UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-K





(Mark One)





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





For the fiscal year ended: December 31, 2010





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





For the transition period from ____________ to _____________





Commission File No. 000-52040





OMNIALUO, INC.


(Name of Small Business Issuer in Its Charter)





Delaware

88-1581779(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification No.)





Room 101, Building E6, Huaqiaocheng East Industrial Park,
 Nanshan District,
 Shenzhen 518053, The People’s Republic of China
 (Address of Principal Executive Offices) (Zip Code)




(+86) 755-8245-1808


(Registrant’s Telephone Number, Including Area Code)





Securities registered pursuant to Section 12(b) of the Act:  Common Stock, $0.01 par value





Name of each exchange on which registered: N/A





Securities registered under Section 12(g) of the Exchange Act:Common stock, $0.01 par value





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes o  No x




Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.  Yes o No x





Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding  12 months (or 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o





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such file). Yes o   Nox





Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained in this form, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.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 definition of “accelerated filer, large accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):




Large Accelerated Filer o
Accelerated Filer  o
Non-Accelerated Filer  o
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 o   No x





The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant (assuming for these purposes, but without conceding, that all executive officers and directors and 10% stockholders are “affiliates” of the registrant), based on the closing price of $0.10 per shares of the registrant’s Common Stock on December 31, 2010, the last business day of the registrant’s most recently completed fiscal year as reported by the OTC Bulletin Board, was approximately $958,327.





The number of shares outstanding of the issuer's common stock as of March 31, 2011 is 22,840,000.





Documents incorporated by reference:NONE.











OMNIALUO, INC.





INDEX


PagePart I
3Item 1
Business
3Item1A
Risk factors
18Item 2
Properties
28Item 3
Legal proceedings
28Item 4
Reserved
28Part II
2929Item 5
Market for registrant’s common equity, related stockholder matters and issuer purchases of equity securities
29Item 7
Management’s discussion and analysis of financial condition and results of operations
29Item 8
Financial statements and supplementary data
36Item 9
Changes in and disagreements with accountants on accounting and financial disclosure
36Item 9A
Controls and procedures
36Part III
37Item 10
Directors, executive officers and corporate governance
37Item 11
Executive compensation
41Item 12
Security ownership of certain beneficial owners and management and related stockholder matters
42Item 13
Certain relationships and related transactions, and director independence
43Item 14
Principal accountant fees and services
44Part IV
45Item 15
Exhibits, financial statement and schedules
45Signatures

70ExhibitsReport of independent registered public accounting firm
47Consolidated Balance Sheets as of December 31, 2010 and 2009
49Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years Ended December 31, 2010 and 2009
48Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2010 and 2009
50Consolidated Statements of Cash Flows for the Years Ended December 31, 2010 and 2009
51Notes to Consolidated Financial Statements
52





1




FORWARD-LOOKING STATEMENTS





This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements that are based on the beliefs of our management, and involve risks and uncertainties, as well as assumptions, that, if they ever materialize or prove incorrect, could cause actual results to differ materially from those expressed or implied by such forward-looking statements. The words “believe,” “expect,” “anticipate,” “project,” “targets,” “optimistic,” “intend,” “aim,” “will” or similar expressions are intended to identify forward-looking statements. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including statements regarding new and existing products, technologies and opportunities, statements regarding market and industry segment growth and demand and acceptance of new and existing products, any projections of sales, earnings, revenue, margins or other financial items, any statements of the plans, strategies and objectives of management for future operations, any statements regarding future economic conditions or performance, uncertainties related to conducting business in China, any statements of belief or intention, any of the factors mentioned in the “Risk Factors” section of this Form 10-K, and any statements of assumptions underlying any of the foregoing. All forward-looking statements included in this report are based on information available to us on the date of this report. We assume no obligation and do not intend to update these forward-looking statements, except as required by law.





USE OF CERTAIN DEFINED TERMS





In this report, unless indicated otherwise, references to:





“OmniaLuo” “the Company,” “we,” “us,” or “our” refer to the combined business of all the entities that form our consolidated business enterprise;





“China,” “Chinese” and “PRC” refer to the People’s Republic of China;





“BVI” refers to the British Virgin Islands;





“SEC” refers to the United States Securities and Exchange Commission;





“Securities Act” refers to the Securities Act of 1933, as amended;





“Exchange Act” refers to the Securities Exchange Act of 1934, as amended;





“RMB” refers to Renminbi, the legal currency of China; and





“U.S. dollar,” “$”, “USD” and “US$” refer to the legal currency of the United States.





2





PART I





ITEM 1. BUSINESS





Corporate History





We were originally incorporated in the State of Delaware on March 7, 2001 under the name Wentworth II, Inc.. We were formed as a vehicle to pursue a business combination, which we effected through our reverse acquisition of Omnia Luo Group Limited (“Omnia BVI”), a company organized under the law of British Virgin Islands through a reverse acquisition as described below.  We had no material operations or revenue from operations prior to the reverse acquisition described below. Our corporate name changed to OmniaLuo, Inc. in November 2007, subsequent to the acquisition.


On October 9, 2007, we entered into a share exchange agreement with Omnia BVI, the shareholders of Omnia BVI and certain of our principal stockholders. Pursuant to the share exchange agreement, we issued to the shareholders of Omnia BVI 16,800,000 shares of our common stock in exchange for all of the issued and outstanding shares of Omnia BVI. As a result, Omnia BVI and its wholly-owned subsidiary Shenzhen Oriental Fashion Co., Ltd., a company organized under the laws of the PRC (“Oriental Fashion”) became our direct and indirect wholly-owned subsidiaries, respectively, and the former shareholders of Omnia BVI became our Company’s controlling stockholders.





For accounting purposes, the share exchange transaction was treated as a reverse acquisition with Omnia BVI as the acquirer and the Company as the acquired party. When we refer in this report to business and financial information for periods prior to the consummation of the reverse acquisition, we are referring to the business and financial information of Omnia BVI on a consolidated basis unless the context suggests otherwise.





Concurrently with the consummation of the reverse acquisition, we issued 4,920,000 shares of the Company’s common stock and warrants to purchase an aggregate of 4,920,000 shares of the Company’s common stock for an aggregate purchase price of $6.15 million, to a total of 38 investors (of whom 29 were accredited investors and nine were non-US residents who purchased shares and warrants in off-shore transactions) in a private placement pursuant to Regulation D and a simultaneous off-shore offering pursuant to Regulation S (collectively, the “2007 Private Placement”). In connection with that private placement, we also issued warrants to purchase 492,000 shares of the Company’s common stock 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 consummation of the reverse acquisition and 2007 Private Placement, we may be deemed to have been an affiliate of Keating Securities by reason of the ownership of shares of our common stock by principals and executives of Keating Securities.





We conduct all of our business operations through our indirectly wholly-owned operating subsidiary, Oriental Fashion.
 Description of Business
 
 Through our operating subsidiary in China, Oriental Fashion, we are engaged in the business of designing, marketing, distributing and selling women’s clothing, with an emphasis on fashionable business casual wear. All our apparel is marketed under the brand names of OMNIALO and OMNIALUO (collectively referred to herein as the “OMNIALUO Brands” or “OMNIALUO brand names”) through a network of 114 retail stores across China. We offer a complete line of business casual women’s wear, including bottoms, tops, and outerwear, as well as accessories, under the OMNIALUO brand names.


There are 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) independent distributor stores, which stores are owned exclusively by third parties and carry the OMNIALUO brands exclusively, and (iii) co-owned stores, which stores are owned jointly by the Company and a third party, and carry the OMNIALUO brands exclusively. All three types of stores are located throughout China. As of December 31, 2010 and 2009, our network of retail stores across China consisted of 114 and 108 stores, respectively. Out of the 108 stores we had as of December 31, 2009, there were 27 Company-owned stores, 8 co-owned stores and 73 independent stores.  Out of the 114 stores we had as of December 31, 2010, there were 25 Company-owned stores, 9 co-owned stores and 80 independent distributor stores.




3




Since 2009, we started to target customers who are professional urban working females between the ages of 28 to 45. Previously, 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.





The OMNIALUO brand of apparel has been awarded “China’s Best Women’s Wear Design” by China Fashion Designers Association (“CFDA”) every year from 2002-2006. Ms. Zheng Luo, a prominent designer in China, is our chief executive officer, chief designer and the originator of the OMNIALUO brands. Ms. Zheng Luo was also the founder and principal shareholder of Omnia BVI prior to our reverse acquisition with Omnia BVI described above. Ms. Zheng Luo is currently our largest individual shareholder.  Ms. Zheng Luo has won numerous prestigious awards and was recently named by Cosmopolitan Magazine the "2008 Chinese Fashion Designer of the Year". The OMNIALUO brands benefit significantly from Ms. Zheng Luo’s professional reputation.





Principal Products and Pricing Strategy





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.





OMNIALUO brand apparel and our chief designer, Ms. Zheng Luo, have consistently won top fashion design awards in China since 2002. In 2008, Ms. Zheng Luo was recognized by the Cosmopolitan Magazine as the “China Fashion Designer of the Year”.





With respect to accessories, we released our accessories products in the third quarter of 2007 and plan to release expanded new accessories products in the next several fiscal quarters. Accessories have been identified as an important product line for us and we have dedicated research and development efforts to the creation of accessories. We believe that customers in China are interested in purchasing a complete outfit, which includes clothing, accessories, and shoes. As such, the availability of accessories coordinated with the clothing line can effectively increase a customer’s total spending. We generally design 80-100 styles to accessorize the clothing lines per season. Our accessory line was well-received in 2010, and the sales revenue of accessory products represented 1.5% of the total revenue in 2010.





In the fourth quarter of 2007, we started designing and developing “Omnialuo Collections” to target “golden collar” female professionals in China. The garments are generally priced from US$250 to US$400. We generally produce only 100 to 200 pieces per style, so as to create a sense of exclusivity. We initially introduced “Omnialuo Collections” to the market on a small scale in the fourth quarter of 2007 and fully launched the product line in the third quarter of 2008. In 2009 and 2010, we continue our efforts in developing this collection to target more female professionals with strong consuming power.





4




Pricing





Our design, marketing, and sales divisions are responsible for pricing our products. The design, marketing, and sales divisions make internal evaluations of apparel based on predicted market acceptance and then price the items accordingly. The final price also takes into consideration competitive apparel price levels.





Current Pricing Strategy





Prior to 2009, our target customers were professional urban working women aging between 25 to 35 and the retail price range of our products was between $40 to $300 with a majority of items priced between $60 and $150. Since 2009, we have been adjusting the styles of our apparel to target a more mature age group of such women aging between 28 to 45, whom we believe have more disposable income and better brand loyalty. Currently, the retail price range of our products is between $110 to $400 per item, with the majority of items priced between $130 and $300. We believe this price range is considered the middle to upper-middle price range in the women’s apparel market.





Our full retail price of apparel is typically five to six times our actual production cost. For example, if a shirt costs $15 in raw materials and manufacturing, full retail price will be $83, or 5.5 times production cost. However, only “new arrival” apparel sells at full retail price. The “new arrival” period usually lasts for two months. After such time, various discounts and promotions reduce the actual selling price to between 60% to 80% of the full retail price, which is equivalent to 3 to 4 times production cost.





In China, the average selling price for similar apparel after the new arrival period is 60% to 70% of the full retail price. Our average is better than this average, as we do not discount our products as much as other manufacturers, in part to support our image as a premium brand. Our independent distributors do have some latitude to deviate from our discount policies, but our experience to date is that we provide greater discounts than do our independent distributors.





New Pricing Strategy





We intend to implement a new pricing strategy in 2012, which is to increase the full retail price to eight to ten times our production cost, and to increase our average selling price to six to eight times our production cost.  Quality has been a top priority in 2011 to prepare for the implementation of this new pricing strategy.




We do not expect the price increase to result in a net reduction in sales as we believe that (i) the price increase is in line with industry trends, and (ii) our enhanced advertising campaign will raise brand recognition, thereby increasing sales. The average gross profit margin of all of our products for fiscal year 2010 was 61%. Our target is to increase the average gross profit margin of all of our products to 62% for fiscal year 2011.


Customers





In China, professional women are generally divided into three categories, “white-collar”, “pink-collar” and “golden-collar” (when accounting for purchasing-power parity, the lifestyle of a household with annual income of $12,500 in China is similar to the lifestyle of a household earning $40,000 annually in the United States). (Source: National Bureau of Statistics of China; McKinsey Global Institute Analysis 2006. Both the individual income and household income referred to here are on an after-tax basis.)





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 like to wear luxury brands. Our brands will eventually target “golden-collar” females as well.





Our current target customers are “white-collar”, “pink-collar” and “golden-collar” professional urban working females between the ages of 28 to 45. The annual income of our targeted customers ranges from $3,700 to $45,000 .




Prior to 2009, we targeted professional urban working females between the ages of 25 to 35.  Since 2009, we have started to expand our target demographic to 35 to 45 year-old females by offering premium and mature styles of apparel. Since 2007, our designs in the spring/summer wear collection have been gradually reflecting these styles. Tapping into the 35 to 45 year-old female market is also intended to develop a large group of loyal customers as well as increase revenues and profits. In China, the wealthiest consumers are the 25 to 45 year-old group, much younger than the highest earning group (45-54 years old) in the United States (McKinsey & Company’s proprietary 2004 personal-financial-services surveys in China). A study by Women’s Wear Daily (“In the Crosshairs”, an article written by Lisa Movius, published in Women’s Wear Daily on March 22, 2005) indicated that urban females aged between 25 to 35 in China demonstrate the highest consumption needs in apparel, spending more than 20% of their disposable income on clothing compared to the national average of 8% to 10%. Our strategy of focusing on the 28 to 45 year-old urban female segment is intended to capitalize on this consumption pattern.





5




Distribution Network and Methods





Our products are sold in the following types of stores: (i) Company-owned stores, which stores are owned exclusively by the Company, (ii) co-owned stores, which stores are owned jointly by the Company and a third party, and (iii) independent distributor stores, stores 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.





The table below summarizes the characteristics of our major distribution channels and the number of stores we had as of December 31, 2010:




Sales Channel

Sub Channel

Location

Objective

Characteristics

*Store Level

Net Profit

MarginCompany-owned

Stores (25)

Flagship Stores

Major shopping malls in Tier 1 cities

Showcase brand and attract customers and distributors

Capital outlay: High

Inventory risk: High

Operating expenses: medium

Medium-lowStandard Stores

Key shopping malls in highly competitive Tier 1 & Tier 2 cities

Test market to gauge customer interest and increase sales

Capital outlay: High

Inventory risk: Medium

Operating expenses: Medium

MediumCo-owned Stores (9)

Co-owned Stores

Tier 1 & Tier 2 cities

Maximize sales and profit

Capital outlay: Medium

Inventory risk: High

Operating expenses: Medium

Medium-highIndependent Distributor Stores (80)

Independent Distributor Stores

Tier 1, Tier 2 & Tier 3 cities

Maximize sales and profit

Capital outlay: Low

Inventory risk: Low

Operating expenses: Low

High








* In calculating the store level net profit margin, we take into consideration related store expenses billed to us, including decoration, rent, payroll, mall management fees, and utilities.





6




Company-owned Stores





Company-owned stores are retail stores owned 100% by us and which sell the OMNIALUO Brand exclusively. We manage the daily operations of these stores, and pay all operating expenses, including decoration, rent, payroll, and utilities. All Company-owned stores are located either within shopping malls or in independent stores located on the street. There are two types of Company-owned stores, (1) flagship stores, and (2) standard stores. Flagship stores are high-profile stores, located in key shopping malls of first-tier cities, such as Shanghai, Beijing, and Shenzhen.  These stores are extravagantly decorated, display a number of luxurious items and offer the complete OMNIALUO Brand product line. The cost of opening and operating flagship stores is high, thus making them the least profitable among all store types. Standard stores are well decorated, however, they are less extravagant than the flagship stores, and are operated in major shopping malls of the first-tier and second-tier cities.  These stores are fashionably decorated and offer the most complete product lines. These stores serve to showcase and promote the OMNIALUO brands. In addition, the Company-owned stores are used to monitor market trends and our products’ performance. Company-owned stores have the lowest profitability among all our distribution channels. Nonetheless, we believe that shopping malls are the best location for our stores as it is believed that shopping malls and department stores generate a significant amount of apparel sales in urban cities in China.





Co-owned Stores





Co-owned stores are owned jointly by us and a third party and sell the OMNIALUO Brand exclusively. All co-owned stores are located in key shopping malls in first-tier and second-tier cities. We are obligated to share revenues with the shopping malls in which our stores are located. In some instances there are minimum revenue payments to the landlord, or a threshold before revenue is split, or both. On average, we must turn over 20% of the profits from each store to the shopping mall in which such store is located. The co-ownership partner receives 30% of the revenue from co-owned stores, after deducting the 20% due to the shopping mall. Operating expenses are split evenly between us and the co-ownership partners, however, 70% of the up-front investment is made by us. We retain full ownership of the inventory delivered to the co-owned stores. Co-owned stores serve as good complements to Company-owned stores and independent distributor stores. Co-owned stores had a relatively high net profit margin of 50% to 60%.





As of December 31, 2010 and 2009, we operated 34 and 35 retail stores, respectively, of which there were 25 and 27 Company-owned stores, respectively, in key shopping malls in the first-tier and second-tier cities (see below under“Location of Retail Stores - Markets”  ), and 9 and 8 co-owned stores, respectively, in key shopping malls located in first-tier and second-tier cities. The two types of stores collectively accounted for approximately 38.3% of our total revenue in 2010 and approximately 34.9% of our total revenue in 2009.





Independent Distributor Stores





Independent distributor stores are owned 100% by a third party and sell the OMNIALUO Brand exclusively. Our products are sold to independent distributor stores at 35-40% of the full retail price. We average approximately 50-55% net profit margin on sales to the independent distributors. No items are sold on consignment. The independent distributor stores make a 30% down payment upon ordering and pay the balance before any shipment is sent. Hence, the independent distributor store model generates a high profit margin for us, with no upfront investment, minimal inventory risk and minimal cash flow shortage.





Independent distributor stores are the most important distribution channel for our sales. As of December 31, 2010 and December 31, 2009, we had 80 and 73 independent distributor stores, respectively, across China. The independent distributor stores represented approximately 61.7% of our total revenues in 2010, and represent approximately 65.1% of our total revenues in 2009. Our future success is to a large extent dependent on increasing the number of the independent distributor stores.





During 2010, there was one customer who contributed 12% to the Company’s consolidated revenue. During 2009, there was one customer who contributed 24% to the Company’s consolidated revenue.





Outlets & Special Sales Promotions





Periodically, we run outlet sales in major malls to dispose of excess inventory at the end of each season. We earn a small profit from the outlet channel.





7




Dedicated Support for Independent Distributors and Co-ownership Partners





We provide assistance to our independent distributors and co-ownership partners. By helping the independent distributors and co-ownership partners operate efficiently and profitably, and rewarding independent distributors and co-ownership partners that meet or exceed sales targets, we hope to encourage successful distributors and co-ownership partners to open more stores. Many of our top ten distributors have multiple independent or co-ownership stores.





We provide assistance to our independent distributors and co-ownership partners in the following areas of operations.





(i) Setting up: retail site selection, construction, provision of our retail infrastructure, image conformity and organization of the operational systems.





(ii) Training: continuing support on visual display, customer service and store administration.





(iii) Advertisement and promotion: coordinating system-wide advertising and promotional activities to increase independent distributors’ and co-partners’ sales and profits. Beyond discounts, promotional activities consist of loyalty clubs and members’ only events, store and Company anniversary promotions, limited editions, gift items and sales promotions coordinated with other suppliers of accessories.
 
 (iv) Inventory liquidation: helping independent distributors to move excess inventory by exchanging inventories among stores and selling through outlets.
 
 (v) Financial analysis and support: Our finance department can analyze each store’s financial situation and recommend specific performance adjustments. It also administers incentive systems to reward successful independent distributors and maintain the highest standards of quality control.


Growth Plan for Distribution Channels





Since our formation in the third quarter of 2006, one of our growth strategies is to open new stores, especially independent distributor stores and co-owned stores which generally have higher margins than Company-owned stores. However, as a result of the global economic recession and the presumed temporary but nonetheless marked decrease in Chinese consumer spending, particularly in the fourth quarter 2008, we were forced to close certain stores that did not make their pre-determined sales requirements. We believe that it was necessary to remove non-performers from an otherwise strong network of retail outlets and closed additional non-performing stores in 2009.
 
 As of December 31, 2009, we had 108 stores in total, including 27 Company-owned stores, 8 co-owned stores and 73 independent distributor stores. During fiscal 2010, with the market gradually recovering from the economic recession, we opened 6 stores.  As of December 31, 2010, we had 114 stores in total, including 25 Company-owned stores, 9 co-owned stores and 80 independent distributor stores. The total store count is still subject to change based on prevailing market conditions. If the market condition continues to improve, we expect to open more stores.
 
 During fiscal 2010, we closed two Company-owned stores and opened one co-owned stores and 7 independent stores. We believe our focus in expanding independent distributor stores and co-owned stores is generally feasible because we structure our independent distributor stores and co-owned stores to require low startup costs. We are also prepared to launch advertising campaigns and market promotions to boost our brand recognition, when necessary, in conjunction with our expansion plan. We launched advertising campaigns and market promotions of OmniaLuo in October 2007 that continued into 2010. The advertising campaign features Ms. Zheng Luo and the OMNIALUO brands in major fashion magazines in China such as Vogue, Harper’s Bazaar and Cosmopolitan. We believe that the increased publicity will enhance our brand image and result in increased interest from independent distributors and co-partners.


8




Franchising





We will be eligible to enter into franchise arrangements one year after our application for a retail license is approved. However, we have no existing plans to enter into such arrangements.





Location of Our Stores - Markets





There is significant regional disparity in China with respect to per capita GDP. Generally, China is divided into five regions, the Eastern, Southern, Western, Northern and Central regions, with the Eastern and Southern China being the richest regions.





Our OMNIALUO Brand apparel has been well-received in the Southern region, and also has a certain level of market penetration in the Eastern and Central regions. We are currently making efforts to strengthen our foothold in existing markets, increase our sales in the Eastern and Southern regions, and develop a market in the Northern region.





Our products are marketed and sold in cities in China that have the highest levels of average disposable income. For marketing purposes, we classify cities into five groups as follows:





(i)
First-tier cities are cosmopolitan cities located in the center of each of the five geographic regions. Shanghai and Hangzhou (Eastern China), Shenzhen and Guangzhou (Southern China), Xi’an, Chengdu, and Chongqing (Western China), Beijing and Shenyang (Northern China), and Wuhan and Changsha (Central China) are first-tier cities.





(ii)
Second-tier cities are typically provincial capitals excluding the cities in tier one. In China, there are approximately 25 second-tier cities.





(iii)
Third-tier cities are major towns outside the provincial capitals. In China, there are over 265 third-tier cities, of which 50 have populations of over 1 million.


(iv)
Fourth-tier cities are small cities distributed in hundreds of small counties.
  (v)
Fifth-tier cities are small cities in rural and remote areas.


Our products are currently sold in first-, second- and third-tier cities. The tables below provide geographical distribution of our sales channels as of December 31, 2010.


Company-Owned Stores and Co-Owned Stores


Region

Main City

Number of StoresEastern China

Shanghai


4Other


0Southern China

Shenzhen


13Guangzhou


4Other


2Fujian


3Western China

Kunming, Chengdu


4Central China

Wuhan


4Northern China

Shenyang, Harbin, Beijing, Jinzhou, Qingdao


0Total




34





Independent Distributor Stores


Region

Total Number of Stores


Number of DistributorsEastern China


26



22Southern China


45



23Central China


15



11Western China


16



12Northern China


12



12Total


114



80




9




Product Design, Research and Development





Designers





One of our main strengths is our artistic design team led by Ms. Zheng Luo, who is our chief designer, founder and chief executive officer. Ms. Zheng Luo is a prominent designer in China’s fashion industry.  Our design team consists of 16 designers, many of whom have been working with Ms. Zheng Luo for several years. Ms. Zheng Luo’s ability to retain her design team provides for consistent designs and greater brand loyalty.





Ms. Zheng Luo and the OMNIALUO brands have been featured frequently in various popular fashion magazines such asHarper’s Bazaar ,L’Official ,Marie Claire ,Vogue ,Jessica  andCosmopolitan . Ms. Zheng Luo has also been interviewed by many leading domestic and international media, including China Central Television (“CCTV”), the largest TV network in China, Hong Kong Phoenix TV, French Fashion TV, Italian Orbit TV, Vogue UK and Washington Daily. In 2003, Ms. Luo was invited to present her design and hold a fashion show for Fashion China Seminar in the Museum of Louvre.  In September 2008, Ms Luo, as the only designer invited from China, held a fashion show at the New York Fashion Week.  In 2008, Ms. Zheng Luo was acknowledged by the Cosmopolitan Magazine as the “Fashion Designer of the Year”.





Ms. Zheng Luo’s designs have been worn by several Chinese media celebrities. In 2006, the well-known Chinese movie star Ms. Ziyi Zhang, who starred in films such as Memoirs of a Geisha, House of Flying Daggers , and Hero, wore one of her evening dresses while attending a celebrity charity banquet. Ms. Luo’s fashion show held in Beijing in November 2006 was attended by, among other notable attendees, Ms. Bingbing Fan, who ranked as the 7th most famous person in China according to Forbes. Ms Bingbing Fan wore Ms. Zheng Luo’s design to that Beijing show.





We conduct active training programs for our designers. Each of our designers attends, on average, more than 10 training sessions ever year and visits the Hong Kong SAR and other major cities in China regularly to see the latest fashion trends and understand local tastes. Training sessions take various forms, including attendance of fashion shows, fashion salons and fashion seminars.





The table below lists some of the awards Ms. Zheng Luo, her team members and the OMNIALUO brand have received.





Awards to Ms. Zheng Luo





2008

Fashion Designer of the Year, awarded by Cosmopolitan Magazine2007

One of the Top 10 Outstanding Designers, awarded by CFDA2006

Golden Peak Award in Beijing’s Fashion Show, awarded byChina Fashion Designers Association (CFDA, the highest authority in China’s fashion industry)



Golden Peak is viewed as the most prestigious award in the Chinese fashion industry. Each year this award is given by the CFDA to one single designer in recognition of his/her overall outstanding achievements in the fashion design industry. Only “The Best Women’s Wear Designer” recipients in the preceding years are qualified to be nominated for the Golden Peak Award.2005

Lycra in Style Designer Award, awarded byHarper’s Bazaar2005

The Best Women’s Wear Designer, awarded by CFDA



This award, granted by CFDA, is regarded as second only to the Golden Peak Award. Ms. Zheng Luo winning the “Best Women’s Wear Designer” award in China is comparable to Calvin Klein’s chief designer, Francisco Costa’s winning the Women’s Wear Designer of the Year in 2006 in the United States.2005

One of the Top 10 Young Designers in China, awarded by CFDA2004

The Best Women’ Wear Designer, awarded by CFDA2004

The Outstanding Designer in Asia, trophy awarded by Moet & Chandon2003

The NAUTICA Originality Foundation Platinum Prize, awarded by Nautica



Ms. Zheng Luo, selected from among more than 1,000 other Chinese designers, won the Nautica prize, a prize awarded to the most talented Chinese designer in 2003.2003

Invited to the Fashion China Seminar held in Paris’ Louvre Museum.



Ms. Zheng Luo, together with five other talented Chinese designers, was invited to present a China-focused fashion show at the Louvre Museum.2002

One of the Top Ten Fashion Designers in CHINA, awarded by CFDA2002

#1 among Top Ten Designers, awarded by CFDA  10
  Awards to the OMNIALUO Brand2006

China Best Women’s Wear Design, awarded by CFDA2005

China Best Women’s Wear Design, awarded by CFDA2004

China Best Women’s Wear Design, awarded by CFDA2003

China Best Women’s Wear Design, awarded by CFDA2002

China Best Women’s Wear Design, awarded by CFDAAwards to Other Company Design Professionals2006

Ms. Yi Zhou was awarded one of the top ten designers in Guangdong Province by CFDA





Product Design Process





New collections in the Chinese fashion industry are usually introduced twice each year, one collection for Spring/Summer and one collection for Fall/Winter.





In order to stay on top of the latest fashion trends, we have been introducing new collections at trade shows or fashion shows four times a year. Specifically, we now introduce our (i) spring collection in November, (ii) summer collection in March, (iii) fall collection in May, and (iv) winter collection in August.





We typically receive, on average, 80% of our orders during these trade events. This percentage is expected to be lower going forward due to our enhanced marketing efforts outside of the trade events and we expect to obtain more orders from other distributors who do not participate in the trade events. We completed the implementation of a new information management system for product order placements, to enhance our overall business process management, in Company-owned and co-owned stores in 2007. Since then, we expanded the system to the distributor stores and have implemented the system in 72 out of our 80 independent distributor stores as of the date of this report.





Our design team currently develops more than 1,700 new products per year, but only releases about 300-500 new products into the market each season after a rigorous selection process. We constantly focus on improving the design and quality of the garments we produce.





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The design process for each season requires approximately fifty to sixty days from conceptualization to finalization, and can be roughly divided into three stages, planning, design and sample making. The design process of one season will start while that of the preceding season is still in progress.





(i)
Planning. In the planning stage, our design team forecasts the upcoming seasons’ fashion trends for Chinese women’s apparel. The goal is to integrate the latest North American fashion trends with the Chinese woman’s aesthetic sense. The design teams then develop four themes per collection. After deciding on the main themes, the design team decides how many product lines to introduce under each theme. The planning stage lasts approximately 20 days.





(ii)
Design. In the design stage, our designers collect original fabrics and accessories. The designers then prepare drawings for the individual items in each product line. The design process takes approximately 30 to 40 days.





(iii)
Sample Making. Sample making is the last stage of the design process where pattern making, cutting, sewing, fitting and revision take place and usually lasts for approximately 2 days.





Procurement, Suppliers, Manufacturing, and Quality Control





Procurement





We have a purchasing department currently comprised of five employees. This department is engaged in all procurement activities, such as specification and sample testing, production capability verification, order placement, contract management, and price and quantity negotiations. Final pricing for all orders are approved by both our chief executive officer Ms. Zheng Luo and our vice president.





We do not use independent agents in our procurement activities. We believe that our in-house personnel are better equipped to focus on and represent our interests, to respond to our needs and, are more likely to build long-term relationships with key vendors. We believe that these relationships will improve our access to raw materials at favorable prices over the long-term.





The entire process from searching for suppliers to reaching a procurement agreement usually takes one week. In most cases, it takes 20 to 30 days to receive the purchased raw materials. In case inventory is lower than required, we remedy shortfalls by purchasing from the same suppliers to ensure the consistency of quality. Manufacturers’ delivery dates are generally specified by contract to ensure that products will be available in our warehouses when we need them. We believe we have good relationships with our suppliers and, generally, there are adequate sources to enable us to produce sufficient supply of apparel in a timely manner. Once we purchase the material, those materials are delivered to independent manufacturers for further processing and/or decoration.





Suppliers





The raw materials required by us can be divided into two categories: (i) tatting and knitwear, and (ii) woolen and leather-made garments. For tatting and knitwear made garments, we purchase raw materials which are delivered to independent manufacturers for further processing. For woolen and leather-made garments, we purchase ready-to-wear clothes which require further design work and are also delivered to independent manufactures for further processing and decoration.





We currently purchase a variety of materials from more than fifty vendors. We believe that there is a sufficient number of suppliers for such materials in the market. In 2010, Junhao Silk was the largest supplier for raw material, representing more than 5% of our total raw material purchase. In 2009, the largest raw material supplier was Shenzhen Yisheng Fabric Co., Ltd. representing more than 5% of our total raw material purchase.


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Outsourced Manufacturing





We do not operate any manufacturing facilities, and we do not currently have any plans to do so. Our apparel is produced by independent manufacturers that are selected, monitored and coordinated by our quality control department to assure conformity to our quality standards. We believe that the use of independent manufacturers increases our production flexibility, enables us to focus on higher margin business, and, at the same time substantially reduces capital expenditures and avoids the costs of maintaining a large production workforce. We maintain ownership of the raw materials and finished goods while such items are at our independent manufacturers.




We believe that our long-term, reliable and cooperative relationships with many of our manufacturers provide a competitive advantage over many of our competitors. Our merchandise is produced by approximately 20 independent manufacturers located in Guangdong Province, China with close proximity to our headquarters in Shenzhen, China. In 2010, we had two independent manufacturers who manufactured more than 10% of our annual manufactured garments in terms of dollar amount: Shenzhen Yinhu Apparel Co., Ltd and Shenzhen Yuqing Garment Co., Ltd. manufactured approximately 36.0% and 13.3% of our annual manufactured garments in terms of dollar amount. respectively. In 2009, we had approximately 15 independent manufacturers in Guangdong, among which Xin Cai produced 10.8% of our annual manufactured garments in terms of dollar amount.


Although there are no long-term agreements between us and any of our contractors or suppliers, we believe our relationships with our suppliers and contract manufacturers are excellent.





Quality Control





We monitor the quality of fabrics ordered and inspect samples of each product before production begins. We also perform random quality control checks during and after production before the garments leave our manufacturers. Our quality control personnel visit all independent manufacturers’ facilities at least three times a week. Final inspections occur when the garments are received in our warehouse. After that, we distribute finished garments to retail stores nation-wide. Currently, we have an independent department of quality control with 7 employees to ensure that our products meet our high quality standards and that we deliver high quality products to retail stores. As we further expand our stores and increase our sales, we plan to hire more quality control personnel.





Information Management Systems





Since January 2007, we have been implementing an information management system. This system is intended to enable us to procure raw materials on an economic purchase order basis, keep track of raw materials stock on a real time basis and monitor the production process. This system is intended to improve production efficiency and reduce purchasing and storage costs. We have applied the distribution function of the new system to our Company-owned stores and some of our co-owned stores. By implementing the distribution function, we are able to check our apparel stock in different categories, different sizes and colors on a real-time basis. For example, if one Company-owned store is in need of certain inventory, we are able to immediately communicate to the other Company-owned store with excess inventory in that category and ensure a prompt redistribution of inventory among both stores within one or two days. This new distribution function is expected to reduce lost sales arising from inventory shortages in particular stores and better allocate resources among different stores across different regions. Currently, we are satisfied with the implementation results of the new distribution function in the Company-owned stores and our co-owned stores. We have started to extend the application of the new system to selected independent distributor stores. As of December 31, 2010, 72 out of our total of 80 independent distributors are qualified to have access to the new system, which accounted for 90% of our total independent distributors stores at the end of 2010.


Inventory





We generally receive the bulk of our orders from retail stores in trade or fashion shows and usually fulfill these orders within three months. The orders are non-cancelable, requiring in the case of orders from independent distributors a 30% down payment upon the order placement, with full payment due before delivery of the goods. Once orders are placed, retail stores are allowed to exchange 10% of the merchandise ordered for the first time but no exchanges are allowed in subsequent orders for the same products.





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Backlog





On December 31, 2010, our backlog of unfilled firm orders for delivery was approximately $2.0 million, compared with a backlog of unfilled firm orders for delivery of approximately $2.5 million as of December 31, 2009. We believe that our backlog at any specific point in time is not necessarily indicative of sales and business results in the near future.





Employees





All of our employees are employees of our wholly owned PRC operating subsidiary, Oriental Fashion. As of December 31, 2010, we had approximately 216 full-time employees. We consider our employee relationships to be satisfactory. We plan to increase the number and level of our skilled executive management executives.





Intellectual Property





The Company has two trademarks, OMNIALO and OMNIALUO, that are registered in the PRC. Starting from November 17, 2009, such trademarks have also been registered in the United States.





Omnialo. Oriental Fashion has acquired rights of use to the Chinese and English OMNIALO trademarks, which were assigned to it for nominal cost by Ms. Zheng Luo, until October 6, 2017. The transfer of ownership of the trademarks has been approved by the Trademark Office of State Administration for Industry and Commerce (the “Trademark Office”). Ms. Zheng Luo has licensed use of these trademarks to Oriental Fashion. These trademarks originally expired in September 2007 (for the Chinese trademark) and October 2007 (for the English trademark), and applications to extend their registration until 2013 were filed and were approved in September 2007, resulting in new expiration dates of September 2017 (for the Chinese trademark) and October 2017 (for the English trademark). Both Oumeng and Ms. Zheng Luo have entered into agreements with Oriental Fashion agreeing not to use the OMNIALO trademarks in the future.





Omnialuo. Oriental Fashion has licensed, at nominal cost, rights of use to the Chinese and English OMNIALUO trademarks, the registration of which Ms. Zheng Luo had initially applied for in March 2005. These applications were approved by the trademark office on January 19, 2009. Ms. Zheng Luo transferred the Chinese and English OMNIALUO trademarks to Oriental Fashion at nominal cost subsequent to registration of the OMNIALUO trademarks by the Trademark Office. Both Oumeng and Ms. Zheng Luo have entered into agreements with Oriental Fashion agreeing not to use the OMNIALUO trademarks in the future.





Competition





The women’s apparel market is highly fragmented in China. It is estimated by the China Garment Industry Report that in 2005, the top ten women’s wear brands, including international brands and domestic ones, totaled only 13.36% of the total market. The market is extremely sensitive to fashion swings and diversified consumer preferences.





Honoring commitments made the World Trade Organization agreements, on December 11, 2004, the Chinese government lifted all restrictions imposed on foreign enterprises regarding their entry into China. Foreign retailers are allowed to establish wholly owned foreign enterprises in China with no restrictions on registered capital. Further, foreign retailers are allowed to open stores in any geographic areas in China. Therefore, in addition to domestic competition, the Company is subject to increasing competition from international brands.





Among our competitors are well established domestic brands such as Moiselle and Pink Mary and well established international brands such as Ports 1961 and others, most of which have the same demographic focus as us. Many of our domestic competitors, and most or all of our international competitors, are significantly larger and have substantially greater distribution and marketing capabilities, capital resources and brand recognition. We believe we can effectively compete with other brands based on our attention to Chinese customers’ aesthetic tastes, reflected through our design and use of materials, and the role in and commitment to the Company of our chief executive officer, chief designer, founder and principal stockholder, Ms. Zheng Luo.





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Growth Strategy





We plan to grow our sales and net profit margin based on the following strategies:





Selectively Expand Distribution Channels





Since our formation in the third quarter of 2006, one of our growth strategies is to open new stores, especially independent distributor stores and co-owned stores which generally have higher margins than company-owned stores. As of December 31, 2008, we had 208 stores.  However, as a result of the global economic recession and the presumed temporary but nonetheless marked decrease in Chinese consumer spending, particularly in the fourth quarter 2008, we were forced to close certain stores that did not make their pre-determined sales requirements. We believe that it was necessary to remove non-performers from an otherwise strong network of retail outlets and closed additional non-performing stores in 2009. As of December 31, 2009, we had 108 stores in total, including 27 company-owned stores, 8 co-owned stores and 73 independent distributor stores. During fiscal 2010, with the market gradually recovering from the economic recession, we opened 6 stores. During fiscal 2010, we closed two company-owned stores and opened one co-owned stores and 7 independent stores. As of December 31, 2010, we had 114 stores in total, including 25 company-owned stores, 9 co-owned stores and 80 independent distributor stores. The total store count is still subject to change based on prevailing market conditions. If the market condition continues to improve, we expect to open more stores.





We believe our focus in expanding independent distributor stores and co-owned stores is generally feasible because we structure our independent distributor stores and co-owned stores to require low startup costs. We are also prepared to launch advertising campaigns and market promotions to boost our brand recognition, when necessary, in conjunction with our expansion plan. We launched advertising campaigns and market promotions of OmniaLuo in October 2007 that continued into 2010. The advertising campaign features Ms. Zheng Luo and the OMNIALUO brands at the Shenzhen Airport and in major fashion magazines in China such as Vogue, Harper’s Bazaar and Cosmopolitan. We believe that the increased publicity will enhance our brand image and result in increased interest from independent distributors and co-partners.





Develop New Merchandise Categories





Accessories have been identified as an important future product line for the OMNIALUO Brand. The new expanded accessories product line was released in the third quarter of 2007. In addition, in the first quarter of 2009, we applied to the Trademark Office for a new trademark, OMNIALUO WEEKEND.  It was approved by the Trademark Office in December 2010. The products with this trademark target female professionals in China who are 18-30 years old. We intend for OMNIALUO WEEKEND and OMNIALUO to develop into a more perfect brand system, which we will then take “up market”.





Expand our Market Vertically and Horizontally





We aim to continue to target the 28 to 35 year old female demographic and vertically extend into the 35 to 45 age group by offering premium and mature styled apparel. The 35 to 45 year old female age group generally has higher brand loyalty and purchasing power. Penetrating this age group is intended to develop a large group of loyal customers and increase our profits. We will also seek to expand our market horizontally by increasing our visibility in northern China by offering apparel tailored to the local consumers’ dressing tastes. This is being implemented by our designers who have an understanding of local northern China preferences. These designs were included in our spring/summer 2009 and 2010 product lines. One of the main tasks in 2011 is to further expand into northern China market to enhance OMNIALUO’s brand penetration in China.





Regulatory Matters





Franchise Regulation





We will be eligible to enter into franchise arrangements one year after our application for a retail license is approved. However, we have no existing plans to enter into such arrangements. Should we enter into such arrangements, we would be required to comply with certain legal requirements, including owning at least two Company-owned or co-owned stores in China for more than one year, having the ability to provide long-term training services to the franchisee, having a goods supply system that is stable and that can guarantee quality, and having a good reputation in business operations, and we would be required to submit an application to the relevant Chinese authorities.  Should we chose to enter into franchise arrangements, we believe there would be little difficulty in meeting these requirements.





15




Industry Overview





The garment industry in China can be divided into seven major categories, which are women’s outerwear, men’s outerwear, kids’ outerwear, knitwear, underwear/nightwear, accessories, and socks. Women’s outerwear is the biggest sector in the Chinese garment industry and accounted for approximately 36% of garment industry sales by dollar amount in 2005. In contrast, men’s outerwear only represented approximately 22% of industry sales in the same period. Underwear/nightwear is also a significant sector in garment industry in China.





The below diagram illustrates the percentage of sales for each garment category in 2005 in China. Overall garment industry sales in China in 2005 were $87 billion (Source: Chinese Garment Industry Report, 2005-2006).











Distribution Channels





In China, urban dwellers do most of their shopping in shopping malls or department stores because they feel brands displayed in big stores are more trustworthy with high quality guarantees. CGIR indicated that, in 2005, 55% of garment purchases were made in shopping malls or department stores, 23% in specialty stores such as franchised stores, 13% in grocery stores, 6% in outlets and the remaining 3% in other channels.





The diagram below illustrated the percentage of Garment Sales in China by Distribution Channels in 2005. Overall garment industry sales in 2005 in China were $87 billion. (Source: Chinese Garment Industry Report, 2005-2006.)





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Market Segments





The Chinese women’s apparel market can be segmented into different categories by price, age, and style as indicated in the following tables.





Segments by Garment Price





Price Category

Full Retail

Price Range

Customer’s Social

Status

Customers’ Annual

Income

Family’s Social

Class

Family’s Annual

Household IncomeLow price

$
< 37

Blue-Collar

$
< 1,500

Poor

$
< $3,125Lower-middle price

$
37-$75

Blue-White Collar

$
1,500-$2,500

Lower-Middle Class

$
3,125-$5,000Middle price

$
75-$125

White-collar

$
2,500 - $7,500

Upper-middle Class

$
5,000-$12,500Upper-middle price

$
125-$188

Pink-collar

$
7,500-$22,500

Mass Affluent

$
12,500-$25,000High price

$
188-$375

Golden-collar I

$
22,500-$30,000

Global Affluent

$
25,000-$50,000Luxury price

$
> 375

Golden-collar II

$
>30,000

Wealthy

$
> 50,000





Note: all income figures are after tax.





In 2005, the upper-middle class and mass affluent class accounted for 9.4% and 0.5% of the total urban population respectively. However, they represent 24.2% and 2.4% of total urban disposable income. With the growing economy in China, the Chinese urban population is undergoing structural changes. The McKinsey report projected that by 2015, the percentage of upper-middle class could grow to 21.2% from 12.6% in 2005 and the mass affluent class could grow to 5.6% from 0.5% in 2005. The report also projected that the two groups collectively would occupy 44.3% of urban disposable income, compared to 26% in 2005.





Segments by Consumer Age Group





Age Group

Age Range

% of Total

Female

Group Size (‘000)<15

Kids


18
%

111,42215-19

Teenagers


9
%

52,67619-25

Youth


7
%

40,44025-35

Young Adults


17
%

103,90335-45

Middle-age Adults


18
%

111,122>45

Seniors


32
%

196,333





Source: National Bureau of Statistics of China, 2005





The 25 to 45 year-old female group is the most heavily populated group in China. By the end of 2004, this group had a population of 215 million, accounting for 35% of the total Chinese female population, which is the wealthiest group in China. The McKinsey report revealed that in China, the wealthiest consumers are in the 25 to 45 year-old group, much younger than the highest earners in the United States who are in the 45 to 54 year-old group. Furthermore, 25 to 35 year-old females have the strongest purchasing desire for apparel. It is reported that 25 to 35 year-old females spend more than 20% of their disposable income on clothing, while average Chinese spend 8% to 10% (“In the Crosshairs”, an article written by Lisa Movius, published inWomen’s Wear Daily   on March 22, 2005).





Target Market Growth





China’s GDP growth is expected continue in the next five years as China is emerging as a major economic power. The increasing urbanization rate and a substantial annual increase in per capita consumption are expected to fuel the growth in apparel market. The CGIR forecasts that the apparel industry will continue to grow for the next few years and the women’s apparel market is expected to outpace the overall apparel industry. As consumption in the Chinese apparel industry is undertaking structural changes from quality focus to quality brand focus, the fastest growth segment will likely to take place in branded products like the OMNIALUO brands.





The Company targets white-collar and pink-collar females in China in the upper-middle class and mass affluent class. As the economic growth continues, growth in both of these classes and their disposable income is expected.





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ITEM 1A. RISK FACTORS





Investing in our securities involves a material degree of risk. Before making an investment decision, you should carefully consider the risk factors set forth in this Annual Report, as well as other information we include in this Annual Report. Although every effort has been made to anticipate possible risks, unforeseen conditions and unexpected events may arise, and this list may not be all-inclusive.





Risks Related to Our Business





The recent global financial crisis could negatively affect our business, results of operations, and financial condition.





The recent credit crisis and turmoil in the global financial system may have an adverse impact on our business and our financial condition, and we may face challenges if conditions in the financial markets do not improve.  Our ability to access the capital markets may be restricted at a time when we would like, or need, to raise capital, which could have an impact on our flexibility to react to changing economic and business conditions.  In addition, these economic conditions also impact levels of commercial and consumer spending, which have recently deteriorated significantly and may remain depressed for the foreseeable future.  It is uncertain how long the global crisis in the financial services and credit markets will continue and how much of an impact it will have on the global economy in general or the Chinese economy in particular.  If demand for our products and services fluctuates as a result of economic conditions or otherwise, our revenue and gross margin could be harmed.





Our business is highly sensitive to economic conditions and consumer spending and an economic downturn could have a material adverse impact on us.





The retail and apparel industries historically have been subject to substantial cyclical variation. A recession in the general economy or a decline in consumer spending in the apparel industry could have a material adverse effect on our financial performance. Purchases of apparel and related merchandise tend to decline during recessionary periods and may decline at other times. There can be no assurance that a prolonged economic downturn would not have a material adverse impact on us or that our customers could continue to make purchases during a recession.





We are highly dependent on our chief executive officer, chief designer, founder and principal stockholder and other key personnel and if we lose other key management or other personnel, our business will suffer.





Our future success will depend in part on the continued service of certain key management and other personnel, particularly Ms. Zheng Luo, our chief executive officer and chief designer, who is closely associated with our brand names. Although Ms. Zheng Luo is our principal shareholder, and has entered into non-competition agreements with us and our Chinese operating subsidiary, none of these factors and arrangements ensure the continued availability of Ms. Zheng Luo’s services to us. We currently have not obtained key-person life insurance with respect to Ms. Zheng Luo. Even if we are to obtain such key-person life insurance for Ms. Zheng Luo, such insurance will only cover certain risks relating to our dependency on Ms. Zheng Luo, and the amount of such insurance may not be adequate to compensate for any loss of Ms. Zheng Luo’s services.





In addition, success will also depend on our ability to attract and retain qualified managers, design, sales and marketing personnel. Competition for these employees is intense. There is no assurance that we can retain our existing key personnel or attract and retain sufficient numbers of qualified employees in the future. The loss of key employees or the inability to hire or retain qualified personnel in the future would have a material adverse effect on the development of our business and our ability to develop, market and sell our products.





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





Our management team lacks public company experience, which could impair our ability to comply with legal and regulatory requirements such as those imposed by the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley.  Aside from our chief financial officer, David Xuguo Wang, who also currently serves as Senior Vice President in a private equity investment firm under Haitong Securities, Co., Ltd., since July 2010. Our senior management does not have experience 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 be unable to implement programs and policies in an effective and timely manner that adequately respond to the increased legal, regulatory and reporting requirements associated with being a publicly traded company.  Our failure to comply with all applicable requirements could lead to the imposition of fines and penalties, distract our management from attending to the management and growth of our business, result in a loss of investor confidence in our financial reports and have an adverse effect on our business and stock price.





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As a public company, we are obligated to maintain effective internal controls over financial reporting. Our internal controls may not be determined to be effective, which may adversely affect investor confidence in us and, as a result, decrease the value of our Common Stock.





The PRC has not adopted management and financial reporting concepts and practices similar to those in the United States.  We may have difficulty in hiring and retaining a sufficient number of qualified finance and management employees to work in the PRC.  As a result of these factors, we may experience difficulty in establishing and maintaining accounting and financial controls, collecting financial data, budgeting, managing our funds and preparing financial statements, books of account and corporate records and instituting business practices that meet investors’ expectations in the United States.





Rules adopted by the Securities and Exchange Commission, or the Commission, pursuant to Section 404 of Sarbanes-Oxley require annual assessment of our internal controls over financial reporting.  This requirement first applied to our annual report on Form 10-K for the fiscal year ended December 31, 2008.  The standards that must be met for management to assess the internal controls over financial reporting as effective are relatively new and complex and require significant documentation, testing and possible remediation to meet the detailed standards. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting.  The process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404 is costly and challenging. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective. If we are unable to conclude that our internal control over financial reporting is effective. We could lose investor confidence in the accuracy and completeness of our financial reports, which could harm our business and cause the price of our Common Stock to decline.





If we are unable to anticipate fashion trends in a timely manner and respond to such trends, our reputation could be harmed and profitability could decrease.





The women’s apparel industry has many characteristics including changing consumer preferences and shifting fashion trends. We believe that our success depends in substantial part on our ability to anticipate emerging fashion trends and design and customize our products to meet new trends and changing consumer demands in a timely manner. There can be no assurance that we will continue to be successful in this regard. Our failure to anticipate and respond to these changes could result in lower sales, excess inventories and lower margins, which would have a material adverse effect on our operations, business and financial condition.





Our business is highly seasonal and if we fall significantly short of our anticipated earnings in one or more quarters, it will significantly decrease the working capital available to us in the following quarters, which may adversely affect our purchasing abilities.





Our business is highly seasonal, with the highest proportion of sales and operating income generally being generated in the fourth quarter of each year, lesser proportions in the second and third quarter of each year, and the lowest proportion of sales and operating income being generated in the first quarter of each year. Our working capital requirements are likely to fluctuate during the year, increasing substantially during one or more quarters as a result of higher planned seasonal inventory levels and higher receivables. If we fall significantly short of our anticipated earnings in one or more quarters, it will significantly decrease the working capital available to us in the following quarters. Due to limitations on borrowing levels, a decrease in working capital may adversely affect our purchasing abilities which would have a material adverse effect on our revenues.





Product branding is important to us and if our brands are misappropriated our reputation could be harmed, which could result in lower sales having a negative impact on our financial results.





We rely upon a combination of trademark, licensing and contractual covenants to establish and protect the brand names of our products. We have registered two of our trademarks and applied for registration of a third trademark in the Trademark Office of China. In our market segments, our reputation is closely related to our brand names. Monitoring unauthorized use of our brand names is difficult, and we cannot be certain that the steps we have taken will prevent their unauthorized use, particularly in foreign countries. Our brand names may be misappropriated or utilized without our consent and such actions may have a material adverse effect on our reputation and on the results of our operations.





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The legal regime in China for the protection of intellectual property rights is still at its early stage of development. Intellectual property protection became an effort in China in 1979 when China began the registration of trademarks nationwide, and also adopted the Criminal Law on the protection of trademarks. Since then, China has adopted its Patent Law, Trademark Law and Copyright Law and promulgated related regulations such as Regulation on Computer Software Protection, Regulation on the Protection of Layout Designs of Integrated Circuits and Regulation on Internet Domain Names. China has also acceded to various international treaties and conventions in this area, such as the Paris Convention for the Protection of Industrial Property, Patent Cooperation Treaty, Madrid Agreement and its Protocol Concerning the International Registration of Marks. In addition, when China became a party to the World Trade Organization in 2001, China amended many of its laws and regulations to comply with the Agreement on Trade-Related Aspects of Intellectual Property Rights. Despite many laws and regulations promulgated and other efforts made by China over the years with a view to tightening up its regulation and protection of intellectual property rights, private parties may not enjoy intellectual property rights in China to the same extent as they would in many Western countries, including the United States, and enforcement of such laws and regulations in China have not achieved the levels reached in those countries. Both the administrative agencies and the court system in China are not well-equipped to deal with violations or handle the nuances and complexities between compliant innovation and non-compliant infringement.





Many of our competitors have substantially greater capabilities and resources and may be able to market products more effectively, which would limit our ability to generate revenue and cash flow.





Competition in the women’s apparel industry is intense and we face increasing domestic and international competition from several companies. Many of our competitors are significantly larger and have substantially greater distribution and marketing capabilities, capital resources and brand recognition. There is no assurance that we will be able to compete successfully against present or future competitors. Such failure to compete would have a material adverse effect on our business and results of operations.





We are uncertain as to our ability to effectively implement and manage our growth strategy.





As part of our growth strategy, we seek to expand our distribution network and introduce new product lines like Omnia Collections and accessories. The success of our growth strategy will depend on brand management, competitive conditions, our ability to manage increased sales and distribution and, in the future, franchise store expansion, the availability of desirable locations and the negotiation of terms with distributor and franchise stores. There is no assurance that we will be able to obtain terms as favorable to us as those under which we now operate or that such terms will not adversely affect our ability to manage inventory risk. There is also no assurance that our growth strategy will be successful or that our sales or net income will increase as a result of the implementation of such strategy.





Our management and internal systems might be inadequate to handle our potential growth.





Successful implementation of our business strategy will require us to develop our operations and effectively manage growth. Any growth will place a significant strain on our systems, management, financial, product design, marketing, distribution and other resources, which would cause us to face operational difficulties. To manage future growth, our management must build operational and financial systems and expand, train, retain and manage our employee base. For instance, we will need to enhance our information systems and operations and attract and retain qualified personnel. Our management may not be able to manage our growth effectively if our systems, procedures, controls and resources are inadequate to support operations. In such case, our expansion would be halted or delayed and we may lose our opportunity to gain significant market share or the timing advantage with which we would otherwise gain significant market share. Any inability to manage growth effectively may harm our ability to implement and execute out current or any subsequent business plans.





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If we are unable to effectively implement our new information management system and data networks, our ability to mange our inventory would be disrupted.





We are implementing a new information management system and data networks. The system has been fully operational in Company-owned stores and co-owned stores since the end of 2007, and we have selected 72 independent distributor stores for implementation of the system by December 31, 2010. Delays or other difficulties in implementing this system could disrupt our ability to manage our inventory effectively. In addition, we plan to establish five regional centers to better monitor each region’s market dynamics, facilitate traffic flows, ensure rapid response and provide partner support and supervision. There is no assurance that this expansion will be completed on time or that it will be successful. Any failure to manage growth effectively could have a material adverse effect on our results of operations and financial condition.





We depend on others to manufacture our products and any disruption in manufacturing could have a material adverse effect on our business.





Our products are manufactured by approximately 20 independent manufacturers. We do not operate any production facilities. One manufacturer engaged by us, Yu Qing Garment Co., Ltd., currently produces approximately 13.3% of our annual manufactured garments in terms of dollar amount. The inability of a manufacturer to ship orders of our products in a timely manner or to meet our quality standards could cause us to miss our customers’ delivery requirements for those items. As a result, cancellation of orders, refusal to accept deliveries or a reduction in purchase prices could have a material adverse effect on us.





We enter into purchase order commitments each season specifying a time frame for delivery, method of payment, design and quality specifications and other standard industry provisions. We do not have long-term contracts with any manufacturer. In addition, we compete with other companies for the production capacity of independent manufacturers and import quota capacity. Some of these competing companies have substantially greater brand recognition, financials, and other resources than we do and thus may have an advantage in the competition for production and import quota capacities.





We require our independent manufacturers to operate in compliance with applicable laws and regulations. While we do not control our manufacturers or their labor practices, our internal and vendor operating guidelines promote compliance with laws and our sourcing personnel periodically visits and monitors the operations of our independent manufacturers. The violation of labor or other laws by one of our independent manufacturers, or the divergence of an independent manufacturer’s labor practices from those generally accepted as ethical, could result in adverse publicity for us and could have a material adverse effect on us.





We may be unable to effectively manage our inventory.





We place orders for our products with our manufacturers prior to the time we have received all of our customers’ orders and maintain an inventory of certain products that we anticipate will be in greater demand. There is no assurance, however, that we will be able to sell the products we have ordered from manufacturers or our existing inventory at a profit or at all. Inventory levels in excess of customer demand may result in inventory write-downs and the sale of excess inventory at discounted prices, which would have a material adverse effect on us and our results of operations.





We depend to some extent on a high volume of mall traffic and the availability of suitable lease space.





Many of our stores are located in shopping malls. Sales at these stores are derived, in part, from the volume of traffic in those malls. Our stores benefit from the ability of the mall’s “anchor” tenants, generally large department stores, and other area attractions to generate consumer traffic in the vicinity of our stores and the continuing popularity of malls as shopping destinations. Sales volume and mall traffic may be adversely affected by economic downturns in a particular area, competition from non-mall retailers and other malls where we do not have stores and the closing of anchor department stores. In addition, a decline in the desirability of the shopping environment in a particular mall, or a decline in the popularity of mall shopping among our target consumers, would adversely affect our business.





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Part of our future growth is significantly dependent on our ability to operate stores in desirable locations with capital investment and lease costs that allow us to earn a reasonable return. We cannot be sure as to when or whether such desirable locations will become available at reasonable costs.





We have closed a significant number of stores in 2008 and 2009 and although we increased our store account in 2010, we cannot be certain that we will be able to execute our plan to open additional stores or that such store openings will be successful.





Since our formation in the third quarter of 2006, one of our growth strategies is to open new stores, especially independent distributor stores and co-owned stores which generally have higher margins than Company-owned stores. However, as a result of the global economic recession and the presumed temporary but nonetheless marked decrease in Chinese consumer spending, particularly in the fourth quarter 2008, we were forced to close certain stores that did not make their pre-determined sales requirements. In fiscal 2008 and 2009, we closed 34 and 100 stores respectively, of the 100 closed stores in 2009 composed of 23 retail stores and 77 distributor stores. With the gradual improvement of the market conditions in 2010, we opened 6 stores in 2010. If the market conditions continue to improve, we expect that we will continue to implement our growth strategy to open more stores.
 
 However, successful implementation of our Company’s growth strategy depends on a number of factors including, but not limited to, favorable economic conditions, obtaining desirable store locations, negotiating acceptable leases, completing projects on budget, supplying proper levels of merchandise and the hiring and training of store managers and sales associates. We cannot assure you that all these factors would exist in our favor for us to be able to execute our plan to open additional stores.
 
 In addition, new stores may place increased demands on our Company’s operational, managerial and administrative resources, which could cause our Company to operate less effectively. Furthermore, there is a possibility that new stores that are opened in existing markets may have an adverse effect on future sales of previously existing stores in such markets. In addition, our failure to predict accurately the demographic or retail environment at any future store location could have a material adverse effect on our business, financial condition and results of operations.


Our expansion into new markets could adversely affect our financial condition and results of operations.





Some of our new stores will be opened in areas of China in which we currently have few or no stores. The expansion into new markets may present competitive, merchandising and administrative challenges that are different from those currently encountered in our existing markets. Any of these challenges could adversely affect our business, financial condition and results of operations. To the extent our new store openings are in existing markets, we may experience reduced net sales volumes in existing stores in those markets.





We depend upon the success of our advertising and marketing programs.





Our business depends on high customer traffic in our stores and effective marketing. We have many initiatives in this area, and we frequently change our advertising and marketing programs. There can be no assurance as to our continued ability to effectively execute our advertising and marketing programs, and any failure to do so could have a material adverse effect on our business and results of operations.





We may face labor shortages or increased labor costs which could adversely affect our growth and operating results.





Labor is a significant component in the cost of operating our stores. If we face labor shortages or increased labor costs because of increased competition for employees, higher employee turnover rates, increases in wages or increases in other employee benefits costs, our operating expenses could increase and our growth could be adversely affected. Our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified employees.





We rely on third parties to distribute our merchandise. If these third parties do not adequately perform this function, our business would be disrupted.





The efficient operation of our business depends on our ability to ship merchandise through third-party carriers directly to our stores. Due to our reliance on these parties for our shipments, interruptions in the ability of our vendors to ship our merchandise or the ability of carriers to fulfill the distribution of merchandise to our stores could adversely affect our business, financial condition and results of operations. An increase in fuel prices may also increase our shipping costs, which could adversely affect our business, financial condition and results of operations.







Risks Related to Doing Business in China





Changes in China’s political or economic situation could harm us and our operational results.





We conduct all of our operations and generate all our revenues in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. Economic reforms adopted by the Chinese government have had a positive effect on the economic development of the country, but the government could change these economic reforms or any of the legal systems at any time. This could either benefit or damage our operations and profitability. Some of the things that could have this effect are:





·
Level of government involvement in the economy;


·
Control of foreign exchange;
 ·
Methods of allocating resources;
 ·
Changes in the development, or rate of development, of the market-oriented sector of the economy;
 ·
Changes in the rapid growth rate of the overall economy;
 ·
Balance of payments position;
 ·
International trade restrictions; and
 ·
International conflict.


The Chinese economy differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development, or OECD, in many ways. As a result of these differences, we may not develop in the same way or at the same rate as might be expected if the Chinese economy were similar to those of the OECD member countries.





Our business is largely subject to the uncertain legal environment in China and our investors’ legal protection could be limited.





The Chinese legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which precedents set in earlier legal cases are not generally used. The overall effect of legislation enacted over the past 20 years has been to enhance the protections afforded to foreign invested enterprises in China. However, these laws, regulations and legal requirements are relatively recent and are evolving rapidly, and their interpretation and enforcement involve uncertainties. These uncertainties could limit the legal protections available to foreign investors, such as the right of foreign invested enterprises (of which we are one) to hold licenses and permits such as requisite business licenses. In addition, all of our executive officers and all of our directors are residents of China and not of the U.S., and substantially all the assets of these persons are located outside the U.S. As a result, it could be difficult for investors to effect service of process in the U.S., or to enforce a judgment obtained in the U.S. against us or any of these persons.





The Chinese government exerts substantial influence over the manner in which we must conduct our business activities.





China only recently has permitted provincial and local economic autonomy and private economic activities. The Chinese government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of these jurisdictions may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.





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Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.





Future inflation in China may inhibit our ability to conduct business profitably in China.





In recent years, the Chinese economy has experienced periods of rapid expansion and high rates of inflation. During the past ten years, the rate of inflation in China has been as high as 20.7% and as low as -2.2%. These factors have led to the adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products.





Any recurrence of severe acute respiratory syndrome, or SARS, or another widespread public health problem, could harm our operations.





A renewed outbreak of SARS or another widespread public health problem in China, where our operations are conducted, could have a negative effect on our operations. Our operations may be impacted by a number of health-related factors, including the following:


·
quarantines or closures of some of our offices which would severely disrupt our operations,
 ·
the sickness or death of our key officers and employees, and
 ·
a general slowdown in the Chinese economy.


Any of the foregoing events or other unforeseen consequences of public health problems could damage our operations.





Restrictions on currency exchange may limit our ability to receive and use our revenues effectively.





The majority of our revenues are and will be settled in RMB and U.S. Dollars, and any future restrictions on currency exchanges may limit our ability to use revenue generated in RMB to fund any future business activities outside China or to make dividend or other payments in U.S. dollars. Although the Chinese government introduced regulations in 1996 to allow greater convertibility of the RMB for current account transactions, significant restrictions still remain, including primarily the restriction that foreign-invested enterprises may only buy, sell or remit foreign currencies after providing valid commercial documents, at those banks in China authorized to conduct foreign exchange business. In addition, conversion of RMB for capital account items, including direct investment and loans, is subject to governmental approval in China, and companies are required to open and maintain separate foreign exchange accounts for capital account items. We cannot be certain that the Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the RMB.





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Failure to comply with PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident stockholders to personal liability, limit our ability to acquire PRC companies or to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute profits to us or otherwise materially adversely affect us.





In October 2005, the PRC State Administration of Foreign Exchange, or SAFE, issued the Notice on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose Companies by Residents Inside China, generally referred to as Circular 75, which required PRC residents to register with the competent local SAFE branch before establishing or acquiring control over an offshore special purpose company, or SPV, for the purpose of engaging in an equity financing outside China on the strength of domestic PRC assets originally held by those residents. Amendments to registrations made under Circular 75 are required in connection with any increase or decrease of capital, transfer of shares, mergers and acquisitions, equity investment or creation of any security interest in any assets located in China to guarantee offshore obligations. In the case of an SPV which was established, and which acquired a related domestic company or assets, before the implementation date of Circular 75, a retroactive SAFE registration was required to have been completed before March 31, 2006. Failure to comply with the requirements of Circular 75, as applied by SAFE, may result in fines and other penalties under PRC laws for evasion of applicable foreign exchange restrictions. Any such failure could also result in the SPV’s affiliates being impeded or prevented from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to the SPV, or from engaging in other transfers of funds into or out of China.





We believe our stockholders who are PRC residents as defined in Circular 75 have registered with the relevant branch of SAFE, as currently required, in connection with their equity interests in us and our acquisitions of equity interests in our PRC subsidiary. However, we cannot provide any assurances that their existing registrations have fully complied with, and they have made all necessary amendments to their registration to fully comply with, all applicable registrations or approvals required by Circular 75. Moreover, because of uncertainty over how Circular 75 will be interpreted and implemented, and how or whether SAFE will apply it to us, we cannot predict how it will affect our business operations or future strategies. For example, our present and prospective PRC subsidiaries’ ability to conduct foreign exchange activities, such as the remittance of dividends and foreign currency-denominated borrowings, may be subject to compliance with Circular 75 by our PRC resident beneficial holders. In addition, such PRC residents may not always be able to complete the necessary registration procedures required by Circular 75. We also have little control over either our present or prospective direct or indirect stockholders or the outcome of such registration procedures. A failure by our PRC resident beneficial holders or future PRC resident stockholders to comply with Circular 75, if SAFE requires it, could subject these PRC resident beneficial holders to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our subsidiaries’ ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.





If the China Securities Regulatory Commission, or CSRC, or another PRC regulatory agency, determines that CSRC approval was required in connection with our recent private placement, we may become subject to penalties.





On August 8, 2006, six PRC regulatory agencies, including the CSRC, promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors, which became effective on September 8, 2006. This new regulation, among other things, has certain provisions that require SPVs formed for the purpose of acquiring PRC domestic companies and controlled by PRC individuals, to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock market. In our case, theformation in September 2006 by Omnia BVI of Oriental Fashion, and Oriental Fashion's subsequent, limited acquisition of discrete assets from Oumeng, should not be seen as an acquisition of a PRC domestic company as contemplated by the new regulation and we therefore have not applied to the CSRC for approval under this regulation. Nonetheless, if the CSRC or another PRC regulatory agency subsequently determines that the CSRC’s approval was required for our private placement or quotation on OTCBB, we may face sanctions by the CSRC or another PRC regulatory agency. If this happens, these regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of the proceeds from that private placement into the PRC, restrict or prohibit payment or remittance of dividends to us or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our shares.





Chinese merger and acquisition regulations may limit our ability as to acquire assets and equity interests of Chinese companies, which could hinder our ability to expand in China and adversely affect our long-term profitability.





The regulations which became effective on September 8, 2006 cover all acquisitions of assets and equity interests of Chinese companies by foreign investors, including overseas companies under the de facto control of Chinese persons or entities. Depending on the structure of the transaction, these regulations will require the target Chinese companies to make a series of applications to the aforementioned agencies, some of which must be made within strict time limits and depend on approvals from one or the other of the aforementioned agencies. If obtained, approvals will have expiration dates by which a transaction must be completed. It is expected that compliance with the regulations will be more time consuming than in the past, will be more costly and will permit the government much more extensive scrutiny and control over the terms of the transaction. Therefore acquisitions in China may not be able to be completed because the terms of the transaction may not satisfy aspects of the approval process and may not be completed, even if approved, if they are not consummated within the time permitted by the approvals granted. This may restrict our ability to implement any acquisition we may decide to pursue and adversely affect our business and prospects.





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Under the New EIT Law, we may be classified as a “resident enterprise” of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC shareholders.





China passed a new Enterprise Income Tax Law, or the New EIT Law, and its implementing rules, both of which became effective on January 1, 2008. Under the New EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the New EIT Law define de facto management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise.





On April 22, 2009, the State Administration of Taxation issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies, or the Notice, further interpreting the application of the New EIT Law and its implementation non-Chinese enterprise or group controlled offshore entities. Pursuant to the Notice, an enterprise incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or group will be classified as a “non-domestically incorporated resident enterprise” if (i) its senior management in charge of daily operation reside or perform their duties mainly in China; (ii) its financial or personnel decisions are made or approved by bodies or persons in China; (iii) its substantial properties, accounting books, corporate chops, board and shareholder minutes are kept in China; and (iv) 1⁄2 directors with voting rights or senior management often resident in China. Such resident enterprise would be subject to an enterprise income tax rate of 25% on its worldwide income and must pay a withholding tax at a rate of 10% when paying dividends to its non-PRC shareholders. However, it remains unclear as to whether the Notice is applicable to an offshore enterprise incorporated by a Chinese natural person. Nor are detailed measures on imposition of tax from non-domestically incorporated resident enterprises are available. Therefore, it is unclear how tax authorities will determine tax residency based on the facts of each case.





However, as our case substantially meets the foregoing criteria, there is a likelihood that we are deemed to be a resident enterprise by Chinese tax authorities. If the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as interest on financing proceeds and non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Second, although under the New EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification could result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC shareholders and with respect to gains derived by our non-PRC shareholders from transferring our shares. We are actively monitoring the possibility of “resident enterprise” treatment for the 2008 tax year and are evaluating appropriate organizational changes to avoid this treatment, to the extent possible.





If we were treated as a “resident enterprise” by PRC tax authorities, we would be subject to taxation in both the U.S. and China, and our PRC tax may not be creditable against our U.S. tax.





The value of our securities will be affected by the foreign exchange rate between U.S. dollars and RMB.





The value of our common stock will be affected by the foreign exchange rate between U.S. dollars and RMB, and between those currencies and other currencies in which our sales may be denominated. For example, to the extent that we need to convert U.S. dollars into RMB for our operational needs and should the RMB appreciate against the U.S. dollar at that time, our financial position, the business of the company, and the price of our common stock may be harmed. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of declaring dividends on our common stock or for other business purposes and the U.S. dollar appreciates against the RMB, the U.S. dollar equivalent of our earnings from our subsidiaries in China would be reduced.





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Risks Related to Our Common Stock





The current market price of the common stock may not be indicative of future market prices.





We anticipate that the market price of our shares will fluctuate significantly in response to numerous factors, many of which are beyond our control, including, without limitation:


·
the announcement of new products or product enhancements by our competitors;
 ·
quarterly variations in our and our competitors’ results of operations;
 ·
changes in financial estimates or recommendations by securities analysts;
 ·
speculation about our business in the press or investment community;
 ·
expiration of lock-up agreements;
 ·
general market conditions and other factors, including factors wholly unrelated to our own operations or performance.
 There is not now and there may never be an active liquid market for our common stock.





We are providing no assurances of any kind or nature whatsoever that an active liquid market for our common stock will ever develop, on the OTCBB or elsewhere. Investors should understand that there may be no alternative exit strategy for them to recover or liquidate their investments in our common stock. Accordingly, investors must be prepared to bear the entire economic risk of an investment in the common stock for an indefinite period of time. If our revenues do not grow or grow more slowly than we anticipate, if operating or capital expenditures exceed our expectations and cannot be adjusted accordingly, or if some other event adversely affects us, the market price of our common stock will decline.





We are subject to the reporting requirements of the United States securities laws, which will require expenditure of capital and other resources.





We are a public reporting company subject to the information and reporting requirements of the Securities Exchange Act of 1934 and other federal securities laws, including, without limitation, compliance with the Sarbanes-Oxley. The costs of preparing and filing annual and quarterly reports, proxy statements and other information with the SEC and furnishing audited reports to stockholders will cause our expenses to be substantially higher than they would otherwise be if we were privately-held. It will be difficult, costly, and time-consuming for us to develop and implement internal controls and reporting procedures required by Sarbanes-Oxley and we will require additional staff and third-party assistance to develop and implement appropriate internal controls and procedures.The entity ia a small reporting company and does not require attestation report.





We may not be able to attract the attention of major brokerage firms or securities analysts.





Security analysts and major brokerage houses may not provide coverage of us, given that our OTC Bulletin Board status provides little or no incentive to recommend the purchase of our common stock. We may also not be able to attract any brokerage houses to conduct secondary offerings with respect to our securities.





We are making no representations and are providing no assurances that our common stock will become listed on NASDAQ, the American Stock Exchange or any other securities exchange.





We anticipate that we may seek to list our common stock on NASDAQ or the American Stock Exchange. We are making no representations nor providing any assurances that we will be able to meet the initial listing standards of either of those or any other stock exchange. Therefore, investors may find it difficult to dispose of shares or to obtain accurate quotations as to the market value of the common stock. In addition, we will be subject to an SEC rule (Rule 15c2-11) that imposes various requirements on broker-dealers who sell securities governed by the rule to persons other than established customers and accredited investors. The requirement that broker-dealers comply with this rule will deter broker-dealers from recommending or selling our Company’s common stock, thus further adversely affecting the liquidity and share price of the common stock, as well as our ability to raise additional capital.




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We have never paid dividends and have no plans to pay dividends at any time in the near or distant future.





We have never paid dividends on our capital stock, and we do not anticipate paying any dividends for the foreseeable or distant future. Our present business plan does not include, for the foreseeable future and beyond, any payments of dividends to stockholders. Stockholders’ sole strategy for any return on their investments must therefore be the potential for the increase in the value of their stock and the possibility of liquidating their stock positions at a gain.





You may experience immediate and substantial dilution if we obtain additional financing.





If we obtain additional financing, that financing may have a dilutive effect on the holders of our securities.





We adopted in the first quarter of 2008 an employee equity incentive plan under which our officers, directors, consultants, and employees will be eligible to receive, in relevant part, either securities or stock options exercisable for the Company’s securities at exercise prices that must generally be no less than the then prevailing fair market value of the Company’s common stock on the date of grant. We have have reserved five million (5,000,000) shares of common stock for issuance under this plan.  Any issuance under this equity incentive plan will have dilutive effect on the holders of our securities.





We will need to raise additional capital in order to achieve our long-term goals, but as yet have not identified any sources for such capital.





We have not yet identified sources for additional financing, and we may be unable to raise sufficient funds on terms that are acceptable to us, or at all. If those funds are not raised, the development of our products would be delayed, and the scope of our operations would be substantially curtailed or completely eliminated.





The existence of the Warrants may adversely affect the market price of our shares, and any future Warrant exercises may result in further dilution.





We currently have issued outstanding warrants to purchase up to 5,704,752 shares of our common stock, of which (i) warrants for up to 5,412,000 shares may be exercised at $1.5625 per share at any time or from time to time until October 9, 2012, including warrants for 492,000 shares which may be exercised on a cashless exercise basis, and (ii) warrants for up to 292,752 shares may be exercised at $1.25 per share at any time or from time to time for a two-year period commencing December 17, 2007. The total number of shares issuable upon exercise of warrants is relatively high compared to the number of shares of our common stock issued and outstanding. Therefore, the existence of these warrants, and the continuing likelihood that they may exercised and the shares acquired upon exercise sold from time to time in the public trading market for our common stock, may have an adverse effect on the market price of our common stock.





Any of the above-identified risks, even if borne out only partially and not fully, will adversely affect our business, our financial condition and our operating results. If any of the events we have identified occur, in whole or in part, the value of our common stock will likely decline, and an investor will lose all or part of the funds paid to acquire our common stock with no opportunity to regain any portion of those funds in return.





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ITEM 2. DESCRIPTION OF PROPERTY





Properties and Leases





As of December 31, 2010, we have the following leased properties:





(1) we operate our executive offices and showrooms in a leased location at No. E6 101# Industrial District, Huaqiao City, Nanshan District, Shenzhen, China, with approximately 11,132 square feet of space, under a lease expiring in September 2011. The expected payments under the lease are $7,893 per month from January 1, 2007 to September 15, 2008, $8,287 per month from September 16, 2008 to September 15, 2009, $8,701 per month from September 16, 2009 to September 15, 2010, and $9,137 per month from September 16, 2010 to September 15, 2011.





(2) we operate another office and showroom in another leased location at No.6 6101#, 1718 Tianshan Road, Shishang Yuan, Shanghai, China, with approximately 2,960 square feet of space, under a lease expiring on October 31, 2013. The payments under the lease are $30,377 per annum from 2005 to 2008. From 2009 to 2013, the payment for each following year will increase by 5% based on the rent for the immediately preceding year.





(3) We operate a Company-owned store in a leased location at the 1st floor of No. 525, Bagualing Industrial District, Bagua Er Road, Futian District, Shenzhen, China, with approximately 1,399 square feet of space, under a lease expiring on December 31, 2011. The payment under the lease is $1,931 per month.





(4) We rent an area in the Helen Shopping Mall located on the 2nd floor of sister building of No. 3 and No. 4 of Baolicheng Garden, Nanhai Avenue, Nanshan District, Shenzhen, China, with approximately 1,722 square feet of space, under a lease expiring on July 14, 2011. The payments under the lease are $4,958 per month. From 2007 to 2011, and from 2009 to 2011, respectively, the payment for each following year will increase by 5% based on the rent for the immediately preceding year.





(5) We rent a warehouse near our headquarters on the 2nd floor of Zhong Lu Warehouse in Kaiping Street, East Industrial Area, Nanshan District, Shenzhen, China, with approximately an area of 11,141 square feet, expiring on May 5th, 2012. The rental cost of the warehouse is $3,920 per month.





Our total rental expenses under operating leases of office and showroom space were $492,071 for the year ended December 31, 2010, and  $452,256 for the year ended December 31, 2009.





We also operate 25 Company-owned stores and, jointly with third parties, 9 co-owned stores in leased locations in various geographic areas in China.





We believe that our existing facilities are adequate for our current needs and that additional space will be available as needed.





We maintain reasonable and customary property and disaster insurance coverage for our properties.





ITEM 3. LEGAL PROCEEDINGS





From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse affect on our business, financial condition or operating results.





ITEM 4. RESERVED





28




PART II





ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.





Market Information





Our common stock is quoted under the symbol “OLOU.OB” on the Electronic Bulletin Board maintained by the National Association of Securities Dealers, Inc., but has not been traded in the Over-The- Counter market except on a limited and sporadic basis. The CUSIP number is 68215N 107.





The following table sets forth, for the periods indicated, the high and low closing prices of our common stock. These prices reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.





Quarter Ended

High *


Low *03/31/2009

$
0.34


$
0.3306/30/2009

$
0.21


$
0.2109/30/2009

$
0.20


$
0.2012/31/2009

$
0.17


$
0.1403/31/2010

$
0.17


$
0.1706/30/2010

$
0.28


$
0.2009/30/2010

$
0.19


$
0.1912/31/2010

$
0.10


$
0.10







*
The above table sets forth the range of high and low closing prices per share of our common stock as reported by  www.quotemedia.com for the period indicated.





Approximate Number of Holders of Our Common Stock





On December 31, 2010, there were approximately 64 stockholders of record of our common stock. The number of record holders does not include persons who held our common stock in nominee or “street name” accounts through brokers.





Dividend Policy





The holders of shares of our common stock are entitled to dividends out of funds legally available when and as declared by our board of directors. We have never declared or paid cash dividends. Our board of directors does not anticipate declaring a dividend in the foreseeable future. Should we decide in the future to pay dividends, as a holding company, our ability to do so and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiaries and other holdings and investments. In addition, our operating subsidiary, Oriental Fashion, from time to time may be subject to restrictions on its ability to make distributions to us, including as a result of restrictive covenants in loan agreements, restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions. In the event of our liquidation, dissolution or winding up, holders of our common stock are entitled to receive, ratably, the net assets available to stockholders after payment of all creditors.





Securities Authorized for Issuance under Equity Compensation Plans





The Company adopted in the first quarter of 2008 an employee equity incentive plan under which the Company’s officers, directors, consultants, and employees will be eligible to receive, in relevant part, either securities or stock options exercisable for the Company’s securities at exercise prices that must generally be no less than the then prevailing fair market value of the Company’s common stock on the date of grant. The Company has reserved five million (5,000,000) shares of common stock for issuance under this plan.





Purchase of Our Equity Securities





No repurchase of our common stock was made during the fiscal year 2010.





ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION





The following selected consolidated statements of operations and comprehensive income (loss) data for the years ended December 31, 2009 and 2010, and the consolidated balance sheet data as of December 31, 2009 and 2010 are derived from the audited consolidated financial statements of the Company included in this Annual Report. The data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes appearing elsewhere in this report. Our historical results are not necessarily indicative of our results for any future periods.





(All amounts, other than per share data, in U.S. dollars)


Statement of OperationsYear Ended

December 2010


Year Ended

December 2009Revenue

$
8,486,153


$
9,349,878Gross Profit


5,159,299



574,910Operating expenses


4,551,881



6,368,933Income (loss) from operations


607,418



(5,794,023)Income taxes


—



—Net income (loss)


223,254



(5,303,436)Basic and Diluted Earnings (Loss) Per Share

$
0.01


$
(0.23)
  BALANCE SHEET DATA
  At

December 31,

2010


At

December 31,

2009Working capital

$
6,152,478


$
4,487,800Current assets


11,565,446



8,363,489Total assets


12,159,991



9,179,778Current liabilities


5,412,968



3,875,689Total liabilities


6,345,923



3,875,689Stockholders’ equity


5,814,068



5,304,089
 
 The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes to those statements included elsewhere in this Annual Report. In addition to the historical consolidated financial information, the following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under “Risk Factors” and elsewhere in this Annual Report.
 
 Overview
  We are a holding company that conducts all of our business operations through our direct wholly-owned subsidiary, Omnia BVI, established in August 2006, and Omnia BVI’s Chinese subsidiary, Oriental Fashion, established in September 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 108 stores as of December 31, 2009, and 114 stores as of December 31, 2010 in 29 provinces throughout China. Until our acquisition of Omnia BVI on October 9, 2007, our operations were very limited.
  29
 
 We were originally incorporated in the State of Delaware on March 7, 2001 under the name Wentworth II, Inc. We were formed as a vehicle to pursue a business combination. For information regarding Wentworth II, Inc.’s corporate financing transactions prior to our recent reverse acquisition with Omnia BVI, see Part II of our registration statement on Form SB-2 filed with the Securities and Exchange Commission on December 17, 2007.
 
 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
 
 Our current target customers are “white-collar” “pink-collar” and “golden-collar” professional urban working females between the ages of 28 to 45.  The annual income of our targeted customers ranges from $3,700 to $45,000.
 
 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. 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 that hold executive positions in corporations or operate their own businesses. “Golden-collar” females usually like to wear luxury brands. Our brands will eventually target “golden-collar” females as well.
 
 Prior to 2009, we targeted professional urban working females between the ages of 25 to 35.  Since 2009, we have started to expand our target demographic to 35 to 45 year-old females by offering premium and mature styles of apparel. Since 2007, our designs in the spring/summer wear collection have been gradually reflecting these styles. Tapping into the 35 to 45 year-old female market is also intended to develop a large group of loyal customers as well as increase revenues and profits.
  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 December 31, 2009 and December 31, 2010, we had a total of 108 and 114 stores, respectively, each consisting of 27 and 25 company-owned stores, respectively, 8 and 9 co-owned stores, respectively, and 73 and 80 independent distributor stores.
 30
 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 margin - Gross margin measures our ability to control direct costs associated with the manufacturing and selling of our products. Gross margin 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 Years Ended December 31, 2009 and 2010
 
 Sales
 
 Sales revenue for the year ended December 31, 2010 was $8,486,153, compared with $9,349,878 (among which approximately $2.2 million was from selling the 2008 inventories) for the same-year period in 2009, representing a 9.24% decrease. We accumulated an unusually large amount of inventory as a result of our expansion in 2008 which we were not able to sell due to the economic recession.  As part of our aggressive inventory reduction effort, we offered deep discounted prices to sell the 2008 inventories which generated approximately $2.2 million and contributed to our 2009 sales. In 2010, we did not make frequent large-scale promotions because of the economic recovery in the entire domestic consuming market.
 
 Cost of revenues for the year ended December 31, 2010 was $3,326,854, compared with $8,774,968 (among which approximately $2.91 million was for the cost of revenues from selling 2008 inventories for approximately $2.2 million which had a retail value of $5.11 million at a price lower than cost) for the same-year period in 2009, representing a 62.09% decrease. The higher cost of revenue in 2009 was also due to aggressive discounted sales of  2008 inventories, often, at discounted prices lower than the costs. While in 2010, the inventories are fairly in season and we  did not need to offer lower-than-cost prices.
 
 Revenue from sales to distributors for the year ended December 31, 2010 was $5,236,057 (or 61.70% of total sales revenue), a decrease of $851,750 (or 13.99%) compared with $6,087,807 (or 65.11% of total sales revenue) for the year ended December 31, 2009. Revenue from retail sales for the year ended December 31, 2010, including sales from Company-owned and co-owned stores, was $3,250,096 (or 38.30% of total sales revenue), a decrease of $11,975 (or 0.37%) compared with $3,262,071 (or 34.89% of total sales revenue) for the year ended December 31, 2009. The decrease from sales to distributors was mainly because our 2009 sales included the $2.2 million sales of 2008 inventories in 2009.


As of December 31, 2010, inventories was $4,063,135, an increase of $1,638,534 (or 67.58%), compared with $2,424,601 as of December 31, 2009. In 2009, we made great efforts to sell 2008 inventories and caused our the inventory level to drop to a very low level. In 2010, our sales, cost of sales and inventories reached to a relatively normal level.
 
 Our overall gross profit for the year ended December 31, 2010 was $5,159,299, compared with $574,910 for the year ended December 31, 2009, an increase of $4,584,389 (or 797.41%).  Our gross profit margin in 2010 was 60.80%, as compared to 6.15% in 2009.  After we reduced our 2008 historical inventories in 2009 at deep discounted prices, which significantly depressed our gross margin for fiscal year 2009, we believe we had reached a normal gross margin level at 60.80% for fiscal 2010.
 
 General and administrative expenses, which include rental expenses for our headquarters, salary expenses for management and headquarter staff, and travel and entertainment expenses, were $2,193,127 for the year ended December 31, 2010, a decrease of $1,107,679 (or 33.56% ) compared with $3,300,806 in 2009. This decrease was mainly due to provision for doubtful debts and bad debts written off in 2009 after the provisioning policy was amended.
  31
 Selling and marketing expenses, which include all costs associated with sales, marketing and distribution functions, were $2,080,619 (24.52% of sales revenues) for the year ended December 31, 2010, a decrease of $713,407 (or 25.53%) compared with $2,794,026 (29.88% of sales revenues) for the year ended December 31, 2009.  In 2009, because of the closing of 100 non-performing stores in 2009, we were required to account some of the expense relating to rent, decoration expense as selling and marketing expenses, which resulted in a higher than usual selling and marketing expenses in 2009. We believe our selling and marketing expenses in 2010 was at a normal level relative to the level of our sales revenue.
 Income from operations for the year ended December 31, 2010 was $607,418 compared to a loss of $5,794,023 in 2009. Net income for the year ended December 31, 2010 was $223,254 compared to a loss of $5,303,436 in 2009.  In 2009, we extended significant restructuring efforts in removing non-performing stores, adjusting our sales network and disposing historical inventories. As a result of these efforts, we believe our operations have been restored to a relatively healthy condition. We are hopeful that our continued efforts in improving and expanding our operations in 2011 will yield positive results.
 
 Liquidity and Capital Resources
 
 As of December 31, 2010, our net cash position was $1,629,530, compared with $869,495 as of December 31, 2009, an increase of $760,035. This increase was mainly attributed to an new bank loan in the amount of $2.73million that we borrowed in 2010.
 
 As of December 31, 2010, our trade receivables were $1,511,102, an increase of $130,922 (or 9.49 %). compared with trade receivables of $1,380,180 as of December 31, 2009.
 
 Other receivables and deposits as of December 31, 2010 was $3,862,525, an increase of $540,111 (or 16.26%) compared with $3,322,414 as of December 31, 2009. The increase was mainly composed of trade deposits paid to suppliers and other receivables.
 
 Net cash flows used by operating activities was negative $952,027 for the year ended December 31, 2010 and was positive $62,193 for the year ended December 31, 2009, an decrease of $1,014,220 (or -1631%). The increase of net cash flow used by operating activities was partially due to the increase of net inventories in 2010. We sold 2008 inventories with a retail value of approximately $5.11 million in 2009. As a result, only $2.42 million inventories remained as of December 31, 2009. In 2010, the inventory was up to our normal level when we increased raw material purchase with the gradual economic recovery in the Chinese consumer market.
 
 The Company’s investing activities to date have consisted mainly of the purchase of property and equipment and short term investments. For the year ended December 31, 2010, the net use of cash in investing activities was $16,917 compared to $6,651 for the year ended December 31, 2009, an increase of $10,266 (or 154%).
 
 Net cash flows provided by financing activities for the year ended December 31, 2010 was $1,697,556, compared with $440,020 of net cash flows used by financing activities for the year ended December 31, 2009, an increase of $2,137,576 (or 486%).  The increase was mainly due to a new bank loan in the amount of $2.73 million that we borrowed in 2010. We increased bank loan to ensure that we have adequate working capital to accommodate our growth.
 
 We had a short-term secured bank loan of $ 986,050 as of December 31, 2010. This bank loan is denominated in Renminbi and repayable within 1 year. It carries interest at 0.531% per month and is guaranteed by (i) Ms. Zheng Luo, who does not receive any compensation for acting as guarantor; (ii) the Company’s bank deposit of $455,100 and (iii) bank deposits of three unrelated parties in the amount of $1,365,300.
 
 Our restricted cash in the amount of $455,100 was also pledged to the bank to secure the bank loans of $2,958,150 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.
 32
  We also had a long-term secured bank loan which is denominated in Renminbi and has a 2-year term. It carries interest at 0.495% per month and is guaranteed by (i) Ms. Zheng Luo, who does 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 as of December 31, 2010 will be repayable in :-
 
 Fiscal year ending on December 31,2011

$
280,6452012


932,955$
1,213,600
  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
 
 The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported in the financial statements, including the notes thereto, and related disclosures of commitments and contingencies, if any. We consider our critical accounting policies to be those that require the more significant judgments and estimates in the preparation of financial statements, including the following:
 
 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, deferred income taxes and share-based compensation, 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 these 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 December 31, 2010, 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, we extend credit based on our evaluation of the customer’s financial conditions.  We generally do not require collateral for trade receivables and maintain an allowance for doubtful accounts of trade receivables.
  During the year ended December 31, 2010, there was a customer whose revenue represented approximately 12% of our total revenue. As of December 31, 2010, there were three suppliers whose trade deposits represented approximately 42%, 31% and 10% of the Company’s total trade deposits paid to suppliers. During the year ended December 31, 2009, there was a customer whose revenue represented approximately 24% of our total revenue. As of December 31, 2009, there were three suppliers whose trade deposits represented approximately 41%, 38% and 11% of the Company’s total trade deposits paid to suppliers
 Allowance for doubtful accounts. We establish an allowance for doubtful accounts based on management’s assessment of the collectability of trade receivables. A considerable amount of judgment is required in assessing the amount of the allowance and we consider the historical level of credit losses and applies percentages to aged receivables categories. We make judgments about the creditworthiness of each customer based on ongoing credit evaluations, and monitors current economic trends that might impact the level of credit losses in the future. If the financial condition of the customers is to deteriorate, resulting in their inability to make payments, a larger allowance may be required. Bad debts are written off when identified. We extend unsecured credit to customers ranging from 30 to 45 days in the normal course of business. We do not accrue interest on trade receivables.
  33
 Allowance for doubtful accounts amounting to $32,635 and $740,811 were charged to the consolidated statement of operations and comprehensive income (loss) during the years ended December 31, 2010 and 2009, respectively.
 
 Revenue recognition.Revenue is recognized when it is probable that the economic benefits will flow to us and when the revenue can be measured reliably, on the following basis :
 
 (i) revenue from sales of the Company’s products is recognized when the significant risks and rewards of ownership have been transferred to the buyer at the time of delivery and the sales price is fixed or determinable and collection is reasonably assured.
 
 In respect of the revenue generated from the co-owned stores, we have reviewed FASB ASC 605 “Revenue Recognition” and considers itself to fulfill the following indicators for gross revenue reporting: (i) we are the primary obligator to the customer as we are responsible for fulfillment and customer remedies in the event of dissatisfaction; (ii) we retain inventory risk of the unsold inventories in the co-owned stores; and (iii) we have complete latitude to set the prices for the products and the net amount to be earned varies with that selling price. Accordingly, the Company is the principal of these transactions according to ASC 605 and reports the revenue from co-owned stores on a gross basis. The payments (or commission) paid to the partners of the co-owned stores are recorded as the Company’s expenses.
 
 (ii) interest income is recognized on an accrual basis.
  Property and Equipment. Property and equipment are stated at cost less accumulated depreciation. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use.
 
 Depreciation is provided on a straight-line basis over the assets’ estimated useful lives at the annual rate of 20%.
 Maintenance or repairs are charged to expense as incurred. Upon sale or disposition, the applicable amounts of asset cost and accumulated depreciation are removed from the accounts and the net amount less proceeds from disposal is charged or credited to the consolidated statement of operations and comprehensive income (loss).
 
 Income Taxes. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statements carrying amounts of existing assets and liabilities and loss carry forwards and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statement of operations and comprehensive income (loss) in the period that includes the enactment date.
 
 United States: we are subject to the United States of America Tax law at tax rate of 34%. We have no assessable profit for the years ended December 31, 2010 and 2009.
 
 We have not recognized a deferred tax liability for the undistributed earnings of its foreign subsidiary of approximately US$579,000 and US$80,000 as of December 31, 2010 and 2009, respectively, because we currently do not expect those unremitted earnings to reverse and become taxable to us in the foreseeable future. A deferred tax liability will be recognized when we no longer plan 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.
  34
 
 On March 16, 2007, the National People’s Congress of the PRC determined to adopt the New corporate income tax law (the “ New CIT Law”). The New CIT Law unifies the application scope, tax rates, tax deduction and preferential policy for both domestic enterprises (“DE”) and foreign investment enterprises (“FIE”). The applicable tax rate of DE and FIE will be 25% after their preferential tax holidays and the transition period have ended. During the transition period, tax rates for the subject entities are 20%, 22% and 24% for the calendar years 2009, 2010 and 2011, respectively, before the application of applicable tax holidays or other tax preferences.
 
 By virtue of the New CIT Law and the above-mentioned tax reduction, Oriental Fashion was subject to EIT rate of 11% and 10% during the years ended December 31, 2010 and 2009, respectively.
 
 No provision for EIT has been made for the year ended December 31, 2010 since Oriental Fashion had no assessable profit for the year. The income taxes for the year ended December 31, 2010 and 2009 in the consolidated statements of operations and comprehensive income (loss) represented the deferred tax recognized.
 
 Comprehensive income. We have adopted ASC 220 “Comprehensive Income”, which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Components of comprehensive income include net income/loss and foreign currency translation adjustments.
 Foreign currency translation. The functional currencies of us and our subsidiaries include United States dollars (“US$”) and RMB. We and our subsidiaries maintain our  financial statements in our respective functional currency. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet date. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchanges rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income or loss for the respective periods.
 
 For financial reporting purposes, the financial statements of the subsidiaries that are prepared using RMB have been translated into US$. Assets and liabilities are translated at the exchange rates at the balance sheet date and revenue and expenses are translated at the average exchange rates and stockholders’ equity is translated at historical exchange rates. Any translation adjustments resulting are not included in determining net income or loss but are included in foreign currency translation adjustments to accumulated other comprehensive income, a component of stockholders’ equity. The exchange rates in effect as of December 31, 2010 and 2009 were RMB1 for $0.1517 and $0.1467, respectively. The average exchange rates for the years ended December 31, 2010 and 2009 were RMB1 for $0.1476 and $0.1466, respectively. There was no significant fluctuation in the exchange rates for conversion of RMB to US$ after the balance sheet date.
 
 Seasonality
 
 Our business is generally seasonal, with the highest proportion of sales and operating income being generated in the fourth quarter of each year, lesser proportions being generated in the second and third quarter of each year, and the lowest proportion of sales and operating income being generated in the first quarter of each year. Our working capital requirements are likely to fluctuate during the year, increasing substantially during one or more quarters as a result of higher planned seasonal inventory levels and higher receivables. If we fall significantly short of our anticipated earnings in one or more quarters, it will significantly decrease the working capital available to us in the following quarters. Due to limitations on borrowing levels, a decrease in working capital may adversely affect our purchasing abilities which would have a material adverse effect on our revenues.
 
 Off-Balance Sheet Arrangements
  None
  35
  ITEM 8. FINANCIAL STATEMENTS
  See the index to our financial statements and our financial statements following the Signature Page at the end of this Annual Report on Form 10-K.
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE
 
 None.
  ITEM 9A (T). 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 December 31, 2010, 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 in providing reasonable assurance of achieving their objectives for the year ended December 31, 2010.
  Internal Controls Over Financial Reporting
 Management’s Annual Report on Internal Control over Financial Reporting.
  Section 404 of the Sarbanes-Oxley Act of 2002 requires that management document and test the Company’s internal control over financial reporting and include in this Annual Report on Form 10-K a report on management’s assessment of the effectiveness of our internal control over financial reporting.
  The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Securities and Exchange Act of 1934 defines internal control over financial reporting as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:
  Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
 Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
  Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
 All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
  36
 
 Under the supervision and with the participation of our management, including Ms. Zheng Luo, our chief executive officer, and Mr. David Wang, our chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting was effective, as of December 31, 2010.
 
 Changes in Internal Controls over Financial Reporting.
  During the fiscal year ended December 31, 2010, 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.
  PART III
 ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
 Directors and Executive Officers
 Set forth below is information regarding our current directors and current executive officers. Except as set forth below, there are no family relationships between any of our directors or executive officers. Each executive offer holds his office until he resigns or is removed by the Board or his successor is elected and qualified. Directors are elected each year by our stockholders at the annual meeting. Each director holds his office until his successor is elected and qualified or until resignation or removal.
  Name

Age

TitleZheng Luo

40

Chairwoman and Chief Executive OfficerDavid Wang

44

Acting Chief Financial OfficerXiaoyin Luo

46

DirectorQing Huang

45

DirectorFei Luo

44

DirectorTianhong Yu

44

DirectorCharles C. Mo

59

DirectorWenbin Fang

43

Director
 Ms. Zheng Luo, Chairwoman and CEO
 Ms. Zheng Luo is our founder, and has been our Chairwoman and chief executive officer since October 2007. She has been chief executive officer and chief designer of Oriental Fashion since January 2007. Before founding Oriental Fashion, Ms. Zheng Luo was chairwoman and chief executive officer of Oumeng (2003 - 2007) and chairwoman and chief executive officer of Green’s Apparel (1996 - 2003). Ms. Zheng Luo has been active in the fashion design and retail business for more than 10 years. She created the OMNIALUO brand in 1996. Ms. Zheng Luo is a renowned designer in the fashion industry who has won various prestigious honors nationally and internationally and received broad media coverage in China, Hong Kong, Paris and Italy. Ms. Zheng Luo earned a Bachelor of Arts degree in International Finance from Shenzhen University in 1991.
 Mr. David Wang, Chief Financial Officer
 
 Mr. David Wang has been our acting chief financial officer since September, 2008. Since July 2010, Mr. Wang has also been serving as Senior Vice President in a private equity investment firm under Haitong Securities Co., Ltd.. From December 2007 to November 2008, Mr. Wang was Vice President of Maxyee Group, an international company focused on real estate and pharmaceuticals. From August 2006 to November 2007, Mr. Wang was the chief financial officer of Sunway Global, Inc., a company engaged in the business of designing, manufacturing and selling logistic transport systems and medicine dispensing systems and equipment. Prior to that, Mr. Wang served as an accountant for Sinopec and prior to that worked as an investment banker for various investment banking firms. Mr. Wang received a Masters Degree and PhD degree in the field of Finance from Xiamen University in Fujian Province, China.
 
 37
  Ms. Xiaoyin Luo, Director
  Ms. Luo Xiaoyin Luo was appointed as a director in January 2008. Ms. Luo serves as Director & General Manager of Hutchison Harbour Ring China, a subsidiary of Hutchison Whampoa Limited (HWL). Ms. Xiaoyin Luo has more than 14 years of service to HWL. Her main responsibilities are commercial property investment, development, operation, and management. Some of her projects include The Center, Westgate Mall, Harbour Ring Plaza and Huangpu Center in Shanghai, Metropolitan Plaza in Chongqing, and Pacific Plaza in Qingdao. Since Hutchison Harbor is the exclusive licensing agent of Warner Brothers Consumer Product Division (WBCP) in China, Ms. Xiaoyin Luo is in charge of the product license and retail license business development for Warner Bros. Studio Store Shanghai Flagship operation management, retail network and distribution channel construction, and sub-licensee development. In 2010, Ms. Xiaoyin Luo founded Shenzhen Oumeng Sound Investment Co., Ltd.focusing on investing in creative industry, apparel and accessories,electronic product design, software design, animation design,etc. Ms. Xiaoyin Luo holds a Bachelor of Economics degree from Shenzhen University and holds an EMBA from China Europe International Business School.
  Mr. Qing Huang, Director
 Mr. Qing Huang was appointed as a director in January 2008. Mr. Huang is engaged in private equity financing activities in China as an investor and advisor. He is currently a general partner of Mingly China Growth Fund, L.P. a private equity fund focused on investing in growth companies in China. Mr. Huang has participated in a large number of international financing transactions by Chinese and non-Chinese companies, including private placement and public offerings of corporate equity and debt. Mr. Huang worked as a lawyer and adviser in the United States, Hong Kong and Shanghai and was associated with international law firms Shearman & Sterling and Linklaters in Hong Kong and Brown & Wood LLP in New York. Mr. Huang graduated from Columbia University School of Law with a J.D. degree, from University of Chicago with a Master’s degree in political science and from Beijing University with a Bachelors’ degree in English and American literatures. He is a member of the New York State Bar Association.
  Mr. Fei Luo, Director
  Mr. Fei Luo was appointed as a director in January 2008. He has served as a director of IER Venture Capital Co., Ltd., a venture capital firm in China, since 2000. He founded Beida Zongheng Financial Consulting Co., Ltd. in 1999 and serves as the president and chairman of the board of Beida Zongheng. From 1997 to 1999, he served as the managing director of Shenzhen Yanning Development Co., Ltd., in charge of investment. From 1993 to 1996, he served as the vice chairman of Shenzhen Anxing Financial Consulting Co., Ltd and vice chairman of Shenzhen Anxing investing Co., Ltd. Mr. Fei Luo received his Master degree in Economics from Peking University in 1999 and his BA in Economics from Peking University in 1988.
  Mr. Tianhong Yu, Director
 Mr. Tianhong Yu was appointed as a director in January 2008. Mr. Yu has served as a vice president and managing director of Huayi Brothers & Taihe Film Investment Co., Ltd., a leading motion picture and television production and distribution company in China, since 2005. From 2003 to 2005, he had planned and supervised a number of movie and TV series. Prior to that, he was the senior manager of TOM Online Inc., a leading wireless internet company in China. Mr. Yu also founded Beijing Modern Art Center and CHINALAW DATABASE, the first law database in China. Mr. Yu received his Bachelor’s Degree in Economic Law from Peking University in 1988.
  Mr. Charles Mo, Director
 
 Mr. Charles Mo began serving as a director of our company in January 2008. Mr. Mo is a Certified Public Accountant with over twenty-five years of experience in public and corporate accounting and finance and has held his CPA license since 1980.  Since June 2005, Mr. Mo has served as the General Manager of Charles Mo & Co., a corporate consulting company, and focuses on general management duties. From October 1999 to May 2005, Mr. Mo served as Chief Operating Officer and Chief Financial Officer of Coca-Cola Shanghai, a beverage company, and was responsible for sales, finance, logistics, production, and general management. From December 1998 to September 1999, Mr. Mo served as Finance Director of Fisher Rosemount Shanghai. From August 1996 to November 1998, Mr. Mo served as Chief Financial Officer of Nike China, an athletic goods company, and was responsible for overseeing finance, human resources, and logistics. From January 1995 to August 1996, Mr. Mo served as Controller and Acting General Manager for Polaroid China, a camera and consumer electronics company. From August 1982 to December 1994, Mr. Mo served as Audit Manager and held various financial management positions for Wang Laboratories, a computer company. From 1978 to 1982, Mr. Mo served as an Accountant and Auditor for the accounting businesses of Ernst & Young and Thomas Allen, CPA.  Mr. Mo has served as an independent director of China Ritar Power Corp. (Nasdaq GM: CRTP), a manufacturer of lead-acid batteries in China, since August 2008, and OmniaLuo, Inc. (OTCBB:OLOU), a manufacturer and seller of women’s clothing in China, since January 2008.  Mr. Mo served as an independent director and chairman of the audit committee of Benda Pharmaceutical Inc (BPMA.OB) from September 14, 2007 to February 22, 2008. Mr. Mo resigned from the board of Benda Pharmaceutical on February 22, 2008. Mr. Mo has served as an independent director and chairman of the audit committee of NIVS IntelliMedia Technology Group sinceFebruary, 2009.  Mr. Mo received a Bachelor of Arts degree in Business Administration in 1974 from HK Baptist College and an MBA in accounting in 1976 from California State University-Fullerton.  We believe that Mr. Mo’s long and varied career exhibit his qualifications to sit on our Board, including his more than 25 years of experience, expertise and background with respect to accounting matters, his experience as a CPA and chief financial officer of large corporations in China, and his understanding of U.S. GAAP and financial statements.
  38
 Mr. Wenbin Fang, Director
  Mr. Wenbin Fang was appointed as a director in January 2008. Mr. Fang has served as general manager in Shen Zhen Meng Sa Di Ka Trading Company since 2003. From 2000 to 2002, Mr. Fang worked for ARTLEVA, an Italian company, where he was focused on exportation of household goods and clothing products from China (including Taiwan) to Italy, France and Germany. From 1998 to 2000, he worked for MAX, where he was focused on exportation of household goods and clothing products from China (including Hong Kong) to Italy and France. From 1993 to 1997, he served as business manager for East Asia (including China) of R.P.R. Clothing Machine Manufactory, an Italian Company. He earned his bachelor’s degree in Industrial Design in Shangdong Design and Art College. He then spent a year (1992-1993) in the Department of Industrial Design of Italy’s National Design and Acting College.
  Family Relationships
 Ms. Xiaoyin Luo is the elder sister of Ms. Zheng Luo and the sister-in-law of Mr. Wenbin Fang. Mr. Wenbin Fang is the husband of Ms. Zheng Luo. There are no other family relationships between any of our directors and executives.
 Board Composition and Committees
  The board of directors is currently composed of seven members. All Board action requires the approval of a majority of the directors in attendance at a meeting at which a quorum is present.
  Each of Qing Huang, Fei Luo, Charles C. Mo and Tianhong Yu (collectively, the “Independent Directors”) were elected to serve on the Board of Directors as an “independent director” as defined by Rule 4200(a)(15) of the Marketplace Rules of The Nasdaq Stock Market, Inc. (the “Nasdaq Marketplace Rules”), and the Board of Directors has confirmed the “independent director” status under the Nasdaq Marketplace Rules of each of the Independent Directors.
  On January 28, 2008, the full Board of Directors, including the Independent Directors:
  (1)
approved the establishment of the Audit Committee, Compensation Committee, and Governance and Nominating Committee of the Board of Directors; and(2)
appointed three of the Independent Directors to each of the Audit Committee, Compensation Committee, and Governance and Nominating Committee and appointed Mr. Mo as the Chair of the Audit Committee, Mr. Huang as the Chair of the Compensation Committee and Mr. Yu as the Chair of the Governance and Nominating Committee.
 
 39
 
 Our Audit Committee is primarily responsible for reviewing the services performed by our independent auditors and evaluating our accounting policies and our system of internal controls. The Nominating Committee is primarily responsible for nominating directors and setting policies and procedures for the nomination of directors. The Nominating Committee will also be responsible for overseeing the creation and implementation of our corporate governance policies and procedures. The Compensation Committee is primarily responsible for reviewing and approving our salary and benefit policies (including stock options), including compensation of executive officers.
 
 Board Practices
 
 The board and our board committees did not hold any meetings in 2010.  In lieu of meetings, the board took one action by unanimous written consent, and the audit committee and compensation committee took three and zero action by unanimous written consent, respectively.
 
 Director Compensation
  We have not paid our directors fees in the past for attending scheduled and special meetings of our board of directors.
  On January 28,2008, the full Board approved a form of Non-Officer Director’s Contract, which includes indemnification provisions, for each of the Independent Directors, Wenbin Fang and Xiaoyin Luo. Under the terms of the Non-Officer Director’s Contracts, the Company agreed to pay the Independent Directors an annual fee of $12,000 each, as compensation for the services to be provided by them as directors and as chairpersons of various board committees, as applicable. We also reimburse each director for reasonable travel expenses related to such director’s attendance at board of directors and committee meetings.
 
 Under the terms of the Non-Officer Director’s Contracts, the Company agreed to indemnify the Independent Directors, Wenbin Fang and Xiaoyin Luo, against expenses, judgments, fines, penalties or other amounts actually and reasonably incurred by the directors in connection with any proceeding if such director acted in good faith and in the best interests of the Company. This brief description of the terms of the Non-Officer Director’s Contracts is qualified by reference to the provisions of the form of agreement incorporated by reference as an exhibit to Annual Report. We believe the terms of these agreements are reasonable and customary and comparable to those entered into by other publicly-traded companies in the United States.
 Involvement in Certain Legal Proceedings
 To the best of our knowledge, none of our directors or executive officers has been convicted in a criminal proceeding, excluding traffic violations or similar misdemeanors, or has been a party to any judicial or administrative proceeding during the past five years that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws, except for matters that were dismissed without sanction or settlement. Except as set forth in our discussion below in “Certain Relationships and Related Transactions,” none of our directors, director nominees or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.
 
 Section 16(a) Beneficial Ownership Reporting Compliance
  Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who own more than 10% of a registered class of our equity securities, to file with the Commission initial reports of ownership and reports of changes in ownership of common stock and our other equity securities. These insiders are required by Commission regulations to furnish us with copies of all Section 16(a) forms they file, including Forms 3, 4 and 5.
  Commission rules require disclosure in our Annual Report on Form 10-K of the failure of an executive officer, director or 10% beneficial owner to file such forms on a timely basis. Based upon a review of the filings made on their behalf during 2010 and 2009, as well as an examination of the Commission's EDGAR system Form 3, 4, and 5 filings and the Company's records, the following describes exceptions to timely filings: Form 3 for David Wang, to report the appointment of him as our Chief Financial Officer (principal financial and accounting officer) on October 30, 2008; Form 5 for Xiaomei Liu to report her resignation as our Chief Financial Officer on October 30, 2008 and will no longer be subject to Section 16 reporting obligations; Form 5 for all directors and officers for fiscal years 2008 and 2009, and Form 4 for Ms. Zheng Luo for the grant of 456,800 shares of options on January 6, 2009 and 228,400 shares of option on January 20, 2009.
  40
  Code of Ethics
  On January 28, 2008, our board of directors adopted a code of ethics that applies to all of our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer. The code of ethics addresses, among other things, honesty and ethical conduct, conflicts of interest, compliance with laws, regulations and policies, including disclosure requirements under the federal securities laws, confidentiality, trading on inside information, and reporting of violations of the code. A copy of the code of ethics has been filed as Exhibit 14.1 to our current report on Form 8-K filed on February 1, 2008.
 Audit Committee and Audit Committee Financial Expert
 The Board of Directors has determined that Mr. Mo, an “independent director” as defined by Rule 4200(a)(15) of the Nasdaq Marketplace Rules, possesses accounting or related financial management experience that qualifies him as financially sophisticated within the meaning of Rule 4350(d)(2)(A) of the Nasdaq Marketplace Rules and that he is an “audit committee financial expert” as defined by the rules and regulations of the Securities and Exchange Commission. Mr. Mo is the Chairman of our Audit Committee.
 
 Compensation Committee Interlocks and Insider Participation
 
 None of our executive officers has served as a member of our Compensation Committee, or other committee serving an equivalent function, of any other entity whose executive officers serve as our director or member of our Compensation Committee.
 ITEM 11. EXECUTIVE COMPENSATION
  Summary Compensation Table –  2010 and 2009
 The following table sets forth information concerning all compensation awarded to, earned by or paid to each person serving as a principal executive officer for services rendered in all capacities during fiscal years 2010 and 2009. No other executive officers received compensation in excess of $100,000 in either fiscal year.
  Name and

Principal position

Year

Salary

($)(1)

Bonus

($)

Stock

Awards

($)


Option

Awards

($)

Nonequity

incentive plan

compensation

($)

Nonqualified

deferred

compensation

earnings

($)

All other

compensation

($)Zheng Luo,

Chief Executive Officer

2010


36,364



$
0



02009


34,935




414,199
(2)


128,000
(3)David Wang,

Chief Financial Officer (4)

2010


15,7582009


68,600
  (1) Calculated on the basis that $1 = RMB 7.7 in 2009 and $1 = RMB 6.6 in 2010
 
 (2) We failed to meet the 2008 performance threshold under the securities purchase agreement and the make good escrow agreement that we entered into with the investors in the 2007 Private Placement. As a result, shares were released to investors, Ms. Zheng Luo and another stockholder pursuant to the agreed terms and formula. 767,035 shares of the Escrow Shares were estimated to be released back to Ms. Luo. The release of shares from escrow to Ms. Luo constituted a compensatory plan.  The per share closing price of the Company’s common stock on December 31, 2008 of $0.54 was used to calculate the compensation expenses.  The total expense recognized for the fiscal year 2008 was $414,199. During the year ended December 31, 2009, 711,269 and 111,275 shares of Escrow Shares were released back to Ms. Zheng Luo and the other stockholder. The release of shares from escrow to the other stockholder did not constitute a compensatory plan as this stockholder did not hold and currently does not hold any position in the Company and has no relationship to the Company other than as a stockholder.
 
 (3) Compensation recognized in connection with the options to purchase (i) 456,800 shares of our Common Stock on January 6th, 2009 and (ii) 228,400 shares of our Common Stock on January 20th, 2009, each at the exercise price of $0.6 per share.
 (4) Mr. David Wang joined the Company in September 2008 and was appointed CFO in November 2008. Since July 2010, in additional to acting as our chief financial officer, Mr. Wang has also been serving asSenior Vice President in a private equity firm under Haitong Securities Co. Ltd., and his salary was reduced to $15,758 per year.
 
 41
 
 Employment Agreements
  The terms of Ms. Zheng Luo’s contract provide for a two year employment term, from January 1, 2010 through December 31, 2011, with an annual salary of $36,364.  The Company renewed Ms. Zheng Luo’s contract in 2010 from January 1, 2010 through December 31, 2011.
  Director Compensation
 Historically, we have not compensated our directors for their services as directors and we did not compensate our directors during 2006 or 2007.
 On January 28,2008, the full Board approved a form of Non-Officer Director’s Contract, which includes indemnification provisions, for each of the Independent Directors, Wenbin Fang and Xiaoyin Luo. Under the terms of the Non-Officer Director’s Contracts, the Company agreed to pay the Independent Directors an annual fee of $12,000 each, as compensation for the services to be provided by them as directors and as chairpersons of various board committees, as applicable. We also reimburse each director for reasonable travel expenses related to such director’s attendance at board of directors and committee meetings.
 Outstanding Equity Awards at Fiscal Year End
 We 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. Pursuant to the Plan, on January 6, 2009, we granted options to the Chief Executive Officer and certain qualified employees to purchase 735,200 and 137,040 shares of common stock with an exercise price of $0.60 and $1.25 per share respectively. Additionally, on January 20, 2009, we granted options to purchase 497,600 shares of common stock with an exercise price of $0.60 per share to a director and several of our employees.
  ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
  The following table sets forth information regarding beneficial ownership of our common stock as of March 25, 2010.  (i) by each person who is known by us to beneficially own more than 5% of our common stock or who may otherwise be deemed to be “control persons” and affiliates of us; (ii) by each of our current officers and current and proposed directors; and (iii) by all of our current officers and current and proposed directors as a group. Unless otherwise specified, the address of each of the persons set forth below is in care of Oriental Fashion, Room 101, Building E6, Huaqiaocheng, East Industrial Park, Nanshan District, Shenzhen, 518053, The People’s Republic of China.
  Name and Address of Beneficial Owner

Director or Officer

Amount and

Nature of

Beneficial

Ownership (1)


Percentage

(2)Zheng Luo (3) (4)

Director and Officer


6,703,427
(5)(6)


29.35
%Xiaoyin Luo (3)(4)

Director


5,411,514



23.69
%Wenbin Fang (3)(4)

Director


1,141,791
(5)


5.00
%Qing Huang (4)

Director


-0-



-0-Fei Lou (4)

Director


-0-



-0-Tianhong Yu (4)

Director


-0-



-0-Charles Mo (4)

Director


-0-



-0-David Wang (4)

Officer


-0-



-0-JAIC-CROSBY Greater China

Investment Fund Limited (8)

P.O. Box 2081GT, Century

Yard, Cricket Square, Hutchins

Drive, George Town, Grand

Cayman, Cayman Islands




942,208
(6)(7)


4.09
%All current and proposed directors and current officers as a group (eight in the group)



13,256,732 shares



58.04
%
 
 * Less than 1%.
  1 Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Each of the beneficial owners listed above has direct ownership of and sole voting power and investment power with respect to the shares of our common stock.
 
 2 A total of 22,840,000 shares of our common stock are considered to be outstanding pursuant to SEC Rule 13d-3(d)(1). For each Beneficial Owner above, any options exercisable within 60 days have been included in the denominator.
 
 3 Ms. Xiaoyin Luo is the elder sister of Ms. Zheng Luo and sister-in-law of Mr. Wenbin Fang. Mr. Wenbin Fang is the husband of Ms.. Zheng Luo. Each disclaims beneficial ownership of the shares held by the other.
 
 4 The address for each of the individuals shown is c/o Oriental Fashion, Room 101, Building E6, Huaqiaocheng, East Industrial Park, Nanshan District, Shenzhen, 518053, The People’s Republic of China
 5 Share amounts shown do not include shares held by the individual’s spouse, as to which the individual disclaims beneficial ownership.
  6 Reflects the transfer by Ms. Zheng Luo, as part of the reverse acquisition, of 140,891 shares of common stock to JAIC-CROSBY Greater China Investment Fund Limited in October, 2007.
  7 Includes warrants to purchase 200,000 shares of our common stock, which may by their terms become exercisable within 60 days of the date of this report.
  8 JAIC-CROSBY Greater China Investment Fund Limited was a “control person” and affiliate of Omnia prior to the reverse acquisition and 2007 Private Placement by reason of the existence and its exercise of its contractual rights under its preferred investment documentation, and may now be deemed to be a “control person” and affiliate of the Company.
  42
 Changes in Control
  We do not currently have any arrangements which if consummated may result in a change of control of our Company.
 Securities Authorized for Issuance under Equity Compensation Plans
 Set forth below is information with respect to our compensation plans as of December 31, 2010 under which our equity securities are authorized for issuance, aggregated as follows:
  Plan Category

Number of securities to be

issued upon exercise of

outstanding options, warrants

and rights


Weighted-average exercise

price of outstanding options,

warrants and rights


Number of securities

remaining available for future

issuance under equity

compensation plans (excluding

securities reflected in column

(a))(a)


(b)


(c)Equity compensation plan approved by security holders (1)


1,369,840



0.665



3,630,160Equity compensation plan not approved by equity compensation holders


N/A



N/A



N/ATotal
 (1)
The Company adopted in the first quarter of 2008 an employee equity incentive plan under which the Company’s officers, directors, consultants, and employees will be eligible to receive, in relevant part, either securities or stock options exercisable for the Company’s securities at exercise prices that must generally be no less than the then prevailing fair market value of the Company’s common stock on the date of grant. The Company has reserved five million (5,000,000) shares of common stock or issuance under this plan.
  ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
  Transactions with Related Persons
  The following includes a summary of transactions since the beginning of fiscal 2010, or any currently proposed transaction, in which we were, or are, to be a participant and the amount involved exceeded or exceeds $120,000, and in which any related person had or will have a direct or indirect material interest (other than compensation described under “Executive Compensation”). We believe the terms obtained, or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable to terms available or the amounts that would be paid or received, as applicable, in arm’s-length transactions.
 Bank loan
  As of December 31, 2010, there was a short-term secured bank loan of $986,050 (originally denominated in RMB), which carried interest at 0.531% per month. The bank loan was (i) guaranteed by Ms. Zheng Luo, who did not receive any compensation for acting as guarantor; and (ii) our bank deposit of $455,100 and (iii) bank deposits of three unrelated parties in the amount of $1,365,300. Our restricted cash of $455,100 was also pledged to the bank to secure the bank loans of $2,958,150 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.
 
 There was also a long-term secured bank loan with a 2 year term. It carries interest at 0.495% 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 us for acting as guarantor and (iii) the property owned by Ms. Zheng Luo.
  43
  The long-term secured bank loan as of December 31, 2010 will be repayable in:
  Fiscal year ending on December 31,2011

$
280,6452012

$
932,955$
1,213,600
 Except as set forth in our discussion above, none of our directors, director nominees or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.
 
 Director Independence
  Each of Qing Huang, Fei Luo, Charles C. Mo and Tianhong Yu (collectively, the “Independent Directors”) were elected to serve on the Board of Directors as an “independent director” as defined by Rule 4200(a)(15) of the Marketplace Rules of The Nasdaq Stock Market, Inc. (the “Nasdaq Marketplace Rules”), and the Board of Directors has confirmed the “independent director” status under the Nasdaq Marketplace Rules of each of the Independent Directors.
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  Audit Fees
  The aggregate fees billed for professional services rendered by PKF, Certified Public Accountants, Hong Kong, a member firm of  the PKF International Limited network of legally independent firms, or PKF, for the audit of our annual financial statements and review of the financial statements for the fiscal years ended December 31, 2010 and 2009 were $77,500 and $79,000, respectively.
 Audit-Related Fees
 The aggregate fees billed in each of the fiscal years ended December 31, 2010 and 2009 for assurance and related services  by PKF that are reasonably related to the performance of the audit or review of the registrant’s financial statements and are not reported under the paragraph captioned “Audit Fees” above were $0 and $0, respectively.
 Tax Fees
  The aggregate fees billed in each of the fiscal years ended December 31, 2010 and 2009 for professional services rendered by PKF for tax compliance, tax advice, and tax planning were $0 and $0, respectively.
 All Other Fees
 The aggregate fees billed in each of the fiscal years ended December 31, 2010 and 2009 for products and services provided by PKF, other than the services reported above under other captions of this Item 14  were $0 and $0, respectively.
 Pre-Approval Policies and Procedures
 Under the Sarbanes-Oxley, all audit and non-audit services performed by our auditors must be approved in advance by our Board to assure that such services do not impair the auditors’ independence from us. In accordance with its policies and procedures, our Board pre-approved the audit and non-audit service performed by our auditor for our consolidated financial statements as of and for the years ended December 31, 2010 and 2009, respectively.




44


PART IV


ITEM 15. EXHIBITS, FINANCIAL STATE SCHEDULES


(a) Financial Statements




The following financial statements, including notes thereto and the independent auditors' report with respect thereto, are filed as part of this Annual Report on Form 10-K:




Report of Independent Registered Public Accounting Firm


47Consolidated Statements of Operations and Comprehensive Income (Loss)


48Consolidated Balance Sheets


49Consolidated Statements of Stockholders’ Equity


50Consolidated Statements of Cash Flows


51Notes to Consolidated Financial Statements


52 - 68





(b) Exhibits




45





OmniaLuo, Inc.


Consolidated Financial Statements


For the year ended December 31, 2010


Index to Consolidated Financial Statements




PagesReport of Independent Registered Public Accounting Firm


47Consolidated Statements of Operations and Comprehensive Income (Loss)


48Consolidated Balance Sheets


49Consolidated Statements of Stockholders’ Equity


50Consolidated Statements of Cash Flows


51Notes to Consolidated Financial Statements


52 - 68





46





Report of Independent Registered Public Accounting Firm





To the Directors and Stockholders of


OmniaLuo, Inc.





We have audited the accompanying consolidated balance sheets of OmniaLuo, Inc. (the “Company”) and its subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2010.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.





We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.





In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2010 and 2009, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.




/s/PKF
 Certified Public Accountants
 Hong Kong, China
 March 31, 2011


47




OmniaLuo, Inc.


Consolidated Statements of Operations and Comprehensive Income (Loss)


(Stated in US Dollars)




Year ended December 31,2010



2009Revenues - Note 3

$
8,486,153


$
9,349,878Cost of revenues


(3,326,854
)


(8,774,968
)Gross profit


5,159,299



574,910ExpensesGeneral and administrative expenses


2,193,127



3,300,806Depreciation


278,135



274,101Selling and marketing expenses


2,080,619



2,794,0264,551,881



6,368,933Income (loss) from operations


607,418



(5,794,023
)Interest income


9,419



1,442Other income


5,925



55,684Government grant income - Note 3


132,840



146,610Finance costs - Note 4


(206,162
)


(79,723
)Income (loss) before income taxes


549,440



(5,670,010
)Income taxes - Note 5


(326,186
)


366,574Net income (loss)

$
223,254


$
(5,303,436
)Other comprehensive income (loss)Foreign currency translation adjustments


203,979



(2,812
)Comprehensive income (loss)

$
427,233


$
(5,306,248
)Earnings (loss) per ordinary share - Note 6- Basic and diluted

$
0.01


$
(0.23
)Weighted average number of shares outstanding- Basic and diluted


22,840,000



22,840,000





See the accompanying notes to consolidated financial statements




48




OmniaLuo, Inc.


Consolidated Balance Sheets


(Stated in US Dollars)




As of December 31,2010



2009ASSETSCurrent assetsCash and cash equivalents

$
1,629,530


$
869,495Trade receivables, net - Note 7


1,511,102



1,380,180Inventories, net - Note 8


4,063,135



2,424,601Other receivables and deposits - Note 9


3,862,525



3,322,414Restricted cash


455,100



-Deferred tax asset - Note 5


44,054



366,799Total current assets


11,565,446



8,363,489Property and equipment, net - Note 10


594,545



816,289TOTAL ASSETS

$
12,159,991


$
9,179,778LIABILITIES AND STOCKHOLDERS’ EQUITYLIABILITIESCurrent liabilitiesShort-term secured bank loan - Note 12

$
986,050


$
-Current maturities of long-term secured bank loan - Note 13


280,645



-Trade payables


1,387,804



521,581Loan from a stockholder - Note 14


8,005



7,862Other payables, deposits received and accrued expenses- Note 15


2,750,464



3,346,246Total current liabilities


5,412,968



3,875,689Long-term secured bank loan - Note 13


932,955



-TOTAL LIABILITIES


6,345,923



3,875,689COMMITMENTS AND CONTINGENCIES - Note 16STOCKHOLDERS’ EQUITYCommon stock: par value $0.01 per shareAuthorized 40,000,000 shares; issued and outstanding22,840,000 shares


228,400



228,400Preferred stock: par value $0.01 per shareAuthorized 10,000,000 shares; none issued and outstanding


-



-Additional paid-in capital


9,280,977



9,198,231Statutory reserve - Note 17


568,115



512,709Accumulated other comprehensive income


1,034,998



831,019Accumulated deficit


(5,298,422
)


(5,466,270
)TOTAL STOCKHOLDERS’ EQUITY


5,814,068



5,304,089TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$
12,159,991


$
9,179,778




See the accompanying notes to consolidated financial statements




49




OmniaLuo, Inc.


Consolidated Statements of Stockholders’ Equity


(Stated in US Dollars)





AccumulatedCommon stock


Additional





otherNumber





paid-in


Statutory


comprehensive


Accumulatedof shares


Amount


capital


reserve


income


deficit


TotalBalance, January 1, 2009


22,840,000


$
228,400


$
8,893,589


$
512,709


$
833,831


$
(162,834
)

$
10,305,695Net loss


-



-



-



-



-



(5,303,436
)


(5,303,436
)Share-based compensationfor stock option plan


-



-



304,642



-



-



-



304,642Foreign currency translationadjustments


-



-



-



-



(2,812
)


-



(2,812
)Balance, December 31, 2009


22,840,000



228,400



9,198,231



512,709



831,019



(5,466,270
)


5,304,089Net income


-



-



-



-



-



223,254



223,254Share-based compensationfor stock option plan


-



-



82,746



-



-



-



82,746Foreign currency translationadjustments


-



-



-



-



203,979



-



203,979Appropriation to statutoryreserve


-



-



-



55,406



-



(55,406
)


-Balance, December 31, 2010


22,840,000


$
228,400


$
9,280,977


$
568,115


$
1,034,998


$
(5,298,422
)

$
5,814,068


See the accompanying notes to consolidated financial statements




50




OmniaLuo, Inc.


Consolidated Statements of Cash Flows


(Stated in US Dollars)




Year ended December 31,2010



2009Cash flows from operating activitiesNet income (loss)

$
223,254


$
(5,303,436
)Adjustment to reconcile net income (loss) to net cash (used in)provided by operating activities:Depreciation


278,135



274,101Allowance for doubtful accounts


47,371



805,319(Recovery of) allowance for obsolete inventories


(96,903
)


454,052Bad debts written off


-



392,834Income taxes


326,186



(366,574
)Loss on disposal of property and equipment


375



386Share-based compensation


82,746



304,642Investment income


(2,291
)


-Changes in operating assets and liabilities:Trade receivables


(114,250
)


(314,572
)Inventories


(1,416,942
)


3,579,491Other receivables and deposits


(430,072
)


897,707Trade payables


825,515



(212,365
)Other payables, deposits received and accrued expenses


(675,151
)


(449,392
)Net cash flows (used in) provided by operating activities


(952,027
)


62,193Cash flows from investing activitiesAcquisition of short term investments


(1,621,671
)


-Proceeds from disposal of short term investments


1,633,853



-Deposit for potential acquisition


(293,410
)


-Repayment of deposit for potential acquisition


300,000



-Acquisition of property and equipment


(35,746
)


(6,974
)Proceeds from disposal of property and equipment


57



323Net cash flows used in investing activities


(16,917
)


(6,651
)Cash flows from financing activitiesProceeds from bank loans


3,489,100



-Repayment of bank loans


(1,348,900
)


(439,830
)Loan from (repayment of loan to) stockholders


156



(190
)Increase in restricted cash


(442,800
)


-Net cash flows provided by (used in) financing activities


1,697,556



(440,020
)Effect of foreign currency translation on cash and cash equivalents


31,423



(24
)Net increase (decrease) in cash and cash equivalents


760,035



(384,502
)Cash and cash equivalents - beginning of year


869,495



1,253,997Cash and cash equivalents - end of year

$
1,629,530


$
869,495Supplemental disclosure for cash flow informationCash paid for :-Interest

$
109,242


$
24,395Income taxes

$
-


$
-


See the accompanying notes to consolidated financial statements




51




OmniaLuo, Inc.


Notes to Consolidated Financial Statements


(Stated in US Dollars)




1.           Corporate information




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.


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 December 31, 2010 and 2009.


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”).


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.




52




OmniaLuo, Inc.


Notes to Consolidated Financial Statements


(Stated in US Dollars)





1.           Corporate information (Cont’d)


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 had already 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 aforementioned RTO.







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 114 retail stores across the PRC.  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.


3.           Summary of significant accounting policies




Basis of presentation


The accompanying 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”).





Principles of consolidation


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




53





OmniaLuo, Inc.


Notes to Consolidated Financial Statements


(Stated in US Dollars)




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


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 and share-based compensation, 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 these 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 December 31, 2010, 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 year ended December 31, 2010, there was a customer whose revenue represented approximately 12% of the Company’s total revenue. As of December 31, 2010, there were three suppliers whose trade deposits represented approximately 42%, 31% and 10% of the Company’s total trade deposits paid to suppliers.




During the year ended December 31, 2009, there was a customer whose revenue represented approximately 24% of the Company’s total revenue. As of December 31, 2009, there were three suppliers whose trade deposits represented approximately 41%, 38% and 11% of the Company’s total trade deposits paid to suppliers.




Cash and cash equivalents




Cash and cash equivalents include all cash, deposits in banks and other highly liquid investments with initial maturities of three months or less.  As of December 31, 2010, approximately 99% of the cash and cash equivalents were denominated in Renminbi (“RMB”), which were not freely convertible into foreign currencies and the remittance of these funds out of the PRC was subject to exchange control restrictions imposed by the PRC government.  The remaining balances of cash and cash equivalents were denominated in United States dollars and Hong Kong dollars.





54





OmniaLuo, Inc.


Notes to Consolidated Financial Statements


(Stated in US Dollars)





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




Allowance for doubtful accounts




The Company establishes an allowance for doubtful accounts based on management’s assessment of the collectibility of trade receivables.  A considerable amount of judgment is required in assessing the amount of the allowance and the Company considers the historical level of credit losses and applies percentages to aged receivables categories.  The Company makes judgments about the creditworthiness of each customer based on ongoing credit evaluations, and monitors current economic trends that might impact the level of credit losses in the future.  If the financial condition of the customers is to deteriorate, resulting in their inability to make payments, a larger allowance may be required.


Bad debts are written off when identified.  The Company extends unsecured credit to customers ranging from 30 to 45 days in the normal course of business.  The Company does not accrue interest on trade receivables.


Allowance for doubtful accounts amounting to $32,635 and $740,811 were charged to the consolidated statement of operations and comprehensive income (loss) during the years ended December 31, 2010 and 2009, respectively.


Inventories




Inventories are stated at the lower of cost or market.  Cost is determined on a FIFO basis and includes all expenditures incurred in bringing the goods to the point of sale and putting them in a saleable condition.


The Company estimates the net realizable value of inventories based on intended use, current market value and inventory ageing analyses.  The Company writes down the inventories for estimated obsolescence or unmarketable inventories equivalent to the difference between the cost of inventories and the estimated market value based upon assumptions about future demand and market conditions.


(Recovery of) allowance for obsolete inventories of $(96,903) and $454,052 were (credited) charged to the consolidated statement of operations and comprehensive income (loss) during the years ended December 31, 2010 and 2009, respectively.


Property and equipment





Property and equipment are stated at cost less accumulated depreciation.  Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use.





Depreciation is provided on a straight-line basis over the assets’ estimated useful lives at the annual rate of 20%.


Maintenance or repairs are charged to expense as incurred.  Upon sale or disposition, the applicable amounts of asset cost and accumulated depreciation are removed from the accounts and the net amount less proceeds from disposal is charged or credited to the consolidated statement of operations and comprehensive income (loss).




55





OmniaLuo, Inc.


Notes to Consolidated Financial Statements


(Stated in US Dollars)








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





Impairment of long-lived assets




Long-lived assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.  The Company recognizes impairment of long-lived assets in the event that the net book values of such assets exceed the future undiscounted cash flows attributable to such assets.  During the reporting periods, the Company did not identify any indicators that would require testing for impairment.




Revenue recognition




Revenue is recognized when it is probable that the economic benefits will flow to the Company and when the revenue can be measured reliably, on the following basis :




(i)
Revenue from sales of the Company’s products is recognized when the significant risks and rewards of ownership have been transferred to the buyer at the time of delivery and the sales price is fixed or determinable and collection is reasonably assured.


In respect of the revenue generated from the co-owned stores, the Company has reviewed FASB ASC 605 “Revenue Recognition” and considers itself to fulfill the following indicators for gross revenue reporting: (i) the Company is the primary obligator to the customer as the Company is responsible for fulfillment and customer remedies in the event of dissatisfaction; (ii) the Company retains inventory risk of the unsold inventories in the co-owned stores; and (iii) the Company has complete latitude to set the prices for the products and the net amount to be earned varies with that selling price. Accordingly, the Company is the principal of these transactions according to ASC 605 and reports the revenue from co-owned stores on a gross basis. The payments (or commission) paid to the partners of the co-owned stores are recorded as the Company’s expenses.


(ii)
Interest income is recognized on an accrual basis.




Advertising and transportation expenses




Advertising and transportation expenses are charged to expense as incurred.




Advertising expenses amounting to $11,752 and $63,583 for the years ended December 31, 2010 and 2009, respectively, were included in selling and marketing expenses.




Transportation expenses amounting to $37,321 and $63,117 for the years ended December 31, 2010 and 2009, respectively, were included in selling and marketing expenses.





Leases




Leases are classified as finance leases whenever the terms of the leases transfer substantially all the risks and rewards of ownership to the lessee.  All other leases are classified as operating leases.


Rentals payable under operating leases are charged to the consolidated statement of operations and comprehensive income (loss) on a straight-line basis over the terms of the relevant leases.





56





OmniaLuo, Inc.


Notes to Consolidated Financial Statements


(Stated in US Dollars)




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





Warranty




The Company maintains a policy of providing after sales services for all products by way of a warranty program.  The Company has assessed the amount of goods that would be returned from customers and concluded that no warranty reserve was necessary.  However, the Company will periodically assess the estimation of its warranty liability and recognize the reserve when necessary based on the actual experience.




Shares-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 and the estimated fair value of the Company’s common stock and 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.





Income taxes




Income taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statements carrying amounts of existing assets and liabilities and loss carry forwards and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statement of operations and comprehensive income (loss) in the period that includes the enactment date.




Off-balance sheet arrangements




The Company does not have any off-balance sheet arrangements.





Government grant income




Government grant income consisted of receipt of funds to subsidize the investment cost of information technology system development and market development in China.  No present or future obligation arises from the receipt of such amount.




57




OmniaLuo, Inc.


Notes to Consolidated Financial Statements


(Stated in US Dollars)





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





Comprehensive income




The Company has adopted ASC 220 “Comprehensive Income” which establishes standards for reporting and display of comprehensive income, its components and accumulated balances.  Components of comprehensive income include net income/loss and foreign currency translation adjustments.





Foreign currency translation




The functional currencies of the Company and its subsidiaries include United States dollars (“US$”) and RMB. The Company and its subsidiaries maintain their financial statements in their respective functional currency.  Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet date.  Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchanges rates prevailing at the dates of the transaction.  Exchange gains or losses arising from foreign currency transactions are included in the determination of net income or loss for the respective periods.


For financial reporting purposes, the financial statements of the subsidiaries that are prepared using RMB have been translated into US$.  Assets and liabilities are translated at the exchange rates at the balance sheet date and revenue and expenses are translated at the average exchange rates and stockholders’ equity is translated at historical exchange rates.  Any translation adjustments resulting are not included in determining net income or loss but are included in foreign currency translation adjustments to accumulated other comprehensive income, a component of stockholders’ equity.  The exchange rates in effect as of December 31, 2010 and 2009 were RMB1 for $0.1517 and $0.1467 respectively. The average exchange rates for the years ended December 31, 2010 and 2009 were RMB1 for $0.1476 and $0.1466 respectively. There was no significant fluctuation in the exchange rates for conversion of RMB to US$ after the balance sheet date.


Basic and diluted earnings (loss) per share




Basic earnings (loss) 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 (loss) 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 year ended December 31, 2010 and 2009, there were no dilutive potential shares.





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 :-




58





OmniaLuo, Inc.


Notes to Consolidated Financial Statements


(Stated in US Dollars)




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





Fair value of financial instruments (cont’d)





As of December 31, 2010


As of December 31, 2009Carrying





Carryingamount


Fair value


amount


Fair valueLong-term secured bank loan

$
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.





Recently issued accounting pronouncements





In January 2010, the FASB issued ASU 2010-06 “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements” that expands the required disclosures about fair value measurements. This guidance provides for new disclosures requiring the Company to (i) disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers and (ii) present separately information about purchases, sales, issuances and settlements in the reconciliation of Level 3 fair value measurements. This guidance also provides clarification of existing disclosures requiring the Company to (i) determine each class of assets and liabilities based on the nature and risks of the investments rather than by major security type and (ii) for each class of assets and liabilities, disclose the valuation techniques and inputs used to measure fair value for both Level 2 and Level 3 fair value measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early application is permitted. The Company is currently evaluating the impact of the adoption of the disclosures about the roll forward of activity in Level 3 fair value measurements on its financial statements.





In April, 2010, the FASB issued ASU 2010-13 “Compensation-Stock Compensation (Topic 718) - Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades - a consensus of the FASB Emerging Issues Task Force”. ASU 2010-13 provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity's equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this update do not expand the recurring disclosures required by Topic 718. Disclosures currently required under Topic 718 are applicable to a share-based payment award, including the nature and the term of share-based payment arrangements. The amendments in this update are effective for fiscal year, and interim periods within those fiscal years, beginning on or after December 15, 2010. The Company is currently evaluating the impact of the adoption of ASU 2010-13 on its financial statements.




59




OmniaLuo, Inc.


Notes to Consolidated Financial Statements


(Stated in US Dollars)




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





Recently issued accounting pronouncements (cont’d)





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 ending 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 Company is currently evaluating the impact of the adoption of ASU 2010-20 on its financial statements.





4.           Finance costs


Year ended December 31,2010


2009Interest expenses

$
109,242


$
24,395Bank charges and net exchange loss


96,920



55,328$
206,162


$
79,723




5.           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 years ended December 31, 2010 and 2009.




The Company has not recognized a deferred tax liability for the undistributed earnings of its foreign subsidiary of approximately US$579,000 and US$80,000 as of December 31, 2010 and 2009, respectively, because the Company currently does not expect those unremitted earnings to reverse 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.




60





OmniaLuo, Inc.


Notes to Consolidated Financial Statements


(Stated in US Dollars)




5.           Income taxes (Cont’d)




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 calendar year 2007.





On March 16, 2007, the National People’s Congress of the PRC determined to adopt the New corporate income tax law (the “New CIT Law”).  The New CIT Law unifies the application scope, tax rates, tax deduction and preferential policy for both domestic enterprises (“DE”) and foreign investment enterprises (“FIE”).  The applicable tax rate of DE and FIE will be 25% after their preferential tax holidays and the transition period have ended.  During the transition period, tax rates for the subject entities are 20%, 22% and 24% for the calendar years 2009, 2010 and 2011, respectively, before the application of applicable tax holidays or other tax preferences.




By virtue of the New CIT Law and the above-mentioned tax reduction, Oriental Fashion was subject to EIT rate of 11% and 10% for the years ended December 31, 2010 and 2009, respectively.





No provision for EIT has been made for the year ended December 31, 2010 since Oriental Fashion had no assessable profit for the year. The income taxes for the years ended December 31, 2010 and 2009 in the consolidated statements of operations and comprehensive income (loss) represented the deferred tax recognized.





The effective income tax differs from the PRC EIT tax rate of 11% and 10% for the years ended December 31, 2010 and 2009, respectively, as follows:





Year ended December 31,2010


2009Provision (Benefit) for income taxes at 11% (2009 : 10%)

$
60,438


$
(567,001
)Non-taxable items for tax


(10,659
)


-Non-deductible items for tax


55,015



200,427Deferred tax due to the tax rate change


(36,905
)


-Reversal of deferred tax assets previously recognized


258,297



-Income taxes

$
326,186


$
(366,574
)





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 December 31, 2010.




61





OmniaLuo, Inc.


Notes to Consolidated Financial Statements


(Stated in US Dollars)




5.           Income taxes (Cont’d)




Deferred tax assets as of December 31, 2010 and 2009 are composed of the following :-





Year ended December 31,2010


2009PRCNet operating loss carried forward

$
23,532


$
366,799Others


20,522



-$
44,054


$
366,799





The deferred tax asset of net operating loss carried forward reflects the benefit of $208,150 and $3,665,741 in loss carryforwards for the year ended December 31, 2010 and 2009, respectively, which expire through to 2014. Realization is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. Although realization is not assured, management believes it is more likely than not that all of the deferred tax asset will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.





6.           Earnings (loss) per share - basic and diluted





The basic earnings per share is calculated using the net income (loss) and the weighted average number of shares outstanding during the reporting periods.  All share and per share data reflects the recapitalization as if it occurred as of the beginning of the first period presented.





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 December 31, 2010 and 2009 have not been included in the computation of diluted earnings (loss) per share for the year then December 31, 2010 and 2009 respectively because to do so would have an anti-dilutive effect. Accordingly, the basic and diluted loss per share for the years ended December 31, 2010 and 2009 are the same.





7.           Trade receivables


Year ended December 31,2010


2009Trade receivables

$
2,324,642


$
2,134,470Allowance for doubtful accounts


(813,540
)


(754,290
)$
1,511,102


$
1,380,180





An analysis of the allowance for doubtful accounts for the years ended December 31, 2010 and 2009 is as follows:





Year ended December 31,2010


2009Balance at beginning of year

$
754,290


$
13,023Addition of bad debt expense, net


32,635



740,811Translation adjustments


26,615



456Balance at end of year

$
813,540


$
754,290





62





OmniaLuo, Inc.


Notes to Consolidated Financial Statements


(Stated in US Dollars)





8.           Inventories




Year ended December 31,2010


2009Raw materials

$
570,487


$
150,274Work in progress


502,620



185,440Finished goods


3,380,858



2,563,1474,453,965



2,898,861Allowance for obsolete inventories


(390,830
)


(474,260
)$
4,063,135


$
2,424,601




(Recovery of) allowance for obsolete inventories of $(96,903) and $454,052 were recognized for the years ended December 31, 2010 and 2009, respectively, and were included in cost of revenues.




9.           Other receivables and deposits


As of December 31,2010


2009Other receivables, rental, utilities and other deposits

$
448,561


$
334,820Allowance for doubtful accounts


(81,893
)


(64,548
)366,668



270,272Trade deposits to suppliers


3,495,857



3,052,142$
3,862,525


$
3,322,414




An analysis of the allowance for doubtful accounts for the years ended December 31, 2010 and 2009 is as follows:




Year ended December 31,2010


2009Balance at beginning of year

$
64,548


$
-Addition of bad debt expense, net


14,736



64,508Translation adjustments


2,609



40Balance at end of year

$
81,893


$
64,548





10.           Property and equipment, net


As of December 31,2010


2009Office equipment and computers

$
939,901


$
875,523Machinery


17,207



15,466Leasehold improvements


560,958



542,469Motor vehicles


19,190



18,5581,537,256



1,452,016Accumulated depreciation


(942,711
)


(635,727
)Property and equipment, net

$
594,545


$
816,289




63





OmniaLuo, Inc.


Notes to Consolidated Financial Statements


(Stated in US Dollars)





10.           Property and equipment, net (Cont’d)




Depreciation for the years ended December 31, 2010 and 2009 was $278,135 and $274,101, respectively.




During the years ended December 31, 2010 and 2009, property and equipment with net book value of $432 and $709 were disposed of at considerations of $57 and $323, respectively, resulting in a loss of $375 and $386 respectively.




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 1 year. It carries interest at 0.531% per month and is guaranteed by (i) Ms. Zheng Luo, who does not receive any compensation for acting as guarantor; (ii) the Company’s bank deposit of $455,100 and (iii) bank deposits of three unrelated parties in the amount of $1,365,300.
 
 The Company’s restricted cash of $455,100 was also pledged to the bank to secure the bank loans of $2,958,150 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.


13.           Long-term secured bank loan


The bank loan is denominated in Renminbi and has a 2-year term.  It carries interest at 0.495% per month and is guaranteed by (i) Ms. Zheng Luo, who does 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 as of December 31, 2010 will be repayable in :-





Fiscal year ending December 31, 2011

$
280,645Fiscal year ending December 31, 2012


932,955$
1,213,600




14.           Loan from a stockholder


A stockholder extended a loan to the Company in 2006, which is interest-free, unsecured and repayable on demand.  The stockholder advanced $156 to the Company during the year ended December 31, 2010.




64





OmniaLuo, Inc.


Notes to Consolidated Financial Statements


(Stated in US Dollars)





15.           Other payables, deposits received and accrued expenses


As of December 31,2010


2009Other payables and accruals

$
613,255


$
611,266Amounts due to partners of co-owned stores


287,921



302,599Receipt in advance from customers


714,066



1,408,284Deposits received


368,811



468,657Business tax and value-added taxes payables


766,411



555,440$
2,750,464


$
3,346,246




16.           Commitments and contingencies


Operating lease arrangements




The Company leases office premises and showrooms under various non-cancelable operating lease agreements that expire at various dates through years 2011 to 2012.  The minimum future commitments payable under these agreements as of December 31, 2010 was $257,997 which fall due in :-





Year ending December 31, 2011

$
241,642Year ending December 31, 2012


16,355$
257,997





Rental expenses under operating leases were $492,071 and $452,256 for the years ended December 31, 2010 and 2009, 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 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.




17.           Statutory reserve


The statutory reserve comprises the statutory reserve of Oriental Fashion.  In accordance with the relevant PRC regulations, Oriental Fashion is required to appropriate 10% of its net income determined in accordance with PRC GAAP each year, if any, to fund the statutory reserve until the balance of the reserve reaches 50% of the registered capital.  The statutory reserve is not distributable and can be used to make up cumulative prior year losses.





65





OmniaLuo, Inc.


Notes to Consolidated Financial Statements


(Stated in US Dollars)





18.           Defined contribution plan


Pursuant to the relevant PRC regulations, the Company is required to make contribution 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 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 the consolidated statement of operations.  The Company contributed $80,441 and $34,105 for the years ended December 31, 2010 and 2009, respectively.





19.           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.





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 year ended December 31, 2010 is presented below :-


Averageexercise

Remaining

AggregateNumber of


price

contractual

intrinsicshares


per share

term

valueOutstanding as of January 1, 2010


1,369,840


$
0.67Granted


-



-Exercised/Forfeited/Cancelled


-



-Outstanding as of December 31, 2010


1,369,840


$
0.67

8 years

$
-
#Exercisable as of December 31, 2010


1,369,840


$
0.67

8 years

$
-
#




66





OmniaLuo, Inc.


Notes to Consolidated Financial Statements


(Stated in US Dollars)





19.           Stock option plan (Cont’d)


#          Aggregate intrinsic value represents the value of the Company’s closing stock price on December 31, 2010 of $0.10 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 Company recorded non-cash share-based compensation expense of $82,746 and $304,642 for the years ended December 31, 2010 and 2009, respectively in respect of share options granted on January 6, 2009 and January 20, 2009, 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 used the following assumptions.




Expected volatility
119.66 %Expected dividends
NilExpected life
1.5 years - 2 yearsRisk-free interest rate
1 %







Related party transactions




Apart from the transactions and information as disclosed in notes 12, 13 and 14 to the consolidated financial statements and below, the Company did not have other material transactions with its related parties during the reporting periods.




Year ended December 31,2010


2009Rent paid to director, Luo Zheng

$
97,416


$
-





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




21.           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”




67





OmniaLuo, Inc.


Notes to Consolidated Financial Statements


(Stated in US Dollars)




21.           Segment information (Cont’d)








Retail sales


Sales to distributors


Total2010


2009


2010


2009


2010


2009Revenue from external customers

$
3,250,096


$
3,262,071


$
5,236,057


$
6,087,807


$
8,486,153


$
9,349,878Gross profit (loss)


1,640,209



1,464,067



3,519,090



(889,157
)


5,159,299



574,910Interest income


3,607



501



5,812



934



9,419



1,435Interest expenses


41,838



8,511



67,404



15,884



109,242



24,395Depreciation


114,114



103,588



164,021



170,513



278,135



274,101Segment profit (loss)


(851,762
)


(1,714,866
)


1,732,011



(3,232,114
)


880,249



(4,946,980
)Segment assets


4,651,091



3,143,266



7,493,125



5,866,088



12,144,216



9,009,354Expenditure forsegment assets

$
13,690


$
2,433


$
22,056


$
4,541


$
35,746


$
6,974





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


Year ended December 31,2010


2009Total consolidated revenues

$
8,486,153


$
9,349,878Total profit (loss) for reportable segments

$
880,249



(4,946,980
)Unallocated amounts relating to operations:Interest income


-



7General and administrative expenses


(248,063
)


(418,395
)Share-based compensation


(82,746
)


(304,642
)Income (loss) before income taxes

$
549,440


$
(5,670,010
)




As of December 31,2010


2009AssetsTotal assets for reportable segments

$
12,144,216


$
9,009,354Cash and cash equivalents


15,775



170,424$
12,159,991


$
9,179,778





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




22.         Subsequent events








The Company has evaluated all events or transactions that occurred through the date the consolidated financial statements were issued, and has determined that there were no material recognizable nor subsequent events or transactions which would require recognition or disclosure in the consolidated financial statements.





68




Exhibit

No.

Description2.1

Share Exchange Agreement, dated October 9, 2007, among the registrant, certain stockholders of the registrant signatory thereto, Omnia Luo Group Limited, and the shareholders of Omnia Luo Group Limited (filed as an exhibit to the Current Report of Wentworth II, Inc. on Form 8-K, as filed with the SEC on October 15, 2007, and incorporated herein by reference).*3.1

Certificate of Incorporation of Wentworth II, Inc. as filed with the Secretary of State of Delaware (filed as an exhibit to the registration statement of Wentworth II, Inc. on Form SB-2, as filed with the SEC on December 12, 2001, and incorporated herein by reference).*3.2

Bylaws of Wentworth II, Inc. (filed as an exhibit to the registration statement of Wentworth II, Inc. on Form SB-2, as filed with the SEC on December 12, 2001, and incorporated herein by reference).*4.1

Form of Warrant to Purchase Common Stock issued by the registrant to certain investors, dated October 9, 2007 (filed as an exhibit to the Current Report of Wentworth II, Inc. on Form 8-K, as filed with the SEC on October 15, 2007, and incorporated herein by reference).*4.2

Form of Warrant to Purchase Common Stock issued by the registrant to certain of the former shareholders of Omnia Luo Group Limited in exchange for their warrants to purchase ordinary shares of Omnia Luo Group Limited, dated October 9, 2007 (filed as an exhibit to the Current Report of Wentworth II, Inc. on Form 8-K, as filed with the SEC on October 15, 2007, and incorporated herein by reference).*4.3

Form of Common Stock Placement Agent Warrant issued by the registrant to Keating Securities, LLC, dated October 9, 2007 (filed as an exhibit to the Current Report of Wentworth II, Inc. on Form 8-K, as filed with the SEC on October 15, 2007, and incorporated herein by reference).*




14.1

Business Ethics Policy and Code of Conduct (Incorporated by reference to Exhibit 14.1 to the registrant’s Current Report on Form 8-K filed on February 1, 2008).*21

Subsidiaries of the registrant (Incorporated by reference to Exhibit 21 to the registrant’s Current Report on Form 8-K filed on October 15, 2007).*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.**








* Incorporated by reference.


** Filed herewith.




69




SIGNATURES


In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


OMNIALUO, INC.Dated: March 31, 2011
By:
/s/ Zheng LuoZheng Luo, Chief Executive Officer (Principal Executive

Officer)





In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.





Each person whose signature appears below hereby authorizes Zheng Luo or Xiaoyin Luo as attorneys-in-fact to sign on his or her behalf, individually, and in each capacity stated below, and to file all amendments and/or supplements to this annual report on Form 10-K.


Signature

Title/s/ Zheng Luo



March 31, 2011Zheng Luo

Chairwoman/s/ David Wang

Chief Financial Officer (Principal

March 31, 2011David Wang

Financial and Accounting Officer)/s/ Wenbin Fang

Director

March 31, 2011Wenbin Fang/s/ Qing Huang

Director

March 31, 2011Qing Huang/s/ Fei Luo

Director

March 31, 2011Fei Luo/s/ Xiaoyin Luo

Director

March 31, 2011Xiaoyin Luo/s/ Charles C. Mo

Director

March 31,2011Charles C. Mo/s/ Tianhong Yu

Director

March 31,2011Tianhong Yu




70