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EX-5.1 - VLOV INC.v215012_ex5-1.htm
EX-23.1 - VLOV INC.v215012_ex23-1.htm
EX-23.3 - VLOV INC.v215012_ex23-3.htm
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 18, 2011

REGISTRATION STATEMENT NO. 333-163803

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM S-1
(Amendment No. 6)

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

VLOV, INC.

(Exact name of registrant as specified in its charter)

Nevada

 (State or other jurisdiction of incorporation or organization)

2300

 (Primary Standard Industrial Classification Code Number)

20-8658254

 (I.R.S. Employer Identification Number)

 11/F., Xiamen Guanyin Shan International Commercial Operation Centre, A3-2 124
Hubin Bei Road, Siming District, Xiamen, Fujian Province
People’s Republic of China
(86592) 2345999

 (Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Qingqing Wu, Chief Executive Officer
11/F., Xiamen Guanyin Shan International Commercial Operation Centre, A3-2 124
Hubin Bei Road, Siming District, Xiamen, Fujian Province
People’s Republic of China
(86592) 2345999

COPY TO:
Kevin K. Leung, Esq.
Francis Chen, Esq.
LKP Global Law, LLP
1901 Avenue of the Stars, Suite 480
Los Angeles, CA 90067
(424) 239-1890

 (Name, address, including zip code, and telephone number, including area code, of agent for service)

FROM TIME TO TIME AFTER THE
EFFECTIVE DATE OF THIS REGISTRATION STATEMENT

 (Approximate date of commencement of proposed sale to the public)
 
 
 

 

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. x

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
Smaller reporting company x

CALCULATION OF REGISTRATION FEE
 
Title of Each Class of
Securities to be Registered
  
Amount to
be
Registered
(1)
     
Proposed
Maximum
Per Share
Offering Price
     
Proposed
Maximum
Aggregate
Offering
Price
     
Amount of 
Registration
Fee
 
Common stock, $0.00001 par value per share (including those issuable upon conversion of series A convertible preferred stock)
   
3,406,514
   
$
1.46
(2)
 
$
4,973,510.44
   
$
577.42
 
                                 
Common stock, $0.00001 par value per share (issuable upon exercise of common stock purchase warrants)
   
1,716,877
   
$
3.43
(3)
 
$
5,888,888.11
   
$
683.70
 
                                 
Total
   
5,123,391
                   
$
1,261.12
(4)
 
(1)
Pursuant to Rule 416 under the Securities Act of 1933, as amended (the “Securities Act”), this registration statement shall be deemed to cover additional securities (i) to be offered or issued in connection with any provision of any securities purported to be registered hereby to be offered pursuant to terms which provide for a change in the amount of securities being offered or issued to prevent dilution resulting from stock splits, stock dividends, or similar transactions and (ii) of the same class as the securities covered by this registration statement issued or issuable prior to completion of the distribution of the securities covered by this registration statement as a result of a split of, or a stock dividend on, the registered securities.

(2)
Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(c) of the Securities Act based upon the average of the high and low prices of the common stock of the Registrant as reported on the Over-the-Counter Bulletin Board on March 15, 2011.

(3)
Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(g) under the Securities Act.

(4)
$1,754.53 has been previously paid.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
 
 
 

 

The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and no offer to buy these securities is being solicited in any state where the offer or sale is not permitted.

Prospectus

VLOV, INC.

5,123,391 shares of Common Stock

This prospectus covers the resale by selling security holders named on page 14 of up to 5,123,391 shares of our common stock, $0.00001 par value per share, which includes:

 
·
1,489,656 shares of common stock underlying 1,489,656 outstanding shares of series A convertible preferred stock issued in conjunction with our financing completed on November 17, 2009 (the “Preferred Shares Financing”);

 
·
1,080,574 shares of common stock converted from 1,080,574 shares of series A convertible preferred stock issued in conjunction the Preferred Shares Financing;

 
·
653,534 shares of common stock issued in conjunction with our financing completed on December 1, 2009 (the “Common Shares Financing,” and with the Preferred Shares Financing collectively as the “Financings”);

 
·
1,716,877 shares of common stock underlying the common stock purchase warrants issued in conjunction with the Financings;

 
·
8,250 shares of common stock from exercise of common stock purchase warrants to purchase 8,250 shares of common stock; and

 
·
174,500 shares of common stock issued in connection with a bridge financing related to our share exchange transaction with Peng Xiang Peng Fei Investments, Limited in February 2009.

This offering is not being underwritten. These securities will be offered for sale from time to time by the selling security holders identified in this prospectus in accordance with the terms described in the section of this prospectus entitled “Plan of Distribution.” We will not receive any of the proceeds from the sale of the common stock by the selling security holders.

The prices at which the selling security holders may sell the shares of common stock that are part of this offering will be determined by the prevailing market price for the shares at the time the shares are sold, a price related to the prevailing market price, at negotiated prices or prices determined, from time to time by the selling security holders. See "Plan of Distribution."

Our securities are not listed on any national securities exchange. Our common stock is currently quoted on the OTC Bulletin Board under the symbol “VLOV.” The last reported per share price for our common stock was $1.45 as quoted on the OTC Bulletin Board on March 15, 2011.

INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE “RISK FACTORS” BEGINNING ON PAGE 3.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

The date of this prospectus is _________________, 2011

 
 

 

No offers to sell are made, nor are offers sought, to buy these securities in any jurisdiction where the offer or sale is not permitted. The reader should assume that the information contained in this prospectus is accurate as of the date in the front of this prospectus only. Our business, financial condition, results of operations, and prospectus may have changed since that date.

TABLE OF CONTENTS
  
 
Page
   
Prospectus Summary
1
Risk Factors
3
Special Note Regarding Forward-Looking Statements
14
Use of Proceeds
15
Selling Security Holders
15
Plan of Distribution
28
Legal Matters
29
Experts
29
Business
29
Description of Property
44
Summary Financial Data
44
Management’s Discussion and Analysis of Financial Condition and Results of Operations
46
Legal Proceedings
56
Management
56
Executive Compensation
59
Security Ownership of Certain Beneficial Holders and Management
61
Certain Relationships and Related Party Transactions
63
Description of Securities
64
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
68
Disclosure of Commission Position on Indemnification for Securities Act Liabilities
68
Additional Information
69
Index to Consolidated Financial Statements
F-1
 
 
i

 

PROSPECTUS SUMMARY

This summary contains basic information about us and this offering. The reader should read the entire prospectus carefully, especially the risks of investing in our common stock discussed under “Risk Factors.” Some of the statements contained in this prospectus, including statements under “Summary” and “Risk Factors” as well as those noted in the documents incorporated herein by reference, are forward-looking statements and may involve a number of risks and uncertainties. We note that our actual results and future events may differ significantly based upon a number of factors. The reader should not put undue reliance on the forward-looking statements in this document, which speak only as of the date on the cover of this prospectus.

References to “we,” “our,” “us,” the “Company,” or “VLOV” refer to VLOV, Inc. and its subsidiaries and affiliated companies.

Our Business

We are an apparel producer in the People’s Republic of China (“PRC” or “China”) that currently designs, develops and manufactures casual apparel and clothing products 15-34 years old, middle-class Chinese male consumer s under the brand name “V·LOV”, which we sell to our distributors for retail sales at points of sales (“POS”) that the distributors own and operate, either directly or through third-party retail operators.  Our distributors’ POS sell our products exclusively, and there were 526 VLOV POS in second and third-tier cities throughout northern, central and southern China as of November 3, 2010.

Corporate Structure

All of our business operations are carried out by our variable interest entity (“VIE”), Jinjiang Yinglin Jinduren Fashion Limited (“Yinglin Jinduren”), which we control through contractual arrangements between Yinglin Jinduren and Dong Rong Capital Investment Limited, formerly known as Korea Jinduren (International) Dress Limited (“HK Dong Rong”), a Hong Kong company wholly-owned by Peng Xiang Peng Fei Investments, Limited (“PXPF”), a British Virgin Islands company and our wholly-owned subsidiary.  Through these contractual arrangements, we have the ability to substantially influence Yinglin Jinduren’s daily operations and financial affairs, appoint its senior executives, approve all matters requiring shareholder approval and receive, to the extent that Yinglin Jinduren has net income, all such net income on a quarterly basis.  To ensure Yinglin Jinduren’s performance of its contractual obligations in the course of its business operations, we have the right, but not the obligation, to provide guarantee of such performance.  As a result of these contractual arrangements, which enable us to control Yinglin Jinduren, we are considered the primary beneficiary of Yinglin Jinduren. Accordingly, we consolidate Yinglin Jinduren’s results, assets and liabilities in our financial statements.  Other than our interests in the contractual arrangements and the exercise of our rights thereunder, neither we nor PXPF and HK Dong Rong own any equity interests in Yinglin Jinduren or carry out any other activities.

Mr. Qingqing Wu, our chief executive officer and majority stockholder, is also the majority owner of Yinglin Jinduren, with his brother Mr. Zhifan Wu, who previously served on our board of directors, as the minority owner. As such, we believe that our interests are aligned with those of Yinglin Jinduren and its owners.  However, we cannot give assurance that such interests will always be aligned, and as our control of Yinglin Jinduren is contractually based, we cannot give assurance that we can effectively control Yinglin Jinduren if and when such interests are no longer aligned.  Please see “ Our contractual arrangements with Yinglin Jinduren and its owners as well as our ability to enforce our rights thereunder may not be as effective in providing control over Yinglin Jinduren as direct ownership ” and “Management members of Yinglin Jinduren have potential conflicts of interest with us, which may adversely affect our business and your ability for recourse ” in the “Risk Factors” section beginning on page 3 of this prospectus.
 
In November 2009, HK Dong Rong established a wholly-owned subsidiary, Dong Rong (China) Co., Ltd. (“China Dong Rong”), in the PRC. It is our present intention and that of the equity owners of Yinglin Jinduren to transfer the business operations currently conducted by Yinglin Jinduren to China Dong Rong by the second quarter of 2011.  Such transfer will provide us with greater control over our operating assets, which we currently control through our contractual arrangements with Yinglin Jinduren and its owners.  The Company is still in the process of working on this planned transfer, which includes transferring sales contracts with Yinglin Jinduren’s current clients to China Dong Rong, transferring Yinglin Jinduren’s assets to China Dong Rong and obtaining the necessary approvals from the PRC authorities for such transfer, and thus the transfer has not been completed as of the date of this prospectus. The Company is also in the early stage of evaluating its options related to the sale of Yinglin Jinduren’s manufacturing-related assets as the Company now outsources its product manufacturing but no definitive plans have been established and approved for such sale.  The Company intends to exit from the contractual arrangements with Yinglin Jinduren after completion of the planned transfer and sale of Yinglin Jinduren’s manufacturing-related assets.  Additional information regarding this planned transfer, the sale of the manufacturing-related assets and their potential effects on our business if and when completed can be found under the heading “ Planned Transfer to China Dong Rong ” on page 34 of this prospectus.
 
Financing Transaction – Preferred Shares Financing

In November 2009, we completed a financing transaction with 57 accredited investors by issuing an aggregate of 2,796,721 shares of our series A convertible preferred stock, par value $0.00001 per share (the “Preferred Shares”) for aggregate purchase price of approximately $8.00 million, and issued to them warrants (the “Warrants”) to purchase up to 1,398,360 shares of common stock, par value $0.00001 per share, for no additional consideration.  There were two closings, the first on October 27, 2009, for gross proceeds of approximately $4.14 million, and the second on November 17, 2009, for gross proceeds of approximately $3.86 million.  The transaction was pursuant to a securities purchase agreement that we entered into with these selling security holders.  Each Preferred Share is convertible into one share of common stock at $2.86 per share (subject to certain adjustments) at any time at its holder’s option, and will automatically convert upon the listing of our common stock on either the Nasdaq Capital Market or NYSE Amex Equities.  Each Warrant entitles its holder to purchase a share of common stock at an exercise price of $3.43 per share (subject to certain adjustments) for a period of three years.  We are also entitled to call the Warrants for cancellation if the volume-weighted average price of our common stock for 20 consecutive days exceeds 200% of the then applicable exercise price.  A description of the adjustments to the conversion price of the Preferred Shares and the exercise price of the Warrants is included in the section of this prospectus entitled “Description of Securities.”

Financing Transaction – Common Shares Financing

On December 1, 2009, we entered into a securities purchase agreement with 17 accredited investors, pursuant to which we sold and issued to them 653,534 shares of our common stock (the “Common Shares”) for aggregate purchase price of approximately $1.87 million, and issued to them Warrants to purchase up to 326,767 shares of common stock, for no additional consideration.  Except for their issuance date, the Warrants issued in this transaction have terms that are identical to those Warrants issued in the Preferred Shares transaction described above.

Financial Results

Our consolidated financial statements for the years ended December 31, 2009 and 2008 are included in this prospectus.  For 2009 and 2008, we had approximately $64.34 million and $51.87 million in sales, respectively, and approximately $10.44 million and $9.19 million in net income, respectively.

 
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We have also included our unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2010 and 2009.  For the three months ended September 30, 2010 and 2009, we had approximately $13.06 million and $13.88 million in sales, respectively, and approximately $3.43 million and $2.74 million in net income, respectively. For the nine months ended September 30, 2010 and 2009, we had approximately $49.1 million and $45.82 million in sales, respectively, and approximately $8.98 million and $8.82 million in net income, respectively.

See “Index to Consolidated Financial Statements” on page F-1.

Risks Affecting Our Business

We are subject to a number of risks, which the reader should be aware of before deciding to purchase the securities in this offering. These risks are discussed in the summary below and in the section titled “Risk Factors” beginning on page 3 of this prospectus.

Summary of Risk Factors

This document contains certain statements of a forward-looking nature. Such forward-looking statements, including but not limited to growth and strategies, future operating and financial results, financial expectations and current business indicators are based upon current information and expectations and are subject to change based on factors beyond our control. Forward-looking statements typically are identified by the use of terms such as “look,” “may,” “will,” “should,” “might,” “believe,” “plan,” “expect,” “anticipate,” “estimate” and similar words, although some forward-looking statements are expressed differently. The accuracy of such statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, including but not limited to:

 
·
our ability to timely and accurately complete orders for our products;

 
·
our dependence on a limited number of major customers;

 
·
our ability to expand and grow our distribution channels;

 
·
general economic conditions which affect consumer demand for our products;

 
·
the effect of terrorist acts, or the threat thereof, on consumer confidence and spending;

 
·
acceptance in the marketplace of our new products and changes in consumer preferences;

 
·
foreign currency exchange rate fluctuations;

 
·
our ability to identify and successfully execute cost control initiatives; and

 
·
other risks outlined above and in our other public filings.

The reader is cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document. We undertake no obligation to update this forward-looking information.

While our management fully intends to make concerted efforts to manage these risks, we cannot provide assurances that we will be able to do so successfully.  See “Risk Factors” beginning on page 3 of this prospectus.

The Offering

We are registering 5,123,391 shares of our common stock for sale by the selling security holders identified in the section of this prospectus entitled “Selling Security Holders.”  As required by the securities purchase agreements that we executed as part of the Preferred Shares Financing and Common Shares Financing (more fully described under the section titled “Business” below), we are registering for resale the following: (i) 3,232,014 shares of common stock (including 1,489,656 shares of common stock underlying 1,489,656 outstanding Preferred Shares, 1,080,574 shares of common stock converted from 1,080,574 Preferred Shares and 8,250 shares of common stock from exercise of Warrants to purchase 8,250 shares of common stock), and (ii) 1,716,877 shares of common stock underlying outstanding Warrants. Additionally, as required by the bridge loan and financing agreement that HK Dong Rong entered into in connection with a bridge financing related to the share exchange transaction between PXPF and us, we are registering 174,500 shares of common stock issued to investors of the bridge financing.  Information regarding our common stock is included in the section of this prospectus entitled “Description of Securities.”

 
2

 

The shares of common stock offered under this prospectus may be sold by the selling security holders on the public market, in negotiated transactions with a broker-dealer or market maker as principal or agent, or in privately negotiated transactions not involving a broker or dealer.  Information regarding the times and manner in which the shares of common stock offered under this prospectus may be offered and sold is provided in the sections of this prospectus entitled “Plan of Distribution.”   We will not receive any of the proceeds from those sales. The registration of the shares of common stock offered under this prospectus does not necessarily mean that any of these shares will ultimately be offered or sold by the selling security holders.

General Information

Our principal executive offices are located at 11/F., Xiamen Guanyin Shan International Commercial Operation Centre, A3-2 124, Hubin Bei Road, Siming District, Xiamen, Fujian Province, China, and our telephone number is (86592) 2345999.

RISK FACTORS

The reader should carefully consider the risks described below together with all of the other information included in this prospectus. The statements contained in or incorporated into this prospectus that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements.  If any of the following risks actually occurs, our business, financial condition or results of operations could be harmed.  In that case, the trading price of our common stock could decline, and an investor in our securities may lose all or part of their investment.

Risks Relating to Our Industry

Our sales are influenced by general economic cycles. A prolonged period of depressed consumer spending would have a material adverse effect on our profitability.

Apparel is a cyclical industry that is dependent upon the overall level of consumer spending.  The global economy is currently experiencing a downturn.  Purchases of trendy apparel and accessories tend to decline in periods of uncertainty regarding future economic prospects, when consumer spending, particularly on discretionary items, and disposable income decline.  Many factors affect the level of consumer spending in the apparel industries, including, among others: prevailing economic conditions, levels of employment, salaries and wage rates, energy costs, interest rates, the availability of consumer credit, taxation and consumer confidence in future economic conditions.  During periods of economic uncertainty, we may not be able to maintain or increase our sales to existing customers, make sales to new customers, maintain sales levels at our existing POS, or maintain or improve our margins from operations as a percentage of net sales.  Our customers anticipate and respond to adverse changes in economic conditions and uncertainty by reducing inventories and canceling orders.  A prolonged period of depressed consumer spending would have a material adverse effect on our profitability.

We compete with companies with significantly greater resources than ours, and if we are unable to compete effectively with these companies, our market share may decline and our business could be harmed.

We face intense competition in the apparel industry from other established companies both in China and other countries.  A number of our competitors may have significantly greater financial, technological, manufacturing, sales, marketing and distribution resources than we do.  Their greater capabilities in these areas may enable them to better withstand periodic downturns in the apparel industry, compete more effectively on the basis of price and production, better adapt to changes in consumer preferences or retail requirements, devote greater resources to the marketing and sale of their products, and more quickly develop new products.  In addition, new companies may enter the markets in which we compete, further increasing competition in the industry.  As a result, we may not be able to compete successfully with them if we cannot continue enhancing our marketing and management strategies, quality and value or responding appropriately to consumers needs.

We believe that our ability to compete successfully depends on a number of factors, including the style and quality of our products and the strength of our brand name, as well as many factors beyond our control.  We may not be able to compete successfully in the future, and increased competition may result in price reductions, reduced profit margins, loss of market share and an inability to generate cash flows that are sufficient to maintain or expand our development and marketing of new products, which would adversely impact the trading price of our common stock.

 
3

 

The worldwide apparel industry is subject to ongoing pricing pressure.

The apparel market is characterized by low barriers to entry for both suppliers and marketers, global sourcing through suppliers located throughout the world, trade liberalization, continuing movement of product sourcing to lower cost countries, ongoing emergence of new competitors with widely varying strategies and resources, and an increasing focus on apparel in the mass merchant channel of distribution.  These factors contribute to ongoing pricing pressure throughout the supply chain.  This pressure has and may continue to:

 
·
require us to reduce wholesale prices on existing products;

 
·
result in reduced gross margins across our product lines; and

 
·
increase pressure on us to further reduce our production costs and our operating expenses.

Any of these factors could adversely affect our business and financial condition.

Fluctuation in the price, availability and quality of raw materials could increase our cost of goods and decrease our profitability.

We outsource all of our manufacturing needs to, and purchase finished goods from, O.E.M. manufacturers, who supply their own raw materials. For our own production, we purchase raw materials directly from local fabric and accessory suppliers.  We may also import specialty fabrics to meet specific customer requirements.  The prices we charge for our products are dependent in part on the market price for raw materials used to produce them.  The price, availability and quality of the raw materials for our products may fluctuate substantially, depending on a variety of factors, including demand, supply conditions, transportation costs, government regulation, economic climates and other unpredictable factors.  Any raw material price increases could increase our cost of sales and decrease our profitability unless we are able to pass higher prices on to our customers.

For the nine months ended September 30, 2010, two suppliers accounted for 10.73% and 10.13%, respectively, of our total purchases of finished products and raw materials (for our own production).  For the nine months ended September 30, 2009, two suppliers accounted for 10.64% and 13.12%, respectively, of our total purchases.  We do not have any long-term written agreements with any of our suppliers and do not anticipate entering into any such agreements in the near future.  We do not believe that the loss of any of these suppliers would have a material adverse effect on our ability to obtain finished goods or raw materials essential to our business because we believe we can locate other suppliers in a timely manner.

Our continued operations depend on current fashion trends.  If our designs and products do not continue to be fashionable, our business could be adversely affected.

Our success depends in large part on our ability to develop, market and deliver innovative and stylish products that are consistent and build on our brand and image at a pace and intensity competitive with our competition.  The novelty and the design of our VLOV apparel are critical to our success and competitive position, and the inability to continue to develop and offer unique products to our customers could harm our business.  We cannot be certain that trendy apparel and related accessories will continue to be fashionable.  Should the trend steer away from apparel and related accessories such as ours, our sales could decrease and our business could be adversely affected.  In addition, our future designs and plans to expand our product offerings may not be successful, and any unsuccessful designs or product offerings could adversely affect our business.

Our business and the success of our products could be harmed if we are unable to maintain our brand image.

Our success to date has been due in large part to the growth of our brand image.  If we are unable to timely and appropriately respond to changing consumer demand, our brand name and brand image may be impaired.  Even if we react appropriately to changes in consumer preferences, consumers may consider our brand image to be outdated or associate our brand with styles that are no longer popular.  In the past, many apparel companies have experienced periods of rapid growth in revenues and earnings followed by periods of declining sales and losses.  Our business may be similarly affected in the future.

Risks Relating to Our Business

Our limited operating history makes it difficult to evaluate our future prospects and results of operations.

We have a limited operating history. Yinglin Jinduren commenced business in 2004. Accordingly, you should consider our future prospects in light of the risks and uncertainties experienced by early stage companies in evolving industries such as the apparel industry in China. Some of these risks and uncertainties relate to our ability to:

 
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·
maintain our market position;

 
·
attract additional customers and increase spending per customer;

 
·
respond to competitive market conditions;

 
·
increase awareness of our brand and continue to develop customer loyalty;

 
·
respond to changes in our regulatory environment;

 
·
maintain effective control of our costs and expenses;

 
·
raise sufficient capital to sustain and expand our business; and

 
·
attract, retain and motivate qualified personnel.

If we are unsuccessful in addressing any of these risks and uncertainties, our business may be materially and adversely affected.

We may be unable to sustain our past growth or manage our future growth, which may have a material adverse effect on our future operating results.

We have experienced rapid growth since our inception, and have increased our net sales from $4.74 million in 2004 to $64.34 million in 2009.  We anticipate that our future growth rate will depend upon various factors, including the strength of our brand image, the market success of our current and future products, the success or our growth strategies, competitive conditions and our ability to manage our future growth.  Future growth may place a significant strain on our management and operations.  As we continue to grow in our operations, our operational, administrative, financial and legal procedures and controls will need to be expanded.  As a result, we may need to train and manage an increasing number of employees, which could distract our management team from our business. Our future success will depend substantially on the ability of our management team to manage our anticipated growth. If we are unable to anticipate or manage our growth effectively, our future operating results could be adversely affected.

Our business could be harmed if we fail to maintain proper inventory levels.

We place orders with our O.E.M. manufacturers for most of our products when we receive all of our customers’ orders.  We do this to minimize purchasing costs, the time necessary to fill customer orders and the risk of non-delivery.  We also maintain an inventory of certain products that we anticipate will be in greater demand.  However, we may be unable to sell the products we have ordered in advance from manufacturers or that we have in our inventory.  Inventory levels in excess of customer demand may result in inventory write-downs, and the sale of excess inventory at discounted prices could significantly impair our brand image and have a material adverse effect on our operating results and financial condition.  Conversely, if we underestimate consumer demand for our products or if our manufacturers fail to supply the quality products that we require at the time we need them, we may experience inventory shortages.  Inventory shortages might delay shipments to customers, negatively impact retailer and distributor relationships, and diminish brand loyalty.

We rely on our distributors to operate our retail network.

Our distributors operate, directly or indirectly via third parties, the V·LOV POS.  We do not own or operate any V·LOV POS ourselves. We depend on our distributors’ regional retail experience and economies of scale.  We may not be able to expand the geographical coverage of our existing distributors, or be able to engage new distributors who have strong network and retail experience, which may substantially impair our sales targets.  We rely on our distributors in the management and expansion of the V·LOV retail sales network.  Even though we provide retail policies and guidelines, training, advertising and marketing support, our distributors might not carry out our visions and satisfy the needs of our business.  Our sales to distributors also may not correlate directly to the demand for our products by end customers.  If our distributors mismanage and do not effectively expand our retail network, our business and our reputation can be adversely affected.

We rely on outsourcing for a majority of our manufacturing needs.  Our inability to secure production sources meeting our quality, cost, working conditions and other requirements, or failures by our contractors to perform, could harm our sales, service levels and reputation.

We source a majority of our products from independent O.E.M. manufacturers who supply their own raw materials.  As a result, we must locate and secure production capacity.  We depend on these manufacturers to maintain adequate financial resources, secure a sufficient supply of raw materials, and maintain sufficient development and manufacturing capacity in an environment characterized by continuing cost pressure and demands for product innovation and speed-to-market. In addition, we do not have material long-term contracts with any of our O.E.M. manufacturers, who generally may unilaterally terminate their relationship with us at any time.

 
5

 

Our dependence on O.E.M. manufacturing could subject us to difficulty in obtaining timely delivery of products of acceptable quality.  A manufacturer's failure to timely deliver products or to meet our quality standards could cause us to miss the delivery date requirements of our distributors. In addition, any interference with our or our distributors’ ability to receive delivery from those manufacturers, such as conditions at ports or issues that otherwise affect transportation and warehousing providers, could cause delayed delivery of products.  Additionally, if we experience a significant increase in demand, or if we need to replace any of the manufacturers that we currently use, we may have to expand our third-party manufacturing capacity.  We cannot be assured that this capacity will be available to us, or that if available it will be available on terms that are acceptable to us.  Failing to make timely deliveries may cause our distributors to cancel orders, refuse to accept deliveries, impose non-compliance charges through invoice deductions or other charge-backs, demand reduced prices or reduce future orders, any of which could harm our sales and margins.

Our success depends on the continued protection of our trademark and other proprietary intellectual property rights.

Our trademark and other intellectual property rights are important to our success and competitive position, and the loss of or inability to enforce trademark and other proprietary intellectual property rights could harm our business.  We devote substantial resources to the establishment and protection of our trademark and other proprietary intellectual property rights in China.  Our efforts to establish and protect our trademark and other proprietary intellectual property rights may not be adequate to prevent imitation or counterfeiting of our products by others or to prevent others from seeking to block sales of our products.  Unauthorized copying of our products or unauthorized use of our trademarks or other proprietary rights may not only erode sales of our products but may also cause significant damage to our brand names and our ability to effectively represent ourselves to our customers.

Our business could suffer from the financial instability of our distributors.

We do not engage in any retail sales.  Instead, we sell our products to our distributors who, in turn, sell them at the POS that they operate.  As a result, financial difficulties of our distributors could result in their reduced purchases from us, which in turn could detrimentally affect our revenues.  We sell to certain distributors on open account with 60 to 90 day payment terms, but these arrangements are not always possible.  We presently have 12 distributors, all of which we have had a business relationship for more than one year.  The Company performs individual evaluation of each distributor who request credit terms.  Such evaluation focuses on the distributor’s payment history and ability, and takes into account such distributor’s specific operational history, background and other relevant information as well as the economic and market environment in which the distributor operates.  Thus, we have historically avoided credit exposure due to the financial instability of our distributors; however, while management believes that we will continue to be able to do so, there is no assurance that we will always be able to do so.

The loss of our chief executive officer or other key management personnel would have an adverse impact on our future development and could impair our ability to succeed.

Our performance is substantially dependent upon the expertise of our chief executive officer, Mr. Qingqing Wu, and other key management personnel.   Mr. Wu spends all of his working time on our Company's business, including as our Chief Designer, a role previously occupied by Mr. Fengfei Zeng.  It may be difficult to find qualified individuals to replace Mr. Wu or other key management personnel if we were to lose any one or more of them.  The loss of Mr. Wu or any of our key management personnel could have a material adverse effect on our business, development, financial condition, and operating results.  Furthermore, most members of our design team are not currently under contract.

Our quarterly revenues and operating results fluctuate as a result of a variety of factors, including seasonal fluctuations in demand for denim and related apparel, and accessories delivery date delays, timing of new POS openings.

Our quarterly revenues and operating results have varied significantly in the past and can be expected to fluctuate in the future due to a number of factors, many of which are beyond our control.  For example, sales of our products have historically been somewhat seasonal in nature with the strongest sales generally occurring during the Chinese New Year holiday in early spring, Labor Day holiday in early May, summer months, and National Day holiday in early October.  Delays in scheduling or delivery of products by our distributors could negatively impact our net sales and results of operations for any given quarter.  The timing of new POS openings by our distributors and the amount of revenue contributed by such new POS could also impact our net sales and results of operations for any given quarter.  As a result of these specific and other general factors, our operating results will likely vary from quarter to quarter and the results for any particular quarter may not be necessarily indicative of results for the full year.  Any shortfall in revenues or net income from levels expected by securities analysts and investors could cause a decrease in the trading price of our common stock.

We depend on our distributors for our sales. A significant adverse change in our relationship with a distributor or in a distributor’s performance or financial position could harm our business and financial condition.

Presently we have distribution agreements with 12 distributors.  For the year ended December 31, 2009, four of our distributors each accounted for 10% or more of our total net sales, or 54.58% of our total net sales in the aggregate.  For the nine months ended September 30, 2010, three of our distributors each accounted for 10% or more of our total net sales, or 41.55% of our total net sales in the aggregate.  A decision by a major distributor, whether motivated by competitive considerations, strategic shifts, financial requirements or difficulties, economic conditions or otherwise, to decrease its purchases from us or to change its manner of doing business with us, could adversely affect our business and financial condition.  In addition, although we have long-standing relationships, we do not have long term contracts with any of our distributors.  We identify suitable distributors and enter into distributorship agreements, generally for a term of up to 12 months, renewable on a year to year basis upon satisfying certain criteria.

 
6

 

We do not believe that there is any material risk of loss of any of these distributors during the next 12 months.  We believe that we could replace any of these distributors within 12 months, such that the loss of a distributor would not have a material adverse effect on our financial condition in the long term.  None of our affiliates are officers, directors, or material shareholders of any of these distributors.

We will incur increased costs as a result of being a public company.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company prior to the Share Exchange.  We will incur costs associated with our public company reporting requirements.  We will incur costs associated with corporate governance requirements, including certain requirements under the Sarbanes-Oxley Act of 2002, as well as rules implemented by the SEC and the Financial Industry Regulatory Authority (“FINRA”).  We expect these rules and regulations, in particular Section 404 of the Sarbanes-Oxley Act of 2002, to significantly increase our legal and financial compliance costs and to make some activities more time-consuming and costly. Like many smaller public companies, we face a significant impact from required compliance with Section 404 of the Sarbanes-Oxley Act of 2002.  Section 404 requires management of public companies to evaluate the effectiveness of internal control over financial reporting and the independent auditors to attest to the effectiveness of such internal controls and the evaluation performed by management.  The SEC has adopted rules implementing Section 404 for public companies as well as disclosure requirements.  We are currently preparing for compliance with Section 404; however, there can be no assurance that we will be able to effectively meet all of the requirements of Section 404 as currently known to us in the currently mandated timeframe.  Any failure to implement effectively new or improved internal controls, or to resolve difficulties encountered in their implementation, could harm our operating results, cause us to fail to meet reporting obligations or result in management being required to give a qualified assessment of our internal controls over financial reporting or our independent auditors providing an adverse opinion regarding management’s assessment, when such opinion is required.  Any such result could cause investors to lose confidence in our reported financial information, which could have a material adverse effect on our stock price.

We also expect these new rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage.  As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers.  We are currently evaluating and monitoring developments with respect to these new rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

We must successfully maintain and/or upgrade our information technology systems.

We rely on various information technology systems to manage our operations, and we regularly evaluate these systems against our current and expected requirements.  Although we have no current plans to implement modifications or upgrades to our systems, we will eventually be required to make changes to legacy systems and acquiring new systems with new functionality.  We are considering additional investments in updating our current system to help us improve our internal control system and to meet compliance requirements under Section 404.  We are also continuing to develop and update our internal information systems on a timely basis to meet our business expansion needs.  Any information technology system disruptions, if not anticipated and appropriately mitigated, could have an adverse effect on our business and operations.

Business interruptions could adversely affect our business.

Our operations and the operations of our suppliers and distributors are vulnerable to interruption by fire, earthquake, hurricanes, power loss, telecommunications failure and other events beyond our control. In the event of a major natural disaster, we could experience business interruptions, destruction of facilities and loss of life. In the event that a material business interruption occurs that affects us or our suppliers or distributors, deliveries could be delayed and our business and financial results could be harmed.

We must attract more consumers within our targeted profile to our brand.

Our current products are weighted towards Chinese male consumers 15 to 34 years of age. If we are not successful in attracting consumers within our demographic profile to our brand, our results of operation and our ability to grow will be adversely affected.

 
7

 

Risks Related to Our Corporate Structure

We conduct our business through Yinglin Jinduren by means of contractual arrangements. If the Chinese government determines that these contractual arrangements do not comply with applicable regulations, our business could be adversely affected. If the PRC regulatory bodies determine that the agreements that establish the structure for operating our business in China do not comply with PRC regulatory restrictions on foreign investment, we could be subject to severe penalties. In addition, changes in such Chinese laws and regulations may materially and adversely affect our business.
 
There are uncertainties regarding the interpretation and application of PRC laws, rules and regulations, including but not limited to the laws, rules and regulations governing the validity and enforcement of the contractual arrangements between HK Dong Rong and Yinglin Jinduren. Although we have been advised by our PRC counsel, that based on their understanding of the current PRC laws, rules and regulations, the structure for operating our business in China (including our corporate structure and contractual arrangements with Yinglin Jinduren and its owners, as well our ability to enforce our rights thereunder) comply with all applicable PRC laws, rules and regulations, and do not violate, breach, contravene or otherwise conflict with any applicable PRC laws, rules or regulations, we cannot assure you that the PRC regulatory authorities will not determine that our corporate structure and contractual arrangements violate PRC laws, rules or regulations.  If the PRC regulatory authorities determine that our contractual arrangements are in violation of applicable PRC laws, rules or regulations, our contractual arrangements will become invalid or unenforceable.   In addition, new PRC laws, rules and regulations may be introduced from time to time to impose additional requirements that may be applicable to our contractual arrangements.  For example, the PRC Property Rights Law that became effective on October 1, 2007 requires companies to register security interests on equity interests granted under equity pledge agreements with the local Administration for Industry and Commerce.  However, it is unclear whether or not the Company is required to register the security interests under the Property Rights Law because HK Dong Rong entered into the equity pledge agreement with Yinglin Jinduren in 2005, prior to the October 1, 2007 enactment of the Property Rights Law.  This law does not state that it is applicable to transactions prior to its 2007 enactment date and the security interests granted under the equity pledge agreement have not been registered.  Because such registration has not been completed, there is a risk that HK Dong Rong may not be able to enforce its rights under the equity pledge agreement.  In the event Yinglin Jinduren’s equity owners, our CEO Mr. Wu and his brother Mr. Zhifan Wu (collectively the “Yinglin Jinduren Equity Owners”), fail to perform their contractual obligations under the equity pledge agreement, HK Dong Rong, as pledgee, becomes entitled to exercise its rights under the equity pledge agreement including the right to vote with, control and sell the pledged equity interests.  If a dispute arises between the Company and the Yinglin Jinduren Equity Owners and Yinglin Jinduren Equity Owners breach their obligations under the equity pledge agreement by selling the equity ownership of Yinglin Jinduren to a third party without the Company’s consent, HK Dong Rong may not be able to enforce such rights and claim a superior security interest over the pledged equity interests as against a bona fide purchaser of such equity interests because HK Dong Rong’s security interests in the pledged equity interests were not registered with the local Administration for Industry and Commerce.  If Yinglin Jinduren is sold to a bona fide purchaser and the Company is unable to enforce the security interests granted under the equity pledge agreement to prevent the completion of such sale, then there is a potential risk that Yinglin Jinduren’s bona fide purchaser may, in turn, refuse to perform all of Yinglin Jinduren’s obligations to the Company under the contractual arrangements including Yinglin Jinduren’s obligation to pay the Company fees equal to Yinglin Jinduren’s net income.  Such refusal would result in the Company effectively losing control over its business operations, which are currently conducted through Yinglin Jinduren, thereby severing the Company’s ability to continue receiving payments from Yinglin Jinduren and leaving the Company with no or minimal operations and assets.  If the Company losses control over Yinglin Jinduren’s operations and the fee payments that it currently receives from Yinglin Jinduren under the contractual arrangements because Yinglin Jinduren and Yinglin Jinduren’s Equity Owners breach their obligations under the equity pledge agreement or the other contractual arrangement agreements or commit fraud in performing their obligations under such agreements, then the Company would no longer be considered the “primary beneficiary” of Yinglin Jinduren’s operations, and thus it would no longer be able to consolidate Yinglin Jinduren’s results, assets and liabilities in the Company’s financial statements.
 
The Chinese government has broad discretion in dealing with violations of laws and regulations, including levying fines, revoking business and other licenses and requiring actions necessary for compliance. In particular, licenses and permits issued or granted to us by relevant governmental bodies may be revoked at a later time by higher regulatory bodies.  We cannot predict the effect of the interpretation of existing or new Chinese laws or regulations on our businesses.  We cannot assure you that our current ownership and operating structure would not be found in violation of any current or future Chinese laws or regulations.  As a result, we may be subject to sanctions, including fines, and could be required to restructure our operations or cease to provide certain services.  Any of these or similar actions could significantly disrupt our business operations or restrict us from conducting a substantial portion of our business operations, which could materially and adversely affect our business, financial condition and results of operations.

If we, HK Dong Rong or Yinglin Jinduren are determined to be in violation of any existing or future PRC laws, rules or regulations or fail to obtain or maintain any of the required governmental permits or approvals, the relevant PRC regulatory authorities would have broad discretion in dealing with such violations, including:

 
·
revoking the business and operating licenses of Yinglin Jinduren and/or voiding the contractual arrangements;

 
·
discontinuing or restricting the operations of Yinglin Jinduren;

 
·
imposing conditions or requirements with which we or HK Dong Rong or Yinglin Jinduren may not be able to comply;

 
·
requiring us to restructure the relevant ownership structure or operations;

 
·
restricting or prohibiting our use of the proceeds from our initial public offering to finance our business and operations in China; or

 
·
imposing fines or other forms of economic penalties.
 
As all of our business operations are conducted by Yinglin Jinduren to which we have no direct ownership, the imposition of any of these penalties would severely disrupt our ability to conduct business and have a material adverse effect on our financial condition, results of operations and prospects.
 
Our contractual arrangements with Yinglin Jinduren and its owners as well as our ability to enforce our rights thereunder may not be as effective in providing control over Yinglin Jinduren as direct ownership.

We have no equity ownership interest in Yinglin Jinduren, and rely on contractual arrangements to control and operate the company and its businesses. We cannot assure you that the owners of Yinglin Jinduren will always act in our best interests, and these contractual arrangements may not be as effective in providing control over the company as direct ownership.  For example, Yinglin Jinduren could fail to take actions required for our business despite its contractual obligation to do so.  If Yinglin Jinduren fails to perform under its agreements with us, we are required by the terms of these agreements to enforce our rights by arbitration before The China International Economic and Trade Arbitration Commission (CIETAC). To initiate such proceeding, we must first prepare and submit an arbitration request to CIETAC for its acceptance.  Once accepted, CIETAC will form an arbitration tribunal to hear the matter, set a hearing date and notify Yinglin Jinduren of the proceeding.  Yinglin Jinduren will have 45 days from the receipt of such notice to prepare its statement of defense.  While we have been advised by our PRC counsel that current CIETAC rules requires a decision to be rendered within six months from the selection of the arbitration tribunal, the passage of any prolong period of time without resolution may disrupt and negatively affect our business operations.  Further, we must borne half of CIETAC’s fees in addition to our own expenses incurred to prepare for such proceeding, which fees may become prohibitively expensive as the arbitration must take place in Shanghai and be conducted in Chinese.  As we are also contractually bound by CIETAC’s decision, in the event such decision is unfavorable to us, we may effectively lose our control over Yinglin Jinduren and thus our operating business, which will materially and adversely affect our business, financial conditions and results of operations.

 
8

 

Because we rely on the consulting services agreement with Yinglin Jinduren for our revenue, we would have no or minimal operations and assets if this agreement is terminated, which will severely and detrimentally affect our continuing business viability under our current corporate structure.

We are a holding company and do not have any assets or conduct any business operations other than the contractual arrangements between HK Dong Rong, our indirect wholly owned subsidiary, and Yinglin Jinduren.  As a result, we currently rely entirely for our income on the fees we earn from Yinglin Jinduren pursuant to the consulting services agreement which forms a part of the contractual arrangements.  The consulting services agreement may be terminated by written notice of HK Dong Rong or Yinglin Jinduren in the event that: (a) Yinglin Jinduren causes a material breach of the agreement, provided that if the breach does not relate to a financial obligation of the breaching party, that party may attempt to remedy the breach within 14 days following the receipt of the written notice; (b) one party becomes bankrupt, insolvent, is the subject of proceedings or arrangements for liquidation or dissolution, ceases to carry on business, or becomes unable to pay its debts as they become due; (c) HK Dong Rong terminates its operations; or (d) circumstances arise which would materially and adversely affect the performance or the objectives of the agreement.  Additionally, HK Dong Rong may terminate the consulting services agreement without cause.  Because neither we nor our direct and indirect subsidiaries own equity interests of Yinglin Jinduren, the termination of the consulting services agreement would not only sever our ability to continue receiving payments from Yinglin Jinduren under our current holding company structure, but Yinglin Jinduren, through which all of our operations are currently conducted, would no longer be our operating business, thereby leaving us with no or minimal operations and assets.  Although we are currently not aware of any event or reason that may cause the consulting services agreement to terminate, we cannot assure you that such an event or reason will not occur in the future.  In the event that the consulting services agreement is terminated, this may have a severe and detrimental effect on our continuing business viability under our current corporate structure, which in turn may affect the value of your investment.

We rely principally on payments from Yinglin Jinduren for our income, and any limitation on the ability of Yinglin Jinduren to make such payments to us or on our ability to take such payments could have a material adverse effect on our financial condition, results of operations and prospects.

We are a holding company, and rely principally on payments from Yinglin Jinduren under the consulting services agreement for our income.  If Yinglin Jinduren incurs debt in its own name in the future, the instruments governing such debt may restrict its ability to make payments to us.  In addition, under the PRC Enterprise Income Tax Law (the “EIT Law”), an enterprise established outside of the PRC but whose management body is within the PRC may be classified as a “resident enterprise” for income tax purposes.  As such, if we are deemed a "resident enterprise," a determination currently made on a case-by-case basis by the PRC tax authority, and if the payments that we receive from Yinglin Jinduren under the consulting services agreement are deemed dividends, we may be subject to a 10% income tax.  If this should happen or if Yinglin Jinduren’s ability to make payments to us is otherwise restricted, our income could be reduced significantly so as to materially and adversely affect our financial condition, results of operations and prospects.

Management members of Yinglin Jinduren have potential conflicts of interest with us, which may adversely affect our business and your ability for recourse.

Mr. Qingqing Wu, our chief executive officer, is also the chairman of Yinglin Jinduren and owns 65.91% of its equity ownership interests. Conflicts of interests between their respective duties to our company and Yinglin Jinduren may arise.  As our directors and executive officers, they have a duty of loyalty and care to us under U.S. and Hong Kong law when there are any potential conflicts of interests between our company and Yinglin Jinduren.  We cannot assure you, however, that when conflicts of interest arise, every one of them will act completely in our interests or that conflicts of interests will be resolved in our favor.  For example, they may determine that it is in Yinglin Jinduren’s interests to sever the contractual arrangements with HK Dong Rong, irrespective of the effect such action may have on us.  Because Yinglin Jinduren is our sole operating business we derive our income entirely from the contractual arrangements, we would have no or minimal operations and assets if the contractual arrangements are severed.  In addition, any one of them could violate his or her legal duties by diverting business opportunities from us to others, thereby reducing the amount of payment that Yinglin Jinduren is obligated to remit to us under the consulting services agreement.

In the event that you believe that your rights have been infringed under the securities laws or otherwise as a result of any one of the circumstances described above, it may be difficult or impossible for you to bring an action against Yinglin Jinduren or our officers or directors who are members of Yinglin Jinduren’s management, all of whom reside within China.  Even if you are successful in bringing an action, the laws of China may render you unable to enforce a judgment against the assets of Yinglin Jinduren and its management, all of which are located in China.

You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based on United States or other foreign laws against us or our management.

We are a holding company and do not have any assets or conduct any business operations other than the contractual arrangements between HK Dong Rong and Yinglin Jinduren. In addition, all of Yinglin Jinduren’s assets are located in, and all of our executive officers and directors reside within, China. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon our executive officers and directors, including with respect to matters arising under U.S. federal securities laws or applicable state securities laws.  Moreover, our Chinese counsel has advised us that China does not have treaties with the United States or many other countries providing for the reciprocal recognition and enforcement of judgment of courts.  As a result, our public shareholders may have substantial difficulty in protecting their interests through actions against our management or directors than would shareholders of a corporation with assets and management members located in the United States.
 
Our principle shareholder may be subject to registration requirement under current regulations relating to offshore investment activities by PRC residents, the non-compliance of which may subject us to fines and sanctions that could adversely affect our business.

In October 2005, the State Administration of Foreign Exchange (“SAFE”) promulgated Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Corporate Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles, or Circular 75, that states that if PRC citizens residing in the PRC, or PRC residents, use assets or equity interests in their PRC entities as capital contributions to establish offshore companies or inject assets or equity interests of their PRC entities into offshore companies to raise capital overseas, they must register with local SAFE branches with respect to their overseas investments in offshore companies.  They must also file amendments to their registrations if their offshore companies experience material events involving capital variation, such as changes in share capital, share transfers, mergers and acquisitions, spin-off transactions, long-term equity or debt investments or uses of assets in China to guarantee offshore obligations.  Under this regulation, their failure to comply with the registration procedures set forth in such regulation may result in restrictions being imposed on the foreign exchange activities of the relevant PRC entity, including the payment of dividends and other distributions to its offshore parent, as well as restrictions on the capital inflow from the offshore entity to the PRC entity.

Although Mr. Qingqing Wu, our principal shareholder, resides in the PRC, he is a foreign national.  As such, he has not registered with the local branch of the SAFE under Circular No. 75.  However, we cannot provide any assurance that SAFE may nevertheless require Mr. Wu to comply with such registration requirement.  Should SAFE make such determination, failure to comply could subject us to fines or sanctions imposed by the PRC government, which may adversely affect our business.

Unless we amend the articles of incorporation of China Dong Rong to lower its required registered capital from $8 million to $4 million we will be required to contribute the remaining registered capital for China Dong Rong of $4,000,000 by November 19, 2011

On November 19, 2009, we incorporated China Dong Rong with registered capital of $8,000,000 of which $4,000,000 was funded and the remaining $4 million must be contributed by November 19, 2011.  There was no restriction on the funds contributed, and therefore such contribution is not reflected as a statutory reserve.  We intend to amend China Dong Rong’s articles of incorporation to lower its registered capital requirement by November 19, 2011 to $4,000,000.  If we are not able to amend China Dong Rong’s articles of incorporation to lower the registered capital requirement to $4 million by November 18, 2011, then we will be required to contribute this remaining required registered capital of $4 million for China Dong Rong.

 
9

 

Risks Related to Doing Business in China

Yinglin Jinduren is subject to restrictions on making payments to us.

We are a holding company incorporated in Nevada and do not have any assets or conduct any business operations other than our indirect investments in Yinglin Jinduren.  As a result of our holding company structure, we rely entirely on payments from that company under the contractual arrangements with our indirect wholly owned subsidiary, HK Dong Rong. The Chinese government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of China. We may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency.  See “Government control of currency conversion may affect the value of your investment.”  Furthermore, if our affiliated entity in China incurs debt on their own in the future, the instruments governing the debt may restrict their ability to make payments.  If we are unable to receive all of the revenues from our operations through these contractual arrangements, we may be unable to pay dividends on our ordinary shares.

Because our assets are located overseas, shareholders may not receive distributions that they would otherwise be entitled to if we were declared bankrupt or insolvent.

All of our assets are located in the PRC.  Because our assets are located overseas, our assets may be outside of the jurisdiction of U.S. courts to administer if we are the subject of an insolvency or bankruptcy proceeding. As a result, if we declared bankruptcy or insolvency, our shareholders may not receive the distributions on liquidation that they would otherwise be entitled to if our assets were to be located within the U.S., under U.S. bankruptcy law.

Adverse changes in economic and political policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could adversely affect our business.

All of our business operations are currently conducted in the PRC, under the jurisdiction of the PRC government.  Accordingly, our results of operations, financial condition and prospects are subject to a significant degree to economic, political and legal developments in China.  China’s economy differs from the economies of most developed countries in many respects, including with respect to the amount of government involvement, level of development, growth rate, and control of foreign exchange and allocation of resources.  While the PRC economy has experienced significant growth in the past 20 years, growth has been uneven across different regions and among various economic sectors of China.  The PRC government has implemented various measures to encourage economic development and guide the allocation of resources.  Some of these measures benefit the overall PRC economy, but may also have a negative effect on us.  For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us.  Since early 2004, the PRC government has implemented certain measures to control the pace of economic growth.  Such measures may cause a decrease in the level of economic activity in China, which in turn could adversely affect our results of operations and financial condition.

Unprecedented rapid economic growth in China may increase our costs of doing business, and may negatively impact our profit margins and/or profitability.

Our business depends in part upon the availability of relatively low-cost labor and materials.  Rising wages in China may increase our overall costs of production.  In addition, rising raw material costs, due to strong demand and greater scarcity, may increase our overall costs of production.  If we are not able to pass these costs on to our customers in the form of higher prices, our profit margins and/or profitability could decline.

You may face difficulties in protecting your interests, and your ability to protect your rights through the U.S. federal courts may be limited, because our subsidiaries are incorporated in non-U.S. jurisdictions, we conduct substantially all of our operations in China, and except for our CFO all of our officers and directors reside outside the United States.

Although we are incorporated in Nevada, we conduct substantially all of our operations in China through Yinglin Jinduren.  Other than our CFO, all of our officers and directors reside outside the United States and some or all of the assets of those persons are located outside of the United States.  As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in China in the event that you believe that your rights have been infringed under the securities laws or otherwise.  Even if you are successful in bringing an action of this kind, the laws of the PRC may render you unable to enforce a judgment against our assets or the assets of our directors and officers.

As a result of all of the above, our public shareholders may have more difficulty in protecting their interests through actions against our management, directors or major shareholders than would shareholders of a corporation doing business entirely within the United States.

 
10

 

The relative lack of public company experience of our management team may put us at a competitive disadvantage.

Our management team in China lacks public company experience, which could impair our ability to comply with legal and regulatory requirements such as those imposed by Sarbanes-Oxley Act of 2002.  Other than our CFO, the individuals who now constitute our senior management have never had responsibility for managing a publicly traded company. Such responsibilities include complying with federal securities laws and making required disclosures on a timely basis.  Our senior management may not be able to implement programs and policies in an effective and timely manner that adequately respond to such increased legal, regulatory compliance and reporting requirements. Our failure to comply with all applicable requirements could lead to the imposition of fines and penalties and distract our management from attending to the growth of our business.

Governmental control of currency conversion may affect the value of your investment.

The Chinese government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of China.  We receive substantially all of our revenues in RMB.  Under our current structure, our income is primarily derived from payments from Yinglin Jinduren. Shortages in the availability of foreign currency may restrict the ability of our Chinese subsidiaries and our affiliated entity to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. Under existing Chinese foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from China State Administration of Foreign Exchange by complying with certain procedural requirements.  However, approval from appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies.  The Chinese government may also at its discretion restrict access in the future to foreign currencies for current account transactions.  If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our stockholders.

Fluctuation in the value of RMB may have a material adverse effect on your investment.

The value of RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions.  Our revenues and costs are mostly denominated in RMB, as well as a significant portion of our financial assets.  We rely entirely on fees paid to us by our affiliated entity in China.  Any significant fluctuation in the value of RMB may materially and adversely affect our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on, our stock in U.S. dollars.  For example, an appreciation of RMB against the U.S. dollar would make any new RMB denominated investments or expenditures more costly to us, to the extent that we need to convert U.S. dollars into RMB for such purposes.  An appreciation of RMB against the U.S. dollar would also result in foreign currency translation losses for financial reporting purposes when we translate our RMB denominated financial assets into U.S. dollar, as U.S. dollar is our reporting currency.

Dividends we receive from our subsidiary located in the PRC may be subject to PRC withholding tax.

The PRC Enterprise Income Tax Law, or the EIT Law, and the implementation regulations for the EIT Law issued by the PRC State Council, became effective as of January 1, 2008. The EIT Law provides that a maximum income tax rate of 20% is applicable to dividends payable to non-PRC investors that are “non-resident enterprises,” to the extent such dividends are derived from sources within the PRC, and the State Council has reduced such rate to 10% through the implementation regulations.  We have incorporated a wholly-owned subsidiary in the PRC, China Dong Rong, which is deemed to be a wholly foreign owned enterprise (“WFOE”).  When China Dong Rong commences business operations, and elects to pay dividends, any such dividends paid to us may be subject to the 10% income tax if we are considered as a “non-resident enterprise” under the EIT Law.  If we are required under the EIT Law and its implementation regulations to pay income tax for any dividends we receive from our WFOE, it may have a material and adverse effect on our net income and materially reduce the amount of dividends, if any, we may pay to our shareholders.

We face risks related to health epidemics and other outbreaks.

Our business could be adversely affected by the effects of an epidemic outbreak, such as the SARS epidemic in April 2003.  Any prolonged recurrence of such adverse public health developments in China may have a material adverse effect on our business operations.  For instance, health or other government regulations adopted in response may require temporary closure of our stores or offices.  Such closures would severely disrupt our business operations and adversely affect our results of operations.  We have not adopted any written preventive measures or contingency plans to combat any future outbreak of SARS or any other epidemic.

If relations between the United States and China worsen, investors may be unwilling to hold or buy our stock and our stock price may decrease.

At various times during recent years, the United States and China have had significant disagreements over political and economic issues. Controversies may arise in the future between these two countries.  Any political or trade controversies between the United States and China, whether or not directly related to our business, could reduce the price of our common stock.

Risks Related to an Investment in Our Securities

Our common stock has limited liquidity.

Our common stock is traded on the Over-the-Counter Bulletin Board.  It is thinly traded compared to larger more widely known companies in the same industry.  Thinly traded common stock can be more volatile than stock trading in an active public market.  We cannot predict the extent to which an active public market for our common stock will develop or be sustained.

 
11

 

Our stock is categorized as a penny stock.  Trading of our stock may be restricted by the SEC’s penny stock regulations which may limit a shareholder’s ability to buy and sell our stock.

Our stock is categorized as a penny stock.  The SEC has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions.  Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and accredited investors.  The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market.  The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account.  The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation.  In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules; the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction.  These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules.  Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities.  We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.

FINRA sales practice requirements may also limit a shareholder’s ability to buy and sell our stock.

In addition to the “penny stock” rules described above, the Financial Industry Regulatory Authority (“FINRA”) has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer.  Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers.  The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.

We expect to experience volatility in our stock price, which could negatively affect shareholders’ investments.

The market price for shares of our common stock may be volatile and may fluctuate based upon a number of factors, including, without limitation, business performance, news announcements or changes in general market conditions.

Other factors, in addition to the those risks included in this section, that may have a significant impact on the market price of our common stock include, but are not limited to:

 
·
receipt of substantial orders or order cancellations of products;

 
·
quality deficiencies in services or products;

 
·
international developments, such as technology mandates, political developments or changes in economic policies;

 
·
changes in recommendations of securities analysts;

 
·
shortfalls in our backlog, revenues or earnings in any given period relative to the levels expected by securities analysts or projected by us;

 
·
government regulations, including stock option accounting and tax regulations;

 
·
energy blackouts;

 
·
acts of terrorism and war;

 
·
widespread illness;

 
·
proprietary rights or product or patent litigation;

 
·
strategic transactions, such as acquisitions and divestitures;

 
·
rumors or allegations regarding our financial disclosures or practices; or
 
 
12

 

 
·
earthquakes or other natural disasters concentrated in Fujian, China where a significant portion of our operations are based.

In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities.  Due to changes in the volatility of our common stock price, we may be the target of securities litigation in the future.  Securities litigation could result in substantial costs and divert management’s attention and resources.

We do not anticipate that cash dividends will be paid in the foreseeable future.

We do not anticipate paying cash dividends on our common stock in the foreseeable future and we may not have sufficient funds legally available to pay dividends.  Even if the funds are legally available for distribution, we may nevertheless decide not to pay any dividends.  We presently intend to retain all earnings for our operations.

Our common shares are not currently traded at high volume, and you may be unable to sell at or near ask prices or at all if you need to sell or liquidate a substantial number of shares at one time.

We cannot predict the extent to which an active public market for its common stock will develop or be sustained.  However, we do not rule out the possibility of applying for listing on the Nasdaq Capital Market or other markets.

Our common shares are currently traded, but currently with low volume, based on quotations on the “Over-the-Counter Bulletin Board”, meaning that the number of persons interested in purchasing our common shares at or near bid prices at any given time may be relatively small or non-existent.   This situation is attributable to a number of factors, including the fact that we are a small company which is still relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable.  As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price.  We cannot give you any assurance that a broader or more active public trading market for our common stock will develop or be sustained, or that trading levels will be sustained.

Shareholders should be aware that, according to SEC Release No. 34-29093, the market for “penny stocks” has suffered in recent years from patterns of fraud and abuse.  Such patterns include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses.  Our management is aware of the abuses that have occurred historically in the penny stock market.  Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities. The occurrence of these patterns or practices could increase the future volatility of our share price.
 
Our corporate actions are substantially controlled by our principal shareholders and affiliated entities.
 
As of March 16, 2011, our principal shareholders, which includes our officers and directors and their affiliated entities, owned approximately 51.87% of our outstanding shares of common stock. These shareholders, acting individually or as a group, could exert substantial influence over matters such as electing directors and approving mergers or other business combination transactions.  In addition, because of the percentage of ownership and voting concentration in these principal shareholders and their affiliated entities, elections of our board of directors will generally be within the control of these shareholders and their affiliated entities.  While all of our shareholders are entitled to vote on matters submitted to our shareholders for approval, the concentration of shares and voting control presently lies with these principal shareholders and their affiliated entities.  As such, it would be difficult for shareholders to propose and have approved proposals not supported by management.  There can be no assurances that matters voted upon by our officers and directors in their capacity as shareholders will be viewed favorably by all of our shareholders.

 
13

 

The elimination of monetary liability against our directors, officers and employees under Nevada law and the existence of indemnification rights to our directors, officers and employees may result in substantial expenditures by our company and may discourage lawsuits against our directors, officers and employees.

Our Articles of Incorporation, as amended, contain a provision permitting us to eliminate the liability of our directors for monetary damages to our company and shareholders to the extent provided by Nevada law.  We may also have contractual indemnification obligations under our employment agreements with our officers.  The foregoing indemnification obligations could result in our company incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers, which we may be unable to recoup.  These provisions and resultant costs may also discourage our company from bringing a lawsuit against directors and officers for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our shareholders against our directors and officers even though such actions, if successful, might otherwise benefit our company and shareholders.

Legislative actions, higher insurance costs and potential new accounting pronouncements may impact our future financial position and results of operations.

There have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and there may potentially be new accounting pronouncements or additional regulatory rulings that will have an impact on our future financial position and results of operations.  The Sarbanes-Oxley Act of 2002 and other rule changes are likely to increase general and administrative costs and expenses.  In addition, insurers are likely to increase premiums as a result of high claims rates over the past several years, which we expect will increase our premiums for insurance policies.  Further, there could be changes in certain accounting rules.  These and other potential changes could materially increase the expenses we report under generally accepted accounting principles, and adversely affect our operating results.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent material misstatements.
 
We are subject to reporting obligations under U.S. securities laws.  The SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company to include a management report on such company’s internal controls over financial reporting in its annual report, which contains management’s assessment of the effectiveness of our internal controls over financial reporting. Our management may conclude that our internal controls over our financial reporting are not effective.  Our reporting obligations as a public company will place a significant strain on our management, operational and financial resources and systems for the foreseeable future. Effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to help prevent fraud.  As a result, our failure to achieve and maintain effective internal controls over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price of our stock.  Furthermore, we anticipate that we will incur considerable costs and use significant management time and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act.

The full conversion and exercise of certain outstanding series A convertible preferred stock and warrants could result in the substantial dilution of the Company in terms of a particular percentage ownership in our Company as well as the book value of the common shares. The sale of a large amount of common shares received upon exercise of the warrants on the public market to finance the exercise price or to pay associated income taxes, or the perception that such sales could occur, could substantially depress the prevailing market prices for our shares.
 
As of March 16, 2011, there were 966,760 shares of series A convertible preferred stock outstanding, as well as 1,716,877 warrants with an exercise price of $3.43 per share.  In the event of conversion or exercise of these securities, a stockholder could suffer substantial dilution of their investment in terms of the percentage ownership in us as well as the book value of the common shares held.  Full conversion and exercise of the outstanding series A convertible preferred stock and warrants would have increased the outstanding common shares as of March 16, 2011, by approximately 14.46% to approximately 21,239,806 shares.
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

All statements contained in this prospectus, other than statements of historical facts, that address future activities, events or developments, are forward-looking statements, including, but not limited to, statements containing the words “believe,” “anticipate,” “expect” and words of similar import. These statements are based on certain assumptions and analyses made by us in light of our experience and our assessment of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate under the circumstances. Whether actual results will conform to the expectations and predictions of management, however, is subject to a number of risks and uncertainties that may cause actual results to differ materially. Such risks are in the section entitled “Risk Factors” on page 3, and in our previous SEC filings.

Consequently, all of the forward-looking statements made in this prospectus are qualified by these cautionary statements, and there can be no assurance that the actual results anticipated by management will be realized or, even if substantially realized, that they will have the expected consequences to or effects on our business operations.

 
14

 

USE OF PROCEEDS

We will not receive any proceeds from the sale of the common stock by the selling security holders.  All proceeds from the sale of such securities offered by the selling security holders under this prospectus will be for the account of the selling security holders, as described below in the sections entitled “Selling Security Holders” and “Plan of Distribution.”  With the exception of any brokerage fees and commissions which are the respective obligations of the selling security holders, we are responsible for the fees, costs and expenses of this offering which includes our legal and accounting fees, printing costs and filing and other miscellaneous fees and expenses.

All of the shares covered by this prospectus are, prior to their sale under this prospectus, issuable upon conversion of our series A convertible preferred stock or exercise of our series A warrants.

SELLING SECURITY HOLDERS

We are registering the following securities:
 
 
·
1,489,656 shares of common stock underlying 1,489,656 outstanding shares of the series A convertible preferred stock issued in conjunction with our financing completed on November 17, 2009 (the “Preferred Shares Financing”);

 
·
1,080,574 shares of common stock converted from 1,080,574 shares of series A convertible preferred stock issued in conjunction with the Preferred Shares Financing;

 
·
653,534 shares of common stock issued in conjunction with our financing completed on December 1, 2009 (the “Common Shares Financing,” and with the Preferred Shares Financing collectively as the “Financings”);

 
·
1,716,877 shares of common stock underlying the common stock purchase warrants issued in conjunction with the Financings;

 
·
8,250 shares of common stock from exercise of common stock purchase warrants to purchase 8,250 shares of common stock; and

 
·
174,500 shares of common stock issued in connection with a bridge financing related to our share exchange transaction with PXPF in February 2009.

We are registering these securities in order to permit the selling security holders to dispose of the shares of common stock from time to time. The selling security holders may sell all, some, or none of their shares in this offering. See “Plan of Distribution.”
 
The table below lists the selling security holders and other information regarding the beneficial ownership of the shares of common stock by each of the selling security holders.  Column B lists the number of shares of common stock beneficially owned by each selling security holder as of March 16, 2011 (assuming full conversion of the Preferred Shares and exercise of the Warrants held by such selling security holder, if any).  Column C lists the shares of common stock covered by this prospectus that may be disposed of by each of the selling security holders. Column D lists the number of shares of common stock that will be beneficially owned by the selling security holders assuming all of the shares covered by this prospectus are sold.  Column E lists the percentage of class beneficially owned by the selling security holders assuming all of the shares covered by this prospectus are sold, based on 18,556,169 of common stock outstanding on March 16, 2011.
 
We cannot provide an estimate of the number of securities that any of the selling security holders will hold in the future. For purposes of this table, beneficial ownership is determined in accordance with the rules of the SEC, and includes voting power and investment power with respect to such securities.

The inclusion of any securities in the following table does not constitute an admission of beneficial ownership by the persons named below. Except as indicated in the footnotes to the table, no selling security holder has had any material relationship with us or our affiliates during the last three years. Except as indicated below, no selling security holder is the beneficial owner of any additional shares of common stock or other equity securities issued by us or any securities convertible into, or exercisable or exchangeable for, our equity securities. Except as indicated below, no selling security holder is a registered broker-dealer or an affiliate of a broker-dealer.

 
15

 

Selling Security Holder Table

Name
(A)
 
Securities
Beneficially
Owned Prior
to Offering
(B)
   
Securities
Being
Offered
(C)
   
Securities
Beneficially
Owned After
Offering
(D)
   
% Beneficial
Ownership
After Offering
(E)
 
Ancora Greater China Fund, LP (1)
    194,950 (2)     47,590 (3)     147,360 (2)     * %(2)
Aran Asset Management SA (4)
    11,364 (5)     11,364 (5)     0       0 %
ARC China Investments Fund Ltd. (6)(10)(154)
    357,342 (7)     357,342 (7)     0       0 %
ARC Semper China Investments Ltd. (8)(10)(156)
    34,032 (9)     34,032 (9)     0       0 %
Giovanni Berloni (11)
    5,075 (12)     5,075 (12)     0       0 %
Jeff Bishop (13)
    55,964 (14)     55,964 (14)     0       0 %
Blue Earth Fund, LP (15)
    131,121 (16)     131,121 (16)     0       0 %
Anthony Bobulinski (17)
    52,500 (18)     52,500 (18)     0       0 %
Kung-Hsiung Chang (19)
    4,725 (20)     4,725 (20)     0       0 %
Yi-Tsung Chang (21)
    4,725 (22)     4,725 (22)     0       0 %
Michael Cohen (23)
    105,000 (24)     105,000 (24)     0       0 %
Ronnie Cons and Mike Cons (25)
    47,203 (26)     47,203 (26)     0       0 %
Gundyco ITF Core Capital Markets Limited (27)
    12,187 (28)     12,187 (28)     0       0 %
Gundyco ITF Core Energy Enterprises Inc. (29)
    109,362 (30)     109,362 (30)     0       0 %
Covey Capital Partners Master, Ltd. (31)
    118,007 (32)     118,007 (32)     0       0 %
EPESA, LP, LLLP (33)(154)
    44,580 (34)     44,580 (34)     0       0 %
Field Nominees Ltd. A/C 1368511 (35)
    236,014 (36)     236,014 (36)     0       0 %
Ephraim Fields (37)
    157,343 (38)     157,343 (38)     0       0 %
ARDLUI Holdings Limited (39)(156)
    51,049 (40)     51,049 (40)     0       0 %
Fiordaliso Ltd. (41)(154)
    51,049 (42)     51,049 (42)     0       0 %
Fishman Family Trust (43)
    10,665 (44)     10,665 (44)     0       0 %
Fitel Nominees Limited A/C C054696 (45)
    23,602 (46)     23,602 (46)     0       0 %
James Fuld, Jr. (47)
    78,672 (48)     78,672 (48)     0       0 %
Gilford Securities Inc. (49) (155)
    25,587 (50)     25,587 (50)     0       0 %
Robert Gleckman (51)
    15,535 (52)     15,535 (52)     0       0 %
Len Goldberg and Caryl T. Goldberg (53)
    39,336 (54)     39,336 (54)     0       0 %
Golden 1177 LP (55)
    120,000 (56)     120,000 (56)     0       0 %
Jeffrey A. Grossman (57)
    36,714 (58)     36,714 (58)     0       0 %
Boyd Hinds (59)
    26,224 (60)     26,224 (60)     0       0 %
David Hnatek (61)
    52,449 (62)     52,449 (62)     0       0 %
Hai-Lung Huang (63)
    8,100 (64)     8,100 (64)     0       0 %
Hyllos Investment Ltd. (65)
    29,700 (66)     29,700 (66)     0       0 %
IGSB-Stad I, LLC (67)
    39,336 (68)     39,336 (68)     0       0 %
Lawrence D. & Christine L. Isen Family Trust (69)
    19,420 (70)     19,420 (70)     0       0 %
JBWA2 LP (71)
    45,000 (72)     45,000 (72)     0       0 %
Michael Jordan (73)
    52,448 (74)     52,448 (74)     0       0 %
Kaufman2 LP (75)
    90,000 (76)     90,000 (76)     0       0 %
Robert Klinek and Susan Pack as Joint Tenants with Rights of Survivorship (77)
    10,665 (78)     10,665 (78)     0       0 %
Geoffrey Knapp (79)
    75,000 (80)     75,000 (80)     0       0 %
Jacqueline Knapp (81)(117)
    46,550 (82)     46,550 (82)     0       0 %
Chiao-Mi Lee (83)
    4,725 (84)     4,725 (84)     0       0 %
John S. Lemak IRA Rollover Morgan Keegan custodian (85)
    52,500 (86)     52,500 (86)     0       0 %
Ernst Liniger (87)
    7,937 (88)     7,937 (88)     0       0 %
Loeb Enterprises II, LLC (89)(154)
    102,098 (90)     102,098 (90)     0       0 %
Lumen Capital Limited Partnership (91)
    26,224 (92)     26,224 (92)     0       0 %
Marketbyte LLC Defined Benefit & Trust (93)
    26,660 (94)     26,660 (94)     0       0 %
Sam Maywood (95)
    39,942 (96)     39,942 (96)     0       0 %
Sven Hugo Meyer (97)(154)
    49,600 (98)     49,600 (98)     0       0 %
Michael Morris (99)
    39,336 (100)     39,336 (100)     0       0 %
Roger Mulhaupt (101)
    71,416 (102)     71,416 (102)     0       0 %
Bette Nagelberg ACF Jenna C. Nagelberg U/CA/UTMA (103)(115)
    31,812 (104)     31,812 (104)     0       0 %
David S. Nagelberg 2003 Revocable Trust U/A/D 7/2/03 (105)(115)
    150,000 (106)     150,000 (106)     0       0 %
Jeremy M. Nagelberg 2007 Trust (107)(115)
    31,812 (108)     31,812 (108)     0       0 %
Jesse A. Nagelberg 2007 Trust (109)(115)
    31,812 (110)     31,812 (110)     0       0 %
Justin E. Nagelberg 2007 Trust (111)(115)
    31,812 (112)     31,812 (112)     0       0 %
Murray J. Nagelberg (113)(115)
    46,417 (114)     46,417 (114)     0       0 %
Nardes Investments SA 21414 at Fortis Banque (Suisse) SA (116)
    233,101 (117)     233,101 (117)     0       0 %
NBAD Private Bank (Suite) S.A. (118)
    73,500 (119)     73,500 (119)     0       0 %
Nemo Asset Management (120)
    8,741 (121)     8,741 (121)     0       0 %
Jeffrey Nesses (122)
    13,113 (123)     13,113 (123)     0       0 %
Dermot O’Sullivan (124)
    5,075 (125)     5,075 (125)     0       0 %
Gary L. Poelstra (126)
    10,665 (127)     10,665 (127)     0       0 %
Pope Investments II LLC (128)
    470,750 (129)     126,910 (3)     343,840 (129)     1.93 %(129)
RossPlan LP (130)
    67,500 (131)     67,500 (131)     0       0 %
Rothschild & Cie Banque (132)
    24,300 (133)     24,300 (133)     0       0 %
Sandor Capital Master Fund, L.P. (134)
    157,500 (135)     157,500 (135)     0       0 %
Semper Gestion S.A. (136)
    261,975 (137)     261,975 (137)     0       0 %
Sequoia Aggressive Growth Fund Ltd. (138)
    322,844 (139)     322,844 (139)     0       0 %
Lawrence J. Sheer (115)(140)
    46,550 (141)     46,550 (141)     0       0 %
Silver Rock II, Ltd. (142)
    150,000 (143)     150,000 (143)     0       0 %
Taylor International Fund Ltd. (144)
    262,238 (145)     262,238 (145)     0       0 %
Virtus Trust Limited as Trustee of the Hillside Ventures Investments Trust B (146)
    52,098 (147)     52,098 (147)     0       0 %
XWRT2 LP (148)
    45,000 (149)     45,000 (149)     0       0 %
Wilshire Investments LLC (150)
    26,224 (151)     26,224 (151)     0       0 %
Zhimin You (152)
    10,729 (153)     10,729 (153)     0       0 %
                                 
TOTAL
    5,614,591       5,123,391       491,200       2.33 %

* Less than 1%

 
16

 

(1)
The address for this security holder is One Chagrin Highlands, 2000 Auburn Drive, #305, Cleveland, OH 44122. John P. Micklitsch, as managing partner of this security holder, has dispositive and voting power over these securities and may be deemed to be the beneficial owner of these securities.

(2)
Includes 47,590 shares of common stock issued to this security holder in connection with a bridge financing related to our share exchange transaction with PXPF (more fully described under the section titled “Certain Relationships and Related Party Transactions” below), all of which we are registering for resale pursuant to the bridge loan and financing agreement (the “Bridge Financing Agreement”) entered into as part of the bridge financing.

(3)
Shares being registered pursuant to the Bridge Financing Agreement.

(4)
The address for this security holder is Bohnhofplatz, P.O. Box 4010, 6304 Zug, Switzerland. Michael C. Thalmann, as chairman and CEO of this security holder, has dispositive and voting power over these securities and may be deemed to be the beneficial owner of these securities.

(5)
Includes 6,993 shares of common stock converted from 6,993 shares of series A preferred stock and 4,371 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing (more fully described under the section titled “History and Corporate Structure” below), all of which we are registering for resale pursuant to the securities purchase agreement that we entered into as part of the Preferred Shares Financing (the “Preferred Shares Agreement”).

 
17

 
 
(6)
The address for this security holder is 23 The Bund, 14th Floor, Shanghai, PRC. Adam Roseman, as chairman of this security holder, has dispositive and voting power over these securities and may be deemed to be the beneficial owner of these securities.

(7)
Includes 242,307 shares of common stock converted from 242,307 shares of series A preferred stock and 115,035 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(8)
The address for this security holder is 5 Rue Pedro-Meylan 5, cp 109-ch 1211, Geneve 17, Switzerland. Adam Roseman and Gregoire Vaucher, as directors of this security holder, have dispositive and voting power over these securities and may be deemed to be the beneficial owners of these securities.

(9)
Includes 23,077 shares of common stock converted from 23,077 shares of series A preferred stock and 10,955 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(10)
Under common control and are deemed affiliates of one another.

(11)
The address for this security holder is JBR, Rimal 5, Apt. 3204, P.O. Box 118222, Dubai, UAE.

(12)
Includes 3,325 shares of common stock converted from 3,325 shares of series A preferred stock and 1,750 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(13)
The address for this security holder is 18 Sackett Road, Lee, NH 03861.

(14)
Includes 34,985 shares of common stock underlying 34,985 shares of series A preferred stock and 20,979 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(15)
The address for this security holder is 1312 Cedar Street, Santa Monica, CA 90405. Brett Conrad, as managing member and general partner of this security holder, has dispositive and voting power over these securities and may be deemed to be the beneficial owner of these securities.

(16)
Includes 52,448 shares of common stock underlying 52,448 shares of series A preferred stock and 26,224 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement, as well as 34,966 shares of common stock and 17,483 shares of common stock underlying the warrants issued to this selling security holder in the Common Shares Financing (more fully described under the section titled “History and Corporate Structure” below), all of which we are registering for resale pursuant to the securities purchase agreement that we entered into as part of the Common Shares Financing (the “Common Shares Agreement”).

(17)
The address for this security holder is 10330 Santa Monica Boulevard, Los Angeles, CA 90025.

(18)
Includes 35,000 shares of common stock converted from 35,000 shares of series A preferred stock and 17,500 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(19)
The address for this security holder is 3F/3 Lane 1041 Ta-Hsuen 1st Road, Gue-Sun Dist., Kaohsiung City 804, Taiwan.

(20)
Includes 2,975 shares of common stock converted from 2,975 shares of series A preferred stock and 1,750 shares of common stock from exercise of the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(21)
The address for this security holder is No. 196 Jian Hwa 1st Road, Pingtung City, Taiwan.
 
 
18

 

(22)
Includes 2,975 shares of common stock converted from 2,975 shares of series A preferred stock and 1,750 shares of common stock from exercise of the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(23)
The address for this security holder is 210 Sandringham Drive, Toronto, Ontario, Canada, M3H 1E3.

(24)
Includes 70,000 shares of common stock underlying 70,000 shares of series A preferred stock and 35,000 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(25)
The address for this security holder is 6800 Boulevard Des Grandes-Prairies, Saint-Leonard, Quebec, Canada H1P 3P3.

(26)
Includes 29,720 shares of common stock converted from 29,720 shares of series A preferred stock and 17,483 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(27)
The address for this security holder is 1 King Street West, Suite 1505, Toronto, Canada M5H 1A1. James Cassina, as president of this security holder, has dispositive and voting power over these securities and may be deemed to be the beneficial owner of these securities.

(28)
Includes 7,800 shares of common stock converted from 7,800 shares of series A preferred stock and 4,387 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(29)
The address for this security holder is P.O. Box N-10567, 2nd Terrace West, Centreville, Nassau, Bahamas. James Cassina, as president of this security holder, has dispositive and voting power over these securities and may be deemed to be the beneficial owner of these securities.

(30)
Includes 70,000 shares of common stock converted from 70,000 shares of series A preferred stock and 39,362 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(31)
The address for this security holder is 3353 Peachtree Road NE, North Tower, Suite 545, Atlanta, GA 30326, J. Christopher Lanigan and R. Scott Mayo, as directors of this security holder, and R. Scott Winton, as chief financial officer of Covey Capital Advisors, LLC, investment manager of this security holder, have dispositive and voting power over these securities and may be deemed to be the beneficial owners of these securities.

(32)
Includes 74,301 shares of common stock converted from 74,301 shares of series A preferred stock and 43,706 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(33)
The address for this security holder is 2401 SW 145th Avenue, Miramar, FL 33027. Steven Kruss, as general partner of this security holder, has dispositive and voting power over these securities and may be deemed to be the beneficial owner of these securities.

(34)
Includes 29,720 shares of common stock converted from 29,720 shares of series A preferred stock and 14,860 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(35)
The address for this security holder is GS Front Street, Hamilton Hm12, Bermuda. Linda Hodgson and May O’Mara, as authorized signatories of this security holder, have dispositive and voting power over these securities and may be deemed to be the beneficial owners of these securities.

(36)
Includes 148,601 shares of common stock converted from 148,601 shares of series A preferred stock and 87,413 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(37)
The address for this security holder is 265 East 66th Street, #41A, New York, NY 10065.
 
 
19

 

(38)
Includes 104,895 shares of common stock underlying 104,895 shares of series A preferred stock and 52,448 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(39)
The address for this security holder is 33 Pleiadon Street, Kifissia 145 61, Athens, Greece. Euripides Hatzistefanis and Efstratios Hatzistefanis, as the partners of this security holder, have dispositive and voting power over these securities and may be deemed to be the beneficial owners of these securities.

(40)
Includes 34,615 shares of common stock converted from 34,615 shares of series A preferred stock and 16,434 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(41)
The address for this security holder is Le Patio Palace, 41 Avenue Hector Otto, MC 98000 Monaco – Principality of Monaco. Diego Lissi, as director of this security holder, has dispositive and voting power over these securities and may be deemed to be the beneficial owner of these securities.

(42)
Includes 34,615 shares of common stock converted from 34,615 shares of series A preferred stock and 16,434 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(43)
The address for this security holder is P.O. Box 1203, Rancho Santa Fe, CA 92067. Richard Fishman and Susann Fishman, as the trustees of this security holder, have dispositive and voting power over these securities and may be deemed to be the beneficial owners of these securities.

(44)
Includes 6,667 shares of common stock underlying 6,667 shares of series A preferred stock and 3,998 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(45)
The address for this security holder is 11 Saint James's Square, Manchester, M2 6, United Kingdom ‎ . Harry Ansell, Nicholas Lam b, Daniel Bristowe and Charles Campbell, as investment managers of this security holder, have dispositive and voting power over these securities and may be deemed to be the beneficial owners of these securities.

(46)
Includes 14,861 shares of common stock underlying 14,861 shares of series A preferred stock and 8,741 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(47)
The address for this security holder is 114 East 72nd Street, New York, NY 10021.

(48)
Includes 52,448 shares of common stock and 26,224 shares of common stock underlying the warrants issued to this selling security holder in the Common Shares Financing, all of which we are registering for resale pursuant to the Common Shares Agreement.

(49)
The address for this security holder is 777 3rd Avenue, 17th Floor, New York, NY 10017. Robert A. Maley, as president of this security holder, has dispositive and voting power over these securities and may be deemed to be the beneficial owner of these securities.

(50)
Includes 9,675 shares of common stock underlying 9,675 shares of series A preferred stock and 15,912 shares of common stock underlying the warrants transferred to this selling security holder by certain of the investors in the Preferred Shares Financing pursuant to arrangements between such parties.

(51)
The address for this security holder is 18440 St Moritz Drive, Tarzana, CA 91356.

(52)
Includes 9,708 shares of common stock underlying 9,708 shares of series A preferred stock and 5,827 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(53)
The address for this security holder is 27 Stagecoach Road, Avon, CT 06001.
 
 
20

 

(54)
Includes 26,224 shares of common stock and 13,112 shares of common stock underlying the warrants issued to this selling security holder in the Common Shares Financing, all of which we are registering for resale pursuant to the Common Shares Agreement.

(55)
The address for this security holder is #500, 1177 West Hastings Street, Vancouver, British Columbia, V6E 2K3, Canada. Alexander Lall, as general partner of this security holder, has dispositive and voting power over these securities and may be deemed to be the beneficial owner of these securities.

(56)
Includes 80,000 shares of common stock and 40,000 shares of common stock underlying the warrants issued to this selling security holder in the Common Shares Financing, all of which we are registering for resale pursuant to the Common Shares Agreement.

(57)
The address for this security holder is 35 Rochelle Drive, New City, NY 10956.

(58)
Includes 23,602 shares of common stock underlying 23,602 shares of series A preferred stock and 13,112 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(59)
The address for this security holder is 41 West 82nd Street #9B, New York, NY 10024.

(60)
Includes 17,483 shares of common stock and 8,741 shares of common stock underlying the warrants issued to this selling security holder in the Common Shares Financing, all of which we are registering for resale pursuant to the Common Shares Agreement.

(61)
The address for this security holder is 8000 Paseo Esmerado, Carlsbad, CA 92009.

(62)
Includes 34,966 shares of common stock and 17,483 shares of common stock underlying the warrants issued to this selling security holder in the Common Shares Financing, all of which we are registering for resale pursuant to the Common Shares Agreement.

(63)
The address for this security holder is No.25 Alley 15 Chong Shon Tung Road, East District, Tainan City, Taiwan.

(64)
Includes 5,100 shares of common stock converted from 5,100 shares of series A preferred stock and 3,000 shares of common stock from exercise of the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(65)
The address for this security holder is P.O. Box 438, Road Town, Tortola, British Virgin Islands. Sandra Nesensohn and Peter Stephan Konig, among others , as authorized signatories of this security holder, have dispositive and voting power over these securities and may be deemed to be the beneficial owners of these securities.

(66)
Includes 18,700 shares of common stock underlying 18,700 shares of series A preferred stock and 11,000 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(67)
The address for this security holder is P.O. Box 5609, Santa Barbara, CA 93150. Timothy K. Bliss, as manager of this security holder, has dispositive and voting power over these securities and may be deemed to be the beneficial owner of these securities.

(68)
Includes 24,767 shares of common stock underlying 24,767 shares of series A preferred stock and 14,569 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(69)
The address for this security holder is 10673 Hunters Glen, San Diego, CA 92130. Lawrence D. Isen, as trustee of this security holder, has dispositive and voting power over these securities and may be deemed to be the beneficial owner of these securities.

(70)
Includes 12,136 shares of common stock underlying 12,136 shares of series A preferred stock and 7,284 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

 
21

 

(71)
The address for this security holder is 650 Bellevue Way NE, #3704, Bellevue, WA 98004. C. James Jensen, as general partner of this security holder, has dispositive and voting power over these securities and may be deemed to be the beneficial owner of these securities.

(72)
Includes 30,000 shares of common stock and 15,000 shares of common stock underlying the warrants issued to this selling security holder in the Common Shares Financing, all of which we are registering for resale pursuant to the Common Shares Agreement.

(73)
The address for this security holder is 15 Linden Lane, Rumson, NJ 07760.

(74)
Includes 34,965 shares of common stock underlying 34,965 shares of series A preferred stock and 17,483 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(75)
The address for this security holder is 127 W 69th Street, New York, NY 10023. Daniel Kaufman, as general partner of this security holder, has dispositive and voting power over these securities and may be deemed to be the beneficial owner of these securities.

(76)
Includes 30,000 shares of common stock and 15,000 shares of common stock underlying the warrants issued to this selling security holder in the Common Shares Financing, as well as 30,000 shares of common stock and 15,000 shares of common stock underlying the warrants issued to an investor in the Common Shares Financing and subsequently transferred to this selling security holder, all of which we are registering for resale pursuant to the Common Shares Agreement.

(77)
The address for this security holder is P.O. Box 157, Rancho Santa Fe, San Diego, California 92067. Robert Kleinek and Susan Pack, as joint tenants with right of survivorship of this security holder, have joint dispositive and voting power over these securities and may be deemed to be the beneficial owners of these securities.

(78)
Includes 6,667 shares of common stock underlying 6,667 shares of series A preferred stock and 3,998 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(79)
The address for this security holder is 1031 Keys Drive, Boulder City, Clark, Nevada 89005.

(80)
Includes 50,000 shares of common stock and 25,000 shares of common stock underlying the warrants issued to this selling security holder in the Common Shares Financing, all of which we are registering for resale pursuant to the Common Shares Agreement.

(81)
The address for this security holder is 947 Huron Road, Franklin Lakes, Bergen, New Jersey 07417.

(82)
Includes 29,100 shares of common stock underlying 29,100 shares of series A preferred stock and 17,450 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(83)
The address for this security holder is No. 21 Lane 45, Wuan Street, Pingtung City, Taiwan.

(84)
Includes 2,975 shares of common stock converted from 2,975 shares of series A preferred stock and 1,750 shares of common stock from exercise of the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(85)
The address for this security holder is 4410 Bordeaux Avenue, Dallas, TX 75205. John S. Lemak, as custodian of this security holder, has dispositive and voting power over these securities and may be deemed to be the beneficial owner of these securities.
 
 
22

 

(86)
Includes 35,000 shares of common stock and 17,500 shares of common stock underlying the warrants issued to this selling security holder in the Common Shares Financing, all of which we are registering for resale pursuant to the Common Shares Agreement.

(87)
The address for this security holder is Elchweg 23, CH-8405 Winterthur, Switzerland.

(88)
Includes 5,000 shares of common stock underlying 5,000 shares of series A preferred stock and 2,937 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(89)
The address for this security holder is 70 East 55th Street, 4th Floor, New York, NY 10022. Michael Loeb, Robert Imershein and Richard Vogel, as president and CEO, COO and managing director of this security holder, respectively, have dispositive and voting power over these securities and may be deemed to be the beneficial owners of these securities.

(90)
Includes 69,231 shares of common stock converted from 69,231 shares of series A preferred stock and 32,867 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(91)
The address for this security holder is 265 West Trail, Stamford, Fairfield, Connecticut 06903. Allan C. Lichtenbery, as managing member of this security holder, has dispositive and voting power over these securities and may be deemed to be the beneficial owner of these securities.

(92)
Includes 17,483 shares of common stock and 8,741 shares of common stock underlying the warrants issued to this selling security holder in the Common Shares Financing, all of which we are registering for resale pursuant to the Common Shares Agreement.

(93)
The address for this security holder is 4653 Carmel Mountain Road, Suite 308-402, San Diego, CA 92130. Lawrence D. Isen and Christian L. Isen, as trustees of this security holder, have dispositive and voting power over these securities and may be deemed to be the beneficial owners of these securities.

(94)
Includes 16,660 shares of common stock underlying 16,660 shares of series A preferred stock and 10,000 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(95)
The address for this security holder is 6105 Avenida Cresta, La Jolla, California 92037.

(96)
Includes 25,024 shares of common stock underlying 25,024 shares of series A preferred stock and 14,918 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(97)
The address for this security holder is Rue Jean, Jacquet 4, CH 1201 Geneva, Switzerland.

(98)
Includes 33,650 shares of common stock underlying 33,650 shares of series A preferred stock and 15,950 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(99)
The address for this security holder is 12 Silver Birch Road, Merrick, Nassau, New York 11566.

(100)
Includes 26,224 shares of common stock and 13,112 shares of common stock underlying the warrants issued to this selling security holder in the Common Shares Financing, all of which we are registering for resale pursuant to the Common Shares Agreement.

(101)
The address for this security holder is Espigraben - 1811, 8264 Eschenz, Steckborn, Thurgau, Switzerland.

(102)
Includes 45,000 shares of common stock underlying 45,000 shares of series A preferred stock and 26,416 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

 
23

 

(103)
The address for this security holder is 111 Via De La Valle, Del Mar, CA 92014. Bette Nagelberg, as custodian of this security holder, has dispositive and voting power over these securities and may be deemed to be the beneficial owner of these securities.

(104)
Includes 19,887 shares of common stock underlying 19,887 shares of series A preferred stock and 11,925 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(105)
The address for this security holder is 939 Coast Boulevard #210E, La Jolla, CA 92037. David S. Nagelberg, as trustee of this security holder, has dispositive and voting power over these securities and may be deemed to be the beneficial owner of these securities.

(106)
Includes 100,000 shares of common stock underlying 100,000 shares of series A preferred stock and 50,000 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(107)
The address for this security holder is 947 Huron Road, Franklin Lakes, NJ 07417. Mitchell Knapp and Lawrence Sheer, as trustees of this security holder, have dispositive and voting power over these securities and may be deemed to be the beneficial owners of these securities.

(108)
Includes 19,887 shares of common stock underlying 19,887 shares of series A preferred stock and 11,925 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(109)
The address for this security holder is 947 Huron Road, Franklin Lakes, NJ 07417. Mitchell Knapp and Lawrence Sheer, as trustees of this security holder, have dispositive and voting power over these securities and may be deemed to be the beneficial owners of these securities.

(110)
Includes 19,887 shares of common stock underlying 19,887 shares of series A preferred stock and 11,925 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(111)
The address for this security holder is 947 Huron Road, Franklin Lakes, NJ 07417. Mitchell Knapp and Lawrence Sheer, as trustees of this security holder, have dispositive and voting power over these securities and may be deemed to be the beneficial owners of these securities.

(112)
Includes 19,887 shares of common stock underlying 19,887 shares of series A preferred stock and 11,925 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(113)
The address for this security holder is 812 Plainfield Lane, Valley Stream, Nassau, New York 11581.

(114)
Includes 29,017 shares of common stock underlying 29,017 shares of series A preferred stock and 17,400 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(115)
Are deemed affiliates of one another.

(116)
The address for this security holder is Rue du Port 12, CH-1204, Geneva, Switzerland. Hubert-Lance Huet, as manager of this security holder, has dispositive and voting power over these securities and may be deemed to be the beneficial owner of these securities.

(117)
Includes 145,688 shares of common stock underlying 145,688 shares of series A preferred stock and 87,413 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(118)
The address for this security holder is Quai de I’lle 5, P.O. Box 5055, 1204 Geneva 11, Switzerland. Valerie Anson, as head of middle office of this security holder, has dispositive and voting power over these securities and may be deemed to be the beneficial owner of these securities.

(119)
Includes 49,000 shares of common stock converted from 49,000 shares of series A preferred stock and 24,500 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

 
24

 
 
(120)
The address for this security holder is 5 Rue Pedro Meylan 5, CH-1208 Geneva, Switzerland. Olivier Couriol, as director of this security holder, has dispositive and voting power over these securities and may be deemed to be the beneficial owner of these securities.

(121)
Includes 5,827 shares of common stock underlying 5,827 shares of series A preferred stock and 2,914 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(122)
The address for this security holder is P.O. Box 8803, Rancho Santa Fe, CA 92067.

(123)
Includes 8,742 shares of common stock and 4,371 shares of common stock underlying the warrants issued to this selling security holder in the Common Shares Financing, all of which we are registering for resale pursuant to the Common Shares Agreement.

(124)
The address for this security holder is Apt 409, Saoaf 6, SBR, P.O. Box 118222, Dubai, UAE.

(125)
Includes 3,325 shares of common stock converted from 3,325 shares of series A preferred stock and 1,750 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(126)
The address for this security holder is 1011 Brioso Drive, Suite 201, Costa Mesa, CA 92627.

(127)
Includes 6,667 shares of common stock underlying 6,667 shares of series A preferred stock and 3,998 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(128)
The address for this security holder is 5100 Poplar Avenue, Suite 805, Memphis, TN 38137. William P. Wells, as chief manager of Pope Asset Management, LLC, the investment advisor to this security holder, has dispositive and voting power over these securities and may be deemed to be the beneficial owner of these securities.

(129)
Includes 126,910 shares of common stock issued to this security holder in connection with, and which we are registering for resale pursuant to, the Bridge Financing Agreement.

(130)
The address for this security holder is 130 East 65th Street, New York, NY 10065. Ross Pirasteh, as general manager and general partner of this security holder, has dispositive and voting power over these securities and may be deemed to be the beneficial owner of these securities.

(131)
Includes 45,000 shares of common stock and 22,500 shares of common stock underlying the warrants issued to this selling security holder in the Common Shares Financing, all of which we are registering for resale pursuant to the Common Shares Agreement.

(132)
The address for this security holder is 29 Avenue de Messine, 75008 Paris, France. Eric Legendre, Frederic Garcia, Patrice Renaudin and Chantal Aumasson, as managing members of this security holder, have dispositive and voting power over these securities and may be deemed to be the beneficial owners of these securities.

(133)
Includes 15,300 shares of common stock underlying 15,300 shares of series A preferred stock and 9,000 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(134)
The address for this security holder is 2828 Routh Street, Suite 500, Dallas, TX 75201. John S. Lemak, as manager of this security holder, has dispositive and voting power over these securities and may be deemed to be the beneficial owner of these securities.

(135)
Includes 105,000 shares of common stock and 52,500 shares of common stock underlying the warrants issued to this selling security holder in the Common Shares Financing, all of which we are registering for resale pursuant to the Common Shares Agreement.

 
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(136)
The address for this security holder is Rue Pedro-Meylan 5, CH-1208, Geneve, Switzerland. Blaise Hatt-Arnold and Gregoire Vaucher, as managing members of this security holder, have dispositive and voting power over these securities and may be deemed to be the beneficial owners of these securities.

(137)
Includes 46,066 shares of common stock converted from 46,066 shares of series A preferred stock, 118,881 shares of common stock underlying 118,881 shares of series A preferred stock and 97,028 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(138)
The address for this security holder is Rue Pedro-Meylan 5, CH-1208 Geneva, Switzerland. Olivier Couriol and Christian Navill, as directors of this security holder, have dispositive and voting power over these securities and may be deemed to be the beneficial owners of these securities.

(139)
Includes 206,294 shares of common stock underlying 206,294 shares of series A preferred stock and 116,550 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(140)
The address for this security holder is 791 Passaic Avenue, Clifton, NJ 07012.

(141)
Includes 29,100 shares of common stock underlying 29,100 shares of series A preferred stock and 17,450 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(142)
The address for this security holder is Villa # D103, Palm Jumeirah Island, Dubai, UAE. Rima Salam, as director of this security holder, has dispositive and voting power over these securities and may be deemed to be the beneficial owner of these securities.

(143)
Includes 100,000 shares of common stock converted from 100,000 shares of series A preferred stock and 50,000 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(144)
The address for this security holder is 714 South Dearborn Street, 2nd Floor, Chicago, IL 60605. Stephen S. Taylor, as managing director of this security holder, has dispositive and voting power over these securities and may be deemed to be the beneficial owner of these securities.

(145)
Includes 174,825 shares of common stock underlying 174,825 shares of series A preferred stock and 87,413 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(146)
The address for this security holder is Bordeaux Court, Les Echelons, St. Peter Port, Guernsey GY1 3DR. Nicholas Moss and David Allison, as directors of this security holder, have dispositive and voting power over these securities and may be deemed to be the beneficial owners of these securities.

(147)
Includes 34,615 shares of common stock converted from 34,615 shares of series A preferred stock and 17,483 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(148)
The address for this security holder is 131 Laurel Grove Avenue, Kentfield, CA 94904. Joseph Abrams, as general partner of this security holder, has dispositive and voting power over these securities and may be deemed to be the beneficial owner of these securities.

(149)
Includes 30,000 shares of common stock and 15,000 shares of common stock underlying the warrants issued to this selling security holder in the Common Shares Financing, all of which we are registering for resale pursuant to the Common Shares Agreement.

(150)
The address for this security holder is 410 17th Street, #1705, Denver, CO 80202. James A Lustig, as president of this security holder, has dispositive and voting power over these securities and may be deemed to be the beneficial owner of these securities.
 
 
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(151)
Includes 17,483 shares of common stock converted from 17,483 shares of series A preferred stock and 8,741 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.
(152)
The address for this security holder is 228 Taizhou Road, Building #1, Room 1002, Shanghai, China 200042.

(153)
Includes 6,755 shares of common stock converted from 6,755 shares of series A preferred stock and 3,974 shares of common stock underlying the warrants issued to this selling security holder in the Preferred Shares Financing, all of which we are registering for resale pursuant to the Preferred Shares Agreement.

(154)
Transferred an aggregate of 9,675 Preferred Shares and Warrants to purchase up to 15,912 shares of common stock to Gilford Securities, Inc. pursuant to arrangements between these security holders and Gilford.

(155)
A broker-dealer or an affiliate of a broker-dealer.
 
 
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PLAN OF DISTRIBUTION

Of the selling security holders identified above:

 
·
57 of them are investors in our Preferred Shares Financing completed on November 17, 2009, in which we sold and issued an aggregate of 2,796,721 Preferred Shares at a per share purchase price of $2.86 for aggregate purchase price of approximately $8.00 million, as well as Warrants to purchase up to 1,398,360 shares of common stock for no additional consideration. There were two closings, the first on October 27, 2009, for gross proceeds of approximately $4.14 million, and the second on November 17, 2009, for gross proceeds of approximately $3.86 million. Each Preferred Share is convertible into one share of common stock at $2.86 per share (subject to certain adjustments) at any time at its holder’s option, and will automatically convert upon the listing of our common stock on either the Nasdaq Capital Market or NYSE Amex Equities. Each Warrant entitles its holder to purchase a share of common stock at an exercise price of $3.43 per share (subject to certain adjustments) for a period of three years. We are also entitled to call the Warrants for cancellation if the volume-weighted average price of our common stock for 20 consecutive days exceeds 200% of the then applicable exercise price. Gilford Securities, Inc. acted as the placement agent of the Preferred Shares Financing.  A description of the adjustments to the conversion price of the Preferred Shares and the exercise price of the Warrants is included in the section of this prospectus entitled “Description of Securities.”

 
·
16 of them are investors in our Common Shares Financing completed on December 1, 2009, in which we sold and issued an aggregate of 653,534 Common Shares at a per share purchase price of $2.86 for aggregate purchase price of approximately $1.87 million, as well as Warrants to purchase up to 326,767 shares of common stock for no additional consideration. The Warrants issued to these investors have the same terms as those that we issued in the Preferred Shares Financing.

 
·
Two of them, namely Pope Investments II LLC (“Pope”) and Ancora Greater China Fund, LP (“Ancora”), are parties to a bridge loan and financing agreement with Korea Jinduren (now called HK Dong Rong) (the “Bridge Loan Agreement”), pursuant to which they agreed to provide a U.S. public shell company suitable for a share exchange transaction with Korea Jinduren, and to loan Korea Jinduren $550,000 for payment of professional fees and expenses incurred in connection with such transaction. These investors (along with MMH, LLC) would collectively receive shares of common stock equal to 4% of our post-share exchange total outstanding and issued common stock in connection with the share exchange transaction. Additionally, these investors would be repaid the loan and collectively receive shares of common stock equal to 1% of our post-share exchange total issued and outstanding common stock (the “Bridge Loan Shares”) on or after October 1, 2009 and only upon the completion of a financing. The Bridge Loan financing closed in June 2008, and the Company repaid the Bridge Loan in October 2009. The Bridge Loan Agreement requires that the Bridge Loan Shares be included in a registration statement to be filed in connection with the financing.

Each selling security holder named above and any of their pledgees, assignees, and successors-in-interest (each a “Selling Security Holder” and collectively the “Selling Security Holders”) may, from time to time, sell any or all of their shares of common stock on the OTC Bulletin Board or any other stock exchange, market, or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. A Selling Security Holder may use any one or more of the following methods when selling shares:
 
 
·
ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;

 
·
block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;

 
·
purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

 
·
an exchange distribution in accordance with the rules of the applicable exchange;

 
·
privately negotiated transactions;

 
·
settlement of short sales entered into after the effective date of the registration statement of which this prospectus is a part;

 
·
broker-dealers may agree with the Selling Security Holders to sell a specified number of such shares at a stipulated price per share;

 
·
through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;

 
·
a combination of any such methods of sale; or

 
·
any other method permitted pursuant to applicable law.

The Selling Security Holders may also sell shares under Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”), if available, rather than under this prospectus.
 
Broker-dealers engaged by the Selling Security Holders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Security Holders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated, but, except as set forth in a supplement to this prospectus, in the case of an agency transaction not in excess of a customary brokerage commission in compliance with FINRA Rule 2440; and in the case of a principal transaction a markup or markdown in compliance with FINRA IM-2440.

In connection with the sale of the common stock or interests therein, the Selling Security Holders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions they assume. The Selling Security Holders may also sell shares of the common stock short and deliver these securities to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities. The Selling Security Holders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).

The Selling Security Holders and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Each Selling Security Holder has informed the Company that it does not have any written or oral agreement or understanding, directly or indirectly, with any person to distribute their shares of common stock.

 
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The Company is required to pay certain fees and expenses incurred by the Company incident to the registration of the shares. The Company has agreed to indemnify the Selling Stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.

Because Selling Security Holders may be deemed to be “underwriters” within the meaning of the Securities Act, they will be subject to the prospectus delivery requirements of the Securities Act including Rule 172 thereunder. In addition, any securities covered by this prospectus which qualify for sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144 rather than under this prospectus. There is no underwriter or coordinating broker acting in connection with the proposed sale of the resale shares by the Selling Security Holders.

We agreed to use commercially reasonable efforts to keep this prospectus effective until the earlier of (i) the date on which all of the registrable shares may be resold by the Selling Security Holders without registration and without regard to any volume or manner-of-sale limitations by reason of Rule 144, or (ii) all of the registrable shares have been sold pursuant to this prospectus or Rule 144 under the Securities Act or any other rule of similar effect. The resale shares will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states, the resale shares may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.

Under applicable rules and regulations under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), any person engaged in the distribution of the resale shares may not simultaneously engage in market making activities with respect to the common stock for the applicable restricted period, as defined in Regulation M, prior to the commencement of the distribution. In addition, the Selling Security Holders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of shares of the common stock by the Selling Security Holders or any other person. We will make copies of this prospectus available to the Selling Security Holders and have informed them of the need to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale (including by compliance with Rule 172 under the Securities Act).

LEGAL MATTERS

LKP Global Law, LLP has rendered an opinion regarding the legality of the issuance of the shares of common stock being registered in this prospectus. As of March 18, 2011, LKP Global Law, LLP and/or its principals holds Company securities.
  
EXPERTS

The consolidated financial statements of the Company as of December 31, 2009 and 2008 and for the years then ended appearing in this prospectus and registration statement have been audited by Crowe Horwath LLP, an independent registered public accounting firm, as set forth in their report appearing herein, and are included in reliance upon such reports given on the authority of such firm as experts in auditing and accounting.

BUSINESS

Overview

We are an apparel producer in the People’s Republic of China (“PRC” or “China”) that currently designs, develops, manufactures, distributes and sells  casual apparel and clothing products under the brand name “V·LOV” targeted toward 15-34 years old, middle-class Chinese male consumers.

We design and develop our apparel and clothing products in our production facility located in Yinglin in southeastern Fujian Province. Presently, we employ five (5) designers.  Our designers typically have a degree in fashion as well as other industry experience. Our designers are responsible for creating fall fashions and spring fashions for our various branded lines including, Richard Wu, VLOV and V9. After identifying our top sales products from the prior seasons, we review global fashion trends especially in Europe and Asia.  Then we decide on the overall theme, colors and materials to be used for our products.  Our designers then create sketches via Computer Aided Design (CAD) drawings.  Our technicians then prepare samples according to the designs.  After creating samples, these are inspected, amended, reviewed and/or approved by our head designer and, ultimately, by our CEO and Chairman, Mr. Wu.  Clothing samples are then made from these designs and shown to our distributors.  Our distributors then order product from these samples.
 
We market and distribute our products through independent distributors, each of whom is granted rights to market and sell our products in a defined market or territory through a distribution agreement. We maintain and exercise control over brand advertising and marketing activities from our headquarters in Yinglin, where we set the tone for integrity, consistency and direction of the V·LOV brand image throughout China. We also have marketing staff travelling around the country to help us enforce our visions and provide support and guidelines for our distributors. Although we have our own manufacturing capacity at our Yinglin facility, the most important function of that facility is to support our research and development department in sample and prototype designs and other research and development activities. We presently outsource 100% of our manufacturing to independent third-party factories as a part of our overall sourcing strategy.
 
All of our business operations are carried out by our variable interest entity (“VIE”), Jinjiang Yinglin Jinduren Fashion Limited (“Yinglin Jinduren”), which we control through contractual arrangements between Yinglin Jinduren and Dong Rong Capital Investment Limited, formerly known as Korea Jinduren (International) Dress Limited (“HK Dong Rong”), which is wholly-owned by Peng Xiang Peng Fei Investments, Limited (“PXPF”), our wholly-owned subsidiary. Other than our interests in the contractual arrangements, neither we nor PXPF and HK Dong Rong own any equity interests in Yinglin Jinduren, which equity interests are owned by our chief executive officer and his brother, who is also one of our directors.

 
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History and Corporate Structure

We were incorporated in Nevada on October 30, 2006, originally under the name “Sino Charter, Inc.”, with a principal business objective to provide internet-based flight charter booking for East Asia. Prior to share exchange transaction with PXPF described below, we were a public reporting “shell company,” as defined in Rule 12b-2 of the Exchange Act.

On August 1, 2008, MMH Group, LLC (“MMH”) entered into a stock purchase agreement with Bradley Miller, who served as our sole director and officer since our incorporation date, to acquire from him 100,000 shares of our common stock (taking into account the reverse stock split described below). The transaction closed on August 4, 2008, and concurrently with the closing, MMH sold 24,000 of the shares to Ancora Greater China Fund, L.P. (“Ancora”), and 56,000 of the shares to Pope Investments II, LLC (“Pope”), leaving MMH with 20,000 shares. MMH is owned by Matthew Hayden, who was our former sole director and officer prior to the share exchange transaction with PXPF described below.

On January 12, 2009, we effected a 1-for-100 reverse split of our common stock (the “Reverse Split”) by filing a Certificate of Amendment to Articles of Incorporation with the Nevada Secretary of State.

On February 12, 2009, we entered into a securities purchase agreement with MMH, Ancora and Pope, pursuant to which we sold 102,800 shares of our common stock to MMH, 123,360 shares to Ancora and 287,840 shares to Pope. On February 13, 2009, we sold an additional 814,500 shares of our common stock to four purchasers.

On February 13, 2009 (the “Closing Date”), we entered into a share exchange agreement (the “Exchange Agreement”) with PXPF and its shareholders who, immediately prior to the closing of the transactions contemplated by the Exchange Agreement (the “Exchange Transaction”), collectively held 100% of PXPF’s issued and outstanding share capital (the “BVI Shareholders”). On the Closing Date, we issued 14,560,000 shares of common stock to the BVI Shareholders in exchange for all of their equity interests in PXPF.  The BVI Shareholders became our controlling shareholders, PXPF became our wholly-owned subsidiary, and we acquired the business and operations of PXPF. Immediately prior to the Exchange Transaction, we had 1,454,421 shares of common stock outstanding, including 122,800 shares held by MMH, as well as 147,360 shares held by Ancora and 343,840 shares held by Pope. Immediately after the Exchange Transaction, we had 16,014,421 shares of common stock outstanding. In connection with the Exchange Transaction, we changed our name from “Sino Charter, Inc.” to “VLOV, Inc.” on March 4, 2009, to better reflect our business operations.

The Exchange Transaction was accounted for as a reverse merger (recapitalization) with PXPF deemed to be the accounting acquirer, and us as the legal acquirer. Accordingly, the financial information presented in our financial statements is the historical financial information of PXPF, as adjusted to give effect to the change in the share capital as a result of the reverse merger (recapitalization). The basis of the assets, liabilities and retained earnings of PXPF, the accounting acquirer, have been carried over in the recapitalization.

PXPF was incorporated in the British Virgin Islands on April 30, 2008. PXPF was formed by the owners of Yinglin Jinduren as a special purpose vehicle for raising capital outside of the PRC. Other than holding 100% of the equity interests in HK Dong Rong, PXPF has no operations of its own.

HK Dong Rong was incorporated on January 5, 2005 originally under the name Korea Jinduren (International) Dress Limited (“Korea Jinduren”). The company was set up by the owners of Yinglin Jinduren as a special purpose vehicle for raising capital outside of the PRC, and changed its name to HK Dong Rong on April 27, 2009. HK Dong Rong is wholly-owned by PXPF. Other than activities arising from its contractual arrangements with Yinglin Jinduren, HK Dong Rong has no other operations of its own.

On June 11, 2008, HK Dong Rong entered into a bridge loan and financing agreement (“Bridge Loan Agreement”) with Pope Investments II LLC (“Pope”), Ancora Greater China Fund, LP (“Ancora,” and with Pope, collectively the “Bridge Loan Investors”) and MMH Group LLC (“MMH”). Under the Bridge Loan Agreement, MMH and the Bridge Loan Investors agreed to provide a U.S. public shell company suitable for the Exchange Transaction, and the Bridge Loan Investors also agreed to loan Korea Jinduren the sum of $550,000 (the “Bridge Loan”) for payment of professional fees and expenses incurred in connection with the Exchange Transaction. The Bridge Loan Investors and MMH would collectively receive shares of common stock equal to 4% of our post-Exchange Transaction total outstanding and issued common stock. Additionally, the Bridge Loan Investors would be repaid the Bridge Loan and collectively receive  shares of our common stock equal to 1% of our post-Exchange Transaction total issued and outstanding common stock (the “Bridge Loan Shares”) on or after October 1, 2009 and only upon the completion of a financing. 174,500 shares of common stock were issued at the closing of the Exchange Transaction as the Bridge Loan Shares. Both the Bridge Loan and the Bridge Loan Shares were placed in a third-party escrow account, and payments were made from such account as fees and expenses were incurred, and the Bridge Loan Shares held in escrow until their release to the Bridge Loan Investors was required. On October 28, 2009, the entire amount of the Bridge Loan paid out for fees and expenses was repaid, and the balance of the Bridge Loan remaining in escrow, if any, returned to the Bridge Loan Investors. The Bridge Loan Shares were released to the Bridge Loan Investors on December 28, 2009 and on March 15, 2010.

 
30

 
 
Yinglin Jinduren was organized in the PRC on January 19, 2002, and is owned by Qingqing Wu, our Chief Executive Officer, and his brother Zhifan Wu.  Yinglin Jinduren holds the government licenses and approvals necessary to operate our apparel business in China.  PRC law currently imposes certain restrictions on foreign ownership of PRC business entities. To comply with such foreign ownership restrictions, neither we, PXPF nor HK Dong Rong own any equity interests in Yinglin Jinduren, but control and receive the economic benefits of its business operations through contractual arrangements. Through HK Dong Rong, we have contractual arrangements with Yinglin Jinduren and its owners to obtain substantially the same control of and rights to Yinglin Jinduren that we would have had through direct acquisition of its equity interests. Through these contractual arrangements, we provide consulting and other general business operation services to Yinglin Jinduren, and also have the ability to substantially influence its daily operations and financial affairs, since we are able to appoint its senior executives and approve all matters requiring approval of the equity owners. As a result of these contractual arrangements, we are able to control Yinglin Jinduren and to receive, through a service fee earned by HK Dong Rong, all of the net income of Yinglin Jinduren, although we have generally allowed such amounts to be retained by Yinglin Jinduren to support its operations.  Our contractual agreements are silent as to the sharing of losses in the event that Yinglin Jinduren incurs losses in any period.  As a result, in the event Yinglin Jinduren incurs losses, we would expect to absorb such losses through our inability to collect the accumulated net income due to us.

Contractual Arrangements with Yinglin Jinduren and its Owners

Our relationships with Yinglin Jinduren and its owners, Qingqing Wu and his brother Zhifan Wu, are governed by a series of contractual arrangements, as we (including our subsidiaries) do not own any equity interests in Yinglin Jinduren. In the opinion of Allbright Law Offices, our PRC counsel, rendered in connection with the Exchange Transaction: (a) each of PXPF, HK Dong Rong and Yinglin Jinduren are duly established and validly existing under the laws of its place  of establishment, and has the requisite corporate power to conduct its business; (b) the contractual arrangements constitute valid and binding obligations of the parties of such agreements; (c) each of the contractual arrangements and the rights and obligations of the parties thereto are enforceable and valid in accordance with the laws of the PRC; (d) no approval from or filing with any PRC governmental body is required in connection with the entry and performance of the contractual arrangements; and (c) under Chinese laws, each of HK Dong Rong and Yinglin Jinduren is an independent legal entity and neither of them is exposed to liabilities incurred by the other party. The foregoing opinion, which also describes the corporate history of each of PXPF, HK Dong Rong and Yinglin Jinduren immediately prior to the Exchange Transaction, is based on documents provided by PXPF and search result from the PRC Companies Registry, the genuineness, completeness, accuracy and validity of which are assumed by Allbright Law Offices, and is limited to interpretation of all such documents based on PRC laws and regulations which Allbright Law Offices believed were applicable at the time the opinion was rendered.

On December 28, 2005, HK Dong Rong entered into the following contractual arrangements with Yinglin Jinduren and its owners:

Consulting Services Agreement.  Pursuant to the exclusive consulting services agreement between HK Dong Rong and Yinglin Jinduren, HK Dong Rong has the exclusive right to provide to Yinglin Jinduren general consulting services relating to the management and operations of Yinglin Jinduren’s apparel business (the “Services”). Additionally, HK Dong Rong owns any intellectual property rights developed through the Services provided to Yinglin Jinduren. During the term of this agreement, Yinglin Jinduren’s operational incomes are deposited into a bank account designated by HK Dong Rong. Yinglin Jinduren is obligated to pay a quarterly consulting service fee in Renminbi (“RMB”) to HK Dong Rong that is equal to all of Yinglin Jinduren’s net income for such quarter, based on a financial report certified by Yinglin Jinduren’s chief financial officer and delivered to HK Dong Rong within 45 days after the end of such quarter. In addition to such quarterly reports, Yinglin Jinduren is also obligated to report its monthly financial results and business conditions to HK Dong Rong, as well as provide its annual audited accounts within 90 days of the fiscal year end. Yinglin Jinduren is also obligated to maintain accurate books and records of its business activities and transactions, and to make all such information available to HK Dong Rong.  In the event of a breach by Yinglin Jinduren of the foregoing or other obligations under this agreement, HK Dong Rong is entitled to all remedies under PRC law, including recovery of direct and indirect losses as well as legal fees. The consulting services agreement is in effect unless and until terminated by written notice of either party in the event that: (a) the other party causes a material breach of this agreement, provided that if the breach does not relate to a financial obligation of the breaching party, that party may attempt to remedy the breach within 14 days following the receipt of the written notice; (b) the other party becomes bankrupt, insolvent, is the subject of proceedings or arrangements for liquidation or dissolution, ceases to carry on business, or becomes unable to pay its debts as they become due; (c) HK Dong Rong terminates its operations; (d) Yinglin Jinduren’s business license or any other license or approval for its business operations is terminated, cancelled or revoked; or (e) circumstances arise which would materially and adversely affect the performance or the objectives of the consulting services agreement.  Additionally, HK Dong Rong may terminate the consulting services agreement without cause. Any dispute arising from this agreement that the parties cannot resolve must be submitted for arbitration before the China International Economic and Trade Arbitration Commission.

Because all of our business operations are conducted by Yinglin Jinduren, we have generally allowed Yinglin Jinduren to retain its net income in the PRC in order to support its operations. Additionally, Yinglin Jinduren was allowed to declare dividends, which dividends were declared and paid to Yinglin Jinduren’s owners prior to the Exchange Transaction. Thus, immediately prior to the Exchange Transaction, Yinglin Jinduren declared and paid the equivalent of $5,131,000 in RMB as dividends to Mr. Wu and his brother. However, Yinglin Jinduren has not declared or paid any dividend since the Exchange Transaction and will not do so in the future.

Additionally, under applicable PRC regulations, Yinglin Jinduren is required to set aside at least 10% of its annual after-tax net profit, if any, to fund government-mandated statutory reserves until the balance of such reserves reaches 50% of its registered capital, or RMB 5,000,000 (based on its registered capital of RMB 10,000,000).  The funds in the statutory reserves can only be used for certain purposes, such as to increase its registered capital or to eliminate its future losses as determined under PRC generally acceptable accounting principles.  At September 30, 2010 and December 31, 2009, Yinglin Jinduren’s statutory reserves were fully funded, and its total accumulated net income distributable to HK Dong Rong on such dates were $15.154 million and $6.173 million, respectively, which amounts are reflected as retained earnings on our consolidated balance sheets as of these dates included elsewhere in this prospectus.
 
 
31

 
  
Operating Agreement.  Pursuant to the operating agreement among HK Dong Rong, Yinglin Jinduren and the owners of Yinglin Jinduren who collectively hold 100% of the outstanding equity interests of Yinglin Jinduren, HK Dong Rong provides guidance and instructions on Yinglin Jinduren’s daily operations, financial management and employment issues.  The owners of Yinglin Jinduren must designate the candidates recommended by HK Dong Rong as their representatives on Yinglin Jinduren’s board of directors.  HK Dong Rong has the right to appoint senior executives of Yinglin Jinduren.  In addition, HK Dong Rong has the right, but not the obligation, to guarantee the performance of Yinglin Jinduren under any agreements or arrangements relating to Yinglin Jinduren’s business arrangements with any third party.  Yinglin Jinduren, in return, agrees to pledge its accounts receivable and all of its assets to HK Dong Rong.  Moreover, Yinglin Jinduren agrees that without the prior consent of HK Dong Rong, Yinglin Jinduren will not engage in any transactions that could materially affect the assets, liabilities, rights or operations of Yinglin Jinduren, including, without limitation, incurrence or assumption of any indebtedness, sale or purchase of any assets or rights, incurrence of any encumbrance on any of its assets or intellectual property rights in favor of a third party or transfer of any agreements relating to its business operation to any third party.  The term of this agreement is the maximum period of time permitted by law unless sooner terminated by any other agreements reached by all parties or upon a 30-day written notice from HK Dong Rong.  The term may be extended only upon HK Dong Rong’s written confirmation prior to the expiration of the agreement, with the extended term to be mutually agreed upon by the parties. We have been advised by our PRC counsel that there is no current PRC regulation mandating the maximum length of term permissible for such agreement.

Equity Pledge Agreement.   Under the equity pledge agreement between the owners of Yinglin Jinduren and HK Dong Rong, the stockholders of Yinglin Jinduren pledged all of their equity interests in Yinglin Jinduren to HK Dong Rong to guarantee Yinglin Jinduren’s performance of its obligations under the consulting services agreement.  If Yinglin Jinduren or its owners breach their respective contractual obligations, HK Dong Rong, as pledgee, will be entitled to certain rights, including, but not limited to, the right to vote with, control and sell the pledged equity interests.  The owners of Yinglin Jinduren also agreed, that upon occurrence of any event of default, HK Dong Rong shall be granted an exclusive, irrevocable power of attorney to take actions in the place and instead of the owners to carry out the security provisions of the equity pledge agreement, and take any action and execute any instrument as required by HK Dong Rong to accomplish the purposes of the equity pledge agreement.  The owners of Yinglin Jinduren agreed not to dispose of the pledged equity interests or take any actions that would prejudice HK Dong Rong’s interest.  The equity pledge agreement will expire two years from the fulfillment of Yinglin Jinduren’s obligations under the consulting services agreement. HK Dong Rong’s security interests over the pledged equity interests have not been registered with the local Administration for Industry and Commerce, as it is unclear whether registration is required under China’s Property Rights Law that became effective on October 1, 2007. Please see “We conduct our business through YinglinJinduren by means of contractual arrangements. If the Chinese government determines that these contractual arrangements do not comply with applicable regulations, our business could be adversely affected. If the PRC regulatory bodies determine that the agreements that establish the structure for operating our business in China do not comply with PRC regulatory restrictions on foreign investment, we could be subject to severe penalties. In addition, changes in such Chinese laws and regulations may materially and adversely affect our business” in the “Risk Factors” section beginning on page 3 of this prospectus.

Option Agreement.   Under the option agreement between the owners of Yinglin Jinduren and HK Dong Rong, the owners irrevocably granted HK Dong Rong or its designee an exclusive option to purchase, to the extent permitted under Chinese law, all or part of the equity interests in Yinglin Jinduren for the cost of the owners’ initial contributions to Yinglin Jinduren’s registered capital or the minimum amount of consideration permitted by applicable Chinese law.  HK Dong Rong or its designee has sole discretion to decide when to exercise the option, whether in part or in full.  The term of this agreement is ten years from January 1, 2006 and may be extended prior to its expiration by written agreement of the parties.

Proxy Agreement.   Pursuant to the proxy agreement between HK Dong Rong and the owners of Yinglin Jinduren, the owners agreed to irrevocably grant a designee of HK Dong Rong with the right to exercise the owners’ voting and other rights, including the rights to attend and vote at shareholders’ meetings (or by written consent in lieu of such meetings) in accordance with applicable laws and Yinglin Jinduren’s governing charters comprising of its Articles of Association (the “Articles”). Under the Articles, shareholders have the power to (a) approve the company’s business, budget, accounting, profit distribution and loss allocation plans, (b) appoint or remove the company’s senior executives and determine their compensations, (c) increase or decrease the company’s registered capital, (d) approve the issuance of debt obligations, (e) approve the company’s merger, division, dissolution or liquidation, and (f) amend the Articles. Additionally, a shareholder holding at least one tenth of the company’s total voting rights may call for a shareholders’ meeting. The proxy agreement may not be terminated without the unanimous consent of all parties, except that HK Dong Rong may terminate the proxy agreement with or without cause upon 30-day written notice to the owners.

As a result of the these contractual arrangements between HK Dong Rong and Yinglin Jinduren and its owners, we have the ability to effectively control Yinglin Jinduren’s daily operations and financial affairs, appoint senior executives and decide on all matters subject to owners’ approval. In other words, while Mr. Wu and his brother continue to own 100% Yinglin Jinduren’s equity interests, they have given us all of their rights as owners through these contractual arrangements. Accordingly, we are considered the primary beneficiary of Yinglin Jinduren and Yinglin Jinduren is deemed our variable interest entity (“VIE”).

However, control based on these contractual arrangements may ultimately not be as effective as direct ownership of Yinglin Jinduren, as we will need to enforce our rights through quasi-judicial proceeding in the event Yinglin Jinduren fails to perform its contractual obligations. In the event the outcome of such proceeding is unfavorable to us, we may effectively lose control over Yinglin Jinduren.  Please see “ Our contractual arrangements with Yinglin Jinduren and its owners as well as our ability to enforce our rights thereunder may not be as effective in providing control over Yinglin Jinduren as direct ownership ”  in the “Risk Factors” section beginning on page 3 of this prospectus.  Our chief executive officer, Mr. Qingqing Wu, holds approximately 51.72% of our issued and outstanding common stock as of the date of this prospectus and is also the majority owner of Yinglin Jinduren (65.91%), along with his brother Mr. Zhifan Wu (34.09%), who previously served on our board of directors. As such, we believe that our interests are aligned with those of Yinglin Jinduren and its owners. However, we cannot give assurance that such interests will always be aligned, or that we can effectively control Yinglin Jinduren if and when such interests are no longer aligned.  Please see “Management members of Yinglin Jinduren have potential conflicts of interest with us, which may adversely affect our business and your ability for recourse ” in the “Risk Factors” section beginning on page 3 of this prospectus.

 
32

 

Our Current Corporate Structure

 
 
 (1)
Through the Exchange Transaction, we became the parent company of PXPF, thereby enabling Yinglin Jinduren, through PXPF and HK Dong Rong, to raise capital in the United States. Our management includes: Mr. Qingqing Wu as Chairman and Chief Executive Officer, Mr. Bennet P. Tchaikovsky as Chief Financial Officer, and Dr. Jianwei Shen, Mr. Yuzhen Wu, Ms. Ying Zhang and Mr. Jianhui Wang as members of the board of directors. As of March 16, 2011: Mr. Qingqing Wu owns approximately 51.72% of our issued and outstanding common stock; Mr. Bennet P. Tchaikovsky owns 20,000 shares of common stock, and Dr. Jianwei Shen, Mr. Yuzhan Wu, Ms. Ying Zhang and Mr. Jianhui Wang do not own any shares of common stock.

 
 (2)
PXPF was formed by the owners of Yinglin Jinduren as a special purpose vehicle for raising capital outside of the PRC. The management of PXPF is comprised of Mr. Qingqing Wu as its sole Director.  We are the sole shareholder of PXPF.

 
 (3)
HK Dong Rong was formed by the owners of Yinglin Jinduren as a special purpose vehicle for raising capital outside of the PRC. The management of HK Dong Rong is comprised of Mr. Qingqing Wu as Chairman and Mr. Lileng Lin as Director. PXPF is the sole shareholder.

 
 (4)
HK Dong Rong controls Yinglin Jinduren through contractual arrangements designed to mimic equity ownership of Yinglin Jinduren by HK Dong Rong. These contracts include a consulting services agreement, operating agreement, equity pledge agreement, option agreement, and proxy agreement.

 
 (5)
The management of Yinglin Jinduren is comprised of Mr. Qingqing Wu as Chairman and Executive Director, and Mr. Zhifan Wu as Executive Director. Mr. Qingqing Wu and Mr. Zhifan Wu, who are brothers, hold 65.91% and 34.09% of the ownership interests of Yinglin Jinduren, respectively.

 
 (6)
The management of China Dong Rong is comprised of Mr. Qingqing Wu as Executive Director.
 
 
33

 

Planned Transfer to China Dong Rong

On November 19, 2009, HK Dong Rong incorporated Dong Rong (China) Co., Ltd. in the PRC as its wholly-owned subsidiary (“China Dong Rong”), with registered capital of $8 million.  China Dong Rong, which currently conducts no business activities, is deemed to be a wholly foreign owned enterprise, or WFOE, as its direct parent company, HK Dong Rong, is not a PRC company.  $4 million of the registered capital has been funded, with the balance to be funded within two years from the incorporation date or by November 19, 2011.  Under applicable PRC regulations and similar to Yinglin Jinduren (as discussed on page 31), China Dong Rong is also required to set aside at least 10% of its annual after-tax net profit, if any, to fund government-mandated statutory reserves until the balance of such reserves reaches 50% of its registered capital, or $4 million (based on its registered capital of $8 million).  The funds in the statutory reserves can only be used for certain purposes, such as to increase its registered capital or to eliminate its future losses as determined under PRC generally acceptable accounting principles.  China Dong Rong has just commenced operations at the end of the last quarter in 2010 in conjunction with the Planned Transfer, as discussed more fully below, and thus its statutory reserves have not yet been funded.

It is the Company’s present intention and that of the equity owners of Yinglin Jinduren to transfer the business operations currently conducted by Yinglin Jinduren to China Dong Rong by the second quarter of 2011, which is described below as the “Planned Transfer.”  The Company is also in the early stage of evaluating its options related to the sale of Yinglin Jinduren’s Manufacturing-related Assets (as defined below) because the Company now outsources all of its manufacturing needs, but no definitive plans have been established and approved for such sale.  However, the completion of the Planned Transfer is not dependent on the completion of the sale of the Manufacturing-related Assets and as described more fully below, the Company plans to complete the Planned Transfer prior to the completion of the sale of the Manufacturing-related Assets.  Further, there is no assurance that the Company will be able to complete the sale of all of the Manufacturing-related Assets.

The following must occur in order to complete the “Planned Transfer” to China Dong Rong: (a) the Company’s receipt of approval of its pending application with the PRC Trademark Office for the transfer of trademarks from Yinglin Jinduren to China Dong Rong; (b) the transfer of all sales contracts with Yinglin Jinduren’s current customers to China Dong Rong; and (c) the transfer of the assets currently owned by Yinglin Jinduren that are needed to conduct design, sales and marketing operations (the “Sales and Marketing Assets”) to China Dong Rong (collectively, the “Planned Transfer”).  With respect to the transfer of the trademarks, the timing for completion of such transfer is subject to receipt of the PRC Trademark Office’s approval, which the Company currently anticipates will occur in the second quarter of 2011 although there is no assurance that approval will be received by then as the PRC Trademark Office is still processing the transfer as of the date of this prospectus.  The Company also currently anticipates completing the transfer of all sales contracts of Yinglin Jinduren’s current customers during the second quarter of 2011; however, as the Company also wants to effectuate such transfers with minimal disruption to the customers and the Company’s business, some transfers may not occur by the end of the second quarter of 2011.  Until a sales contract is transferred to China Dong Rong, Yinglin Jinduren will continue to service such contract.  The Company anticipates it will transfer ownership of the Sales and Marketing Assets toward the end of second quarter of 2011 at the discretion of Mr. Wu, depending on the progress of the transfer of the sales contracts.  The transfer of the Sales and Marketing Assets will be accomplished through an Asset Transfer Agreement that will be executed between Yinglin Jinduren and China Dong Rong at the time such transfer is to occur, which currently is anticipated to occur by the end of the second quarter of 2011.  Any delay in completing any of the three above-described transfers would delay the completion of the Planned Transfer, and as explained more fully below, the Company’s termination of the contractual arrangements with Yinglin Jinduren would also be delayed.

The Company now outsources its manufacturing and thus it is also planning to sell to third parties all of the assets of Yinglin Jinduren, other than the Sales and Marketing Assets, (the “Manufacturing-related Assets”), because such assets are no longer required for the Company to operate its clothing business.  These Manufacturing-related Assets include manufacturing equipment, land use rights and the building housing its manufacturing facilities.  However, the Company is still in the early stages of planning and has yet to establish a formal, definitive plan for such sale.  Further, delays in completing this sale may occur because there is no assurance that the Company will be able to immediately find buyers for some or all of the Manufacturing-related Assets.  The sale of land use rights and the building may also be delayed because such sales are subject to PRC government approval, which may take up to at least three months after entry into definitive agreements with potential buyers which have yet to be identified.  Any proceeds from the sale of these Manufacturing-related Assets will be distributed to HK Dong Rong which, in turn, will transfer such proceeds into China Dong Rong.

As described above, there may be some delays preventing the completion of both the Planned Transfer and the sale of the Manufacturing-related Assets.  The Company intends to exit from the contractual arrangements with Yinglin Jinduren only after both the Planned Transfer and the sale of all of the Manufacturing-related Assets have been completed because the contractual arrangements allow the Company to maintain its control over Yinglin Jinduren and the Manufacturing-related Assets until the completion of the sale of such assets and the transfer of the sales proceeds back to China Dong Rong.  Prior to the completion of the Planned Transfer and the sale of the Manufacturing-related Assets, the Company can operate all of its business operations through both China Dong Rong and Yinglin Jinduren.  The Company has direct control, through its 100% equity ownership of China Dong Rong, over fulfillment of sales contracts that have been transferred over to China Dong Rong from Yinglin Jinduren.  Through the contractual arrangements, the Company will also continue to maintain control over Yinglin Jinduren, which will continue to fulfill any sales contracts that remain with Yinglin Jinduren until all such contracts have been transferred over to China Dong Rong.  After the Planned Transfer is completed but prior to the completion of the sale of the Manufacturing-related Assets, the Company will operate all of its business operations through China Dong Rong, while continuing to control Yinglin Jinduren and the Manufacturing-related Assets via the contractual arrangements.
 
The Planned Transfer to China Dong Rong will provide us with direct control over our operating assets, which we currently control through the contractual arrangements with Yinglin Jinduren and its owners.  As described above, the Company is still in the process of working on the Planned Transfer and thus such transfer has not been completed as of the date of this prospectus.

A description of our corporate structure (including diagram) if the Planned Transfer, the sale of Yinglin Jinduren’s Manufacturing-related Assets and the Company’s exit from the contractual arrangements with Yinglin Jinduren are completed, would be as follows:
 

 
34

 
 
 
(1)
Through the Exchange Transaction, we became the parent company of PXPF, thereby enabling us, through PXPF and HK Dong Rong, to raise capital in the United States.  Our management includes: Mr. Qingqing Wu as Chairman and Chief Executive Officer, Mr. Bennet P. Tchaikovsky as Chief Financial Officer, and Dr. Jianwei Shen, Mr. Yuzhen Wu, Ms. Ying Zhang and Mr. Jianhui Wang as members of the board of directors.  As of March 16, 2011: Mr. Qingqing Wu owns approximately 51.72% of our issued and outstanding common stock; Mr. Bennet P. Tchaikovsky owns 20,000 shares of common stock, and Dr. Jianwei Shen, Mr. Yuzhan Wu, Ms. Ying Zhang and Mr. Jianhui Wang do not own any shares of common stock.

 
(2)
PXPF was formed as a special purpose vehicle for raising capital outside of the PRC.  The management of PXPF is comprised of Mr. Qingqing Wu as its sole Director.  We are the sole shareholder of PXPF.

 
(3)
HK Dong Rong was formed as a special purpose vehicle for raising capital outside of the PRC.  The management of HK Dong Rong is comprised of Mr. Qingqing Wu as Chairman and Mr. Lileng Lin as Director.  PXPF is the sole shareholder of HK Dong Rong.

 
(4)
HK Dong Rong is the 100% equity owner of China Dong Rong, which is our operating business.  The management of China Dong Rong is comprised of Mr. Qingqing Wu as Executive Director.

As discussed above, the Company intends to exit from the contractual arrangements with Yinglin Jinduren after both the Planned Transfer and the sale of the Manufacturing-related Assets have been completed.  The completion of the Planned Transfer and the exit from the contractual arrangements on Yinglin Jinduren would have the following effects on the Company:

 
(a)
The Company would directly own and control our PRC business operations after such business operations are transferred to China Dong Rong, which is our wholly owned PRC subsidiary through our wholly owned holding subsidiaries PXPF and HK Dong Rong.

 
(b)
The potential conflicts of interest with Yinglin Jinduren’s management, as discussed in the risk factor on page 9 of this prospectus titled “Management members of Yinglin Jinduren have potential conflicts of interest with us, which may adversely affect our business and your ability for recourse” would no longer exist because the Company will exit from the contractual arrangements with Yinglin Jinduren after the completion of the Planned Transfer and the sale of the Manufacturing-related Assets, as such contractual arrangements would no longer be needed since the business operations now conducted by Yinglin Jinduren will have been transferred over to China Dong Rong.

 
(c)
The risks related to our current corporate structure as they relate to the contractual arrangements that are discussed in our risk factors starting on page 8 of this prospectus under the heading “Risks Related to Our Corporate Structure” including the applicable risks and limitations on our holding company’s ability to receive distributions from the Yinglin Jinduren would no longer apply because after the completion of the Planned Transfer and the sale of the Manufacturing-related Assets, the contractual arrangements will be terminated and such transfer would provide the Company direct control over its business operations and revenues through its control of China Dong Rong.  As discussed more fully above under the first risk factor on page 8 with the title starting with “We conduct our business through Yinglin Jinduren by means of contractual arrangements…”, the security interests on the equity interests of Yinglin Jinduren as granted under the equity pledge agreement have not been registered with the local Administration for Industry and Commerce.  After exiting the contractual arrangements including the equity pledge agreement, such security interests would no longer exist thus eliminating the need for such registration.  Because the Company is in the process of converting from contractual control to direct equity ownership and because it is uncertain as to whether such registration under the Property Rights Law is applicable to pre-2007 transactions like the equity pledge agreement, the Company will not be registering these security interests with the local Administration for Industry and Commerce.  The Company will continue operating under the contractual arrangements but without registration of such security interests until completion of the Planned Transfer to China Dong Rong, the sale of the Manufacturing-related Assets and its subsequent exit from the contractual arrangements with Yinglin Jinduren as discussed above.

 
(d)
Since the Planned Transfer does not involve a foreign currency exchange transaction, the Planned Transfer has no effect on the requirements for the Company and its officers in regards to SAFE regulations.
 
 
35

 

Financing Transactions

Preferred Shares Financing

In November 2009, we sold and issued an aggregate of 2,796,721 shares of our series A convertible preferred stock, par value $0.00001 per share (the “Preferred Shares”) to 57 accredited investors (collectively the “Preferred Shares Purchasers”) at $2.86 per share for an aggregate purchase price of approximately $8.00 million, and issued to them warrants (the “Warrants”) to purchase up to 1,398,360 shares of common stock, par value $0.00001 per share, for no additional consideration. The transaction was pursuant to a securities purchase agreement that we entered into with these selling security holders. There were two closings, the first on October 27, 2009, for gross proceeds of approximately $4.14 million (the “Initial Closing”), and the second on November 17, 2009, for gross proceeds of approximately $3.86 million (the “Final Closing”).

The securities purchase agreement includes customary representations and warranties by each party thereto.  We are required to file a registration statement to register the common stock underlying the Preferred Shares and Warrants with the SEC for resale by the Preferred Shares Purchasers within 30 days after the Final Closing and to have the registration statement declared effective within 90 days thereafter (or 150 days if the registration statement receives full review). If the registration statement is not timely filed or declared effective, we will be subject to liquidated damages of 1% of the Preferred Shares Purchasers’ aggregate purchase price per month, up to 10%, and pro-rated for partial periods. Additionally, we agreed to use our best efforts, within 180 days of the Final Closing, to: (a) hire a bilingual chief financial officer, (b) have a majority of independent directors on our board of directors, and (c) establish an audit, compensation and nominating committees. We further agreed to use our best efforts to cause our common stock to be qualified for listing on either the Nasdaq Capital Market or the NYSE Amex Equities (each a “Senior Listing”).

The Preferred Shares are convertible into common stock at $2.86 per share (subject to certain adjustments) at any time at the holder’s option, and will automatically convert upon a Senior Listing. The designation, rights, preferences and other terms and provisions of the Preferred Shares are set forth in the Certificate of Designation filed with the Nevada Secretary of State on October 23, 2009 (the “Certificate”). The Preferred Shares are entitled to participate in any dividends declared and paid on our common stock on an as-converted basis. Preferred Shares holders are also entitled to notice of any stockholders’ meeting and shall vote together with common stock holders on an as-converted basis.  Additionally, as long as any Preferred Shares are outstanding, we cannot, without the affirmative vote of the holders of a majority of the then outstanding shares of the Preferred Shares, (a) alter or change adversely the powers, preferences, or rights given to the Preferred Shares or alter or amend the Certificate, (b) authorize or create any class of stock ranking as to dividends, redemption or distribution of assets upon a Liquidation (as defined in Section 5 of the Certificate) senior to or otherwise pari passu with the Preferred Shares, (c) amend our charter documents in any manner that adversely affects any rights of the holders of Preferred Shares, (d) increase the number of authorized shares of Preferred Shares, or (e) enter into any agreement with respect to any of the foregoing. A description of the adjustments to the conversion price of the Preferred Shares is included in the section of this prospectus entitled “Description of Securities.”

Each Warrant entitles its holder to purchase one share of common stock at an exercise price of $3.43 per share (subject to certain adjustments) for a period of three years. We are also entitled to call the Warrants for cancellation of the Warrants if the volume-weighted average price of our common stock for 20 consecutive days exceeds 200% of the then applicable exercise price. A description of the adjustments to the exercise price of the Warrants is included in the section of this prospectus entitled “Description of Securities.”

The conversion price of the Preferred Shares and the exercise price of the Warrants are subject to anti-dilution adjustments in the event that we issue additional equity, equity linked securities or securities convertible into common stock at a purchase price less than the then applicable conversion or exercise price (other than shares issued to our officers, directors, employees or consultants pursuant to any stock or option plan duly adopted by a majority of our non-employee directors, or issued upon the conversion or exercise of any securities outstanding as of the Closing Date, or for acquisitions or strategic transactions approved a majority of our directors). The conversion and exercises prices are also subject to customary adjustments such as any stock dividend, stock split, reverse stock split or other similar transaction.

In connection with the securities purchase agreement, certain of our shareholders entered into a Lock-up Agreement (the “Lock-up Agreement”) whereby they agreed not to offer, sell, or other dispose of (a) 50% of their shares of common stock for nine months from the Initial Closing, and (b) the remaining 50% of their shares of common stock for twelve months from the Initial Closing.

In connection with the Financing, the Company agreed to place $150,000 of the gross proceeds from the Financing and Warrants to purchase up to 300,000 shares of common stock in an escrow account to be expended for investor relations, pursuant to the terms of an escrow agreement (the “Escrow Agreement”).

Gilford Securities Incorporated (the “Placement Agent”) acted as the placement agent in connection with the Financing. For its services, the Placement Agent received a cash fee equal to 1% of the aggregate purchase price of the Preferred Shares issued in the transaction. The Placement Agent also received 9,675 Preferred Shares and Warrants to purchase up to 15,912 shares of common stock.

Common Shares Financing

On December 1, 2009, we entered into a securities purchase agreement with 17 accredited investors (collectively the “Common Shares Purchasers”) pursuant to which we agreed to issue and sell up to 699,301 shares of our common stock (the “Common Shares”) to accredited investors at $2.86 per share for an aggregate purchase price of up to $2,000,000.86, and to issue Warrants to purchase up to 349,651 shares of our common stock for no additional consideration. At the closing on December 1, 2009, we issued to the Common Shares Purchasers 653,534 Common Shares and Warrants to purchase up to 326,767 shares of common stock for gross proceeds of approximately $1.87 million.

The securities purchase agreement includes customary representations and warranties by each party thereto. We are required to include the Common Shares and the common stock underlying the Warrants issued to the Common Shares Purchasers in the registration statement that we are filing for the Preferred Shares Purchasers, and to have the registration statement declared effective within 90 days of the filing of such registration statement (or 150 days if the registration statement receives full review). If the registration statement is not timely filed or declared effective, we will be subject to liquidated damages of 1% of the Common Shares Purchasers’ aggregate purchase price per month, up to 10%, and pro-rated for partial periods.

 
36

 
 
Other than their issuance date, the Warrants issued to the Common Shares Purchasers are identical to those issued to the Preferred Shares Purchasers, and entitle their holders to purchase one share of common stock at an exercise price of $3.43 per share (subject to certain adjustments) for a period of three years. A description of the adjustments to the exercise price of the Warrants is included in the section of this prospectus entitled “Description of Securities.”

As discussed above, the Company was required to register the shares of common stock issued and issuable in connection with both of the above-described 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 and as discussed in footnote 7 to the Company’s financial statements for the quarter ended September 30, 2010 on page F-13, the Company has accrued $691,000 as of September 30, 2010, for estimated liquidated damages it expects to be required to pay to the investors in the financings.  Pursuant to the agreements entered into in connection with the financings, the total amount of liquidated damages that the Company may be subject to is $987,000.  The Company plans to pay such penalty when this registration statement is declared effective.

Our Distribution Channel and Customers

We do not engage directly in retail sales of our products; rather, we sell our products to our independent distributors, each of whom is granted rights to market and sell our products in a defined market or territory through a distribution agreement. Presently, we have distribution agreements with 12 distributors as follows:

Distributors
 
Geographical
Location
 
Nine Months
ended September
30, 2010
Sales
(RMB)
   
Nine Months
ended September
30, 2010
Sales
(US$)*
   
% of Sales
 
C-002 of Mingzhu 100 Market
 
Zhejiang
   
53,268,285
     
7,836,000
     
16.0
%
Jingduren Store, Tianqiao District, Jinan
 
Shandong
   
42,245,614
     
6,214,000
     
12.6
%
Jinyang Commerce Co., Ltd.
 
Hubei
   
43,174,512
     
6,351,000
     
12.9
%
Jinduren Store, Shenhe District
 
Liaoning
   
29,821,246
     
4,387,000
     
8.9
%
Clothwork Apparel, Wanma Plaza
 
Jiangxi
   
27,864,213
     
4,099,000
     
8.4
%
Yunfang Jingduren Store
 
Yunnan
   
26,922,697
     
3,960,000
     
8.1
%
Jinduren Store in Duocai Xintiandi
 
Shaanxi
   
23,077,041
     
3,395,000
     
6.9
%
Yinji Fuchun Apparel
 
Henan
   
22,336,415
     
3,286,000
     
6.7
%
Nachun Li
 
Guangxi
   
22,417,099
     
3,298,000
     
6.7
%
Xinshiji Apparel City
 
Beijing
   
17,364,125
     
2,554,000
     
5.2
%
Jiaming Tang
 
Sichuan
   
14,295,431
     
2,103,000
     
4.3
%
Fujian Minhou Yonghui Business Company Ltd.
 
Fujian
   
11,031,914
     
1,622,000
     
3.3
%
 
* Based on an average exchange rate of 1RMB = 6.82 USD for the nine months ended September 30, 2010, as quoted on www.oanda.com.

As of November 3, 2010, our products were sold by our distributors at 526 V·LOV retail locations operated by our distributors throughout northern, central and southern China. These retail locations, also known as points of sales (“POS”), include counters, concessions, free standing stores and store-in-stores. We do not own or operate any V·LOV retail locations ourselves; the POS are established and owned by our distributors, each of whom operates its network of POS directly or through third-party retail operators. A geographical breakdown of V·LOV POS operated by our distributors as of November 3, 2010, is as follows:
 
Province /City :
 
Number of
POS
 
Hubei
   
63
 
Shandong
   
58
 
Zhejiang
   
91
 
Jiangxi
   
49
 
Yunnan
   
42
 
Henan
   
48
 
Shaanxi
   
42
 
Liaoning
   
44
 
Guangxi
   
24
 
Beijing
   
41
 
Sichuan
   
15
 
Fujian
   
9
 

We believe that our distribution model has enabled us to grow by leveraging our distributors’ regional retail expertise and economies of scale.  We provide retail policies and guidelines, training, advertising and marketing support as well as advertising subsidies to assist our distributors in the management and expansion of the V·LOV retail distribution network.  To achieve brand consistency, we have established management and operational guidelines for all our distributors to follow. These guidelines include, but are not limited to, inventory control, sales and pricing procedures, product and window display requirements and customer service standards. Although our distributorship agreements do not require our distributors to share POS sales information, our distributorship agreements require all POS to be V·LOV’s exclusive POS, and our sales and marketing staff travel throughout China to monitor and advise our distributors. Distributors that maintain at least a three-year good standing relationship with us enjoy 60 to 90 days of credit while new distributors usually pay us upon our receipt of their orders.  Our total bad debt expense has been less than 1% of revenue per year during the last three years.

Our goal is to provide stylish, fashion-forward clothing, to our target customer, the male Chinese consumer aged 20 to 45. To achieve this goal, we must maintain our brand image and make our brand more exclusive. We, along with our distributors, believe that certain types of POS (counters and concessions) lessen our overall brand value. Accordingly, since the beginning of this year, our distributors have closed over 200 counters and concessions. Conversely, we believe that certain POS, mainly stand-alone stores, enhance brand value. Thus, our distributors plan to open 30 stand-alone locations by the end of this year. To date, our distributors have been willing to make such investments because we have increased our marketing budget significantly as a percentage of our revenue and because of our ability to produce clothing that we believe is reflective of our brand image. Ultimately, our goal is for our distributors to move towards stand-alone stores as this will continue to enhance our brand value amongst our target consumer base.  

 
37

 

Each year, we hold two sales previews – typically in April/May and in November– to showcase our new designs to our distributors. At each sales preview, the distributors place orders for products based on designs that they believe will appeal to their specific geographical markets, and the products are manufactured and delivered to the distributors accordingly. We then monitor and oversee their operations of the V·LOV POS through our marketing and sales team.  Our marketing and sales team advises and works closely with our distributors on renovating and updating their V·LOV POS as and when necessary to achieve maximum performance and to enable them to expand their sales distribution network. Upon achieving performance targets, distributors may become eligible for advertising rebates from us pursuant to our distribution agreements. We also have other marketing activities, including the fashion show held recently in Beijing on October 26, 2010.

We do not force product upon our distributors. Rather, we create sample products for our distributors to select from. The distributors select the products that they believe will best sell at their POS. We believe that having the distributors select the products for their POS also decreases the likelihood of product returns substantially.

We are constantly looking for new distributors. We select distributors based on a range of criteria which we consider important for the operation of the overall V·LOV retail distribution network’s goal of providing cutting edge casual wear POS. We do not require our distributors to have any minimum number of years of relevant experience. We assess the suitability of a distributor candidate based on, but not limited to, the following: 
 
 
·
the relevant experience in the management and operation of casual wear retail stores;

 
·
the ability to develop and operate a network of retail stores in its designated sales region;

 
·
the perceived ability to meet our sales targets;

 
·
the suitability of its store location and size; and

 
·
overall creditworthiness.

We identify suitable distributors and enter into distributorship agreements, generally for a term of up to 12 months, renewable on a year to year basis upon the distributor meeting certain criteria.  We set guidelines for our distributors in respect of the location, store layout and product display of their V·LOV POS.  We have continued to upscale our product offerings to our distributors and have been working with our distributors to sell our products primarily via free standing store and store-in-store POS and not through counter and concession POS as we believe that free standing stores and store-in-stores strengthen our brand image with consumers. In this regard, our distributors have collectively closed more than 200 counters and concessions since March 31, 2010 in preparation of opening new free standing stores and store-in-stores. We anticipate that our distributors will open 30 stand alone stores that reflect VLOV’s upscale brand image by December 31, 2010. We allow our distributors to use authorized third party retail store operators to operate V·LOV POS.  Distributors must obtain our prior written approval before appointing such retail store operators.

We have contractual relationships only with our distributors and not with each POS. We require our distributors to implement, monitor, comply with and enforce our retail store guidelines on their POS. Except for the provision of advertising subsidies upon satisfying sales goals, we do not make any payment, give other sales incentives, or pay any fee to our distributors. Our distributors do not pay us any fee other than for their purchase of our products.

We generally assist our distributors with transferring or exchanging their unsold inventories with our other distributors in order to reduce their inventory levels, and at the end of each season, we may also allow our distributors to sell their remaining inventories at discounted pricing. As a result, we have historically had minimal returns from our distributors.

Our Suppliers and Manufacturers

Although we have our own manufacturing capacity at our Yinglin facility, the most important function of that facility is to support our research and development department in sample and prototype designs and other research and development activities. We presently outsource 100% of our manufacturing to independent third-party factories as a part of our overall sourcing strategy. Outsourcing work allows us to maximize production flexibility while managing capital expenditures and costs of maintaining what would otherwise be a massive workforce.

Historically, we have outsourced to two types of manufacturers: (1) sub-contractors, which require us to provide them with the raw materials for our products, and (2) O.E.M. manufacturers, which supply their own raw materials. Beginning in 2009, however, we shifted our outsourcing entirely to O.E.M. manufacturers.

Our outsourcing varies seasonally depending upon such factors as current factory capacity and customer demand. We currently work with 25 O.E.M. manufacturers. We do not execute agreements with them since there are many well-qualified clothing manufacturers to choose from and any of them can be readily replaced. However, we have established good working relationships with all of the manufacturers that we work with and do not expect to replace any of them. Prior to entering into a relationship with an O.E.M. manufacturer, we review and assess their product quality thoroughly. We generally agree to pay our O.E.M. manufacturers within 30-60 days after dispatching finished goods to our distributors. We typically place orders with our O.E.M. manufacturers when we receive orders from our distributors.

We select raw materials (including fabric, fasteners, thread, buttons, labels and related materials) directly from local fabric and accessory suppliers and identify imported specialty fabrics to meet specific distributor requirements. Our O.E.M. manufacturers purchase these raw materials from these suppliers according to our manufacturing and design specifications. We currently work with more than 20 suppliers. We do not execute agreements with them since there are no shortages of suppliers and materials to choose from, and any of them can be readily replaced. However, we have good working relationships with all of our current suppliers and do not expect to replace any of them.

For the three months ended September 30, 2010, no suppliers accounted for 10% or more of our total purchases of finished products and raw materials (for our own production).  For the nine months ended September 30, 2010, two suppliers accounted for 10% or more of our total purchases: Shishi City Jiexing Apparel Industry Development Co., Ltd. for 10.73% and Quanzhou Yashen Apparels Development Co., Ltd. for 10.13%. To date, we have not experienced any significant difficulty in purchasing raw materials or finished products.

 
38

 

Our Sales and Marketing

The strength of the V·LOV brand name and image is not only contributable to our ability to design and produce trendy and high quality apparel; it is also largely dependent on the skill of our sales and marketing team to promote our products to our target consumers. We currently have 44 sales and marketing staff. Our sales and marketing director is in charge of four departments: sales, marketing, strategic planning and logistics.

We actively market our brand. Our print ads appear in local newspapers and fashion magazines, in outdoor venues such as mass transit stations, exterior bus panels and billboards, and in indoor venues such as in-mall kiosks. We run television and radio ads, and look to promote our brand through sponsorship of movies, sporting events and television programs targeted at our customer demographic profile. We also have sales and marketing guidelines for all our distributors to follow at the V·LOV POS. These guidelines include pricing and sale procedures, product and window display requirements and customer service standards.

Our advertising expenses were approximately $1.37 million and $0.75 million for the three months ended September 30, 2010 and 2009, respectively, representing 65.2% and 55.1%  of our operating costs for these periods, respectively, and approximately $4.11 million and $2.19 million for the nine months ended September 30, 2010 and 2009, representing 51.1% and 49.0% of our operating costs for these periods, respectively.

We are always promoting our brand to new distributors to expand our distribution network. Management believes we can continue to benefit from our solid reputation for providing high quality goods in the markets where we have a presence, which provides us further opportunities to work with potentially desirable distributors. Our marketing strategy aims to attract distributors with the strongest branding experience within the strongest markets in order to effectively promote our brand. Referrals from existing distributors have been and continue to be a fruitful source of distributor candidates.

Production and Quality Control

We are committed to designing and manufacturing high quality garments.  We have implemented strict quality control and craft discipline systems to ensure that our products meet certain quality and safety standards, which include:

 
·
evaluate customers to make sure we produce middle to high-end products only;

 
·
evaluate suppliers to make sure the raw materials could meet our standards;

 
·
inspect the manufacturing process and fabric quality by our trained employees;

 
·
run routine checks on the fabrics for flammability, durability, chemical content, static properties, color retention and various other properties in our advanced testing center; and

 
·
audit the final products before products are delivered.

We require our O.E.M. manufacturers to comply with our manufacturing standards and specifications, and do not allow them to sub-contract our production orders without our prior written consent. We are actively involved throughout the entire manufacturing process: we inspect prototypes of each product prior to initial cutting, routinely perform continuous on-site inspections, subject finished products to ensure that they meet our rigorous quality standards and our specifications, and conduct a final inspection of finished products prior to shipment to ensure that they meet our high standards. Our policies and arrangements allow us to return defective products back to the relevant manufacturers.

In addition, we work closely with our distributors so that they understand our testing and inspection process.  Due to our strict quality control and testing process, we have not undergone any product or merchandise recalls, and we generally do not receive any significant requests by our distributors to return finished goods. Product returns have not resulted in material operating expenses historically.

 
39

 
  
Logistics and Inventory

O.E.M. manufacturers, unlike sub-contractors, ship finished products directly to our distributors after final quality inspection. As a result, we have experienced a steady drop in inventory of finished products since we began realigning our manufacturing needs toward O.E.M. manufacturers in September 2008.  Products that we make at our facility are typically delivered to our distributors by truck or local couriers.

Competition

The fashion apparel industry is quite competitive in China, including brand names and companies of all sizes, both within China and elsewhere in the world, many of which have greater financial and manufacturing resources than us.  Nevertheless, we have been in the high fashion apparel business since 2004 and believe that we have earned a reputation for producing high fashion and high quality products and at competitive prices, with excellent customer service.

We believe that our chief competitive strength is our in-depth and thorough understanding of our targeted customer groups in China. Mr. Qingqing Wu, our Chief Executive Officer, now leads our design team, a role previously occupied by Mr. Fengfei Zeng, whose contract with us expired in March 2010.  Under Mr. Wu’s leadership, and with inputs from our distributors, our design team formulates new design concepts by analyzing information on global and local fashion trends and market research.  Prototypes are reviewed by our distributors and marketing team and further refined based on evaluations carried out by marketing personnel before showcasing the final designs at our sales fairs.

Currently, there are several companies in China that we consider to be direct competitors, including both state-owned and private companies of different sizes.  Some of our local competitors include Fairwhale and Cabbeen.  International brands such as G-STAR and jack.jones are also competing in the same space as V·LOV.

Intellectual Properties and Licenses

We presently have 19 trademarks registered with the Trademark Bureau of the State Administration of Industry and Commerce of the PRC (the “PRC Trademark Office”), which are issued for a period of 10 years.

Additionally, we have trademark license contracts with Mr. Qingqing Wu, our chief executive officer, pursuant to which he has irrevocably and perpetually granted us, for no consideration, the right to use four trademarks currently registered in his name with the PRC Trademark Office.  These trademarks were intended to be transferred to Yinglin Jinduren for no consideration prior to the Exchange Transaction, and the license contracts were entered into because the transfers could not be timely completed. Mr. Wu is in the process of transferring the trademarks to us for no consideration, although such transfers have not been completed as of the date of this prospectus. To date, we have not used these trademarks.

Our trademark and other intellectual property rights are important to our success and competitive position.  We take all necessary precautions to protect our intellectual property.  Aside from registering our trademarks with the PRC Trademark Office to protect our intellectual property, our marketing team also diligently conducts market research and patrols our POS stores and other marketplaces to ensure that our intellectual property are not being violated.  In the event of any infringement upon our intellectual property rights, we will pursue all available legal rights and remedies.

Governmental Regulations

Fabric Safety

We are required to comply with central, provincial and local regulations governing fabric safety.   In order to address these compliance issues, we have established an advanced fabric testing center to ensure that our products meet certain quality and safety standards established by the governmental authorities.  Our testing center located in our Yinglin facility runs routine checks on our products for flammability, durability, chemical content, static properties, color retention and various other properties.  In addition, we work closely with our distributors so that they understand our testing and inspection process.

 
40

 

Enterprise Taxation

Pursuant to the PRC Enterprise Income Tax Law (the "New Tax Law") passed by the Tenth National People's Congress on 16 March 2007, the new PRC income tax rates for domestic and foreign enterprises are unified at 25% effective January 1, 2008. The enactment of the New Tax Law is not expected to have any significant financial effect on the amounts accrued in the balance sheet in respect of taxation payable and deferred taxation.

Value Added Tax

The Provisional Regulations of the People’s Republic of China Concerning Value Added Tax promulgated by the State Council came into effect on January 1, 1994, and was amended effective January 1, 2009.  Under these regulations, as amended, and the Implementing Rules of the Provisional Regulations of the People’s Republic of China Concerning Value Added Tax, value added tax is imposed on goods sold in or imported into the PRC and on processing, repair and replacement services provided within the PRC.

Value added tax payable in the PRC is charged on an aggregated basis at a rate of 13 or 17% (depending on the type of goods involved) on the full price collected for the goods sold or, in the case of taxable services provided, at a rate of 17% on the charges for the taxable services provided but excluding, in respect of both goods and services, any amount paid in respect of value added tax included in the price or charges, and less any deductible value added tax already paid by the taxpayer on purchases of goods and service in the same financial year.

Environmental Protection Regulations

In accordance with the Environmental Protection Law of the PRC adopted by the Standing Committee of the NPC on 26th December, 1989, the bureau of environmental protection of the State Council sets the national guidelines for the discharge of pollutants. The provincial and municipal governments of provinces, autonomous regions and municipalities may also set their own guidelines for the discharge of pollutants within their own provinces or districts in the event that the national guidelines are inadequate.

A company or enterprise which causes environmental pollution and discharges other polluting materials which endanger the public is required to implement environmental protection methods and procedures into its business operations. This may be achieved by setting up a system of accountability within the company’s business structure for environmental protection; adopting effective procedures to prevent environmental hazards such as waste gases, water and residues, dust powder, radioactive materials and noise arising from production, construction and other activities from polluting and endangering the environment. The environmental protection system and procedures should be implemented simultaneously with the commencement of and during the operation of construction, production and other activities undertaken by the company. Any company or enterprise which discharges environmental pollutants should report and register such discharge with relevant bureaus of environmental protection and pay any fines imposed for the discharge. A fee may also be imposed on the company for the cost of any work required to restore the environment to its original state. Companies which have caused severe pollution to the environment are required to restore the environment or remedy the effects of the pollution within a prescribed time limit.

If a company fails to report and/or register the environmental pollution caused by it, it will receive a warning or be penalized. Companies which fail to restore the environment or remedy the effects of the pollution within the prescribed time will be penalized or have their business licenses terminated. Companies or enterprises which have polluted and endangered the environment must bear the responsibility for remedying the danger and effects of the pollution, as well as to compensate any losses or damages suffered as a result of such environmental pollution.

Based on the present nature of our operations, we do not believe that environmental laws and the cost of compliance with those laws have or will have a material impact on us or our operations.

 
41

 

Foreign Exchange Controls
 
Pursuant to the Foreign Currency Administration Rules promulgated in 1996, as amended and various regulations issued by the State Administration of Foreign Exchange (“SAFE”), and other relevant PRC government authorities, RMB is convertible without prior approval from SAFE only to the extent of current account items, such as trade-related receipts and payments, interest and dividends and after complying with certain procedural requirements. Capital account items, such as direct equity investments, loans and repatriation of investments, require the prior approval from the SAFE or its local counterpart for conversion of RMB into a foreign currency, such as U.S. dollars, and remittance of the foreign currency outside the PRC.

Payments for transactions that take place within the PRC must be made in RMB. Foreign-invested enterprises may retain foreign exchange in accounts with designated foreign exchange banks subject to limitations set by the SAFE or its local counterpart. Unless otherwise approved, domestic enterprises must convert all of their foreign currency receipts into RMB.

Pursuant to the SAFE’s Notice on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Corporate Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles, or Circular No. 75, issued on October 21, 2005, (i) a PRC citizen residing in the PRC, or PRC resident, shall register with the local branch of the SAFE before it establishes or controls an overseas special purpose vehicle, or overseas SPV, for the purpose of overseas equity financing (including convertible debts financing); (ii) when a PRC resident contributes the assets of or its equity interests in a domestic enterprise into an overseas SPV, or engages in overseas financing after contributing assets or equity interests to an overseas SPV, such PRC resident shall register his or her interest in the overseas SPV and the change thereof with the local branch of the SAFE; and (iii) when the overseas SPV undergoes a material event outside of China, such as change in share capital or merger and acquisition, the PRC resident shall, within 30 days from the occurrence of such event, register such change with the local branch of the SAFE. On May 29, 2007, the SAFE issued relevant guidance to its local branches for the implementation of Circular No. 75. This guidance standardizes more specific and stringent supervision on the registration requirement relating to Circular No. 75 and further requires PRC residents holding any equity interests or options in SPVs to register with the SAFE. Failure to comply with such registration requirement may result in liability under PRC laws for evasion of applicable foreign exchange restrictions.

Although Mr. Qingqing Wu, our principal shareholder, resides in the PRC, he is a foreign national. As such, he has not registered with the local branch of the SAFE under Circular No. 75.

Seasonality

Chinese consumers’ spending behaviors are typically stable year to year; they are typically affected by seasonal shopping patterns within the year.  Sales are particularly higher before the Chinese New Year holiday in early spring, the Labor Day holiday in early May, the summer months and the National Day holiday in early October.

We have typically experienced seasonal fluctuations in sales volume due to the seasonal fluctuations experienced by the majority of our customers.  These seasonal fluctuations typically result in sales increases in the first and second quarters and sales decreases in the third and fourth quarters of each year.  The mix of product sales may vary considerably from time to time as a result of changes in seasonal and geographic demand for particular types of casual wear and accessories.  In addition, unexpected and abnormal changes in climate may affect sales of our products that are timed for release during a particular season.

 
42

 

Fluctuations in our sales may also result from a number of other factors including:

 
·
the timing of our competitors’ launch of new products;

 
·
consumer acceptance of our new and existing products;

 
·
changes in the overall clothing industry growth rates;

 
·
economic and demographic conditions that affect consumer spending and retail sales;

 
·
the mix of products ordered by our distributors;

 
·
the timing of the placement and delivery of distributor orders; and

 
·
variation in the expenditure necessary to support our business.

As a result, we believe that comparisons of our operating results between any interim periods may not be meaningful and that these comparisons may not be an accurate indicator of our future performance.

Employees

The following table sets forth the number of our employees for each of our areas of operations and as a percentage of our total workforce as of December 31, 2009:

   
Number of
Employees
   
% of Employees
 
Production Development
   
253
     
66.23
%
Sales & Marketing and Quality Assurance
   
53
     
13.87
%
Production Management
   
24
     
6.28
%
Purchasing
   
6
     
1.57
%
Finance
   
9
     
2.36
%
Management & Administration
   
14
     
3.67
%
Research & Development
   
23
     
6.02
%
                 
TOTAL
   
382
     
100
%

We believe we are in full compliance with Chinese labor laws and regulations and are committed to providing safe and comfortable working conditions and accommodations for our employees.

Labor Costs. Because garment manufacturing is a labor-intensive business, we outsource most of our manufacturing to contract manufacturers. We rely on in-house skilled labor and talents to design, develop and sell our products.  Generally, we offer one to three months of training to new workers to better understand our brand and improve their relevant skills during the training period.  Management expects that our access to reasonably priced and competent labor will continue into the foreseeable future.

Working Conditions and Employee Benefits.  We believe in the importance of maintaining our social responsibilities, and we are committed to providing employees with a safe, clean, comfortable working environment and accommodations. Our employees also are entitled to time off during public holidays. In addition, we frequently monitor contract manufacturers’ working conditions to ensure their compliance with related labor laws and regulations. We believe we are in full compliance with our obligations to provide pension benefits to our workers, as mandated by the PRC government. We strictly comply with the Chinese labor laws and regulations, and offer reasonable wages, life insurance and medical insurance to our workers.

Compliance with Environmental Laws

Based on the present nature of our operations, we do not believe that environmental laws and the cost of compliance with those laws have or will have a material impact on us or our operations.

 
43

 

Offices

Our principal executive office is located at 11/F., Xiamen Guanyin Shan International Commercial Operation Centre, A3-2124, Hubin Bei Road, Siming District, Xiamen, Fujian Province, China. Our main telephone number is +86-0592-2345999 and fax number is +86-0592-2345777.

DESCRIPTION OF PROPERT Y

Our offices and our facilities are located in Fujian Province, China. The table below provides a general description of our current facilities:
 
Location
  
Principal Activities
  
Area (sq. meters)
  
Lease Expiration Date
11/F., Xiamen Guanyin Shan International
Commercial Operation Centre, A3-2 124
Hubin Bei Road, Siming District, Xiamen,
Fujian Province, PRC
 
Marketing, R&D, accounting and finance
 
1,376
 
 October 8, 2012
Yinglin Dongpu Village, Yilin
Town, Jinjiang City, Fujian Province,
PRC 362200
 
Manufacturing and distribution
 
2,859
 
N/A (property owned by V·LOV)
 

We lease our Xiamen office under a property lease agreement that expires October 7, 2012, with monthly lease amount of RMB 39,902.  We previously leased two offices in Fujian Province, one in Shishi City for our marketing and R&D, and the other in Quanzhou City for our accounting and finance. Both of these leases expired and have not been renewed. Instead, all of the functions previously carried out at these offices have been consolidated into our Xiamen office. Rental expense was $36,000 and $66,000 during 2008 and 2009 respectively. We believe that our existing facilities are well maintained and in good operating condition.

SUMMARY FINANCIAL DATA

The summary financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes included elsewhere in this prospectus.  We derived the financial data as of and for the nine months ended September 30, 2010 and 2009 from our unaudited consolidated financial statements included elsewhere in this prospectus, and as of and for years ended December 31, 2009 and 2008, from our audited financial statements included in this prospectus.  The historical results are not necessarily indicative of the results to be expected for any future period. All monetary amounts are expressed in U.S. dollars and, except per share data, are in thousands.
 
   
Nine Months Ended
September 30,
   
Year Ended
December 31,
 
   
2010
   
2009
   
2009
   
2008
 
                         
Income Statement Data:
                       
Net Sales
 
$
49,105
   
$
45,823
   
$
64,343
   
$
51,867
 
Cost of Sales
   
29,918
     
29,316
     
41,080
     
33,316
 
Gross Profit
   
19,187
     
16,507
     
23,263
     
18,551
 
Total Operating Expenses
   
8,044
     
4,473
     
9,694
     
6,249
 
Operating Income
   
11,143
     
12,034
     
13,569
     
12,302
 
Total Other Income (Expense)
   
827
     
(29
)
   
982
     
(44
)
Income Before Income Taxes
   
11,970
     
12,005
     
14,551
     
12,258
 
Income Tax Provision
   
2,992
     
3,183
     
4,106
     
3,065
 
Net Income
 
$
8,978
   
$
8,822
   
$
10,445
   
$
9,193
 
                                 
Net income attributable to common shareholders
   
8,127
     
8,822
     
10,445
     
9,193
 
Net income attributable to preferred shareholders
   
851
     
-
     
-
     
-
 
Net income
   
8,978
     
8,822
     
10,445
     
9,193
 
                                 
Earnings per share:
                               
Basic- common
 
$
0.47
   
$
0.56
   
$
0.41
   
$
0.63
 
Diluted
 
$
0.47
   
$
0.56
   
$
0.40
   
$
0.63
 
Weighted average shares outstanding:
                               
Basic
   
17,199,755
     
15,773,187
     
15,898,584
     
14,560,000
 
Diluted
   
19,001,350
     
15,773,187
     
15,949,034
     
14,560,000
 

 
44

 
 
   
As of
September 30,
   
As of December 31,
 
   
2010
   
2009
   
2008
 
Balance Sheet Data:
                 
Cash and Cash Equivalents
 
$
7,149
   
$
11,036
   
$
2,863
 
Working Capital
 
$
26,400
   
$
16,815
   
$
6,230
 
Total Assets
 
$
35,593
   
$
27,241
   
$
12,647
 
Total Liabilities
 
$
8,062
   
$
9,272
   
$
5,078
 
Total Shareholders’ Equity
 
$
27,531
   
$
17,969
   
$
7,569
 

 
45

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the results of our operations and financial condition for the three and nine months ended September 30, 2010 and 2009, and for the fiscal years ended December 31, 2009 and 2008, should be read in conjunction with the Summary Financial Data, our  financial statements, and the notes to those financial statements that are included elsewhere in this prospectus. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors, Cautionary Notice Regarding Forward-Looking Statements and Business sections in this prospectus. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements. Although we believe the expectations expressed in these forward-looking statements are based on reasonable assumptions within the bounds of our knowledge of our business, our actual results could differ materially from those discussed in these statements. Factors that could contribute to such differences include, but are not limited to, those discussed in the “Risk Factors” section of this report. We undertake no obligation to update publicly any forward-looking statements for any reason even if new information becomes available or other events occur in the future.

Overview

We design, develop, manufacture, distribute and sell casual apparel and clothing products in the PRC targeted toward middle-class Chinese men under the brand name “V·LOV”.  We sell our products to our independent distributors, each of whom is granted rights to market and sell our products in a defined market or territory.  As of September 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 November 3, 2010, our distributors owned and operated 526 points of sales, or POS, across the PRC, including counters, concessions and free standing stores and store-in-stores.  We maintain and exercise control over advertising and marketing activities from our headquarters in Fujian, China, where we set the tone for integrity, consistency and direction of the V·LOV brand image throughout China.

Our goal is to provide stylish, fashion-forward clothing, to our target customer, the male Chinese consumer aged 20 to 45. To achieve this goal, we must maintain our brand image and make our brand more exclusive. We, along with our distributors, believe that certain types of POS (counters and concessions) lessen our overall brand value. Accordingly, since the beginning of this year, our distributors have closed over 200 counters and concessions. Conversely, we believe that certain POS, mainly stand-alone stores, enhance brand value. Thus, our distributors plan to open 30 stand-alone locations by the end of this year. To date, our distributors have been willing to make such investments because we have increased our marketing budget significantly as a percentage of our revenue and because of our ability to produce clothing that we believe is reflective of our brand image. Ultimately, our goal is for our distributors to move towards stand-alone stores as this will continue to enhance our brand value amongst our target consumer base.

All of our business operations are carried out by our variable interest entity Jinjiang Yinglin Jinduren Fashion Limited (“Yinglin Jinduren”), which we control through contractual arrangements between Yinglin Jinduren and our wholly-owned subsidiary Dong Rong Capital Investment Limited (“HK Dong Rong”), a Hong Kong company.  Through these contractual arrangements, we have the ability to control Yinglin Jinduren’s daily operations and financial affairs, appoint its senior executives and approve all matters requiring shareholder approval, and receive a fee equal to Yinglin Jinduren’s net income. As a result of these contractual arrangements, we are considered the primary beneficiary of Yinglin Jinduren’s operations. Accordingly, we consolidate Yinglin Jinduren’s results, assets and liabilities in our financial statements.  Mr. Qingqing Wu, our Chief Executive Officer, and his brother, Mr. Zhifan Wu, hold 65.91% and 34.09%, respectively, of the ownership interests of Yinglin Jinduren.
 
We also have a wholly-owned PRC subsidiary through HK Dong Rong called Dong Rong (China) Co., Ltd. (“China Dong Rong”). As discussed more fully above on page 34, it is our present 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 and sell Yinglin Jinduren’s manufacturing-related assets as the Company now outsources its product manufacturing. The Company intends to exit from the contractual arrangements with Yinglin Jinduren at the time of or immediately following the completion of the planned transfer and the sale of the manufacturing-related assets, although no definitive plans have been established and approved for such sale.  The Company is still in the process of working on the planned transfer and thus such transfer has not been completed and China Dong Rong has just recently commenced conducting business activities.
 
Critical Accounting Policies

Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements that have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported net sales and expenses during the reporting periods.  On an ongoing basis, we evaluate our estimates and assumptions.  We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

 
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Our significant accounting policies are described in Note 1 to our consolidated financial statements.  Our critical accounting policies are those where we have made the most difficult, subjective or complex judgments in making estimates, and/or where these estimates can significantly impact our financial results under different assumptions and conditions. Our critical accounting policies are:

Basis of presentation and consolidation

As discussed above and in Note 1 to our consolidated financial statements, our operations are conducted through Yinglin Jinduren, a PRC company in which the equity interests are held by Mr. Qingqing Wu, our chief executive officer, and his brother Mr. Zhifan Wu. Through contractual arrangements, we control the daily operations of Yinglin Jinduren, as well as all matters requiring shareholder approval.  We receive a fee equal to Yinglin Jinduren’s net income and, in the event it were to incur losses, would be expected to absorb those losses through our inability to collect the accumulated net income due to us.  As a result, we are considered to be the primary beneficiary of Yinglin Jinduren’s operations and accordingly we consolidate its assets, liabilities and results of operations in our consolidated financial statements.  We have no operations other than those conducted through Yinglin Jinduren.

Revenue Recognition

A majority of our products are manufactured on our behalf by third parties, based on orders for our products received from customers. We are responsible for product design, product specification, pricing to the customer, the choice of third party manufacturer, product quality and credit risk associated with the customer receivable. As such, the Company acts as a principal, not as an agent, and records revenues on a gross basis.

We recognize revenues in accordance with FASB ASC 605-10-S99-1 when (a) the price to the customer is fixed or determinable, (b) persuasive evidence of an arrangement exists, (c) delivery has occurred and (d) collectability of the resulting receivable is reasonably assured. Revenue from the sales of goods is recognized on the transfer of significant risks and rewards of ownership, which generally coincides with the time when the goods are delivered to the carrier designated by the customer and title passes to the customer.

Accounts receivable

Accounts receivable, which are unsecured, are stated at the amount we expect to collect. We continuously monitor collections and payments from our customers (our distributors) and maintain a provision for estimated credit losses based upon historical experience and any specific customer collection issues that have been identified. Historically, our credit losses have not been significant and within our expectations; however, we cannot guarantee that we will continue to experience the same credit loss rates that have been experienced in the past.

Our accounts receivable aging was as follows for the periods below (amounts in thousands):
 
From Date of Invoice to Customer:
 
September 30,
2010
   
December 31, 2009
 
0-30 days
 
$
8,853
   
$
6,914
 
31-60 days
   
2,308
     
2,190
 
61-90 days
   
4,178
     
-
 
91-120 days
   
2,600
     
-
 
121 days and above
   
-
     
-
 
Allowance for bad debts
   
-
     
-
 
Total Accounts Receivable
 
$
17,939
   
$
9,104
 
 
On average, we collect our receivables within 90 days. Our ability to collect is attributed to the steps that we take prior to extending credit to our distributors as discussed above. If we are having difficulty collecting from a distributor, we take the following steps: cease existing shipments to the distributor, visit the distributor to request payment on past due invoice, and if necessary, take legal recourse. If all of these steps are unsuccessful, management would then determine whether or not the receivable should be written off.

All receivables categorized over 61 days as of September 30, 2010 were collected as of November 2, 2010.

Other receivables were $109,000 and $87,000 as of September 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 September 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 September 30, 2010, the warrants that we issued in connection with sales of our series A convertible preferred stock in November 2009 and our common stock in December 2009 are accounted for as derivative instrument liabilities, We determine the fair value of these instruments using a binomial option pricing model. That model requires the use of a number of assumptions, including our expected dividend yield and the expected volatility of our common stock price over the life of the instruments. Because of the limited trading history for our common stock, we have estimated the future volatility of our common stock price based on the historical experience of other entities considered comparable to us. The identification of, and accounting for, derivative instrumen