research and development
services with us.
50
LEGAL
PROCEEDINGS
We are
not currently involved in any material legal proceedings, and we are not aware
of any material legal proceedings pending or threatened against
us. We are also not aware of any material legal proceedings involving
any of our directors, officers, or affiliates or any owner of record or
beneficially of more than 5% of any class of our voting securities.
MANAGEMENT
Effective
April 27, 2010, Mr. Yushan Zheng voluntarily resigned as our Chief Financial
Officer. Mr. Zheng’s resignation was not the result of any material disagreement
with us or any matter relating to our operations, policies or practices. Our
board of directors appointed Mr. Bennet P. Tchaikovsky to replace Mr. Zheng.
Effective
June 1, 2010, Mr. Congming Xie and Mr. Zhifan Wu each voluntarily resigned from
our board of directors. The decision by each of them to resign from his
directorship was not the result of any material disagreement with us or any
matter relating to our operations, policies or practices. Our board of directors
appointed Mr. Jianhui Wang to fill one of the vacancies created by these
resignations.
Our
current directors and executive officers, their ages, their respective offices
and positions, and their respective dates of election or appointment are as
follows:
Name
|
|
Age
|
|
Position Held
|
|
Officer/Director since
|
Qingqing
Wu
|
40
|
Chairman
of the Board, President, Chief Executive Officer and Chief Operating
Officer
|
February
23, 2009
|
|||
Bennet
P. Tchaikovsky
|
41
|
Chief
Financial Officer
|
April
27, 2010
|
|||
Jianwei
Shen
|
54
|
Director
|
March
7, 2009
|
|||
Yuzhen
Wu
|
32
|
Director
|
March
7, 2009
|
|||
Ying
Zhang
|
32
|
Director
|
March
10, 2010
|
|||
Jianhui
Wang
|
40
|
Director
|
June
1,
2010
|
Business
Experience Descriptions
Set forth
below is a summary of our executive officers’ and directors’ business experience
for the past 5 years.
Qingqing Wu graduated from
Xiamen Jimei School of Light Industry in 1990 with a major in apparel design and
received a Masters in Business Administration degree from Tsing-Hua University
in 2007. Mr. Wu worked as a designer at Huacai Apparel Factory in Jinjiang
County from August 1990 to August 1992. Between September 1992 and September
1994, Mr. Wu served as the Director of Design and Assistant to General Manager
at Shidali Apparel Co., Ltd. in Jinjiang City. In November 1994, Mr. Wu founded
Yinglin Jinduren. Since November 2009, Mr. Wu has also served as the Standing
Director of the First Committee of the Association of Fabric & Apparel in
Jinjiang City.
Bennet P. Tchaikovsky is
presently the Chief Financial Officer for China Jo-Jo Drugstores, Inc. which he
performs on a part-time basis. From May 2008 to April 16, 2010, Mr.
Tchaikovsky served as the Chief Financial Officer of Skystar Bio-Pharmaceutical
Company which he performs on a part-time basis. From March 2008 through November
2009, Mr. Tchaikovsky served as a director of Ever-Glory International Group.
From December 2008 through November 2009, Mr. Tchaikovsky served as a director
of Sino Clean Energy, Inc. From July 2004 through October 2007, Mr. Tchaikovsky
served as the chief financial officer of Innovative Card Technologies,
Inc. Mr. Tchaikovsky acted as a consultant to Innovative Card
Technologies from November 2007 until July 2008. Mr. Tchaikovsky is a licensed
Certified Public Accountant and an inactive member of the California State Bar.
He received a B.A. in Business Economics from the University of California at
Santa Barbara, and a J.D. from Southwestern University School of Law.
Dr. Jianwei Shen holds a
Doctorate of Economics and Management from China Agricultural University, a
Doctorate of Philosophy from Hohenheim University in Germany, a Master Degree in
Economics and Management from Beijing Agricultural University, and a Bachelor’s
Degree in Agricultural Economics from Beijing Agricultural
University. Since October 2006, Dr. Shen has been an independent
director and a member of the Audit Committee of the China Essence Group Ltd., a
company listed on the Singapore Exchange (Main Board). From January
2002 to January 2005, he served as a project manager at Fujian Fuma Foods Group
Co., and he worked as a project manager at Beijing Dasbro Co. Ltd from November
1993 to December 2000. Dr. Shen is also a member of the Specialist
Advisors to the City of Jinjiang, Fujian, a position he has held since January
2006. Dr. Shen also provides strategic corporate advisory services to
Yinglin Jinduren.
Yuzhen Wu graduated from
Huaqiao University in 1998 with a major in Business Management. Mr. Wu has been
working at Yinglin Jingduren since May 1998. From June 1998 to August 2001, Mr.
Wu worked as the workshop director. From September 2001 to October 2003, Mr. Wu
worked as the production manager overseeing all production arrangements and
process. Mr. Wu served as the vice general manager between November 2003 and
January 2006, and as director of the general production management since
February 2006.
51
Ying (Teresa) Zhang is
currently the chief financial officer and a director of China Wind Systems, Inc.
She was an auditing manager at GC Alliance HK CPA in Beijing from July 2005
until January 2010. From January 2003 through June 2005, Ms. Zhang
served as a liaison officer for the Australian-Chinese Friendship Business
Association, and from July 2000 to September 2002 she was an auditor at Ernst
& Young in Beijing. Ms. Zhang is a certified practicing
accountant in Australia. She received a bachelor’s degree in
international accounting from Renmin University in China in 1996 and a
master’s degree in accounting from Macquarie University in Australia in
2005.
Jianhui Wang is currently the
president of Zhongbang Investment Management Group, Inc. to which he was
appointed in August 2008. Prior to that position, from August 2004 to July 2008,
Mr. Wang was the vice president and chief financial officer of China World Team
Investment Holding Co., Ltd. Mr. Wang served as the president of Fujian Shishi
Sea World Co., Ltd. from August 2001 to July 2004, and as the vice president and
vice chairman of the board of Fujian Dayu Tourism Development Co., Ltd. from
June 1998 to July 2001. From August 1996 to May 1998, Mr. Wang was the vice
president of Longchuan (Fujian) Recreation Co., Ltd. Mr. Wang is also a senior
economist and visiting professor at Guanghua School of Management at Peking
University. Mr. Wang graduated with a Master of Business Administration from
Xiamen University in 1995 and obtained his Bachelor of Management Science and
Engineering from Wuhan Institute of Economy in 2009.
Family
Relationships
There
are no family relationships between or among any of our directors or executive
officers.
Involvement
in Certain Legal Proceedings
None
of our directors or executive officers has, during the past ten
years:
|
·
|
Had any petition under the
federal bankruptcy laws or any state insolvency law filed by or against,
or had a receiver, fiscal agent, or similar officer appointed by a court
for the business or property of such person, or any partnership in which
he was a general partner at or within two years before the time of such
filing, or any corporation or business association of which he was an
executive officer at or within two years before the time of such
filing;
|
|
·
|
Been convicted in a criminal
proceeding or a named subject of a pending criminal proceeding (excluding
traffic violations and other minor
offenses);
|
|
(i)
|
Acting as a futures commission
merchant, introducing broker, commodity trading advisor, commodity pool
operator, floor broker, leverage transaction merchant, any other person
regulated by the Commodity Futures Trading Commission, or an associated
person of any of the foregoing, or as an investment adviser, underwriter,
broker or dealer in securities, or as an affiliated person, director or
employee of any investment company, bank, savings and loan association or
insurance company, or engaging in or continuing any conduct or practice in
connection with such
activity;
|
|
(ii)
|
Engaging in any type of business
practice; or
|
|
(iii)
|
Engaging in any activity in
connection with the purchase or sale of any security or commodity or in
connection with any violation of federal or state securities laws or
federal commodities laws;
|
|
·
|
Been the subject of any order,
judgment, or decree, not subsequently reversed, suspended, or vacated, of
any court of competent jurisdiction, permanently or temporarily enjoining
him from, or otherwise limiting, the following
activities:
|
|
·
|
Been the subject of any order,
judgment, or decree, not subsequently reversed, suspended, or vacated, of
any federal or state authority barring, suspending, or otherwise limiting
for more than 60 days the right of such person to engage in any activity
described in (i) above, or to be associated with persons engaged in any
such activity;
|
|
·
|
Been found by a court of
competent jurisdiction in a civil action or by the SEC to have violated
any federal or state securities law, where the judgment in such civil
action or finding by the SEC has not been subsequently reversed,
suspended, or vacated; or
|
|
·
|
Been found by a court of
competent jurisdiction in a civil action or by the Commodity Futures
Trading Commission to have violated any federal commodities law, where the
judgment in such civil action or finding by the Commodity Futures Trading
Commission has not been subsequently reversed, suspended, or
vacated.
|
Board
of Directors
Our board
of directors is currently composed of six members. All members of our board of
directors serve in this capacity until their terms expire or until their
successors are duly elected and qualified. Our bylaws provide that the
authorized number of directors will be not less than one and not more than
thirteen.
Our board
of directors formally established separate audit, nominating and compensation
committees on March 10, 2010.
52
Audit
Committee
Three
independent directors are currently appointed to the audit committee: Ms. Ying
Zhang, Dr. Jianwei Shen and Mr. Jianhui Wang. Our board of directors has
determined, based on information furnished by Ms. Zhang and other available
information, that she meets the requirements of an “audit committee financial
expert” as such term is defined in the rules promulgated under the Securities
Act and the Exchange Act, and has accordingly designated her as such as well as
chairperson of the committee.
The
responsibilities of our audit committee include:
·
|
meeting with our management
periodically to consider the adequacy of our internal control over
financial reporting and the objectivity of our financial reporting;
|
·
|
appointing the independent
registered public accounting firm, determining the compensation of the
independent registered public accounting firm and pre-approving the
engagement of the independent registered public accounting firm for audit
and non-audit services;
|
·
|
overseeing the independent
registered public accounting firm, including reviewing independence and
quality control procedures and experience and qualifications of audit
personnel that are providing us audit services;
|
·
|
meeting with the independent
registered public accounting firm and reviewing the scope and significant
findings of the audits performed by them, and meeting with management and
internal financial personnel regarding these matters; and
|
·
|
reviewing our financing plans,
the adequacy and sufficiency of our financial and accounting controls,
practices and procedures, the activities and recommendations of the
auditors and our reporting policies and practices, and reporting
recommendations to our full board of directors for approval.
|
Compensation
Committee
Three
independent directors are currently appointed to the compensation committee: Ms.
Ying Zhang, Dr. Jianwei Shen and Mr. Jianhui Wang. Dr. Shen is chairperson of
the committee. Our compensation committee will oversee and, as appropriate, make
recommendations to the board of directors regarding the annual salaries and
other compensation of our executive officers and our employees, and other
policies, and provide assistance and recommendations with respect to our
compensation policies and practices.
Nominating
Committee
Three
independent directors are currently appointed to the nominating committee: Ms.
Ying Zhang, Dr. Jianwei Shen and Mr. Jianhui Wang. Ms. Zhang is chairperson of
the committee. Our nominating committee will assist in the selection of director
nominees, approves director nominations to be presented for stockholder approval
at our annual general meeting and assist in filling any vacancies on our board
of directors, and consider any nomination of director candidates validly made by
stockholders.
Director
Independence
Based
upon information submitted by Ms. Ying Zhang, Dr. Jianwei Shen and Mr. Jianhui
Wang, the board of directors has determined that each of them is “independent”
under Rule 5605(a)(2) of The NASDAQ Listing Rules, even though such definition
does not currently apply to us because we are not listed on The NASDAQ Capital
Market.
Compensation
Committee Interlocks and Insider Participation
No
interlocking relationship exists between our board of directors and the board of
directors or compensation committee of any other company, nor has any
interlocking relationship existed in the past.
Section
16(a) of the Exchange Act
Based
solely on review of the copies of such forms furnished to us, or written
representations that no reports were required, we believe that for the fiscal
year ended December 31, 2009, our directors, executive officers and persons who
owned more than 10% of a registered class of the Company's equity securities
complied with Section 16(a) filing requirements applicable to them, except for
the following: (1) Matthew Hayden did not file a Form 4 in connection with his
resignation from his officer positions and directorship; (2) MMH Group, LLC did
not file a Form 4 in connection with the additional shares of the Company’s
common stock it acquired in February 2009; and (3) Ancora Greater China Fund, LP
did not file a Form 4 in connection with the additional shares of the Company’s
common stock it acquired in February 2009.
Code
of Business Conduct and Ethics
We have
adopted a code of ethics that applies to all directors, officers, and employees,
including our Chief Executive Officer and Chief Financial Officer. A copy of the
code of ethics is attached as Exhibit 14.1 to our annual report on Form 10-K
filed with the SEC on March 7, 2008.
EXECUTIVE
COMPENSATION
Executive
Compensation
The
following summary compensation table indicates the cash and non-cash
compensation earned during the fiscal years ended December 31, 2009 and
2008 by our principal executive officer and each of our other two highest paid
executives, if any, whose total compensation exceeded $100,000 during the fiscal
years ended December 31, 2009 and 2008.
SUMMARY
COMPENSATION TABLE
Name and principal position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
All Other
Compensation
($)
|
Total
($)
|
|||||||||||||||||||||||||
Qingqing
Wu, current President,
|
2009
|
8,856 | 0 | 0 | 0 | 0 | 0 | 0 | $ | 8,856 | ||||||||||||||||||||||||
CEO,
Secretary and COO (1)
|
||||||||||||||||||||||||||||||||||
2008
|
N/A | N/A | N/A | N/A | N/A | N/A | N/A | $ | N/A | |||||||||||||||||||||||||
Matthew
Hayden, former President,
|
2009
|
0 | 0 | 0 | 0 | 0 | 0 | 0 | $ | 0 | ||||||||||||||||||||||||
CEO,
Secretary, CFO and Treasurer
|
||||||||||||||||||||||||||||||||||
(2)
|
2008
|
0 | 0 | 0 | 0 | 0 | 0 | 0 | $ | 0 |
(1)
|
Mr. Wu became our president,
Chief Executive Officer, Chief Operating Officer and Secretary on February
23, 2009, in connection with our acquisition of PXPF (further described
above under the heading “History and Corporate Structure”). For 2009, all
of Mr. Wu’s compensation was paid by Yinglin Jinduren, and is based on
interbank exchange rate of RMB 1 to $0.1466 on December 31, 2009. Other
than compensation that he received from Yinglin Jinduren, Mr. Wu did not
receive any compensation from us or any of our subsidiaries during 2009.
We currently do not have any plan with respect to Mr. Wu’s compensation,
even though Yinglin Jinduren has not declared or paid dividends to its
owners since the Exchange Transaction and do not intend to do so in the
future.
|
53
(2)
|
Mr. Matthew Hayden became the
Company’s President, Chief Executive Officer, Secretary, Chief Financial
Officer, and Treasurer on August 1, 2008, and resigned from all of
these positions on February 23, 2009, in connection with our acquisition
of PXPF.
|
Outstanding
Equity Awards
There are
no unexercised options, stock that has not vested, or equity incentive plan
awards for any of our named executive officers outstanding as of the end of our
last completed fiscal year.
Retirement
Plans
We
currently have no plans that provide for the payment of retirement benefits, or
benefits that will be paid primarily following retirement, including but not
limited to tax-qualified defined benefit plans, supplemental executive
retirement plans, tax-qualified defined contribution plans and nonqualified
defined contribution plans.
Potential
Payments upon Termination or Change-in-Control
We
currently have no contract, agreement, plan or arrangement, whether written or
unwritten, that provides for payments to a named executive officer at,
following, or in connection with any termination, including without limitation
resignation, severance, retirement or a constructive termination of a named
executive officer, or a change in control of the registrant or a change in the
named executive officer’s responsibilities, with respect to each named executive
officer
Employment
Agreements
Except as
described below, we currently have no employment agreements with any of our
executive officers, nor any compensatory plans or arrangements resulting from
the resignation, retirement or any other termination of any of our executive
officers, from a change-in-control, or from a change in any executive officer’s
responsibilities following a change-in-control.
Loanout
Agreement for the Services of Bennet P. Tchaikovsky
On April
27, 2010, we entered into a Loanout Agreement with Worldwide Officers, Inc., a
California corporation, pursuant to which we have retained the services of Mr.
Bennet P. Tchaikovsky to serve as our Chief Financial Officer for a term of one
year. Under the terms of the Loanout Agreement, Mr. Tchaikovsky will perform his
duties from the United States and on a part-time basis (90 hours per month), for
an annual fee of $70,000. Additionally, Mr. Tchaikovsky will have the right to
receive 20,000 shares of our restricted common stock, to vest as follows: 3,562
shares on June 30, 2010, 5,041 shares on September 30, 2010, 5,041 shares on
December 31, 2010, 4,932 shares on March 31, 2011, and 1,424 shares on April 26,
2011.
The
Loanout Agreement terminates upon Mr. Tchaikovsky’s death. We may also terminate
the Loanout Agreement upon a 10-day written notice if Mr. Tchaikovsky is unable
to perform his duties as the Chief Financial Officer for over 45 consecutive
days during the term of the Loanout Agreement. We may also terminate the Loanout
Agreement for cause, upon notice if at any time Mr. Tchaikovsky: (a) willfully
breaches or habitually neglects his duties; or (b) commits acts of dishonesty,
fraud, misrepresentation, gross negligence or willful misconduct that would
prevent the effective performance of his duties or would result in material harm
to us or our business. Lastly, we may terminate the Loanout Agreement without
cause upon a 30-day written notice to Mr. Tchaikovsky.
On the
other hand, Mr. Tchaikovsky may terminate the Loanout Agreement after 90-day
written notice to us.
The
Loanout Agreement also contains restrictive covenants: (i) preventing the use
and/or disclosure of confidential information during or at any time after
termination; (ii) preventing competition with us during the term of the Loanout
Agreement and for a period of 3 years after termination (including contact with
or solicitation of our customers, employees or suppliers), provided that Mr.
Tchaikovsky may make investments of up to 2% in the publicly-traded equity
securities of any of our competitors; (iii) requiring Mr. Tchaikovsky to refer
any business opportunities to us during the term of the Loanout Agreement and
for a period of 1 year after termination. However, Mr. Tchaikovsky shall have no
further obligations with respect to competition and business opportunities if
the Loanout Agreement is terminated without cause or if he terminates his
employment for cause.
Lastly,
we are obligated under the Loanout Agreement to indemnify Mr. Tchaikovsky for
any claims made against him in his capacity as the Chief Financial Officer and,
in connection to that obligation, we are required to include him under any
director and officer insurance policy that is in effect during the term of the
Loanout Agreement.
54
Director
Compensation
Five of
our current directors were appointed on or after February 23, 2009 in connection
with the Exchange Transaction, none of whom received compensation as directors
in 2009. Ms. Ying Zhang became our director on March 10, 2010, and so did not
receive compensation as a director in 2009. Our sole director prior to the
Exchange Transaction did not receive compensation as a director during 2009.
Agreements
with Directors
We
entered into a written agreement with Ms. Ying Zhang dated March 10, 2010,
pursuant to which she will, in addition to her duties as a director, serve on
the audit committee as chairperson and be designated as the audit committee
financial expert, serve on the compensation committee as a member, and serve on
the nominating committee as chairperson. For her services, Ms. Zhang will
receive annual compensation of $30,000 in cash and 10,000 restricted shares of
our common stock, payable in four quarterly installments of $7,500 and 2,500
shares each beginning with the quarter ending June 30, 2010. Additionally, we
are obligated to obtain a directors and officers insurance policy, and to
include Ms. Zhang as an insured under such policy.
We
entered into a written agreement with Dr. Jianwei Shen dated March 10, 2010,
pursuant to which he will, in addition to his duties as a director, serve on the
audit committee as a member, serve on the compensation committee as chairperson,
and serve on the nominating committee as a member. For his services, Dr. Shen
will receive annual compensation of $22,000 in cash, payable in four quarterly
installments of $5,500 beginning with the quarter ending June 30, 2010.
Additionally, we are obligated to obtain a directors and officers insurance
policy, and to include Dr. Shen as an insured under such policy.
We
entered into a written agreement with Mr. Jianhui Wang dated June 1, 2010,
pursuant to which he will, in addition to his duties as a director, serve on the
audit, compensation and nominating committees. For his services, Mr. Wang will
receive annual compensation of $16,000, payable in quarterly installments and
subject to his continuous service on the Board. Additionally, Mr. Wang will be
reimbursed for his expenses incurred in connection with the performance of his
duties, including travel expenses. We are obligated to obtain directors’ and
officers’ liability insurance, and to include Mr. as an insured under such
policy.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth information regarding the beneficial ownership of our
common stock as of August 24, 2010, for each of the following
persons:
•
|
each of our directors and each of
the named executive officers in the “Management—Executive Compensation”
section of this prospectus;
|
•
|
all directors and named executive
officers as a group; and
|
•
|
each person who is known by us to
own beneficially 5% or more of our common stock after the change of
control transaction.
|
Beneficial
ownership is determined in accordance with the rules of the SEC. Unless
otherwise indicated in the table, the persons and entities named in the table
have sole voting and sole investment power with respect to the shares set forth
opposite the stockholder’s name. Unless otherwise indicated, the address of each
beneficial owner listed below is 11/F., Xiamen Guanyin Shan International
Commercial Operation Centre, A3-2 124, Hubin Bei Road, Siming District, Xiamen,
Fujian Province, People’s Republic of China. The percentage of class
beneficially owned set forth below is based on 17,849,983 shares of common stock
outstanding on August 24, 2010.
55
Name and Position
|
Number of
Shares
of
Common
Stock
Beneficially
Owned (1)
|
Percent of
Shares
of
Common
Stock
Beneficially
Owned
(1)(2)
|
||||||
Qingqing
Wu, Chairman of the Board, President, and Chief Executive Officer
(3)
|
9,596,496
|
53.76
|
%
|
|||||
Bennet
P. Tchaikovsky, Chief Financial Officer (4)
|
3,562
|
*
|
%
|
|||||
Jianwei
Shen, Director
|
0
|
0
|
%
|
|||||
Yuzhen
Wu, Director
|
0
|
0
|
%
|
|||||
Ying
Zhang, Director (5)
|
2,500
|
*
|
%
|
|||||
Jinahui
Wang
|
0
|
0
|
%
|
|||||
All
Executive Officers and Directors as a Group (7
persons)
|
9,602,558
|
53.80
|
%
|
|||||
5%
Stockholders:
|
||||||||
Bestgrain
Limited (6)
|
9,596,496
|
53.76
|
%
|
* Less
than 1%
(1)
|
Under Rule 13d-3, a beneficial
owner of a security includes any person who, directly or indirectly,
through any contract, arrangement, understanding, relationship, or
otherwise has or shares: (i) voting power, which includes the power to
vote, or to direct the voting of shares; and (ii) investment power, which
includes the power to dispose or direct the disposition of shares. Certain
shares may be deemed to be beneficially owned by more than one person (if,
for example, persons share the power to vote or the power to dispose of
the shares). In addition, shares are deemed to be beneficially owned by a
person if the person has the right to acquire the shares (for example,
upon exercise of an option) within 60 days of the date as of which the
information is provided. In computing the percentage ownership of any
person, the amount of shares outstanding is deemed to include the amount
of shares beneficially owned by such person (and only such person) by
reason of these acquisition rights. As a result, the percentage of
outstanding shares of any person as shown in this table does not
necessarily reflect the person's actual ownership or voting power with
respect to the number of shares of common stock actually
outstanding.
|
(2)
|
Unless otherwise indicated in the
footnotes to the table, each shareholder shown on the table has sole
voting and investment power with respect to the shares beneficially owned
by him or it.
|
(3)
|
Represents shares held
directly by Bestgrain Limited. Mr. Qingqing Wu is the director and sole
shareholder of Bestgrain Limited, thus Mr. Wu indirectly owns the shares
held by Bestgrain Limited through his sole ownership of Bestgrain
Limited.
|
(4)
|
Bennet P. Tchaikovsky’s
address is 6571 Morningside Drive, Huntington Beach, CA 92648. Includes
3,562 shares to which Mr. Tchaikovsky has the right to acquire within 60
days of August 24, 2010.
|
(5)
|
Ying
Zhang’s address is No. 9 Yanyu Middle Road, Qianzhou Village, Huishan
District, Wuxi, Jiangsu Province, China 214181. Includes 2,500 shares to
which Ms. Zhang has the right to acquire within 60 days of August 24,
2010.
|
(6)
|
The
address of Bestgrain Limited is 18A Man Hing Commercial Building, 79-83
Queen’s Road Central, Hong
Kong.
|
56
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Set forth
below are our related party transactions since January 1, 2008:
Exchange
Transaction
On
February 13, 2009 (the “Closing Date”), we executed the Exchange Agreement with
PXPF and the BVI Shareholders. PXPF owns 100% of HK Dong Rong (formerly known as
Korea Jinduren), which controls Yinglin Jinduren through contractual
arrangements. On the Closing Date, we issued 14,560,000 shares of our common
stock to the BVI Shareholders in exchange for 100% of the issued and outstanding
capital stock of PXPF. As a result of the Exchange Transaction, the BVI
Shareholders became our controlling shareholders and PXPF became our wholly
owned subsidiary.
Bridge
Loan
On
June 11, 2008, Korea Jinduren (now called HK Dong Rong) entered into a bridge
loan and financing agreement (“Bridge Loan Agreement”) with Pope Investments II
LLC (“Pope”), Ancora Greater China Fund, LP (“Ancora,” and with Pope,
collectively the “Bridge Loan Investors”) and MMH Group LLC (“MMH”). Under the
Bridge Loan Agreement, MMH and the Bridge Loan Investors agreed to provide a
U.S. public shell company suitable for the Exchange Transaction, and the Bridge
Loan Investors also agreed to loan Korea Jinduren the sum of $550,000 (the
“Bridge Loan”) for payment of professional fees and expenses incurred in
connection with the Exchange Transaction. The Bridge Loan Investors and MMH
would collectively receive shares of common stock equal to 4% of our
post-Exchange Transaction total outstanding and issued common stock.
Additionally, the Bridge Loan Investors would be repaid the Bridge Loan and
collectively receive shares of our common stock equal to 1% of our
post-Exchange Transaction total issued and outstanding common stock (the “Bridge
Loan Shares”) on or after October 1, 2009 and only upon the completion of a
financing. 174,500 shares of common stock were issued at the closing of the
Exchange Transaction as the Bridge Loan Shares and have therefore been reflected
in the number of our outstanding common shares since such time. Both the Bridge
Loan and the Bridge Loan Shares were placed in a third-party escrow account, and
payments were made from such account as fees and expenses were incurred, and the
Bridge Loan Shares held in escrow until their release to the Bridge Loan
Investors was required. On October 28, 2009, the entire amount of the Bridge
Loan paid out for fees and expenses was repaid, and the balance of the Bridge
Loan remaining in escrow, if any, returned to the Bridge Loan Investors. The
Bridge Loan Shares were released to the Bridge Loan Investors on December 28,
2009 and on March 15, 2010. The Bridge Loan was not recorded at December 31,
2008 because repayment obligation did not exist at such time, since repayment
would only occur on or after October 1, 2009 and only upon the completion of a
financing.
Immediately
prior to the Exchange Transaction, Pope, Ancora and MMH beneficially owned
343,840 shares, 147,360 shares and 122,800 shares of our common stock,
respectively, representing 23.6%, 10.1% and 8.4%, respectively, of our then
issued and outstanding common stock. Matt Hayden, our former chief
executive officer, is the managing member of MMH. We do not believe that Pope,
Ancora and MMH are “promoters” as such term is defined in Rule 1-02 of
Regulation S-X.
Our
Officers and Directors’ Relationship with Us, Our Subsidiaries and
VIE
As
described in “Business – Our History and Corporate Structure” above, we control
Yinglin Jinduren through contractual arrangements between HK Dong Rong, our
wholly-owned subsidiary, and Yinglin Jinduren. As described below, some of our
officers and directors are also management members of HK Dong Rong and Yinglin
Jinduren:
Mr.
Qingqing Wu, our Chairman and Chief Executive Officer, is the Director of
PXPF, with which we entered into the Exchange Transaction. He is also the sole
shareholder and Director of Bestgrain Limited, which owned approximately 53.76%
of our common stock issued and outstanding as of August 24,
2010.
Mr. Wu is
also a Director of HK Dong Rong, which is wholly owned by PXPF.
Mr. Wu
is also a Director of Yinglin Jinduren, which we control by contractual
arrangements, as is Mr. Yuzhen Wu, who is a member of our board of directors.
Mr. Qingqing Wu and Mr. Zhifan Wu, who are brothers, hold 65.91% and 34.09%,
respectively, of the ownership interests of Yinglin
Jinduren.
Other
Related Transactions
June
30,
|
December
31,
|
|||||||||||
2010
|
2009
|
2008
|
||||||||||
Amounts
due from a director:
|
||||||||||||
Mr. Qingqing Wu (1)
|
$
|
-
|
$
|
2,428,000
|
$
|
-
|
||||||
Amount
due to a director/officer:
|
||||||||||||
Mr. Qingqing
Wu (2)
|
$
|
48,000
|
$
|
30,000
|
$
|
2,000
|
||||||
Mr.
Bennet P. Tchaikovsky (3)
|
18,000
|
-
|
-
|
|||||||||
Total
|
$
|
66,000
|
$
|
30,000
|
$
|
2,000
|
|
(1)
|
This amount was deposited into a
corporate foreign currency account in October and November 2009. To avoid
translation losses due to the appreciation of the RMB, this amount was
withdrawn from the corporate account, converted into RMB and deposited in
a personal RMB account of Mr. Qingqing Wu in trust for the Company. The
amount was converted back into U.S. dollars and deposited back into the
corporate foreign currency account in March 2010.
|
|
(2)
|
The amount due to the director is
money he advanced to us for our general expenses, and was unsecured,
interest free and repayable on demand.
|
|
(3)
|
Represents
3,562 shares of common stock that are required to be issued to this
officer as of June 30, 2010, pursuant to his agreement with the
Company.
|
Mr.
Qingqing Wu currently has four trademarks registered in his name that were
intended to be transferred to Yinglin Jinduren for no consideration prior to the
closing of the Exchange Transaction. As such transfers could not be timely
effected, Mr. Wu entered into trademark license contracts with Yinglin Jinduren
on February 12, 2009, pursuant to which he perpetually granted Yinglin Jinduren
the rights to use these trademarks for no consideration. Mr. Wu is also in the
process of transferring the trademarks to Yinglin Jinduren for no consideration
as originally intended, although such transfers have not been completed. To
date, Yinglin Jinduren has not utilized these trademarks, and the Company
considers the value of these trademarks to be de minimis.
DESCRIPTION
OF SECURITIES
The
following information describes our capital stock and provisions of our articles
of incorporation and our bylaws, both as amended and in effect as of the date of
this prospectus. This description is only a summary. The reader should also
refer to our articles of incorporation and bylaws that have been incorporated by
reference or filed with the SEC as exhibits.
General
Our
authorized capital stock consists of 100,000,000 shares of common stock, par
value $0.00001 per share, and 100,000,000 shares of preferred stock, par value
$0.00001 per share, of which 2,800,000 are designated as series A convertible
preferred stock (“Series A Preferred”).
57
Common
Stock
Holders
of our common stock are entitled to one vote per share on all matters submitted
to a vote of the stockholders, including the election of directors. Generally,
all matters to be voted on by stockholders must be approved by a majority of the
votes entitled to be cast by all shares of our common stock that are present in
person or represented by proxy. Holders of our common stock representing a
majority of our capital stock issued, outstanding, and entitled to vote,
represented in person or by proxy, are necessary to constitute a quorum at any
meeting of our stockholders. Our articles of incorporation do not provide for
cumulative voting in the election of directors.
The
holders of shares of our common stock will be entitled to such cash dividends as
may be declared from time to time by our board of directors from funds available
therefore.
Upon
liquidation, dissolution, or winding up, the holders of shares of our common
stock will be entitled to receive pro rata all assets available for distribution
to such holders after distribution of assets to the holders of Series A
Preferred.
In the
event of any merger or consolidation with or into another company in connection
with which shares of our common stock are converted into or exchangeable for
shares of stock, other securities, or property (including cash), all holders of
our common stock will be entitled to receive the same kind and amount of shares
of stock and other securities and property (including cash).
Holders
of our common stock have no pre-emptive rights and no conversion rights, and
there are no redemption provisions applicable to our common stock.
Series
A Convertible Preferred Stock
The
following is a summary of the material terms of the Certificate of Designation
of Preferences, Rights and Limitations (the “Series A Certificate”) of the
Series A Preferred and is qualified in its entirety by reference to the Series A
Certificate, which is attached as Exhibit 3.1 to our Current Report on Form 8-K
filed October 30, 2009.
Voting
Rights
Except as
otherwise provided in the Series A Certificate or by law, each holder of shares
of Series A Preferred shall be entitled to notice of any stockholder’s meeting
and to vote at such meeting together with our common stock as a single class on
an as-converted basis of one vote for each share of Series A
Preferred.
Additionally,
as long as any shares of Series A Preferred are outstanding, we may not, without
the affirmative vote of the holders of a majority of the then outstanding shares
of the Series A Preferred, (a) effect a Fundamental Transaction or Change of
Control Transaction (as defined in Sections 1 and 7(e) of the Series A
Certificate, respectively), (b) alter or change adversely the powers,
preferences, or rights given to the Series A Preferred or alter or amend the
Series A Certificate, (c) authorize or create any class of stock ranking as to
dividends, redemption or distribution of assets upon a Liquidation (as defined
in Section 5 of the Series A Certificate) senior to or otherwise pari passu with the
Series A Preferred, (d) amend our articles of incorporation or other charter
documents in any manner that adversely affects any rights of the holders of
Series A Preferred, (e) increase the number of authorized shares of Series A
Preferred, or (f) enter into any agreement with respect to any of the
foregoing.
Conversion
Rights
Conversion
at the Holder’s Option
Each
share of Series A Preferred is convertible at any time and from time to time
after the issue date at the holder’s option into shares of our common stock
determined by dividing the Stated Value of such share of Series A Preferred by
the Conversion Price (each as defined below).
Stated
Value. Each share of Series A Preferred shall have a stated
value equal to $2.86.
Conversion
Price. The conversion price for the Series A Preferred shall
equal $2.86, subject to adjustment as provided in the Series A Certificate.
Automatic
Conversion
If we
complete the listing of our common stock on the Nasdaq Capital Market or the
NYSE Amex Equities, all outstanding shares of Series A Preferred plus all
accrued but unpaid dividends shall automatically be converted into shares of the
Company’s common stock at the Conversion Price.
58
Adjustment
for Stock Dividends and Stock Splits
If, at
any time while Series A Preferred is outstanding, we: (a) pay a stock dividend
or otherwise makes a distribution or distributions payable in shares of common
stock on shares of common stock or any other Common Stock Equivalents (as
defined in Section 1 of the Series A Certificate, and, which, for avoidance of
doubt, shall not include any shares of common stock issued by the Company upon
conversion of, or payment of a dividend on, Series A Preferred); (b) subdivide
outstanding shares of common stock into a larger number of shares; (c) combine
(including by way of a reverse stock split) outstanding shares of common stock
into a smaller number of shares; or (d) issue, in the event of a
reclassification of shares of the common stock, any shares of capital stock of
the Company, then the Conversion Price shall be multiplied by a fraction of
which the numerator shall be the number of shares of common stock (excluding any
treasury shares of the Company) outstanding immediately before such event and of
which the denominator shall be the number of shares of common stock outstanding
immediately after such event.
Adjustment
for Subsequent Equity Sales
If, at
any time while Series A Preferred is outstanding, we or any of our subsidiaries
sell or grant any option to purchase or sell or grant any right to reprice our
securities, or otherwise dispose of or issue (or announce any sale, grant or any
option to purchase or other disposition) any common stock or Common Stock
Equivalents entitling any person to acquire shares of common stock at an
effective price per share that is lower than the then Conversion Price (such
lower price, the “Base Conversion Price” and such issuances collectively, a
“Dilutive Issuance”) (if the holder of the common stock or Common Stock
Equivalents so issued shall at any time, whether by operation of purchase price
adjustments, reset provisions, floating conversion, exercise or exchange prices
or otherwise, or due to warrants, options or rights per share which are issued
in connection with such issuance, be entitled to receive shares of common stock
at an effective price per share that is lower than the Conversion Price, such
issuance shall be deemed to have occurred for less than the Conversion Price on
such date of the Dilutive Issuance), then the Conversion Price shall be reduced
by multiplying the Conversion Price by a fraction, the numerator of which is the
number of shares of common stock issued and outstanding immediately prior to the
Dilutive Issuance plus the number of shares of common stock which the offering
price for such Dilutive Issuance would purchase at the then Conversion Price,
and the denominator of which shall be the sum of the number of shares of common
stock issued and outstanding immediately prior to the Dilutive Issuance plus the
number of shares of common stock so issued or issuable in connection with the
Dilutive Issuance. Notwithstanding the foregoing, no adjustment will be made in
respect of an Exempt Issuance (as defined in Section 1 of the Series A
Certificate). We must notify the holders in writing, no later than the business
day following the issuance of any common stock or Common Stock Equivalents
subject to the foregoing adjustment, indicating the applicable issuance price,
or applicable reset price, exchange price, conversion price and other pricing
terms.
Adjustment
for Subsequent Rights Offerings
If, at
any time while the Series A Preferred is outstanding, we issue rights, options
or warrants to all holders of common stock (and not to holders of Series A
Preferred) entitling them to subscribe for or purchase shares of common stock at
a price per share that is lower than the VWAP (defined in Section 1 of the
Series A Certificate) on the record date referenced below, then the Conversion
Price shall be multiplied by a fraction of which the denominator shall be the
number of shares of the common stock outstanding on the date of issuance of such
rights or warrants plus the number of additional shares of common stock offered
for subscription or purchase, and of which the numerator shall be the number of
shares of the common stock outstanding on the date of issuance of such rights or
warrants plus the number of shares which the aggregate offering price of the
total number of shares so offered (assuming delivery to the Company in full of
all consideration payable upon exercise of such rights, options or warrants)
would purchase at such VWAP. Such adjustment shall be made whenever such rights
or warrants are issued, and shall become effective immediately after the record
date for the determination of stockholders entitled to receive such rights,
options or warrants.
Adjustment
for Pro Rata Distributions
If, at
any time while the Series A Preferred is outstanding, we distribute to all
holders of common stock (and not to holders of Series A Preferred) evidences of
our indebtedness or assets (including cash and cash dividends) or rights or
warrants to subscribe for or purchase any security (other than common stock),
then in each such case the Conversion Price shall be adjusted by multiplying
such Conversion Price in effect immediately prior to the record date fixed for
determination of stockholders entitled to receive such distribution by a
fraction of which the denominator shall be the VWAP determined as of the record
date mentioned above, and of which the numerator shall be such VWAP on such
record date less the then fair market value at such record date of the portion
of such assets, evidence of indebtedness or rights or warrants so distributed
applicable to one outstanding share of the common stock as determined by our
board of directors in good faith. In either case the adjustments shall be
described in a statement delivered to the holders of Series A Preferred
describing the portion of assets or evidences of indebtedness so distributed or
such subscription rights applicable to one share of common stock. Such
adjustment shall be made whenever any such distribution is made and shall become
effective immediately after the record date mentioned above.
59
Adjustment
for Fundamental Transactions
If, at
any time while the Series A Preferred is outstanding, (a) we effect any merger
or consolidation of the Company with or into another person, (b) we effect any
sale of all or substantially all of our assets in one transaction or a series of
related transactions, (c) any tender offer or exchange offer (whether by us or
another person) is completed pursuant to which holders of common stock are
permitted to tender or exchange their shares for other securities, cash or
property, or (d) we effect any reclassification of the common stock or any
compulsory share exchange pursuant to which the common stock is effectively
converted into or exchanged for other securities, cash or property (in any such
case, a “Fundamental Transaction”), then, upon any subsequent conversion of
Series A Preferred, the holders of Series A Preferred shall have the right to
receive, for each Conversion Share (as defined in Section 1 of the Series A
Certificate) that would have been issuable upon such conversion immediately
prior to the occurrence of such Fundamental Transaction, the same kind and
amount of securities, cash or property as it would have been entitled to receive
upon the occurrence of such Fundamental Transaction if it had been, immediately
prior to such Fundamental Transaction, the holder of one share of common stock
(the “Alternate Consideration”). For purposes of any such conversion, the
determination of the Conversion Price shall be appropriately adjusted to apply
to such Alternate Consideration based on the amount of Alternate Consideration
issuable in respect of one share of common stock in such Fundamental
Transaction, and the Company shall apportion the Conversion Price among the
Alternate Consideration in a reasonable manner reflecting the relative value of
any different components of the Alternate Consideration. If holders of common
stock are given any choice as to the securities, cash or property to be received
in a Fundamental Transaction, then the holders of Series A Preferred shall be
given the same choice as to the Alternate Consideration they receive upon any
conversion of Series A Preferred following such Fundamental Transaction. To the
extent necessary to effectuate the foregoing provisions, any successor to the
Company or surviving entity in such Fundamental Transaction shall file a new
Certificate of Designation with the same terms and conditions and shall issue to
holders of Series A Preferred new preferred stock consistent with the foregoing
provisions and evidencing such holders’ right to convert such preferred stock
into Alternate Consideration. The terms of any agreement pursuant to which a
Fundamental Transaction is effected shall include terms requiring any such
successor or surviving entity to comply with the foregoing provisions and
insuring that Series A Preferred (or any such replacement security) will be
similarly adjusted upon any subsequent transaction analogous to a Fundamental
Transaction.
Common
Stock Purchase Warrants
The
following is a summary of the material terms of the Warrants issued to the
investors in both the Preferred Shares Financing and Common Shares Financing,
and is qualified in its entirety by reference to the form of the Warrant, which
is attached as Exhibit 99.2 to our Current Report on Form 8-K filed October 30,
2009.
The
Warrants collectively entitle their holders to purchase up to 1,725,134 shares
of common stock at an exercise price of $3.43 per share (the “Exercise Price”)
for a period of three years from their issuance date. We are also entitled to
call the Warrants for cancellation of the Warrants if the VWAP (as defined in
Section 1 of the Series A Certificate) exceeds 200% of the then applicable
Exercise Price.
While the
Warrants are outstanding, the Exercise Price is subject to the same
anti-dilution adjustments as those applicable to the Conversion Price of the
Series A Preferred (please see descriptions for “Adjustment for Stock Dividends
and Stock Split,” “Adjustment for Subsequent Equity Sales,” “Adjustment for
Subsequent Rights Offerings,” “Adjustment for Pro Rata Distributions” and
“Adjustment for Fundamental Transactions” above). Simultaneously with any
adjustment to the Exercise Price, the number of shares of common stock issuable
upon exercise of the Warrants shall be increased or decreased proportionately,
so that after any such adjustment the aggregate Exercise Price payable for the
increased or decreased number of shares of common stock shall be the same as the
aggregate Exercise Price in effect immediately prior to such
adjustment.
Market
Price of and Dividends on Common Equity and Related Stockholder
Matters
On April
2, 2008, our shares of common stock commenced trading on the Over-The-Counter
Bulletin Board (the “OTCBB”) under the symbol “SNOH.” On January 16, 2009, in
connection with a 1-for-100 reverse split of our issued and outstanding shares
of common stock, our symbol changed to “SICI.” On March 20, 2009, in
connection with our name change that went effective March 20, 2009, our symbol
changed to “VLOV.”
The
following table sets forth the high and low bid information for our common stock
for each quarter within our last two fiscal years and interim periods, as
reported by the OTC Bulletin Board. Other than the bid prices in 2008 (which
reflect the reverse split in January 2009 and do not represent actual
inter-dealer quotations), the bid prices reflect inter-dealer quotations, do not
include retail markups, markdowns, or commissions, and do not necessarily
reflect actual transactions.
60
Low
|
High
|
|||||||
2010
|
||||||||
Quarter
ended June 30, 2010
|
$ | 3.00 | $ | 6.00 | ||||
Quarter ended March 31,
2010
|
4.00 | 7.00 | ||||||
2009
|
||||||||
Quarter
ended December 31, 2009
|
$ | 2.95 | $ | 7.50 | ||||
Quarter
ended September 30, 2009
|
1.00 | 5.50 | ||||||
Quarter
ended June 30, 2009
|
1.25 | 2.50 | ||||||
Quarter
ended March 31, 2009
|
0.28 | 8.00 | ||||||
2008
|
||||||||
Quarter
ended December 31, 2008 *
|
$ | 5.00 | $ | 5.00 | ||||
Quarter
ended September 30, 2008 *
|
13.00 | 13.00 | ||||||
Quarter
ended June 30, 2008 * **
|
10.00 | 10.00 |
* Price
adjusted to reflect 1-for-100 reverse split effected January 12,
2009.
** Our
common stock had no active trading market until April 2, 2008.
The
last reported closing sales price for shares of our common stock was $3.60 per
share on the OTCBB on August 26, 2010.
Holders
As of
August 24, 2010, we had 90 stockholders of record of our common stock based upon
the stockholder list provided by our transfer
agent.
Transfer
Agent
Our
transfer agent is Transfer Online, whose address is 317 SW Alder Street,
Portland, Oregon 97204, and whose telephone number is (503)
227-2950.
Dividends
We have
never paid cash dividends on our common stock. We intend to keep
future earnings, if any, to finance the expansion of our business, and we do not
anticipate that any cash dividends will be paid in the foreseeable
future. Our future payment of dividends will depend on our earnings,
capital requirements, expansion plans, financial condition and other relevant
factors that our board of directors may deem relevant. Our retained
earnings deficit currently limits our ability to pay dividends.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING
AND FINANCIAL DISCLOSURE
There are
not and have not been any disagreements between us and our accountants on any
matter of accounting principles, practices, or financial statement disclosure
during our two most recent fiscal years and subsequent interim
period.
DISCLOSURE
OF COMMISSION POSITION OF INDEMNIFICATION
FOR
SECURITIES ACT LIABILITIES
Under
Sections 78.7502 and 78.751 of the Nevada Revised Statutes, we have broad powers
to indemnify and insure our directors and officers against liabilities they may
incur in their capacities as such. Our bylaws implement the indemnification and
insurance provisions permitted by Chapter 78 of the Nevada Revised Statutes by
providing that:
|
·
|
The
Company shall indemnify any of its current and past directors and officers
who by reason of being a director or officer, becomes or is threatened to
be made a party to any proceeding, whether civil, criminal, administrative
or investigative, against expenses (including attorneys’ fees), judgments,
fines, and amounts paid in settlement actually and reasonably incurred by
such person in connection with such proceeding, provided such person acted
in good faith and in a manner which he or she reasonably believed to be in
or not opposed to the best interest of the Company, and with respect to
any criminal action or proceeding, had no reasonable cause to believe the
conduct was unlawful. The Company shall also indemnify any of its current
and past directors and officers who by reason of being a director or
officer becomes or is threatened to be made a party to any threatened,
pending or completed derivative action, provided such person acted in good
faith and in a manner which he or she reasonably believed to be in or not
opposed to the best interest of the Company, and provided further that no
indemnity shall be provided if such person is adjudged to be liable for
gross negligence or willful misconduct unless the court shall determine
that such person is fairly and reasonably entitled to indemnity.
Authorization for indemnity by the Company shall be made by a majority of
the Company’s directors who are not parties to such action, suit or
proceeding, by independent legal counsel selected by one of more of the
Company’s directors, or by the Company’s shareholders.
|
|
·
|
The
expenses of directors and officers incurred in defending a civil or
criminal action, suit, or proceeding shall be paid by the Company upon
receipt of an undertaking by or on behalf of such person to repay such
amount.
|
|
·
|
The
Company shall have the power to purchase and maintain insurance on behalf
of its current and past directors and officers against any liability
assessed against such person in such capacity or arising out such person’s
position as a director or officer, whether or not the Company would have
the power to indemnify such person against such liability.
|
61
Insofar
as indemnification for liabilities arising under the Securities Act of 1933, as
amended (the “Securities Act”) may be permitted to directors, officers, or
persons controlling the Company pursuant to the foregoing provisions, or
otherwise, we have been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
ADDITIONAL
INFORMATION
We are
subject to the reporting requirements of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). Reports filed with the SEC pursuant to the
Exchange Act, including proxy statements, annual and quarterly reports, and
other reports that we have filed can be inspected and copied at the Public
Reference Section of the SEC at 100 F. Street N.E., Room 1580, Washington, D.C.
20549, at prescribed rates. You may obtain information on the operation of the
public reference rooms by calling the SEC at 1-800-SEC-0330. The SEC also
maintains an Internet website that contains reports, proxy statements and other
information about issuers, like us, that file electronically with the SEC. The
address of that website is www.sec.gov.
62
Index
to Consolidated Financial Statements
Pages
|
||
Consolidated
Balance Sheets as of June 30, 2010 (unaudited) and December 31,
2009
|
F-2
|
|
Consolidated
Statements of Income and Comprehensive Income for the Three and Six Months
Ended June 30, 2010 and 2009 (unaudited)
|
F-3
|
|
Consolidated
Statement of Stockholder’ Equity and Comprehensive Income
(unaudited)
|
F-4
|
|
Consolidated
Statements of Cash Flows for the Three and Six Months Ended June 30, 2010
and 2009 (unaudited)
|
F-5
|
|
Notes
to the Consolidated Financial Statements (unaudited)
|
F-6
|
|
Report
of Independent Registered Public Accounting Firm
|
F-21
|
|
Consolidated
Balance Sheets as of December 31, 2009
|
F-22
|
|
Consolidated
Statements of Income for the Years Ended December 31, 2009 and
2008
|
F-23
|
|
Consolidated
Statements of Shareholders’ Equity and Comprehensive
Income
|
F-24
|
|
Consolidated
Statements of Cash Flows for the Year Ended December 31, 2009 and
2008
|
F-25
|
|
Notes
to the Consolidated Financial Statements
|
F-26
|
F-1
VLOV,
INC.
CONSOLIDATED
BALANCE SHEETS
(Amounts
in thousands - except for share and per share data)
|
June 30,
|
December 31,
|
||||||
|
2010
|
2009
|
||||||
|
(unaudited)
|
|||||||
ASSETS
|
||||||||
Current
Assets:
|
||||||||
Cash
and cash equivalents
|
$
|
13,437
|
$
|
11,036
|
||||
Time
deposits
|
3,020
|
-
|
||||||
Accounts
and other receivables
|
13,323
|
9,191
|
||||||
Amount
due from a director
|
-
|
2,428
|
||||||
Trade
deposits
|
601
|
2,309
|
||||||
Inventories
|
958
|
285
|
||||||
Prepaid
expenses
|
534
|
763
|
||||||
Total
current assets
|
31,873
|
26,012
|
||||||
Property,
plant and equipment, net
|
983
|
966
|
||||||
Land
use rights
|
224
|
263
|
||||||
TOTAL
ASSETS
|
$
|
33,080
|
$
|
27,241
|
||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
Liabilities:
|
||||||||
Accounts
payable
|
$
|
2,899
|
$
|
2,565
|
||||
Accrued
expenses and other payables
|
872
|
583
|
||||||
Amount
due to a director
|
66
|
30
|
||||||
Derivative
liability
|
3,840
|
3,684
|
||||||
Short-term
bank loans
|
589
|
734
|
||||||
Income
taxes payable
|
1,082
|
1,601
|
||||||
Total
current liabilities
|
9,348
|
9,197
|
||||||
Non-current
Liabilities:
|
||||||||
Other
payable
|
76
|
75
|
||||||
Total
liabilities
|
9,424
|
9,272
|
||||||
Commitments
|
-
|
-
|
||||||
Stockholders'
Equity:
|
||||||||
Common
stock, $0.00001 par value, 100,000,000 shares authorized,17,565,617 and
16,667,957 shares respectively issued and outstanding
|
1
|
1
|
||||||
Preferred
stock, $0.00001 par value, 100,000,000 shares authorized,1,905,561 and
2,796,721 shares issued and outstanding respectively,
(liquidation
preference $5,449,904 and $7,998,622, respectively)
|
2,727
|
4,003
|
||||||
Additional
paid-in capital
|
7,636
|
6,319
|
||||||
Statutory
reserve
|
913
|
913
|
||||||
Retained
earnings
|
11,717
|
6,173
|
||||||
Accumulated
other comprehensive income
|
662
|
560
|
||||||
Total
stockholders' equity
|
23,656
|
17,969
|
||||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$
|
33,080
|
$
|
27,241
|
See
accompanying notes to consolidated financial statements
F-2
VLOV,
INC.
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited;
amounts in thousands - except for share and per share data)
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Net
sales
|
$
|
17,946
|
$
|
14,073
|
$
|
36,013
|
$
|
31,939
|
||||||||
Cost
of sales
|
11,109
|
8,997
|
22,254
|
20,464
|
||||||||||||
Gross
profit
|
6,837
|
5,076
|
13,759
|
11,475
|
||||||||||||
Operating
expenses:
|
||||||||||||||||
Selling
expenses
|
2,556
|
1,314
|
4,039
|
2,059
|
||||||||||||
General
and administrative expenses
|
1,071
|
438
|
1,901
|
1,052
|
||||||||||||
3,627
|
1,752
|
5,940
|
3,111
|
|||||||||||||
Income
from operations
|
3,210
|
3,324
|
7,819
|
8,364
|
||||||||||||
Other
income (expenses):
|
||||||||||||||||
Change
in fair value of derivative liability
|
2,166
|
-
|
(175
|
)
|
-
|
|||||||||||
Interest
income
|
18
|
3
|
44
|
10
|
||||||||||||
Interest
expense
|
(16
|
)
|
(14
|
)
|
(37
|
)
|
(28
|
)
|
||||||||
2,168
|
(11
|
)
|
(168
|
)
|
(18
|
)
|
||||||||||
Income
before provision for income taxes
|
5,378
|
3,313
|
7,651
|
8,346
|
||||||||||||
Provision
for income taxes
|
911
|
1,003
|
2,107
|
2,260
|
||||||||||||
Net
income
|
4,467
|
2,310
|
5,544
|
6,086
|
||||||||||||
Other
comprehensive income:
|
||||||||||||||||
Foreign
currency translation adjustment
|
101
|
(21
|
)
|
102
|
(14
|
)
|
||||||||||
Comprehensive
income
|
$
|
4,568
|
$
|
2,289
|
$
|
5,646
|
$
|
6,072
|
||||||||
Basic earnings
per share
|
$
|
0.26
|
$
|
0.14
|
$
|
0.33
|
$
|
0.39
|
||||||||
Diluted
earnings per share
|
$
|
0.26
|
$
|
0.14
|
$
|
0.32
|
$
|
0.39
|
||||||||
Weighted
average number of common shares and participating
preferred shares outstanding:
|
||||||||||||||||
Basic
|
17,042,685
|
16,000,000
|
16,856,357
|
15,657,901
|
||||||||||||
Diluted
|
17,384,002
|
16,000,000
|
17,197,674
|
15,657,901
|
See
accompanying notes to consolidated financial statements
F-3
VLOV,
INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDER’S EQUITY AND COMPREHENSIVE INCOME
(Unaudited;
amounts in thousands- except for share and per share data)
|
Accumulated
|
|||||||||||||||||||||||||||||||||||
|
Additional
|
Other
|
||||||||||||||||||||||||||||||||||
|
Common stock
|
Preferred stock
|
paid-in
|
Statutory
|
Comprehensive
|
Retained
|
||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
capital
|
reserve
|
income
|
earnings
|
Total equity
|
|||||||||||||||||||||||||||
Balance
at December 31, 2008
|
14,560,000
|
$
|
1
|
-
|
$
|
-
|
$
|
1,236
|
$
|
913
|
$
|
543
|
$
|
4,876
|
$
|
7,569
|
||||||||||||||||||||
Shares
issued in reverse merger acquisition
|
1,440,000
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||||||
Foreign
currency translation
|
(14
|
)
|
(14
|
)
|
||||||||||||||||||||||||||||||||
Payments
of dividend
|
(5,127
|
)
|
(5,127
|
)
|
||||||||||||||||||||||||||||||||
Net
income
|
6,086
|
6,086
|
||||||||||||||||||||||||||||||||||
Balance
at June 30, 2009
|
16,000,000
|
1
|
-
|
-
|
1,236
|
913
|
529
|
5,835
|
8,514
|
|||||||||||||||||||||||||||
Shares
issued in reverse merger acquisition
|
14,421
|
|||||||||||||||||||||||||||||||||||
Sale
of preferred stock and warrants
|
-
|
-
|
2,796,721
|
7,999
|
-
|
-
|
-
|
-
|
7,999
|
|||||||||||||||||||||||||||
Sale
of common stock and warrants
|
653,536
|
-
|
-
|
-
|
1,870
|
-
|
-
|
-
|
1,870
|
|||||||||||||||||||||||||||
Fair
value of warrant liability
|
-
|
-
|
-
|
(3,996
|
)
|
(698
|
)
|
-
|
-
|
-
|
(4,694
|
)
|
||||||||||||||||||||||||
Preferred
stock - beneficial conversion feature
|
-
|
-
|
-
|
(4,003
|
)
|
4,003
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||||||
Preferred
stock - deemed dividend
|
-
|
-
|
4,003
|
-
|
-
|
-
|
(4,003
|
)
|
-
|
|||||||||||||||||||||||||||
Issuance
fees and costs
|
-
|
-
|
-
|
-
|
(92
|
)
|
-
|
-
|
-
|
(92
|
)
|
|||||||||||||||||||||||||
Net
income
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
4,359
|
4,359
|
|||||||||||||||||||||||||||
Foreign
currency translation adjustment
|
-
|
-
|
-
|
-
|
-
|
-
|
31
|
-
|
31
|
|||||||||||||||||||||||||||
Dividend
declared
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(18
|
)
|
(18
|
)
|
|||||||||||||||||||||||||
Total
comprehensive income
|
||||||||||||||||||||||||||||||||||||
Balance
at December 31, 2009
|
16,667,957
|
$
|
1
|
2,796,721
|
$
|
4,003
|
$
|
6,319
|
$
|
913
|
$
|
560
|
$
|
6,173
|
$
|
17,969
|
||||||||||||||||||||
Net
income
|
5,544
|
5,544
|
||||||||||||||||||||||||||||||||||
Foreign
Currency translation adjustment
|
102
|
102
|
||||||||||||||||||||||||||||||||||
Conversion
of preferred stock to common stock
|
891,160
|
-
|
(891,160
|
)
|
(1,276
|
)
|
1,276
|
-
|
||||||||||||||||||||||||||||
Warrants
converted
|
6,500
|
-
|
-
|
|||||||||||||||||||||||||||||||||
Preferred
stock- beneficial conversion feature
|
197
|
197
|
||||||||||||||||||||||||||||||||||
Change
in fair value of warrant liability
|
(156
|
)
|
(156
|
)
|
||||||||||||||||||||||||||||||||
Balance
at June 30, 2010
|
17,565,617
|
$
|
1
|
1,905,561
|
$
|
2,727
|
$
|
7,636
|
$
|
913
|
$
|
662
|
$
|
11,717
|
$
|
23,656
|
F-4
VLOV,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited;
amounts in thousands)
|
Six Months Ended June 30,
|
|||||||
|
2010
|
2009
|
||||||
Cash
flows from operating activities:
|
||||||||
Net
income
|
$
|
5,544
|
$
|
6,086
|
||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
Depreciation
and amortization
|
35
|
50
|
||||||
Change
in fair value of derivative liability
|
175
|
-
|
||||||
(Increase)
decrease in assets:
|
||||||||
Accounts
receivable
|
(4,099
|
)
|
(2,207
|
)
|
||||
Trade
deposits
|
1,710
|
-
|
||||||
Inventories
|
(669
|
)
|
17
|
|||||
Prepaid
expenses
|
231
|
(15
|
)
|
|||||
Increase
(decrease) in liabilities:
|
||||||||
Accounts
payable
|
322
|
1,371
|
||||||
Accrued
expenses and other payables
|
321
|
(521
|
)
|
|||||
Income
and other tax payables
|
(522
|
)
|
(458
|
)
|
||||
Net
cash provided by operating activities
|
3,048
|
4,323
|
||||||
Cash
flows from investing activities:
|
||||||||
Purchases
of property, plant and equipment
|
(7
|
)
|
-
|
|||||
Time
deposits
|
(3,020
|
)
|
-
|
|||||
Net
cash used in investing activities
|
(3,027
|
)
|
-
|
|||||
-
|
||||||||
Cash
flows from financing activities:
|
||||||||
Pledged
bank deposits
|
-
|
88
|
||||||
Amount
due to/from a director
|
2,428
|
-
|
||||||
Proceeds
from debt financing
|
315
|
440
|
||||||
Payments
of short-term debt
|
(440
|
)
|
(293
|
)
|
||||
Warrants
exercised
|
22
|
-
|
||||||
Payments
of dividend *
|
-
|
(5,130
|
)
|
|||||
Net
cash provided by (used in) financing activities
|
2,325
|
(4,895
|
)
|
|||||
Effect
of exchange rate changes
|
55
|
(5
|
)
|
|||||
Net
increase in cash and cash equivalents
|
2,401
|
(577
|
)
|
|||||
Cash
and cash equivalents, beginning of period
|
11,036
|
2,863
|
||||||
Cash
and cash equivalents, end of period
|
$
|
13,437
|
$
|
2,286
|
||||
Supplemental
disclosure of cash flow information:
|
||||||||
Interest
paid
|
$
|
37
|
$
|
28
|
||||
Income
taxes paid
|
$
|
2,288
|
$
|
1,829
|
See
accompanying notes to consolidated financial statements
* The
dividend was paid to the private shareholders prior to the reverse
merger.
F-5
VLOV,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010
(1)
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
|
(a)
|
Description of business and
organization
|
VLOV
Inc. (the “Company”) was incorporated in the State of Nevada on October 30,
2006, under the name “Sino Charter, Inc.” The Company changed its name to “VLOV,
Inc.” on March 20, 2009. The Company designs, manufactures and sells fashion
apparel under the brand name “VLOV”. All current operations of the Company are
in the People’s Republic of China (“China” or the “PRC”).
On
February 13, 2009, the Company completed a stock exchange transaction with the
stockholders of Peng Xiang Peng Fei Investments Limited (“PXPF”), whereby
14,560,000 restricted shares of common stock were issued to the stockholders of
PXPF in exchange for 100% of the common stock of PXPF (the “Share Exchange”).
The completion of the Share Exchange resulted in a change of
control.
The
Share Exchange has been accounted for as a reverse acquisition and
recapitalization of the Company whereby PXPF is deemed to be the accounting
acquirer (legal acquiree) and the Company is the accounting acquiree (legal
acquirer). The accompanying consolidated financial statements are in substance
those of PXPF, and the Company is deemed to be a continuation of the business of
PXPF. At the time of the reverse merger with PXPF, the Company had no assets or
liabilities, and the 1,454,421 shares of its common stock outstanding
immediately prior to the time of the Share Exchange have been accounted for at
their par value at the time of the transaction.
The
Company does not conduct any substantive operations of its own; all of the
Company’s operations are conducted by a variable interest entity, Jinjiang
Yinglin Jinduren Fashion Limited (“Yinglin Jinduren”), which is controlled by
Dong Rong Capital Investment Limited (“HK Dong Rong”). HK Dong Rong is a limited
liability company incorporated in Hong Kong on January 5, 2005 originally under
the name “Korea Jinduren (International) Dress Limited” (“Korea Jinduren”), and
was acquired by PXPF from the majority shareholders of PXPF on September 22,
2008. PXPF is a limited liability company incorporated in the British Virgin
Islands (“BVI”) on April 30, 2008.
Yinglin
Jinduren is a limited company incorporated without shares in the PRC on January
19, 2002, of which the initial paid-in capital of RMB10,000,000 ($1,237,000) was
funded by the majority shareholders of PXPF. The management of Yinglin Jinduren
is comprised of Mr. Qingqing Wu as Chairman and Executive Director, and Mr.
Zhifan Wu as Executive Director. Mr. Qingqing Wu is the Company’s Chief
Executive Officer, President and Chairman of the Board of Directors. Mr.
Qingqing Wu and Mr. Zhifan Wu, who are brothers, hold 65.91% and 34.09%,
respectively, of the ownership interests of Yinglin Jinduren.
PRC
law currently has limits on foreign ownership of domestic PRC companies. To
comply with these foreign ownership restrictions, on December 28, 2005, HK Dong
Rong (then known as Korea Jinduren) entered into certain exclusive agreements
with Yinglin Jinduren and its shareholders. Pursuant to these agreements, HK
Dong Rong provides exclusive consulting services to Yinglin Jinduren in return
for a consulting services fee which is equal to Yinglin Jinduren’s net profits.
Prior to the Share Exchange, however, certain dividends were declared and paid
from Yinglin Jinduren’s net income to its equity owners. In addition, Yinglin
Jinduren’s equity owners have pledged their equity interests in Yinglin Jinduren
to HK Dong Rong, irrevocably granted HK Dong Rong an exclusive option to
purchase all or part of the equity interests in Yinglin Jinduren and agreed to
entrust all the rights to exercise their voting power to the person(s) appointed
by HK Dong Rong.
Through
these contractual arrangements, HK Dong Rong has the ability to control Yinglin
Jinduren’s daily operations and financial affairs, appoint its senior executives
and approve all matters requiring shareholder approval. As part of these
contractual arrangements, HK Dong Rong and Yinglin Jinduren entered into an
operating agreement which, amongst other matters, precludes Yinglin Jinduren
from borrowing money, selling or acquiring assets, including intellectual
property rights, providing guarantees to third parties or assigning any business
agreements, without the prior written consent of HK Dong Rong. HK Dong Rong also
agreed that, if any guarantee for Yinglin Jinduren’s performance of any contract
or loan was required, HK Dong Rong would provide such guarantee to Yinglin
Jinduren.
As a
result of these contractual arrangements, HK Dong Rong is entitled to
receive the expected residual returns of Yinglin Jinduren. Additionally,
although Yinglin Jinduren has been profitable, in the event that Yinglin
Jinduren were to incur losses, HK Dong Rong would be obligated to absorb a
majority of the risk of loss from Yinglin Jinduren’s activities as a result of
its inability to receive payment for its accumulated consulting fees
that are equal to Yinglin Jinduren’s net income.
F-6
VLOV,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010
(1)
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED)
|
(a)
|
Description of business and
organization (continued)
|
The
Company believes that the equity investors in Yinglin Jinduren do not have the
characteristics of a controlling financial interest, and that the Company is the
primary beneficiary of the operations and residual returns of Yinglin Jinduren
and, in the event of losses, would be required to absorb a majority of such
losses. Accordingly, the Company consolidates Yinglin Jinduren’s results, assets
and liabilities in the accompanying financial statements. Due to the contractual
arrangements, the net income and interest allocable to the noncontrolling
interest is zero.
The
Company’s consolidated assets do not include any collateral for Yinglin
Jinduren’s obligations. The creditors of Yinglin Jinduren do not have recourse
to the general credit of the Company.
On
November 19, 2009, HK Dong Rong incorporated Dong Rong (China) Co., Ltd. in the
PRC as its wholly-owned subsidiary (“China Dong Rong”), with registered capital
of $8 million. As of June 30, 2010, $4 million has been contributed to
China Dong Rong and the remaining registered capital will be contributed within
two years after the date of incorporation. It is the intention of the Company
and the equity owners of Yinglin Jinduren to transfer the business operations of
Yinglin Jinduren to China Dong Rong; however, such transfer had not yet occurred
as of June 30, 2010.
(b)
|
Basis of presentation and
consolidation
|
The
accompanying consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of
America.
As
previously described, the Company, through its wholly owned subsidiary HK Dong
Rong, consolidates Yinglin Jinduren as Yinglin Jinduren is considered to be a
variable interest entity (VIE) and the Company is considered to be its primary
beneficiary.
Because
the Company and Yinglin Jinduren are under common control, the initial
measurement of the assets and liabilities of Yinglin Jinduren for the purpose of
consolidation by the Company was at book value. The Company has had no other
business activities except for the exclusive agreements with Yinglin Jinduren
and its equity owners.
The
consolidated financial statements include the financial statements of the
Company, its subsidiary and the variable interest entity, Yinglin Jinduren. All
significant inter-company transactions and balances between the Company, its
subsidiary and the variable interest entity are eliminated upon
consolidation.
(c)
|
Use of
Estimates
|
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make certain estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements. The reported amounts of
revenues and expenses during the reporting period may be affected by the
estimates and assumptions we are required to make. Estimates that are critical
to the accompanying consolidated financial statements relate primarily to
returns, sales allowances and customer chargebacks, the valuation of long-lived
assets and the identification and valuation of derivative instruments. Estimates
and assumptions are reviewed periodically and the effects of revisions are
reflected in the period that they are determined to be necessary. Actual results
could differ from these estimates.
(d)
|
Accounting
Pronouncements
|
In
June 2009, the Financial Accounting Standards Board (‘‘FASB’’) issued a
statement establishing the FASB Accounting Standards Codification™ (the “FASB
ASC" or the “Codification"). The Codification became the single source of
authoritative U.S. generally accepted accounting principles (‘‘US GAAP’’)
recognized by the FASB to be applied by non-governmental entities. Rules and
interpretive releases of the United States Securities and Exchange Commission
under authority of federal securities laws are also sources of authoritative US
GAAP for SEC registrants. The Codification did not change existing US GAAP but
incorporated existing accounting and reporting standards into a new topical
structure with a new referencing system. Authoritative standards included in the
Codification are designated by their Accounting Standards Codification (‘‘ASC’’)
topical reference, and new standards will be designated as Accounting Standards
Updates (‘‘ASU’’), with a year and assigned sequence number. We have updated our
references to US GAAP to reflect the Codification.
F-7
VLOV,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010
(1)
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED)
|
(e)
|
Revenue
Recognition
|
A
majority of the Company’s products are manufactured on its behalf by third
parties, based on orders for the Company’s products received from customers. The
Company is responsible for product design, product specification, pricing to the
customer, the choice of third-party manufacturer, product quality and credit
risk associated with the customer receivable. As such, the Company acts as a
principal and records revenues on a gross basis.
The
Company recognizes revenues when (a) the price to the customer is fixed or
determinable, (b) persuasive evidence of an arrangement exists, (c) delivery has
occurred and (d) collectability of the resulting receivable is reasonably
assured. Revenue from the sales of goods is recognized on the transfer of
significant risks and rewards of ownership, which generally coincides with the
time when the goods are delivered and the title has passed to the customer.
Revenue excludes value-added tax and is stated after deduction of trade
discounts and allowances.
(f)
|
Cash and Cash
Equivalents
|
For
purposes of the statement of cash flows, the Company considers all highly liquid
instruments with original maturities of three months or less to be cash
equivalents. Cash and cash equivalents comprise cash at bank and on hand and
demand deposits with banks.
(g)
|
Accounts
receivable
|
Accounts
receivable, which are unsecured, are stated at the amount the Company expects to
collect. The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
The Company evaluates the collectability of its accounts receivable based on a
combination of factors, including customer credit-worthiness and historical
collection experience. Management reviews the receivable aging and adjusts the
allowance based on historical experience, financial condition of the customer
and other relevant current economic factors. As of June 30, 2010, all of the
trade receivable balances were aged less than 90 days. Management has determined
no allowance for uncollectible amounts is required.
(h)
|
Depreciation and
Amortization
|
Property,
plant and equipment are stated at cost less accumulated depreciation and
impairment losses. Depreciation of property, plant and equipment is computed
using the straight-line method based on the following estimated useful
lives:
Buildings
|
30
years
|
Furniture,
fixtures and equipment
|
5
years
|
Motor
vehicles
|
5
years
|
Office
equipment
|
5
years
|
Plant
and machinery
|
5
to 15 years
|
(i)
|
Inventories
|
Inventories
are stated at the lower of cost or market value, determined by the weighted
average method. Work-in-progress and finished goods inventories consist of raw
materials, direct labor and overhead associated with the manufacturing
process.
(j)
|
Foreign Currency
Translation
|
The
Company has the PRC’s currency, Renminbi (“RMB”), as its functional
currency. The consolidated financial statements of the Company are translated
from RMB into U.S. Dollars (“US$”). Accordingly, all assets and liabilities are
translated at the exchange rates prevailing at the balance sheet dates, all
income and expenditure items are translated at the average rates for each of the
periods and equity accounts, except for retained earnings, are translated at the
rate at the transaction date. Retained earnings reflect the cumulative net
income (loss) translated at the average rates for the respective periods since
inception less dividends translated at the rate at the transaction
date.
F-8
VLOV,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010
(1)
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED)
|
(j)
|
Foreign Currency Translation
(continued)
|
RMB is
not a fully convertible currency. All foreign exchange transactions involving
RMB must take place either through the People's Bank of China (the "PBOC") or
other institutions authorized to buy and sell foreign exchange. The exchange
rates adopted for the foreign exchange transactions are the rates of exchange
quoted by the PBOC, which are determined largely by supply and demand. The rates
of exchange quoted by the People's Bank of China on June 30, 2010 and December
31, 2009 were US$1.00 to RMB 6.79 and RMB 6.83, respectively. The average
translation rates of US$1.00 to RMB 6.82 was applied to the income statement
accounts for the three months and six months ended June 30, 2010 and 2009,
respectively.
Translation
adjustments are recorded as other comprehensive income in the consolidated
statement of stockholders equity and comprehensive income and as a separate
component of stockholders equity.
Commencing
from July 21, 2005, China adopted a managed floating exchange rate regime based
on market demand and supply with reference to a basket of currencies. Since
then, the PBOC administers and regulates the exchange rate of US$ against RMB
taking into account the demand and supply of RMB, as well as domestic and
foreign economic and financial conditions.
(k)
|
Land use
rights
|
All
land in the PRC is owned by the government and cannot be sold to any individual
or company. However, the government grants the user a “land use right” to use
the land.
Land
use right is stated at cost less accumulated amortization and impairment losses.
Amortization is calculated on the straight-line method over the estimated useful
life of 50 years. The Company’s land use right expires in 2054.
Intangible
assets of the Company are reviewed annually to determine whether their carrying
value has become impaired. The Company considers assets to be impaired if the
carrying value exceeds the future projected cash flows from related operations.
The Company also re-evaluates the periods of amortization to determine whether
subsequent events and circumstances warrant revised estimates of useful lives.
As of June 30, 2010, the Company expects these assets to be fully
recoverable.
(l)
|
Long-Lived
Assets
|
The
Company estimates the future undiscounted cash flows to be derived from an asset
to assess whether or not a potential impairment exists when events or
circumstances indicate the carrying value of a long-lived asset may be impaired.
If the carrying value exceeds the Company’s estimate of future undiscounted cash
flows, the Company then calculates the impairment as the excess of the carrying
value of the asset over the Company’s estimate of its fair market
value.
(m)
|
Comprehensive
Income
|
The
Company’s only component of other comprehensive income is foreign currency
translation gains and losses. The foreign currency translation gains for the
three months and six months ended June 30, 2010 were US$101,000 and US$102,000
respectively. The foreign currency translation losses for the three months and
six months ended June 30, 2009 were US$21,000 and US$14,000 respectively.
Accumulated other comprehensive income is recorded as a separate component of
stockholders’ equity.
(n)
|
Income
Taxes
|
The
Company is mainly subject to income taxes in the PRC. Significant judgment is
required in determining the provision for income taxes. There are many
transactions and calculations for which the ultimate tax determination is
uncertain during the ordinary course of business. The Company recognizes
liabilities for anticipated tax audit issues based on estimates of whether
additional taxes will be due. Where the final tax outcome of these matters is
different from the amounts that were initially recorded, such differences will
impact the income tax and deferred tax provisions in the period in which such
determination is made.
F-9
VLOV,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010
(1)
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED)
|
(n)
|
Income Taxes
(continued)
|
Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates applicable to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
The
Company evaluates its uncertain tax positions and 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.
(o)
|
Advertising
Costs
|
Advertising
costs are expensed in the period in which the advertisements are first run.
Advertising expense for the three months ended June 30, 2010 and 2009 were
approximately US$1.37 million and US$0.75 million, respectively, and
approximately US$2.74 million and US$1.44 million for the six months ended June
30, 2010 and 2009, respectively. Advertising costs include advertising subsidy
expense which is accrued based on the terms in effect with distributors and paid
when all attaching conditions have been completed.
(p)
|
Shipping and Handling
Costs
|
Shipping
and handling costs are expensed as incurred and included in cost of
sales.
(q)
|
Research and Development
Costs
|
The
Company charges all product design and development costs to expense when
incurred. Product design and development costs aggregated approximately US$0.46
million and US$0.37 million for the three months ended June 30, 2010 and 2009,
respectively, and approximately US$0.97 million and US$0.62 million for the six
months ended June 30, 2010 and 2009, respectively.
(r)
|
Derivative Financial
Instruments
|
The
Company does not use derivative instruments to hedge exposures to cash flow,
market, or foreign currency risks.
The
Company reviews the terms of convertible debt or convertible preferred stock
that it issues to determine whether there are embedded derivative instruments,
including the embedded conversion option, that are required to be bifurcated and
accounted for separately as a derivative financial instrument. Also, in
connection with the sale of convertible debt or equity instruments, the Company
may issue freestanding warrants that may, depending on their terms, be accounted
for as derivative instrument liabilities, rather than as
equity.
Derivative
financial instruments are initially measured at their fair value. For derivative
financial instruments that are accounted for as liabilities, the derivative
instrument is initially recorded at its fair value and is then re-valued at each
reporting date, with changes in the fair value reported as charges or credits to
income. For option-based derivative financial instruments, the Company uses a
binomial option pricing model to value the derivative
instruments.
(s)
|
Fair Value of Financial
Instruments
|
The
carrying amounts of the Company’s financial instruments, which principally
include cash and cash equivalents, time deposits, accounts receivable and
accounts payable, approximate their fair values due to the relatively short
maturity of such instruments.
The
carrying amount of the Company’s short-term borrowings approximates their fair
value based upon current rates and terms available to the Company for similar
debt.
Warrants
that are recorded as derivative instrument liabilities are carried at their fair
value, with changes in the fair value reported as charges or credits to income
each period.
F-10
VLOV,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010
(1)
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED)
|
(t)
|
Earnings Per
Share
|
Basic
net income per share is computed by dividing net income attributable to common
shareholders by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share is calculated by
dividing net income by the weighted-average number of common shares used in the
basic earnings per share calculation plus the number of common shares that would
be issued assuming exercise or conversion of all potentially dilutive common
stock equivalents outstanding. Equity instruments are excluded from the
calculation of diluted earnings per share if the effect of including such
instruments is anti-dilutive.
(u)
|
New Accounting
Pronouncements
|
The
following lists the Accounting Standards Codification Updates that are relevant
to the Company’s consolidated financial statements and were effective during the
periods covered by these financial statements. These pronouncements, however,
did not have material impact on the Company’s financial
statements.
Pronouncement
|
Issued
|
Title
|
||
ASU
No. 2009-15
|
October
2009
|
Accounting
for Own-Share Lending Arrangements in Contemplation of Convertible Debt
Issuance or Other Financing
|
||
ASU
No. 2009-16
|
December
2009
|
Transfers
and Servicing (Topic 860): Accounting for Transfers and Financial
Assets.
|
||
ASU
No. 2009-17
|
December
2009
|
Consolidations
(Topic 810): Improvements to Financial Reporting by Enterprises Involved
with Variable Interest Entities
|
||
ASU
No. 2010-01
|
January
2010
|
Equity
(Topic 505): Accounting for Distributions to Shareholders with Components
of Stock and Cash – a consensus of the FASB Emerging Issues Task
Force
|
||
ASU
No. 2010-02
|
January
2010
|
Consolidation
(Topic 810): Accounting and Reporting for Decreases in Ownership of a
Subsidiary – a Scope Clarification
|
||
ASU
No. 2010-05
|
|
January
2010
|
|
Compensation
- Stock Compensation (Topic718): Escrowed Share Arrangements and the
Presumption of
Compensation
|
The
following pronouncements will become effective after the periods covered by
these financial statements. The Company is assessing their impact, but does not
believe that the adoption of these pronouncements will have a material impact on
the Company’s financial statements.
Pronouncement
|
Issued
|
Title
|
||
ASU
No. 2009-13
|
October
2009
|
Revenue
Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements – a
consensus of the FASB Emerging Issues Task Force
|
||
ASU
No. 2010-06
|
January
2010
|
Fair
Value Measurements and Disclosures (Topic 820): Improving Disclosures
about Fair Value Measurements
|
||
ASU
No. 2010-09
|
February
2010
|
Subsequent
Events (Topic 855): Amendments to Certain Recognition and Disclosure
Requirements
|
||
ASU
No. 2010-11
|
|
March
2010
|
|
Derivatives
and Hedging (Topic 815): Scope Exception Related to Embedded Credit
Derivatives
|
At its
meeting on March 18, 2010, the FASB’s Emerging Issues Task Force reached a
consensus on five issues (the "Issues"). The Issues were ratified by the
FASB at its meeting on March 31, 2010, and the related Accounting Standards
Codification Updates to be issued will become authoritative accounting guidance.
None of these Issues are anticipated to have a material effect on the
Company’s consolidated financial statements.
F-11
VLOV,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010
(2)
|
TIME
DEPOSITS
|
Time
deposits (in thousands):
|
June 30,
|
December 31,
|
||||||
|
2010
|
2009
|
||||||
(unaudited)
|
||||||||
Time
deposits
|
$
|
3,020
|
$
|
-
|
Time
deposits represent amounts deposited with Xiamen International Bank and will
mature on September 30, 2010.
(3)
|
INVENTORIES
|
Inventories
consist of the following (in thousands):
|
June 30,
|
December 31,
|
||||||
|
2010
|
2009
|
||||||
(unaudited)
|
||||||||
Raw
materials
|
$
|
761
|
$
|
145
|
||||
Work
in process
|
-
|
15
|
||||||
Finished
goods
|
197
|
125
|
||||||
$
|
958
|
$
|
285
|
(4)
|
PROPERTY, PLANT AND
EQUIPMENT
|
Property,
plant and equipment is summarized as follows (in thousands):
|
June 30,
|
December 31,
|
||||||
|
2010
|
2009
|
||||||
(unaudited)
|
||||||||
Buildings
|
$
|
914
|
$
|
914
|
||||
Furniture,
fixtures and equipment
|
83
|
83
|
||||||
Motor
vehicles
|
196
|
196
|
||||||
Office
equipment
|
25
|
24
|
||||||
Plant
and machinery
|
207
|
207
|
||||||
Total
property, plant and equipment
|
1,425
|
1,424
|
||||||
Less
: accumulated depreciation
|
(442
|
)
|
(458
|
)
|
||||
$
|
983
|
$
|
966
|
There
was no capitalized interest for the six months ended June 30, 2010 and the years
ended December 31, 2009.
F-12
VLOV,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010
(5)
|
LAND USE
RIGHTS
|
Land
use rights are summarized as follows (in thousands):
|
June 30,
|
December 31,
|
||||||
|
2010
|
2009
|
||||||
|
(unaudited)
|
|||||||
Land
use rights
|
$
|
315
|
$
|
315
|
||||
Less
: accumulated amortization
|
(91
|
)
|
(52
|
)
|
||||
$
|
224
|
$
|
263
|
There
was no capitalized interest for the six months ended June 30, 2010 and the year
ended December 31, 2009.
(6)
|
ACCRUED EXPENSES AND OTHER
PAYABLES
|
Accrued
expenses and other payables are summarized as follows (in
thousands):
|
June 30,
|
December 31,
|
||||||
|
2010
|
2009
|
||||||
(unaudited)
|
||||||||
Current
portion:
|
||||||||
Accrued
salaries and wages
|
$
|
94
|
$
|
165
|
||||
Accrued
expenses (1)
|
664
|
305
|
||||||
Advertising
subsidies payables
|
114
|
113
|
||||||
$
|
872
|
$
|
583
|
|||||
Non-current
portion:
|
||||||||
Advertising
subsidies payables
|
76
|
75
|
||||||
$
|
948
|
$
|
658
|
(1)
Includes $592,000 in estimated liquidated damages relating to the Company’s
fourth quarter 2009 financings. The Company is required to register the shares
of common stock issued in connection with the financings, including the shares
underlying the preferred stock and warrants issued in the financings, pursuant
to an effective registration statement by May 16, 2010. The registration
statement was filed on December 17, 2009, but has not yet been declared
effective. Accordingly, the Company has accrued $592,000 and $300,000 as of June
30, 2010 and December 31, 2009, respectively, for estimated liquidated
damages it expects to be required to pay to the investors in the financings.
Pursuant to the agreements entered into in connection with the financings, the
total amount of liquidated damages that the Company may be subject to is
$987,000.
F-13
VLOV,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010
(7)
|
RELATED PARTY
TRANSACTIONS
|
|
June 30,
|
December 31,
|
||||||
|
2010
|
2009
|
||||||
|
(unaudited)
|
|||||||
Amount
due from a director (in thousands):
|
||||||||
Mr.
Qingqing Wu
|
$
|
-
|
$
|
2,428
|
||||
Amounts
due to directors/officers (in thousands):
|
||||||||
Mr.
Qingqing Wu (1)
|
48
|
30
|
||||||
Mr.
Bennet Tchaikovsky (2)
|
18
|
-
|
||||||
Total
|
$
|
66
|
$
|
30
|
(1)
|
The amount due to this
director is unsecured, interest-free and repayable on
demand.
|
(2)
|
Represents 3,562 shares of
common stock that are required to be issued to this officer as of June 30,
2010, pursuant to his agreement with the
Company.
|
Mr.
Qingqing Wu currently has four trademarks registered in his name that were
intended to be transferred to Yinglin Jinduren for no consideration prior to the
closing of the Exchange Transaction. As such transfers could not be timely
effected, Mr. Wu entered into trademark license contracts with Yinglin Jinduren
on February 12, 2009, pursuant to which he perpetually granted Yinglin Jinduren
the rights to use these trademarks for no consideration. Mr. Wu is also in the
process of transferring the trademarks to Yinglin Jinduren for no consideration
as originally intended, although such transfers have not been completed. To
date, Yinglin Jinduren has not utilized these trademarks, and the Company
considers the value of these trademarks to be de minimis.
(8)
|
DERIVATIVE FINANCIAL
INSTRUMENTS
|
On
October 27, November 17 and December 1, 2009, respectively, the Company issued
723,052, 675,308 and 326,767 common stock purchase warrants (the “Warrants”),
respectively. Each Warrant entitles its holder to purchase one share of common
stock of the Company at an exercise price of $3.43 per share (subject to certain
adjustments) for a period of three years. The Company is entitled to redeem the
Warrants for the then applicable exercise price (currently $3.43) if the
volume-weighted average price of the Company’s common stock for 20 consecutive
days exceeds 200% of the then applicable exercise price.
The
Company uses a binomial option pricing model to value these Warrants. In valuing
the Warrants at the time they were issued and at June 30, 2010, the Company used
the market price of its common stock on the date of valuation, an expected
dividend yield of 0% and the remaining period to the expiration date of the
Warrants. All Warrants can be exercised by the holder at any
time.
Because
of the limited historical trading period of the Company’s common stock, the
expected volatility of its common stock over the remaining life of the Warrants,
which has been estimated at 85%, is based on a review of the volatility of
entities considered by management as comparable. The risk-free rates of return
used ranged from 0.74% to 0.78%, based on constant maturity rates published by
the U.S. Federal Reserve, applicable to the remaining life of the
Warrants.
At
June 30, 2010, the following derivative liabilities related to common stock
warrants were outstanding:
|
|
Numbers of warrants
|
Value
|
|||||||||||||||||||
Issue date
|
Expiration date
|
Exercise price
per share
|
June 30, 2010
|
December 31,
2009
|
June 30, 2010
|
December 31,
2009
|
||||||||||||||||
October
27, 2009
|
October
27, 2012
|
$
|
3.43
|
723,052
|
723,052
|
$
|
1,612,419
|
$
|
1,538,959
|
|||||||||||||
November
17, 2009
|
November
17, 2012
|
$
|
3.43
|
668,808
|
675,308
|
1,495,656
|
1,440,952
|
|||||||||||||||
December
1, 2009
|
December
1, 2012
|
$
|
3.43
|
326,767
|
326,767
|
732,084
|
704,510
|
|||||||||||||||
1,718,627
|
1,725,127
|
$
|
3,840,159
|
$
|
3,684,421
|
F-14
VLOV,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010
(8)
|
DERIVATIVE FINANCIAL
INSTRUMENTS (CONTINUED)
|
During
the six months ended June 30, 2010, the Company recognized a gain of $174,301
related to the change in the fair value of these derivative instrument
liabilities.
Assets
and liabilities measured at fair value are classified in their entirety based on
the lowest level of input that is significant to their fair value measurement.
The Company’s derivative financial instruments which are required to be measured
at fair value on a recurring basis are measured at fair value using Level 3
inputs. Level 3 inputs are unobservable inputs that are supported by little or
no market activity and that are significant to the fair value of the assets or
liabilities.
The
following represents a reconciliation of the changes in fair value of financial
instruments measured at fair value using Level 3 inputs during the quarter ended
June 30, 2010:
Warrants
|
||||
Balance
– December 31, 2009
|
3,684,421
|
|||
Exercised
|
(18,563
|
)
|
||
Fair
value adjustments
|
174,301
|
|||
Balance
– June 30, 2010
|
3,840,159
|
Estimating
the fair values of derivative financial instruments requires the development of
significant and subjective estimates that may, and are likely to, change over
the duration of the instrument with related changes in internal and external
market factors. In addition, valuation techniques are sensitive to changes in
the trading market price of our common stock, which may exhibit significant
volatility. Because derivative financial instruments are initially and
subsequently carried at fair values, our income will reflect the volatility in
these estimate and assumption changes.
(9)
|
SHORT-TERM
BORROWINGS
|
The
carrying amounts of the Company’s borrowings are as follows (in
thousands):
|
June 30, 2010
|
December 31, 2009
|
||||||||||||||
|
Interest
|
Interest
|
||||||||||||||
Amount
|
Rate
|
Amount
|
Rate
|
|||||||||||||
Bank
loan
|
$
|
589
|
7.700
|
%
|
$
|
734
|
7.700
|
%
|
As of
June 30, 2010, the short-term borrowings were secured by a personal guarantee
granted by Mr. Qingqing Wu, a director of the Company.
(10)
|
COMMON
STOCK
|
The
Company is authorized to issue 100,000,000 shares of common stock, $0.00001 par
value. The Company had 1,454,421 common shares outstanding prior to the Share
Exchange with PXPF, and, as described in Note 1, issued 14,560,000 common shares
to the shareholders of PXPF in connection with the Share
Exchange. For accounting purposes, the shares issued to the
shareholders of PXPF are assumed to have been outstanding on January 1, 2008,
and the 1,454,421 shares held by the existing shareholders of the Company prior
to the Share Exchange on February 13, 2009 are assumed to have been issued on
that date in exchange for the net assets of the Company.
On
December 1, 2009, the Company sold 653,534 shares of common stock to certain
accredited investors. During the three months ended June 30, 2010, 13,000
warrants and 891,160 preferred convertible shares were exercised and converted
into 6,500 and 891,160 shares of common stock.
As
of June 30, 2010, 17,565,617 shares of common stock were issued and
outstanding.
F-15
VLOV,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010
(11)
|
PREFERRED
STOCK
|
The
Company is authorized to issue 100,000,000 shares of preferred stock, $0.00001
par value, of which 2,800,000 shares have been designated as Series A
Convertible Preferred Stock (the “Preferred Stock”).
On
October 27 and November 17, 2009, the Company sold 1,446,105 and 1,350,616
shares, respectively, of Preferred Stock to certain accredited investors. Each
share of Preferred Stock is convertible into one share of common stock, at a
conversion price of $2.86 per share (subject to certain adjustments) at any time
at the holder’s option, and will automatically convert if the common stock is
qualified for listing on either the NASDAQ Capital Market or the NYSE Amex
Equities. The designation, rights, preferences and other terms and provisions of
the Preferred Stock are set forth in the Certificate of Designation filed with
the Nevada Secretary of State on October 23, 2009. Each share of Preferred Stock
is entitled to participate in any dividends declared and paid on the common
stock on an as-converted basis. Holders of the Preferred Stock are also entitled
to notice of any stockholders’ meeting and vote together with common stock
holders on an as-converted basis. The Preferred Stock has a liquidation
preference of $2.86 per share, plus any accrued but unpaid dividends. During the
three months ended June 30, 2010, 891,160 shares of Preferred Stock were
converted, and at June 30, 2010, 1,905,561 shares of Preferred Stock were
outstanding, with an aggregate liquidation preference of
$5,449,904.
(12)
|
EARNINGS PER
SHARE
|
The
following table sets forth the computation of basic and diluted earnings per
share:
(a)
|
Basic
|
Basic
earnings per share is calculated by dividing the profit attributable to equity
holders of the Company by the weighted average number of common shares and
participating preferred shares outstanding during the periods
shown.
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Income
attributable to common shareholders of the Company
|
$
|
4,467
|
$
|
2,310
|
$
|
5,544
|
$
|
6,086
|
||||||||
Weighted
average number of common shares outstanding
|
17,042,685
|
16,000,000
|
16,856,357
|
15,657,901
|
(b)
|
Diluted
|
Diluted
earnings per share is calculated by adjusting the weighted average number of
common shares outstanding to assume conversion of all dilutive potential common
shares. The Company has one category of dilutive potential common shares: the
Warrants issued in connection with the Preferred Shares Financing and Common
Shares Financing in 2009. The Warrants are assumed to have been converted into
common shares and the calculation is done to determine the number of shares that
could have been acquired at fair value (determined as the average annual market
share price of the Company’s common stock) based on the monetary value of the
subscription rights attached to outstanding Warrants. The Preferred
Shares as converted to common stock have been excluded from the diluted earnings
per share because to do so would be anti-dilutive. The number of shares
calculated as above is compared with the number of shares that would have been
issued assuming the exercise of the Warrants.
F-16
VLOV,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010
(12)
|
EARNINGS PER SHARE
(CONTINUED)
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Income
attributable to common shareholders of the Company (in
thousands)
|
$
|
4,467
|
$
|
2,310
|
$
|
5,544
|
$
|
6,086
|
||||||||
Weighted
average number of common shares outstanding
|
17,042,685
|
16,000,000
|
16,856,357
|
15,657,901
|
||||||||||||
Adjustment
for:
|
||||||||||||||||
Warrants
|
341,317
|
-
|
341,317
|
-
|
||||||||||||
17,384,002
|
16,000,000
|
17,197,674
|
15,657,901
|
(13)
|
INCOME
TAXES
|
The
provisions for income tax expense were as follows (in
thousands):
|
Six Months Ended June 30,
|
|||||||
|
2010
|
2009
|
||||||
PRC
enterprise income tax - current
|
$
|
2,107
|
$
|
2,260
|
The
Company is mainly subject to income taxes in the PRC, and provision for the PRC
corporate income tax was calculated based on the statutory tax rate of 33% on
the assessable income arose in or before year 2007. Pursuant to the PRC
Enterprise Income Tax Law (the “Income Tax Law”) passed by the Tenth National
People’s Congress on 16 March 2007, the PRC income tax rates for domestic and
foreign enterprises are unified at 25% effective from January 1, 2008. The
enactment of the Income Tax Law is not expected to have any significant
financial effect on the amounts accrued in the consolidated balance sheet in
respect of taxation payable and deferred taxation.
The
following table reconciles the US statutory rates to the Company's effective tax
rate for the six months ended June 30, 2010 and 2009:
|
Six Months Ended June 30,
|
|||||||
|
2010
|
2009
|
||||||
U.S
Statutory rates
|
34
|
%
|
34
|
%
|
||||
Foreign
income not recognized in the U.S.
|
(34
|
)%
|
(34
|
)%
|
||||
China
income tax rate
|
25
|
%
|
25
|
%
|
||||
Effective
tax rate
|
25
|
%
|
25
|
%
|
F-17
VLOV,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010
(13)
|
INCOME TAXES
(CONTINUED)
|
The
following table reconciles the theoretical tax expense calculated at the
statutory rates to the Company’s effective tax expense for the six months ended
June 30, 2010 and 2009, respectively.
Reconciliation of effective tax expense (in thousands):
|
Six Months Ended June 30,
|
|||||||
|
2010
|
2009
|
||||||
Theoretical
tax expense calculated at PRC statutory enterprise income tax rate of
25%
|
$
|
1,990
|
$
|
2,087
|
||||
Tax
effect of non-deductible expenses
|
117
|
173
|
||||||
Effective
tax expense
|
$
|
2,107
|
$
|
2,260
|
The
applicable rate of Hong Kong profits tax for the six months ended June 30, 2010
and 2009 was 16.5%. However, no provision for Hong Kong profits tax has been
made for the six months ended June 30, 2010 and 2009 as the Company did not
carry on any business subject to Hong Kong profits tax.
PXPF
is a company incorporated as an international company in the BVI and is fully
exempt from Domestic Corporate Tax of the BVI.
As of
the balance sheet dates presented, there were no deferred tax assets or
liabilities.
(14)
|
STATUTORY
RESERVES
|
Under
PRC regulations, Yinglin Jinduren may pay dividends only out of its accumulated
profits, if any, determined in accordance with PRC GAAP. In addition, it is
required to set aside at least 10% of its after-tax net profits each year, if
any, to fund statutory reserves until the balance of the reserves reaches 50% of
its registered capital. The statutory reserves are not distributable
in the form of cash dividends to the Company but can be used to make up prior
year cumulative losses. As of June 30, 2010, the registered capital of Yinglin
Jinduren was RMB 10,000,000 and the statutory reserves have been fully
funded.
(15)
|
LEASE
COMMITMENTS
|
The
Company leases a premise under a long-term, non-cancelable lease. The
lease is accounted for as an operating lease. Rent expense amounted to
US$35,000 and US$22,000 for the six months ended June 30, 2010 and 2009
respectively.
Future
minimum payments under long-term, non-cancelable leases as of June 30, 2010, are
as follows (in thousands):
|
Future
minimum
payments
|
|||
Six
Months Ending December 31:
|
||||
2010
|
$
|
35
|
||
Year
Ending December 31:
|
||||
2011
|
70
|
|||
2012
|
54
|
|||
$
|
159
|
F-18
VLOV,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010
(16)
|
BUSINESS AND CREDIT
CONCENTRATIONS
|
The
Company operates in the fashion apparel industry and generates all of its sales
in the PRC. The fashion apparel industry is impacted by the general economy.
Changes in the marketplace would significantly affect management’s estimates and
the Company’s performance.
The
Company sells its product to its distributors. As of June 30, 2010, the Company
has distribution agreements with 12 distributors. The Company has the following
concentrations of business with each distributor (customer) constituting greater
than 10% of the Company’s sales:
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Distributors
|
||||||||||||||||
Distributor
A
|
16.94
|
%
|
20.08
|
%
|
15.89
|
%
|
20.14
|
%
|
||||||||
Distributor
B
|
12.25
|
%
|
13.33
|
%
|
12.99
|
%
|
13.40
|
%
|
||||||||
Distributor
C
|
*
|
12.18
|
%
|
*
|
12.14
|
%
|
||||||||||
Distributor
D
|
12.27
|
%
|
11.00
|
%
|
13.01
|
%
|
11.02
|
%
|
||||||||
Distributor
E
|
*
|
10.10
|
%
|
*
|
10.08
|
%
|
The
Company has the following concentrations of business with each vendor
constituting greater than 10% of the Company’s purchases:
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Vendors
|
||||||||||||||||
Vendor
A
|
*
|
10.11
|
%
|
*
|
14.06
|
%
|
||||||||||
Vendor
B
|
12.53
|
%
|
10.08
|
%
|
14.39
|
%
|
10.46
|
%
|
||||||||
Vendor
C
|
10.32
|
%
|
*
|
11.75
|
%
|
*
|
||||||||||
Vendor
D
|
*
|
11.83
|
%
|
*
|
*
|
|||||||||||
Vendor
E
|
*
|
14.84
|
%
|
*
|
*
|
|||||||||||
Vendor
F
|
*
|
*
|
10.13
|
%
|
*
|
The
Company has the following concentrations of business with each distributor
constituting greater than 10% of the Company’s trade
receivables:
|
Six Months Ended June 30,
|
|||||||
|
2010
|
2009
|
||||||
Distributors
|
||||||||
Distributor
A
|
12.97
|
%
|
17.86
|
%
|
||||
Distributor
B
|
12.44
|
%
|
14.78
|
%
|
||||
Distributor
C
|
11.20
|
%
|
14.51
|
%
|
||||
Distributor
D
|
18.58
|
%
|
14.40
|
%
|
||||
Distributor
E
|
*
|
10.56
|
%
|
F-19
VLOV,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010
(16)
|
BUSINESS AND CREDIT
CONCENTRATIONS
(CONTINUED)
|
The
Company has the following concentrations of business with each creditor
constituting greater than 10% of the Company’s trade payables:
|
Six Months Ended June 30,
|
|||||||
|
2010
|
2009
|
||||||
Creditors
|
||||||||
Creditor
A
|
*
|
14.94
|
%
|
|||||
Creditor
B
|
21.61
|
%
|
14.07
|
%
|
||||
Creditor
C
|
*
|
11.23
|
%
|
|||||
Creditor
D
|
12.35
|
%
|
10.45
|
%
|
||||
Creditor
E
|
*
|
10.40
|
%
|
|||||
Creditor
F
|
13.71
|
%
|
*
|
The
above concentrations make the Company vulnerable to a near-term severe impact
should the relationships be terminated.
* The
concentration is less then 10%
(17)
|
BENEFIT
PLAN
|
Pursuant
to the relevant regulations of the PRC government, Yinglin Jinduren participates
in a local municipal government retirement benefits scheme (the “Scheme”),
whereby Yinglin Jinduren is required to contribute a certain percentage of the
basic salaries of its employees to the Scheme to fund their retirement benefits.
Contributions under the Scheme are charged to the income statement as incurred.
Contributions to the Scheme were US$36,000 and US$44,000 for the three months
ended June 30, 2010 and 2009, respectively, and US$65,000 and US$88,000 for the
six months ended June 30, 2010 and 2009, respectively.
F-20
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
VLOV,
Inc.
We have
audited the accompanying consolidated balance sheets of VLOV, Inc. (the
“Company”) and its subsidiaries (hereinafter collectively referred to as the
“Group”) as of December 31, 2009 and 2008 and the related consolidated
statements of income, stockholders' equity and comprehensive income, and cash
flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated 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 controls over financial
reporting. Our audits included consideration of internal controls
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 controls over financial
reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
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 consolidated financial statements referred to above present fairly,
in all material respects, the financial position of VLOV, Inc. 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 U.S. generally accepted accounting
principles.
Crowe
Horwath LLP
Sherman
Oaks, California
April 14,
2010
F-21
VLOV,
INC.
CONSOLIDATED
BALANCE SHEETS
(Amounts
in thousands – except for share and per share data)
|
December 31,
|
December 31,
|
||||||
|
2009
|
2008
|
||||||
ASSETS
|
||||||||
Current
Assets:
|
||||||||
Cash
and cash equivalents
|
$
|
11,036
|
$
|
2,863
|
||||
Pledged
bank deposits
|
-
|
88
|
||||||
Accounts
and other receivables
|
9,191
|
7,843
|
||||||
Amount
due from a director
|
2,428
|
-
|
||||||
Trade
deposits
|
2,309
|
-
|
||||||
Inventories
|
285
|
514
|
||||||
Prepaid
expenses
|
763
|
-
|
||||||
Total
current assets
|
26,012
|
11,308
|
||||||
Property,
plant and equipment, net
|
966
|
1,067
|
||||||
Land
use rights
|
263
|
272
|
||||||
TOTAL
ASSETS
|
$
|
27,241
|
$
|
12,647
|
||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
Liabilities:
|
||||||||
Accounts
payable
|
$
|
2,565
|
$
|
2,040
|
||||
Accrued
expenses and other payables
|
583
|
543
|
||||||
Amount
due to a director
|
30
|
2
|
||||||
Bills
payable
|
-
|
293
|
||||||
Derivative
liability
|
3,684
|
-
|
||||||
Short-term
bank loans
|
734
|
587
|
||||||
Income
taxes payable
|
1,601
|
1,613
|
||||||
Total
current liabilities
|
9,197
|
5,078
|
||||||
Non-current
Liabilities:
|
||||||||
Other
payable
|
75
|
-
|
||||||
Total
liabilities
|
9,272
|
5,078
|
||||||
Commitments
|
-
|
-
|
||||||
Stockholders'
Equity:
|
||||||||
Common
stock, $0.00001 par value, 100,000,000 shares authorized, 16,667,957 and
14,560,000 shares respectively issued and outstanding
|
1
|
1
|
||||||
Preferred
stock, $0.00001 par value, 100,000,000 shares authorized, 2,796,721 shares
issued and outstanding (liquidation preference $7,998,622)
|
4,003
|
-
|
||||||
Additional
paid-in capital
|
6,319
|
1,236
|
||||||
Statutory
reserve
|
913
|
913
|
||||||
Retained
earnings
|
6,173
|
4,876
|
||||||
Accumulated
other comprehensive income
|
560
|
543
|
||||||
Total
stockholders' equity
|
17,969
|
7,569
|
||||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$
|
27,241
|
$
|
12,647
|
See
accompanying notes to consolidated financial statements
F-22
VLOV,
INC.
CONSOLIDATED
STATEMENTS OF INCOME
(Amounts
in thousands – except for share and per share data)
Year Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Net
sales
|
$
|
64,343
|
$
|
51,867
|
||||
Cost
of sales
|
41,080
|
33,316
|
||||||
Gross
profit
|
23,263
|
18,551
|
||||||
Operating
expenses:
|
||||||||
Selling
expenses
|
4,604
|
3,547
|
||||||
General
and administrative expenses
|
5,090
|
2,702
|
||||||
9,694
|
6,249
|
|||||||
Income
from operations
|
13,569
|
12,302
|
||||||
Other
income (expenses):
|
||||||||
Change
in fair value of derivative liability
|
1,009
|
-
|
||||||
Interest
income
|
31
|
23
|
||||||
Interest
expense
|
(58
|
)
|
(67
|
)
|
||||
982
|
(44
|
)
|
||||||
Income
before provision for income taxes
|
14,551
|
12,258
|
||||||
Provision
for income taxes
|
4,106
|
3,065
|
||||||
Net
income
|
10,445
|
9,193
|
||||||
Other
comprehensive income:
|
||||||||
Foreign
currency translation adjustment
|
17
|
334
|
||||||
Comprehensive
income
|
$
|
10,462
|
$
|
9,527
|
||||
Net
income
|
10,445
|
9,193
|
||||||
Less:
Deemed dividend on Series A Convertible Preferred Stock
|
4,003
|
-
|
||||||
Net
income attributable to common shareholders
|
$
|
6,442
|
$
|
9,193
|
||||
Basic
earnings per share
|
$
|
0.41
|
$
|
0.63
|
||||
Diluted
earnings per share
|
$
|
0.40
|
$
|
0.63
|
||||
Weighted
average number of common shares outstanding:
|
||||||||
Basic
|
15,898,584
|
14,560,000
|
||||||
Diluted
|
15,949,034
|
14,560,000
|
See
accompanying notes to consolidated financial statements
F-23
VLOV,
INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(Amounts
in thousands – except for share and per share data)
Common stock
|
Preferred stock
|
Additional
|
Accumulated
other
|
||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
paid-in
capital
|
Statutory
reserve
|
comprehensive
income
|
Retained
earnings
|
Total
equity
|
||||||||||||||||||||||||
Balance
at January 1, 2008
|
14,560,000
|
$
|
1
|
-
|
$
|
-
|
$
|
1,236
|
$
|
913
|
$
|
209
|
$
|
84
|
$
|
2,443
|
|||||||||||||||||
Net
income
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
9,193
|
9,193
|
||||||||||||||||||||||||
Foreign
currency translation adjustment
|
-
|
-
|
-
|
-
|
-
|
-
|
334
|
-
|
334
|
||||||||||||||||||||||||
Dividend
declared
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(4,401
|
)
|
(4,401
|
)
|
||||||||||||||||||||||
Total
comprehensive income
|
|||||||||||||||||||||||||||||||||
Balance
at December 31, 2008
|
14,560,000
|
$
|
1
|
-
|
$
|
-
|
$
|
1,236
|
$
|
913
|
$
|
543
|
$
|
4,876
|
$
|
7,569
|
|||||||||||||||||
Shares
issued in reverse merger acquisition
|
1,454,421
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||||
Sale
of preferred stock and warrants
|
-
|
-
|
2,796,721
|
7,999
|
-
|
-
|
-
|
-
|
7,999
|
||||||||||||||||||||||||
Sale
of common stock and warrants
|
653,536
|
-
|
-
|
-
|
1,870
|
-
|
-
|
-
|
1,870
|
||||||||||||||||||||||||
Fair
value of warrant liability
|
-
|
-
|
-
|
(3,996
|
)
|
(698
|
)
|
-
|
-
|
-
|
(4,694
|
)
|
|||||||||||||||||||||
Preferred
stock - beneficial conversion feature
|
-
|
-
|
-
|
(4,003
|
)
|
4,003
|
-
|
-
|
-
|
||||||||||||||||||||||||
Preferred
stock - deemed dividend
|
-
|
-
|
4,003
|
-
|
-
|
-
|
(4,003
|
)
|
-
|
||||||||||||||||||||||||
Issuance
fees and costs
|
-
|
-
|
-
|
-
|
(92
|
)
|
-
|
-
|
(92
|
)
|
|||||||||||||||||||||||
Net
income
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
10,445
|
10,445
|
||||||||||||||||||||||||
Foreign
currency translation adjustment
|
-
|
-
|
-
|
-
|
-
|
-
|
17
|
-
|
17
|
||||||||||||||||||||||||
Dividend
declared
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(5,145
|
)
|
(5,145
|
)
|
||||||||||||||||||||||
Total
comprehensive income
|
|||||||||||||||||||||||||||||||||
Balance
at December 31, 2009
|
16,667,957
|
$
|
1
|
2,796,721
|
$
|
4,003
|
$
|
6,319
|
$
|
913
|
$
|
560
|
$
|
6,173
|
$
|
17,969
|
See
accompanying notes to consolidated financial statements
* The
dividend was paid to the private shareholders prior to the reverse merger.
F-24
VLOV,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Amounts
in thousand)
|
Year Ended December 31,
|
|||||||
|
2009
|
2008
|
||||||
Cash
flows from operating activities:
|
||||||||
Net
income
|
$
|
10,445
|
$
|
9,193
|
||||
Adjustments
to reconcile net income to net cash provided by operating activities:
|
||||||||
Depreciation
and amortization
|
90
|
107
|
||||||
(Gain)/loss
on disposal of property, plant and equipment
|
(2
|
)
|
1
|
|||||
Change
in fair value of derivative liability
|
(1,009
|
)
|
-
|
|||||
(Increase)
decrease in assets:
|
||||||||
Accounts
receivable
|
(3,057
|
)
|
(2,961
|
)
|
||||
Trade
deposits
|
(2,307
|
)
|
-
|
|||||
Inventories
|
228
|
4,446
|
||||||
Prepaid
expenses
|
(764
|
)
|
144
|
|||||
Increase
(decrease) in liabilities:
|
||||||||
Accounts
payable
|
525
|
(1,577
|
)
|
|||||
Bills
payable, accrued expenses and other payables
|
1,531
|
(471
|
)
|
|||||
Income
and other tax payables
|
(12
|
)
|
145
|
|||||
Net
cash provided by operating activities
|
$
|
5,668
|
$
|
9,027
|
||||
Cash
flows from investing activities:
|
||||||||
Purchases
of property, plant and equipment
|
-
|
(61
|
)
|
|||||
Disposals
of property, plant and equipment
|
23
|
7
|
||||||
Amount
due to/from a director
|
28
|
168
|
||||||
Net
cash provided by investing activities
|
$
|
51
|
$
|
114
|
||||
Cash
flows from financing activities:
|
||||||||
Pledged
bank deposits
|
88
|
-
|
||||||
Proceeds
from equity financing
|
9,776
|
-
|
||||||
Amount
due from a director
|
(2,428
|
)
|
-
|
|||||
Proceeds
from debt financing
|
733
|
587
|
||||||
Payments
of short-term debt
|
(586
|
)
|
(587
|
)
|
||||
Payments
of dividend
|
(5,131
|
)
|
(9,389
|
)
|
||||
Net
cash provided by (used in) financing activities
|
2,452
|
(9,389
|
)
|
|||||
Effect
of exchange rate changes
|
2
|
353
|
||||||
Net
increase in cash and cash equivalents
|
8,173
|
105
|
||||||
Cash
and cash equivalents, beginning of year
|
2,863
|
2,758
|
||||||
Cash
and cash equivalents, end of year
|
$
|
11,036
|
$
|
2,863
|
||||
Supplemental
disclosure of cash flow information:
|
||||||||
Interest
paid
|
$
|
58
|
$
|
67
|
||||
Income
taxes paid
|
$
|
3,528
|
$
|
3,209
|
See
accompanying notes to consolidated financial statements
F-25
VLOV,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED DECEMBER 31, 2009
(1) SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
(a) Description
of business and organization
VLOV Inc.
(the “Company”) was incorporated on October 30, 2006 in the State of Nevada,
under the name Sino Charter, Inc. The Company changed its name to VLOV, Inc. on
March 20, 2009.
On
February 13, 2009, the Company completed a stock exchange transaction with the
stockholders of Peng Xiang Peng Fei Investments Limited (“PXPF”), whereby
14,560,000 restricted shares of common stock were issued to the stockholders of
PXPF in exchange for 100% of the common stock of PXPF (the “Share Exchange”).
The
completion of the Share Exchange resulted in a change of control. Under the
terms of the share exchange agreement (the “Exchange Agreement”), effective
February 18, 2009, Qingqing Wu was appointed to the board of directors as
Chairman, Matthew Hayden resigned as the Company’s Chief Executive Officer,
President, Chief Financial Officer and Secretary, and the following persons were
appointed as the Company’s officers:
Name:
|
Offices:
|
|
Qingqing
Wu, President,
|
Chief
Executive Officer, Chief Operating Officer and Secretary
|
|
Yushan
Zheng
|
Chief
Financial Officer and Treasurer
|
However,
it was the intent of the parties to the Exchange Agreement that Mr. Hayden
resign from his officer positions after the filing of the Company’s annual
report on Form 10-K for the fiscal year ended November 30, 2008 (the “10-K”).
Accordingly, the Company, Mr. Wu, Mr. Zheng and Mr. Hayden entered into a
Supplemental Agreement dated February 18, 2009, pursuant to which Mr. Wu and Mr.
Zheng agreed to resign from their offices, and Mr. Hayden agreed to be
reappointed as Chief Executive Officer, President, Chief Financial Officer and
Secretary on an interim basis, until the earlier of February 23, 2009 or
immediately after the filing of the 10-K. Accordingly, on February 23, 2009,
pursuant to the terms of the Supplemental Agreement, Mr. Hayden resigned from
his officer positions, and Mr. Wu was reappointed to the board of directors and
as President, Chief Executive Officer, Chief Operating Officer and Secretary,
and Mr. Zheng as Chief Financial Officer and Treasurer.
Under the
Exchange Agreement, Mr. Hayden also agreed to resign from the board of
directors, and Mr. Jianwei Shen, Mr. Zhifan Wu and Mr. Yuzhen Wu were appointed
as directors.
The Share
Exchange has been accounted for as a reverse acquisition and recapitalization of
the Company whereby PXPF is deemed to be the accounting acquirer (legal
acquiree) and the Company is the accounting acquiree (legal acquirer). The
accompanying consolidated financial statements are in substance those of PXPF
and the Company is deemed to be a continuation of the business of
PXPF. At the time of the reverse merger with PXPF, the Company had no
assets or liabilities and the 1,454,421 shares of its common stock outstanding
immediately prior to the time of the Share Exchange have been accounted for at
their par value at the time of the transaction.
PXPF is a
limited liability company incorporated on April 30, 2008 in the British Virgin
Islands. PXPF designs, manufactures and sells fashion apparel under the brand
name “VLOV”. All current operations of the Company are in the People’s Republic
of China (“China” or the “PRC”).
The
Company does not conduct any substantive operations of its own and conducts its
primary business operations through a variable interest entity, Jinjiang Yinglin
Jinduren Fashion Limited (“Yinglin Jinduren”), which is controlled by the
Company’s subsidiary, Dong Rong Capital Investment Limited (“HK Dong Rong”). HK
Dong Rong is a limited liability company incorporated in Hong Kong on January 5,
2005 originally under the name Korea Jinduren International Dress Limited
(“Korea Jinduren”) and was acquired by PXPF from the majority shareholders of
PXPF on September 22, 2008.
F-26
VLOV,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED DECEMBER 31, 2009
Yinglin
Jinduren is a limited company incorporated without shares in the PRC on January
19, 2002, of which the initial paid-in capital of RMB10,000,000 ($1,237,000) was
funded by the majority shareholders of PXPF. The management of Yinglin Jinduren
is comprised of Mr. Qingqing Wu as Chairman and Executive Director, and Mr.
Zhifan Wu as Executive Director. Mr. Qingqing Wu is the Company’s
Chief Executive Officer, President and Chairman of the Board of Directors, and
Mr. Zhifan Wu is a Company director. Mr. Qingqing Wu and Mr. Zhifan Wu, who are
brothers, hold 65.91% and 34.09%, respectively, of the ownership interests of
Yinglin Jinduren.
PRC law
currently has limits on foreign ownership of domestic PRC companies. To comply
with these foreign ownership restrictions, on December 28, 2005, HK Dong Rong
(then known as Korea Jinduren) entered into certain exclusive agreements with
Yinglin Jinduren and its shareholders. Pursuant to these agreements, HK Dong
Rong provides exclusive consulting services to Yinglin Jinduren in return for a
consulting services fee which is equal to Yinglin Jinduren’s net profits. Prior
to the Exchange Agreement, however, certain dividends were paid from net income
to the equity owners of Yinglin Jinduren. In addition, Yinglin Jinduren’s
shareholders have pledged their equity interests in Yinglin Jinduren to HK Dong
Rong, irrevocably granted HK Dong Rong an exclusive option to purchase, to the
extent permitted under PRC law, all or part of the equity interests in Yinglin
Jinduren and agreed to entrust all the rights to exercise their voting power to
the person(s) appointed by HK Dong Rong. Through these contractual arrangements,
HK Dong Rong has the ability to control Yinglin Jinduren’s daily operations and
financial affairs, appoint its senior executives and approve all matters
requiring shareholder approval. As part of these contractual arrangements, HK
Dong Rong and Yinglin Jinduren entered into an operating agreement which,
amongst other matters, precludes Yinglin Jinduren from borrowing money, selling
or acquiring assets, including intellectual property rights, providing
guarantees to third parties or assigning any business agreements, without the
prior written consent of HK Dong Rong. HK Dong Rong also agreed that, if any
guarantee for Yinglin Jinduren’s performance of any contract or loan was
required, HK Dong Rong would provide such guarantee to Yinglin Jinduren.
As a
result of these contractual arrangements, HK Dong Rong is entitled to
receive the expected residual returns of Yinglin Jinduren. In
addition, although Yinglin Jinduren has been profitable, in the event that it
were to incur losses, HK Dong Rong would be obligated to absorb a majority of
the risk of loss from Yinglin Jinduren’s activities as a result of its inability
to receive payment for its accumulated consulting fees, which fees are equal to
Yinglin Jinduren’s net income. The Company believes that the equity investors in
Yinglin Jinduren do not have the characteristics of a controlling financial
interest, and that the Company is the primary beneficiary of the operations and
residual returns of Yinglin Jinduren and, in the event of losses, would be
required to absorb a majority of such losses. Accordingly, the Company
consolidates Yinglin Jinduren’s results, assets and liabilities in the
accompanying financial statements. Due to the contractual arrangements, the net
income and interest allocable to the noncontrolling interest is zero.
The
Company’s consolidated assets do not include any collateral for Yinglin
Jinduren’s obligations. The creditors of Yinglin Jinduren do not have recourse
to the general credit of the Company.
On
November 19, 2009, HK Dong Rong incorporated Dong Rong (China) Co., Ltd. in the
PRC as its wholly-owned subsidiary (“China Dong Rong”), with registered capital
of $8 million. As of December 31, 2009, $4 million has been contributed to China
Dong Rong and the remaining registered capital will be contributed within two
years after the date of incorporation. It is the intention of the Company and
the equity owners of Yinglin Jinduren to transfer the business operations of
Yinglin Jinduren to China Dong Rong; however, such transfer had not yet occurred
as of December 31, 2009.
(b) Basis
of presentation and consolidation
The
accompanying consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America.
As
described above, the Company, through its wholly owned subsidiary HK Dong Rong,
consolidates Yinglin Jinduren as Yinglin Jinduren is considered to be a variable
interest entity (VIE) and the Company is considered to be its primary
beneficiary.
F-27
VLOV,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED DECEMBER 31, 2009
Because
the Company and Yinglin Jinduren are under common control, the initial
measurement of the assets and liabilities of Yinglin Jinduren for the purpose of
consolidation by the Company was at book value. The Company has had no other
business activities except for the exclusive agreements with Yinglin Jinduren
and its shareholders.
The
consolidated financial statements include the financial statements of the
Company, its subsidiary and the variable interest entity, Yinglin Jinduren. All
significant inter-company transactions and balances between the Company, its
subsidiary and the variable interest entity are eliminated upon consolidation.
(c) Use
of Estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make certain estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements. The reported amounts of
revenues and expenses during the reporting period may be affected by the
estimates and assumptions we are required to make. Estimates that are critical
to the accompanying consolidated financial statements relate primarily to
returns, sales allowances and customer chargebacks, the valuation of long-lived
assets and the identification and valuation of derivative
instruments. Estimates and assumptions are reviewed periodically and the
effects of revisions are reflected in the period that they are determined to be
necessary. Actual results could differ from these estimates.
(d) Accounting Pronouncements
In June
2009, the Financial Accounting Standards Board (‘‘FASB’’) issued a statement
establishing the FASB Accounting Standards Codification™ (the “FASB ASC" or the
“Codification"). The Codification became the single source of authoritative U.S.
generally accepted accounting principles (‘‘US GAAP’’) recognized by the FASB to
be applied by non-governmental entities. Rules and interpretive releases of the
United States Securities and Exchange Commission under authority of federal
securities laws are also sources of authoritative US GAAP for SEC registrants.
The Codification did not change existing US GAAP but incorporated existing
accounting and reporting standards into a new topical structure with a new
referencing system. Authoritative standards included in the Codification are
designated by their Accounting Standards Codification (‘‘ASC’’) topical
reference, and new standards will be designated as Accounting Standards Updates
(‘‘ASU’’), with a year and assigned sequence number. We have updated our
references to US GAAP to reflect the Codification.
(e) Revenue
Recognition
A
majority of the Company’s products are manufactured on its behalf by third
parties, based on orders for the Company’s products received from customers. The
Company is responsible for product design, product specification, pricing to the
customer, the choice of third-party manufacturer, product quality and credit
risk associated with the customer receivable. As such, the Company acts as a
principal and records revenues on a gross basis.
The
Company recognizes revenues when (a) the price to the customer is fixed or
determinable, (b) persuasive evidence of an arrangement exists, (c) delivery has
occurred and (d) collectability of the resulting receivable is reasonably
assured. Revenue from the sales of goods is recognized on the transfer of
significant risks and rewards of ownership, which generally coincides with the
time when the goods are delivered and the title has passed to the customer.
Revenue excludes value-added tax and is stated after deduction of trade
discounts and allowances.
F-28
VLOV,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED DECEMBER 31, 2009
(f)
Cash and Cash Equivalents
For
purposes of the statement of cash flows, the Company considers all highly liquid
instruments with original maturities of three months or less to be cash
equivalents. Cash and cash equivalents comprise cash at bank and on hand and
demand deposits with banks.
(g)
Accounts receivable
Accounts
receivable, which are unsecured, are stated at the amount the Company expects to
collect. The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
The Company evaluates the collectability of its accounts receivable based on a
combination of factors, including customer credit-worthiness and historical
collection experience. Management reviews the receivable aging and adjusts the
allowance based on historical experience, financial condition of the customer
and other relevant current economic factors. As of December 31, 2009, all of the
trade receivable balances were aged less than 90 days. The management determined
no allowance for uncollectible amounts is required.
(h)
Depreciation and Amortization
Property,
plant and equipment are stated at cost less accumulated depreciation and
impairment losses. Depreciation of property, plant and equipment is computed
using the straight-line method based on the following estimated useful lives:
Buildings
|
30
years
|
Furniture,
fixtures and equipment
|
5
years
|
Motor
vehicles
|
5
years
|
Office
equipment
|
5
years
|
Plant
and machinery
|
5
to 15 years
|
(i)
Inventories
Inventories
are stated at the lower of cost or market value, determined by the weighted
average method. Work-in-progress and finished goods inventories consist of raw
materials, direct labor and overhead associated with the manufacturing process.
(j)
Foreign Currency Translation
The
Company has its local currency, Renminbi (“RMB”), as its functional currency.
The consolidated financial statements of the Company are translated from RMB
into US$. Accordingly, all assets and liabilities are translated at the
exchange rates prevailing at the balance sheet dates, all income and expenditure
items are translated at the average rates for each of the periods and equity
accounts, except for retained earnings, are translated at the rate at the
transaction date. Retained earnings reflect the cumulative net income (loss)
translated at the average rates for the respective periods since inception less
dividends translated at the rate at the transaction date.
RMB is
not a fully convertible currency. All foreign exchange transactions involving
RMB must take place either through the People's Bank of China (the "PBOC") or
other institutions authorized to buy and sell foreign exchange. The
exchange rates adopted for the foreign exchange transactions are the rates of
exchange quoted by the PBOC, which are determined largely by supply and
demand. Translation of amounts from RMB into US$ has been made at the
following exchange rates for the respective years:
|
Year Ended December 31,
|
|||||||
|
2009
|
2008
|
||||||
Assets
and liabilities
|
US$
|
0.14670
|
US$
|
0.14670
|
||||
Statement
of income
|
US$
|
0.14661
|
US$
|
0.14415
|
The
resulting translation adjustments are recorded as other comprehensive income in
the consolidated statement of stockholders equity and comprehensive income and
as a separate component of stockholders equity.
F-29
VLOV,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED DECEMBER 31, 2009
Commencing
from July 21, 2005, China adopted a managed floating exchange rate regime based
on market demand and supply with reference to a basket of currencies. Since
then, the PBOC administers and regulates the exchange rate of US$ against RMB
taking into account the demand and supply of RMB, as well as domestic and
foreign economic and financial conditions.
(k)
Land use rights
All land
in the People’s Republic of China is owned by the government and cannot be sold
to any individual or company. However, the government grants the user a “land
use right” to use the land.
Land use
rights are stated at cost less accumulated amortization and impairment losses.
Amortization is calculated on the straight-line method over the estimated useful
life of 50 years. These land use rights expire in 2054.
Intangible
assets of the Company are reviewed annually to determine whether their carrying
value has become impaired. The Company considers assets to be impaired if the
carrying value exceeds the future projected cash flows from related operations.
The Company also re-evaluates the periods of amortization to determine whether
subsequent events and circumstances warrant revised estimates of useful lives.
As of December 31, 2009, the Company expects these assets to be fully
recoverable.
(l)
Long-Lived Assets
The
Company estimates the future undiscounted cash flows to be derived from an asset
to assess whether or not a potential impairment exists when events or
circumstances indicate the carrying value of a long-lived asset may be impaired.
If the carrying value exceeds the Company’s estimate of future undiscounted cash
flows, the Company then calculates the impairment as the excess of the carrying
value of the asset over the Company’s estimate of its fair market value.
(m)
Comprehensive Income
The
Company’s only component of other comprehensive income is foreign currency
translation gains and losses. The foreign currency translation gains for the
years ended December 31, 2009 and 2008 were US$17,000 and US$334,000
respectively. Accumulated other comprehensive income is recorded as a separate
component of stockholders’ equity.
(n)
Income Taxes
The
Company is mainly subject to income taxes in the PRC. Significant judgment is
required in determining the provision for income taxes. There are many
transactions and calculations for which the ultimate tax determination is
uncertain during the ordinary course of business. The Company recognizes
liabilities for anticipated tax audit issues based on estimates of whether
additional taxes will be due. Where the final tax outcome of these matters is
different from the amounts that were initially recorded, such differences will
impact the income tax and deferred tax provisions in the period in which such
determination is made.
Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates applicable to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
The
Company evaluates its uncertain tax positions and 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.
F-30
VLOV,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED DECEMBER 31, 2009
(o)
Advertising Costs
Advertising
costs are expensed in the period in which the advertisements are first run or
over the life of the endorsement contract. Advertising expense for the years
ended December 31, 2009 and 2008 were approximately US$3.18 million and US$2.68
million, respectively. Advertising costs include advertising subsidy expense
which is accrued based on the terms in effect with distributors and paid when
all attaching conditions have been completed.
(p)
Shipping and Handling Costs
Shipping
and handling costs are expensed as incurred and included in cost of sales.
(q)
Research and Development Costs
The
Company charges all product design and development costs to expense when
incurred. Product design and development costs aggregated approximately US$1.79
million and US$2.24 million for the years ended December 31, 2009 and 2008
respectively.
(r)
Derivative Financial Instruments
We do not
use derivative instruments to hedge exposures to cash flow, market, or foreign
currency risks.
We review
the terms of convertible debt or convertible preferred stock that we issue to
determine whether there are embedded derivative instruments, including the
embedded conversion option, that are required to be bifurcated and accounted for
separately as a derivative financial instrument. Also, in connection with the
sale of convertible debt or equity instruments, we may issue freestanding
warrants that may, depending on their terms, be accounted for as derivative
instrument liabilities, rather than as equity.
Derivative
financial instruments are initially measured at their fair value. For derivative
financial instruments that are accounted for as liabilities, the derivative
instrument is initially recorded at its fair value and is then re-valued at each
reporting date, with changes in the fair value reported as charges or credits to
income. For option-based derivative financial instruments, we use a binomial
option pricing model to value the derivative instruments.
(s)
Fair Value of Financial Instruments
The
carrying amounts of the Company’s financial instruments, which principally
include cash and cash equivalents, accounts receivable and accounts payable,
approximate their fair values due to the relatively short maturity of such
instruments.
The
carrying amount of the Company’s short-term borrowings approximates their fair
value based upon current rates and terms available to the Company for similar
debt.
Warrants
that are recorded as derivative instrument liabilities are carried at their fair
value, with changes in the fair value reported as charges or credits to income
each period.
(t)
Earnings Per Share
Basic net
income per share is computed by dividing net income attributable to common
shareholders by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share is calculated by
dividing net income by the weighted-average number of common shares used in the
basic earnings per share calculation plus the number of common shares that would
be issued assuming exercise or conversion of all potentially dilutive common
stock equivalents outstanding. We exclude equity instruments from the
calculation of diluted earnings per share if the effect of including such
instruments is antidilutive.
F-31
VLOV,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED DECEMBER 31, 2009
(u) New
Accounting Pronouncements
The
following lists the Accounting Standards Codification Updates that are relevant
to the Company’s consolidated financial statements have been issued, or will
become effective, after the end of the period covered by these financial
statements:
Pronouncement
|
Issued
|
Title
|
||
ASU
No. 2009-13
|
October
2009
|
Revenue
Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements – a
consensus of the FASB Emerging Issues Task Force
|
||
ASU
No. 2009-15
|
October
2009
|
Accounting
for Own-Share Lending Arrangements in Contemplation of Convertible Debt
Issuance or Other Financing
|
||
ASU
No. 2009-16
|
December
2009
|
Transfers
and Servicing (Topic 860): Accounting for Transfers and Financial Assets.
|
||
ASU
No. 2009-17
|
December
2009
|
Consolidations
(Topic 810): Improvements to Financial Reporting by Enterprises
Involved with Variable Interest Entities
|
||
ASU
No. 2010-01
|
January
2010
|
Equity
(Topic 505): Accounting for Distributions to Shareholders with
Components of Stock and Cash – a consensus of the FASB Emerging Issues
Task Force
|
||
ASU
No. 2010-02
|
January
2010
|
Consolidation
(Topic 810): Accounting and Reporting for Decreases in
Ownership of a Subsidiary – a Scope Clarification
|
||
ASU
No. 2010-05
|
January
2010
|
Compensation -
Stock Compensation (Topic718): Escrowed Share Arrangements and the
Presumption of Compensation
|
||
ASU
No. 2010-06
|
January
2010
|
Fair
Value Measurements and Disclosures (Topic 820): Improving Disclosures
about Fair Value Measurements
|
||
ASU
No. 2010-09
|
February
2010
|
Subsequent
Events (Topic 855): Amendments to Certain Recognition and Disclosure
Requirements
|
||
ASU
No. 2010-11
|
March 2010
|
Derivatives
and Hedging (Topic 815): Scope Exception Related to Embedded Credit
Derivatives
|
To the
extent appropriate, the guidance in the above Accounting Standards Codification
Updates is already reflected in our consolidated financial statements and
management does not anticipate that these accounting pronouncements will have
any future effect on our consolidated financial statements.
At its
meeting on March 18, 2010, the FASB’s Emerging Issues Task Force reached a
consensus on five Issues. The consensuses were ratified by the FASB at its
meeting on March 31, 2010, and the related Accounting Standards Codification
Updates to be issued will become authoritative accounting guidance. None of the
consensuses address Issues that have a material effect on our consolidated
financial statements.
F-32
VLOV,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED DECEMBER 31, 2009
(2)
AMOUNT DUE FROM A DIRECTOR
As
described in Note 9, the Company raised capital in the period from October to
December, 2009 by issuing convertible preferred stocks, common stock and
warrants.
Because
of strict control over the conversion of foreign currency and the transfer of
funds by corporate customers, the Company withdrew part of the net proceeds from
the capital raise ($2,428,000), converted such amount into RMB and
deposited them in a personal account held on trust by one of the Company’s
directors, Mr. Qingqing Wu.
The U.S.
dollars were converted into RMB and were deposited into the personal account on
the date of conversion. The RMB remained on deposit in the director’s bank
account until March 29, 2010, when the trust account was cancelled and the money
was transferred back to the account of HK Dong Rong.
(3)
TRADE DEPOSITS PAID
The trade
deposits were paid to the apparels suppliers of the Company. The amounts have
been fully utilized as of March 31, 2010.
(4)
INVENTORIES
Inventories
consist of the following (in thousands):
|
December 31,
|
December 31,
|
||||||
|
2009
|
2008
|
||||||
Raw
materials
|
$
|
145
|
$
|
262
|
||||
Work
in process
|
15
|
23
|
||||||
Finished
goods
|
125
|
229
|
||||||
$
|
285
|
$
|
514
|
(5)
PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment is summarized as follows (in thousands):
|
December 31,
|
December 31,
|
||||||
|
2009
|
2008
|
||||||
Buildings
|
$
|
914
|
$
|
914
|
||||
Furniture,
fixtures and equipment
|
83
|
84
|
||||||
Motor
vehicles
|
196
|
196
|
||||||
Office
equipment
|
24
|
24
|
||||||
Plant
and machinery
|
207
|
235
|
||||||
Total
property, plant and equipment
|
1,424
|
1,453
|
||||||
Less
: accumulated depreciation
|
(458
|
)
|
(386
|
)
|
||||
$
|
966
|
$
|
1,067
|
F-33
VLOV,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED DECEMBER 31, 2009
There was
no capitalized interest for the years ended December 31, 2009 and 2008.
(6)
LAND USE RIGHTS
Land use
rights are summarized as follows (in thousands):
|
December 31,
|
December 31,
|
||||||
|
2009
|
2008
|
||||||
Land
use right
|
$
|
315
|
$
|
315
|
||||
Less
: accumulated amortization
|
(52
|
)
|
(43
|
)
|
||||
$
|
263
|
$
|
272
|
There was
no capitalized interest for the years ended December 31, 2009 and 2008.
(7)
ACCRUED EXPENSES AND OTHER PAYABLES
Accrued
expenses and other payables are summarized as follows (in thousands):
|
December 31,
|
December 31,
|
||||||
|
2009
|
2008
|
||||||
Current
portion:
|
||||||||
Accrued
salaries and wages
|
$
|
165
|
$
|
120
|
||||
Accrued
expenses
|
305
|
4
|
||||||
Advertising
subsidies payables
|
113
|
419
|
||||||
$
|
583
|
$
|
543
|
|||||
Non-current
portion:
|
||||||||
Advertising
subsidies payables
|
75
|
-
|
||||||
$
|
658
|
$
|
543
|
(8)
RELATED PARTY TRANSACTIONS
|
|
December 31,
|
|
|||||
|
|
2009
|
|
|
2008
|
|
||
Amount
due from a director:
|
||||||||
Mr. Qingqing Wu
|
$
|
2,428,000
|
$
|
-
|
||||
Amount
due to a director:
|
||||||||
Mr. Qingqing
Wu
|
$
|
30,000
|
$
|
2,000
|
Please
see Note 2 regarding the amount due from a director.
The
amount due to a director is unsecured, interest-free and repayable on demand.
Mr.
Qingqing Wu currently has four trademarks registered in his name that were
intended to be transferred to Yinglin Jinduren for no consideration prior to the
closing of the Exchange Transaction. As such transfers could not be timely
effected, Mr. Wu entered into trademark license contracts with Yinglin Jinduren
on February 12, 2009, pursuant to which he perpetually granted Yinglin Jinduren
the rights to use these trademarks for no consideration. Mr. Wu is also in the
process of transferring the trademarks to Yinglin Jinduren for no consideration
as originally intended, although such transfers have not been completed. To
date, Yinglin Jinduren has not utilized these trademarks, and the Company
considers the value of these trademarks to be de minimis.
(9)
SALE OF PREFERRED STOCK, COMMON STOCK AND WARRANTS
On October
27, 2009, the Company entered into a securities purchase agreement (the
“Purchase Agreement”) with several accredited investors (collectively the
“Purchasers”) pursuant to which the Company agreed to sell to the Purchasers
shares of the Company’s series A convertible preferred stock (the “Preferred
Shares”) at $2.86 per share and to issue warrants (the “Warrants”) to purchase
shares of the Company’s common stock (the "Preferred Shares Financing"). At the
initial closing on October 27, 2009, the Company issued to the Purchasers
1,446,105 Preferred Shares and Warrants to purchase 723,052 shares of common
stock for gross proceeds of approximately $4.1 million. At the final closing on
November 17, 2009, the Company issued to the Purchasers an additional 1,350,616
Preferred Shares and Warrants to purchase 675,308 shares of common stock for
gross proceeds of approximately $3.9 million.
F-34
VLOV,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED DECEMBER 31, 2009
The
Company is required to register the common stock underlying the Preferred Shares
and Warrants with the SEC for resale by the Purchasers within 30 days after the
final closing and to have the registration statement declared effective within
90 days thereafter (or 150 days if the registration statement receives a full
review). If the registration statement is not timely filed or declared
effective, the Company will be subject to liquidated damages of 1% of the
Purchasers’ aggregate purchase price per month, up to 10%, and pro-rated for
partial periods. As discussed further below, the registration statement was
filed on December 17, 2009, but has not yet been declared effective.
The
designation, rights, preferences and other terms and provisions of the Preferred
Shares are set forth in the Certificate of Designation filed with the Nevada
Secretary of State on October 23, 2009 (the “Certificate”). The Preferred Shares
are convertible into common stock at $2.86 per share (subject to certain
adjustments) at any time at the holder’s option, and will automatically convert
when the common stock is qualified for listing on either the Nasdaq Capital
Market or the NYSE Amex Equities. The Preferred Shares are entitled to
participate in any dividends declared and paid on the Company’s common stock on
an as-converted basis. Preferred Shares holders are also entitled to notice of
any stockholders’ meeting and vote together with common stock holders on an
as-converted basis. Additionally, as long as any Preferred Shares are
outstanding, the Company cannot, without the affirmative vote of the holders of
a majority of the then outstanding Preferred Shares, (a) alter or change
adversely the powers, preferences, or rights given to the Preferred Shares or
alter or amend the Certificate, (b) authorize or create any class of stock
ranking as to dividends, redemption or distribution of assets upon a Liquidation
(as defined in Section 5 of the Certificate) senior to or otherwise pari passu
with the Preferred Shares, (c) amend its charter documents in any manner that
adversely affects any rights of the holders of Preferred Shares, (d) increase
the number of authorized shares of Preferred Shares, or (e) enter into any
agreement with respect to any of the foregoing.
Each
Warrant entitles its holder to purchase one share of common stock at an exercise
price of $3.43 per share (subject to certain adjustments) for a period of three
years. The Company is also entitled to redeem the Warrants for the then
applicable exercise price (currently $3.43) if the volume-weighted average price
of the common stock for 20 consecutive days exceeds 200% of the then applicable
exercise price.
The
conversion price of the Preferred Shares and the exercise price of the Warrants
are subject to anti-dilution adjustments in the event that the Company issues
additional equity, equity linked securities or securities convertible into
common stock at a purchase price less than the then applicable conversion or
exercise price (other than shares issued to the Company’s officers, directors,
employees or consultants pursuant to any stock or option plan duly adopted by a
majority of the Company’s non-employee directors, or issued upon the conversion
or exercise of any securities outstanding as of the closing date of the
Preferred Shares Financing, or for acquisitions or strategic transactions
approved by a majority of the Company’s directors). The conversion and exercises
prices are also subject to customary adjustments for stock dividends, stock
splits, reverse stock splits or other similar transactions.
In
connection with the Purchase Agreement, certain of the Company’s shareholders
entered into a lock-up agreement (the “Lock-up Agreement”) whereby they agreed
not to offer, sell, or other dispose of (a) 50% of their common stock holdings
for nine months from the initial closing of the Preferred Shares Financing, and
(b) the remaining 50% of their common stock holdings for twelve months from the
initial closing.
In
connection with the Preferred Shares Financing, the Company agreed to place
$150,000 of the gross proceeds from the Financing and Warrants to purchase up to
300,000 shares of common stock in an escrow account to be expended for investor
relations, pursuant to the terms of an escrow agreement (the “Escrow
Agreement”).
F-35
VLOV,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED DECEMBER 31, 2009
Gilford
Securities, Incorporated acted as the placement agent in connection with the
Preferred Shares Financing (the “Placement Agent”).
On
December 1, 2009, the Company entered into a second securities purchase
agreement (the “Second Purchase Agreement”) with several accredited investors,
including some of the Purchasers (the “Common Shares Purchasers”) pursuant to
which the Company issued to the Common Shares Purchasers 653,534 shares of
common stock at $2.86 per share and warrants to purchase 326,767 shares of
common stock, for gross proceeds of approximately $1.87 million (the "Common
Shares Financing"). The terms of the warrants issued in connection
with the Second Purchase Agreement are identical to the Warrants issued in
connection with the Purchase Agreement.
The
Company is required to include the shares of common stock issued in the Common
Shares Financing (as well as the shares underlying the Warrants issued) in the
registration statement that it is obligated to file to register the common stock
underlying the Preferred Shares and Warrants issued in the Preferred Shares
Financing. The registration statement was required to be filed on or before
December 17, 2009, and must be declared effective within 90 days thereafter (or
150 days if the registration statement receives a full review). If the
registration statement is not timely filed or declared effective, the Company
will be subject to liquidated damages of 1% of the Purchasers’ aggregate
purchase price per month, up to 10%, and pro-rated for partial periods, a
maximum amount of approximately $987,000. The registration statement was filed
on December 17, 2009, but has not yet been declared effective. Because the
Company does not expect that the registration statement will become effective by
the required date of May 16, 2010, the Company has accrued $300,000 at December
31, 2009 for estimated liquidated damages it expects to be required to pay to
the Purchasers.
Because
the Warrants contain provisions that would reduce their exercise price in the
event that the Company issues additional equity, equity linked securities or
securities convertible into common stock at a purchase price less than the then
applicable conversion or exercise price, and because the Warrants are
denominated in a currency that is different from the Company’s functional
currency, they have been accounted for as derivative instrument liabilities
(see Note 10).
The
Preferred Shares are not subject to redemption (except on liquidation), are
entitled to participate in any dividends declared and paid on the Company’s
common stock on an as-converted basis, and the holders of the Preferred Shares
are entitled to vote together with common stock holders on an as-converted
basis. The Preferred Shares, excluding the embedded conversion option, are
considered to be an equity instrument and accordingly, the embedded conversion
option has not been separated and accounted for as a derivative instrument
liability. However, the Company has recognized a beneficial conversion feature
related to the Preferred Shares, to the extent that the conversion feature,
based on the proceeds allocated to the Preferred Shares, was in-the-money at the
time they were issued. After allocating part of the proceeds received to the
fair value of the Warrants (see Note 10), the remaining proceeds were allocated
to the Preferred Shares. The beneficial conversion feature recognized was
limited to the proceeds allocated to the Preferred Shares and amounted to
approximately $1.973 million and $2.030 million related to the initial closing
and the final closing of the Preferred Shares Financing, respectively. Because
the Preferred Shares do not have a stated redemption date and may be converted
by the holder at any time, the discount recognized by the allocation of proceeds
to the beneficial conversion feature has been immediately amortized through
retained earnings as a deemed dividend to the holders of the Preferred
Shares.
(10)
DERIVATIVE FINANCIAL INSTRUMENTS
As
described in Note 9, on October 27, November 17 and December 1, 2009,
respectively, the Company issued 723,052, 675,308 and 326,767 Warrants,
respectively. Each Warrant entitles its holder to purchase one share of common
stock of the Company at an exercise price of $3.43 per share (subject to certain
adjustments) for a period of three years. The Company is entitled to redeem the
Warrants for the then applicable exercise price (currently $3.43) if the
volume-weighted average price of our common stock for 20 consecutive days
exceeds 200% of the then applicable exercise price.
The
Company uses a binomial option pricing model to value these Warrants. In valuing
the Warrants at the time they were issued and at December 31, 2009, the Company
used the market price of its common stock on the date of valuation, an expected
dividend yield of 0% and the remaining period to the expiration date of the
Warrants. All Warrants can be exercised by the holder at any time.
F-36
VLOV,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED DECEMBER 31, 2009
Because
of the limited historical trading period of the Company’s common stock, the
expected volatility of its common stock over the remaining life of the Warrants,
which has been estimated at 85%, is based on a review of the volatility of
entities considered by management as comparable. The risk-free rates of return
used ranged from 1.14% to 1.66%, based on constant maturity rates published by
the U.S. Federal Reserve, applicable to the remaining life of the Warrants.
At
December 31, 2009, the following derivative liabilities related to common stock
warrants were outstanding:
Issue Date
|
Expiration Date
|
# of
Warrants
|
Exercise
Price Per
Share
|
Value –
Issue Date
|
Value -
December 31,
2009
|
|||||||||||||
October
27, 2009
|
October
27, 2012
|
723,052
|
$
|
3.43
|
$
|
2,163,116
|
$
|
1,538,959
|
||||||||||
November
17 2009
|
November
17, 2012
|
675,308
|
3.43
|
1,832,410
|
1,440,952
|
|||||||||||||
December
1, 2009
|
December
1, 2012
|
326,767
|
3.43
|
697,580
|
704,510
|
|||||||||||||
1,725,127
|
$
|
4,693,106
|
$
|
3,684,421
|
During
the quarter ended December 31, 2009, the Company recognized income of $1,008,685
related to the change in the fair value of these derivative instrument
liabilities.
Assets
and liabilities measured at fair value are classified in their entirety based on
the lowest level of input that is significant to their fair value measurement.
The Company’s derivative financial instruments which are required to be measured
at fair value on a recurring basis are measured at fair value using Level 3
inputs. Level 3 inputs are unobservable inputs that are supported by little or
no market activity and that are significant to the fair value of the assets or
liabilities.
The
following represents a reconciliation of the changes in fair value of financial
instruments measured at fair value using Level 3 inputs during the year ended
December 31, 2009:
|
Warrants
|
|||
|
||||
Balance
– December 31, 2008
|
$
|
-
|
||
Issuances
|
||||
October
27, 2009
|
2,163,116
|
|||
November
17, 2009
|
1,832,410
|
|||
December
1, 2009
|
697,580
|
|||
Fair
value adjustments
|
(1,008,685
|
)
|
||
Balance
– December 31, 2009
|
$
|
3,684,421
|
Estimating
the fair values of derivative financial instruments requires the development of
significant and subjective estimates that may, and are likely to, change over
the duration of the instrument with related changes in internal and external
market factors. In addition, valuation techniques are sensitive to changes in
the trading market price of our common stock, which may exhibit significant
volatility. Because derivative financial instruments are initially and
subsequently carried at fair values, our income will reflect the volatility in
these estimate and assumption changes.
F-37
VLOV,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED DECEMBER 31, 2009
(11) SHORT-TERM
BORROWINGS
The
carrying amounts of the Company’s borrowings are as follows (in thousands):
|
December 31 ,2009
|
December 31 ,2008
|
||||||||||||||
|
Amount
|
Interest
Rate
|
Amount
|
Interest
Rate
|
||||||||||||
Bank
loan
|
$
|
734
|
7.700
|
%
|
$
|
587
|
9.320
|
%
|
As of
December 31, 2009, the short-term borrowings were secured by a personal
guarantee granted by Mr. Qingqing Wu, a director of the Company.
(12) COMMON
STOCK
The
Company is authorized to issue 100,000,000 shares of common stock, $0.00001 par
value. As described in Note 1, the Company had 1,454,421 common
shares outstanding prior to the Share Exchange with PXPF, and issued 14,560,000
common shares to the shareholders of PXPF in connection with the Share
Exchange. For accounting purposes, the shares issued to the
shareholders of PXPF are assumed to have been outstanding on January 1, 2008 and
the 1,454,421 shares held by the existing shareholders of the Company prior to
the Share Exchange on February 13, 2009 are assumed to have been issued on that
date in exchange for the net assets of the Company.
As
described in Note 9, on December 1, 2009, the Company sold 653,534 shares of
common stock to certain accredited investors.
At
December 31, 2009, 16,667,957 common shares were issued and outstanding.
(13) PREFERRED
STOCK
The
Company is authorized to issue 100,000,000 shares of preferred stock, $0.00001
par value, of which 2,800,000 shares have been designated as Series A
Convertible Preferred Stock.
As
described in Note 9, on October 27 and November 17, 2009, the Company sold
1,446,105 and 1,350,616 shares, respectively, of its Series A Convertible
Preferred Stock (the “Preferred Shares”) to certain accredited investors. Each
Preferred Share is convertible into one share of common stock, at a conversion
price of $2.86 per share (subject to certain adjustments) at any time at the
holder’s option, and will automatically convert if the common stock is qualified
for listing on either the Nasdaq Capital Market or the NYSE Amex Equities. The
designation, rights, preferences and other terms and provisions of the Preferred
Shares are set forth in the Certificate of Designation filed with the Nevada
Secretary of State on October 23, 2009. The Preferred Shares are entitled to
participate in any dividends declared and paid on the common stock on an
as-converted basis. Preferred Shares holders are also entitled to notice of any
stockholders’ meeting and vote together with common stock holders on an
as-converted basis. The Preferred Shares have a liquidation preference of $2.86
per share, plus any accrued but unpaid dividends. At December 31, 2009,
2,796,721 Preferred Shares were outstanding, with an aggregate liquidation
preference of $7,998,622.
(14)
EARNINGS PER SHARE
The
following table sets forth the computation of basic and diluted earnings per
share:
(a)
Basic
Basic
earnings per share is calculated by dividing the profit attributable to equity
holders of the company by the weighted average number of ordinary shares and
participating preferred shares outstanding during the year.
F-38
VLOV,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED DECEMBER 31, 2009
|
Year Ended December 31,
|
|||||||
2009
|
2008
|
|||||||
Income
attributable to common shareholders of the Company
|
6,442
|
9,193
|
||||||
Weighted
average number of common shares outstanding
|
15,898,584
|
14,560,000
|
(b)
Diluted
Diluted
earnings per share is calculated by adjusting the weighted average number of
common shares outstanding to assume conversion of all dilutive potential common
shares. The Company has one category of dilutive potential common shares: the
Warrants issued in connection with the Preferred Shares Financing and Common
Shares Financing described in Note 9. The Warrants are assumed to have been
converted into common shares and the calculation is done to determine the number
of shares that could have been acquired at fair value (determined as the average
annual market share price of the Company’s common stock) based on the monetary
value of the subscription rights attached to outstanding Warrants. The
Preferred Shares as converted to common stock have been excluded from the
diluted earnings per share because to do so would be anti-dilutive. The
number of shares calculated as above is compared with the number of shares that
would have been issued assuming the exercise of the Warrants.
|
Year Ended December 31,
|
|||||||
2009
|
2008
|
|||||||
Income
attributable to common shareholders of the Company
|
6,442
|
9,193
|
||||||
Weighted
average number of common shares outstanding
|
15,898,584
|
14,560,000
|
||||||
Adjustment
for:
|
||||||||
-
Warrants
|
50,450
|
-
|
||||||
15,949,034
|
14,560,000
|
(15)
INCOME TAXES
The
provisions for income tax expense were as follows (in thousands):
|
Year Ended December 31,
|
|||||||
2009
|
2008
|
|||||||
PRC
enterprise income tax - current
|
$
|
4,106
|
$
|
3,065
|
The
Company is mainly subject to income taxes in the PRC and provision for the PRC
corporate income tax was calculated based on the statutory tax rate of 33% on
the assessable income arose in or before year 2007. Pursuant to the PRC
Enterprise Income Tax Law (the “Income Tax Law”) passed by the Tenth National
People’s Congress on 16 March 2007, the PRC income tax rates for domestic and
foreign enterprises are unified at 25% effective from January 1, 2008. The
enactment of the Income Tax Law is not expected to have any significant
financial effect on the amounts accrued in the consolidated balance sheet in
respect of taxation payable and deferred taxation.
F-39
VLOV,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED DECEMBER 31, 2009
The
applicable rate of Hong Kong profits tax for the years ended December 31, 2009
and 2008 was 16.5%. However, no provision for Hong Kong profits tax has been
made for the years ended December 31, 2009 and 2008 as the Company did not carry
on any business which generates profits chargeable to Hong Kong profits tax.
PXPF is a
company incorporated as an international company in the BVI and is fully exempt
from Domestic Corporate Tax of the BVI.
As of the
balance sheet dates presented, there were no deferred tax assets or liabilities.
|
Year Ended December 31,
|
|||||||
2009
|
2008
|
|||||||
Profit
before tax
|
14,912
|
12,258
|
||||||
Tax
calculated at domestic tax rate applicable to profits in the respective
countries
|
3,825
|
3,065
|
||||||
Tax
effect of:
|
||||||||
-Expenses
not deductible for tax purposes
|
280
|
-
|
||||||
$
|
4,106
|
$
|
3,065
|
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
Company classifies interest and/or penalties related to income tax matters in
income tax expense. As of December 31, 2009 and 2008, there was no interest and
penalties related to uncertain tax positions. The Company does not anticipate
any significant increases or decreases to its liability for unrecognized tax
benefits within the next 12 months.
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 limitations is ten years. There is no
statute of limitations in the case of tax evasion. Accordingly, the income tax
returns of the Company’s PRC operating subsidiaries for the years ended December
31, 2007 through 2009 are open to examination by the PRC state and local tax
authorities.
(16)
STATUTORY RESERVES
Under PRC
regulations, Yinglin Jinduren may pay dividends only out of its accumulated
profits, if any, determined in accordance with PRC GAAP. In addition,
it is required to set aside at least 10% of its after-tax net profits each year,
if any, to fund the statutory reserves until the balance of the reserves reaches
50% of its registered capital. The statutory reserves are not
distributable in the form of cash dividends to the Company but can be used to
make up prior year cumulative losses. As of December 31, 2009, the registered
capital was RMB 10,000,000 and the statutory reserves have been established
sufficiently.
(17)
LEASE COMMITMENTS
The
Company leases certain facilities under long-term, non-cancelable leases and
year-to-year leases. These leases are accounted for as operating leases. Rent
expense amounted to US$66,000 and US$36,000 for the years ended December 31,
2009 and 2008 respectively.
Future
minimum payments under long-term, non-cancelable leases as of December 31, 2009
are as follows (in thousands):
|
Future
minimum
payments
|
|||
Year
Ending December 31:
|
||||
2010
|
$
|
70
|
||
2011
|
70
|
|||
2012
|
54
|
|||
$
|
194
|
F-40
VLOV,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED DECEMBER 31, 2009
(18)
BUSINESS AND CREDIT CONCENTRATIONS
The
Company operates in the fashion apparel industry and generates all of its sales
in the PRC. The fashion apparel industry is impacted by the general economy.
Changes in the marketplace would significantly affect management’s estimates and
the Company’s performance.
The
Company has distribution agreements with 12 distributors at December 31, 2009.
The Company has the following concentrations of business with each customer
constituting greater than 10% of the Company’s sales:
|
Year ended December 31,
|
|||||||
2009
|
2008
|
|||||||
Customers
|
||||||||
Customer
A
|
18.97
|
%
|
25.76
|
%
|
||||
Customer
B
|
13.54
|
%
|
12.72
|
%
|
||||
Customer
C
|
11.20
|
%
|
10.42
|
%
|
||||
Customer
D
|
10.87
|
%
|
15.25
|
%
|
The
accounts receivable concentration of the above customers is comparable to the
above sales concentrations.
The
Company has the following concentrations of business with each vendor
constituting greater than 10% of the Company’s purchases:
|
Year ended December 31,
|
|||||||
2009
|
2008
|
|||||||
Vendors
|
||||||||
Vendor
A
|
11.50
|
%
|
38.17
|
%
|
||||
Vendor
B
|
11.46
|
%
|
15.31
|
%
|
The above
concentrations make the Company vulnerable to a near-term severe impact should
the relationships be terminated.
(19)
BENEFIT PLAN
Pursuant
to the relevant regulations of the PRC government, Yinglin Jinduren participates
in a local municipal government retirement benefits scheme (the “Scheme”),
whereby Yinglin Jinduren is required to contribute a certain percentage of the
basic salaries of its employees to the Scheme to fund their retirement benefits.
Contributions under the Scheme are charged to the income statement as incurred.
Contributions to the Scheme were US$177,000 and US$175,000 for the years ended
December 31, 2009 and 2008 respectively.
F-41
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
ITEM
13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The
following table sets forth the costs and expenses, payable by the registrant in
connection with the sale of common stock being registered. All amounts are
estimates except the SEC registration fee.
Securities
and Exchange Commission registration fee
|
$
|
[_____]
|
||
Printing
and engraving expenses
|
-
|
|||
Blue
Sky fees and expenses
|
5,000.00
|
*
|
||
Legal
fees and expenses
|
25,000.00
|
*
|
||
Accounting
fees and expenses
|
15,000.00
|
*
|
||
Miscellaneous
|
-
|
|||
Total
|
$
|
46,754.53
|
*
Estimated
ITEM
14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under
Sections 78.7502 and 78.751 of the Nevada Revised Statutes, we have broad powers
to indemnify and insure our directors and officers against liabilities they may
incur in their capacities as such. Our bylaws implement the indemnification and
insurance provisions permitted by Chapter 78 of the Nevada Revised Statutes by
providing that:
|
·
|
The
Company shall indemnify any of its current and past directors and officers
who by reason of being a director or officer, becomes or is threatened to
be made a party to any proceeding, whether civil, criminal, administrative
or investigative, against expenses (including attorneys’ fees), judgments,
fines, and amounts paid in settlement actually and reasonably incurred by
such person in connection with such proceeding, provided such person acted
in good faith and in a manner which he or she reasonably believed to be in
or not opposed to the best interest of the Company, and with respect to
any criminal action or proceeding, had no reasonable cause to believe the
conduct was unlawful. The Company shall also indemnify any of its current
and past directors and officers who by reason of being a director or
officer becomes or is threatened to be made a party to any threatened,
pending or completed derivative action, provided such person acted in good
faith and in a manner which he or she reasonably believed to be in or not
opposed to the best interest of the Company, and provided further that no
indemnity shall be provided if such person is adjudged to be liable for
gross negligence or willful misconduct unless the court shall determine
that such person is fairly and reasonably entitled to indemnity.
Authorization for indemnity by the Company shall be made by a majority of
the Company’s directors who are not parties to such action, suit or
proceeding, by independent legal counsel selected by one of more of the
Company’s directors, or by the Company’s shareholders.
|
|
·
|
The
expenses of directors and officers incurred in defending a civil or
criminal action, suit, or proceeding shall be paid by the Company upon
receipt of an undertaking by or on behalf of such person to repay such
amount.
|
|
·
|
The
Company shall have the power to purchase and maintain insurance on behalf
of its current and past directors and officers against any liability
assessed against such person in such capacity or arising out such person’s
position as a director or officer, whether or not the Company would have
the power to indemnify such person against such liability.
|
II-1
Insofar
as indemnification for liabilities arising under the Securities Act of 1933, as
amended (the “Securities Act”) may be permitted to directors, officers or
persons controlling the Company pursuant to the foregoing provisions, the
Company’s Articles of Incorporation, the Nevada Revised Business Statutes or
otherwise, we have been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
ITEM
15. RECENT SALES OF UNREGISTERED SECURITIES
The
following is a summary of our transactions during the last three years involving
sales of our securities that were not registered under the Securities Act of
1933, as amended (the “Act”):
From May
2010 to August 2010, we issued an aggregate of 1,205,438 shares of common stock
to certain of the investors in the Preferred Financing, when these investors
converted an aggregate of 1,205,438 shares of the Company’s series A convertible
preferred stock issued to them in connection with the Preferred Financing, and
exercised warrants to purchase 8,250 shares of common stock also issued to them
in connection with the Preferred Financing. The shares of common stock were
issued in accordance with and in reliance upon the exemption from securities
registration afforded by Rule 506 of Regulation D under the Act.
On April
16, 2010, we issued common stock purchase warrant to purchase up to 300,000
shares of our common stock to an independent consultant for consultation and
advisory services relating to our investor relationship. The warrant is
exercisable for a period of four years beginning November 5, 2010, and the
exercise price is $3.43 per share, provided that the warrant may be exercised on
a “cashless” basis. The warrant was issued in accordance with and in reliance
upon the exemption from securities registration afforded by Rule 506 of
Regulation D under the Act.
On
December 1, 2009, we sold and issued 653,534 shares of common stock (the “Common
Shares”) to several accredited investors at $2.86 per share, and issued to these
investors Warrants to purchase up to 326,767 shares of common stock for no
additional consideration, for gross proceeds of approximately $1.87 million. The
Common Shares and Warrants were issued in accordance with and in reliance upon
the exemption from securities registration afforded by Rule 506 of Regulation D
under the Act. We made this determination based on, in part, the representations
of these investors which included, in pertinent part, that such investors were
“accredited investors” within the meaning of Rule 501 of Regulation D
promulgated under the Act, and that such investors were acquiring our
securities, for investment purposes for their own respective accounts and not as
nominees or agents, and not with a view to the resale or distribution thereof,
and that each such investor understood that the Preferred Shares and Warrants,
as well as the shares of common stock from conversion of the Preferred Shares or
exercise of the Warrants, may not be sold or otherwise disposed of without
registration under the Act or an applicable exemption therefrom.
II-2
In
November 2009, we sold and issued an aggregate of 2,796,721 Preferred Shares and
issued Warrants to purchase up to 1,398,360 shares of common stock to 57
accredited investors. There were two closings, the first on October 27, 2009,
for gross proceeds of approximately $4.14 million, and the second on November
17, 2009, for gross proceeds of approximately $3.86 million. The
Preferred Shares and Warrants were issued in accordance with and in reliance
upon the exemption from securities registration afforded by Rule 506 of
Regulation D under the Act. We made this determination based on, in part, the
representations of these investors which included, in pertinent part, that such
investors were “accredited investors” within the meaning of Rule 501 of
Regulation D promulgated under the Act, and that such investors were acquiring
our securities, for investment purposes for their own respective accounts and
not as nominees or agents, and not with a view to the resale or distribution
thereof, and that each investor understood that the Preferred Shares and
Warrants, as well as the shares of common stock from conversion of the Preferred
Shares or exercise of the Warrants, may not be sold or otherwise disposed of
without registration under the Act or an applicable exemption
therefrom.
In
2009 in connection the Bridge Loan Agreement between HK Dong Rong and the Bridge
Loan Investors, we issued to the Bridge Loan Investors an aggregate of 174,500
shares of common stock. These common shares were issued in accordance with and
in reliance upon the exemption from securities registration afforded by Rule 506
of Regulation D under the Act. We made this determination based on, in part, the
representations of the Bridge Loan Investors which included, in pertinent part,
that they were “accredited investors” within the meaning of Rule 501 of
Regulation D promulgated under the Act, and that they were acquiring our
securities, for investment purposes for their own respective accounts and not as
nominees or agents, and not with a view to the resale or distribution thereof,
and that each of them understood that these common shares may not be sold or
otherwise disposed of without registration under the Securities Act or an
applicable exemption therefrom.
On
February 13, 2009, in connection with our Exchange Transaction with PXPF, we
issued 14,560,000 shares of our common stock to the BVI Shareholders in
exchange for 100% of the capital stock of PXPF. The issuance of the common stock
to BVI Shareholders was exempt from registration under the Securities Act
pursuant to Section 4(2) and Regulation D or S thereof. We made this
determination based on the representations of the shareholders of PXPF which
included, in pertinent part, that such shareholders were "accredited investors"
within the meaning of Rule 501 of Regulation D promulgated under the Act, and
that such shareholders were acquiring our common stock, for investment purposes
for their own respective accounts and not as nominees or agents, and not with a
view to the resale or distribution thereof, and that each member understood that
the shares of our common stock may not be sold or otherwise disposed of without
registration under the Act or an applicable exemption therefrom.
On
February 12, 2009, we completed an offering of 514,000 shares of our common
stock at a price of $0.10 per share to three purchasers. The total amount
received from this offering was $51,400. The issuance of these securities was
exempt from registration under Section 4(2) of the Act. The Company made
this determination based on the representations of these purchasers, which
included, in pertinent part, that such purchasers were either (a) "accredited
investors" within the meaning of Rule 501 of Regulation D promulgated under the
Act, or (b) not a "U.S. person" as that term is defined in Rule 902(k) of
Regulation S under the Act, and that such purchasers were acquiring our common
stock, for investment purposes for their own respective accounts and not as
nominees or agents, and not with a view to the resale or distribution thereof,
and that each such purchaser understood that the shares of our common stock may
not be sold or otherwise disposed of without registration under the Act or an
applicable exemption therefrom.
On
February 13, 2009, we completed an offering of 814,500 shares of our common
stock at a price of $0.001 per share to 4 purchasers. The total amount
received from this offering was $814.50. The issuance of these securities was
exempt from registration under Section 4(2) of the Act. The Company made
this determination based on the representations of these purchasers, which
included, in pertinent part, that such purchasers were either (a) "accredited
investors" within the meaning of Rule 501 of Regulation D promulgated under the
Act, or (b) not a "U.S. person" as that term is defined in Rule 902(k) of
Regulation S under the Act, and that such purchasers were acquiring our common
stock, for investment purposes for their own respective accounts and not as
nominees or agents, and not with a view to the resale or distribution thereof,
and that each such purchaser understood that the shares of our common stock may
not be sold or otherwise disposed of without registration under the Act or an
applicable exemption therefrom.
In
November 2006, we issued 10,000,000 shares of common stock pursuant to the
exemption from registration contained in section 4(2) of the Securities Act.
This was accounted for as a sale of common stock.
ITEM
16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
Exhibits
See
“Exhibit Index” below, which follows the signature page to this registration
statement.
ITEM
17. UNDERTAKINGS
(a) The
undersigned registrant hereby undertakes:
II-3
(1)
|
To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration
statement:
|
(i)
|
To
include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933 (the "Securities Act");
|
II-4
(ii)
|
To
reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus file with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate
offering price set forth in the “Calculation of Registration Fee” table in
the effective registration statement;
and
|
(iii)
|
Include
any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change
to such information in the registration
statement.
|
(2)
|
That,
for the purpose of determining any liability under the Securities Act of
1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
|
(3)
|
To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
|
(4)
|
That,
for the purpose of determining liability under the Securities Act of 1933
to any purchaser, if the registrant is subject to Rule 430C, each
prospectus filed pursuant to Rule 424(b) as part of a registration
statement relating to an offering, other than registration statements
relying on Rule 430B or other than prospectuses filed in reliance on Rule
430A, shall be deemed to be part of and included in the registration
statement as of the date it is first used after effectiveness. Provided,
however, that no statement made in a registration statement or prospectus
that is part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the registration
statement or prospectus that is part of the registration statement will,
as to a purchaser with a time of contract of sale prior to such first use,
supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or
made in any such document immediately prior to such date of first use.
|
(5)
|
That,
for the purpose of determining liability of the registrant under the
Securities Act of 1933 to any purchaser in the initial distribution of the
securities, the undersigned registrant undertakes that in a primary
offering of securities of the undersigned registrant pursuant to this
registration statement, regardless of the underwriting method used to sell
the securities to purchaser, if the securities are offered or sold to such
purchaser by means of any of the following communications, the undersigned
registrant will be a seller to the purchaser and will be considered to
offer or sell such securities to such purchaser:
|
(i)
|
Any
preliminary prospectus or prospectus of the undersigned registrant
relating to the offering required to be filed pursuant to Rule 424;
|
(ii)
|
Any
free writing prospectus relating to the offering prepared by or on behalf
of the undersigned registrant or used or referred to by the undersigned
registrant;
|
(iii)
|
The
portion of any other free writing prospectus relating to the offering
containing material information about the undersigned registrant or its
securities provided by or on behalf of the undersigned registrant; and
|
(iv)
|
Any
other communication that is an offer in the offering made by the
undersigned registrant to the purchaser.
|
(b)
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-5
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Shishi, Fujian Province,
on August 27, 2010.
VLOV,
INC.
|
|
By:
|
/s/ Qingqing Wu
|
Qingqing
Wu
Chief Executive Officer
(Principal Executive Officer)
|
|
By:
|
/s/ Bennet P. Tchaikovsky
|
Bennet
P. Tchaikovsky
Chief Financial Officer
(Principal
Financial and Accounting Officer)
|
Pursuant
to the requirements of the Securities Act of 1933, as amended, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated:
Signature
|
Title
|
Date
|
||
/s/ Qingqing Wu
|
Chairman
of the Board, President,
|
August
27, 2010
|
||
Qingqing
Wu
|
and
Chief Executive Officer
|
|||
/s/ Bennet P. Tchaikovsky
|
Chief
Financial Officer
|
August
27, 2010
|
||
Bennet
P. Tchaikovsky
|
||||
/s/ Jianwei Shen
|
Director
|
August
27, 2010
|
||
Jianwei
Shen
|
||||
/s/ Yuzhen Wu
|
Director
|
August
27, 2010
|
||
Yuzhen
Wu
|
||||
/s/ Jianhui Wang
|
Director
|
August
27, 2010
|
||
Jianhui
Wang
|
||||
/s/
Ying Zhang
|
Director
|
August
27, 2010
|
||
Ying
Zhang
|
II-6
EXHIBIT
INDEX
Exhibit
Number
|
Description
|
|
2.1
|
Share
Exchange Agreement (1)
|
|
3.1
|
Articles
of Incorporation (2)
|
|
3.2
|
Amendment
to Articles of Incorporation (for 1-for-100 reverse stock split), filed
with the Nevada Secretary of State on January 12, 2009 (10)
|
|
3.3
|
Articles
of Merger filed on March 4, 2009 and effective March 20, 2009
(3)
|
|
3.4
|
Certificate
of Correction filed on March 6, 2009 (3)
|
|
3.5
|
Certificate
of Designation of Preferences, Rights and Limitations of Series A
Convertible Preferred Stock, filed with the Nevada Secretary of State on
October 23, 2009 (4)
|
|
3.6
|
Bylaws
(2)
|
|
3.7
|
Amendment
to the Bylaws (1)
|
|
4.1
|
Specimen
Common Stock Certificate (2)
|
|
4.2
|
Specimen
Series A Convertible Preferred Stock Certificate (4)
|
|
4.3
|
Form
of Common Stock Purchase Warrant for the Preferred Shares Financing (4)
|
|
4.4
|
Form
of Common Stock Purchase Warrant for the Common Shares Financing (6)
|
|
4.5
|
Form
of Common Stock Purchase Warrant issued to American Capital Ventures, Inc.
(14)
|
|
5.1
|
Opinion
of Richardson & Patel LLP *
|
|
10.1
|
Consulting
Services Agreement (1)
|
|
10.2
|
Operating
Agreement (1)
|
|
10.3
|
Equity
Pledge Agreement (1)
|
|
10.4
|
Option
Agreement (1)
|
|
10.5
|
Voting
Rights Proxy Agreement (1)
|
|
10.6
|
Share
Purchase Binding Letter of Intent with ARC China, Inc. dated September 29,
2009 (5)
|
|
10.7
|
Form
of Securities Purchase Agreement for the Preferred Shares Financing (4)
|
|
10.8
|
Form
of Escrow Agreement for the Preferred Shares Financing (4)
|
|
10.9
|
Form
of Securities Purchase Agreement for the Common Shares Financing (6)
|
|
10.10
|
Supplemental
Agreement dated February 18, 2009 (8)
|
|
10.11
|
Form
of Director Offer Letter entered into with Ying Zhang and Jianwei Shen
(11)
|
|
10.12
|
Bridge
Loan and Financing Agreement dated June 11, 2008 *
|
|
10.13
|
Trademark
License Contract for serial number 3871951 dated February 12,
2009 (12)
|
II-7
10.14
|
Trademark
License Contract for serial number 3884844 dated February 12,
2009 (12)
|
|
10.15
|
Trademark
License Contract for serial number 3884845 dated February 12,
2009 (12)
|
|
10.16
|
Trademark
License Contract for serial number 4247545 dated February 12,
2009 (12)
|
|
10.17
|
Form
of Securities Purchase Agreement dated February 13, 2009 (12)
|
|
10.18
|
Form
of Securities Purchase Agreement dated February 12, 2009 (12)
|
|
10.19
|
Loanout Agreement with Worldwide Officers, Inc. dated April 27, 2010 (13) | |
10.20
|
Director Offer Letter with Jianhui Wang dated June 1, 2010 (15) | |
14.1
|
Code
of Ethics (7)
|
|
21.1
|
List
of Subsidiaries (12)
|
|
23.1
|
Consent
of Crowe Horwath LLP *
|
|
23.2
|
Consent
of Richardson & Patel LLP (included in Exhibit 5.1)
*
|
|
23.3
|
Consent
of Allbright Law Offices *
|
|
99.1
|
Legal
Opinion of Allbright Law Offices
**
|
II-8
*
|
Filed
herewith.
|
(1)
|
Filed
on February 13, 2009 as an exhibit to our Current Report on Form 8-K, and
incorporated herein by reference.
|
|
(2)
|
Filed
on February 9, 2007 as an exhibit to our Registration Statement on Form
SB-2, and incorporated herein by reference.
|
|
(3)
|
Filed
on March 20, 2009 as an exhibit to our Current Report on Form 8-K, and
incorporated herein by reference.
|
|
(4)
|
Filed
on October 30, 2009 as an exhibit to our Current Report on Form 8-K, and
incorporated herein by reference.
|
|
(5)
|
Filed
on October 5, 2009 as an exhibit to our Current Report on Form 8-K, and
incorporated herein by reference.
|
|
(6)
|
Filed
on December 2, 2009 as an exhibit to our Current Report on Form 8-K, and
incorporated herein by reference.
|
|
(7)
|
Filed
on March 7, 2008 as an exhibit to our Annual Report on Form 10-K, and
incorporated herein by reference.
|
|
(8)
|
Filed
on February 20, 2009 as an exhibit to our Current Report on Form 8-K, and
incorporated herein by reference.
|
|
(9)
|
Filed
on April 15, 2009, as an exhibit to our Current Report on Form 8-K, and
incorporated herein by reference.
|
|
(10)
|
Filed
on December 17, 2009, as an exhibit to our Registration Statement on Form
S-1, and incorporated herein by reference.
|
|
(11)
|
Filed
on March 16, 2010, as an exhibit to our Current Report on Form 8-K, and
incorporated herein by reference.
|
|
(12)
|
Filed
on April 15, 2010, as an exhibit to our Annual Report on Form 10-K, and
incorporated herein by reference.
|
|
(13) | Filed on May 3, 2010, as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference. | |
(14) | Filed on May 25, 2010, as an exhibit to our Amendment to Registration Statement on Form S-1/A, and incorporated herein by reference. | |
(15) | Filed on June 3, 2010, as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference. |
II-9