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

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

OR

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to _________________

Commission File Number 000-52040

OMNIALUO, INC.
(Name of Small Business Issuer in Its Charter)

State of Delaware
 
88-1581799
(State of Incorporation)
  
(IRS Employer I.D. Number)

Room 101, Building E6
Huaqiaocheng East Industrial Park
Nashan District
Shenzhen 518053
The People’s Republic of China
(Address of principal executive offices)

(+86) 755 - 8245 - 1808
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x     No ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes ¨   No x

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. (Check one):

Large accelerated filer ¨
 
Accelerated filer ¨
Non-accelerated filer ¨  (Do not check if a smaller reporting company)
  
Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨   No x

The number of shares outstanding of the issuer’s common stock, $0.01 par value per share, as of November 14, 2011, was 22,840,000.
 
 
 

 

OMNIALUO, INC.

INDEX

TABLE OF CONTENTS

     
Page
 
Forward-Looking Statements
 
1
       
Part I.
Financial Information
 
2
Item 1.
Financial Statements
 
2
 
(a) Condensed Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 30, 2011 and 2010 (Unaudited)
 
4
 
(b) Condensed Consolidated Balance Sheets as of September 30, 2011 (Unaudited) and December 31, 2010
 
5
 
(c) Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010 (Unaudited)
 
6
 
(d) Notes to Condensed Consolidated Financial Statements for the Three and Nine Months Ended September 30, 2011 and 2010 (Unaudited)
 
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
21
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
25
Item 4.
Controls and Procedures
 
25
       
Part II.
Other Information
 
26
Item 1.
Legal Proceedings
  26
Item 1A.    
Risk Factors
 
26
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
26
Item 3.
Defaults Upon Senior Securities
 
26
Item 4.
Reserved
 
26
Item 5.
Other Information
 
26
Item 6.
Exhibits
 
26
Signatures
   
27
       
Exhibits
   
 
       
Certifications
     
 
 
 

 

OMNIALUO, INC.

FORWARD-LOOKING STATEMENTS

The discussions of the business and activities of OmniaLuo, Inc. (together with its direct and indirect subsidiaries, “we,” “us,” “our” or “the Company”) set forth in this Form 10-Q and in other past and future reports and announcements by the Company may contain forward-looking statements and assumptions regarding future activities and results of operations of the Company.  You can identify these statements by the fact that they do not relate strictly to historical or current facts. Forward-looking statements involve risks and uncertainties. Forward-looking statements include statements regarding, among other things, (a) our projected sales, profitability, and cash flows, (b) our growth strategies, (c) anticipated trends in our industry, (d) our future financing plans and (e) our anticipated needs for working capital. They are generally identifiable by use of the words "may," "will," "should," "anticipate," "estimate," "plans," “potential," "projects," "continuing," "ongoing," "expects," "management believes," "we believe," "we intend" or the negative of these words or other variations on these words or comparable terminology. These statements may be found under "Management's Discussion and Analysis of Financial Condition and Results of Operations” as well as in this Form 10-Q generally. In particular, these include statements relating to future actions, prospective products or product approvals, future performance or results of current and anticipated products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results.

Any or all of our forward-looking statements in this report may turn out to be inaccurate. They can be affected by inaccurate assumptions we might make or by known or unknown risks or uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially as a result of various factors, including, without limitation, the risks outlined under "Risk Factors" and matters described in the most recent Form 10-K filed by the Company. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur. You should not place undue reliance on these forward-looking statements.

We undertake no obligation to update forward-looking statements to reflect subsequent events, changed circumstances, or the occurrence of unanticipated events.
 
 
1

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
OmniaLuo, Inc.

Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2011 and 2010
(Stated in US dollars)
 
 
2

 

OmniaLuo, Inc.
Condensed Consolidated Financial Statements
For the three and nine months ended Septembeter 30, 2011 and 2010
Index to Condensed Consolidated Financial Statements

   
Pages
     
Condensed Consolidated Statements of Income and Comprehensive Income
 
4
     
Condensed Consolidated Balance Sheets
 
5
     
Condensed Consolidated Statements of Cash Flows
 
6
     
Notes to Condensed Consolidated Financial Statements
 
7-20
 
 
3

 

OmniaLuo, Inc.
Condensed Consolidated Statements of Income and Comprehensive Income
For the three and nine months ended September 30, 2011 and 2010
(Stated in US Dollars)

   
Three months ended
September 30,
(Unaudited)
   
Nine months ended
September 30,
(Unaudited)
 
   
2011
   
2010
   
2011
   
2010
 
                         
Revenues
  $ 2,971,997     $ 1,984,899     $ 7,310,353     $ 6,054,664  
Cost of revenues
    (1,253,551 )     (794,814 )     (2,808,179 )     (2,333,380 )
                                 
Gross profit
    1,718,446       1,190,085       4,502,174       3,721,284  
                                 
Expenses
                               
General and administrative expenses
    551,056       551,640       1,766,385       1,495,518  
Depreciation
    75,147       62,169       221,331       207,580  
Selling and marketing expenses
    566,810       482,874       1,841,425       1,550,967  
                                 
      1,193,013       1,096,683       3,829,141       3,254,065  
                                 
Income from operations
    525,433       93,402       673,033       467,219  
Interest income
    30,743       3,995       46,554       5,896  
Other income
    81,500       79,906       189,557       101,397  
Finance costs
    (71,734 )     (52,033 )     (116,389 )     (138,887 )
                                 
Income before income taxes
    565,942       125,270       792,755       435,625  
                                 
Income taxes - Note 4
    (72,490 )     (44,914 )     (142,172 )     (97,570 )
                                 
Net income
  $ 493,452     $ 80,356     $ 650,583     $ 338,055  
                                 
Other comprehensive income
                                 
Foreign currency translation adjustments
    71,472       99,631       197,585       107,627  
                                 
Comprehensive income
  $ 564,924     $ 179,987     $ 848,168     $ 445,682  
                                 
Earnings per ordinary share - Note 5
                               
- Basic and diluted
  $ 0.02     $ 0.00     $ 0.03     $ 0.01  
                                 
Weighted average number of shares outstanding
                               
- Basic and diluted
    22,840,000       22,840,000       22,840,000       22,840,000  

See the accompanying notes to condensed consolidated financial statements
 
 
4

 

OmniaLuo, Inc.
Condensed Consolidated Balance Sheets
As of September 30, 2011 and December 31, 2010
(Stated in US Dollars)

   
As of
   
As of
 
   
September 30,
2011
   
December 31,
2010
 
   
(Unaudited)
       
ASSETS
           
Current assets
           
Cash and cash equivalents
  $ 576,154     $ 1,629,530  
Trade receivables, net - Note 6
    2,370,012       1,511,102  
Inventories, net - Note 7
    4,509,648       4,063,135  
Loan to a related party - Note 8
    929,450       -  
Other receivables and deposits - Note 9
    5,076,161       3,862,525  
Restricted cash - Note12
    468,630       455,100  
Deferred tax asset
    36,011       44,054  
                 
Total current assets
    13,966,066       11,565,446  
Property and equipment, net - Note 10
    413,504       594,545  
                 
TOTAL ASSETS
  $ 14,379,570     $ 12,159,991  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
LIABILITIES
               
Current liabilities
               
Short-term secured bank loan - Note 12
  $ 1,398,080     $ 986,050  
Current maturities of long-term secured bank loan - Note 13
    1,077,849       280,645  
Trade payables
    1,495,413       1,387,804  
Loan from a stockholder - Note 14
    242,220       8,005  
Other payables, deposits received and accrued expenses - Note 15
    3,375,424       2,750,464  
Income tax payable
    128,348       -  
                 
Total current liabilities
    7,717,334       5,412,968  
Long-term secured bank loan - Note 13
    -       932,955  
                 
TOTAL LIABILITIES
    7,717,334       6,345,923  
                 
COMMITMENTS AND CONTINGENCIES - Note 17
               
                 
STOCKHOLDERS’ EQUITY
               
Common stock: par value $0.01 per share
               
Authorized 40,000,000 shares; issued and outstanding
               
22,840,000 shares
    228,400       228,400  
Preferred stock: par value $0.01 per share
               
Authorized 10,000,000 shares; none issued and outstanding
    -       -  
Additional paid-in capital
    9,280,977       9,280,977  
Statutory reserve
    568,115       568,115  
Accumulated other comprehensive income
    1,232,583       1,034,998  
Accumulated deficit
    (4,647,839 )     (5,298,422 )
                 
TOTAL STOCKHOLDERS’ EQUITY
    6,662,236       5,814,068  
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 14,379,570     $ 12,159,991  

See the accompanying notes to condensed consolidated financial statements
 
 
5

 

OmniaLuo, Inc.
Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 2011 and 2010
(Stated in US Dollars)

   
Nine months ended September 30,
(Unaudited)
 
   
2011
   
2010
 
Cash flows from operating activities
           
Net income
  $ 650,583     $ 338,055  
Adjustments to reconcile net income to net cash used in operating activities:
               
Depreciation
    221,331       207,580  
Income taxes
    9,203       97,570  
Allowance for doubtful accounts
    43,729       -  
Loss on disposal of property and equipment
    -       373  
Share-based compensation
    -       63,083  
Investment income
    (1,826 )     (1,231 )
Changes in operating assets and liabilities
               
Trade receivables
    (844,656 )     (428,995 )
Inventories
    (320,492 )     (1,218,194 )
Other receivables and deposits
    (1,081,176 )     (87,496 )
Trade payables
    65,286       934,676  
Other payables, deposits received and accrued expenses
    548,735       (893,460 )
Income tax payable
    126,289       -  
                 
Net cash flows used in operating activities
    (582,994 )     (988,039 )
                 
Cash flows from investing activities
               
Acquisition of short-term investments
    (799,261 )     (1,171,671 )
Proceeds from disposal of short-term investments
    801,087       732,783  
Proceeds from disposal of property and equipment
    -       57  
Deposit for potential acquisition
    -       (293,410 )
Acquisition of property and equipment
    (25,802 )     (16,069 )
Loan to a related party
    (1,075,928 )     -  
Repayment of loan to a related party
    161,389       -  
Loan to a third party
    (62,504 )     -  
Repayment of loan to a related party
    62,504       -  
                 
Net cash flows used in investing activities
    (938,515 )     (748,310 )
                 
Cash flows from financing activities
               
Proceeds from bank loans
    1,537,040       3,374,215  
Repayment of bank loans
    (1,329,540 )     (1,092,952 )
Loan from a stockholder
    230,471       157  
Increase in restricted cash
    -       (440,115 )
                 
Net cash flows provided by financing activities
    437,971       1,841,305  
                 
Effect of foreign currency translation on cash and cash equivalents
    30,162       16,039  
                 
Net (decrease) increase in cash and cash equivalents
    (1,053,376 )     120,995  
Cash and cash equivalents - beginning of period
    1,629,530       869,495  
                 
Cash and cash equivalents - end of period
  $ 576,154     $ 990,490  
                 
Supplemental disclosures for cash flow information
               
Interest paid
  $ 117,271     $ 74,331  
Income taxes paid
  $ 6,681     $ -  
 
 
 
 
 
See the accompanying notes to condensed consolidated financial statements
 
 
6

 

OmniaLuo, Inc.
Notes to Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2011 and 2010 (Unaudited)
(Stated in US Dollars)

1.
Corporation information

 
(a)
OmniaLuo, Inc. (the “Company”) was incorporated in the State of Delaware on March 7, 2001 under the name of Wentworth II, Inc. for the purpose of pursuing a business combination. On November 16, 2007, the Company changed its name to OmniaLuo, Inc.

The Company’s common stock began trading on the Over-the-Counter Bulletin Board under the ticker symbol “OLOU” on January 10, 2008.

 
(b)
On October 9, 2007, the Company entered into a share exchange agreement with Omnia Luo Group Limited (“Omnia BVI”), the shareholders of Omnia BVI and certain of the then Company’s principal stockholders. Pursuant to the share exchange agreement, the Company agreed to issue to the shareholders of Omnia BVI 16,800,000 shares of the Company’s common stock in exchange for all of the then issued and outstanding shares of Omnia BVI.

The aforesaid share exchange transaction was completed on October 9, 2007 and thereafter Omnia BVI became a wholly-owned subsidiary of the Company and the former shareholders of Omnia BVI became the majority stockholders of the Company. This transaction constituted a reverse takeover transaction (the “RTO”).

Concurrent with the consummation of the RTO, the Company issued 4,920,000 shares of its common stock and five-year warrants to purchase an aggregate of 4,920,000 shares of the Company’s common stock at $1.5625 per share for an aggregate purchase price of $6.15 million, to a total of 38 investors in a private placement (the “2007 Private Placement”). In connection with this private placement, the Company issued five-year warrants to purchase 492,000 shares of the Company’s common stock at $1.5625 per share to Keating Securities, LLC (“Keating Securities”), as a financial advisory fee in partial consideration of their services in connection with the private placement. Prior to the consummation of the RTO and the 2007 Private Placement, the Company was deemed to have been an affiliate of Keating Securities by reason of the ownership of shares of the Company’s common stock by principals and executives of Keating Securities. The warrants issued to the investors and Keating Securities have been classified in equity and were outstanding as of September 30, 2011.

Omnia BVI is a business company organized under the laws of the British Virgin Islands (the “BVI”) on August 11, 2006. It has conducted no business and is a holding company whose only asset is a 100% equity interest in Shenzhen Oriental Fashion Co., Ltd. (“Oriental Fashion”). Oriental Fashion was established on September 19, 2006 in the People’s Republic of China (the “PRC”).

On July 15, 2011, a new subsidiary, Shenzhen Luozheng Oriental Aesthetics Creative Co., Ltd. 深圳市罗峥东方美学创意设计有限公司 (“Oriental Aesthetics”) was established in the PRC. Oriental Fashion contributed $154,700 to Oriental Aesthetics on May 25, 2011 as the registered capital, representing 100% equity interest. Oriental Aesthetics currently does not have any business activity and is planning to be engaged in design and development of apparel and related products.
 
 
7

 

OmniaLuo, Inc.
Notes to Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2011 and 2010 (Unaudited)
(Stated in US Dollars)

1.
Corporate information (Cont’d)

 
(c)
Pursuant to preferred stock purchase and shareholders agreements dated as of December 15, 2006 and December 20, 2006, Omnia BVI had issued an aggregate of 2,147 convertible preferred shares (the “BVI Preferred Shares”) and detachable warrants to purchase up to $365,940 in its ordinary shares, based on the offering price in the next financing of Omnia BVI (the “BVI Warrants”), to a private venture capital investment fund (the “Lead Investor”) and several individual investors for a total cash investment of $729,980.

By agreements dated as of October 9, 2007: (i) among Omnia BVI, the Lead Investor, Ms. Zheng Luo (the principal stockholder and chief executive officer of the Company) and another of the Company’s stockholders, and (ii) among Omnia BVI, Ms. Zheng Luo and each of the other holders of BVI Preferred Shares and Warrants, effective upon the closing of the RTO, each BVI Preferred Shares was converted into a specified number of ordinary shares of Omnia BVI, with each such ordinary share of Omnia BVI then being exchanged for 319.8294 shares of the Company’s common stock and each BVI Warrant was exchanged for warrants to purchase the Company’s common stock, exercisable at any time during a two-year period commencing on December 17, 2007, at a per share price of $1.25. 292,752 warrants were issued in exchange for the BVI Warrants and have expired.

The Company’s common stock issuable under the aforementioned agreements were included in the 16,800,000 shares of the Company’s common stock issued in relation to the RTO as detailed in note 1(b) to the condensed consolidated financial statements.

2.
Description of business

Following the RTO, the Company commenced to be engaged in the design, marketing, distribution and sales of women’s apparel under the brand names of “OMNIALUO” and “OMNIALO” (collectively referred to herein as the “OMNIALUO Brands”) through a network of over 115 retail stores across the PRC as of September 30, 2011.  The Company offers a complete line of business casual women’s wear, including bottoms, tops and outerwear, as well as accessories.

There are currently three different types of retail stores that carry the OMNIALUO Brands: (i) Company-owned stores, which stores are owned exclusively by the Company and carry only the OMNIALUO Brands, (ii) co-owned stores, which stores are owned jointly by the Company and a third party, and carry the OMNIALUO Brands exclusively, and (iii) independent distributor stores, which stores are owned exclusively by third parties and carry the OMNIALUO Brands exclusively.

 
 
8

 

OmniaLuo, Inc.
Notes to Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2011 and 2010 (Unaudited)
(Stated in US Dollars)

3.
Summary of significant accounting policies

Basis of presentation

The accompanying condensed consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim consolidated financial information.  Accordingly, they do not include all the information and notes necessary for comprehensive consolidated financial statements.

In the opinion of the management of the Company, all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the nine-month period have been made. Results for the interim periods presented are not necessarily indicative of the results that might be expected for the entire fiscal year. These condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2010 and the notes thereto included in the Company’s Form 10K as filed with the Securities and Exchange Commission on March 31, 2011.

Principles of consolidation

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.

Use of estimates

In preparing financial statements in conformity with U.S. GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods.  These accounts and estimates include, but are not limited to, the valuation of trade and other receivables, inventories and deferred income taxes, provision for warranty and the estimation on useful lives of property and equipment. Management makes these estimates using the best information available at the time the estimates are made; however, actual results could differ materially from those estimates.

Concentrations of credit risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, restricted cash and trade receivables. As of September 30, 2011, the Company’s cash and cash equivalents and restricted cash were held by major financial institutions located in the PRC and Hong Kong, which management believes are of high credit quality. With respect to trade receivables, the Company extends credit based on an evaluation of the customer’s financial condition. The Company generally does not require collateral for trade receivables and maintains an allowance for doubtful accounts of trade receivables.

During the nine months ended September 30, 2011, there was no customer whose revenue contributed 10% or more to the Company’s total revenue. As of September 30, 2011, there were two suppliers whose trade deposits represented approximately 33% and 15% of the Company’s total trade deposits paid to suppliers.
 
 
9

 

OmniaLuo, Inc.
Notes to Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2011 and 2010 (Unaudited)
(Stated in US Dollars)

3.
Summary of significant accounting policies (Cont’d)

Concentrations of credit risk (cont’d)

During the nine months ended September 30, 2010, there was a customer whose revenue represented approximately 20% of the Company’s total revenue. As of September 30, 2010, there were three suppliers whose trade deposits represented approximately 44%, 34% and 11% of the Company’s total trade deposits paid to suppliers.

Stock-based compensation

The Company adopted the fair value method of accounting for share-based compensation.  Under the fair value method, compensation cost related to employee stock options or similar equity instruments which are equity-classified awards, is measured at the grant date based on the value of the award and is recognized over the requisite service period, which is usually the vesting period. The cost of a liability-classified award is measured based on its current fair value.

Fair value of share options granted is determined using the Black-Scholes model. Under this model, certain assumptions, including the risk-free interest rate, the expected life of the options, the estimated fair value of the Company’s common stock and the expected volatility, are required to determine the fair value of the options. If different assumptions had been used, the fair value of the options would have been different from the amount the Company computed and recorded which would have resulted in either an increase or decrease in the compensation expense.

Fair value of financial instruments

ASC 820 requires the disclosure of the estimated fair value of financial instruments including those financial instruments for which fair value option was not elected. Except for the bank loan disclosed below, the carrying amounts of other financial assets and liabilities approximate their fair values due to short maturities :-

   
As of September 30, 2011
   
As of December 31, 2010
 
   
(Unaudited)
       
   
Carrying
         
Carrying
       
   
amount
   
Fair value
   
amount
   
Fair value
 
                         
Long-term secured bank loan
  $ 1,077,849     $ 1,064,894     $ 1,213,600     $ 1,206,614  

The fair value of bank loan is calculated using the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Basic and diluted earnings per share

Basic earnings per share is computed using the weighted average number of shares outstanding during the periods presented. The weighted average number of shares of the Company represents the average number of common stock outstanding during the reporting periods.

Diluted earnings per share are computed using the sum of weighted average number of shares outstanding and dilutive potential shares outstanding during the periods presented. During the three and nine months ended September 30, 2011 and 2010, there were no dilutive potential shares.
 
 
10

 

OmniaLuo, Inc.
Notes to Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2011 and 2010 (Unaudited)
(Stated in US Dollars)

3.
Summary of significant accounting policies (Cont’d)

Recently issued accounting pronouncements

In July 2010, the FASB issued ASU 2010-20 “Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”. The objective of ASU 2010-20 is to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. Under ASU 2010-20, an entity is required to provide disclosures so that financial statement users can evaluate the nature of the credit risk inherent in the entity’s portfolio of financing receivables, how that risk is analyzed and assessed to arrive at the allowance for credit losses, and the changes and reasons for those changes in the allowance for credit losses. ASU 2010-20 is applicable to all entities, both public and non-public and is effective for interim and annual reporting periods beginning on or after December 15, 2010. Comparative disclosure for earlier reporting periods that ended before initial adoption is encouraged but not required. However, comparative disclosures are required to be disclosed for those reporting periods ending after initial adoption. The adoption of this ASU has no material impact on the Company’s financial statements.

In April 2011, the FASB issued ASU 2011-02 “Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring”. The amendments to Topic 310 clarify the guidance on a creditor’s evaluation of whether a debtor is experiencing financial difficulties. A creditor should evaluate whether it is probable that the debtor would be in payment default on any of its debts in foreseeable future without the modification. In addition, the amendments to Topic 310 clarify that a creditor is precluded from using the effective interest rate test in the debtor’s guidance on restructuring of payables (paragraph 470-60-55-10) when evaluating whether a restructuring constitutes a troubled debt restructuring. An entity should disclose the total amount of receivables and the allowance for credit losses as of the end of the period of adoption related to those receivables that are newly considered impaired under Section 310-10-35 for which impairment was previously measured under Subtopic 450-20, Contingencies – Loss Contingencies. The adoption of this ASU has no material impact on the Company’s financial statements.
 
 
11

 

OmniaLuo, Inc.
Notes to Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2011 and 2010 (Unaudited)
(Stated in US Dollars)

3.
Summary of significant accounting policies (Cont’d)

Recently issued accounting pronouncements (cont’d)

In May 2011, the FASB issued ASU 2011-04 “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”. The FASB and the International Accounting Standard Board (IASB) work together to ensure that fair value has the same meaning in U.S. GAAP and IFRSs and that their respective fair value measurement and disclosure requirements are the same (except for minor differences in wording and style). The Boards concluded that the amendments in this ASU will improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. The amendments in this ASU explain how to measure fair value. They do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The amendments in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The management is assessing the impact of this ASU on the Company’s financial statements.

In June 2011, the FASB issued ASU 2011-05 “Comprehensive Income (Topic 220): Presentation of Comprehensive Income”. In this ASU, the entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This Update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments in this ASU are to be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early application by public entities is permitted. The management is assessing the impact of this ASU on the Company’s financial statements.

In September 2011, the FASB issued ASU 2011-08 “Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment”. The amendments in this Update will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early application is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The management is assessing the impact of this ASU on the Company’s financial statements.
 
 
12

 

OmniaLuo, Inc.
Notes to Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2011 and 2010 (Unaudited)
(Stated in US Dollars)

4.
Income taxes

United States

The Company is subject to the United States of America Tax law at tax rate of 34%. It has no assessable profit for the three and nine months ended September 30, 2011 and 2010, respectively. The Company has not recognized a deferred tax liability for the undistributed earnings of its non-U.S. subsidiaries as of September 30, 2011 and December 31, 2010 respectively, because the Company currently does not expect those unremitted earnings to distribute and become taxable to the Company in the foreseeable future. A deferred tax liability will be recognized when the Company no longer plans to permanently reinvest undistributed earnings.  Calculation of related unrecognized deferred tax liability is not practicable.

BVI

Omnia BVI was incorporated in the BVI and, under the current laws of the BVI, is not subject to income tax.

PRC

Oriental Fashion is subject to the PRC Enterprise Income Tax (“EIT”). As Oriental Fashion was a wholly-foreign owned enterprise engaged in manufacture industry which was duly approved by the PRC tax authority, it was entitled to two years’ exemption, from the first profit making calendar year of operations after offset of accumulated taxable losses, followed by 50% tax reduction for the immediate next three calendar years. This tax holiday commenced in the fiscal financial year 2007. Oriental Fashion was subject to EIT rate of 12% and 11% during the three and nine months ended September 30, 2011 and 2010 respectively. Oriental Aesthetics was subject to EIT rate of 25% during the three and nine months ended September 30, 2011.

ASC 740 requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. The management evaluated the Company’s tax positions and considered that no provision for uncertainty in income taxes was necessary as of September 30, 2011.

5.
Earnings per share - basic and diluted

The basic earnings per share is calculated using the net income and the weighted average number of shares outstanding during the reporting periods.

5,412,000 warrants issued to investors and Keating Securities, and options to purchase 1,369,840 shares of the Company’s common stock granted to the Company’s director and employees outstanding as of September 30, 2011 and 2010 have not been included in the computation of diluted earnings per share for the three and nine months then ended because of their anti-dilutive effect. Accordingly, the basic and diluted earnings per share for the three and nine months ended September 30, 2011 and 2010 are the same.
 
 
13

 

OmniaLuo, Inc.
Notes to Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2011 and 2010 (Unaudited)
(Stated in US Dollars)

6.
Trade receivables, net

   
As of
   
As of
 
   
September 30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
       
             
Trade receivables
  $ 3,252,181     $ 2,324,642  
Allowance for doubtful accounts
    (882,169 )     (813,540 )
                 
    $ 2,370,012     $ 1,511,102  

An analysis of the allowance for doubtful accounts for the nine months ended September 30, 2011 and 2010 is as follows :-

   
Nine months ended
September 30,
(Unaudited)
 
   
2011
   
2010
 
             
Balance at beginning of period
  $ 813,540     $ 754,290  
Addition of bad debts expenses, net
    43,729       -  
Translation adjustments
    24,900       13,348  
                 
Balance at end of period
  $ 882,169     $ 767,638  

7.
Inventories

   
As of
   
As of
 
   
September 30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
       
             
Raw materials
  $ 515,578     $ 570,487  
Work in progress
    1,434,262       502,620  
Finished goods
    2,962,257       3,380,858  
                 
      4,912,097       4,453,965  
Allowance for obsolete inventories
    (402,449 )     (390,830 )
                 
    $ 4,509,648     $ 4,063,135  

8.
Loan to a related party
 
 

 
The loan is due from Shenzhen Oumeng Sound Investment Co., Ltd. 深圳市歐萌尚德投資有限公司, of which the Company’s director Ms. Xiaoyin Luo is a minority stockholder and director. It is unsecured, interest-bearing at 9% per annum and fully repayable on June 21, 2012. The loan of $161,389 was repaid to the company during the nine months ended September 30, 2011.
 
 
14

 

OmniaLuo, Inc.
Notes to Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2011 and 2010 (Unaudited)
(Stated in US Dollars)

9.
Other receivables and deposits

   
As of
   
As of
 
   
September 30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
       
             
Other receivables, rental, utilities and other deposits
  $ 474,901     $ 448,561  
Allowance for doubtful debts
    (84,328 )     (81,893 )
                 
      390,573       366,668  
Trade deposits to suppliers
    4,685,588       3,495,857  
                 
    $ 5,076,161     $ 3,862,525  

10.
Property and equipment, net

   
As of
   
As of
 
   
September 30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
       
             
Office equipment and computers
  $ 993,255     $ 939,901  
Machinery
    18,531       17,207  
Leasehold improvement
    577,636       560,958  
Motor vehicles
    19,760       19,190  
                 
      1,609,182       1,537,256  
Accumulated depreciation
    (1,195,678 )     (942,711 )
                 
Property and equipment, net
  $ 413,504     $ 594,545  

11.
Trademarks

Oriental Fashion currently owns four trademarks, namely “Omnialuo”, “Omnialo”, “歐柏蘭羅” and “歐柏蘭奴” which were registered in the PRC. These trademarks were transferred to the subsidiary from a major stockholder of the Company for nil consideration during 2006.

 
12.
Short-term secured bank loan

The bank loan is denominated in Renminbi and repayable within one year. It carries interest at 8.203% per annum.

The bank loan is guaranteed by (i) Ms. Zheng Luo, who did not receive any compensation for acting as guarantor; (ii) the Company’s bank deposit of $468,630 and (iii) bank deposits of three unrelated parties in the amount of $1,405,890.

The Company’s restricted cash of $468,630 was also pledged to the bank to secure the bank loans of $4,686,300 granted to the aforementioned unrelated parties. The restricted cash will be released by the bank after the Company and the unrelated parties have fully repaid their borrowings.
 
 
15

 

OmniaLuo, Inc.
Notes to Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2011 and 2010 (Unaudited)
(Stated in US Dollars)

13.
Long-term secured bank loan

The bank loan is denominated in Renminbi and has a 2-year term. It carries interest at 0.5625% per month and is guaranteed by (i) Ms. Zheng Luo, who did not receive any compensation for acting as guarantor; (ii) a third party, who received $19,072 from the Company for acting as guarantor and (iii) the property owned by Ms. Zheng Luo.

The long-term secured bank loan of $1,077,849 as of September 30, 2011 will be repayable in 2012.

14.
Loan from a stockholder

The loan is interest-free, unsecured and repayable on demand. The stockholder advanced $230,471 and $149 to the Company during the nine months ended September 30, 2011 and 2010, respectively.

 
15.
Other payables, deposits received and and accrued expenses

   
As of
   
As of
 
   
September 30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
       
             
Other payables and accruals
  $ 685,843     $ 613,255  
Amounts due to partners of co-owned stores
    11       287,921  
Receipts in advance from customers
    665,375       714,066  
Deposits received
    407,737       368,811  
Business tax and value-added taxes payable
    1,616,458       766,411  
                 
    $ 3,375,424     $ 2,750,464  

16.
Stock option plan

On April 23, 2008, the board of directors adopted the 2008 Equity Incentive Plan (the “Plan”). The purposes of the Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to employees, directors and consultants, and to promote the success of the Company’s business. The maximum aggregate number of shares that may be issued under the Plan is 5,000,000 shares.

Pursuant to the Plan, on January 6, 2009, the Company granted options to purchase 735,200 and 137,040 shares of common stock with an exercise price of $0.60 and $1.25 per share, respectively, to a director and several employees of the Company. In accordance with the vesting provisions of the grants, 50% of the options were vested on the date of grant and 12.5% will vest thereafter on each of the following March 31, June 30, September 30 and December 31, until fully vested. The options granted expire in ten years after the date of grant or are exercisable for 36 months after the optionee ceases to be a service provider to the Company.
 
 
16

 

OmniaLuo, Inc.
Notes to Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2011 and 2010 (Unaudited)
(Stated in US Dollars)

16.
Stock option plan (Cont’d)

Pursuant to the Plan, on January 20, 2009, the Company granted options to purchase 497,600 shares of common stock with an exercise price of $0.60 per share to a director and several employees of the Company. In accordance with the vesting provisions of the grants, 50% of the options will vest on the first anniversary date of the date of grant and 12.5% will vest thereafter on each of the following March 31, June 30, September 30 and December 31, until fully vested.  The options granted expire in ten years after the date of grant or are exercisable for 36 months after the optionee ceases to be a service provider to the Company.

A summary of share option plan activity for the nine months ended September 30, 2011 is presented below :-

         
Average
   
Remaining
   
Aggregate
 
   
Number of
   
exercise price
   
contractual
   
intrinsic
 
   
shares
   
per share
   
term
   
value
 
                         
Outstanding as of January 1, 2011
    1,369,840     $ 0.67                
Granted
    -       -                
Exercised/Forfeited/Cancelled
    -       -                
                               
Outstanding as of September 30, 2011
    1,369,840     $ 0.67    
7.27 years
    $ -  
                                 
Exercisable as of September 30, 2011
    1,369,840     $ 0.67    
7.31 years
    $ -  

Aggregate intrinsic value represents the value of the Company’s closing stock price on September 30, 2011 of $0.04 in excess of the exercise price multiplied by the number of options outstanding or exercisable.

The weighted average grant-date fair value of options granted on January 6, 2009 and January 20, 2009 was $0.27 and $0.32 per share respectively. The non-cash share-based compensation expenses were fully amortized in the fiscal year 2010. The Company recorded non-cash share-based compensation expense of $63,083 for the nine months ended September 30, 2010, in respect of the share options, which was allocated to general and administrative expenses.

The fair value of the above option awards granted on January 6, 2009 and January 20, 2009 was estimated on the date of grant using the Black-Scholes Option Valuation Model that uses the following assumptions.

Expected volatility
    119.66 %
Expected dividends
 
Nil
 
Expected life
 
1.5 years - 2 years
 
Risk-free interest rate
    1 %
 
 
17

 

OmniaLuo, Inc.
Notes to Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2011 and 2010 (Unaudited)
(Stated in US Dollars)

17.
Commitments and contingencies

Operating lease arrangements

The Company leases office premises and showrooms under various operating lease agreements that expire at various dates through years 2011 to 2015. The minimum future commitments payable under non-cancellable agreements as of September 30, 2011 was $67,521 which fall due within one year.

Rental expenses under operating leases were $331,229 and $366,607 for the nine months ended September 30, 2011 and 2010 respectively.

Contingencies

In accordance with the PRC tax regulations, the Company’s sales are subject to value added tax (“VAT”) at 17% upon the issuance of VAT invoices to its customers. When preparing these financial statements, the Company recognized revenue when goods were delivered, and made full tax provision in accordance with relevant national and local laws and regulations of the PRC.

The Company follows the practice of reporting its revenue for PRC tax purposes when invoices are issued. In the local statutory financial statements prepared under the PRC GAAP, the Company recognized revenue on an “invoice basis” instead of when goods are delivered. Accordingly, despite the fact that the Company has made full tax provision in these condensed consolidated financial statements, the Company may be subject to a penalty for the deferred reporting of tax obligations. The exact amount of penalty cannot be estimated with any reasonable degree of certainty. The management considers it is very unlikely that the tax penalty will be imposed.

18.
Defined contribution plan

Pursuant to the relevant PRC regulations, the Company is required to make contributions to a defined contribution retirement scheme organized by a state-sponsored social insurance plan in respect of the retirement benefits for the Company’s employees. The only obligation of the Company with respect to the retirement scheme is to make the required contributions under the plan. No forfeited contribution is available to reduce the contribution payable in future years. The defined contribution plan contributions were charged to profit or loss. The Company contributed $82,614 and $63,169 during the nine months ended September 30, 2011 and 2010, respectively.
 
 
18

 

OmniaLuo, Inc.
Notes to Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2011 and 2010 (Unaudited)
(Stated in US Dollars)

19.
Related party transactions

Apart from the transactions and information as disclosed in notes 8, 12, 13 and 14 to the condensed consolidated financial statements and below, the Company did not have other material related party transactions during the nine months ended September 30, 2011 and 2010, respectively.

   
Three months ended
September 30,
(Unaudited)
   
Nine months ended
September 30,
(Unaudited)
 
   
2011
   
2010
   
2011
   
2010
 
                         
Rent paid to director, Luo Zheng
  $ 17,231     $ 24,198     $ 67,628     $ 72,619  

The rent was determined by the Company and Ms. Luo with reference to market rent of similar property.

20.
Segment information

The Company uses the “management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. Management, including the chief operating decision maker, reviews the operating results of retail sales (including Company-owned and co-owned stores) and sales to distributors and as such, the Company has determined that it has two operating segments as defined by ASC Topic 280 “Segment Reporting”.

   
Retail sales
   
Sales to distributors
   
Total
 
   
Nine months ended
   
Nine months ended
   
Nine months ended
 
   
September 30, (Unaudited)
   
September 30, (Unaudited)
   
September 30, (Unaudited)
 
   
2011
   
2010
   
2011
   
2010
   
2011
   
2010
 
                                     
Revenues
  $ 3,492,171     $ 2,144,335     $ 3,818,182     $ 3,910,329     $ 7,310,353     $ 6,054,664  
Segment (loss) profit
  $ (285,898 )   $ (630,718 )   $ 1,084,443     $ 1,277,969     $ 798,545     $ 647,251  

   
Retail sales
   
Sales to distributors
   
Total
 
   
Three months ended
   
Three months ended
   
Three months ended
 
   
September 30, (Unaudited)
   
September 30, (Unaudited)
   
September 30, (Unaudited)
 
   
2011
   
2010
   
2011
   
2010
   
2011
   
2010
 
                                     
Revenues
  $ 1,206,765     $ 679,469     $ 1,765,232     $ 1,305,430     $ 2,971,997     $ 1,984,899  
Segment (loss) profit
  $ (34,889 )   $ (139,651 )   $ 632,851     $ 351,915     $ 597,962     $ 212,264  

   
As of
   
As of
   
As of
   
As of
   
As of
   
As of
 
   
September 30,
   
December 31,
   
September 30,
   
December 31,
   
September 30,
   
December 31,
 
   
2011
   
2010
   
2011
   
2010
   
2011
   
2010
 
   
(Unaudited)
         
(Unaudited)
         
(Unaudited)
       
                                     
Segment assets
  $ 6,785,392     $ 4,651,091     $ 7,418,843     $ 7,493,125     $ 14,204,235     $ 12,144,216  
 
 
19

 

OmniaLuo, Inc.
Notes to Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2011 and 2010 (Unaudited)
(Stated in US Dollars)

20.
Segment information (Cont’d)

A reconciliation is provided for unallocated amounts relating to corporate operations which is not included in the segment information :-

   
Three months ended September
30, (Unaudited)
   
Nine months ended September
30, (Unaudited)
 
   
2011
   
2010
   
2011
   
2010
 
                         
Total consolidated revenue
  $ 2,971,997     $ 1,984,899     $ 7,310,353     $ 6,054,664  
                                 
Total income for reportable segments
    597,962     $ 212,264     $ 798,545     $ 647,251  
Unallocated amounts relating to operations :-
                               
Other income
    18,150       -       91,411       -  
Interest income
    271       -       271       -  
General and administrative expenses
    (50,441 )     (67,331 )     (97,472 )     (148,543 )
Stock-based compensation
    -       (19,663 )     -       (63,083 )
                                 
Income before income taxes
  $ 565,942     $ 125,270     $ 792,755     $ 435,625  

   
As of
   
As of
 
   
September 30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
       
Assets
           
             
Total assets for reportable segments
  $ 14,204,235     $ 12,144,216  
Cash and cash equivalents
    175,335       15,775  
                 
    $ 14,379,570     $ 12,159,991  

All of the Company’s long-lived assets and customers are located in the PRC. Accordingly, no geographic information is presented.

21.
Subsequent events

The Company has evaluated all events or transactions that occurred through the date the condensed consolidated financial statements were issued, and has determined that there were no material subsequent events or transactions which would require recognition or disclosure in the condensed consolidated financial statements.
 
 
20

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the condensed consolidated financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and notes in Item I above and with the audited consolidated financial statements and notes, and with the information under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our most recent Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from the results described in or implied by these forward-looking statements as a result of various factors, including those discussed in this report and under the heading “Risk Factors” in our most recent Annual Report on Form 10-K.

Except as otherwise specifically stated or unless the context otherwise requires, the "Company", "we," "us," "our," and the "Registrant" refer to, collectively, (i) OmniaLuo, Inc. (formerly Wentworth II, Inc.), (ii) Omnia Luo Group Limited (“Omnia BVI”), a wholly-owned subsidiary of OmniaLuo, Inc. organized under the laws of the British Virgin Islands, and (iii) Shenzhen Oriental Fashion Co. Ltd., a wholly-owned subsidiary of Omnia BVI organized under the laws of the People’s Republic of China (the “PRC” or “China”).

Overview

OmniaLuo, Inc. is a holding company that conducts all of its business operations through its indirect wholly-owned subsidiary, Omnia BVI’s Chinese subsidiary, Shenzhen Oriental Fashion Co., Ltd., (“Oriental Fashion”), established in September 2006. Oriental Fashion is indirectly held by the Company through its direct wholly-owned subsidiary, Omnia BVI, established in August 2006. Oriental Fashion designs, develops, markets and distributes women’s apparel under the brand names of OMNIALO and OMNIALUO through its network of retail stores across China, which consisted of 115 stores as of September 30, 2011, and 117 stores as of September 30, 2010, in 29 provinces throughout China. Until our acquisition of Omnia BVI on October 9, 2007, our operations were very limited.

On July 15, 2011, Oriental Fashion formed a new wholly-owned subsidiary, Shenzhen Luozheng Oriental Aesthetics Creative Co., Ltd. (“Oriental Aesthetics”), under the laws of the PRC. Oriental Aesthetics currently does not have any business activity yet and is planning to be engaged in design and development of apparel and related products.

Principal Products

We offer a complete line of business casual women’s wear including bottoms, tops and outerwear as well as accessories. All apparel is marketed under the OMNIALUO brands through a network of retail stores across China. Our main product line is “fashionable business casual,” which is suitable for both business and casual environments. Fashionable business casual is clothing that can be worn to work as well as outside the office environment. In recent years, fashionable business casual has gained significant market share in the fashion industry. We also have a smaller “business casual” product line.

Apparel under the OMNIALUO brands is made of high quality materials, and many pieces contain intricate and delicate craftwork. The designs are made to accentuate a woman’s figure while providing a unique cut and stitching to the material, which provide a slimming look. The majority of materials used are composed of tatting and knitwear. Tatting and knitwear are soft fabrics and allow women’s skin to “breathe” thus providing comfort in addition to style.

Customers

Since 2009, our target customers have been “white-collar”, “pink-collar” and “golden-collar” professional urban working females between the ages of 28 to 45. Before 2009, we targeted professional urban working females between the ages of 25 to 35. The annual income of our targeted customers ranges from $3,700 to $45,000. We increased the ages of our target customers by offering premium and mature styles of apparel. We believe professional urban working females in this age group has the most purchasing power and our strategy of focusing on this female segment is intended to capitalize on this consumption pattern.

In China, professional women are generally divided into three categories, “white-collar”, “pink-collar” and “golden-collar”. “Pink-collar” workers usually work in high-paying industries such as finance, consulting, legal services, or assume senior positions in government agencies. Our business casual collections as well as our fashionable business casual collection appeal to pink-collar women. “White collar” workers usually work in junior or middle positions in an office environment. This includes positions such as secretaries, administrators, operators, IT staff, accounting staff and junior saleswomen. Usually, there is no strict dress code for “white-collar” professionals in the office. “White-collar” professionals can wear “relaxed” business style apparel instead of business suits in their workplaces. In this sense, our fashionable business casual can be worn by “white-collar” females both in and out of the work environment. Currently, “golden-collar” generally refers to the class of professionals with annual incomes from $30,000 to $45,000. They typically hold executive positions in corporations or operate their own businesses. “Golden-collar” females usually tend to wear luxury brands.
 
 
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Distribution Network and Methods

Our products are sold in the following types of stores: (i) Company-owned stores, which are owned exclusively by the Company, (ii) co-owned stores, which are owned jointly by the Company and a third party, and (iii) independent distributor stores, which are owned exclusively by third parties. All three types of stores carry the OMNIALUO brands exclusively. We refer to Company-owned stores and co-owned stores collectively as retail stores. All three types of stores are located throughout China. We also run special, limited-time outlet sales in major malls to sell excess inventories at the end of each season. We currently do not have franchisees or franchised stores. As of September 30, 2011 and September 30, 2010, the total numbers of stores were 115 and 117 respectively, each consisting of 26 and 27 company-owned stores, respectively, 9 and 8 co-owned stores, respectively, and 80 and 82 independent distributor stores, respectively.

Factors Relevant to Evaluating Our Business and Financial Performance

We design, develop, and market a diversified selection of women’s wear with a focus on fashionable business casual style. We target moderate to premium priced women’s wear. In evaluating our performance, management reviews certain key performance indicators, including:

Gross profit - Gross profit measures our ability to control direct costs associated with the manufacturing and selling of our products. Gross profit is the difference between the net sales and cost of sales, which is comprised of direct inventory costs for merchandise sold, including all costs to transport merchandise from third-party suppliers to our distribution center.

Operating income - Operating income is a measure of our earning power from ongoing operations and is measured as our earnings before interest and income taxes.

Results of Operations for the Three Months and Nine Months ended September 30, 2011 and September 30, 2010

As of September 30, 2011, we operated or had distribution relationships with 115 stores, comprising 26 company-owned stores, 9 co-owned stores, and 80 independent distributor stores, as compared to 117 stores as of September 30, 2010, comprising 27 company-owned stores, 8 co-owned stores and 82 independent distributor stores. We had the same number of company-owned, co-owned and independent distributor stores as of June 30, 2011.

Before 2009, we targeted professional urban working females between the ages of 25 to 35, who prefer clothing with youthful or trendy styles and concern lower prices with less focus on quality or material. The pricing of our clothing was reflected in our lines for this target market.  Generally, the profit margin for medium and lower-end clothing lines is low and its success is largely dependent on sales volume.  Because of rising labor costs and the growing impact of inflation, medium to lower-end clothing lines are becoming even less profitable. In order to stay competitive and to leverage one of our core competencies, our strong design capability, we have shifted our focus to professional urban working females between the ages of 35 and 40.  Women in this age group generally have more disposable income and prefer clothing with higher quality, better design and more elegant style. We have been adjusting our product styles and quality to meet the needs of customers in this age group. In implementing our market and product strategies, we expect to emphasize our company-owned and co-owned stores, over which we have more control in areas of store design, product image and personnel. Although compared to the quarter ended September 30, 2010, we generally maintained the ratio among our company-owned, co-owned and independent distributor stores as of September 30, 2011, we intend to gradually adjust our store mix with more emphasis on company-owned and co-owned stores and will gradually discontinue certain non-performing independent distributor stores. We also plan to eventually develop a franchise program to admit franchise stores.

Our total revenue for the three months ended September 30, 2011 was $2,971,997, representing an increase of 49.73% from our total revenue of $1,984,899 for the same period of 2010, while our cost of revenues for the three months ended September 30, 2011 was $1,253,551, representing an increase of 57.72% from our cost of revenues for the same period of 2010. In the second and the third quarters of 2011, we continued to adjust the sales strategy to expand the investment and management of the company-owned stores so as to strengthen the market control and promotion. In addition, we made efforts in upgrading the image of our stores by improving the quality of the products, which directly contributed to the increase of revenue. We also emphasized on improving our sales force by providing continuous internal training to our sales representatives. All the efforts we made resulted in the increase of sales revenue, and we will keep the adjustment in the fourth quarter.
 
 
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Revenue for the nine months ended September 30, 2011 was $7,310,353, representing an increase of 20.74% from our total revenues of $6,054,664 for the same period of 2010, while our cost of revenues for the nine months ended September 30, 2011 was $2,808,179, representing an increase of 20.35% from our cost of revenues for the same period of 2010. The increase was mainly because of the adjustment of market strategy in the second and the third quarters as we described above.

Revenue from sales to independent distributors for the three months ended September 30, 2011 was $1,765,232 (59.40% of the total sales revenue for the period), $459,802 (or 35.22%) more than the revenue from sales to distributors for the three months ended September 30, 2010 of $1,305,430 (65.77% of the total sales revenue for the period). The increase in sales to independent distributors was due to the reason of helping non-performing distributors to increase their sales by providing continuous internal training to their sales representatives and the new image upgrade of the independent distributors guided by our professional staff.

Revenue from sales to independent distributors for the nine months ended September 30, 2011 was $3,818,182 (52.23% of the total sales revenue for the period), $92,147 (or 2.36%) less than revenue from sales to distributors for the nine months ended September 30, 2010 of $3,910,329 (64.58% of the total sales revenue for the period). The decrease was due to the impact of our product adjustment and the impact of growing inflation, which partially offset the sales increase by independent distributor stores.

Revenue from retail sales for the three months ended September 30, 2011, including from company-owned and co-owned stores, was $1,206,765 (40.60% of the total sales revenue for the period), representing $527,296 (or 77.60%) increase over retail sales for the three months ended September 30, 2010 of $679,469 (34.23% of the total sales revenue for the period). The increase was the result of the effort we made in the second and the third quarters of 2011. We kept adjusting the sales strategy to expand the investment and management of the company-owned stores so as to strengthen the market control and promotion. In addition, we spent efforts in upgrading the image of our company-owned and co-owned stores and improving the quality of the products, which directly contributed to the increase of revenue from retail sales.

Revenue from retail sales for the nine months ended September 30, 2011, including from company-owned and co-owned stores, was $3,492,171 (47.77% of the total sales revenue for the period), representing $1,347,836 (or 62.86%) increase over retail sales for the nine months ended September 30, 2010 of $2,144,335 (35.42% of the total sales revenue for the period). The increase was mainly due to the reasons as described above.

Overall gross profit for the three months ended September 30, 2011 was $1,718,446 (representing an overall gross profit margin of 57.82%), compared with overall gross profit of $1,190,085 (representing an overall gross profit margin of 59.96%) for the three months ended September 30, 2010, almost the same gross profit level as compared to the same period last year.

Overall gross profit for the nine months ended September 30, 2011 was $4,502,174 (representing an overall gross profit margin of 61.59%), compared with overall gross profit of $3,721,284 (representing an overall gross profit margin of 61.46%) for the nine months ended September 30, 2010.

General and administrative expenses, which include rental expenses for headquarters, salary expenses for management and headquarters staff, and travel and entertainment expenses for the three months ended September 30, 2011 were $551,056 (18.54% of the total sales revenues), compared with $551,640 for the three months ended September 30, 2010 (27.79% of the total sales revenues).

General and administrative expenses for the nine months ended September 30, 2011 were $1,766,385 (24.16% of the total sales revenues), compared with $1,495,518 for the nine months ended September 30, 2010 (24.70% of the total sales revenues), an increase of $270,867 (or 18.11%). The increase was mainly due to the increase in salaries as a result of inflation, and travel and entertainment expenses in connection with the exhibitions and trade fairs that we participated.

Selling and marketing expenses, which include all costs associated with sales, marketing and distribution functions, were $566,810 for the three months ended September 30, 2011 (19.07% of the total sales revenues), compared with $482,874 for the three months ended September 30, 2010 (24.33% of the total sales revenues), an increase of $83,936 (or 17.38%).  The primary reasons for the increase were the increase in selling and marketing expenses associated with our operations of company-owned stores, including the management fees paid to the malls that housed our company owned-stores, and the salary and training expenses associated with our sales force.

Selling and marketing expenses were $1,841,425 for the nine months ended September 30, 2011 (25.19% of the total sales revenues), compared with $1,550,967 for the nine months ended September 30, 2010 (25.62% of the total sales revenues), an increase of $290,458 (or 18.73%).  The primary reasons for the increase were described above.

Income from operations for the three months ended September 30, 2011 was $525,433 (17.68% of the total sales revenues), compared with income from operations for the three months ended September 30, 2010 of $93,402 (4.71% of the total sales revenues), representing an increase of $432,031 (or 462.55%).  The increase was mainly attributable to our market and product strategy adjustment that we implemented since the second quarter as described above, which directly contributed to the increase in our revenue. As a result, our income from operations for the three months ended September 30, 2011 increased dramatically compared with the same period of last year.
 
 
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Income from operations for the nine months ended September 30, 2011 was $673,033 (9.21% of the total sales revenues), compared with income from operations for the nine months ended September 30, 2010 of $467,219 (7.72% of the total sales revenues), representing an increase of 44.05%.  The increase was primarily due to our market and product strategy adjustment as described above.

Net income for the three months ended September 30, 2011 was $493,452, compared with net income $80,356 for the three months ended September 30, 2010, representing an increase of $413,096 (or 514.08%). The increase was primarily due to the market and product strategy adjustment in the second and the third quarters as described above.

Net income for the nine months ended September 30, 2011 was $650,583, compared with $338,055 for the nine months ended September 30, 2010, representing an increase of $312,528 (or 92.45%). The increase was primarily due to the market and product strategy adjustment as described above.

Liquidity and Capital Resources

As of September 30, 2011, the Company’s net cash position was $576,154, compared with $1,629,530 as of December 31, 2010, representing a decrease of $1,053,376 (or 64.64%). The decrease was mainly due to the decrease of cash flows from financing activities. As of September 30, 2011, the Company’s working capital was $6,248,732, compared with $6,152,478 as of December 31, 2010.

As of September 30, 2011, inventories were $4,509,648, an increase of $446,513 (or 10.99%), compared with $4,063,135 as of December 31, 2010. The increase was primarily caused by our market and product strategy adjustment and our strategy to minimize the effect of growing inflation. Fabrics used to make lower end clothing are generally ordinary materials that are readily available in the market while fabrics used for higher end clothing lines with design features must possess features and qualities that can meet the design requirements for the clothing line and they are less available and more expensive. As we are upgrading our clothing lines to medium to high end clothing lines, in order to ensure the availability of raw materials for our production, we are required to purchase raw materials well in advance and maintain a higher inventory level of these materials. Additionally, for certain fabrics, such as silk, that are frequently used as basic materials for our clothing products; we purchased a larger quantity of these fabrics beyond our immediate manufacturing needs to minimize the impact of inflation.

As of September 30, 2011, trade receivables were $2,370,012, an increase of $858,910 (or 56.84%), compared with trade receivables of $1,511,102 as of December 31, 2010. The increase was primarily attributable to lower collection rate related to our independent distributors as they are adapting to our market and product strategy adjustment.

As of September 30, 2011, other receivables and deposits were $5,076,161, an increase of $1,213,636 (or 31.42%), compared with $3,862,525 as of December 31, 2010. The increase was primarily attributable to the increase in trade deposits to suppliers in order to take advantage of lower and/or fixed pricing of materials offered by the suppliers as a way to minimize the impact of inflation.

Net cash used in operating activities for the nine months ended September 30, 2011 was $582,994, compared with net cash used in operating activities of $988,039 for the nine months ended September 30, 2010, a decrease of $405,045 (or 40.99%). The decrease was primarily due to less cash outflows in other payables, deposits received and accrued expenses compared with the third quarter of 2010.

The Company’s investing activities consisted mainly of the loans to a related party and a third party, and short-term investments. For the nine months ended September 30, 2011 and 2010, the net cash used in investing activities was $938,515 and $748,310, respectively, an increase of $190,205. The increase was mainly because of the loan to a related company of $1,075,928, of which $161,389 was repaid during the nine months ended September 30, 2011, decrease in short-term investments of $440,714 and deposit for potential acquisition of $293,410. The loans to the related party are fully repayable on June 21, 2012.

Net cash flows from financing activities for the nine months ended September 30, 2011 was $437,971, compared with $1,841,305 of net cash flows from financing activities for the nine months ended September 30, 2010. The net cash flows for the nine months ended September 30, 2011 included mainly the proceeds from bank loans of $1,537,040, the repayment of the principal for short-term bank loans of $1,329,540 and advances from a stockholder of $230,471.
 
 
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The Company had a short-term secured bank loan of $1,398,080 and a long-term secured bank loan of $1,077,849 as of September 30, 2011. The short-term bank loan is denominated in Renminbi and repayable within one year. It carries interest at 8.203% per annum. The bank loan is guaranteed by (i) Ms. Zheng Luo, who did not receive any compensation for acting as guarantor; (ii) the Company’s bank deposit of $468,630; and (iii) bank deposits of three unrelated parties in the amount of $1,405,890. The long-term bank loan is denominated in Renminbi and has a 2-year term. It carries interest at 0.5625% per month and is guaranteed by (i) Ms. Zheng Luo, who did not receive any compensation for acting as guarantor; (ii) a third party, who received $19,072 from the Company for acting as guarantor; and (iii) the property owned by Ms. Zheng Luo.

We believe that our currently available working capital should be adequate to sustain our operations at our current levels. Thereafter, based on our current operating plan and our available cash and cash equivalents, we expect that we will need to obtain additional financing in the future through the sale of equity securities, private placements, and loans to fund our cash needs and continue our presently planned operations. However, depending on our future needs and changes and trends in the capital markets affecting our shares and the Company, we may determine to seek additional equity or debt financing in the private or public markets. Additional financing, whether through public or private equity or debt financing, arrangements with stockholders or other sources to fund operations, may not be available, or if available, may be on terms unacceptable to us.

Critical Accounting Policies

Our critical accounting policies are set out in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 that we filed with the Securities and Exchange Commission on March 31, 2011. During the three months ended September 30, 2011, there was no change to our critical accounting policies.

Recently Issued Accounting Pronouncements

Please refer to note 3 to the Condensed Consolidated Financial Statements for the three months and nine months ended September 30, 2011.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Not applicable.

Item 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, Ms. Zheng Luo and Mr. David Wang, respectively, evaluated the effectiveness of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports, such as this report, that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, our management concluded that as of September 30, 2011, and as of the date that the evaluation of the effectiveness of our disclosure controls and procedures was completed, our disclosure controls and procedures were effective to satisfy the objectives for which they are intended.

Changes in Internal Controls over Financial Reporting

During the three months ended September 30, 2011, there were no changes in our internal control over financial reporting identified in connection with the evaluation performed during the fiscal year covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
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PART II – OTHER INFORMATION

Item 1.
Legal Proceedings

None.

Item 1A.
Risk factors

Not Applicable

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.
Defaults Upon Senior Securities

None.

Item 4.
Reserved
 
 
Item 5.
Other Information

None.

Item 6.
Exhibits

Exhibit
No.
 
Description
     
31.1
 
Certification of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2
 
Certification of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1
 
Certification of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2
 
Certification of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
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OMNIALUO, INC.
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
OMNIALUO, INC.
(Registrant)
     
Date: November 14, 2011
 
/s/ Zheng Luo
   
Zheng Luo
   
President & Chief Executive Officer
   
(Principal Executive Officer)
     
Date: November 14, 2011
 
/s/ David Wang
   
David Wang
   
Chief Financial Officer
   
(Principal Financial and Accounting Officer)
 
 
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