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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

We design, develop, manufacture, distribute and sell casual apparel and clothing products in the PRC targeted toward middle-class Chinese men under the brand name “V·LOV”.  We sell our products to our independent distributors, each of whom is granted rights to market and sell our products in a defined market or territory.  As of June 30, 2010, we had agreements with 12 distributors throughout northern, central and southern China.  After distributors place purchase orders for our products, such products are manufactured by us and our outsourced manufacturers and delivered to our distributors.  As of August 12, 2010, our distributors owned and operated 519 points of sales, or POS, across the PRC, including counters, concessions, free standing stores and store-in-stores.  We maintain and exercise control over advertising and marketing activities from our headquarters in Fujian, China, where we set the tone for integrity, consistency and direction of the V·LOV brand image throughout China.

All of our business operations are carried out by our variable interest entity Jinjiang Yinglin Jinduren Fashion Limited (“Yinglin Jinduren”), which we control through contractual arrangements between Yinglin Jinduren and our wholly-owned subsidiary Dong Rong Capital Investment Limited (“HK Dong Rong”), a Hong Kong company 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.

 
Payments Due by Period
  
     
Total
     
Less than 1
year
     
1 Year +
  
     
(in thousands of dollars)
 
Contractual Obligations  :
                 
                   
Total Indebtedness
 
$
589
   
$
589
   
$
 
                         
Operating Leases
   
159
     
35
     
124  
 
                         
Total Contractual Obligations:
 
$
748
   
$
624
   
$
124 
 

Total indebtedness consists of installment loans from financial institutions in the PRC.

Operating lease amounts include minimum lease payments under our non-cancelable operating 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.

 
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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.

 
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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