Attached files
file | filename |
---|---|
EX-32.2 - VLOV INC. | v206533_ex32-2.htm |
EX-31.1 - VLOV INC. | v206533_ex31-1.htm |
EX-31.2 - VLOV INC. | v206533_ex31-2.htm |
EX-32.1 - VLOV INC. | v206533_ex32-1.htm |
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q/A
(Amendment
No. 2)
(Mark
One)
x Quarterly Report Pursuant To Section 13
Or 15(d) Of The Securities Exchange Act Of 1934
For the
quarterly period ended: June 30, 2010
Or
¨ Transition Report Pursuant To Section
13 Or 15(d) Of The Securities Exchange Act Of 1934
For the
transition period from ______________ to _______________
Commission
File Number: 000-53155
VLOV
INC.
(Exact name of registrant as specified in its charter)
Nevada
|
20-8658254
|
|
(State
or other jurisdiction of incorporation of
origination)
|
(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
|
N/A
|
|
(Address
of principal executive offices)
|
(Zip
code)
|
(86595)
2345999
(Registrant’s
telephone number, including area code)
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ¨ No ¨
Indicate
by check mark 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 ¨
|
Accelerated
filer ¨
|
|
Non-accelerated
filer ¨
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
APPLICABLE
ONLY TO CORPORATE ISSUERS:
Indicate
the number of shares outstanding of each issuer’s classes of common stock, as of
the latest practicable date: 17,832,500 shares issued and outstanding as of
August 3, 2010.
EXPLANATORY
NOTE
This
Amendment No. 2 of the quarterly report on Form 10-Q for quarter ended June 30,
2010 (“Amendment No. 2”) is being filed by VLOV, Inc. (the “Company”) to further
amend the Company’s Form 10-Q for the three and six months ended June 30, 2010
filed with the Securities and Exchange Commission (“SEC”) on August 19, 2010
(“Initial 10-Q”), as amended by Amendment No. 1 of the Form 10-Q filed on
October 27, 2010 (“Amendment No. 1”). This Amendment No. 2 is filed
to: (A) correct an inadvertent error in the number of fully diluted shares for
the six months ending June 30, 2010, (B) reclassify $12,000 from accrued
liabilities and other payables to amount due to a director and (C) to further
detail the fully diluted share amount in the reclassification
explanation.
These
changes were made, and this Amendment No. 2 is being filed, in connection with a
letter from the SEC dated November 12, 2010 regarding Amendment No. 3 to the
Company’s Registration Statement on Form S-1 (333-163803). Except as
required to reflect the changes noted above, this Amendment No. 2 does not
attempt to modify or update any other disclosures set forth in the Initial 10-Q
and Amendment No. 1. Other events or circumstances occurring after
the date of the Initial 10-Q or other disclosures necessary to reflect
subsequent events have not been updated subsequent to the date of the Initial
10-Q. Accordingly, this Amendment No. 2 should be read in conjunction
with the Initial 10-Q, Amendment No. 1 and our filings with the SEC subsequent
to the filing of the Initial 10−Q. The filing of this Amendment No. 2
shall not be deemed an admission that the original filing, when made, included
any untrue statement of material fact or omitted to state a material fact
necessary to make a statement not misleading.
TABLE
OF CONTENTS
TO
QUARTERLY REPORT ON FORM 10-Q/A
FOR
THE QUARTER ENDED JUNE 30, 2010
Page
|
|||||
PART
I
|
FINANCIAL
INFORMATION
|
||||
Item
1.
|
Financial
Statements (unaudited)
|
4
|
|||
Consolidated
Balance Sheets as of June 30, 2010 (unaudited) and December 31,
2009
|
4
|
||||
Consolidated
Statements of Income and Comprehensive Income for the three months and six
months ended June 30, 2010 and 2009 (unaudited)
|
5
|
||||
Consolidated
Statements of Stockholder’s Equity (unaudited)
|
6
|
||||
Consolidated
Statements of Cash Flows for the three months and six months ended June
30, 2010 and 2009 (unaudited)
|
7
|
||||
Notes
to the Consolidated Financial Statements
|
8
|
||||
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
24
|
||||
Quantitative
and Qualitative Disclosures about Market Risk
|
32
|
||||
Controls
and Procedures
|
32
|
||||
OTHER
INFORMATION
|
|||||
Legal
Proceedings
|
32
|
||||
Risk
Factors
|
32
|
||||
Unregistered
Sales of Equity Securities and Use of Proceeds
|
32
|
||||
Defaults
Upon Senior Securities
|
33
|
||||
Item
4.
|
Reserved
|
33
|
|||
Other
Information
|
33
|
||||
Exhibits
|
33
|
||||
36
|
2
CAUTION
REGARDING FORWARD-LOOKING INFORMATION
All
statements contained in this Quarterly Report on Form 10-Q/A (“Form 10-Q/A”) for
VLOV Inc., 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. However, whether actual results will conform to the
expectations and predictions of management is subject to a number of risks and
uncertainties that may cause actual results to differ materially.
Such
risks include, among others, the following: national and local general economic
and market conditions; our ability to sustain, manage or forecast our growth;
raw material costs and availability; new product development and introduction;
existing government regulations and changes in, or the failure to comply with,
government regulations; adverse publicity; competition; the loss of significant
customers or suppliers; fluctuations and difficulty in forecasting operating
results; changes in business strategy or development plans; business
disruptions; the ability to attract and retain qualified personnel; the ability
to protect technology; and other factors referenced in this and previous
filings.
Consequently,
all of the forward-looking statements made in this Form 10-Q/A 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.
3
PART
I - FINANCIAL INFORMATION
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
|
860
|
583
|
||||||
Amount
due to a director
|
78
|
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
4
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
|
|||||||||||||
(Restated)
|
(Restated)
|
|||||||||||||||
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
|
||||||||
Allocation
of net income for calculating basic earnings per
share:
|
||||||||||||||||
Net
income attributable to common shareholders
|
3,911
|
2,310
|
4,800
|
6,086
|
||||||||||||
Net
income attributable to preferred shareholders
|
566
|
744
|
||||||||||||||
Net
income
|
$
|
4,467
|
$
|
2,310
|
$
|
5,544
|
$
|
6,086
|
||||||||
Basic earnings
per share- common
|
$
|
0.23
|
$
|
0.14
|
$
|
0.28
|
$
|
0.39
|
||||||||
Diluted
earnings per share
|
$
|
0.22
|
$
|
0.14
|
$
|
0.28
|
$
|
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
|
20,070,771
|
16,000,000
|
20,070,619
|
15,657,901
|
See
accompanying notes to consolidated financial statements
5
VLOV,
INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDER’S EQUITY
(Unaudited;
amounts in thousands- except for share and per share data)
Accumulated
|
||||||||||||||||||||||||||||||||||||
Additional
|
Other
|
|||||||||||||||||||||||||||||||||||
Common stock
|
Preferred stock
|
paid-in
|
Statutory
|
Comprehensive
|
Retained
|
Total
|
||||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
capital
|
reserve
|
income
|
earnings
|
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
|
)
|
|||||||||||||||||||||||||
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
|
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.
7
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.
8
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.
9
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
|
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.
10
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.
11
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.
12
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.
13
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.
14
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)
|
652
|
305
|
||||||
Advertising
subsidies payables
|
114
|
113
|
||||||
$
|
860
|
$
|
583
|
|||||
Non-current
portion:
|
||||||||
Advertising
subsidies payables
|
76
|
75
|
||||||
$
|
936
|
$
|
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.
15
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)
|
30
|
-
|
||||||
Total
|
$
|
78
|
$
|
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 of $18 thousand and $12
thousand of cash compensation due as of June 30,
2010.
|
Pursuant
to trademark license contracts with Mr. Qingqing Wu, a Company director, the
Company has the rights to use four trademarks which are owned by and registered
to Mr. Wu without consideration, although to date, the Company has not utilized
these trademarks. Mr. Wu is in the process of transferring these trademarks to
the Company. Costs associated with these trademarks are not
significant.
(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
|
16
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.
17
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 - common” is calculated by dividing
the net income attributable to common shareholders of
the Company by the weighted average number of common shares. Using the two class
method pursuant to ASC 260-10-45, the Company allocated its net income to
preferred and common shareholders during the three and six months ended June 30,
2010, based on the number of common shares outstanding during the periods shown
(taking into account the number of preferred shares converted into common shares
at the end of such periods on a 1-for-1 basis), 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
|
3,911
|
2,310
|
4,800
|
6,086
|
||||||||||||
Income
attributable to preferred shareholders of the Company
|
556
|
-
|
744
|
-
|
||||||||||||
Net
income
|
$
|
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 assuming conversion of all dilutive potential common
shares. The Company has two categories of dilutive potential common shares: the
Preferred Shares issued in October and November 2009 (the “Preferred Shares
Financing”), and the Warrants issued in connection with both the Preferred
Shares Financing and the shares of common stock sold in December 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 that
were outstanding at the end of the respective periods are assumed to have been
converted into common shares on a 1-for-1 basis. Since the Preferred Shares are
included in the diluted calculation, net income (attributable to both common and
preferred shareholders) is used. 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.
18
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
|
||||||||||||
Net
income
|
$
|
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:
|
||||||||||||||||
Preferred
stock
|
2,424,543
|
2,614,527
|
||||||||||||||
Warrants
|
603,543
|
-
|
599,735
|
-
|
||||||||||||
20,070,771
|
16,000,000
|
20,070,619
|
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
|
%
|
19
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:
|
||||
$
|
35
|
|||
Year
Ending December 31:
|
||||
2011
|
70
|
|||
2012
|
54
|
|||
$
|
159
|
20
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
|
%
|
21
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%
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.
(18)
|
RESTATEMENT
|
The
Company restated its consolidated statements of income and comprehensive income
for the three and six months ended June 30, 2010 in order to (a) reflect
preferred stock in its fully diluted earnings per share calculation,(b) allocate
net income between common stock and preferred stock in the computation of basic
earnings per share using the two-class method and (c) to correct the number of
fully diluted shares for the six months ended June 30, 2010 per our first
amended 10Q for the period ending June 30, 2010 which had no impact on diluted
earnings per share for the six months ended June 30, 2010.
The
impact of the foregoing errors on the consolidated statements of income and
comprehensive income for the three and six months ended June 30, 2010 is
reflected in the following tables:
Three
months ended June 30, 2010:
Originally
|
||||||||||||
Filed
|
Adjustment
|
Restated
|
||||||||||
Net
income attributable to common shareholders
|
4,467
|
(556
|
)
|
3,911
|
||||||||
Net
income attributable to preferred shareholders
|
-
|
556
|
556
|
|||||||||
Basic
earnings per share- common
|
$
|
0.26
|
$
|
(0.03
|
)
|
$
|
0.23
|
|||||
Diluted
earnings per share
|
$
|
0.26
|
$
|
(0.04
|
)
|
$
|
0.22
|
|||||
Weighted
average number of common shares and participating preferred shares
Outstanding:
|
||||||||||||
Weighted
average number of common shares outstanding
|
17,042,685
|
17,042,685
|
||||||||||
Adjustments
for:
|
||||||||||||
Warrants
(1)
|
341,317
|
262,226
|
603,543
|
|||||||||
Preferred
Stock
|
-
|
2,424,543
|
2,424,543
|
|||||||||
Diluted
|
17,384,002
|
2,686,769
|
20,070,771
|
(1)
|
The adjustment to the warrants
represents the application of the treasury stock method and not the
incremental number of shares that the Company would issue based on a
cashless exercise.
|
22
Six
months ended June 30, 2010:
Originally
|
||||||||||||
Filed
|
Adjustment
|
Restated
|
||||||||||
Net
income attributable to common shareholders
|
5,544
|
(744
|
)
|
4,800
|
||||||||
Net
income attributable to preferred shareholders
|
-
|
744
|
744
|
|||||||||
Basic
earnings per share- common
|
$
|
0.33
|
$
|
(0.05
|
)
|
$
|
0.28
|
|||||
Diluted
earnings per share
|
$
|
0.32
|
$
|
(0.04
|
)
|
$
|
0.28
|
|||||
Weighted
average number of common shares and participating preferred shares
Outstanding:
|
||||||||||||
Weighted
average number of common shares outstanding
|
16,856,357
|
16,856,357
|
||||||||||
Adjustments
for:
|
||||||||||||
Warrants
(1)
|
341,317
|
258,418
|
599,735
|
|||||||||
Preferred
Stock
|
2,614,527
|
2,614,527
|
||||||||||
Diluted
|
|
17,197,674
|
2,872,945
|
20,070,619
|
(1)
|
The
adjustment to the warrants represents the application of the
treasury stock method and not the incremental number of shares that the
Company would issue based on a cashless
exercise.
|
23
Item
2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
The
following management’s discussion and analysis should be read in conjunction
with our consolidated financial statements and the notes thereto that are
included elsewhere in this report. In addition to historical information, the
following discussion contains certain forward-looking statements within the
“safe harbor” provisions of the Private Securities Litigation Reform Act of
1995. These statements relate to our future plans, objectives, expectations and
intentions. These statements may be identified by the use of words such as “may,
“will,” “could,” “expect,, “anticipate,” “intend,” “believe, “estimate,” “plan,”
“predict” and similar terms or terminology, or the negative of such terms or
other comparable terminology. Although we believe the expectations expressed in
these forward-looking statements are based on reasonable assumptions within the
bound 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 our annual report on Form 10-K for the year
ended December 31, 2009 and filed with the SEC on April 15, 2010. 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.
Our
financial statements are prepared in U.S. Dollars and in accordance with
accounting principles generally accepted in the United States. See “Exchange
Rates” below for information concerning the exchanges rates at which Renminbi
were translated into U.S. Dollars at various pertinent dates and for pertinent
periods.
Overview
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 formerly known as Korea Jinduren International Dress
Limited. 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 Chairman 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 report, however, such transfer has not occurred and China Dong Rong
currently conducts no business activities.
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.
24
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 revenue 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
|
25
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 2009 in connection with sales of our
series A convertible preferred stock and our common stock 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.
Results
of Operations
Comparison
of Three and Six Months ended June 30, 2010 and 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
|
%
|
26
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
|
%
|
27
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.
28
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
|
%
|
Selling,
General and Administrative Expenses
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||||||||||||||||||
2009
|
2010
|
2009
|
2010
|
|||||||||||||||||||||||||||||
$
|
% of
Total
Net Sales
|
$
|
% of
Total
Net Sales
|
$
|
% of
Total
Net Sales
|
$
|
% of
Total
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.
29
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.
Liquidity
and Capital Resources
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.
30
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.
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.
Total
indebtedness consists of installment loans from financial institutions in the
PRC.
Operating
lease amounts include minimum lease payments under our non-cancelable operating
leases 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.
31
Item 3.
|
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.
Item 4.
|
Controls and
Procedures
|
Evaluation
of Disclosure Controls and Procedures
As of
June 30, 2010, we carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended. Based upon
that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were not effective at the
reasonable assurance level.
Our
current accounting staff remains relatively inexperienced with respect to U.S.
GAAP-based reporting and SEC rules and regulations, and will require additional
training. In April 2010, the Company retained a CFO on a part-time basis to
assist with the preparation of the Company’s financial statements in accordance
with U.S. GAAP. Additionally, the Company engaged an outside consultant to
assist with the valuation of the securities issued in connection with its fourth
quarter 2009 financings. The Company looks to take such other steps as necessary
to address the weakness in its accounting staff, the effectiveness of which will
not be known until the Company performs a test in connection with management’s
tests of internal control over financial reporting to be undertaken as of
December 31, 2010.
Changes
in Internal Control over Financial Reporting
There was
no change in our internal control over financial reporting during the quarter
ended June 30, 2010 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART
II - OTHER INFORMATION
Item 1.
|
Legal
Proceedings.
|
None
Item 1A.
|
Risk
Factors.
|
As of and
for the six months ended June 30, 2010, there were no material changes in our
risk factors from those disclosed in Part I, Item 1A, of our annual report on
Form 10-K as of and for the year ended December 31, 2009.
Item 2.
|
Unregistered Sales of Equity
Securities and Use of
Proceeds.
|
During
the three months ended June 30, 2010, the Company issued an aggregate of 891,160
shares of common stock to certain of the investors in the Company’s financing
completed in November 2009 (the “Financing”), when these investors converted an
aggregate of 891,160 shares of the Company’s series A convertible preferred
stock issued to them in connection with the Financing.
The
Company additionally issued an aggregate of 6,500 shares of common stock to
three investors in the Financing when these investors exercised their common
stock purchase warrants issued to them in connection with the Financing. The
exercise price of the warrants is $3.43 per share, and the Company received
gross proceeds of $22,295 from these warrant exercises.
The
foregoing shares of common stock were issued to these investors in reliance upon
the exemption from securities registration afforded by Rule 506 of Regulation D
under the Securities Act of 1933, as amended.
32
Item 3.
|
Defaults upon Senior
Securities.
|
None
Item 4.
|
Reserved.
|
Item 5.
|
Other
Information.
|
None
Item 6.
|
Exhibits.
|
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)
|
|
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)
|
33
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 (12)
|
|
10.13
|
Trademark
License Contract for serial number 3871951 dated February 12,
2009 (12)
|
|
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)
|
|
31.1
|
Certifications
pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act
of 1934, as amended *
|
|
31.2
|
Certifications
pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act
of 1934, as amended *
|
|
32.1
|
Certifications
pursuant to 18 U.S.C. Section 1350 *
|
|
32.2
|
Certifications
pursuant to 18 U.S.C. Section 1350 *
|
|
99.1
|
Legal
Opinion of Allbright Law Offices
(13)
|
*
|
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.
|
34
(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.
|
Filed on June 3,
2010, as an exhibit to our Current Report on Form 8-K, and
incorporated herein by
reference.
|
35
SIGNATURES
In
accordance with the requirements of the Exchange Act, the Registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VLOV
INC.
|
||
(Registrant)
|
||
Date:
December 29, 2010
|
By:
|
/s/
Qingqing Wu
|
Qingqing
Wu
|
||
Chief
Executive
Officer
|
Date:
December 29, 2010
|
By:
|
/s/
Bennet P. Tchaikovsky
|
Bennet
P. Tchaikovsky
|
||
Chief
Financial Officer
|
36